Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All statements contained herein, other than historical facts, may constitute “forward-looking statements.” These statements may relate to, among other things, our future operating results, our business prospects and the prospects of our portfolio companies, actual and potential conflicts of interest with Gladstone Management Corporation (the “Adviser”) and its affiliates, the use of borrowed money to finance our investments, the adequacy of our financing sources and working capital, and our ability to co-invest, among other factors. In some cases, you can identify forward-looking statements by terminology such as “estimate,” “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “project,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative or variations of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include: (1) changes in the economy and the capital markets, including stock price volatility, inflation, elevated interest rates and risks of recession; (2) risks associated with negotiation and consummation of pending and future transactions; (3) the loss of one or more of our executive officers, in particular David Gladstone, David Dullum, or Terry Lee Brubaker; (4) changes in our investment objectives and strategy; (5) availability, terms (including the possibility of interest rate volatility) and deployment of capital; (6) changes in our industry, interest rates, exchange rates, or the general economy, including inflation; (7) our business prospects and the prospects of our portfolio companies; (8) the degree and nature of our competition; (9) changes in governmental regulation, tax rates and similar matters; (10) our ability to exit investments in a timely manner; (11) our ability to maintain our qualification as a regulated investment company (“RIC”) and as a business development company (“BDC”); and (12) those factors described in Item 1A. “Risk Factors” herein and the “Risk Factors” sections of our Annual Report on Form 10-K for the fiscal year ended March 31, 2024, filed with the U.S. Securities and Exchange Commission (“SEC”) on May 8, 2024 (the “Annual Report”). We caution readers not to place undue reliance on any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements and future results could differ materially from historical performance. We have based forward-looking statements on information available to us on the date of this Quarterly Report on Form 10-Q (the “Quarterly Report”). Except as required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC, including subsequent annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements contained in this Quarterly Report are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended.
In this Quarterly Report, the “Company,” “we,” “us,” and “our” refer to Gladstone Investment Corporation and its wholly-owned subsidiaries unless the context otherwise indicates. Dollar amounts, except per share amounts, are in thousands, unless otherwise indicated.
The following analysis of our financial condition and results of operations should be read in conjunction with our accompanying Consolidated Financial Statements and the notes thereto contained elsewhere in this Quarterly Report and in our Annual Report. Historical financial condition and results of operations and percentage relationships among any amounts in the financial statements are not necessarily indicative of financial condition, results of operations or percentage relationships for any future periods.
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OVERVIEW
General
We were incorporated under the General Corporation Law of the State of Delaware on February 18, 2005. We operate as an externally managed, closed-end, non-diversified management investment company and have elected to be treated as a BDC under the Investment Company Act of 1940, as amended (the “1940 Act”). For U.S. federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). To continue to qualify as a RIC for U.S. federal income tax purposes and obtain favorable RIC tax treatment, we must meet certain requirements, including certain minimum distribution requirements.
We were established for the purpose of investing in debt and equity securities of established private businesses operating in the United States (“U.S.”). Our investment objectives are to: (i) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness, and make distributions to our stockholders that grow over time; and (ii) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses, generally in combination with the aforementioned debt securities, that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our objectives, our investment strategy is to invest in several categories of debt and equity securities, with individual investments generally totaling up to $75 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 investments and 25% 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. that meet certain criteria, including: the sustainability of the business’ free cash flow and its ability to grow it over time, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the portfolio company, reasonable capitalization of the portfolio company, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples, and the potential to realize appreciation and gain liquidity in our equity position, if any. We anticipate that liquidity in our equity position will be achieved through a merger or acquisition of the portfolio company, a public offering of the portfolio 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 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. Our targeted portfolio companies are generally considered too small for the larger capital marketplace.
We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity. In July 2012, the SEC granted us an exemptive order (the “Co-Investment Order”) that expanded our ability to co-invest, under certain circumstances, with certain of our affiliates, including Gladstone Capital 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 (“5.00% 2026 Notes”), our 4.875% Notes due 2028 ("4.875% 2028 Notes") and our 8.00% Notes due 2028 (“8.00% 2028 Notes”) are traded on the Nasdaq Global Select Market (“Nasdaq”) under the trading symbols “GAIN,” “GAINN,” "GAINZ" and “GAINL,” respectively.
