What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-07 compared with 2024-08-05 · 286 added, 107 removed, 326 unchanged (55% of the section changed)

39 unchanged sentences

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, 2024, our investment portfolio was comprised of 77.0% in debt investments and 23.0% in equity investments, at cost.

As of September 30, 2024, our investment portfolio was comprised of 77.4% in debt investments and 22.6% 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 $4 million to $15 million) (“Lower Middle Market”) in the U.S.

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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 three months ended June 30, 2024, we exited one portfolio company.

From our initial public offering in June 2005 through June 30, 2024, we have invested in 58 companies, excluding investments in syndicated loans, for a total of approximately $1.7 billion, before giving effect to principal repayments and divestitures.

During the six months ended September 30, 2024, we exited two portfolio companies.

From our initial public offering in June 2005 through September 30, 2024, we have invested in 58 companies, excluding investments in syndicated loans, for a total of approximately $1.8 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 June 30, 2024, we had unrecognized, contractual success fees of $46.8 million, or $1.28 per common share.

As a result, as of September 30, 2024, we had unrecognized, contractual success fees of $50.2 million, or $1.37 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 June 30, 2024, we exited our investments of 32 portfolio companies that we acquired under our buyout strategy (which excludes investments in syndicated loans).

From inception through September 30, 2024, we exited our investments of 32 portfolio companies that we acquired under our buyout strategy (which excludes investments in syndicated loans).

In the aggregate, these sales have generated $332.5 million in net realized gains and $42.0 million in other income upon exit, for a total increase to our net assets of $374.5 million.

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The 32 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 run rate by 100.0% from March 2011 through June 30, 2024, and allowed us to declare and pay 22 supplemental distributions to common stockholders from March 2012 through June 30, 2024.

The successful exits, in part, enabled us to increase the monthly distribution run rate by 100.0% from March 2011 through September 30, 2024, and allowed us to declare 23 and pay 22 supplemental distributions to common stockholders from March 2012 through September 30, 2024.

Capital Raising

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Refer to “ Liquidity and Capital Resources — Revolving Line of Credit ” for further discussion of the Credit Facility and to “ Liquidity and Capital Resources — Equity — Common Stock ” further discussion of our common stock.

In May 2024, we entered into equity distribution agreements with Oppenheimer & Co., B.

Riley Securities, Inc.

and Virtu Americas LLC (each a “Sales Agent”), under which we have the ability to issue and sell shares of our common stock, from time to time, through the Sales Agents, up to an aggregate offering price of $75.0 million in what is commonly referred to as an "at-the-market" program (the "2024 Common Stock ATM Program").

Although we have been able to access the capital markets historically, market conditions 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, 2024, the closing market price of our common stock was $ 13.98 per share, representing a 7.5 % premium to our net asset value (“NAV”) of $ 13.01 per share as of June 30, 2024.

On September 30, 2024, the closing market price of our common stock was $ 14.45 per share, representing a 15.7 % premium to our net asset value (“NAV”) of $ 12.49 per share as of September 30, 2024.

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 June 30, 2024, our asset coverage ratio on our senior securities representing indebtedness was 216.3%.

As of September 30, 2024, our asset coverage ratio on our senior securities representing indebtedness was 229.3%.

Investment Highlights

Investment Activity

During the three months ended June 30, 2024, the following significant transactions occurred:

During the six months ended September 30, 2024, the following significant transactions occurred:

• In May 2024, our remaining shares in Funko Acquisition Holdings, LLC ("Funko") were sold, representing an exit of our investment in Funko, and resulting in a return of our equity cost basis of $21 thousand and a realized gain of $2 thousand.

Recent Developments

Investment Activity

• In July 2024, we invested an additional $18.5 million through secured first lien debt in Nocturne Luxury Villas, Inc.

to fund an add-on acquisition.

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

• In September 2024, we exited our investment in Nth Degree Investment Group, LLC ("Nth Degree"), which resulted in success fee income of $0.1 million, a realized gain on our preferred equity of $42.3 million, and the repayment of our debt investment of $25.0 million.

Distributions and Dividends

In July 2024, our Board of Directors declared the following monthly cash distributions to common stockholders:

• In October 2024, our Board of Directors declared the following monthly cash distributions to common stockholders:

Payment Date Distribution per Common Share

July 22, 2024 July 31, 2024 $ 0.08

August 21, 2024 August 30, 2024 0.08

September 20, 2024 September 30, 2024 0.08

October 22, 2024 October 31, 2024 $ 0.08

November 20, 2024 November 29, 2024 0.08

December 20, 2024 December 31, 2024 0.08

Total for the Quarter:

• On October 15, 2024, we also paid to common stockholders the following supplemental distribution previously declared by our Board of Directors on September 17, 2024:

Record Date Payment Date Distribution per Common Share

October 4, 2024 October 15, 2024 $ 0.70

Total for the Quarter:

RESULTS OF OPERATIONS

Comparison of the Three Months Ended June 30, 2024 to the Three Months Ended June 30, 2023

For the Three Months Ended June 30,

Comparison of the Three Months Ended September 30, 2024 to the Three Months Ended September 30, 2023

