What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-03 compared with 2022-02-08 · 165 added, 355 removed, 325 unchanged (62% of the section changed)

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(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;

(6) changes in our industry, interest rates, exchange rates, regulation, or the general economy, including inflation;

(7) our business prospects and the prospects of our portfolio companies;

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(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;

(12) the impact of COVID-19 generally and on the economy, the capital markets and our portfolio companies, including the measures taken by governmental authorities to address it, which may precipitate or exacerbate other risks and/or uncertainties;

and (13) those factors described in Item 1A.

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federal income tax purposes and obtain favorable RIC tax treatment, we must meet certain requirements, including certain minimum distribution requirements.

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 Administrator’s 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.”).

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To achieve our objectives, our investment strategy is to invest in several categories of debt and equity securities, with individual investments generally totaling up to $70 million, although investment size may vary depending upon our total assets or available capital at the time of investment.

We expect that our investment portfolio over time will consist of approximately 75% in debt securities and 25% in equity securities, at cost.

As of December 31, 2021, our investment portfolio was comprised of 76.8% in debt securities and 23.2% in equity securities, at cost.

We expect that our investment portfolio over time will consist of approximately 75% in debt investments and 25% in equity investments, at cost.

As of June 30, 2022, our investment portfolio was comprised of 72.9% in debt investments and 27.1% in equity investments, at cost.

We focus on investing in lower middle market private businesses (which we generally define as companies with annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $3 million to $20 million) (“Lower Middle Market”) in the U.S.

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We anticipate that liquidity in our equity position will be achieved through a merger or acquisition of the portfolio company, a public offering of the portfolio company’s stock, or, to a lesser extent, by exercising our right to require the portfolio company to repurchase our warrants, though there can be no assurance that we will always have these rights.

We invest in portfolio companies that need funds for growth capital, to finance acquisitions, including management buyouts, recapitalize or, to a lesser extent, refinance their existing debt facilities.

We invest in portfolio companies that seek funds for management buyouts and/or growth capital to finance acquisitions, recapitalize or, to a lesser extent, refinance their existing debt facilities.

We seek to avoid investing in high-risk, early-stage enterprises.

We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity.

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.

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 and any future BDC or closed-end management investment company that is advised (or sub-advised if it controls the fund) by the Adviser, or any combination of the foregoing, subject to the conditions in the Co-Investment Order.

We believe the Co-Investment Order has enhanced and will continue to enhance our ability to further our investment objectives and strategies.

If we are participating in an investment with one or more co-investors, whether or not an affiliate of ours, our investment is likely to be smaller than if we were investing alone.

We are externally managed by the Adviser, an investment adviser registered with the SEC and an affiliate of ours, pursuant to an investment advisory and management agreement (the “Advisory Agreement”).

The Adviser manages our investment activities.

We have also entered into an administration agreement with Gladstone Administration, LLC, an affiliate of ours and the Adviser, whereby we pay separately for administrative services.

Our shares of common stock, our 5.00% Notes due 2026 (“2026 Notes”), and our 4.875% Notes due 2028 (“2028 Notes”) are traded on the Nasdaq Global Select Market (“Nasdaq”) under the trading symbols “GAIN,” “GAINN,” and “GAINZ,” respectively.

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While the business environment remains competitive, we continue to see new investment opportunities consistent with our investment strategy of providing a combination of debt and equity in support of management and independent sponsor-led buyouts of Lower Middle Market companies in the U.S.

During the nine months ended December 31, 2021, we invested in two new portfolio companies, exited three portfolio companies, merged two existing portfolio companies into a new portfolio company, and dissolved one portfolio company.

From our initial public offering in June 2005 through December 31, 2021, we invested in 55 companies, excluding investments in syndicated loans, for a total of approximately $1.5 billion, before giving effect to principal repayments and divestitures.

During the three months ended June 30, 2022, we invested in one new portfolio company and exited one portfolio company.

From our initial public offering in June 2005 through June 30, 2022, we invested in 56 companies, excluding investments in syndicated loans, for a total of approximately $1.5 billion, before giving effect to principal repayments and divestitures.

The majority of the debt securities in our portfolio have a success fee component, which enhances the yield on our debt investments.

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Due to the contingent nature of success fees, there are no guarantees that we will be able to collect any or all of these success fees or know the timing of any such collections.

As a result, as of December 31, 2021, we had unrecognized, contractual success fees of $49.3 million, or $1.48 per common share.

As a result, as of June 30, 2022, we had unrecognized, contractual success fees of $49.0 million, or $1.47 per common share.

Consistent with accounting principles generally accepted in the U.S.

(“GAAP”), we have not recognized success fee receivables and related income in our accompanying Consolidated Financial Statements until earned.

From inception through December 31, 2021, we completed sales of 27 portfolio companies that we acquired under our buyout strategy (which excludes investments in syndicated loans).

From inception through June 30, 2022, we completed sales of 28 portfolio companies that we acquired under our buyout strategy (which excludes investments in syndicated loans).

In the aggregate, these sales have generated $267.3 million in net realized gains and $39.4 million in other income upon exit, for a total increase to our net assets of $306.6 million.

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The 28 liquidity events have offset any realized losses since inception, which were primarily incurred during the 2008-2009 recession in connection with the sale of performing syndicated loans at a realized loss to pay off a former lender.

The successful exits, in part, enabled us to increase the monthly distribution by 87.5% from March 2011 through December 31, 2021, and allowed us to declare and pay 14 supplemental distributions to common stockholders through December 31, 2021.

The successful exits, in part, enabled us to increase the monthly distribution by 87.5% from March 2011 through June 30, 2022, and allowed us to declare and pay 16 supplemental distributions to common stockholders through June 30, 2022.

Capital Raising Efforts

We have been able to meet our capital needs through extensions of and increases to the Fifth Amended and Restated Credit Agreement dated April 30, 2013, as amended from time to time (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 Facility’s 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 nine months ended December 31, 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 then existing 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 then existing 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 December 31, 2021, the closing market price of our common stock was $17.08 per share, representing a 28.7% premium to our net asset value (“NAV”) of $13.27 per share as of December 31, 2021.

During the year ended March 31, 2022, we issued our 2028 Notes for gross proceeds of $134.6 million.

Refer to “ Liquidity and Capital Resources — Revolving Line of Credit ” for further discussion of the Credit Facility.

Although we have been able to access the capital markets historically, market conditions, including the impact of COVID-19, inflation, and rising interest rates, may continue to affect the trading price of our common stock and thus our ability to finance new investments through the issuance of common equity.

On June 30, 2022, the closing market price of our common stock was $14.08 per share, representing a 4.8% premium to our net asset value (“NAV”) of $13.44 per share as of June 30, 2022.

When our common stock trades below NAV, our ability to issue additional equity is constrained by provisions of the 1940 Act, which generally prohibits the issuance and sale of our common stock at an issuance price below the then-current NAV per share without stockholder approval, other than through sales to our then-existing stockholders pursuant to a rights offering.

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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 December 31, 2021, our asset coverage ratio on our senior securities representing indebtedness was 259.5%.

