GLADSTONE INVESTMENT CORPORATION 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 withGladstone 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 particularDavid Gladstone ,David Dullum , orTerry 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 and as a business development company; and (12) those factors described in Item 1A. "Risk Factors" herein and the "Risk Factors" sections of our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2019 , filed with theU.S. Securities and Exchange Commission ("SEC") onMay 13, 2019 (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 theSEC , 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 toGladstone 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 or results of operations for any future periods.
OVERVIEW
General
We were incorporated under the General Corporation Law of theState of Delaware onFebruary 18, 2005 . OnJune 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 business development company ("BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"). ForU.S. federal income tax purposes, we have elected to be treated as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). To continue to qualify as a RIC forU.S. federal income tax purposes and obtain favorable RIC tax treatment, we must meet certain requirements, including certain minimum distribution requirements. From our initial public offering in 2005 throughDecember 31, 2019 , we have paid 174 consecutive monthly distributions to common stockholders. 44
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We are externally managed by the Adviser, an affiliate of ours and anSEC -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") withGladstone 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 byDavid Gladstone , our chairman and chief executive officer. Additionally,Gladstone Securities, LLC ("Gladstone Securities "), a privately-held broker-dealer (indirectly owned and controlled byMr. Gladstone , our chairman and chief executive officer) registered with theFinancial Industry Regulatory Authority and insured by theSecurities Investor Protection Corporation , has provided other services, such as investment banking and due diligence services, to certain of our portfolio companies, for whichGladstone Securities receives a fee. Any such fees paid by portfolio companies toGladstone 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 inthe 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$30 million , although investment size may vary depending upon our total assets or available capital at the time of investment. We intend that our investment portfolio over time will consist of approximately 75% in debt securities and 25% in equity securities, at cost. As ofDecember 31, 2019 , our investment portfolio was made up of 75.4% in debt securities and 24.6% 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 theU.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 or to finance acquisitions or 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. InJuly 2012 , theSEC granted us an exemptive order (the "Co-InvestmentOrder") that expanded our ability to co-invest, under certain circumstances, with certain of our affiliates, including Gladstone Capital Corporation ("Gladstone Capital ") and any future business development company 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, 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") are traded on the Nasdaq Global Select Market under the trading symbols "GAIN," "GAINM," and "GAINL," respectively. 45
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Table of Contents 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-ledbuyouts ofLower Middle Market companies in theU.S. During the nine months endedDecember 31, 2019 , we exited five portfolio companies, with a combined fair value prior to their exits of$125.7 million , invested$43.2 million in two new portfolio companies and retained a common stock ownership in one of the exited portfolio companies, resulting in a net reduction of two companies in our portfolio, which was comprised of 28 companies as ofDecember 31, 2019 . From our initial public offering inJune 2005 throughDecember 31, 2019 , we made investments in 51 companies, excluding investments in syndicated loans, for a total of over$1.2 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 ofDecember 31, 2019 , we had unrecognized, contractual success fees of$36.0 million , or$1.10 per common share. Consistent with accounting principles generally accepted in theU.S. ("GAAP"), we have not recognized success fee receivables and related income in our Consolidated Financial Statementsuntil earned. From inception throughDecember 31, 2019 , we completed sales of 21 portfolio companies that we acquired under our buyout strategy (which excludes investments in syndicated loans). In the aggregate, these sales have generated$232.9 million in net realized gains and$30.3 million in other income upon exit, for a total increase to our net assets of$263.2 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 21 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. These successful exits, in part, enabled us to increase the monthly distribution by 70.0% fromMarch 2011 throughDecember 31, 2019 , and allowed us to declare and pay a$0.03 per common share supplemental distribution in fiscal year 2012, a$0.05 per common share supplemental distribution inNovember 2013 , a$0.05 per common share supplemental distribution inDecember 2014 , a$0.06 per common share supplemental distribution in each ofJune 2017 ,December 2017 ,June 2018 , andDecember 2018 , a$0.09 per common share supplemental distribution inJune 2019 , a$0.03 per common share supplemental distribution inSeptember 2019 , and a$0.09 per common share supplemental distribution inDecember 2019 .
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 datedApril 30, 2013 , as amended (the "Credit Facility"), and by accessing the capital markets in the form of public offerings of common and preferred stock. We have successfully extended the Credit Facility's revolving period multiple times, most recently toAugust 2021 , and currently have a total commitment amount of$200.0 million (with a potential total commitment of$300.0 million through additional commitments from new or existing lenders). During the year endedMarch 31, 2019 , we sold 168,842 shares of our common stock under our at-the-market ("ATM") program for gross proceeds of approximately$1.9 million . Additionally, we issued 3.0 million shares of our Series E Term Preferred Stock for gross proceeds of$74.8 million inAugust 2018 . Refer to "Liquidity and Capital Resources - Revolving Line of Credit" for further discussion of the Credit Facility and "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. Although we have been able to access the capital markets historically, market conditions may continue to affect the trading price of our common stock and thus our ability to finance new investments through the issuance of common equity. OnDecember 31, 2019 , the closing market price of our common stock was$13.25 per share, representing a 5.9% premium to our net asset value ("NAV") of$12.51 per share as ofDecember 31, 2019 . 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. At our 2019 Annual Meeting of Stockholders held onAugust 15, 2019 , our stockholders approved a proposal authorizing us to issue and sell shares of our common stock at a price below our then-current NAV per share, subject to certain limitations, including that the number of common shares issued and sold pursuant to such authority does not exceed 25.0% of our then-outstanding common stock immediately prior to each such sale, provided that our board of directors ("Board of Directors") makes certain determinations prior to any such sale. ThisAugust 2019 stockholder authorization is in effect for one year from the date of stockholder approval. We sought and obtained stockholder approval concerning similar proposals at each Annual Meeting of Stockholders since 2008, and with our Board of Directors' subsequent approval, we issued shares of our common stock in three offerings at a price below the then-current NAV per share, once inMay 2017 , once inMarch 2015 , and once inOctober 2012 . Certain sales under the ATM program in March andApril 2018 were also below the then-current estimated NAV per share. The resulting proceeds, in part, have allowed us to (i) grow our portfolio by making new investments, (ii) generate additional income through these new investments, (iii) ensure continued compliance with regulatory tests and (iv) increase our debt capital while still complying with our applicable debt-to-equity ratios. Refer to "Liquidity and Capital Resources - Equity - Common Stock" for further discussion of our common stock. 46
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Regulatory Compliance
Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage limitations of the 1940 Act, which require us to have asset coverage (as defined in Sections 18 and 61 of the 1940 Act), of at least 150% on each of our senior securities representing indebtedness and our senior securities that are stock (such as our two series of term preferred stock currently outstanding). OnApril 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 amended by the Small Business Credit Availability Act. As a result, the Company's asset coverage requirements for senior securities changed from 200% to 150%, effective as ofApril 10, 2019 , one year after the date of the Board of Directors' approval. Under the 200% asset coverage standard in effect prior toApril 10, 2019 , we were able to borrow debt or issue senior securities in the amount of$1.00 for every$1.00 of equity in the Company. SinceApril 10, 2019 , under the 150% asset coverage standard, we may now incur debt or issue senior securities in the amount of$2.00 for every$1.00 of equity in the Company. Notwithstanding the modified asset coverage requirement under the 1940 Act described above, we are separately subject to a minimum asset coverage requirement of 200% with respect to our Series D Term Preferred Stock.