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Business
Portfolio and Investment Activity
While the business environment remains competitive, we continue to see new investment opportunities consistent with our investment strategy of providing a combination of debt and equity in support of management and independent sponsor-led buyouts of Lower Middle Market companies in the U.S. During the six months ended September 30, 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. Unlike paid-in-kind (“PIK”) income, we generally do not recognize success fees as income until payment has been received. Due to the contingent nature of success fees, there are no guarantees that we will be able to collect any or all of these success fees or know the timing of any such collections. As a result, as of September 30, 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 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. We believe, in aggregate, these transactions were equity-oriented investment successes and exemplify our investment strategy of striving to achieve returns through current income on the debt portion of our investments and capital gains from the equity portion. The 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 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
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 unsecured notes, as well as common and preferred stock. We have successfully extended the Credit Facility’s revolving period multiple times, most recently to October 2026, and currently have a total commitment amount of $200.0 million (with a potential total commitment of $300.0 million through additional commitments from new or existing lenders). During the year ended March 31, 2024, we issued the 8.00% 2028 Notes for gross proceeds of $74.8 million and sold 3,097,162 shares of our common stock under our common stock "at-the-market" program ("2022 Common Stock ATM Program") for gross proceeds of approximately $44.5 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 ” 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 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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Regulatory Compliance
Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage limitations of the 1940 Act, which require us to have asset coverage (as defined in Sections 18 and 61 of the 1940 Act) of at least 150% on each of our senior securities representing indebtedness and our senior securities that are stock (such as our previously outstanding series of term preferred stock).
On April 10, 2018, our Board of Directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) thereof, approved the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, our asset coverage requirements for senior securities changed from 200% to 150%, effective as of April 10, 2019, one year after the date of the Board of Directors’ approval.
As of September 30, 2024, our asset coverage ratio on our senior securities representing indebtedness was 229.3%.
Investment Highlights
Investment Activity
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.
• In July 2024, we invested an additional $18.5 million through secured first lien debt in Nocturne Luxury Villas, Inc. ("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 October 2024, our Board of Directors declared the following monthly cash distributions to common stockholders:
Record Date
Payment Date Distribution per Common Share
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: $ 0.24
• 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: $ 0.70
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RESULTS OF OPERATIONS
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
INVESTMENT INCOME
Interest income $ 20,996 $ 20,277 $ 719 3.5 %
Dividend and success fee income 1,569 — 1,569 NM
Total investment income 22,565 20,277 2,288 11.3 %
EXPENSES
Base management fee 4,447 4,341 106 2.4 %
Loan servicing fee 2,194 2,325 (131) (5.6) %
Incentive fee 2,232 11,540 (9,308) (80.7) %
Administration fee 567 334 233 69.8 %
Interest expense 6,399 6,104 295 4.8 %
Amortization of deferred financing costs and discounts 629 574 55 9.6 %
Other 1,669 1,163 506 43.5 %
Expenses before credits from Adviser 18,137 26,381 (8,244) (31.2) %
Credits to fees from Adviser (2,863) (4,374) 1,511 (34.5) %
Total expenses, net of credits to fees 15,274 22,007 (6,733) (30.6) %
NET INVESTMENT INCOME (LOSS) 7,291 (1,730) 9,021 NM
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain 42,303 289 42,014 NM
Net unrealized (depreciation) appreciation (34,112) 48,797 (82,909) 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
Basic and diluted 36,688,667 33,817,214 2,871,453 8.5 %
BASIC AND DILUTED PER COMMON SHARE:
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
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Investment Income
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 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 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. Hobbs Co. – Atlanta, LLC ("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 Corporation were 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 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 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.
Expenses
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 $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.
