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, 2021 , filed with theU.S. Securities and Exchange Commission ("SEC") onMay 11, 2021 (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. 43
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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. 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$40 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, 2021 , our investment portfolio was comprised of 74.4% in debt securities and 25.6% in equity securities, at cost. We focus on investing in lower middle market private businesses (which we generally define as companies with annual earnings before interest, taxes, depreciation and amortization ("EBITDA") of$3 million to$20 million ) ("Lower Middle Market") in theU.S. that meet certain criteria, including: the sustainability of the business' free cash flow and its ability to grow it over time, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the portfolio company, reasonable capitalization of the portfolio company, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples, and the potential to realize appreciation and gain liquidity in our equity position, if any. We anticipate that liquidity in our equity position will be achieved through a merger or acquisition of the portfolio company, a public offering of the portfolio company's stock, or, to a lesser extent, by exercising our right to require the portfolio company to repurchase our warrants, though there can be no assurance that we will always have these rights. We invest in portfolio companies that need funds for growth capital, 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, our 5.00% Notes due 2026 ("2026 Notes"), and our 4.875% Notes due 2028 ("2028 Notes") are traded on the Nasdaq Global Select Market ("Nasdaq") under the trading symbols "GAIN," "GAINN," and "GAINZ," respectively.
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-led buyouts ofLower Middle Market companies in theU.S. During the six months endedSeptember 30, 2021 , we invested in two new portfolio companies, exited one portfolio company, merged two existing portfolio companies into a new portfolio company, and dissolved one portfolio company. From our initial public offering inJune 2005 throughSeptember 30, 2021 , we invested in 55 companies, excluding investments in syndicated loans, for a total of approximately$1.4 billion , before giving effect to principal repayments and divestitures. 44
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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 of
September 30, 2021 , we had unrecognized, contractual success fees of
$49.0 million , or $1.48 per common share. Consistent with accounting principles
generally accepted in the U.S. ("GAAP"), we have not recognized success fee
receivables and related income in our accompanying Consolidated Financial
Statements until earned.
From inception through September 30, 2021 , we completed sales of 25 portfolio
companies that we acquired under our buyout strategy (which excludes investments
in syndicated loans). In the aggregate, these sales have generated
$240.8 million in net realized gains and $33.4 million in other income upon
exit, for a total increase to our net assets of $274.2 million . We believe, in
aggregate, these transactions were equity-oriented investment successes and
exemplify our investment strategy of striving to achieve returns through current
income on the debt portion of our investments and capital gains from the equity
portion. The 25 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. The successful exits, in part, enabled us to increase
the monthly distribution by 75.0% from March 2011 through September 30, 2021 ,
and allowed us to declare and pay 13 supplemental distributions to common
stockholders through September 30, 2021 .
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 and unsecured notes. We have successfully extended the Credit Facility's revolving period multiple times, most recently toFebruary 2024 , 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, 2021 , we issued our 2028 Notes for gross proceeds of$134.6 million . During the year endedMarch 31, 2021 , we issued our 2026 Notes for gross proceeds of$127.9 million and sold 155,560 shares of our common stock under our at-the-market program (the "Common Stock ATM Program") for gross proceeds of approximately$1.8 million , and 784,853 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$19.3 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 and mandatorily redeemable preferred stock, including our at-the-market programs. 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, 2021 , the closing market price of our common stock was$13.87 per share, representing a 4.5% premium to our net asset value ("NAV") of$13.27 per share as ofSeptember 30, 2021 . 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.
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 previously outstanding series of term preferred 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, 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.
As of
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Table of Contents Investment Highlights Investment Activity
During the six months ended
• In
LLC ("CTG") and recorded a realized loss of $1.8 million .
• In
("Nocturne") through a combination of secured first lien debt and
preferred equity. Nocturne, headquartered in Telluride, Colorado , is a
luxury vacation rental manager.
• In
connection with the investment, our secured second lien debt was
converted to secured first lien debt.
• In
Country"), which resulted in success fee income of
realized gain of
net cash proceeds of
investment of $9.1 million at par.
• In July 2021 , we invested an additional $5.9 million in the form of
secured first lien debt into Nocturne.
• In July 2021 , we invested $24.3 million in Utah Pacific Bridge & Steel ,Ltd. ("Utah Pacific") through a combination of secured first lien debt
and preferred equity. Utah Pacific, headquartered in
manufacturer of large steel components used in bridge replacement,
rehabilitation, and construction.
• In September 2021 , one of our portfolio companies, D.P.M.S., Inc.
("Danco"), merged with another of our portfolio companies, Galaxy
Technologies, Inc. ("Galaxy"), into a newly formed portfolio company,
debt investments in
cost, and Galaxy, which totaled
converted into two second lien term loans with an aggregate cost and
principal of $25.3 million to Galaxy Technologies Holdings . Our common
equity investment in Danco , with a cost basis of $0.0 million , and ourpreferred and common equity investments in Galaxy, with an aggregate cost
basis of
The following significant investment activity occurred subsequent to
• In
company,
debt.