For the Three Months Ended September 30,

2024 2023 $ Change % Change

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Interest income $ 20,996 $ 20,277 $ 719 3.5 %

Dividend and success fee income 1,553 1,907 (354) (18.6) %

Dividend and success fee income 1,569 — 1,569 NM

Total investment income 22,565 20,277 2,288 11.3 %

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Loan servicing fee 2,194 2,325 (131) (5.6) %

Incentive fee (3,788) 2,194 (5,982) NM

Incentive fee 2,232 11,540 (9,308) (80.7) %

Administration fee 567 334 233 69.8 %

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Total expenses, net of credits to fees 15,274 22,007 (6,733) (30.6) %

NET INVESTMENT INCOME 12,414 8,440 3,974 47.1 %

NET INVESTMENT INCOME (LOSS) 7,291 (1,730) 9,021 NM

REALIZED AND UNREALIZED GAIN (LOSS)

Net realized gain 2 1,155 (1,153) (99.8) %

Net realized gain 42,303 289 42,014 NM

Net unrealized (depreciation) appreciation (34,112) 48,797 (82,909) NM

Net realized and unrealized (loss) gain (18,940) 346 (19,286) NM

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (6,526) $ 8,786 $ (15,312) NM

Net realized and unrealized gain 8,191 49,086 (40,895) (83.3) %

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 15,482 $ 47,356 $ (31,874) (67.3) %

WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING

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BASIC AND DILUTED PER COMMON SHARE:

Net investment income $ 0.34 $ 0.25 $ 0.09 36.0 %

Net increase in net assets resulting from operations $ (0.18) $ 0.26 $ (0.44) NM

Net investment income (loss) $ 0.20 $ (0.05) $ 0.25 NM

Net increase in net assets resulting from operations $ 0.42 $ 1.40 $ (0.98) (70.0) %

NM - Not meaningful

Investment Income

Total investment income increased $1.9 million, or 9.3%, for the three months ended June 30, 2024, as compared to the prior year period, primarily due to an increase in interest income, partially offset by a decrease in dividend and success fee income.

Interest income from our investments in debt securities increased $2.2 million, or 12.1%, for the three months ended June 30, 2024, as compared to the prior year period.

Total investment income increased $2.3 million, or 11.3%, for the three months ended September 30, 2024, as compared to the prior year period, primarily due to an increase in dividend and success fee income and an increase in interest income.

Interest income from our investments in debt securities increased $0.7 million, or 3.5%, for the three months ended September 30, 2024, as compared to the prior year period.

Generally, the level of interest income from investments is directly related to the weighted-average 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 June 30, 2024 was $571.0 million, compared to $495.3 million for the prior year period.

This increase was primarily due to the $92.4 million of follow-on debt investments in existing portfolio companies and the origination of $46.8 million of new debt investments after March 31, 2023, partially offset by $31.0 million of pay-offs, restructurings, or write-offs of debt investments and $27.0 million of loans placed on non-accrual status after March 31, 2023, 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 14.5% for the three months ended June 30, 2024, compared to 14.7% for the prior year period.

The weighted-average principal balance of our interest-bearing investment portfolio during the three months ended September 30, 2024 was $572.8 million, compared to $543.8 million for the prior year period.

This increase was primarily due to the $84.2 million of follow-on debt investments in existing portfolio companies and the origination of $34.8 million of new debt investments after June 30, 2023, partially offset by $56.0 million of pay-offs, restructurings, or write-offs of debt investments and $30.8 million of loans placed on non-accrual status after June 30, 2023, 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 14.5% for the three months ended September 30, 2024, compared to 14.6% for the prior year period.

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

As of June 30, 2024, certain of our loans to B+T Group Acquisition, Inc., Diligent Delivery Systems, Edge Adhesives Holdings, Inc.

As of September 30, 2024, our loans to B+T Group Acquisition, Inc.

("B+T"), Diligent Delivery Systems ("Diligent"), Edge Adhesives Holdings, Inc.

("Edge"), and J.R.

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Hobbs") were on non-accrual status, with an aggregate debt cost basis of $90.0 million.

As of June 30, 2023, our loans to Edge, J.R.

As of September 30, 2023, our loans to Edge, J.R.

Hobbs and The Mountain Corporation were on non-accrual status, with an aggregate debt cost basis of $66.9 million.

As of June 30, 2024, SFEG Holdings, Inc.

("SFEG") represented 10.3% of the total investment portfolio at fair value.

As of September 30, 2024, Nocturne represented 11.6% and SFEG Holdings, Inc.("SFEG") 10.8% of the total investment portfolio at fair value.

As of March 31, 2024, SFEG represented 10.1% of the total investment portfolio at fair value.

Dividend and success fee income for the three months ended June 30, 2024 decreased $0.4 million, or 18.6%, from the prior year period.

During the three months ended June 30, 2024, dividend and success fee income consisted of $1.6 million of success fee income.

During the three months ended June 30, 2023, dividend and success fee income consisted of $1.9 million of dividend income.

Total expenses, net of any non-contractual, unconditional, and irrevocable credits from the Adviser, decreased $2.1 million, or 17.7%, during the three months ended June 30, 2024, as compared to the prior year period, primarily due to a decrease in incentive fees, partially offset by an increase in interest expense, other expense and base management fee expense and a decrease in credits from the Adviser.

