Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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. Except per share amounts, dollar amounts included herein are in thousands unless otherwise indicated.
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 1940 Act. For U.S. federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of 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 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 March 31, 2025, our investment portfolio was comprised of 73.3% in debt investments and 26.7% in equity investments, at cost.
We focus on investing in Lower Middle Market businesses 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, and have opportunistically made several co-investments with Gladstone Capital and Gladstone Alternative pursuant to the Co-Investment Order. We believe the Co-Investment Order has enhanced and will continue to enhance our ability to further our investment objectives and strategies. If we are participating in an investment with one or more co-investors, whether or not an affiliate of ours, our investment is likely to be smaller than if we were investing alone.
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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 year ended March 31, 2025, we invested in four new portfolio companies and exited two portfolio companies. From our initial public offering in June 2005 through March 31, 2025, we have invested in 62 companies, excluding investments in syndicated loans, for a total of approximately $2.0 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 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 March 31, 2025, we had unrecognized, contractual success fees of $52.5 million, or $1.43 per common share. Consistent with GAAP, we generally have not recognized success fee receivables and related income in our accompanying Consolidated Financial Statements until earned.
From inception through March 31, 2025 , we exited our investments in 33 portfolio companies that we acquired under our buyout strategy. In the aggregate, these sales have generated $353.4 million in net realized gains and $45.4 million in other income upon exit, for a total increase to our net assets of $398.8 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 33 liquidity events have offset any realized losses since inception, which were primarily incurred during the 2008-2009 recession in connection with the sale of performing syndicated loans at a realized loss to pay off a former lender. The successful exits, in part, enabled us to increase the monthly distribution by 100.0% from March 2011 through March 31, 2025 and allowed us to declare and pay 23 supplemental distributions to common stockholders through March 31, 2025 .
Capital Raising
We have been able to meet our capital needs through extensions of and increases to 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 $270.0 million (with a potential total commitment of $300.0 million through additional commitments from new or existing lenders). During the year ended March 31, 2025, we issued the 7.875% 2030 Notes for gross proceeds of $126.5 million and sold 148,714 shares of our common stock under our "at-the-market" program (the "2024 Common Stock ATM Program") for gross proceeds of approximately $2.0 million. 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 previous "at-the-market" program (the "2022 Common Stock ATM Program") for gross proceeds of approximately $44.5 million. Refer to “ Liquidity and Capital Resources.”
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 March 31, 2025, the closing market price of our common stock was $ 13.36 per share, representing a 1.4 % discount to our NAV of $ 13.55 per share as of March 31, 2025. When our common stock trades below NAV, our ability to issue additional equity is constrained by provisions of the 1940 Act, which generally prohibits the issuance and sale of our common stock at an issuance price below the then current NAV per share without stockholder approval, other than through sales to our then existing stockholders pursuant to a rights offering.
Regulatory Compliance
Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage limitations of the 1940 Act, which require us to have asset coverage (as defined in Sections 18 and 61 of the 1940 Act) of at least 150% on each of our senior securities representing indebtedness and our senior securities that are stock.
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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 March 31, 2025, our asset coverage ratio on our senior securities representing indebtedness was 204.4%.
Investment Highlights
Investment Activity
During the fiscal year ended March 31, 2025, 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 at par.
• In November 2024, we invested $ 27.2 million in a new portfolio company, Pyrotek Special Effects, Inc. ("Pyrotek"), in the form of $ 20.1 million of secured first lien debt and $ 7.1 million of preferred equity. Pyrotek, headquartered in Ontario, Canada, is a leading provider of special effects services and solutions for the live entertainment industry.
• In December 2024, we invested $ 5.0 million in Gladstone Alternative, one of our affiliated funds, through common equity. Gladstone Alternative is a registered, non-diversified, closed-end management investment company that operates as an interval fund.
• In December 2024, we invested $ 71.3 million in a new portfolio company, Nielsen-Kellerman Acquisition Corp. ("Nielsen-Kellerman"), in the form of $ 49.1 million of secured first lien debt and $ 22.2 million of preferred equity. Nielsen-Kellerman, headquartered in Boothwyn, Pennsylvania, designs, manufactures, and distributes a wide range of rugged, waterproof environmental measurement and sports performance instruments.