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The base management fee, loan servicing fee, incentive fee, and their related non-contractual, unconditional, and irrevocable credits are computed quarterly, as described under “Transactions with the Adviser” in Note 4 — Related Party Transactions in the accompanying Notes to Consolidated Financial Statements and are summarized in the following table:
Three Months Ended September 30,
2024 2023
Average total assets subject to base management fee (A)
$ 889,400 $ 868,200
Multiplied by prorated annual base management fee of 2.0% 0.5 % 0.5 %
Base management fee (B)
$ 4,447 $ 4,341
Credits to fees from Adviser - other (B)
(669) (2,049)
Net base management fee $ 3,778 $ 2,292
Loan servicing fee (B)
$ 2,194 $ 2,325
Credits to base management fee - loan servicing fee (B)
(2,194) (2,325)
Net loan servicing fee $ — $ —
Incentive fee – income-based $ 594 $ 1,733
Incentive fee – capital gains-based (C)
1,638 9,807
Total incentive fee (B)
$ 2,232 $ 11,540
Credits to fees from Adviser - other (B)
— —
Net total incentive fee $ 2,232 $ 11,540
(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 $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.
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Realized and Unrealized Gain (Loss)
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
J.R. Hobbs Co. - Atlanta, LLC — 1,150 — 1,150
Phoenix Doors Systems, Inc. — 1,095 — 1,095
Edge Adhesives Holdings, Inc. — (892) — (892)
UPB Acquisition, Inc. — (981) — (981)
Ginsey Home Solutions, Inc. — (1,090) — (1,090)
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)
B+T Group Acquisition, Inc. — (3,108) — (3,108)
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").
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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 .
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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 %
EXPENSES
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
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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. 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 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.
Expenses
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.
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The base management fee, loan servicing fee, incentive fee, and their related non-contractual, unconditional, and irrevocable credits are computed quarterly, as described under “Transactions with the Adviser” in Note 4 — Related Party Transactions in the accompanying Notes to Consolidated Financial Statements and are summarized in the following table:
Six Months Ended September 30,
2024 2023
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.
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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
Old World Christmas, Inc. — 4,734 — 4,734
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
J.R. Hobbs Co. - 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)
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)
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
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
The Maids International, LLC — 3,747 — 3,747
Galaxy Technologies Holdings, Inc. — 3,481 — 3,481
Nocturne Luxury Villas, Inc. — 1,613 — 1,613
UPB Acquisition, Inc. — 1,493 — 1,493
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. 273 (2,247) — (1,974)
B+T Group Acquisition, Inc. — (5,295) — (5,295)
Horizon Facilities Services, Inc. — (5,758) — (5,758)
Schylling, Inc. — (8,394) — (8,394)
ImageWorks Display and Marketing Group, Inc. — (10,276) — (10,276)
Other, net (<$1.0 million, net) 289 (838) — (549)
Total $ 1,444 $ 48,018 $ (93) $ 49,369
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Net Realized Gain (Loss)
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 $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. 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 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 .
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LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
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,
2024 2023
Beginning investment portfolio, at fair value $ 920,504 $ 753,543
New investments — 53,530
Disbursements to existing portfolio companies 20,098 61,258
Unscheduled principal repayments (28,000) —
Net proceeds from sale and recapitalization of investments (48,546) (1,775)
Net realized gain on investments 42,305 1,155
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 September 30, 2024:
Amount
For the remaining six months ending March 31, 2025
$ 64,060
For the fiscal years ending March 31:
2026 206,310
2027 213,485
2028 66,231
2029 100,394
Thereafter —
Total contractual repayments $ 650,480
Investments in equity securities 189,667
Total cost basis of investments held as of September 30, 2024:
$ 840,147
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Financing Activities
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
Common Stock Distributions
To qualify to be taxed as a RIC and thus avoid corporate level federal income tax on the income we distribute to our stockholders, we are required, among other requirements, to distribute to our stockholders on an annual basis at least 90% of our taxable ordinary income plus the excess of our net short-term capital gains over net long-term capital losses (“Investment Company Taxable Income”), determined without regard to the dividends paid deduction. Additionally, the Credit Facility generally restricts the amount of distributions to stockholders that we can pay out to be no greater than the sum of certain amounts, including our net investment income, plus net capital gains, plus amounts elected by the Company to be considered as having been paid during the prior fiscal year in accordance with Section 855(a) of the Code. In accordance with these requirements, our Board of Directors declared, and we paid, monthly cash distributions of $0.08 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. In addition, for the fiscal year ended March 31, 2024, net capital gains exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $1.4 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, 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 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
Our common stockholders who hold their shares through our transfer agent, Computershare, Inc. (“Computershare”), have the option to participate in a dividend reinvestment plan offered by Computershare, as the plan agent. This is an “opt in” dividend reinvestment plan, meaning that common stockholders may elect to have their cash distributions automatically reinvested in additional shares of our common stock. Common stockholders who do not make such election will receive their distributions in cash. Any distributions reinvested under the plan will be taxable to a common stockholder to the same extent, and with the same character, as if the common stockholder had received the distribution in cash. The common stockholder generally will have an adjusted basis in the additional common shares purchased through the plan equal to the dollar amount that would have been received if the U.S. stockholder had received the dividend or distribution in cash. The additional common shares will have a new holding period commencing on the day following the date on which the shares are credited to the common stockholder’s account. Computershare purchases shares in the open market in connection with the obligations under the plan.