In accordance with GAAP, during the three months ended June 30, 2024, we recorded a $3.8 million reversal of previously accrued capital gains-based incentive fee compared to a capital gains-based incentive fee of $0.1 million during the three months ended June 30, 2023.

Dividend and success fee income for the three months ended September 30, 2024 increased $1.6 million, from the prior year period.

During the three months ended September 30, 2024, dividend and success fee income consisted of $1.4 million of dividend income and $0.2 million of success fee income.

During the three months ended September 30, 2023, there was no dividend or success fee income.

Total expenses, net of any non-contractual, unconditional, and irrevocable credits from the Adviser, decreased $6.7 million, or 30.6%, during the three months ended September 30, 2024, as compared to the prior year period, primarily due to a decrease in incentive fees, partially offset by a decrease in fee credits from the Adviser and an increase in other expense, interest expense, and administration fee expense.

In accordance with GAAP, during the three months ended September 30, 2024, we recorded a $1.6 million capital gains-based incentive fee compared to $9.8 million during the three months ended September 30, 2023.

The capital gains-based incentive fee is 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 decreased by $2.1 million, for the three months ended June 30, 2024, as compared to the prior year period, primarily due to a decrease in pre-incentive fee net investment income and an increase in net assets, which drives the hurdle rate.

The income-based incentive fee decreased by $1.1 million, for the three months ended September 30, 2024, as compared to the prior year period, primarily due to an increase in net assets, which drives the hurdle rate and a decrease in pre-incentive fee net investment income.

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 June 30,

Three Months Ended September 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 expense increased $1.5 million, or 30.3%, during the three months ended June 30, 2024, as compared to the prior year period, primarily due to interest expense related to the 8.00% 2028 Notes issued in May 2023 and increased borrowings on the Credit Facility, partially offset by a decrease in the effective interest rate.

The weighted-average balance outstanding under the Credit Facility during the three months ended June 30, 2024 was $64.7 million, compared to $43.6 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, 2024 was 10.8%, as compared to 11.2% in the prior year period.

The decrease in the effective interest rate on the Credit Facility was primarily a result of the decrease in the unused fee associated with the undrawn portion of the Credit Facility, partially offset by an increase in interest rates.

Other expenses increased $1.0 million, or 100.6%, during the three months ended June 30, 2024, as compared to the prior year period, due to an increase in bad debt expense.

Interest expense increased $0.3 million, or 4.8%, during the three months ended September 30, 2024, as compared to the prior year period, primarily due to increased borrowings on the Credit Facility and an increase in the effective interest rate.

The weighted-average balance outstanding under the Credit Facility during the three months ended September 30, 2024 was $60.8 million, compared to $50.4 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 September 30, 2024 was 11.0%, as compared to 10.9% in the prior year period.

The increase in the effective interest rate on the Credit Facility was primarily a result of higher interest rates during the three months ended September 30, 2024.

Other expenses increased $0.5 million, or 43.5%, during the three months ended September 30, 2024, as compared to the prior year period, due to an increase in bad debt expense, professional fees and tax expense.

Realized and Unrealized Gain (Loss)

The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the three months ended June 30, 2024 and 2023 were as follows:

Three Months Ended June 30, 2024

The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the three months ended September 30, 2024 and 2023 were as follows:

Three Months Ended September 30, 2024

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

Nocturne Luxury Villas, Inc.

$ — $ 6,707 $ — $ 6,707

Nth Degree Investment Group, LLC 42,284 — (38,028) 4,256

ImageWorks Display and Marketing Group, Inc.

— 3,269 — 3,269

Old World Christmas, Inc.

— 3,203 — 3,203

Galaxy Technologies Holding, Inc.

— 2,754 — 2,754

Schylling, Inc.

— 2,566 — 2,566

The E3 Company, LLC — 2,561 — 2,561

The Maids International, LLC — 1,434 — 1,434

- Atlanta, LLC — 1,150 — 1,150

Phoenix Doors Systems, Inc.

— 1,095 — 1,095

Edge Adhesives Holdings, Inc.

— (892) — (892)

UPB Acquisition, Inc.

2 unchanged sentences

— (1,090) — (1,090)

The E3 Company, LLC — 2,646 — 2,646

Old World Christmas, Inc.

Brunswick Bowling Products, Inc.

— (2,321) — (2,321)

B+T Group Acquisition, Inc — (2,839) — (2,839)

Horizon Facilities Service, Inc.

— (11,752) — (11,752)

Other, net (<$1.0 million, net) 19 (948) — (929)

Total $ 42,303 $ 3,916 $ (38,028) $ 8,191

Three Months Ended September 30, 2023

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

Counsel Press, Inc.

$ — $ 21,667 $ — $ 21,667

Educators Resources, Inc.

— 9,542 — 9,542

Mason West, LLC — 8,745 — 8,745

Brunswick Bowling Products, Inc.

— 5,713 — 5,713

Nth Degree Investment Group, LLC — 5,626 — 5,626

SFEG Holdings, Inc.

