UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Form 10-Q

 

 

 

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Quarterly Period Ended August 31, 2021

 

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File No. 814-00732

 

 

 

SARATOGA INVESTMENT CORP.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   20-8700615
(State or other jurisdiction of
incorporation or organization)
 

(I.R.S. Employer

Identification Number)

 

535 Madison Avenue

New York, New York 10022

(Address of principal executive offices)

 

(212) 906-7800

(Registrant’s telephone number, including area code)

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.001 per share   SAR   The New York Stock Exchange
7.25% Notes due 2025   SAK   The New York Stock Exchange

 

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

The number of outstanding common shares of the registrant as of October 5, 2021 was 11,364,831.

 

 

 

 

 

 

TABLE OF CONTENTS

 

      Page
       
PART I. FINANCIAL INFORMATION   1
       
Item 1. Consolidated Financial Statements   1
       
  Consolidated Statements of Assets and Liabilities as of August 31, 2021 (unaudited) and February 28, 2021   1
       
  Consolidated Statements of Operations for the three and six months ended August 31, 2021 (unaudited) and August 31, 2020 (unaudited)   2
       
  Consolidated Statements of Changes in Net Assets for three and six months ended August 31, 2021 (unaudited) and August 31, 2020 (unaudited)   3
       
  Consolidated Statements of Cash Flows for the six months ended August 31, 2021 (unaudited) and August 31, 2020 (unaudited)   4
       
  Consolidated Schedules of Investments as of August 31, 2021 (unaudited) and February 28, 2021   5
       
  Notes to Consolidated Financial Statements as of August 31, 2021 (unaudited)   19
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   83
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk   117
       
Item 4. Controls and Procedures   118
       
PART II. OTHER INFORMATION   119
       
Item 1. Legal Proceedings   119
       
Item 1A. Risk Factors   119
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   120
       
Item 3. Defaults Upon Senior Securities   120
       
Item 4. Mine Safety Disclosures   120
       
Item 5. Other Information   120
       
Item 6. Exhibits   121
     
Signatures   124

 

i

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

 

Saratoga Investment Corp.

Consolidated Statements of Assets and Liabilities

(unaudited)

 

   August 31,
2021
   February 28,
2021
 
   (unaudited)     
ASSETS        
Investments at fair value*        
Non-control/Non-affiliate investments (amortized cost of $525,118,034 and $478,588,197, respectively)  $531,442,136   $476,139,943 
Affiliate investments (amortized cost of $48,669,364 and $10,071,722, respectively)   56,449,385    13,174,291 
Control investments (amortized cost of $67,821,806 and $61,353,761, respectively)   78,205,835    64,998,481 
Total investments at fair value (amortized cost of $641,609,204 and $550,013,680, respectively)   666,097,356    554,312,715 
Cash and cash equivalents   60,268,602    18,828,047 
Cash and cash equivalents, reserve accounts   13,040,805    11,087,027 
Interest receivable (net of reserve of $0 and $1,152,086, respectively)   5,114,727    4,223,630 
Due from affiliate (See Note 6)   -    2,719,000 
Management fee receivable   364,374    34,644 
Other assets   926,156    947,315 
Total assets  $745,812,020   $592,152,378 
           
LIABILITIES          
Revolving credit facility  $-   $- 
Deferred debt financing costs, revolving credit facility   (782,102)   (639,983)
SBA debentures payable   172,000,000    158,000,000 
Deferred debt financing costs, SBA debentures payable   (3,632,458)   (2,642,622)
6.25% Notes Payable 2025   -    60,000,000 
Deferred debt financing costs, 6.25% notes payable 2025   -    (1,675,064)
7.25% Notes Payable 2025   43,125,000    43,125,000 
Deferred debt financing costs, 7.25% notes payable 2025   (1,238,426)   (1,401,307)
7.75% Notes Payable 2025   5,000,000    5,000,000 
Deferred debt financing costs, 7.75% notes payable 2025   (211,573)   (239,222)
4.375% Notes Payable 2026   175,000,000    - 
Premium on 4.375% notes payable 2026   1,229,376    - 
Deferred debt financing costs, 4.375% notes payable 2026   (3,813,346)   - 
6.25% Notes Payable 2027   15,000,000    15,000,000 
Deferred debt financing costs, 6.25% notes payable 2027   (451,613)   (476,820)
Base management and incentive fees payable   11,424,984    6,556,674 
Deferred tax liability   3,512,481    1,922,664 
Accounts payable and accrued expenses   2,760,847    1,750,267 
Interest and debt fees payable   2,468,265    2,645,784 
Directors fees payable   -    70,500 
Due to manager   308,740    279,065 
Excise tax payable   -    691,672 
Total liabilities   421,700,175    287,966,608 
           
Commitments and contingencies (See Note 8)          
           
NET ASSETS          
Common stock, par value $0.001, 100,000,000 common shares          
authorized, 11,188,912 and 11,161,416 common shares issued and outstanding, respectively   11,189    11,161 
Capital in excess of par value   305,520,631    304,874,957 
Total distributable earnings (deficit)   18,580,025    (700,348)
Total net assets   324,111,845    304,185,770 
Total liabilities and net assets  $745,812,020   $592,152,378 
NET ASSET VALUE PER SHARE  $28.97   $27.25 

  

*

 Certain prior period amounts have been reclassified to conform to current period presentation.

 

See accompanying notes to consolidated financial statements.

 

1

 

 

Saratoga Investment Corp.

Consolidated Statements of Operations

(unaudited)

 

   For the three months ended   For the six months ended 
   August 31,
2021
   August 31,
2020
   August 31,
2021
   August 31,
2020
 
INVESTMENT INCOME                
Interest from investments                
Interest income:*                
Non-control/Non-affiliate investments  $11,298,024   $10,375,636   $22,534,761   $20,499,197 
Affiliate investments   936,508    220,136    1,277,020    450,507 
Control investments   2,059,101    1,249,971    3,914,086    2,383,556 
Payment-in-kind interest income:                    
Non-control/Non-affiliate investments   710,329    328,938    887,095    910,884 
Affiliate investments   -    48,018    -    94,241 
Control investments   109,971    37,771    187,646    72,553 
Total interest from investments   15,113,933    12,260,470    28,800,608    24,410,938 
Interest from cash and cash equivalents   1,071    1,610    1,593    13,406 
Management fee income   814,622    625,436    1,632,854    1,260,008 
Dividend Income   658,881    -    1,057,498    - 
Structuring and advisory fee income   1,038,250    940,000    2,340,125    1,253,306 
Other income   814,926    28,060    1,424,995    215,060 
Total investment income   18,441,683    13,855,576    35,257,673    27,152,718 
                     
OPERATING EXPENSES                    
Interest and debt financing expenses   5,184,184    3,328,447    9,525,096    5,892,323 
Base management fees   3,002,097    2,209,052    5,761,005    4,369,580 
Incentive management fees expense (benefit)   2,018,163    1,529,677    7,280,699    (328,633)
Professional fees   460,753    367,553    967,814    754,441 
Administrator expenses   712,500    602,083    1,406,250    1,158,333 
Insurance   86,318    67,727    172,636    135,453 
Directors fees and expenses   100,500    75,000    192,500    135,000 
General & administrative   453,225    333,824    943,876    684,638 
Income tax expense (benefit)   30,682    7,501    58,601    (1,444)
Total operating expenses   12,048,422    8,520,864    26,308,477    12,799,691 
NET INVESTMENT INCOME   6,393,261    5,334,712    8,949,196    14,353,027 
                     
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS                    
Net realized gain (loss) from investments:                    
Non-control/Non-affiliate investments   1,641,462    11,929    3,551,605    20,409 
Control investments   (139,867)   -    (139,867)   - 
Net realized gain (loss) from investments   1,501,595    11,929    3,411,738    20,409 
Income tax (provision) benefit from realized gain on investments   (448,883)   -    (448,883)   - 
Net change in unrealized appreciation (depreciation) on investments:*                    
Non-control/Non-affiliate investments   2,256,932    10,532,000    8,772,357    (14,212,906)
Affiliate investments   2,681,640    706,760    4,677,451    (1,415,479)
Control investments   (1,562,033)   5,341,641    6,739,309    258,417 
Net change in unrealized appreciation (depreciation) on investments   3,376,539    16,580,401    20,189,117    (15,369,968)
Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments   (1,328,711)   (116,521)   (1,558,855)   151,219 
Net realized and unrealized gain (loss) on investments   3,100,540    16,475,809    21,593,117    (15,198,340)
Realized losses on extinguishment of debt   (1,552,140)   -    (1,552,140)   - 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS  $7,941,661   $21,810,521   $28,990,173   $(845,313)
                     
WEIGHTED AVERAGE - BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE  $0.71   $1.95   $2.59   $(0.08)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED   11,175,436    11,207,142    11,172,787    11,212,315 

 

*Certain prior period amounts have been reclassified to conform to current period presentation.

 

See accompanying notes to consolidated financial statements.

 

2

 

 

Saratoga Investment Corp.

Consolidated Statements of Changes in Net Assets

(unaudited)

 

   For the six months ended 
   August 31,
2021
   August 31,
2020
 
INCREASE (DECREASE) FROM OPERATIONS:        
Net investment income  $8,949,196   $14,353,027 
Net realized gain from investments   3,411,738    20,409 
Realized losses on extinguishment of debt   (1,552,140)   - 
Income tax (provision) benefit from realized gain on investments   (448,883)   - 
Net change in unrealized appreciation (depreciation) on investments   20,189,117    (15,369,968)
Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments   (1,558,855)   151,219 
Net increase (decrease) in net assets resulting from operations   28,990,173    (845,313)
           
DECREASE FROM SHAREHOLDER DISTRIBUTIONS:          
Total distributions to shareholders   (9,709,800)   (4,487,015)
Net decrease in net assets from shareholder distributions   (9,709,800)   (4,487,015)
           
CAPITAL SHARE TRANSACTIONS:          
Proceeds from issuance of common stock   157,040    - 
Stock dividend distribution   1,742,614    774,990 
Repurchases of common stock   (1,252,143)   (1,550,417)
Repurchase fees   (992)   (1,740)
Offering costs   (817)   - 
Net increase in net assets from capital share transactions   645,702    (777,167)
Total increase (decrease) in net assets   19,926,075    (6,109,495)
Net assets at beginning of period   304,185,770    304,286,853 
Net assets at end of period  $324,111,845   $298,177,358 

 

See accompanying notes to consolidated financial statements.

 

3

 

 

Saratoga Investment Corp.

