10-Q
1
d251320d10q.htm
10-Q
10-Q
Table of Contents
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 September 30, 2021
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
5.00% Notes due 2026
GAINN
The Nasdaq Stock Market LLC
4.875% Notes due 2028
GAINZ
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 November 1, 2021 was 33,205,023.
Table of Contents
GLADSTONE INVESTMENT CORPORATION
TABLE OF CONTENTS
PART I.
FINANCIAL INFORMATION:
Item 1.
Financial Statements (Unaudited)
Consolidated Statements of Assets and Liabilities as of September 30,
2021 and March 31, 2021
2
Consolidated Statements of Operations for the three and six months ended
September 30, 2021 and 2020
3
Consolidated Statements of Changes in Net Assets for the three and six
months ended September 30, 2021 and 2020
4
Consolidated Statements of Cash Flows for the six months ended September 30,
2021 and 2020
5
Consolidated Schedules of Investments as of September
30, 2021 and March 31, 2021
6
Notes to Consolidated Financial Statements
18
Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
43
Results of Operations
48
Liquidity and Capital Resources
56
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
63
Item 4.
Controls and Procedures
63
PART II.
OTHER INFORMATION:
Item 1.
Legal Proceedings
64
Item 1A.
Risk Factors
64
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
64
Item 3.
Defaults Upon Senior Securities
64
Item 4.
Mine Safety Disclosures
64
Item 5.
Other Information
64
Item 6.
Exhibits
65
SIGNATURES
66
Table of Contents
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
September 30,
2021
March 31,
2021
ASSETS
Investments at fair value
Non-Control/Non-Affiliate
investments (Cost of $350,516 and $297,400, respectively)
$
383,339
$
298,222
Affiliate investments (Cost of $340,703 and $341,651, respectively)
353,164
307,977
Control investments (Cost of $0 and $24,512, respectively)
27,630
Cash and cash equivalents
2,184
2,062
Restricted cash and cash equivalents
238
336
Interest receivable
2,651
3,369
Due from administrative agent
1,820
1,164
Deferred financing costs, net
1,164
1,359
Other assets, net
1,372
1,612
TOTAL ASSETS
$
745,932
$
643,731
LIABILITIES
Borrowings:
Line of credit at fair value (Cost of $8,900 and $22,400, respectively)
$
8,900
$
22,400
Notes payable, net
255,626
123,883
Secured borrowing
5,096
5,096
Total borrowings
269,622
151,379
Mandatorily redeemable preferred stock, $0.001 par value per share, $25.00 liquidation preference
per share; 5,990,000 shares authorized; 0 and 3,774,853 shares issued and outstanding, respectively, net
92,209
Accounts payable and accrued expenses
1,475
563
Interest payable
1,901
591
Fees due to Adviser (A)
31,399
15,664
Fee due to Administrator (A)
571
577
Other liabilities
263
384
TOTAL LIABILITIES
$
305,231
$
261,367
Commitments and contingencies (B)
NET ASSETS
$
440,701
$
382,364
ANALYSIS OF NET ASSETS
Common stock, $0.001 par value per share, 100,000,000 shares authorized, 33,205,023
shares issued and outstanding
$
33
$
33
Capital in excess of par value
398,083
400,796
Cumulative net unrealized appreciation (depreciation) of investments
45,284
(29,734
)
(Overdistributed) underdistributed net investment income
(10,098
)
2,592
Accumulated net realized gain in excess of distributions
7,399
8,677
Total distributable earnings
42,585
(18,465
)
TOTAL NET ASSETS
$
440,701
$
382,364
NET ASSET VALUE PER SHARE
$
13.27
$
11.52
(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
Table of Contents
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended September 30,
Six Months Ended September 30,
2021
2020
2021
2020
INVESTMENT INCOME
Interest income
Non-Control/Non-Affiliate
investments
$
7,407
$
7,014
$
14,284
$
12,978
Affiliate investments
6,678
4,616
15,509
8,964
Control investments
213
210
497
419
Cash and cash equivalents
4
Total interest income
14,298
11,840
30,290
22,365
Dividend income
Non-Control/Non-Affiliate
investments
1
3
Affiliate investments
1,589
1,589
Total dividend income
1,590
1,592
Success fee income
Non-Control/Non-Affiliate
investments
1,650
1,650
182
Affiliate investments
1,000
3,032
Total success fee income
2,650
4,682
182
Total investment income
18,538
11,840
36,564
22,547
EXPENSES
Base management fee (A)
3,577
2,989
6,897
5,845
Loan servicing fee (A)
1,794
1,747
3,662
3,456
Incentive fee (A)
7,351
452
19,599
(302
)
Administration fee (A)
571
390
970
836
Interest expense on borrowings
3,082
1,055
5,382
1,972
Dividends on mandatorily redeemable preferred stock
802
2,158
2,306
4,260
Amortization of deferred financing costs and discounts
452
466
908
840
Professional fees
343
254
649
825
Other general and administrative expenses
1,125
778
2,173
1,535
Expenses before credits from Adviser
19,097
10,289
42,546
19,267
Credits to base management fee loan servicing fee (A)
(1,794
)
(1,747
)
(3,662
)
(3,456
)
Credits to fees from
Adviserother (A)
(930
)
(1,070
)
(2,181
)
(1,805
)
Total expenses, net of credits to fees
16,373
7,472
36,703
14,006
NET INVESTMENT INCOME (LOSS)
2,165
4,368
(139
)
8,541
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss):
Non-Control/Non-Affiliate
investments
47
143
60
Affiliate investments
464
574
2,250
1,314
Other
(1,998
)
(1,998
)
Total net realized (loss) gain
(1,534
)
621
395
1,374
Net unrealized appreciation (depreciation):
Non-Control/Non-Affiliate
investments
15,101
(4,076
)
32,003
(13,014
)
Affiliate investments
16,926
6,612
46,134
7,970
Control investments
(4,523
)
(895
)
(3,119
)
1,798
Total net unrealized appreciation (depreciation)
27,504
1,641
75,018
(3,246
)
Net realized and unrealized gain (loss)
25,970
2,262
75,413
(1,872
)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
$
28,135
$
6,630
$
75,274
$
6,669
BASIC AND DILUTED PER COMMON SHARE:
Net investment income (loss)
$
0.07
$
0.13
$
$
0.26
Net increase in net assets resulting from operations
$
0.85
$
0.20
$
2.27
$
0.20
WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING:
Basic and diluted
33,205,023
33,205,023
33,205,023
33,148,652
(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
Table of Contents
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
(UNAUDITED)
2021
2020
NET ASSETS, MARCH 31
$
382,364
$
369,031
OPERATIONS
Net investment (loss) income
(2,304
)
4,173
Net realized gain on investments
1,929
753
Net unrealized appreciation (depreciation) of investments
47,514
(4,887
)
Net increase in net assets from operations
47,139
39
DISTRIBUTIONS (A)
Distributions to common stockholders from net investment income ( $0.20 and $0.28 per
share, respectively)
(6,593
)
(9,272
)
Distributions to common stockholders from net realized gains ( $0.07 and $0.02 per share,
respectively)
(2,372
)
(666
)
Net decrease in net assets from distributions
(8,965
)
(9,938
)
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 INCREASE (DECREASE) IN NET ASSETS
38,174
(8,162
)
NET ASSETS, JUNE 30
$
420,538
$
360,869
OPERATIONS
Net investment income
2,165
4,368
Net realized gain on investments
464
621
Net realized loss on other
(1,998
)
Net unrealized appreciation of investments
27,504
1,641
Net increase in net assets from operations
28,135
6,630
DISTRIBUTIONS (A)
Distributions to common stockholders from net investment income ( $0.16 and $0.20 per
share, respectively)
(5,490
)
(6,553
)
Distributions to common stockholders from net realized gains ( $0.08 and $0.01 per share,
respectively)
(2,482
)
(420
)
Net decrease in net assets from distributions
(7,972
)
(6,973
)
NET INCREASE (DECREASE) IN NET ASSETS
20,163
(343
)
NET ASSETS, SEPTEMBER 30
$
440,701
$
360,526
(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.
4
Table of Contents
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended September 30,
2021
2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in net assets resulting from operations
$
75,274
$
6,669
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in
operating activities:
Purchase of investments
(47,550
)
(57,382
)
Principal repayments of investments
14,060
1,000
Net proceeds from the sale of investments
8,137
1,104
Net realized gain on investments
(2,393
)
(1,374
)
Net realized loss on other
1,998
Net unrealized (appreciation) depreciation of investments
(75,018
)
3,246
Amortization of premiums, discounts, and acquisition costs, net
(9
)
(9
)
Amortization of deferred financing costs and discounts
908
840
Bad debt expense, net of recoveries
568
60
Changes in assets and liabilities:
Decrease in interest receivable
259
1,232
Increase in due from administrative agent
(656
)
(1,342
)
Decrease (increase) in other assets, net
242
(100
)
Increase (decrease) in accounts payable and accrued expenses
913
(324
)
Increase in interest payable
1,311
108
Increase in fees due to
Adviser (A)
15,698
525
Decrease in fee due to
Administrator (A)
(6
)
(224
)
Decrease in other liabilities
(22
)
(13,412
)
Net cash used in operating activities
(6,286
)
(59,383
)
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
62,700
81,500
Repayments on line of credit
(76,200
)
(14,100
)
Proceeds from issuance of notes payable
134,550
Proceeds from issuance of mandatorily redeemable preferred stock
6,283
Redemption of mandatorily redeemable preferred stock
(94,371
)
Deferred financing and offering costs
(3,432
)
(634
)
Distributions paid to common stockholders
(16,937
)
(16,911
)
Net cash provided by financing activities
6,310
57,879
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND RESTRICTED CASH
EQUIVALENTS
24
(1,504
)
CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND RESTRICTED CASH EQUIVALENTS, BEGINNING OF
PERIOD
2,398
4,060
CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND RESTRICTED CASH EQUIVALENTS, END OF
PERIOD
$
2,422
$
2,556
CASH PAID FOR INTEREST
$
3,286
$
1,374
(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.
5
Table of Contents
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2021
(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) 87.1%
Secured First Lien Debt 45.0%
Diversified/Conglomerate Manufacturing 1.0%
Phoenix Door Systems, Inc. Line of Credit, $100 available (L+7.0%, 9.0% Cash (0.3% Unused
Fee), Due 3/2022) (K)
$
1,350
$
1,350
$
1,330
Phoenix Door Systems, Inc. Term Debt (L+11.0%, 13.0% Cash, Due 9/2024) (K)
3,200
3,200
3,152
4,550
4,482
Diversified/Conglomerate Services 26.8%
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)
21,100
21,100
21,100
Counsel Press, Inc. Term Debt (L+13.0%, 14.0% Cash, Due 3/2023) (L)
6,400
6,400
6,400
Horizon Facilities Services, Inc. Term Debt (L+9.5%, 12.0% Cash, Due 6/2024) (L)
27,700
27,700
27,700
Mason West, LLC Term Debt (L+10.0%, 12.5% Cash, Due 7/2025) (L)
25,250
25,250
25,250
117,950
117,950
Healthcare, Education, and Childcare 4.5%
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 5.6%
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
Hotels, Motels, Inns, and Gaming Total 2.2%
Nocturne Villa Rentals, Inc. Line of Credit, $2,200 available (L+8.0%, 10.0% Cash, Due
6/2022) (L)
800
800
800
Nocturne Villa Rentals, Inc. Term Debt (L+10.5%, 12.5% Cash, Due 6/2026) (L)
8,700
8,700
8,700
9,500
9,500
Leisure, Amusement, Motion Pictures, and Entertainment 4.9%
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
$
198,131
$
198,063
Secured Second Lien Debt 15.2%
Aerospace and Defense 5.8%
Galaxy Technologies Holdings, Inc. Term Debt (L+4.1%, 7.1% Cash, Due 10/2026) (L)
$
6,500
$
6,500
$
6,500
Galaxy Technologies Holdings, Inc. Term Debt (L+7.0%, 10.0% Cash, Due 10/2026) (L)
18,796
18,796
18,796
25,296
25,296
Automobile 0.9%
Country Club Enterprises, LLC Term Debt (L+8.0%, 10.0% Cash, Due 2/2022) (K)
4,000
4,000
3,960
Country Club Enterprises, LLC Guaranty ($1,000) (T)
4,000
3,960
Cargo Transport 3.0%
Diligent Delivery Systems Term Debt (L+9.0%, 11.0% Cash, Due 11/2022) (K)
13,000
12,979
13,015
Home and Office Furnishings, Housewares, and Durable Consumer Products 3.0%
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) 2.5%
SBS Industries Holdings, Inc. Term Debt (L+7.0%, 9.0% Cash, Due 11/2024) (G)(K)
11,736
11,736
11,032
Total Secured Second Lien Debt
$
67,311
$
66,603
THE ACCOMPANYING NOTES
ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS .
6
Table of Contents
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
SEPTEMBER 30, 2021
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
Company and
Investment (A)(B)(D)(E)
Principal/Shares/
Units (F)(J)
Cost
Fair Value
Preferred Equity 25.3%
Diversified/Conglomerate Services 12.9%
Bassett Creek Services, Inc. Preferred
Stock (C)(L)
4,900
$
4,900
$
7,643
Counsel Press, Inc. Preferred
Stock (C)(L)
6,995
6,995
28,393
Horizon Facilities Services, Inc. Preferred Stock (C)(L)
10,080
10,080
10,080
Mason West, LLC Preferred
Stock (C)(L)
11,206
11,206
10,946
33,181
57,062
Healthcare, Education, and Childcare 4.5%
Educators Resource, Inc. Preferred
Stock (C)(L)
8,560
8,560
20,005
Home and Office Furnishings, Housewares, and Durable Consumer Products 2.0%
Brunswick Bowling Products, Inc. Preferred Stock (C)(L)
6,653
6,653
4,512
Ginsey Home Solutions, Inc. Preferred
Stock (C)(L)
19,280
9,583
4,245
16,236
8,757
Hotels, Motels, Inns, and Gaming Total
-1.7%
Nocturne Villa Rentals, Inc.- Preferred Stock
(C)(L)
6,600
6,600
7,492
Leisure, Amusement, Motion Pictures, and Entertainment 4.2 %
Schylling, Inc. Preferred
Stock (C)(L)
4,000
4,000
18,458
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
$
71,348
$
111,774
Common Equity/Equivalents 1.6%
Aerospace and Defense -1.1%
Galaxy Technologies Holdings, Inc. Common Stock (C)(L)
16,957
$
11,513
$
4,760
Cargo Transport 0.5%
Diligent Delivery Systems Common Stock Warrants (C)(L)
8
%
500
2,061
Diversified/Conglomerate Manufacturing 0.0%
Phoenix Door Systems, Inc. Common
Stock (C)(L)
3,195
1,452
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)
6,290
31
78
Total Common Equity/Equivalents
$
13,726
$
6,899
Total
Non-Control/Non-Affiliate Investments
$
350,516
$
383,339
THE ACCOMPANYING NOTES
ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS .
7
Table of Contents
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
SEPTEMBER 30, 2021
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
Company and
Investment (A)(B)(D)(E)
Principal/Shares/
Units (F)(J)
Cost
Fair Value
AFFILIATE INVESTMENTS (O)
80.1%
Secured First Lien Debt 52.9%
Chemicals, Plastics, and Rubber 6.0%
PSI Molded Plastics, Inc. Term Debt (L+5.5%, 7.0% Cash, Due 1/2024) (L)
$
26,618
$
26,618
$
26,618
Diversified/Conglomerate Manufacturing 1.9%
Edge Adhesives Holdings, Inc. (M)
Term Debt (L+10.5%, 12.5% Cash, Due 2/2022) (K)
8,310
8,310
8,310
Diversified/Conglomerate Services 22.9%
ImageWorks Display and Marketing Group, Inc. Term Debt (L+11.0%, 13.0% Cash,
Due
11/2022) (L)
22,000
22,000
22,000
J.R. Hobbs Co. - Atlanta, LLC - Term Debt (L+6.0%, 8.0% Cash, Due 10/2024) (G)(K)
36,000
36,000
34,200
J.R. Hobbs Co. - Atlanta, LLC Term Debt (L+10.3%, 11.8% Cash, Due 10/2024) (G)(K)
16,500
16,500
15,675
The Maids International, LLC Term Debt (L+10.5%, 12.0% Cash, Due 3/2025) (L)
28,560
28,560
28,560
103,060
100,435
Home and Office Furnishings, Housewares, and Durable Consumer Products 6.1%
Old World Christmas, Inc. 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 2.0%
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) (L)
8,399
8,399
8,399
8,937
8,937
Mining, Steel, Iron and Non-Precious Metals Total
4.1%
Utah Pacific Bridge & Steel, Ltd., $2,000 available (L+8.5%, 10.0% Cash, Due 7/2022) (L)
Utah Pacific Bridge & Steel, Ltd. (L+10.0%, 11.5% Cash, Due 7/2026) (L)
18,250
18,250
18,250
18,250
18,250
Personal and Non-Durable Consumer Products
(Manufacturing Only) 6.1%
The Mountain Corporation Line of Credit, $0 available (L+5.0%, 9.0% Cash,
Due 5/2022) (G)(L)
3,400
3,400
3,400
The Mountain Corporation Line of Credit, $0 available (L+5.0%, 9.0% Cash,
Due 5/2022) (G)(L)
500
500
500
Pioneer Square Brands, Inc. Term Debt (L+12.0%, 13.0% Cash, Due 8/2022) (L)
23,100
23,100
23,100
27,000
27,000
Telecommunications 3.8%
B+T Group Acquisition, Inc. (M) Line of
Credit, $0 available (L+11.0%, 13.0% Cash, Due 12/2021) (L)
2,800
2,800
2,800
B+T Group Acquisition, Inc. (M) Term
Debt (L+11.0%, 13.0% Cash, Due 12/2021) (L)
14,000
14,000
14,000
16,800
16,800
Total Secured First Lien Debt
$
235,975
$
233,350
THE ACCOMPANYING NOTES
ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS .
8
Table of Contents
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
SEPTEMBER 30, 2021
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
Company and
Investment (A)(B)(D)(E)
Principal/Shares/
Units (F)(J)
Cost
Fair Value
Secured Second Lien Debt 0.4%
Personal and Non-Durable Consumer Products
(Manufacturing Only) 0.4%
The Mountain Corporation Term Debt (L+4.0%, 7.0% Cash, Due 4/2024) (G)(L)
$
11,700
$
11,700
$
1,672
The Mountain Corporation Delayed Draw Term Debt, $0 available (L+4.0%, 7.0% Cash, Due
4/2024) (G)(L)
1,500
1,500
214
13,200
1,886
Total Secured Second Lien Debt
$
13,200
$
1,886
Preferred Equity 26.6%
Chemicals, Plastics, and Rubber 0.0%
PSI Molded Plastics, Inc. Preferred
Stock (C)(L)
158,598
$
19,730
$
Diversified/Conglomerate Manufacturing 0.0%
Edge Adhesives Holdings, Inc. (M)
Preferred Stock (C)(L)
8,199
8,199
Diversified/Conglomerate Services 4.4%
ImageWorks Display and Marketing Group, Inc. Preferred Stock (C)(L)
67,490
6,749
15,120
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
4,614
24,309
19,734
Home and Office Furnishings, Housewares, and Durable Consumer Products 7.5%
Old World Christmas, Inc. Preferred
Stock (C)(L)
6,180
32,884
Leisure, Amusement, Motion Pictures, and Entertainment 3.3%
SOG Specialty Knives & Tools, LLC Preferred Stock (C)(L)
14,949
14,949
14,335
Mining, Steel, Iron and Non-Precious Metals
1.4%
Utah Pacific Bridge & Steel, Ltd. Preferred Stock (C)(L)
6,000
6,000
6,000
Personal and Non-Durable Consumer Products
(Manufacturing Only) 7.0%
The Mountain Corporation Preferred
Stock (C)(L)
6,899
6,899
Pioneer Square Brands, Inc. Preferred
Stock (C)(L)
5,502
5,500
30,925
12,399
30,925
Telecommunications 3.0%
B+T Group Acquisition, Inc. (M)
Preferred Stock (C)(L)
14,304
4,722
13,279
Total Preferred Equity
$
90,308
$
117,157
THE ACCOMPANYING NOTES
ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS .
9
Table of Contents
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
SEPTEMBER 30, 2021
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
Company and
Investment (A)(B)(D)(E)
Principal/Shares/
Units (F)(J)
Cost
Fair Value
Common Equity/Equivalents 0.2%
Diversified/Conglomerate Services 0.0%
Nth Degree Investment Group, LLC Common Units (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 0.2%
B+T Group Acquisition, Inc. (M) Common
Stock Warrant (C)(L)
3.5
%
771
Total Common Equity/Equivalents
$
1,220
$
771
Total Affiliate Investments
$
340,703
$
353,164
TOTAL INVESTMENTS 167.2%
$
691,219
$
736,503
THE ACCOMPANYING NOTES
ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS .
10
Table of Contents
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
SEPTEMBER 30, 2021
(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 $549.1 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 September 30, 2021, 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 September 30, 2021. 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 September 30, 2021.
(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 September 30, 2021.
(I)
Reserved.
(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)
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 .
11
Table of Contents
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
MARCH 31, 2021
(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) 77.9%
Secured First Lien Debt 48.9%
Diversified/Conglomerate Manufacturing 1.1%
Phoenix Door Systems, Inc. Line of Credit, $0 available (L+7.0%, 9.0% Cash (0.3% Unused
Fee), Due 3/2022) (L)
$
1,150
$
1,150
$
1,150
Phoenix Door Systems, Inc. Term Debt (L+11.0%, 13.0% Cash, Due 9/2024) (L)
3,200
3,200
3,200
4,350
4,350
Diversified/Conglomerate Services 30.6%
Bassett Creek Services, Inc. Term Debt (L+10.0%, 12.0% Cash, Due 4/2023) (K)
37,500
37,500
36,656
Counsel Press, Inc. Term Debt (L+11.8%, 12.8% Cash, Due 3/2023) (L)
21,100
21,100
21,100
Counsel Press, Inc. Term Debt (L+13.0%, 14.0% Cash, Due 3/2023) (L)
6,400
6,400
6,400
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
117,950
117,106
Healthcare, Education, and Childcare 5.2%
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 6.4%
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 5.6%
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
$
188,431
$
187,587
Secured Second Lien Debt 11.0%
Automobile 1.0%
Country Club Enterprises, LLC Term Debt (L+8.0%, 10.0% Cash, Due 2/2022) (K)
$
4,000
$
4,000
$
3,890
Country Club Enterprises, LLC Guaranty ($1,000) (T)
4,000
3,890
Cargo Transport 3.4%
Diligent Delivery Systems Term Debt (L+9.0%, 11.0% Cash, Due 11/2022) (Q)
13,000
12,970
13,000
Home and Office Furnishings, Housewares, and Durable Consumer Products 3.5%
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) 3.1%
SBS Industries Holdings, Inc. Term Debt (L+7.0%, 9.0% Cash, Due 11/2024) (L)
11,736
11,736
11,736
Total Secured Second Lien Debt
$
42,006
$
41,926
THE ACCOMPANYING NOTES
ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS .
12
Table of Contents
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
MARCH 31, 2021
(DOLLAR
AMOUNTS IN THOUSANDS)
Company and
Investment (A)(B)(D)(E)
Principal/Shares/
Units (F)(J)
Cost
Fair Value
Preferred Equity 17.3%
Diversified/Conglomerate Services 9.2%
Bassett Creek Services, Inc. Preferred
Stock (C)(L)
4,900
$
4,900
$
Counsel Press, Inc. Preferred
Stock (C)(L)
6,995
6,995
21,348
Horizon Facilities Services, Inc. Preferred Stock (C)(L)
10,080
10,080
3,663
Mason West, LLC Preferred
Stock (C)(L)
11,206
11,206
9,774
33,181
34,785
Healthcare, Education, and Childcare 2.9%
Educators Resource, Inc. Preferred
Stock (C)(L)
8,560
8,560
11,194
Home and Office Furnishings, Housewares, and Durable Consumer Products 2.5%
Brunswick Bowling Products, Inc. Preferred Stock (C)(L)
6,653
6,653
1,015
Ginsey Home Solutions, Inc. Preferred
Stock (C)(L)
19,280
9,583
8,550
16,236
9,565
Leisure, Amusement, Motion Pictures, and Entertainment 2.1%
Schylling, Inc. Preferred
Stock (C)(L)
4,000
4,000
7,936
Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) 0.6%
SBS Industries Holdings, Inc. Preferred
Stock (C)(L)
27,705
2,771
2,463
Total Preferred Equity
$
64,748
$
65,943
Common Equity/Equivalents 0.7%
Cargo Transport 0.6%
Diligent Delivery Systems Common Stock Warrants (C)(Q)
8
%
$
500
$
2,211
Diversified/Conglomerate Manufacturing 0.1%
Phoenix Door Systems, Inc. Common
Stock (C)(L)
3,195
1,452
460
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)
7,178
33
95
Total Common Equity/Equivalents
$
2,215
$
2,766
Total
Non-Control/Non-Affiliate Investments
$
297,400
$
298,222
THE ACCOMPANYING NOTES
ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
13
Table of Contents
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
MARCH 31, 2021
(DOLLAR
AMOUNTS IN THOUSANDS)
Company and
Investment (A)(B)(D)(E)
Principal/Shares/
Units (F)(J)
Cost
Fair Value
AFFILIATE INVESTMENTS (O)
80.9%
Secured First Lien Debt 47.6%
Beverage, Food, and Tobacco 2.4%
Head Country, Inc. Term Debt (L+10.5%, 12.5% Cash, Due 2/2023) (L)
$
9,050
$
9,050
$
9,050
Chemicals, Plastics, and Rubber 6.0%
PSI Molded Plastics, Inc. Term Debt (L+5.5%, 7.0% Cash, Due 1/2024) (L)
26,618
26,618
22,985
Diversified/Conglomerate Manufacturing 5.4%
D.P.M.S., Inc. Line of Credit, $0 available (L+6.5%, 9.0% Cash (0.5% Unused Fee), Due
10/2023) (L)
1,500
1,500
1,500
D.P.M.S., Inc. Term Debt (10.0% Cash, Due 10/2023) (I)(L)
10,796
10,796
5,751
Edge Adhesives Holdings, Inc. (M) Line
of Credit, $0 available (L+8.0%, 10.0% Cash, Due 9/2021) (K)
1,020
1,020
1,005
Edge Adhesives Holdings, Inc. (M) Term
Debt (L+10.5%, 12.5% Cash, Due 2/2022) (K)
9,300
9,300
9,161
Edge Adhesives Holdings, Inc. (M) Term
Debt (L+11.8%, 13.8% Cash, Due 2/2022) (K)
3,000
3,000
2,955
25,616
20,372
Diversified/Conglomerate Services 13.3%
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 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 7.1%
Old World Christmas, Inc. 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 2.3%
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) (L)
8,399
8,399
8,399
8,937
8,937
Personal and Non-Durable Consumer Products
(Manufacturing Only) 7.0%
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) (Q)
23,100
23,100
23,215
26,500
26,615
Telecommunications 4.1%
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
2,597
B+T Group Acquisition, Inc. (M) Term
Debt (L+11.0%, 13.0% Cash,
Due 12/2021) (G)(K)
14,000
14,000
12,985
16,800
15,582
Total Secured First Lien Debt
$
191,081
$
181,101
THE ACCOMPANYING NOTES
ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
14
Table of Contents
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
MARCH 31, 2021
(DOLLAR
AMOUNTS IN THOUSANDS)
Company and
Investment (A)(B)(D)(E)
Principal/Shares/
Units (F)(J)
Cost
Fair Value
Secured Second Lien Debt 12.6%
Diversified/Conglomerate Services 12.0%
J.R. Hobbs Co. Atlanta, LLC Line of Credit, $0 available (L+6.0%, 8.0% Cash, Due
10/2024) (K)
$
10,000
$
10,000
$
9,975
J.R. Hobbs Co. Atlanta, LLC Term Debt (L+10.3%, 11.8% Cash, Due 10/2024) (K)
36,000
36,000
35,910
46,000
45,885
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
1,849
The Mountain Corporation Delayed Draw Term Debt, $0 available (L+4.0%, 7.0% Cash, Due
4/2024) (G)(L)
1,500
1,500
237
13,200
2,086
Total Secured Second Lien Debt
$
59,200
$
47,971
Preferred Equity 20.7%
Beverage, Food, and Tobacco 1.7%
Head Country, Inc. Preferred
Stock (C)(L)
4,000
$
4,000
$
6,469
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 3.5%
ImageWorks Display and Marketing Group, Inc. Preferred Stock (C)(L)
67,490
6,749
9,819
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
3,560
24,309
13,379
Home and Office Furnishings, Housewares, and Durable Consumer Products 5.3%
Old World Christmas, Inc. Preferred
Stock (C)(L)
6,180
20,248
Leisure, Amusement, Motion Pictures, and Entertainment 1.8%
SOG Specialty Knives & Tools, LLC Preferred Stock (C)(L)
14,949
14,949
6,754
Personal and Non-Durable Consumer Products
(Manufacturing Only) 8.4%
The Mountain Corporation Preferred
Stock (C)(L)
6,899
6,899
Pioneer Square Brands, Inc. Preferred
Stock (C)(Q)
5,502
5,500
32,055
12,399
32,055
Telecommunications 0.0%
B+T Group Acquisition, Inc. (M)
Preferred Stock (C)(L)
14,304
4,722
Total Preferred Equity
$
90,149
$
78,905
THE ACCOMPANYING NOTES
ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
15
Table of Contents
GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
MARCH 31, 2021
(DOLLAR
AMOUNTS IN THOUSANDS)
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
Units (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
$
341,651
$
307,977
CONTROL INVESTMENTS (P)
7.2%:
Secured Second Lien Debt 3.4%
Aerospace and Defense 3.4%
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 3.8%
Aerospace and Defense 3.8%
Galaxy Technologies, Inc. Preferred
Stock (C)(L)
5,517,444
$
11,464
$
14,630
Common Equity 0.0%
Aerospace and Defense 0.0%
Galaxy Technologies, Inc. Common
Stock (C)(L)
88,843
$
48
$
Total Control Investments
$
24,512
$
27,630
TOTAL INVESTMENTS 166.0%
$
663,563
$
633,829
THE ACCOMPANYING NOTES
ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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GLADSTONE INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)
MARCH 31, 2021
(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 $524.0 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, 2021, 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 LIBOR, which was 0.1% as of March 31, 2021. 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, 2021.