As of
Investment Highlights
During the nine months endedDecember 31, 2019 , and inclusive of non-cash transactions, we invested$43.2 million in two new portfolio companies, received$167.4 million in proceeds from repayments and sales, and extended$52.1 million of follow-on investments to existing portfolio companies through revolver draws, term loans, and equity. Investment Activity
During the nine months ended
• In
which resulted in a realized loss of $2.7 million . In connection with the
sale, we received net cash proceeds of $4.9 million , including the
repayment of our debt investment of $3.2 million at par.
• In
which resulted in dividend income of
of $19.8 million , including the repayment of our debt investment of
$11.0 million at par.
• In April and
Atlanta, LLC with a total commitment amount of$10.0 million , which matures inOctober 2024 .
• In
Inc. was repaid at par. In connection with the repayment, we received
success fee income of $0.2 million .
• In June 2019 , we invested $38.8 million in Horizon Facilities Services,Inc. ("Horizon") through a combination of secured first lien debt and
preferred equity. Horizon, headquartered in
leading provider of outsourced services to the rental car industry.
• In August 2019 , we sold our investment in Alloy Die Casting Co. ("ADC"),
which resulted in success fee income of
of
proceeds of
of $13.3 million at par.
• In
("Phoenix") through a combination of secured first lien debt and common
equity. Phoenix , headquartered in Mason, Ohio , manufactures high impacttraffic doors for the commercial and industrial market and architectural
doors for the municipal market.
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• In September 2019 , we invested an additional $8.5 million in Bassett
Creek Services, Inc. in the form of first lien debt.
• In
fair value of
of $14.5 million .
• In November 2019 , we invested an additional $16.9 million in Brunswick
Bowling Products, Inc. in the form of second lien debt, of which
$10.0 million was repaid in December 2019 .
• In
Degree"), which resulted in dividend income of
income of $0.2 million , and a realized gain of $47.9 million . In
connection with the sale, we received net cash proceeds of $68.6 million ,
including the repayment of our debt investment of $13.3 million at par,
and retained an equity investment in common stock in Nth Degree
Investment Group, LLC .
Recent Developments
Investment Activity
The following significant investment activity occurred subsequent to
In
In
ATM Activity
Subsequent toDecember 31, 2019 and throughFebruary 3, 2020 , we sold 227,004 shares of our common stock under the ATM program withWedbush Securities, Inc. at a weighted-average gross price of$13.80 per share and raised approximately$3.1 million of gross proceeds. The weighted-average net price per share, after deducting commissions and offering costs borne by us, was$13.55 and resulted in total net proceeds of approximately$3.1 million . These sales were above our then current estimated NAV per share.
Distributions and Dividends
In
Dividend per Dividend per
Share of Share of
Distribution per Series D Term Series E Term
Record Date Payment Date Common Share Preferred Stock Preferred Stock
January 24, 2020 January 31, 2020 $
0.07
February 28, 2020 0.07 0.13020833 0.13281250
March 20, 2020 March 31, 2020 0.07 0.13020833 0.13281250
Total for the Quarter: $ 0.21 $ 0.39062499 $ 0.39843750 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. LIBOR is currently
anticipated to be phased out during late 2021. LIBOR is currently expected to
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. However, we expect we
will need to renegotiate certain loan documents with our portfolio companies
that utilize LIBOR as a factor in determining the interest rate to replace LIBOR
with the new standard that is established and may also need to renegotiate
certain provisions of the Credit Facility. 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.
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RESULTS OF OPERATIONS
Comparison of the Three Months EndedDecember 31, 2019 to the Three Months EndedDecember 31, 2018 For the Three Months Ended December 31, 2019 2018 $ Change % Change INVESTMENT INCOME Interest income$ 12,126 $ 12,460 $ (334 ) (2.7 )% Dividend, success fee, and other income 3,870 2,505 1,365 54.5 Total investment income 15,996 14,965 1,031 6.9 EXPENSES Base management fee 2,970 3,227 (257 ) (8.0 ) Loan servicing fee 1,794 1,730 64 3.7 Incentive fee 2,873 4,138 (1,265 ) (30.6 ) Administration fee 369 346 23 6.6 Interest and dividend expense 3,053 3,848 (795 ) (20.7 ) Amortization of deferred financing costs and discounts 373 373 - - Other 1,017 328 689 210.1
Expenses before credits from Adviser 12,449 13,990
(1,541 ) (11.0 ) Credits to fees from Adviser (2,611 ) (5,047 ) 2,436 (48.3 ) Total expenses, net of credits to fees 9,838 8,943 895 10.0 NET INVESTMENT INCOME 6,158 6,022 136 2.3 REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain on investments 34,005 76,804 (42,799 ) (55.7 ) Net unrealized depreciation of investments (26,999 ) (66,335 ) 39,336 (59.3 ) Net unrealized depreciation of other 154 - 154 NM Net realized and unrealized gain 7,160 10,469
(3,309 ) (31.6 )
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS$ 13,318 $ 16,491
BASIC AND DILUTED PER COMMON SHARE: Net investment income$ 0.19 $ 0.18 $ 0.01 5.6 % Net increase in net assets resulting from operations$ 0.41 $ 0.50 $ (0.09 ) (18.0 )% NM = Not Meaningful Investment Income Total investment income increased 6.9% for the three months endedDecember 31, 2019 , as compared to the prior year period. The increase was due to an increase dividend, success fee, and other income, partially offset by a decrease in interest income. Interest income from our investments in debt securities decreased 2.7% for the three months endedDecember 31, 2019 , 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 endedDecember 31, 2019 was$383.0 million , compared to$381.5 million for the prior year period. This increase was primarily due to the origination of$51.9 million of new debt investments and$79.3 million of follow-on debt investments to existing portfolio companies, partially offset by the pay-off or restructuring of$109.9 million of debt investments and$9.7 million of loans placed on non-accrual status afterSeptember 30, 2018 and their respective impact on the weighted-average principal balance when considering timing of new investments, pay-offs, restructurings, and non-accruals, 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 12.6% for the three months endedDecember 31, 2019 , compared to 13.0% 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. AtDecember 31, 2019 , certain of our loans to four portfolio companies, Meridian,The Mountain Corporation ("The Mountain"),PSI Molded Plastics, Inc. ("PSI Molded"), andSOG Specialty Knives & Tools, LLC ("SOG"), were on non-accrual status, with an aggregate debt cost basis of$56.4 million . AtDecember 31, 2018 , certain of our loans to four portfolio companies, B-Dry, The Mountain, PSI Molded, and SOG, were on non-accrual status, with an aggregate debt cost basis of$73.5 million . 49
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Dividend, success fee, and other income for the three months endedDecember 31, 2019 increased 54.5% from the prior year period. During the three months endedDecember 31, 2019 , dividend, success fee, and other income consisted primarily of$3.6 million of dividend income. During the three months endedDecember 31, 2018 , dividend, success fee, and other income consisted primarily of$2.9 million of success fee income.
