GLADSTONE INVESTMENT CORPORATION All statements contained herein, other than historical facts, may constitute "forward-looking statements." These statements may relate to, among other things, our future operating results, our business prospects and the prospects of our portfolio companies, actual and potential conflicts of interest withGladstone Management Corporation (the "Adviser") and its affiliates, the use of borrowed money to finance our investments, the adequacy of our financing sources and working capital, and our ability to co-invest, among other factors. In some cases, you can identify forward-looking statements by terminology such as "estimate," "may," "might," "believe," "will," "provided," "anticipate," "future," "could," "growth," "plan," "project," "intend," "expect," "should," "would," "if," "seek," "possible," "potential," "likely" or the negative or variations of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include: (1) changes in the economy and the capital markets; (2) risks associated with negotiation and consummation of pending and future transactions; (3) the loss of one or more of our executive officers, in particularDavid Gladstone ,David Dullum , orTerry Lee Brubaker ; (4) changes in our investment objectives and strategy; (5) availability, terms (including the possibility of interest rate volatility) and deployment of capital; (6) changes in our industry, interest rates, exchange rates, regulation, or the general economy; (7) our business prospects and the prospects of our portfolio companies; (8) the degree and nature of our competition; (9) changes in governmental regulation, tax rates and similar matters; (10) our ability to exit investments in a timely manner; (11) our ability to maintain our qualification as a regulated investment company ("RIC") and as a business development company ("BDC"); (12) the impact of COVID-19 generally and on the economy, the capital markets and our portfolio companies, including the measures taken by governmental authorities to address it; and (13) those factors described in Item 1A. "Risk Factors" herein and the "Risk Factors" sections of our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2020 , filed with theU.S. Securities and Exchange Commission ("SEC") onMay 12, 2020 (the "Annual Report"). We caution readers not to place undue reliance on any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements and future results could differ materially from historical performance. We have based forward-looking statements on information available to us on the date of this Quarterly Report on Form 10-Q (the "Quarterly Report"). Except as required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with theSEC , including subsequent annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements contained in this Quarterly Report are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended. In this Quarterly Report, the "Company," "we," "us," and "our" refer toGladstone Investment Corporation and its wholly-owned subsidiaries unless the context otherwise indicates. Dollar amounts, except per share amounts, are in thousands, unless otherwise indicated. The following analysis of our financial condition and results of operations should be read in conjunction with our accompanying Consolidated Financial Statements and the notes thereto contained elsewhere in this Quarterly Report and in our Annual Report. Historical financial condition and results of operations and percentage relationships among any amounts in the financial statements are not necessarily indicative of financial condition, results of operations or percentage relationships for any future periods.
OVERVIEW
General
We were incorporated under the General Corporation Law of theState of Delaware onFebruary 18, 2005 . OnJune 22, 2005 , we completed our initial public offering and commenced operations. We operate as an externally managed, closed-end, non-diversified management investment company and have elected to be treated as a BDC under the Investment Company Act of 1940, as amended (the "1940 Act"). ForU.S. federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). To continue to qualify as a RIC forU.S. federal income tax purposes and obtain favorable RIC tax treatment, we must meet certain requirements, including certain minimum distribution requirements. From our initial public offering in 2005 throughSeptember 30, 2020 , we have paid 183 consecutive monthly distributions to common stockholders. 45
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We are externally managed by the Adviser, an affiliate of ours and anSEC -registered investment adviser, pursuant to an investment advisory and management agreement (the "Advisory Agreement"). We have also entered into an administration agreement (the "Administration Agreement") withGladstone Administration, LLC (the "Administrator"), an affiliate of ours and the Adviser. Each of the Adviser and the Administrator are privately-held companies that are indirectly owned and controlled byDavid Gladstone , our chairman and chief executive officer.David Dullum , our president, also serves as the executive vice president of private equity (buyouts) of the Adviser.Michael LiCalsi , our general counsel and secretary, also serves as the Administrator's president, general counsel, and secretary, as well as the executive vice president of administration of the Adviser). Additionally,Gladstone Securities, LLC ("Gladstone Securities "), a privately-held broker-dealer (indirectly owned and controlled byMr. Gladstone , our chairman and chief executive officer) registered with theFinancial Industry Regulatory Authority and insured by theSecurities Investor Protection Corporation , has provided other services, such as investment banking and due diligence services, to certain of our portfolio companies, for whichGladstone Securities receives a fee. Any such fees paid by portfolio companies toGladstone Securities do not impact the fees we pay to the Adviser or the non-contractual, unconditional, and irrevocable credits against the base management fee. For additional information refer to Note 4 -Related Party Transactions in the accompanying Notes to Consolidated Financial Statements. Since May of 2020,Gladstone Securities also acts as dealer manager in connection with our offering of up to$350.0 million aggregate principal amount of our 6.00% Notes due 2040 on a "reasonable best efforts" basis. We were established for the purpose of investing in debt and equity securities of established private businesses operating inthe United States ("U.S."). Our investment objectives are to: (i) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness, and make distributions to our stockholders that grow over time; and (ii) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses, generally in combination with the aforementioned debt securities, that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our objectives, our investment strategy is to invest in several categories of debt and equity securities, with individual investments generally totaling up to$30 million , although investment size may vary depending upon our total assets or available capital at the time of investment. We expect that our investment portfolio over time will consist of approximately 75% in debt securities and 25% in equity securities, at cost. As ofSeptember 30, 2020 , our investment portfolio was comprised of 73.1% in debt securities and 26.9% in equity securities, at cost. We focus on investing in lower middle market private businesses (which we generally define as companies with annual earnings before interest, taxes, depreciation and amortization ("EBITDA") of$3 million to$20 million ) ("Lower Middle Market") in theU.S. that meet certain criteria, including: the sustainability of the business' free cash flow and its ability to grow it over time, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the portfolio company, reasonable capitalization of the portfolio company, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples, and the potential to realize appreciation and gain liquidity in our equity position, if any. We anticipate that liquidity in our equity position will be achieved through a merger or acquisition of the portfolio company, a public offering of the portfolio company's stock, or, to a lesser extent, by exercising our right to require the portfolio company to repurchase our warrants, though there can be no assurance that we will always have these rights. We invest in portfolio companies that need funds for growth capital, to finance acquisitions, including management buyouts, recapitalize or, to a lesser extent, refinance their existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises. We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity. InJuly 2012 , theSEC granted us an exemptive order (the "Co-Investment Order") that expanded our ability to co-invest, under certain circumstances, with certain of our affiliates, including Gladstone Capital Corporation ("Gladstone Capital ") and any future BDC or closed-end management investment company that is advised (or sub-advised if it controls the fund) by the Adviser, or any combination of the foregoing, subject to the conditions in the Co-Investment Order. Since 2012, we have opportunistically made several co-investments with Gladstone Capital pursuant to the Co-Investment Order. We believe the Co-Investment Order has enhanced and will continue to enhance our ability to further our investment objectives and strategies. If we are participating in an investment with one or more co-investors, whether or not an affiliate of ours, our investment is likely to be smaller than if we were investing alone. Our shares of common stock, 6.25% Series D Cumulative Term Preferred Stock ("Series D Term Preferred Stock") and 6.375% Series E Cumulative Term Preferred Stock ("Series E Term Preferred Stock") are traded on the Nasdaq Global Select Market ("Nasdaq") under the trading symbols "GAIN," "GAINM," and "GAINL," respectively. 46
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Table of Contents Business Portfolio Activity While the business environment remains competitive, we continue to see new investment opportunities consistent with our investment strategy of providing a combination of debt and equity in support of management and independent sponsor-ledbuyouts ofLower Middle Market companies in theU.S. During the six months endedSeptember 30, 2020 , we invested in one new portfolio company and did not exit any portfolio companies. As ofSeptember 30, 2020 , our portfolio was comprised of 29 companies. From our initial public offering inJune 2005 throughSeptember 30, 2020 , we made investments in 53 companies, excluding investments in syndicated loans, for a total of approximately$1.4 billion , before giving effect to principal repayments and divestitures. The majority of the debt securities in our portfolio have a success fee component, which enhances the yield on our debt investments. Unlike paid-in-kind ("PIK") income, we generally do not recognize success fees as income until payment has been received. Due to the contingent nature of success fees, there are no guarantees that we will be able to collect any or all of these success fees or know the timing of any such collections. As a result, as ofSeptember 30, 2020 , we had unrecognized, contractual success fees of$45.0 million , or$1.35 per common share. Consistent with accounting principles generally accepted in theU.S. ("GAAP"), we have not recognized success fee receivables and related income in our accompanying Consolidated Financial Statements until earned. From inception throughSeptember 30, 2020 , we completed sales of 22 portfolio companies that we acquired under our buyout strategy (which excludes investments in syndicated loans). In the aggregate, these sales have generated$223.5 million in net realized gains and$30.3 million in other income upon exit, for a total increase to our net assets of$253.8 million . We believe, in aggregate, these transactions were equity-oriented investment successes and exemplify our investment strategy of striving to achieve returns through current income on the debt portion of our investments and capital gains from the equity portion. The 22 liquidity events have offset any realized losses since inception, which were primarily incurred during the 2008-2009 recession in connection with the sale of performing syndicated loans at a realized loss to pay off a former lender. These successful exits, in part, enabled us to increase the monthly distribution by 75.0% fromMarch 2011 throughSeptember 30, 2020 , and allowed us to declare and pay 11 supplemental distributions.
