GLADSTONE INVESTMENT CORPORATION The following analysis of our financial condition and results of operations should be read in conjunction with our accompanying Consolidated Financial Statements and the notes thereto contained elsewhere in this Annual Report. Historical financial condition and results of operations and percentage relationships among any amounts in the financial statements are not necessarily indicative of financial condition, results of operations or percentage relationships for any future periods. Except per share amounts, dollar amounts included herein are in thousands unless otherwise indicated.
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 1940 Act. ForU.S. federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of 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. We were established for the purpose of investing in debt and equity securities of established private businesses operating in theU.S. Our investment objectives are to: (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$70 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 ofMarch 31, 2022 , our investment portfolio was comprised of 76.3% in debt securities and 23.7% in equity securities, at cost. We focus on investing inLower Middle Market businesses 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 management buyouts and/or growth capital to finance acquisitions, 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, and 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. 51
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Table of Content s 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 year endedMarch 31, 2022 , we invested in two new portfolio companies, exited three portfolio companies, merged two existing portfolio companies into a new portfolio company and dissolved one portfolio company. From our initial public offering inJune 2005 throughMarch 31, 2022 , we invested in 55 companies, excluding investments in syndicated loans, for a total of approximately$1.5 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 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 ofMarch 31, 2022 , we had unrecognized, contractual success fees of$50.5 million , or$1.52 per common share. Consistent with GAAP, we generally have not recognized success fee receivables and related income in our accompanying Consolidated Financial Statements until earned. From inception throughMarch 31, 2022 , we completed sales of 27 portfolio companies that we acquired under our buyout strategy (which excludes investments in syndicated loans). In the aggregate, these sales have generated$262.8 million in net realized gains and$36.4 million in other income upon exit, for a total increase to our net assets of$299.2 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 27 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 87.5% fromMarch 2011 throughMarch 31, 2022 and allowed us to declare and pay 15 supplemental distributions to common stockholders throughMarch 31, 2022 .
Capital Raising Efforts
We have been able to meet our capital needs through extensions of and increases to the Credit Facility and by accessing the capital markets in the form of public offerings of unsecured notes, as well as common and preferred stock. 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 year endedMarch 31, 2022 , 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." 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. OnMarch 31, 2022 , the closing market price of our common stock was$16.13 per share, representing a 20.1% premium to our NAV of$13.43 per share as ofMarch 31, 2022 . 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).
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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
Investment Highlights
Investment Activity
During the fiscal year ended
•In
•InJune 2021 , we invested$10.0 million in a new portfolio company,Nocturne Villa Rentals, Inc. ("Nocturne"), through a combination of secured first lien debt and preferred equity. Nocturne, headquartered inTelluride, Colorado , is a luxury vacation rental manager.
•In
•InJune 2021 , we sold our investment inHead Country, Inc. ("Head Country"), which resulted in success fee income of$2.0 million and a realized gain of$3.6 million . In connection with the sale, we received net cash proceeds of$16.7 million , including the repayment of our debt investment of$9.1 million at par.
•In
•InJuly 2021 , we invested$24.3 million in a new portfolio company,Utah Pacific Bridge & Steel, Ltd. ("Utah Pacific"), through a combination of secured first lien debt and preferred equity. Utah Pacific, headquartered inLindon, Utah , is a manufacturer of large steel components used in bridge replacement, rehabilitation, and construction. •InSeptember 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,Galaxy Technologies Holdings, Inc. ("Galaxy Technologies Holdings "). Our debt investments inDanco , which totaled$12.3 million at principal and cost, and Galaxy, which totaled$13.0 million at principal and cost, were converted into two second lien term loans with an aggregate cost and principal of$25.3 million toGalaxy Technologies Holdings . Our common equity investment inDanco , with a cost basis of$0.0 million , and our preferred and common equity investments in Galaxy, with an aggregate cost basis of$11.5 million , were converted into a common equity investment inGalaxy Technologies Holdings with a combined cost basis of$11.5 million .