Consolidated Statements of Cash Flows

(unaudited)

 

   For the six months ended 
   August 31,
2021
   August 31,
2020
 
Operating activities        
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS  $28,990,173   $(845,313)
ADJUSTMENTS TO RECONCILE NET INCREASE (DECREASE) IN NET ASSETS RESULTING          
FROM OPERATIONS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:          
Payment-in-kind and other adjustments to cost   (1,905,423)   846,330 
Net accretion of discount on investments   (884,936)   (605,955)
Amortization of deferred debt financing costs   1,023,062    622,164 
Realized losses on extinguishment of debt   1,552,140    - 
Income tax expense (benefit)   30,964    (1,444)
Net realized (gain) loss from investments   (3,411,738)   (20,409)
Net change in unrealized (appreciation) depreciation on investments   (20,189,117)   15,369,968 
Net change in provision for deferred taxes on unrealized appreciation (depreciation) on investments   1,558,855    (151,219)
Proceeds from sales and repayments of investments   149,787,188    32,632,779 
Purchases of investments   (235,180,617)   (70,707,731)
(Increase) decrease in operating assets:          
Interest receivable   (891,097)   413,938 
Due from affiliate   2,719,000    - 
Management and incentive fee receivable   (329,730)   (11,915)
Other assets   (60,140)   61,775 
Increase (decrease) in operating liabilities:          
Base management and incentive fees payable   4,868,310    (12,061,368)
Accounts payable and accrued expenses   1,010,580    103,461 
Interest and debt fees payable   (177,519)   53,271 
Directors fees payable   (70,500)   (2,000)
Excise tax payable   (691,672)   - 
Due to manager   29,675    (247,861)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES   (72,222,542)   (34,551,529)
           
Financing activities          
Borrowings on debt   87,500,000    20,000,000 
Paydowns on debt   (73,500,000)   - 
Issuance of notes   175,000,000    48,125,000 
Repayments of notes   (60,000,000)   - 
Payments of deferred debt financing costs   (5,569,027)   (2,364,458)
Premium on  debt issuance, 4.375% notes 2026   1,250,000    - 
Proceeds from issuance of common stock   157,040    -
Payments of cash dividends   (7,967,186)   (3,712,025)
Repurchases of common stock   (1,252,143)   (1,550,417)
Repurchases fees   (992)   (1,740)
Payments of offering costs   (817)   - 
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES   115,616,875    60,496,360 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND CASH AND CASH EQUIVALENTS, RESERVE ACCOUNTS   43,394,333    25,944,831 
CASH AND CASH EQUIVALENTS AND CASH AND CASH EQUIVALENTS, RESERVE ACCOUNTS, BEGINNING OF PERIOD   29,915,074    39,450,352 
CASH AND CASH EQUIVALENTS AND CASH AND CASH EQUIVALENTS, RESERVE ACCOUNTS, END OF PERIOD  $73,309,407   $65,395,183 
           
Supplemental information:          
Interest paid during the period  $8,679,552   $5,216,888 
Cash paid for taxes   703,158    13,830 
Supplemental non-cash information:          
Payment-in-kind interest income and other adjustments to cost   1,905,423    (846,330)
Net accretion of discount on investments   884,936    605,955 
Amortization of deferred debt financing costs   1,023,062    622,164 
Stock dividend distribution   1,742,614    774,990 

 

See accompanying notes to consolidated financial statements.

 

4

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

August 31, 2021

(unaudited)

 

Company  Industry  Investment Interest Rate/
Maturity
  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
Non-control/Non-affiliate investments - 163.5% (b)                         
Targus Holdings, Inc. (d), (h)  Consumer Products  Common Stock  12/31/2009   210,456   $1,589,630   $531,247    0.2%
      Total Consumer Products           1,589,630    531,247    0.2%
Schoox, Inc. (h), (i)  Corporate Education Software  Series 1 Membership Interest  12/8/2020   226,782    475,698    3,258,360    1.0%
      Total Corporate Education Software           475,698    3,258,360    1.0%
New England Dental Partners  Dental Practice Management  First Lien Term Loan
(3M USD LIBOR+8.00%), 8.50% Cash, 11/25/2025
  11/25/2020  $6,555,000    6,497,689    6,630,383    2.0%
New England Dental Partners (j)  Dental Practice Management  Delayed Draw Term Loan
(3M USD LIBOR+8.00%), 8.50% Cash, 11/25/2025
  11/25/2020  $2,150,000    2,130,984    2,174,725    0.7%
      Total Dental Practice Management           8,628,673    8,805,108    2.7%
PDDS Buyer, LLC  Dental Practice Management Software  First Lien Term Loan
(3M USD LIBOR+7.00%), 9.50% Cash, 7/15/2024
  7/15/2019  $14,000,000    13,910,371    14,140,000    4.4%
PDDS Buyer, LLC  Dental Practice Management Software  Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 9.50% Cash, 7/15/2024
  7/15/2019  $7,000,000    6,947,336    7,070,000    2.2%
PDDS Buyer, LLC (h)  Dental Practice Management Software  Series A-1 Preferred Shares  8/10/2020   1,755,831    2,000,000    2,567,171    0.8%
      Total Dental Practice Management Software           22,857,707    23,777,171    7.4%
C2 Educational Systems (d)  Education Services  First Lien Term Loan
(3M USD LIBOR+8.50%), 10.00% Cash, 5/31/2023
  5/31/2017  $18,500,000    18,475,029    16,141,250    5.0%
C2 Education Systems, Inc. (h)  Education Services  Series A-1 Preferred Stock  5/18/2021   3,127    499,904    508,955    0.2%
Texas Teachers of Tomorrow, LLC (h), (i)  Education Services  Common Stock  12/2/2015   750    750,000    3,334,832    1.0%
Texas Teachers of Tomorrow, LLC (d)  Education Services  First Lien Term Loan
(3M USD LIBOR+7.25%), 9.75% Cash, 6/28/2024
  6/28/2019  $25,695,971    25,523,797    25,988,906    8.0%
Zollege PBC  Education Services  First Lien Term Loan
(3M USD LIBOR+5.50%), 6.50% Cash, 5/11/2026
  5/11/2021  $16,000,000    15,864,040    15,840,000    4.9%
Zollege PBC (j)  Education Services  Delayed Draw Term Loan
(3M USD LIBOR+5.50%), 6.50% Cash, 5/11/2026
  5/11/2021  $-    -    -    0.0%
Zollege PBC (h)  Education Services  Class A Units  5/11/2021   250,000    250,000    250,000    0.1%
      Total Education Services           61,362,770    62,063,943    19.2%

 

5

 

 

Company  Industry  Investment Interest Rate/
Maturity
  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
Destiny Solutions Inc. (h), (i)  Education Software  Limited Partner Interests  5/16/2018   3,064    3,969,291    6,217,585    1.9%
Identity Automation Systems (d)  Education Software  First Lien Term Loan
(3M USD LIBOR+9.24%), 10.99% Cash, 5/8/2024
  8/25/2014  $17,160,000    17,160,000    17,160,000    5.3%
Identity Automation Systems (h)  Education Software  Common Stock Class A-2 Units  8/25/2014   232,616    232,616    747,032    0.2%
Identity Automation Systems (h)  Education Software  Common Stock Class A-1 Units  3/6/2020   43,715    171,571    193,081    0.1%
GoReact  Education Software  First Lien Term Loan
(3M USD LIBOR+7.50%), 9.50% Cash, 1/17/2025
  1/17/2020  $5,000,000    4,946,581    5,000,000    1.5%
GoReact  Education Software  Delayed Draw Term Loan
(3M USD LIBOR+7.50%), 9.50% Cash, 1/17/2025
  1/17/2020  $2,000,000    2,000,000    2,000,000    0.6%
        Total Education Software           28,480,059    31,317,698    9.6%
Top Gun Pressure Washing, LLC  Facilities Maintenance  First Lien Term Loan
(3M USD LIBOR+7.00%), 9.50% Cash, 12/31/2025
  8/12/2019  $5,000,000    4,964,713    4,956,500    1.5%
Top Gun Pressure Washing, LLC (j)  Facilities Maintenance  Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 9.50% Cash, 12/31/2025
  8/12/2019  $5,500,000    5,450,772    5,452,150    1.8%
TG Pressure Washing Holdings, LLC (f), (h)  Facilities Maintenance  Preferred Equity  8/12/2019   488,148    488,148    307,180    0.1%
        Total Facilities Maintenance           10,903,633    10,715,830    3.4%
Davisware, LLC  Field Service Management  First Lien Term Loan
(3M USD LIBOR+7.00%), 9.00% Cash, 7/31/2024
  9/6/2019  $3,000,000    2,980,638    3,033,900    0.9%
Davisware, LLC  Field Service Management  Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 9.00% Cash, 7/31/2024
  9/6/2019  $977,790    975,088    988,839    0.3%
      Total Field Service Management           3,955,726    4,022,739    1.2%
GDS Software Holdings, LLC  (h)  Financial Services  Common Stock Class A Units  8/23/2018   250,000    250,000    470,147    0.1%
      Total Financial Services           250,000    470,147    0.1%
Ohio Medical, LLC (h)  Healthcare Products Manufacturing  Common Stock  1/15/2016   5,000    380,353    624,713    0.2%
      Total Healthcare Products Manufacturing           380,353    624,713    0.2%
Axiom Parent Holdings, LLC (h)  Healthcare Services  Common Stock Class A Units  6/19/2018   400,000    400,000    903,096    0.3%
Axiom Purchaser, Inc. (d)  Healthcare Services  First Lien Term Loan
(3M USD LIBOR+6.00%), 7.75% Cash, 6/19/2023
  6/19/2018  $10,000,000    9,963,054    10,059,000    3.1%
Axiom Purchaser, Inc. (d)  Healthcare Services  Delayed Draw Term Loan
(3M USD LIBOR+6.00%), 7.75% Cash, 6/19/2023
  6/19/2018  $6,000,000    5,968,772    6,035,400    1.9%
ComForCare Health Care (d)  Healthcare Services  First Lien Term Loan
(3M USD LIBOR+7.75%), 8.75% Cash, 1/31/2025
  1/31/2017  $25,000,000    24,878,938    25,000,000    7.7%
        Total Healthcare Services           41,210,764    41,997,496    13.0%

 

6

 

  

Company  Industry  Investment Interest Rate/
Maturity
  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
TRC HemaTerra, LLC (h)  Healthcare Software  Class D Membership Interests  4/15/2019   2,241    2,310,929    2,875,793    0.9%
HemaTerra Holding Company, LLC  Healthcare Software  First Lien Term Loan
(3M USD LIBOR+6.75%), 8.25% Cash, 1/31/2026
  4/15/2019  $36,000,000    35,669,821    35,899,200    11.1%
HemaTerra Holding Company, LLC (d), (j)  Healthcare Software  Delayed Draw Term Loan
(3M USD LIBOR+6.75%), 8.25% Cash, 1/31/2026
  4/15/2019  $12,000,000    11,922,307    11,966,400    3.7%
Procurement Partners, LLC  Healthcare Software  First Lien Term Loan
(3M USD LIBOR+6.50%), 7.50% Cash, 11/12/2025
  11/12/2020  $23,125,000    22,909,487    22,974,688    7.1%
Procurement Partners, LLC (j)  Healthcare Software  Delayed Draw Term Loan
(3M USD LIBOR+6.50%), 7.50% Cash, 11/12/2025
  11/12/2020  $-    -    -    0.0%
Procurement Partners Holdings LLC (h)  Healthcare Software  Class A Units    11/12/2020   381,456    381,456    433,543    0.1%
      Total Healthcare Software           73,194,000    74,149,624    22.9%
Roscoe Medical, Inc. (d), (h)  Healthcare Supply  Common Stock  3/26/2014   5,081    508,077    209,500    0.1%
Roscoe Medical, Inc.  Healthcare Supply  Second Lien Term Loan
11.25% Cash, 3/31/2022
  3/26/2014  $5,141,413    5,141,413    5,205,680    1.6%
        Total Healthcare Supply           5,649,490    5,415,180    1.7%
Book4Time, Inc. (a)  Hospitality/Hotel  First Lien Term Loan
(3M USD LIBOR+8.50%), 10.25%, 12/22/2025
  12/22/2020  $3,136,517    3,108,872    3,137,144    1.0%
Book4Time, Inc. (a), (j)  Hospitality/Hotel  Delayed Draw Term Loan
(3M USD LIBOR+8.50%), 10.25%, 12/22/2025
  12/22/2020  $-    -    -    0.0%
Book4Time, Inc. (a), (h), (i)  Hospitality/Hotel  Class A Preferred Shares  12/22/2020  $200,000    156,826    211,273    0.1%
Knowland Group, LLC  Hospitality/Hotel  Second Lien Term Loan
(3M USD LIBOR+8.00%), 10.00% Cash/1.00% PIK, 5/9/2024
  11/9/2018  $15,798,140    15,798,140    10,837,346    3.3%
Sceptre Hospitality Resources, LLC  Hospitality/Hotel  First Lien Term Loan
(1M USD LIBOR+9.00%), 10.00% Cash, 4/27/2025
  4/27/2020  $3,000,000    2,976,412    2,985,000    0.9%
        Total Hospitality/Hotel           22,040,250    17,170,763    5.3%

