NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2023
(DOLLAR AMOUNTS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA AND AS OTHERWISE INDICATED)
NOTE 1. ORGANIZATION
Gladstone Capital Corporation was incorporated under the Maryland General Corporation Law on May 30, 2001 and completed an initial public offering on August 24, 2001. The terms “the Company,” “we,” “our” and “us” all refer to Gladstone Capital Corporation and its consolidated subsidiaries. We are an externally managed, closed-end, non-diversified management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), and are applying the guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 “Financial Services-Investment Companies” (“ASC 946”). In addition, we have elected to be treated for U.S. federal income tax purposes as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”). We were established for the purpose of investing in debt and equity securities of established private businesses operating in the United States (“U.S.”). Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established lower middle market companies (which we generally define as companies with annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $3 million to $15 million) in the U.S. that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains.
Gladstone Business Loan, LLC (“Business Loan”), a wholly-owned subsidiary of ours, was established on February 3, 2003, for the sole purpose of holding certain investments pledged as collateral to our line of credit. The financial statements of Business Loan are consolidated with those of Gladstone Capital Corporation. We may also have significant subsidiaries (as defined under Rule 1-02(w)(2) of the U.S. Securities and Exchange Commission’s (“SEC”) Regulation S-X) whose financial statements are not consolidated with ours. We did not have any unconsolidated subsidiaries that met any of the significance conditions under Rule 1-02(w)(2) of the SEC’s Regulation S-X as of or during the six month periods ended March 31, 2023 and March 31, 2022.
We are externally managed by Gladstone Management Corporation (the “Adviser”), an affiliate of ours and an SEC registered investment adviser, pursuant to an investment advisory and management agreement (as amended and/or restated from time to time, the “Advisory Agreement”). Administrative services are provided by Gladstone Administration, LLC (the “Administrator”), an affiliate of ours and the Adviser, pursuant to an administration agreement (the “Administration Agreement”). Refer to Note 4—Related Party Transactions for additional information regarding these arrangements.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Statements and Basis of Presentation
We prepare our interim financial statements in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Articles 6, 10 and 12 of Regulation S-X. Accordingly, we have not included in this quarterly report all of the information and notes required by GAAP for annual financial statements. The accompanying Consolidated Financial Statements include our accounts and those of our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. In accordance with Article 6 of Regulation S-X, we do not consolidate portfolio company investments. Under the investment company rules and regulations pursuant to the American Institute of Certified Public Accountants Audit and Accounting Guide for Investment Companies, codified in ASC 946, we are precluded from consolidating any entity other than another investment company, except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries. In our opinion, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. The results of operations for the three and six months ended March 31, 2023 are not necessarily indicative of results that ultimately may be achieved for the fiscal year ending
September 30, 2023 or any future interim periods. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, as filed with the SEC on November 14, 2022.
Use of Estimates
Preparing financial statements requires management to make estimates and assumptions that affect the amounts reported in our accompanying Consolidated Financial Statements and these Notes to Consolidated Financial Statements. Actual results may differ from those estimates.
Investment Valuation Policy
Accounting Recognition
We record our investments at fair value in accordance with the FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) and the 1940 Act. Investment transactions are recorded on the trade date. Realized gains or losses are generally measured by the difference between the net proceeds from the repayment or sale and the cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, and include investments charged off during the period, net of recoveries. Unrealized appreciation or depreciation primarily reflects the change in investment fair values, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.
Board Responsibility
Our board of directors (the “Board of Directors”) has approved investment valuation policies and procedures pursuant to Rule 2a-5 (the “Policy”) and, in July 2022, designated the Adviser to serve as the Board of Directors’ valuation designee under the 1940 Act.
In accordance with the 1940 Act, our Board of Directors has the ultimate responsibility for reviewing the good faith fair value determination of our investments for which market quotations are not readily available based on our Policy and for overseeing the Valuation Designee. Such review and oversight includes receiving written fair value determinations and supporting materials provided by the Valuation Designee, in coordination with the Administrator and with the oversight by the Company’s chief valuation officer (collectively, the “Valuation Team”). The Valuation Committee of our Board of Directors (comprised entirely of independent directors) meets to review the valuation determinations and supporting materials, discusses the information provided by the Valuation Team, determines whether the Valuation Team has followed the Policy, and reviews other facts and circumstances, including current valuation risks, conflicts of interest, material valuation matters, appropriateness of valuation methodologies, back-testing results, price challenges/overrides, and ongoing monitoring and oversight of pricing services. After the Valuation Committee concludes its meeting, it and the chief valuation officer, representing the Valuation Designee, present the Valuation Committee’s findings on the Valuation Designee’s determinations to the entire Board of Directors so that the full Board of Directors may review the Valuation Designee’s determined fair values of such investments in accordance with the Policy.
There is no single standard for determining fair value (especially for privately-held businesses), as fair value depends upon the specific facts and circumstances of each individual investment. In determining the fair value of our investments, the Valuation Team, led by the chief valuation officer, uses the Policy, and each quarter the Valuation Committee and Board of Directors review the Policy to determine if changes thereto are advisable and whether the Valuation Team has applied the Policy consistently.
Use of Third Party Valuation Firms
The Valuation Team engages third party valuation firms to provide independent assessments of fair value of certain of our investments.
ICE Data Pricing and Reference Data, LLC (“ICE”), a valuation specialist, generally provides estimates of fair value on our proprietary debt investments. The Valuation Team generally assigns ICE’s estimates of fair value to our debt investments where we do not have the ability to effectuate a sale of the applicable portfolio company. The Valuation Team corroborates ICE’s estimates of fair value using one or more of the valuation techniques discussed below. The Valuation Team’s estimate of value on a specific debt investment may significantly differ from ICE’s. When this occurs, our Valuation Committee and Board of Directors review whether the Valuation Team has followed the Policy and the
Valuation Committee reviews whether the Valuation Team’s recommended fair value is reasonable in light of the Policy and other facts and circumstances.
We may engage other independent valuation firms to provide earnings multiple ranges, as well as other information, and evaluate such information for incorporation into the total enterprise value (“TEV”) of certain of our investments. Generally, at least once per year, we engage an independent valuation firm to value or review the valuation of each of our significant equity investments, which includes providing the information noted above. The Valuation Team evaluates such information for incorporation into our TEV, including review of all inputs provided by the independent valuation firm. The Valuation Team then makes a recommendation to our Valuation Committee as to the fair value. Our Valuation Committee reviews the recommended fair value, and whether it is reasonable in light of the Policy, and other relevant facts and circumstances, as necessary.
Valuation Techniques
In accordance with ASC 820, the Valuation Team uses the following techniques when valuing our investment portfolio:
•Total Enterprise Value — In determining the fair value using a TEV, the Valuation Team first calculates the TEV of the portfolio company by incorporating some or all of the following factors: the portfolio company’s ability to make payments and other specific portfolio company attributes; the earnings of the portfolio company (the trailing or projected twelve month revenue or EBITDA); EBITDA multiples obtained from our indexing methodology whereby the original transaction EBITDA multiple at the time of our closing is indexed to a general subset of comparable disclosed transactions and EBITDA multiples from recent sales to third parties of similar securities in similar industries; a comparison to publicly traded securities in similar industries; and other pertinent factors. The Valuation Team generally reviews industry statistics and may use outside experts when gathering this information. Once the TEV is determined for a portfolio company, the Valuation Team generally allocates the TEV to the portfolio company’s securities based on the facts and circumstances of the securities, which typically results in the allocation of fair value to securities based on the order of their relative priority in the capital structure. Generally, the Valuation Team uses TEV to value our equity investments and, in the circumstances where we have the ability to effectuate a sale of a portfolio company, our debt investments.
TEV is primarily calculated using EBITDA and EBITDA multiples; however, TEV may also be calculated using revenue and revenue multiples or a discounted cash flow (“DCF”) analysis whereby future expected cash flows of the portfolio company are discounted to determine a net present value using estimated risk-adjusted discount rates, which incorporate adjustments for nonperformance and liquidity risks. Generally, the Valuation Team uses a DCF analysis to calculate TEV to corroborate estimates of value for our equity investments where we do not have the ability to effectuate a sale of a portfolio company or for debt of credit impaired portfolio companies.
•Yield Analysis — The Valuation Team generally determines the fair value of our debt investments for which we do not have the ability to effectuate a sale of the applicable portfolio company using the yield analysis, which includes a DCF calculation and assumptions that the Valuation Team believes market participants would use, including, estimated remaining life, current market yield, current leverage, and interest rate spreads. This technique develops a modified discount rate that incorporates risk premiums including increased probability of default, increased loss upon default and increased liquidity risk. Generally, the Valuation Team uses the yield analysis to corroborate both estimates of value provided by ICE and market quotes.
•Market Quotes — For our investments for which a limited market exists, we generally base fair value on readily available and reliable market quotations which are corroborated by the Valuation Team (generally by using the yield analysis described above). In addition, the Valuation Team assesses trading activity for similar investments and evaluates variances in quotations and other market insights to determine if any available quoted prices are reliable. Typically, the Valuation Team uses the lower indicative bid price (“IBP”) in the bid-to-ask price range obtained from the respective originating syndication agent’s trading desk on or near the valuation date. The Valuation Team may take further steps to consider additional information to validate that price in accordance with the Policy. For securities that are publicly traded, we generally base fair value on the closing market price of the securities we hold as of the reporting date. For restricted securities that are publicly traded, we generally base fair value on the closing market price of the securities we hold as of the reporting date less a discount for the restriction, which includes consideration of the nature and term to expiration of the restriction.