As of June 30, 2022, our asset coverage ratio on our senior securities representing indebtedness was 261.9%.

Investment Highlights

Investment Activity

During the nine months ended December 31, 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.

– 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 in 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.

• In October 2021, we invested an additional $10.5 million in Bassett Creek Services, Inc., in the form of secured first lien debt.

• In December 2021, we invested an additional $19.0 million in the form of secured first lien debt in Nocturne.

• In December 2021, we invested an additional $6.4 million in the form of secured first lien debt in Schylling, Inc.

• In December 2021, we sold our investment in Pioneer Square Brands, Inc.

(“Pioneer”), which resulted in success fee income of $0.5 million and a realized gain of $21.9 million.

During the three months ended June 30, 2022, the following significant transactions occurred:

• In May 2022, we invested an additional $6.4 million in the form of secured first lien debt in Nocturne Villa Rentals, Inc.

("Nocturne") to fund an add-on acquisition.

• In June 2022, we sold our investment in Bassett Creek Services, Inc.

("Bassett Creek"), which resulted in success fee income of $3.0 million and a realized gain on preferred equity of $4.7 million.

In connection with the sale, we received net cash proceeds of $57.6 million, including the repayment of our debt investment of $48.0 million at par.

• In December 2021, we sold our investment in SOG Specialty Knives & Tools, LLC (“SOG”), which resulted in success fee income of $2.9 million.

In connection with the sale, we received net cash proceeds of $23.3 million, including the repayment of our debt investment of $8.9 million at par, and retained a common stock investment in the intermediary entity, Gladstone SOG Investments, Inc., which maintains a cost basis of $0.6 million.

The following significant investment activity occurred subsequent to December 31, 2021.

• In June 2022, we invested $21.0 million in a new portfolio company, Dema/Mai Holdings, Inc.

(“Dema/Mai”), in the form of preferred equity to acquire Mai Mechanical, LLC, a leading provider of plumbing and mechanical services focused on multi-family residential construction headquartered in Denver, Colorado, from J.R.

- Atlanta, LLC ("J.R.

Hobbs"), an existing portfolio company.

Subsequent to June 30, 2022, in July 2022, we invested an additional $39.1 million in the form of secured first lien debt in Dema/Mai to fund an add-on acquisition of Dema Plumbing, a plumbing and mechanical systems installation and service provider to single-family residential homebuilders.

Refer to Note 13 – Subsequent Events in the accompanying Notes to Consolidated Financial Statements for further discussion of significant investment activity that occurred subsequent to June 30, 2022.

The following significant investment activity occurred subsequent to June 30, 2022.

Also refer to Note 13 – Subsequent Events in the accompanying Notes to Consolidated Financial Statements .

• In January 2022, we invested $5.0 million in an existing portfolio company, SBS Industries Holdings, Inc.

("SBS"), through a combination of secured second lien debt and preferred equity.

As part of the additional investment, SBS was renamed SFEG Holdings, Inc.

• In February 2022, we extended a guaranty on behalf of one of our portfolio companies, J.R.

Hobbs, whereby we have guaranteed 50% of their obligations with another lender, with a maximum amount of $9.3 million.

As of the date of this report, we have not been required to make payments on this guaranty and we consider the likelihood of future required payment to be remote and the fair value of the guaranty to be insignificant.

• In July 2022, we recapitalized our investment in Horizon Facilities Services, Inc.

("Horizon") and invested an additional $30.0 million in the form of secured first lien debt.

In connection with this investment, we received equity proceeds of $12.3 million, which were recognized as a $10.1 million return of preferred equity cost basis and a realized gain of $2.2 million, as well as dividend income of $3.1 million and success fee income of $1.7 million.

Recent Developments

Distributions and Dividends

In January 2022, our Board of Directors declared the following monthly and supplemental cash distributions to common stockholders:

In July 2022, our Board of Directors declared the following monthly cash distributions to common stockholders:

Payment Date Distribution per

January 21, 2022 January 31, 2022 $ 0.075

February 4, 2022 February 14, 2022 0.120 (A)

February 18, 2022 February 28, 2022 0.075

March 23, 2022 March 31, 2022 0.075

July 22, 2022 July 29, 2022 $ 0.075

August 23, 2022 August 31, 2022 0.075

September 22, 2022 September 30, 2022 0.075

Total for the Quarter:

(A) Represents a supplemental distribution to common stockholders.

LIBOR Transition

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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, related orders imposed by state and local governments, including paused or reversed reopening orders, and operating challenges, including but not limited to, labor shortages, supply chain delays and increased material costs.

Through proactive measures and continued diligence, the management teams of our portfolio companies have demonstrated their ability to respond effectively and efficiently to the challenges posed by COVID-19, including its variants, related orders imposed by state and local governments, including paused or reversed reopening orders, and operating challenges, including but not limited to, labor shortages, supply chain delays and increased material costs.

We believe we have sufficient levels of liquidity to support our existing portfolio companies, as necessary, and continue our buyout strategy by deploying capital in new investment opportunities.

Impact of Inflation

We believe the effects of inflation, if any, on our historical results of operations and financial condition have been immaterial.

During the three months ended June 30, 2022, general inflationary pressures and certain commodity price volatility have impacted our portfolio companies to varying degrees;

however, the broad based impact of these pricing changes have largely been mitigated by price adjustments without adverse sales implications, and thus, have not materially impacted our portfolio companies’ ability to service their indebtedness, including our loans.

Notwithstanding the results to date, we expect that the cumulative effect of these inflationary pressures may impact the profit margins or sales of certain portfolio companies and their ability to service their debts.

We continue to monitor the current inflationary environment to anticipate any impact on our portfolio companies, including their availability to pay interest on our loans.

We cannot assure you that our results of operations and financial condition or that of our portfolio companies will not be materially impacted by inflation in the future.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended December 31, 2021 to the Three Months Ended December 31, 2020

For the Three Months Ended December 31,

Comparison of the Three Months Ended June 30, 2022 to the Three Months Ended June 30, 2021

For the Three Months Ended June 30,

2022 2021 $ Change % Change

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Total expenses, net of credits to fees 11,926 20,330 (8,404) (41.3) %

NET INVESTMENT INCOME 8,399 6,255 2,144 34.3 %

NET INVESTMENT INCOME (LOSS) 7,371 (2,304) 9,675 NM

REALIZED AND UNREALIZED GAIN (LOSS)

Net realized gain on investments 4,452 1,929 2,523 130.8 %

Net unrealized depreciation of investments (20,102) (89) (20,013) NM

Net realized and unrealized gain (loss) 1,947 9,016 (7,069) NM

Net unrealized appreciation of investments 212 47,514 (47,302) (99.6) %

Net realized and unrealized gain 4,664 49,443 (44,779) (90.6) %

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 12,035 $ 47,139 $ (35,104) (74.5) %

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BASIC AND DILUTED PER COMMON SHARE:

Net investment income $ 0.25 $ 0.19 $ 0.06 31.6 %

Net investment income (loss) $ 0.22 $ (0.07) $ 0.29 NM

Net increase in net assets resulting from operations $ 0.36 $ 1.42 $ (1.06) (74.6) %

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Investment Income

Total investment income decreased 3.6% for the three months ended December 31, 2021, as compared to the prior year period, due to a decrease in dividend and success fee income, partially offset by an increase in interest income.