• In December 2024, we invested $ 78.7 million in a new portfolio company, Ricardo Defense, Inc. ("Ricardo"), in the form of $ 61.3 million of secured first lien debt and $ 17.4 million of preferred equity. Ricardo, headquartered in Troy, Michigan, with operations in California, Texas and Alabama and overseas, develops engineering and product solutions for U.S. Army vehicle and logistics programs.
• In January 2025, we restructured our investment in PSI Molded Plastics, Inc ("PSI Molded"). As a result of the restructuring, we converted debt with a cost basis of $ 16.4 million into preferred equity.
• In February 2025, we invested an additional $ 3.0 million through secured first lien debt in Pyrotek to fund an add-on acquisition.
• In February 2025, we recapitalized our existing investment in Educators Resource, Inc. and invested an additional $ 10.0 million in the form of secured first lien debt. In connection with this recapitalization, we received dividend income of $ 1.8 million.
• In March 2025, we exited our investment in Nocturne, which resulted in success fee income of $ 3.5 million, a realized gain on our preferred equity of $ 19.8 million and the repayment of our debt investment of $ 85.6 million at par.
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Recent Developments
Distributions and Dividends
In April 2025, our Board of Directors declared the following monthly cash distributions to common stockholders:
Record Date Payment Date Distribution per Common Share
April 21, 2025 April 30, 2025 $ 0.08
May 21, 2025 May 30, 2025 0.08
June 4, 2025 June 13, 2025 0.54 (A)
June 20, 2025 June 30, 2025 0.08
Total for the Quarter: $ 0.78
(A) Represents a supplemental distribution to common stockholders.
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RESULTS OF OPERATIONS
Comparison of the Fiscal Year Ended March 31, 2025 to the Fiscal Year Ended March 31, 2024
For the Fiscal Years Ended March 31,
2025 2024 $ Change % Change
INVESTMENT INCOME
Interest income $ 83,612 $ 81,794 $ 1,818 2.2 %
Dividend and success fee income 10,050 5,512 4,538 82.3 %
Total investment income 93,662 87,306 6,356 7.3 %
EXPENSES
Base management fee 19,105 17,500 1,605 9.2 %
Loan servicing fee 9,636 9,118 518 5.7 %
Incentive fee 12,265 21,047 (8,782) (41.7) %
Administration fee 1,914 1,789 125 7.0 %
Interest expense 28,246 24,121 4,125 17.1 %
Amortization of deferred financing costs and discounts 2,852 2,305 547 23.7 %
Other 6,294 4,363 1,931 44.3 %
Expenses before credits from Adviser 80,312 80,243 69 0.1 %
Credits to fees from Adviser (14,745) (14,714) (31) 0.2 %
Total expenses, net of credits to fees 65,567 65,529 38 0.1 %
NET INVESTMENT INCOME 28,095 21,777 6,318 29.0 %
REALIZED AND UNREALIZED GAIN (LOSS), NET OF TAXES
Net realized gain on investments 63,184 30,256 32,928 108.8 %
Net unrealized (depreciation) appreciation of investments (25,960) 33,301 (59,261) NM
Net unrealized appreciation of other — (29) 29 (100.0) %
Net realized and unrealized gain, net of taxes on deemed distribution of long-term capital gains 37,224 63,528 (26,304) (41.4) %
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 65,319 $ 85,305 $ (19,986) (23.4) %
WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING
Basic and diluted 36,735,218 34,466,724 2,268,494 6.6 %
BASIC AND DILUTED PER COMMON SHARE:
Net investment income $ 0.76 $ 0.63 $ 0.13 20.6 %
Net increase in net assets resulting from operations $ 1.78 $ 2.47 $ (0.69) (27.9) %
NM = Not Meaningful
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Investment Income
Total investment income increased $6.4 million, or 7.3%, for the year ended March 31, 2025, as compared to the prior year. This increase was 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 $1.8 million, or 2.2%, for the year ended March 31, 2025, as compared to the prior year. 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 year ended March 31, 2025 was $601.5 million, compared to $560.8 million during the prior year. This increase was primarily due to the origination of $177.7 million of new debt investments and $102.5 million of follow-on debt investments in existing portfolio companies, partially offset by the pay-off, restructuring, or write-off of $151.6 million of debt investments and $31.0 million of existing loans placed on non-accrual status after March 31, 2023, and their respective impact on the weighted-average principal balance when considering the timing of new investments, pay-offs, restructurings, write-offs, and accrual status changes, as applicable.