Capital Raising Efforts
We have been able to meet our capital needs through extensions of and increases to the Fifth Amended and Restated Credit Agreement datedApril 30, 2013 , as amended (the "Credit Facility"), and by accessing the capital markets in the form of public offerings of common and preferred stock. We have successfully extended the Credit Facility's revolving period multiple times, most recently toAugust 2021 , and currently have a total commitment amount of$180.0 million (with a potential total commitment of$300.0 million through additional commitments from new or existing lenders). During the six months endedSeptember 30, 2020 , we sold 155,560 shares of our common stock under our common stock at-the-market program (the "Common Stock ATM Program") for gross proceeds of approximately$1.8 million and 258,610 shares of our Series E Term Preferred Stock under our preferred stock at-the-market program (the "Series E ATM Program") for gross proceeds of approximately$6.3 million . During the year endedMarch 31, 2020 , we sold 227,004 shares of our common stock under the Common Stock ATM Program for gross proceeds of approximately$3.1 million . Refer to "Liquidity and Capital Resources - Revolving Line of Credit" for further discussion of the Credit Facility and to "Liquidity and Capital Resources - Equity - Common Stock" and "Liquidity and Capital Resources - Equity - Term Preferred Stock" for further discussion of our common stock, including our at-the-market programs, and mandatorily redeemable preferred stock. Although we have been able to access the capital markets historically, market conditions, including the impact of COVID-19, may continue to affect the trading price of our common stock and thus our ability to finance new investments through the issuance of common equity. OnSeptember 30, 2020 , the closing market price of our common stock was$9.10 per share, representing a 16.2% discount to our net asset value ("NAV") of$10.86 per share as ofSeptember 30, 2020 . When our common stock trades below NAV, our ability to issue additional equity is constrained by provisions of the 1940 Act, which generally prohibits the issuance and sale of our common stock at an issuance price below the then-current NAV per share without stockholder approval, other than through sales to our then-existing stockholders pursuant to a rights offering. At our 2020 Annual Meeting of Stockholders held onAugust 20, 2020 , our stockholders approved a proposal authorizing us, with the subsequent approval of our board of directors ("Board of Directors"), to issue and sell shares of our common stock at a price below our then-current NAV per share, provided that the number of shares issued and sold pursuant to such authority does not exceed 25.0% of our then-outstanding common stock immediately prior to each such sale. ThisAugust 2020 stockholder authorization is in effect for one year from the date of stockholder approval. We sought and obtained stockholder approval concerning similar proposals at each Annual Meeting of Stockholders since 2008, and with our Board of Directors' subsequent approval, we issued shares of our common stock in three offerings at a price below the then-current NAV per share, once inMay 2017 , once inMarch 2015 , and once inOctober 2012 . Certain sales under the previous Common Stock ATM Program in March and April of 2018 were also below the then-current estimated NAV per share. The resulting proceeds, in part, have allowed us to (i) grow our portfolio by making new investments, (ii) generate additional income through these new investments, (iii) ensure continued compliance with regulatory tests and (iv) increase our debt capital while still complying with our applicable debt-to-equity ratios. Refer to "Liquidity and Capital Resources - Equity - Common Stock" for further discussion of our common stock. 47
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Regulatory Compliance
Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage limitations of the 1940 Act, which require us to have asset coverage (as defined in Sections 18 and 61 of the 1940 Act), of at least 150% on each of our senior securities representing indebtedness and our senior securities that are stock (such as our two series of term preferred stock currently outstanding). OnApril 10, 2018 , our Board of Directors, including a "required majority" (as such term is defined in Section 57(o) of the 1940 Act) thereof, approved the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, our asset coverage requirements for senior securities changed from 200% to 150%, effective as ofApril 10, 2019 , one year after the date of the Board of Directors' approval. Notwithstanding the modified asset coverage requirement under the 1940 Act described above, we are separately subject to a minimum asset coverage requirement of 200% with respect to our Series D Term Preferred Stock.
As of
Investment Highlights
Investment Activity
During the six months ended
• In
through a combination of secured first lien debt and preferred equity.
Mason West, headquartered in Placentia, California , is a provider of
engineered seismic restraint and vibration isolation solutions. In
and redeemed $3.1 million of preferred equity.
• In September 2020 , we invested an additional $8.0 million into PSI MoldedPlastics, Inc. ("PSI Molded") in the form of preferred equity and also amended certain terms of our existing debt. Recent Developments ATM Activity Subsequent toSeptember 30, 2020 and throughOctober 23, 2020 , we sold 61,536 shares of our Series E Term Preferred Stock under the Series E ATM Program withVirtu Americas LLC with an aggregate liquidation preference of$1.5 million . The weighted-average gross price per share net of discounts was$24.29 and resulted in gross proceeds of approximately$1.5 million . After deducting commissions and offering costs borne by us, net proceeds totaled approximately$1.5 million .
Distributions and Dividends
In
Dividend per Dividend per
Share of Share of
Distribution per Series D Term Series E Term
Record Date Payment Date Common Share Preferred Stock Preferred Stock
October 23, 2020 October 30, 2020 $ 0.07 $ 0.13020833 $ 0.13281250
November 20, 2020 November 30, 2020 0.07 0.13020833 0.13281250
December 23, 2020 December 31, 2020 0.07 0.13020833 0.13281250
Total for the Quarter: $ 0.21 $ 0.39062499 $ 0.39843750
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LIBOR Transition
In general, our investments in debt securities have a term of five years, accrue
interest at variable rates (based on the one-month London Interbank Offered Rate
("LIBOR")) and, to a lesser extent, at fixed rates. LIBOR is currently
anticipated to be phased out during late 2021. LIBOR may transition to a new
standard rate, the Secured Overnight Financing Rate ("SOFR"), which will
incorporate certain overnight repo market data collected from multiple data
sets. To attain an equivalent one-month rate, we currently intend to adjust the
SOFR to minimize the difference between the interest that a borrower would be
paying using LIBOR versus what it will be paying using SOFR. We are currently
monitoring the transition and cannot assure you whether SOFR will become a
standard rate for variable rate debt. We expect we will need to continue 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. Assuming that SOFR replaces LIBOR and is
appropriately adjusted to equate to one-month LIBOR, we expect that there should
be minimal impact on our operations.