Interest income from our investments in debt securities increased 9.8% for the three months ended December 31, 2021, as compared to the prior year period.

Total investment income increased 7.1% for the three months ended June 30, 2022, as compared to the prior year period, due to an increase in dividend and success fee income, partially offset by a decrease in interest income.

Interest income from our investments in debt securities decreased 20.3% for the three months ended June 30, 2022, as compared to the prior year period.

During the three months ended June 30, 2021, we received $2.3 million of past due interest from certain loans that were previously on non-accrual status compared to no such collection in the current year period.

Generally, the level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period multiplied by the weighted-average yield.

The weighted-average principal balance of our interest-bearing investment portfolio during the three months ended December 31, 2021 was $443.6 million, compared to $404.0 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 $21.6 million of new debt investments, and $58.3 million of follow-on debt investments to existing portfolio companies, partially offset by $64.2 million of loans placed on non-accrual status and $35.3 million of pay-offs, restructurings, or write-offs of debt investments after September 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 11.9% for the three months ended December 31, 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 December 31, 2021, our loans to J.R.

Hobbs, The Mountain Corporation (“The Mountain”), and SBS were on non-accrual status, with an aggregate debt cost basis of $81.3 million.

As of December 31, 2020, 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, were on non-accrual status, with an aggregate debt cost basis of $95.1 million.

Dividend and success fee income for the three months ended December 31, 2021 decreased $1.8 million from the prior year period.

During the three months ended December 31, 2021, dividend and success fee income consisted of $3.4 million of success fee income.

During the three months ended December 31, 2020, dividend and success fee income consisted primarily of $5.0 million of dividend income.

As of December 31, 2021 and March 31, 2021, no single investment represented greater than 10% of the total investment portfolio at fair value.

Total expenses, net of any non-contractual, unconditional, and irrevocable credits from the Adviser, decreased 25.0% during the three months ended December 31, 2021, as compared to the prior year period, primarily due to an increase in credits to fees from the Adviser and a decrease in the incentive fee, partially offset by increases in interest and dividend expense and the base management fee.

In accordance with GAAP, we recorded a $0.4 million capital gains-based incentive fee during the three months ended December 31, 2021, compared to $1.8 million during the three months ended December 31, 2020.

The weighted-average principal balance of our interest-bearing investment portfolio during the three months ended June 30, 2022 was $431.0 million, compared to $466.1 million for the prior year period.

This decrease was primarily due to the $64.2 million of loans placed on non-accrual status and $48.9 million of pay-offs, restructurings, or write-offs of debt investments, partially offset by the $50.5 million of follow-on debt investments to existing portfolio companies, $44.5 million of loans returned to accrual status, and the origination of $21.6 million of new debt investments after March 31, 2021, and their respective impact on the weighted-average principal balance when considering timing of new investments, pay-offs, restructurings, write-offs, and accrual status changes, as applicable.

The weighted-average yield on our interest-bearing investments, excluding cash and cash equivalents and receipts recorded as dividend and success fee income, was 11.9% for the three months ended June 30, 2022, compared to 13.8% for the prior year period.

The weighted-average yield may vary from period to period, based on the current stated interest rate on interest-bearing investments, coupled with any collection of past due interest during the period.

During the three months ended June 30, 2021, we collected $2.3 million in past due interest from portfolio companies that were previously on non-accrual status, including $1.3 million from B+T Group Acquisition, Inc., $1.0 million from SOG Speciality Knives & Tools, LLC and $0.1 million from PSI Molded Plastics, Inc.

We had no collections of past due interest during three months ended June 30, 2022.

As of June 30, 2022, our loans to J.R.

Hobbs, The Mountain Corporation (“The Mountain”), and SFEG Holdings, Inc.

("SFEG") were on non-accrual status, with an aggregate debt cost basis of $77.3 million.

As of June 30, 2021, our loans to The Mountain and SFEG were on non-accrual status, with an aggregate debt cost basis of $28.7 million.

Dividend and success fee income for the three months ended June 30, 2022 increased $4.5 million from the prior year period.

During the three months ended June 30, 2022, dividend and success fee income consisted of $5.0 million of success fee income and $1.6 million of dividend income.

During the three months ended June 30, 2021, dividend and success fee income consisted primarily of $2.0 million of success fee income.

As of June 30, 2022 and March 31, 2022, no single investment represented greater than 10% of the total investment portfolio at fair value.

Total expenses, net of any non-contractual, unconditional, and irrevocable credits from the Adviser, decreased 41.3% during the three months ended June 30, 2022, as compared to the prior year period, primarily due to a decrease in the incentive fee.

In accordance with GAAP, we recorded a $0.9 million capital gains-based incentive fee during the three months ended June 30, 2022, compared to $10.3 million recorded during the three months ended June 30, 2021.

The capital gains-based incentive fee was a result of the net impact of net realized gains and net unrealized appreciation (depreciation) on investments during the respective periods.

The income-based incentive fee increased by $0.2 million for the three months ended December 31, 2021, as compared to the prior year period, primarily due to an increase in pre-incentive fee net investment income, coupled with an increase in net assets, which drives the hurdle rate.

The income-based incentive fee increased by $0.1 million for the three months ended June 30, 2022, as compared to the prior year period, primarily due to an increase in pre-incentive fee net investment income, coupled with an increase in net assets, which drives the hurdle rate.

The base management fee, loan servicing fee, incentive fee, and their related non-contractual, unconditional, and irrevocable credits are computed quarterly, as described under “Transactions with the Adviser” in Note 4 — Related Party Transactions in the accompanying Notes to Consolidated Financial Statements and are summarized in the following table:

Three Months Ended December 31,

Three Months Ended June 30,

Average total assets subject to base management fee (A)

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(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 15.8% during the three months ended December 31, 2021, as compared to the prior year period, due to an increase in interest expense, partially offset by a decrease in dividend expense.

Interest expense increased by $2.8 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 three months ended December 31, 2021 was $21.2 million, as compared to $104.8 million in the prior year period.

The effective interest rate on the Credit Facility, excluding the impact of deferred financing costs, during the three months ended December 31, 2021 was 11.1%, as compared to 3.8% 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 $2.3 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.

Interest and dividend expense decreased 0.5% during the three months ended June 30, 2022, as compared to the prior year period, due to a decrease in dividend expense, partially offset by an increase in interest expense.

Dividend expense decreased by $1.5 million as a result of the 6.375% Series E Cumulative Term Preferred Stock (“Series E Term Preferred Stock”) redemption August 2021.

Interest expense increased by $1.5 million primarily due to the issuance of the 2028 Notes in August 2021, which was partially offset by lower interest expense related to the Credit Facility.

There was no weighted-average balance outstanding on the Credit Facility during the three months ended June 30, 2022, as compared to $26.4 million in the prior year period.