•In
•In
•In
•InDecember 2021 , we sold our investment inPioneer Square Brands, Inc. ("Pioneer"), which resulted in success fee income of$0.5 million and a realized gain of$21.9 million . In connection with the sale, we received net cash proceeds of$50.6 million , including the repayment of our debt investment of$23.1 million at par. 53
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•InDecember 2021 , we sold our investment inSOG Specialty Knives & Tools, LLC ("SOG"), which resulted in success fee income of$2.9 million . In connection with the sale, we received net cash proceeds of$23.3 million , including the repayment of our debt investment of$8.9 million at par, and retained a common stock investment in the intermediary entity,Gladstone SOG Investments, Inc. , which maintains a cost basis of$0.6 million . •InJanuary 2022 , we invested$5.0 million inSBS Industries Holdings, Inc. ("SBS"), through a combination of secured second lien debt and preferred equity to fund an add-on acquisition. As part of the additional investment, SBS was renamedSFEG Holdings, Inc ("SFEG"). •InMarch 2022 , we entered into a new$26.0 million secured first lien term loan withJ.R. Hobbs , replacing our previously outstanding first lien term loan with a total cost basis of$36.0 million , which resulted in a realized loss of$10.0 million . The new term loan has a stated interest rate of LIBOR + 10.3% and maturesOctober 1, 2024 .
•In
Recent Developments
Distributions and Dividends
In
Record Date Payment Date Distribution per Common Share
April 22, 2022 April 29, 2022 $ 0.075
May 20, 2022 May 31, 2022 0.075
June 6, 2022 June 15, 2022 0.120 (A)
June 22, 2022 June 30, 2022 0.075
Total for the Quarter: $ 0.345
(A)Represents a supplemental distribution to common stockholders.
LIBOR Transition
In general, our investments in debt securities have a term of five years, accrue interest at variable rates (based on the one-month LIBOR) and, to a lesser extent, at fixed rates. MostU.S. dollar LIBOR are currently anticipated to be phased out inJune 2023 . LIBOR may transition to a new standard 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 have amended all outstanding 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 have demonstrated their ability to
respond effectively and efficiently to the challenges posed by COVID-19,
including its variants, related orders imposed by state and local governments,
including paused or reversed reopening orders, and operating challenges,
including but not limited to, labor shortages, supply chain delays and increased
material costs. We believe we have sufficient levels of liquidity to support our
existing portfolio companies, as necessary, and continue our buyout strategy by
deploying capital in new investment opportunities.
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Impact of Inflation
We believe the effects of inflation, if any, on our historical results of operations and financial condition have been immaterial. During the fiscal year endedMarch 31, 2022 , general inflationary pressures and certain commodity price volatility have impacted our portfolio companies to varying degrees; however, the broad based impact of these pricing changes have largely been mitigated by price adjustments without adverse sales implications, and thus, have not materially impacted our portfolio companies' ability to service their indebtedness, including our loans. Notwithstanding the results to date, we do expect that the cumulative effect of these inflationary pressures may impact the profit margins or sales of certain portfolio companies and their ability to service their debts. We continue to monitor the current inflationary environment to anticipate any impact on our portfolio companies including their availability to pay interest on our loans. We cannot assure you that our results of operations and financial condition or that of our portfolio companies will not be materially impacted by inflation in the future. Refer to "Risk Factors - Risks Related to the Economy - We may experience fluctuations in our quarterly and annual results based on the impact of inflation in theU.S. " 55
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RESULTS OF OPERATIONS