COVID-19 Impact
We continue to closely monitor and work with our portfolio companies to navigate
the significant challenges created by the continuing COVID-19 pandemic and are
focused on ensuring the safety of the Adviser's and Administrator's personnel
and of the employees of our portfolio companies, while also managing our ongoing
business activities. While we are closely monitoring all of our portfolio
companies, our portfolio continues to be diverse from a geographic and industry
perspective. Through proactive measures and continued diligence, the management
teams of our portfolio companies continue to demonstrate their ability to
respond effectively and efficiently to the challenges posed by COVID-19 and
related orders imposed by state and local governments, including paused or
reversed reopening orders. 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 Three Months EndedSeptember 30, 2020 to the Three Months EndedSeptember 30, 2019 For the Three Months Ended September 30, 2020 2019 $ Change % Change INVESTMENT INCOME Interest income$ 11,840 $ 14,143 $ (2,303 ) (16.3 )% Dividend and success fee income - 2,493 (2,493 ) (100.0 ) Total investment income 11,840 16,636 (4,796 ) (28.8 ) EXPENSES Base management fee 2,989 3,144 (155 ) (4.9 ) Loan servicing fee 1,747 1,593 154 9.7 Incentive fee 452 1,600 (1,148 ) (71.8 ) Administration fee 390 423 (33 ) (7.8 ) Interest and dividend expense 3,213 3,297 (84 ) (2.5 ) Amortization of deferred financing costs and discounts 466 373 93 24.9 Other 1,032 1,824 (792 ) (43.4 ) Expenses before credits from Adviser 10,289 12,254 (1,965 ) (16.0 ) Credits to fees from Adviser (2,817 ) (2,201 )
(616 ) 28.0
Total expenses, net of credits to fees 7,472 10,053
(2,581 ) (25.7 )
NET INVESTMENT INCOME 4,368 6,583
(2,215 ) (33.6 )
REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain on investments 621 21,144 (20,523 ) (97.1 ) Net unrealized appreciation (depreciation) of investments 1,641 (16,854 ) 18,495 (109.7 ) Net unrealized depreciation of other - 131
(131 ) (100.0 )
Net realized and unrealized gain 2,262 4,421
(2,159 ) (48.8 )
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS$ 6,630 $ 11,004
BASIC AND DILUTED PER COMMON SHARE: Net investment income$ 0.13 $ 0.20
Net increase in net assets resulting from operations$ 0.20 $ 0.34 $ (0.14 ) (41.2 )% NM = Not Meaningful Investment Income Total investment income decreased 28.8% for the three months endedSeptember 30, 2020 , as compared to the prior year period. The decrease was due to a decrease in dividend and success fee income as well as a decrease in interest income. Interest income from our investments in debt securities decreased 16.3% for the three months endedSeptember 30, 2020 , as compared to the prior year period. During the three months endedSeptember 30, 2019 , we received$2.1 million of past due interest upon the exit of our investment in Alloy Die Casting Co ("ADC"). Generally, the level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period multiplied by the weighted-average yield. The weighted-average principal balance of our interest-bearing investment portfolio during the three months endedSeptember 30, 2020 was$388.7 million , compared to$374.1 million for the prior year period. This increase was primarily due to the origination of$65.1 million of new debt investments and$39.7 million of follow-on debt investments to existing portfolio companies, partially offset by$48.0 million of pay-offs, restructurings, or write-offs of debt investments and$47.9 million of loans placed on non-accrual status afterJune 30, 2019 , and their respective impact on the weighted-average principal balance when considering timing of new investments, pay-offs, restructurings, write-offs, and accrual status changes, as applicable. The weighted-average yield on our interest-bearing investments, excluding cash and cash equivalents and receipts recorded as dividend and success fee income, was 12.1% for the three months endedSeptember 30, 2020 , compared to 15.0% for the prior year period. The weighted-average yield may vary from period to period, based on the current stated interest rate on interest-bearing investments. 50
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As ofSeptember 30, 2020 , our loans to B+T Group Acquisition, Inc. ("B+T"),Horizon Facilities Services, Inc. ("Horizon"),The Mountain Corporation ("The Mountain"), PSI Molded, andSOG Specialty Knives & Tools, LLC ("SOG") were on non-accrual status, with an aggregate debt cost basis of$94.9 million . As ofSeptember 30, 2019 , certain of our loans toMeridian Rack & Pinion, Inc. ("Meridian"), The Mountain, PSI Molded, and SOG were on non-accrual status, with an aggregate debt cost basis of$56.4 million . Dividend and success fee income for the three months endedSeptember 30, 2020 decreased 100% from the prior year period. During the three months endedSeptember 30, 2020 , we did not earn any dividend and success fee income. During the three months endedSeptember 30, 2019 , dividend and success fee income consisted primarily of$0.6 million of dividend income and$1.9 million of success fee income.
As of
Expenses
Total expenses, net of any non-contractual, unconditional, and irrevocable credits from the Adviser, decreased 25.7% during the three months endedSeptember 30, 2020 , as compared to the prior year period, primarily due to a decrease in the incentive fee and other expenses and an increase in credits to fees from the Adviser. In accordance with GAAP, we recorded a capital gains-based incentive fee of$0.5 million during the three months endedSeptember 30, 2020 , compared to a capital gains-based incentive fee of$0.9 million during the three months endedSeptember 30, 2019 . The capital gains-based incentive fee was a result of the net impact of net realized gains (losses) and net unrealized appreciation (depreciation) on investments during the respective periods. The income-based incentive fee decreased by$0.7 million for the three months endedSeptember 30, 2020 , as compared to the prior year period, primarily due to a decrease in pre-incentive fee net investment income, which did not exceed the hurdle rate for the three months endedSeptember 30, 2020 . The base management fee, loan servicing fee, incentive fee, and their related non-contractual, unconditional, and irrevocable credits are computed quarterly, as described under "Transactions with the Adviser" in Note 4 -Related Party Transactions in the accompanying Notes to Consolidated Financial Statements and are summarized in the following table: Three Months EndedSeptember 30, 2020 2019
Average total assets subject to base management fee(A)
0.5 %
Base management fee(B) 2,989
3,144
Credits to fees from Adviser-other(B) (1,070 ) (608 ) Net base management fee$ 1,919 $ 2,536 Loan servicing fee(B) 1,747 1,593 Credits to base management fee-loan servicing fee(B) (1,747 ) (1,593 ) Net loan servicing fee $ - $ - Incentive fee - income-based $ -$ 742 Incentive fee - capital gains-based(C) 452
858
Total incentive fee(B)$ 452 $ 1,600 Credits to fees from Adviser-other(B) - - Net total incentive fee$ 452 $ 1,600
A) Average total assets subject to the base management fee is defined in the
Advisory Agreement as total assets, including investments made with proceeds
of borrowings, less any uninvested cash or cash equivalents resulting from
borrowings, valued at the end of the applicable quarters within the
respective periods and adjusted appropriately for any share issuances or
repurchases during the periods.
(B) Reflected as a line item on our Consolidated Statement of Operations.
(C) The capital gains-based incentive fees are recorded in accordance with GAAP
and do not necessarily reflect amounts contractually due under the terms of
the Advisory Agreement.
Other expenses decreased 43.4% during the three months endedSeptember 30, 2020 , as compared to the prior year period, primarily due to a decrease in tax expense and professional fees. 51
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Realized and Unrealized Gain (Loss)
Net Realized Gain (Loss) on Investments
During the three months endedSeptember 30, 2020 , we recorded net realized gains on investments of$0.6 million related to previous exits. During the three months endedSeptember 30, 2019 , we recorded net realized gains on investments of$21.1 million , primarily related to a$20.4 million realized gain from the exit of ADC.
Net Unrealized Appreciation (Depreciation) of Investments
During the three months endedSeptember 30, 2020 , we recorded net unrealized appreciation of investments of$1.6 million . The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the three months endedSeptember 30, 2020 were as follows: Three Months Ended September 30, 2020 Reversal of Realized Unrealized Unrealized Net Gain Appreciation (Appreciation) Gain Portfolio Company (Loss) (Depreciation) Depreciation (Loss) Pioneer Square Brands, Inc. $ - $ 11,867 $ -$ 11,867 Ginsey Home Solutions, Inc. - 2,414 - 2,414Frontier Packaging , Inc. - 2,150 - 2,150 SOG Specialty Knives & Tools, LLC - 1,982 - 1,982 ImageWorks Display and Marketing Group, Inc. - 1,451 - 1,451 Counsel Press, Inc. - (1,239 ) - (1,239 ) Edge Adhesives Holdings, Inc. - (1,269 ) - (1,269 ) D.P.M.S., Inc. - (2,253 ) - (2,253 ) PSI Molded Plastics, Inc. - (4,592 ) - (4,592 ) Brunswick Bowling Products, Inc. - (8,606 ) - (8,606 ) Other, net (<$1.0 million , net) 621 (264 ) - 357 Total$ 621 $ 1,641 $ -$ 2,262 The primary driver of net unrealized appreciation of investments of$1.6 million for the three months endedSeptember 30, 2020 was an increase in performance of certain of our portfolio companies, which was partially offset by decreased performance of certain of our other portfolio companies and a decrease in comparable multiples used to estimate the fair value of some of our portfolio companies. In part, the performance of certain of our portfolio companies was driven by the impact COVID-19 has had or is expected to have on our portfolio companies and the markets in which they operate, including government restrictions on the portfolio companies' ability to operate under historical conditions, current and future shutdowns and reopening restrictions, as well as demand for their products and general economic outlook. 52
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During the three months endedSeptember 30, 2019 , we recorded net unrealized depreciation of investments of$16.9 million . The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the three months endedSeptember 30, 2019 were as follows: Three Months Ended September 30, 2019 Reversal of Realized Unrealized Unrealized Net Gain Appreciation (Appreciation) Gain Portfolio Company (Loss) (Depreciation) Depreciation (Loss)
Alloy Die Casting Co.$ 20,355 $ -$ (12,634 ) $ 7,721 Nth Degree, Inc. - 7,328 - 7,328 Counsel Press, Inc. - 3,766 - 3,766 D.P.M.S., Inc. - 2,730 - 2,730 ImageWorks Display and Marketing Group, Inc. - 2,602 - 2,602 Old World Christmas, Inc. - 2,004 - 2,004 Galaxy Tool Holding Corporation - 1,532 - 1,532 Schylling, Inc. - 1,269 - 1,269 SBS Industries Holdings, Inc. - (1,232 ) - (1,232 ) SOG Specialty Knives and Tools, LLC - (1,443 ) - (1,443 ) PSI Molded Plastics, Inc. - (2,416 ) - (2,416 ) Ginsey Home Solutions, Inc. - (2,718 ) - (2,718 ) Pioneer Square Brands, Inc. - (3,163 ) - (3,163 ) Meridian Rack & Pinion, Inc. - (4,570 ) - (4,570 ) J.R. Hobbs Co.-Atlanta, LLC - (9,530 ) - (9,530 ) Other, net (<$1.0 million , net) 789 (248 ) (131 ) 410 Total$ 21,144 $ (4,089 ) $ (12,765 ) $ 4,290 The primary drivers of net unrealized depreciation of$16.9 million for the three months endedSeptember 30, 2019 were the reversal of previously recorded unrealized appreciation of our investment in ADC upon its exit, a decline in performance of certain of our other portfolio companies, and a decrease in comparable multiples used to estimate the fair value of certain of our portfolio companies, which were partially offset by increased performance of certain of our portfolio companies. Across our entire investment portfolio, we recorded$2.3 million of net unrealized appreciation on our debt positions and$0.7 million of net unrealized depreciation on our equity positions for the three months endedSeptember 30, 2020 . As ofSeptember 30, 2020 , the fair value of our investment portfolio was less than the cost basis by$46.9 million , as compared toJune 30, 2020 , when the fair value of our investment portfolio was less than the cost basis by$48.5 million , representing net unrealized appreciation of$1.6 million for the three months endedSeptember 30, 2020 . Our entire portfolio had a fair value of 92.8% of cost as ofSeptember 30, 2020 .