 

7

 

 

Company  Industry  Investment Interest Rate/
Maturity
  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
Granite Comfort, LP  HVAC Services and Sales  First Lien Term Loan
(1M USD LIBOR+9.00%), 10.00% Cash, 11/16/2025
  11/16/2020  $20,000,000    19,819,474    19,952,000    6.2%
Granite Comfort, LP (j)  HVAC Services and Sales  Delayed Draw Term Loan
(1M USD LIBOR+9.00%), 10.00% Cash, 11/16/2025
  11/16/2020  $-    -    -    0.0%
      Total HVAC Services and Sales           19,819,474    19,952,000    6.2%
Vector Controls Holding Co., LLC (d)  Industrial Products  First Lien Term Loan
(3M USD LIBOR+6.50%), 8.00% Cash, 3/6/2025
  3/6/2013  $5,596,946    5,596,946    5,596,946    1.7%
Vector Controls Holding Co., LLC (d), (h)  Industrial Products  Warrants to Purchase Limited Liability Company Interests, Expires 11/30/2027  5/31/2015   343    -    2,273,252    0.7%
        Total Industrial Products           5,596,946    7,870,198    2.4%
LogicMonitor, Inc.  IT Services  First Lien Term Loan
(3M USD LIBOR+5.00), 6.00% Cash, 5/17/2023
  3/20/2020  $33,000,000    32,826,640    33,000,000    10.2%
         Total IT Services           32,826,640    33,000,000    10.2%
inMotionNow, Inc.  Marketing Services  First Lien Term Loan
(3M USD LIBOR+7.50), 10.00% Cash, 5/15/2024
  5/15/2019  $12,200,000    12,129,007    12,385,440    3.8%
inMotionNow, Inc.  Marketing Services  Delayed Draw Term Loan
(3M USD LIBOR+7.50)  10.00% Cash, 5/15/2024
  5/15/2019  $5,000,000    4,968,203    5,076,000    1.6%
      Total Marketing Services           17,097,210    17,461,440    5.4%
Chronus LLC  Mentoring Software  First Lien Term Loan
(3M USD LIBOR+5.25), 6.25% Cash, 8/26/2026
  8/26/2021  $15,000,000    14,850,218    14,850,000    4.6%
Chronus LLC (h)  Mentoring Software  Series A Preferred Stock  8/26/2021   3,000    3,000,000    3,000,000    0.9%
        Total Mentoring Software           17,850,218    17,850,000    5.5%
Omatic Software, LLC  Non-profit Services  First Lien Term Loan
(3M USD LIBOR+8.00%), 9.75% Cash/1.00% PIK, 5/29/2023
  5/29/2018  $8,209,323    8,158,925    8,142,007    2.5%
        Total Non-profit Services           8,158,925    8,142,007    2.5%
Emily Street Enterprises, L.L.C.  Office Supplies  Senior Secured Note
(3M USD LIBOR+8.50%), 10.00% Cash, 12/31/2023
  12/28/2012  $3,300,000    3,300,000    3,291,750    1.0%
Emily Street Enterprises, L.L.C. (h)  Office Supplies  Warrant Membership Interests 
Expires 12/28/2022
  12/28/2012   49,318    400,000    330,018    0.1%
      Total Office Supplies           3,700,000    3,621,768    1.1%

 

8

 

 

Company  Industry  Investment Interest Rate/
Maturity
  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
Apex Holdings Software Technologies, LLC  Payroll Services  First Lien Term Loan
(3M USD LIBOR+8.00%), 9.00% Cash, 9/21/2024
  9/21/2016  $17,500,000    17,482,760    17,314,500    5.2%
Apex Holdings Software Technologies, LLC  Payroll Services  Delayed Draw Term Loan
(3M USD LIBOR+8.00%), 9.00% Cash, 9/21/2024
  10/1/2018  $-    -    -    0.0%
        Total Payroll Services           17,482,760    17,314,500    5.2%
Lexipol, LLC (h), (i)  Public Safety/Local Government Software  Series A Preferred Stock  3/30/2021   105    10,516,900    10,516,759    3.2%
        Total Public Safety/Local Government Software           10,516,900    10,516,759    3.2%
Buildout, Inc.  Real Estate Services  First Lien Term Loan
(3M USD LIBOR+7.75%), 9.25% Cash, 7/9/2025
  7/9/2020  $14,000,000    13,883,370    14,002,800    4.3%
Buildout, Inc.  Real Estate Services  Delayed Draw Term Loan
(3M USD LIBOR+7.75%), 9.25% Cash, 7/9/2025
  2/12/2021  $3,000,000    2,972,260    3,000,600    0.8%
Buildout, Inc. (h), (i)  Real Estate Services  Limited Partner Interests  7/9/2020   1,071    1,071,301    1,268,298    0.4%
        Total Real Estate Services           17,926,931    18,271,698    5.5%
TMAC Acquisition Co., LLC  Restaurant  Unsecured Term Loan
8.00% PIK, 9/01/2023
  3/1/2018  $2,758,622    2,758,622    2,687,649    0.8%
        Total Restaurant           2,758,622    2,687,649    0.8%
Pepper Palace, Inc.  Specialty Food Retailer  First Lien Term Loan
(3M USD LIBOR+6.25%), 7.25% Cash, 6/30/2026
  6/30/2021  $34,000,000    33,662,362    33,660,000    10.3%
Pepper Palace, Inc. (j)  Specialty Food Retailer  Delayed Draw Term Loan
(3M USD LIBOR+6.25%), 7.25% Cash, 6/30/2026
  6/30/2021  $-    -    -    0.0%
Pepper Palace, Inc. (j)  Specialty Food Retailer  Revolving Credit Facility
(3M USD LIBOR+6.25%), 7.25% Cash, 6/30/2026
  6/30/2021  $-    -    -    0.0%
Pepper Palace, Inc. (h)  Specialty Food Retailer  Membership Interest  6/30/2021   1,000,000    1,000,000    1,000,000    0.2%
      Total Specialty Food Retailer           34,662,362    34,660,000    10.5%
ArbiterSports, LLC (d)  Sports Management  First Lien Term Loan
(3M USD LIBOR+6.50%), 8.25% Cash, 2/21/2025
  2/21/2020  $26,000,000    25,824,985    24,715,599    7.5%
ArbiterSports, LLC (d)  Sports Management  Delayed Draw Term Loan
(3M USD LIBOR+6.50%), 8.25% Cash, 2/21/2025
  2/21/2020  $1,000,000    1,000,000    950,600    0.3%
        Total Sports Management           26,824,985    25,666,199    7.8%
Avionte Holdings, LLC (h)  Staffing Services  Class A Units  1/8/2014   100,000    100,000    1,281,900    0.4%
        Total Staffing Services           100,000    1,281,900    0.4%
Jobvite, Inc. (d)  Talent Acquisition Software  Second Lien Term Loan
(3M USD LIBOR+7.50%), 8.50% Cash, 1/6/2027
  7/6/2021  $20,000,000    19,825,000    19,826,000    6.1%
        Total Talen Acquisition Software           19,825,000    19,826,000    6.1%
National Waste Partners (d)  Waste Services  Second Lien Term Loan
10.00% Cash, 2/13/2022
  2/13/2017  $9,000,000    8,992,308    8,999,999    2.8%
        Total Waste Services           8,992,308    8,999,999    2.8%
Sub Total Non-control/Non-affiliate investments                 525,118,034    531,442,136    163.5%
Affiliate investments - 17.3% (b)                             
Artemis Wax Corp. (f), (j)  Consumer Services  Delayed Draw Term Loan
(1M USD LIBOR+9.00%), 11.00% Cash, 5/20/2026
  5/20/2021  $18,700,000    18,515,545    18,513,000    5.7%
Artemis Wax Corp. (f) (h)  Consumer Services  Series B-1 Preferred Stock  5/20/2021   934,463    1,500,000    1,500,000    0.5%
Artemis Wax Corp. (f) (h)  Consumer Services  Series C Preferred Stock  5/20/2021   5,175    5,175,211    5,175,212    1.6%
        Total Consumer Services           25,190,756    25,188,212    7.8%

 

9

 

 

Company  Industry  Investment Interest Rate/
Maturity
  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
Axero Holdings, LLC(f)  Employee Collaboration Software  First Lien Term Loan
(3 USD LIBOR+10.00%), 11.00% Cash, 6/30/2026
  6/30/2021  $5,500,000    5,445,000    5,445,000    1.7%
Axero Holdings, LLC (f), (j)  Employee Collaboration Software  Delayed Draw Term Loan
(3 USD LIBOR+10.00%), 11.00% Cash, 6/30/2026
  6/30/2021  $-    -    -    0.0%
Axero Holdings, LLC (f), (h)  Employee Collaboration Software  Series A Preferred Units  6/30/2021   2,000,000    2,000,000    2,000,000    0.6%
Axero Holdings, LLC (f), (h)  Employee Collaboration Software  Series B Preferred Units  6/30/2021   2,000,000    2,000,000    2,000,000    0.6%
      Total Employee Collaboration Software           9,445,000    9,445,000    2.9%
GreyHeller LLC (f)  Cyber Security  First Lien Term Loan
(3M USD LIBOR+9.00%), 10.00% Cash, 12/31/2025
  11/17/2016  $7,000,000    6,988,553    7,000,000    2.2%
GreyHeller LLC (d), (f), (j)  Cyber Security  Delayed Draw Term Loan
(3M USD LIBOR+9.00%), 10.00% Cash, 12/31/2025
  10/19/2020  $6,250,000    6,195,055    6,250,000    1.8%
GreyHeller LLC (f), (h)  Cyber Security  Series A Preferred Units  11/17/2016   850,000    850,000    8,566,173    2.6%
      Total Cyber Security           14,033,608    21,816,173    6.6%
Sub Total Affiliate investments                 48,669,364    56,449,385    17.3%
Control investments - 24.1% (b)                             
Netreo Holdings, LLC (g)  IT Services  First Lien Term Loan
(3M USD LIBOR +6.25%), 9.00% Cash/2.75% PIK,
12/31/2025
  7/3/2018  $5,382,517    5,355,321    5,414,274    1.6%
Netreo Holdings, LLC (g), (j)  IT Services  Delayed Draw Term Loan
(3M USD LIBOR +6.25%), 9.00% Cash/2.75% PIK,
12/31/2025
  5/26/2020  $10,337,632    10,242,097    10,398,624    3.2%
Netreo Holdings, LLC (g), (h)  IT Services  Common Stock Class A Unit  7/3/2018   4,600,677    8,344,500    17,957,123    5.5%
      Total IT Services           23,941,918    33,770,021    10.3%
Saratoga Investment Corp. CLO 2013-1, Ltd. (a), (e), (g)  Structured Finance Securities  Other/Structured Finance Securities
14.22%, 4/20/2033
  1/22/2008  $111,000,000    34,504,888    35,060,814    10.8%
Saratoga Investment Corp. CLO 2013-1, Ltd. Class F-2-R-3 Note (a), (g)  Structured Finance Securities  Other/Structured Finance Securities
(3M USD LIBOR+10.00%), 10.12%, 4/20/2033
  8/9/2021  $9,375,000    9,375,000    9,375,000    3.0%
        Total Structured Finance Securities           43,879,888    44,435,814    13.8%
Sub Total Control investments                 67,821,806    78,205,835    24.1%
TOTAL INVESTMENTS - 204.9% (b)                $641,609,204   $666,097,356    204.9%

