GLADSTONE CAPITAL CORPORATION The following analysis of our financial condition and results of operations should be read in conjunction with our accompanying Consolidated Financial Statements and the notes thereto contained elsewhere in this Annual Report. Historical financial condition and results of operations and percentage relationships among any amounts in the financial statements are not necessarily indicative of financial condition, results of operations or percentage relationships for any future periods. Except per share amounts, dollar amounts in the tables included herein are in thousands unless otherwise indicated.
OVERVIEW
General
We were incorporated under the Maryland General Corporation Law onMay 30, 2001 . We operate as an externally managed, closed-end, non-diversified management investment company, and have elected to be treated as a BDC under the 1940 Act. In addition, for federal income tax purposes we have elected to be treated as a RIC under the Code. To continue to qualify as a RIC for federal income tax purposes and obtain favorable RIC tax treatment, we must meet certain requirements, including certain minimum distribution requirements. We were established for the purpose of investing in debt and equity securities of established private businesses operating in theU.S. Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established lower middle market companies in theU.S. 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 (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities, in connection with our debt investments, that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our investment objectives, our primary investment strategy is to invest in several categories of debt and equity securities, with each investment generally ranging from$8 million to$30 million , although investment size may vary, depending upon our total assets or available capital at the time of investment. We expect that our investment portfolio over time will consist of approximately 90.0% debt investments and 10.0% equity investments, at cost. As ofSeptember 30, 2021 , our investment portfolio was made up of approximately 91.6% debt investments and 8.4% equity investments, at cost. We focus on investing in lower middle market companies (which we generally define as companies with annual earnings before interest, taxes, depreciation and amortization of$3 million to$15 million ) in theU.S. that meet certain criteria, including the following: 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 borrower, reasonable capitalization of the borrower, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples and, to a lesser extent, the potential to realize appreciation and gain liquidity in our equity position, if any. We lend to borrowers that need funds for growth capital or to finance acquisitions or recapitalize or refinance their existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises. Our targeted portfolio companies are generally considered too small for the larger capital marketplace. We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity. InJuly 2012 , theSEC granted us the Co-Investment Order that expanded our ability to co-invest, under certain circumstances, with certain of our affiliates, including Gladstone Investment, a BDC also managed by the Adviser, and any future BDC or registered closed-end management investment company that is advised (or sub-advised if it controls the fund) by the Adviser, or any combination of the foregoing, subject to the conditions in the Co-Investment Order. We believe the Co-Investment Order has enhanced and will continue to 59
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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. Business
Portfolio and Investment Activity
In general, our investments in debt securities have a term of no more than seven years, accrue interest at variable rates (generally based on the 30-day LIBOR) and, to a lesser extent, at fixed rates. We seek debt instruments that pay interest monthly or, at a minimum, quarterly, may have a success fee or deferred interest provision and are primarily interest only, with all principal and any accrued but unpaid interest due at maturity. Generally, success fees accrue at a set rate and are contractually due upon a change of control of a portfolio company, typically from an exit or sale. Some debt securities have deferred interest whereby some portion of the interest payment is added to the principal balance so that the interest is paid, together with the principal, at maturity. This form of deferred interest is often called PIK interest.
Typically, our equity investments consist of common stock, preferred stock, limited liability company interests, or warrants to purchase the foregoing. Often, these equity investments occur in connection with our original investment, recapitalizing a business, or refinancing existing debt.
During the year endedSeptember 30, 2021 , we invested$139.0 million in eight new portfolio companies and extended$42.8 million in investments to existing portfolio companies. In addition, during the year endedSeptember 30, 2021 , we exited ten portfolio companies through early payoffs or a restructure. We received a total of$139.3 million in combined net proceeds and principal repayments from the aforementioned portfolio company exits as well as principal repayments by existing portfolio companies during the year endedSeptember 30, 2021 . This activity resulted in a net decrease in our overall portfolio by two portfolio companies to 46 and a net increase of$51.9 million in our portfolio at cost sinceSeptember 30, 2020 . From our initial public offering inAugust 2001 throughSeptember 30, 2021 , we have made 574 different loans to, or investments in, 254 companies for a total of approximately$2.2 billion , before giving effect to principal repayments on investments and divestitures.
During the year ended
Proprietary Investments
• In
LLC through secured first lien debt.
• In December 2020 , we invested $10.0 million in Encore Dredging Holdings ,LLC through a combination of secured first lien debt and equity. In April
2021, we invested an additional $12.5 million in Encore Dredging
Holdings, LLC , through a combination of secured first lien debt and
equity. In August 2021 , we invested an additional $5.0 million in Encore
Dredging Holdings, LLC through secured first lien debt.
• In
at par for net proceeds of
we received a prepayment fee of $0.2 million .
• In
through secured first lien debt. In September 2021 , we invested an
additional $13.0 million in SpaceCo Holdings, LLC through secured first
lien debt.
• In
through a combination of secured first lien debt and equity.
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• In February 2021 , our investment in Vacation Rental Pros Property
Management, LLC paid off at par for net proceeds of $8.2 million .
• In
through a combination of secured first lien debt and equity.
• In March 2021 , our investment in Magpul Industries Corp. paid off at par
for net proceeds of
received a prepayment fee of $0.7 million .
• In March 2021 , our investment in Vision Government Solutions, Inc. paid
off at par for net proceeds of $9.9 million .
• In
success fee income of
investment of approximately
received net cash proceeds of approximately
repayment of our debt investment of $13.0 million at par.
• In June 2021 , we invested $17.0 million in Eegee's LLC through secured
first lien debt.
• In
through secured first lien debt.
• In June 2021 , we invested $10.0 million in Unirac, Inc. through secured
first lien debt. In September 2021 , we invested an additional
$2.0 million in Unirac, Inc. through secured first lien debt.