The effective interest rate on the Credit Facility, excluding the impact of deferred financing costs, during the three months ended June 30, 2022 was 1.0%, as compared to 9.3% in the prior year period.

The decrease in the effective interest rate on the Credit Facility was a result of no borrowings outstanding on the Credit Facility and the 1.0% unused commitment fee on the undrawn portion of the Credit Facility.

Realized and Unrealized Gain (Loss)

The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the three months ended December 31, 2021 and 2020 were as follows:

Three Months Ended December 31, 2021

The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the three months ended June 30, 2022 and 2021 were as follows:

Three Months Ended June 30, 2022

Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized (Appreciation) Depreciation Net Gain (Loss)

Brunswick Bowling Products, Inc.

$ — $ 10,344 $ — $ 10,344

Horizon Facilities Service, Inc.

$ — $ 15,504 $ — $ 15,504

Schylling, Inc.

— 2,931 — 2,931

ImageWorks Display and Marketing Group, Inc.

Nocturne Villa Rentals, Inc.

— 6,147 — 6,147

The Maids International, LLC — (1,216) — (1,216)

– Atlanta, LLC — (1,575) — (1,575)

Mason West, LLC — (3,390) — (3,390)

Pioneer Square Brands, Inc.

Brunswick Bowling Products, Inc.

— 4,903 — 4,903

1 unchanged sentence

— 3,990 — 3,990

Galaxy Technologies Holdings, Inc.

— (4,464) — (4,464)

Other, net (<$1.0 million, net) 110 224 — 334

Total $ 22,049 $ 5,323 $ (25,425) $ 1,947

Three Months Ended December 31, 2020

Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized (Appreciation) Depreciation Net Gain (Loss)

Pioneer Square Brands, Inc.

$ — $ 4,420 $ — $ 4,420

Educators Resource, Inc.

SFEG Holdings, Inc.

— 3,108 — 3,108

Nth Degree Investment Group, LLC — 2,625 — 2,625

Old World Christmas, Inc.

— (674) — (674)

Diligent Delivery Systems — 2,961 — 2,961

Frontier Packaging, Inc.

Educators Resource, Inc.

— (939) — (939)

SOG Specialty Knives and Tools, LLC — 1,806 — 1,806

Schylling, Inc.

ImageWorks Display and Marketing Group, Inc.

— (1,132) — (1,132)

Head Country, Inc.

Horizon Facilities Service, Inc.

The Maids International, LLC — (1,254) — (1,254)

Mason West, LLC — (2,260) — (2,260)

The Mountain Corporation — (2,846) — (2,846)

Ginsey Home Solutions, Inc.

Bassett Creek Services, Inc.

PSI Molded Plastics, Inc.

ImageWorks Display and Marketing Group, Inc.

— (2,850) — (2,850)

D.P.M.S., Inc.

— (1,805) — (1,805)

Brunswick Bowling Products, Inc.

- Atlanta, LLC — (5,158) — (5,158)

B+T Group Acquisition, Inc.

— (6,234) — (6,234)

SBS Industries Holdings, Inc.

Bassett Creek Services, Inc.

4,728 — (12,250) (7,522)

1 unchanged sentence

Total $ 4,452 $ 12,462 $ (12,250) $ 4,664

Net Realized Gain (Loss) on Investments

During the three months ended December 31, 2021, we recorded net realized gains on investments of $22.0 million, primarily due to a $21.9 million realized gain from the exit of Pioneer and realized gains related to prior period exits of certain investments.

During the three months ended December 31, 2020, we recorded net realized gains on investments of $9.1 million primarily related to a $14.0 million realized gain from the exit of Frontier Packaging, Inc.

("Frontier") and a $3.3 million realized gain from the recapitalization of Old World Christmas, Inc.

("Old World"), partially offset by an $8.5 million realized loss related to the partial write-off of a debt investment in SBS.

Net Unrealized Appreciation (Depreciation) of Investments

Net unrealized depreciation of investments of $20.1 million for the three months ended December 31, 2021 was primarily due to the reversal of previously recorded unrealized appreciation of our investment in Pioneer upon its exit and the decreased performance of certain of our portfolio companies.

These amounts were partially offset by the increased performance of certain of our other portfolio companies, driven partially by the reversal of the impact of COVID-19 on certain of our portfolio companies and the markets in which they operate, and increased comparable transaction multiples used to estimate the fair value of certain of our portfolio companies.

In part, the performance of certain of our portfolio companies was driven by the impact COVID-19 has had or is expected to have on our portfolio companies and the markets in which they operate, including government restrictions on the portfolio companies’ ability to operate under historical conditions, current and future shutdowns and reopening restrictions, operating challenges, including but not limited to, labor shortages, supply chain delays, increased material costs and demand for their products, and general economic outlook, or the reversal of such impact towards pre-COVID-19 levels.

Net unrealized depreciation of investments of $0.1 million for the three months ended December 31, 2020 was primarily due to the reversal of previously recorded unrealized appreciation of our investment in Frontier upon its exit and the decreased performance of certain of our portfolio companies, partially offset by the increased performance of certain of our portfolio companies.

In part, the performance of certain of our portfolio companies was driven by the impact COVID-19 has had or is expected to have on our portfolio companies and the markets in which they operate, including government restrictions on the portfolio companies’ ability to operate under historical conditions, current and future shutdowns and reopening restrictions, as well as demand for their products and general economic outlook.

Across our entire investment portfolio, we recorded net unrealized depreciation of $1.9 million and $18.2 million on our debt and on our equity positions, respectively, for the three months ended December 31, 2021 .

As of December 31, 2021 , the fair value of our investment portfolio was more than the cost basis by $25.2 million, as compared to September 30, 2021, when the fair value of our investment portfolio was more than the cost basis by $45.3 million, representing net unrealized depreciation of $ 20.1 million for the three months ended December 31, 2021 .

Our entire portfolio had a fair value of 103.7% of cost as of December 31, 2021 .

Comparison of the Nine Months Ended December 31, 2021 to the Nine Months Ended December 31, 2020

For the Nine Months Ended December 31,

2021 2020 $ Change % Change

INVESTMENT INCOME

Interest income $ 43,634 $ 34,513 $ 9,121 26.4 %

Dividend and success fee income 9,672 5,406 4,266 78.9 %

Total investment income 53,306 39,919 13,387 33.5 %

Base management fee 10,527 8,961 1,566 17.5 %

Loan servicing fee 5,430 5,242 188 3.6 %

Incentive fee 22,186 3,454 18,732 NM

Administration fee 1,407 1,218 189 15.5 %

Interest and dividend expense 11,606 9,615 1,991 20.7 %

Amortization of deferred financing costs and discounts 1,355 1,291 64 5.0 %

Other 3,828 3,178 650 20.5 %

Expenses before credits from Adviser 56,339 32,959 23,380 70.9 %

Credits to fees from Adviser (11,293) (7,836) (3,457) 44.1 %

Total expenses, net of credits to fees 45,046 25,123 19,923 79.3 %

NET INVESTMENT INCOME 8,260 14,796 (6,536) (44.2 %)

REALIZED AND UNREALIZED GAIN (LOSS)

Net realized gain on investments 24,442 10,479 13,963 133.2 %

Net realized loss on other (1,998) — (1,998) NM

Net unrealized appreciation (depreciation) of investments 54,916 (3,335) 58,251 NM

Net realized and unrealized gain (loss) 77,360 7,144 70,216 NM

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 85,620 $ 21,940 $ 63,680 290.2 %

WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING

Basic and diluted 33,205,023 33,167,511 37,512 0.1 %

BASIC AND DILUTED PER COMMON SHARE:

Net investment income $ 0.25 $ 0.45 $ (0.20) (44.4 %)

Net increase in net assets resulting from operations $ 2.58 $ 0.66 $ 1.92 NM

NM = Not Meaningful

Investment Income

Total investment income increased 33.5% for the nine months ended December 31, 2021, as compared to the prior year period, due to increases in both interest income and dividend and success fee income.