Recent Developments
Distributions and Dividends
In
Record Date Payment Date Distribution per Common Share
October 22, 2021 October 29, 2021 $ 0.075
November 19, 2021 November 30, 2021 0.075
December 7, 2021 December 15, 2021 0.090 (A)
December 23, 2021 December 31, 2021 0.075
Total for the Quarter: $ 0.315
(A) Represents a supplemental distribution to common stockholders.
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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. Most U.S. dollar LIBOR are
currently anticipated to be phased out in June 2023 . 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 a limited number of loan agreements with our portfolio companies to
include fallback language providing a mechanism for the parties to negotiate a
new reference interest rate in the event that LIBOR ceases to exist. 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
remain 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, including its variants, 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, 2021 to the Three Months EndedSeptember 30, 2020 For the Three Months Ended September 30, 2021 2020 $ Change % Change INVESTMENT INCOME Interest income$ 14,298 $ 11,840 $ 2,458 20.8 % Dividend and success fee income 4,240 - 4,240 NM Total investment income 18,538 11,840 6,698 56.6 EXPENSES Base management fee 3,577 2,989 588 19.7 Loan servicing fee 1,794 1,747 47 2.7 Incentive fee 7,351 452 6,899 NM Administration fee 571 390 181 46.4 Interest and dividend expense 3,884 3,213 671 20.9 Amortization of deferred financing costs and discounts 452 466 (14 ) (3.0 ) Other 1,468 1,032 436 42.2 Expenses before credits from Adviser 19,097 10,289 8,808 85.6 Credits to fees from Adviser (2,724 ) (2,817 ) 93 (3.3 ) Total expenses, net of credits to fees 16,373 7,472 8,901 119.1 NET INVESTMENT INCOME 2,165 4,368
(2,203 ) (50.4 )
REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain on investments 464 621 (157 ) (25.3 ) Net realized loss on other (1,998 ) - (1,998 ) NM Net unrealized appreciation (depreciation) of investments 27,504 1,641 25,863 NM Net realized and unrealized gain (loss) 25,970 2,262 23,708 NM NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS$ 28,135 $ 6,630 $ 21,505 324.4 BASIC AND DILUTED PER COMMON SHARE: Net investment income$ 0.07 $ 0.13
Net increase in net assets resulting from operations$ 0.85 $ 0.20 $ 0.65 325.0 NM = Not Meaningful Investment Income Total investment income increased 56.6% for the three months endedSeptember 30, 2021 , as compared to the prior year period. The increase was due to increases in both interest income and dividend and success fee income. Interest income from our investments in debt securities increased 20.8% for the three months endedSeptember 30, 2021 , as compared to the prior year period. During the three months endedSeptember 30, 2021 , we received$1.6 million of past due interest from certain loans that were previously on non-accrual status. 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, 2021 was$425.5 million , compared to$388.7 million for the prior year period. This increase was primarily due to the$79.5 million of loans returned to accrual status, the origination of$54.2 million of new debt investments, and$48.4 million of follow-on debt investments to existing portfolio companies, partially offset by$64.2 million of loans placed on non-accrual status and$43.3 million of pay-offs, restructurings, or write-offs of debt investments afterJune 30, 2020 , 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 13.3% for the three months endedSeptember 30, 2021 , compared to 12.1% 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. 48
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As ofSeptember 30, 2021 , our loans to J.R. Hobbs,The Mountain Corporation ("The Mountain"), andSBS Industries Holdings, Inc ("SBS") were on non-accrual status, with an aggregate debt cost basis of$81.3 million . As ofSeptember 30, 2020 , certain of our loans to B+T Group Acquisition, Inc. ("B+T"),Horizon Facilities Services, Inc. ("Horizon"), The Mountain,PSI Molded Plastics, Inc. ("PSI Molded"), andSOG Specialty Knives & Tools, LLC ("SOG"), were on non-accrual status, with an aggregate debt cost basis of$94.9 million . Dividend and success fee income for the three months endedSeptember 30, 2021 increased$4.2 million from the prior year period. During the three months endedSeptember 30, 2021 , dividend and success fee income consisted of$2.6 million of success fee income and$1.6 million of dividend income. During the three months endedSeptember 30, 2020 , we did not earn any dividend and success fee income.