— 3,450 — 3,450

The Maids International, LLC — 1,801 — 1,801

Utah Pacific Bridge & Steel, Ltd.

— 1,213 — 1,213

Dema/Mai Holdings, Inc.

— (1,126) — (1,126)

ImageWorks Display and Marketing Group, Inc.

— (1,392) — (1,392)

Schylling, Inc.

— (1,439) — (1,439)

PSI Molded Plastics, Inc.

— (1,797) — (1,797)

Edge Adhesives Holdings, Inc.

B+T Group Acquisition, Inc.

— (3,108) — (3,108)

Phoenix Doors Systems, Inc.

Other, net (<$1.0 million, net) 289 (150) — 139

Total $ 289 $ 48,745 $ — $ 49,034

Net Realized Gain (Loss)

During the three months ended September 30, 2024, we recorded net realized gains on investments of $42.3 million, primarily due to the realized gain from the exit of Nth Degree Investment Group, Inc.

During the three months ended September 30, 2023, we recorded net realized gains on investments of $0.3 million related to a recapitalization of Old World Christmas, Inc.

("Old World").

Net Unrealized Appreciation (Depreciation)

Net unrealized depreciation of investments of $34.1 million for the three months ended September 30, 2024 was primarily due to the reversal of unrealized appreciation of Nth Degree upon exit, and a decrease in the performance of certain of our portfolio companies.

These decreases were partially offset by an increase in transaction multiples used to estimate the fair value of certain of our portfolio companies and increased performance of certain of our other portfolio companies.

Net unrealized appreciation of investments of $48.7 million for the three months ended September 30, 2023 was primarily due to increased performance of certain of our portfolio companies and an increase in transaction multiples used to estimate the fair value of certain of our portfolio companies, in addition to increased fair value as a result of expected payoff amounts for certain investments.

These increases were partially offset by decreased performance of certain of our other portfolio companies.

Across our entire investment portfolio, we recorded net unrealized depreciation of $19.4 million on our equity positions and net unrealized depreciation of $14.7 million on our debt positions for the three months ended September 30, 2024 .

As of September 30, 2024 , the fair value of our investment portfolio was more than the cost basis by $13.2 million, as compared to June 30, 2024, when the fair value of our investment portfolio was more than the cost basis by $47.3 million, representing net unrealized depreciation of $34.1 million for the three months ended September 30, 2024 .

Our entire portfolio had a fair value of 101.6% of cost as of September 30, 2024 .

Comparison of the Six Months Ended September 30, 2024 to the Six Months Ended September 30, 2023

For the Six Months Ended September 30,

2024 2023 $ Change % Change

INVESTMENT INCOME

Interest income $ 41,621 $ 38,670 $ 2,951 7.6 %

Dividend and success fee income 3,122 1,907 1,215 63.7 %

Total investment income 44,743 40,577 4,166 10.3 %

Base management fee 9,065 8,272 793 9.6 %

Loan servicing fee 4,416 4,497 (81) (1.8) %

Incentive fee (1,556) 13,734 (15,290) NM

Administration fee 1,073 856 217 25.4 %

Interest expense 12,879 11,078 1,801 16.3 %

Amortization of deferred financing costs and discounts 1,260 1,119 141 12.6 %

Other 3,613 2,132 1,481 69.5 %

Expenses before credits from Adviser 30,750 41,688 (10,938) (26.2) %

Credits to fees from Adviser (5,712) (7,821) 2,109 (27.0) %

Total expenses, net of credits to fees 25,038 33,867 (8,829) (26.1) %

NET INVESTMENT INCOME 19,705 6,710 12,995 193.7 %

REALIZED AND UNREALIZED GAIN (LOSS)

Net realized gain 42,305 1,444 40,861 NM

Net unrealized (depreciation) appreciation (53,054) 47,988 (101,042) NM

Net realized and unrealized (loss) gain (10,749) 49,432 (60,181) NM

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 8,956 $ 56,142 $ (47,186) (84.0) %

WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING

Basic and diluted 36,688,667 33,704,976 2,983,691 8.85 %

BASIC AND DILUTED PER COMMON SHARE:

Net investment income $ 0.54 $ 0.20 $ 0.34 170.0 %

Net increase in net assets resulting from operations $ 0.24 $ 1.67 $ (1.43) (85.6) %

NM = Not Meaningful

Investment Income

Total investment income increased $4.2 million, or 10.3%, for the six months ended September 30, 2024, as compared to the prior year period, primarily due to an increase in interest income, and dividend and success fee income.

Interest income from our investments in debt securities increased $3.0 million, or 7.6%, for the six months ended September 30, 2024, as compared to the prior year period.

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

The weighted-average principal balance of our interest-bearing investment portfolio during the six months ended September 30, 2024 was $578.1 million, compared to $519.7 million for the prior year period.

This increase was primarily due to $110.9 million of follow-on debt investments in existing portfolio companies, the origination of $85.8 million of new debt investments, partially offset by $56.0 million of pay-offs, restructurings, or write-offs of debt investments and $30.8 million of loans placed on non-accrual status after March 31, 2023, 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 14.4% for the six months ended September 30, 2024, compared to 14.6% for the prior year period.