  

   Number of Shares   Cost   Fair Value   % of
Net Assets
 
Cash and cash equivalents and cash and cash equivalents, reserve accounts - 22.6% (b)                
U.S. Bank Money Market (l)   73,309,407   $73,309,407   $73,309,407    22.6%
Total cash and cash equivalents and cash and cash equivalents, reserve accounts   73,309,407   $73,309,407   $73,309,407    22.6%

 

(a)Represents an ineligible investment as defined under Section 55(a) of the Investment Company Act of 1940, as amended. As of August 31, 2021 non-qualifying assets represent 7.2% of the Company’s portfolio at fair value. As a BDC, the Company can only invest 30% of its portfolio in non-qualifying assets.

 

(b)Percentages are based on net assets of $324,111,845 as of August 31, 2021.

 

(c)Because there is no readily available market value for these investments, the fair values of these investments were determined using significant unobservable inputs and approved in good faith by our board of directors. These investments have been included as Level 3 in the Fair Value Hierarchy (see Note 3 to the consolidated financial statements).

 

10

 

 

(d)These securities are either fully or partially pledged as collateral under a senior secured revolving credit facility (see Note 7 to the consolidated financial statements).

 

(e)This investment does not have a stated interest rate that is payable thereon. As a result, the 14.22% interest rate in the table above represents the effective interest rate currently earned on the investment cost and is based on the current cash interest and other income generated by the investment.

 

(f)As defined in the Investment Company Act, this portfolio company is an Affiliate as we own between 5.0% and 25.0% of the voting securities. Transactions during the six months ended August 31, 2021 in which the issuer was an Affiliate are as follows:

 

Company  Purchases   Sales   Total Interest from Investments   Management Fee Income   Net Realized Gain (Loss) from Investments   Net Change in Unrealized Appreciation (Depreciation) 
Artemis Wax Corp.  $25,013,000   $         -   $521,897   $          -   $         -   $(2,544)
Axero Holdings, LLC   9,445,000    -    105,875    -    -    - 
GreyHeller LLC   3,960,000    -    649,248    -    -    4,679,996 
Total  $38,418,000   $-   $1,277,020   $-   $-   $4,677,452 

 

(g)As defined in the Investment Company Act, we “Control” this portfolio company because we own more than 25% of the portfolio company’s outstanding voting securities. Transactions during the six months ended August 31, 2021 in which the issuer was both an Affiliate and a portfolio company that we Control are as follows:

 

Company  Purchases   Sales   Total Interest from Investments   Management Fee Income   Net Realized Gain (Loss) from Investments   Net Change in Unrealized Appreciation (Depreciation) 
Netreo Holdings, LLC  $10,076,667   $-   $806,671   $-   $-   $4,240,497 
Saratoga Investment Corp. CLO 2013-1, Ltd.   -    -    2,415,144    1,632,854    -    2,952,837 
Saratoga Investment Corp. CLO 2013-1, Ltd. Class F-R-3 Note   -    (17,875,000)   814,431    -    -    (454,025)
Saratoga Investment Corp. CLO 2013-1, Ltd. Class F-1-R-3 Note   8,500,000    (8,500,000)   4,786    -    (139,867)   - 
Saratoga Investment Corp. CLO 2013-1, Ltd. Class F-2-R-3 Note   9,375,000    -    60,700    -    -    - 
Total  $27,951,667   $(26,375,000)  $4,101,732   $1,632,854   $(139,867)  $6,739,309 

 

(h)Non-income producing at August 31, 2021.

 

(i)Includes securities issued by an affiliate of the Company.

 

(j)All or a portion of this investment has an unfunded commitment as of August 31, 2021. (see Note 8 to the consolidated financial statements).

 

(k)As of August 31, 2021, there were no investments was on non-accrual status. (see Note 2 to the consolidated financial statements).

 

(l)Included within cash and cash equivalents and cash and cash equivalents, reserve accounts in the Company’s consolidated statements of assets and liabilities as of August 31, 2021.

 

LIBOR - London Interbank Offered Rate

 

1M USD LIBOR - The 1 month USD LIBOR rate as of August 31, 2021 was 0.08%.

3M USD LIBOR - The 3 month USD LIBOR rate as of August 31, 2021 was 0.12%.

PIK - Payment-in-Kind (see Note 2 to the consolidated financial statements).

 

See accompanying notes to consolidated financial statements.

 

11

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2021*

 

Company  Industry  Investment Interest Rate/
Maturity
  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
Non-control/Non-affiliate investments - 156.6% (b)                         
Targus Holdings, Inc. (d), (h)  Consumer Products  Common Stock  12/31/2009   210,456   $1,589,630   $475,116    0.2%
      Total Consumer Products           1,589,630    475,116    0.2%
My Alarm Center, LLC (k)  Consumer Services  Preferred Equity Class A Units
8.00% PIK
  7/14/2017   2,227    2,357,879    -    0.0%
My Alarm Center, LLC (h)  Consumer Services  Preferred Equity Class B Units  7/14/2017   1,797    1,796,880    -    0.0%
My Alarm Center, LLC (h)  Consumer Services  Preferred Equity Class Z Units  9/12/2018   676    712,343    181,240    0.1%
My Alarm Center, LLC (h)  Consumer Services  Common Stock  7/14/2017   96,224    -    -    0.0%
      Total Consumer Services           4,867,102    181,240    0.1%
Schoox, Inc. (h), (i)  Corporate Education Software  Series 1 Membership Interest  12/8/2020   226,782    1,050,000    1,050,000    0.3%
      Total Corporate Education Software           1,050,000    1,050,000    0.3%
Passageways, Inc.  Corporate Governance  First Lien Term Loan
(3M USD LIBOR+7.00%), 8.75% Cash, 12/31/2025
  7/5/2018  $5,000,000    4,972,250    5,050,000    1.7%
Passageways, Inc. (j)  Corporate Governance  Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 8.75% Cash, 12/31/2025
  1/3/2020  $5,000,000    4,980,871    5,050,000    1.7%
Passageways, Inc. (h)  Corporate Governance  Series A Preferred Stock  7/5/2018   2,027,205    1,000,000    3,164,579    1.0%
      Total Corporate Governance           10,953,121    13,264,579    4.4%
New England Dental Partners  Dental Practice Management  First Lien Term Loan
(3M USD LIBOR+8.00%), 8.50% Cash, 11/25/2025
  11/25/2020  $6,555,000    6,491,331    6,489,450    2.1%
New England Dental Partners (j)  Dental Practice Management  Delayed Draw Term Loan
(3M USD LIBOR+8.00%), 8.50% Cash, 11/25/2025
  11/25/2020  $650,000    644,419    643,500    0.2%
      Total Dental Practice Management           7,135,750    7,132,950    2.3%
PDDS Buyer, LLC  Dental Practice Management Software  First Lien Term Loan
(3M USD LIBOR+7.00%), 9.50% Cash, 7/15/2024
  7/15/2019  $14,000,000    13,895,777    14,278,600    4.7%
PDDS Buyer, LLC  Dental Practice Management Software  Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 9.50% Cash, 7/15/2024
  7/15/2019  $7,000,000    6,938,964    7,139,300    2.3%
PDDS Buyer, LLC (h)  Dental Practice Management Software  Series A-1 Preferred Shares  8/10/2020   1,755,831    2,000,000    2,240,946    0.7%
      Total Dental Practice Management Software           22,834,741    23,658,846    7.7%

 

12

 

 

Company  Industry  Investment Interest Rate/
Maturity
  Original
Acquisition Date
  Principal/
Number of
Shares
   Cost   Fair Value (c)   % of
Net Assets
 
C2 Educational Systems (d)  Education Services  First Lien Term Loan
(3M USD LIBOR+8.50%), 10.00% Cash, 5/31/2023
  5/31/2017  $16,000,000    15,998,379    13,499,200    4.4%
Texas Teachers of Tomorrow, LLC (h), (i)  Education Services  Common Stock  12/2/2015   750    750,000    1,011,596    0.3%
Texas Teachers of Tomorrow, LLC (d)  Education Services  First Lien Term Loan
(3M USD LIBOR+7.25%), 9.75% Cash, 6/28/2024
  6/28/2019  $25,947,024    25,748,711    25,874,372    8.5%
      Total Education Services           42,497,090    40,385,168    13.2%
Destiny Solutions Inc. (d)  Education Software  First Lien Term Loan
(3M USD LIBOR+7.50%), 9.50% Cash, 10/24/2024
  5/16/2018  $43,500,000    43,204,446    43,630,500    14.3%
Destiny Solutions Inc. (h), (i)  Education Software  Limited Partner Interests  5/16/2018   2,342    2,468,464    3,069,267    1.0%
Identity Automation Systems (d)  Education Software  First Lien Term Loan
(3M USD LIBOR+9.24%), 10.99% Cash, 5/8/2024
  8/25/2014  $17,247,500    17,247,500    17,357,884    5.7%
Identity Automation Systems (h)  Education Software  Common Stock Class A-2 Units  8/25/2014   232,616    232,616    725,726    0.2%
Identity Automation Systems (h)  Education Software  Common Stock Class A-1 Units  3/6/2020   43,715    171,571    185,553    0.1%
GoReact  Education Software  First Lien Term Loan
(3M USD LIBOR+7.50%), 9.50% Cash, 1/17/2025
  1/17/2020  $5,000,000    4,940,297    5,100,000    1.7%
GoReact (j)  Education Software  Delayed Draw Term Loan
(3M USD LIBOR+7.50%), 9.50% Cash, 1/17/2025
  1/17/2020  $-    -    -    0.0%
Kev Software Inc. (a)  Education Software  First Lien Term Loan
(1M USD LIBOR+8.63%), 9.63% Cash, 9/13/2023
  9/13/2018  $17,835,914    17,745,629    18,021,407    5.9%
      Total Education Software           86,010,523    88,090,337    28.9%
Top Gun Pressure Washing, LLC  Facilities Maintenance  First Lien Term Loan
(3M USD LIBOR+7.00%), 9.50% Cash, 8/12/2024
  8/12/2019  $5,000,000    4,961,639    4,491,500    1.5%
Top Gun Pressure Washing, LLC (j)  Facilities Maintenance  Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 9.50% Cash, 8/12/2024
  8/12/2019  $1,825,000    1,810,198    1,639,397    0.6%
TG Pressure Washing Holdings, LLC (h)  Facilities Maintenance  Preferred Equity  8/12/2019   488,148    488,148    62,552    0.0%
      Total Facilities Maintenance           7,259,985    6,193,449    2.1%
Davisware, LLC  Field Service Management  First Lien Term Loan
(3M USD LIBOR+7.00%), 9.00% Cash, 7/31/2024
  9/6/2019  $3,000,000    2,977,590    3,030,000    1.0%
Davisware, LLC  Field Service Management  Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 9.00% Cash, 7/31/2024
  9/6/2019  $977,790    974,399    987,568    0.3%
      Total Field Service Management           3,951,989    4,017,568    1.3%
GDS Software Holdings, LLC  (h)  Financial Services  Common Stock Class A Units  8/23/2018   250,000    250,000    418,531    0.1%
      Total Financial Services           250,000    418,531    0.1%
Ohio Medical, LLC (h)  Healthcare Products Manufacturing  Common Stock  1/15/2016   5,000    380,353    566,592    0.2%
      Total Healthcare Products Manufacturing           380,353    566,592    0.2%
Axiom Parent Holdings, LLC (h)  Healthcare Services  Common Stock Class A Units  6/19/2018   400,000    400,000    1,415,301    0.5%
Axiom Purchaser, Inc. (d)  Healthcare Services  First Lien Term Loan
(3M USD LIBOR+6.00%), 7.75% Cash, 6/19/2023
  6/19/2018  $10,000,000    9,955,177    10,059,000    3.3%
Axiom Purchaser, Inc. (d)  Healthcare Services  Delayed Draw Term Loan
(3M USD LIBOR+6.00%), 7.75% Cash, 6/19/2023
  6/19/2018  $6,000,000    5,961,748    6,035,400    2.0%
ComForCare Health Care  Healthcare Services  First Lien Term Loan
(3M USD LIBOR+7.75%), 8.75% Cash, 1/31/2025
  1/31/2017  $25,000,000    24,871,639    24,900,000    8.2%
      Total Healthcare Services           41,188,564    42,409,701    14.0%