•Investments in Funds — For equity investments in other funds for which we cannot effectuate a sale of the fund, the Valuation Team generally determines the fair value of our invested capital at the net asset value (“NAV”) provided by the fund. Any invested capital that is not yet reflected in the NAV provided by the fund is valued at par value. The Valuation Team may also determine fair value of our investments in other investment funds based on the capital accounts of the underlying entity.
In addition to the valuation techniques listed above, the Valuation Team may also consider other factors when determining the fair value of our investments, including: the nature and realizable value of the collateral, including external parties’ guaranties, any relevant offers or letters of intent to acquire the portfolio company, timing of expected loan repayments, and the markets in which the portfolio company operates.
Fair value measurements of our investments may involve subjective judgments and estimates and due to the uncertainty inherent in valuing these securities, the determinations of fair value may fluctuate from period to period and may differ materially from the values that could be obtained if a ready market for these securities existed. Our NAV could be materially affected if the determinations regarding the fair value of our investments are materially different from the values that we ultimately realize upon our disposal of such securities. Additionally, changes in the market environment and other events that may occur over the life of the investment may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which it is recorded.
Refer to Note 3—Investments for additional information regarding fair value measurements and our application of ASC 820.
Revenue Recognition
Interest Income Recognition
Interest income, including the amortization of premiums, acquisition costs and amendment fees, the accretion of original issue discounts (“OID”), and paid-in-kind (“PIK”) interest, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due or if our qualitative assessment indicates that the debtor is unable to service its debt or other obligations, we will place the loan on non-accrual status and cease recognizing interest income on that loan for financial reporting purposes until the borrower has demonstrated the ability and intent to pay contractual amounts due. However, we remain contractually entitled to this interest. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis depending upon management’s judgment. Generally, non-accrual loans are restored to accrual status when past due principal and interest are paid and, in management’s judgment, are likely to remain current, or due to a restructuring such that the interest income is deemed to be collectible. As of March 31, 2023, our loan to Edge Adhesives Holdings, Inc. was on non-accrual status with a debt cost basis of $6.1 million, or 1.0% of the cost basis of all debt investments in our portfolio, and a fair value of $2.8 million, or 0.5% of the fair value of all debt investments in our portfolio. There were no loans on non-accrual status as of September 30, 2022.
We currently hold, and we expect to hold in the future, some loans in our portfolio that contain OID or PIK provisions. We recognize OID for loans originally issued at discounts and recognize the income over the life of the obligation based on an effective yield calculation. PIK interest, computed at the contractual rate specified in a loan agreement, is added to the principal balance of a loan and recorded as income over the life of the obligation. Thus, the actual collection of PIK income may be deferred until the time of debt principal repayment. To maintain our ability to be taxed as a RIC, we may need to pay out both OID and PIK non-cash income amounts in the form of distributions, even though we have not yet collected the cash on either.
As of each of March 31, 2023 and September 30, 2022, we held four OID loans, primarily from the syndicated loans in our portfolio. We recorded OID income of $59 thousand and $0.1 million during the three and six months ended March 31, 2023, respectively, and $87 thousand and $0.2 million during the three and six months ended March 31, 2022, respectively. The unamortized balance of OID investments as of March 31, 2023 and September 30, 2022 totaled $0.8 million and $0.9 million, respectively. As of March 31, 2023 and September 30, 2022, we had seven and six investments which had a PIK interest component, respectively. We recorded PIK interest income of $0.8 million and $1.8 million during the three and six months ended March 31, 2023, respectively, and $0.9 million and $2.1 million during the three and six months ended
March 31, 2022, respectively. We collected $0 and $0.4 million in PIK interest in cash during the three and six months ended March 31, 2023, respectively, and $2.4 million during each of the three and six months ended March 31, 2022.
Success Fee Income Recognition
We record success fees as income when earned, which often occurs upon receipt of cash. Success fees are generally contractually due upon a change of control in a portfolio company, typically resulting from an exit or sale, and are non-recurring.
Dividend Income Recognition
We accrue dividend income on preferred and common equity securities to the extent that such amounts are expected to be collected and if we have the option to collect such amounts in cash or other consideration.
Related Party Fees
We are party to the Advisory Agreement with the Adviser, which is owned and controlled by our chairman and chief executive officer. In accordance with the Advisory Agreement, we pay the Adviser fees as compensation for its services, consisting of a base management fee and an incentive fee. Additionally, we pay the Adviser a loan servicing fee as compensation for its services as servicer under the terms of our revolving credit facility with KeyBank National Association (“KeyBank”), as administrative agent, lead arranger and lender (as amended and/or restated from time to time, our “Credit Facility”). These fees are accrued at the end of the quarter when the services are performed and generally paid the following quarter.
We are also party to the Administration Agreement with the Administrator, which is owned and controlled by our chairman and chief executive officer, whereby we pay separately for administrative services. Refer to Note 4 — Related Party Transactions for additional information regarding these related party fees and agreements.
NOTE 3. INVESTMENTS
Fair Value
In accordance with ASC 820, the fair value of each investment is determined to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between willing market participants on the measurement date. This fair value definition focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of a financial instrument as of the measurement date.
•Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical financial instruments in active markets;
•Level 2 — inputs to the valuation methodology include quoted prices for similar financial instruments in active or inactive markets, and inputs that are observable for the financial instrument, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are in those markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers; and
•Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are those inputs that reflect assumptions that market participants would use when pricing the financial instrument and can include the Valuation Team’s assumptions based upon the best available information.
When a determination is made to classify our investments within Level 3 of the valuation hierarchy, such determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (or components that are actively quoted and can be validated to external sources). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. Investments in funds measured using NAV as a practical expedient are not categorized within the fair value hierarchy.
As of March 31, 2023, all of our investments were valued using Level 3 inputs within the ASC 820 fair value hierarchy, except for our investment in B. Riley Financial, Inc. (“B. Riley”), which was valued using Level 1 inputs, our investment in Funko Acquisition Holdings, LLC (“Funko”), which was valued using Level 2 inputs, and our investment in Leeds Novamark Capital I, L.P. (“Leeds”), which was valued using NAV as a practical expedient. As of September 30, 2022, all of our investments were valued using Level 3 inputs within the ASC 820 fair value hierarchy, except for our investment in Funko, which was valued using Level 2 inputs, and our investment in Leeds, which was valued using NAV as a practical expedient.
We transfer investments in and out of Level 1, 2, and 3 of the valuation hierarchy as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. During the six months ended March 31, 2023 and 2022, there were no investments transferred into or out of Levels 1, 2 or 3 of the valuation hierarchy.
As of March 31, 2023 and September 30, 2022, our investments, by security type, at fair value were categorized as follows within the ASC 820 fair value hierarchy:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements |
| | Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
As of March 31, 2023: | | | | | | | | |
Secured first lien debt | | $ | 498,947 | | | $ | — | | | $ | — | | | $ | 498,947 | |
Secured second lien debt | | 117,438 | | | — | | | — | | | 117,438 | |
Unsecured debt | | 2,372 | | | 2,336 | | (B) | — | |
| 36 | |
Preferred equity | | 28,298 | | | — | | | — | |
| 28,298 | |
Common equity/equivalents | | 31,471 | | (A) | — | | | 27 | | (C) | 31,444 | |
Total Investments as of March 31, 2023 | | $ | 678,526 | | | $ | 2,336 | | | $ | 27 | | | $ | 676,163 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements |
| | Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
As of September 30, 2022: | | | | | | | | |
Secured first lien debt | | $ | 463,858 | | | $ | — | | | $ | — | | | $ | 463,858 | |
Secured second lien debt | | 115,928 | | | — | | | — | | | 115,928 | |
Unsecured debt | | 55 | | | — | | | — | |
| 55 | |
Preferred equity | | 27,046 | | | — | | | — | |
| 27,046 | |
Common equity/equivalents | | 36,331 | | (A) | — | |
| 58 | | (C) | 36,273 | |
Total Investments as of September 30, 2022 | | $ | 643,218 | | | $ | — | | | $ | 58 | | | $ | 643,160 | |
(A)Excludes our investment in Leeds with fair values of $0.2 million and $6.4 million as of March 31, 2023 and September 30, 2022, respectively. Leeds was valued using NAV as a practical expedient.
(B)Fair value was determined based on the closing market price of B. Riley 6.75% senior notes which are traded on the Nasdaq Global Select Market under the trading symbol RILYO.
(C)Fair value was determined based on the closing market price of shares of Funko, Inc. (our units in Funko can be converted into common shares of Funko, Inc.) at the reporting date less a discount for lack of marketability as our investment was subject to certain restrictions.