Comparison of the Fiscal Year EndedMarch 31, 2022 to the Fiscal Year EndedMarch 31, 2021 For the Fiscal Years Ended March 31, 2022 2021 $ Change % Change INVESTMENT INCOME Interest income$ 59,649 $ 47,164 $ 12,485 26.5 % Dividend and success fee income 12,903 9,463 3,440 36.4 % Total investment income 72,552 56,627 15,925 28.1 % EXPENSES Base management fee 14,113 12,115 1,998 16.5 % Loan servicing fee 7,178 7,082 96 1.4 % Incentive fee 26,360 8,778 17,582 200.3 % Administration fee 1,806 1,619 187 11.6 % Interest and dividend expense 15,384 13,114 2,270 17.3 % Amortization of deferred financing costs and discounts 1,803 1,750 53 3.0 % Other 4,593 4,262 331 7.8 % Expenses before credits from Adviser 71,237 48,720 22,517 46.2 % Credits to fees from Adviser (13,675) (10,031) (3,644) 36.3 % Total expenses, net of credits to fees 57,562 38,689 18,873 48.8 % NET INVESTMENT INCOME 14,990 17,938 (2,948) (16.4) % REALIZED AND UNREALIZED GAIN (LOSS), NET OF TAXES Net realized gain on investments 14,442 11,374 3,068 27.0 % Net realized loss on other (1,998) (782) (1,216) (155.5) % Net unrealized appreciation of investments 74,882 13,924 60,958 437.8 % Net realized and unrealized gain, net of taxes on deemed distribution of long-term capital gains 87,326 24,516 62,810 256.2 % NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS$ 102,316 $ 42,454 $ 59,862 141.0 % BASIC AND DILUTED PER COMMON SHARE: Net investment income$ 0.45 $ 0.54 $ (0.09) (16.7) % Net increase in net assets resulting from operations$ 3.08 $ 1.28 $ 1.80 140.6 % Investment Income Total investment income increased by 28.1% for the year endedMarch 31, 2022 , as compared to the prior year. This increase was primarily due to an increase in interest income, as well as an increase in dividend and success fee income. Interest income from our investments in debt securities increased 26.5% for the year endedMarch 31, 2022 , as compared to the prior year. 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. 56
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The weighted-average principal balance of our interest-bearing investment portfolio during the year endedMarch 31, 2022 was$442.8 million , compared to$398.1 million during the prior year. This increase was primarily due to the origination of$54.2 million of new debt investments,$85.9 million of follow-on debt investments to existing portfolio companies, and$79.5 million of loans placed back on accrual status, partially offset by the pay-off, restructuring, or write-off of$72.1 million of debt investments and$64.2 million of existing loans placed on non-accrual status afterMarch 31, 2020 , and their respective impact on the weighted-average principal balance when considering the 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 other income, was 13.5% and 11.9% for the years endedMarch 31, 2022 and 2021, respectively. The weighted-average yield may vary from period to period, based on the current stated interest rate on interest-bearing investments, coupled with any collection of past due interest during the period. During the year endedMarch 31, 2022 , we collected$7.3 million in past due interest from portfolio companies that were previously on non-accrual status, including$3.4 million fromHorizon Facilities Services, Inc. ("Horizon"),$2.8 million from B+T Group Acquisition, Inc. ("B+T"),$1.0 million fromSOG Speciality Knives & Tools, LLC and$0.1 million fromPSI Molded Plastics, Inc. We had no collections of past due interest during the year endedMarch 31, 2021 . As ofMarch 31, 2022 , our loans toJ.R. Hobbs ,The Mountain Corporation ("The Mountain"), and SFEG were on non-accrual status, with an aggregate debt cost basis of$77.2 million . As ofMarch 31, 2021 , our loans to B+T, Horizon and The Mountain were on non-accrual status, with an aggregate debt cost basis of$61.1 million . Dividend and success fee income for the year endedMarch 31, 2022 increased 36.4% from the prior year. During the year endedMarch 31, 2022 , dividend and success fee income consisted of$10.3 million of success fee income and$2.6 million of dividend income. During the year endedMarch 31, 2021 , dividend and success fee income consisted of$7.1 million of dividend income and$2.4 million of success fee income.