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Equity
Registration Statement
On February 28, 2024, we filed a registration statement on Form N-2 (File No. 333-277452), which the SEC declared effective on April 18, 2024. The registration statement permits us to issue, through one or more transactions, up to an aggregate of $450.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities, and warrants to purchase common stock, preferred stock, or debt securities, including through concurrent, separate offerings of such securities. As of the date of this report, we have the ability to issue all $450.0 million of the securities registered under the registration statement.
On September 3, 2021, we filed a registration statement on Form N-2 (File No. 333-259302), which the SEC declared effective on October 15, 2021. The registration statement permitted us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities, and warrants to purchase common stock, preferred stock, or debt securities, including through concurrent, separate offerings of such securities. This registration statement was terminated on April 18, 2024.
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 the 2024 Common Stock ATM Program. 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. and Virtu Americas LLC (each a “2022 Sales Agent”), under which we had 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 $50.0 million in what is commonly referred to as an "at-the-market" program (the "2022 Common Stock ATM Program"). In August 2023, we entered into an equity distribution agreement with B. Riley Securities, Inc. and entered into amendments to the agreements with Oppenheimer & Co. Inc. and Virtu Americas LLC in order to add B. Riley Securities, Inc. as a 2022 Sales Agent for the 2022 Common Stock ATM Program. 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. However, we cannot determine the timing or terms of any future equity issuances or whether we will be able to issue equity on terms favorable to us, or at all. When our common stock is trading at a price below NAV per share, the 1940 Act places regulatory constraints on our ability to obtain additional capital by issuing common stock. Generally, the 1940 Act provides that we may not issue and sell our common stock at a price below our NAV per common share, other than to our then-existing common stockholders pursuant to a rights offering, without first obtaining approval from our stockholders and our independent directors and meeting other stated requirements. 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 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.
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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 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. Available borrowings are subject to various constraints and applicable advance rates, which are generally based on the size, characteristics, and quality of the collateral pledged by Business Investment. The Credit Facility also requires that any interest and principal payments on pledged loans be remitted directly by the borrower into a lockbox account with KeyBank. KeyBank is also the trustee of the account and generally remits the collected funds to us once a month.
Among other things, the Credit Facility contains covenants that require Business Investment to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions) and restrict certain material changes to our credit and collection policies without the lenders’ consent. The Credit Facility also generally seeks to restrict distributions to stockholders to the sum of (i) our net investment income, (ii) net capital gains, and (iii) amounts deemed by the Company to be considered as having been paid during the prior fiscal year in accordance with Section 855(a) of the Code. Loans eligible to be pledged as collateral are subject to certain limitations, including, among other things, restrictions on geographic concentrations, industry concentrations, loan size, payment frequency and status, average life, portfolio company leverage, and lien property. The Credit Facility also requires Business Investment to comply with other financial and operational covenants, which obligate Business Investment to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of obligors required in the borrowing base. Additionally, the Credit Facility contains a performance guaranty that requires the Company to maintain (i) a minimum net worth 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
5.00% Notes due 2026
In March 2021, we completed a public offering of the 5.00% 2026 Notes with an aggregate principal amount of $127.9 million, which resulted in net proceeds of approximately $123.8 million after deducting underwriting discounts, commissions and offering costs borne by us. The 5.00% 2026 Notes are traded under the ticker symbol “GAINN” on Nasdaq. The 5.00% 2026 Notes will mature on May 1, 2026 and may be redeemed in whole or in part at any time or from time to time at the Company’s option. The 5.00% 2026 Notes bear interest at a rate of 5.00% per year (which equates to $6.4 million per year), payable quarterly in arrears.