The following table presents our portfolio investments, valued using Level 3 inputs within the ASC 820 fair value hierarchy and carried at fair value as of March 31, 2023 and September 30, 2022, by caption on our accompanying Consolidated Statements of Assets and Liabilities and by security type:
| | | | | | | | | | | | | | |
| Total Recurring Fair Value Measurements Reported in |
| Consolidated Statements of Assets and Liabilities Using Significant Unobservable Inputs (Level 3) |
| March 31, 2023 | | September 30, 2022 | |
| Non-Control/Non-Affiliate Investments | | | | |
| Secured first lien debt | $ | 447,479 | | | $ | 413,631 | | |
| Secured second lien debt | 109,933 | | | 108,263 | | |
| Unsecured debt | 36 | | (A) | 55 | | |
| Preferred equity | 19,135 | | | 17,719 | | |
| Common equity/equivalents | 22,236 | | (B) | 28,688 | | (C) |
Total Non-Control/Non-Affiliate Investments | $ | 598,819 | | | $ | 568,356 | | |
| Affiliate Investments | | | | |
| Secured first lien debt | $ | 35,650 | | | $ | 34,804 | | |
| Preferred equity | 5,350 | | | 3,640 | | |
| Common equity/equivalents | 1,110 | | | 647 | | |
| Total Affiliate Investments | $ | 42,110 | | | $ | 39,091 | | |
| Control Investments | | | | |
| Secured first lien debt | $ | 15,818 | | | $ | 15,423 | | |
| Secured second lien debt | 7,505 | | | 7,665 | | |
| Preferred equity | 3,813 | | | 5,687 | | |
| Common equity/equivalents | 8,098 | | | 6,938 | | |
Total Control Investments | $ | 35,234 | | | $ | 35,713 | | |
| Total Investments at Fair Value Using Level 3 Inputs | $ | 676,163 | | | $ | 643,160 | | |
(A)Excludes our investment in B. Riley with a fair value of $2.3 million as of March 31, 2023. B. Riley was valued using Level 1 inputs.
(B)Excludes our investments in Leeds and Funko with fair values of $0.2 million and $27 thousand, respectively, as of March 31, 2023. Leeds was valued using NAV as a practical expedient, and Funko was valued using Level 2 inputs.
(C)Excludes our investments in Leeds and Funko with fair values of $6.4 million and $58 thousand, respectively, as of September 30, 2022. Leeds was valued using NAV as a practical expedient, and Funko was valued using Level 2 inputs.
In accordance with ASC 820, the following table provides quantitative information about our Level 3 fair value measurements of our investments as of March 31, 2023 and September 30, 2022. The table below is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements.
The weighted average calculations in the table below are based on the principal balances for all debt related calculations and on the cost basis for all equity related calculations for the particular input.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quantitative Information about Level 3 Fair Value Measurements |
| | | | | | | | | Range / Weighted Average as of |
| March 31,
2023 | | September 30,
2022 | | Valuation Techniques/ Methodologies | | Unobservable Input | | March 31,
2023 | | September 30,
2022 |
| | | | |
| | | | | | |
Secured first lien debt | $ | 458,476 | | | $ | 423,912 | | | Yield Analysis | | Discount Rate | | 11.0% - 25.7% / 13.7% | | 8.0% - 29.5% / 11.8% |
| 40,471 | | | 39,946 | | | TEV | | EBITDA multiple | | 4.6x – 6.4x / 6.0x | | 4.8x – 6.7x / 6.2x |
| | | | |
| | EBITDA | | $963 - $13,215 / $9,251 | | $800 - $10,257 / $7,605 |
| | | | |
| | Revenue multiple | | 0.3x – 0.6x / 0.4x | | 0.3x – 0.6x / 0.5x |
| | | | |
| | Revenue | | $14,300 - $15,483 / $15,033 | | $11,514 - $16,320 / $14,656 |
| | | | |
| | | | | | |
Secured second lien debt | 99,773 | | | 97,472 | | | Yield Analysis | | Discount Rate | | 11.3% - 15.3% / 14.2% | | 11.5% - 15.4% / 13.8% |
| 10,160 | | | 10,791 | | | Market Quote | | IBP | | 63.5% - 98.5% / 81.4% | | 82.0% - 95.0% / 86.5% |
| 7,505 | | | 7,665 | | | TEV | | EBITDA multiple | | 5.5x – 5.5x / 5.5x | | 5.6x – 5.6x / 5.6x |
| | | | |
| | EBITDA | | $3,095 - $3,095 / $3,095 | | $3,299 - $3,299 / $3,299 |
| | | | |
| | | | | | |
Unsecured debt(A) | 36 | | | 55 | | | TEV | | Revenue multiple | | 1.3x – 1.3x / 1.3x | | 0.3x – 1.3x / 1.0x |
| | | | |
| | Revenue | | $5,778 - $5,778 / $5,778 | | $764 - $11,514 / $4,249 |
| | | | |
| | | | | | |
Preferred and common equity / equivalents(B) | 59,742 | | | 63,319 | | | TEV | | EBITDA multiple | | 4.4x – 12.9x / 6.4x | | 4.1x – 11.0x / 6.5x |
| | | | |
| | EBITDA | | $963 -$91,580 / $9,806 | | $800 -$74,512 / $11,742 |
| | | | |
| | Revenue multiple | | 0.3x – 3.0x / 1.3x | | 0.3x– 4.4x / 1.4x |
| | | | |
| | Revenue | | $3,162 -$15,483 / $14,115 | | $764 -$42,926 / $19,963 |
Total Level 3 Investments, at Fair Value | $ | 676,163 | | | $ | 643,160 | | | | | | | | | |
(A)Fair value as of March 31, 2023 excludes our investment in B. Riley with a fair value of $2.3 million. B. Riley was valued using Level 1 inputs as of March 31, 2023.
(B)Fair value as of March 31, 2023 excludes our investments in Leeds and Funko with fair values of $0.2 million and $27 thousand, respectively. Fair value as of September 30, 2022 excludes our investments in Leeds and Funko with fair values of $6.4 million and $58 thousand, respectively. Leeds was valued using NAV as a practical expedient and Funko was valued using Level 2 inputs as of both March 31, 2023 and September 30, 2022.
Fair value measurements can be sensitive to changes in one or more of the valuation inputs. Changes in discount rates, EBITDA or EBITDA multiples (or revenue or revenue multiples), each in isolation, may change the fair value of certain of our investments. Generally, an increase/(decrease) in market yields or, discount rates, or a (decrease)/increase in EBITDA or EBITDA multiples (or revenue or revenue multiples) may result in a (decrease)/increase, respectively, in the fair value of certain of our investments.
Changes in Level 3 Fair Value Measurements of Investments
The following tables provide the changes in fair value, broken out by security type, during the three and six months ended March 31, 2023 and 2022 for all investments for which we determine fair value using unobservable (Level 3) inputs.
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2023 | | Secured
First Lien
Debt | | Secured
Second Lien
Debt | | Unsecured
Debt | | Preferred
Equity | | Common
Equity/
Equivalents | | Total |
| Fair Value as of December 31, 2022 | | $ | 450,243 | | | $ | 114,755 | | | $ | 45 | | | $ | 26,140 | | | $ | 28,011 | | | $ | 619,194 | |
| Total gains (losses): | | | | | | | | | | | | |
Net realized gain (loss)(A) | | (107) | | | — | | | — | | | 510 | | | — | | | 403 | |
Net unrealized appreciation (depreciation)(B) | | (2,035) | | | 319 | | | (9) | | | 1,931 | | | 1,401 | | | 1,607 | |
Reversal of prior period net depreciation (appreciation) on realization(B) | | 107 | | | — | | | — | | | — | | | — | | | 107 | |
New investments, repayments and settlements: (C) | | | | | | | | | | | | |
Issuances/originations | | 58,385 | | | 4,060 | | | — | | | 371 | | | 2,032 | | | 64,848 | |
Settlements/repayments | | (7,646) | | | (1,696) | | | — | | | — | | | — | | | (9,342) | |
Net proceeds from sales | | — | | | — | | | — | | | (654) | | | — | | | (654) | |
Transfers | | — | | | — | | | — | | | — | | | — | | | — | |
Fair Value as of March 31, 2023 | | $ | 498,947 | | | $ | 117,438 | | | $ | 36 | | | $ | 28,298 | | | $ | 31,444 | | | $ | 676,163 | |
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended March 31, 2023 | | Secured
First Lien
Debt | | Secured
Second Lien
Debt | | Unsecured
Debt | | Preferred
Equity | | Common
Equity/
Equivalents | | Total |
Fair Value as of September 30, 2022 | | $ | 463,858 | | | $ | 115,928 | | | $ | 55 | | | $ | 27,046 | | | $ | 36,273 | | | $ | 643,160 | |
| Total gains (losses): | | | | | | | | | | | | |
Net realized gain (loss)(A) | | (107) | | | — | | | (95) | | | 510 | | | 4,995 | | | 5,303 | |
Net unrealized appreciation (depreciation)(B) | | (2,490) | | | (225) | | | (19) | | | 1,025 | | | 617 | | | (1,092) | |
Reversal of prior period net depreciation (appreciation) on realization(B) | | 210 | | | — | | | 95 | | | — | | | (4,995) | | | (4,690) | |
New investments, repayments and settlements: (C) | | | | | | | | | | | | |
Issuances/originations | | 69,860 | | | 4,242 | | | — | | | 371 | | | 2,532 | | | 77,005 | |
Settlements/repayments | | (32,384) | | | (2,507) | | | — | | | — | | | — | | | (34,891) | |
Net proceeds from sales | | — | | | — | | | — | | | (654) | | | (7,978) | | | (8,632) | |
Transfers | | — | | | — | | | — | | | — | | | — | | | — | |
Fair Value as of March 31, 2023 | | $ | 498,947 | | | $ | 117,438 | | | $ | 36 | | | $ | 28,298 | | | $ | 31,444 | | | $ | 676,163 | |
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2022 | | Secured
First Lien
Debt | | Secured
Second
Lien Debt | | Unsecured
Debt | | Preferred
Equity | | Common
Equity/
Equivalents | | Total |
| Fair Value as of December 31, 2021 | | $ | 395,753 | | | $ | 106,232 | | | $ | 66 | | | $ | 26,483 | | | $ | 41,494 | | | $ | 570,028 | |
| Total gains (losses): | | | | | | | | | | | | |
Net realized gain (loss)(A) | | — | | | — | | | — | | | — | | | — | | | — | |