As of
Expenses
Total expenses, net of any non-contractual, unconditional, and irrevocable credits from the Adviser, increased 119.1% during the three months endedSeptember 30, 2021 , as compared to the prior year period, primarily due to an increase in the incentive fee, as well as increases in interest and dividend expense, and the base management fee. In accordance with GAAP, we recorded a$5.6 million capital gains-based incentive fee during the three months endedSeptember 30, 2021 , compared to a capital gains-based incentive fee of$0.5 million during the three months endedSeptember 30, 2020 . The capital gains-based incentive fee was a result of the net impact of net realized gains (losses) and net unrealized appreciation (depreciation) on investments during the respective periods. The income-based incentive fee increased by$1.8 million for the three months endedSeptember 30, 2021 , as compared to the prior year period, as the increase in pre-incentive fee net investment income more than offset the increase in net assets, which drives the hurdle rate. The base management fee, loan servicing fee, incentive fee, and their related non-contractual,unconditional, and irrevocable credits are computed quarterly, as described under "Transactions with the Adviser" in Note 4 -Related Party Transactions in the accompanying Notes to Consolidated Financial Statements and are summarized in the following table: Three Months Ended September 30, 2021 2020 Average total assets subject to base management fee(A)$ 715,400 $ 597,800 Multiplied by prorated annual base management fee of 2.0% 0.5 % 0.5 % Base management fee(B) 3,577 2,989 Credits to fees from Adviser - other(B) (930 ) (1,070 ) Net base management fee $ 2,647 $ 1,919 Loan servicing fee(B) 1,794 1,747 Credits to base management fee - loan servicing fee(B) (1,794 ) (1,747 ) Net loan servicing fee $ - $ - Incentive fee - income-based $ 1,757 $ - Incentive fee - capital gains-based(C) 5,594 452 Total incentive fee(B) $ 7,351 $ 452 Credits to fees from Adviser - other(B) - - Net total incentive fee $ 7,351 $ 452
(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 increased 20.9% during the three months endedSeptember 30, 2021 , as compared to the prior year period, primarily due to an increase in interest expense, which was partially offset by a decrease in dividend expense. Interest expense increased by$2.0 million due to the issuance of the 2026 Notes inMarch 2021 and the 2028 Notes inAugust 2021 , which was partially offset by lower interest expense related to the Credit Facility. The weighted-average balance outstanding on the Credit Facility during the three months endedSeptember 30, 2021 was$24.4 million , as compared to$106.1 million in the prior year period. 49
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The effective interest rate on the Credit Facility, excluding the impact of deferred financing costs, during the three months endedSeptember 30, 2021 was 10.0%, as compared to 3.6% in the prior year period. The increase in the effective interest rate on the Credit Facility was primarily a result of an increase in unused commitment fees on the undrawn portion of the Credit Facility. Dividend expense decreased by$1.4 million as a result of the 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") redemptions inMarch 2021 andAugust 2021 , respectively, partially offset by the Series E ATM Program sales during the prior fiscal year.
Realized and Unrealized Gain (Loss)
Net Realized Gain (Loss) on Investments
During the three months endedSeptember 30, 2021 , we recorded net realized gains on investments of$0.5 million , primarily related to previous exits of certain investments. During the three months endedSeptember 30, 2020 , we recorded net realized gains on investments of$0.6 million related to previous exits of certain investments.
Net Realized Gain (Loss) on Other
During the three months endedSeptember 30, 2021 , we recorded a net realized loss on other of$2.0 million , which primarily related to unamortized deferred issuance costs written off upon the redemption of our Series E Term Preferred Stock inAugust 2021 . During the three months endedSeptember 30, 2020 , there were no realized gains or losses on other.
Net Unrealized Appreciation (Depreciation) of Investments
During the three months endedSeptember 30, 2021 , we recorded net unrealized appreciation of investments of$27.5 million . The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the three months endedSeptember 30, 2021 were as follows: Three Months Ended September 30, 2021 Reversal of Realized Unrealized Unrealized Gain Appreciation (Appreciation) Net Gain Portfolio Company (Loss) (Depreciation) Depreciation (Loss) Schylling, Inc. $ - $ 6,277 $ -$ 6,277 Basset Creek Services, Inc. - 5,474 - 5,474 Counsel Press, Inc. - 4,903 - 4,903 Old World Christmas, Inc. - 3,986 - 3,986 B+T Group Acquisition, Inc. - 3,971 - 3,971 Educators Resource, Inc. - 3,607 - 3,607 Horizon Facilities Service, Inc. - 2,983 - 2,983 ImageWorks Display and Marketing Group, Inc. - 2,938 - 2,938 Brunswick Bowling Products, Inc. - 2,326 - 2,326 Mason West, LLC - 2,064 - 2,064 The Maids International, LLC - 1,873 - 1,873 SOG Specialty Knives and Tools, LLC - 1,796 - 1,796 Nocturne Villa Rentals, Inc. - 892 - 892 Diligent Delivery Systems - 525 - 525 J.R. Hobbs Co. - Atlanta, LLC - (2,625 ) - (2,625 ) SBS Industries Holdings, Inc. - (3,278 ) - (3,278 ) Ginsey Home Solutions, Inc. - (3,903 ) - (3,903 ) Galaxy Technologies Holdings, Inc. - (6,320 ) - (6,320 ) Other, net (<$1.0 million , net) 464 15 - 479 Total$ 464 $ 27,504 $ -$ 27,968 The primary drivers of net unrealized appreciation of$27.5 million for the three months endedSeptember 30, 2021 were the increased performance of certain portfolio companies and an increase in comparable transaction multiples used to estimate the fair value of certain of our portfolio companies, which were partially offset by a decline in performance of certain 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, or the reversal of such impact towards pre-COVID-19 levels. 50
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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 Gain Appreciation (Appreciation) Net 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. Across our entire investment portfolio, we recorded net unrealized appreciation of$1.5 million and$26.0 million on our debt and on our equity positions, respectively, for the three months endedSeptember 30, 2021 . As ofSeptember 30, 2021 , the fair value of our investment portfolio was more than the cost basis by$45.3 million , as compared toJune 30, 2021 , when the fair value of our investment portfolio was more than the cost basis by$17.8 million , representing net unrealized appreciation of$27.5 million for the three months endedSeptember 30, 2021 . Our entire portfolio had a fair value of 106.6% of cost as ofSeptember 30, 2021 . 51
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Comparison of the Six Months EndedSeptember 30, 2021 to the Six Months EndedSeptember 30, 2020 For the Six Months Ended September 30, 2021 2020 $ Change % Change INVESTMENT INCOME Interest income$ 30,290 $ 22,365 $ 7,925 35.4 % Dividend and success fee income 6,274 182 6,092 NM Total investment income 36,564 22,547 14,017 62.2 EXPENSES Base management fee 6,897 5,845 1,052 18.0 Loan servicing fee 3,662 3,456 206 6.0 Incentive fee 19,599 (302 ) 19,901 NM Administration fee 970 836 134 16.0 Interest and dividend expense 7,688 6,232 1,456 23.4 Amortization of deferred financing costs and discounts 908 840 68 8.1 Other 2,822 2,360 462 19.6 Expenses before credits from Adviser 42,546 19,267 23,279 120.8 Credits to fees from Adviser (5,843 ) (5,261 )
(582 ) 11.1
Total expenses, net of credits to fees 36,703 14,006 22,697 162.1 NET INVESTMENT (LOSS) INCOME (139 ) 8,541
(8,680 ) (101.6 )
REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain on investments 2,393 1,374 1,019 74.2 Net realized loss on other (1,998 ) - (1,998 ) NM Net unrealized appreciation (depreciation) of investments 75,018 (3,246 ) 78,264 NM
Net realized and unrealized gain (loss) 75,413 (1,872 )
77,285 NM
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 75,274 $ 6,669 $ 68,605 NM
BASIC AND DILUTED PER COMMON SHARE:
Net investment (loss) income $ - $ 0.26 Net increase in net assets resulting from operations$ 2.27 $ 0.20 $ 2.07 NM % NM = Not Meaningful Investment Income Total investment income increased 62.2% for the six months endedSeptember 30, 2021 , as compared to the prior year period. The increase was due to increases in both interest income and dividend and success fee income. Interest income from our investments in debt securities increased 35.4% for the six months endedSeptember 30, 2021 , as compared to the prior year period. During the six months endedSeptember 30, 2021 , we received$3.9 million of past due interest from certain loans that were previously on non-accrual status. 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, 2021 was$445.7 million , compared to$373.5 million for the prior year period. This increase was primarily due to$79.5 million of loans returned to accrual status, the origination of$54.2 million of new debt investments, and$48.5 million of follow-on debt investments to existing portfolio companies, partially offset by$64.2 million of loans placed on non-accrual status and$43.3 million of pay-offs, restructurings, or write-offs of debt investments afterMarch 31, 2020 , 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 13.6% for the six months endedSeptember 30, 2021 , compared to 11.9% 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, 2021 , our loans to J.R. Hobbs, The Mountain, and SBS were on non-accrual status, with an aggregate debt cost basis of$81.3 million . 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 . 52
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Dividend and success fee income for the six months ended
As of
Expenses