As of
Expenses
Total expenses, net of any non-contractual, unconditional, and irrevocable credits from the Adviser, increased 48.8% for the year endedMarch 31, 2022 , as compared to the prior year, primarily due to an increase in the capital gains-based incentive fee, income-based incentive fee, interest and dividend expense, and base management fee, partially offset by an increase in credits to fees from Adviser. In accordance with GAAP, we recorded a capital gains-based incentive fee of$18.3 million during the year endedMarch 31, 2022 , compared to a capital gains-based incentive fee of$5.0 million during the year endedMarch 31, 2021 . The capital gains-based incentive fee is a result of the net impact of net realized gains (losses) and net unrealized appreciation (depreciation) on investments during the respective periods. The income-based incentive fee increased during the year endedMarch 31, 2022 , as compared to the prior year, as the increase in pre-incentive fee net investment income more than offset the increase in net assets, which drives the hurdle rate. 57
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The base management fee, loan servicing fee, incentive fee, and their related non-contractual, unconditional, and irrevocable credits are computed quarterly, as described under "Transactions with the Adviser" in Note 4 -Related Party Transactions in the accompanying Notes to Consolidated Financial Statements and are summarized in the following table: Year Ended
2022 2021
Average total assets subject to base management fee(A)
2.0 % 2.0 %
Base management fee(B) 14,113 12,115
Credits to fees from Adviser - other(B) (6,497) (2,949) Net base management fee$ 7,616 $ 9,166 Loan servicing fee(B)$ 7,178 $ 7,082 Credits to base management fee - loan servicing fee(B) (7,178) (7,082) Net loan servicing fee $ - $ - Incentive fee - income-based$ 8,074 $ 3,746 Incentive fee - capital gains-based(C) 18,286
5,032
Total incentive fee(B) 26,360
8,778
Credits to fees from Adviser - other(B) - - Net total incentive fee$ 26,360 $ 8,778 (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 accompanying 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 17.3% during the year endedMarch 31, 2022 , as compared to the prior year, primarily due to the issuance of the 2028 Notes inAugust 2021 as well as the 2026 Notes issued inMarch 2021 , partially offset by a lower weighted-average balance outstanding on the Credit Facility and the redemption of the Series E Term Preferred Stock in the current year. The weighted-average balance outstanding on the Credit Facility during the year endedMarch 31, 2022 was$18.1 million , as compared to$82.6 million in the prior year. The effective interest rate on the Credit Facility, excluding the impact of deferred financing costs, during the year endedMarch 31, 2022 was 12.5%, as compared to 4.3% in the prior year. This increase in the effective interest rate on the Credit Facility was primarily a result of the increase in unused commitment fee on the undrawn portion of the Credit Facility. Other expenses increased 7.8% during the year endedMarch 31, 2022 , as compared to the prior year, primarily due to an increase in bad debt expense and tax expense, partially offset by a decrease in professional expenses and shareholder expenses. 58
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Realized and Unrealized Gain (Loss), net of Taxes