As of
Expenses
Total expenses, net of any non-contractual, unconditional, and irrevocable credits from the Adviser, increased 10.0% during the three months endedDecember 31, 2019 , as compared to the prior year period, primarily due to a decrease in credits to fees from the Adviser and an increase in other expenses, partially offset by a decrease in the incentive fee and interest and dividend expense. In accordance with GAAP, we recorded a capital gains-based incentive fee of$1.4 million during the three months endedDecember 31, 2019 , compared to a capital gains-based incentive fee of$2.1 million during the three months endedDecember 31, 2018 . 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 decreased by$0.5 million for the three months endedDecember 31, 2019 , as compared to the prior year period, due to a decrease in pre-incentive fee net investment income as well as an increase in net assets, which drives the hurdle rate. The base management fee, loan servicing fee, incentive fee, and their related non-contractual, unconditional, and irrevocable credits are computed quarterly, as described under "Transactions with the Adviser" in Note 4 -Related Party Transactions in the accompanying Notes to Consolidated Financial Statements and are summarized in the following table: Three Months Ended December 31, 2019 2018 Average total assets subject to base management fee(A)$ 594,000 $ 645,400 Multiplied by prorated annual base management fee of 2.0% 0.5 % 0.5 % Base management fee(B) 2,970 3,227 Credits to fees from Adviser-other(B) (817 ) (3,317 ) Net base management fee $ 2,153 $ (90 ) Loan servicing fee(B) 1,794 1,730 Credits to base management fee-loan servicing fee(B) (1,794 ) (1,730 ) Net loan servicing fee $ - $ - Incentive fee - income-based $ 1,515 $ 2,032 Incentive fee - capital gains-based(C) 1,358 2,106 Total incentive fee(B) $ 2,873 $ 4,138 Credits to fees from Adviser-other(B) - - Net incentive fee $ 2,873 $ 4,138
(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 Statement of Operations.
(C) Only a portion of cumulative capital gains-based incentive fees recorded in
accordance with GAAP is contractually due under the terms of the Advisory
Agreement as of
prior periods.
Interest and dividend expense decreased 20.7% during the three months endedDecember 31, 2019 , as compared to the prior year period, due to a lower weighted-average balance outstanding on the Credit Facility partially offset by an increase in the effective interest rate. The weighted-average balance outstanding on the Credit Facility during the three months endedDecember 31, 2019 was$37.5 million , as compared to$116.7 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 endedDecember 31, 2019 was 9.3%, as compared to 5.7% in the prior year period. This increase in the effective interest rate on the Credit Facility was primarily a result of the unused commitment fee on the undrawn portion of the Credit Facility, partially offset by a decrease in LIBOR. Refer to "Liquidity and Capital Resources - Revolving Line of Credit" for further discussion of the Credit Facility. Refer to "Liquidity and Capital Resources - Equity - Term Preferred Stock"for further discussion of the mandatorily redeemable preferred stock. 50
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Other expenses increased 210.1% during the three months ended
Realized and Unrealized Gain (Loss)
Net Realized Gain (Loss) on Investments
During the three months endedDecember 31, 2019 , we recorded net realized gains on investments of$34.0 million , primarily related to a$47.9 million realized gain from the exit of Nth Degree, partially offset by$14.5 million realized loss from the exit of B-Dry. During the three months endedDecember 31, 2018 , we recorded net realized gains on investments of$76.8 million , primarily related to a$65.7 million realized gain from the exit ofCambridge Sound Management, Inc. ("Cambridge"), a$13.0 million realized gain from the exit ofLogo Sportswear, Inc. ("Logo"), and a$5.4 million realized gain from the exit ofStar Seed, Inc. ("Star Seed"), which were partially offset by a$7.7 million realized loss from the restructuring of our equity investment inCountry Club Enterprises, LLC ("CCE").
Net Unrealized Appreciation (Depreciation) of Investments
During the three months ended
Three Months Ended December 31, 2019
Reversal of
Realized Unrealized Unrealized
Gain Appreciation (Appreciation) Net Gain
Portfolio Company (Loss) (Depreciation) Depreciation (Loss)
Nth Degree, Inc. $ 47,861 $ 1,926 $ (40,846 ) $ 8,941
Galaxy Tool Holding Corporation - 6,577 - 6,577
Old World Christmas, Inc. - 2,447 - 2,447
Counsel Press, Inc. - 2,152 - 2,152
Pioneer Square Brands, Inc. - 1,694 - 1,694
B-Dry, LLC. (14,452 ) - 14,699 247
B+T Group Acquisition Inc. - (526 ) - (526 )
Diligent Delivery Systems - (550 ) - (550 )
Horizon Facilities Service, Inc. - (584 ) - (584 )
Brunswick Bowling Products, Inc. - (1,100 ) - (1,100 )
Frontier Packaging , Inc. - (1,145 ) - (1,145 )
Educators Resource, Inc. - (1,627 ) - (1,627 )
Ginsey Home Solutions, Inc. - (2,372 ) - (2,372 )
PSI Molded Plastics, Inc. - (2,532 ) - (2,532 )
SBS Industries Holdings, Inc. - (4,358 ) - (4,358 )
Other, net (<$1.0 million , net) 596 (854 ) - (258 )
Total $ 34,005 $ (852 ) $ (26,147 ) $ 7,006
The primary drivers of net unrealized depreciation of $27.0 million for the
three months ended December 31, 2019 were the reversal of previously recorded
unrealized appreciation of our investment in Nth Degree upon its exit, a decline
in performance of certain of our other portfolio companies, and a decrease in
comparable multiples used to estimate the fair value of certain of our portfolio
companies, which were partially offset by the reversal of previously recorded
unrealized depreciation of our investment in B-Dry upon its exit and increased
performance of certain of our portfolio companies.