(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, 2021.
(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.
(U)
Reserved.
(V)
Cumulative gross unrealized depreciation for federal income tax purposes is $109.0 million; cumulative
gross unrealized appreciation for federal income tax purposes is $78.5 million. Cumulative net unrealized depreciation is $30.5 million, based on a tax cost of $664.3 million.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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GLADSTONE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(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.
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 a U.S. Securities and Exchange Commission
(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 six months ended September 30, 2021 are not
necessarily indicative of results that ultimately may be achieved for the fiscal year ending March 31, 2022 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, 2021, as filed with the SEC on May 11, 2021.
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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.
Reclassifications
Certain prior period amounts have been
reclassified to conform to the current period presentation in the Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements . Reclassifications did not impact net increase (decrease) in net assets
resulting from operations, total assets, total liabilities or total net assets, or Consolidated Statements of Changes in Net Assets and Consolidated Statements of Cash Flows classifications.
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,
discusses the information provided by the Valuation Team, determines whether the Valuation Team has followed the Policy, determines whether the Valuation Teams recommended fair value is reasonable in light of the Policy, and reviews other
facts and circumstances. 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.
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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 multiples obtained from our indexing methodology whereby the original transaction EBITDA multiple at the time
of our closing is indexed to a general subset of comparable disclosed transactions and EBITDA multiples 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 and EBITDA multiples; however, TEV may also be calculated using revenue and 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 described 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.
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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 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 September 30, 2021, our loans to J.R. Hobbs Co. Atlanta, LLC (J.R. Hobbs), The Mountain Corporation (The Mountain), and SBS Industries Holdings,
Inc. were on non-accrual status, with an aggregate debt cost basis of $81.3 million, or 15.8% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $66.7 million,
or 13.3% of the fair value of all debt investments in our portfolio. As of March 31, 2021, our loans to B+T Group Acquisition, Inc., Horizon Facilities Services, Inc., and The Mountain were on non-accrual
status, with an aggregate debt cost basis of $61.1 million, or 12.4% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $48.8 million, or 10.3% 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 September 30, 2021 and March 31, 2021, 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.
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Recent Accounting Pronouncements
In August 2021, the FASB issued Accounting Standards Update 2021-06, Presentation of Financial Statements
(Topic 205): Financial Services Depository and Lending (Topic 924), and Financial Services Investment Companies (Topic 946) (ASU 2021-06), which modifies the disclosure
requirements for acquired and disposed businesses. ASU 2021-06 was effective upon issuance. The adoption of ASU 2021-06 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 September 30, 2021 and March 31, 2021, 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 six months ended September 30, 2021 and 2020, respectively.
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As of September 30, 2021 and March 31, 2021, 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 September 30, 2021:
Secured first lien debt
$
431,413
$
$
$
431,413
Secured second lien debt
68,489
68,489
Preferred equity
228,931
228,931
Common equity/equivalents
7,670
78
(A)
7,592
Total Investments as of September 30, 2021
$
736,503
$
$
78
$
736,425
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, 2021:
Secured first lien debt
$
368,688
$
$
$
368,688
Secured second lien debt
102,897
102,897
Preferred equity
159,478
159,478
Common equity/equivalents
2,766
95
(A)
2,671
Total Investments as of March 31, 2021
$
633,829
$
$
95
$
633,734
(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.
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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 September 30, 2021 and March 31, 2021, 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
September 30, 2021
March 31, 2021
Non-Control/Non-Affiliate
Investments
Secured first lien debt
$
198,063
$
187,587
Secured second lien debt
66,603
41,926
Preferred equity
111,774
65,943
Common equity/equivalents (A)
6,821
2,671
Total
Non-Control/Non-Affiliate Investments
383,261
298,127
Affiliate Investments
Secured first lien debt
233,350
181,101
Secured second lien debt
1,886
47,971
Preferred equity
117,157
78,905
Common equity/equivalents
771
Total Affiliate Investments
353,164
307,977
Control Investments
Secured first lien debt
Secured second lien debt
13,000
Preferred equity
14,630
Common equity/equivalents
Total Control Investments
27,630
Total investments at fair value using Level 3 inputs
$
736,425
$
633,734
(A)
Excludes our investment in Funko with a fair value of $78 and $95 as of September 30, 2021 and
March 31, 2021, respectively, which was valued using Level 2 inputs.
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In accordance with ASC 820, the following table provides quantitative information about our investments
valued using Level 3 fair value measurements as of September 30, 2021 and March 31, 2021. 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
Unobservable
Input
Range / Weighted-Average as of
September 30,
2021
March 31,
2021
September 30, 2021
March 31, 2021
Secured first lien debt
$
368,746
$
303,330
(A)
TEV
EBITDA
multiple
4.2x 8.4x / 7.0x
4.6x 8.0x / 7.0x
EBITDA
$2,620 $19,505 /
$7,800
$1,403 $9,500 /
$5,746
Revenue
multiple
0.7x 0.7x / 0.7x
0.6x 0.7x / 0.6x
Revenue
$14,147 $14,147 /
$14,147
$14,474 $30,537 /
$26,110
62,667
65,358
Yield Analysis
Discount Rate
10.0% 13.8% /
12.6%
13.3% 17.9% /
14.7%
Secured second lien debt
40,481
53,122
(B)
TEV
EBITDA
multiple
6.7x 6.8x / 6.8x
5.9x 6.6x / 6.2x
EBITDA
$3,913 $5,813 /
$5,158
$4,551 $5,100 /
$4,772
Revenue
multiple
0.7x 0.7x / 0.7x
0.7x 0.7x / 0.7x
Revenue
$14,147 $14,147
/ $14,147
$14,474 $14,474 /
$14,474
28,008
49,775
Yield Analysis
Discount Rate
10.9% 13.1% /
11.4%
8.1% 13.5% /
11.2%
Preferred equity
228,931
159,478
(C)
TEV
EBITDA
multiple
4.2x 8.4x / 6.8x
5.6x 8.0x / 6.6x
EBITDA
$1,711 $19,505 /
$6,359
$2,587 $9,720 /
$5,938
Revenue
multiple
0.7x 0.7x / 0.7x
0.6x 0.7x / 0.6x
Revenue
$14,147 $14,147 /
$14,147
$14,474 $30,537 /
$25,465
Common equity/equivalents (E)
7,592
2,671
(D)
TEV
EBITDA
multiple
4.9x 8.5x / 6.7x
4.6x 7.1x / 5.7x
EBITDA
$871 $13,237 /
$5,835
$1,403 $7,135 /
$4,132
Revenue
multiple
0.7x 0.7x / 0.7x
0.7x 0.7x / 0.7x
Revenue
$14,147 $14,147 /
$14,147
$14,474 $14,474 /
$14,474
Total
$
736,425
$
633,734
(A)
Fair value as of March 31, 2021 includes one proprietary debt investment with a fair value of
$23.2 million, which was valued at the expected payoff amount as the unobservable input.
(B)
Fair value as of March 31, 2021 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.
(C)
Fair value as of March 31, 2021 includes one proprietary equity investment with a fair value of
$32.1 million, which was valued at the expected exit amount as the unobservable input.
(D)
Fair value as of March 31, 2021 includes one proprietary equity investment with a fair value of
$2.2 million, which was valued at the expected exit amount as the unobservable input.
(E)
Fair value as of both September 30, 2021 and March 31, 2021 excludes our investment in Funko with a
fair value of $78 and $95, 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.
25
Table of Contents
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 six months ended September 30,
2021 and 2020 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 September 30, 2021:
Fair value as of June 30, 2021
$
416,973
$
57,044
$
202,465
$
2,021
$
678,503
Total gain (loss):
Net realized gain (loss) (A)
Net unrealized appreciation
(depreciation) (B)
(2,618
)
4,098
36,500
(10,463
)
27,517
Reversal of previously recorded (appreciation) depreciation upon realization (B)
New investments, repayments and
settlements (C) :
Issuances / originations
24,400
5
6,000
30,405
Settlements / repayments
Sales
Transfers (D)
(7,342
)
7,342
(16,034
)
16,034
Fair value as of September 30, 2021
$
431,413
$
68,489
$
228,931
$
7,592
$
736,425
Secured
First Lien
Debt
Secured
Second Lien
Debt
Preferred
Equity
Common
Equity/
Equivalents
Total
Six Months ended September 30, 2021:
Fair value as of March 31, 2021
$
368,688
$
102,897
$
159,478
$
2,671
$
633,734
Total gain (loss):
Net realized gain (loss) (A)
1,786
1,786
Net unrealized appreciation
(depreciation) (B)
3,232
4,126
79,356
(11,113
)
75,601
Reversal of previously recorded (appreciation) depreciation upon realization (B)
60
(629
)
(569
)
New investments, repayments and
settlements (C) :
Issuances / originations
28,450
6,509
12,600
47,559
Settlements / repayments
(14,060
)
(14,060
)
Sales
(7,626
)
(7,626
)
Transfers (D)
45,043
(45,043
)
(16,034
)
16,034
Fair value as of September 30, 2021
$
431,413
$
68,489
$
228,931
$
7,592
$
736,425
Secured
First Lien
Debt
Secured
Second Lien
Debt
Preferred
Equity
Common
Equity/
Equivalents
Total
Three Months ended September 30, 2020:
Fair value as of June 30, 2020
$
312,628
$
116,134
$
122,237
$
10,295
$
561,294
Total gain (loss):
Net realized gain (loss) (A)
114
114
Net unrealized appreciation
(depreciation) (B)
1,355
951
(2,636
)
1,971
1,641
Reversal of previously recorded (appreciation) depreciation upon realization (B)
New investments, repayments and
settlements (C) :
Issuances / originations
33,399
105
23,581
57,085
Settlements / repayments
(8,000
)
(8,000
)
Sales
(3,106
)
(114
)
(3,220
)
Transfers (D)
17,114
(17,114
)
Fair value as of September 30, 2020
$
356,496
$
100,076
$
140,076
$
12,266
$
608,914
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Secured
First Lien
Debt
Secured
Second
Lien Debt
Preferred
Equity
Common
Equity/
Equivalents
Total
Six Months ended September 30, 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)
114
114
Net unrealized appreciation
(depreciation) (B)
(1,215
)
390
(248
)
(2,188
)
(3,261
)
Reversal of previously recorded (appreciation) depreciation upon realization (B)
New investments, repayments and
settlements (C) :
Issuances / originations
33,499
310
23,581
57,390
Settlements / repayments
(8,000
)
(8,000
)
Sales
(3,106
)
(114
)
(3,220
)
Transfers (D)
23,964
(23,964
)
Fair value as of September 30, 2020
$
356,496
$
100,076
$
140,076
$
12,266
$
608,914
(A)
Included in net realized gain (loss) on investments on our accompanying Consolidated Statements of
Operations for the respective periods ended September 30, 2021 and 2020.
(B)
Included in net unrealized appreciation (depreciation) of investments on our accompanying Consolidated
Statements of Operations for the respective periods ended September 30, 2021 and 2020.
(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)
2021: Transfers represent (1) secured second lien debt of J.R. Hobbs Co. Atlanta, LLC with a total
cost basis and fair value of $52.5 million and $52.4 million, respectively, which was converted into secured first lien debt during the three months ended June 30, 2021, (2) secured first lien debt of D.P.M.S., Inc. with a total cost
basis and fair value of $12.3 million and $7.3 million, respectively, which was converted into secured second lien debt of Galaxy Technologies Holdings, Inc. (Galaxy Technologies Holdings) during the three months ended
September 30, 2021 and (3) preferred equity of Galaxy Technologies, Inc. with a total cost basis and fair value of $11.5 million and $16.0 million, respectively, which was converted into common equity of Galaxy Technologies
Holdings during the three months ended September 30, 2021.
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 Plastics, Inc., 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.
Investment Activity
During the six months ended
September 30, 2021, the following significant transactions occurred:
In May 2021, we dissolved our investment in Channel Technologies Group, LLC and recorded a realized loss of
$1.8 million.
In June 2021, we invested $10.0 million in Nocturne Villa Rentals, Inc. (Nocturne) through a
combination of secured first lien debt and preferred equity. Nocturne, headquartered in Telluride, Colorado, is a luxury vacation rental manager.
In June 2021, we invested an additional $6.5 million in J.R. Hobbs in the form of secured second lien debt.
In connection with the investment, our secured second lien debt was converted to secured first lien debt.
In June 2021, we sold our investment in Head Country, Inc. (Head Country), which resulted in success
fee income of $2.0 million and a realized gain of $3.6 million. In connection with the sale, we received net cash proceeds of $16.7 million, including the repayment of our debt investment of $9.1 million at par.
In July 2021, we invested an additional $5.9 million in the form of secured first lien debt into Nocturne.
In July 2021, we invested $24.3 million in Utah Pacific Bridge & Steel, Ltd. (Utah
Pacific) through a combination of secured first lien debt and preferred equity. Utah Pacific, headquartered in Lindon, Utah, is a manufacturer of large steel components used in bridge replacement, rehabilitation, and construction.
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Table of Contents
In September 2021, one of our portfolio companies, D.P.M.S., Inc. (Danco), merged with another of our
portfolio companies, Galaxy Technologies, Inc. (Galaxy), into a newly formed portfolio company, Galaxy Technologies Holdings, Inc. (Galaxy Technologies Holdings). Our debt investments in Danco, which totaled
$12.3 million at principal and cost, and Galaxy, which totaled $13.0 million at principal and cost, were converted into two second lien term loans with an aggregate cost and principal of $25.3 million to Galaxy Technologies Holdings.