Net Unrealized (Appreciation) Depreciation on Other
During the three months ended
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Comparison of the Six Months EndedSeptember 30, 2020 to the Six Months EndedSeptember 30, 2019 For the Six Months Ended September 30, 2020 2019 $ Change % Change INVESTMENT INCOME Interest income$ 22,365 $ 26,018 $ (3,653 ) (14.0 )% Dividend and success fee income 182 7,928 (7,746 ) (97.7 ) Total investment income 22,547 33,946 (11,399 ) (33.6 ) EXPENSES Base management fee 5,845 6,315 (470 ) (7.4 ) Loan servicing fee 3,456 3,345 111 3.3 Incentive fee (302 ) 3,169 (3,471 ) (109.5 ) Administration fee 836 737 99 13.4 Interest and dividend expense 6,232 6,446 (214 ) (3.3 ) Amortization of deferred financing costs and discounts 840 746 94 12.6 Other 2,360 2,925 (565 ) (19.3 ) Expenses before credits from Adviser 19,267 23,683 (4,416 ) (18.6 ) Credits to fees from Adviser (5,261 ) (5,175 )
(86 ) 1.7
Total expenses, net of credits to fees 14,006 18,508
(4,502 ) (24.3 )
NET INVESTMENT INCOME 8,541 15,438
(6,897 ) (44.7 )
REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain on investments 1,374 21,677 (20,303 ) (93.7 ) Net unrealized depreciation of investments (3,246 ) (19,901 ) 16,655 (83.7 ) Net unrealized appreciation of other - (164 )
164 (100.0 )
Net realized and unrealized (loss) gain (1,872 ) 1,612 (3,484 ) NM NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS$ 6,669 $ 17,050
BASIC AND DILUTED PER COMMON SHARE: Net investment income$ 0.26 $ 0.47
Net increase in net assets resulting from operations$ 0.20 $ 0.52 $ (0.32 ) (61.5 )% NM = Not Meaningful Investment Income Total investment income decreased 33.6% for the six months endedSeptember 30, 2020 , as compared to the prior year period. The decrease was due to a decrease in dividend and success fee income, as well as a decrease in interest income. Interest income from our investments in debt securities decreased 14.0% for the six months endedSeptember 30, 2020 , as compared to the prior year period. During the six months endedSeptember 30, 2019 , we received$2.1 million of past due interest upon the exit of our investment in ADC. Generally, the level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period, multiplied by the weighted-average yield. The weighted-average principal balance of our interest-bearing investment portfolio during the six months endedSeptember 30, 2020 was$373.5 million , compared to$369.0 million for the prior year period. This increase was primarily due to the origination of$93.8 million of new debt investments and$51.6 million of follow-on debt investments to existing portfolio companies, partially offset by$81.0 million of pay-offs, restructurings, or write-offs of debt investments and$47.9 million of loans placed on non-accrual status afterMarch 31, 2019 , and their respective impact on the weighted-average principal balance when considering timing of new investments, pay-offs, restructurings, write-offs, and accrual status changes, as applicable. The weighted-average yield on our interest-bearing investments, excluding cash and cash equivalents and receipts recorded as dividend, success fee, and other income, was 11.9% for the six months endedSeptember 30, 2020 , compared to 14.1% for the prior year period. The weighted-average yield may vary from period to period, based on the current stated interest rate on interest-bearing investments. As ofSeptember 30, 2020 , our loans to B+T, Horizon, The Mountain, PSI Molded, and SOG were on non-accrual status, with an aggregate debt cost basis of$94.9 million . As ofSeptember 30, 2019 , certain of our loans to Meridian, The Mountain, PSI Molded, and SOG were on non-accrual status, with an aggregate debt cost basis of$56.4 million . 54
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Dividend and success fee income for the six months endedSeptember 30, 2020 decreased 97.7% from the prior year period. During the six months endedSeptember 30, 2020 , dividend and success fee income consisted primarily of$0.2 million of success fee income. During the six months endedSeptember 30, 2019 , dividend and success fee income consisted primarily of$5.8 million of success fee income and$2.1 million of dividend income.
As of
Expenses
Total expenses, net of any non-contractual, unconditional, and irrevocable credits from the Adviser, decreased 24.3% during the six months endedSeptember 30, 2020 , as compared to the prior year period, primarily due to a decrease in the incentive fee, base management fee, other expenses, and interest and dividend expense. In accordance with GAAP, we recorded a$0.3 million reversal of the capital gains-based incentive fee during the six months endedSeptember 30, 2020 , compared to a capital gains-based incentive fee of$0.3 million during the six months endedSeptember 30, 2019 . The reversal of the capital gains-based incentive fee was a result of the net impact of net realized gains (losses) and net unrealized appreciation (depreciation) on investments during the respective periods. The income-based incentive fee decreased by$2.8 million for the six months endedSeptember 30, 2020 , as compared to the prior year period, primarily due to a decrease in pre-incentive fee net investment income, which did not exceed the hurdle rate for the six months endedSeptember 30, 2020 . The base management fee, loan servicing fee, incentive fee, and their related non-contractual, unconditional, and irrevocable credits are computed quarterly, as described under "Transactions with the Adviser" in Note 4 -Related Party Transactions in the accompanying Notes to Consolidated Financial Statements and are summarized in the following table: Six Months EndedSeptember 30, 2020 2019
Average total assets subject to base management fee(A)
1.0 %
Base management fee(B) 5,845
6,315
Credits to fees from Adviser-other(B) (1,805 ) (1,830 ) Net base management fee$ 4,040 $ 4,485 Loan servicing fee(B) 3,456 3,345 Credits to base management fee-loan servicing fee(B) (3,456 ) (3,345 ) Net loan servicing fee $ - $ - Incentive fee - income-based $ -$ 2,823 Incentive fee - capital gains-based(C) (302 )
346
Total incentive fee(B)$ (302 ) $ 3,169 Credits to fees from Adviser-other(B) - - Net total incentive fee$ (302 ) $ 3,169
(A) Average total assets subject to the base management fee is defined in the
Advisory Agreement as total assets, including investments made with proceeds
of borrowings, less any uninvested cash or cash equivalents resulting from
borrowings, valued at the end of the applicable quarters within the
respective periods and adjusted appropriately for any share issuances or
repurchases during the periods.
(B) Reflected as a line item on our Consolidated Statement of Operations.