• In
in a realized gain on our investment of approximately
connection with the sale, we received net cash proceeds of approximately
$19.6 million , including the repayment of our debt investment of$18.0 million at par.
• In
an existing portfolio company, through secured second lien debt.
• In September 2021 , Precision International, LLC was sold, which resulted
in a realized gain on our investment of approximately
connection with the sale, we received net cash proceeds of approximately
$1.0 million , including the repayment of our debt investment of$0.3 million at par and a consent fee of approximately$0.3 million . Syndicated Investments • InDecember 2020 , our investment inEdmentum Ultimate Holdings, LLC was
sold, which resulted in a realized loss of approximately
our equity investment. In connection with the sale, we received net cash
proceeds of approximately $4.9 million , including the repayment of our
debt investment of $4.6 million at par.
• In December 2020 , our investment in Vertellus Holdings LLC was sold,
which resulted in a realized loss of approximately $41 thousand . Inconnection with the sale, we received net cash proceeds of approximately
$4.1 million , including the repayment of our debt investment of$1.1 million at par.
• In
for net proceeds of
received a prepayment fee of
Refer to Note 15-Subsequent Events in the accompanying Consolidated Financial
Statements included elsewhere in this Annual Report for portfolio activity
occurring subsequent to
Capital Raising
We have been able to meet our capital needs through extensions of and increases
to our line of credit under the Credit Facility and by accessing the capital
markets in the form of public equity offerings of common stock and
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public and private debt offerings. We have successfully extended the Credit Facility's revolving period multiple times, most recently toOctober 2023 , and currently have a total commitment amount of$175.0 million . We sold 2,737,521 and 1,220,927 common shares under our at-the-market program during the years endedSeptember 30, 2021 and 2020, respectively. InNovember 2021 , we completed a private placement of$50.0 million aggregate principal amount of the 2027 Notes. InDecember 2020 , we completed an offering of$100.0 million aggregate principal amount of the 2026 Notes. InMarch 2021 , we completed an offering of an additional$50.0 million aggregate principal amount of the 2026 Notes. InOctober 2019 , we completed an offering of$38.8 million aggregate principal amount of the 2024 Notes, inclusive of the overallotment. Additionally, we completed an offering of$57.5 million aggregate principal amount of our 2023 Notes, inclusive of the overallotment inNovember 2018 . Refer to "Liquidity and Capital Resources - Revolving Credit Facility," "Liquidity and Capital Resources - Equity - Common Stock," and "Liquidity and Capital Resources - Notes Payable" for further discussion. Although we were able to access the capital markets historically and in recent years, market conditions may affect the trading price of our capital stock and thus may inhibit our ability to finance new investments through the issuance of equity in the future. When our common stock trades below NAV per common share, our ability to issue equity is constrained by provisions of the 1940 Act, which generally prohibits the issuance and sale of our common stock below NAV per common share without first obtaining approval from our stockholders and our independent directors, other than through sales to our then-existing stockholders pursuant to a rights offering.
On
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 an asset coverage (as defined in Sections 18 and 61 of the 1940 Act) of at least 150% on our "senior securities representing indebtedness" and our "senior securities that are stock." 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 a result, the Company's asset coverage requirements for senior securities changed from 200% to 150%, effectiveApril 10, 2019 .
As of
Recent Developments
Debt Offering
InNovember 2021 , we completed a private placement of$50.0 million aggregate principal amount of the 2027 Notes for net proceeds of approximately$48.5 million after adding discounts and deducting underwriting costs, commissions and offering expenses borne by us. The 2027 Notes will mature onMay 1, 2027 and may be redeemed in whole or in part at any time or from time to time at the Company's option prior to maturity at par plus a "make-whole" premium, if applicable. The 2027 Notes bear interest at a rate of 3.75% per year. Interest is payable semi-annually onMay 1 andNovember 1 of each year (which equates to approximately$1.9 million per year).
Debt Redemption
On
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Distributions
In
Distribution
per Common
Record Date Payment Date Share
October 22, 2021 October 29, 2021 $ 0.065
November 19, 2021 November 30, 2021 0.065
December 23, 2021 December 31, 2021 0.065
Total for the Quarter $ 0.195
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 LIBOR) and, to a lesser
extent, at fixed rates. Most U.S. dollar LIBOR are currently anticipated to be
phased out in June 2023 . LIBOR is currently expected to transition to a new
standard rate, the SOFR, which will incorporate certain overnight repo market
data collected from multiple data sets. To attain an equivalent one-month rate,
we currently intend to adjust the SOFR to minimize the difference between the
interest that a borrower would be paying using LIBOR versus what it will be
paying using SOFR. We are currently monitoring the transition and cannot assure
you whether SOFR will become a standard rate for variable rate debt. We 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 include LIBOR
replacement language. Assuming that SOFR replaces LIBOR and is appropriately
adjusted to equate to one-month LIBOR, we expect that there should be minimal
impact on our operations.
COVID-19
We continue to monitor and work with the management teams and shareholders of
our portfolio companies to navigate the significant market, operational and
economic challenges created by the continuing COVID-19 pandemic. The Company's
investment portfolio continues to be focused on a diversified mix of industries
and sectors that have proven to be more durable than industries or sectors that
are more prone to economic cycles including consumer or retail industries. We
believe our portfolio companies effectively and efficiently responded to the
challenges posed by COVID-19 and related orders imposed by state and local
governments including paused or reversed reopening orders, including developing
liquidity plans supported by internal cash reserves, shareholder support, and,
as appropriate, accessing the government Paycheck Protection Program. We
believe we have sufficient levels of liquidity to support our existing portfolio
companies, as necessary, and selectively deploy capital in new investment
opportunities.