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During the three months ended
Three Months Ended December 31, 2018
Reversal of
Realized Unrealized Unrealized
Gain Appreciation (Appreciation) Net Gain
Portfolio Company (Loss) (Depreciation) Depreciation (Loss)
Cambridge Sound Management, Inc. $ 65,749 $ - $ (47,211 ) $ 18,538
Counsel Press, Inc. - 3,408 - 3,408
Schylling, Inc. - 3,405 - 3,405
SBS Industries, LLC - 3,234 - 3,234
Brunswick Bowling Products, Inc. - 3,088 - 3,088
Alloy Die Casting Co. - 2,610 - 2,610
Nth Degree, Inc. - 1,998 - 1,998
J.R. Hobbs Co.-Atlanta, LLC - 1,746 - 1,746
Old World Christmas, Inc. - 1,669 - 1,669
Ginsey Home Solutions, Inc. - 1,395 - 1,395
Jackrabbit, Inc. - 1,228 - 1,228
Logo Sportswear, Inc. 13,042 - (11,906 ) 1,136Pioneer Square Brands, Inc. - 829 - 829Frontier Packaging , Inc. - 562 - 562 Head Country, Inc. - 538 - 538 Drew Foam Companies, Inc. 300 - - 300 Funko Acquisition Holdings, LLC - (299 ) - (299 ) Meridian Rack & Pinion, Inc. - (628 ) - (628 ) Tread Corporation - (956 ) - (956 ) Country Club Enterprises, LLC (7,725 ) - 6,727 (998 ) Star Seed, Inc. 5,441 - (6,866 ) (1,425 ) The Mountain Corporation - (1,916 ) - (1,916 ) ImageWorks Display and Marketing Group, Inc. - (2,646 ) - (2,646 ) Galaxy Tool Holding Corporation - (2,823 ) - (2,823 ) Bassett Creek Services, Inc. - (3,013 ) - (3,013 ) Edge Adhesives Holdings, Inc. - (3,079 ) - (3,079 ) D.P.M.S., Inc. - (3,636 ) - (3,636 ) SOG Specialty Knives & Tools, LLC - (6,230 ) - (6,230 ) PSI Molded Plastics, Inc. - (7,532 ) - (7,532 ) Other, net (<$250 net) (3 ) (31 ) - (34 ) Total$ 76,804 $ (7,079 ) $ (59,256 ) $ 10,469 The primary drivers of net unrealized depreciation of$66.3 million for the three months endedDecember 31, 2018 were the reversal of previously recorded unrealized appreciation of our investments in Cambridge, Logo, and Star Seed upon their exits and a decline in performance of certain of our other portfolio companies, which was partially offset by the reversal of previously recorded unrealized depreciation of our investment in CCE upon its restructuring, increased performance of certain of our portfolio companies, and an increase in comparable multiples used to estimate the fair value of certain of our portfolio companies. Across our entire investment portfolio, we recorded$3.4 million of net unrealized depreciation on our debt positions and$23.6 million of net unrealized depreciation on our equity positions for the three months endedDecember 31, 2019 . As ofDecember 31, 2019 , the fair value of our investment portfolio was less than our cost basis by$12.4 million , as compared to the fair value exceeding the cost basis by$14.6 million as ofSeptember 30, 2019 , representing net unrealized depreciation of$27.0 million for the three months endedDecember 31, 2019 . Our entire portfolio had a fair value of 97.8% of cost as ofDecember 31, 2019 .
Net Unrealized (Appreciation) Depreciation on Other
During the three months endedDecember 31, 2019 , we recorded net unrealized depreciation of other of$0.2 million related to the Credit Facility recorded at fair value. During the three months endedDecember 31, 2018 , we did not record any unrealized appreciation or depreciation of other. 52
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Comparison of the Nine Months EndedDecember 31, 2019 to the Nine Months EndedDecember 31, 2018 For the Nine Months Ended December 31, 2019 2018 $ Change % Change INVESTMENT INCOME Interest income$ 38,144 $ 37,669 $ 475 1.3 %
Dividend, success fee, and other income 11,798 5,891
5,907 100.3
Total investment income 49,942 43,560 6,382 14.7
EXPENSES
Base management fee 9,285 9,613 (328 ) (3.4 )
Loan servicing fee 5,139 5,144 (5 ) (0.1 )
Incentive fee 6,042 18,849 (12,807 ) (67.9 )
Administration fee 1,106 975 131 13.4
Interest and dividend expense 9,499 11,684 (2,185 ) (18.7 )
Amortization of deferred financing costs
and discounts 1,119 1,237 (118 ) (9.5 )
Other 3,942 3,958 (16 ) (0.4 )
Expenses before credits from Adviser 36,132 51,460 (15,328 ) (29.8 )
Credits to fees from Adviser (7,786 ) (9,986 ) 2,200 (22.0 )
Total expenses, net of credits to fees 28,346 41,474
(13,128 ) (31.7 )
NET INVESTMENT INCOME 21,596 2,086 19,510 NM REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain on investments 55,682 88,056 (32,374 ) (36.8 ) Net realized loss on other - (1,687 ) 1,687 (100.0 ) Net unrealized depreciation of investments (46,900 ) (9,773 ) (37,127 ) 379.9 Net unrealized (appreciation) depreciation of other (10 ) 500
(510 ) (102.0 )
Net realized and unrealized gain 8,772 77,096
(68,324 ) (88.6 )
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS$ 30,368 $ 79,182
BASIC AND DILUTED PER COMMON SHARE: Net investment income$ 0.66 $ 0.06 $ 0.60 NM Net increase in net assets resulting from operations$ 0.93 $ 2.41 $ (1.48 ) (61.4 )% NM = Not Meaningful Investment Income Total investment income increased 14.7% for the nine months endedDecember 31, 2019 , as compared to the prior year period. The increase was due to an increase in dividend, success fee, and other income as well as an increase in interest income. Interest income from our investments in debt securities increased 1.3% for the nine months endedDecember 31, 2019 , as compared to the prior year period. During the nine months endedDecember 31, 2019 , we received$2.1 million of past due interest upon the exit of our investment in ADC. 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 endedDecember 31, 2019 was$373.7 million , compared to$384.4 million for the prior year period. This decrease was primarily due to the pay-off or restructuring of$124.4 million of debt investments and$56.3 million of loans placed on non-accrual status afterMarch 31, 2018 , partially offset by the origination of$76.2 million of new debt investments and$77.9 million of follow-on debt investments to existing portfolio companies, and their respective impact on the weighted-average principal balance when considering timing of new investments, pay-offs, restructuring, and non-accruals, 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 13.5% for the nine months endedDecember 31, 2019 , compared to 13.0% 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. AtDecember 31, 2019 , certain of our loans to four portfolio companies, Meridian, The Mountain, PSI Molded, and SOG, were on non-accrual status, with an aggregate debt cost basis of$56.4 million . AtDecember 31, 2018 , certain of our loans to four portfolio companies, B-Dry, The Mountain, PSI Molded, and SOG, were on non-accrual status, with an aggregate debt cost basis of$73.5 million . 53
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Dividend, success fee, and other income for the nine months endedDecember 31, 2019 increased 100.3% from the prior year period. During the nine months endedDecember 31, 2019 , dividend, success fee, and other income consisted of$9.4 million of dividend income and$2.4 million of success fee income. During the nine months endedDecember 31, 2018 , dividend, success fee and other income consisted of$5.1 million of success fee income and$0.8 million of dividend income.