 

13

 

 

Company  Industry  Investment Interest Rate/
Maturity
  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
TRC HemaTerra, LLC (h)  Healthcare Software  Class D Membership Interests  4/15/2019   2,000,000    2,000,000    2,572,002    0.8%
HemaTerra Holding Company, LLC  Healthcare Software  First Lien Term Loan
(3M USD LIBOR+6.75%), 9.25% Cash, 4/15/2024
  4/15/2019  $6,000,000    5,956,593    6,060,000    2.0%
HemaTerra Holding Company, LLC (d), (j)  Healthcare Software  Delayed Draw Term Loan
(3M USD LIBOR+6.75%), 9.25% Cash, 4/15/2024
  4/15/2019  $12,000,000    11,914,035    12,120,000    4.0%
Procurement Partners, LLC  Healthcare Software  First Lien Term Loan
(3M USD LIBOR+6.50%), 7.50% Cash, 11/12/2025
  11/12/2020  $8,000,000    7,924,230    7,920,000    2.6%
Procurement Partners, LLC (j)  Healthcare Software  Delayed Draw Term Loan
(3M USD LIBOR+6.50%), 7.50% Cash, 11/12/2025
  11/12/2020  $-    -    -    0.0%
Procurement Partners Holdings LLC (h)  Healthcare Software  Class A Units  11/12/2020   300,000    300,000    300,000    0.1%
      Total Healthcare Software           28,094,858    28,972,002    9.5%
Roscoe Medical, Inc. (d), (h)  Healthcare Supply  Common Stock  3/26/2014   5,081    508,077    280,346    0.1%
Roscoe Medical, Inc.  Healthcare Supply  Second Lien Term Loan
11.25% Cash, 6/28/2021
  3/26/2014  $5,141,413    5,141,413    5,141,413    1.7%
      Total Healthcare Supply           5,649,490    5,421,759    1.8%
Book4Time, Inc. (a)  Hospitality/Hotel  First Lien Term Loan
(3M USD LIBOR+8.50%), 10.25%, 12/22/2025
  12/22/2020  $3,136,517    3,105,788    3,105,152    1.0%
Book4Time, Inc. (a), (j)  Hospitality/Hotel  Delayed Draw Term Loan
(3M USD LIBOR+8.50%), 10.25%, 12/22/2025
  12/22/2020  $-    -    -    0.0%
Book4Time, Inc. (a), (i)  Hospitality/Hotel  Class A Preferred Shares  12/22/2020   200,000    156,826    156,826    0.1%
Knowland Group, LLC  Hospitality/Hotel  Second Lien Term Loan
(3M USD LIBOR+8.00%), 10.00% Cash, 5/9/2024
  11/9/2018  $15,767,918    15,767,918    10,788,409    3.5%
Sceptre Hospitality Resources, LLC  Hospitality/Hotel  First Lien Term Loan
(1M USD LIBOR+9.00%), 10.00% Cash, 4/27/2025
  4/27/2020  $3,000,000    2,973,387    3,030,000    1.0%
      Total Hospitality/Hotel           22,003,919    17,080,387    5.6%

 

14

 

 

Company  Industry  Investment Interest Rate/
Maturity
  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
Granite Comfort, LP  HVAC Services and Sales  First Lien Term Loan
(1M USD LIBOR+9.00%), 10.00% Cash, 11/16/2025
  11/16/2020  $7,000,000    6,932,689    6,950,300    2.3%
Granite Comfort, LP  HVAC Services and Sales  Delayed Draw Term Loan
(1M USD LIBOR+9.00%), 10.00% Cash, 11/16/2025
  11/16/2020  $8,000,000    7,922,181    7,943,200    2.6%
      Total HVAC Services and Sales           14,854,870    14,893,500    4.9%
Vector Controls Holding Co., LLC (d)  Industrial Products  First Lien Term Loan
11.50% (9.75% Cash/1.75% PIK), 3/6/2022
  3/6/2013  $7,021,046    7,021,046    7,021,046    2.3%
Vector Controls Holding Co., LLC (d), (h)  Industrial Products  Warrants to Purchase Limited Liability Company Interests, Expires 11/30/2027  5/31/2015   343    -    2,025,598    0.7%
      Total Industrial Products           7,021,046    9,046,644    3.0%
CLEO Communications Holding, LLC (d)  IT Services  First Lien Term Loan
(3M USD LIBOR+8.00%), 9.00% Cash/2.00% PIK, 3/31/2022
  3/31/2017  $14,073,964    14,064,807    14,176,704    4.7%
CLEO Communications Holding, LLC (d), (j)  IT Services  Delayed Draw Term Loan
(3M USD LIBOR+8.00%), 9.00% Cash/2.00% PIK, 3/31/2022
  3/31/2017  $20,451,756    20,388,504    20,601,054    6.8%
LogicMonitor, Inc.  IT Services  First Lien Term Loan
(3M USD LIBOR+5.00), 6.00% Cash, 5/17/2023
  3/20/2020  $23,000,000    22,865,749    23,089,700    7.6%
      Total IT Services           57,319,060    57,867,458    19.1%
inMotionNow, Inc.  Marketing Services  First Lien Term Loan
(3M USD LIBOR+7.50), 10.00% Cash, 5/15/2024
  5/15/2019  $12,200,000    12,116,232    12,322,000    4.1%
inMotionNow, Inc.  Marketing Services  Delayed Draw Term Loan
(3M USD LIBOR+7.50)  10.00% Cash, 5/15/2024
  5/15/2019  $5,000,000    4,960,820    5,050,000    1.7%
      Total Marketing Services           17,077,052    17,372,000    5.8%

 

15

 

 

Company  Industry  Investment Interest Rate/
Maturity
  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
Omatic Software, LLC  Non-profit Services  First Lien Term Loan
(3M USD LIBOR+8.00%), 9.75% Cash, 5/29/2023
  5/29/2018  $5,500,000    5,470,787    5,554,450    1.8%
      Total Non-profit Services           5,470,787    5,554,450    1.8%
Emily Street Enterprises, L.L.C.  Office Supplies  Senior Secured Note
(3M USD LIBOR+8.50%), 10.00% Cash, 12/31/2023
  12/28/2012  $3,300,000    3,300,000    3,287,460    1.1%
Emily Street Enterprises, L.L.C. (h)  Office Supplies  Warrant Membership Interests 
Expires 12/28/2022
  12/28/2012   49,318    400,000    322,853    0.1%
      Total Office Supplies           3,700,000    3,610,313    1.2%
Apex Holdings Software Technologies, LLC  Payroll Services  First Lien Term Loan
(3M USD LIBOR+8.00%), 9.00% Cash, 9/21/2024
  9/21/2016  $18,000,000    17,981,413    17,368,200    5.7%
Apex Holdings Software Technologies, LLC  Payroll Services  Delayed Draw Term Loan
(3M USD LIBOR+8.00%), 9.00% Cash, 9/21/2024
  10/1/2018  $1,000,000    994,557    964,900    0.3%
      Total Payroll Services           18,975,970    18,333,100    6.0%
Village Realty Holdings LLC  Property Management  First Lien Term Loan
(3M USD LIBOR+6.50%), 8.75% Cash, 10/8/2024
  10/8/2019  $7,250,000    7,189,591    7,395,000    2.4%
Village Realty Holdings LLC (j)  Property Management  Delayed Draw Term Loan
(3M USD LIBOR+6.50%), 8.75% Cash, 10/8/2024
  10/8/2019  $4,876,322    4,838,617    4,973,850    1.6%
V Rental Holdings LLC (h)  Property Management  Class A-1 Membership Units  10/8/2019   122,578    365,914    2,208,681    0.7%
      Total Property Management           12,394,122    14,577,531    4.7%
Buildout, Inc.  Real Estate Services  First Lien Term Loan
(3M USD LIBOR+7.75%), 9.25% Cash, 7/9/2025
  7/9/2020  $14,000,000    13,873,317    13,952,400    4.6%
Buildout, Inc.  Real Estate Services  Delayed Draw Term Loan
(3M USD LIBOR+7.75%), 9.25% Cash, 7/9/2025
  2/12/2021  $3,000,000    2,970,361    2,989,800    1.0%
Buildout, Inc. (h), (i)  Real Estate Services  Limited Partner Interests  7/9/2020   1,071    1,071,301    1,090,002    0.4%
      Total Real Estate Services           17,914,979    18,032,202    6.0%
TMAC Acquisition Co., LLC (k)  Restaurant  Unsecured Term Loan
8.00% PIK, 9/01/2023
  3/1/2018  $2,261,017    2,261,017    2,140,911    0.7%
      Total Restaurant           2,261,017    2,140,911    0.7%
ArbiterSports, LLC (d)  Sports Management  First Lien Term Loan
(3M USD LIBOR+6.50%), 8.25% Cash, 2/21/2025
  2/21/2020  $26,000,000    25,800,743    24,525,800    8.1%
ArbiterSports, LLC (d)  Sports Management  Delayed Draw Term Loan
(3M USD LIBOR+6.50%), 8.25% Cash, 2/21/2025
  2/21/2020  $1,000,000    1,000,000    943,300    0.3%
      Total Sports Management           26,800,743    25,469,100    8.4%
Avionte Holdings, LLC (h)  Staffing Services  Class A Units  1/8/2014   100,000    100,000    924,509    0.3%
      Total Staffing Services           100,000    924,509    0.3%
National Waste Partners (d)  Waste Services  Second Lien Term Loan
10.00% Cash, 2/13/2022
  2/13/2017  $9,000,000    8,981,436    9,000,000    3.0%
      Total Waste Services           8,981,436    9,000,000    3.0%
Sub Total Non-control/Non-affiliate investments                 478,588,197    476,139,943    156.6%