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RESULTS OF OPERATIONS
Comparison of the Year EndedSeptember 30, 2021 to the Year EndedSeptember 30, 2020 For the Year Ended September 30, 2021 2020 $ Change % Change INVESTMENT INCOME Interest income$ 49,959 $ 46,021 $ 3,938 8.6 % Other income 3,835 1,938 1,897 97.9 Total investment income 53,794 47,959 5,835 12.2 EXPENSES Base management fee 8,674 7,568 1,106 14.6 Loan servicing fee 5,579 5,819 (240 ) (4.1 ) Incentive fee 5,746 5,251 495 9.4 Administration fee 1,438 1,430 8 0.6 Interest expense on borrowings 11,513 9,991 1,522 15.2 Amortization of deferred financing costs 1,347 1,484 (137 ) (9.2 ) Other expenses 1,907 2,105 (198 ) (9.4 )
Expenses, before credits from Adviser 36,204 33,648
2,556 7.6 Credit to base management fee - loan servicing fee (5,579 ) (5,819 ) 240 (4.1 )
Credit to fees from Adviser - other (2,953 ) (5,033 )
2,080 (41.3 ) Total expenses, net of credits 27,672 22,796 4,876 21.4 NET INVESTMENT INCOME 26,122 25,163 959 3.8 NET REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on investments 4,179 (7,476 ) 11,655 (155.9 ) Net realized gain (loss) on other (999 ) (1,407 ) 408 (29.0 ) Net unrealized appreciation (depreciation) of investments 55,347 (18,670 ) 74,017 (396.4 ) Net unrealized appreciation (depreciation) of other (350 ) 517 (867 ) (167.7 ) Net gain (loss) from investments and other 58,177 (27,036 )
85,213 (315.2 )
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS$ 84,299 $ (1,873 ) $ 86,172 NM PER BASIC AND DILUTED COMMON SHARE Net investment income$ 0.79 $ 0.81 $
(0.02 ) (2.5 )%
Net increase (decrease) in net assets resulting from operations$ 2.54 $ (0.06 ) $ 2.60 NM NM - not meaningful Investment Income Interest income increased by 8.6% for the year endedSeptember 30, 2021 , as compared to the prior year. The increase was due primarily to an increase in the weighted average principal balance of our interest-bearing portfolio, partially offset by a decrease in the weighted average yield on our interest-bearing portfolio. The 64
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weighted average principal balance of our interest-bearing investment portfolio for the year endedSeptember 30, 2021 , was$462.8 million , compared to$418.0 million for the year endedSeptember 30, 2020 , an increase of$44.8 million , or 10.7%. The weighted average yield on our interest-bearing investments is based on the current stated interest rate on interest-bearing investments, which decreased to 10.6% for the year endedSeptember 30, 2021 , compared to 11.0% for the year endedSeptember 30, 2020 , inclusive of any allowances on interest receivables made during those periods. The decrease was driven mainly by a decrease in the interest rate spread on new deals over the two respective years. As ofSeptember 30, 2021 , there were no loans on non-accrualstatus. As ofSeptember 30, 2020 , loans to one portfolio company, B+T Group Acquisition Inc. ("B+T"), were on non-accrual status, with an aggregate debt cost basis of approximately$7.2 million , or 1.6% of the cost basis of all debt investments in our portfolio. Other income increased by 97.9% during the year endedSeptember 30, 2021 , as compared to the prior year period primarily due to a$1.5 million increase in dividend income and a$0.5 million increase in prepayment fees received year over year.
As of
Expenses
Expenses, net of any non-contractual, unconditional and irrevocable credits to fees from the Adviser, increased$4.9 million , or 21.4%, for the year endedSeptember 30, 2021 as compared to the prior year. This increase was primarily due to a$2.1 million decrease in credits to fees from the Adviser, a$1.5 million increase in interest expense on borrowings, and a$1.1 million increase in the gross base management fee. Total interest expense on borrowings and notes payable increased by$1.5 million , or 15.2%, during the year endedSeptember 30, 2021 compared to the prior year. This increase was driven by an increase in our overall funding needs and a change in the composition of our overall debt financing. Interest expense on our notes payable increased by$3.0 million year over year with the issuance of the 2026 Notes inDecember 2020 andMarch 2021 , partially offset by the redemption of the 2023 Notes inJanuary 2021 . Interest expense on our Credit Facility decreased by$1.4 million period over period, driven primarily by a decrease in the weighted average balance outstanding on our Credit Facility and a decrease in LIBOR, period over period, partially offset by an increase in unused commitment fees. The weighted average balance outstanding on our Credit Facility was$59.4 million during the year endedSeptember 30, 2021 , as compared to$103.5 million in the prior year, a decrease of 42.6%. The effective interest rate on our Credit Facility, including unused commitment fees incurred, but excluding the impact of deferred financing costs, was 5.0% during the year endedSeptember 30, 2021 , compared to 4.3% during the prior year. The increase in the effective interest rate was driven primarily by a$0.7 million increase in unused commitment fees paid during the year endedSeptember 30, 2021 as compared to the prior year. The gross base management fee earned by the Adviser increased by$1.1 million , or 14.6%, during the year endedSeptember 30, 2021 , as compared to the prior year, resulting from an increase in average total assets subject to the base management fee year over year. The income-based incentive fee increased by$0.5 million , or 9.4%, for the year endedSeptember 30, 2021 , as compared to the prior year, due to higher pre-incentive fee net investment income over the respective periods. Our Board of Directors accepted non-contractual, unconditional and irrevocable credits from the Adviser of$0.5 million and$3.0 million , to reduce the income-based incentive fee to the extent net investment income did not cover 100.0% of our distributions to common stockholders during the years endedSeptember 30, 2021 and 2020, respectively. 65
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The base management, loan servicing and incentive fees, and associated non-contractual, unconditional and irrevocable credits, are computed quarterly, as described under "Transactions with the Adviser" in Note 4-Related Party Transactions of the Notes to Consolidated Financial Statements and are summarized in the following table:
Year Ended September 30,
2021 2020
Average total assets subject to base management fee(A)
$ 432,457 Multiplied by annual base management fee of 1.75% 1.75 % 1.75 % Base management fee(B) 8,674
7,568
Portfolio company fee credit (2,195 ) (1,589 ) Syndicated loan fee credit (307 ) (406 ) Net Base Management Fee$ 6,172 $ 5,573 Loan servicing fee(B)$ 5,579 $ 5,819 Credit to base management fee - loan servicing fee(B) (5,579 ) (5,819 ) Net Loan Servicing Fee $ - $ - Incentive fee (B)$ 5,746 $ 5,251 Incentive fee credit (451 ) (3,038 ) Net Incentive Fee$ 5,295 $ 2,213 Portfolio company fee credit$ (2,195 ) $ (1,589 ) Syndicated loan fee credit (307 ) (406 ) Incentive fee credit (451 ) (3,038 ) Credit to Fees from Adviser-Other(B)$ (2,953 ) $ (5,033 )
(A) Average total assets subject to the base management fee is defined 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 two most recently completed quarters within the respective years
and adjusted appropriately for any share issuances or repurchases during the
period.