The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the years endedMarch 31, 2022 and 2021 were as follows: Year Ended March 31, 2022 Reversal of Realized Unrealized Unrealized Gain (Loss) on Appreciation (Appreciation) Net Gain Portfolio Company Investments (Depreciation) Depreciation (Loss) Brunswick Bowling Products, Inc. $ -$ 20,470 $ -$ 20,470 Bassett Creek Serivces, Inc. - 17,994 - 17,994 Old World Christmas, Inc. - 17,594 - 17,594 B+T Group Acquisition, Inc. - 16,885 - 16,885 Horizon Facilities Services, Inc. - 14,144 - 14,144 Schylling, Inc. - 9,883 - 9,883 SOG Specialty Knives & Tools, LLC - 8,197 - 8,197 Educators Resource, Inc. - 8,058 - 8,058ImageWorks Display and Marketing Group , Inc. - 6,586 - 6,586 Counsel Press, Inc. - 4,027 - 4,027 PSI Molded Plastics, Inc. - 3,633 - 3,633 Nocturne Villa Rentals, Inc. - 3,623 - 3,623 Head Country, Inc. 3,627 - (2,469) 1,158 Channel Technologies Group, LLC (1,841) - 1,841 - The Maids International, LLC - (881) - (881) The Mountain Corporation - (1,045) - (1,045) Mason West, LLC - (2,221) - (2,221) Pioneer Square Brands, Inc. 21,939 (1,245) (25,425) (4,731) Ginsey Home Solutions, Inc. - (5,287) - (5,287) SFEG Holdings, Inc.(A) - (5,376) - (5,376) Galaxy Technologies Holdings, Inc. (B) - (9,587) - (9,587) J.R. Hobbs Co. - Atlanta, LLC (10,000) (4,709) 800 (13,909) Other, net (<$1.0 million , net ) 717 (661) 53 109 Total$ 14,442 $ 100,082 $ (25,200) $ 89,324 (A)InJanuary 2022 ,SBS Industries Holdings, Inc. was renamedSFEG Holdings, Inc. (B)In conjunction with theSeptember 2021 merger ofDanco and Galaxy into the newly formedGalaxy Technologies Holdings , total unrealized depreciation for the year endedMarch 31, 2022 includes the net unrealized appreciation (depreciation) forDanco and Galaxy prior to the merger. 59
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Year Ended
Reversal of
Realized Unrealized Unrealized
Gain (Loss) on Appreciation (Appreciation) Net Gain
Portfolio Company Investments (Depreciation) Depreciation (Loss)
Pioneer Square Brands, Inc. $ - $ 26,410 $ - $ 26,410
Old World Christmas, Inc. 3,544 6,840 - 10,384
SOG Specialty Knives & Tools, LLC - 6,364 - 6,364
Educators Resource, Inc. - 5,631 - 5,631
Frontier Packaging , Inc. 14,321 2,534 (11,869) 4,986
Schylling, Inc. - 3,604 - 3,604
Head Country, Inc. - 2,974 - 2,974
Ginsey Home Solutions, Inc. - 2,131 - 2,131
Diligent Delivery Systems - 1,877 - 1,877
ImageWorks Display and Marketing Group ,
Inc. - 1,554 - 1,554
Horizon Facilities Services, Inc. - 963 - 963
Cambridge Sound Management, Inc. 739 - - 739
Alloy Die Casting Co. 576 - - 576
Mason West, LLC - (1,432) - (1,432)
Galaxy Tool Holding Corporation - (1,528) - (1,528)
PSI Molded Plastics, Inc. - (1,752) - (1,752)
The Maids International, LLC - (1,779) - (1,779)
The Mountain Corporation - (1,986) - (1,986)
Nth Degree Investment Group, LLC 113 (3,649) - (3,536)
D.P.M.S., Inc. - (5,045) - (5,045)
SBS Industries Holdings, Inc. (A) (8,470) 2,463 - (6,007)
Brunswick Bowling Products, Inc. - (20,542) - (20,542)
Other, net (<$1.0 million , net ) 551 172 (11) 712
Total $ 11,374 $ 25,804 $ (11,880) $ 25,298 (A)In
Net Realized Gain (Loss) on Investments
During the year endedMarch 31, 2022 , we recorded net realized gains on investments of$14.4 million , primarily due to a$21.9 million realized gain from the exit of Pioneer, a$3.6 million realized gain from the exit of Head Country and$0.7 million realized gains related to prior period exits, partially offset by a$10.0 million realized loss recognized on the restructuring of the first lien term loan toJ.R. Hobbs and a$1.8 million realized loss from the dissolution of CTG. During the year endedMarch 31, 2021 , we recorded net realized gains on investments of$11.4 million , primarily related to a$14.3 million realized gain from the exit of Frontier, a$3.5 million realized gain from the recapitalization of Old World, and gains from previous exits, partially offset by an$8.5 million realized loss related to the partial write-off of a debt investment inSBS Industries .