(C) The capital gains-based incentive fees are recorded in accordance with GAAP
and do not necessarily reflect amounts contractually due under the terms of
the Advisory Agreement.
Interest and dividend expense decreased 3.3% during the six months endedSeptember 30, 2020 , as compared to the prior year period, due to a decrease in the effective interest rate, partially offset by a higher weighted-average balance outstanding on the Credit Facility. The weighted-average balance outstanding on the Credit Facility during the six months endedSeptember 30, 2020 was$80.5 million , as compared to$49.9 million in the prior year period. The effective interest rate on the Credit Facility, excluding the impact of deferred financing costs, during the six months endedSeptember 30, 2020 was 4.5%, as compared to 8.4% in the prior year period. The decrease in the effective interest rate on the Credit Facility was primarily a result of a decrease in LIBOR and a decrease in unused commitment fees on the undrawn portion of the Credit Facility. Refer to "Liquidity and Capital Resources - Revolving Line of Credit" for further discussion of the Credit Facility. 55
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Other expenses decreased 19.3% during the six months endedSeptember 30, 2020 , as compared to the prior year period, primarily due to a decrease in tax expense and professional fees.
Realized and Unrealized Gain (Loss)
Net Realized Gain on Investments
During the six months endedSeptember 30, 2020 , we recorded net realized gains on investments of$1.4 million related to previous exits. During the six months endedSeptember 30, 2019 , we recorded net realized gains on investments of$21.7 million , primarily related to a$20.4 million realized gain from the exit of ADC and a$3.2 million realized gain from the exit ofJackrabbit Inc. ("Jackrabbit"), which were partially offset by a$2.7 million realized loss from the exit ofTread Corporation ("Tread").
Net Unrealized Appreciation (Depreciation) of Investments
During the six months endedSeptember 30, 2020 , we recorded net unrealized depreciation of investments of$3.2 million . The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the six months endedSeptember 30, 2020 were as follows: Six Months Ended September 30, 2020 Reversal of Realized Unrealized Unrealized Gain Appreciation (Appreciation) Net Gain Portfolio Company (Loss) (Depreciation) Depreciation (Loss) Pioneer Square Brands, Inc. $ - $ 16,215 $ -$ 16,215 Ginsey Home Solutions, Inc. - 3,670 - 3,670Frontier Packaging , Inc. - 2,534 - 2,534 SOG Specialty Knives and Tools, LLC - 2,159 - 2,159 Galaxy Tool Holding Corporation - 1,798 - 1,798 Head Country, Inc. - 846 - 846 Cambridge Sound Management, Inc. 740 - - 740 B+T Group Acquisition, Inc. - (588 ) - (588 ) Horizon Facilities Services, Inc. - (1,415 ) - (1,415 ) Bassett Creek Services, Inc. - (1,828 ) - (1,828 ) Counsel Press, Inc. - (1,980 ) - (1,980 ) D.P.M.S., Inc. - (2,637 ) - (2,637 ) Nth Degree, Inc. 113 (3,649 ) - (3,536 ) PSI Molded Plastics, Inc. - (4,215 ) - (4,215 ) Brunswick Bowling Products, Inc. - (13,222 ) - (13,222 ) Other, net (<$1.0 million , net) 521 (934 ) - (413 ) Total$ 1,374 $ (3,246 ) $ -$ (1,872 ) The primary drivers of net unrealized depreciation of$3.2 million for the six months endedSeptember 30, 2020 were a decline in performance of certain portfolio companies, and a decrease in comparable multiples used to estimate the fair value of certain of our portfolio companies, which were partially offset by increased performance of certain of our other portfolio companies. In part, the performance of certain of our portfolio companies was driven by the impact COVID-19 has had or is expected to have on our portfolio companies and the markets in which they operate, including government restrictions on the portfolio companies' ability to operate under historical conditions, current and future shutdowns and reopening restrictions, as well as demand for their products and general economic outlook. 56
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During the six months endedSeptember 30, 2019 , we recorded net unrealized depreciation of investments of$19.9 million . The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the six months endedSeptember 30, 2019 were as follows: Six Months Ended September 30, 2019 Reversal of Realized Unrealized Unrealized Gain Appreciation (Appreciation) Net Gain Portfolio Company (Loss) (Depreciation) Depreciation (Loss) Alloy Die Casting Co.$ 20,355 $ 8,823$ (12,634 ) $ 16,544 Nth Degree, Inc. - 10,763 - 10,763 Counsel Press, Inc. - 5,170 - 5,170 D.P.M.S., Inc. - 3,681 - 3,681 ImageWorks Display and Marketing Group, Inc. - 1,861 - 1,861 Head Country, Inc. - 1,708 - 1,708 Old World Christmas, Inc. - 1,202 - 1,202 Tread Corporation (2,726 ) - 3,380 654 Horizon Facilities Services, Inc. - 623 - 623 PSI Molded Plastics, Inc. - (1,135 ) - (1,135 ) Galaxy Tool Holding Corporation - (1,248 ) - (1,248 ) Brunswick Bowling Products, Inc. - (1,319 ) - (1,319 ) Jackrabbit, Inc. 3,198 - (4,547 ) (1,349 ) SOG Specialty Knives and Tools, LLC - (1,947 ) - (1,947 ) SBS Industries Holdings, Inc. - (2,030 ) - (2,030 ) Educators Resource, Inc. - (2,116 ) - (2,116 ) Pioneer Square Brands, Inc. - (2,786 ) - (2,786 ) Ginsey Home Solutions, Inc. - (3,555 ) - (3,555 ) Meridian Rack & Pinion, Inc. - (5,536 ) - (5,536 ) J.R. Hobbs Co.-Atlanta, LLC - (17,822 ) - (17,822 ) Other, net (<$1.0 million , net) 850 (305 ) (132 ) 413 Total$ 21,677 $ (5,968 )$ (13,933 ) $ 1,776 The primary drivers of net unrealized depreciation of$19.9 million for the six months endedSeptember 30, 2019 were a decline in performance of certain portfolio companies, the reversal of previously recorded unrealized appreciation of our investments in ADC and Jackrabbit upon their exit, and a decrease in comparable multiples used to estimate the fair value of certain of our portfolio companies, which were partially offset by the reversal of previously recorded unrealized depreciation of our investment in Tread upon its exit and increased performance of certain of our other portfolio companies. Across our entire investment portfolio, we recorded net unrealized depreciation of$0.8 million and$2.4 million on our debt and on our equity positions, respectively, for the six months endedSeptember 30, 2020 . As ofSeptember 30, 2020 , the fair value of our investment portfolio was less than the cost basis by$46.9 million , as compared toMarch 31, 2020 , when the fair value of our investment portfolio was less than the cost basis by$43.7 million , representing net unrealized depreciation of$3.2 million for the six months endedSeptember 30, 2020 . Our entire portfolio had a fair value of 92.8% of cost as ofSeptember 30, 2020 .
Net Unrealized (Appreciation) Depreciation on Other
During the six months endedSeptember 30, 2020 , we did not record any unrealized appreciation or depreciation of other. During the six months endedSeptember 30, 2019 , we recorded net unrealized appreciation of other of$0.2 million related to the Credit Facility recorded at fair value. 57
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LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Net cash used in operating activities for the six months endedSeptember 30, 2020 was$59.4 million , as compared to net cash provided by operating activities of$24.0 million for the six months endedSeptember 30, 2019 . This change was primarily due to decreases in principal repayments of investments and net proceeds from the sale of investments.