(B) Reflected, on a gross basis, as a line item on our accompanying Consolidated
Statement of Operationslocated elsewhere in this Annual Report.
Realized Loss and Unrealized Appreciation
Net Realized Gain (Loss) on Investments
For the year endedSeptember 30, 2021 , we recorded a net realized gain on investments of$4.2 million , which was primarily a result of a$5.3 million net realized gain recognized from the exit ofAG Transportation Holdings, LLC , a$0.6 million net realized gain from the exit ofAmerican Trailer Rental Group LLC and gains from previous exits of certain other investments, partially offset by a$2.4 million net realized loss on our investment inEdmentum Ultimate Holdings, LLC . For the year endedSeptember 30, 2020 , we recorded a net realized loss on investments of$7.5 million , which was primarily a result of the sale of our investment inMeridian Rack & Pinion, Inc. ("Meridian") inJanuary 2020 for a$5.6 million realized loss and the loss recognized on our investment inNew Trident Holdcorp, Inc. ("New Trident") of$4.4 million inDecember 2019 , partially offset by a realized gain of$2.5 million from the sale of our investment inThe Mochi Ice Cream Company ("Mochi") inJanuary 2020 . 66
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Net Unrealized Appreciation of Investments
During the year ended
Year Ended September 30, 2021
Reversal of
Unrealized Unrealized
Realized Gain Appreciation Depreciation Net Gain
Portfolio Company (Loss) (Depreciation) (Appreciation) (Loss)
Lignetics, Inc. $ - $ 14,420 $ - $ 14,420
Antenna Research Associates ,
Inc. - 9,306 - 9,306
B+T Group Acquistion Inc. - 6,453 - 6,453
AG Transportation Holdings ,
LLC 5,289 6,788 (7,934 ) 4,143
Targus Cayman HoldCo, Ltd. - 4,125 - 4,125
Defiance Integrated
Technologies, Inc. - 2,535 - 2,535
Imperative Holdings
Corporation - 2,281 - 2,281
Leeds Novamark Capital I,
L.P. - 2,219 - 2,219
MCG Energy Solutions, LLC - 1,659 - 1,659
PIC 360, LLC - 1,641 - 1,641
Triple H Food Processors,
LLC - 1,523 - 1,523
Encore Dredging Holdings ,
LLC - 1,443 - 1,443
TNCP Intermediate HoldCo,
LLC - 1,252 - 1,252
Iten Defense, LLC - 798 - 798
Tailwind Smith Cooper
Intermediate Corporation - 789 - 789
American Trailer Rental
Group LLC 598 1,213 (1,042 ) 769
EL Academies, Inc. - 760 - 760
Café Zupas - 746 - 746
DKI Ventures, LLC - 732 - 732
Sea Link International IRB,
Inc. - 662 - 662
Canopy Safety Brands, LLC - 657 - 657
SpaceCo Holdings, LLC - 500 - 500
Keystone Acquisition Corp. - 481 - 481
Edmentum Ultimate Holdings ,
LLC (2,351 ) - 2,770 419
Medical Solutions Holdings ,
Inc. - 406 - 406
R2i Holdings, LLC - 351 - 351
Belnick, Inc. - 350 - 350
Vertellus Holdings LLC (41 ) - 313 272
Gray Matter Systems, LLC - 260 - 260
Unirac, Inc. - 238 - 238
ALS Education, LLC - 237 - 237
Magpul Industries Corp. - 210 (210 ) -
Drive Chassis Holdco, LLC - 260 (261 ) (1 )
Precision International, LLC 354 (184 ) (332 ) (162 )
GFRC Holdings, LLC - (548 ) - (548 )
LWO Acquisitions Company LLC - (609 ) - (609 )
ENET Holdings, LLC - (674 ) - (674 )
NetFortris Corp. - (1,371 ) - (1,371 )
Other, net (<$500 ) 330 72 62 464
Total: $ 4,179 $ 61,981 $ (6,634 ) $ 59,526
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The primary driver of net unrealized appreciation of$55.3 million for the year endedSeptember 30, 2021 was the improvement in the financial and operational performance across a number of our portfolio companies and an increase in comparable transaction multiples used to estimate the fair value of several of our portfolio companies, partially offset by the reversal of unrealized depreciation associated with the exit of our investment inAG Transportation Holdings, LLC and a decrease in performance of certain of our other portfolio companies.