Our common equity investment in Danco, with a cost basis of $0.0 million, and our preferred and common equity investments in Galaxy, with an aggregate cost basis of $11.5 million, were converted into a common equity investment in Galaxy
Technologies Holdings with a combined cost basis of $11.5 million.
Investment Concentrations
As of September 30, 2021, our investment portfolio consisted of investments in 27 portfolio companies located in 19 states across 14 different industries
with an aggregate fair value of $736.5 million. Our investments in Old World Christmas, Inc., Counsel Press, Inc., Pioneer Square Brands Inc., J.R. Hobbs, and Bassett Creek Services, Inc. represented our five largest portfolio investments at
fair value and collectively comprised $264.8 million, or 35.9%, of our total investment portfolio at fair value as of September 30, 2021.
The
following table summarizes our investments by security type as of September 30, 2021 and March 31, 2021:
September 30, 2021
March 31, 2021
Cost
Fair Value
Cost
Fair Value
Secured first lien debt
$
434,106
62.8
%
$
431,413
58.6
%
$
379,512
57.2
%
$
368,688
58.2
%
Secured second lien debt
80,511
11.6
68,489
9.3
114,206
17.2
102,897
16.2
Total debt
514,617
74.4
499,902
67.9
493,718
74.4
471,585
74.4
Preferred equity
161,656
23.4
228,931
31.1
166,361
25.1
159,478
25.2
Common equity/equivalents
14,946
2.2
7,670
1.0
3,484
0.5
2,766
0.4
Total equity/equivalents
176,602
25.6
236,601
32.1
169,845
25.6
162,244
25.6
Total investments
$
691,219
100.0
%
$
736,503
100.0
%
$
663,563
100.0
%
$
633,829
100.0
%
Investments at fair value consisted of the following industry classifications as of September 30, 2021 and March 31, 2021:
September 30, 2021
March 31, 2021
Fair Value
Percentage of
Total Investments
Fair Value
Percentage of
Total Investments
Diversified/Conglomerate Services
$
295,181
40.1
%
$
261,714
41.3
%
Home and Office Furnishings, Housewares, and Durable Consumer Products
106,491
14.6
94,663
15.0
Leisure, Amusement, Motion Pictures, and Entertainment
63,311
8.6
45,209
7.1
Personal and Non-Durable Consumer Products
(Manufacturing Only)
59,889
8.1
60,852
9.6
Healthcare, Education, and Childcare
40,005
5.4
31,194
4.9
Telecommunications
30,850
4.2
15,582
2.5
Aerospace and Defense
30,056
4.1
27,630
4.4
Chemicals, Plastics, and Rubber
26,618
3.6
22,985
3.6
Mining, Steel, Iron and Non-Precious Metals
24,250
3.3
Hotels, Motels, Inns, and Gaming
16,992
2.3
Cargo Transport
15,076
2.0
15,211
2.4
Diversified/Conglomerate Manufacturing
12,792
1.7
25,181
4.0
Machinery (Non-agriculture, Non-construction, and Non-electronic)
11,032
1.5
14,199
2.2
Beverage, Food, and Tobacco
15,519
2.4
Other < 2.0%
3,960
0.5
3,890
0.6
Total investments
$
736,503
100.0
%
$
633,829
100.0
%
Investments at fair value were included in the following geographic regions of the U.S. as of September 30, 2021 and
March 31, 2021:
September 30, 2021
March 31, 2021
Location
Fair Value
Percentage of
Total Investments
Fair Value
Percentage of
Total Investments
West
214,697
29.2
%
160,581
25.3
%
South
192,267
26.1
182,529
28.8
Northeast
187,621
25.5
163,938
25.9
Midwest
141,918
19.2
126,781
20.0
Total investments
$
736,503
100.0
%
$
633,829
100.0
%
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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.
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 September 30, 2021:
Amount
For the remaining six months ending March 31:
2022
$
30,460
For the fiscal years ending March 31:
2023
114,850
2024
93,055
2025
171,777
2026
52,250
Thereafter
52,246
Total contractual repayments
$
514,638
Adjustments to cost basis of debt investments
(21
)
Investments in equity securities
176,602
Total cost basis of investments held as of September 30, 2021:
$
691,219
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 September 30, 2021 and March 31, 2021, we had gross receivables from
portfolio companies of $1.8 million and $1.5 million, respectively. As of September 30, 2021 and March 31, 2021, the allowance for uncollectible receivables was $1.1 million and $0.9 million, respectively.
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 13, 2021, 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, 2022.
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.
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Table of Contents
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 September 30,
Six Months Ended September 30,
2021
2020
2021
2020
Average total assets subject to base management fee (A)
$
715,400
$
597,800
$
689,700
$
584,500
Multiplied by prorated annual base management fee of 2.0%
0.5
%
0.5
%
1.0
%
1.0
%
Base management fee (B)
3,577
2,989
6,897
5,845
Credits to fees from Adviser -
other (B)
(930
)
(1,070
)
(2,181
)
(1,805
)
Net base management fee
$
2,647
$
1,919
$
4,716
$
4,040
Loan servicing fee (B)
1,794
1,747
3,662
3,456
Credits to base management fee - loan servicing fee (B)
(1,794
)
(1,747
)
(3,662
)
(3,456
)
Net loan servicing fee
$
$
$
$
Incentive fee income-based
$
1,757
$
$
3,695
$
Incentive fee capital
gains-based (C)
5,594
452
15,904
(302
)
Total incentive fee (B)
$
7,351
$
452
$
19,599
$
(302
)
Credits to fees from Adviser -
other (B)
Net total incentive fee
$
7,351
$
452
$
19,599
$
(302
)
(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 $63 and $132 for the three and six months ended September 30, 2021,
respectively, and $71 and $97 for the three and six months ended September 30, 2020, 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.
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Table of Contents
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 and for the period ended September 30, 2021, no capital gains-based incentive fees were contractually due to the Adviser. As of and for the year ended
March 31, 2021, no capital gains-based incentive fees 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 six months ended September 30, 2021, we recorded
capital gains-based incentive fees of $5.6 million and $15.9 million, respectively. During the three months ended September 30, 2020, we recorded capital gains-based incentive fees of $0.5 million. During the six months ended
September 30, 2020, we recorded a reversal of $0.3 million of previously accrued capital gains-based incentive fees.
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.
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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 13, 2021, 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, 2022.
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.
Other Transactions
From time to time, Gladstone Securities provides 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 six months ended September 30, 2021, the fees received by Gladstone Securities from our portfolio companies totaled $0.3 million and $0.4 million, respectively. During the three and six
months ended September 30, 2020, the fees received by Gladstone Securities from our portfolio companies totaled $0.4 million and $0.4 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
September 30,
As of
March 31,
2021
2021
Base management and loan servicing fee due to Adviser, net of credits
$
1,266
$
1,435
Incentive fee due to Adviser (A)
30,080
14,163
Other due to Adviser
53
66
Total fees due to Adviser
$
31,399
$
15,664
Fee due to Administrator
$
571
$
577
Total related party fees due
$
31,970
$
16,241
(A)
Includes a capital gains-based incentive fee of $28.3 million and $12.4 million as of
September 30, 2021 and March 31, 2021, respectively, recorded in accordance with GAAP requirements, and which was not contractually due under the terms of the Advisory Agreement. 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 $38 and $0, as of September 30, 2021 and March 31, 2021, 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 September 30, 2021 and March 31, 2021, respectively.
NOTE 5. BORROWINGS
Revolving Line of Credit
On March 8, 2021, we, through our wholly-owned subsidiary, Business Investment, entered into Amendment No. 6 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 February 29, 2024, and if not renewed or extended by such date, all principal and interest will be due and payable on February 28, 2026 (two years after the
revolving period end date). As of September 30, 2021, the Credit Facility provided two one-year extension options that may be exercised on or before the first and second anniversary of March 8, 2021,
subject to approval by all lenders. Additionally, the COVID-19 Relief Period (described below) was extended to September 30, 2021.
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On August 10, 2020, we, through Business Investment, entered into Amendment No. 5 to the Credit
Facility. Among other things, Amendment No. 5 amended 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 provided for
certain temporary changes during the COVID-19 Relief Period (August 10, 2020 until March 31, 2021, subject to extension under 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 February 29, 2024, with the margin then increasing to 3.10% for the period from February 29, 2024 to February 28, 2025, and increasing further to 3.35% thereafter. The Credit Facility has an unused commitment fee on the
daily unused commitment amount of 0.50% per annum if the average unused commitment amount for the period is less than or equal to 50% of the total commitment amount, 0.75% per annum if the average unused commitment amount for the period is greater
than 50% but less than or equal to 65% of the total commitment amount, and 1.00% per annum if the average unused commitment amount for the period is greater than 65% of the total commitment amount.
The following tables summarize noteworthy information related to the Credit Facility:
As of
September 30,
As of
March 31,
2021
2021
Commitment amount
$
180,000
$
180,000
Borrowings outstanding at cost
8,900
22,400
Availability (A)
171,100
157,600
For the Three Months
Ended
September 30,
For the Six Months
Ended
September 30,
2021
2020
2021
2020
Weighted-average borrowings outstanding
$
24,355
$
106,123
$
25,354
$
80,503
Effective interest rate (B)
10.0
%
3.6
%
9.6
%
4.5
%
Commitment (unused) fees incurred
$
397
$
122
$
786
$
490
(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 $171.1 million and $157.6 million as of September 30, 2021 and March 31, 2021, 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 $286.3 million as of September 30, 2021 (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 September 30, 2021, and as defined in the performance guaranty of the Credit
Facility, we had a net worth of $695.2 million, asset coverage on our senior securities representing indebtedness of 254.5%, 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 September 30, 2021, we were in compliance with all covenants under the Credit Facility.
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 September 30, 2021 and March 31, 2021, 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 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 September 30, 2021 and March 31, 2021, the Credit Facility was valued using
Level 3 inputs and any changes in its fair value are recorded in Net unrealized depreciation (appreciation) of other on our accompanying Consolidated Statements of Operations.
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The following tables provide relevant information and disclosures about the Credit Facility as of
September 30, 2021 and March 31, 2021, and for the three and six months ended September 30, 2021 and 2020, 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)
September 30, 2021
March 31, 2021
Credit Facility
$
8,900
$
22,400
Fair Value Measurements of Borrowings Using Significant
Unobservable Inputs (Level 3) Reported in
Consolidated Statements of Assets and Liabilities
Credit
Facility
Three Months Ended September 30, 2021:
Fair value at June 30, 2021
$
41,900
Borrowings
32,900
Repayments
(65,900
)
Fair value at September 30, 2021
$
8,900
Six Months Ended September 30, 2021:
Fair value at March 31, 2021
$
22,400
Borrowings
62,700
Repayments
(76,200
)
Fair value at September 30, 2021
$
8,900
Fair Value Measurements of Borrowings Using Significant
Unobservable Inputs (Level 3) Reported in
Consolidated Statements of Assets and Liabilities
Credit
Facility
Three Months Ended September 30, 2020:
Fair value at June 30, 2020
$
59,500
Borrowings
63,300
Repayments
(6,200
)
Fair value at September 30, 2020
$
116,600
Six Months Ended September 30, 2020:
Fair value at March 31, 2020
$
49,200
Borrowings
81,500
Repayments
(14,100
)
Fair value at September 30, 2020
$
116,600
The fair value of the collateral under the Credit Facility was $549.1 million and $524.0 million as of
September 30, 2021 and March 31, 2021, respectively.
Notes Payable
5.00% Notes due 2026
In March 2021, we completed a public
offering of 5.00% Notes due 2026 with an aggregate principal amount of $127.9 million (the 2026 Notes), which resulted in net proceeds of approximately $123.8 million after deducting underwriting discounts, commissions and
offering costs borne by us. The 2026 Notes are traded under the ticker symbol GAINN on the Nasdaq Global Select Market (Nasdaq). The 2026 Notes will mature on May 1, 2026 and may be redeemed in whole or in part at any
time or from time to time at the Companys option on or after May 1, 2023. The 2026 Notes bear interest at a rate of 5.00% per year, which is payable quarterly in arrears.
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The indenture relating to the 2026 Notes contains certain covenants, including (i) an inability to
incur additional debt or issue additional debt or preferred securities unless the Companys asset coverage meets the threshold specified in the 1940 Act after such borrowing, (ii) an inability to declare any dividend or distribution
(except a dividend payable in our stock) on a class of our capital stock or to purchase shares of our capital stock unless the Companys asset coverage meets the threshold specified in the 1940 Act at the time of (and giving effect to) such
declaration or purchase, and (iii) if, at any time, we are not subject to the reporting requirements of the Exchange Act, we will provide the holders of the 2026 Notes, as applicable, and the trustee with audited annual consolidated financial
statements and unaudited interim consolidated financial statements.
The 2026 Notes are recorded at the aggregate principal amount, less underwriting
discounts, commissions, and offering costs, on our accompanying Consolidated Statements of Assets and Liabilities . Total underwriting discounts, commissions, and offering costs related to this offering were $4.1 million, which have
been recorded as discounts to the aggregate principal amount on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized over the period ending May 1, 2026, the maturity date.
4.875% Notes due 2028
In August 2021, we completed a
public offering of 4.875% Notes due 2028 with an aggregate principal amount of $134.6 million (the 2028 Notes), which resulted in net proceeds of approximately $131.3 million after deducting underwriting discounts, commissions
and offering costs borne by us. The 2028 Notes are traded under the ticker symbol GAINZ on the Nasdaq. The 2028 Notes will mature on November 1, 2028 and may be redeemed in whole or in part at any time or from time to time at the
Companys option on or after November 1, 2023. The 2028 Notes bear interest at a rate of 4.875% per year, which is payable quarterly in arrears.
The indenture relating to the 2028 Notes contains certain covenants, including (i) an inability to incur additional debt or issue additional debt or
preferred securities unless the Companys asset coverage meets the threshold specified in the 1940 Act after such borrowing, (ii) an inability to declare any dividend or distribution (except a dividend payable in our stock) on a class of
our capital stock or to purchase shares of our capital stock unless the Companys asset coverage meets the threshold specified in the 1940 Act at the time of (and giving effect to) such declaration or purchase, and (iii) if, at any time,
we are not subject to the reporting requirements of the Exchange Act, we will provide the holders of the 2028 Notes, as applicable, and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial
statements.