The weighted-average yield on our interest-bearing investments, excluding cash and cash equivalents and receipts recorded as dividend and success fee income, was 13.9% and 14.4% for the years ended March 31, 2025 and 2024, respectively. 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 years ended March 31, 2025 and 2024, we had no collections of past due interest.
As of March 31, 2025, 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 $90.2 million. As of March 31, 2024, our loans to Edge and J.R. Hobbs were on non-accrual status, with an aggregate debt cost basis of $59.1 million.
Dividend and success fee income for the year ended March 31, 2025 increased $4.5 million, or 82.3%, as compared to the prior year. During the year ended March 31, 2025, dividend and success fee income consisted of $6.8 million of success fee income and $3.3 million of dividend income. During the year ended March 31, 2024, dividend and success fee income consisted of $3.6 million of success fee income and $1.9 million of dividend income.
As of March 31, 2025 and 2024, SFEG Holdings, Inc. represented 10.8% and 10.1% of the total investment portfolio at fair value, respectively.
Expenses
Total expenses, net of any non-contractual, unconditional, and irrevocable credits from the Adviser, increased $38.0 thousand, or 0.1%, for the year ended March 31, 2025, as compared to the prior year, primarily due to increases in interest expense, other expenses and base management fee, partially offset by a decrease in incentive fees.
In accordance with GAAP, we recorded a capital gains-based incentive fee of $7.4 million during the year ended March 31, 2025, compared to a capital gains-based incentive fee of $12.7 million during the year ended March 31, 2024. The capital gains-based incentive fee is a result of the net impact of net realized gains (losses) and net unrealized appreciation (depreciation) on investments during the respective periods. The income-based incentive fee for the year ended March 31, 2025 decreased $3.5 million, or 42.2%, as compared to the prior year, due to the increase in net assets, which increases the pre-incentive fee net investment income required to meet the hurdle rate, and the decrease in pre-incentive fee net investment income.
Base management fee for the year ended March 31, 2025 increased $1.6 million, or 9.2%, as compared to the prior year, primarily due to the increase in the average total assets subject to the base management fee as a result of a net increase in additional investments at cost and an increase in the fair value of investments.
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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:
Year Ended March 31,
2025 2024
Average total assets subject to base management fee (A)(B)
$ 955,250 $ 875,000
Multiplied by annual base management fee of 2.0%
2.0 % 2.0 %
Base management fee (C)
19,105 17,500
Credits to fees from Adviser - other (C)
(5,109) (5,596)
Net base management fee
$ 13,996 $ 11,904
Loan servicing fee (C)
$ 9,636 $ 9,118
Credits to base management fee - loan servicing fee (C)
(9,636) (9,118)
Net loan servicing fee $ — $ —
Incentive fee – income-based $ 4,820 $ 8,336
Incentive fee – capital gains-based (D)
7,445 12,711
Total incentive fee (C)
12,265 21,047
Credits to fees from Adviser - other (C)
— —
Net total incentive fee $ 12,265 $ 21,047
(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) Excludes our investment in Gladstone Alternative valued at the end of the applicable quarters within the respective periods.
(C) Reflected as a line item on our accompanying Consolidated Statement of Operations .
(D) 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 $4.1 million, or 17.1%, during the year ended March 31, 2025, as compared to the prior year, primarily due to the issuance of the 7.785% 2030 Notes in December 2024 and the 8.00% 2028 Notes in May 2023 and the increase in the effective interest rate of the Credit Facility. The weighted-average balance outstanding on our Credit Facility during the year ended March 31, 2025 was $60.3 million, as compared to $61.0 million in the prior year. The effective interest rate on our Credit Facility, excluding the impact of deferred financing costs, during the year ended March 31, 2025 was 10.6%, as compared to 10.1% in the prior year. This increase in the effective interest rate on our Credit Facility was primarily a result of an increase in unused commitment fees, partially offset by a decrease in interest rates on the drawn portion of our Credit Facility.
Other expenses increased $1.9 million, or 44.3%, during the year ended March 31, 2025, as compared to the prior year, primarily due to an increase in bad debt expense.