Purchases of investments were
As ofSeptember 30, 2020 , we had equity investments in or loans to 29 portfolio companies with an aggregate cost basis of$655.9 million . As ofSeptember 30, 2019 , we had equity investments in or loans to 29 portfolio companies with an aggregate cost basis of$593.8 million . The following table summarizes our total portfolio investment activity during the six months endedSeptember 30, 2020 and 2019: Six Months Ended September 30, 2020 2019 Beginning investment portfolio, at fair value$ 565,924 $ 624,172 New investments 46,902
43,180
Disbursements to existing portfolio companies 10,480
28,200
Unscheduled principal repayments (8,000 ) (53,926 ) Net proceeds from sales of investments (3,107 ) (34,413 ) Net realized gain on investments -
21,015
Net unrealized depreciation of investments (3,246 ) (5,967 ) Reversal of net unrealized appreciation of investments -
(13,934 ) Amortization of premiums, discounts, and acquisition costs, net
9 9
Ending investment portfolio, at fair value$ 608,962
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 : Amount For the remaining six months 2021 endingMarch 31 :$ 20,240 For the fiscal years ending 2022 March 31: 58,894 2023 106,150 2024 93,055 2025 175,432 Thereafter 25,250 Total contractual repayments$ 479,021 Adjustments to cost basis of debt investments (39 ) Investments in equity securities 176,884 Total cost basis of investments held as ofSeptember 30, 2020 :$ 655,866 Financing Activities Net cash provided by financing activities for the six months endedSeptember 30, 2020 was$57.9 million , which consisted primarily of$67.4 million of net borrowings under the Credit Facility,$6.3 million of gross proceeds from the issuance of mandatorily redeemable preferred stock under the Series E ATM Program, and$1.7 million of gross proceeds from the issuance of common stock under the Common Stock ATM Program, partially offset by$16.9 million in distributions to common stockholders. Net cash used in financing activities for the six months endedSeptember 30, 2019 was$23.7 million , which consisted primarily of$17.3 million in distributions to common stockholders and$6.2 million of net repayments on the Credit Facility. 58
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Distributions and Dividends to Stockholders
Common Stock Distributions
To qualify to be taxed as a RIC and thus avoid corporate level federal income
tax on the income we distribute to our stockholders, we are required, among
other requirements, to distribute to our stockholders on an annual basis at
least 90% of our taxable ordinary income plus the excess of our net short-term
capital gains over net long-term capital losses ("Investment Company Taxable
Income"), determined without regard to the dividends paid deduction.
Additionally, the Credit Facility generally restricts the amount of
distributions to stockholders that we can pay out to be no greater than the sum
of certain amounts, including our net investment income, plus net capital gains,
plus amounts elected by the Company to be considered as having been paid during
the prior fiscal year in accordance with Section 855(a) of the Code. In
accordance with these requirements, our Board of Directors declared, and we
paid, monthly cash distributions of $0.07 per common share for each of the six
months from April through September 2020 , and a supplemental distribution of
0.09 per common share in June 2020 .
For the fiscal year ended March 31, 2020 , Investment Company Taxable Income
exceeded distributions declared and paid, and, in accordance with Section 855(a)
of the Code, we elected to treat $17.9 million of the first distributions paid
subsequent to fiscal year-end as having been paid in the prior year. In
addition, for the fiscal year ended March 31, 2020 , net capital gains exceeded
distributions declared and paid, and, in accordance with Section 855(a) of the
Code, we elected to treat $5.3 million of the first distributions paid
subsequent to fiscal year-end as having been paid in the prior year. For the
year ended March 31, 2020 , we recorded $6.5 million of net adjustments for
estimated permanent book-tax differences to reflect tax character, which
decreased Capital in excess of par value and increased Accumulated net realized
gain in excess of distributions and Underdistributed (overdistributed) net
investment income. For the six months ended September 30, 2020 , we recorded
$0.6 million of net adjustments for estimated permanent book-tax differences to
reflect tax character, which decreased Capital in excess of par value and
Accumulated net realized gain in excess of distributions and increased
Underdistributed net investment income.
Preferred Stock Dividends
Our Board of Directors declared and we paid monthly cash dividends of (i)$0.13020833 per share to holders of our Series D Term Preferred Stock for each of the six months from April throughSeptember 2020 and (ii)$0.1328125 per share to holders of our Series E Term Preferred Stock for each of the six months from April throughSeptember 2020 . In accordance with GAAP, we treat these monthly dividends as an operating expense.
Dividend Reinvestment Plan
Our common stockholders who hold their shares through our transfer agent,Computershare, Inc. ("Computershare"), have the option to participate in a dividend reinvestment plan offered by Computershare, as the plan agent. This is an "opt in" dividend reinvestment plan, meaning that common stockholders may elect to have their cash distributions automatically reinvested in additional shares of our common stock. Common stockholders who do not make such election will receive their distributions in cash. Any distributions reinvested under the plan will be taxable to a common stockholder to the same extent, and with the same character, as if the common stockholder had received the distribution in cash. The common stockholder generally will have an adjusted basis in the additional common shares purchased through the plan equal to the dollar amount that would have been received if theU.S. stockholder had received the dividend or distribution in cash. The additional common shares will have a new holding period commencing on the day following the date on which the shares are credited to the common stockholder's account. Computershare purchases shares in the open market in connection with the obligations under the plan. The Computershare dividend reinvestment plan is not open to holders of our preferred stock.
Equity
Registration Statement
OnJune 14, 2019 , we filed a registration statement on Form N-2 (File No. 333-232124), which theSEC declared effective onJuly 24, 2019 . The registration statement permits us to issue, through one or more transactions, up to an aggregate of$300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities, and warrants to purchase common stock, preferred stock, or debt securities, including through concurrent, separate offerings of such securities. As ofSeptember 30, 2020 , we had the ability to issue up to$288.6 million in securities under the registration statement. 59
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Common Stock
InDecember 2019 , we entered into equity distribution agreements withWedbush Securities, Inc. ("Wedbush"),Cantor Fitzgerald & Co. , andLadenburg Thalmann & Co., Inc. (each, a "Common Stock ATM Sales Agent"), under which we have the ability to issue and sell shares of our common stock, from time to time, through the Common Stock ATM Sales Agents, up to an aggregate offering price of$35.0 million in the Common Stock ATM Program. As ofSeptember 30, 2020 , we had remaining capacity to sell up to$30.1 million of common stock under the Common Stock ATM Program. During the three months endedJune 30, 2020 , we sold 155,560 shares of our common stock under the Common Stock ATM Program with Wedbush at a weighted-average gross price of$11.39 per share and raised approximately$1.8 million of gross proceeds. The weighted-average net price per share, after deducting commissions and offering costs borne by us, was$11.17 and resulted in total net proceeds of approximately$1.7 million . These sales were above our then current estimated NAV per share. We did not sell any shares of our common stock under the Common Stock ATM Program during the three months endedSeptember 30, 2020 . During the year endedMarch 31, 2020 , we sold 227,004 shares of our common stock under the Common Stock ATM Program with Wedbush at a weighted-average gross price of$13.80 per share and raised approximately$3.1 million of gross proceeds. The weighted-average net price per share, after deducting commissions and offering costs borne by us, was$13.55 and resulted in total net proceeds of approximately$3.1 million . These sales were above our then current estimated NAV per share. We anticipate issuing equity securities to obtain additional capital in the future. However, we cannot determine the timing or terms of any future equity issuances or whether we will be able to issue equity on terms favorable to us, or at all. When our common stock is trading at a price below NAV per share, the 1940 Act places regulatory constraints on our ability to obtain additional capital by issuing common stock. Generally, the 1940 Act provides that we may not issue and sell our common stock at a price below our NAV per common share, other than to our then-existing common stockholders pursuant to a rights offering, without first obtaining approval from our stockholders and our independent directors and meeting other stated requirements. OnSeptember 30, 2020 , the closing market price of our common stock was$9.10 per share, representing a 16.2% discount to our NAV per share of$10.86 as ofSeptember 30, 2020 . At our 2020 Annual Meeting of Stockholders held onAugust 20, 2020 , our stockholders approved a proposal authorizing us with the subsequent approval of our Board of Directors, to issue and sell shares of our common stock at a price below our then current NAV per common share for a period of one year from the date of such approval, provided that the number of shares issued and sold pursuant to such authority does not exceed 25.0% of our then-outstanding common stock immediately prior to each such sale.
