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, 2020 , our investment portfolio was made up of approximately 91.3% debt investments and 8.7% 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 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 Investment Corporation pursuant to the Co-Investment Order. We believe the Co-Investment Order has enhanced 61
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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.
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, 2020 , we invested$131.2 million in six new portfolio companies and extended$18.8 million in investments to existing portfolio companies. In addition, during the year endedSeptember 30, 2020 , we exited eleven portfolio companies through early payoffs or a restructure. We received a total of$78.8 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, 2020 . This activity resulted in a net decrease in our overall portfolio by five portfolio companies to 48 and a net increase of$66.2 million in our portfolio at cost sinceSeptember 30, 2019 . From our initial public offering inAugust 2001 throughSeptember 30, 2020 , we have made 553 different loans to, or investments in, 246 companies for a total of approximately$2.1 billion , before giving effect to principal repayments on investments and divestitures.
During the year ended
Proprietary Investments
• In October 2019 , we invested $14.0 million in Universal Survey Center,
Inc. through secured first lien debt.
• In
first lien debt.
• In January 2020 , we invested an additional $5.5 million in Lignetics ,
Inc., an existing portfolio company, through a combination of secured
second lien debt and preferred equity. In July 2020 , we sold $6.0 million
of our debt investment in Lignetics, Inc. at par.
• In January 2020 , we sold our investment in The Mochi Ice Cream Company
("Mochi"), which resulted in a realized gain of approximately
$2.5 million . In connection with the sale, we received net cash proceeds
of approximately $9.7 million , including the repayment of our debt
investment of $6.8 million at par.
• In
("Meridian"), with a fair value of $0 as of December 31, 2019 and
recorded a realized loss of $5.6 million .
• In February 2020 , we invested $19.0 million in American Trailer Rental
Group LLC through a combination of secured second lien debt and common
equity.
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• In March 2020 , our investments in XMedius America, Inc. and XMedius
Solutions Inc. paid off at par for combined net proceeds of
$14.9 million .
• In
secured second lien debt.
• In May 2020 , we invested $23.5 million in ALS Education, LLC through
secured first lien debt.
• In May 2020 , we sold our investment in Travel Sentry, Inc. for net
proceeds of
• In
par for net proceeds of $3.8 million .
• In
par for net proceeds of
received a prepayment fee of $0.3 million .
• In
through secured first lien debt.
Syndicated Investments
• In
second lien debt.
• In October 2019 , our investment in DigiCert Holdings, Inc. paid off at
par for net proceeds of $2.4 million .
• In December 2019 , our investment in LDiscovery, LLC paid off at par for
net proceeds of $5.0 million .
• In
par for net proceeds of
received a prepayment fee of $0.1 million .
• In
to our investment in New Trident Holdcorp, Inc. ("New Trident") which
filed for bankruptcy protection in February 2019 .
• In
proceeds of
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 public debt offerings. We have successfully extended the Credit Facility's revolving period multiple times, most recently toJuly 2021 , and currently have a total commitment amount of$180.0 million . We sold 1,220,927 and 1,843,943 common shares under our at-the-market program during the years endedSeptember 30, 2020 and 2019, respectively. InOctober 2019 , we completed a public debt offering of$38.8 million aggregate principal amount of the 2024 Notes, inclusive of the overallotment. Additionally, we completed a public debt 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, including the impact of COVID-19 and the results of the election, may continue to affect the trading price of our capital stock and thus may inhibit our ability to finance new investments through the issuance of equity. When our 63
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common stock trades below NAV per common share, as it has done periodically
since
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
Distributions
In
Distribution
per Common
Record Date Payment Date Share
October 23, 2020 October 30, 2020 $ 0.065
November 20, 2020 November 30, 2020 0.065
December 23, 2020 December 31, 2020 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 30-day LIBOR) and, to a lesser extent,
at fixed rates. LIBOR is currently anticipated to be phased out during late
2021. LIBOR may 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 30-day 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 30-day LIBOR, we expect that there should be minimal
impact on our operations.