Interest income from our investments in debt securities increased 26.4% for the nine months ended December 31, 2021, as compared to the prior year period.

During the nine months ended December 31, 2021, we received $3.9 million of past due interest from certain loans that were previously on non-accrual status.

The weighted-average principal balance of our interest-bearing investment portfolio during the nine months ended December 31, 2021 was $444.9 million, compared to $383.7 million for the prior year period.

This increase was primarily due to $79.5 million of loans returned to accrual status, $59.2 million of follow-on debt investments to existing portfolio companies, and the origination of $54.2 million of new debt investments, 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 13.0% for the nine months ended December 31, 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 December 31, 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 December 31, 2020, our loans to B+T, Horizon, The Mountain, PSI Molded, and SOG were on non-accrual status, with an aggregate debt cost basis of $95.1 million.

Dividend and success fee income for the nine months ended December 31, 2021 increased by $4.3 million from the prior year period.

During the nine months ended December 31, 2021, dividend and success fee income consisted of $8.1 million of success fee income and $1.6 million of dividend income.

During the nine months ended December 31, 2020, dividend and success fee income consisted of $5.0 million of dividend income and $0.4 million of success fee income.

As of December 31, 2021 and March 31, 2021, no single investment represented greater than 10% of the total investment portfolio at fair value.

Total expenses, net of any non-contractual, unconditional, and irrevocable credits from the Adviser, increased 79.3% during the nine months ended December 31, 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 $16.3 million capital gains-based incentive fee during the nine months ended December 31, 2021, compared to $1.5 million during the nine months ended December 31, 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 $3.9 million for the nine months ended December 31, 2021, as compared to the prior year period, primarily due an increase in pre-incentive fee net investment income, coupled with an increase in net assets, which drives the hurdle rate.

Nine Months Ended December 31,

Average total assets subject to base management fee (A)

$ 701,800 $ 597,400

Multiplied by prorated annual base management fee of 2.0% 1.5 % 1.5 %

Base management fee (B)

Credits to fees from Adviser - other (B)

(5,863) (2,594)

Net base management fee $ 4,664 $ 6,367

Loan servicing fee (B)

Credits to base management fee - loan servicing fee (B)

(5,430) (5,242)

Net loan servicing fee $ — $ —

Incentive fee – income-based $ 5,892 $ 2,002

Incentive fee – capital gains-based (C)

Total incentive fee (B)

$ 22,186 $ 3,454

Credits to fees from Adviser - other (B)

Net total incentive fee $ 22,186 $ 3,454

(A) Average total assets subject to the base management fee is defined in the Advisory Agreement as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods.

(B) Reflected as a line item on our Consolidated Statements of Operations .

(C) The capital gains-based incentive fees are recorded in accordance with GAAP and do not necessarily reflect amounts contractually due under the terms of the Advisory Agreement.

Interest and dividend expense increased 20.7% during the nine months ended December 31, 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 $6.2 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 nine months ended December 31, 2021 was $24.0 million, as compared to $88.7 million in the prior year period.

The effective interest rate on the Credit Facility, excluding the impact of deferred financing costs, during the nine months ended December 31, 2021 was 10.1%, as compared to 4.2% 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 $4.2 million as a result of the Series D Term Preferred Stock and 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)

The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the nine months ended December 31, 2021 and 2020 were as follows:

Nine Months Ended December 31, 2021

Three Months Ended June 30, 2021

Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized (Appreciation) Depreciation Net Gain (Loss)

1 unchanged sentence

$ — $ 11,297 $ — $ 11,297

Brunswick Bowling Products, Inc.

— 13,842 — 13,842

Old World Christmas, Inc.

— 8,650 — 8,650

SOG Specialty Knives and Tools, LLC — 5,785 — 5,785

Educators Resource, Inc.

— 5,204 — 5,204

Schylling, Inc.

— 4,244 — 4,244

Horizon Facilities Service, Inc.

PSI Molded Plastics, Inc.

— 3,633 — 3,633

Educators Resource, Inc.

Horizon Facilities Service, Inc.

— 3,435 — 3,435

1 unchanged sentence

— 3,013 — 3,013

SOG Specialty Knives & Tools, LLC — 7,575 — 7,575

ImageWorks Display and Marketing Group, Inc.

— 2,364 — 2,364

PSI Molded Plastics, Inc.

— 3,633 — 3,633

Counsel Press, Inc.

— 2,141 — 2,141

Nocturne Villa Rentals, Inc.

— 1,504 — 1,504

Galaxy Technologies Holdings, Inc.

Galaxy Tool Holding Corporation — 1,404 — 1,404

Brunswick Bowling Products, Inc.

— 1,172 — 1,172

3 unchanged sentences

Diligent Delivery Systems — (669) — (669)

The Maids International, LLC — (819) — (819)

Mason West, LLC — (891) — (891)

SBS Industries Holdings, Inc.

— (3,314) — (3,314)

Ginsey Home Solutions, Inc.

— (4,012) — (4,012)

– Atlanta, LLC — (4,085) — (4,085)

Pioneer Square Brands, Inc.

— (1,462) — (1,462)

Galaxy Technologies Holdings, Inc.

— (10,784) — (10,784)

Other, net (<$1.0 million, net) 143 (411) 52 (216)

Total $ 1,929 $ 48,090 $ (576) $ 49,443

Nine Months Ended December 31, 2020

Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized (Appreciation) Depreciation Net Gain (Loss)

Pioneer Square Brands, Inc.

$ — $ 20,635 $ — $ 20,635

Frontier Packaging, Inc.

14,032 2,534 (11,869) 4,697

Ginsey Home Solutions, Inc.

— 4,151 — 4,151

SOG Specialty Knives and Tools, LLC — 3,964 — 3,964

Educators Resource, Inc.

— 3,335 — 3,335

Old World Christmas, Inc.

3,289 37 — 3,326

Diligent Delivery Systems — 2,409 — 2,409

Galaxy Technologies, Inc.

— 2,173 — 2,173

Head Country, Inc.

— 1,762 — 1,762

Schylling, Inc.

— 1,069 — 1,069

Cambridge Sound Management, Inc.

ImageWorks Display and Marketing Group, Inc.