The 2028 Notes are recorded at the aggregate principal amount, less underwriting discounts, commissions, and offering costs, on
our accompanying Consolidated Statements of Assets and Liabilities . Total underwriting discounts, commissions, and offering costs related to this offering were $3.3 million, which have been recorded as discounts to the aggregate
principal amount on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized over the period ending November 1, 2028, the maturity date.
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The following tables summarize our 2026 and 2028 Notes as of September 30, 2021 and March 31,
2021:
As of September 30, 2021 :
Description
Ticker
Symbol
Date Issued
Maturity Date (A)
Interest
Rate
Notes
Outstanding
Principal
Amount
per Note
Aggregate
Principal
Amount
2026 Notes
GAINN
March 2, 2021
May 1, 2026
5.00
%
5,117,500
$
25.00
$
127,938
2028 Notes
GAINZ
August 18, 2021
November 1, 2028
4.875
%
5,382,000
$
25.00
$
134,550
Notes payable,
gross (B)
10,499,500
$
262,488
Less: Discounts
(6,862
)
Notes payable,
net (C)
$
255,626
As of March 31, 2021 :
Description
Ticker
Symbol
Date Issued
Maturity Date (A)
Interest
Rate
Notes
Outstanding
Principal
Amount
per Note
Aggregate
Principal
Amount
2026 Notes
GAINN
March 2, 2021
May 1, 2026
5.00
%
5,117,500
$
25.00
$
127,938
Notes payable,
gross (B)
$
127,938
Less: Discounts
(4,055
)
Notes payable,
net (C)
$
123,883
(A)
The 2026 Notes can be redeemed at our option at any time on or after May 1, 2023. The 2028 Notes
can be redeemed at our option at any time on or after November 1, 2023.
(B)
As of September 30, 2021 and March 31, 2021, asset coverage on our senior securities
representing indebtedness, calculated pursuant to Sections 18 and 61 of the 1940 Act, was 254.5% and 398.0%, respectively.
(C)
Reflected as a line item on our accompanying Consolidated Statement of Assets and Liabilities.
The fair value, based on the last reported closing prices, of the 2026 Notes and 2028 Notes as of September 30, 2021 was
$133.1 million and $144.1 million, respectively. The fair value, based on the last reported closing prices, of the 2026 Notes as of March 31, 2021 was $132.3 million. We consider the closing prices of the 2026 Notes and 2028
Notes to be Level 1 inputs within the ASC 820 hierarchy.
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.
NOTE 6. MANDATORILY
REDEEMABLE PREFERRED STOCK
In August 2021, we used a portion of the proceeds from the issuance of our 2028 Notes to voluntarily redeem all outstanding
shares of our 6.375% Series E Cumulative Term Preferred Stock (or Series E Term Preferred Stock or Series E), which had a liquidation preference of $25.00 per share. In connection with the voluntary redemption of our Series E
Term Preferred Stock, we incurred a loss on extinguishment of debt of $2.0 million, which was recorded in Realized loss on other in our accompanying Consolidated Statements of Operations and which was primarily comprised of
unamortized deferred issuance costs at the time of redemption.
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The following table summarizes our Series E Term Preferred Stock outstanding as of March 31, 2021:
As of March 31, 2021 :
Class of Term
Preferred
Stock
Ticker
Symbol
Date Issued
Mandatory
Redemption Date
Interest
Rate
Shares
Outstanding
Liquidation
Preference
per Share
Aggregate
Liquidation
Preference
Series E
GAINL
August 22, 2018
August 31, 2025
6.375
%
3,774,853
$
25.00
$
94,371
Term preferred stock,
gross (A)
3,774,853
$
25.00
$
94,371
Less: Discounts
(2,162
)
Term preferred stock,
net (B)
$
92,209
(A)
As of March 31, 2021, asset coverage on our senior securities that are stock, calculated pursuant to
Sections 18 and 61 of the 1940 Act, was 248.6%.
(B)
Reflected as a line item on our accompanying Consolidated Statement of Assets and Liabilities.
The following tables summarize dividends declared by our Board of Directors and paid by us on our Series E Term Preferred Stock and our
6.25% Series D Cumulative Term Preferred Stock (Series D Term Preferred Stock) during the six months ended September 30, 2021 and 2020:
For the Six Months Ended September 30, 2021 :
Declaration Date
Record
Date
Payment
Date
Dividend per
Share of
Series E Term Preferred
Stock (A)
April 13, 2021
April 23, 2021
April 30, 2021
$
0.13281250
April 13, 2021
May 19, 2021
May 28, 2021
0.13281250
April 13, 2021
June 18, 2021
June 30, 2021
0.13281250
July 13, 2021
July 23, 2021
July 30,2021
0.13281250
July 13, 2021
August 23, 2021
August 30, 2021
0.07968750
(B)
Total
$
0.61093750
For the Six Months Ended September 30, 2020 :
Declaration Date
Record
Date
Payment
Date
Dividend per
Share of
Series D Term
Preferred Stock (C)
Dividend per
Share of
Series E Term
Preferred Stock (A)
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
Total
$
0.78124998
$
0.79687500
(A)
We voluntarily redeemed all outstanding shares of our Series E Term Preferred Stock on August 19, 2021.
(B)
Represents accrued and unpaid dividends up to, but excluding, the redemption date of August 19, 2021.
(C)
We voluntarily redeemed all outstanding shares of our Series D Term Preferred Stock on March 3, 2021.
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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. If we determined the tax characterization of dividends
paid to preferred stockholders in the current calendar year as of September 30, 2021, 71.3% would be from ordinary income and 28.7% would be 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 was recorded at the liquidation preference, less discounts, on our accompanying Consolidated Statements of Assets and Liabilities as of March 31, 2021. 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 fair value of our Series E Term Preferred Stock, based on the last reported closing sale price as of March 31, 2021, which we consider to be a
Level 1 input within the fair value hierarchy, was $96.1 million.
NOTE 7. REGISTRATION STATEMENT AND COMMON EQUITY OFFERINGS
Registration Statement
On September 3, 2021, we
filed a registration statement on Form N-2 (File No. 333-259302), which the SEC declared effective on October 15, 2021. The registration statement permits us
to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities, and warrants to purchase common stock, preferred stock, or debt
securities, including through concurrent, separate offerings of such securities. As of the date of this report, we had the ability to issue up to $300.0 million of the securities registered under the registration statement.
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 six months ended September 30, 2021 and 2020:
Three Months Ended
September 30,
Six Months Ended September 30,
2021
2020
2021
2020
Numerator: net increase in net assets resulting from operations
$
28,135
$
6,630
$
75,274
$
6,669
Denominator: basic and diluted weighted-average common shares
33,205,023
33,205,023
33,205,023
33,148,652
Basic and diluted net increase in net assets resulting from operations per weighted-average
common share
$
0.85
$
0.20
$
2.27
$
0.20
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. If we determined the tax characterization of cash distributions paid to common stockholders in the current calendar year as of September 30, 2021, 71.3% would be from ordinary income and 28.7% would be from
capital gains.
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We paid the following cash distributions to our common stockholders for the six months ended
September 30, 2021 and 2020:
Fiscal Year
Declaration Date
Record Date
Payment Date
Distribution per Common Share
2022
April 13, 2021
April 23, 2021
April 30, 2021
$
0.070
April 13, 2021
May 19, 2021
May 28, 2021
0.070
April 13, 2021
June 8, 2021
June 17, 2021
0.060
(A)
April 13, 2021
June 18, 2021
June 30, 2021
0.070
July 13, 2021
July 23, 2021
July 30, 2021
0.070
July 13, 2021
August 23, 2021
August 31, 2021
0.070
July 13, 2021
September 3, 2021
September 15, 2021
0.030
(A)
July 13, 2021
September 22, 2021
September 30, 2021
0.070
Six Months Ended September 30, 2021:
$
0.510
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
Six Months Ended September 30, 2020:
$
0.510
(A)
Represents a supplemental distribution to common stockholders.
Aggregate cash distributions to our common stockholders declared and paid were $16.9 million for both the six months ended September 30, 2021 and
2020.
For the fiscal year ended March 31, 2021, Investment Company Taxable Income exceeded distributions declared and paid, and, in accordance with
Section 855(a) of the Code, we elected to treat $16.1 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, 2021 net capital gains exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $8.5 million of the first distributions paid subsequent to fiscal year-end as having been paid in the prior year.
For the three months ended September 30, 2021, we recorded
$2.1 million of net adjustments for estimated permanent book-tax differences to reflect tax character, which decreased Capital in excess of par value and increased Overdistributed net investment income
and Accumulated net realized gain in excess of distributions on our accompanying Consolidated Statements of Assets and Liabilities . For the six months ended September 30, 2021, we recorded $2.7 million of net adjustments for
estimated permanent book-tax differences to reflect tax character, which decreased Capital in excess of par value and Overdistributed net investment income and increased Accumulated net realized gain in excess
of distributions on our accompanying Consolidated Statements of Assets and Liabilities .
For the three and six months ended September 30,
2020, we recorded $0.4 million and $0.6 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 .
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. 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, 2021, we did not elect to retain long-term capital gains and to treat them as deemed distributions to common stockholders.
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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 September 30, 2021 and March 31, 2021, 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 $0.4 million and $0.7 million as of September 30, 2021 and
March 31, 2021, 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 September 30, 2021 and March 31, 2021 to be immaterial.
We have also extended a guaranty on behalf of one of our portfolio companies. As of September 30, 2021, 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 September 30, 2021 and March 31, 2021 to be immaterial.
As of September 30, 2021, 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 September 30, 2021 and March 31, 2021, which are not reflected as liabilities in the accompanying Consolidated Statements of Assets and Liabilities:
September 30, 2021
March 31, 2021
Unused line of credit and delayed draw term loan commitments
$
4,300
$
3,000
Guaranties
1,000
1,000
Total
$
5,300
$
4,000
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NOTE 11. FINANCIAL HIGHLIGHTS
Three Months Ended
September 30,
Six Months Ended September 30,
2021
2020
2021
2020
Per Common Share Data:
Net asset value at beginning of
period (A)
$
12.66
$
10.87
$
11.52
$
11.17
Income from investment
operations (B)
Net investment income (loss)
0.07
0.13
0.26
Net realized gain (loss) on investments and other
(0.05
)
0.02
0.01
0.04
Net unrealized appreciation (depreciation) of investments
0.83
0.05
2.26
(0.10
)
Total from investment operations
0.85
0.20
2.27
0.20
Effect of equity capital
activity (B)
Cash distributions to common stockholders from net investment income (C)
(0.16
)
(0.20
)
(0.36
)
(0.48
)
Cash distributions to common stockholders from realized gains (C)
(0.08
)
(0.01
)
(0.15
)
(0.03
)
Total from equity capital activity
(0.24
)
(0.21
)
(0.51
)
(0.51
)
Other, net (B)(E)
(0.01
)
Net asset value at end of
period (A)
$
13.27
$
10.86
$
13.27
$
10.86
Per common share market value at beginning of period
$
14.41
$
10.24
$
12.23
$
7.85
Per common share market value at end of period
13.87
9.10
13.87
9.10
Total investment return (F)
(2.13
)%
(9.10
)%
17.51
%
21.91
%
Common stock outstanding at end of
period (A)
33,205,023
33,205,023
33,205,023
33,205,023
Statement of Assets and Liabilities Data:
Net assets at end of period
$
440,701
$
360,526
$
440,701
$
360,526
Average net assets (G)
426,635
360,232
410,553
362,964
Senior Securities Data:
Total borrowings, at cost
$
276,484
$
121,696
$
276,484
$
121,696
Mandatorily redeemable preferred stock
(H)
138,715
138,715
Ratios/Supplemental Data:
Ratio of net expenses to average net assets annualized (I)
15.35
%
8.30
%
17.88
%
7.72
%
Ratio of net investment income (loss) to average net assets annualized (J)
2.03
4.85
(0.07
)
4.71
(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 from
the Adviser, the ratio of expenses to average net assetsannualized would have been 17.90% and 11.42% for the three months ended September 30, 2021 and 2020, respectively, and 20.73% and 10.26% for the six months ended September 30,
2021 and 2020, respectively.
(J)
Had we not received any non-contractual, unconditional, and irrevocable
credits of fees from the Adviser, the ratio of net investment income (loss) to average net assetsannualized would have been (0.52)% and 1.72% for the three months ended September 30, 2021 and 2020, respectively, and (2.91)% and 1.81% for
the six months ended September 30, 2021 and 2020, respectively.
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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 six month periods ended September 30, 2021 and 2020.
NOTE 13. SUBSEQUENT EVENTS
Investment Activity
In October 2021, we invested
$10.5 million in an existing portfolio company, Bassett Creek Services, Inc., in the form of secured first lien debt.
Distributions and
Dividends
In October 2021, our Board of Directors declared the following monthly and supplemental distributions to common stockholders:
Record Date
Payment Date
Distribution per Common Share
October 22, 2021
October 29, 2021
$
0.075
November 19, 2021
November 30, 2021
0.075
December 7, 2021
December 15, 2021
0.090
(A)
December 23, 2021
December 31, 2021
0.075
Total for the Quarter:
$
0.315
(A)
Represents a supplemental distribution to common stockholders.
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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, 2021, filed with the U.S. Securities and Exchange Commission (SEC) on May 11, 2021 (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.
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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 .
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 $40 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 September 30, 2021, our investment portfolio was comprised of 74.4%
in debt securities and 25.6% 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, our 5.00% Notes due 2026 (2026 Notes), and our 4.875% Notes due 2028 (2028 Notes) are traded on the Nasdaq
Global Select Market (Nasdaq) under the trading symbols GAIN, GAINN, and GAINZ, respectively.
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 six months ended September 30, 2021, we invested in two
new portfolio companies, exited one portfolio company, merged two existing portfolio companies into a new portfolio company, and dissolved one portfolio company. From our initial public offering in June 2005 through September 30, 2021, we
invested in 55 companies, excluding investments in syndicated loans, for a total of approximately $1.4 billion, before giving effect to principal repayments and divestitures.
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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 September 30, 2021, we had unrecognized, contractual
success fees of $49.0 million, or $1.48 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 September 30, 2021, we completed sales of 25 portfolio companies that
we acquired under our buyout strategy (which excludes investments in syndicated loans). In the aggregate, these sales have generated $240.8 million in net realized gains and $33.4 million in other income upon exit, for a total increase to
our net assets of $274.2 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 25 liquidity events have offset any realized losses since inception, which were primarily incurred during the 2008-2009 recession in connection with the sale of performing syndicated loans
at a realized loss to pay off a former lender. The successful exits, in part, enabled us to increase the monthly distribution by 75.0% from March 2011 through September 30, 2021, and allowed us to declare and pay 13 supplemental distributions
to common stockholders through September 30, 2021.
