GLADSTONE CAPITAL CORPORATION All statements contained herein, other than historical facts, may constitute "forward-looking statements." These statements may relate to, among other things, our future operating results, our business prospects and the prospects of our portfolio companies, actual and potential conflicts of interest withGladstone Management Corporation (the "Adviser"), our investment adviser, and its affiliates, the use of borrowed money to finance our investments, the adequacy of our financing sources and working capital, and our ability to co-invest, among other factors. In some cases, you can identify forward-looking statements by terminology such as "estimate," "may," "might," "believe," "will," "provided," "anticipate," "future," "could," "growth," "plan," "project," "intend," "expect," "should," "would," "if," "seek," "possible," "potential," "likely" or the negative or variations of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include: (1) changes in the economy and the capital markets, including stock price volatility, inflation, rising interest rates and risks of recession; (2) risks associated with negotiation and consummation of pending and future transactions; (3) the loss of one or more of our executive officers, in particularDavid Gladstone ,Terry Lee Brubaker orRobert L. Marcotte ; (4) changes in our investment objectives and strategy; (5) availability, terms (including the possibility of interest rate volatility) and deployment of capital; (6) changes in our industry, interest rates, exchange rates or the general economy; (7) our business prospects and the prospects of our portfolio companies; (8) the degree and nature of our competition; (9) changes in governmental regulation, tax rates and similar matters; (10) our ability to exit investments in a timely manner; (11) our ability to maintain our qualification as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and as a business development company ("BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"); and (12) those factors described herein, including Item 1A. "Risk Factors," and in the "Risk Factors" section of our Annual Report on Form 10-K (our "Annual Report") for the fiscal year endedSeptember 30, 2022 , filed with theU.S. Securities and Exchange Commission ("SEC") onNovember 14, 2022 . We caution readers not to place undue reliance on any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements and future results could differ materially from historical performance. We have based forward-looking statements on information available to us on the date of this report. Except as required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with theSEC from time to time, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements contained in this Quarterly Report on Form 10-Q are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended. The following analysis of our financial condition and results of operations should be read in conjunction with our accompanying Consolidated Financial Statements and the notes thereto contained elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report. Historical financial condition and results of operations and percentage relationships among any amounts in the financial statements are not necessarily indicative of financial condition or results of operations for any future periods. Except per share amounts, dollar amounts in the tables included herein are in thousands unless otherwise indicated.
OVERVIEW
General
We were incorporated under the Maryland General Corporation Law onMay 30, 2001 . We operate as an externally managed, closed-end, non-diversified management investment company, and have elected to be treated as a BDC under the 1940 Act. In addition, for federal income tax purposes we have elected to be treated as a RIC under the Code. To continue to qualify as a RIC for federal income tax purposes and obtain favorable RIC tax treatment, we must meet certain requirements, including certain minimum distribution requirements. 42
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We were established for the purpose of investing in debt and equity securities of established private businesses operating in theU.S. Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established lower middle market businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to 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. To achieve our investment objectives, our investment strategy is to invest in several categories of debt and equity securities, with each investment generally ranging from$8 million to$30 million , although investment size may vary, depending upon our total assets or available capital at the time of investment. We expect that our investment portfolio over time will consist of approximately 90.0% debt investments and 10.0% equity investments, at cost. As ofDecember 31, 2022 , our investment portfolio was made up of approximately 91.1% debt investments and 8.9% equity investments, at cost. We focus on investing in lower middle market companies (which we generally define as companies with annual earnings before interest, taxes, depreciation and amortization of$3 million to$15 million ) in theU.S. that meet certain criteria, including the following: the sustainability of the business' free cash flow and its ability to grow it over time, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the borrower, reasonable capitalization of the borrower, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples and, to a lesser extent, the potential to realize appreciation and gain liquidity in our equity position, if any. We lend to borrowers that need funds for growth capital or to finance acquisitions or recapitalize or refinance their existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises. Our targeted portfolio companies are generally considered too small for the larger capital marketplace. We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity. InJuly 2012 , theSEC granted us an exemptive order (the "Co-Investment Order") that expanded our ability to co-invest, under certain circumstances, with certain of our affiliates, including Gladstone Investment Corporation, a BDC also managed by the Adviser, and any future BDC or closed-end management investment company that is advised (or sub-advised if it controls the fund) by the Adviser, or any combination of the foregoing, subject to the conditions in the Co-Investment Order. Since 2012, we have opportunistically made several co-investments with Gladstone Investment Corporation pursuant to the Co-Investment Order. We believe the Co-Investment Order has enhanced and will continue to enhance our ability to further our investment objectives and strategies. If we are participating in an investment with one or more co-investors, our investment is likely to be smaller than if we were investing alone. We are externally managed by the Adviser, an investment adviser registered with theSEC and an affiliate of ours, pursuant to an investment advisory and management agreement. The Adviser manages our investment activities. We have also entered into an administration agreement withGladstone Administration, LLC (the "Administrator"), an affiliate of ours and the Adviser, whereby we pay separately for administrative services. Additionally,Gladstone Securities, LLC ("Gladstone Securities "), a privately-held broker-dealer registered with theFinancial Industry Regulatory Authority and insured by theSecurities Investor Protection Corporation , which is 100% indirectly owned and controlled byMr. 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 whichGladstone Securities receives a fee.