Term Preferred Stock
InAugust 2018 , we completed a public offering of 2,990,000 shares of our Series E Term Preferred Stock at a public offering price of$25.00 per share. Gross proceeds totaled$74.8 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were$72.1 million . Total underwriting discounts and offering costs related to this offering were$2.7 million , which have been recorded as discounts to the liquidation value on our Consolidated Statements of Assets and Liabilities and are being amortized over the period endingAugust 31, 2025 , the mandatory redemption date. Our Series E Term Preferred Stock is not convertible into our common stock or any other security and provides for a fixed dividend equal to 6.375% per year, payable monthly (which equates to$5.2 million per year as ofSeptember 30, 2020 ). We are required to redeem all outstanding shares of our Series E Term Preferred Stock onAugust 31, 2025 , for cash at a redemption price equal to$25.00 per share, plus an amount equal to accumulated but unpaid dividends, if any, to, but excluding, the date of redemption. In addition, two other potential mandatory redemption triggers are as follows: (1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of our outstanding Series E Term Preferred Stock, and (2) if we fail to maintain asset coverage as required by Sections 18 and 61 of the 1940 Act (which is currently 150%) and are unable to correct such failure within a specific amount of time, we are required to redeem a portion of our outstanding Series E Term Preferred Stock or otherwise cure the asset coverage redemption trigger (we may also redeem additional securities to cause asset coverage to be up to 200%). We may also voluntarily redeem all or a portion of our Series E Term Preferred Stock at our sole option at the redemption price at any time. InAugust 2018 , we used the proceeds from the issuance of our Series E Term Preferred Stock, along with borrowings under the Credit Facility, to voluntarily redeem all outstanding shares of our 6.750% Series B Cumulative Term Preferred Stock (our "Series B Term Preferred Stock") and our 6.500% Series C Cumulative Term Preferred Stock (our "Series C Term Preferred Stock"), each of which had a liquidation preference of$25.00 per share. In connection with the voluntary redemption of our Series B Term Preferred Stock and our Series C Term Preferred Stock, we incurred a loss on extinguishment of debt of$1.7 million , which was recorded in Realized loss on other in our Consolidated Statements of Operations and which was primarily comprised of unamortized deferred issuance costs at the time of redemption. 60
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InMay 2020 , we entered into sales agreements withWedbush and Virtu Americas LLC ("Virtu") (each a "Series E ATM Sales Agent"), under which we have the ability to issue and sell shares of our Series E Term Preferred Stock, from time to time, through the Series E ATM Sales Agents, up to$50.0 million aggregate liquidation preference in the Series E ATM Program. As ofSeptember 30, 2020 , we had remaining capacity to sell up to$43.5 million of our Series E Term Preferred Stock under the Series E ATM Program. During the six months endedSeptember 30, 2020 , we sold 258,610 shares of our Series E Term Preferred Stock under the Series E ATM Program with Wedbush and Virtu with an aggregate liquidation preference of$6.5 million . The weighted-average gross price per share net of discounts was$24.29 and resulted in gross proceeds of approximately$6.3 million . After deducting commissions and offering costs borne by us, net proceeds totaled approximately$6.2 million . InSeptember 2016 , we completed a public offering of 2,300,000 shares of our Series D Term Preferred Stock at a public offering price of$25.00 per share. Gross proceeds totaled$57.5 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were$55.4 million . Total underwriting discounts and offering costs related to this offering were$2.1 million , which have been recorded as discounts to the liquidation value on our Consolidated Statements of Assets and Liabilities and are being amortized over the period endingSeptember 30, 2023 , the mandatory redemption date. Our Series D Term Preferred Stock is not convertible into our common stock or any other security. Our Series D Term Preferred Stock provides for a fixed dividend equal to 6.25% per year, payable monthly (which equates to$3.6 million per year). We are required to redeem all outstanding shares of our Series D Term Preferred Stock onSeptember 30, 2023 , for cash at a redemption price equal to$25.00 per share, plus an amount equal to accumulated but unpaid dividends, if any, to, but excluding, the date of redemption. In addition, two other potential mandatory redemption triggers are as follows: (1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of our outstanding Series D Term Preferred Stock, and (2) if we fail to maintain asset coverage of at least 200% and are unable to correct such failure within a specific amount of time, we are required to redeem a portion of our outstanding Series D Term Preferred Stock or otherwise cure the asset coverage redemption trigger (and we may also redeem additional securities to cause the asset coverage to be 240%). We may also voluntarily redeem all or a portion of our Series D Term Preferred Stock at our sole option at the redemption price at any time. Each series of our mandatorily redeemable preferred stock has a preference over our common stock with respect to dividends, whereby no distributions are payable on our common stock unless the stated dividends, including any accrued and unpaid dividends, on the mandatorily redeemable preferred stock have been paid in full. The Series D Term Preferred Stock and Series E Term Preferred Stock are considered liabilities in accordance with GAAP and, as such, affect our asset coverage, exposing us to additional leverage risks. The asset coverage on our senior securities that are stock (our Series D Term Preferred Stock and Series E Term Preferred Stock) as ofSeptember 30, 2020 was 235.9%, calculated pursuant to Sections 18 and 61 of the 1940 Act.
Revolving Line of Credit
OnAugust 22, 2018 , we, through our wholly-owned subsidiary,Gladstone Business Investment, LLC ("Business Investment "), entered into Amendment No. 4 to the Fifth Amended and Restated Credit Agreement, originally entered into onApril 30, 2013 and as previously amended, withKeyBank National Association ("KeyBank") as administrative agent, lead arranger, managing agent and lender, the Adviser, as servicer, and certain other lenders party thereto. The revolving period was extended toAugust 22, 2021 , and if not renewed or extended by such date, all principal and interest will be due and payable onAugust 22, 2023 (two years after the revolving period end date). Additionally, the Credit Facility commitment amount was increased from$165.0 million to$200.0 million and, subject to certain terms and conditions, can be expanded to a total facility amount of$300.0 million through additional commitments from existing or new lenders. We incurred fees of approximately$1.6 million in connection with this amendment. OnAugust 10, 2020 , we, throughBusiness Investment , entered into Amendment No. 5 to the Credit Facility. Among other things, Amendment No. 5 amends the Credit Facility to (i) add LIBOR replacement language; (ii) implement a 0.5% LIBOR floor; (iii) reduce the facility size from$200.0 million to$180.0 million , which may be expanded to$300.0 million through additional commitments; and (iv) provide certain other changes to existing terms and covenants. In addition, Amendment No. 5 provides for certain temporary changes during the COVID-19 Relief Period (which began onAugust 10, 2020 and ends onMarch 31, 2021 , and which may be extended, subject to certain conditions) including: (i) amending the definition of "Effective Advance Rate," provided that during such period the overall effective advance rate does not exceed 55%; and (ii) removing or changing certain "Excess Concentration Limits" (as defined in the Credit Facility). 61
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Advances under the Credit Facility generally bear interest at 30-dayLIBOR, subject to a floor of 0.5%, plus 2.85% per annum untilAugust 21, 2021 , with the margin then increasing to 3.10% for the period fromAugust 22, 2021 toAugust 21, 2022 , and increasing further to 3.35% thereafter. The Credit Facility has an unused commitment fee on the daily unused commitment amount of 0.50% per annum if the average unused commitment amount for the period is less than or equal to 50% of the total commitment amount, 0.75% per annum if the average unused commitment amount for the period is greater than 50% but less than or equal to 65% of the total commitment amount, and 1.00% per annum if the average unused commitment amount for the period is greater than 65% of the total commitment amount. Interest is payable monthly during the term of the Credit Facility. Available borrowings are subject to various constraints and applicable advance rates, which are generally based on the size, characteristics, and quality of the collateral pledged byBusiness Investment . The Credit Facility also requires that any interest and principal payments on pledged loans be remitted directly by the borrower into a lockbox account withKeyBank .KeyBank is also the trustee of the account and generally remits the collected funds to us once a month. Among other things, the Credit Facility contains covenants that requireBusiness Investment to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions) and restrict certain material changes to our credit and collection policies without the lenders' consent. The Credit Facility also generally seeks to restrict distributions to stockholders to the sum of (i) our net investment income, (ii) net capital gains, and (iii) amounts deemed by the Company to be considered as having been paid during the prior fiscal year in accordance with Section 855(a) of the Code. Loans eligible to be pledged as collateral are subject to certain limitations, including, among other things, restrictions on geographic concentrations, industry concentrations, loan size, payment frequency and status, average life, portfolio company leverage, and lien property. The Credit Facility also requiresBusiness Investment to comply with other financial and operational covenants, which obligateBusiness Investment to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of obligors required in the borrowing base. Additionally, the Credit Facility contains a performance guaranty that requires the Company to maintain (i) a minimum net worth (defined in the Credit Facility to include our mandatory redeemable term preferred stock) of the greater of$210.0 million or$210.0 million plus 50% of all equity and subordinated debt raised minus 50% of any equity or subordinated debt redeemed or retired afterNovember 16, 2016 , which equated to$224.4 million as ofSeptember 30, 2020 , (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, 2020 , and as defined in the performance guaranty of the Credit Facility, we had a net worth of$495.4 million , asset coverage on our senior securities representing indebtedness of 502.1%, calculated in accordance with the requirements of Sections 18 and 61 of the 1940 Act, and an active status as a BDC and RIC. As ofSeptember 30, 2020 , we had availability, after adjustments for various constraints based on collateral quality, of$63.4 million under the Credit Facility and were in compliance with all covenants under the Credit Facility.