Total expenses, net of any non-contractual, unconditional, and irrevocable credits from the Adviser, increased 162.1% during the six months endedSeptember 30, 2021 , as compared to the prior year period, primarily due to an increase in the incentive fee, as well as increases in interest and dividend expense, and the base management fee, partially offset by an increase in credits to fees from the Adviser. In accordance with GAAP, we recorded a$15.9 million capital gains-based incentive fee during the six months endedSeptember 30, 2021 , compared to a$0.3 million reversal of the capital gains-based incentive fee during the six months endedSeptember 30, 2020 . The capital gains-based incentive fee was a result of the net impact of net realized gains (losses) and net unrealized appreciation (depreciation) on investments during the respective periods. The income-based incentive fee increased by$3.7 million for the six months endedSeptember 30, 2021 , as compared to the prior year period, as the increase in pre-incentive fee net investment income more than offset the increase in net assets, which drives the hurdle rate. The base management fee, loan servicing fee, incentive fee, and their related non-contractual, unconditional, and irrevocable credits are computed quarterly, as described under "Transactions with the Adviser" in Note 4 -Related Party Transactions in the accompanying Notes to Consolidated Financial Statements and are summarized in the following table: Six Months Ended September 30, 2021 2020 Average total assets subject to base management fee(A)$ 689,700 $ 584,500 Multiplied by prorated annual base management fee of 2.0% 1.0 % 1.0 % Base management fee(B) 6,897 5,845 Credits to fees from Adviser - other(B) (2,181 ) (1,805 ) Net base management fee $ 4,716 $ 4,040 Loan servicing fee(B) 3,662 3,456 Credits to base management fee - loan servicing fee(B) (3,662 ) (3,456 ) Net loan servicing fee $ - $ - Incentive fee - income-based $ 3,695 $ - Incentive fee - capital gains-based(C) 15,904 (302 ) Total incentive fee(B)$ 19,599 $ (302 ) Credits to fees from Adviser - other(B) - - Net total incentive fee$ 19,599 $ (302 )
(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 increased 23.4% during the six months endedSeptember 30, 2021 , as compared to the prior year period, primarily due to the increase in interest expense partially offset by a decrease in dividend expense. Interest expense increased by$3.4 million primarily due to the issuance of the 2026 Notes inMarch 2021 and the 2028 Notes inAugust 2021 , which was partially offset by lower interest expense related to the Credit Facility. The weighted-average balance outstanding on the Credit Facility during the six months endedSeptember 30, 2021 was$25.4 million , as compared to$80.5 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, 2021 was 9.6%, as compared to 4.5% in the prior year period. The increase in the effective interest rate on the Credit Facility was primarily a result of an increase in unused commitment fees on the undrawn portion of the Credit Facility. Dividend expense decreased by$2.0 million as a result of the 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") redemptions inMarch 2021 andAugust 2021 , respectively, partially offset by the Series E ATM Program sales during the prior fiscal year. 53
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Realized and Unrealized Gain (Loss)
Net Realized Gain on Investments
During the six months endedSeptember 30, 2021 , we recorded net realized gains on investments of$2.4 million , primarily related to a$3.6 million realized gain from the exit of Head Country and$0.5 million realized gains related to previous exits of certain investments, partially offset by a$1.8 million realized loss from the dissolution of CTG. During the six months endedSeptember 30, 2020 , we recorded net realized gains on investments of$1.4 million related to previous exits of certain investments.
Net Realized Gain (Loss) on Other
During the six months endedSeptember 30, 2021 , we recorded a net realized loss on other of$2.0 million which primarily related to unamortized deferred issuance costs written off upon the redemption of our Series E Term Preferred Stock inAugust 2021 . During the six months endedSeptember 30, 2020 , there were no realized gains or losses on other.
Net Unrealized Appreciation (Depreciation) of Investments
During the six months endedSeptember 30, 2021 , we recorded net unrealized appreciation of investments of$75.0 million . The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the six months endedSeptember 30, 2021 were as follows: Six Months Ended September 30, 2021 Reversal of Realized Unrealized Unrealized Gain Appreciation (Appreciation) Net Gain Portfolio Company (Loss) (Depreciation) Depreciation (Loss) B+T Group Acquisition, Inc. $ -$ 15,268 $ -$ 15,268 Old World Christmas, Inc. - 12,636 - 12,636 Schylling, Inc. - 10,522 - 10,522 Educators Resource, Inc. - 8,811 - 8,811 Basset Creek Services, Inc. - 8,487 - 8,487 SOG Specialty Knives and Tools, LLC - 7,580 - 7,580 Counsel Press, Inc. - 7,045 - 7,045 Horizon Facilities Service, Inc. - 6,417 - 6,417 ImageWorks Display and Marketing Group, Inc. - 5,302 - 5,302 PSI Molded Plastics, Inc. - 3,633 - 3,633 Brunswick Bowling Products, Inc. - 3,498 - 3,498 Galaxy Tool Holding Corporation - 1,404 - 1,404 Mason West, LLC - 1,172 - 1,172 Head Country, Inc. 3,627 - (2,469 ) 1,158 The Maids International, LLC - 1,054 - 1,054 Channel Technologies Group, LLC (1,841 ) - 1,841 - Pioneer Square Brands, Inc. - (1,244 ) - (1,244 ) J.R. Hobbs Co. - Atlanta, LLC - (2,511 ) - (2,511 ) SBS Industries Holdings, Inc. - (3,167 ) - (3,167 ) Ginsey Home Solutions, Inc. - (4,305 ) - (4,305 ) Galaxy Technologies Holdings, Inc. - (6,320 ) - (6,320 ) Other, net (<$1.0 million , net) 607 312 52 971 Total$ 2,393 $ 75,594 $ (576 )$ 77,411 The primary drivers of net unrealized appreciation of$75.0 million for the six months endedSeptember 30, 2021 were the increased performance of certain portfolio companies, the reversal of previously recorded unrealized depreciation of our investment in CTG upon its dissolution, and an increase in comparable transaction multiples used to estimate the fair value of certain of our portfolio companies, which were partially offset by the reversal of previously recorded unrealized appreciation of our investment in Head Country and a decline in performance of certain 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, or the reversal of such impact towards pre-COVID-19 levels. 54