During the six months ended September 30, 2024 and 2023, we had no collections of past due interest.

As of September 30, 2024, our loans to B+T, Diligent, Edge, and J.R.

Hobbs were on non-accrual status, with an aggregate debt cost basis of $90.0 million.

As of September 30, 2023, our loans to Edge, J.R.

Hobbs and The Mountain were also on non-accrual status, with an aggregate debt cost basis of $66.9 million.

As of September 30, 2024, Nocturne represented 11.6%, and SFEG represented 10.8% of the total investment portfolio at fair value.

As of March 31, 2024, SFEG represented 10.1% of the total investment portfolio at fair value.

Dividend and success fee income for the six months ended September 30, 2024 increased $1.2 million, or 63.7% from the prior year period.

During the six months ended September 30, 2024, dividend and success fee income consisted of $1.7 million of success fee income and $1.4 million of dividend income.

During the six months ended September 30, 2023, dividend and success fee income consisted of $1.9 million of dividend income.

Total expenses, net of any non-contractual, unconditional, and irrevocable credits from the Adviser, decreased $8.8 million, or 26.1%, during the six months ended September 30, 2024, as compared to the prior year period, primarily due to a decrease in incentive fees, partially offset by a decrease in fee credits from the Adviser and an increase in interest expense, other expense, and base management fee.

In accordance with GAAP, we recorded a $2.2 million reversal of previously accrued capital gains-based incentive fee during the six months ended September 30, 2024, compared to a $9.9 million capital gains-based incentive fee recorded during the six months ended September 30, 2023.

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 decreased by $3.3 million for the six months ended September 30, 2024, as compared to the prior year period, primarily due to an increase in net assets, which drives the hurdle rate, and a decrease in pre-incentive fee net investment income.

Six Months Ended September 30,

Average total assets subject to base management fee (A)

$ 906,500 $ 827,200

Multiplied by prorated annual base management fee of 2.0% 1.0 % 1.0 %

Base management fee (B)

$ 9,065 $ 8,272

Credits to fees from Adviser - other (B)

(1,296) (3,324)

Net base management fee $ 7,769 $ 4,948

Loan servicing fee (B)

$ 4,416 $ 4,497

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

(4,416) (4,497)

Net loan servicing fee $ — $ —

Incentive fee – income-based $ 594 $ 3,860

Incentive fee – capital gains-based (C)

(2,150) 9,874

Total incentive fee (B)

$ (1,556) $ 13,734

Credits to fees from Adviser - other (B)

Net total incentive fee $ (1,556) $ 13,734

(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 expense increased $1.8 million, or 16.3%, during the six months ended September 30, 2024, as compared to the prior year period, primarily due to interest expense related to the 8.00% 2028 Notes issued in May 2023 and increased borrowings on the Credit Facility, partially offset by a decrease in the effective interest rate.

The weighted-average balance outstanding on the Credit Facility during the six months ended September 30, 2024 was $62.8 million as compared to $47.0 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, 2024 was 10.9%, as compared to 11.0% in the prior year period.

The decrease in the effective interest rate on the Credit Facility was primarily a result of a decrease in unused commitment fees on the undrawn portion of the Credit Facility, partially offset by higher interest rates on the drawn portion of the Credit Facility during the six months ended September 30, 2024.

Other expenses increased $1.5 million, or 69.5%, during the six months ended September 30, 2024, as compared to the prior year period, due to an increase in bad debt expense and professional fees.

Realized and Unrealized Gain (Loss)

The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the six months ended September 30, 2024 and 2023 were as follows:

Six Months Ended September 30, 2024

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

The E3 Company, LLC $ — $ 5,208 $ — $ 5,208

Nocturne Luxury Villas, Inc.

— 4,988 — 4,988

ImageWorks Display and Marketing Group, Inc.

Old World Christmas, Inc.

— 4,734 — 4,734

Horizon Facilities Service, Inc.

Schylling, Inc.

— 3,031 — 3,031

UPB Acquisition, Inc — 2,987 — 2,987

Galaxy Technologies Holdings, Inc.

— 2,757 — 2,757

Ginsey Home Solutions, Inc.

— 2,385 — 2,385

- Atlanta, LLC — 1,349 — 1,349

Dema/Mai Holdings, Inc.

— 1,318 — 1,318

The Maids International, LLC — 1,251 — 1,251

Diligent Delivery Systems — (1,092) — (1,092)

Home Concepts Acquisition, Inc.

— (1,238) — (1,238)

PSI Molded Plastics, Inc.

— (1,767) — (1,767)

Brunswick Bowling Products, Inc.

— (2,165) — (2,165)

Edge Adhesives Holdings, Inc.

— (2,335) — (2,335)

B+T Group Acquisition, Inc.

— (2,742) — (2,742)

Nth Degree Investment Group, LLC 42,284 (7,195) (38,028) (2,939)

Mason West, LLC — (9,201) — (9,201)

Horizon Facilities Services, Inc.

(8,614) (8,614)

Phoenix Door Systems, Inc.

(18,163) (18,163)

Other, net (<$1.0 million, net) 21 273 4 298

Total $ 42,305 $ (15,030) $ (38,024) $ (10,749)

Three Months Ended June 30, 2023

Six Months Ended September 30, 2023

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

Counsel Press, Inc.