During the year ended
Year Ended September 30, 2020
Reversal of
Unrealized Unrealized
Realized Gain Appreciation Depreciation Net Gain
Portfolio Company (Loss) (Depreciation) (Appreciation) (Loss)
Vertellus Holdings LLC $ - $ 2,194 $ - $ 2,194
Lignetics, Inc. (63 ) 1,654 - 1,591
The Mochi Ice Cream Company 2,533 1,541 (2,570 ) 1,504
Antenna Research Associates ,
Inc. - 1,098 - 1,098
Leeds Novamark Capital I,
L.P. - 1,002 - 1,002
Vacation Rental Pros
Property Management, LLC - 384 - 384
New Trident Holdcorp, Inc. (4,409 ) - 4,409 -
DiscoverOrg, LLC - (348 ) 336 (12 )
Travel Sentry, Inc. (92 ) (525 ) 534 (83 )
Meridian Rack & Pinion, Inc. (5,589 ) (112 ) 5,589 (112 )
Targus Cayman HoldCo, Ltd. - (199 ) - (199 )
Precision International, LLC - (268 ) - (268 )
Canopy Safety Brands, LLC - (442 ) 122 (320 )
R2i Holdings, LLC - (333 ) - (333 )
CHA Holdings, Inc. - (336 ) - (336 )
Medical Solutions Holdings ,
Inc. - (343 ) - (343 )
Café Zupas - (519 ) - (519 )
EL Academies, Inc. - (553 ) - (553 )
Keystone Acquisition Corp. - (589 ) - (589 )
Triple H Food Processors,
LLC - (642 ) - (642 )
Tailwind Smith Cooper
Intermediate Corporation - (833 ) - (833 )
B+T Group Acquisition Inc. - (858 ) - (858 )
DKI Ventures, LLC - (1,221 ) - (1,221 )
LWO Acquisitions Company LLC - (1,768 ) - (1,768 )
Sea Link International IRB,
Inc. - (1,928 ) - (1,928 )
NetFortris Corp. - (2,426 ) - (2,426 )
Edge Adhesives Holdings ,
Inc. - (2,977 ) - (2,977 )
FES Resources Holdings LLC - (3,236 ) - (3,236 )
Defiance Integrated
Technologies, Inc. - (4,179 ) - (4,179 )
Imperative Holdings
Corporation - (4,776 ) - (4,776 )
ENET Holdings, LLC - (5,196 ) - (5,196 )
Other, net (<$500 ) 144 (227 ) (129 ) (212 )
Total: $ (7,476 ) $ (26,961 ) $ 8,291 $ (26,146 ) Since
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combination of the marked increase in market spreads for comparable loan investments and discounts applied to any portfolio company whose markets, or operations have been impacted by the COVID-19 pandemic, were the primary drivers of net unrealized depreciation of investments of$18.7 million for year endedSeptember 30, 2020 . The decreased performance of certain of our portfolio companies, a decrease in comparable multiples used to estimate the fair value of certain of our portfolio companies, and the reversal of previously recorded unrealized appreciation of Mochi upon exit, partially offset by the reversal of previously recorded unrealized depreciation upon the exit of Meridian and New Trident also impacted the total net unrealized depreciation. As ofSeptember 30, 2021 , the fair value of our investment portfolio was greater than its cost basis by approximately$11.1 million and our entire investment portfolio was valued at 102.0% of cost, as compared to cumulative net unrealized depreciation of$44.2 million and a valuation of our entire portfolio at 91.1% of cost as ofSeptember 30, 2020 . This year over year increase in the cumulative unrealized appreciation on investments represents net unrealized appreciation of$55.3 million for the year endedSeptember 30, 2021 .
Net Unrealized (Appreciation) Depreciation of Other
During the year endedSeptember 30, 2021 , we recorded$0.4 million of unrealized depreciation on our Credit Facility at fair value as compared to$0.5 million of unrealized appreciation during the year endedSeptember 30, 2020 . The comparison of the fiscal year endedSeptember 30, 2020 to the fiscal year endedSeptember 30, 2019 can be found in our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2020 , as filed with theSEC onNovember 11, 2020 , located within Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, which is incorporated by reference herein. 69
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LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Our cash flows from operating activities are primarily generated from the interest payments on debt securities that we receive from our portfolio companies, as well as net proceeds received through repayments or sales of our investments. We utilize this cash primarily to fund new investments, make interest payments on our Credit Facility and notes payable, make distributions to our stockholders, pay management and administrative fees to the Adviser and Administrator, and for other operating expenses. Net cash used in operating activities for the year endedSeptember 30, 2021 was$14.1 million as compared to$46.1 million for the year endedSeptember 30, 2020 . The change was primarily due to an increase in principal repayments and net proceeds from sales of investments. Repayments and net proceeds from sales were$142.7 million during the year endedSeptember 30, 2021 compared to$78.8 million during the year endedSeptember 30, 2020 . Net cash used in operating activities for the year endedSeptember 30, 2020 was$46.1 million as compared to net cash provided by operating activities of$9.3 million for the year endedSeptember 30, 2019 . The change was primarily due to a decrease in principal repayments and net proceeds from sales of investments. Repayments and net proceeds from sales were$78.8 million during the year endedSeptember 30, 2020 compared to$131.1 million during the year endedSeptember 30, 2019 .