Net unrealized appreciation (depreciation)(B) | | (81) | | | (180) | | | (27) | | | 1,452 | | | (230) | | | 934 | |
Reversal of prior period net depreciation (appreciation) on realization(B) | | (285) | | | 117 | | | — | | | — | | | 1 | | | (167) | |
New investments, repayments and settlements: (C) | | | | | | | | | | | | |
Issuances/originations | | 12,120 | | | 166 | | | 25 | | | — | | | — | | | 12,311 | |
Settlements/repayments | | (29,605) | | | (20,837) | | | — | | | — | | | — | | | (50,442) | |
Net proceeds from sales | | — | | | — | | | — | | | — | | | (1) | | | (1) | |
| Transfers | | — | | | — | | | — | | | — | | | — | | | — | |
Fair Value as of March 31, 2022 | | $ | 377,902 | | | $ | 85,498 | | | $ | 64 | | | $ | 27,935 | | | $ | 41,264 | | | $ | 532,663 | |
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended March 31, 2022 | | Secured
First Lien
Debt | | Secured
Second
Lien Debt | | Unsecured
Debt | | Preferred
Equity | | Common
Equity/
Equivalents | | Total |
Fair Value as of September 30, 2021 | | $ | 337,394 | | | $ | 135,956 | | | $ | 10 | | | $ | 29,246 | | | $ | 48,441 | | | $ | 551,047 | |
| Total gains (losses): | | | | | | | | | | | | |
Net realized gain (loss)(A) | | — | | | — | | | — | | | — | | | 13,876 | | | 13,876 | |
Net unrealized appreciation (depreciation)(B) | | 4,412 | | | 379 | | | 29 | | | 791 | | | 292 | | | 5,903 | |
Reversal of prior period net depreciation (appreciation) on realization(B) | | (380) | | | (1,601) | | | — | | | (4,281) | | | (9,113) | | | (15,375) | |
New investments, repayments and settlements: (C) | | | | | | | | | | | | |
Issuances/originations | | 86,823 | | | 30,336 | | | 25 | | | 3,500 | | | 3,500 | | | 124,184 | |
Settlements/repayments | | (50,347) | | | (79,572) | | | — | | | — | | | — | | | (129,919) | |
Net proceeds from sales | | — | | | — | | | — | | | (1,321) | | | (15,732) | | | (17,053) | |
| Transfers | | — | | | — | | | — | | | — | | | — | | | — | |
Fair Value as of March 31, 2022 | | $ | 377,902 | | | $ | 85,498 | | | $ | 64 | | | $ | 27,935 | | | $ | 41,264 | | | $ | 532,663 | |
(A)Included in net realized gain (loss) on investments on our accompanying Consolidated Statements of Operations for the corresponding period.
(B)Included in net unrealized appreciation (depreciation) on investments on our accompanying Consolidated Statements of Operations for the corresponding period.
(C)Includes increases in the cost basis of investments resulting from new portfolio investments, accretion of discounts, PIK, and other non-cash disbursements to portfolio companies, as well as decreases in the cost basis of investments resulting from principal repayments or sales, the amortization of premiums and acquisition costs and other cost-basis adjustments.
Investment Activity
Proprietary Investments
As of each of March 31, 2023 and September 30, 2022, we held 46 proprietary investments with an aggregate fair value of $668.5 million and $630.8 million, or 98.5% and 97.1% of the total investment portfolio at fair value, respectively. The following significant proprietary investment transactions occurred during the six months ended March 31, 2023:
•In October and November 2022, we received distributions totaling $6.0 million from our investment in Leeds related primarily to the sale of underlying assets in the fund, which resulted in a realized gain of approximately
$4.4 million. We retain an equity investment in Leeds with no remaining cost basis and fair value of $0.2 million as of March 31, 2023.
•In December 2022, our investment in R2i Holdings, LLC paid off at par for net cash proceeds of $19.2 million.
•In January 2023, we invested $29.0 million in NeoGraf Solutions LLC (“Neograf”) through secured first lien debt and common equity. We also extended NeoGraf a $4.5 million line of credit commitment, which was unfunded at close.
•In January and March 2023, we invested a total of $6.3 million in Salt & Straw, LLC, an existing portfolio company, through funding on our existing delayed draw term loan commitment.
•In March 2023, we invested $13.5 million in Leadpoint Business Services, LLC through secured first lien debt. We also extended Leadpoint Business Services, LLC a $5.5 million line of credit commitment of which $5.5 million was funded as of March 31, 2023.
Syndicated Investments
As of March 31, 2023 and September 30, 2022, we held five and six syndicated investments with an aggregate fair value of $10.2 million and $18.8 million, or 1.5% and 2.9% of the total investment portfolio at fair value, respectively. The following significant syndicated investment transaction occurred during the six months ended March 31, 2023:
•In October 2022, our investment in Targus Cayman HoldCo Ltd. was sold for net proceeds of approximately $8.0 million, which resulted in a realized gain of approximately $5.9 million. As part of the proceeds, we received an interest in B. Riley Financial, Inc. 6.75% senior notes in the amount of $2.4 million which are traded on the Nasdaq Global Select Market under the trading symbol RILYO.
Investment Concentrations
As of March 31, 2023, our investment portfolio consisted of investments in 51 portfolio companies located in 24 states in 13 different industries, with an aggregate fair value of $678.8 million. The five largest investments at fair value as of March 31, 2023 totaled $178.6 million, or 26.3% of our total investment portfolio, as compared to the five largest investments at fair value as of September 30, 2022 totaling $174.5 million, or 26.9% of our total investment portfolio. As of March 31, 2023 and September 30, 2022, our average investment by obligor was $13.6 million and $12.6 million at cost, respectively.
The following table outlines our investments by security type as of March 31, 2023 and September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | September 30, 2022 |
| Cost | | Fair Value | | Cost | | Fair Value |
| Secured first lien debt | $ | 513,175 | | | 73.7 | % | | $ | 498,947 | | | 73.5 | % | | $ | 475,806 | | | 72.5 | % | | $ | 463,858 | | | 71.4 | % |
| Secured second lien debt | 120,684 | | | 17.3 | | | 117,438 | | | 17.3 | | | 118,949 | | | 18.2 | | | 115,928 | | | 17.8 | |
| Unsecured debt | 2,614 | | | 0.4 | | | 2,372 | | | 0.3 | | | 293 | | | 0.0 | | | 55 | | | 0.0 | |
| Total debt investments | 636,473 | | | 91.4 | | | 618,757 | | | 91.1 | | | 595,048 | | | 90.7 | | | 579,841 | | | 89.2 | |
| Preferred equity | 34,732 | | | 5.0 | | | 28,298 | | | 4.2 | | | 34,505 | | | 5.3 | | | 27,046 | | | 4.2 | |
| Common equity/equivalents | 24,826 | | | 3.6 | | | 31,704 | | | 4.7 | | | 26,500 | | | 4.0 | | | 42,728 | | | 6.6 | |
Total equity investments | 59,558 | | | 8.6 | | | 60,002 | | | 8.9 | | | 61,005 | | | 9.3 | | | 69,774 | | | 10.8 | |
Total Investments | $ | 696,031 | | | 100.0 | % | | $ | 678,759 | | | 100.0 | % | | $ | 656,053 | | | 100.0 | % | | $ | 649,615 | | | 100.0 | % |
Our investments at fair value consisted of the following industry classifications as of March 31, 2023 and September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | September 30, 2022 |
| Industry Classification | | Fair Value | | Percentage of
Total
Investments | | Fair Value | | Percentage of
Total
Investments |
| Diversified/Conglomerate Service | | $ | 158,695 | | | 23.4 | % | | $ | 148,907 | | | 22.9 | % |
| Diversified/Conglomerate Manufacturing | | 142,091 | | | 20.9 | | | 114,105 | | | 17.6 | |
| Healthcare, Education, and Childcare | | 133,509 | | | 19.7 | | | 136,401 | | | 21.0 | |
| Aerospace and Defense | | 86,384 | | | 12.7 | | | 88,649 | | | 13.6 | |
| Beverage, Food, and Tobacco | | 70,119 | | | 10.3 | | | 64,283 | | | 9.9 | |
| Oil and Gas | | 23,993 | | | 3.5 | | | 25,373 | | | 3.9 | |
| Automobile | | 19,941 | | | 3.0 | | | 20,144 | | | 3.1 | |
| Personal and Non-Durable Consumer Products | | 17,123 | | | 2.5 | | | 18,583 | | | 2.9 | |
| Machinery | | 10,896 | | | 1.6 | | | 9,562 | | | 1.5 | |
| Telecommunications | | 7,464 | | | 1.1 | | | 10,088 | | | 1.6 | |
| Textiles and Leather | | — | | | — | | | 7,978 | | | 1.2 | |
| Other, < 2.0% | | 8,544 | | | 1.3 | | | 5,542 | | | 0.8 | |
| Total Investments | | $ | 678,759 | | | 100.0 | % | | $ | 649,615 | | | 100.0 | % |
Our investments at fair value were included in the following U.S. geographic regions as of March 31, 2023 and September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | September 30, 2022 |
| Location | | Fair Value | | Percentage of Total Investments | | Fair Value | | Percentage of Total Investments |
| South | | $ | 303,139 | | | 44.7 | % | | $ | 326,524 | | | 50.3 | % |
| West | | 194,913 | | | 28.7 | | | 169,415 | | | 26.1 | |
| Midwest | | 144,399 | | | 21.3 | | | 118,191 | | | 18.2 | |
| Northeast | | 36,308 | | | 5.3 | | | 35,485 | | | 5.4 | |
| Total Investments | | $ | 678,759 | | | 100.0 | % | | $ | 649,615 | | | 100.0 | % |
The geographic composition indicates the location of the headquarters for our portfolio companies. A portfolio company may have additional locations in other geographic regions.