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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. Across our entire investment portfolio, we recorded net unrealized appreciation of$7.4 million and$67.6 million on our debt and on our equity positions, respectively, for the six months endedSeptember 30, 2021 . As ofSeptember 30, 2021 , the fair value of our investment portfolio was more than the cost basis by$45.3 million , as compared toMarch 31, 2021 , when the fair value of our investment portfolio was less than the cost basis by$29.7 million , representing net unrealized appreciation of$75.0 million for the six months endedSeptember 30, 2021 . Our entire portfolio had a fair value of 106.6% of cost as ofSeptember 30, 2021 . 55
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LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Net cash used in operating activities for the six months endedSeptember 30, 2021 was$6.3 million , as compared to net cash used in operating activities of$59.4 million for the six months endedSeptember 30, 2020 . This change was primarily due to a decrease in purchases of investments, an increase in principal repayments of investments and net proceeds from the sale of investments, as well as a decrease in tax payments for our deemed distributions declared in prior fiscal years.
Purchases of investments were
As ofSeptember 30, 2021 , we had equity investments in or loans to 27 portfolio companies with an aggregate cost basis of$691.2 million . As ofSeptember 30, 2020 , we had equity investments in or loans to 29 portfolio companies with an aggregate cost basis of$655.9 million .
The following table summarizes our total portfolio investment activity during
the six months ended
Six Months Ended September 30,
2021 2020
Beginning investment portfolio, at fair value
$ 565,924 New investments 34,200
46,902
Disbursements to existing portfolio companies 13,350
10,480
Unscheduled principal repayments (14,060 ) (8,000 ) Net proceeds from sales of investments (7,648 ) (3,107 ) Net realized gain on investments 1,805 - Net unrealized appreciation (depreciation) of investments 75,594 (3,246 ) Reversal of net unrealized appreciation of investments (576 ) - Amortization of premiums, discounts, and acquisition costs, net 9 9 Ending investment portfolio, at fair value$ 736,503
The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as ofSeptember 30, 2021 : Amount For the remaining six months ending March 31: 2022$ 30,460 For the fiscal years ending March 31: 2023 114,850 2024 93,055 2025 171,777 2026 52,250 Thereafter 52,246 Total contractual repayments$ 514,638 Adjustments to cost basis of debt investments (21 ) Investments in equity securities 176,602 Total cost basis of investments held as of September 30, 2021:$ 691,219
Financing Activities
Net cash provided by financing activities for the six months endedSeptember 30, 2021 was$6.3 million , which consisted primarily of$134.6 million in gross proceeds from the issuance of our 2028 Notes, partially offset by the redemption of our Series E Term Preferred Stock of$94.4 million ,$16.9 million in distributions to common stockholders,$13.5 million of net repayments under the Credit Facility, and$3.4 million of deferred financing and offering costs. 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. 56
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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 2021 , and supplemental distributions of
$0.06 and $0.03 per common share in June and September 2021 , respectively. See
also "Recent Developments-Distributions and Dividends" for a discussion of cash
distributions to common stockholders declared by our Board of Directors in
October 2021 .
For the fiscal year ended March 31, 2021 , Investment Company Taxable Income
exceeded distributions declared and paid, and, in accordance with Section 855(a)
of the Code, we elected to treat $16.1 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, 2021 , net capital gains exceeded
distributions declared and paid, and, in accordance with Section 855(a) of the
Code, we elected to treat $8.5 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, 2021 , we recorded $2.0 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.
For the six months ended September 30, 2021 , we recorded $2.7 million of net
adjustments for estimated permanent book-tax differences to reflect tax
character, which decreased Capital in excess of par value and Overdistributed
net investment income and increased Accumulated net realized gain in excess of
distributions.