As of
Expenses
Total expenses, net of any non-contractual, unconditional, and irrevocable
credits from the Adviser, decreased 31.7% during the nine months ended
In accordance with GAAP, we recorded a capital gains-based incentive fee of$1.7 million during the nine months endedDecember 31, 2019 , compared to a capital gains-based incentive fee of$15.7 million during the nine months endedDecember 31, 2018 . 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$1.2 million for the nine months endedDecember 31, 2019 , as compared to the prior year period, as the increase in pre-incentive fee net investment income more than offset the increase in net assets, which drives the hurdle rate. The base management fee, loan servicing fee, incentive fee, and their related non-contractual,unconditional, and irrevocable credits are computed quarterly, as described under "Transactions with the Adviser" in Note 4 -Related Party Transactions in the accompanying Notes to Consolidated Financial Statements and are summarized in the following table: Nine Months Ended December 31, 2019 2018 Average total assets subject to base management fee(A)$ 619,000 $ 640,870 Multiplied by prorated annual base management fee of 2.0% 1.5 % 1.5 % Base management fee(B) 9,285 9,613 Credits to fees from Adviser-other(B) (2,647 ) (4,842 ) Net base management fee $ 6,638 $ 4,771 Loan servicing fee(B) 5,139 5,144 Credits to base management fee-loan servicing fee(B) (5,139 ) (5,144 ) Net loan servicing fee $ - $ - Incentive fee - income-based $ 4,338 $ 3,111 Incentive fee - capital gains-based(C) 1,704
15,738
Total incentive fee(B) $ 6,042$ 18,849 Credits to fees from Adviser-other(B) - - Net incentive fee $ 6,042$ 18,849
(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 Statement of Operations.
(C) A portion of cumulative capital gains-based incentive fees recorded in
accordance with GAAP is contractually due under the terms of the Advisory
Agreement as of
prior periods.
Interest and dividend expense decreased 18.7% during the nine months endedDecember 31, 2019 , as compared to the prior year period, due to a lower weighted-average balance outstanding on the Credit Facility, partially offset by an increase in the effective interest rate. The weighted-average balance outstanding on the Credit Facility during the nine months endedDecember 31, 2019 was$45.8 million , as compared to$113.6 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 endedDecember 31, 2019 was 8.6%, as compared to 5.6% in the prior year period. This increase in the effective interest rate on the Credit Facility was primarily a result of the unused commitment fee on the undrawn portion of the Credit Facility. Refer to "Liquidity and Capital Resources - Revolving Line of Credit" for further discussion of the Credit Facility. Refer to "Liquidity and Capital Resources - Equity - Term Preferred Stock" for further discussion of the mandatorily redeemable preferred stock. 54
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Realized and Unrealized Gain (Loss)
Net Realized Gain on Investments
During the nine months endedDecember 31, 2019 , we recorded net realized gains on investments of$55.7 million , primarily related to a$47.9 million realized gain from the exit of Nth Degree, a$20.4 million realized gain from the exit of ADC and a$3.2 million realized gain from the exit of Jackrabbit, which were partially offset by a$2.7 million realized loss from the exit of Tread and$14.5 million realized loss from the exit of B-Dry.During the nine months endedDecember 31, 2018 , we recorded net realized gains on investments of$88.1 million , primarily related to a$65.7 million realized gain from the exit of Cambridge, a$13.0 million realized gain from the exit of Logo, a$13.8 million realized gain from the exit ofDrew Foam Companies, Inc. , and a$5.4 million realized gain from the exit of Star Seed, partially offset by a$7.7 million realized loss from the restructure of our equity investment in CCE and a$3.6 million realized loss from the exit ofNDLI, Inc ("NDLI").
Net Realized Loss on Other
During the nine months endedDecember 31, 2018 , we recorded a net realized loss on other of$1.7 million , which primarily related to unamortized deferred issuance costs written off upon the redemption of our Series B Term Preferred Stock and Series C Term Preferred Stock inAugust 2018 . There were no realized gains or losses on other during the nine months endedDecember 31, 2019 .
Net Unrealized Appreciation (Depreciation) of Investments
During the nine months ended
Nine Months Ended December 31, 2019
Reversal of
Realized Unrealized Unrealized
Gain Appreciation (Appreciation) Net Gain
Portfolio Company (Loss) (Depreciation) Depreciation (Loss)
Nth Degree, Inc. $ 47,861 $ 12,689 $ (40,846 ) $ 19,704
Alloy Die Casting Co. 20,355 8,823 (12,634 ) 16,544
Counsel Press, Inc. - 7,321 - 7,321
Galaxy Tool Holding Corporation - 5,329 - 5,329
D.P.M.S., Inc. - 3,740 - 3,740
Old World Christmas, Inc. - 3,649 - 3,649
ImageWorks Display and Marketing
Group, Inc. - 2,019 - 2,019
Head Country, Inc. - 1,423 - 1,423
Tread Corporation (2,726 ) - 3,380 654
Drew Foam Companies, Inc. 565 - - 565
B-Dry, LLC (14,452 ) - 14,699 247
The Mountain Corporation - (796 ) - (796 )
Pioneer Square Brands, Inc. - (1,092 ) - (1,092 )
Frontier Packaging , Inc. - (1,303 ) - (1,303 )
Jackrabbit, Inc. 3,198 - (4,547 ) (1,349 )
SOG Specialty Knives and Tools,
LLC - (2,305 ) - (2,305 )
Brunswick Bowling Products, Inc. - (2,419 ) - (2,419 )
PSI Molded Plastics, Inc. - (3,668 ) - (3,668 )
Educators Resource, Inc. - (3,743 ) - (3,743 )
Meridian Rack & Pinion, Inc. - (5,796 ) - (5,796 )
Ginsey Home Solutions, Inc. - (5,926 ) - (5,926 )
SBS Industries Holdings, Inc. - (6,387 ) - (6,387 )
J.R. Hobbs Co.-Atlanta, LLC - (17,822 ) - (17,822 )
Other, net (<$1.0 million , net) 881 (556 ) (132 ) 193
Total $ 55,682 $ (6,820 ) $ (40,080 ) $ 8,782
The primary drivers of net unrealized depreciation of $46.9 million for the nine
months ended December 31, 2019 were the reversal of previously recorded
unrealized appreciation of our investments in Nth Degree, ADC, and Jackrabbit
upon their exit, a decline in performance of certain portfolio companies, and a
decrease in comparable multiples used to estimate the fair value of certain of
our portfolio companies, which were partially offset by the reversal of
previously recorded unrealized depreciation of our investment in B-Dry and Tread
upon their exit and increased performance of certain of our other portfolio
companies.