 

16

 

 

Company  Industry  Investment Interest Rate/
Maturity
  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
Affiliate investments - 4.3% (b)                             
GreyHeller LLC (f)  Cyber Security  First Lien Term Loan
(3M USD LIBOR+11.00%), 12.00% Cash, 12/31/2025
  11/17/2016  $7,000,000    6,988,549    7,000,000    2.3%
GreyHeller LLC (d), (f), (j)  Cyber Security  Delayed Draw Term Loan
(3M USD LIBOR+11.00%), 12.00% Cash, 12/31/2025
  10/19/2020  $2,250,000    2,233,173    2,250,000    0.7%
GreyHeller LLC (f), (h)  Cyber Security  Series A Preferred Units  11/17/2016   850,000    850,000    3,924,291    1.3%
      Total Cyber Security           10,071,722    13,174,291    4.3%
Sub Total Affiliate investments                 10,071,722    13,174,291    4.3%
Control investments - 21.4% (b)                             
Netreo Holdings, LLC (g)  IT Services  First Lien Term Loan
(3M USD LIBOR +6.25%), 9.00% Cash/2.75% PIK,
12/31/2025
  7/3/2018  $5,296,555    5,268,156    5,349,521    1.8%
Netreo Holdings, LLC (g), (j)  IT Services  Delayed Draw Term Loan
(3M USD LIBOR +6.25%), 9.00% Cash/2.75% PIK,
12/31/2020
  5/26/2020  $1,223,203    1,213,962    1,235,435    0.4%
Netreo Holdings, LLC (g), (h)  IT Services  Common Stock Class A Unit  7/3/2018   3,150,000    3,150,000    8,634,768    2.8%
      Total IT Services           9,632,118    15,219,724    5.0%
Saratoga Investment Corp. CLO 2013-1, Ltd. (a), (e), (g)  Structured Finance Securities  Other/Structured Finance Securities
11.72%, 1/20/2030
  1/22/2008  $111,000,000    33,846,643    31,449,732    10.3%
Saratoga Investment Corp. CLO 2013-1, Ltd. Class F-R-3 Note (a), (g)  Structured Finance Securities  Other/Structured Finance Securities
(3M USD LIBOR+10.00%), 10.19%, 4/20/2033
  2/26/2021  $17,875,000    17,875,000    18,329,025    6.1%
      Total Structured Finance Securities           51,721,643    49,778,757    16.4%
Sub Total Control investments                 61,353,761    64,998,481    21.4%
TOTAL INVESTMENTS - 182.2% (b)                $550,013,680   $554,312,715    182.2%

 

   Number of Shares   Cost   Fair Value   % of
Net Assets
 
Cash and cash equivalents and cash and cash equivalents, reserve accounts - 6.2% (b)                    
U.S. Bank Money Market (l)   18,828,047   $18,828,047   $18,828,047    6.2%
Total cash and cash equivalents and cash and cash equivalents, reserve accounts   18,828,047   $18,828,047   $18,828,047    6.2%

 

*Certain reclassifications have been made to previously reported Non-control/Non-affiliate and Affiliate groups to show results on a consistent basis across periods.
  
(a)Represents an ineligible investment as defined under Section 55(a) of the Investment Company Act of 1940, as amended. As of February 28, 2021 non-qualifying assets represent 9.5% of the Company’s portfolio at fair value. As a BDC, the Company can only invest 30% of its portfolio in non-qualifying assets.

 

(b)Percentages are based on net assets of $304,185,770 as of February 28, 2021.

 

(c)Because there is no readily available market value for these investments, the fair values of these investments were determined using significant unobservable inputs and approved in good faith by our board of directors. These investments have been included as Level 3 in the Fair Value Hierarchy (see Note 3 to the consolidated financial statements).

 

17

 

 

(d)These securities are either fully or partially pledged as collateral under a senior secured revolving credit facility (see Note 7 to the consolidated financial statements).

 

(e)This investment does not have a stated interest rate that is payable thereon. As a result, the 11.72% interest rate in the table above represents the effective interest rate currently earned on the investment cost and is based on the current cash interest and other income generated by the investment.

 

(f)As defined in the Investment Company Act, this portfolio company is an Affiliate as we own between 5.0% and 25.0% of the voting securities. Transactions during the year ended February 28, 2021 in which the issuer was an Affiliate are as follows:

 

Company  Purchases   Sales   Total Interest
from
Investments
   Management
Fee Income
   Net Realized 
Gain (Loss) from
Investments
   Net Change in
Unrealized
Appreciation
(Depreciation)
 
Elyria Foundry Company, L.L.C.  $-   $(2,309,806)  $172,626   $          -   $(8,726,013)  $7,745,228 
GreyHeller LLC   2,227,500    -    987,969    -    -    942,175 
Total  $2,227,500   $(2,309,806)  $1,160,595   $-   $(8,726,013)  $8,687,403 

 

(g)As defined in the Investment Company Act, we “Control” this portfolio company because we own more than 25% of the portfolio company’s outstanding voting securities. Transactions during the year ended February 28, 2021 in which the issuer was both an Affiliate and a portfolio company that we Control are as follows:

 

Company  Purchases   Sales   Total Interest
from
Investments
   Management
Fee Income
   Net Realized 
Gain (Loss) from
Investments
   Net Change in
Unrealized
Appreciation
(Depreciation)
 
Netreo Holdings, LLC  $1,188,000   $-   $738,012   $-   $          -   $1,832,136 
Saratoga Investment Corp. CLO 2013-1, Ltd.   14,000,000    -    3,535,591    2,507,626    -    (1,433,723)
Saratoga Investment Corp. CLO 2013-1, Ltd. Class F-R-2 Notes   -    (2,500,000)   237,163    -    -    22,000 
Saratoga Investment Corp. CLO 2013-1, Ltd. Class F-R-3 Note   17,875,000    -    15,187    -    -    454,025 
Saratoga Investment Corp. CLO 2013-1, Ltd. Class G-R-2 Notes   -    (7,500,000)   805,759    -    -    65,250 
Saratoga Investment Corp. CLO 2013-1 Warehouse 2, Ltd.   22,500,000    (25,000,000)   679,926    -    -    295,459 
Total  $55,563,000   $(35,000,000)  $6,011,638   $2,507,626   $-   $1,235,147 

 

(h)Non-income producing at February 28, 2021.

 

(i)Includes securities issued by an affiliate of the company.

 

(j)All or a portion of this investment has an unfunded commitment as of February 28, 2021. (see Note 8 to the consolidated financial statements).

 

(k)As of February 28, 2021, the investment was on non-accrual status. The fair value of these investments was approximately $2.1 million, which represented 0.4% of the Company’s portfolio (see Note 2 to the consolidated financial statements).

 

(l)Included within cash and cash equivalents and cash and cash equivalents, reserve accounts in the Company’s consolidated statements of assets and liabilities as of February 28, 2021.

 

LIBOR - London Interbank Offered Rate

 

1M USD LIBOR - The 1 month USD LIBOR rate as of February 28, 2021 was 0.12%.

3M USD LIBOR - The 3 month USD LIBOR rate as of February 28, 2021 was 0.19%.

PIK - Payment-in-Kind (see Note 2 to the consolidated financial statements).

  

See accompanying notes to consolidated financial statements.

 

18

 

  

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2021

(unaudited)

 

Note 1. Organization

 

Saratoga Investment Corp. (the “Company”, “we”, “our” and “us”) is a non-diversified closed end management investment company incorporated in Maryland that has elected to be treated and is regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company commenced operations on March 23, 2007 as GSC Investment Corp. and completed its initial public offering (“IPO”) on March 28, 2007. The Company has elected to be treated as a regulated investment company (“RIC”) under subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Company expects to continue to qualify and to elect to be treated, for tax purposes, as a RIC. The Company’s investment objective is to generate current income and, to a lesser extent, capital appreciation from its investments.

 

GSC Investment, LLC (the “LLC”) was organized in May 2006 as a Maryland limited liability company. As of February 28, 2007, the LLC had not yet commenced its operations and investment activities.

 

On March 21, 2007, the Company was incorporated and concurrently therewith the LLC was merged with and into the Company, with the Company as the surviving entity, in accordance with the procedure for such merger in the LLC’s limited liability company agreement and Maryland law. In connection with such merger, each outstanding limited liability company interest of the LLC was converted into a share of common stock of the Company.

 

On July 30, 2010, the Company changed its name from “GSC Investment Corp.” to “Saratoga Investment Corp.” in connection with the consummation of a recapitalization transaction.

 

The Company is externally managed and advised by the investment adviser, Saratoga Investment Advisors, LLC (the “Manager” or “Saratoga Investment Advisors”), pursuant to an investment advisory and management agreement (the “Management Agreement”). Prior to July 30, 2010, the Company was managed and advised by GSCP (NJ), L.P.

 

The Company has established wholly-owned subsidiaries, SIA-Avionte, Inc., SIA-AX, Inc., SIA-GH, Inc., SIA-MAC, Inc., SIA-PEP, Inc., SIA-PP, Inc., SIA-TG, Inc., SIA-TT, Inc., SIA-Vector, Inc. and SIA-VR, Inc., which are structured as Delaware entities, or tax blockers (“Taxable Blockers”), to hold equity or equity-like investments in portfolio companies organized as limited liability companies, or LLCs (or other forms of pass through entities). Tax blockers are consolidated for accounting purposes but are not consolidated for income tax purposes and may incur income tax expense as a result of their ownership of portfolio companies.

 

On March 28, 2012, our wholly-owned subsidiary, Saratoga Investment Corp. SBIC, LP (“SBIC LP”), received a Small Business Investment Company (“SBIC”) license from the Small Business Administration (“SBA”). On August 14, 2019, our wholly-owned subsidiary, Saratoga Investment Corp. SBIC II LP (“SBIC II LP”), also received an SBIC license from the SBA. The new license will provide up to $175.0 million in additional long-term capital in the form of SBA debentures.

 

Note 2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), are stated in U.S. Dollars and include the accounts of the Company and its special purpose financing subsidiaries, Saratoga Investment Funding, LLC (previously known as GSC Investment Funding LLC), Saratoga Investment Funding II, LLC, SBIC LP, SBIC II LP, SIA-Avionte, Inc., SIA-AX, Inc., SIA-GH, Inc., SIA-MAC, Inc., SIA-PEP., SIA-PP, Inc., SIA-TG, Inc., SIA-TT, Inc., SIA-Vector, Inc. and SIA-VR, Inc. All intercompany accounts and transactions have been eliminated in consolidation. All references made to the “Company,” “we,” and “us” herein include Saratoga Investment Corp. and its consolidated subsidiaries, except as stated otherwise.

 

The Company, SBIC LP and SBIC II LP are all considered to be investment companies for financial reporting purposes and have applied the guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, “Financial Services — Investment Companies” (“ASC 946”). There have been no changes to the Company, SBIC LP or SBIC II LP’s status as investment companies during the three months ended August 31, 2021.