As of
The following table summarizes our total portfolio investment activity during
the years ended
Year Ended September 30,
2021 2020
Beginning investment portfolio, at fair value $ 450,400 $ 402,875
New investments 138,992 131,150
Disbursements to existing portfolio companies 42,849
18,756
Scheduled principal repayments (4,854 ) (5,648 ) Unscheduled principal repayments (121,962 ) (70,344 ) Net proceeds from sales of investments (12,457 ) (2,763 ) Net unrealized appreciation (depreciation) of investments 61,981 (26,961 ) Reversal of prior period net appreciation (depreciation) of investments (6,634 )
8,291
Net realized gain (loss) on investments 4,179 (7,685 ) Increase in investment balance due to PIK interest(A) 5,994
2,400
Net change in premiums, discounts and amortization (876 ) 329 Ending Investment Portfolio, at Fair Value$ 557,612 $ 450,400 (A) PIK interest is a non-cash source of income and is calculated at the contractual rate stated in a loan agreement and added to the principal balance of a loan. 70
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The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as ofSeptember 30, 2021 . Year EndingSeptember 30 , Amount 2022(A)$ 118,499 2023 32,544 2024 46,231 2025 96,825 2026 190,456 Thereafter 17,581 Total contractual repayments$ 502,136 Adjustments to cost basis of debt investments (1,584 ) Investments in equity securities 45,960 Investments held as ofSeptember 30, 2021 at Cost:$ 546,512
(A) Includes debt investments with contractual principal amounts totaling
2021.
Financing Activities
Net cash provided by financing activities for the year ended September 30, 2021
was $12.4 million , which consisted primarily of $150.0 million in gross proceeds
from the issuance of notes payable and $26.9 million in gross proceeds from the
issuance of common stock, partially offset by $77.5 million in net repayments on
our Credit Facility, $57.5 million used in the redemption of our 2023 Notes, and
$26.0 million in distributions to common shareholders.
Net cash provided by financing activities for the year ended September 30, 2020
was $32.8 million , which consisted primarily of $61.1 million in net borrowings
on our Credit Facility and $38.8 million in gross proceeds from the issuance of
notes payable, partially offset by $51.8 million used in the redemption of our
Series 2024 Term Preferred Stock and $25.2 million in distributions to common
shareholders.
Net cash provided by financing activities for the year ended September 30, 2019
was $4.5 million , which consisted primarily of $57.5 million in gross proceeds
from the issuance of the 2023 Notes and $17.2 million in gross proceeds from the
issuance of common stock, partially offset by $43.1 million in net repayments on
our Credit Facility and $24.6 million in distributions to common stockholders.
Distributions 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 to distribute to our stockholders on an annual basis at least 90.0% of our Investment Company Taxable Income. Additionally, our Credit Facility has a covenant that generally restricts the amount of distributions to stockholders that we can pay out to be no greater than our aggregate net investment income, net capital gains and amounts elected to have been paid during the prior year in accordance with Section 855(a) of the Code. In accordance with these requirements, during the year endedSeptember 30, 2021 , we paid monthly cash distributions of$0.065 per common share for each month, which totaled an aggregate of$26.0 million . During the year endedSeptember 30, 2020 , we paid monthly cash distributions of$0.07 per common share for the months ofOctober 2019 throughMarch 2020 and paid monthly cash distributions of$0.065 per common share for the months ofApril 2020 throughSeptember 2020 . These distributions totaled an aggregate of$25.2 million . During the year endedSeptember 30, 2019 , we paid monthly cash distributions of 71
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$0.07 per common share for each month, which totaled an aggregate of$24.6 million . InOctober 2021 , our Board of Directors declared a monthly distribution of$0.065 per common share for each of October, November, andDecember 2021 . Our Board of Directors declared these distributions to our stockholders based on our estimates of our Investment Company Taxable Income for the fiscal year endingSeptember 30, 2022 . From inception throughSeptember 30, 2021 , we have paid 224 monthly or quarterly consecutive distributions to common stockholders totaling approximately$396.3 million or$21.04 per share. For the fiscal years endedSeptember 30, 2021 , 2020, and 2019, distributions declared and paid exceeded taxable income available for common distributions resulting in a partial return of capital of approximately$1.0 million ,$0.4 million , and$0.7 million , respectively.
Preferred Stock Dividends
OnOctober 2, 2019 , we voluntarily redeemed all 2,070,000 outstanding shares of our Series 2024 Term Preferred Stock at a redemption price of$25.00 per share which represents the liquidation preference per share, plus accrued and unpaid dividends throughOctober 1, 2019 in the amount of$0.004166 per share, for a payment per share of$25.004166 and an aggregate redemption price of approximately$51.8 million . In accordance with GAAP, we treated these monthly dividends as an operating expense. For federal income tax purposes, the dividends paid by us to preferred stockholders generally constituted ordinary income to the extent of our current and accumulated earnings and profits and is reported after the end of the calendar year based on tax information for the full fiscal year. Such a characterization made on an interim, quarterly basis may not be representative of the actual tax characterization for the full fiscal year.
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 make such election will receive their distributions in cash. Common stockholders who receive distributions in the form of stock will be subject to the same federal, state and local tax consequences as stockholders who elect to receive their distributions in cash. The common stockholder will have an adjusted basis in the additional common shares purchased through the plan equal to the amount of the reinvested distribution. The additional 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.
Equity
Registration Statement
Our shelf 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. As ofSeptember 30, 2021 , we had the ability to issue up to an additional$55.5 million in securities under the registration statement.
Common Stock
In
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per share and raised
InMay 2021 , we entered into a new equity distribution agreement withJefferies LLC (the "New Jefferies Sales Agreement") under which we have the ability to issue and sell, from time to time, shares of our common stock with an aggregate offering price of up to$60.0 million . During the year endedSeptember 30, 2021 , we sold 655,252 shares of our common stock under the NewJefferies Sales Agreement, at a weighted-average price of$11.71 per share and raised$7.7 million of gross proceeds. Net proceeds, after deducting commissions and offering costs borne by us, were approximately$7.5 million . As ofSeptember 30, 2021 , we had a remaining capacity to sell up to an additional$52.3 million of our common stock under the New Jefferies Sales Agreement. 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. To the extent that our common stock trades at a market price below our NAV per share, we will generally be precluded from raising equity capital through public offerings of our common stock, other than pursuant to stockholder and independent director approval or a rights offering to existing common stockholders.