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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 COVID-19 pandemic. The Company's investment
portfolio continues to be focused on a diversified mix of industries and sectors
that are generally expected 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 have taken immediate actions to effectively and
efficiently respond 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, 2020 to the Year EndedSeptember 30, 2019 For the Year Ended September 30, 2020 2019 $ Change %Change INVESTMENT INCOME Interest income$ 46,021 $ 45,768 $ 253 0.6 % Other income 1,938 4,267 (2,329 ) (54.6 ) Total investment income 47,959 50,035 (2,076 ) (4.1 ) EXPENSES Base management fee 7,568 7,230 338 4.7 Loan servicing fee 5,819 5,072 747 14.7 Incentive fee 5,251 5,776 (525 ) (9.1 ) Administration fee 1,430 1,325 105 7.9 Interest expense on borrowings 9,991 8,037 1,954 24.3 Dividend expense on mandatorily redeemable preferred stock 9 3,105 (3,096 ) (99.7 ) Amortization of deferred financing costs 1,484 1,348 136 10.1 Other expenses 2,096 2,020 76 3.8 Expenses, before credits from Adviser 33,648 33,913 (265 ) (0.8 ) Credit to base management fee - loan servicing fee (5,819 ) (5,072 ) (747 ) 14.7 Credit to fees from Adviser - other (5,033 ) (3,386 )
(1,647 ) 48.6
Total expenses, net of credits 22,796 25,455 (2,659 ) (10.4 ) NET INVESTMENT INCOME 25,163 24,580 583 2.4 NET REALIZED AND UNREALIZED (LOSS) GAIN Net realized loss on investments (7,476 ) (16,388 ) 8,912 (54.4 ) Net realized loss on other (1,407 ) - (1,407 ) NM Net unrealized appreciation of investments (18,670 ) 11,844 (30,514 ) (257.6 ) Net unrealized appreciation (depreciation) of other 517 (167 )
684 (409.6 )
Net loss from investments and other (27,036 ) (4,711 ) (22,325 ) 473.9
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS
PER BASIC AND DILUTED COMMON SHARE Net investment income$ 0.81 $ 0.84 $
(0.03 ) (3.6 )%
Net increase (decrease) in net assets resulting from operations$ (0.06 ) $ 0.68 $ (0.74 ) (108.8 )% NM - not meaningful Investment Income Interest income increased by 0.6% for the year endedSeptember 30, 2020 , 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 weighted average yield on our interest-bearing investments is based on the current stated interest rate on interest-bearing investments, which decreased to 11.0% for the year endedSeptember 30, 2020 , compared to 12.3% for 66
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the year endedSeptember 30, 2019 , inclusive of any allowances on interest receivables made during those periods. The decrease was driven mainly by a decrease in LIBOR over the two respective years. The weighted average principal balance of our interest-bearing investment portfolio for the year endedSeptember 30, 2020 , was$418.0 million , compared to$373.7 million for the year endedSeptember 30, 2019 , an increase of$44.3 million , or 11.9%. 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. As ofSeptember 30, 2019 , loans to two portfolio companies, Meridian and New Trident, were on non-accrual status with an aggregate debt cost basis of approximately$8.5 million , or 2.2% of the cost basis of all debt investments in our portfolio. Other income decreased by 54.6% during the year endedSeptember 30, 2020 , as compared to the prior year period primarily due to a$1.6 million decrease in success fees received year over year and a$0.7 million decrease 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, decreased$2.7 million , or 10.4%, for the year endedSeptember 30, 2020 as compared to the prior year. This decrease was primarily due to a$3.1 million decrease in preferred dividend expense due to the redemption of our Series 2024 Term Preferred Stock inOctober 2019 and a$1.6 million increase in credits to fees from the Adviser, partially offset by a$2.0 million increase in interest expense on borrowings and notes payable. Interest expense increased by 24.3% during the year endedSeptember 30, 2020 , as compared to the prior year, due primarily to the issuance of$38.8 million aggregate principal amount of the 2024 Notes inOctober 2019 . We incurred$2.0 million in interest expense related to the 2024 Notes issuance during the year endedSeptember 30, 2020 versus no such amounts in the prior year period. The weighted average balance outstanding on our Credit Facility during the year endedSeptember 30, 2020 was$103.5 million , as compared to$71.5 million in the prior year, an increase of 44.7%. The effective interest rate on our Credit Facility, including unused commitment fees incurred but excluding the impact of deferred financing costs, was 4.3% during the year endedSeptember 30, 2020 , compared to 6.8% during the prior year. The decrease in the effective interest rate was driven primarily by a decrease in LIBOR and a decrease in unused commitment fees as compared to the prior year period. Interest expense on our Credit Facility decreased by$0.4 million period over period as the decrease in the effective interest rate more than offset the increase in the weighted average balance outstanding on our Credit Facility. The net base management fee earned by the Adviser increased by$0.2 million , or 4.5%, during the year endedSeptember 30, 2020 , as compared to the prior year, resulting from an increase in average total assets subject to the base management fee period over period. The income-based incentive fee decreased by$0.5 million , or 9.1%, for the year endedSeptember 30, 2020 , as compared to the prior year, due to lower pre-incentive fee net investment income over the respective periods and the change to the incentive fee hurdles effectiveApril 1, 2020 as described under "Transactions with the Adviser" in Note 4-Related Party Transactions of the Notes to Consolidated Financial Statements. Our Board of Directors accepted non-contractual, unconditional and irrevocable credits from the Adviser of$3.0 million and$1.5 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, 2020 and 2019, respectively.