— (1,312) — (1,312)

Bassett Creek Services, Inc.

— (1,359) — (1,359)

Counsel Press, Inc.

— (1,850) — (1,850)

Nth Degree, Inc.

113 (3,649) — (3,536)

PSI Molded Plastics, Inc.

— (3,755) — (3,755)

D.P.M.S., Inc.

— (4,442) — (4,442)

SBS Industries Holdings, Inc.

(8,470) 1,580 — (6,890)

Brunswick Bowling Products, Inc.

— (18,048) — (18,048)

Other, net (<$1.0 million, net) 775 (700) — 75

Total $ 10,479 $ 8,534 $ (11,869) $ 7,144

Net Realized Gain on Investments

During the nine months ended December 31, 2021 , we recorded net realized gains on investments of $24.4 million, primarily due to a $21.9 million realized gain from the exit of Pioneer, a $3.6 million realized gain from the exit of Head Country and $0.7 million realized gains related to prior period exits, partially offset by a $1.8 million realized loss from the dissolution of CTG.

During the nine months ended December 31, 2020 , we recorded net realized gains on investments of $10.5 million, primarily related to a $14.0 million realized gain from the exit of Frontier, a $3.3 million realized gain from the recapitalization of Old World, and gains from previous exits, partially offset by an $8.5 million realized loss related to the partial write-off of a debt investment in SBS.

Net Realized Gain (Loss) on Investments

During the three months ended June 30, 2022, we recorded net realized gains on investments of $4.5 million, primarily due to a $4.7 million realized gain from the exit of Bassett Creek Services, Inc.

During the three months ended June 30, 2021, we recorded net realized gains on investments of $1.9 million, primarily related to a $3.6 million realized gain from the exit of Head Country, Inc.

("Head Country"), partially offset by a $1.8 million realized loss from the dissolution of Channel Technologies Group, LLC ("CTG").

Net Unrealized Appreciation (Depreciation) of Investments

Net unrealized appreciation of investments of $54.9 million for the nine months ended December 31, 2021 was primarily due to increased performance of certain of our portfolio companies, driven partially by the reversal of the impact of COVID-19 on certain of our portfolio companies and the markets in which they operate, increased comparable multiples used to estimate the fair value of certain of our portfolio companies and the reversal of previously recorded unrealized depreciation of our investments in CTG upon its dissolution.

These amounts were partially offset by the reversal of previously recorded unrealized appreciation of our investment in Pioneer and Head Country upon exit and the decreased performance of certain of our portfolio companies.

Net unrealized depreciation of investments of $3.3 million for the nine months ended December 31, 2020 was primarily due to the reversal of previously recorded unrealized appreciation of our investment in Frontier upon its exit, the decreased performance of certain of our portfolio companies and decreased comparable transaction multiples used to estimate the fair value of certain of our portfolio companies, partially offset by increased performance of certain of our portfolio companies.

In part, the performance of certain of our portfolio companies was driven by the impact COVID-19 has had or is expected to have on our portfolio companies and the markets in which they operate, including government restrictions on the portfolio companies’ ability to operate under historical conditions, current and future shutdowns and reopening restrictions, as well as demand for their products and general economic outlook.

Across our entire investment portfolio, we recorded net unrealized appreciation of $5.5 million and $49.4 million on our debt and on our equity positions, respectively, for the nine months ended December 31, 2021.

As of December 31, 2021, the fair value of our investment portfolio was more than the cost basis by $25.2 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 $54.9 million for the nine months ended December 31, 2021.

Our entire portfolio had a fair value of 103.7% of cost as of December 31, 2021 .

Net Realized Gain (Loss) on Other

During the nine months ended December 31, 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 nine months ended December 31, 2020 , there were no realized gains or losses on other.

Net unrealized appreciation of investments of $0.2 million for the three months ended June 30, 2022 was primarily due to increased performance of certain of our other portfolio companies, driven partially by the reversal of the impact of COVID-19 on certain of our portfolio companies and the markets in which they operate.

These amounts were partially offset by the reversal of unrealized appreciation of our investment in Bassett Creek upon its exit, decreased performance of certain of our other portfolio companies and decreased comparable transaction multiples used to estimate the fair value of certain of our portfolio companies.

In part, the performance of certain of our portfolio companies was driven by the impact COVID-19, and its variants, has had or is expected to have on our portfolio companies and the markets in which they operate, including government restrictions on the portfolio companies’ ability to operate under historical conditions, current and future shutdowns and reopening restrictions, operating challenges, including but not limited to, labor shortages, supply chain delays, increased material costs and demand for their products, and general economic outlook, or the reversal of such impact towards pre-COVID-19 levels.

Net unrealized appreciation of investments of $47.5 million for the three months ended June 30, 2021 was primarily due to the increased performance of certain portfolio companies, the reversal of previously recorded unrealized depreciation of our investment in CTG upon its dissolution, and an increase in comparable transaction multiples used to estimate the fair value of certain of our portfolio companies, which were partially offset by the reversal of previously recorded unrealized appreciation of our investment in Head Country and a decline in performance of certain other portfolio companies.

In part, the performance of certain of our portfolio companies was driven by the impact COVID-19, and its variants, has had or is expected to have on our portfolio companies and the markets in which they operate, including government restrictions on the portfolio companies’ ability to operate under historical conditions, current and future shutdowns and reopening restrictions, as well as demand for their products and general economic outlook.

Across our entire investment portfolio, we recorded net unrealized depreciation of $7.2 million on our debt positions and appreciation of $7.4 million on our equity positions, for the three months ended June 30, 2022 .

As of June 30, 2022 , the fair value of our investment portfolio was more than the cost basis by $45.4 million, as compared to March 31, 2022, when the fair value of our investment portfolio was more than the cost basis by $45.1 million, representing net unrealized appreciation of $ 0.2 million for the three months ended June 30, 2022 .

Our entire portfolio had a fair value of 107.0% of cost as of June 30, 2022 .

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Net cash provided by operating activities for the nine months ended December 31, 2021 was $39.3 million, as compared to net cash used in operating activities of $32.6 million for the nine months ended December 31, 2020.

This change was primarily due to an increase in principal repayments of investments and net proceeds from the sale of investments.

Principal repayments and net proceeds from the sale of investments totaled $96.9 million during the nine months ended December 31, 2021, compared to $51.2 million during the nine months ended December 31, 2020.

Purchases of investments were $84.6 million during the nine months ended December 31, 2021, compared to $89.6 million during the nine months ended December 31, 2020.

As of December 31, 2021, we had equity investments in or loans to 26 portfolio companies with an aggregate cost basis of $675.6 million.

As of December 31, 2020, we had equity investments in or loans to 28 portfolio companies with an aggregate cost basis of $657.9 million.

The following table summarizes our total portfolio investment activity during the nine months ended December 31, 2021 and 2020:

Nine Months Ended December 31,

Net cash provided by operating activities for the three months ended June 30, 2022 was $41.3 million, as compared to net cash provided by operating activities of $14.4 million for the three months ended June 30, 2021.