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During the nine months ended
Nine Months Ended December 31, 2018
Reversal of
Realized Unrealized Unrealized
Gain Appreciation (Appreciation) Net Gain
Portfolio Company (Loss) (Depreciation) Depreciation (Loss)
Cambridge Sound Management, Inc. $ 65,749 $ 25,533 $ (47,211 ) $ 44,071
Nth Degree, Inc. - 15,603 - 15,603
Brunswick Bowling Products, Inc. - 8,721 - 8,721
Alloy Die Casting Co. - 6,408 - 6,408
SBS Industries, LLC - 6,108 - 6,108
Schylling, Inc. - 5,722 - 5,722
Counsel Press, Inc. - 5,520 - 5,520
Star Seed, Inc. 5,441 5,400 (6,865 ) 3,976
Logo Sportswear, Inc. 13,042 2,796 (11,906 ) 3,932
Jackrabbit, Inc. - 3,555 - 3,555
Old World Christmas, Inc. - 3,090 - 3,090
Pioneer Square Brands, Inc. - 2,991 - 2,991
Ginsey Home Solutions, Inc. - 2,942 - 2,942
Galaxy Tool Holding Corporation - 1,454 - 1,454
Funko Acquisition Holdings, LLC 745 536 (356 ) 925
Frontier Packaging , Inc. - 727 - 727
Tread Corporation - 534 - 534
Behrens Manufacturing, LLC 323 (1 ) - 322
Head Country, Inc. - 229 - 229
ImageWorks Display and Marketing
Group, Inc. - 122 - 122
NDLI, Inc. (3,606 ) - 3,600 (6 )
Diligent Delivery Systems - (664 ) - (664 )
Drew Foam Companies, Inc. 14,086 - (14,755 ) (669 )
B-Dry, LLC - (856 ) - (856 )
Edge Adhesives Holdings, Inc. - (995 ) - (995 )
J.R. Hobbs Co.-Atlanta, LLC - (1,007 ) - (1,007 )
Country Club Enterprises, LLC (7,725 ) (12 ) 6,727 (1,010 )
Meridian Rack & Pinion, Inc. - (2,203 ) - (2,203 )
Bassett Creek Services, Inc. - (3,013 ) - (3,013 )
D.P.M.S., Inc. - (3,251 ) - (3,251 )
SOG Specialty Knives & Tools, LLC - (6,445 ) - (6,445 )
The Mountain, Inc. - (7,255 ) - (7,255 )
PSI Molded Plastic, Inc. - (11,298 ) - (11,298 )
Other, net (<$250 net) 1 2 - 3
Total $ 88,056 $ 60,993 $ (70,766 ) $ 78,283
The primary drivers of net unrealized depreciation of $9.8 million for the nine
months ended December 31, 2018 were the reversal of previously recorded
unrealized appreciation upon the exit of our investment in Cambridge, Drew Foam,
Logo, and Star Seed and a decline in performance of certain of our other
portfolio companies, which was partially offset by the reversal of previously
recorded unrealized depreciation of our investment in CCE upon its restructuring
and of our investment in NDLI upon its exit, increased performance of certain of
our portfolio companies, and an increase in comparable multiples used to
estimate the fair value of certain of our portfolio companies.
Across our entire investment portfolio, we recorded $6.4 million of net
unrealized depreciation on our debt positions and $40.5 million of net
unrealized depreciation on our equity positions for the nine months ended
December 31, 2019 . As of December 31, 2019 , the fair value of our investment
portfolio was less than our cost basis by $12.4 million , as compared to the fair
value exceeding the cost basis by $34.5 million as of March 31, 2019 ,
representing net unrealized depreciation of $46.9 million for the nine months
ended December 31, 2019 . Our entire portfolio had a fair value of 97.8% of cost
as of December 31, 2019 .
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Net Unrealized (Appreciation) Depreciation on Other
During the nine months endedDecember 31, 2019 , we recorded net unrealized appreciation of other of$10 related to the Credit Facility recorded at fair value. During the nine months endedDecember 31, 2018 , we recorded net unrealized depreciation of other of$0.5 million related to the Credit Facility recorded at fair value. 57
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LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Net cash provided by operating activities for the nine months endedDecember 31, 2019 was$86.3 million , as compared to net cash provided by operating activities of$90.5 million for the nine months endedDecember 31, 2018 . This change was primarily due to an increase in purchases of investments and a decrease in other liabilities, partially offset by an increase in total principal repayments of investments and net proceeds from the sale of investments.
Purchases of investments were
As ofDecember 31, 2019 , we had equity investments in or loans to 28 portfolio companies with an aggregate cost basis of$573.3 million . As ofDecember 31, 2018 , we had equity investments in or loans to 30 portfolio companies with an aggregate cost basis of$602.5 million . The following table summarizes our total portfolio investment activity during the nine months endedDecember 31, 2019 and 2018: Nine Months EndedDecember 31, 2019 2018
Beginning investment portfolio, at fair value
43,180 57,761
Disbursements to existing portfolio companies 52,124
26,450
Unscheduled principal repayments (79,216 ) (44,714 ) Net proceeds from sales of investments (87,060 ) (108,772 ) Net realized gain on investments 54,522
86,911
Net unrealized (depreciation) appreciation of investments (6,820 )
60,993
Reversal of net unrealized appreciation of investments (40,080 ) (70,766 ) Amortization of premiums, discounts, and acquisition costs, net 14 14 Ending investment portfolio, at fair value$ 560,836
The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as ofDecember 31, 2019 : Amount For the remaining three 2020 months ending March 31:$ 24,700 For the fiscal years ending 2021 March 31: 44,548 2022 54,396 2023 91,049 2024 84,118 Thereafter 133,271 Total contractual repayments$432,082 Adjustments to cost basis of debt investments (52 ) Investments in equity securities 141,224 Total cost basis of investments held as of December 31, 2019:$ 573,254 Financing Activities Net cash used in financing activities for the nine months endedDecember 31, 2019 was$75.9 million , which consisted primarily of$48.8 million of net repayments on the Credit Facility and$27.0 million in distributions to common stockholders. Net cash used in financing activities for the nine months endedDecember 31, 2018 was$90.2 million , which was primarily a result of the redemption of our Series B Term Preferred Stock and Series C Term Preferred Stock of$81.7 million ,$56.9 million of net repayments on the Credit Facility, and$23.8 million in distributions to common stockholders, partially offset by$72.1 million of net proceeds from the issuance of our Series E Term Preferred Stock, and$1.8 million of net proceeds from the issuance of common stock under the ATM program. 58
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Distributions and Dividends to Stockholders
Common Stock Distributions
To qualify to be taxed as a RIC and thus avoid corporate level federal income
tax on the income we distribute to our stockholders, we are required, among
other requirements, to distribute to our stockholders on an annual basis at
least 90% of our 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 $0.068 per common share for each of the nine
months from April through December 2019 , a supplemental distribution of $0.09
per common share in June 2019 , a supplemental distribution of $0.03 per common
share in September 2019 , and a supplemental distribution of $0.09 per common
share in December 2019 .