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-
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Related Party Transactions of the Notes to Consolidated Financial Statements and are summarized in the following table:
Year Ended September 30,
2020 2019
Average total assets subject to base management fee(A)
$ 413,143 Multiplied by annual base management fee of 1.75% 1.75 % 1.75 % Base management fee(B) 7,568 7,230 Portfolio company fee credit (1,589 ) (1,474 ) Syndicated loan fee credit (406 ) (424 ) Net Base Management Fee$ 5,573 $ 5,332 Loan servicing fee(B)$ 5,819 $ 5,072 Credit to base management fee-loan servicing fee(B) (5,819 ) (5,072 ) Net Loan Servicing Fee $ - $ - Incentive fee (B)$ 5,251 $ 5,776 Incentive fee credit (3,038 ) (1,488 ) Net Incentive Fee$ 2,213 $ 4,288 Portfolio company fee credit$ (1,589 ) $ (1,474 ) Syndicated loan fee credit (406 ) (424 ) Incentive fee credit (3,038 ) (1,488 ) Credit to Fees from Adviser-Other(B)$ (5,033 ) $ (3,386 )
(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 Loss on Investments
For the year endedSeptember 30, 2020 , we recorded a net realized loss on investments of$7.5 million , which resulted primarily from the sale of our investment in Meridian inJanuary 2020 for a$5.6 million realized loss and the loss recognized on our investment in New Trident of$4.4 million inDecember 2019 , partially offset by a realized gain of$2.5 million from the sale of our investment in Mochi inJanuary 2020 . For the year endedSeptember 30, 2019 , we recorded a net realized loss on investments of$16.4 million , which resulted primarily from the restructuring of our investment inFrancis Drilling Fluids, Ltd. ("FDF") inDecember 2018 and the associated recognition of a$26.9 million net realized loss, partially offset by the sale of our investment in Alloy Die Casting Co ("ADC") inAugust 2019 for an$8.7 million realized gain.
Net Unrealized Appreciation of Investments
During the year ended
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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 (<$250 ) 144 (227 ) (129 ) (212 )
Total: $ (7,476 ) $ (26,961 ) $ 8,291 $ (26,146 )
Since March 2020 , the U.S. loan market has exhibited a heightened level of
volatility and wider credit spreads associated with the uncertainty and
potentially adverse economic ramifications of the spread of COVID-19. The
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 ended
September 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.
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During the year ended
Year Ended September 30, 2019
Reversal of
Unrealized Unrealized
Realized Gain Appreciation Depreciation Net Gain
Portfolio Company (Loss) (Depreciation) (Appreciation) (Loss)
Alloy Die Casting Co. $ 8,734 $ 7,419 $ (5,415 ) $ 10,738
Defiance Integrated
Technologies, Inc. - 3,199 - 3,199
Targus Cayman HoldCo, Ltd. - 2,495 - 2,495
Leeds Novamark Capital I,
L.P. - 1,365 - 1,365
The Mochi Ice Cream Company - 1,208 - 1,208
Vision Government Solutions,
Inc. - 1,162 (6 ) 1,156
GFRC Holdings, LLC - 955 - 955
PIC 360, LLC - 689 - 689
Arc Drilling Holding LLC - 668 - 668
Vacation Rental Pros
Property Management, LLC - 645 - 645
LDiscovery, LLC - 516 - 516
Precision International, LLC - 488 - 488
Canopy Safety Brands, LLC - 357 - 357
Funko Acquisition Holdings ,
LLC 499 (131 ) (263 ) 105
Impact! Chemical
Technologies, Inc - (619 ) 647 28
FedCap Partners, LLC (814 ) - 833 19
Triple H Food Processors,
LLC - (40 ) (40 ) (80 )
Red Ventures, LLC - - (119 ) (119 )
WadeCo Specialties, Inc. - (236 ) 95 (141 )
Phoenix Aromas & Essential
Oils, LLC - (162 ) - (162 )
United Flexible, Inc. 2,145 50 (2,387 ) (192 )
Lignetics, Inc. - (201 ) - (201 )
Sea Link International IRB,
Inc. - (221 ) - (221 )
DKI Ventures, LLC - (227 ) - (227 )
Travel Sentry, Inc. - (240 ) - (240 )
TNCP Intermediate HoldCo,
LLC - (266 ) - (266 )
Belnick, Inc. - (325 ) - (325 )
EL Academies, Inc. - (429 ) - (429 )
NetFortris Corp. - (544 ) - (544 )
Imperative Holdings
Corporation - (585 ) - (585 )
Merlin International, Inc. - (600 ) - (600 )
R2i Holdings, LLC - (638 ) - (638 )
ENET Holdings, LLC (90 ) (580 ) - (670 )
IA Tech, LLC - (450 ) (450 ) (900 )
Antenna Research Associates ,
Inc. - (1,243 ) - (1,243 )
Edge Adhesives Holdings ,
Inc. - (2,409 ) - (2,409 )
Meridian Rack & Pinion, Inc. - (2,993 ) - (2,993 )
FES Resources Holdings LLC - (3,114 ) - (3,114 )
LWO Acquisitions Company LLC - (6,289 ) - (6,289 )
Francis Drilling Fluids,
Ltd. (26,872 ) - 20,379 (6,493 )
Other, net (<$250 ) 10 (105 ) 1 (94 )
Total: $ (16,388 ) $ (1,431 ) $ 13,275 $ (4,544 )
The largest driver of our net unrealized appreciation of $11.8 million for the
year ended September 30, 2019 was the reversal of previously recorded unrealized
depreciation upon the restructure of FDF. This appreciation was
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partially offset by the decline in the valuation of
As ofSeptember 30, 2020 , the fair value of our investment portfolio was less than its cost basis by approximately$44.3 million and our entire investment portfolio was valued at 91.1% of cost, as compared to cumulative net unrealized depreciation of$25.6 million and a valuation of our entire portfolio at 94.0% of cost as ofSeptember 30, 2019 . This year over year increase in the cumulative unrealized depreciation on investments represents net unrealized depreciation of$18.7 million for the year endedSeptember 30, 2020 . The cumulative net unrealized depreciation of our investments does not have an impact on our current ability to pay distributions to stockholders; however, it may be an indication of future realized losses, which could ultimately reduce our income available for distribution to stockholders.