Business
Portfolio and Investment Activity
In general, our investments in debt securities have a term of no more than seven years, accrue interest at variable rates (generally based on the 30-dayLondon Interbank Offered Rate ("LIBOR") or one-month Term Secured Overnight Financing Rate ("SOFR") and, to a lesser extent, at fixed rates. We seek debt instruments that pay interest monthly or, at a minimum, quarterly, may have a success fee or deferred interest provision and are primarily interest only, with all principal and any accrued but unpaid interest due at maturity. Generally, success fees accrue at a set rate and are contractually due upon a change of control of a portfolio company, typically from an exit or sale. Some debt securities have deferred interest whereby some portion of the interest payment is added to the principal balance so that the interest is paid, together with the principal, at maturity. This form of deferred interest is often called paid-in-kind ("PIK") interest. 43
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Typically, our equity investments consist of common stock, preferred stock, limited liability company interests, or warrants to purchase the foregoing. Often, these equity investments occur in connection with our original investment, recapitalizing a business, or refinancing existing debt.
During the three months endedDecember 31, 2022 , we extended$11.0 million in investments to existing portfolio companies primarily through draws on existing delayed draw term loan and line of credit commitments. In addition, two portfolio companies were sold during the three months endedDecember 31, 2022 . We received a total of$39.2 million in combined net proceeds and principal repayments from the aforementioned portfolio company exits, as well as principal repayments by existing portfolio companies, during the three months endedDecember 31, 2022 . Our overall portfolio decreased by$15.3 million at cost sinceSeptember 30, 2022 and consists of 50 portfolio companies as ofDecember 31, 2022 . From our initial public offering inAugust 2001 throughDecember 31, 2022 , we have made 613 different loans to, or investments in, 268 companies for a total of approximately$2.5 billion , before giving effect to principal repayments on investments and divestitures.
During the three months ended
Proprietary Investments
•In October andNovember 2022 , we received distributions totaling$6.0 million from our investment inLeeds Novamark Capital I, L.P. ("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 a cost basis of$0.0 million and fair value of$0.2 million as ofDecember 31, 2022 .
•In
Syndicated Investments
•InOctober 2022 , our investment inTargus 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$2.4 million in aggregate cost basis of B. Riley Financial, Inc. 6.75% senior notes which are traded on the Nasdaq Global Select Market under the trading symbol RILYO.
Capital Raising
We have been able to meet our capital needs through extensions of and amendments to our line of credit withKeyBank National Association ("KeyBank"), as administrative agent, lead arranger and lender (as amended and/or restated from time to time, our "Credit Facility") and by accessing the capital markets in the form of public equity offerings of common stock and public and private debt offerings. We have successfully extended the Credit Facility's revolving period multiple times, most recently toOctober 2023 , and currently have a total commitment amount of$245.0 million . We sold 1,079,806 shares of our common stock under our at-the-market program during the three months endedDecember 31, 2022 . InNovember 2021 , we completed a private placement of$50.0 million aggregate principal amount of 2027 Notes. InDecember 2020 , we completed a debt offering of$100.0 million aggregate principal amount of our 5.125% Notes due 2026 (the "2026 Notes"). InMarch 2021 , we completed a debt offering of an additional$50.0 million aggregate principal amount of the 2026 Notes. Refer to "Liquidity and Capital Resources - Revolving Line of Credit," "Liquidity and Capital Resources - Equity - Common Stock," and "Liquidity and Capital Resources - Notes Payable" for further discussion. Although we have been able to access the capital markets historically and in recent years, market conditions may affect the trading price of our capital stock and thus may inhibit our ability to finance new investments through the issuance of equity in the future. When our common stock trades below net asset value ("NAV") per common share, our ability to issue equity is constrained by provisions of the 1940 Act, which generally prohibits the issuance and sale of our common stock below NAV per common share without first obtaining approval from our stockholders and our independent directors, other than through sales to our then-existing stockholders pursuant to a rights offering.