 

19

 

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of the accompanying consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and income, gains (losses) and expenses during the period reported. Actual results could differ materially from those estimates.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include short-term, liquid investments in a money market fund. Cash and cash equivalents are carried at cost which approximates fair value. Per section 12(d)(1)(A) of the 1940 Act, the Company may not invest in another registered investment company such as a money market fund if such investment would cause the Company to exceed any of the following limitations:

 

we were to own more than 3.0% of the total outstanding voting stock of the money market fund;

 

we were to hold securities in the money market fund having an aggregate value in excess of 5.0% of the value of our total assets, except as allowed pursuant to Rule 12d1-1 of Section 12(d)(1) of the 1940 Act which is designed to permit “cash sweep” arrangements rather than investments directly in short-term instruments; or

 

we were to hold securities in money market funds and other registered investment companies and BDCs having an aggregate value in excess of 10.0% of the value of our total assets.

 

As of August 31, 2021, the Company did not exceed any of these limitations.

 

Cash and Cash Equivalents, Reserve Accounts

 

Cash and cash equivalents, reserve accounts include amounts held in designated bank accounts in the form of cash and short-term liquid investments in money market funds, representing payments received on secured investments or other reserved amounts associated with the Company’s $45.0 million senior secured revolving credit facility with Madison Capital Funding LLC. The Company is required to use these amounts to pay interest expense, reduce borrowings, or pay other amounts in accordance with the terms of the senior secured revolving credit facility.

 

In addition, cash and cash equivalents, reserve accounts also include amounts held in designated bank accounts, in the form of cash and short-term liquid investments in money market funds, within our wholly-owned subsidiaries, SBIC LP and SBIC II LP.

 

The statements of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts.

 

The following table provides a reconciliation of cash and cash equivalents and cash and cash equivalents, reserve accounts reported within the consolidated statements of assets and liabilities that sum to the total of the same such amounts shown in the consolidated statements of cash flows:

 

   August 31,
2021
   August 31,
2020
 
Cash and cash equivalents  $60,268,602   $39,052,320 
Cash and cash equivalents, reserve accounts   13,040,805    26,342,863 
Total cash and cash equivalents and cash and cash equivalents, reserve accounts  $73,309,407   $65,395,183 

 

Investment Classification

 

The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in companies in which we own more than 25.0% of the voting securities or maintain greater than 50.0% of the board representation. Under the 1940 Act, “Affiliated Investments” are defined as those non-control investments in companies in which we own between 5.0% and 25.0% of the voting securities. Under the 1940 Act, “Non-affiliated Investments” are defined as investments that are neither Control Investments nor Affiliated Investments.

 

20

 

 

Investment Valuation

 

The Company accounts for its investments at fair value in accordance with the FASB ASC Topic 820, Fair Value Measurement (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. ASC 820 requires the Company to assume that its investments are to be sold or its liabilities are to be transferred at the measurement date in the principal market to independent market participants, or in the absence of a principal market, in the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact.

 

Investments for which market quotations are readily available are fair valued at such market quotations obtained from independent third-party pricing services and market makers subject to any decision by our board of directors to approve a fair value determination to reflect significant events affecting the value of these investments. We value investments for which market quotations are not readily available at fair value as approved, in good faith, by our board of directors based on input from our Manager, the audit committee of our board of directors and a third-party independent valuation firm.

 

The Company undertakes a multi-step valuation process each quarter when valuing investments for which market quotations are not readily available, as described below:

 

  Each investment is initially valued by the responsible investment professionals of the Manager and preliminary valuation conclusions are documented, reviewed and discussed with our senior management; and

 

  An independent valuation firm engaged by our board of directors independently reviews a selection of these preliminary valuations each quarter so that the valuation of each investment for which market quotes are not readily available is reviewed by the independent valuation firm at least once each fiscal year.

 

In addition, all our investments are subject to the following valuation process:

 

  The audit committee of our board of directors reviews and approves each preliminary valuation and our Manager and independent valuation firm (if applicable) will supplement the preliminary valuation to reflect any comments provided by the audit committee; and

 

  Our board of directors discusses the valuations and approves the fair value of each investment, in good faith, based on the input of our Manager, independent valuation firm (to the extent applicable) and the audit committee of our board of directors.

 

We use multiple techniques for determining fair value based on the nature of the investment and experience with those types of investments and specific portfolio companies. The selections of the valuation techniques and the inputs and assumptions used within those techniques often require subjective judgements and estimates. These techniques include market comparables, discounted cash flows and enterprise value waterfalls. Fair value is best expressed as a range of values from which the Company determines a single best estimate. The types of inputs and assumptions that may be considered in determining the range of values of our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments, market yield trend analysis and volatility in future interest rates, call and put features, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flows and other relevant factors.

 

The Company’s investment in Saratoga Investment Corp. CLO 2013-1, Ltd. (“Saratoga CLO”) is carried at fair value, which is based on a discounted cash flow valuation technique that utilizes prepayment, re-investment and loss inputs based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for equity interests in collateralized loan obligation funds similar to Saratoga CLO, when available, as determined by our Manager and recommended to our board of directors. Specifically, we use Intex cash flows, or an appropriate substitute, to form the basis for the valuation of our investment in Saratoga CLO. The cash flows use a set of inputs including projected default rates, recovery rates, reinvestment rates and prepayment rates in order to arrive at estimated valuations. The inputs are based on available market data and projections provided by third parties as well as management estimates. The Company uses the output from the Intex models (i.e., the estimated cash flows) to perform a discounted cash flow analysis on expected future cash flows to determine the valuation for our investment in Saratoga CLO.

 

Because such valuations, and particularly valuations of private investments and private companies, are inherently uncertain, they may fluctuate over short periods of time and may be based on estimates. The determination of fair value may differ materially from the values that would have been used if a ready market for these investments existed. The Company’s net asset value could be materially affected if the determinations regarding the fair value of our investments were materially higher or lower than the values that we ultimately realize upon the disposal of such investments.

 

21

 

 

Derivative Financial Instruments

 

The Company accounts for derivative financial instruments in accordance with FASB ASC Topic 815, Derivatives and Hedging (“ASC 815”). ASC 815 requires recognizing all derivative instruments as either assets or liabilities on the consolidated statements of assets and liabilities at fair value. The Company values derivative contracts at the closing fair value provided by the counterparty. Changes in the values of derivative contracts are included in the consolidated statements of operations.

 

Investment Transactions and Income Recognition

 

Purchases and sales of investments and the related realized gains or losses are recorded on a trade-date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Company stops accruing interest on its investments when it is determined that interest is no longer collectible. Discounts and premiums on investments purchased are accreted/amortized using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion of discounts over the life of the investment and amortization of premiums on investments up to the earliest call date.

  

Loans are generally placed on non-accrual status when there is reasonable doubt that principal or interest will be collected. Accrued interest is generally reserved when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as a reduction in principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current, although we may make exceptions to this general rule if the loan has sufficient collateral value and is in the process of collection. At August 31, 2021, there were no investments on non-accrual status. At February 28, 2021, certain investments in two portfolio companies, including preferred equity interests, were on non-accrual status with a fair value of approximately $2.1 million, or 0.4% of the fair value of our portfolio.

 

Interest income on our investment in Saratoga CLO is recorded using the effective interest method in accordance with the provisions of ASC Topic 325, Investments-Other, Beneficial Interests in Securitized Financial Assets, (“ASC 325”), based on the anticipated yield and the estimated cash flows over the projected life of the investment. Yields are revised when there are changes in actual or estimated cash flows due to changes in prepayments and/or re-investments, credit losses or asset pricing. Changes in estimated yield are recognized as an adjustment to the estimated yield over the remaining life of the investment from the date the estimated yield was changed.

 

Payment-in-Kind Interest

 

The Company holds debt and preferred equity investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision. The PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at maturity, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. The Company stops accruing PIK interest if it is expected that the issuer will not be able to pay all principal and interest when due.

 

Dividend Income

 

Dividends received are recorded in the consolidated statements of operations when earned.

 

Structuring and Advisory Fee Income

 

Structuring and advisory fee income represents various fee income earned and received performing certain investment structuring and advisory activities during the closing of new investments.

 

Other Income

 

Other income includes prepayment income fees, and origination, monitoring, administration and amendment fees and is recorded in the consolidated statements of operations when earned.

 

Deferred Debt Financing Costs

 

Financing costs incurred in connection with our credit facility and notes are deferred and amortized using the straight-line method over the life of the respective facility and debt securities. Financing costs incurred in connection with our SBA debentures are deferred and amortized using the straight-line method over the life of the debentures.

 

The Company presents deferred debt financing costs on the balance sheet as a contra-liability as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.

 

Contingencies

 

In the ordinary course of business, the Company may enter into contracts or agreements that contain indemnifications or warranties. Future events could occur that lead to the execution of these provisions against the Company. Based on its history and experience, management feels that the likelihood of such an event is remote. Therefore, the Company has not accrued any liabilities in connection with such indemnifications.

 

22

 

 

In the ordinary course of business, the Company may directly or indirectly be a defendant or plaintiff in legal actions with respect to bankruptcy, insolvency or other types of proceedings. Such lawsuits may involve claims that could adversely affect the value of certain financial instruments owned by the Company.

 

Income Taxes

 

The Company has elected to be treated for tax purposes as a RIC under the Code and, among other things, intends to make the requisite distributions to its stockholders which will relieve the Company from federal income taxes. Therefore, no provision has been recorded for federal income taxes, except as related to the Taxable Blockers and long-term capital gains, when applicable.

 

In order to qualify as a RIC, among other requirements, the Company is required to timely distribute to its stockholders at least 90.0% of its investment company taxable income, as defined by the Code, for each fiscal tax year. The Company will be subject to a nondeductible U.S. federal excise tax of 4.0% on undistributed income if it does not distribute at least (1) 98.0% of its net ordinary income in any calendar year, (2) 98.2% of its capital gain net income for each one-year period ending on October 31and (3) any net ordinary income and capital gain net income that it recognized for preceding years, but were not distributed during such year, and on which the Company paid no U.S federal income tax.

  

Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year dividend distributions into the next tax year and pay the 4.0% U.S. federal excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions for U.S. federal excise tax purposes, the Company accrues the U.S. federal excise tax, if any, on estimated excess taxable income as taxable income is earned.

 

In accordance with certain applicable U.S. Treasury regulations and private letter rulings issued by the Internal Revenue Service (“IRS”), a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC subject to a limitation on the aggregate amount of cash to be distributed to all stockholders, which limitation must be at least 20.0% of the aggregate declared distribution. If too many stockholders elect to receive cash, each stockholder electing to receive cash will receive a pro rata amount of cash (with the balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive less than 20.0% of his or her entire distribution in cash. If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock.

 

The Company may utilize wholly-owned holding companies taxed under Subchapter C of the Code or tax blockers, when making equity investments in portfolio companies taxed as pass-through entities to meet its source-of-income requirements as a RIC. Taxable Blockers are consolidated in the Company’s U.S. GAAP financial statements and may result in current and deferred federal and state income tax expense with respect to income derived from those investments. Such income, net of applicable income taxes, is not included in the Company’s tax-basis net investment income until distributed by the Taxable Blocker, which may result in timing and character differences between the Company’s U.S. GAAP and tax-basis net investment income and realized gains and losses. Income tax expense or benefit from Taxable Blockers related to net investment income are included in total operating expenses, while any expense or benefit related to federal or state income tax originated for capital gains and losses are included together with the applicable net realized or unrealized gain or loss line item. Deferred tax assets of the Taxable Blockers are reduced by a valuation allowance when, in the opinion of management, it is more-likely than-not that some portion or all of the deferred tax assets will not be realized.