Net Unrealized (Appreciation) Depreciation of Other
During the year endedSeptember 30, 2020 , we recorded$0.5 million of unrealized appreciation on our Credit Facility at fair value as compared to$0.2 million of unrealized depreciation during the year endedSeptember 30, 2019 . Comparison of the Year EndedSeptember 30, 2019 to the Year EndedSeptember 30, 2018 For the Year Ended September 30, 2019 2018 $ Change %Change INVESTMENT INCOME Interest income$ 45,768 $ 43,958 $ 1,810 4.1 % Other income 4,267 1,623 2,644 162.9 Total investment income 50,035 45,581 4,454 9.8 EXPENSES Base management fee 7,230 7,033 197 2.8 Loan servicing fee 5,072 5,042 30 0.6 Incentive fee 5,776 5,348 428 8.0 Administration fee 1,325 1,250 75 6.0 Interest expense on borrowings 8,037 5,858 2,179 37.2 Dividend expense on mandatorily redeemable preferred stock 3,105 3,105 - - Amortization of deferred financing costs 1,348 1,014 334 32.9 Other expenses 2,020 1,966 54 2.7 Expenses, before credits from Adviser 33,913 30,616 3,297 10.8 Credit to base management fee-loan servicing fee (5,072 ) (5,042 ) (30 ) 0.6 Credit to fees from Adviser-other (3,386 ) (3,081 )
(305 ) 9.9
Total expenses, net of credits 25,455 22,493 2,962 13.2 NET INVESTMENT INCOME 24,580 23,088 1,492 6.5 NET REALIZED AND UNREALIZED (LOSS) GAIN Net realized loss on investments (16,388 ) (26,063 ) 9,675 (37.1 ) Net realized loss on other - (133 ) 133 (100.0 ) Net unrealized appreciation of investments 11,844 21,641 (9,797 ) (45.3 ) Net unrealized appreciation (depreciation) of other (167 ) 115
(282 ) (245.2 )
Net loss from investments and other (4,711 ) (4,440 )
(271 ) 6.1
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS$ 19,869 $ 18,648 $ 1,221 6.5 % PER BASIC AND DILUTED COMMON SHARE Net investment income$ 0.84 $ 0.85
Net increase in net assets resulting from operations$ 0.68 $ 0.69 $ (0.01 ) (1.4 )% 71
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Investment Income
Interest income increased by 4.1% for the year endedSeptember 30, 2019 , as compared to the prior year. This increase was primarily due to an increase in the weighted average yield on our interest-bearing portfolio. The weighted average yield on our interest-bearing investments is based on the current stated interest rates on interest-bearing investments which increased to 12.3% for the year endedSeptember 30, 2019 compared to 11.8% for the year endedSeptember 30, 2018 , inclusive of any allowances on interest receivables made during those periods. The increase in the weighted average yield was partially driven by the receipt and recognition of$0.9 million of past due interest upon the exit of our investment in ADC inAugust 2019 .
The weighted average principal balance of our interest-bearing investment
portfolio remained relatively flat for the year ended
As of
Other income increased by 162.9% during the year endedSeptember 30, 2019 , as compared to the prior year, primarily due to an increase in success fees and prepayment penalties received. For the year endedSeptember 30, 2019 , other income consisted primarily of$1.9 million in success fees recognized,$1.2 million in prepayment fees received, and$1.1 million in dividend income. For the year endedSeptember 30, 2018 , other income consisted primarily of$0.6 million in prepayment fees received,$0.5 million in dividend income, and$0.4 million in success fees recognized.