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Regulatory Compliance
Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage limitations of the 1940 Act, which require us to have an asset coverage (as defined in Sections 18 and 61 of the 1940 Act) of at least 150% on our "senior securities representing indebtedness" and our "senior securities that are stock." OnApril 10, 2018 , our Board of Directors, including a "required majority" (as such term is defined in Section 57(o) of the 1940 Act) thereof, approved the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, the Company's asset coverage requirements for senior securities changed from 200% to 150%, effectiveApril 10, 2019 .
As of
Recent Developments
Distributions
On
Record Date Payment Date Distribution per Common Share
January 20, 2023 January 31, 2023 $ 0.075
February 17, 2023 February 28, 2023 0.075
March 17, 2023 March 31, 2023 0.075
Total for the Quarter: $ 0.225
LIBOR Transition
In general, our investments in debt securities have a term of five years, accrue
interest at variable rates (based on the one-month LIBOR or SOFR) and, to a
lesser extent, at fixed rates. Most U.S. dollar LIBOR are currently anticipated
to be phased out in June 2023 . LIBOR is currently expected to transition to a
new standard rate, the SOFR, which will
incorporate certain overnight repo market data collected from multiple data
sets. The majority of the new variable rate debt investments that we are making
are based on SOFR and several of our other existing investments have been
transitioned to SOFR. Further, the majority of our outstanding loan agreements
for variable rate debt investments that are still based on one-month LIBOR have
been amended to include LIBOR replacement language should LIBOR cease to exist.
Assuming that SOFR replaces LIBOR, we expect that there should be minimal impact
on our operations. In addition, our Credit Facility has been amended to update
the reference rate from LIBOR to SOFR plus an 11 basis point credit spread
adjustment.
Impact of Inflation
We believe the effects of inflation, if any, on our historical results of operations and financial condition have been immaterial. During the three months endedDecember 31, 2022 , general inflationary pressures and certain commodity price volatility have impacted our portfolio companies to varying degrees; however, the broad based impact of these pricing changes have largely been mitigated by price adjustments without adverse sales implications, and thus, have not materially impacted our portfolio companies' ability to service their indebtedness, including our loans. Notwithstanding the results to date, the cumulative effect of these inflationary pressures may, in the future, impact the profit margins or sales of certain portfolio companies and their ability to service their debts. We continue to monitor the current inflationary environment to anticipate any impact on our portfolio companies, including their availability to pay interest on our loans. We cannot assure you that our results of operations and financial condition or that of our portfolio companies will not be materially impacted by inflation in the future. 45
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RESULTS OF OPERATIONS
Comparison of the Three Months EndedDecember 31, 2022 to the Three Months EndedDecember 31, 2021 Three Months Ended December 31, 2022 2021 $ Change % Change INVESTMENT INCOME Interest income$ 18,367 $ 12,866 $ 5,501 42.8 % Success fee, dividend, and other income 927 3,301 (2,374) (71.9) Total investment income 19,294 16,167 3,127 19.3 EXPENSES Base management fee 2,829 2,520 309 12.3 Loan servicing fee 1,874 1,462 412 28.2 Incentive fee 2,181 2,091 90 4.3 Administration fee 403 379 24 6.3 Interest expense on line of credit and notes payable 4,629 3,007 1,622 53.9 Amortization of deferred financing costs 378 289 89 30.8 Other expenses 585 648 (63) (9.7) Expenses, before credits from Adviser 12,879 10,396 2,483 23.9 Credit to base management fee - loan servicing fee (1,874) (1,462) (412) 28.2 Credits to fees from Adviser - other (436) (1,927) 1,491 (77.4) Total expenses, net of credits 10,569 7,007 3,562 50.8 NET INVESTMENT INCOME 8,725 9,160 (435) (4.7) NET REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on investments 9,319 13,880 (4,561) (32.9) Net realized gain (loss) on other 253 (700) 953 (136.1) Net unrealized appreciation (depreciation) of investments (12,599) (10,237) (2,362) 23.1 Net gain (loss) from investments and other (3,027) 2,943 (5,970) (202.9) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS$ 5,698 $ 12,103 $ (6,405) (52.9) % Investment Income Interest income increased by 42.8% for the three months endedDecember 31, 2022 , as compared to the prior year period. Generally, the level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period multiplied by the weighted-average yield. The weighted average principal balance of our interest-bearing investment portfolio for the three months endedDecember 31, 2022 was$589.6 million , compared to$494.4 million for the three months endedDecember 31, 2021 , an increase of$95.2 million , or 19.3%. The weighted average yield on our interest-bearing investments is based on the current stated interest rate on interest-bearing investments, which increased to 12.3% for the three months endedDecember 31, 2022 , compared to 10.3% for the three months endedDecember 31, 2021 , inclusive of any allowances on interest receivables made during those periods. The increase in the weighted average yield was driven mainly by increases in interest rates. As ofDecember 31, 2022 , loans toEdge Adhesives Holdings, Inc. were on non-accrual status with an aggregate debt cost basis of$6.1 million , or 1.1% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of$2.5 million , or 0.4% of the fair value of all debt investments in our portfolio. As ofSeptember 30, 2022 , there were no loans on non-accrual status. Other income decreased by 71.9% during the three months endedDecember 31, 2022 , as compared to the prior year period, primarily due to decreases in success fees and prepayment fees received, period over period.