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Realized and Unrealized Gain (Loss)
The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the years ended March 31, 2025 and 2024 were as follows:
Year Ended March 31, 2025
Portfolio Company Realized
Gain (Loss) on Investments Unrealized
Appreciation
(Depreciation) Reversal of
Unrealized
(Appreciation)
Depreciation Net Gain
(Loss)
The E3 Company, LLC $ — $ 19,418 $ — $ 19,418
Nocturne Luxury Villas, Inc. 19,790 18,668 (24,334) 14,124
UPB Acquisition, Inc. — 13,723 — 13,723
SFEG Holdings, Inc. — 12,652 — 12,652
ImageWorks Display and Marketing Group, Inc. — 10,314 — 10,314
Schylling, Inc. — 9,230 — 9,230
Dema/Mai Holdings, Inc. — 8,889 — 8,889
Ginsey Home Solutions, Inc. — 8,178 — 8,178
J.R. Hobbs Co. - Atlanta, LLC — 3,532 — 3,532
Brunswick Bowling Products, Inc. — 3,118 — 3,118
The Maids International, LLC — 2,984 — 2,984
B+T Group Acquisition, Inc. — (1,691) — (1,691)
Nth Degree Investment Group, LLC 43,373 (7,195) (38,028) (1,850)
Edge Adhesives Holdings, Inc. — (2,562) — (2,562)
Home Concepts Acquisition, Inc. — (3,957) — (3,957)
Mason West, LLC — (6,497) — (6,497)
Old World Christmas, Inc. — (7,099) — (7,099)
Educators Resource, Inc. — (8,137) — (8,137)
PSI Molded Plastics, Inc. — (9,151) — (9,151)
Horizon Facilities Services, Inc. — (28,066) — (28,066)
Other, net (<$1.0 million, net ) 21 47 4 72
Total $ 63,184 $ 36,398 $ (62,358) $ 37,224
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Year Ended March 31, 2024
Portfolio Company Realized
Gain (Loss) on Investments Unrealized
Appreciation
(Depreciation) Reversal of
Unrealized
(Appreciation)
Depreciation Net Gain
(Loss)
Nth Degree Investment Group, LLC $ — $ 31,199 $ — $ 31,199
Counsel Press, Inc. 43,459 22,676 (43,566) 22,569
Brunswick Bowling Products, Inc. — 14,789 — 14,789
Educators Resource, Inc. — 12,193 — 12,193
Mason West, LLC — 8,819 — 8,819
SFEG Holdings, Inc. — 7,812 — 7,812
Galaxy Technologies Holdings, Inc. — 6,849 — 6,849
The E3 Company, LLC — 5,189 — 5,189
Utah Pacific Bridge & Steel, Ltd. — 4,539 — 4,539
Ginsey Home Solutions, Inc. — 2,415 — 2,415
The Maids International, LLC — 2,226 — 2,226
Gladstone SOG Investments, Inc. 882 — (93) 789
The Mountain Corporation (14,650) — 14,650 —
Diligent Delivery Systems — (1,207) — (1,207)
Edge Adhesives Holdings, Inc. — (1,350) — (1,350)
Home Concepts Acquisition, Inc. — (2,037) — (2,037)
Old World Christmas, Inc. 273 (3,352) — (3,079)
Nocturne Luxury Villas, Inc. — (3,998) — (3,998)
PSI Molded Plastics, Inc. — (4,529) — (4,529)
Schylling, Inc. — (7,553) — (7,553)
ImageWorks Display and Marketing Group, Inc. — (8,319) — (8,319)
B+T Group Acquisition, Inc. — (10,921) — (10,921)
Horizon Facilities Services, Inc. — (12,344) — (12,344)
Other, net (<$1.0 million, net ) 292 (786) — (494)
Total $ 30,256 $ 62,310 $ (29,009) $ 63,557
Net Realized Gain (Loss) on Investments
During the year ended March 31, 2025, we recorded net realized gains on investments of $63.2 million , primarily due to a $43.4 million realized gain from the exit of Nth Degree and a $ 19.8 million realized gain from the exit of Nocturne.
During the year ended March 31, 2024, we recorded net realized gains on investments of $30.3 million, primarily due to a $43.5 million realized gain from the exit of Counsel Press, Inc. ("Counsel Press"), $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 Christmas. Inc. These amounts were partially offset by the $14.7 million realized loss recognized from the dissolution and liquidation of The Mountain Corporation ("The Mountain").