As of
Expenses
Expenses, net of any non-contractual, unconditional and irrevocable credits to
fees from the Adviser, increased
Interest expense increased by 37.2% during the year endedSeptember 30, 2019 , as compared to the prior year, primarily due to the issuance of$57.5 million aggregate principal amount of the 2023 Notes inNovember 2018 and an increase in the effective interest rate on our Credit Facility. We incurred$3.2 million in interest expense related to the 2023 Notes during the year endedSeptember 30, 2019 versus no such amounts in the prior year period. The weighted average balance outstanding on our Credit Facility decreased during the year endedSeptember 30, 2019 compared to the prior year period with the issuance of the 2023 Notes. The weighted average balance outstanding during the year endedSeptember 30, 2019 , was$71.5 million , as compared to$114.7 million in the prior year, a decrease of 37.7%. The effective interest rate on our Credit Facility, including unused commitment fees incurred but excluding the impact of deferred financing costs, was 6.8% during the year endedSeptember 30, 2019 , compared to 5.1% during the prior year. The increase in the effective interest rate was driven by an increase in LIBOR as compared to the prior year period and an increase in unused commitment fees paid in the current year period, partially offset by a decrease in the marginal interest rate on our Credit Facility effectiveMarch 9, 2018 . The net base management fee earned by the Adviser decreased by$0.3 million , or 5.6%, during the year endedSeptember 30, 2019 , as compared to the prior year, resulting primarily from an increase in credits from the Adviser year over year, which are driven mainly by origination fees on new deals closed during the year. 72
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The net income-based incentive fee increased by$0.6 million , or 17.4%, for the year endedSeptember 30, 2019 , as compared to the prior year, due to higher pre-incentive fee net investment income, partially offset by an increase in net assets, which drives the hurdle rate, over the prior year. Our Board of Directors accepted a non-contractual, unconditional and irrevocable credit from the Adviser of$1.5 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 year endedSeptember 30, 2019 . The credit granted during the year endedSeptember 30, 2018 , totaled$1.7 million . 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 accompanying Notes to Consolidated Financial Statements and are summarized in the following table: Year EndedSeptember 30, 2019 2018
Average total assets subject to base management fee(A)
$ 401,886 Multiplied by annual base management fee of 1.75% 1.75 % 1.75 % Base management fee(B) 7,230 7,033 Portfolio company fee credit (1,474 ) (1,020 ) Syndicated loan fee credit (424 ) (364 ) Net Base Management Fee$ 5,332 $ 5,649 Loan servicing fee(B)$ 5,072 $ 5,042 Credit to base management fee-loan servicing fee(B) (5,072 ) (5,042 ) Net Loan Servicing Fee $ - $ - Incentive fee (B)$ 5,776 $ 5,348 Incentive fee credit (1,488 ) (1,697 ) Net Incentive Fee$ 4,288 $ 3,651 Portfolio company fee credit$ (1,474 ) $ (1,020 ) Syndicated loan fee credit (424 ) (364 ) Incentive fee credit (1,488 ) (1,697 ) Credit to Fees from Adviser-Other(B)$ (3,386 ) $ (3,081 )
(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 Loss on Investments
For the year endedSeptember 30, 2019 , we recorded a net realized loss on investments of$16.4 million , which resulted primarily from the restructuring of our investment in FDF inDecember 2018 and the associated recognition of a$26.9 million net realized loss, partially offset by the sale of our investment in ADC inAugust 2019 for an$8.7 million realized gain.
For the year ended
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on non-accrual status, and the associated recognition of a$28.2 million realized loss. This was partially offset by a$0.7 million realized gain from the sale of a portion of our equity investment inFunko Acquisition Holdings, LLC and a$0.6 million realized gain associated with the sale of our investment inFlight Fit N Fun LLC .