For the fiscal year ended March 31, 2019 , Investment Company Taxable Income
exceeded distributions declared and paid, and, in accordance with Section 855(a)
of the Code, we elected to treat $16.0 million of the first distributions paid
after fiscal year-end as having been paid in the prior year. In addition, for
the fiscal year ended March 31, 2019 , net capital gains exceeded distributions
declared and paid, and, in accordance with Section 855(a) of the Code, we
elected to treat $13.2 million of the first distributions paid after fiscal
year-end as having been paid in the prior year. For the year ended March 31,
2019 , we recorded $16.1 million of net adjustments for estimated permanent
book-taxdifferences to reflect tax character, which decreased Capital in excess
of par value and increased Accumulated net realized gain in excess of
distributions and (Overdistributed) underdistributed net investment income. For
the nine months ended December 31, 2019 , we recorded $1.4 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
(Overdistributed) net investment income.
Preferred Stock Dividends
Our Board of Directors declared and we paid monthly cash dividends of (i)$0.13020833 per share to holders of our Series D Term Preferred Stock for each of the nine months from April throughDecember 2019 and (ii)$0.1328125 per share to holders of our Series E Term Preferred Stock for each of the nine months from April throughDecember 2019 . 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 theU.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
OnJune 14, 2019 , we filed a registration statement on Form N-2 (File No. 333-232124), which theSEC declared effective onJuly 24, 2019 . 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 ofDecember 31, 2019 , we had the ability to issue up to$300.0 million in securities under the registration statement. 59
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Common Stock
InDecember 2019 , we entered into equity distribution agreements withWedbush Securities, Inc. ,Cantor Fitzgerald & Co. , andLadenburg Thalmann & Co., Inc. (each, a "Sales Agent"), under which we have the ability to issue and sell shares of our common stock, from time to time, through the Sales Agents, up to an aggregate offering price of$35.0 million in an ATM program. This ATM program replaced theFebruary 2018 ATM program discussed below. As ofDecember 31, 2019 , we had remaining capacity to sell up to$35.0 million of common stock under the ATM program. InFebruary 2018 , we entered into equity distribution agreements withCantor Fitzgerald & Co. ("Cantor"),Ladenburg Thalmann & Co., Inc. , andWedbush Securities, Inc. , under which we had the ability to issue and sell shares of our common stock, from time to time, through the Sales Agents, up to an aggregate offering price of$35.0 million in an ATM program. TheFebruary 2018 ATM program was replaced by theDecember 2019 ATM program. During the three months endedJune 30, 2018 , we sold 168,824 shares of our common stock under theFebruary 2018 ATM program with Cantor at a weighted-average gross price of$11.09 per share and raised approximately$1.9 million of gross proceeds. The weighted-average net price per share, after deducting commissions and offering costs borne by us, was$10.87 and resulted in total net proceeds of approximately$1.8 million . Certain of these sales were below our then-current estimated NAV per share during the sales period, with a discount of$0.002 per share, when comparing the sales price per share, after deducting commissions, to the then-current estimated NAV per share; however, the net dilutive effect (after commissions and offering costs borne by us) of these sales was$0.00 per common share as a result of the small number of shares sold at a slight discount to NAV per share and resulting rounding. In aggregate, the sales during the three months endedJune 30, 2018 were above our then-current estimated NAV per share.
We did not sell any shares of our common stock under the current or previous ATM
programs during the nine months ended
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. OnDecember 31, 2019 , the closing market price of our common stock was$13.25 per share, representing a 5.9% premium to our NAV per share of$12.51 as ofDecember 31, 2019 . At our 2019 Annual Meeting of Stockholders held onAugust 15, 2019 , our stockholders approved a proposal authorizing us to issue and sell shares of our common stock at a price below our then-current NAV per share, subject to certain limitations, including that the number of common shares issued and sold pursuant to such authority does not exceed 25.0% of our then-outstanding common stock immediately prior to each such sale, provided that our Board of Directors makes certain determinations prior to any such sale. ThisAugust 2019 stockholder authorization is in effect for one year from the date of stockholder approval.