As of
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Expenses
Expenses, net of any non-contractual, unconditional and irrevocable credits to fees from the Adviser, increased$3.6 million , or 50.8%, for the three months endedDecember 31, 2022 , as compared to the prior year period. This increase was primarily due to a$1.8 million increase in the net base management fee earned by the Adviser and a$1.6 million increase in interest expense. Total interest expense on borrowings and notes payable increased by$1.6 million , or 53.9%, during the three months endedDecember 31, 2022 , as compared to the prior year period. This increase was driven by increased borrowings outstanding on our Credit Facility, partially offset by a decrease in the effective interest rate on our Credit Facility. The weighted average balance outstanding on our Credit Facility was$129.1 million during the three months endedDecember 31, 2022 , as compared to$33.0 million in the prior year period, an increase of 291.2%. The effective interest rate on our Credit Facility, including unused commitment fees incurred, but excluding the impact of deferred financing costs, was 6.9% during the three months endedDecember 31, 2022 , compared to 7.5% during the prior year period. The decrease in the effective interest rate was driven primarily by a$0.2 million decrease in unused commitment fees during the three months endedDecember 31, 2022 as compared to the prior year period. The net base management fee earned by the Adviser increased by$1.8 million , or 303.5%, for the three months endedDecember 31, 2022 , as compared to the prior year period, resulting from a decrease in credits to the base management fee from the Adviser period over period and an increase in average total assets subject to the base management fee.
The base management, loan servicing and incentive fees, and associated non-contractual, unconditional and irrevocable credits, are computed quarterly, as described under "Transactions with the Adviser" in Note 4-Related Party Transactions of the Notes to Consolidated Financial Statements and are summarized in the following table:
Three Months Ended
December 31,
2022 2021
Average total assets subject to base management fee(A)
$ 576,000 Multiplied by prorated annual base management fee of 1.75% 0.4375 % 0.4375 % Base management fee(B)$ 2,829 $ 2,520 Portfolio company fee credit (404) (1,869) Syndicated loan fee credit (32) (58) Net Base Management Fee$ 2,393 $ 593 Loan servicing fee(B) 1,874 1,462 Credit to base management fee - loan servicing fee(B) (1,874) (1,462) Net Loan Servicing Fee $ - $ - Incentive fee(B) 2,181 2,091 Incentive fee credit - - Net Incentive Fee$ 2,181 $ 2,091 Portfolio company fee credit (404) (1,869) Syndicated loan fee credit (32) (58) Incentive fee credit - - Credits to Fees From Adviser - other(B)$ (436)
(A)Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods. (B)Reflected, on a gross basis, as a line item on our Consolidated Statements of Operations.
Net Realized and Unrealized Gain (Loss)
Net Realized Gain (Loss) on Investments
For the three months ended
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Ltd. in
For the three months endedDecember 31, 2021 , we recorded a net realized gain on investments of$13.9 million , which resulted primarily from a$13.4 million realized gain recognized on the sale of our investment inLignetics, Inc. inNovember 2021 .
Net Unrealized Appreciation (Depreciation) of Investments
During the three months ended
Three Months Ended
Reversal of
Unrealized Unrealized
Realized Gain Appreciation (Appreciation) Net
Portfolio Company (Loss) (Depreciation) Depreciation Gain (Loss)
Encore Dredging Holdings, LLC $ - $ 2,277 $ - $ 2,277
ENET Holdings, LLC - 446 103 549
Circuitronics EMS Holdings LLC (921) - 921 -
Targus Cayman HoldCo, Ltd. 5,916 - (5,916) -
Antenna Research Associates, Inc. - (545) - (545)
Leeds Novamark Capital I, L.P. 4,406 - (5,018) (612)
8th Avenue Food & Provisions, Inc. - (1,022) - (1,022)
Defiance Integrated Technologies, Inc. - (1,076) - (1,076)
Salvo Technologies, Inc. - (1,479) - (1,479)
B+T Group Acquisition Inc. - (1,858) - (1,858)
Other, net (<$500 ) (82) 473 95 486
Total: $ 9,319 $ (2,784) $ (9,815) $ (3,280)
The primary drivers of net unrealized depreciation of $12.6 million for the
three months ended December 31, 2022 was the reversal of unrealized depreciation
associated with the exit of our investment in Targus Cayman HoldCo, Ltd. and the
sale of underlying assets within Leeds Novamark Capital I, L.P as well as the
decrease in comparable transaction multiples used to estimate the fair value of
certain of our other portfolio companies, and the decline in the financial and
operations performance of certain of our other portfolio companies.