Net Unrealized Appreciation of Investments
During the year ended
Year Ended September 30, 2019
Reversal of
Unrealized Unrealized
Realized Gain Appreciation Depreciation Net Gain
Portfolio Company (Loss) (Depreciation) (Appreciation) (Loss)
Alloy Die Casting Co. $ 8,734 $ 7,419 $ (5,415 ) $ 10,738
Defiance Integrated
Technologies, Inc. - 3,199 - 3,199
Targus Cayman HoldCo, Ltd. - 2,495 - 2,495
Leeds Novamark Capital I,
L.P. - 1,365 - 1,365
The Mochi Ice Cream Company - 1,208 - 1,208
Vision Government Solutions,
Inc. - 1,162 (6 ) 1,156
GFRC Holdings, LLC - 955 - 955
PIC 360, LLC - 689 - 689
Arc Drilling Holding LLC - 668 - 668
Vacation Rental Pros
Property Management, LLC - 645 - 645
LDiscovery, LLC - 516 - 516
Precision International, LLC - 488 - 488
Canopy Safety Brands, LLC - 357 - 357
Funko Acquisition Holdings ,
LLC 499 (131 ) (263 ) 105
Impact! Chemical
Technologies, Inc - (619 ) 647 28
FedCap Partners, LLC (814 ) - 833 19
Triple H Food Processors,
LLC - (40 ) (40 ) (80 )
Red Ventures, LLC - - (119 ) (119 )
WadeCo Specialties, Inc. - (236 ) 95 (141 )
Phoenix Aromas & Essential
Oils, LLC - (162 ) - (162 )
United Flexible, Inc. 2,145 50 (2,387 ) (192 )
Lignetics, Inc. - (201 ) - (201 )
Sea Link International IRB,
Inc. - (221 ) - (221 )
DKI Ventures, LLC - (227 ) - (227 )
Travel Sentry, Inc. - (240 ) - (240 )
TNCP Intermediate HoldCo,
LLC - (266 ) - (266 )
Belnick, Inc. - (325 ) - (325 )
EL Academies, Inc. - (429 ) - (429 )
NetFortris Corp. - (544 ) - (544 )
Imperative Holdings
Corporation - (585 ) - (585 )
Merlin International, Inc. - (600 ) - (600 )
R2i Holdings, LLC - (638 ) - (638 )
ENET Holdings, LLC (90 ) (580 ) - (670 )
IA Tech, LLC - (450 ) (450 ) (900 )
Antenna Research Associates ,
Inc. - (1,243 ) - (1,243 )
Edge Adhesives Holdings ,
Inc. - (2,409 ) - (2,409 )
Meridian Rack & Pinion, Inc. - (2,993 ) - (2,993 )
FES Resources Holdings LLC - (3,114 ) - (3,114 )
LWO Acquisitions Company LLC - (6,289 ) - (6,289 )
Francis Drilling Fluids,
Ltd. (26,872 ) - 20,379 (6,493 )
Other, net (<$250 ) 10 (105 ) 1 (94 )
Total: $ (16,388 ) $ (1,431 ) $ 13,275 $ (4,544 )
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The largest driver of our net unrealized appreciation of$11.8 million for the year endedSeptember 30, 2019 was the reversal of previously recorded unrealized depreciation upon the restructure of FDF. This appreciation was partially offset by the decline in the valuation ofLWO Acquisitions Company LLC due to its financial and operational performance.
During the year ended
Year Ended September 30, 2018
Reversal of
Unrealized Unrealized
Realized Gain Appreciation Depreciation Net Gain
Portfolio Company (Loss) (Depreciation) (Appreciation) (Loss)
Edge Adhesives Holdings ,
Inc. $ - $ 2,830 $ - $ 2,830
United Flexible, Inc. - 2,475 - 2,475
Alloy Die Casting Co. - 2,341 - 2,341
AG Transportation Holdings ,
LLC - 2,083 - 2,083
Targus Cayman HoldCo, Ltd. - 1,677 - 1,677
PIC 360, LLC - 1,306 - 1,306
Funko Acquisition Holdings ,
LLC 745 869 (356 ) 1,258
Sea Link International IRB,
Inc. - 559 - 559
Leeds Novamark Capital I,
L.P. - 526 - 526
Merlin International, Inc. - 450 - 450
WadeCo Specialties, Inc. - 385 - 385
EL Academies, Inc. - 379 - 379
Precision International, LLC - 306 - 306
RBC Acquisition Corp. 284 - - 284
IA Tech, LLC - 267 - 267
Triple H Food Processors,
LLC - 236 - 236
Canopy Safety Brands, LLC - 195 - 195
Funko, LLC 127 - - 127
Flight Fit N Fun LLC 630 - (725 ) (95 )
HB Capital Resources, Ltd. - 330 (440 ) (110 )
Vision Government Solutions,
Inc. - (412 ) - (412 )
Frontier Financial Group ,
Inc. - (500 ) - (500 )
GFRC Holdings, LLC - (519 ) - (519 )
Meridian Rack & Pinion, Inc. - (671 ) - (671 )
Vacation Rental Pros
Property Management, LLC - (1,020 ) - (1,020 )
Defiance Integrated
Technologies, Inc. - (1,768 ) - (1,768 )
Sunshine Media Holdings (28,169 ) (1,319 ) 27,660 (1,828 )
Arc Drilling Holding LLC - (2,006 ) - (2,006 )
New Trident Holdcorp, Inc. - (2,794 ) - (2,794 )
LWO Acquisitions Company ,
LLC - (3,190 ) - (3,190 )
Francis Drilling Fluids,
Ltd. - (7,436 ) - (7,436 )
Other, net (<$250 ) 320 28 (105 ) 243
Total: $ (26,063 ) $ (4,393 ) $ 26,034 $ (4,422 ) The primary drivers of our net unrealized appreciation for the year ended
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on certain of our portfolio companies, namely
As ofSeptember 30, 2019 , the fair value of our investment portfolio was less than its cost basis by approximately$25.6 million and our entire investment portfolio was valued at 94.0% of cost, as compared to cumulative net unrealized depreciation of$37.4 million and a valuation of our entire portfolio at 91.2% of cost as ofSeptember 30, 2018 . This year over year decrease in the cumulative unrealized depreciation on investments represents net unrealized appreciation of$11.8 million for the year endedSeptember 30, 2019 . The cumulative net unrealized depreciation of our investments does not have an impact on our current ability to pay distributions to stockholders; however, it may be an indication of future realized losses, which could ultimately reduce our income available for distribution to stockholders.