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 and unsecured notes. We have successfully extended the Credit Facilitys revolving period multiple
times, most recently to February 2024, and currently have a total commitment amount of $180.0 million (with a potential total commitment of $300.0 million through additional commitments from new or existing lenders). During the six months
ended September 30, 2021, we issued our 2028 Notes for gross proceeds of $134.6 million. During the year ended March 31, 2021, we issued our 2026 Notes for gross proceeds of $127.9 million and sold 155,560 shares of our common
stock under our 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.
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 and mandatorily redeemable preferred stock, including our at-the-market programs.
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
September 30, 2021, the closing market price of our common stock was $13.87 per share, representing a 4.5% premium to our net asset value (NAV) of $13.27 per share as of September 30, 2021. 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.
Regulatory Compliance
Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage
limitations of the 1940 Act, which require us to have asset coverage (as defined in Sections 18 and 61 of the 1940 Act), of at least 150% on each of our senior securities representing indebtedness and our senior securities that are stock (such as
our previously outstanding series of term preferred stock).
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.
As of September 30, 2021,
our asset coverage ratio on our senior securities representing indebtedness was 254.5%.
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Investment Highlights
Investment Activity
During the six months ended
September 30, 2021, the following significant transactions occurred:
In May 2021, we dissolved our investment in Channel Technologies Group, LLC (CTG) and recorded a
realized loss of $1.8 million.
In June 2021, we invested $10.0 million in Nocturne Villa Rentals, Inc. (Nocturne) through a
combination of secured first lien debt and preferred equity. Nocturne, headquartered in Telluride, Colorado, is a luxury vacation rental manager.
In June 2021, we invested an additional $6.5 million in J.R. Hobbs Co. Atlanta, LLC (J.R.
Hobbs) in the form of secured second lien debt. In connection with the investment, our secured second lien debt was converted to secured first lien debt.
In June 2021, we sold our investment in Head Country, Inc. (Head Country), which resulted in success
fee income of $2.0 million and a realized gain of $3.6 million. In connection with the sale, we received net cash proceeds of $16.7 million, including the repayment of our debt investment of $9.1 million at par.
In July 2021, we invested an additional $5.9 million in the form of secured first lien debt into Nocturne.
In July 2021, we invested $24.3 million in Utah Pacific Bridge & Steel, Ltd. (Utah
Pacific) through a combination of secured first lien debt and preferred equity. Utah Pacific, headquartered in Lindon, Utah, is a manufacturer of large steel components used in bridge replacement, rehabilitation, and construction.
In September 2021, one of our portfolio companies, D.P.M.S., Inc. (Danco), merged with another of our
portfolio companies, Galaxy Technologies, Inc. (Galaxy), into a newly formed portfolio company, Galaxy Technologies Holdings, Inc. (Galaxy Technologies Holdings). Our debt investments in Danco, which totaled
$12.3 million at principal and cost, and Galaxy, which totaled $13.0 million at principal and cost, were converted into two second lien term loans with an aggregate cost and principal of $25.3 million to Galaxy Technologies Holdings.
Our common equity investment in Danco, with a cost basis of $0.0 million, and our preferred and common equity investments in Galaxy, with an aggregate cost basis of $11.5 million, were converted into a common equity investment in Galaxy
Technologies Holdings with a combined cost basis of $11.5 million.
The following significant investment activity occurred
subsequent to September 30, 2021. Also refer to Note 13 Subsequent Events in the accompanying Notes to Consolidated Financial Statements .
In October 2021, we invested $10.5 million in an existing portfolio company, Bassett Creek Services,
Inc., in the form of secured first lien debt.
Recent Developments
Distributions and Dividends
In October 2021, our
Board of Directors declared the following monthly and supplemental cash distributions to common stockholders:
Record Date
Payment Date
Distribution per Common Share
October 22, 2021
October 29, 2021
$
0.075
November 19, 2021
November 30, 2021
0.075
December 7, 2021
December 15, 2021
0.090
(A)
December 23, 2021
December 31, 2021
0.075
Total for the Quarter:
$
0.315
(A)
Represents a supplemental distribution to common stockholders.
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LIBOR Transition
In general, our investments in debt securities have a term of five years, accrue interest at variable rates (based on the
one-month London Interbank Offered Rate (LIBOR)) and, to a lesser extent, at fixed rates. Most U.S. dollar LIBOR are currently anticipated to be phased out in June 2023. LIBOR may transition to a
new standard rate, the Secured Overnight Financing Rate (SOFR), which will incorporate certain overnight repo market data collected from multiple data sets. To attain an equivalent one-month rate,
we currently intend to adjust the SOFR to minimize the difference between the interest that a borrower would be paying using LIBOR versus what it will be paying using SOFR. We are currently monitoring the transition and cannot assure you
whether SOFR will become a standard rate for variable rate debt. We expect we will need to continue to renegotiate a limited number of loan agreements with our portfolio companies to include fallback language providing a mechanism for the
parties to negotiate a new reference interest rate in the event that LIBOR ceases to exist. Assuming that SOFR replaces LIBOR and is appropriately adjusted to equate to one-month LIBOR, we expect that there
should be minimal impact on our operations.
COVID-19 Impact
We continue to closely monitor and work with our portfolio companies to navigate the significant challenges created by the
continuing COVID-19 pandemic and remain focused on ensuring the safety of the 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, including its variants, 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.
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RESULTS OF OPERATIONS
Comparison of the Three Months Ended September 30, 2021 to the Three Months Ended September 30, 2020
For the Three Months Ended September 30,
2021
2020
$ Change
% Change
INVESTMENT INCOME
Interest income
$
14,298
$
11,840
$
2,458
20.8
%
Dividend and success fee income
4,240
4,240
NM
Total investment income
18,538
11,840
6,698
56.6
EXPENSES
Base management fee
3,577
2,989
588
19.7
Loan servicing fee
1,794
1,747
47
2.7
Incentive fee
7,351
452
6,899
NM
Administration fee
571
390
181
46.4
Interest and dividend expense
3,884
3,213
671
20.9
Amortization of deferred financing costs and discounts
452
466
(14
)
(3.0
)
Other
1,468
1,032
436
42.2
Expenses before credits from Adviser
19,097
10,289
8,808
85.6
Credits to fees from Adviser
(2,724
)
(2,817
)
93
(3.3
)
Total expenses, net of credits to fees
16,373
7,472
8,901
119.1
NET INVESTMENT INCOME
2,165
4,368
(2,203
)
(50.4
)
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain on investments
464
621
(157
)
(25.3
)
Net realized loss on other
(1,998
)
(1,998
)
NM
Net unrealized appreciation (depreciation) of investments
27,504
1,641
25,863
NM
Net realized and unrealized gain (loss)
25,970
2,262
23,708
NM
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
$
28,135
$
6,630
$
21,505
324.4
BASIC AND DILUTED PER COMMON SHARE:
Net investment income
$
0.07
$
0.13
$
(0.06
)
(46.2
)%
Net increase in net assets resulting from operations
$
0.85
$
0.20
$
0.65
325.0
NM = Not Meaningful
Investment Income
Total investment income increased
56.6% for the three months ended September 30, 2021, as compared to the prior year period. The increase was due to increases in both interest income and dividend and success fee income.
Interest income from our investments in debt securities increased 20.8% for the three months ended September 30, 2021, as compared to the prior year
period. During the three months ended September 30, 2021, we received $1.6 million of past due interest from certain loans that were previously on non-accrual status. 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 September 30, 2021 was $425.5 million, compared to $388.7 million for the prior year period. This increase was primarily due to the $79.5 million of loans returned
to accrual status, the origination of $54.2 million of new debt investments, and $48.4 million of follow-on debt investments to existing portfolio companies, partially offset by $64.2 million of
loans placed on non-accrual status and $43.3 million of pay-offs, restructurings, or write-offs of debt investments after June 30, 2020, 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 13.3% for the three months ended September 30, 2021, compared to 12.1% 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.
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Table of Contents
As of September 30, 2021, our loans to J.R. Hobbs, The Mountain Corporation (The Mountain),
and SBS Industries Holdings, Inc (SBS) were on non-accrual status, with an aggregate debt cost basis of $81.3 million. As of September 30, 2020, certain of our loans to B+T Group
Acquisition, Inc. (B+T), Horizon Facilities Services, Inc. (Horizon), 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 $94.9 million.
Dividend and success fee income for the
three months ended September 30, 2021 increased $4.2 million from the prior year period. During the three months ended September 30, 2021, dividend and success fee income consisted of $2.6 million of success fee income and
$1.6 million of dividend income. During the three months ended September 30, 2020, we did not earn any dividend and success fee income.
As of
September 30, 2021 and March 31, 2021, 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 119.1% during the three months ended September 30, 2021, as compared to the prior year period, primarily due to an increase in
the incentive fee, as well as increases in interest and dividend expense, and the base management fee.
In accordance with GAAP, we recorded a
$5.6 million capital gains-based incentive fee during the three months ended September 30, 2021, compared to a capital gains-based incentive fee of $0.5 million during the three months ended September 30, 2020. 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 $1.8 million for
the three months ended September 30, 2021, as compared to the prior year period, as the increase in pre-incentive fee net investment income more than offset the increase 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 September 30,
2021
2020
Average total assets subject to base management fee (A)
$
715,400
$
597,800
Multiplied by prorated annual base management fee of 2.0%
0.5
%
0.5
%
Base management fee (B)
3,577
2,989
Credits to fees from Adviser -
other (B)
(930
)
(1,070
)
Net base management fee
$
2,647
$
1,919
Loan servicing fee (B)
1,794
1,747
Credits to base management fee - loan servicing
fee (B)
(1,794
)
(1,747
)
Net loan servicing fee
$
$
Incentive fee income-based
$
1,757
$
Incentive fee capital
gains-based (C)
5,594
452
Total incentive fee (B)
$
7,351
$
452
Credits to fees from Adviser -
other (B)
Net total incentive fee
$
7,351
$
452
(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 20.9% during the three
months ended September 30, 2021, as compared to the prior year period, primarily due to an increase in interest expense, which was partially offset by a decrease in dividend expense. Interest expense increased by $2.0 million due to the
issuance of the 2026 Notes in March 2021 and the 2028 Notes in August 2021, which was partially offset by lower interest expense related to the Credit Facility. The weighted-average balance outstanding on the Credit Facility during the three months
ended September 30, 2021 was $24.4 million, as compared to $106.1 million in the prior year period.
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Table of Contents
The effective interest rate on the Credit Facility, excluding the impact of deferred financing costs, during the three months ended September 30, 2021 was 10.0%, as compared to 3.6% in the
prior year period. The increase in the effective interest rate on the Credit Facility was primarily a result of an increase in unused commitment fees on the undrawn portion of the Credit Facility. Dividend expense decreased by $1.4 million as a
result of the 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) redemptions in March 2021 and August 2021,
respectively, partially offset by the Series E ATM Program sales during the prior fiscal year.
Realized and Unrealized Gain (Loss)
Net Realized Gain (Loss) on Investments
During the three
months ended September 30, 2021, we recorded net realized gains on investments of $0.5 million, primarily related to previous exits of certain investments. During the three months ended September 30, 2020, we recorded net realized
gains on investments of $0.6 million related to previous exits of certain investments.
Net Realized Gain (Loss) on Other
During the three months ended September 30, 2021, we recorded a net realized loss on other of $2.0 million, which primarily related to unamortized
deferred issuance costs written off upon the redemption of our Series E Term Preferred Stock in August 2021. During the three months ended September 30, 2020, there were no realized gains or losses on other.
Net Unrealized Appreciation (Depreciation) of Investments
During the three months ended September 30, 2021, we recorded net unrealized appreciation of investments of $27.5 million. The realized gains
(losses) and unrealized appreciation (depreciation) across our investments for the three months ended September 30, 2021 were as follows:
Three Months Ended September 30, 2021
Portfolio Company
Realized
Gain
(Loss)
Unrealized
Appreciation
(Depreciation)
Reversal of
Unrealized
(Appreciation)
Depreciation
Net Gain
(Loss)
Schylling, Inc.
$
$
6,277
$
$
6,277
Basset Creek Services, Inc.
5,474
5,474
Counsel Press, Inc.
4,903
4,903
Old World Christmas, Inc.
3,986
3,986
B+T Group Acquisition, Inc.
3,971
3,971
Educators Resource, Inc.
3,607
3,607
Horizon Facilities Service, Inc.
2,983
2,983
ImageWorks Display and Marketing Group, Inc.
2,938
2,938
Brunswick Bowling Products, Inc.
2,326
2,326
Mason West, LLC
2,064
2,064
The Maids International, LLC
1,873
1,873
SOG Specialty Knives and Tools, LLC
1,796
1,796
Nocturne Villa Rentals, Inc.
892
892
Diligent Delivery Systems
525
525
J.R. Hobbs Co. Atlanta, LLC
(2,625
)
(2,625
)
SBS Industries Holdings, Inc.
(3,278
)
(3,278
)
Ginsey Home Solutions, Inc.
(3,903
)
(3,903
)
Galaxy Technologies Holdings, Inc.
(6,320
)
(6,320
)
Other, net (<$1.0 million, net)
464
15
479
Total
$
464
$
27,504
$
$
27,968
The primary drivers of net unrealized appreciation of $27.5 million for the three months ended September 30, 2021
were the increased performance of certain portfolio companies and an increase in comparable transaction multiples used to estimate the fair value of certain of our portfolio companies, which were partially offset by a decline in performance of
certain other portfolio companies. In part, the performance of certain of our portfolio companies was driven by the impact COVID-19 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, or the reversal of such impact towards pre-COVID-19 levels.
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Table of Contents
During the three months ended September 30, 2020, we recorded net unrealized appreciation of
investments of $1.6 million. The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the three months ended September 30, 2020 were as follows:
Three Months Ended September 30, 2020
Portfolio Company
Realized
Gain
(Loss)
Unrealized
Appreciation
(Depreciation)
Reversal of
Unrealized
(Appreciation)
Depreciation
Net Gain
(Loss)
Pioneer Square Brands, Inc.
$
$
11,867
$
$
11,867
Ginsey Home Solutions, Inc.
2,414
2,414
Frontier Packaging, Inc.
2,150
2,150
SOG Specialty Knives & Tools, LLC
1,982
1,982
ImageWorks Display and Marketing Group, Inc.
1,451
1,451
Counsel Press, Inc.
(1,239
)
(1,239
)
Edge Adhesives Holdings, Inc.
(1,269
)
(1,269
)
D.P.M.S., Inc.
(2,253
)
(2,253
)
PSI Molded Plastics, Inc.
(4,592
)
(4,592
)
Brunswick Bowling Products, Inc.