Net Unrealized Appreciation (Depreciation) of Investments
Net unrealized appreciation of investments of$74.9 million for the year endedMarch 31, 2022 was primarily due to increased performance of certain of our portfolio companies, driven partially by the reversal of the impact of COVID-19 on certain of our portfolio companies and the markets in which they operate, increased comparable multiples used to estimate the fair value of certain of our portfolio companies and the reversal of previously recorded unrealized depreciation of our investments in CTG upon its dissolution. These amounts were partially offset by the reversal of previously recorded unrealized appreciation of our investment in Pioneer and Head Country upon exit and the decreased performance of certain of our portfolio companies. In part, the performance of certain of our portfolio companies was driven by the impact COVID-19, and its variants, 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, operating challenges, including but not limited to, labor shortages, supply chain delays, increased material costs and demand for their products, and general economic outlook, or the reversal of such impact towards pre-COVID-19 levels. 60
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Net unrealized appreciation of investments of$13.9 million for the year endedMarch 31, 2021 was primarily due to increased performance of certain of our portfolio companies and an increase in comparable multiples used to estimate the fair value of a majority of our portfolio companies, partially offset by the reversal of previously recorded unrealized appreciation upon the exit of Frontier and a decrease in performance of certain of our other portfolio companies. The decrease in the performance of a limited number of our portfolio companies was driven by the continued impact COVID-19, and its variants, has had or is expected to have on those portfolio companies and the markets in which they operate, including government restrictions on the portfolio companies' ability to operate under historical conditions, shutdowns, demand for products, and general economic outlook. Across our entire investment portfolio, we recorded$70.3 million of net unrealized appreciation on our equity investments and$4.6 million of net unrealized appreciation on our debt investments for the year endedMarch 31, 2022 . AtMarch 31, 2022 , the fair value of our investment portfolio was more than our cost basis by$45.1 million , compared toMarch 31, 2021 , when the fair value of our investment portfolio was less than our cost basis by$29.7 million . This resulted in net unrealized appreciation of$74.9 million for the year endedMarch 31, 2022 . Our entire portfolio was fair valued at 106.7% of cost as ofMarch 31, 2022 .
Net Realized Gain (Loss) on Other
During the year endedMarch 31, 2022 , 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 year endedMarch 31, 2021 , we recorded a net realized loss on other of$0.8 million which primarily related to unamortized deferred issuance costs written off upon the redemption of our Series D Term Preferred Stock inMarch 2021 . The comparison of the fiscal year endedMarch 31, 2021 to the fiscal year endedMarch 31, 2020 can be found in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2021 located within Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, which is incorporated by reference herein.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Cash inflows from operating activities are primarily generated from cash collections of interest and other income from our portfolio companies, as well as from cash proceeds received from repayments of debt investments and from sales of equity investments. These cash collections are principally used to fund new investments, pay distributions to our common stockholders, make interest payments on our Credit Facility, 2026 Notes and 2028 Notes, pay management and incentive fees to the Adviser and other operating expenses. We may also use cash inflows from operating activities to repay outstanding borrowings under the Credit Facility. Net cash provided by operating activities for the year endedMarch 31, 2022 was$36.6 million , as compared to net cash used in operating activities of$29.7 million for the year endedMarch 31, 2021 . This change was primarily due to increases in principal repayments of investments and net proceeds from the sale of investments and a decline in purchase of new investments. Purchases of investments totaled$92.7 million during the year endedMarch 31, 2022 , compared to$95.3 million during the year endedMarch 31, 2021 . Repayments and net proceeds from the sale of investments totaled$101.4 million during the year endedMarch 31, 2022 , compared to$51.8 million during the year endedMarch 31, 2021 . Net cash used in operating activities for the year endedMarch 31, 2021 was$29.7 million , as compared to net cash provided by operating activities of$35.3 million for the year endedMarch 31, 2020 . This change was primarily due to decreases in principal repayments of investments and net proceeds from the sale of investments and a decline