Notes Offering
InMay 2020 , we entered into a dealer manager agreement ("Dealer Manager Agreement") with our affiliated dealer manager,Gladstone Securities , under which we may sell a maximum of$350.0 million aggregate principal amount of our 6.00% notes due 2040 (the "Notes"). However, we can only offer for sale up to$200.0 million aggregate principal amount of the Notes pursuant to a prospectus supplement datedMay 22, 2020 and a base prospectus datedJuly 24, 2019 relating to the registration statement on Form N-2 (File No. 333- 232124) under the Securities Act of 1933, as amended. The Notes will mature onNovember 1, 2040 . We will pay interest on the Notes on the first day of each month, commencing on the first day of the month following the issuance of such Note. Subject to certain limitations, holders of the Notes will have the option to tender their Notes for redemption at a redemption price of$22.50 per Note until the earlier of the date upon which our Board of Directors, by resolution, suspends or terminates the optional redemption right of the holders or the date, if any, on which the Notes are listed on Nasdaq Global Select Market or another national securities exchange. In addition, we will repurchase the Notes, upon request, in the event of the holder's death at a redemption price of$25.00 per Note. Except upon the occurrence of certain events that would constitute a change in control of us or to comply with applicable law, we may not redeem the Notes at our option until the later of (1) the one-year anniversary of the termination of the offering of the Notes and (2)July 1, 2025 . After such date, we may, at our sole option, redeem all or a portion of the Notes at a redemption price of$25.00 per Note. The Notes will be our direct unsecured obligations and rank equal in right of payment with all outstanding and future unsecured, unsubordinated indebtedness issued by us. As ofSeptember 30, 2020 , no Notes have been issued. 62
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OFF-BALANCE SHEET ARRANGEMENTS
Unlike PIK income, we generally do not recognize success fees as income until payment has been received. Due to the contingent nature of success fees, there are no guarantees that we will be able to collect any or all of these success fees or know the timing of any such collections. As a result, as ofSeptember 30, 2020 andMarch 31, 2020 , we had unrecognized, contractual off-balance sheet success fee receivables of$45.0 million and$37.6 million (or approximately$1.35 and$1.14 per common share), respectively, on our debt investments. Consistent with GAAP, we have not recognized success fee receivables and related income in our accompanying Consolidated Financial Statements until earned.
CONTRACTUAL OBLIGATIONS
We have line of credit and delayed draw term loan commitments to certain of our portfolio companies that have not been fully drawn. Since these line of credit and delayed draw term loan commitments have expiration dates and we expect many will never be fully drawn, the total line of credit and delayed draw term loan commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of the combined unused line of credit and delayed draw term loan commitments as ofSeptember 30, 2020 to be immaterial. As ofSeptember 30, 2020 , we have also extended a guaranty on behalf of one of our portfolio companies,Country Club Enterprises, LLC ("CCE"), whereby we have guaranteed$1.0 million of CCE's obligations. As ofSeptember 30, 2020 , we have not been required to make payments on this or any previous guaranties, and we consider the credit risks to be remote and the fair value of this guaranty to be immaterial.
The following table shows our contractual obligations as of
Payments Due by Period
Less than 3-5 More than
Contractual Obligations(A) Total 1 Year 1-3 Years Years 5 Years
Credit Facility(B) $ 116,600 $ - $ 116,600 $ - $ -
Mandatorily redeemable preferred stock 138,715 - 57,500 81,215 -
Secured borrowing 5,096 - - 5,096 -
Interest payments on obligations(C) 50,167 13,415 26,372 10,380 -
Total $ 310,578 $ 13,415 $ 200,472 $ 96,691 $ -
(A) Excludes unused line of credit and delayed draw term loan commitments and
guaranties to our portfolio companies in the aggregate principal amount of
(B) Principal balance of borrowings outstanding under the Credit Facility, based
on the maturity date following the current contractual revolving period end
date.
(C) Includes interest payments due on the Credit Facility and secured borrowing
and dividend obligations on each series of our mandatorily redeemable
preferred stock. The amount of interest payments calculated for purposes of
this table was based upon rates and outstanding balances as of
2020. Dividend obligations on our mandatorily redeemable preferred stock
assume quarterly declarations and monthly dividend payments through the date
of mandatory redemption of each series.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity
with GAAP requires management to make estimates and assumptions that affect the
reported consolidated amounts of assets and liabilities, including disclosure of
contingent assets and liabilities at the date of the financial statements, and
revenues and expenses during the period reported. Actual results could differ
materially from those estimates under different assumptions or conditions. We
have identified our investment valuation policy (which has been approved by our
Board of Directors) as our most critical accounting policy, which is described
in Note 2 - Summary of Significant Accounting Policies in the accompanying Notes
to Consolidated Financial Statements included elsewhere in this Quarterly
Report. Additionally, refer to Note 3 - Investments in the accompanying Notes to
Consolidated Financial Statements included elsewhere in this Quarterly Report
for additional information regarding fair value measurements and our application
of Financial Accounting Standards Board Accounting Standards Codification Topic
820, "Fair Value Measurements and Disclosures." We have also identified our
revenue recognition policy as a critical accounting policy, which is described
in Note 2 - Summary of Significant Accounting Policies in the accompanying Notes
to Consolidated Financial Statements included elsewhere in this Quarterly
Report.
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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, are used as inputs in our valuation techniques. Generally, we, through the Adviser, participate in periodic board meetings of our portfolio companies in which we hold board seats and also require them to provide annual audited and monthly unaudited financial statements. Using these statements or comparable information and board discussions, the Adviser calculates and evaluates certain credit statistics. The Adviser risk rates all of our investments in debt securities. The Adviser does not risk rate equity securities. For loans that have been rated by aSEC-registered Nationally Recognized Statistical Rating Organization ("NRSRO"), the Adviser generally uses the average of two corporate level NRSRO's risk ratings for such security. For all other debt securities, the Adviser uses a proprietary risk rating system. While the Adviser seeks to mirror the NRSRO systems, we cannot provide any assurance that the Adviser's risk rating system will provide the same risk rating as an NRSRO for these securities. The Adviser's risk rating system is used to estimate the probability of default on debt securities and the expected loss, if there is a default. The Adviser's risk rating system uses a scale of 0 to >10, with >10 being the lowest probability of default. It is the Adviser's understanding that most debt securities ofLower Middle Market companies do not exceed the grade of BBB on an NRSRO scale, so there would be no debt securities in the Lower Middle Market that would meet the definition ofAAA , AA or A. Therefore, the Adviser's scale begins with the designation >10 as the best risk rating which may be equivalent to a BBB from an NRSRO; however, no assurance can be given that a >10 on the Adviser's scale is equal to a BBB or Baa2 on an NRSRO scale. The Adviser's risk rating system covers both qualitative and quantitative aspects of the business and the securities we hold.
The following table reflects risk ratings for all loans in our portfolio as of
Rating September 30, 2020 March 31, 2020
Highest 9.0 9.0
Average 6.2 6.5
Weighted-average 6.1 6.9
Lowest 3.0 4.0
Tax Status
We intend to continue to maintain our qualification as a RIC under Subchapter M
of the Code for U.S. federal income tax purposes. As a RIC, we generally are not
subject to U.S. federal income tax on the portion of our taxable income and
gains distributed to our stockholders. To maintain our qualification as a RIC,
we must maintain our status as a BDC and meet certain source-of-income and asset
diversification requirements. In addition, in order to qualify to be taxed as a
RIC, we must distribute to stockholders at least 90% of our Investment Company
Taxable Income, determined without regard to the dividends paid deduction. Our
policy generally is to make distributions to our stockholders in an amount up to
100% of Investment Company Taxable Income. We may retain some or all of our net
long-term capital gains, if any, and designate them as deemed distributions, or
distribute such gains to stockholders in cash. See "Business- Liquidity and
Capital Resources - Distributions and Dividends to Stockholders."
In an effort to limit federal excise taxes, we have to distribute to
stockholders, during each calendar year, an amount close to the sum of: (1) 98%
of our ordinary income for the calendar year, (2) 98.2% of our net capital gains
(both long-term and short-term), if any, for the one-year period ending on
October 31 of the calendar year, and (3) any income realized, but not
distributed, in the preceding period (to the extent that income tax was not
imposed on such amounts), less certain reductions, as applicable. Under the RIC
Modernization Act, we are permitted to carryforward any capital losses that we
may incur for an unlimited period, and such capital loss carryforwards will
retain their character as either short-term or long-term capital losses. Our
capital loss carryforward balance was $0 as of both September 30, 2020 and
March 31, 2020 .
Recent Accounting Pronouncements
Refer to Note 2 - Summary of Significant Accounting Policies in the accompanying
Notes to Consolidated Financial Statements included elsewhere in this Quarterly
Report for a description of recent accounting pronouncements.
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