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During the three months ended
Three Months Ended December 31, 2021
Reversal of
Unrealized Unrealized
Realized Gain Appreciation (Appreciation) Net
Portfolio Company (Loss) (Depreciation) Depreciation Gain (Loss)
NetFortris Corp. $ - $ 3,905 $ - $ 3,905
ENET Holdings, LLC - 1,050 - 1,050
Imperative Holdings Corporation - 719 - 719
PIC 360, LLC - 488 - 488
AG Transportation Holdings, LLC 468 - - 468
LWO Acquisitions Company LLC - (311) - (311)
Sea Link International IRB, Inc. - (376) - (376)
MCG Energy Solutions, LLC - (542) - (542)
Lignetics, Inc. 13,408 - (14,958) (1,550)
Other, net (<$500 ) 4 38 (250) (208)
Total: $ 13,880 $ 4,971 $ (15,208) $ 3,643
The primary driver of net unrealized depreciation of $10.2 million for the three
months ended December 31, 2021 was the reversal of unrealized depreciation
associated with the exit of our investment in Lignetics, Inc. and the
improvement in the financial and operational performance of NetFortris Corp. and
ENET Holdings, LLC , partially offset by the decline in the financial and
operational performance of certain of our other portfolio companies.
Net Realized Loss on Other
We incurred a loss on extinguishment of debt of $0.8 million during the three
months ended December 31, 2021 , which resulted from the write-off of unamortized
deferred issuance costs at the time of redemption of our $38.8 million aggregate
principal amount of 5.375% Notes due 2024 (the "2024 Notes") in November 2021 .
No such amounts were recorded during the three months ended December 31, 2022 .
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Our cash flows from operating activities are primarily generated from the interest payments on debt securities that we receive from our portfolio companies, as well as net proceeds received through repayments or sales of our investments. We utilize this cash primarily to fund new investments, make interest payments on our Credit Facility, make distributions to our stockholders, pay management and administrative fees to the Adviser and Administrator, and for other operating expenses.
Net cash provided by operating activities for the three months endedDecember 31, 2022 was$34.5 million , as compared to net cash used in operating activities of$5.8 million for the three months endedDecember 31, 2021 . The change was primarily due to a decrease in purchases of investments, partially offset by a decrease in principal repayments, period over period. Purchases of investments were$13.4 million during the three months endedDecember 31, 2022 , compared to$110.8 million during the three months endedDecember 31, 2021 . Repayments and net proceeds from sales were$39.4 million during the three months endedDecember 31, 2022 compared to$96.4 million during the three months endedDecember 31, 2021 . As ofDecember 31, 2022 , we had loans to, syndicated participations in or equity investments in 50 companies, with an aggregate cost basis of approximately$640.8 million . As ofSeptember 30, 2022 , we had loans to, syndicated participations in or equity investments in 52 companies, with an aggregate cost basis of approximately$656.1 million . 49
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The following table summarizes our total portfolio investment activity during
the three months ended
Three Months Ended
December 31,
2022 2021
Beginning investment portfolio, at fair value $ 649,615 $ 557,612
New investments 2,416 106,918
Disbursements to existing portfolio companies 10,963 3,876
Scheduled principal repayments on investments (2,048) (1,881)
Unscheduled principal repayments on investments (23,515) (77,862)
Net proceeds from sale of investments (13,620) (17,056)
Net unrealized appreciation (depreciation) of investments (2,784) 4,971
Reversal of prior period depreciation (appreciation) of investments on realization
(9,815) (15,208)
Net realized gain (loss) on investments 9,319 13,880
Increase in investments due to PIK(A) 1,194 1,079
Net change in premiums, discounts and amortization 14 266
Investment Portfolio, at Fair Value $
621,739
(A)PIK interest is a non-cash source of income and is calculated at the contractual rate stated in a loan agreement and added to the principal balance of a loan.