in Other liabilities, principally due to$13.3 million of tax payments made related to prior year deemed distributions, partially offset by a decline in purchases of investments, and an increase in Fees due to Adviser related to the prior year payment of$8.1 million of capital gains-based incentive fees that were contractually due period over period. Purchases of investments totaled$95.3 million during the year endedMarch 31, 2021 , compared to$145.4 million during the year endedMarch 31, 2020 . Repayments and net proceeds from the sale of investments totaled$51.8 million during the year endedMarch 31, 2021 , compared to$169.9 million during the year endedMarch 31, 2020 . As ofMarch 31, 2022 , we had equity investments in, or loans to, 26 companies with an aggregate cost basis of$669.2 million . As ofMarch 31, 2021 , we had equity investments in, or loans to, 28 companies with an aggregate cost basis of 61
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Years Ended
2022 2021
Beginning investment portfolio, at fair value $ 633,829 $ 565,924
New investments 34,200 46,902
Disbursements to existing portfolio companies 58,538 48,370
Unscheduled principal repayments (51,398) (20,734)
Net proceeds from sales of investments (49,419) (29,689)
Net realized gain on investments 13,746 9,114
Net unrealized appreciation (depreciation) of investments 100,083 25,805
Reversal of net unrealized appreciation of investments (25,201) (11,881)
Amortization of premiums, discounts, and acquisition costs, net 18 18
Ending investment portfolio, at fair value $
714,396
The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as ofMarch 31, 2022 : Amount
For the fiscal years ending
2023 $ 92,888
2024 97,418
2025 169,334
2026 78,231
2027 71,245
Thereafter 1,500
Total contractual repayments $ 510,616
Adjustments to cost basis of debt investments (12)
Investments in equity securities 158,644
Total cost basis of investments held as of March 31, 2022: $ 669,248
Financing Activities
Net cash used in financing activities for the year ended March 31, 2022 was
$24.5 million , which consisted primarily of the redemption of our Series E Term
Preferred Stock of $94.4 million , $38.9 million in distributions to common
stockholders, $22.4 million of net repayments on our Credit Facility, and $3.4
million of deferred financing and offering costs, partially offset by $134.6
million in gross proceeds from the issuance of our 2028 Notes.
Net cash provided by financing activities for the year ended March 31, 2021 was
$28.1 million , which consisted primarily of the $127.9 million in gross proceeds
from the issuance of our 2026 Notes, $19.3 million of gross proceeds from the
issuance of mandatorily redeemable preferred stock under the Series E ATM
program, and $1.7 million of net proceeds from the issuance of common stock
under the Common Stock ATM Program, partially offset by the redemption of our
Series D Term Preferred Stock of $57.5 million , $30.9 million in distributions
to common stockholders, $26.8 million of net repayments on our Credit Facility,
and $5.7 million of deferred financing and offering costs.
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 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
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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 fromApril 2021 throughSeptember 2021 , monthly cash distributions of$0.075 per common share for each of the six months fromOctober 2021 throughMarch 2022 , and supplemental distributions of$0.06 ,$0.03 ,$0.09 , and$0.12 per common share inJune 2021 ,September 2021 ,December 2021 andFebruary 2022 , respectively. See also "Recent Developments - Distributions and Dividends" for a discussion of cash distributions to common stockholders declared by our Board of Directors inApril 2022 . For each of the fiscal years endedMarch 31, 2022 and 2021, Investment Company Taxable Income exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat$13.9 million and$16.1 million , respectively, of the first distributions paid subsequent to fiscal year-end as having been paid in the prior year. In addition, for each of the fiscal years endedMarch 31, 2022 and 2021, net capital gains exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat$15.7 million and$8.5 million , respectively, of the first distributions paid subsequent to fiscal year-end as having been paid in the prior year. For the year endedMarch 31, 2022 , we recorded$2.8 million of net adjustments for estimated permanent book-tax differences to reflect tax character, which decreased Capital in excess of par value and Underdistributed net investment income and increased Accumulated net realized gain in excess of distributions. For the year endedMarch 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.
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 fromApril 2021 throughJuly 2021 and$0.07968750 per share of our Series E Term Preferred Stock for the period fromAugust 1, 2021 up to, but excluding, the redemption date ofAugust 19, 2021 . In accordance with GAAP, we treated 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.