Investment Principal Repayments
The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of March 31, 2023:
| | | | | | | | | | | | | | |
| | | | Amount |
For the remaining six months ending September 30: | | 2023(A) | | $ | 5,709 | |
For the fiscal years ending September 30: | | 2024 | | 35,783 | |
| | 2025 | | 82,772 | |
| | 2026 | | 158,184 | |
| | 2027 | | 269,559 | |
| | Thereafter | | 85,828 | |
| | Total contractual repayments | | $ | 637,835 | |
| | Adjustments to cost basis of debt investments | | (1,362) | |
| | Investments in equity securities | | 59,558 | |
| | Investments held as of March 31, 2023 at cost: | | $ | 696,031 | |
(A)Includes debt investments with contractual principal amounts totaling $0.2 million for which the maturity date has passed as of March 31, 2023.
Receivables from Portfolio Companies
Receivables from portfolio companies represent non-recurring costs incurred on behalf of such portfolio companies and are included in other assets on our accompanying Consolidated Statements of Assets and Liabilities. We generally maintain an allowance for uncollectible receivables from portfolio companies when the receivable balance becomes 90 days or more past due or if it is determined, based upon management’s judgment, that the portfolio company is unable to pay its obligations. We write off accounts receivable when we have exhausted collection efforts and have deemed the receivables uncollectible. As of March 31, 2023 and September 30, 2022, we had gross receivables from portfolio companies of $0.6 million and $0.5 million, respectively. The allowance for uncollectible receivables was $0 as of each of March 31, 2023 and September 30, 2022.
NOTE 4. RELATED PARTY TRANSACTIONS
Transactions with the Adviser
We have been externally managed by the Adviser pursuant to the Advisory Agreement since October 1, 2004 pursuant to which we pay the Adviser a base management fee and an incentive fee for its services. On July 12, 2022, our Board of Directors, including a majority of the directors who are not parties to the Advisory Agreement or interested persons of us or the Adviser, unanimously approved the renewal of the Advisory Agreement through August 31, 2023.
We also pay the Adviser a loan servicing fee for its role of servicer pursuant to our Credit Facility. The entire loan servicing fee paid to the Adviser by Business Loan is non-contractually, unconditionally and irrevocably credited against the base management fee otherwise payable to the Adviser, since Business Loan is a consolidated subsidiary of ours, and overall, the base management fee (including any loan servicing fee) cannot exceed 1.75% of total assets (including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings) during any given fiscal year pursuant to the Advisory Agreement.
Two of our executive officers, David Gladstone (our chairman and chief executive officer) and Terry Lee Brubaker (our chief operating officer), serve as directors and executive officers of the Adviser, which is 100% indirectly owned and controlled by Mr. Gladstone. Robert Marcotte (our president) also serves as executive vice president of private equity (debt) of the Adviser. Michael LiCalsi, our general counsel and secretary (who also serves as the Administrator’s president, general counsel and secretary), is also the executive vice president of administration of our Adviser.
The following table summarizes the base management fee, incentive fee, and loan servicing fee and associated non-contractual, unconditional and irrevocable credits reflected in our accompanying Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | Six Months Ended
March 31, | |
| 2023 | | 2022 | | 2023 | | 2022 | |
Average total assets subject to base management fee(A) | $ | 662,400 | | | $ | 566,629 | | | $ | 654,514 | | | $ | 571,314 | | |
Multiplied by prorated annual base management fee of 1.75% | 0.4375 | % | | 0.4375 | % | | 0.8750 | % | | 0.8750 | % | |
Base management fee(B) | $ | 2,898 | | | $ | 2,479 | | | $ | 5,727 | | | $ | 4,999 | | |
| Portfolio company fee credit | (689) | | | (59) | | | (1,093) | | | (1,928) | | |
Syndicated loan fee credit | (31) | | | (43) | | | (63) | | | (101) | | |
| Net Base Management Fee | $ | 2,178 | | | $ | 2,377 | | | $ | 4,571 | | | $ | 2,970 | | |
Loan servicing fee(B) | 1,923 | | | 1,520 | | | 3,797 | | | 2,982 | | |
Credit to base management fee - loan servicing fee(B) | (1,923) | | | (1,520) | | | (3,797) | | | (2,982) | | |
| Net Loan Servicing Fee | $ | — | | | $ | — | | | $ | — | | | $ | — | | |
Incentive fee(B) | 2,408 | | | 1,971 | | | 4,589 | | | 4,062 | | |
Incentive fee credit | — | | | — | | | — | | | — | | |
| Net Incentive Fee | $ | 2,408 | | | $ | 1,971 | | | $ | 4,589 | | | $ | 4,062 | | |
| Portfolio company fee credit | (689) | | | (59) | | | (1,093) | | | (1,928) | | |
Syndicated loan fee credit | (31) | | | (43) | | | (63) | | | (101) | | |
| Incentive fee credit | — | | | — | | | — | | | — | | |
Credits to Fees From Adviser - other(B) | $ | (720) | | | $ | (102) | | | $ | (1,156) | | | $ | (2,029) | | |
(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 two most recently completed quarters within the respective years and adjusted appropriately for any share issuances or repurchases during the period.
(B)Reflected as a line item on our accompanying Consolidated Statements of Operations.
Base Management Fee
The base management fee is payable quarterly to the Adviser pursuant to our Advisory Agreement and is assessed at an annual rate of 1.75%, computed on the basis of the value of our average total assets at the end of the two most recently-completed quarters (inclusive of the current quarter), which are total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings and adjusted appropriately for any share issuances or repurchases during the period.
Additionally, pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies. The Adviser may also provide other services to our portfolio companies under certain agreements and may receive fees for services other than managerial assistance. Such services may include: (i) assistance obtaining, sourcing or structuring credit facilities, long-term loans or additional equity from unaffiliated third parties; (ii) negotiating important contractual financial relationships; (iii) consulting services regarding restructuring of the portfolio company and financial modeling as it relates to raising additional debt and equity capital from unaffiliated third parties; and (iv) taking a primary role in interviewing, vetting and negotiating employment contracts with candidates in connection with adding and retaining key portfolio company management team members. The Adviser non-contractually, unconditionally, and irrevocably credits 100% of any fees for such services against the base management fee that we would otherwise be required to pay to the Adviser.
Our Board of Directors accepted a non-contractual, unconditional, and irrevocable credit from the Adviser to reduce the annual base management fee on syndicated loan participations to 0.5%, to the extent that proceeds resulting from borrowings were used to purchase such syndicated loan participations, for each of the three and six months ended March 31, 2023 and 2022.
Loan Servicing Fee
The Adviser also services the loans held by Business Loan (the borrower under the Credit Facility), in return for which the Adviser receives a 1.5% annual fee payable monthly based on the aggregate outstanding balance of loans pledged under our Credit Facility. As discussed in the notes to the table above, we treat payment of the loan servicing fee pursuant to the
Credit Facility as a pre-payment of the base management fee under the Advisory Agreement. Accordingly, these loan servicing fees are 100% non-contractually, unconditionally and irrevocably credited back to us by the Adviser.
Incentive Fee
The incentive fee consists of two parts: an income-based incentive fee and a capital gains-based incentive fee. The income-based incentive fee rewards the Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% (2.0% during the period from April 1, 2020 through March 31, 2023) of our net assets, which we define as total assets less indebtedness and before taking into account any incentive fees payable or contractually due but not payable during the period, at the end of the immediately preceding calendar quarter, adjusted appropriately for any share issuances or repurchases during the period (the “hurdle rate”). The income-based incentive fee with respect to our pre-incentive fee net investment income is generally payable quarterly to the Adviser and is computed as follows:
•no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate;
•100.0% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875% (2.4375% during the period from April 1, 2020 through March 31, 2022 and 2.50% from April 1, 2022 through March 31, 2023) of our net assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter; and
•20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% (2.4375% during the period from April 1, 2020 through March 31, 2022 and 2.50% from April 1, 2022 through March 31, 2023) of our net assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter.
On April 12, 2022, our Board of Directors approved an amendment of the Advisory Agreement which extended the temporary revision to the hurdle rate through March 31, 2023 and increased the excess incentive fee hurdle rate from 2.1875% per quarter (8.75% annualized) to 2.50% per quarter (10.0% annualized), up from the 2.4375% per quarter (9.75% annualized) in effect since April 1, 2020.