$ — $ 22,676 $ — $ 22,676

Nth Degree Investment Group, LLC — 12,677 — 12,677

Galaxy Technologies Holdings, Inc.

Mason West, LLC — 11,690 — 11,690

Educators Resource, Inc.

— 10,563 — 10,563

Brunswick Bowling Products, Inc.

— 8,311 — 8,311

SFEG Holdings, Inc.

— 6,437 — 6,437

Mason West, LLC — 2,945 — 2,945

Brunswick Bowling Products, Inc.

The Maids International, LLC — 3,747 — 3,747

Galaxy Technologies Holdings, Inc.

— 3,481 — 3,481

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— 1,613 — 1,613

The Maids International, LLC — 1,946 — 1,946

Educators Resources, Inc.

UPB Acquisition, Inc.

— 1,493 — 1,493

Counsel Press Inc.

Ginsey Home Solutions, Inc.

— 1,247 — 1,247

Gladstone SOG Investments, Inc 882 — (93) 789

PSI Molded Plastics, Inc.

— (1,234) — (1,234)

Dema/Mai Holdings, Inc.

— (1,875) — (1,875)

Old World Christmas, Inc.

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Net Realized Gain (Loss)

During the three months ended June 30, 2024, we recorded net realized gains on investments of $2 thousand, primarily due to the realized gain from the exit of Funko.

During the three months ended June 30, 2023, we recorded net realized gains on investments of $1.2 million, primarily due to $0.9 million of realized gains related to a prior period exit and a $0.3 million realized gain from the recapitalization of Old World Christmas, Inc.

During the six months ended September 30, 2024, we recorded net realized gains on investments of $42.3 million, primarily due to a $42.3 million realized gain from the exit of Nth Degree.

During the six months ended September 30, 2023, we recorded net realized gains on investments of $1.4 million, primarily due to $1.2 million of realized gains related to certain prior period exits and $0.3 million of realized gain from the recapitalization of Old World.

Net Unrealized Appreciation (Depreciation)

Net unrealized depreciation of investments of $18.9 million for the three months ended June 30, 2024 was primarily due to a decrease in transaction multiples used to estimate the fair value of certain of our portfolio companies and a decrease in performance of certain of our portfolio companies.

These decreases were partially offset by increased performance of certain of our other portfolio companies.

Net unrealized depreciation of investments of $0.8 million for the three months ended June 30, 2023 was primarily due to decreased performance of certain of our portfolio companies.

These amounts were partially offset by increased performance of certain of our other portfolio companies and an increase in transaction multiples used to estimate the fair value of certain of our portfolio companies.

Across our entire investment portfolio, we recorded net unrealized depreciation of $10.1 million on our debt positions and net unrealized depreciation of $8.8 million on our equity positions for the three months ended June 30, 2024 .

As of June 30, 2024 , the fair value of our investment portfolio was more than the cost basis by $47.3 million, as compared to March 31, 2024, when the fair value of our investment portfolio was more than the cost basis by $66.2 million, representing net unrealized depreciation of $18.9 million for the three months ended June 30, 2024 .

Our entire portfolio had a fair value of 105.5% of cost as of June 30, 2024 .

Net unrealized depreciation of investments of $53.1 million for the six months ended September 30, 2024 was primarily due to the reversal of unrealized appreciation of Nth Degree upon exit and decreased performance of certain of our portfolio companies.

Net unrealized appreciation of investments of $47.9 million for the six months ended September 30, 2023 was primarily due to increased performance of certain of our portfolio companies and an increase in transaction multiples used to estimate the fair value of certain of our portfolio companies, in addition to increased fair value as a result of expected payoff amounts for certain investments.

These increases were partially offset by decreased performance of certain of our other portfolio companies.

Across our entire investment portfolio, we recorded net unrealized depreciation of $28.2 million on our equity positions and depreciation of $24.9 million on our debt positions , for the six months ended September 30, 2024 .

As of September 30, 2024 , the fair value of our investment portfolio was more than the cost basis by $13.2 million , as compared to March 31, 2024, when the fair value of our investment portfolio was more than the cost basis by $32.9 million, representing net unrealized depreciation of $53.1 million for the six months ended September 30, 2024 .

Our entire portfolio had a fair value of 101.6% of cost as of September 30, 2024 .

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Net cash provided by operating activities for the three months ended June 30, 2024 was $12.3 million compared to net cash used in operating activities of $36.4 million for the three months ended June 30, 2023.

This change was primarily due to a decrease in purchases of investments.

Purchases of investments were $0.6 million during the three months ended June 30, 2024, compared to $48.0 million during the three months ended June 30, 2023.

Aggregate net proceeds from the sale and recapitalization of investments totaled $3.0 million during the three months ended June 30, 2024, compared to $1.8 million during the three months ended June 30, 2023.

As of June 30, 2024, we had equity investments in and/or loans to 23 portfolio companies with an aggregate cost basis of $851.9 million.

As of June 30, 2023, we had equity investments in and/or loans to 25 portfolio companies with an aggregate cost basis of $768.0 million.