The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as ofDecember 31, 2022 : Amount For the remaining nine months ending September 30: 2023(A)$ 8,790 For the fiscal years ending September 30: 2024 48,181 2025 81,691 2026 155,294 2027 253,672 Thereafter 36,975 Total contractual repayments$ 584,603 Adjustments to cost basis of debt investments (1,126) Investments in equity securities 57,299 Investments held as of December 31, 2022 at cost:$ 640,776
(A)Includes debt investments with contractual principal amounts totaling
Financing Activities
Net cash used in financing activities for the three months endedDecember 31, 2022 was$30.4 million , which consisted primarily of$33.4 million in net repayments on our Credit Facility and$7.4 million in distributions to our common shareholders, partially offset by$10.7 million in gross proceeds from the issuance of common stock under our equity distribution agreement withJefferies LLC . Net cash provided by financing activities for the three months endedDecember 31, 2021 was$6.4 million , which consisted primarily of$50.0 million in gross proceeds from the issuance of our 2027 Notes, partially offset by$38.8 million used in the redemption of our 2024 Notes. 50
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Table of Contents Distributions to Stockholders Common Stock Distributions To qualify to be taxed as a RIC and thus avoid corporate level federal income tax on the income we distribute to our stockholders, we are required to distribute to our stockholders on an annual basis at least 90.0% of our Investment Company Taxable Income. Additionally, our Credit Facility has a covenant that generally restricts the amount of distributions to stockholders that we can pay out to be no greater than our aggregate net investment income, net capital gains and amounts elected to have been paid during the prior year in accordance with Section 855(a) of the Code. In accordance with these requirements, we paid monthly cash distributions of$0.07 per common share for each month for the three months endedDecember 31, 2022 , and$0.065 per common share for each month for the three months endedDecember 31, 2021 . These distributions totaled an aggregate of$7.4 million and$6.7 million for the three months endedDecember 31, 2022 and 2021, respectively. InJanuary 2023 , our Board of Directors declared a monthly distribution of$0.075 per common share for each of January, February, andMarch 2023 . Our Board of Directors declared these distributions to our stockholders based on our estimates of our Investment Company Taxable Income for the fiscal year endingSeptember 30, 2023 . From inception throughDecember 31, 2022 , we have paid 239 monthly or quarterly consecutive distributions to common stockholders totaling approximately$431.0 million or$22.04 per share.
For the fiscal year ended
The characterization of the common stockholder distributions declared and paid for the fiscal year endingSeptember 30, 2023 will be determined at fiscal year end, based upon our investment company taxable income for the full fiscal year and distributions paid during the full fiscal year. Such a characterization made on a quarterly basis may not be representative of the actual full fiscal year characterization. Dividend Reinvestment Plan Our common stockholders who hold their shares through our transfer agent,Computershare, Inc. ("Computershare"), have the option to participate in a dividend reinvestment plan offered by Computershare, as the plan agent. This is an "opt in" dividend reinvestment plan, meaning that common stockholders may elect to have their cash distributions automatically reinvested in additional shares of our common stock. Common stockholders who do make such election will receive their distributions in cash. Common stockholders who receive distributions in the form of stock will be subject to the same federal, state and local tax consequences as stockholders who elect to receive their distributions in cash. The common stockholder will have an adjusted basis in the additional common shares purchased through the plan equal to the amount of the reinvested distribution. The additional shares will have a new holding period commencing on the day following the date on which the shares are credited to the common stockholder's account. Computershare purchases shares in the open market in connection with the obligations under the plan.
Equity
Registration Statement
Our shelf registration statement permits us to issue, through one or more transactions, up to an aggregate of$300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock, preferred stock or debt securities. As ofDecember 31, 2022 , we had the ability to issue up to$284.7 million in securities under the registration statement. Common Stock We anticipate issuing equity securities to obtain additional capital in the future. However, we cannot determine the timing or terms of any future equity issuances or whether we will be able to issue equity on terms favorable to us, or at all. To the extent that our common stock trades at a market price below our NAV per share, we will generally be precluded from raising equity capital through public offerings of our common stock, other than pursuant to stockholder and independent director approval or a rights offering to existing common stockholders.