The second part of the incentive fee is a capital gains-based incentive fee that is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date) and equals 20.0% of our “net realized capital gains” (as defined herein) as of the end of the fiscal year. In determining the capital gains-based incentive fee payable to the Adviser, we calculate “net realized capital gains” at the end of each applicable year by subtracting the sum of our cumulative aggregate realized capital losses and our entire portfolio’s aggregate unrealized capital depreciation from our cumulative aggregate realized capital gains. For this purpose, cumulative aggregate realized capital gains, if any, equals the sum of the differences between the net sales price of each investment, when sold, and the original cost of such investment since inception. Cumulative aggregate realized capital losses equals the sum of the amounts by which the net sales price of each investment, when sold, is less than the original cost of such investment since inception. The entire portfolio’s aggregate unrealized capital depreciation, if any, equals the sum of the difference between the valuation of each investment as of the applicable calculation date and the original cost of such investment. At the end of the applicable fiscal year, the amount of capital gains that serves as the basis for our calculation of the capital gains-based incentive fee equals the cumulative aggregate realized capital gains less cumulative aggregate realized capital losses, less the entire portfolio’s aggregate unrealized capital depreciation, if any. If this number is positive at the end of such fiscal year, then the capital gains-based incentive fee for such year equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. No capital gains-based incentive fee has been recorded or paid since our inception through March 31, 2023, as cumulative unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.
In accordance with GAAP, a capital gains-based incentive fee accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital appreciation and depreciation. If such amount is positive at the end of a period, then GAAP requires us to record a capital gains-based incentive fee equal to 20.0% of such amount, less the aggregate amount of actual capital gains-based incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such period. GAAP requires that the capital gains-based incentive fee accrual consider the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that such unrealized capital
appreciation will be realized in the future. No GAAP accrual for a capital gains-based incentive fee has been recorded from our inception through March 31, 2023.
Transactions with the Administrator
We have entered into the Administration Agreement with the Administrator to provide administrative services. We reimburse the Administrator pursuant to the Administration Agreement for the portion of expenses the Administrator incurs while performing services for us. The Administrator’s expenses are primarily rent and the salaries, benefits and expenses of the Administrator’s employees, including: our chief financial officer and treasurer, chief compliance officer, chief valuation officer, and general counsel and secretary (who also serves as the Administrator’s president, general counsel and secretary) and their respective staffs. Two of our executive officers, David Gladstone (our chairman and chief executive officer) and Terry Lee Brubaker (our chief operating officer) serve as members of the board of managers and executive officers of the Administrator, which, as of March 31, 2023, is 100% indirectly owned and controlled by Mr. Gladstone. Another of our officers, Michael LiCalsi (our general counsel and secretary), serves as the Administrator’s president as well as the executive vice president of administration for the Adviser.
Our allocable portion of the Administrator’s expenses is generally derived by multiplying the Administrator’s total expenses by the approximate percentage of time during the current quarter the Administrator’s employees performed services for us in relation to their time spent performing services for all companies serviced by the Administrator. On July 12, 2022, our Board of Directors, including a majority of the directors who are not parties to the Administration Agreement or interested persons of either party, approved the renewal of the Administration Agreement through August 31, 2023.
Other Transactions
Gladstone Securities, LLC (“Gladstone Securities”), a privately-held broker-dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation, which is 100% indirectly owned and controlled by Mr. Gladstone, our chairman and chief executive officer, has provided other services, such as investment banking and due diligence services, to certain of our portfolio companies, for which Gladstone Securities receives a fee. Any such fees paid by portfolio companies to Gladstone Securities do not impact the fees we pay to the Adviser or the non-contractual, unconditional and irrevocable credits against the base management fee or incentive fee. Gladstone Securities received fees from portfolio companies totaling $0.2 million and $0.3 million during the three and six months ended March 31, 2023, respectively, and $25 thousand and $0.6 million during the three and six months ended March 31, 2022, respectively.
Related Party Fees Due
Amounts due to related parties on our accompanying Consolidated Statements of Assets and Liabilities were as follows:
| | | | | | | | | | | |
| March 31, 2023 | | September 30, 2022 |
| Base management fee due to Adviser | $ | 255 | | | $ | (189) | |
| Loan servicing fee due to Adviser | 494 | | | 423 | |
| Incentive fee due to Adviser | 2,408 | | | 1,870 | |
Total fees due to Adviser | 3,157 | | | 2,104 | |
Fee due to Administrator | 605 | | | 423 | |
Total Related Party Fees Due | $ | 3,762 | | | $ | 2,527 | |
In addition to the above fees, other operating expenses due to the Adviser as of March 31, 2023 and September 30, 2022, totaled $0.1 million and $44 thousand, respectively. In addition, net expenses payable to Gladstone Investment Corporation (for reimbursement purposes), which includes certain co-investment expenses, totaled $0 and $13 thousand as of March 31, 2023 and September 30, 2022, respectively. These amounts are generally settled in the quarter subsequent to being incurred and are included in other liabilities on the accompanying Consolidated Statements of Assets and Liabilities as of March 31, 2023 and September 30, 2022.
NOTE 5. BORROWINGS
Revolving Credit Facility
On May 13, 2021, we, through Business Loan, amended and restated the Credit Facility to, among other things, (i) decrease the commitment amount from $205.0 million to $175.0 million, (ii) extend the revolving period end date to October 31, 2023, (iii) extend the maturity date to October 31, 2025 (at which time all principal and interest will be due and payable if the Credit Facility is not extended by the revolving period end date), (iv) reduce the interest rate margin to 2.70% during the revolving period and 3.25% thereafter, with a LIBOR floor of 0.35%, (v) revise the unused fee to include an additional fee tier of 0.35% per annum on the daily undrawn amounts if the average unused amount is equal to or less than 35% during the applicable period, (vi) provide for certain excess concentration limits, including a reduced second lien limit and a new broadly syndicated loan limit and (vii) add customary LIBOR replacement language. We incurred fees of approximately $1.1 million in connection with this amendment and restatement, which are being amortized through our Credit Facility’s revolving period end date of October 31, 2023.
On September 12, 2022, we, through Business Loan, entered into Amendment No. 1 to the Credit Facility to update the reference rate from LIBOR to SOFR plus an 11 basis point credit spread adjustment. On September 20, 2022, we, through Business Loan, entered into Amendment No. 2 to the Credit Facility to increase the size of the Credit Facility by $50.0 million from $175.0 million to $225.0 million, as permitted under the terms of the Credit Facility. On October 31, 2022, we, through Business Loan, entered into Amendment No. 3 to the Credit Facility to increase the size of the Credit Facility by $20.0 million from $225.0 million to $245.0 million, as permitted under the terms of the Credit Facility.
The following tables summarize noteworthy information related to our Credit Facility:
| | | | | | | | | | | |
| March 31, 2023 | | September 30, 2022 |
| Commitment amount | $ | 245,000 | | $ | 225,000 |
| Line of credit outstanding, at cost | 152,600 | | 141,800 | |
Availability(A) | 71,046 | | 60,068 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended
March 31, | | For the Six Months Ended
March 31, | |
| 2023 | | 2022 | | 2023 | | 2022 | |
| Weighted average borrowings outstanding, at cost | $ | 125,756 | | | $ | 42,491 | | | $ | 127,427 | | | $ | 37,677 | | |
Weighted average interest rate(B) | 8.0 | % | | 5.9 | % | | 7.5 | % | | 6.6 | % | |
| Commitment (unused) fees incurred | $ | 185 | | | $ | 344 | | | $ | 341 | | | $ | 679 | | |
(A) Available borrowings are subject to various constraints imposed under our Credit Facility, based on the aggregate loan balance pledged by Business Loan, which varies as loans are added and repaid, regardless of whether such repayments are prepayments or made as contractually required.
(B) Includes unused commitment fees and excludes the impact of deferred financing costs.
Our Credit Facility also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account with KeyBank. KeyBank is also the trustee of the account and generally remits the collected funds to us once each month. Amounts collected in the lockbox account with KeyBank are presented as Due from administrative agent on the accompanying Consolidated Statement of Assets and Liabilities as of March 31, 2023 and September 30, 2022.
Our Credit Facility contains covenants that require Business Loan to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions), and restrict material changes to our credit and collection policies without the lenders’ consent. Our Credit Facility also generally limits distributions to our stockholders on a fiscal year basis to the sum of our net investment income, net capital gains and amounts elected to have been paid during the prior year in accordance with Section 855(a) of the Code. Business Loan is also subject to certain limitations on the type of loan investments it can apply as collateral towards the borrowing base to receive additional borrowing availability under our Credit Facility, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life and lien property. Our Credit Facility further requires Business Loan to comply with other financial and operational covenants, which obligate Business Loan to, among
other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of 25 obligors required in the borrowing base.
Additionally, we are required to maintain (i) a minimum net worth (defined in our Credit Facility to include any outstanding mandatorily redeemable preferred stock) of $325.0 million plus 50.0% of all equity and subordinated debt raised after May 13, 2021 less 50% of any equity and subordinated debt retired or redeemed after May 13, 2021, which equates to $349.1 million as of March 31, 2023, (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 of March 31, 2023, and as defined in our Credit Facility, we had a net worth of $539.1 million, asset coverage on our “senior securities representing indebtedness” of 195.5%, calculated in accordance with the requirements of Section 18 and 61 of the 1940 Act, and an active status as a BDC and RIC. In addition, we had 34 obligors in our Credit Facility’s borrowing base as of March 31, 2023. As of March 31, 2023, we were in compliance with all of our Credit Facility covenants.
Fair Value
We elected to apply the fair value option of ASC 825, “Financial Instruments,” specifically for the Credit Facility, which was consistent with our application of ASC 820 to our investments. Generally, the fair value of our Credit Facility is determined using a yield analysis which includes a DCF calculation and the assumptions that the Valuation Team believes market participants would use, including the estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. As of March 31, 2023, the discount rate used to determine the fair value of our Credit Facility was one-month Term SOFR, plus 3.00% per annum, plus a 0.75% unused commitment fee. As of September 30, 2022, the discount rate used to determine the fair value of our Credit Facility was one-month Term SOFR, plus 2.81% per annum, plus a 0.50% unused commitment fee. Generally, an increase or decrease in the discount rate used in the DCF calculation may result in a corresponding decrease or increase, respectively, in the fair value of our Credit Facility. As of March 31, 2023 and September 30, 2022, our Credit Facility was valued using Level 3 inputs and any changes in its fair value are recorded in net unrealized depreciation (appreciation) of other on our accompanying Consolidated Statements of Operations.