Term Preferred Stock
InAugust 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 Consolidated Statements of Assets and Liabilities and are being amortized over the period endingAugust 31, 2025 , the mandatory redemption date. Our Series E Term Preferred Stock is not convertible into our common stock or any other security and provides for a fixed dividend equal to 6.375% per year, payable monthly (which equates to$4.8 million per year). We are required to redeem all shares of our outstanding Series E Term Preferred Stock onAugust 31, 2025 , for cash at a redemption price equal to$25.00 per share, plus an amount equal to accumulated but unpaid dividends, if any, to, but excluding, the date of redemption. In addition, two other potential mandatory redemption triggers are as follows: (1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of our outstanding Series E Term Preferred Stock, and (2) if we fail to maintain asset coverage as required by Sections 18 and 61 of the 1940 Act (which is currently 150%) and are unable to correct such failure within a specific amount of time, we are required to redeem a portion of our outstanding Series E Term Preferred Stock or otherwise cure the asset coverage redemption trigger (we may also redeem additional securities to cause asset coverage to be up to 200%). We may also voluntarily redeem all or a portion of our Series E Term Preferred Stock at our sole option at the redemption price at any time on or afterAugust 31, 2020 . 60
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InAugust 2018 , we used the proceeds from the issuance of our Series E Term Preferred Stock, along with borrowings under the Credit Facility, to voluntarily redeem all outstanding shares of our Series B Term Preferred Stock and our Series C Term Preferred Stock, each of which had a liquidation preference of$25.00 per share. In connection with the voluntary redemption of our Series B Term Preferred Stock and Series C Term Preferred Stock, we incurred a loss on extinguishment of debt of$1.7 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. InSeptember 2016 , we completed a public offering of 2,300,000 shares of our Series D Term Preferred Stock at a public offering price of$25.00 per share. Gross proceeds totaled$57.5 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were$55.4 million . Total underwriting discounts and offering costs related to this offering were$2.1 million , which have been recorded as discounts to the liquidation value on our Consolidated Statements of Assets and Liabilities and are being amortized over the period endingSeptember 30, 2023 , the mandatory redemption date. Our Series D Term Preferred Stock is not convertible into our common stock or any other security. Our Series D Term Preferred Stock provides for a fixed dividend equal to 6.25% per year, payable monthly (which equates to$3.6 million per year). We are required to redeem all shares of our outstanding Series D Term Preferred Stock onSeptember 30, 2023 , for cash at a redemption price equal to$25.00 per share, plus an amount equal to accumulated but unpaid dividends, if any, to, but excluding, the date of redemption. In addition, two other potential mandatory redemption triggers are as follows: (1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of our outstanding Series D Term Preferred Stock, and (2) if we fail to maintain asset coverage of at least 200% and are unable to correct such failure within a specific amount of time, we are required to redeem a portion of our outstanding Series D Term Preferred Stock or otherwise cure the asset coverage redemption trigger (and we may also redeem additional securities to cause the asset coverage to be 240%). We may also voluntarily redeem all or a portion of our Series D Term Preferred Stock at our sole option at the redemption price at any time. Each series of our mandatorily redeemable preferred stock has a preference over our common stock with respect to dividends, whereby no distributions are payable on our common stock unless the stated dividends, including any accrued and unpaid dividends, on the mandatorily redeemable preferred stock have been paid in full. The Series D Term Preferred Stock and Series E Term Preferred Stock are considered liabilities in accordance with GAAP and, as such, affect our asset coverage, exposing us to additional leverage risks. The asset coverage on our senior securities that are stock (our Series D Term Preferred Stock and Series E Term Preferred Stock) as ofDecember 31, 2019 was 383.8%, calculated pursuant to Sections 18 and 61 of the 1940 Act.
Revolving Line of Credit
OnAugust 22, 2018 , we, through our wholly-owned subsidiary,Gladstone Business Investment, LLC ("Business Investment "), entered into Amendment No. 4 to the Fifth Amended and Restated Credit Agreement, originally entered into onApril 30, 2013 and as previously amended, withKeyBank 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 toAugust 22, 2021 , and if not renewed or extended by such date, all principal and interest will be due and payable onAugust 22, 2023 (two years after the revolving period end date). As ofDecember 31, 2019 , the Credit Facility provided a one-year extension option that may be exercised on or before the second anniversary of theAugust 22, 2018 amendment date, subject to approval by all lenders. Additionally, the Credit Facility commitment amount was increased from$165.0 million to$200.0 million and, subject to certain terms and conditions, can be expanded to a total facility amount of$300.0 million through additional commitments from existing or new lenders. Advances under the Credit Facility generally bear interest at 30-day LIBOR plus 2.85% per annum untilAugust 21, 2021 , with the margin then increasing to 3.10% for the period fromAugust 22, 2021 toAugust 21, 2022 , 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. We incurred fees of approximately$1.6 million in connection with this amendment. 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 byBusiness 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 withKeyBank .KeyBank is also the trustee of the account and generally remits the collected funds to us once a month. 61
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Among other things, the Credit Facility contains covenants that requireBusiness 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 requiresBusiness Investment to comply with other financial and operational covenants, which obligateBusiness 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 afterNovember 16, 2016 , which equated to$218.7 million as ofDecember 31, 2019 , (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 ofDecember 31, 2019 , and as defined in the performance guaranty of the Credit Facility, we had a net worth of$538.3 million , asset coverage on our senior securities representing indebtedness of 5,240.9%, calculated in accordance with the requirements of Sections 18 and 61 of the 1940 Act, and an active status as a BDC and RIC. As ofDecember 31, 2019 , we had availability, after adjustments for various constraints based on collateral quality, of$169.2 million under the Credit Facility and were in compliance with all covenants under the Credit Facility.
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 ofDecember 31, 2019 andMarch 31, 2019 , we had unrecognized, contractual off-balance sheet success fee receivables of$36.0 million and$30.1 million (or approximately$1.10 and$0.92 per common share), respectively, on our debt investments. Consistent with GAAP, we have not recognized success fee receivables and related income in our Consolidated Financial Statements until earned.
CONTRACTUAL OBLIGATIONS
We have line of credit commitments to certain of our portfolio companies that have not been fully drawn. Since these line of credit commitments have expiration dates and we expect many will never be fully drawn, the total line of credit commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of the combined unused line of credit commitments as ofDecember 31, 2019 to be immaterial. As ofDecember 31, 2019 , we have also extended a guaranty on behalf of one of our portfolio companies, CCE, whereby we have guaranteed$1.0 million of CCE's obligations. As ofDecember 31, 2019 , we have not been required to make payments on this or any previous guaranties, and we consider the credit risks to be remote and the fair value of this guaranty to be immaterial. The following table shows our contractual obligations as ofDecember 31, 2019 , at cost: Payments Due by Period Less than More than Contractual Obligations(A) Total 1 Year 1-3 Years 3-5 Years 5 Years Credit Facility(B)$ 4,200 $ - $ -$ 4,200 $ - Mandatorily redeemable preferred stock 132,250 - - 57,500 74,750 Secured borrowing 5,096 - 5,096 - - Interest payments on obligations(C) 48,795 10,909 21,084 13,625 3,177 Total$ 190,341 $ 10,909 $ 26,180 $ 75,325 $ 77,927
(A) Excludes unused line of credit commitments and guaranties to our portfolio
companies in the aggregate principal amount of
(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 and secured borrowing
and dividend obligations on each series of our mandatorily redeemable
preferred stock. The amount of interest payments calculated for purposes of
this table was based upon rates and outstanding balances as of
2019. Dividend obligations on our mandatorily redeemable preferred stock
assume quarterly declarations and monthly dividend payments through the date
of mandatory redemption of each series.
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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 Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report. Additionally, refer to Note 3 - Investments in the 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 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 anSEC-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 ofLower 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 ofAAA , 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
Rating December 31, 2019 March 31, 2019
Highest 9.0 9.0
Average 6.8 6.7
Weighted-Average 7.0 7.2
Lowest 3.0 1.0
Tax Status
We intend to continue to maintain our qualification as a RIC under Subchapter M
of the Code for U.S. federal income tax purposes. As a RIC, we generally are not
subject to 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, in order 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.
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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 onOctober 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 bothDecember 31, 2019 andMarch 31, 2019 .
Recent Accounting Pronouncements
Refer to Note 2 - Summary of Significant Accounting Policies in the accompanying
Notes to Consolidated Financial Statements included elsewhere in this Quarterly
Report for a description of recent accounting pronouncements.
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