Net Unrealized Appreciation (Depreciation) of Investments
Net unrealized depreciation of investments of $26.0 million for the year ended March 31, 2025 was primarily due to the reversal of net unrealized appreciation of Nth Degree and Nocturne 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 $33.3 million for the year ended March 31, 2024 was primarily due to the net unrealized appreciation across our portfolio, as well as the reversal of unrealized depreciation of our investment in The Mountain upon its liquidation and dissolution. These amounts were partially offset by the reversal of unrealized appreciation of our investment in Counsel Press upon exit. The net appreciation was driven primarily by increased performance of certain of our portfolio companies, partially offset by decreased comparable transaction multiples used to estimate the fair value of certain of our portfolio companies.
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Across our entire investment portfolio, we recorded $25.2 million of net unrealized depreciation on our debt investments and $0.7 million of net unrealized depreciation on our equity investments for the year ended March 31, 2025. As of March 31, 2025, the fair value of our investment portfolio was more than our cost basis by $40.3 million, compared to March 31, 2024, when the fair value of our investment portfolio was more than our cost basis by $66.2 million. This resulted in net unrealized depreciation of $25.9 million for the year ended March 31, 2025. Our entire portfolio was fair valued at 104.3% of cost as of March 31, 2025.
The comparison of the fiscal year ended March 31, 2024 to the fiscal year ended March 31, 2023 can be found in our Annual Report on Form 10-K for the fiscal year ended March 31, 2024 located within Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Cash inflows from operating activities are primarily generated from cash collections of interest and other income from our portfolio companies, as well as from cash proceeds received from repayments of debt investments and from sales of equity investments. These cash collections are principally used to fund new investments, pay distributions to our common stockholders, make interest payments on our Credit Facility and the Notes, pay management and incentive fees to the Adviser and other operating expenses. We may also use cash inflows from operating activities to repay outstanding borrowings under our Credit Facility.
Net cash provided by operating activities for the year ended March 31, 2025 was $16.3 million, as compared to net cash used in operating activities of $69.9 million for the year ended March 31, 2024. This change was primarily due to increases in principal repayments of investments and the aggregate net proceeds from the sale and recapitalization of investments, partially offset by an increase in purchases of investments.
Purchases of investments totaled $221.2 million during the year ended March 31, 2025, compared to $183.9 million during the year ended March 31, 2024. Net proceeds from the sale and recapitalization of investments and principal repayments of investments totaled $199.6 million during the year ended March 31, 2025, compared to $80.2 million during the year ended March 31, 2024.
Net cash used in operating activities for the year ended March 31, 2024 was $69.9 million , as compared to net cash used in operating activities of $4.5 million for the year ended March 31, 2023. This change was primarily due to an increase in purchases of investments, partially offset by a decrease in the aggregate net proceeds from the sale and recapitalization of investments and principal repayments of investments.
Purchases of investments totaled $183.9 million during the year ended March 31, 2024 , compared to $133.8 million during the year ended March 31, 2023. Net proceeds from the sale and recapitalization of investments and principal repayments totaled $80.2 million during the year ended March 31, 2024 , compared to $87.8 million during the year ended March 31, 2023.
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As of March 31, 2025, we had equity investments in and/or loans to 25 companies with an aggregate cost basis of $939.1 million. As of March 31, 2024, we had equity investments in and/or loans to 24 companies with an aggregate cost basis of $854.3 million. The following table summarizes our total portfolio investment activity for the years ended March 31, 2025 and 2024:
Years Ended March 31,
2025 2024
Beginning investment portfolio, at fair value $ 920,504 $ 753,543
New investments 178,844 61,258
Disbursements to existing portfolio companies 42,373 122,666
Unscheduled principal repayments (123,600) (28,000)
Net proceeds from sales of investments (76,025) (52,228)
Net realized gain on investments 63,184 29,964
Net unrealized appreciation of investments 36,398 62,310
Reversal of net unrealized appreciation of investments (62,358) (29,009)
Ending investment portfolio, at fair value $ 979,320 $ 920,504
The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of March 31, 2025:
Amount
For the fiscal years ending March 31:
2026 $ 104,787
2027 133,336
2028 105,409
2029 184,944
2030 159,506
Thereafter —
Total contractual repayments $ 687,982
Investments in equity securities 251,084
Total cost basis of investments held as of March 31, 2025: $ 939,066
Financing Activities
Net cash used in financing activities for the year ended March 31, 2025 was $4.4 million, which consisted primarily of $67.0 million of net repayments on our Credit Facility, $61.0 million in distributions to common stockholders, $4.9 million of deferred financing and offering costs, partially offset by $126.5 million of gross proceeds from the issuance of the 7.875% 2030 Notes and $2.0 million of proceeds from the issuance of common stock under the 2024 Common Stock ATM Program, net of expenses and shelf offering registration costs.