The following tables present our Credit Facility carried at fair value as of March 31, 2023 and September 30, 2022, on our accompanying Consolidated Statements of Assets and Liabilities for Level 3 of the hierarchy established by ASC 820 and the changes in fair value of our Credit Facility during the three and six months ended March 31, 2023 and 2022:
| | | | | | | | | | | |
| Total Recurring Fair Value Measurement Reported in |
| Consolidated Statements of Assets and Liabilities Using Significant Unobservable Inputs (Level 3) |
| March 31, 2023 | | September 30, 2022 |
Credit Facility | $ | 152,439 | | | $ | 141,800 | |
| | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Data Inputs (Level 3) |
| Three Months Ended
March 31, |
| 2023 | | 2022 |
| Fair value as of December 31, 2022 and 2021, respectively | $ | 108,400 | | | $ | 53,900 | |
Borrowings | 85,600 | | | 23,300 | |
Repayments | (41,400) | | | (59,800) | |
Net unrealized depreciation(A) | (161) | | | — | |
Fair Value as of March 31, 2023 and 2022, respectively | $ | 152,439 | | | $ | 17,400 | |
| | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Data Inputs (Level 3) |
| Six Months Ended
March 31, |
| 2023 | | 2022 |
| Fair value as of September 30, 2022 and 2021, respectively | $ | 141,800 | | | $ | 50,500 | |
Borrowings | 100,400 | | | 161,500 | |
Repayments | (89,600) | | | (194,600) | |
Net unrealized depreciation(A) | (161) | | | — | |
Fair Value as of March 31, 2023 and 2022, respectively | $ | 152,439 | | | $ | 17,400 | |
(A) Included in net unrealized appreciation (depreciation) of other on our accompanying Consolidated Statements of Operations for the three and six months ended March 31, 2023.
The fair value of the collateral under our Credit Facility totaled approximately $572.2 million and $577.6 million as of March 31, 2023 and September 30, 2022, respectively.
Notes Payable
In November 2021, we completed a private placement of $50.0 million aggregate principal amount of 3.75% Notes due 2027 (the “2027 Notes”) for net proceeds of approximately $48.5 million after deducting initial purchasers’ costs, commissions and offering expenses borne by us. The 2027 Notes will mature on May 1, 2027 and may be redeemed in whole or in part at any time or from time to time at the Company’s option prior to maturity at par plus a “make-whole” premium, if applicable. The 2027 Notes bear interest at a rate of 3.75% per year. Interest is payable semi-annually on May 1 and November 1 of each year (which equates to approximately $1.9 million per year).
In April 2022, pursuant to the registration rights agreement we entered into in connection with the 2027 Notes, we conducted an exchange offer through which we offered to exchange all of our then outstanding 2027 Notes (the “Restricted Notes”) that were issued on November 4, 2021, for an equal aggregate principal amount of our new 3.75% Notes due 2027 (the “Exchange Notes”) that had been registered with the SEC under the Securities Act of 1933, as amended. The terms of the Exchange Notes are identical to those of the outstanding Restricted Notes, except that the transfer restrictions and registration rights relating to the Restricted Notes do not apply to the Exchange Notes, and the Exchange Notes do not
provide for the payment of additional interest in the event of a registration default.
In December 2020, we completed an offering of $100.0 million aggregate principal amount of 5.125% Notes due 2026 (the “2026 Notes”) for net proceeds of approximately $97.7 million after deducting underwriting discounts, commissions and offering expenses borne by us. In March 2021, we completed an offering of an additional $50.0 million aggregate principal
amount of the 2026 Notes for net proceeds of approximately $50.6 million after adding premiums and deducting underwriting costs, commissions and offering expenses borne by us. The 2026 Notes will mature on January 31, 2026 and may be redeemed in whole or in part at any time or from time to time at the Company’s option prior to maturity at par plus a “make-whole” premium, if applicable. The 2026 Notes bear interest at a rate of 5.125% per year. Interest is payable semiannually on January 31 and July 31 of each year (which equates to approximately $7.7 million per year).
In October 2019, we completed an offering of $38.8 million aggregate principal amount of 5.375% Notes due 2024 (the “2024 Notes”), inclusive of the overallotment option exercised by the underwriters, for net proceeds of approximately $37.5 million after deducting underwriting discounts, commissions and offering expenses borne by us. On November 1,
2021, we voluntarily redeemed the 2024 Notes with an aggregate principal amount outstanding of $38.8 million. The 2024 Notes would have otherwise matured on November 1, 2024.
The indenture relating to the 2027 Notes and 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 2027 Notes and the 2026 Notes, as applicable, and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements.
The 2027 Notes and 2026 Notes are recorded at the principal amount, plus applicable premiums, less discounts and offering costs, on our Consolidated Statements of Assets and Liabilities.
The fair value, based on a DCF analysis, of the 2027 Notes as of March 31, 2023 was $45.5 million. The fair value, based on a DCF analysis, of the 2026 Notes as of March 31, 2023 was $145.5 million. We consider the 2027 Notes and 2026 Notes to be Level 3 within the ASC 820 fair value hierarchy.
NOTE 6. REGISTRATION STATEMENT AND COMMON EQUITY OFFERINGS
Our shelf registration statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock or preferred stock. As of March 31, 2023, we had the ability to issue up to an additional $270.8 million in securities under the registration statement.
Common Stock At-the-Market Offerings
In May 2021, we entered into an equity distribution agreement with Jefferies LLC, as amended in August 2022 (the “Jefferies Sales Agreement”), under which we have the ability to issue and sell, from time to time, shares of our common stock with an aggregate offering price of up to $60.0 million. During the six months ended March 31, 2023, we sold 2,450,773 shares of our common stock under the Jefferies Sales Agreement, at a weighted-average price of $10.08 per share and raised approximately $24.7 million of gross proceeds. Net proceeds, after deducting commissions and offering costs borne by us, were approximately $24.3 million. All sales were above our then current estimated NAV per share. As of March 31, 2023, we had a remaining capacity to sell up to an additional $23.1 million of our common stock under the Jefferies Sales Agreement.
NOTE 7. NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER WEIGHTED AVERAGE COMMON SHARE
The following table sets forth the computation of basic and diluted net increase (decrease) in net assets resulting from operations per weighted average common share for the three and six months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | Six Months Ended
March 31, | |
| 2023 | | 2022 | | 2023 | | 2022 | |
Numerator: basic and diluted net increase (decrease) in net assets resulting from operations per common share | $ | 11,986 | | | $ | 8,303 | | | $ | 17,684 | | | $ | 20,406 | | |
Denominator: basic and diluted weighted average common share | 36,604,182 | | | 34,304,371 | | | 35,898,020 | | | 34,304,371 | | |
Basic and diluted net increase (decrease) in net assets resulting from operations per common share | $ | 0.33 | | | $ | 0.24 | | | $ | 0.49 | | | $ | 0.59 | | |
NOTE 8. DISTRIBUTIONS TO COMMON STOCKHOLDERS
To qualify to be taxed as a RIC under Subchapter M of the Code, we must generally distribute to our stockholders, for each taxable year, 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”). The amount to be paid out as distributions to our stockholders is determined by our Board of Directors quarterly and is based on management’s estimate of Investment Company Taxable Income. Based on that estimate, our Board of Directors declares three monthly distributions to common stockholders each quarter.
The federal income tax characteristics of all distributions will be reported to stockholders on the IRS Form 1099 after the end of each calendar year. Estimates of tax characterization made on a quarterly basis may not be representative of the actual tax characterization of cash distributions for the full year. Estimates made on a quarterly basis are updated as of each interim reporting date.
For the calendar year ended December 31, 2022, 93.2% of distributions to common stockholders were deemed to be paid from ordinary income and 6.8% of distributions were deemed to be return of capital for 1099 stockholder reporting
purposes. For the calendar year ended December 31, 2021, 100.0% of distributions to common stockholders were deemed to be paid from ordinary income for 1099 stockholder reporting purposes.
We paid the following monthly distributions to common stockholders for the six months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year | | Declaration Date | | Record Date | | Payment Date | | Distribution per Common Share |
| 2023 | | October 11, 2022 | | October 21, 2022 | | October 31, 2022 | | $ | 0.07 | |
| | October 11, 2022 | | November 18, 2022 | | November 30, 2022 | | 0.07 | |
| | October 11, 2022 | | December 20, 2022 | | December 30, 2022 | | 0.07 | |
| | January 10, 2023 | | January 20, 2023 | | January 31, 2023 | | 0.075 | |
| | January 10, 2023 | | February 17, 2023 | | February 28, 2023 | | 0.075 | |
| | January 10, 2023 | | March 17, 2023 | | March 31, 2023 | | 0.075 | |
| | Six Months Ended March 31, 2023: | | $ | 0.435 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year | | Declaration Date | | Record Date | | Payment Date | | Distribution per Common Share |
| 2022 | | October 12, 2021 | | October 22, 2021 | | October 29, 2021 | | $ | 0.065 | |
| | October 12, 2021 | | November 19, 2021 | | November 30, 2021 | | 0.065 | |
| | October 12, 2021 | | December 23, 2021 | | December 31, 2021 | | 0.065 | |
| | January 11, 2022 | | January 21, 2022 | | January 31, 2022 | | 0.065 | |
| | January 11, 2022 | | February 18, 2022 | | February 28, 2022 | | 0.065 | |
| | January 11, 2022 | | March 23, 2022 | | March 31, 2022 | | 0.065 | |
| | Six Months Ended March 31, 2022: | | $ | 0.39 | |
Aggregate distributions declared and paid to our common stockholders were approximately $15.7 million and $13.4 million for the six months ended March 31, 2023 and 2022, respectively, and were declared based on estimates of Investment Company Taxable Income for the respective fiscal years. For the fiscal year ended September 30, 2022, distributions declared and paid exceeded taxable income available for common distributions resulting in a partial return of capital of approximately $1.4 million.
