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; (2) risks associated with negotiation and consummation of pending and future transactions; (3) the loss of one or more of our executive officers, in particular David Gladstone, David Dullum, or Terry Lee Brubaker; (4) changes in our investment objectives and strategy; (5) availability, terms (including the possibility of interest rate volatility) and deployment of capital; (6) changes in our industry, interest rates, exchange rates, regulation, or the general economy; (7) our business prospects and the prospects of our portfolio companies; (8) the degree and nature of our competition; (9) changes in governmental regulation, tax rates and similar matters; (10) our ability to exit investments in a timely manner; (11) our ability to maintain our qualification as a regulated investment company (“RIC”) and as a business development company (“BDC”); (12) the impact of COVID-19 generally and on the economy, the capital markets and our portfolio companies, including the measures taken by governmental authorities to address it; and (13) those factors described in Item 1A. “Risk Factors” herein and the “Risk Factors” sections of our Annual Report on Form 10-K for the fiscal year ended March 31, 2021, filed with the U.S. Securities and Exchange Commission (“SEC”) on May 11, 2021 (the “Annual Report”). We caution readers not to place undue reliance on any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements and future results could differ materially from historical performance. We have based forward-looking statements on information available to us on the date of this Quarterly Report on Form 10-Q (the “Quarterly Report”). Except as required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC, including subsequent annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements contained in this Quarterly Report are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended.
In this Quarterly Report, the “Company,” “we,” “us,” and “our” refer to Gladstone Investment Corporation and its wholly-owned subsidiaries unless the context otherwise indicates. Dollar amounts, except per share amounts, are in thousands, unless otherwise indicated.
The following analysis of our financial condition and results of operations should be read in conjunction with our accompanying Consolidated Financial Statements and the notes thereto contained elsewhere in this Quarterly Report and in our Annual Report. Historical financial condition and results of operations and percentage relationships among any amounts in the financial statements are not necessarily indicative of financial condition, results of operations or percentage relationships for any future periods.
OVERVIEW
General
We were incorporated under the General Corporation Law of the State of Delaware on February 18, 2005. On June 22, 2005, we completed our initial public offering and commenced operations. We operate as an externally managed, closed-end, non-diversified management investment company and have elected to be treated as a BDC under the Investment Company Act of 1940, as amended (the “1940 Act”). For U.S. federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). To continue to qualify as a RIC for U.S. federal income tax purposes and obtain favorable RIC tax treatment, we must meet certain requirements, including certain minimum distribution requirements.
We are externally managed by the Adviser, an affiliate of ours and an SEC-registered investment adviser, pursuant to an investment advisory and management agreement (the “Advisory Agreement”). We have also entered into an administration agreement (the “Administration Agreement”) with Gladstone Administration, LLC (the “Administrator”), an affiliate of ours and the Adviser. Each of the Adviser and the Administrator are privately-held companies that are indirectly owned and controlled by David Gladstone, our chairman and chief executive officer. David Dullum, our president, also serves as the executive vice president of private equity (buyouts) of the Adviser. Michael LiCalsi, our general counsel and secretary, also serves as the Administrator’s president, general counsel, and secretary, as well as the executive vice president of administration of the Adviser).
Additionally, Gladstone Securities, LLC (“Gladstone Securities”), a privately-held broker-dealer (indirectly owned and controlled by Mr. Gladstone, our chairman and chief executive officer) registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation, has provided other services, such as investment banking and due diligence services, to certain of our portfolio companies, for which Gladstone Securities receives a fee. Any such fees paid by portfolio companies to Gladstone Securities do not impact the fees we pay to the Adviser or the non-contractual, unconditional, and irrevocable credits against the base management fee. For additional information refer to Note 4 — Related Party Transactions in the accompanying Notes to Consolidated Financial Statements.
We were established for the purpose of investing in debt and equity securities of established private businesses operating in the United States (“U.S.”). Our investment objectives are to: (i) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness, and make distributions to our stockholders that grow over time; and (ii) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses, generally in combination with the aforementioned debt securities, that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our objectives, our investment strategy is to invest in several categories of debt and equity securities, with individual investments generally totaling up to $40 million, although investment size may vary depending upon our total assets or available capital at the time of investment. We expect that our investment portfolio over time will consist of approximately 75% in debt securities and 25% in equity securities, at cost. As of December 31, 2021, our investment portfolio was comprised of 76.8% in debt securities and 23.2% in equity securities, at cost.
We focus on investing in lower middle market private businesses (which we generally define as companies with annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $3 million to $20 million) (“Lower Middle Market”) in the U.S. that meet certain criteria, including: the sustainability of the business’ free cash flow and its ability to grow it over time, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the portfolio company, reasonable capitalization of the portfolio company, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples, and the potential to realize appreciation and gain liquidity in our equity position, if any. We anticipate that liquidity in our equity position will be achieved through a merger or acquisition of the portfolio company, a public offering of the portfolio company’s stock, or, to a lesser extent, by exercising our right to require the portfolio company to repurchase our warrants, though there can be no assurance that we will always have these rights. We invest in portfolio companies that need funds for growth capital, to finance acquisitions, including management buyouts, recapitalize or, to a lesser extent, refinance their existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises.
We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity. In July 2012, the SEC granted us an exemptive order (the “Co-Investment Order”) that expanded our ability to co-invest, under certain circumstances, with certain of our affiliates, including Gladstone Capital Corporation (“Gladstone
Capital”) and any future BDC or closed-end management investment company that is advised (or sub-advised if it controls the fund) by the Adviser, or any combination of the foregoing, subject to the conditions in the Co-Investment Order. Since 2012, we have opportunistically made several co-investments with Gladstone Capital pursuant to the Co-Investment Order. We believe the Co-Investment Order has enhanced and will continue to enhance our ability to further our investment objectives and strategies. If we are participating in an investment with one or more co-investors, whether or not an affiliate of ours, our investment is likely to be smaller than if we were investing alone.
Our shares of common stock, our 5.00% Notes due 2026 (“2026 Notes”), and our 4.875% Notes due 2028 (“2028 Notes”) are traded on the Nasdaq Global Select Market (“Nasdaq”) under the trading symbols “GAIN,” “GAINN,” and “GAINZ,” respectively.
Business
Portfolio Activity
While the business environment remains competitive, we continue to see new investment opportunities consistent with our investment strategy of providing a combination of debt and equity in support of management and independent sponsor-led buyouts of Lower Middle Market companies in the U.S. During the nine months ended December 31, 2021, we invested in two new portfolio companies, exited three portfolio companies, merged two existing portfolio companies into a new portfolio company, and dissolved one portfolio company. From our initial public offering in June 2005 through December 31, 2021, we invested in 55 companies, excluding investments in syndicated loans, for a total of approximately $1.5 billion, before giving effect to principal repayments and divestitures.
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 December 31, 2021, we had unrecognized, contractual success fees of $49.3 million, or $1.48 per common share. Consistent with accounting principles generally accepted in the U.S. (“GAAP”), we have not recognized success fee receivables and related income in our accompanying Consolidated Financial Statements until earned.
From inception through December 31, 2021, we completed sales of 27 portfolio companies that we acquired under our buyout strategy (which excludes investments in syndicated loans). In the aggregate, these sales have generated $262.8 million in net realized gains and $36.4 million in other income upon exit, for a total increase to our net assets of $299.2 million. We believe, in aggregate, these transactions were equity-oriented investment successes and exemplify our investment strategy of striving to achieve returns through current income on the debt portion of our investments and capital gains from the equity portion. The 27 liquidity events have offset any realized losses since inception, which were primarily incurred during the 2008-2009 recession in connection with the sale of performing syndicated loans at a realized loss to pay off a former lender. The successful exits, in part, enabled us to increase the monthly distribution by 87.5% from March 2011 through December 31, 2021, and allowed us to declare and pay 14 supplemental distributions to common stockholders through December 31, 2021.
Capital Raising Efforts
We have been able to meet our capital needs through extensions of and increases to the Fifth Amended and Restated Credit Agreement dated April 30, 2013, as amended from time to time (the “Credit Facility”), and by accessing the capital markets in the form of public offerings of common and preferred stock and unsecured notes. We have successfully extended the Credit Facility’s revolving period multiple times, most recently to February 2024, and currently have a total commitment amount of $180.0 million (with a potential total commitment of $300.0 million through additional commitments from new or existing lenders). During the nine months ended December 31, 2021, we issued our 2028 Notes for gross proceeds of $134.6 million. During the year ended March 31, 2021, we issued our 2026 Notes for gross proceeds of $127.9 million and sold 155,560 shares of our common stock under our then existing at-the-market program (the “Common Stock ATM Program”) for gross proceeds of approximately $1.8 million, and 784,853 shares of our Series E Term Preferred Stock under our then existing preferred stock at-the-market program (the “Series E ATM Program”) for gross proceeds of approximately $19.3 million. Refer to “Liquidity and Capital Resources — Revolving Line of Credit” for further discussion of the Credit Facility and to “Liquidity and Capital Resources — Equity — Common Stock” and “Liquidity and Capital Resources — Equity — Term Preferred Stock” for further discussion of our common stock and mandatorily redeemable preferred stock, including our at-the-market programs.
Although we have been able to access the capital markets historically, market conditions, including the impact of COVID-19, may continue to affect the trading price of our common stock and thus our ability to finance new investments through the issuance of common equity. On December 31, 2021, the closing market price of our common stock was $17.08 per share, representing a 28.7% premium to our net asset value (“NAV”) of $13.27 per share as of December 31, 2021. When our common stock trades below NAV, our ability to issue additional equity is constrained by provisions of the 1940 Act, which generally prohibits the issuance and sale of our common stock at an issuance price below the then-current NAV per share without stockholder approval, other than through sales to our then-existing stockholders pursuant to a rights offering.
Regulatory Compliance
Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage limitations of the 1940 Act, which require us to have asset coverage (as defined in Sections 18 and 61 of the 1940 Act), of at least 150% on each of our senior securities representing indebtedness and our senior securities that are stock (such as our previously outstanding series of term preferred stock).
On April 10, 2018, our Board of Directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) thereof, approved the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, our asset coverage requirements for senior securities changed from 200% to 150%, effective as of April 10, 2019, one year after the date of the Board of Directors’ approval.
As of December 31, 2021, our asset coverage ratio on our senior securities representing indebtedness was 259.5%.
Investment Highlights
Investment Activity
During the nine months ended December 31, 2021, the following significant transactions occurred:
•In May 2021, we dissolved our investment in Channel Technologies Group, LLC (“CTG”) and recorded a realized loss of $1.8 million.
•In June 2021, we invested $10.0 million in Nocturne Villa Rentals, Inc. (“Nocturne”) through a combination of secured first lien debt and preferred equity. Nocturne, headquartered in Telluride, Colorado, is a luxury vacation rental manager.
•In June 2021, we invested an additional $6.5 million in J.R. Hobbs Co. – Atlanta, LLC (“J.R. Hobbs”) in the form of secured second lien debt. In connection with the investment, our secured second lien debt was converted to secured first lien debt.
•In June 2021, we sold our investment in Head Country, Inc. (“Head Country”), which resulted in success fee income of $2.0 million and a realized gain of $3.6 million. In connection with the sale, we received net cash proceeds of $16.7 million, including the repayment of our debt investment of $9.1 million at par.
•In July 2021, we invested an additional $5.9 million in the form of secured first lien debt in Nocturne.
•In July 2021, we invested $24.3 million in Utah Pacific Bridge & Steel, Ltd. (“Utah Pacific”) through a combination of secured first lien debt and preferred equity. Utah Pacific, headquartered in Lindon, Utah, is a manufacturer of large steel components used in bridge replacement, rehabilitation, and construction.
•In September 2021, one of our portfolio companies, D.P.M.S., Inc. (“Danco”), merged with another of our portfolio companies, Galaxy Technologies, Inc. (“Galaxy”), into a newly formed portfolio company, Galaxy Technologies Holdings, Inc. (“Galaxy Technologies Holdings”). Our debt investments in Danco, which totaled $12.3 million at principal and cost, and Galaxy, which totaled $13.0 million at principal and cost, were converted into two second lien term loans with an aggregate cost and principal of $25.3 million to Galaxy Technologies Holdings. Our common equity investment in Danco, with a cost basis of $0.0 million, and our preferred and common equity investments in Galaxy, with an aggregate cost basis of $11.5 million, were converted into a common equity investment in Galaxy Technologies Holdings with a combined cost basis of $11.5 million.
•In October 2021, we invested an additional $10.5 million in Bassett Creek Services, Inc., in the form of secured first lien debt.
•In December 2021, we invested an additional $19.0 million in the form of secured first lien debt in Nocturne.
•In December 2021, we invested an additional $6.4 million in the form of secured first lien debt in Schylling, Inc.
•In December 2021, we sold our investment in Pioneer Square Brands, Inc. (“Pioneer”), which resulted in success fee income of $0.5 million and a realized gain of $21.9 million. In connection with the sale, we received net cash proceeds of $50.6 million, including the repayment of our debt investment of $23.1 million at par.
•In December 2021, we sold our investment in SOG Specialty Knives & Tools, LLC (“SOG”), which resulted in success fee income of $2.9 million. In connection with the sale, we received net cash proceeds of $23.3 million, including the repayment of our debt investment of $8.9 million at par, and retained a common stock investment in the intermediary entity, Gladstone SOG Investments, Inc., which maintains a cost basis of $0.6 million.
The following significant investment activity occurred subsequent to December 31, 2021. Also refer to Note 13 – Subsequent Events in the accompanying Notes to Consolidated Financial Statements.
•In January 2022, we invested $5.0 million in an existing portfolio company, SBS Industries Holdings, Inc. ("SBS"), through a combination of secured second lien debt and preferred equity. As part of the additional investment, SBS was renamed SFEG Holdings, Inc.
•In February 2022, we extended a guaranty on behalf of one of our portfolio companies, J.R. Hobbs, whereby we have guaranteed 50% of their obligations with another lender, with a maximum amount of $9.3 million. As of the date of this report, we have not been required to make payments on this guaranty and we consider the likelihood of future required payment to be remote and the fair value of the guaranty to be insignificant.
Recent Developments
Distributions and Dividends
In January 2022, our Board of Directors declared the following monthly and supplemental cash distributions to common stockholders:
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Record Date
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Payment Date
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Distribution per
Common Share
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January 21, 2022
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January 31, 2022
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$
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0.075
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February 4, 2022
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February 14, 2022
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0.120
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(A)
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February 18, 2022
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February 28, 2022
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0.075
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March 23, 2022
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March 31, 2022
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0.075
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Total for the Quarter:
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$
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0.345
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(A)Represents a supplemental distribution to common stockholders.
LIBOR Transition
In general, our investments in debt securities have a term of five years, accrue interest at variable rates (based on the one-month London Interbank Offered Rate (“LIBOR”)) and, to a lesser extent, at fixed rates. Most U.S. dollar LIBOR are currently anticipated to be phased out in June 2023. LIBOR may transition to a new standard rate, the Secured Overnight Financing Rate (“SOFR”), which will incorporate certain overnight repo market data collected from multiple data sets. To attain an equivalent one-month rate, we currently intend to adjust the SOFR to minimize the difference between the interest that a borrower would be paying using LIBOR versus what it will be paying using SOFR. We are currently monitoring the transition and cannot assure you whether SOFR will become a standard rate for variable rate debt. We have amended all outstanding loan agreements with our portfolio companies to include fallback language providing a mechanism for the parties to negotiate a new reference interest rate in the event that LIBOR ceases to exist. Assuming that SOFR replaces LIBOR and is appropriately adjusted to equate to one-month LIBOR, we expect that there should be minimal impact on our operations.
COVID-19 Impact
We continue to closely monitor and work with our portfolio companies to navigate the significant challenges created by the continuing COVID-19 pandemic and remain focused on ensuring the safety of the Adviser’s and Administrator’s personnel and of the employees of our portfolio companies, while also managing our ongoing business activities. While we are closely monitoring all of our portfolio companies, our portfolio continues to be diverse from a geographic and industry perspective. Through proactive measures and continued diligence, the management teams of our portfolio companies continue to demonstrate their ability to respond effectively and efficiently to the challenges posed by COVID-19, including its variants, related orders imposed by state and local governments, including paused or reversed reopening orders, and operating challenges, including but not limited to, labor shortages, supply chain delays and increased material costs. We believe we have sufficient levels of liquidity to support our existing portfolio companies, as necessary, and continue our buyout strategy by deploying capital in new investment opportunities.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended December 31, 2021 to the Three Months Ended December 31, 2020
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For the Three Months Ended December 31,
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2021
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2020
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$ Change
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% Change
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INVESTMENT INCOME
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Interest income
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$
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13,344
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$
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12,148
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$
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1,196
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9.8
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%
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Dividend and success fee income
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3,398
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5,224
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(1,826)
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(35.0)
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%
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Total investment income
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16,742
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17,372
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(630)
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(3.6)
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%
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EXPENSES
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Base management fee
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3,630
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3,116
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514
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16.5
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%
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Loan servicing fee
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1,768
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1,786
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(18)
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(1.0)
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%
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Incentive fee
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2,587
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3,756
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(1,169)
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(31.1)
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%
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Administration fee
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437
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382
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55
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14.4
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%
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Interest and dividend expense
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3,918
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3,383
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|
535
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15.8
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%
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Amortization of deferred financing costs and discounts
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447
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451
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(4)
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(0.9)
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%
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Other
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1,006
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818
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188
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23.0
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%
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Expenses before credits from Adviser
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13,793
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13,692
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101
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0.7
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%
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Credits to fees from Adviser
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(5,450)
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(2,575)
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(2,875)
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111.7
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%
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Total expenses, net of credits to fees
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8,343
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11,117
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(2,774)
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(25.0)
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%
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NET INVESTMENT INCOME
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8,399
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6,255
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2,144
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34.3
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%
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REALIZED AND UNREALIZED GAIN (LOSS)
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Net realized gain on investments
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22,049
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9,105
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12,944
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142.2
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%
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Net unrealized depreciation of investments
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(20,102)
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(89)
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(20,013)
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NM
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Net realized and unrealized gain (loss)
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1,947
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9,016
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(7,069)
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NM
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NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
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$
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10,346
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$
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15,271
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$
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(4,925)
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(32.3)
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%
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WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING
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Basic and diluted
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33,205,023
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33,205,023
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—
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—
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BASIC AND DILUTED PER COMMON SHARE:
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Net investment income
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$
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0.25
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$
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0.19
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$
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0.06
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31.6
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%
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Net increase in net assets resulting from operations
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$
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0.31
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$
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0.46
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$
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(0.15)
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(32.6)
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%
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NM = Not Meaningful
Investment Income
Total investment income decreased 3.6% for the three months ended December 31, 2021, as compared to the prior year period, due to a decrease in dividend and success fee income, partially offset by an increase in interest income.
Interest income from our investments in debt securities increased 9.8% for the three months ended December 31, 2021, as compared to the prior year period. Generally, the level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period multiplied by the weighted-average yield. The weighted-average principal balance of our interest-bearing investment portfolio during the three months ended December 31, 2021 was $443.6 million, compared to $404.0 million for the prior year period. This increase was primarily due to the $79.5 million of loans returned to accrual status, the origination of $21.6 million of new debt investments, and $58.3 million of follow-on debt investments to existing portfolio companies, partially offset by $64.2 million of loans placed on non-accrual status and $35.3 million of pay-offs, restructurings, or write-offs of debt investments after September 30, 2020, and their respective impact on the weighted-average principal balance when considering timing of new investments, pay-offs, restructurings, write-offs, and accrual status changes, as applicable. The weighted-average yield on our interest-bearing investments, excluding cash and cash equivalents and receipts recorded as dividend and success fee income, was 11.9% for the three months ended December 31, 2021, compared to 11.9% for the prior year period. The weighted-average yield may vary from period to period, based on the current stated interest rate on interest-bearing investments.
As of December 31, 2021, our loans to J.R. Hobbs, The Mountain Corporation (“The Mountain”), and SBS were on non-accrual status, with an aggregate debt cost basis of $81.3 million. As of December 31, 2020, our loans to B+T Group Acquisition, Inc. (“B+T”), Horizon Facilities Services, Inc. (“Horizon”), The Mountain, PSI Molded Plastics, Inc. (“PSI Molded”), and SOG, were on non-accrual status, with an aggregate debt cost basis of $95.1 million.
Dividend and success fee income for the three months ended December 31, 2021 decreased $1.8 million from the prior year period. During the three months ended December 31, 2021, dividend and success fee income consisted of $3.4 million of success fee income. During the three months ended December 31, 2020, dividend and success fee income consisted primarily of $5.0 million of dividend income.
As of December 31, 2021 and March 31, 2021, no single investment represented greater than 10% of the total investment portfolio at fair value.
Expenses
Total expenses, net of any non-contractual, unconditional, and irrevocable credits from the Adviser, decreased 25.0% during the three months ended December 31, 2021, as compared to the prior year period, primarily due to an increase in credits to fees from the Adviser and a decrease in the incentive fee, partially offset by increases in interest and dividend expense and the base management fee.
In accordance with GAAP, we recorded a $0.4 million capital gains-based incentive fee during the three months ended December 31, 2021, compared to $1.8 million during the three months ended December 31, 2020. The capital gains-based incentive fee was a result of the net impact of net realized gains and net unrealized appreciation (depreciation) on investments during the respective periods. The income-based incentive fee increased by $0.2 million for the three months ended December 31, 2021, as compared to the prior year period, primarily due to an increase in pre-incentive fee net investment income, coupled with an increase in net assets, which drives the hurdle rate.
The base management fee, loan servicing fee, incentive fee, and their related non-contractual, unconditional, and irrevocable credits are computed quarterly, as described under “Transactions with the Adviser” in Note 4 — Related Party Transactions in the accompanying Notes to Consolidated Financial Statements and are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
2021
|
|
2020
|
|
Average total assets subject to base management fee(A)
|
$
|
726,000
|
|
|
$
|
623,200
|
|
|
Multiplied by prorated annual base management fee of 2.0%
|
0.5
|
%
|
|
0.5
|
%
|
|
Base management fee(B)
|
$
|
3,630
|
|
|
$
|
3,116
|
|
|
Credits to fees from Adviser - other(B)
|
(3,682)
|
|
|
(789)
|
|
|
Net base management fee
|
$
|
(52)
|
|
|
$
|
2,327
|
|
|
|
|
|
|
|
Loan servicing fee(B)
|
$
|
1,768
|
|
|
$
|
1,786
|
|
|
Credits to base management fee - loan servicing fee(B)
|
(1,768)
|
|
|
(1,786)
|
|
|
Net loan servicing fee
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Incentive fee – income-based
|
$
|
2,197
|
|
|
$
|
2,002
|
|
|
Incentive fee – capital gains-based(C)
|
390
|
|
|
1,754
|
|
|
Total incentive fee(B)
|
$
|
2,587
|
|
|
$
|
3,756
|
|
|
Credits to fees from Adviser - other(B)
|
—
|
|
|
—
|
|
|
Net total incentive fee
|
$
|
2,587
|
|
|
$
|
3,756
|
|
(A)Average total assets subject to the base management fee is defined in the Advisory Agreement as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods.
(B)Reflected as a line item on our Consolidated Statements of Operations.
(C)The capital gains-based incentive fees are recorded in accordance with GAAP and do not necessarily reflect amounts contractually due under the terms of the Advisory Agreement.
Interest and dividend expense increased 15.8% during the three months ended December 31, 2021, as compared to the prior year period, due to an increase in interest expense, partially offset by a decrease in dividend expense. Interest expense increased by $2.8 million primarily due to the issuance of the 2026 Notes in March 2021 and the 2028 Notes in August 2021, which was partially offset by lower interest expense related to the Credit Facility. The weighted-average balance outstanding on the Credit Facility during the three months ended December 31, 2021 was $21.2 million, as compared to $104.8 million in the prior year period. The effective interest rate on the Credit Facility, excluding the impact of deferred financing costs, during the three months ended December 31, 2021 was 11.1%, as compared to 3.8% in the prior year period. The increase in the effective interest rate on the Credit Facility was primarily a result of an increase in unused commitment fees on the undrawn portion of the Credit Facility. Dividend expense decreased by $2.3 million as a result of the 6.25% Series D Cumulative Term Preferred Stock (“Series D Term Preferred Stock”) and 6.375% Series E Cumulative Term Preferred Stock (“Series E Term Preferred Stock”) redemptions in March 2021 and August 2021, respectively, partially offset by the Series E ATM Program sales during the prior fiscal year.
Realized and Unrealized Gain (Loss)
The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the three months ended December 31, 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2021
|
|
Portfolio Company
|
|
Realized Gain (Loss)
|
|
Unrealized Appreciation (Depreciation)
|
|
Reversal of Unrealized (Appreciation) Depreciation
|
|
Net Gain (Loss)
|
|
Brunswick Bowling Products, Inc.
|
|
$
|
—
|
|
|
$
|
10,344
|
|
|
$
|
—
|
|
|
$
|
10,344
|
|
|
Horizon Facilities Service, Inc.
|
|
—
|
|
|
5,129
|
|
|
—
|
|
|
5,129
|
|
|
Schylling, Inc.
|
|
—
|
|
|
2,931
|
|
|
—
|
|
|
2,931
|
|
|
ImageWorks Display and Marketing Group, Inc.
|
|
—
|
|
|
1,019
|
|
|
—
|
|
|
1,019
|
|
|
The Maids International, LLC
|
|
—
|
|
|
(1,216)
|
|
|
—
|
|
|
(1,216)
|
|
|
J.R. Hobbs Co. – Atlanta, LLC
|
|
—
|
|
|
(1,575)
|
|
|
—
|
|
|
(1,575)
|
|
|
Mason West, LLC
|
|
—
|
|
|
(3,390)
|
|
|
—
|
|
|
(3,390)
|
|
|
Pioneer Square Brands, Inc.
|
|
21,939
|
|
|
—
|
|
|
(25,425)
|
|
|
(3,486)
|
|
|
Counsel Press, Inc.
|
|
—
|
|
|
(3,679)
|
|
|
—
|
|
|
(3,679)
|
|
|
Galaxy Technologies Holdings, Inc.
|
|
—
|
|
|
(4,464)
|
|
|
—
|
|
|
(4,464)
|
|
|
Other, net (<$1.0 million, net)
|
|
110
|
|
|
224
|
|
|
—
|
|
|
334
|
|
|
Total
|
|
$
|
22,049
|
|
|
$
|
5,323
|
|
|
$
|
(25,425)
|
|
|
$
|
1,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2020
|
|
Portfolio Company
|
|
Realized Gain (Loss)
|
|
Unrealized Appreciation (Depreciation)
|
|
Reversal of Unrealized (Appreciation) Depreciation
|
|
Net Gain (Loss)
|
|
Pioneer Square Brands, Inc.
|
|
$
|
—
|
|
|
$
|
4,420
|
|
|
$
|
—
|
|
|
$
|
4,420
|
|
|
Educators Resource, Inc.
|
|
—
|
|
|
3,488
|
|
|
—
|
|
|
3,488
|
|
|
Old World Christmas, Inc.
|
|
3,289
|
|
|
27
|
|
|
—
|
|
|
3,316
|
|
|
Diligent Delivery Systems
|
|
—
|
|
|
2,961
|
|
|
—
|
|
|
2,961
|
|
|
Frontier Packaging, Inc.
|
|
14,032
|
|
|
—
|
|
|
(11,869)
|
|
|
2,163
|
|
|
SOG Specialty Knives and Tools, LLC
|
|
—
|
|
|
1,806
|
|
|
—
|
|
|
1,806
|
|
|
Schylling, Inc.
|
|
—
|
|
|
1,138
|
|
|
—
|
|
|
1,138
|
|
|
Head Country, Inc.
|
|
—
|
|
|
916
|
|
|
—
|
|
|
916
|
|
|
Horizon Facilities Service, Inc.
|
|
—
|
|
|
909
|
|
|
—
|
|
|
909
|
|
|
The Maids International, LLC
|
|
—
|
|
|
495
|
|
|
—
|
|
|
495
|
|
|
Ginsey Home Solutions, Inc.
|
|
—
|
|
|
480
|
|
|
—
|
|
|
480
|
|
|
Bassett Creek Services, Inc.
|
|
—
|
|
|
469
|
|
|
—
|
|
|
469
|
|
|
PSI Molded Plastics, Inc.
|
|
—
|
|
|
459
|
|
|
—
|
|
|
459
|
|
|
ImageWorks Display and Marketing Group, Inc.
|
|
—
|
|
|
(1,411)
|
|
|
—
|
|
|
(1,411)
|
|
|
D.P.M.S., Inc.
|
|
—
|
|
|
(1,805)
|
|
|
—
|
|
|
(1,805)
|
|
|
Brunswick Bowling Products, Inc.
|
|
—
|
|
|
(4,825)
|
|
|
—
|
|
|
(4,825)
|
|
|
SBS Industries Holdings, Inc.
|
|
(8,470)
|
|
|
1,580
|
|
|
—
|
|
|
(6,890)
|
|
|
Other, net (<$1.0 million, net)
|
|
254
|
|
|
673
|
|
|
—
|
|
|
927
|
|
|
Total
|
|
$
|
9,105
|
|
|
$
|
11,780
|
|
|
$
|
(11,869)
|
|
|
$
|
9,016
|
|
Net Realized Gain (Loss) on Investments
During the three months ended December 31, 2021, we recorded net realized gains on investments of $22.0 million, primarily due to a $21.9 million realized gain from the exit of Pioneer and realized gains related to prior period exits of certain investments. During the three months ended December 31, 2020, we recorded net realized gains on investments of $9.1 million primarily related to a $14.0 million realized gain from the exit of Frontier Packaging, Inc. ("Frontier") and a $3.3 million realized gain from the recapitalization of Old World Christmas, Inc. ("Old World"), partially offset by an $8.5 million realized loss related to the partial write-off of a debt investment in SBS.
Net Unrealized Appreciation (Depreciation) of Investments
Net unrealized depreciation of investments of $20.1 million for the three months ended December 31, 2021 was primarily due to the reversal of previously recorded unrealized appreciation of our investment in Pioneer upon its exit and the decreased performance of certain of our portfolio companies. These amounts were partially offset by the increased performance of certain of our other portfolio companies, driven partially by the reversal of the impact of COVID-19 on certain of our portfolio companies and the markets in which they operate, and increased comparable transaction multiples used to estimate the fair value of certain of our portfolio companies. In part, the performance of certain of our portfolio companies was driven by the impact COVID-19 has had or is expected to have on our portfolio companies and the markets in which they operate, including government restrictions on the portfolio companies’ ability to operate under historical conditions, current and future shutdowns and reopening restrictions, operating challenges, including but not limited to, labor shortages, supply chain delays, increased material costs and demand for their products, and general economic outlook, or the reversal of such impact towards pre-COVID-19 levels.
Net unrealized depreciation of investments of $0.1 million for the three months ended December 31, 2020 was primarily due to the reversal of previously recorded unrealized appreciation of our investment in Frontier upon its exit and the decreased performance of certain of our portfolio companies, partially offset by the increased performance of certain of our portfolio companies. In part, the performance of certain of our portfolio companies was driven by the impact COVID-19 has had or is expected to have on our portfolio companies and the markets in which they operate, including government restrictions on the portfolio companies’ ability to operate under historical conditions, current and future shutdowns and reopening restrictions, as well as demand for their products and general economic outlook.
Across our entire investment portfolio, we recorded net unrealized depreciation of $1.9 million and $18.2 million on our debt and on our equity positions, respectively, for the three months ended December 31, 2021. As of December 31, 2021, the fair value of our investment portfolio was more than the cost basis by $25.2 million, as compared to September 30, 2021, when the fair value of our investment portfolio was more than the cost basis by $45.3 million, representing net unrealized depreciation of $20.1 million for the three months ended December 31, 2021. Our entire portfolio had a fair value of 103.7% of cost as of December 31, 2021.
Comparison of the Nine Months Ended December 31, 2021 to the Nine Months Ended December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended December 31,
|
|
|
2021
|
|
2020
|
|
$ Change
|
|
% Change
|
|
INVESTMENT INCOME
|
|
|
|
|
|
|
|
|
Interest income
|
$
|
43,634
|
|
|
$
|
34,513
|
|
|
$
|
9,121
|
|
|
26.4
|
%
|
|
Dividend and success fee income
|
9,672
|
|
|
5,406
|
|
|
4,266
|
|
|
78.9
|
%
|
|
Total investment income
|
53,306
|
|
|
39,919
|
|
|
13,387
|
|
|
33.5
|
%
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
Base management fee
|
10,527
|
|
|
8,961
|
|
|
1,566
|
|
|
17.5
|
%
|
|
Loan servicing fee
|
5,430
|
|
|
5,242
|
|
|
188
|
|
|
3.6
|
%
|
|
Incentive fee
|
22,186
|
|
|
3,454
|
|
|
18,732
|
|
|
NM
|
|
Administration fee
|
1,407
|
|
|
1,218
|
|
|
189
|
|
|
15.5
|
%
|
|
Interest and dividend expense
|
11,606
|
|
|
9,615
|
|
|
1,991
|
|
|
20.7
|
%
|
|
Amortization of deferred financing costs and discounts
|
1,355
|
|
|
1,291
|
|
|
64
|
|
|
5.0
|
%
|
|
Other
|
3,828
|
|
|
3,178
|
|
|
650
|
|
|
20.5
|
%
|
|
Expenses before credits from Adviser
|
56,339
|
|
|
32,959
|
|
|
23,380
|
|
|
70.9
|
%
|
|
Credits to fees from Adviser
|
(11,293)
|
|
|
(7,836)
|
|
|
(3,457)
|
|
|
44.1
|
%
|
|
Total expenses, net of credits to fees
|
45,046
|
|
|
25,123
|
|
|
19,923
|
|
|
79.3
|
%
|
|
NET INVESTMENT INCOME
|
8,260
|
|
|
14,796
|
|
|
(6,536)
|
|
|
(44.2
|
%)
|
|
|
|
|
|
|
|
|
|
|
REALIZED AND UNREALIZED GAIN (LOSS)
|
|
|
|
|
|
|
|
|
Net realized gain on investments
|
24,442
|
|
|
10,479
|
|
|
13,963
|
|
|
133.2
|
%
|
|
Net realized loss on other
|
(1,998)
|
|
|
—
|
|
|
(1,998)
|
|
|
NM
|
|
Net unrealized appreciation (depreciation) of investments
|
54,916
|
|
|
(3,335)
|
|
|
58,251
|
|
|
NM
|
|
Net realized and unrealized gain (loss)
|
77,360
|
|
|
7,144
|
|
|
70,216
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
|
$
|
85,620
|
|
|
$
|
21,940
|
|
|
$
|
63,680
|
|
|
290.2
|
%
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING
|
|
|
|
|
|
|
|
|
Basic and diluted
|
33,205,023
|
|
|
33,167,511
|
|
|
37,512
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
Net investment income
|
$
|
0.25
|
|
|
$
|
0.45
|
|
|
$
|
(0.20)
|
|
|
(44.4
|
%)
|
|
Net increase in net assets resulting from operations
|
$
|
2.58
|
|
|
$
|
0.66
|
|
|
$
|
1.92
|
|
|
NM
|
NM = Not Meaningful
Investment Income
Total investment income increased 33.5% for the nine months ended December 31, 2021, as compared to the prior year period, due to increases in both interest income and dividend and success fee income.
Interest income from our investments in debt securities increased 26.4% for the nine months ended December 31, 2021, as compared to the prior year period. During the nine months ended December 31, 2021, we received $3.9 million of past due interest from certain loans that were previously on non-accrual status. 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 nine months ended December 31, 2021 was $444.9 million, compared to $383.7 million for the prior year period. This increase was primarily due to $79.5 million of loans returned to accrual status, $59.2 million of follow-on debt investments to existing portfolio companies, and the origination of $54.2 million of new debt investments, partially offset by $64.2 million of loans placed on non-accrual status and $43.3 million of pay-offs, restructurings, or write-offs of debt investments after March 31, 2020, and their respective impact on the weighted-
average principal balance when considering timing of new investments, pay-offs, restructurings, write-offs, and accrual status changes, as applicable. The weighted-average yield on our interest-bearing investments, excluding cash and cash equivalents and receipts recorded as dividend, success fee, and other income, was 13.0% for the nine months ended December 31, 2021, compared to 11.9% for the prior year period. The weighted-average yield may vary from period to period, based on the current stated interest rate on interest-bearing investments.
As of December 31, 2021, our loans to J.R. Hobbs, The Mountain, and SBS were on non-accrual status, with an aggregate debt cost basis of $81.3 million. As of December 31, 2020, our loans to B+T, Horizon, The Mountain, PSI Molded, and SOG were on non-accrual status, with an aggregate debt cost basis of $95.1 million.
Dividend and success fee income for the nine months ended December 31, 2021 increased by $4.3 million from the prior year period. During the nine months ended December 31, 2021, dividend and success fee income consisted of $8.1 million of success fee income and $1.6 million of dividend income. During the nine months ended December 31, 2020, dividend and success fee income consisted of $5.0 million of dividend income and $0.4 million of success fee income.
As of December 31, 2021 and March 31, 2021, no single investment represented greater than 10% of the total investment portfolio at fair value.
Expenses
Total expenses, net of any non-contractual, unconditional, and irrevocable credits from the Adviser, increased 79.3% during the nine months ended December 31, 2021, as compared to the prior year period, primarily due to an increase in the incentive fee, as well as increases in interest and dividend expense and the base management fee, partially offset by an increase in credits to fees from the Adviser.
In accordance with GAAP, we recorded a $16.3 million capital gains-based incentive fee during the nine months ended December 31, 2021, compared to $1.5 million during the nine months ended December 31, 2020. The capital gains-based incentive fee was a result of the net impact of net realized gains (losses) and net unrealized appreciation (depreciation) on investments during the respective periods. The income-based incentive fee increased by $3.9 million for the nine months ended December 31, 2021, as compared to the prior year period, primarily due an increase in pre-incentive fee net investment income, coupled with an increase in net assets, which drives the hurdle rate.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended December 31,
|
|
|
2021
|
|
2020
|
|
Average total assets subject to base management fee(A)
|
$
|
701,800
|
|
|
$
|
597,400
|
|
|
Multiplied by prorated annual base management fee of 2.0%
|
1.5
|
%
|
|
1.5
|
%
|
|
Base management fee(B)
|
10,527
|
|
|
8,961
|
|
|
Credits to fees from Adviser - other(B)
|
(5,863)
|
|
|
(2,594)
|
|
|
Net base management fee
|
$
|
4,664
|
|
|
$
|
6,367
|
|
|
|
|
|
|
|
Loan servicing fee(B)
|
5,430
|
|
|
5,242
|
|
|
Credits to base management fee - loan servicing fee(B)
|
(5,430)
|
|
|
(5,242)
|
|
|
Net loan servicing fee
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Incentive fee – income-based
|
$
|
5,892
|
|
|
$
|
2,002
|
|
|
Incentive fee – capital gains-based(C)
|
16,294
|
|
|
1,452
|
|
|
Total incentive fee(B)
|
$
|
22,186
|
|
|
$
|
3,454
|
|
|
Credits to fees from Adviser - other(B)
|
—
|
|
|
—
|
|
|
Net total incentive fee
|
$
|
22,186
|
|
|
$
|
3,454
|
|
(A)Average total assets subject to the base management fee is defined in the Advisory Agreement as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods.
(B)Reflected as a line item on our Consolidated Statements of Operations.
(C)The capital gains-based incentive fees are recorded in accordance with GAAP and do not necessarily reflect amounts contractually due under the terms of the Advisory Agreement.
Interest and dividend expense increased 20.7% during the nine months ended December 31, 2021, as compared to the prior year period, primarily due to the increase in interest expense, partially offset by a decrease in dividend expense. Interest expense increased by $6.2 million primarily due to the issuance of the 2026 Notes in March 2021 and the 2028 Notes in August 2021, which was partially offset by lower interest expense related to the Credit Facility. The weighted-average balance outstanding on the Credit Facility during the nine months ended December 31, 2021 was $24.0 million, as compared to $88.7 million in the prior year period. The effective interest rate on the Credit Facility, excluding the impact of deferred financing costs, during the nine months ended December 31, 2021 was 10.1%, as compared to 4.2% in the prior year period. The increase in the effective interest rate on the Credit Facility was primarily a result of an increase in unused commitment fees on the undrawn portion of the Credit Facility. Dividend expense decreased by $4.2 million as a result of the Series D Term Preferred Stock and Series E Term Preferred Stock redemptions in March 2021 and August 2021, respectively, partially offset by the Series E ATM Program sales during the prior fiscal year.
Realized and Unrealized Gain (Loss)
The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the nine months ended December 31, 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended December 31, 2021
|
|
Portfolio Company
|
|
Realized Gain (Loss)
|
|
Unrealized Appreciation (Depreciation)
|
|
Reversal of Unrealized (Appreciation) Depreciation
|
|
Net Gain (Loss)
|
|
B+T Group Acquisition, Inc.
|
|
$
|
—
|
|
|
$
|
15,279
|
|
|
$
|
—
|
|
|
$
|
15,279
|
|
|
Brunswick Bowling Products, Inc.
|
|
—
|
|
|
13,842
|
|
|
—
|
|
|
13,842
|
|
|
Old World Christmas, Inc.
|
|
—
|
|
|
13,559
|
|
|
—
|
|
|
13,559
|
|
|
Schylling, Inc.
|
|
—
|
|
|
13,453
|
|
|
—
|
|
|
13,453
|
|
|
Horizon Facilities Service, Inc.
|
|
—
|
|
|
11,547
|
|
|
—
|
|
|
11,547
|
|
|
Educators Resource, Inc.
|
|
—
|
|
|
8,876
|
|
|
—
|
|
|
8,876
|
|
|
Bassett Creek Services, Inc.
|
|
—
|
|
|
7,877
|
|
|
—
|
|
|
7,877
|
|
|
SOG Specialty Knives & Tools, LLC
|
|
—
|
|
|
7,575
|
|
|
—
|
|
|
7,575
|
|
|
ImageWorks Display and Marketing Group, Inc.
|
|
—
|
|
|
6,321
|
|
|
—
|
|
|
6,321
|
|
|
PSI Molded Plastics, Inc.
|
|
—
|
|
|
3,633
|
|
|
—
|
|
|
3,633
|
|
|
Counsel Press, Inc.
|
|
—
|
|
|
3,366
|
|
|
—
|
|
|
3,366
|
|
|
Nocturne Villa Rentals, Inc.
|
|
—
|
|
|
1,504
|
|
|
—
|
|
|
1,504
|
|
|
Galaxy Technologies Holdings, Inc.
|
|
—
|
|
|
1,404
|
|
|
—
|
|
|
1,404
|
|
|
Head Country, Inc.
|
|
3,627
|
|
|
—
|
|
|
(2,469)
|
|
|
1,158
|
|
|
Channel Technologies Group, LLC
|
|
(1,841)
|
|
|
—
|
|
|
1,841
|
|
|
—
|
|
|
Diligent Delivery Systems
|
|
—
|
|
|
(903)
|
|
|
—
|
|
|
(903)
|
|
|
Mason West, LLC
|
|
—
|
|
|
(2,217)
|
|
|
—
|
|
|
(2,217)
|
|
|
SBS Industries Holdings, Inc.
|
|
—
|
|
|
(3,314)
|
|
|
—
|
|
|
(3,314)
|
|
|
Ginsey Home Solutions, Inc.
|
|
—
|
|
|
(4,012)
|
|
|
—
|
|
|
(4,012)
|
|
|
J.R. Hobbs Co. – Atlanta, LLC
|
|
—
|
|
|
(4,085)
|
|
|
—
|
|
|
(4,085)
|
|
|
Pioneer Square Brands, Inc.
|
|
21,939
|
|
|
(1,245)
|
|
|
(25,425)
|
|
|
(4,731)
|
|
|
Galaxy Technologies Holdings, Inc.
|
|
—
|
|
|
(10,784)
|
|
|
—
|
|
|
(10,784)
|
|
|
Other, net (<$1.0 million, net)
|
|
717
|
|
|
(759)
|
|
|
52
|
|
10
|
|
|
Total
|
|
$
|
24,442
|
|
|
$
|
80,917
|
|
|
$
|
(26,001)
|
|
|
$
|
79,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended December 31, 2020
|
|
Portfolio Company
|
|
Realized Gain (Loss)
|
|
Unrealized Appreciation (Depreciation)
|
|
Reversal of Unrealized (Appreciation) Depreciation
|
|
Net Gain (Loss)
|
|
Pioneer Square Brands, Inc.
|
|
$
|
—
|
|
|
$
|
20,635
|
|
|
$
|
—
|
|
|
$
|
20,635
|
|
|
Frontier Packaging, Inc.
|
|
14,032
|
|
|
2,534
|
|
|
(11,869)
|
|
|
4,697
|
|
|
Ginsey Home Solutions, Inc.
|
|
—
|
|
|
4,151
|
|
|
—
|
|
|
4,151
|
|
|
SOG Specialty Knives and Tools, LLC
|
|
—
|
|
|
3,964
|
|
|
—
|
|
|
3,964
|
|
|
Educators Resource, Inc.
|
|
—
|
|
|
3,335
|
|
|
—
|
|
|
3,335
|
|
|
Old World Christmas, Inc.
|
|
3,289
|
|
|
37
|
|
|
—
|
|
|
3,326
|
|
|
Diligent Delivery Systems
|
|
—
|
|
|
2,409
|
|
|
—
|
|
|
2,409
|
|
|
Galaxy Technologies, Inc.
|
|
—
|
|
|
2,173
|
|
|
—
|
|
|
2,173
|
|
|
Head Country, Inc.
|
|
—
|
|
|
1,762
|
|
|
—
|
|
|
1,762
|
|
|
Schylling, Inc.
|
|
—
|
|
|
1,069
|
|
|
—
|
|
|
1,069
|
|
|
Cambridge Sound Management, Inc.
|
|
740
|
|
|
—
|
|
|
—
|
|
|
740
|
|
|
ImageWorks Display and Marketing Group, Inc.
|
|
—
|
|
|
(1,312)
|
|
|
—
|
|
|
(1,312)
|
|
|
Bassett Creek Services, Inc.
|
|
—
|
|
|
(1,359)
|
|
|
—
|
|
|
(1,359)
|
|
|
Counsel Press, Inc.
|
|
—
|
|
|
(1,850)
|
|
|
—
|
|
|
(1,850)
|
|
|
Nth Degree, Inc.
|
|
113
|
|
|
(3,649)
|
|
|
—
|
|
|
(3,536)
|
|
|
PSI Molded Plastics, Inc.
|
|
—
|
|
|
(3,755)
|
|
|
—
|
|
|
(3,755)
|
|
|
D.P.M.S., Inc.
|
|
—
|
|
|
(4,442)
|
|
|
—
|
|
|
(4,442)
|
|
|
SBS Industries Holdings, Inc.
|
|
(8,470)
|
|
|
1,580
|
|
|
—
|
|
|
(6,890)
|
|
|
Brunswick Bowling Products, Inc.
|
|
—
|
|
|
(18,048)
|
|
|
—
|
|
|
(18,048)
|
|
|
Other, net (<$1.0 million, net)
|
|
775
|
|
|
(700)
|
|
|
—
|
|
|
75
|
|
|
Total
|
|
$
|
10,479
|
|
|
$
|
8,534
|
|
|
$
|
(11,869)
|
|
|
$
|
7,144
|
|
Net Realized Gain on Investments
During the nine months ended December 31, 2021, we recorded net realized gains on investments of $24.4 million, primarily due to a $21.9 million realized gain from the exit of Pioneer, a $3.6 million realized gain from the exit of Head Country and $0.7 million realized gains related to prior period exits, partially offset by a $1.8 million realized loss from the dissolution of CTG. During the nine months ended December 31, 2020, we recorded net realized gains on investments of $10.5 million, primarily related to a $14.0 million realized gain from the exit of Frontier, a $3.3 million realized gain from the recapitalization of Old World, and gains from previous exits, partially offset by an $8.5 million realized loss related to the partial write-off of a debt investment in SBS.
Net Unrealized Appreciation (Depreciation) of Investments
Net unrealized appreciation of investments of $54.9 million for the nine months ended December 31, 2021 was primarily due to increased performance of certain of our portfolio companies, driven partially by the reversal of the impact of COVID-19 on certain of our portfolio companies and the markets in which they operate, increased comparable multiples used to estimate the fair value of certain of our portfolio companies and the reversal of previously recorded unrealized depreciation of our investments in CTG upon its dissolution. These amounts were partially offset by the reversal of previously recorded unrealized appreciation of our investment in Pioneer and Head Country upon exit and the decreased performance of certain of our portfolio companies. In part, the performance of certain of our portfolio companies was driven by the impact COVID-19 has had or is expected to have on our portfolio companies and the markets in which they operate, including government restrictions on the portfolio companies’ ability to operate under historical conditions, current and future shutdowns and reopening restrictions, operating challenges, including but not limited to, labor shortages, supply chain delays, increased material costs and demand for their products, and general economic outlook, or the reversal of such impact towards pre-COVID-19 levels.
Net unrealized depreciation of investments of $3.3 million for the nine months ended December 31, 2020 was primarily due to the reversal of previously recorded unrealized appreciation of our investment in Frontier upon its exit, the decreased performance of certain of our portfolio companies and decreased comparable transaction multiples used to estimate the fair value of certain of our portfolio companies, partially offset by increased performance of certain of our portfolio companies. In part, the performance of certain of our portfolio companies was driven by the impact COVID-19 has had or is expected to have on our portfolio companies and the markets in which they operate, including government restrictions on the portfolio companies’ ability to operate under historical conditions, current and future shutdowns and reopening restrictions, as well as demand for their products and general economic outlook.
Across our entire investment portfolio, we recorded net unrealized appreciation of $5.5 million and $49.4 million on our debt and on our equity positions, respectively, for the nine months ended December 31, 2021. As of December 31, 2021, the fair value of our investment portfolio was more than the cost basis by $25.2 million, as compared to March 31, 2021, when the fair value of our investment portfolio was less than the cost basis by $29.7 million, representing net unrealized appreciation of $54.9 million for the nine months ended December 31, 2021. Our entire portfolio had a fair value of 103.7% of cost as of December 31, 2021.
Net Realized Gain (Loss) on Other
During the nine months ended December 31, 2021, we recorded a net realized loss on other of $2.0 million which primarily related to unamortized deferred issuance costs written off upon the redemption of our Series E Term Preferred Stock in August 2021. During the nine months ended December 31, 2020, there were no realized gains or losses on other.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Net cash provided by operating activities for the nine months ended December 31, 2021 was $39.3 million, as compared to net cash used in operating activities of $32.6 million for the nine months ended December 31, 2020. This change was primarily due to an increase in principal repayments of investments and net proceeds from the sale of investments.
Principal repayments and net proceeds from the sale of investments totaled $96.9 million during the nine months ended December 31, 2021, compared to $51.2 million during the nine months ended December 31, 2020. Purchases of investments were $84.6 million during the nine months ended December 31, 2021, compared to $89.6 million during the nine months ended December 31, 2020.
As of December 31, 2021, we had equity investments in or loans to 26 portfolio companies with an aggregate cost basis of $675.6 million. As of December 31, 2020, we had equity investments in or loans to 28 portfolio companies with an aggregate cost basis of $657.9 million.
The following table summarizes our total portfolio investment activity during the nine months ended December 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended December 31,
|
|
|
2021
|
|
2020
|
|
Beginning investment portfolio, at fair value
|
$
|
633,829
|
|
|
$
|
565,924
|
|
|
New investments
|
34,200
|
|
|
46,902
|
|
|
Disbursements to existing portfolio companies
|
50,350
|
|
|
42,669
|
|
|
Unscheduled principal repayments
|
(46,898)
|
|
|
(20,734)
|
|
|
Net proceeds from sales of investments
|
(49,421)
|
|
|
(29,410)
|
|
|
Net realized gain on investments
|
23,748
|
|
|
8,858
|
|
|
Net unrealized appreciation (depreciation) of investments
|
80,917
|
|
|
8,534
|
|
|
Reversal of net unrealized appreciation of investments
|
(26,001)
|
|
|
(11,869)
|
|
|
Amortization of premiums, discounts, and acquisition costs, net
|
14
|
|
|
14
|
|
|
Ending investment portfolio, at fair value
|
$
|
700,738
|
|
|
$
|
610,888
|
|
The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of December 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
For the remaining three months ending March 31:
|
|
2022
|
|
$
|
4,000
|
|
|
For the fiscal years ending March 31:
|
|
2023
|
|
90,950
|
|
|
|
|
2024
|
|
96,168
|
|
|
|
|
2025
|
|
204,187
|
|
|
|
|
2026
|
|
52,250
|
|
|
|
|
Thereafter
|
|
71,246
|
|
|
|
|
Total contractual repayments
|
|
$
|
518,801
|
|
|
|
|
Adjustments to cost basis of debt investments
|
|
(17)
|
|
|
|
|
Investments in equity securities
|
|
156,772
|
|
|
|
|
Total cost basis of investments held as of December 31, 2021:
|
|
$
|
675,556
|
|
Financing Activities
Net cash used in financing activities for the nine months ended December 31, 2021 was $13.0 million, which consisted primarily of the redemption of our Series E Term Preferred Stock of $94.4 million, $27.4 million in distributions to common stockholders, $22.4 million of net repayments under the Credit Facility and $3.4 million of deferred financing and offering costs, partially offset by $134.6 million in gross proceeds from the issuance of our 2028 Notes.