The following table summarizes our total portfolio investment activity during the three months ended June 30, 2024 and 2023:

Three Months Ended June 30,

Net cash provided by operating activities for the six months ended September 30, 2024 was $75.5 million compared to net cash used in operating activities of $96.6 million for the six months ended September 30, 2023.

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

Purchases of investments were $20.1 million during the six months ended September 30, 2024, compared to $114.8 million during the six months ended September 30, 2023.

Aggregate net proceeds from the sale and recapitalization of investments and principal repayments of investments totaled $76.5 million during the six months ended September 30, 2024, compared to $1.8 million during the six months ended September 30, 2023.

As of September 30, 2024, we had equity investments in and/or loans to 22 portfolio companies with an aggregate cost basis of $840.1 million.

As of September 30, 2023, we had equity investments in and/or loans to 26 portfolio companies with an aggregate cost basis of $834.8 million.

The following table summarizes our total portfolio investment activity during the six months ended September 30, 2024 and 2023:

Six Months Ended September 30,

Beginning investment portfolio, at fair value $ 920,504 $ 753,543

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Net realized gain on investments 42,305 1,155

Net unrealized depreciation of investments (18,946) (727)

Net unrealized (depreciation) appreciation of investments (15,030) 48,018

Reversal of net unrealized depreciation (appreciation) of investments (38,024) (93)

Ending investment portfolio, at fair value $ 853,307 $ 915,636

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, 2024:

For the remaining nine months ending March 31, 2025

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, 2024:

For the remaining six months ending March 31, 2025

For the fiscal years ending March 31:

Thereafter 25,000

Total contractual repayments $ 650,480

Investments in equity securities 189,667

Total cost basis of investments held as of June 30, 2024:

Total cost basis of investments held as of September 30, 2024:

Financing Activities

Net cash used in financing activities for the three months ended June 30, 2024 was $12.4 million, which consisted primarily of $8.8 million in distributions to common stockholders, $3.3 million of net repayments under the Credit Facility and $0.2 million of deferred financing and offering costs.

Net cash provided by financing activities for the three months ended June 30, 2023 was $71.0 million, which consisted primarily of $74.8 million of gross proceeds from the issuance of our 8.00% 2028 Notes and $11.0 million of net borrowings under the Credit Facility, partially offset by $12.1 million in distributions to common stockholders and $2.7 million of deferred financing and offering costs.

Net cash used in financing activities for the six months ended September 30, 2024 was $76.0 million, which consisted primarily of $58.1 million of net repayments under the Credit Facility, $17.6 million in distributions to common stockholders and $0.3 million of deferred financing and offering costs.

Net cash provided by financing activities for the six months ended September 30, 2023 was $95.9 million, which consisted primarily of $74.8 million of gross proceeds from the issuance of our 8.00% 2028 Notes and $44.1 million of net borrowings under the Credit Facility and $4.1 million of proceeds from the issuance of common stock, net of expenses and shelf offering registration costs, partially offset by $24.3 million in distributions to common stockholders and $2.7 million of deferred financing and offering costs.

Distributions and Dividends to Stockholders

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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 $0.08 per common share for each of the three months from April through June 2024.

See also “ Recent Developments - Distributions and Dividends ” for a discussion of cash distributions to common stockholders declared by our Board of Directors in July 2024.

In accordance with these requirements, our Board of Directors declared, and we paid, monthly cash distributions of $0.08 per common share for each of the six months from April through September 2024, and a supplemental distribution of $0.70 per common share paid in October 2024.

See also “ Recent Developments - Distributions and Dividends ” for a discussion of cash distributions to common stockholders declared and paid by our Board of Directors in October 2024.

For the fiscal year ended March 31, 2024, Investment Company Taxable Income exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $18.7 million of the first distributions paid subsequent to fiscal year-end as having been paid in the prior year.

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For the year ended March 31, 2024, we recorded $0.8 million of net adjustments for estimated permanent book-tax differences to reflect tax character, which increased Overdistributed net investment income and decreased Accumulated net realized gain in excess of distributions and Capital in excess of par value.

For the three months ended June 30, 2024, we recorded $0.2 million of net adjustments for estimated permanent book-tax differences to reflect tax character, which increased Overdistributed net investment income and decreased Capital in excess of par value .

For the six months ended September 30, 2024, we recorded $0.8 million of net adjustments for estimated permanent book-tax differences to reflect tax character, which increased Overdistributed net investment income and decreased Capital in excess of par value .

Dividend Reinvestment Plan

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Riley Securities, Inc.

There were no shares sold under the 2024 Common Stock ATM Program during the three months ended June 30, 2024.

As of June 30, 2024, we had remaining capacity under the 2024 Common Stock ATM Program to sell all $75.0 million.

There were no shares sold under the 2024 Common Stock ATM Program during the three and six months ended September 30, 2024.

As of September 30, 2024, we had remaining capacity under the 2024 Common Stock ATM Program to sell all $75.0 million.

In August 2022, we entered into equity distribution agreements with Oppenheimer & Co.

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The 2022 Common Stock ATM Program terminated in connection with our entry into the 2024 Common Stock ATM Program.