On
Revolving Credit Facility
OnMay 13, 2021 , we, through Business Loan, amended and restated the Credit Facility to, among other things, (i) decrease the commitment amount from$205.0 million to$175.0 million , (ii) extend the revolving period end date toOctober 31, 2023 , (iii) extend the maturity date toOctober 31, 2025 (at which time all principal and interest will be due and payable if the Credit Facility is not extended by the revolving period end date), (iv) reduce the interest rate margin to 2.70% during the revolving period and 3.25% thereafter, with a LIBOR floor of 0.35%, (v) revise the unused fee to include an additional fee tier of 0.35% per annum on the daily undrawn amounts if the average unused amount is equal to or less than 35% during the applicable period, (vi) provide for certain excess concentration limits, including a reduced second lien limit and a new broadly syndicated loan limit and (vii) add customary LIBOR replacement language. We incurred fees of approximately$1.1 million in connection with this amendment and restatement, which are being amortized through our Credit Facility's revolving period end date ofOctober 31, 2023 . Interest is payable monthly during the term of our Credit Facility. Available borrowings are subject to various constraints imposed under our Credit Facility, based on the aggregate loan balance pledged by Business Loan, which varies as loans are added and repaid, regardless of whether such repayments are prepayments or made as contractually required. Our Credit Facility also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account withKeyBank and withThe Bank of New York Mellon Trust Company, N.A. as custodian.KeyBank , which also serves as the trustee of the account, generally remits the collected funds to us once a month. Our Credit Facility contains covenants that require Business Loan to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions), and restrict material changes to our credit and collection policies without the lenders' consents. Our Credit Facility generally limits distributions to our stockholders on a fiscal year basis to the sum of our net investment income, net capital gains and amounts elected to have been paid during the prior year in accordance with Section 855(a) of the Code. Business Loan is also subject to certain limitations on the type of loan investments it can apply as collateral towards the borrowing base to receive additional borrowing availability under our Credit Facility, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life, portfolio company leverage and lien property. Our Credit Facility further requires Business Loan to comply with other financial and operational covenants, which obligate Business Loan to, 73
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among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of 25 obligors required in the borrowing base.
Additionally, we are required to maintain (i) a minimum net worth (defined in our Credit Facility to include any outstanding mandatorily redeemable preferred stock) of$325.0 million plus 50.0% of all equity and subordinated debt raised afterMay 13, 2021 less 50% of any equity and subordinated debt retired or redeemed afterMay 13, 2021 , which equates to$328.8 million as ofSeptember 30, 2021 , (ii) asset coverage with respect to "senior securities representing indebtedness" of at least 150% (or such percentage as may be set forth in Section 18 of the 1940 Act, as modified by Section 61 of the 1940 Act), and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code. As ofSeptember 30, 2021 , and as defined in our Credit Facility, we had a net worth of$504.0 million , asset coverage on our "senior securities representing indebtedness" of 230.7% and an active status as a BDC and RIC. In addition, as ofSeptember 30, 2021 , we had 31 obligors in our Credit Facility's borrowing base and we were in compliance with all of our Credit Facility covenants. Refer to Note 5-Borrowings of the notes to our Consolidated Financial Statements included elsewhere in this Annual Report for additional information regarding our Credit Facility. Notes Payable InDecember 2020 , we completed an offering of$100.0 million aggregate principal amount of the 2026 Notes for net proceeds of approximately$97.7 million after deducting underwriting discounts, commissions and offering expenses borne by us. InMarch 2021 , we completed an offering of an additional$50.0 million aggregate principal amount of the 2026 Notes for net proceeds of approximately$50.6 million after adding premiums and deducting underwriting costs, commissions and offering expenses borne by us. The 2026 Notes will mature onJanuary 31, 2026 and may be redeemed in whole or in part at any time or from time to time at the Company's option prior to maturity at par plus a "make-whole" premium, if applicable. The 2026 Notes bear interest at a rate of 5.125% per year. Interest is payable semi-annually onJanuary 31 andJuly 31 of each year (which equates to approximately$7.7 million per year). InOctober 2019 , we completed a debt offering of$38.8 million aggregate principal amount of the 2024 Notes, inclusive of the overallotment option exercised by the underwriters, for net proceeds of approximately$37.5 million after deducting underwriting discounts, commissions and offering expenses borne by us. As ofSeptember 30, 2021 , the 2024 Notes were traded under the ticker symbol "GLADL" on the Nasdaq Global Select Market. OnNovember 1, 2021 , we voluntarily redeemed the 2024 Notes with an aggregate principal amount outstanding of$38.8 million . InNovember 2018 , we completed a public debt offering of$57.5 million aggregate principal amount of the 2023 Notes, inclusive of the overallotment option exercised by the underwriters, for net proceeds of$55.4 million after deducting underwriting discounts, commissions and offering expenses borne by us. OnJanuary 7, 2021 , we voluntarily redeemed the 2023 Notes with an aggregate principal amount outstanding of$57.5 million . The redemption amount was$58.1 million inclusive of accrued interest through the date of redemption. In connection with the voluntary redemption of the 2023 Notes, we incurred a loss on extinguishment of debt of$1.2 million , which is primarily comprised of the unamortized deferred issuance costs at the time of redemption. The indenture relating to the 2026 Notes and the 2024 Notes contains certain covenants, including (i) an inability to incur additional debt or issue additional debt or preferred securities unless the Company's asset coverage meets the threshold specified in the 1940 Act after such borrowing, (ii) an inability to declare any dividend or distribution (except a dividend payable in our stock) on a class of our capital stock or to purchase shares of our capital stock unless the Company's asset coverage meets the threshold specified in the 1940 Act at the time of (and giving effect to) such declaration or purchase, and (iii) if, at any time, we are not subject to the reporting requirements of the Exchange Act, we will provide the holders of the 2026 Notes and the 2024 Notes, as 74
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applicable, and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements.