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Revolving Credit Facility
OnMay 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 toOctober 31, 2023 , (iii) extend the maturity date toOctober 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 ofOctober 31, 2023 . OnSeptember 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. OnSeptember 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. OnOctober 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. Interest is payable monthly during the term of our Credit Facility. Available borrowings are subject to various constraints imposed under our Credit Facility, based on the aggregate loan balance pledged by Business Loan, which varies as loans are added and repaid, regardless of whether such repayments are prepayments or made as contractually required. Our Credit Facility also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account withKeyBank and withThe Bank of New York Mellon Trust Company, N.A. as custodian.KeyBank , which also serves as the trustee of the account, generally remits the collected funds to us once a month. Our Credit Facility also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account withKeyBank .KeyBank is also the trustee of the account and generally remits the collected funds to us once each month. Amounts collected in the lockbox account withKeyBank are presented as Due from administrative agent on the accompanying Consolidated Statement of Assets and Liabilities as ofDecember 31, 2022 andSeptember 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 afterMay 13, 2021 less 50% of any equity and subordinated debt retired or redeemed afterMay 13, 2021 , which equates to$342.1 million as ofDecember 31, 2022 , (ii) asset coverage with respect to "senior securities representing indebtedness" of at least 150% (or such percentage as may be set forth in Section 18 of the 1940 Act, as modified by Section 61 of the 1940 Act), and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code. As ofDecember 31, 2022 , and as defined in our Credit Facility, we had a net worth of$521.3 million , asset coverage on our "senior securities representing indebtedness" of 202.8%, 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 32 obligors in our Credit Facility's borrowing base as ofDecember 31, 2022 . As ofDecember 31, 2022 , we were in compliance with all of our Credit Facility covenants. Refer to Note 5-Borrowings of the notes to our Consolidated Financial Statements included elsewhere in this Quarterly Report for additional information regarding our Credit Facility. 52
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Notes Payable
InNovember 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 onMay 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 onMay 1 andNovember 1 of each year (which equates to approximately$1.9 million per year). InApril 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 onNovember 4, 2021 , for an equal aggregate principal amount of our new 3.75% Notes due 2027 (the "Exchange Notes") that had been registered with theSEC 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. InDecember 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. InMarch 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 onJanuary 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 onJanuary 31 andJuly 31 of each year (which equates to approximately$7.7 million per year). InOctober 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. OnNovember 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 onNovember 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.
Off-Balance Sheet Arrangements
We generally recognize success fee income when the payment has been received. As ofDecember 31, 2022 andSeptember 30, 2022 , we had off-balance sheet success fee receivables on our accruing debt investments of$4.0 million and$4.7 million (or approximately$0.11 per common share and$0.13 per common share), respectively, that would be owed to us, generally upon a change of control of the portfolio companies. Consistent with GAAP, we generally have not recognized our success fee receivables and related income in our Consolidated Financial Statements until earned. Due to the contingent nature of our success fees, there are no guarantees that we will be able to collect all of these success fees or know the timing of such collections.
Contractual Obligations
We have lines of credit, delayed draw term loans, and an uncalled capital
commitment with certain of our portfolio companies that have not been fully
drawn. Since these commitments have expiration dates and we expect many will
never be fully drawn, the total commitment amounts do not necessarily represent
future cash requirements. We estimate the fair
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value of the combined unused lines of credit, the unused delayed draw term
loans, and the uncalled capital commitment as of
The following table shows our contractual obligations as ofDecember 31, 2022 , at cost: Payments Due by Period Less than More than 5 Contractual Obligations(A) 1 Year 1-3 Years 3-5 Years Years Total Credit Facility(B) $ -$ 108,400 $ - $ -$ 108,400 Notes Payable - - 200,000 - 200,000 Interest expense on debt obligations(C) 18,551 35,604 3,141 - 57,296 Total$ 18,551 $ 144,004 $ 203,141 $ -$ 365,696 (A)Excludes our unused line of credit commitments, unused delayed draw term loans, and uncalled capital commitments to our portfolio companies in an aggregate amount of$67.3 million , at cost, as ofDecember 31, 2022 . (B)Principal balance of borrowings outstanding under our Credit Facility, based on the maturity date following the current contractual revolver period end date. (C)Includes estimated interest payments on our Credit Facility, 2027 Notes, and 2026 Notes. The amount of interest expense calculated for purposes of this table was based upon rates and balances as ofDecember 31, 2022 .
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported consolidated amounts of assets and liabilities, including disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ materially from those estimates under different assumptions or conditions. We have identified our investment valuation policy (which has been approved by our Board of Directors) as our most critical accounting policy, which is described in Note 2- Summary of Significant Accounting Policies in the accompanying notes to our Consolidated Financial Statements included elsewhere in this Quarterly Report. Additionally, refer to Note 3-Investments in our accompanying Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report for additional information regarding fair value measurements and our application of Financial Accounting Standards Board Accounting Standards Codification Topic 820, "Fair Value Measurements and Disclosures." We have also identified our revenue recognition policy as a critical accounting policy, which is described in Note 2- Summary of Significant Accounting Policies in our accompanying Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report.