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 have the ability to issue up to$300.0 million of the securities registered under the registration statement. Equity 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 had the ability to issue and sell shares of our common stock, from time to time, through the Common Stock 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. 63
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We did not sell any shares of our common stock under the Common Stock ATM Program during the year endedMarch 31, 2022 . 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. OnMarch 31, 2022 , the closing market price of our common stock was$16.13 per share, representing a 20.1% premium to our NAV of$13.43 per share as ofMarch 31, 2022 .
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 actual 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 had 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 year endedMarch 31, 2022 . 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 accompanying 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. 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.
Revolving Line of Credit
OnMarch 8, 2021 , we, through our wholly-owned subsidiary,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 ofMarch 31, 2022 , the Credit Facility provided a one-year extension option that may be 64
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exercised on or before the 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 (initiallyAugust 10, 2020 untilMarch 31, 2021 ) 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 guarantee that requires the Company to maintain (i) a minimum net worth 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 ofMarch 31, 2022 , (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 ofMarch 31, 2022 , and as defined in the performance guaranty of the Credit Facility, we had a net worth of$701.2 million , asset coverage on our senior securities representing indebtedness of 252.9%, calculated in accordance with the requirements of Sections 18 and 61 of the 1940 Act, and an active status as a BDC and RIC. As ofMarch 31, 2022 , we had availability, after adjustments for various constraints based on collateral quality, of$180.0 million under the Credit Facility and were in compliance with all covenants under the Credit Facility.
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 65 -------------------------------------------------------------------------------- Table of Content s 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 ofMarch 31, 2022 and 2021, we had unrecognized, contractual off-balance sheet success fee receivables of$50.5 million and$46.2 million (or approximately$1.52 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 ofMarch 31, 2022 to be immaterial. 66
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InFebruary 2022 , we extended a guaranty on behalf of one of our portfolio companies,J.R. Hobbs , whereby we have guaranteed 50% of their obligations with another lender, with a maximum amount of$9.3 million . In addition, as ofMarch 31, 2022 , we also have a guaranty on behalf of our portfolio companyCountry Club Enterprises, LLC , whereby we have guaranteed$1.0 million of obligations. As ofMarch 31, 2022 , we have not been required to make payments on these or any previous guaranties, and we consider the credit risks to be remote and the fair value of these guaranties to be immaterial.
The following table shows our contractual obligations as of
Payments Due by Period
Less than More than
Contractual Obligations(A) Total 1 Year 1-3 Years 3-5 Years 5 Years
Credit Facility(B) $ - $ - $ - $ - $ -
Notes payable 262,488 - - 127,938 134,550
Secured borrowing 5,096 - 5,096 - -
Interest payments on
obligations(C) 79,437 15,143 30,205 20,079 14,010
Total $ 347,021 $ 15,143 $ 35,301 $ 148,017 $ 148,560
(A)Excludes unused line of credit and delayed draw term loan commitments and
guaranties to our portfolio companies in the aggregate principal amount of $14.5
million .
(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 March 31, 2022 .
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 Annual Report. Additionally, refer to Note 3 - Investments in the accompanying Notes to Consolidated Financial Statements included elsewhere in this Annual Report for additional information regarding fair value measurements and our application of Financial Accounting Standards Board Accounting Standards Codification Topic 820, "Fair Value Measurements and Disclosures." We have also identified our revenue recognition policy as a critical accounting policy, which is described in Note 2- Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements included elsewhere in this Annual Report.
Investment Valuation
Credit Monitoring and Risk Rating
The Adviser monitors a wide variety of key credit statistics that provide information regarding our portfolio companies to help us assess credit quality and portfolio performance and, in some instances, 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 67
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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
As of March 31,
Rating 2022 2021
Highest 9.0 9.0
Average 6.5 6.2
Weighted-average 7.0 6.6
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, 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 - Material U.S.
Federal Income Tax Considerations" and "- 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 March 31, 2022 and 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 Annual Report for a description of recent accounting pronouncements.
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