This change was primarily due to an increase in principal repayments of investments and net proceeds from the sale of investments, partially offset by an increase in purchase of investments.

Principal repayments and net proceeds from the sale of investments totaled $57.4 million during the three months ended June 30, 2022, compared to $21.8 million during the three months ended June 30, 2021.

Purchases of investments were $27.8 million during the three months ended June 30, 2022, compared to $17.2 million during the three months ended June 30, 2021.

As of June 30, 2022, we had equity investments in or loans to 26 portfolio companies with an aggregate cost basis of $644.2 million.

As of June 30, 2021, we had equity investments in or loans to 27 portfolio companies with an aggregate cost basis of $660.8 million.

The following table summarizes our total portfolio investment activity during the three months ended June 30, 2022 and 2021:

Three Months Ended June 30,

Beginning investment portfolio, at fair value $ 714,396 $ 633,829

8 unchanged sentences

Ending investment portfolio, at fair value $ 689,513 $ 678,594

The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of December 31, 2021:

For the remaining three months ending March 31:

The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of June 30, 2022:

For the remaining nine months ending March 31, 2023 $ 89,488

For the fiscal years ending March 31:

3 unchanged sentences

Investments in equity securities 174,744

Total cost basis of investments held as of December 31, 2021:

Total cost basis of investments held as of June 30, 2022:

Financing Activities

Net cash used in financing activities for the nine months ended December 31, 2021 was $13.0 million, which consisted primarily of the redemption of our Series E Term Preferred Stock of $94.4 million, $27.4 million in distributions to common stockholders, $22.4 million of net repayments under the Credit Facility and $3.4 million of deferred financing and offering costs, partially offset by $134.6 million in gross proceeds from the issuance of our 2028 Notes.

Net cash provided by financing activities for the nine months ended December 31, 2020 was $31.2 million, which consisted primarily of $34.8 million of net borrowings under the Credit Facility, $19.3 million of gross proceeds from the issuance of mandatorily redeemable preferred stock under the then existing Series E ATM Program, and $1.7 million of gross proceeds from the issuance of common stock under the then existing Common Stock ATM Program, partially offset by $23.9 million in distributions to common stockholders.

Net cash used in financing activities for the three months ended June 30, 2022 was $11.5 million, which consisted primarily of $11.5 million in distributions to common stockholders.

Net cash provided by financing activities for the three months ended June 30, 2021 was $10.5 million, which consisted primarily of $19.5 million of net borrowings under the Credit Facility, partially offset by $9.0 million in distributions to common stockholders.

Distributions and Dividends to Stockholders

2 unchanged sentences

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, monthly cash distributions of $0.075 per common share for each of the three months from October through December 2021, and supplemental distributions of $0.06, $0.03, and $0.09 per common share in June, September, and December 2021, respectively.

See also “ Recent Developments - Distributions and Dividends ” for a discussion of cash distributions to common stockholders declared by our Board of Directors in January 2022.

In accordance with these requirements, our Board of Directors declared, and we paid, monthly cash distributions of $0.075 per common share for each of the three months from April through June 2022, and a supplemental distribution of $0.12 per common share in June 2022.

See also “ Recent Developments - Distributions and Dividends ” for a discussion of cash distributions to common stockholders declared by our Board of Directors in July 2022.

For the fiscal year ended March 31, 2022, Investment Company Taxable Income exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $13.9 million of the first distributions paid subsequent to fiscal year-end as having been paid in the prior year.

In addition, for the fiscal year ended March 31, 2022, net capital gains exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $15.7 million of the first distributions paid subsequent to fiscal year-end as having been paid in the prior year.

For the year ended March 31, 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 nine months ended December 31, 2021, we recorded $2.8 million of net adjustments for estimated permanent book-tax differences to reflect tax character, which

decreased Capital in excess of par value and Overdistributed net investment income and increased Accumulated net realized gain in excess of distributions.

For the year ended March 31, 2022, we recorded $2.8 million of net adjustments for estimated permanent book-tax differences to reflect tax character, which decreased Capital in excess of par value and Underdistributed net investment income and increased Accumulated net realized gain in excess of distributions.

For the three months ended June 30, 2022, we recorded $0.9 million of net adjustments for estimated permanent book-tax differences to reflect tax cha racter, which decreased Capital in excess of par value and increased Overdistributed net investment income and 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.

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 June 2021.

In accordance with GAAP, we treated these monthly dividends as an operating expense.

Dividend Reinvestment Plan

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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 nine months ended December 31, 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 did not sell any shares of our common stock under the Common Stock ATM Program during the year ended March 31, 2022.

We anticipate issuing equity securities to obtain additional capital in the future.

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When our common stock is trading at a price below NAV per share, the 1940 Act places regulatory constraints on our ability to obtain additional capital by issuing common stock.

Generally, the 1940 Act provides that we may not issue and sell our common stock at a price below our NAV per common share, other than to our then-existing common stockholders pursuant to a rights offering, without first obtaining approval from our stockholders and our independent directors and meeting other stated requirements.

On December 31, 2021, the closing market price of our common stock was $17.08 per share, representing a 28.7% premium to our NAV per share of $13.27 as of December 31, 2021.

stated requirements.

On June 30, 2022, the closing market price of our common stock was $14.08 per share, representing a 4.8% premium to our NAV per share of $13.44 as of June 30, 2022.

Term Preferred Stock

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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.

and Virtu Americas LLC (each a “Series E ATM Sales Agent”), under which we had the ability to issue and sell shares of our Series E Term Preferred Stock, from time to time, through the Series E ATM Sales Agents, up to $50.0 million aggregate liquidation preference in the Series E ATM Program.

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 nine months ended December 31, 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.

We did not sell any shares of our Series E Term Preferred Stock under the Series E ATM Program during the year ended March 31, 2022.

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.

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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 December 31, 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.

As of June 30, 2022, the Credit Facility provided a one-year extension option that may be exercised on or before March 8, 2023, subject to approval by all lenders.

On August 10, 2020, we, through Business Investment, entered into Amendment No.

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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.

At December 31, 2021, we had no borrowings outstanding on the Credit Facility.

At June 30, 2022, we had no borrowings outstanding on the Credit Facility and as of the date of this report, we had $12.6 million outstanding under the Credit Facility.

Interest is payable monthly during the term of the Credit Facility.

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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 December 31, 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 December 31, 2021, and as defined in the performance guaranty of the Credit Facility, we had a net worth of $695.5 million, asset coverage on our senior securities representing indebtedness of 259.5%, 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 December 31, 2021, we had availability, after adjustments for various constraints based on collateral quality, of $179.4 million under the Credit Facility and were in compliance with all covenants under the Credit Facility.

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 June 30, 2022, (ii) asset coverage with respect to senior securities representing indebtedness of at least 150% (or such percentage as may be set forth in Section 18 of the 1940 Act, as modified by Section 61 of the 1940 Act), and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code.

As of June 30, 2022, and as defined in the performance guaranty of the Credit Facility, we had a net worth of $702.1 million, asset coverage on our senior securities representing indebtedness of 261.9%, 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 June 30, 2022, we had availability, after adjustments for various constraints based on collateral quality, of $177.4 million under the Credit Facility and were in compliance with all covenants under the Credit Facility.