Net cash provided by financing activities for the year ended March 31, 2024 was $69.9 million, which consisted primarily of $74.8 million of gross proceeds from the issuance of the 8.00% 2028 Notes, $43.9 million of proceeds from the issuance of common stock under the 2022 Common Stock ATM Program, net of expenses and shelf offering registration costs, and $31.8 million of net borrowings on our Credit Facility, partially offset by $76.1 million in distributions to common stockholders and $4.5 million of deferred financing and offering costs.
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Distributions and Dividends to Stockholders
Common Stock Distributions
To qualify to be taxed as a RIC and thus avoid corporate level federal income tax on the income we distribute to our stockholders, we are required, among other requirements, to distribute to our stockholders on an annual basis at least 90% of our Investment Company Taxable Income, determined without regard to the dividends paid deduction. Additionally, our 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 twelve months from April 2024 through March 2025, and a supplemental distribution of $0.70 per common share in October 2024. See also “ Recent Developments - Distributions and Dividends ” for a discussion of cash distributions to common stockholders declared by our Board of Directors in April 2025.
For each of the fiscal years ended March 31, 2025 and 2024, Investment Company Taxable Income exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $36.7 million and $18.7 million, respectively, of the first distributions paid subsequent to fiscal year-end as having been paid in the prior year. In addition, for each of the fiscal years ended March 31, 2025 and 2024, net capital gains exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $18.7 million and $1.4 million, respectively, of the first distributions paid subsequent to fiscal year-end as having been paid in the prior year. For the year ended March 31, 2025, we recorded $1.2 million of net adjustments for estimated permanent book-tax differences to reflect tax character, which decreased Capital in excess of par value and increased Overdistributed net investment income. 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.
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.
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 up to an additional $321.5 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.
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Equity
Common Stock
In May 2024, we entered into equity distribution agreements with Oppenheimer & Co., B. Riley Securities, Inc. and Virtu Americas LLC (collectively, the "Sales Agents"), under which we have the ability to issue and sell shares of our common stock, from time to time, through the Sales Agents, having an aggregate offering price of up to $ 75.0 million in our 2024 Common Stock ATM Program. As of March 31, 2025, we had remaining capacity to sell up to an additional $ 73.0 million of common stock under the 2024 Common Stock ATM Program.
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 2022 Sales Agents, up to an aggregate offering price of $ 50.0 million in our 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 to add B. Riley Securities, Inc. as a 2022 Sales Agent for the 2022 Common Stock ATM Program. We did not sell any shares under the 2022 Common Stock ATM Program, which terminated in connection with our entry into the 2024 Common Stock ATM Program on May 14, 2024, during the year ended March 31, 2025.
During the year ended March 31, 2025, we sold 148,714 shares of our common stock under the 2024 Common Stock ATM Program at a weighted-average gross price of $ 13.64 per share and raised approximately $ 2.0 million of gross proceeds. The weighted-average net price per share, after deducting commissions and offering costs borne by us, was $ 13.48 and resulted in total net proceeds of approximately $ 2.0 million. These sales were above our then current NAV per share.
During the year ended March 31, 2024, we sold 3,097,162 shares of our common stock under the 2022 Common Stock ATM Program at a weighted-average gross price of $ 14.37 per share and raised approximately $ 44.5 million of gross proceeds. The weighted-average net price per share, after deducting commissions and offering costs borne by us, was $ 14.12 and resulted in total net proceeds of approximately $ 43.7 million. These sales were above our then current NAV per share.
We anticipate issuing equity securities to obtain additional capital in the future. However, we cannot determine the timing or terms of any future equity issuances or whether we will be able to issue equity on terms favorable to us, or at all. When our common stock is trading at a price below NAV per share, the 1940 Act places regulatory constraints on our ability to obtain additional capital by issuing common stock. Generally, the 1940 Act provides that we may not issue and sell our common stock at a price below our NAV per common share, other than to our then existing common stockholders pursuant to a rights offering, without first obtaining approval from our stockholders and our independent directors and meeting other stated requirements. On March 31, 2025, the closing market price of our common stock was $ 13.36 per share, representing a 1.4 % discount to our NAV of $ 13.55 per share as of March 31, 2025.