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The indenture relating to the 5.00% 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 5.00% 2026 Notes and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements.
The 5.00% 2026 Notes are recorded at the aggregate principal amount, less underwriting discounts, commissions, and offering costs, on our accompanying Consolidated Statements of Assets and Liabilities . Total underwriting discounts, commissions, and offering costs related to this offering were $ 4.1 million, which have been recorded as discounts to the aggregate principal amount on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized over the period ending May 1, 2026, the maturity date.
4.875% Notes due 2028
In August 2021, we completed a public offering of the 4.875% 2028 Notes with an aggregate principal amount of $134.6 million, which resulted in net proceeds of approximately $131.3 million after deducting underwriting discounts, commissions and offering costs borne by us. The 4.875% 2028 Notes are traded under the ticker symbol “GAINZ” on Nasdaq. The 4.875% 2028 Notes will mature on November 1, 2028 and may be redeemed in whole or in part at any time or from time to time at the Company’s option. The 4.875% 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 4.875% 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 4.875% 2028 Notes and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements.
The 4.875% 2028 Notes are recorded at the aggregate principal amount, less underwriting discounts, commissions, and offering costs, on our accompanying Consolidated Statements of Assets and Liabilities . Total underwriting discounts, commissions, and offering costs related to this offering were $ 3.3 million, which have been recorded as discounts to the aggregate principal amount on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized over the period ending November 1, 2028, the maturity date.
8.00% Notes due 2028
In May 2023, we completed a public offering of the 8.00% 2028 Notes with an aggregate principal amount of $74.8 million, which resulted in net proceeds of approximately $72.3 million after deducting underwriting discounts, commissions and offering costs borne by us. The 8.00% 2028 Notes are traded under the ticker symbol “GAINL” on Nasdaq. The 8.00% 2028 Notes will mature on August 1, 2028 and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after August 1, 2025. The 8.00% 2028 Notes bear interest at a rate of 8.00% per year (which equates to $6.0 million per year), payable quarterly in arrears.
The indenture relating to the 8.00% 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 8.00% 2028 Notes and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements.
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The 8.00% 2028 Notes are recorded at the aggregate principal amount, less underwriting discounts, commissions, and offering costs, on our accompanying Consolidated Statements of Assets and Liabilities . Total underwriting discounts, commissions, and offering costs related to this offering were $ 2.5 million, which have been recorded as discounts to the aggregate principal amount on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized over the period ending August 1, 2028, the maturity date.
OFF-BALANCE SHEET ARRANGEMENTS
Unlike PIK income, we generally do not recognize success fees as income until payment has been received. Due to the contingent nature of success fees, there are no guarantees that we will be able to collect any or all of these success fees or know the timing of any such collections. As a result, as of September 30, 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.
CONTRACTUAL OBLIGATIONS
We have line of credit commitments to certain of our portfolio companies that have not been fully drawn. 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 September 30, 2024 to be insignificant.
The following table shows our contractual obligations as of September 30, 2024, at cost:
Payments Due by Period
Contractual Obligations (A)
Total Less than
1 Year 1-3 Years 3-5 Years More than
5 Years
Credit Facility (B)
$ 8,900 $ — $ — $ 8,900 $ —
Notes payable 337,238 — 127,938 209,300 —
Interest payments on obligations (C)
70,802 21,604 31,032 18,166 —
Total $ 416,940 $ 21,604 $ 158,970 $ 236,366 $ —
(A) Excludes unused line of credit commitments to our portfolio companies in the aggregate principal of $6.0 million.