As of the date of this report, we had $12.6 million outstanding under the Credit Facility.

Notes Payable

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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 Company’s asset coverage meets the threshold specified in the 1940 Act after such borrowing, (ii) an inability to declare any dividend or distribution (except a dividend payable in our stock) on a class of our capital stock or to purchase shares of our capital stock unless the Company’s asset coverage meets the threshold specified in the 1940 Act at the time of (and giving effect to) such declaration or purchase, and (iii) if, at any time, we are not subject to the reporting requirements of the Exchange Act, we will provide the holders of the 2026 Notes, as applicable, and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements.

The indenture relating to the 2026 Notes contains certain covenants, including (i) an inability to incur additional debt or issue additional debt or preferred securities unless the Company’s asset coverage meets the threshold specified in the 1940 Act after such borrowing, (ii) an inability to declare any dividend or distribution (except a dividend payable in our stock) on a class of our capital stock or to purchase shares of our capital stock unless the Company’s asset coverage meets the threshold specified in the 1940 Act at the time of (and giving effect to) such declaration or purchase, and (iii) if, at any time, we are not subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange

Act"), we will provide the holders of the 2026 Notes and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements.

The 2026 Notes are recorded at the aggregate principal amount, less underwriting discounts, commissions, and offering costs, on our accompanying Consolidated Statements of Assets and Liabilities .

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The 2028 Notes bear interest at a rate of 4.875% per year (which equates to $6.6 million per year), payable quarterly in arrears.

The indenture relating to the 2028 Notes contains certain covenants, including (i) an inability to incur additional debt or issue additional debt or preferred securities unless the Company’s asset coverage meets the threshold specified in the 1940 Act after such borrowing, (ii) an inability to declare any dividend or distribution (except a dividend payable in our stock) on a class of our capital stock or to purchase shares of our capital stock unless the Company’s asset coverage meets the threshold specified in the 1940 Act at the time of (and giving effect to) such declaration or purchase, and (iii) if, at any time, we are not subject to the reporting requirements of the Exchange Act, we will provide the holders of the 2028 Notes, as applicable, and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements.

The indenture relating to the 2028 Notes contains certain covenants, including (i) an inability to incur additional debt or issue additional debt or preferred securities unless the Company’s asset coverage meets the threshold specified in the 1940 Act after such borrowing, (ii) an inability to declare any dividend or distribution (except a dividend payable in our stock) on a class of our capital stock or to purchase shares of our capital stock unless the Company’s asset coverage meets the threshold specified in the 1940 Act at the time of (and giving effect to) such declaration or purchase, and (iii) if, at any time, we are not subject to the reporting requirements of the Exchange Act, we will provide the holders of the 2028 Notes and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements.

The 2028 Notes are recorded at the aggregate principal amount, less underwriting discounts, commissions, and offering costs, on our accompanying Consolidated Statements of Assets and Liabilities .

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Due to the contingent nature of success fees, there are no guarantees that we will be able to collect any or all of these success fees or know the timing of any such collections.

As a result, as of December 31, 2021 and March 31, 2021, we had unrecognized, contractual off-balance sheet success fee receivables of $49.3 million and $46.2 million (or approximately $1.48 and $1.39 per common share), respectively, on our debt investments.

As a result, as of June 30, 2022 and March 31, 2022, we had unrecognized, contractual off-balance sheet success fee receivables of $49.0 million and $50.5 million (or approximately $1.47 and $1.52 per common share), respectively, on our debt investments.

Consistent with GAAP, we have not recognized success fee receivables and related income in our accompanying Consolidated Financial Statements until earned.

CONTRACTUAL OBLIGATIONS

We have line of credit and delayed draw term loan commitments to certain of our portfolio companies that have not been fully drawn.

Since these line of credit and delayed draw term loan commitments have expiration dates and we expect many will never be fully drawn, the total line of credit and delayed draw term loan commitment amounts do not necessarily represent future cash requirements.

We estimate the fair value of the combined unused line of credit and delayed draw term loan commitments as of December 31, 2021 to be immaterial.

As of December 31, 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 CCE’s obligations.

As of December 31, 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 December 31, 2021, at cost/liquidation preference:

We have line of credit and delayed draw term debt commitments to certain of our portfolio companies that have not been fully drawn.

Since these line of credit and delayed draw term debt commitments have expiration dates and we expect many will never be fully drawn, the total line of credit and delayed draw term debt commitment amounts do not necessarily represent future cash requirements.

We estimate the fair value of the combined unused line of credit and delayed draw term debt commitments as of June 30, 2022 to be immaterial.

As of June 30, 2022, we have extended a guaranty on behalf of one of our portfolio companies, Country Club Enterprises, LLC (“CCE”), whereby we have guaranteed $1.0 million of CCE’s obligations.

As of June 30, 2022, we have not been required to make payments on this or any previous guaranty, and we consider the credit risks to be remote and the fair value of this guaranty to be immaterial.

The following table shows our contractual obligations as of June 30, 2022, at cost:

Payments Due by Period

Contractual Obligations(A) Total Less than

Contractual Obligations (A)

Total Less than

1 Year 1-3 Years 3-5 Years More than

Credit Facility (B)

$ — $ — $ — $ — $ —

Notes payable 262,488 — — 127,938 134,550

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Interest payments on obligations (C)

75,653 15,143 30,115 19,664 10,731

Total $ 343,237 $ 15,143 $ 35,211 $ 147,602 $ 145,281

(A) Excludes unused line of credit and delayed draw term loan commitments and guaranties to our portfolio companies in the aggregate principal amount of $5.6 million.

(A) Excludes unused line of credit and delayed draw term debt commitments and guaranties to our portfolio companies in the aggregate principal amount of $5.0 million.

(B) Principal balance of borrowings outstanding under the Credit Facility, based on the maturity date following the current contractual revolving period end date.

The amount of interest payments calculated for purposes of this table was based upon rates and outstanding balances as of December 31, 2021.

Critical Accounting Policies

The amount of interest payments calculated for purposes of this table was based upon rates and outstanding balances as of June 30, 2022.

Critical Accounting Estimates

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported consolidated amounts of assets and liabilities, including disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported.

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The Adviser’s risk rating system covers both qualitative and quantitative aspects of the business and the securities we hold.

The following table reflects risk ratings for all loans in our portfolio as of December 31, 2021 and March 31, 2021:

Rating December 31, 2021 March 31, 2021

The following table reflects risk ratings for all loans in our portfolio as of June 30, 2022 and March 31, 2022:

Rating June 30, 2022 March 31, 2022

Weighted-average

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Under the RIC Modernization Act, we are permitted to carryforward any capital losses that we may incur for an unlimited period, and such capital loss carryforwards will retain their character as either short-term or long-term capital losses.

Our capital loss carryforward balance was $0 as of both December 31, 2021 and March 31, 2021.

Our capital loss carryforward balance was $0 as of both June 30, 2022 and March 31, 2022.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis