NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND AS OTHERWISE INDICATED)
(UNAUDITED)
NOTE 1. ORGANIZATION
Gladstone Investment Corporation (“Gladstone Investment”) was incorporated under the General Corporation Law of the State of Delaware on February 18, 2005, and completed an initial public offering on June 22, 2005. The terms “the Company,” “we,” “our” and “us” all refer to Gladstone Investment and its consolidated subsidiaries. We are an externally advised, closed-end, non-diversified management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), and are applying the guidance of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, “Financial Services-Investment Companies” (“ASC 946”). In addition, we have elected to be treated for U.S. federal income tax purposes as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”). We were established for the purpose of investing in debt and equity securities of established private businesses in the United States (“U.S.”). Debt investments primarily take the form of two types of loans: secured first lien loans and secured second lien loans. Equity investments primarily take the form of preferred or common equity (or warrants or options to acquire the foregoing), often in connection with buyouts and other recapitalizations. 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 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. We intend that our investment portfolio over time will consist of approximately 75.0% in debt investments and 25.0% in equity investments, at cost. As of June 30, 2022, our investment portfolio was comprised of 72.9% in debt investments and 27.1% in equity investments, at cost.
Gladstone Business Investment, LLC (“Business Investment”), a wholly-owned subsidiary of ours, was established on August 11, 2006 for the sole purpose of holding certain investments pledged as collateral under our line of credit. The financial statements of Business Investment are consolidated with those of Gladstone Investment.
We are externally managed by Gladstone Management Corporation (the “Adviser”), an affiliate of ours and a U.S. Securities and Exchange Commission (“SEC”) registered investment adviser, pursuant to an investment advisory and management agreement (the “Advisory Agreement”). Administrative services are provided by Gladstone Administration, LLC (the “Administrator”), an affiliate of ours and the Adviser, pursuant to an administration agreement (the “Administration Agreement”). Refer to Note 4 — Related Party Transactions for more information regarding these arrangements.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Statements and Basis of Presentation
We prepare our interim financial statements in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Articles 6, 10 and 12 of SEC Regulation S-X. Accordingly, we have not included in this quarterly report all of the information and notes required by GAAP for annual financial statements. The accompanying Consolidated Financial Statements include our accounts and those of our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. In accordance with Article 6 of Regulation S-X, we do not consolidate portfolio company investments. Under the investment company rules and regulations pursuant to the American Institute of Certified Public Accountants Audit and Accounting Guide for Investment Companies, codified in ASC 946, we are precluded from consolidating any entity other than another investment company, except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries. In our opinion, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. The results of operations for the three months ended June 30, 2022 are not necessarily indicative of results that ultimately may be achieved for the fiscal year ending March 31, 2023 or any future interim period. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes
thereto included in our annual report on Form 10-K for the fiscal year ended March 31, 2022, as filed with the SEC on May 11, 2022.
Use of Estimates
Preparing financial statements requires management to make estimates and assumptions that affect the amounts reported in our accompanying Consolidated Financial Statements and these Notes to Consolidated Financial Statements. Actual results may differ from those estimates.
Investment Valuation Policy
Accounting Recognition
We record our investments at fair value in accordance with the FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) and the 1940 Act. Investment transactions are recorded on the trade date. Realized gains or losses are generally measured by the difference between the net proceeds from the repayment or sale and the cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, and include investments charged off during the period, net of recoveries. Unrealized appreciation or depreciation primarily reflects the change in investment fair values, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.
Board Responsibility
In accordance with the 1940 Act, our board of directors (“Board of Directors”) has the ultimate responsibility for reviewing and determining, in good faith, the fair value of our investments for which market quotations are not readily available based on our investment valuation policy (which has been approved by our Board of Directors) (the “Policy”). Such review occurs in three phases. First, prior to its quarterly meetings, the Board of Directors receives written valuation recommendations and supporting materials provided by professionals of the Adviser and Administrator with oversight and direction from the chief valuation officer (the “Valuation Team”). Second, the Valuation Committee of our Board of Directors (comprised entirely of independent directors) meets to review the valuation recommendations and supporting materials, discusses the information provided by the Valuation Team, determines whether the Valuation Team has followed the Policy, determines whether the Valuation Team’s recommended fair value is reasonable in light of the Policy, and reviews other facts and circumstances. Third, after the Valuation Committee concludes its meeting, it and the chief valuation officer present the Valuation Committee’s findings to the entire Board of Directors so that the full Board of Directors may review and determine in good faith the fair value of such investments in accordance with the Policy.
There is no single standard for determining fair value (especially for privately-held businesses), as fair value depends upon the specific facts and circumstances of each individual investment. In determining the fair value of our investments, the Valuation Team, led by the chief valuation officer, uses the Policy, and each quarter the Valuation Committee and Board of Directors review the Policy to determine if changes thereto are advisable and whether the Valuation Team has applied the Policy consistently.
Use of Third-Party Valuation Firms
The Valuation Team engages third-party valuation firms to provide independent assessments of fair value of certain of our investments.
ICE Data Pricing and Reference Data, LLC (“ICE”), a valuation specialist, generally provides estimates of fair value on our debt investments. The Valuation Team generally assigns ICE’s estimates of fair value to our debt investments where we do not have the ability to effectuate a sale of the applicable portfolio company. The Valuation Team corroborates ICE’s estimates of fair value using one or more of the valuation techniques discussed below. The Valuation Team’s estimate of value on a specific debt investment may significantly differ from ICE’s. When this occurs, our Valuation Committee and Board of Directors review whether the Valuation Team has followed the Policy and whether the Valuation Team’s recommended fair value is reasonable in light of the Policy and other facts and circumstances before determining fair value.
We may engage other independent valuation firms to provide earnings multiple ranges, as well as other information, and evaluate such information for incorporation into the total enterprise value (“TEV”) of certain of our investments. Generally, at least once per year, we engage an independent valuation firm to value or review the valuation of each of our significant equity investments, which includes providing the information noted above. The Valuation Team evaluates such information for incorporation into our TEV, including review of all inputs provided by the independent valuation firm. The Valuation Team then makes a recommendation to our Valuation Committee and Board of Directors as to the fair value. Our Board of Directors reviews the recommended fair value and whether it is reasonable in light of the Policy and other relevant facts and circumstances before determining fair value.
Valuation Techniques
In accordance with ASC 820, the Valuation Team uses the following techniques when valuing our investment portfolio:
•Total Enterprise Value — In determining the fair value using a TEV, the Valuation Team first calculates the TEV of the portfolio company by incorporating some or all of the following factors: the portfolio company’s ability to make payments and other specific portfolio company attributes; the earnings of the portfolio company (the trailing or projected twelve month revenue or earnings before interest, taxes, depreciation and amortization (“EBITDA”)); EBITDA multiples obtained from our indexing methodology whereby the original transaction EBITDA multiple at the time of our closing is indexed to a general subset of comparable disclosed transactions and EBITDA multiples from recent sales to third parties of similar securities in similar industries; a comparison to publicly traded securities in similar industries; and other pertinent factors. The Valuation Team generally reviews industry statistics and may use outside experts when gathering this information. Once the TEV is determined for a portfolio company, the Valuation Team generally allocates the TEV to the portfolio company’s securities based on the facts and circumstances of the securities, which typically results in the allocation of fair value to securities based on the order of their relative priority in the capital structure. Generally, the Valuation Team uses TEV to value our equity investments and, in the circumstances where we have the ability to effectuate a sale of a portfolio company, our debt investments.
TEV is primarily calculated using EBITDA and EBITDA multiples; however, TEV may also be calculated using revenue and revenue multiples or a discounted cash flow (“DCF”) analysis whereby future expected cash flows of the portfolio company are discounted to determine a net present value using estimated risk-adjusted discount rates, which incorporate adjustments for nonperformance and liquidity risks. Generally, the Valuation Team uses a DCF analysis to calculate TEV to corroborate estimates of value for our equity investments where we do not have the ability to effectuate a sale of a portfolio company or for debt of credit-impaired portfolio companies.
•Yield Analysis — The Valuation Team generally determines the fair value of our debt investments for which we do not have the ability to effectuate a sale of the applicable portfolio company using the yield analysis, which includes a DCF calculation and assumptions that the Valuation Team believes market participants would use, including: estimated remaining life, current market yield, current leverage, and interest rate spreads. This technique develops a modified discount rate that incorporates risk premiums including, among other things, increased probability of default, increased loss upon default, and increased liquidity risk. Generally, the Valuation Team uses the yield analysis to corroborate both estimates of value provided by ICE and market quotes.
•Market Quotes — For our investments for which a limited market exists, we generally base fair value on readily available and reliable market quotations, which are corroborated by the Valuation Team (generally by using the yield analysis described above). In addition, the Valuation Team assesses trading activity for similar investments and evaluates variances in quotations and other market insights to determine if any available quoted prices are reliable. Typically, the Valuation Team uses the lower indicative bid price in the bid-to-ask price range obtained from the respective originating syndication agent’s trading desk on or near the valuation date. The Valuation Team may take further steps to consider additional information to validate that price in accordance with the Policy. For securities that are publicly traded, we generally base fair value on the closing market price of the securities we hold as of the reporting date. For restricted securities that are publicly traded, we generally base fair value on the closing market price of the securities we hold as of the reporting date less a discount for the restriction, which includes consideration of the nature and term to expiration of the restriction.
•Investments in Funds — For equity investments in other funds for which we cannot effectuate a sale of the fund, the Valuation Team generally determines the fair value of our invested capital at the net asset value (“NAV”) provided by the fund. Any invested capital that is not yet reflected in the NAV provided by the fund is valued at par value. The Valuation Team may also determine fair value of our investments in other investment funds based on the capital accounts of the underlying entity.
In addition to the valuation techniques listed above, the Valuation Team may also consider other factors when determining the fair value of our investments, including: the nature and realizable value of the collateral, including external parties’ guaranties, any relevant offers or letters of intent to acquire the portfolio company, timing of expected loan repayments, and the markets in which the portfolio company operates.
Fair value measurements of our investments may involve subjective judgments and estimates and, due to the uncertainty inherent in valuing these securities, the determinations of fair value may fluctuate from period to period and may differ materially from the values that could be obtained if a ready market for these securities existed. Our NAV could be materially affected if the determinations regarding the fair value of our investments are materially different from the values that we ultimately realize upon our disposal of such securities. Additionally, changes in the market environment and other events that may occur over the life of the investment may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which it is recorded.
Refer to Note 3 — Investments for additional information regarding fair value measurements and our application of ASC 820.
Revenue Recognition
Interest Income Recognition
Interest income, adjusted for amortization of premiums, amendment fees and acquisition costs and the accretion of discounts, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due, or if our qualitative assessment indicates that the debtor is unable to service its debt or other obligations, we will place the loan on non-accrual status and cease recognizing interest income on that loan until the borrower has demonstrated the ability and intent to pay contractual amounts due. However, we remain contractually entitled to this interest. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis, depending upon management’s judgment. Generally, non-accrual loans are restored to accrual status when past-due principal and interest are paid and, in management’s judgment, are likely to remain current, or, due to a restructuring, the interest income is deemed to be collectible. As of June 30, 2022, our loans to J.R. Hobbs Co. – Atlanta, LLC (“J.R. Hobbs”), The Mountain Corporation (“The Mountain”), and SFEG Holdings, Inc. ("SFEG") were on non-accrual status, with an aggregate debt cost basis of $77.3 million, or 16.5% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $53.1 million, or 11.9% of the fair value of all debt investments in our portfolio. As of March 31, 2022, our loans to J.R. Hobbs, The Mountain, and SFEG were on non-accrual status, with an aggregate debt cost basis of $77.2 million, or 15.1% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $60.0 million, or 12.2% of the fair value of all debt investments in our portfolio.
Paid-in-kind (“PIK”) interest, computed at the contractual rate specified in the loan agreement, is added to the principal balance of the loan and recorded as interest income. As of June 30, 2022 and March 31, 2022, we did not have any loans with a PIK interest component.
Success Fee Income Recognition
We record success fees as income when earned, which often occurs upon receipt of cash. Success fees are generally contractually due upon a change of control in a portfolio company, typically resulting from an exit or sale, and are non-recurring.
Dividend Income Recognition
We accrue dividend income on preferred and common equity securities to the extent that such amounts are expected to be collected and if we have the option to collect such amounts in cash or other consideration.
Related Party Fees
We are party to the Advisory Agreement with the Adviser, which is owned and controlled by our chairman and chief executive officer. In accordance with the Advisory Agreement, we pay the Adviser fees as compensation for its services, consisting of a base management fee and an incentive fee. Additionally, we pay the Adviser a loan servicing fee as compensation for its services as servicer under the terms of the Fifth Amended and Restated Credit Agreement dated April 30, 2013, as amended (the "Credit Facility").
We are also party to the Administration Agreement with the Administrator, which is owned and controlled by our chairman and chief executive officer, whereby we pay separately for administrative services.
Refer to Note 4 — Related Party Transactions for additional information regarding these related party fees and agreements.
NOTE 3. INVESTMENTS
Fair Value
In accordance with ASC 820, we determine the fair value of our investments to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between willing market participants on the measurement date. This fair value definition focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of a financial instrument as of the measurement date.
•Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical financial instruments in active markets;
•Level 2 — inputs to the valuation methodology include quoted prices for similar financial instruments in active or inactive markets, and inputs that are observable for the financial instrument, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists, or instances where prices vary substantially over time or among brokered market makers; and
•Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are those inputs that reflect assumptions that market participants would use when pricing the financial instrument and can include the Valuation Team’s assumptions based upon the best available information.
When a determination is made to classify our investments within Level 3 of the valuation hierarchy, such determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (or components that are actively quoted and can be validated to external sources). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement.
As of June 30, 2022 and March 31, 2022, all of our investments were valued using Level 3 inputs within the ASC 820 fair value hierarchy, except for our investment in Funko Acquisition Holdings, LLC (“Funko”), which was valued using Level 2 inputs.
We transfer investments in and out of Level 1, 2 and 3 of the valuation hierarchy as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. There were no transfers in or out of Level 1, 2 and 3 during the three months ended June 30, 2022 and 2021, respectively.
As of June 30, 2022 and March 31, 2022, our investments, by security type, at fair value were categorized as follows within the ASC 820 fair value hierarchy:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements |
| | | | | | | |
| Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
As of June 30, 2022: | | | | | | | |
Secured first lien debt | $ | 376,752 | | | $ | — | | | $ | — | | | $ | 376,752 | |
Secured second lien debt | 67,936 | | | — | | | — | | | 67,936 | |
Preferred equity | 238,665 | | | — | | | — | |
| 238,665 | |
Common equity/equivalents | 6,160 | | | — | |
| 88 | | (A) | 6,072 | |
Total Investments as of June 30, 2022 | $ | 689,513 | | | $ | — | | | $ | 88 | | | $ | 689,425 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements |
| | | | | | | |
| Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
As of March 31, 2022: | | | | | | | |
Secured first lien debt | $ | 425,087 | | | $ | — | | | $ | — | | | $ | 425,087 | |
Secured second lien debt | 67,958 | | | — | | | — | | | 67,958 | |
Preferred equity | 217,599 | | | — | | | — | | | 217,599 | |
Common equity/equivalents | 3,752 | | | — | | | 74 | | (A) | 3,678 | |
Total Investments as of March 31, 2022 | $ | 714,396 | | | $ | — | | | $ | 74 | | | $ | 714,322 | |
(A)Fair value was determined based on the closing market price of shares of Funko, Inc. (our units in Funko can be converted into common shares of Funko, Inc.) at the reporting date less a discount for lack of marketability, as our investment was subject to certain restrictions.
The following table presents our investments, valued using Level 3 inputs within the ASC 820 fair value hierarchy, and carried at fair value as of June 30, 2022 and March 31, 2022, by caption on our accompanying Consolidated Statements of Assets and Liabilities, and by security type:
| | | | | | | | | | | |
| Total Recurring Fair Value Measurements Reported in Consolidated Statements of Assets and Liabilities Valued Using Level 3 Inputs |
| June 30, 2022 | | March 31, 2022 |
| Non-Control/Non-Affiliate Investments | | | |
| Secured first lien debt | $ | 192,304 | | | $ | 233,673 | |
| Secured second lien debt | 67,936 | | | 66,917 | |
| Preferred equity | 148,707 | | | 139,927 | |
Common equity/equivalents(A) | 1,882 | | | 1,533 | |
| Total Non-Control/Non-Affiliate Investments | 410,829 | | | 442,050 | |
| | | |
| Affiliate Investments | | | |
| Secured first lien debt | 184,448 | | | 191,414 | |
| Secured second lien debt | — | | | 1,041 | |
| Preferred equity | 68,958 | | | 77,672 | |
| Common equity/equivalents | 3,477 | | | 1,432 | |
| Total Affiliate Investments | 256,883 | | | 271,559 | |
| | | |
| Control Investments | | | |
| Secured first lien debt | — | | | — | |
| Secured second lien debt | — | | | — | |
| Preferred equity | 21,000 | | | — | |
| Common equity/equivalents | 713 | | | 713 | |
| Total Control Investments | 21,713 | | | 713 | |
| | | |
| Total investments at fair value using Level 3 inputs | $ | 689,425 | | | $ | 714,322 | |
(A)Excludes our investment in Funko with a fair value of $88 thousand and $74 thousand as of June 30, 2022 and March 31, 2022, respectively, which was valued using Level 2 inputs.
In accordance with ASC 820, the following table provides quantitative information about our investments valued using Level 3 fair value measurements as of June 30, 2022 and March 31, 2022. The table below is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements. The weighted-average calculations in the table below are based on the principal balances for all debt-related calculations and on the cost basis for all equity-related calculations for the particular input.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quantitative Information about Level 3 Fair Value Measurements |
| Fair Value as of | | Valuation
Technique/
Methodology | | Unobservable
Input | | Range / Weighted-Average as of |
| June 30,
2022 | | March 31,
2022 | | | | June 30,
2022 | | March 31,
2022 |
Secured first
lien debt | $ | 362,511 | | | $ | 411,023 | | | TEV | | EBITDA multiple | | 3.4x – 8.0x / 6.7x | | 3.4x – 9.3x / 7.0x |
| | | | | | | EBITDA | | $3,963–$15,692 / $8,655 | | $3,990 – $13,707/$8,221
|
| | | | | | | Revenue multiple | | 0.25x –0.5x / 0.27x | | 0.7x – 0.7x / 0.7x |
| | | | | | | Revenue | | $13,357 – $87,718 / $81,224 | | $14,072 – $14,072 /$14,072
|
| 14,241 | | | 14,064 | | | Yield Analysis | | Discount Rate | | 12.4% – 15.9% / 15.3% | | 11.3% – 15.2% / 14.6%
|
Secured second
lien debt | 53,459 | | | 39,637 | | | TEV | | EBITDA multiple | | 5.4x – 6.5x / 5.8x | | 5.6x – 6.8x / 6.0x |
| | | | | | | EBITDA | | $3,767 – $5,319 / $4,881 | | $3,953 – $5,488 /$4,959
|
| | | | | | | Revenue multiple | | 0.5x –0.5x / 0.5x | | 0.7x – 0.7x / 0.7x |
| | | | | | | Revenue | | $13,357 – $13,357 / $13,357 | | $14,072 – $14,072 /$14,072
|
| 14,477 | | | 28,321 | | | Yield Analysis | | Discount Rate | | 10.1% –11.3% / 11.2% | | 10.0% – 12.2% /11.6% |
Preferred equity(A) | 238,665 | | | 217,599 | | | TEV | | EBITDA multiple | | 2.9x – 8.0x / 6.1x | | 3.4x – 9.3x / 6.8 x |
| | | | | | | EBITDA | | $796 – $15,692 / $7,065 | | $1,210– $13,707 / $6,926
|
| | | | | | | Revenue multiple | | 0.25x – 0.5x / 0.35x | | 0.7x – 0.7x / 0.7x |
| | | | | | | Revenue | | $13,357 – $87,718 / $58,927 | | $14,072 – $14,072 /$14,072
|
Common equity/ equivalents(B) | 6,072 | | | 3,678 | | | TEV | | EBITDA multiple | | 4.6x – 8.0x / 5.6x | | 4.8x – 8.4x / 5.8 x |
| | | | | | | EBITDA | | $838 – $15,692 / $5,944 | | $829 – $13,707 /$5,709
|
| | | | | | | Revenue multiple | | 0.5x – 0.5x / 0.5x | | 0.7x – 0.7x / 0.7 x |
| | | | | | | Revenue | | $13,357 – $13,357 / $13,357 | | $14,072 – $14,072 /$14,072 |
| Total | $ | 689,425 | | | $ | 714,322 | | | | | | | | | |
(A)Fair value as of June 30, 2022 includes one new proprietary equity investment for $21.0 million, which was valued at cost using the transaction price as the unobservable input.
(B)Fair value as of both June 30, 2022 and March 31, 2022 excludes our investment in Funko with a fair value of $88 thousand and $74 thousand, respectively, which was valued using Level 2 inputs.
Fair value measurements can be sensitive to changes in one or more of the valuation inputs. Changes in discount rates, EBITDA or EBITDA multiples (or revenue or revenue multiples), each in isolation, may change the fair value of certain of our investments. Generally, an increase/(decrease) in discount rates or a (decrease)/increase in EBITDA or EBITDA multiples (or revenue or revenue multiples) may result in a (decrease)/increase in the fair value of certain of our investments.
Changes in Level 3 Fair Value Measurements of Investments
The following tables provide our portfolio’s changes in fair value, broken out by security type, during the three months ended June 30, 2022 and 2021 for all investments for which the Adviser determines fair value using unobservable (Level 3) inputs.
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Secured
First Lien
Debt | | Secured
Second Lien
Debt | | Preferred Equity | | Common
Equity/
Equivalents | | Total |
Three Months ended June 30, 2022: | | | | | | | | | |
| Fair value as of March 31, 2022 | $ | 425,087 | | | $ | 67,958 | | | $ | 217,599 | | | $ | 3,678 | | | $ | 714,322 | |
Total gain (loss): | | | | | | | | | |
Net realized gain (loss)(A) | — | | | — | | | 4,728 | | | — | | | 4,728 | |
Net unrealized appreciation (depreciation)(B) | (7,135) | | | (27) | | | 17,216 | | | 2,394 | | | 12,448 | |
Reversal of previously recorded (appreciation) depreciation upon realization(B) | — | | | — | | | (12,250) | | | — | | | (12,250) | |
New investments, repayments and settlements(C): | | | | | | | | | |
Issuances / originations | 6,800 | | | 5 | | | 21,000 | | | | | 27,805 | |
Settlements / repayments | (48,000) | | | — | | | — | | | — | | | (48,000) | |
Sales | — | | | — | | | (9,628) | | | — | | | (9,628) | |
Transfers(D) | — | | | — | | | — | | | — | | | — | |
Fair value as of June 30, 2022 | $ | 376,752 | | | $ | 67,936 | | | $ | 238,665 | | | $ | 6,072 | | | $ | 689,425 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Secured First Lien Debt | | Secured Second Lien Debt | | Preferred Equity | | Common Equity/ Equivalents | | Total |
Three Months ended June 30, 2021: | | | | | | | | | |
| Fair value as of March 31, 2021 | $ | 368,688 | | | $ | 102,897 | | | $ | 159,478 | | | $ | 2,671 | | | $ | 633,734 | |
Total gain (loss): | | | | | | | | | |
Net realized gain (loss)(A) | — | | | — | | | 1,786 | | | — | | | 1,786 | |
Net unrealized appreciation (depreciation)(B) | 5,850 | | | 27 | | | 42,855 | | | (650) | | | 48,082 | |
Reversal of previously recorded (appreciation) depreciation upon realization(B) | 60 | | | — | | | (628) | | | — | | | (568) | |
New investments, repayments and settlements(C): | | | | | | | | | |
Issuances / originations | 4,050 | | | 6,505 | | | 6,600 | | | — | | | 17,155 | |
Settlements / repayments | (14,060) | | | — | | | — | | | — | | | (14,060) | |
Sales | — | | | — | | | (7,626) | | | — | | | (7,626) | |
Transfers(D) | 52,385 | | | (52,385) | | | — | | | — | | | — | |
Fair value as of June 30, 2021 | $ | 416,973 | | | $ | 57,044 | | | $ | 202,465 | | | $ | 2,021 | | | $ | 678,503 | |
(A)Included in net realized gain (loss) on investments on our accompanying Consolidated Statements of Operations for the respective periods ended June 30, 2022 and 2021.
(B)Included in net unrealized appreciation (depreciation) of investments on our accompanying Consolidated Statements of Operations for the respective periods ended June 30, 2022 and 2021.
(C)Includes increases in the cost basis of investments resulting from new portfolio investments, the amortization of discounts and other non-cash disbursements to portfolio companies, as well as decreases in the cost basis of investments resulting from principal repayments or sales, the amortization of premiums and acquisition costs, and other cost-basis adjustments.
(D)2021: Transfers represent secured second lien debt of J.R. Hobbs with a total cost basis and fair value of $52.5 million and $52.4 million, respectively, which was converted into secured first lien debt during the three months ended June 30, 2021.
Investment Activity
During the three months ended June 30, 2022, the following significant transactions occurred:
•In May 2022, we invested an additional $6.4 million in the form of secured first lien debt in Nocturne Villa Rentals, Inc. ("Nocturne") to fund an add-on acquisition.
•In June 2022, we sold our investment in Bassett Creek Services, Inc. ("Bassett Creek"), which resulted in success fee income of $3.0 million and a realized gain on preferred equity of $4.7 million. In connection with the sale, we received net cash proceeds of $57.6 million, including the repayment of our debt investment of $48.0 million at par.
•In June 2022, we invested $21.0 million in a new portfolio company, Dema/Mai Holdings, Inc. (“Dema/Mai”), in the form of preferred equity to acquire Mai Mechanical, LLC, a leading provider of plumbing and mechanical services focused on multi-family residential construction headquartered in Denver, Colorado, from J.R. Hobbs, an existing portfolio company. Refer to Note 13 – Subsequent Events for discussion of add-on investment activity in Dema/Mai that occurred subsequent to June 30, 2022.
Investment Concentrations
As of June 30, 2022, our investment portfolio consisted of investments in 26 portfolio companies located in 18 states across 15 different industries with an aggregate fair value of $689.5 million. Our investments in Old World Christmas, Inc., Horizon Facilities Services, Inc. ("Horizon"), Counsel Press, Inc., Brunswick Bowling Products, Inc., and Nocturne represented our five largest portfolio investments at fair value and collectively comprised $281.4 million, or 40.8%, of our total investment portfolio at fair value as of June 30, 2022.
The following table summarizes our investments by security type as of June 30, 2022 and March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | March 31, 2022 |
| Cost | | Fair Value | | Cost | | Fair Value |
| Secured first lien debt | $ | 388,257 | | 60.3 | % | | $ | 376,752 | | 54.6 | % | | $ | 429,457 | | 64.2 | % | | $ | 425,087 | | 59.5 | % |
| Secured second lien debt | 81,152 | | 12.6 | % | | 67,936 | | 9.9 | % | | 81,147 | | 12.1 | % | | 67,958 | | 9.5 | % |
| Total debt | 469,409 | | 72.9 | % | | 444,688 | | 64.5 | % | | 510,604 | | 76.3 | % | | 493,045 | | 69.0 | % |
| | | | | | | | | | | |
| Preferred equity | 159,179 | | 24.7 | % | | 238,665 | | 34.6 | % | | 143,079 | | 21.4 | % | | 217,599 | | 30.5 | % |
| Common equity/equivalents | 15,565 | | 2.4 | % | | 6,160 | | 0.9 | % | | 15,565 | | 2.3 | % | | 3,752 | | 0.5 | % |
| Total equity/equivalents | 174,744 | | 27.1 | % | | 244,825 | | 35.5 | % | | 158,644 | | 23.7 | % | | 221,351 | | 31.0 | % |
Total investments | $ | 644,153 | | 100.0 | % | | $ | 689,513 | | 100.0 | % | | $ | 669,248 | | 100.0 | % | | $ | 714,396 | | 100.0 | % |
Investments at fair value consisted of the following industry classifications as of June 30, 2022 and March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | March 31, 2022 |
| Fair Value | | Percentage of
Total Investments | | Fair Value | | Percentage of Total Investments |
| Diversified/Conglomerate Services | $ | 254,568 | | | 36.9 | % | | $ | 307,403 | | | 43.0 | % |
| Home and Office Furnishings, Housewares, and Durable Consumer Products | 126,819 | | | 18.4 | % | | 125,440 | | | 17.6 | % |
| Hotels, Motels, Inns, and Gaming | 50,421 | | | 7.3 | % | | 37,923 | | | 5.3 | % |
| Leisure, Amusement, Motion Pictures, and Entertainment | 45,880 | | | 6.6 | % | | 46,514 | | | 6.5 | % |
| Healthcare, Education, and Childcare | 38,313 | | | 5.6 | % | | 39,252 | | | 5.5 | % |
| Chemicals, Plastics, and Rubber | 26,618 | | | 3.9 | % | | 26,618 | | | 3.7 | % |
| Telecommunications | 26,234 | | | 3.8 | % | | 32,467 | | | 4.6 | % |
| Aerospace and Defense | 25,296 | | | 3.6 | % | | 25,296 | | | 3.5 | % |
| Mining, Steel, Iron and Non-Precious Metals | 24,250 | | | 3.5 | % | | 24,250 | | | 3.4 | % |
| Buildings and Real Estate | 21,000 | | | 3.0 | % | | — | | | — | % |
| Machinery (Non-Agriculture, Non-Construction, and Non-Electronic) | 16,932 | | | 2.5 | % | | 13,823 | | | 1.9 | % |
| Cargo Transport | 14,865 | | | 2.2 | % | | 14,533 | | | 2.0 | % |
| Diversified/Conglomerate Manufacturing | 14,241 | | | 2.1 | % | | 14,064 | | | 2.0 | % |
| Other < 2.0% | 4,076 | | | 0.6 | % | | 6,813 | | | 1.0 | % |
| Total investments | $ | 689,513 | | | 100.0 | % | | $ | 714,396 | | | 100.0 | % |
Investments at fair value were included in the following geographic regions of the U.S. as of June 30, 2022 and March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | March 31, 2022 |
| Location | Fair Value | | Percentage of
Total Investments | | Fair Value | | Percentage of
Total Investments |
Northeast | $ | 207,361 | | | 30.1 | % | | $ | 194,100 | | | 27.2 | % |
West | 189,184 | | | 27.4 | % | | 158,607 | | | 22.2 | % |
South | 181,478 | | | 26.3 | % | | 188,978 | | | 26.4 | % |
Midwest | 111,490 | | | 16.2 | % | | 172,711 | | | 24.2 | % |
| Total investments | $ | 689,513 | | | 100.0 | % | | $ | 714,396 | | | 100.0 | % |
The geographic region indicates the location of the headquarters for our portfolio companies. A portfolio company may have additional business locations in other geographic regions.
Investment Principal Repayments
The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of June 30, 2022:
| | | | | | | | | | | |
| | | Amount |
| For the remaining nine months ending March 31, 2023 | | $ | 89,488 | |
| For the fiscal years ending March 31: | | |
| 2024 | | 53,268 | |
| 2025 | | 169,334 | |
| 2026 | | 78,231 | |
| 2027 | | 77,596 | |
| Thereafter | | 1,500 | |
| Total contractual repayments | | $ | 469,417 | |
| Adjustments to cost basis of debt investments | | (8) | |
| Investments in equity securities | | 174,744 | |
| Total cost basis of investments held as of June 30, 2022: | | $ | 644,153 | |
Receivables from Portfolio Companies
Receivables from portfolio companies represent non-recurring costs that we incurred on behalf of portfolio companies. Such receivables, net of any allowance for uncollectible receivables, are included in Other assets, net on our accompanying Consolidated Statements of Assets and Liabilities. We generally maintain an allowance for uncollectible receivables from portfolio companies when the receivable balance becomes 90 days or more past due or if it is determined, based upon management’s judgment, that the portfolio company is unable to pay its obligations. We write-off accounts receivable when we have exhausted collection efforts and have deemed the receivables uncollectible. As of June 30, 2022 and March 31, 2022, we had gross receivables from portfolio companies of $1.9 million and $1.7 million, respectively. As of June 30, 2022 and March 31, 2022, the allowance for uncollectible receivables was $1.4 million and $1.3 million, respectively.
NOTE 4. RELATED PARTY TRANSACTIONS
Transactions with the Adviser
We pay the Adviser certain fees as compensation for its services under the Advisory Agreement, consisting of a base management fee and an incentive fee and a loan servicing fee for the Adviser’s role as servicer pursuant to the Credit Facility, all as described below. On July 12, 2022, our Board of Directors, including a majority of the directors who are not parties to the Advisory Agreement or interested persons of either party, approved the annual renewal of the Advisory Agreement through August 31, 2023.
Two of our executive officers, David Gladstone (our chairman and chief executive officer) and Terry Lee Brubaker (our vice chairman and chief operating officer) serve as directors and executive officers of the Adviser, which is 100% indirectly owned and controlled by Mr. Gladstone. David Dullum (our president) is also the executive vice president of private equity (buyouts) of the Adviser. Michael LiCalsi, our general counsel and secretary (who also serves as the Administrator’s president, general counsel and secretary), is also the executive vice president of administration of our Adviser.
The following table summarizes the base management fees, loan servicing fees, incentive fees, and associated non-contractual, unconditional, and irrevocable credits reflected in our accompanying Consolidated Statements of Operations:
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2022 | | 2021 | | | | |
Average total assets subject to base management fee(A) | $ | 712,600 | | | $ | 664,000 | | | | | |
Multiplied by prorated annual base management fee of 2.0% | 0.5 | % | | 0.5 | % | | | | |
Base management fee(B) | 3,563 | | | 3,320 | | | | | |
Credits to fees from Adviser - other(B) | (750) | | | (1,251) | | | | | |
| Net base management fee | $ | 2,813 | | | $ | 2,069 | | | | | |
| | | | | | | |
Loan servicing fee(B) | 1,758 | | | 1,868 | | | | | |
Credits to base management fee - loan servicing fee(B) | (1,758) | | | (1,868) | | | | | |
| Net loan servicing fee | $ | — | | | $ | — | | | | | |
| | | | | | | |
| Incentive fee – income-based | $ | 2,076 | | | $ | 1,938 | | | | | |
Incentive fee – capital gains-based(C) | 933 | | | 10,310 | | | | | |
Total incentive fee(B) | $ | 3,009 | | | $ | 12,248 | | | | | |
Credits to fees from Adviser - other(B) | — | | | — | | | | | |
| Net total incentive fee | $ | 3,009 | | | $ | 12,248 | | | | | |
(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 accompanying 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.
Base Management Fee
The base management fee is payable quarterly to the Adviser pursuant to our Advisory Agreement and is assessed at an annual rate of 2.0%, computed on the basis of the value of our average gross assets at the end of the two most recently completed quarters (inclusive of the current quarter), which are 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 period and adjusted appropriately for any share issuances or repurchases during the period.
Additionally, pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies. The Adviser may also provide other services to our portfolio companies under certain agreements and may receive fees for services other than managerial assistance. Such services may include: (i) assistance obtaining, sourcing or structuring credit facilities, long term loans or additional equity from unaffiliated third parties; (ii) negotiating important contractual financial relationships; (iii) consulting services regarding restructuring of the portfolio company and financial modeling as it relates to raising additional debt and equity capital from unaffiliated third parties; and (iv) taking a primary role in interviewing, vetting and negotiating employment contracts with candidates in connection with adding and retaining key portfolio company management team members. The Adviser non-contractually, unconditionally, and irrevocably credits 100% of any fees received for such services against the base management fee that we would otherwise be required to pay to the Adviser; however, pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees, totaling $36 thousand for the three months ended June 30, 2022, and $69 thousand for the three months ended June 30, 2021, was retained by the Adviser in the form of reimbursement, at cost, for tasks completed by personnel of the Adviser, primarily related to the valuation of portfolio companies.
Loan Servicing Fee
The Adviser also services the loans held by our wholly-owned subsidiary, Business Investment (the borrower under the Credit Facility), in return for which the Adviser receives a 2.0% annual fee based on the monthly aggregate outstanding balance of loans pledged under the Credit Facility. Since Business Investment is a consolidated subsidiary of ours, coupled with the fact that the total base management fee paid to the Adviser pursuant to the Advisory Agreement cannot exceed 2.0% of total assets (less any uninvested cash or cash equivalents resulting from borrowings) during any given calendar year, we treat payment of the loan servicing fee pursuant to the Credit Facility as a pre-payment of the base management fee under the Advisory Agreement. Accordingly, these loan servicing fees are 100% non-contractually, unconditionally, and irrevocably credited back to us by the Adviser.
Incentive Fee
The incentive fee payable to the Adviser under our Advisory Agreement consists of two parts: an income-based incentive fee and a capital gains-based incentive fee.
The income-based incentive fee rewards the Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% of our net assets, which we define as total assets less indebtedness and before taking into account any incentive fees payable or contractually due but not payable during the period, at the end of the immediately preceding calendar quarter, adjusted appropriately for any share issuances or repurchases during the period (the “Hurdle Rate”). The income-based incentive fee with respect to our pre-incentive fee net investment income is payable quarterly to the Adviser and is computed as follows:
•No incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the Hurdle Rate;
•100.0% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the Hurdle Rate but is less than 2.1875% of our net assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter; and
•20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% of our net assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter.
The second part of the incentive fee is a capital gains-based incentive fee that is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date), and equals 20.0% of our realized capital gains, less any realized capital losses and unrealized depreciation, calculated as of the end of the preceding calendar year. The capital gains-based incentive fee payable to the Adviser is calculated based on (i) cumulative aggregate realized capital gains since our inception, less (ii) cumulative aggregate realized capital losses since our inception, less (iii) the entire portfolio’s aggregate unrealized capital depreciation, if any, as of the date of the calculation. If this number is positive at the applicable calculation date, then the capital gains-based incentive fee for such year equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. For calculation purposes, cumulative aggregate realized capital gains, if any, equals the sum of the excess between the net sales price of each investment, when sold, and the original cost of such investment since our inception. Cumulative aggregate realized capital losses equals the sum of the deficit between the net sales price of each investment, when sold, and the original cost of such investment since our inception. The entire portfolio’s aggregate unrealized capital depreciation, if any, equals the sum of the deficit between the fair value of each investment security as of the applicable calculation date and the original cost of such investment security. As of and for the period ended June 30, 2022, no capital gains-based incentive fees were contractually due to the Adviser. During the year ended March 31, 2022, capital gains-based incentive fees of $5.3 million were contractually due and paid to the Adviser.
In accordance with GAAP, accrual of the capital gains-based incentive fee is determined as if our investments had been liquidated at their fair values as of the end of the reporting period. Therefore, GAAP requires that the capital gains-based incentive fee accrual consider the aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that any such unrealized capital appreciation will be realized in the future. Accordingly, a GAAP accrual is calculated at the end of the reporting period based on (i) cumulative aggregate realized capital gains since our inception, plus (ii) the entire portfolio’s aggregate unrealized capital appreciation, if any, less (iii) cumulative aggregate realized capital losses since our inception, less (iv) the entire portfolio’s aggregate unrealized capital depreciation, if any. If such amount is positive at the
end of a reporting period, a capital gains-based incentive fee equal to 20.0% of such amount, less the aggregate amount of capital gains-based incentive fees accrued in all prior years, is recorded, regardless of whether such amount is contractually due under the terms of the Advisory Agreement. If such amount is negative, then there is no accrual for such period and prior period accruals are reversed, as appropriate. During the three months ended June 30, 2022, we recorded capital gains-based incentive fees of $0.9 million. During the three months ended June 30, 2021, we recorded capital gains-based incentive fees of $10.3 million.
Transactions with the Administrator
We reimburse the Administrator pursuant to the Administration Agreement for our allocable portion of the Administrator’s expenses incurred while performing services to us, which are primarily rent and salaries and benefits expenses of the Administrator’s employees, including our chief financial officer and treasurer, chief valuation officer, chief compliance officer, and general counsel and secretary, and their respective staffs. Two of our executive officers, David Gladstone (our chairman and chief executive officer) and Terry Lee Brubaker (our vice chairman and chief operating officer) serve as members of the board of managers and executive officers of the Administrator, which is 100% indirectly owned and controlled by Mr. Gladstone. Another of our officers, Mr. LiCalsi (our general counsel and secretary), serves as the Administrator’s president as well as the executive vice president of administration for the Adviser.
Our allocable portion of the Administrator’s expenses is generally derived by multiplying the Administrator’s total expenses by the approximate percentage of time during the current quarter the Administrator’s employees performed services for us in relation to their time spent performing services for all companies serviced by the Administrator. On July 12, 2022, our Board of Directors, including a majority of the directors who are not parties to the Administration Agreement or interested persons of either party, approved the annual renewal of the Administration Agreement through August 31, 2023.
Transactions with Gladstone Securities, LLC
Gladstone Securities, LLC (“Gladstone Securities”) is a privately held broker dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation. Gladstone Securities is an affiliate of ours, as its parent company is 100% owned and controlled by David Gladstone, our chairman and chief executive officer. Mr. Gladstone also serves on the board of managers of Gladstone Securities.
Other Transactions
From time to time, Gladstone Securities provides services, such as investment banking and due diligence services, to certain of our portfolio companies, for which it 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. During the three months ended June 30, 2022, the fees received by Gladstone Securities from our portfolio companies totaled $0.3 million. During the three months ended June 30, 2021, the fees received by Gladstone Securities from our portfolio companies totaled $0.1 million.
Related Party Fees Due
Amounts due to related parties on our accompanying Consolidated Statements of Assets and Liabilities were as follows:
| | | | | | | | | | | |
| As of June 30, | | As of March 31, |
| 2022 | | 2022 |
| Base management and loan servicing fee due to Adviser, net of credits | $ | 1,486 | | | $ | 1,648 | |
Incentive fee due to Adviser(A) | 28,404 | | | 27,577 | |
| Other due to Adviser | 94 | | | 63 | |
| Total fees due to Adviser | 29,984 | | | 29,288 | |
| Fee due to Administrator | 695 | | | 627 | |
| Total related party fees due | $ | 30,679 | | | $ | 29,915 | |
(A)Includes a capital gains-based incentive fee of $26.3 million and $25.4 million as of June 30, 2022 and March 31, 2022, respectively, recorded in accordance with GAAP requirements, and which was not contractually due under the terms of the Advisory Agreement. Refer to Note 4 — Related Party Transactions — Transactions with the Adviser — Incentive Fee for additional information, including capital gains-based incentive fee payments made.
Net expenses receivable from Gladstone Capital Corporation, one of our affiliated funds, for reimbursement purposes, which includes certain co-investment expenses, totaled $27 thousand, as of March 31, 2022. There were no co-investment expenses outstanding as of June 30, 2022. These amounts are generally settled in the quarter subsequent to being incurred and have been included in Other assets, net on the accompanying Consolidated Statements of Assets and Liabilities.
NOTE 5. BORROWINGS
Revolving Line of Credit
On March 8, 2021, we, through our wholly-owned subsidiary, 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 June 30, 2022, the Credit Facility provided a one-year extension option that may be exercised on or before March 8, 2023, subject to approval by all lenders.
On August 10, 2020, we, through Business Investment, entered into Amendment No. 5 to the Credit Facility. Among other things, Amendment No. 5 amended the Credit Facility to (i) add London Interbank Offered Rate (“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.
The following tables summarize noteworthy information related to the Credit Facility:
| | | | | | | | | | | |
| As of June 30, 2022 | | As of March 31, 2022 |
| Commitment amount | $ | 180,000 | | $ | 180,000 |
| Borrowings outstanding at cost | $ | — | | $ | — |
Availability(A) | $ | 180,000 | | $ | 180,000 |
| | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | |
| 2022 | | 2021 | | | | |
| Weighted-average borrowings outstanding | $ | — | | | $ | 26,363 | | | | | |
Effective interest rate(B) | 1.0 | % | | 9.3 | % | | | | |
| Commitment (unused) fees incurred | $ | 455 | | | $ | 389 | | | | | |
(A)Availability is subject to various constraints, characteristics and applicable advance rates based on collateral quality under the Credit Facility, which equated to an adjusted availability of $177.4 million and $180.0 million as of June 30, 2022 and March 31, 2022, respectively.
(B)Excludes the impact of deferred financing costs and includes unused commitment fees.
Among other things, the Credit Facility contains a performance guaranty that requires us to maintain (i) a minimum net worth (defined in the Credit Facility to include our mandatory redeemable term preferred stock) of the greater of $210.0 million or $210.0 million plus 50% of all equity and subordinated debt raised, minus 50% of any equity or subordinated debt redeemed or retired after November 16, 2016, which equated to $286.3 million as of June 30, 2022; (ii) asset coverage with respect to senior securities representing indebtedness of at least 150% (or such percentage as may be set forth in Section 18 of the 1940 Act, as modified by Section 61 of the 1940 Act); and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code. As of June 30, 2022, and as defined in the performance guaranty of the Credit Facility, we had a net worth of $702.1 million, asset coverage on our senior securities representing indebtedness of 261.9%, calculated in compliance with the requirements of Sections 18 and 61 of the 1940 Act, and an active status as a BDC and RIC. As of June 30, 2022, we were in compliance with all covenants under the Credit Facility.
Fair Value
We elected to apply the fair value option of ASC Topic 825, “Financial Instruments,” to the Credit Facility, which was consistent with our application of ASC 820 to our investments. Generally, the fair value of the Credit Facility is determined using a yield analysis, which includes a DCF calculation and also takes into account the assumptions the Valuation Team believes market participants would use, including the estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. As of June 30, 2022 and March 31, 2022, the discount rate used to determine the fair value of the Credit Facility was 30-day LIBOR, with a 0.5% floor, plus 2.85% per annum, plus an unused commitment fee of 1.0%. Generally, an increase or decrease in the discount rate used in the DCF calculation may result in a corresponding decrease or increase, respectively, in the fair value of the Credit Facility. As of each of June 30, 2022 and March 31, 2022, the Credit Facility was valued using Level 3 inputs and any changes in its fair value are recorded in Net unrealized appreciation (depreciation) of other on our accompanying Consolidated Statements of Operations. We had no borrowings outstanding on the Credit Facility as of June 30, 2022 and March 31, 2022.
The following tables provide relevant information and disclosures about the Credit Facility as of June 30, 2022 and March 31, 2022, and for the three months ended June 30, 2022 and 2021, as required by ASC 820:
| | | | | | | | | | | |
| Level 3 – Borrowings |
| Recurring Fair Value Measurements Reported in Consolidated Statements of Assets and Liabilities Using Significant Unobservable Inputs (Level 3) |
| June 30, 2022 | | March 31, 2022 |
| Credit Facility | $ | — | | | $ | — | |
| | | | | |
Fair Value Measurements of Borrowings Using Significant Unobservable Inputs (Level 3) Reported in Consolidated Statements of Assets and Liabilities |
| Credit Facility |
| Three Months Ended June 30, 2022: | |
| Fair value at March 31, 2022 | $ | — | |
| Borrowings | — | |
| Repayments | — | |
| Unrealized appreciation (depreciation) | — | |
Fair value at June 30, 2022 | $ | — | |
| |
| |
| |
| |
| |
| | | | | |
Fair Value Measurements of Borrowings Using Significant Unobservable Inputs (Level 3) Reported in Consolidated Statements of Assets and Liabilities |
| Credit Facility |
| Three Months Ended June 30, 2021: | |
| Fair value at March 31, 2021 | $ | 22,400 | |
| Borrowings | 29,800 | |
| Repayments | (10,300) | |
| Unrealized appreciation (depreciation) | — | |
Fair value at June 30, 2021 | $ | 41,900 | |
| |
| |
| |
| |
| |
The fair value of the collateral under the Credit Facility was $566.3 million and $537.5 million as of June 30, 2022 and March 31, 2022, respectively.
Notes Payable
5.00% Notes due 2026
In March 2021, we completed a public offering of 5.00% Notes due 2026 with an aggregate principal amount of $127.9 million (the “2026 Notes”), 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 the Nasdaq Global Select Market (“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 is 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 Securities Exchange Act of 1934, as amended (the "Exchange Act"), we will provide the holders of the 2026 Notes and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements.
The 2026 Notes are recorded at the aggregate principal amount, less underwriting discounts, commissions, and offering costs, on our accompanying Consolidated Statements of Assets and Liabilities. 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 4.875% Notes due 2028 with an aggregate principal amount of $134.6 million (the “2028 Notes”), 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 the 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 is 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 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.
The following tables summarize our 2026 Notes and 2028 Notes as of June 30, 2022 and March 31, 2022:
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As of June 30, 2022: | | | | | | | | | | | | |
| Description | | Ticker
Symbol | | Date Issued | | Maturity Date(A) | | Interest
Rate | | Notes
Outstanding | | Principal
Amount per
Note | | Aggregate
Principal Amount |
| 2026 Notes | | GAINN | | March 2, 2021 | | May 1, 2026 | | 5.00% | | 5,117,500 | | $ | 25.00 | | | $ | 127,938 | |
| 2028 Notes | | GAINZ | | August 18, 2021 | | November 1, 2028 | | 4.875% | | 5,382,000 | | $ | 25.00 | | | 134,550 | |
Notes payable, gross(B) | | 10,499,500 | | | | 262,488 | |
| Less: Unamortized Discounts | | | | | | (5,923) | |
Notes payable, net(C) | | | | | | $ | 256,565 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of March 31, 2022: | | | | | | | | | | | | |
| Description | | Ticker
Symbol | | Date Issued | | Maturity Date(A) | | Interest
Rate | | Notes
Outstanding | | Principal
Amount per
Note | | Aggregate
Principal Amount |
| 2026 Notes | | GAINN | | March 2, 2021 | | May 1, 2026 | | 5.00% | | 5,117,500 | | $ | 25.00 | | | $ | 127,938 | |
| 2028 Notes | | GAINZ | | August 18, 2021 | | November 1, 2028 | | 4.875% | | 5,382,000 | | $ | 25.00 | | | 134,550 | |
Notes payable, gross(B) | | 10,499,500 | | | | 262,488 | |
| Less: Unamortized Discounts | | | | | | (6,236) | |
Notes payable, net(C) | | | | | | $ | 256,252 | |
(A)The 2026 Notes can be redeemed at our option at any time on or after May 1, 2023. The 2028 Notes can be redeemed at our option at any time on or after November 1, 2023.
(B)As of June 30, 2022 and March 31, 2022, asset coverage on our senior securities representing indebtedness, calculated pursuant to Sections 18 and 61 of the 1940 Act, was 261.9% and 252.9%, respectively.
(C)Reflected as a line item on our accompanying Consolidated Statements of Assets and Liabilities.
The fair value, based on the last reported closing prices, of the 2026 Notes and 2028 Notes as of June 30, 2022 was $122.8 million and $126.5 million, respectively. The fair value, based on the last reported closing prices, of the 2026 Notes and 2028 Notes as of March 31, 2022 was $128.3 million and $134.3 million, respectively. We consider the closing prices of the 2026 Notes and 2028 Notes to be Level 1 inputs within the ASC 820 hierarchy.
Secured Borrowing
In August 2012, we entered into a participation agreement with a third-party related to $5.0 million of our secured second lien term debt investment in Ginsey Home Solutions, Inc. (“Ginsey”). In May 2014, we amended the agreement with the third-party to include an additional $0.1 million. ASC Topic 860, “Transfers and Servicing” requires us to treat the participation as a financing-type transaction. Specifically, the third-party has a senior claim to our remaining investment in the event of default by Ginsey which, in part, resulted in the loan participation bearing a rate of interest lower than the contractual rate established at origination. Therefore, our accompanying Consolidated Statements of Assets and Liabilities reflect the entire secured second lien term debt investment in Ginsey and a corresponding $5.1 million secured borrowing liability. The secured borrowing has a stated fixed interest rate of 7.0% and a maturity date of January 3, 2025.
NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK
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 6.375% Series E Cumulative Term Preferred Stock (or “Series E Term Preferred Stock” or “Series E”), which had a liquidation preference of $25.00 per share. In connection with the voluntary redemption of our Series E Term Preferred Stock, 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.
The following tables summarize dividends declared by our Board of Directors and paid by us on our Series E Term Preferred Stock during the three months ended June 30, 2021:
For the Three Months Ended June 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Declaration Date | | Record
Date | | Payment Date | | Dividend per Share of Series E Term Preferred Stock(A) | |
| April 13, 2021 | | April 23, 2021 | | April 30, 2021 | | $ | 0.13281250 | | |
| April 13, 2021 | | May 19, 2021 | | May 28, 2021 | | 0.13281250 | | |
| April 13, 2021 | | June 18, 2021 | | June 30, 2021 | | 0.13281250 | | |
| | | | Total | | $ | 0.39843750 | | |
(A)We voluntarily redeemed all outstanding shares of our Series E Term Preferred Stock on August 19, 2021.
The federal income tax characteristics of dividends paid to our preferred stockholders generally constitute ordinary income or capital gains to the extent of our current and accumulated earnings and profits and are reported after the end of the calendar year based on tax information for the full fiscal year. The tax characterization of dividends paid to our preferred stockholders during the calendar year ended December 31, 2021 was 71.3% from ordinary income and 28.7% from capital gains.
NOTE 7. REGISTRATION STATEMENT AND COMMON EQUITY OFFERINGS
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 June 30, 2022, we had the ability to issue up to $300.0 million of the securities registered under the registration statement.
NOTE 8. NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS PER WEIGHTED-AVERAGE COMMON SHARE
The following table sets forth the computation of basic and diluted Net increase in net assets resulting from operations per weighted-average common share for the three months ended June 30, 2022 and 2021:
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2022 | | 2021 | | | | |
Net increase in net assets resulting from operations | $ | 12,035 | | | $ | 47,139 | | | | | |
Basic and diluted weighted-average common shares | 33,205,023 | | | 33,205,023 | | | | | |
Basic and diluted net increase in net assets resulting from operations per weighted-average common share | $ | 0.36 | | | $ | 1.42 | | | | | |
NOTE 9. DISTRIBUTIONS TO COMMON STOCKHOLDERS
To qualify to be taxed as a RIC under Subchapter M of the Code, we must generally distribute to our stockholders, for each taxable year, 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”). The amount to be paid out as distributions to our stockholders is determined by our Board of Directors and is based upon management’s estimate of Investment Company Taxable Income and net long-term capital gains, as well as amounts to be distributed in accordance with Section 855(a) of the Code. Based on that estimate, our Board of Directors declares monthly distributions, and supplemental distributions, as appropriate, to stockholders each quarter and deemed distributions of long-term capital gains annually as of the end of the fiscal year, as applicable.
The U.S. federal income tax characteristics of cash distributions paid to our common stockholders generally are reported to stockholders on IRS Form 1099 after the end of each calendar year. Estimates of tax characterization made on a quarterly basis may not be representative of the actual tax characterization of cash distributions for the full year. Estimates made on a quarterly basis are updated as of each interim reporting date. If we determined the tax characterization of cash distributions paid to common stockholders during the current calendar year as of June 30, 2022, 60.6% would be from ordinary income and 39.4% would be from capital gains.
We paid the following cash distributions to our common stockholders for the three months ended June 30, 2022 and 2021:
For the Three Months Ended June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
Declaration Date | | Record Date | | Payment Date | | Distribution per
Common Share | |
| April 12, 2022 | | April 22, 2022 | | April 29, 2022 | | $ | 0.075 | | |
| April 12, 2022 | | May 20, 2022 | | May 31, 2022 | | 0.075 | | |
| April 12, 2022 | | June 6, 2022 | | June 15, 2022 | | 0.120 | | (A) |
| April 12, 2022 | | June 22, 2022 | | June 30, 2022 | | 0.075 | | |
| | Three Months Ended June 30, 2022 | | $ | 0.345 | | |
For the Three Months Ended June 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
Declaration Date | | Record Date | | Payment Date | | Distribution per
Common Share | |
| April 13, 2021 | | April 23, 2021 | | April 30, 2021 | | $ | 0.070 | | |
| April 13, 2021 | | May 19, 2021 | | May 28, 2021 | | 0.070 | | |
| April 13, 2021 | | June 8, 2021 | | June 17, 2021 | | 0.060 | | (A) |
| April 13, 2021 | | June 18, 2021 | | June 30, 2021 | | 0.070 | | |
| | Three Months Ended June 30, 2021 | | $ | 0.270 | | |
(A)Represents a supplemental distribution to common stockholders.
Aggregate cash distributions to our common stockholders declared and paid were $11.5 million and $9.0 million for the three months ended June 30, 2022 and 2021, respectively.
For the fiscal year ended March 31, 2022, Investment Company Taxable Income exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $13.9 million of the first distributions paid subsequent to fiscal year-end, as having been paid in the prior year. In addition, for the fiscal year ended March 31, 2022 net capital gains exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $15.7 million of the first distributions paid subsequent to fiscal year-end as having been paid in the prior year.
For the three months ended June 30, 2022, we recorded $0.9 million of net adjustments for estimated permanent book-tax differences to reflect tax character, which decreased Capital in excess of par value and increased Overdistributed net investment income and Accumulated net realized gain in excess of distributions on our accompanying Consolidated Statements of Assets and Liabilities.
For the three months ended June 30, 2021, we recorded $0.6 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 on our accompanying Consolidated Statements of Assets and Liabilities.
We may distribute our net long-term capital gains, if any, in cash or elect to retain some or all of such gains, pay taxes at the U.S. federal corporate-level income tax rate on the amount retained, and designate the retained amount as a “deemed distribution.” If we elect to retain net long-term capital gains and deem them distributed, each U.S. common stockholder will be treated as if they received a distribution of their pro-rata share of the retained net long-term capital gain and the U.S. federal income tax paid. As a result, each U.S. common stockholder will (i) be required to report their pro rata share of the retained gain on their tax return as long-term capital gain, (ii) receive a refundable tax credit for their pro-rata share of federal income tax paid by us on the retained gain, and (iii) increase the tax basis of their shares of common stock by an amount equal to the deemed distribution less the tax credit. To use the deemed distribution approach, we must provide written notice to our common stockholders prior to the expiration of 60 days after the close of the relevant taxable year. For the year ended March 31, 2022, we did not elect to retain long-term capital gains and to treat them as deemed distributions to common stockholders.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
We are party to certain legal proceedings incidental to the normal course of our business. We are required to establish reserves for litigation matters where those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, we do not establish reserves. Based on current knowledge, we do not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our financial condition, results of operation or cash flows. Additionally, based on our current knowledge, we do not believe such loss contingencies are both probable and estimable and therefore, as of June 30, 2022 and March 31, 2022, we had no established reserves for such loss contingencies.
Escrow Holdbacks
From time to time, we enter into arrangements relating to exits of certain investments whereby specific amounts of the proceeds are held in escrow to be used to satisfy potential obligations, as stipulated in the sales agreements. We record escrow amounts in Restricted cash and cash equivalents, if received in cash but subject to potential obligations or other contractual restrictions, or as escrow receivables in Other assets, net, if not yet received in cash, on our accompanying Consolidated Statements of Assets and Liabilities. We establish reserves and holdbacks against escrow amounts if we determine that it is probable and estimable that a portion of the escrow amounts will not ultimately be released or received at the end of the escrow period. Reserves and holdbacks against escrow amounts were $1.0 million and $0.2 million as of June 30, 2022 and March 31, 2022, respectively.
Financial Commitments and Obligations
We may have line of credit and delayed draw term debt commitments to certain of our portfolio companies that have not been fully drawn. Since these lines of credit and delayed draw term debt commitments have expiration dates and we expect many will never be fully drawn, the total line of credit and delayed draw term debt commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of the combined unused line of credit and delayed draw term debt commitments as of June 30, 2022 and March 31, 2022 to be insignificant.
As of June 30, 2022, a guaranty is in place with one of our portfolio companies, Country Club Enterprises, LLC (“CCE”), whereby we have guaranteed $1.0 million of CCE’s obligations. As of June 30, 2022, we have not been required to make any payments on this guaranty, or any guaranties that existed in previous periods, and we consider the credit risk to be remote and the fair value of the guaranty as of June 30, 2022 and March 31, 2022 to be insignificant.
The following table summarizes the principal balances of unused line of credit and delayed draw term debt commitments and guaranties as of June 30, 2022 and March 31, 2022, which are not reflected as liabilities in the accompanying Consolidated Statements of Assets and Liabilities:
| | | | | | | | | | | |
| June 30, 2022 | | March 31, 2022 |
Unused line of credit and delayed draw term debt commitments | $ | 4,000 | | | $ | 4,250 | |
Guaranties | 1,000 | | | 10,250 | |
Total | $ | 5,000 | | | $ | 14,500 | |
NOTE 11. FINANCIAL HIGHLIGHTS
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2022 | | 2021 | | | | |
Per Common Share Data: | | | | | | | |
Net asset value at beginning of period(A) | $ | 13.43 | | | $ | 11.52 | | | | | |
Income from investment operations(B) | | | | | | | |
Net investment income (loss) | 0.22 | | | (0.07) | | | | | |
Net realized gain (loss) on investments and other | 0.13 | | | 0.06 | | | | | |
Net unrealized appreciation (depreciation) of investments | 0.01 | | | 1.43 | | | | | |
Total from investment operations | 0.36 | | | 1.42 | | | | | |
Effect of equity capital activity(B) | | | | | | | |
Cash distributions to common stockholders from net investment income(C) | (0.10) | | | (0.20) | | | | | |
Cash distributions to common stockholders from realized gains(C) | (0.25) | | | (0.07) | | | | | |
Total from equity capital activity | (0.35) | | | (0.27) | | | | | |
Other, net(B)(D) | — | | | (0.01) | | | | | |
Net asset value at end of period(A) | $ | 13.44 | | | $ | 12.66 | | | | | |
| | | | | | | |
Per common share market value at beginning of period | $ | 16.13 | | | $ | 12.23 | | | | | |
Per common share market value at end of period | $ | 14.08 | | | $ | 14.41 | | | | | |
Total investment return(E) | (10.58) | % | | 20.08 | % | | | | |
Common stock outstanding at end of period(A) | 33,205,023 | | | 33,205,023 | | | | | |
| | | | | | | |
Statement of Assets and Liabilities Data: | | | | | | | |
Net assets at end of period | $ | 446,409 | | | $ | 420,538 | | | | | |
Average net assets(F) | $ | 445,377 | | | $ | 394,470 | | | | | |
| | | | | | | |
Senior Securities Data: | | | | | | | |
Total borrowings, at cost | $ | 267,584 | | | $ | 174,934 | | | | | |
Mandatorily redeemable preferred stock (G) | $ | — | | | $ | 94,371 | | | | | |
| | | | | | | |
Ratios/Supplemental Data: | | | | | | | |
Ratio of net expenses to average net assets – annualized(H) | 10.71 | % | | 20.62 | % | | | | |
Ratio of net investment income (loss) to average net assets – annualized(I) | 6.62 | % | | (2.34) | % | | | | |
(A)Based on actual shares of common stock outstanding at the beginning or end of the corresponding period, as appropriate.
(B)Based on weighted-average basic common share data for the corresponding period.
(C)The tax character of distributions is determined based on taxable income calculated in accordance with income tax regulations, which may differ from amounts determined under GAAP. For further information on the estimated character of our distributions to common stockholders, including changes in estimates, as applicable, refer to Note 9 — Distributions to Common Stockholders.
(D)Represents the impact of the different share amounts (weighted-average basic common shares outstanding for the corresponding period and actual common shares outstanding at the end of the period) in the Per Common Share Data calculations and rounding impacts.
(E)Total return equals the change in the market value of our common stock from the beginning of the period, taking into account dividends reinvested in accordance with the terms of our dividend reinvestment plan. Total return does not take into account distributions that may be characterized as a return of capital. For further information on the estimated character of our distributions to common stockholders, including changes in estimates, as applicable, refer to Note 9 — Distributions to Common Stockholders.
(F)Calculated using the average balance of net assets at the end of each month of the reporting period.
(G)Represents the aggregate liquidation preference of our mandatorily redeemable preferred stock.
(H)Ratio of net expenses to average net assets is computed using total expenses, net of any non-contractual, unconditional, and irrevocable credits of fees from the Adviser. Had we not received any non-contractual, unconditional, and irrevocable credits of fees from the Adviser, the ratio of expenses to average net assets - annualized would have been 12.96% and 23.78% for the three months ended June 30, 2022 and 2021, respectively.
(I)Had we not received any non-contractual, unconditional, and irrevocable credits of fees from the Adviser, the ratio of net investment income (loss) to average net assets - annualized would have been 4.37% and (5.50)% for the three months ended June 30, 2022 and 2021, respectively.
NOTE 12. UNCONSOLIDATED SIGNIFICANT SUBSIDIARIES
In accordance with the SEC’s Regulation S-X, we do not consolidate portfolio company investments. Further, in accordance with ASC 946, we are precluded from consolidating any entity other than another investment company, except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries. We did not have any unconsolidated subsidiaries that met any of the significance conditions under Rule 1-02(w) of the SEC’s Regulation S-X as of or during the three month periods ended June 30, 2022 and 2021.
NOTE 13. SUBSEQUENT EVENTS
Investment Activity
•In July 2022, we invested an additional $39.1 million in the form of secured first lien debt in Dema/Mai to fund an add-on acquisition of Dema Plumbing, a plumbing and mechanical systems installation and service provider to single-family residential homebuilders.
•In July 2022, we recapitalized our investment in Horizon and invested an additional $30.0 million in the form of secured first lien debt. In connection with this investment, we received equity proceeds of $12.3 million, which were recognized as a $10.1 million return of preferred equity cost basis and a realized gain of $2.2 million, as well as dividend income of $3.1 million and success fee income of $1.7 million.
Distributions and Dividends
In July 2022, our Board of Directors declared the following monthly distributions to common stockholders:
| | | | | | | | | | | | | | | | | |
Record Date | | Payment Date | | Distribution per Common Share | |
| July 22, 2022 | | July 29, 2022 | | $ | 0.075 | | |
| August 23, 2022 | | August 31, 2022 | | 0.075 | | |
| September 22, 2022 | | September 30, 2022 | | 0.075 | | |
| | Total for the Quarter: | | $ | 0.225 | | |
Revolving Line of Credit
As of the date of this report, we had $12.6 million outstanding under the Credit Facility.