(B) Principal balance of borrowings outstanding under the Credit Facility, based on the maturity date following the current contractual revolving period end date.
(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 September 30, 2024.
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. Actual results could differ materially from those estimates under different assumptions or conditions. We have identified our investment valuation policy (which has been approved by our Board of Directors) as our most critical accounting policy, which is described in Note 2 — Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report. Additionally, refer to Note 3 — Investments in the accompanying Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report for additional information regarding fair value measurements and our application of Financial Accounting Standards Board Accounting Standards Codification Topic 820, “ Fair Value Measurements and Disclosures.” We have also identified our revenue recognition policy as a critical accounting policy, which is described in Note 2 — Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report.
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Investment Valuation
Credit Monitoring and Risk Rating
The Adviser monitors a wide variety of key credit statistics that provide information regarding our portfolio companies to help us assess credit quality and portfolio performance and, in some instances, are used as inputs in our valuation techniques. Generally, we, through the Adviser, participate in periodic board meetings of our portfolio companies in which we hold board seats and also require them to provide annual audited and monthly unaudited financial statements. Using these statements or comparable information and board discussions, the Adviser calculates and evaluates certain credit statistics.
The Adviser risk rates all of our investments in debt securities. The Adviser does not risk rate equity securities. For loans that have been rated by a SEC-registered Nationally Recognized Statistical Rating Organization (“NRSRO”), the Adviser generally uses the average of two corporate level NRSRO’s risk ratings for such security. For all other debt securities, the Adviser uses a proprietary risk rating system. While the Adviser seeks to mirror the NRSRO systems, we cannot provide any assurance that the Adviser’s risk rating system will provide the same risk rating as an NRSRO for these securities. The Adviser’s risk rating system is used to estimate the probability of default on debt securities and the expected loss, if there is a default. The Adviser’s risk rating system uses a scale of 0 to >10, with >10 being the lowest probability of default. It is the Adviser’s understanding that most debt securities of Lower Middle Market companies do not exceed the grade of BBB on an NRSRO scale, so there would be no debt securities in the Lower Middle Market that would meet the definition of AAA, AA or A. Therefore, the Adviser’s scale begins with the designation >10 as the best risk rating which may be equivalent to a BBB from an NRSRO; however, no assurance can be given that a >10 on the Adviser’s scale is equal to a BBB or Baa2 on an NRSRO scale. 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 September 30, 2024 and March 31, 2024:
Rating September 30, 2024 March 31, 2024
Highest
9.0 9.0
Average
6.6 6.6
Weighted-average
7.0 6.9
Lowest
3.0 3.0
Tax Status
We intend to continue to maintain our qualification as a RIC under Subchapter M of the Code for U.S. federal income tax purposes. As a RIC, we generally are not subject to U.S. federal income tax on the portion of our taxable income and gains distributed to our stockholders. To maintain our qualification as a RIC, we must maintain our status as a BDC and meet certain source-of-income and asset diversification requirements. In addition, to qualify to be taxed as a RIC, we must distribute to stockholders at least 90% of our Investment Company Taxable Income, determined without regard to the dividends paid deduction. Our policy generally is to make distributions to our stockholders in an amount up to 100% of Investment Company Taxable Income. We may retain some or all of our net long-term capital gains, if any, and designate them as deemed distributions, or distribute such gains to stockholders in cash. See “ — Liquidity and Capital Resources — Distributions and Dividends to Stockholders . ”
In an effort to limit federal excise taxes, we have to distribute to stockholders, during each calendar year, an amount close to the sum of: (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our net capital gains (both long-term and short-term), if any, for the one-year period ending on October 31 of the calendar year, and (3) any income realized, but not distributed, in the preceding period (to the extent that income tax was not imposed on such amounts), less certain reductions, as applicable. Under the RIC Modernization Act, we are permitted to carryforward any capital losses that we may incur for an unlimited period, and such capital loss carryforwards will retain their character as either short-term or long-term capital losses. Our capital loss carryforward balance was $0 as of both September 30, 2024 and March 31, 2024.
Recent Accounting Pronouncements
Refer to Note 2 — Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report for a description of recent accounting pronouncements.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.