Investment Valuation
Credit Monitoring and Risk Rating
The Adviser monitors a wide variety of key credit statistics that provide information regarding our portfolio companies to help us assess credit quality and portfolio performance and, in some instances, used as inputs in our valuation techniques. Generally, we, through the Adviser, participate in periodic board meetings of our portfolio companies in which we hold board seats and also require them to provide annual audited and monthly unaudited financial statements. Using these statements or comparable information and board discussions, the Adviser calculates and evaluates certain credit statistics. The Adviser risk rates all of our investments in debt securities. The Adviser does not risk rate our equity securities. For syndicated loans that have been rated by anSEC registeredNationally Recognized Statistical Rating Organization ("NRSRO"), the Adviser generally uses the average of two corporate level NRSRO's risk ratings for such security. For all other debt securities, the Adviser uses a proprietary risk rating system. While the Adviser seeks to mirror the NRSRO systems, we cannot provide any assurance that the Adviser's risk rating system will provide the same risk rating as an NRSRO would for these securities. The Adviser's risk rating system is used to estimate the probability of default on debt securities and the expected loss if there is a default. The Adviser's risk rating system uses a scale of 0 to >10, with >10 being the lowest probability of default. It is the Adviser's understanding that most debt securities of medium-sized companies do not exceed the grade of BBB on an NRSRO scale, so there would be no debt securities in the middle market that would meet the definition ofAAA , AA or A. Therefore, the Adviser's scale begins with the designation >10 as the best risk rating which may be equivalent to a BBB from an NRSRO; however, no assurance can be given that a >10 on the Adviser's scale is equal to a BBB or Baa2 on an NRSRO scale. The Adviser's risk rating system covers both qualitative and quantitative aspects of the business and the securities we hold. 54
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The following table reflects risk ratings for all proprietary loans in our
portfolio as of
As of As of
December 31, September 30,
Rating 2022 2022
Highest 10.0 10.0
Average 7.2 7.1
Weighted Average 7.8 7.6
Lowest 1.0 1.0
The following table reflects the risk ratings for all syndicated loans in our
portfolio that were rated by an NRSRO as of December 31, 2022 and September 30,
2022 , representing approximately 1.6% and 1.6%, respectively, of the principal
balance of all debt investments in our portfolio at the end of each period:
As of As of
December 31, September 30,
Rating 2022 2022
Highest 5.0 4.0
Average 3.6 3.4
Weighted Average 4.1 3.6
Lowest 3.0 3.0
The following table reflects the risk ratings for all syndicated loans in our
portfolio that were not rated by an NRSRO as of December 31, 2022 and
September 30, 2022 , representing approximately 0.5% and 0.5%, respectively, of
the principal balance of all debt investments in our portfolio at the end of
each period:
As of As of
December 31, September 30,
Rating 2022 2022
Highest 5.0 5.0
Average 5.0 5.0
Weighted Average 5.0 5.0
Lowest 5.0 5.0
Tax Status
We intend to continue to maintain our qualification as a RIC under Subchapter M
of the Code for federal income tax purposes. As a RIC, we generally are not
subject to federal income tax on the portion of our taxable income and gains
distributed to our stockholders. To maintain our qualification as a RIC, we must
maintain our status as a BDC and meet certain source-of-income and asset
diversification requirements. In addition, in order to qualify to be taxed as a
RIC, we must distribute to stockholders at least 90% of our Investment Company
Taxable Income, determined without regard to the dividends paid deduction. Our
policy generally is to make distributions to our stockholders in an amount up to
100% of our Investment Company Taxable Income. We may retain some or all of our
net long-term capital gains, if any, and designate them as deemed distributions,
or distribute such gains to stockholders in cash.
To avoid a 4% federal excise tax on undistributed amounts of income, we must
distribute to stockholders, during each calendar year, an amount at least equal
to the sum of: (1) 98% of our ordinary income for the calendar year, (2) 98.2%
of our capital gain net income (both long-term and short-term) for the one-year
period ending on October 31 of the calendar year, and (3) any income realized,
but not distributed, in the preceding year (to the extent that income tax was
not imposed on such amounts) less certain over-distributions in prior years.
Under the RIC Modernization Act, we are permitted to carryforward any capital
losses that we may incur for an unlimited period, and such capital loss
carryforwards will retain their character as either short-term or long-term
capital losses.
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Recent Accounting Pronouncements
Refer to Note 2-Summary of Significant Accounting Policies in the notes to our accompanying Consolidated Financial Statements included elsewhere in this Quarterly Report for a description of recent accounting pronouncements, if any.
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