(8,606
)
(8,606
)
Other, net (<$1.0 million, net)
621
(264
)
357
Total
$
621
$
1,641
$
$
2,262
The primary driver of net unrealized appreciation of investments of $1.6 million for the three months ended
September 30, 2020 was an increase in performance of certain of our portfolio companies, which was partially offset by decreased performance of certain of our other portfolio companies and a decrease in comparable multiples used to estimate the
fair value of some 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.
Across our entire investment portfolio, we recorded net unrealized appreciation of $1.5 million and $26.0 million on
our debt and on our equity positions, respectively, for the three months ended September 30, 2021. As of September 30, 2021, the fair value of our investment portfolio was more than the cost basis by $45.3 million, as compared to
June 30, 2021, when the fair value of our investment portfolio was more than the cost basis by $17.8 million, representing net unrealized appreciation of $27.5 million for the three months ended September 30, 2021. Our entire
portfolio had a fair value of 106.6% of cost as of September 30, 2021.
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Table of Contents
Comparison of the Six Months Ended September 30, 2021 to the Six Months Ended September 30,
2020
For the Six Months Ended September 30,
2021
2020
$ Change
% Change
INVESTMENT INCOME
Interest income
$
30,290
$
22,365
$
7,925
35.4
%
Dividend and success fee income
6,274
182
6,092
NM
Total investment income
36,564
22,547
14,017
62.2
EXPENSES
Base management fee
6,897
5,845
1,052
18.0
Loan servicing fee
3,662
3,456
206
6.0
Incentive fee
19,599
(302
)
19,901
NM
Administration fee
970
836
134
16.0
Interest and dividend expense
7,688
6,232
1,456
23.4
Amortization of deferred financing costs and discounts
908
840
68
8.1
Other
2,822
2,360
462
19.6
Expenses before credits from Adviser
42,546
19,267
23,279
120.8
Credits to fees from Adviser
(5,843
)
(5,261
)
(582
)
11.1
Total expenses, net of credits to fees
36,703
14,006
22,697
162.1
NET INVESTMENT (LOSS) INCOME
(139
)
8,541
(8,680
)
(101.6
)
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain on investments
2,393
1,374
1,019
74.2
Net realized loss on other
(1,998
)
(1,998
)
NM
Net unrealized appreciation (depreciation) of investments
75,018
(3,246
)
78,264
NM
Net realized and unrealized gain (loss)
75,413
(1,872
)
77,285
NM
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
$
75,274
$
6,669
$
68,605
NM
BASIC AND DILUTED PER COMMON SHARE:
Net investment (loss) income
$
$
0.26
$
(0.26
)
(100.0
)
Net increase in net assets resulting from operations
$
2.27
$
0.20
$
2.07
NM
%
NM = Not Meaningful
Investment Income
Total investment income increased
62.2% for the six months ended September 30, 2021, as compared to the prior year period. The increase was due to increases in both interest income and dividend and success fee income.
Interest income from our investments in debt securities increased 35.4% for the six months ended September 30, 2021, as compared to the prior year
period. During the six months ended September 30, 2021, we received $3.9 million of past due interest from certain loans that were previously on non-accrual status. 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 six months ended September 30, 2021 was $445.7 million, compared to $373.5 million for the prior year period. This increase was primarily due to $79.5 million of loans returned to accrual status,
the origination of $54.2 million of new debt investments, and $48.5 million of follow-on debt investments to existing portfolio companies, partially offset by $64.2 million of loans
placed on non-accrual status and $43.3 million of pay-offs, restructurings, or write-offs of debt investments after March 31, 2020, 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 13.6% for the six months ended September 30, 2021, compared to 11.9% 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 September 30, 2021, our loans to J.R. Hobbs, The Mountain, and SBS were on non-accrual status, with an
aggregate debt cost basis of $81.3 million. As of September 30, 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
$94.9 million.
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Table of Contents
Dividend and success fee income for the six months ended September 30, 2021 increased by
$6.1 million from the prior year period. During the six months ended September 30, 2021, dividend and success fee income consisted of $4.7 million of success fee income and $1.6 million of dividend income. During the six months
ended September 30, 2020, dividend and success fee income consisted of $0.2 million of success fee income.
As of September 30, 2021 and
March 31, 2021, 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 162.1%
during the six months ended September 30, 2021, as compared to the prior year period, primarily due to an increase in the incentive fee, as well as increases in interest and dividend expense, and the base management fee, partially offset by an
increase in credits to fees from the Adviser.
In accordance with GAAP, we recorded a $15.9 million capital gains-based incentive fee during the six
months ended September 30, 2021, compared to a $0.3 million reversal of the capital gains-based incentive fee during the six months ended September 30, 2020. 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 $3.7 million for the six months ended September 30, 2021, as compared to the
prior year period, as the increase in pre-incentive fee net investment income more than offset the increase 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:
Six Months Ended September 30,
2021
2020
Average total assets subject to base management fee (A)
$
689,700
$
584,500
Multiplied by prorated annual base management fee of 2.0%
1.0
%
1.0
%
Base management fee (B)
6,897
5,845
Credits to fees from Adviser -
other (B)
(2,181
)
(1,805
)
Net base management fee
$
4,716
$
4,040
Loan servicing fee (B)
3,662
3,456
Credits to base management fee - loan servicing
fee (B)
(3,662
)
(3,456
)
Net loan servicing fee
$
$
Incentive fee income-based
$
3,695
$
Incentive fee capital
gains-based (C)
15,904
(302
)
Total incentive fee (B)
$
19,599
$
(302
)
Credits to fees from Adviser -
other (B)
Net total incentive fee
$
19,599
$
(302
)
(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 23.4% during the six
months ended September 30, 2021, as compared to the prior year period, primarily due to the increase in interest expense partially offset by a decrease in dividend expense. Interest expense increased by $3.4 million primarily due to the
issuance of the 2026 Notes in March 2021 and the 2028 Notes in August 2021, which was partially offset by lower interest expense related to the Credit Facility. The weighted-average balance outstanding on the Credit Facility during the six months
ended September 30, 2021 was $25.4 million, as compared to $80.5 million in the prior year period. The effective interest rate on the Credit Facility, excluding the impact of deferred financing costs, during the six months ended
September 30, 2021 was 9.6%, as compared to 4.5% in the prior year period. The increase in the effective interest rate on the Credit Facility was primarily a result of an increase in unused commitment fees on the undrawn portion of the Credit
Facility. Dividend expense decreased by $2.0 million as a result of the 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) redemptions in March 2021 and August 2021, respectively, partially offset by the Series E ATM Program sales during the prior fiscal year.
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Table of Contents
Realized and Unrealized Gain (Loss)
Net Realized Gain on Investments
During the six months
ended September 30, 2021, we recorded net realized gains on investments of $2.4 million, primarily related to a $3.6 million realized gain from the exit of Head Country and $0.5 million realized gains related to previous exits of
certain investments, partially offset by a $1.8 million realized loss from the dissolution of CTG. During the six months ended September 30, 2020, we recorded net realized gains on investments of $1.4 million related to previous exits
of certain investments.
Net Realized Gain (Loss) on Other
During the six months ended September 30, 2021, we recorded a net realized loss on other of $2.0 million which primarily related to unamortized
deferred issuance costs written off upon the redemption of our Series E Term Preferred Stock in August 2021. During the six months ended September 30, 2020, there were no realized gains or losses on other.
Net Unrealized Appreciation (Depreciation) of Investments
During the six months ended September 30, 2021, we recorded net unrealized appreciation of investments of $75.0 million. The realized gains (losses)
and unrealized appreciation (depreciation) across our investments for the six months ended September 30, 2021 were as follows:
Six Months Ended September 30, 2021
Portfolio Company
Realized
Gain
(Loss)
Unrealized
Appreciation
(Depreciation)
Reversal of
Unrealized
(Appreciation)
Depreciation
Net Gain
(Loss)
B+T Group Acquisition, Inc.
$
$
15,268
$
$
15,268
Old World Christmas, Inc.
12,636
12,636
Schylling, Inc.
10,522
10,522
Educators Resource, Inc.
8,811
8,811
Basset Creek Services, Inc.
8,487
8,487
SOG Specialty Knives and Tools, LLC
7,580
7,580
Counsel Press, Inc.
7,045
7,045
Horizon Facilities Service, Inc.
6,417
6,417
ImageWorks Display and Marketing Group, Inc.
5,302
5,302
PSI Molded Plastics, Inc.
3,633
3,633
Brunswick Bowling Products, Inc.
3,498
3,498
Galaxy Tool Holding Corporation
1,404
1,404
Mason West, LLC
1,172
1,172
Head Country, Inc.
3,627
(2,469
)
1,158
The Maids International, LLC
1,054
1,054
Channel Technologies Group, LLC
(1,841
)
1,841
Pioneer Square Brands, Inc.
(1,244
)
(1,244
)
J.R. Hobbs Co. Atlanta, LLC
(2,511
)
(2,511
)
SBS Industries Holdings, Inc.
(3,167
)
(3,167
)
Ginsey Home Solutions, Inc.
(4,305
)
(4,305
)
Galaxy Technologies Holdings, Inc.
(6,320
)
(6,320
)
Other, net (<$1.0 million, net)
607
312
52
971
Total
$
2,393
$
75,594
$
(576
)
$
77,411
The primary drivers of net unrealized appreciation of $75.0 million for the six months ended September 30, 2021 were
the increased performance of certain portfolio companies, the reversal of previously recorded unrealized depreciation of our investment in CTG upon its dissolution, and an increase in comparable transaction multiples used to estimate the fair value
of certain of our portfolio companies, which were partially offset by the reversal of previously recorded unrealized appreciation of our investment in Head Country and a decline in performance of certain other portfolio companies. In part, the
performance of certain of our portfolio companies was driven by the impact COVID-19 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, or the reversal of such impact
towards pre-COVID-19 levels.
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Table of Contents
During the six months ended September 30, 2020, we recorded net unrealized depreciation of investments
of $3.2 million. The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the six months ended September 30, 2020 were as follows:
Six Months Ended September 30, 2020
Portfolio Company
Realized
Gain
(Loss)
Unrealized
Appreciation
(Depreciation)
Reversal of
Unrealized
(Appreciation)
Depreciation
Net Gain
(Loss)
Pioneer Square Brands, Inc.
$
$
16,215
$
$
16,215
Ginsey Home Solutions, Inc.
3,670
3,670
Frontier Packaging, Inc.
2,534
2,534
SOG Specialty Knives and Tools, LLC
2,159
2,159
Galaxy Tool Holding Corporation
1,798
1,798
Head Country, Inc.
846
846
Cambridge Sound Management, Inc.
740
740
B+T Group Acquisition, Inc.
(588
)
(588
)
Horizon Facilities Services, Inc.
(1,415
)
(1,415
)
Bassett Creek Services, Inc.
(1,828
)
(1,828
)
Counsel Press, Inc.
(1,980
)
(1,980
)
D.P.M.S., Inc.
(2,637
)
(2,637
)
Nth Degree, Inc.
113
(3,649
)
(3,536
)
PSI Molded Plastics, Inc.
(4,215
)
(4,215
)
Brunswick Bowling Products, Inc.
(13,222
)
(13,222
)
Other, net (<$1.0 million, net)
521
(934
)
(413
)
Total
$
1,374
$
(3,246
)
$
$
(1,872
)
The primary drivers of net unrealized depreciation of $3.2 million for the six months ended September 30, 2020 were
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.
Across our entire investment portfolio, we recorded net unrealized appreciation of $7.4 million and $67.6 million on our debt and on our equity
positions, respectively, for the six months ended September 30, 2021. As of September 30, 2021, the fair value of our investment portfolio was more than the cost basis by $45.3 million, as compared to March 31, 2021, when the
fair value of our investment portfolio was less than the cost basis by $29.7 million, representing net unrealized appreciation of $75.0 million for the six months ended September 30, 2021. Our entire portfolio had a fair value of
106.6% of cost as of September 30, 2021.
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LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Net cash used in operating
activities for the six months ended September 30, 2021 was $6.3 million, as compared to net cash used in operating activities of $59.4 million for the six months ended September 30, 2020. This change was primarily due to a
decrease in purchases of investments, an increase in principal repayments of investments and net proceeds from the sale of investments, as well as a decrease in tax payments for our deemed distributions declared in prior fiscal years.
Purchases of investments were $47.6 million during the six months ended September 30, 2021, compared to $57.4 million during the six months
ended September 30, 2020. Principal repayments and net proceeds from the sale of investments totaled $22.2 million during the six months ended September 30, 2021, compared to $2.1 million during the three months ended
September 30, 2020.
As of September 30, 2021, we had equity investments in or loans to 27 portfolio companies with an aggregate cost basis of
$691.2 million. As of September 30, 2020, we had equity investments in or loans to 29 portfolio companies with an aggregate cost basis of $655.9 million.
The following table summarizes our total portfolio investment activity during the six months ended September 30, 2021 and 2020:
Six Months Ended September 30,
2021
2020
Beginning investment portfolio, at fair value
$
633,829
$
565,924
New investments
34,200
46,902
Disbursements to existing portfolio companies
13,350
10,480
Unscheduled principal repayments
(14,060
)
(8,000
)
Net proceeds from sales of investments
(7,648
)
(3,107
)
Net realized gain on investments
1,805
Net unrealized appreciation (depreciation) of investments
75,594
(3,246
)
Reversal of net unrealized appreciation of investments
(576
)
Amortization of premiums, discounts, and acquisition costs, net
9
9
Ending investment portfolio, at fair value
$
736,503
$
608,962
The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year,
assuming no voluntary prepayments, as of September 30, 2021:
Amount
For the remaining six months ending March 31:
2022
$
30,460
For the fiscal years ending March 31:
2023
114,850
2024
93,055
2025
171,777
2026
52,250
Thereafter
52,246
Total contractual repayments
$
514,638
Adjustments to cost basis of debt investments
(21
)
Investments in equity securities
176,602
Total cost basis of investments
held as of September 30, 2021:
$
691,219
Financing Activities
Net cash provided by financing activities for the six months ended September 30, 2021 was $6.3 million, which consisted primarily of
$134.6 million in gross proceeds from the issuance of our 2028 Notes, partially offset by the redemption of our Series E Term Preferred Stock of $94.4 million, $16.9 million in distributions to common stockholders, $13.5 million
of net repayments under the Credit Facility, and $3.4 million of deferred financing and offering costs.
Net cash provided by financing activities
for the six months ended September 30, 2020 was $57.9 million, which consisted primarily of $67.4 million of net borrowings under the Credit Facility, $6.3 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 $16.9 million in distributions to common stockholders.
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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 six months
from April through September 2021, and supplemental distributions of $0.06 and $0.03 per common share in June and September 2021, respectively. See also Recent DevelopmentsDistributions and Dividends for a discussion of cash
distributions to common stockholders declared by our Board of Directors in October 2021.