Revolving Line of Credit
As of March 31, 2025 , our Credit Facility had a total commitment amount of $ 270.0 million with an “accordion” feature that permits us to increase the size of the facility to $ 300.0 million. The Credit Facility has a revolving period end date of October 30, 2026 and a final maturity date of October 30, 2028 (at which time all principal and interest will be due and payable if the Credit Facility is not extended by the revolving period end date). Advances under the Credit Facility generally bear interest at 30-day Term SOFR, subject to a floor of 0.35 %, with a SOFR credit spread adjustment of 10 basis points, plus a margin of 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. 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 March 31, 2025, we had no borrowings outstanding on our Credit Facility and as of the date of this report, we had $56.0 million outstanding under our Credit Facility.
Interest is payable monthly during the term of our 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. Our Credit Facility also requires that any interest and principal payments on pledged loans be
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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, our 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. Our 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. Our 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, our Credit Facility contains a performance guaranty that requires the Company to maintain (i) a minimum net worth (defined in our Credit Facility to include any outstanding mandatorily redeemable preferred stock) of the greater of $ 210.0 million or $ 210.0 million plus 50 % of all equity and subordinated debt raised minus 50 % of any equity or subordinated debt redeemed or retired after November 16, 2016, which equated to $ 412.9 million as of March 31, 2025, (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 March 31, 2025, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $ 953.3 million, asset coverage on our senior securities representing indebtedness of 204.4 %, 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 March 31, 2025, we had availability, after adjustments for various constraints based on collateral quality, of $ 270.0 million under our Credit Facility and were in compliance with all covenants under our 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.
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 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
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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.
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.
7.875% Notes due 2030
In December 2024 , we completed a public offering of the 7.875% 2030 Notes with an aggregate principal amount of $ 126.5 million, which resulted in net proceeds of approximately $ 122.4 million after deducting underwriting discounts, commissions and offering costs borne by us. The 7.875% 2030 Notes are traded under the ticker symbol “GAINI” on Nasdaq. The 7.875% 2030 Notes will mature on February 1, 2030 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 February 1, 2027. The 7.875% 2030 Notes bear interest at a rate of 7.875% per year (which equates to $10.0 milli on per year), payable quarterly in arrears.
The indenture relating to the 7.875% 2030 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 7.875% 2030
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Notes and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements.
The 7.875% 2030 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 February 1, 2030, 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 March 31, 2025 and 2024, we had unrecognized, contractual off-balance sheet success fee receivables of $52.5 million and $44.9 million (or approximately $1.43 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 March 31, 2025 to be insignificant.
The following table shows our contractual obligations as of March 31, 2025, 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)
$ — $ — $ — $ — $ —
Notes payable 463,738 — 127,938 335,800 —
Interest payments on obligations (C)
108,334 31,636 51,010 25,688 —
Total $ 572,072 $ 31,636 $ 178,948 $ 361,488 $ —
(A) Excludes unused line of credit commitments to our portfolio companies in the aggregate principal amount of $3.4 million.
(B) Principal balance of borrowings outstanding under our Credit Facility, based on the maturity date following the current contractual revolving period end date.
(C) Includes interest payments due on our Credit Facility and the Notes, as applicable. The amount of interest payments calculated for purposes of this table was based upon rates and outstanding balances as of March 31, 2025.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported consolidated amounts of assets and liabilities, including disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ materially from those estimates under different assumptions or conditions. We have identified our investment valuation policy (which has been approved by our Board of Directors) as our most critical accounting policy, which is described in Note 2— Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements included elsewhere in this Annual Report. Additionally, refer to Note 3 — Investments in the accompanying Notes to Consolidated Financial Statements included elsewhere in this Annual 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 Annual 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 March 31, 2025 and 2024:
As of March 31,
Rating 2025 2024
Highest 9.0 9.0
Average 7.0 6.6
Weighted-average 7.7 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 “Business — Material U.S. Federal Income Tax Considerations” and “ — 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 March 31, 2025 and 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 Annual Report for a description of recent accounting pronouncements.
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