Net cash provided by financing activities for the nine months ended December 31, 2020 was $31.2 million, which consisted primarily of $34.8 million of net borrowings under the Credit Facility, $19.3 million of gross proceeds from the issuance of mandatorily redeemable preferred stock under the then existing Series E ATM Program, and $1.7 million of gross proceeds from the issuance of common stock under the then existing Common Stock ATM Program, partially offset by $23.9 million in distributions to common stockholders.
Distributions and Dividends to Stockholders
Common Stock Distributions
To qualify to be taxed as a RIC and thus avoid corporate level federal income tax on the income we distribute to our stockholders, we are required, among other requirements, to distribute to our stockholders on an annual basis at least 90% of our taxable ordinary income plus the excess of our net short-term capital gains over net long-term capital losses (“Investment Company Taxable Income”), determined without regard to the dividends paid deduction. Additionally, the Credit Facility generally restricts the amount of distributions to stockholders that we can pay out to be no greater than the sum of certain amounts, including our net investment income, plus net capital gains, plus amounts elected by the Company to be considered as having been paid during the prior fiscal year in accordance with Section 855(a) of the Code. In accordance with these requirements, our Board of Directors declared, and we paid, monthly cash distributions of $0.07 per common share for each of the six months from April through September 2021, monthly cash distributions of $0.075 per common share for each of the three months from October through December 2021, and supplemental distributions of $0.06, $0.03, and $0.09 per common share in June, September, and December 2021, respectively. See also “Recent Developments - Distributions and Dividends” for a discussion of cash distributions to common stockholders declared by our Board of Directors in January 2022.
For the fiscal year ended March 31, 2021, Investment Company Taxable Income exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $16.1 million of the first distributions paid subsequent to fiscal year-end as having been paid in the prior year. In addition, for the fiscal year ended March 31, 2021, net capital gains exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $8.5 million of the first distributions paid subsequent to fiscal year-end as having been paid in the prior year. For the year ended March 31, 2021, we recorded $2.0 million of net adjustments for estimated permanent book-tax differences to reflect tax character, which decreased Capital in excess of par value and Accumulated net realized gain in excess of distributions and increased Underdistributed net investment income. For the nine months ended December 31, 2021, we recorded $2.8 million of net adjustments for estimated permanent book-tax differences to reflect tax character, which
decreased Capital in excess of par value and Overdistributed net investment income and increased Accumulated net realized gain in excess of distributions.
Preferred Stock Dividends
Our Board of Directors declared and we paid monthly cash dividends of $0.1328125 per share to holders of our Series E Term Preferred Stock per month from April through July 2021 and $0.07968750 per share of our Series E Term Preferred Stock for the period from August 1, 2021 up to, but excluding, the redemption date of August 19, 2021. In accordance with GAAP, we treat these monthly dividends as an operating expense.
Dividend Reinvestment Plan
Our common stockholders who hold their shares through our transfer agent, Computershare, Inc. (“Computershare”), have the option to participate in a dividend reinvestment plan offered by Computershare, as the plan agent. This is an “opt in” dividend reinvestment plan, meaning that common stockholders may elect to have their cash distributions automatically reinvested in additional shares of our common stock. Common stockholders who do not make such election will receive their distributions in cash. Any distributions reinvested under the plan will be taxable to a common stockholder to the same extent, and with the same character, as if the common stockholder had received the distribution in cash. The common stockholder generally will have an adjusted basis in the additional common shares purchased through the plan equal to the dollar amount that would have been received if the U.S. stockholder had received the dividend or distribution in cash. The additional common shares will have a new holding period commencing on the day following the date on which the shares are credited to the common stockholder’s account. Computershare purchases shares in the open market in connection with the obligations under the plan. The Computershare dividend reinvestment plan is not open to holders of our preferred stock.
Equity
Registration Statement
On September 3, 2021, we filed a registration statement on Form N-2 (File No. 333-259302), which the SEC declared effective on October 15, 2021. The registration statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities, and warrants to purchase common stock, preferred stock, or debt securities, including through concurrent, separate offerings of such securities. As of the date of this report, we have the ability to issue up to $300.0 million of the securities registered under the registration statement.
Common Stock
In December 2019, we entered into equity distribution agreements with Wedbush Securities, Inc., Cantor Fitzgerald & Co., and Ladenburg Thalmann & Co., Inc. (each, a “Common Stock ATM Sales Agent”), under which we have the ability to issue and sell shares of our common stock, from time to time, through the Common Stock ATM Sales Agents, up to an aggregate offering price of $35.0 million in the Common Stock ATM Program. On August 11, 2021, we terminated the equity distribution agreements with each of the Common Stock ATM Sales Agents.
We did not sell any shares of our common stock under the Common Stock ATM Program during the nine months ended December 31, 2021. During the year ended March 31, 2021, we sold 155,560 shares of our common stock under the Common Stock ATM Program at a weighted-average gross price of $11.39 per share and raised approximately $1.8 million of gross proceeds. The weighted-average net price per share, after deducting commissions and offering costs borne by us, was $11.17 and resulted in total net proceeds of approximately $1.7 million. These sales were above our then current estimated NAV per share.
We 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 December 31, 2021, the closing market price of our common stock was $17.08 per share, representing a 28.7% premium to our NAV per share of $13.27 as of December 31, 2021.
Term Preferred Stock
In August 2018, we completed a public offering of 2,990,000 shares of our Series E Term Preferred Stock at a public offering price of $25.00 per share. Gross proceeds totaled $74.8 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were $72.1 million. Total underwriting discounts and offering costs related to this offering were $2.7 million, which have been recorded as discounts to the liquidation value on our accompanying Consolidated Statements of Assets and Liabilities and were amortized over the period ending August 31, 2025, the mandatory redemption date, prior to redemption in August 2021. Prior to redemption in August 2021, the Series E Term Preferred Stock provided for a fixed dividend equal to 6.375% per year, payable monthly.
In May 2020, we entered into sales agreements with Wedbush Securities, Inc. and Virtu Americas LLC (each a “Series E ATM Sales Agent”), under which we have the ability to issue and sell shares of our Series E Term Preferred Stock, from time to time, through the Series E ATM Sales Agents, up to $50.0 million aggregate liquidation preference in the Series E ATM Program. On August 10, 2021, we terminated our sales agreements with each of the Series E ATM Sales Agents.
We did not sell any shares of our Series E Term Preferred Stock under the Series E ATM Program during the nine months ended December 31, 2021. During the year ended March 31, 2021, we sold 784,853 shares of our Series E Term Preferred Stock under the Series E ATM Program with an aggregate liquidation preference of $19.6 million. The weighted-average gross price per share net of discounts was $24.56 and resulted in gross proceeds of approximately $19.3 million. After deducting commissions and offering costs borne by us, net proceeds totaled approximately $19.1 million.
In March 2021, we used a portion of the proceeds from the issuance of our 2026 Notes, to voluntarily redeem all outstanding shares of our Series D Term Preferred Stock, which had a liquidation preference of $25.00 per share. In connection with the voluntary redemption, we incurred a loss on extinguishment of debt of $0.8 million, which was recorded in Realized loss on other in our Consolidated Statements of Operations and which was primarily comprised of unamortized deferred issuance costs at the time of redemption. Prior to redemption in March 2021, the Series D Term Preferred Stock provided for a fixed dividend equal to 6.25% per year, payable monthly, and would have otherwise been subject to mandatory redemption on September 30, 2023.
In August 2021, we used a portion of the proceeds from the issuance of our 2028 Notes, to voluntarily redeem all outstanding shares of our Series E Term Preferred Stock, which had a liquidation preference of $25.00 per share. In connection with the voluntary redemption, we incurred a loss on extinguishment of debt of $2.0 million, which was recorded in Realized loss on other in our accompanying Consolidated Statements of Operations and which was primarily comprised of unamortized deferred issuance costs at the time of redemption.
Revolving Line of Credit
On March 8, 2021, we, through our wholly-owned subsidiary, Gladstone Business Investment, LLC (“Business Investment”), entered into Amendment No. 6 to the Credit Facility with KeyBank National Association (“KeyBank”) as administrative agent, lead arranger, managing agent and lender, the Adviser, as servicer, and certain other lenders party thereto. The revolving period was extended to February 29, 2024, and if not renewed or extended by such date, all principal and interest will be due and payable on February 28, 2026 (two years after the revolving period end date). As of December 31, 2021, the Credit Facility provided two one-year extension options that may be exercised on or before the first and second anniversary of March 8, 2021, subject to approval by all lenders.
On August 10, 2020, we, through Business Investment, entered into Amendment No. 5 to the Credit Facility. Among other things, Amendment No. 5 amended the Credit Facility to (i) add LIBOR replacement language; (ii) implement a 0.5% LIBOR floor; (iii) reduce the facility size from $200.0 million to $180.0 million, which may be expanded to $300.0 million through additional commitments; and (iv) provide certain other changes to existing terms and covenants.
Advances under the Credit Facility generally bear interest at 30-day LIBOR, subject to a floor of 0.5%, plus 2.85% per annum until February 29, 2024, with the margin then increasing to 3.10% for the period from February 29, 2024 to February 28, 2025, and increasing further to 3.35% thereafter. The Credit Facility has an unused commitment fee on the daily unused commitment amount of 0.50% per annum if the average unused commitment amount for the period is less than or equal to 50% of the total commitment amount, 0.75% per annum if the average unused commitment amount for the period is greater than 50% but less than or equal to 65% of the total commitment amount, and 1.00% per annum if the average unused commitment amount for the period is greater than 65% of the total commitment amount. At December 31, 2021, we had no borrowings outstanding on 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 (defined in the Credit Facility to include our mandatory redeemable term preferred stock) of the greater of $210.0 million or $210.0 million plus 50% of all equity and subordinated debt raised, minus 50% of any equity or subordinated debt redeemed or retired after November 16, 2016, which equated to $286.3 million as of December 31, 2021, (ii) asset coverage with respect to senior securities representing indebtedness of at least 150% (or such percentage as may be set forth in Section 18 of the 1940 Act, as modified by Section 61 of the 1940 Act), and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code. As of December 31, 2021, and as defined in the performance guaranty of the Credit Facility, we had a net worth of $695.5 million, asset coverage on our senior securities representing indebtedness of 259.5%, calculated in compliance with the requirements of Sections 18 and 61 of the 1940 Act, and an active status as a BDC and RIC. As of December 31, 2021, we had availability, after adjustments for various constraints based on collateral quality, of $179.4 million under the Credit Facility and were in compliance with all covenants under the Credit Facility.
Notes Payable
5.00% Notes due 2026
In March 2021, we completed a public offering of the 2026 Notes with an aggregate principal amount of $127.9 million, which resulted in net proceeds of approximately $123.8 million after deducting underwriting discounts, commissions and offering costs borne by us. The 2026 Notes are traded under the ticker symbol “GAINN” on Nasdaq. The 2026 Notes will mature on May 1, 2026 and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after May 1, 2023. The 2026 Notes bear interest at a rate of 5.00% per year (which equates to $6.4 million per year), payable quarterly in arrears.
The indenture relating to the 2026 Notes contains certain covenants, including (i) an inability to incur additional debt or issue additional debt or preferred securities unless the Company’s asset coverage meets the threshold specified in the 1940 Act after such borrowing, (ii) an inability to declare any dividend or distribution (except a dividend payable in our stock) on a class of our capital stock or to purchase shares of our capital stock unless the Company’s asset coverage meets the threshold specified in the 1940 Act at the time of (and giving effect to) such declaration or purchase, and (iii) if, at any time, we are not subject to the reporting requirements of the Exchange Act, we will provide the holders of the 2026 Notes, as applicable, and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements.
The 2026 Notes are recorded at the aggregate principal amount, less underwriting discounts, commissions, and offering costs, on our accompanying Consolidated Statements of Assets and Liabilities. Total underwriting discounts, commissions, and offering costs related to this offering were $4.1 million, which have been recorded as discounts to the aggregate principal amount on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized over the period ending May 1, 2026, the maturity date.
4.875% Notes due 2028
In August 2021, we completed a public offering of the 2028 Notes with an aggregate principal amount of $134.6 million, which resulted in net proceeds of approximately $131.3 million after deducting underwriting discounts, commissions and offering costs borne by us. The 2028 Notes are traded under the ticker symbol “GAINZ” on Nasdaq. The 2028 Notes will mature on November 1, 2028 and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after November 1, 2023. The 2028 Notes bear interest at a rate of 4.875% per year (which equates to $6.6 million per year), payable quarterly in arrears.
The indenture relating to the 2028 Notes contains certain covenants, including (i) an inability to incur additional debt or issue additional debt or preferred securities unless the Company’s asset coverage meets the threshold specified in the 1940 Act after such borrowing, (ii) an inability to declare any dividend or distribution (except a dividend payable in our stock) on a class of our capital stock or to purchase shares of our capital stock unless the Company’s asset coverage meets the threshold specified in the 1940 Act at the time of (and giving effect to) such declaration or purchase, and (iii) if, at any time, we are not subject to the reporting requirements of the Exchange Act, we will provide the holders of the 2028 Notes, as applicable, and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements.
The 2028 Notes are recorded at the aggregate principal amount, less underwriting discounts, commissions, and offering costs, on our accompanying Consolidated Statements of Assets and Liabilities. Total underwriting discounts, commissions, and offering costs related to this offering were $3.3 million, which have been recorded as discounts to the aggregate principal amount on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized over the period ending November 1, 2028, the maturity date.
OFF-BALANCE SHEET ARRANGEMENTS
Unlike PIK income, we generally do not recognize success fees as income until payment has been received. Due to the contingent nature of success fees, there are no guarantees that we will be able to collect any or all of these success fees or know the timing of any such collections. As a result, as of December 31, 2021 and March 31, 2021, we had unrecognized, contractual off-balance sheet success fee receivables of $49.3 million and $46.2 million (or approximately $1.48 and $1.39 per common share), respectively, on our debt investments. Consistent with GAAP, we have not recognized success fee receivables and related income in our accompanying Consolidated Financial Statements until earned.
CONTRACTUAL OBLIGATIONS
We have line of credit and delayed draw term loan commitments to certain of our portfolio companies that have not been fully drawn. Since these line of credit and delayed draw term loan commitments have expiration dates and we expect many will never be fully drawn, the total line of credit and delayed draw term loan commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of the combined unused line of credit and delayed draw term loan commitments as of December 31, 2021 to be immaterial.
As of December 31, 2021, we have also extended a guaranty on behalf of one of our portfolio companies, Country Club Enterprises, LLC (“CCE”), whereby we have guaranteed $1.0 million of CCE’s obligations. As of December 31, 2021, we have not been required to make payments on this or any previous guaranties, and we consider the credit risks to be remote and the fair value of this guaranty to be immaterial.
The following table shows our contractual obligations as of December 31, 2021, at cost/liquidation preference:
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Payments Due by Period
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Contractual Obligations(A)
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Total
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Less than
1 Year
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1-3 Years
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3-5 Years
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More than
5 Years
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Credit Facility(B)
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$
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—
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$
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—
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$
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—
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$
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—
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$
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—
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Notes payable
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262,488
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—
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|
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—
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|
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127,938
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|
|
134,550
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Secured borrowing
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|
5,096
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|
|
—
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|
|
—
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|
|
5,096
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—
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Interest payments on obligations(C)
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81,231
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15,143
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30,292
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23,771
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12,025
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Total
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$
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348,815
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$
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15,143
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$
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30,292
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$
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156,805
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$
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146,575
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(A)Excludes unused line of credit and delayed draw term loan commitments and guaranties to our portfolio companies in the aggregate principal amount of $5.6 million.
(B)Principal balance of borrowings outstanding under the Credit Facility, based on the maturity date following the current contractual revolving period end date.
(C)Includes interest payments due on the Credit Facility, 2026 Notes, 2028 Notes, and secured borrowing, as applicable. The amount of interest payments calculated for purposes of this table was based upon rates and outstanding balances as of December 31, 2021.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported consolidated amounts of assets and liabilities, including disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ materially from those estimates under different assumptions or conditions. We have identified our investment valuation policy (which has been approved by our Board of Directors) as our most critical accounting policy, which is described in Note 2 — Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report. Additionally, refer to Note 3 — Investments in the accompanying Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report for additional information regarding fair value measurements and our application of Financial Accounting Standards Board Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures.” We have also identified our revenue recognition policy as a critical accounting policy, which is described in Note 2 — Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report.
Investment Valuation
Credit Monitoring and Risk Rating
The Adviser monitors a wide variety of key credit statistics that provide information regarding our portfolio companies to help us assess credit quality and portfolio performance and, in some instances, are used as inputs in our valuation techniques. Generally, we, through the Adviser, participate in periodic board meetings of our portfolio companies in which we hold board seats and also require them to provide annual audited and monthly unaudited financial statements. Using these statements or comparable information and board discussions, the Adviser calculates and evaluates certain credit statistics.
The Adviser risk rates all of our investments in debt securities. The Adviser does not risk rate equity securities. For loans that have been rated by a SEC-registered Nationally Recognized Statistical Rating Organization (“NRSRO”), the Adviser generally uses the average of two corporate level 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 December 31, 2021 and March 31, 2021:
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Rating
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December 31, 2021
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March 31, 2021
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Highest
|
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9.0
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|
9.0
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Average
|
|
6.6
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|
6.2
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Weighted-average
|
|
6.6
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6.6
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Lowest
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3.0
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4.0
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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 December 31, 2021 and March 31, 2021.
Recent Accounting Pronouncements
Refer to Note 2 — Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report for a description of recent accounting pronouncements.