We did not have any sales of common stock during three and six months eneded September 30, 2024.

During the three and six months ended September 30, 2023, we sold 304,170 shares of common stock under the 2022 Common Stock ATM Program, with a weighted-average gross price of $13.55 per share and a weighted-average net price of $13.35 per share after deducting commissions and offering costs borne by us, raising approximately $4.1 million and $4.1 million of gross and net proceeds, respectively.

All of these sales were above our then current estimated NAV per share.

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

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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.

As of June 30, 2024, the closing market price of our common stock was $ 13.98 per share, representing a 7.5 % premium to our NAV per share of $ 13.01 as of June 30, 2024.

As of September 30, 2024, the closing market price of our common stock was $ 14.45 per share, representing a 15.7 % premium to our NAV per share of $ 12.49 as of September 30, 2024.

Revolving Line of Credit

We, through our wholly-owned subsidiary, Business Investment, are party to a Credit Facility with KeyBank National Association (“KeyBank”), as administrative agent, joint lead arranger and lender, Fifth Third Bank as managing agent, joint lead arranger and lender, the Adviser, as servicer, and certain other lenders party thereto.

As of June 30, 2024, the Credit Facility provides for maximum borrowings of $200.0 million, with a revolving period end date of October 30, 2026 and a maturity date of October 30, 2028.

As of June 30, 2024, advances under the Credit Facility generally bore interest at 30-day Term SOFR, subject to a floor of 0.35%, plus 3.15% per annum until October 30, 2026, with the margin then increasing to 3.40% for the period from October 30, 2026 to October 30, 2027, and increasing further to 3.65% thereafter with a SOFR credit spread adjustment of 10 basis points.

As of September 30, 2024, the Credit Facility provides for maximum borrowings of $200.0 million, with a revolving period end date of October 30, 2026 and a maturity date of October 30, 2028.

As of September 30, 2024, advances under the Credit Facility generally bore interest at 30-day Term SOFR, subject to a floor of 0.35%, plus 3.15% per annum until October 30, 2026, with the margin then increasing to 3.40% for the period from October 30, 2026 to October 30, 2027, and increasing further to 3.65% thereafter with a SOFR credit spread adjustment of 10 basis points.

The Credit Facility has an unused commitment fee on the daily unused commitment amount of 0.50% per annum if the daily unused commitment amount is less than or equal to 50% of the total commitment amount, 0.75% per annum if the daily unused commitment amount is greater than 50% but less than or equal to 65% of the total commitment amount, and 1.00% per annum if the daily unused commitment amount is greater than 65% of the total commitment amount.

At June 30, 2024, we had $ 63.7 million of borrowings outstanding on the Credit Facility and as of the date of this report, we had $86.3 million outstanding under the Credit Facility.

At September 30, 2024, we had $ 8.9 million of borrowings outstanding on the Credit Facility and as of the date of this report, we had $40.2 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 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 $ 348.7 million as of June 30, 2024, (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, 2024, and as defined in the performance guaranty of the Credit Facility, we had a net worth of $ 807.5 million, asset coverage on our senior securities representing indebtedness of 216.3 %, 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, 2024, we had availability, after adjustments for various constraints based on collateral quality, of $ 136.3 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 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 $ 348.7 million as of September 30, 2024, (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, 2024, and as defined in the performance guaranty of the Credit Facility, we had a net worth of $ 789.2 million, asset coverage on our senior securities representing indebtedness of 229.3 %, 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, 2024, we had availability, after adjustments for various constraints based on collateral quality, of $ 191.1 million under the Credit Facility and were in compliance with all covenants under the Credit Facility.

Notes Payable

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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 June 30, 2024 and March 31, 2024, we had unrecognized, contractual off-balance sheet success fee receivables of $46.8 million and $44.9 million (or approximately $1.28 and $1.23 per common share), respectively, on our debt investments.

As a result, as of September 30, 2024 and March 31, 2024, we had unrecognized, contractual off-balance sheet success fee receivables of $50.2 million and $44.9 million (or approximately $1.37 and $1.23 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.

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

We estimate the fair value of the combined unused line of credit commitments as of June 30, 2024 to be insignificant.

The following table shows our contractual obligations as of June 30, 2024, at cost:

We estimate the fair value of the combined unused line of credit commitments as of September 30, 2024 to be insignificant.

The following table shows our contractual obligations as of September 30, 2024, at cost:

Payments Due by Period

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(C) Includes interest payments due on the Credit Facility, 5.00% 2026 Notes, 4.875% 2028 Notes and 8.00% 2028 Notes, as applicable.

The amount of interest payments calculated for purposes of this table was based upon rates and outstanding balances as of June 30, 2024.

The amount of interest payments calculated for purposes of this table was based upon rates and outstanding balances as of September 30, 2024.

Critical Accounting Estimates

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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 June 30, 2024 and March 31, 2024:

Rating June 30, 2024 March 31, 2024

The following table reflects risk ratings for all loans in our portfolio as of September 30, 2024 and March 31, 2024:

Rating September 30, 2024 March 31, 2024

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 June 30, 2024 and March 31, 2024.

Our capital loss carryforward balance was $0 as of both September 30, 2024 and March 31, 2024.

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