Net Unrealized (Appreciation) Depreciation of Other
During the year endedSeptember 30, 2019 , we recorded$0.2 million of unrealized depreciation on our Credit Facility at fair value as compared to$0.1 million of unrealized appreciation during the year endedSeptember 30, 2018 . 76
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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, 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, 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 . Net cash provided by operating activities for the year endedSeptember 30, 2019 was$9.3 million as compared to net cash used in operating activities of$17.8 million for the year endedSeptember 30, 2018 . The change was primarily due to an increase in principal repayments and net proceeds from sales of investments partially offset by an increase in purchases of investments year over year. Repayments and net proceeds from sales were$131.1 million during the year endedSeptember 30, 2019 compared to$67.9 million during the year endedSeptember 30, 2018 . Purchases of investments were$147.1 million during the year endedSeptember 30, 2019 , compared to$106.6 million during the year endedSeptember 30, 2018 .
As of
The following table summarizes our total portfolio investment activity during
the years ended
Year Ended September 30,
2020 2019
Beginning investment portfolio, at fair value $ 402,875 $ 390,046
New investments 131,150 124,168
Disbursements to existing portfolio companies 18,756 22,899
Scheduled principal repayments (5,648 ) (5,543 )
Unscheduled principal repayments (70,344 ) (112,838 )
Net proceeds from sales of investments (2,763 ) (12,680 )
Net unrealized depreciation of investments (26,961 ) (1,431 )
Reversal of prior period net depreciation of investments 8,291 13,275
Net realized loss on investments (7,685 ) (16,415 )
Increase in investment balance due to PIK interest(A) 2,400 1,752
Net change in premiums, discounts and amortization 329 (358 )
Ending Investment Portfolio, at Fair Value $ 450,400 $ 402,875 (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.
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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, 2020 . Year EndingSeptember 30 , Amount 2021$ 49,431 2022 93,477 2023 48,106 2024 55,874 2025 153,150 Thereafter 52,228 Total contractual repayments$ 452,266 Adjustments to cost basis of debt investments (709 ) Investments in equity securities 43,090 Investments held as ofSeptember 30, 2020 at Cost:$ 494,647
Financing Activities
Net cash provided by financing activities for the year endedSeptember 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 endedSeptember 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. Net cash provided by financing activities for the year endedSeptember 30, 2018 was$14.5 million , which consisted primarily of$17.0 million in net borrowings on our Credit Facility and$22.0 million in gross proceeds from the issuance of common stock, partially offset by$22.8 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, 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 years endedSeptember 30, 2019 and 2018, we paid monthly cash distributions of$0.07 per common share for each month, which totaled an aggregate of$24.6 million and$22.8 million , respectively. InOctober 2020 , our Board of Directors declared a monthly distribution of$0.065 per common share for each of October, November, andDecember 2020 . 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, 2021 . From inception throughSeptember 30, 2020 , we have paid 212 monthly or quarterly consecutive distributions to common stockholders totaling approximately$370.3 million or$20.26 per share. 78
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For the fiscal years endedSeptember 30, 2020 and 2019, distributions declared and paid exceeded taxable income available for common distributions resulting in a partial return of capital of approximately$0.4 million and$0.7 million , respectively. For the fiscal year endedSeptember 30, 2018 , our current and accumulated earnings and profits (after taking into account our mandatorily redeemable preferred stock dividends), exceeded common stock distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat$0.3 million of the first common distributions paid to common stockholders in the subsequent fiscal year as having been paid in the prior year.
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, 2020 , we had the ability to issue up to an additional$232.3 million in securities under the registration statement.