The 2026 Notes and 2024 Notes are recorded at the principal amount, plus applicable premiums, less discounts and offering costs, on our Consolidated Statements of Assets and Liabilities.
Off-Balance Sheet Arrangements
We generally recognize success fee income when the payment has been received. As ofSeptember 30, 2021 and 2020, we had off-balance sheet success fee receivables on our accruing debt investments of$11.7 million and$9.9 million (or approximately$0.34 per common share and$0.31 per common share), respectively, that would be owed to us, generally upon a change of control of the portfolio companies. Consistent with GAAP, we generally have not recognized our success fee receivables and related income in our Consolidated Financial Statements until earned. Due to the contingent nature of our success fees, there are no guarantees that we will be able to collect all of these success fees or know the timing of such collections. Contractual Obligations We have lines of credit, delayed draw term loans, and an uncalled capital commitment with certain of our portfolio companies that have not been fully drawn. Since these commitments have expiration dates and we expect many will never be fully drawn, the total commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of the combined unused lines of credit, the unused delayed draw term loans, and the uncalled capital commitment as ofSeptember 30, 2021 and 2020 to be immaterial. The following table shows our contractual obligations as ofSeptember 30, 2021 , at cost: Payments Due by Period Less than More than Contractual Obligations(A) 1 Year 1-3 Years 3-5 Years 5 Years Total Credit Facility(B) $ - $ -$ 50,500 $ -$ 50,500 Notes Payable - - 188,813 - 188,813 Interest expense on debt obligations(C) 12,910 25,821 13,822 - 52,553 Total$ 12,910 $ 25,821 $ 253,135 $ -$ 291,866
(A) Excludes our unused line of credit commitments, unused delayed draw term
loans, and uncalled capital commitments to our portfolio companies in an
aggregate amount of $54.4 million , at cost, as of September 30, 2021 .(B) Principal balance of borrowings outstanding under our Credit Facility, based
on the maturity date following the current contractual revolver period end
date.
(C) Includes estimated interest payments on our Credit Facility, 2026 Notes, and
2024 Notes. The amount of interest expense calculated for purposes of this
table was based upon rates and balances as of
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity
with GAAP requires management to make estimates and assumptions that affect the
reported consolidated amounts of assets and liabilities, including disclosure of
contingent assets and liabilities at the date of the financial statements, and
revenues and expenses during the period reported. Actual results could differ
materially from those estimates under different assumptions or conditions. We
have identified our investment valuation policy (which has been approved by our
Board of Directors) as our most critical accounting policy, which is described
in Note 2-Summary of Significant Accounting Policies in the accompanying notes
to our Consolidated Financial Statements included elsewhere in this Annual
Report. Additionally, refer to Note 3-Investments in our accompanying Notes to
Consolidated
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Financial Statements included elsewhere in this Annual Report for additional information regarding fair value measurements and our application of Financial Accounting Standards Board Accounting Standards Codification Topic 820, "Fair Value Measurements and Disclosures." We have also identified our revenue recognition policy as a critical accounting policy, which is described in Note 2-Summary of Significant Accounting Policies in our accompanying Notes to Consolidated Financial Statements included elsewhere in this Annual 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, 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 our equity securities. For syndicated loans that have been rated by anSEC registeredNationally 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 would for these securities. The Adviser's risk rating system is used to estimate the probability of default on debt securities and the expected loss if there is a default. The Adviser's risk rating system uses a scale of 0 to >10, with >10 being the lowest probability of default. It is the Adviser's understanding that most debt securities of medium-sized companies do not exceed the grade of BBB on an NRSRO scale, so there would be no debt securities in the 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 proprietary loans in our portfolio as ofSeptember 30, 2021 and 2020, representing approximately 95.5% and 92.7%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period: As of September 30, Rating 2021 2020 Highest 10.0 10.0 Average 6.6 6.3 Weighted Average 7.0 6.5 Lowest 1.0 1.0 The following table reflects the risk ratings for all syndicated loans in our portfolio that were rated by an NRSRO as ofSeptember 30, 2021 and 2020, representing approximately 3.9% and 5.4%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period: As of September 30, Rating 2021 2020 Highest 5.0 5.0 Average 4.6 4.7 Weighted Average 4.5 4.7 Lowest 4.0 3.0 76
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The following table reflects the risk ratings for all syndicated loans in our portfolio that were not rated by an NRSRO as ofSeptember 30, 2021 and 2020, representing approximately 0.6% and 1.9%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period: As of September 30, Rating 2021 2020 Highest 5.0 6.0 Average 5.0 5.0 Weighted Average 5.0 4.6 Lowest 5.0 4.0 Tax Status We intend to continue to maintain our qualification as a RIC under Subchapter M of the Code for federal income tax purposes and also to limit certain federal excise taxes imposed on RICs. Refer to Note 10-Federal and State Income Taxes in our accompanying Notes to Consolidated Financial Statements included elsewhere in this Annual Report for additional information regarding our tax status.
Recent Accounting Pronouncements
Refer to Note 2-Summary of Significant Accounting Policies in the notes to our accompanying Consolidated Financial Statements included elsewhere in this Annual Report for a description of recent accounting pronouncements.
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