For the six months ended March 31, 2023 and the fiscal year ended September 30, 2022, we recorded the following adjustments for book-tax differences to reflect tax character. Results of operations, total net assets, and cash flows were not affected by these adjustments.
| | | | | | | | | | | |
| Six Months Ended
March 31, 2023 | | Year Ended September 30, 2022 |
Undistributed net investment income | $ | 271 | | | $ | (5,606) | |
| Accumulated net realized losses | (271) | | | 7,013 | |
| Capital in excess of par value | — | | | (1,407) | |
NOTE 9. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
We are party to certain legal proceedings incidental to the normal course of our business. We are required to establish reserves for litigation matters where those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, we do not establish reserves. Based on current knowledge, we do not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our financial condition, results of operations or cash flows. Additionally, based on our current knowledge, we do not believe such loss contingencies are both probable and estimable and therefore, as of March 31, 2023 and September 30, 2022, we had no established reserves for such loss contingencies.
Escrow Holdbacks
From time to time, we enter into arrangements relating to exits of certain investments whereby specific amounts of the proceeds are held in escrow to be used to satisfy potential obligations, as stipulated in the sales agreements. We record escrow amounts in Restricted cash and cash equivalents, if received in cash but subject to potential obligations or other contractual restrictions, or as escrow receivables in Other assets, net, if not yet received in cash, on our accompanying Consolidated Statements of Assets and Liabilities. We establish reserves and holdbacks against escrow amounts if we determine that it is probable and estimable that a portion of the escrow amounts will not ultimately be released or received at the end of the escrow period. Reserves and holdbacks against escrow amounts were $0.9 million and $0.2 million as of March 31, 2023 and September 30, 2022, respectively.
Financial Commitments and Obligations
We have lines of credit, delayed draw term loans, and an uncalled capital commitment with certain of our portfolio companies that have not been fully drawn. Since these commitments have expiration dates and we expect many will never be fully drawn, the total commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of the combined unused lines of credit, the unused delayed draw term loans and the uncalled capital commitment as of March 31, 2023 and September 30, 2022 to be immaterial.
The following table summarizes the amounts of our unused lines of credit, delayed draw term loans and uncalled capital commitment, at cost, as of March 31, 2023 and September 30, 2022, which are not reflected as liabilities in the accompanying Consolidated Statements of Assets and Liabilities:
| | | | | | | | | | | |
| March 31,
2023 | | September 30,
2022 |
Unused line of credit commitments(A) | $ | 31,337 | | | $ | 36,225 | |
Delayed draw term loans(A) | 25,987 | | | 37,778 | |
| Uncalled capital commitment | 843 | | | 843 | |
| Total | $ | 58,167 | | | $ | 74,846 | |
(A) There may be specific covenant requirements that temporarily limit a portfolio company’s availability to draw on an unused line of credit commitment or a delayed draw term loan.
NOTE 10. FINANCIAL HIGHLIGHTS
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Six Months Ended March 31, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Per Common Share Data: | | | | | | | |
Net asset value at beginning of period(A) | $ | 9.06 | | | $ | 9.44 | | | $ | 9.08 | | | $ | 9.28 | |
Income from operations(B) | | | | | | | |
Net investment income | 0.26 | | | 0.25 | | | 0.51 | | | 0.52 | |
Net realized and unrealized gain (loss) on investments | 0.06 | | | (0.02) | | | (0.04) | | | 0.08 | |
Net realized and unrealized gain (loss) on other | 0.01 | | | 0.01 | | | 0.02 | | | (0.01) | |
Total from operations | 0.33 | | | 0.24 | | | 0.49 | | | 0.59 | |
Distributions to common stockholders from(B)(C) | | | | | | | |
Net investment income | (0.23) | | | (0.20) | | | (0.44) | | | (0.40) | |
Return of capital | — | | | — | | | — | | | — | |
Total distributions | (0.23) | | | (0.20) | | | (0.44) | | | (0.40) | |
Capital share transactions(B) | | | | | | | |
Anti-dilutive effect of common stock issuance(D) | 0.04 | | | — | | | 0.07 | | | — | |
Total capital share transactions | 0.04 | | | — | | | 0.07 | | | — | |
Other, net | (0.01) | | | 0.01 | | | (0.01) | | | 0.02 | |
Net asset value at end of period(A) | $ | 9.19 | | | $ | 9.49 | | | $ | 9.19 | | | $ | 9.49 | |
Per common share market value at beginning of period | $ | 9.62 | | | $ | 11.59 | | | $ | 8.49 | | | $ | 11.30 | |
Per common share market value at end of period | 9.40 | | | 11.79 | | | 9.40 | | | 11.79 | |
Total return(E) | (0.06) | % | | 3.51 | % | | 15.70 | % | | 7.95 | % |
Common stock outstanding at end of period(A) | 37,185,569 | | | 34,304,371 | | | 37,185,569 | | | 34,304,371 | |
| Statement of Assets and Liabilities Data: | | | | | | | |
Net assets at end of period | $ | 341,811 | | | $ | 325,467 | | | $ | 341,811 | | | $ | 325,467 | |
Average net assets(F) | 337,720 | | | 324,891 | | | 332,327 | | | 322,892 | |
| Senior Securities Data: | | | | | | | |
Borrowings under line of credit, at cost | 152,600 | | | 17,400 | | | 152,600 | | | 17,400 | |
| Notes payable | 200,000 | | | 200,000 | | | 200,000 | | | 200,000 | |
| Ratios/Supplemental Data: | | | | | | | |
Ratio of net expenses to average net assets – annualized(G)(H) | 12.94 | % | | 10.55 | % | | 12.94 | % | | 9.65 | % |
Ratio of net investment income to average net assets – annualized(I) | 11.41 | % | | 10.70 | % | | 11.05 | % | | 11.06 | % |
(A) Based on actual shares outstanding at the end of the corresponding period.
(B) Based on weighted average basic per share data.
(C) The tax character of distributions is determined based on taxable income calculated in accordance with income tax regulations, which may differ from amounts determined under GAAP.
(D) During the three and six months ended March 31, 2023, the anti-dilution was a result of issuing common shares during the period at a price above the then current NAV per share.
(E) Total return equals the change in the ending market value of our common stock from the beginning of the fiscal year, taking into account distributions reinvested in accordance with the terms of our dividend reinvestment plan. Total return does not take into account distributions that may be characterized as a return of capital. For further information on the estimated character of our distributions to common stockholders, refer to Note 8—Distributions to Common Stockholders.
(F) Computed using the average of the balance of net assets at the end of each month of the reporting period.
(G) Ratio of net expenses to average net assets is computed using total expenses, net of credits from the Adviser, to the base management, loan servicing and incentive fees.
(H) Had we not received any non-contractual, unconditional and irrevocable credits of fees from the Adviser, the ratio of net expenses to average net assets would have been 16.12% and 15.96% for the three and six months ended March 31, 2023, respectively, and 12.56% and 12.78% for the three and six months ended March 31, 2022, respectively.
(I) Had we not received any non-contractual, unconditional and irrevocable credits of fees from the Adviser, the ratio of net investment income to average net assets would have been 8.30% and 8.09% for the three and six months ended March 31, 2023, respectively, and 8.72% and 7.98% for the three and six months ended March 31, 2022, respectively.
NOTE 11. SUBSEQUENT EVENTS
Portfolio Activity
In April 2023, we invested $25.0 million in Technical Resource Management, LLC (“Technical”) through secured first lien debt and equity. We also extended Technical a $3.0 million line of credit commitment and a $2.5 million delayed draw term loan commitment, each of which were unfunded at close.
In April 2023, our debt investment in HH-Inspire Acquisition, Inc. (“Inspire”) was refinanced. Our existing debt investment totaling $35.5 million was repaid at par plus a $0.2 million prepayment fee, and we invested a total of $16.8 million in Inspire through new secured first lien debt and equity. We also extended Inspire a $1.8 million line of credit commitment, which was unfunded at close.
Distributions and Dividends
On April 11, 2023, our Board of Directors declared the following monthly distributions to common stockholders:
| | | | | | | | | | | | | | |
| Record Date | | Payment Date | | Distribution per Common Share |
| April 21, 2023 | | April 28, 2023 | | $ | 0.08 | |
| May 23, 2023 | | May 31, 2023 | | 0.08 | |
| June 21, 2023 | | June 30, 2023 | | 0.08 | |
| | Total for the Quarter: | | $ | 0.24 | |
Director Activity
Terry Lee Brubaker resigned from our Board of Directors, effective April 14, 2023. Mr. Brubaker’s resignation was not a result of any disagreement with the Company on any matter relating to the Company's operations, policies or practices.