Common Stock
InFebruary 2019 , we entered into an equity distribution agreement withJefferies LLC (the "Jefferies Sales Agreement") under which we have the ability to issue and sell, from time to time, up to an aggregate offering price of$50.0 million shares of our common stock. During the year endedSeptember 30, 2020 , we sold 1,220,927 shares of our common stock under the Jefferies Sales Agreement, at a weighted-average price of$9.55 per share and raised$11.7 million of gross proceeds. Net proceeds, after deducting commissions and offering costs borne by us, were approximately$11.4 million . As ofSeptember 30, 2020 , we had a remaining capacity to sell up to an additional$21.1 million of our common stock under the Jefferies Sales Agreement. 79
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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
OnApril 29, 2020 , we, through Business Loan, entered into Amendment No. 6 to our Credit Facility withKeyBank , which extended the revolving period end date by approximately six months toJuly 15, 2021 , included certain LIBOR transition considerations and decreased the commitment amount from$190 million to$180 million . All principal and interest will continue to be due and payable onApril 15, 2022 . OnJuly 10, 2019 , we, through Business Loan, entered into Amendment No. 5 to our Credit Facility withKeyBank , which (i) modified the covenants to reduce our minimum asset coverage with respect to senior securities representing indebtedness from 200% to 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), (ii) amended the excess concentration limits definition to decrease the limit for non-first lien loans from 60% to 50% under certain circumstances and (iii) amended the distributions covenant to allow a distribution to be applied towards the redemption of our Series 2024 Term Preferred Stock. OnMarch 9, 2018 , we, through Business Loan, entered into Amendment No. 4 to our Credit Facility withKeyBank , which increased the commitment amount from$170.0 million to$190.0 million , extended the revolving period end date by approximately two years toJanuary 15, 2021 , decreased the marginal interest rate added to 30-day LIBOR from 3.25% to 2.85% per annum, and changed the unused commitment fee from 0.50% of the total unused commitment amount to 0.50% when the average unused commitment amount for the reporting period is less than or equal to 50%, 0.75% when the average unused commitment amount for the reporting period is greater than 50% but less than or equal to 65%, and 1.00% when the average unused commitment amount for the reporting period is greater than 65%. Subject to certain terms and conditions, our Credit Facility may be expanded up to a total of$265.0 million through additional commitments of new or existing lenders. We incurred fees of approximately$1.2 million in connection with this amendment, which are being amortized through our Credit Facility's revolving period end date ofJuly 15, 2021 . 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 80
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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, 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 of
As ofSeptember 30, 2020 , and as defined in our Credit Facility, we had a net worth of$327.3 million , asset coverage on our "senior securities representing indebtedness" of 202.6% and an active status as a BDC and RIC. In addition, we had 31 obligors in our Credit Facility's borrowing base as ofSeptember 30, 2020 . As ofSeptember 30, 2020 , 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
InOctober 2019 , we completed a public debt offering of$38.8 million aggregate principal amount of 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. InNovember 2018 , we completed a public debt offering of$57.5 million aggregate principal amount of 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. The 2024 Notes and 2023 Notes are traded under the ticker symbols "GLADL" and "GLADD" on the Nasdaq Global Select Market, respectively. The 2024 Notes and 2023 Notes will mature onNovember 1, 2024 andNovember 1, 2023 , respectively, and may be redeemed in whole or in part at any time or from time to time at the Company's option on or afterNovember 1, 2021 andNovember 1, 2020 , respectively. The 2024 Notes and 2023 Notes bear interest at a rate of 5.375% and 6.125% per year, respectively, payable quarterly onFebruary 1 ,May 1 ,August 1 , andNovember 1 of each year (which equates to approximately$5.6 million per year). The 2024 Notes and 2023 Notes are recorded at the principal amount, less discounts and offering costs, on our Consolidated Statements of Assets and Liabilities. The indenture relating to the 2024 Notes and 2023 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 or distribution 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 2024 Notes and 2023 Notes and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements.
Off-Balance Sheet Arrangements
We generally recognize success fee income when the payment has been received. As ofSeptember 30, 2020 and 2019, we had off-balance sheet success fee receivables on our accruing debt investments of$9.9 million and 81
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$6.2 million (or approximately$0.31 per common share and$0.21 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, 2020 and 2019 to be immaterial. The following table shows our contractual obligations as ofSeptember 30, 2020 , 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) $ -$ 128,000 $ - $ -$ 128,000 Notes Payable - - 96,313 - 96,313
Interest expense on debt obligations(C) 9,823 15,783
2,553 - 28,159
Total $ 9,823 $ 143,783 $ 98,866 $ - $ 252,472 (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 $27.8 million , at cost, as of September 30, 2020 .(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, 2024 Notes, and
2023 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 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.
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Investment Valuation
Credit Monitoring and Risk Rating
The Adviser monitors a wide variety of key credit statistics that provide information regarding our portfolio companies to help us assess credit quality and portfolio performance and, in some instances, 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, 2020 and 2019, representing approximately 92.7% and 87.7%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period: As of September 30, Rating 2020 2019 Highest 10.0 10.0 Average 6.3 6.2 Weighted Average 6.5 6.4 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, 2020 and 2019, representing approximately 5.4% and 9.1%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period: As of September 30, Rating 2020 2019 Highest 5.0 6.0 Average 4.7 4.5 Weighted Average 4.7 4.5 Lowest 3.0 3.0 83
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Table of Contents
The following table reflects the risk ratings for all syndicated loans in our portfolio that were not rated by an NRSRO as ofSeptember 30, 2020 and 2019, representing approximately 1.9% and 3.2%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period: As of September 30, Rating 2020 2019 Highest 6.0 5.0 Average 5.0 2.8 Weighted Average 4.6 3.1 Lowest 4.0 1.0 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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