For the fiscal year ended March 31, 2021, Investment
Company Taxable Income exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $16.1 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, 2021, net capital gains exceeded distributions declared and paid, and, in accordance with
Section 855(a) of the Code, we elected to treat $8.5 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,
2021, we recorded $2.0 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. For the six months ended September 30, 2021, we recorded $2.7 million of net adjustments for estimated permanent
book-tax differences to reflect tax character, which decreased Capital in excess of par value and Overdistributed net investment income and increased Accumulated net realized gain in excess of
distributions.
Preferred Stock Dividends
Our
Board of Directors declared and we paid monthly cash dividends of $0.1328125 per share to holders of our Series E Term Preferred Stock per month from April through July 2021 and $0.07968750 per share of our Series E Term Preferred Stock for the
period from August 1, 2021 up to, but excluding, the redemption date of August 19, 2021. In accordance with GAAP, we treat these monthly dividends as an operating expense.
Dividend Reinvestment Plan
Our common
stockholders who hold their shares through our transfer agent, Computershare, Inc. (Computershare), have the option to participate in a dividend reinvestment plan offered by Computershare, as the plan agent. This is an opt in
dividend reinvestment plan, meaning that common stockholders may elect to have their cash distributions automatically reinvested in additional shares of our common stock. Common stockholders who do not make such election will receive their
distributions in cash. Any distributions reinvested under the plan will be taxable to a common stockholder to the same extent, and with the same character, as if the common stockholder had received the distribution in cash. The common stockholder
generally will have an adjusted basis in the additional common shares purchased through the plan equal to the dollar amount that would have been received if 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 September 3, 2021,
we filed a registration statement on Form N-2 (File No. 333-259302), which the SEC declared effective on October 15, 2021. The registration statement permits
us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities, and warrants to purchase common stock, preferred stock, or
debt securities, including through concurrent, separate offerings of such securities. As of the date of this report, we had the ability to issue up to $300.0 million of the securities registered under the registration statement.
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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. On August 11, 2021, we terminated the equity distribution agreements with each of the Common Stock ATM Sales Agents.
We did not sell any shares of our common stock under the Common Stock ATM Program during the six months ended September 30, 2021. During the year ended
March 31, 2021, 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 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 September 30, 2021, the closing market price of our common stock was $13.87 per share, representing a 4.5% premium to our NAV per
share of $13.27 as of September 30, 2021.
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 accompanying Consolidated Statements of Assets and Liabilities and were amortized over the period ending August 31, 2025, the mandatory redemption date, prior to
redemption in August 2021. Prior to redemption in August 2021, the Series E Term Preferred Stock provided for a fixed dividend equal to 6.375% per year, payable monthly.
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. On August 10,
2021, we terminated our sales agreements with each of the Series E ATM Sales Agents.
We did not sell any shares of our Series E Term Preferred Stock
under the Series E ATM Program during the six months ended September 30, 2021. During the year ended March 31, 2021, 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 March 2021, we used a portion of the proceeds from the issuance of our 2026 Notes, to voluntarily redeem all
outstanding shares of our Series D Term Preferred Stock, which had a liquidation preference of $25.00 per share. In connection with the voluntary redemption, we incurred a loss on extinguishment of debt of $0.8 million, which was recorded in
Realized loss on other in our Consolidated Statements of Operations and which was primarily comprised of unamortized deferred issuance costs at the time of redemption. Prior to redemption in March 2021, the Series D Term Preferred Stock
provided for a fixed dividend equal to 6.25% per year, payable monthly, and would have otherwise been subject to mandatory redemption on September 30, 2023.
In August 2021, we used a portion of the proceeds from the issuance of our 2028 Notes, to voluntarily redeem all outstanding shares of our Series E Term
Preferred Stock, which had a liquidation preference of $25.00 per share. In connection with the voluntary redemption, we incurred a loss on extinguishment of debt of $2.0 million, which was recorded in Realized loss on other in our accompanying
Consolidated Statements of Operations and which was primarily comprised of unamortized deferred issuance costs at the time of redemption.
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Revolving Line of Credit
On March 8, 2021, we, through our wholly-owned subsidiary, Gladstone Business Investment, LLC (Business Investment), entered into Amendment
No. 6 to the Fifth Amended and Restated Credit Agreement, originally entered into on April 30, 2013, 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 February 29, 2024, and if not renewed or extended by such date, all principal and interest will be due and payable on February 28, 2026 (two years
after the revolving period end date). As of September 30, 2021, the Credit Facility provided two one-year extension options that may be exercised on or before the first and second anniversary of
March 8, 2021, subject to approval by all lenders. Additionally, as part of this amendment, the COVID-19 Relief Period (described below) was extended to September 30, 2021. We incurred fees of
approximately $1.0 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 amended the Credit Facility to (i) add LIBOR replacement language; (ii) implement a 0.5% LIBOR floor; (iii) reduce the facility size from $200.0 million
to $180.0 million, which may be expanded to $300.0 million through additional commitments; and (iv) provide certain other changes to existing terms and covenants. In addition, Amendment No. 5 provided for certain temporary
changes during the COVID-19 Relief Period (August 10, 2020 until March 31, 2021, subject to extension under 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 February 29, 2024, with the margin then increasing to 3.10% for the period from February 29, 2024 to February 28, 2025, and increasing further to 3.35% thereafter. The Credit Facility has an unused commitment fee
on the daily unused commitment amount of 0.50% per annum if the average unused commitment amount for the period is less than or equal to 50% of the total commitment amount, 0.75% per annum if the average unused commitment amount for the period is
greater than 50% but less than or equal to 65% of the total commitment amount, and 1.00% per annum if the average unused commitment amount for the period is greater than 65% of the total commitment amount.
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
$286.3 million as of September 30, 2021, (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 September 30, 2021, and as defined in the performance guaranty of the Credit Facility, we had a net worth of
$695.2 million, asset coverage on our senior securities representing indebtedness of 254.5%, 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 September 30,
2021, we had availability, after adjustments for various constraints based on collateral quality, of $171.1 million under the Credit Facility and were in compliance with all covenants under the Credit Facility.
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Notes Payable
5.00% Notes due 2026
In March 2021, we completed a public
offering of the 2026 Notes with an aggregate principal amount of $127.9 million, which resulted in net proceeds of approximately $123.8 million after deducting underwriting discounts, commissions and offering costs borne by us. The 2026
Notes are traded under the ticker symbol GAINN on Nasdaq. The 2026 Notes will mature on May 1, 2026 and may be redeemed in whole or in part at any time or from time to time at the Companys option on or after May 1, 2023.
The 2026 Notes bear interest at a rate of 5.00% per year (which equates to $6.4 million per year), payable quarterly in arrears.
The indenture
relating to the 2026 Notes contains certain covenants, including (i) an inability to incur additional debt or issue additional debt or preferred securities unless the Companys asset coverage meets the threshold specified in the 1940 Act
after such borrowing, (ii) an inability to declare any dividend or distribution (except a dividend payable in our stock) on a class of our capital stock or to purchase shares of our capital stock unless the Companys asset coverage meets
the threshold specified in the 1940 Act at the time of (and giving effect to) such declaration or purchase, and (iii) if, at any time, we are not subject to the reporting requirements of the Exchange Act, we will provide the holders of the 2026
Notes, as applicable, and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements.
The
2026 Notes are recorded at the aggregate principal amount, less underwriting discounts, commissions, and offering costs, on our accompanying Consolidated Statements of Assets and Liabilities . Total underwriting discounts, commissions,
and offering costs related to this offering were $4.1 million, which have been recorded as discounts to the aggregate principal amount on our accompanying Consolidated Statements of Assets and Liabilities and are being
amortized over the period ending May 1, 2026, the maturity date.
4.875% Notes due 2028
In August 2021, we completed a public offering of the 2028 Notes with an aggregate principal amount of $134.6 million, which resulted in net proceeds of
approximately $131.3 million after deducting underwriting discounts, commissions and offering costs borne by us. The 2028 Notes are traded under the ticker symbol GAINZ on Nasdaq. The 2028 Notes will mature on November 1, 2028
and may be redeemed in whole or in part at any time or from time to time at the Companys option on or after November 1, 2023. The 2028 Notes bear interest at a rate of 4.875% per year (which equates to $6.6 million per year), payable
quarterly in arrears.
The indenture relating to the 2028 Notes contains certain covenants, including (i) an inability to incur additional debt or
issue additional debt or preferred securities unless the Companys asset coverage meets the threshold specified in the 1940 Act after such borrowing, (ii) an inability to declare any dividend or distribution (except a dividend payable in
our stock) on a class of our capital stock or to purchase shares of our capital stock unless the Companys asset coverage meets the threshold specified in the 1940 Act at the time of (and giving effect to) such declaration or purchase, and
(iii) if, at any time, we are not subject to the reporting requirements of the Exchange Act, we will provide the holders of the 2028 Notes, as applicable, and the trustee with audited annual consolidated financial statements and unaudited
interim consolidated financial statements.
The 2028 Notes are recorded at the aggregate principal amount, less underwriting discounts, commissions, and
offering costs, on our accompanying Consolidated Statements of Assets and Liabilities . Total underwriting discounts, commissions, and offering costs related to this offering were $3.3 million, which have been recorded as discounts
to the aggregate principal amount on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized over the period ending November 1, 2028, the maturity date.
OFF-BALANCE SHEET ARRANGEMENTS
Unlike PIK income, we generally do not recognize success fees as income until payment has been received. Due to the contingent nature of success fees, there
are no guarantees that we will be able to collect any or all of these success fees or know the timing of any such collections. As a result, as of September 30, 2021 and March 31, 2021, we had unrecognized, contractual off-balance sheet success fee receivables of $49.0 million and $46.2 million (or approximately $1.48 and $1.39 per common share), respectively, on our debt investments. Consistent with GAAP, we have not
recognized success fee receivables and related income in our accompanying Consolidated Financial Statements until earned.
CONTRACTUAL
OBLIGATIONS
We have line of credit and delayed draw term 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 September 30, 2021 to be immaterial.
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As of September 30, 2021, 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 September 30, 2021, 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
September 30, 2021, 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)
$
8,900
$
$
$
8,900
$
Notes payable
262,488
127,938
134,550
Secured borrowing
5,096
5,096
Interest payments on obligations (C)
85,957
15,355
30,716
26,221
13,665
Total
$
362,441
$
15,355
$
30,716
$
168,155
$
148,215
(A)
Excludes unused line of credit and delayed draw term loan commitments and guaranties to our portfolio companies
in the aggregate principal amount of $5.3 million.
(B)
Principal balance of borrowings outstanding under the Credit Facility, based on the maturity date following the
current contractual revolving period end date.
(C)
Includes interest payments due on the Credit Facility, 2026 Notes, 2028 Notes, and secured borrowing, as
applicable. The amount of interest payments calculated for purposes of this table was based upon rates and outstanding balances as of September 30, 2021.
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.
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.
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The following table reflects risk ratings for all loans in our portfolio as of September 30, 2021 and
March 31, 2021:
Rating
September 30, 2021
March 31, 2021
Highest
9.0
9.0
Average
6.6
6.2
Weighted-average
7.0
6.6
Lowest
4.0
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, to qualify to be taxed as a RIC, we must distribute to stockholders at least 90% of our Investment Company Taxable Income, determined without regard to the dividends paid deduction. Our policy generally is to make
distributions to our stockholders in an amount up to 100% of Investment Company Taxable Income. We may retain some or all of our net long-term capital gains, if any, and designate them as deemed distributions, or distribute such gains to
stockholders in cash. See Liquidity and Capital Resources Distributions and Dividends to Stockholders .
In
an effort to limit federal excise taxes, we have to distribute to stockholders, during each calendar year, an amount close to the sum of: (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our net capital gains (both
long-term and short-term), if any, for the one-year period ending 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 September 30, 2021 and March 31, 2021.
Recent Accounting Pronouncements
Refer to Note 2
Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report for a description of recent accounting pronouncements.
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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 unsecured notes (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 90% of the loans in our portfolio at variable rates or variable rates with a floor mechanism, and up to approximately 10% at
fixed rates. As of September 30, 2021 and March 31, 2021, 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:
September 30, 2021
March 31, 2021
Variable rates with a floor
99.9
%
97.7
%
Fixed rates
0.1
2.3
Total
100.0
%
100.0
%
There have been no material changes in the quantitative and qualitative market risk disclosures during the six months ended
September 30, 2021 from those included in our Annual Report.
ITEM 4. CONTROLS AND PROCEDURES.
a) Evaluation of Disclosure Controls and Procedures
As of
September 30, 2021 (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 September 30, 2021 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
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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, 2021, as filed with the SEC on May 11, 2021. 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.
Issuer Purchases of Equity Securities
The following table provides information with respect to the purchases made by us of the Series E Term Preferred Stock during the second quarter of
our fiscal year 2022. We elected to voluntarily redeem the entirety of the then issued and outstanding Series E Term Preferred Stock, pursuant to their terms, on August 19, 2021. On November 1, 2021, we filed a Certificate of Elimination
of the Series E Term Preferred Stock with the Secretary of the State of Delaware, thereby removing the Certificate of Designation of the Series E Term Preferred Stock from our Amended and Restated Certificate of Incorporation.
We do not have any existing publicly announced repurchase plans or programs with respect to any class of our equity securities.
Period
(a)
Total Number
of Shares of
Series E
Term
Preferred
Stock
Purchased
(b)
Average Price
Paid per Share
of Series E
Term Preferred
Stock
(c)
Total Number of
Shares of Series E
Term Preferred
Stock
Purchased
as Part of Publicly
Announced Plans
or Programs
(d)
Maximum Number
of Shares of Series
E Term Preferred
Stock that May Yet
Be Purchased
Under the Plans
or
Programs
July 1 through 31, 2021
August 1 through 31, 2021
3,774,853
$
25.00
September 1 through 30, 2021
Total
3,774,853
$
25.00
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. MINE
SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
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Table of Contents
ITEM 6. EXHIBITS
See the exhibit index.
EXHIBIT INDEX
Exhibit
Description
3.1a
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.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 .
3.3
Certificate of Elimination of 6.375% Series E Cumulative Term Preferred Stock Due 2025*
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 6.375% 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 .
4.3
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 .
4.4
Second Supplemental Indenture between Gladstone Investment Corporation and UMB Bank, National Association, dated as of March
2, 2021, incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K (File No. 814-00704), filed March 2, 2021.
4.5
Third Supplemental Indenture between Gladstone Investment Corporation and UMB Bank, National Association, dated as of August
18, 2021, incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K (File No. 814-00704), filed August 18, 2021.
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.
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Table of Contents
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: November 2, 2021
66
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.