Preferred Stock Dividends
Our Board of Directors declared and we paid monthly cash dividends of $0.1328125
per share to holders of our Series E Term Preferred Stock per month from April
through July 2021 and $0.07968750 per share of our Series E Term Preferred Stock
for the period from August 1, 2021 up to, but excluding, the redemption date of
August 19, 2021 . 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 the U.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
OnSeptember 3, 2021 , we filed a registration statement on Form N-2 (File No. 333-259302), which theSEC declared effective onOctober 15, 2021 . The registration statement permits us to issue, through one or more transactions, up to an aggregate of$300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities, and warrants to purchase common stock, preferred stock, or debt securities, including through concurrent, separate offerings of such securities. As of the date of this report, we had the ability to issue up to$300.0 million of the securities registered under the registration statement. 57
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Common Stock
InDecember 2019 , we entered into equity distribution agreements withWedbush Securities, Inc. ,Cantor Fitzgerald & Co. , andLadenburg Thalmann & Co., Inc. (each, a "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. OnAugust 11, 2021 , we terminated the equity distribution agreements with each of the Common Stock ATM Sales Agents. We did not sell any shares of our common stock under the Common Stock ATM Program during the six months endedSeptember 30, 2021 . During the year endedMarch 31, 2021 , we sold 155,560 shares of our common stock under the Common Stock ATM Program 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 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, 2021 , the closing market price of our common stock was$13.87 per share, representing a 4.5% premium to our NAV per share of$13.27 as ofSeptember 30, 2021 . 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 accompanying Consolidated Statements of Assets and Liabilities and were amortized over the period endingAugust 31, 2025 , the mandatory redemption date, prior to redemption inAugust 2021 . Prior to redemption inAugust 2021 , the Series E Term Preferred Stock provided for a fixed dividend equal to 6.375% per year, payable monthly. InMay 2020 , we entered into sales agreements withWedbush Securities, Inc. andVirtu Americas LLC (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. OnAugust 10, 2021 , we terminated our sales agreements with each of the Series E ATM Sales Agents. We did not sell any shares of our Series E Term Preferred Stock under the Series E ATM Program during the six months endedSeptember 30, 2021 . During the year endedMarch 31, 2021 , we sold 784,853 shares of our Series E Term Preferred Stock under the Series E ATM Program with an aggregate liquidation preference of$19.6 million . The weighted-average gross price per share net of discounts was$24.56 and resulted in gross proceeds of approximately$19.3 million . After deducting commissions and offering costs borne by us, net proceeds totaled approximately$19.1 million . InMarch 2021 , we used a portion of the proceeds from the issuance of our 2026 Notes, to voluntarily redeem all outstanding shares of our Series D Term Preferred Stock, which had a liquidation preference of$25.00 per share. In connection with the voluntary redemption, we incurred a loss on extinguishment of debt of$0.8 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. Prior to redemption inMarch 2021 , the Series D Term Preferred Stock provided for a fixed dividend equal to 6.25% per year, payable monthly, and would have otherwise been subject to mandatory redemption onSeptember 30, 2023 . InAugust 2021 , we used a portion of the proceeds from the issuance of our 2028 Notes, to voluntarily redeem all outstanding shares of our Series E Term Preferred Stock, which had a liquidation preference of$25.00 per share. In connection with the voluntary redemption, we incurred a loss on extinguishment of debt of$2.0 million , which was recorded in Realized loss on other in our accompanying Consolidated Statements of Operations and which was primarily comprised of unamortized deferred issuance costs at the time of redemption. 58
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Revolving Line of Credit
OnMarch 8, 2021 , we, through our wholly-owned subsidiary,Gladstone Business Investment, LLC ("Business Investment "), entered into Amendment No. 6 to the Fifth Amended and Restated Credit Agreement, originally entered into onApril 30, 2013 , 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 toFebruary 29, 2024 , and if not renewed or extended by such date, all principal and interest will be due and payable onFebruary 28, 2026 (two years after the revolving period end date). As ofSeptember 30, 2021 , the Credit Facility provided two one-year extension options that may be exercised on or before the first and second anniversary ofMarch 8, 2021 , subject to approval by all lenders. Additionally, as part of this amendment, the COVID-19 Relief Period (described below) was extended toSeptember 30, 2021 . We incurred fees of approximately$1.0 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 amended 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 provided for certain temporary changes during the COVID-19 Relief Period (August 10, 2020 untilMarch 31, 2021 , subject to extension under 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). Advances under the Credit Facility generally bear interest at 30-day LIBOR, subject to a floor of 0.5%, plus 2.85% per annum untilFebruary 29, 2024 , with the margin then increasing to 3.10% for the period fromFebruary 29, 2024 toFebruary 28, 2025 , and increasing further to 3.35% thereafter. The Credit Facility has an unused commitment fee on the daily unused commitment amount of 0.50% per annum if the average unused commitment amount for the period is less than or equal to 50% of the total commitment amount, 0.75% per annum if the average unused commitment amount for the period is greater than 50% but less than or equal to 65% of the total commitment amount, and 1.00% per annum if the average unused commitment amount for the period is greater than 65% of the total commitment amount. 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$286.3 million as ofSeptember 30, 2021 , (ii) asset coverage with respect to senior securities representing indebtedness of at least 150% (or such percentage as may be set forth in Section 18 of the 1940 Act, as modified by Section 61 of the 1940 Act), and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code. As ofSeptember 30, 2021 , and as defined in the performance guaranty of the Credit Facility, we had a net worth of$695.2 million , asset coverage on our senior securities representing indebtedness of 254.5%, 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, 2021 , we had availability, after adjustments for various constraints based on collateral quality, of$171.1 million under the Credit Facility and were in compliance with all covenants under the Credit Facility. 59
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Table of Contents Notes Payable 5.00% Notes due 2026 InMarch 2021 , we completed a public offering of the 2026 Notes with an aggregate principal amount of$127.9 million , which resulted in net proceeds of approximately$123.8 million after deducting underwriting discounts, commissions and offering costs borne by us. The 2026 Notes are traded under the ticker symbol "GAINN" on Nasdaq. The 2026 Notes will mature onMay 1, 2026 and may be redeemed in whole or in part at any time or from time to time at the Company's option on or afterMay 1, 2023 . The 2026 Notes bear interest at a rate of 5.00% per year (which equates to$6.4 million per year), payable quarterly in arrears. The indenture relating to the 2026 Notes contains certain covenants, including (i) an inability to incur additional debt or issue additional debt or preferred securities unless the Company's asset coverage meets the threshold specified in the 1940 Act after such borrowing, (ii) an inability to declare any dividend or distribution (except a dividend payable in our stock) on a class of our capital stock or to purchase shares of our capital stock unless the Company's asset coverage meets the threshold specified in the 1940 Act at the time of (and giving effect to) such declaration or purchase, and (iii) if, at any time, we are not subject to the reporting requirements of the Exchange Act, we will provide the holders of the 2026 Notes, as applicable, and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements. The 2026 Notes are recorded at the aggregate principal amount, less underwriting discounts, commissions, and offering costs, on our accompanying Consolidated Statements of Assets and Liabilities. Total underwriting discounts, commissions, and offering costs related to this offering were$4.1 million , which have been recorded as discounts to the aggregate principal amount on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized over the period endingMay 1, 2026 , the maturity date.
4.875% Notes due 2028
InAugust 2021 , we completed a public offering of the 2028 Notes with an aggregate principal amount of$134.6 million , which resulted in net proceeds of approximately$131.3 million after deducting underwriting discounts, commissions and offering costs borne by us. The 2028 Notes are traded under the ticker symbol "GAINZ" on Nasdaq. The 2028 Notes will mature onNovember 1, 2028 and may be redeemed in whole or in part at any time or from time to time at the Company's option on or afterNovember 1, 2023 . The 2028 Notes bear interest at a rate of 4.875% per year (which equates to$6.6 million per year), payable quarterly in arrears. The indenture relating to the 2028 Notes contains certain covenants, including (i) an inability to incur additional debt or issue additional debt or preferred securities unless the Company's asset coverage meets the threshold specified in the 1940 Act after such borrowing, (ii) an inability to declare any dividend or distribution (except a dividend payable in our stock) on a class of our capital stock or to purchase shares of our capital stock unless the Company's asset coverage meets the threshold specified in the 1940 Act at the time of (and giving effect to) such declaration or purchase, and (iii) if, at any time, we are not subject to the reporting requirements of the Exchange Act, we will provide the holders of the 2028 Notes, as applicable, and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements. The 2028 Notes are recorded at the aggregate principal amount, less underwriting discounts, commissions, and offering costs, on our accompanying Consolidated Statements of Assets and Liabilities. Total underwriting discounts, commissions, and offering costs related to this offering were$3.3 million , which have been recorded as discounts to the aggregate principal amount on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized over the period endingNovember 1, 2028 , the maturity date.
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, 2021 andMarch 31, 2021 , we had unrecognized, contractual off-balance sheet success fee receivables of$49.0 million and$46.2 million (or approximately$1.48 and$1.39 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, 2021 to be immaterial. 60
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As ofSeptember 30, 2021 , 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, 2021 , 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
Contractual Obligations(A) Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years
Credit Facility(B) $ 8,900 $ - $ - $ 8,900 $ -
Notes payable 262,488 - - 127,938 134,550
Secured borrowing 5,096 - - 5,096 -
Interest payments on obligations(C) 85,957 15,355 30,716 26,221 13,665
Total $ 362,441 $ 15,355 $ 30,716 $ 168,155 $ 148,215
(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, 2026 Notes, 2028
Notes, and secured borrowing, as applicable. The amount of interest payments
calculated for purposes of this table was based upon rates and outstanding
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 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.
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. 61
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The following table reflects risk ratings for all loans in our portfolio as of
Rating September 30, 2021 March 31, 2021
Highest 9.0 9.0
Average 6.6 6.2
Weighted-average 7.0 6.6
Lowest 4.0 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, 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 "- 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, 2021 and
March 31, 2021 .
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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