 

FASB ASC Topic 740, Income Taxes, (“ASC 740”), provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense on the consolidated statements of operations. During the fiscal year ended February 28, 2021, the Company did not incur any interest or penalties. Although we file federal and state tax returns, our major tax jurisdiction is federal. The 2018, 2019, 2020 and 2021 federal tax years for the Company remain subject to examination by the IRS. As of August 31, 2021 and February 28, 2021, there were no uncertain tax positions. The Company is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change significantly in the next 12 months.

 

23

 

 

Dividends

 

Dividends to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a dividend is determined by the board of directors. Net realized capital gains, if any, are generally distributed at least annually, although we may decide to retain such capital gains for reinvestment.

 

We have adopted a dividend reinvestment plan (“DRIP”) that provides for reinvestment of our dividend distributions on behalf of our stockholders unless a stockholder elects to receive cash. As a result, if our board of directors authorizes, and we declare, a cash dividend, then our stockholders who have not “opted out” of the DRIP by the dividend record date will have their cash dividends automatically reinvested into additional shares of our common stock, rather than receiving the cash dividends. We have the option to satisfy the share requirements of the DRIP through the issuance of new shares of common stock or through open market purchases of common stock by the DRIP plan administrator.

 

Capital Gains Incentive Fee

 

The Company records an expense accrual on the consolidated statements of operations, relating to the capital gains incentive fee payable on the consolidated statements of assets and liabilities, by the Company to the Manager when the net realized and unrealized gain on its investments exceed all net realized and unrealized capital losses on its investments given the fact that a capital gains incentive fee would be owed to the Manager if the Company were to liquidate its investment portfolio at such time.

 

The actual incentive fee payable to the Company’s Manager related to capital gains will be determined and payable in arrears at the end of each fiscal year and only reflected those realized capital gains net of realized and unrealized losses for the period.

 

New Accounting Pronouncements

 

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (“ASU 2020-04”). The amendments in ASU 2020-04 provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The standard is effective as of March 12, 2020 through December 31, 2022. Management does not believe this optional guidance has a material impact on the Company’s consolidated financial statements and disclosures.

 

Risk Management

 

In the ordinary course of its business, the Company manages a variety of risks, including market risk and credit risk. Market risk is the risk of potential adverse changes to the value of investments because of changes in market conditions such as interest rate movements and volatility in investment prices.

 

Credit risk is the risk of default or non-performance by portfolio companies, equivalent to the investment’s carrying amount. The Company is also exposed to credit risk related to maintaining all of its cash and cash equivalents, including those in reserve accounts, at a major financial institution and credit risk related to any of its derivative counterparties.

 

The Company has investments in lower rated and comparable quality unrated high yield bonds and bank loans. Investments in high yield investments are accompanied by a greater degree of credit risk. The risk of loss due to default by the issuer is significantly greater for holders of high yield securities, because such investments are generally unsecured and are often subordinated to other creditors of the issuer.

 

Note 3. Investments

 

As noted above, the Company values all investments in accordance with ASC 820. As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent market participants at the measurement date.

 

ASC 820 establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair value. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

 

Based on the observability of the inputs used in the valuation techniques, the Company is required to provide disclosures on fair value measurements according to the fair value hierarchy. The fair value hierarchy ranks the observability of the inputs used to determine fair values. Investments carried at fair value are classified and disclosed in one of the following three categories:

 

Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

 

Level 2— Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date. Such inputs may be quoted prices for similar assets or liabilities, quoted markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full character of the financial instrument, or inputs that are derived principally from, or corroborated by, observable market information. Investments which are generally included in this category include illiquid debt securities and less liquid, privately held or restricted equity securities, for which some level of recent trading activity has been observed.

 

24

 

 

Level 3—Pricing inputs are unobservable for the investment and includes situations where there is little, if any, market activity for the investment. The inputs may be based on the Company’s own assumptions about how market participants would price the asset or liability or may use Level 2 inputs, as adjusted, to reflect specific investment attributes relative to a broader market assumption. Even if observable market data for comparable performance or valuation measures (earnings multiples, discount rates, other financial/valuation ratios, etc.) are available, such investments are grouped as Level 3 if any significant data point that is not also market observable (private company earnings, cash flows, etc.) is used in the valuation technique. We use multiple techniques for determining fair value based on the nature of the investment and experience with those types of investments and specific portfolio companies. The selections of the valuation techniques and the inputs and assumptions used within those techniques often require subjective judgements and estimates. These techniques include market comparables, discounted cash flows and enterprise value waterfalls. Fair value is best expressed as a range of values from which the Company determines a single best estimate. The types of inputs and assumptions that may be considered in determining the range of values of our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments, market yield trend analysis and volatility in future interest rates, call and put features, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flows and other relevant factors.

  

In addition to using the above inputs in investment valuations, the Company continues to employ the valuation policy approved by the board of directors that is consistent with ASC 820 and the 1940 Act (see Note 2). Consistent with our valuation policy, we evaluate the source of inputs, including any markets in which our investments are trading, in determining fair value.

 

The following table presents fair value measurements of investments, by major class, as of August 31, 2021 (dollars in thousands), according to the fair value hierarchy:

 

   Fair Value Measurements 
   Level 1   Level 2   Level 3   Total 
First lien term loans  $     -   $           -   $493,593   $493,593 
Second lien term loans   -    -    44,868    44,868 
Unsecured term loans   -    -    2,688    2,688 
Structured finance securities   -    -    44,436    44,436 
Equity interests   -    -    80,512    80,512 
Total  $-   $-   $666,097   $666,097 

 

The following table presents fair value measurements of investments, by major class, as of February 28, 2021 (dollars in thousands), according to the fair value hierarchy:

 

   Fair Value Measurements 
   Level 1   Level 2   Level 3   Total 
First lien term loans  $       -   $       -   $440,456   $440,456 
Second lien term loans   -    -    24,930    24,930 
Unsecured term loans   -    -    2,141    2,141 
Structured finance securities   -    -    49,779    49,779 
Equity interests   -    -    37,007    37,007 
Total  $-   $-   $554,313   $554,313

 

25

 

 

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the six months ended August 31, 2021 (dollars in thousands):

 

   First lien term loans   Second lien term loans   Unsecured term loans   Structured finance securities   Equity interests   Total 
Balance as of February 28, 2021  $440,456   $24,930   $2,141   $49,779   $37,007   $554,313 
Payment-in-kind and other adjustments to cost   389    30    498    658    331    1,906 
Net accretion of discount on investments   874    10    -    -    -    884 
Net change in unrealized appreciation (depreciation) on investments   285    73    49    2,499    17,283    20,189 
Purchases   173,018    19,825    -    -    42,338    235,181 
Sales and repayments   (121,429)   -    -    (8,360)   (19,998)   (149,787)
Net realized gain (loss) from investments   -    -    -    (140)   3,551    3,411 
Balance as of August 31, 2021  $493,593   $44,868   $2,688   $44,436   $80,512   $666,097 
Net change in unrealized appreciation (depreciation) for the period relating to those Level 3 assets that  were still held by the Company at the end of the period  $1,790   $73   $49   $2,952   $16,605   $21,469 

 

Purchases, payment-in-kind and other adjustments to cost include purchases of new investments at cost, effects of refinancing/restructuring, accretion/amortization of income from discount/premium on debt securities, and PIK interests.

 

Sales and repayments represent net proceeds received from investments sold and principal paydowns received during the period.

  

Transfers and restructurings, if any, are recognized at the beginning of the period in which they occur. There were no transfers or restructures in or out of Levels 1, 2 or 3 during the six months ended August 31, 2021.

 

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the six months ended August 31, 2020 (dollars in thousands):

 

   First lien term loans   Second lien term loans   Unsecured term loans   Structured finance securities   Equity interests   Total 
Balance as of February 29, 2020  $346,233   $73,570   $4,346   $32,470   $29,013   $485,632 
Payment-in-kind and other adjustments to cost   408    943    -    (2,197)   -    (846)
Net accretion of discount on investments   431    175    -    -    -    606 
Net change in unrealized appreciation (depreciation) on investments   (12,446)   (1,393)   (324)   823    (2,030)   (15,370)
Purchases   64,899    -    2,500    -    3,309    70,708 
Sales and repayments   (9,633)   (23,000)   -    -    -    (32,633)
Net realized gain (loss) from investments   20    -    -    -    -    20 
Balance as of August 31, 2020  $389,912   $50,295   $6,522   $31,096   $30,292   $508,117 
Net change in unrealized appreciation (depreciation) for the year relating to those Level 3 assets that  were still held by the Company at the end of the period  $(12,211)  $(1,345)  $(324)  $822   $(2,028)  $(15,086)

 

Transfers and restructurings, if any, are recognized at the beginning of the period in which they occur. There were no transfers or restructures in or out of Levels 1, 2 or 3 during the six months ended August 31, 2020.

 

26

 

 

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of August 31, 2021 were as follows (dollars in thousands):

 

   Fair Value   Valuation Technique  Unobservable Input  Range   Weighted Average* 
First lien term loans  $493,593   Market Comparables  Market Yield (%)   6.0% - 18.7%    9.2% 
           EBITDA Multiples (x)   6.5x    6.5x 
           Revenue Multiples (x)   3.5x - 6.7x    5.8x 
Second lien term loans   44,868   Market Comparables  Market Yield (%)   8.7% - 28.0%    19.9% 
           EBITDA Multiples (x)   7.5x    7.5x 
Unsecured term loans   2,688   Market Comparables  Market Yield (%)   16.7%    16.7% 
Structured finance securities   44,436   Discounted Cash Flow  Discount Rate (%)   10.0% - 15.0%    14.3% 
           Recovery Rate (%)   35% - 70%    70.0% 
           Prepayment Rate (%)   20.0%    20.0% 
Equity interests   80,512   Enterprise Value Waterfall  EBITDA Multiples (x)   3.3x - 20.0x    13.0x 
           Revenue Multiples (x)   1.0x - 11.7x    6.5x 
Total  $666,097                 

 

*The weighted average in the table above is calculated based on each investment’s fair value weighting, using the applicable unobservable input.

 

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of February 28, 2021 were as follows (dollars in thousands):

 

   Fair Value   Valuation Technique  Unobservable Input  Range   Weighted Average* 
First lien term loans  $440,456   Market Comparables  Market Yield (%)   5.8%  - 18.7%    9.7% 
           EBITDA Multiples (x)   6.8x    6.8x 
           Revenue Multiples (x)   4.1x - 8.0x    7.5x 
Second lien term loans   24,930   Market Comparables  Market Yield (%)   10.0% - 24.5%    16.5% 
           EBITDA Multiples (x)   7.5x    7.5x 
Unsecured term loans   2,141   Market Comparables  Market Yield (%)   31.1%    31.1% 
           EBITDA Multiples (x)   5.2x    5.2x 
Structured finance securities   49,779   Discounted Cash Flow  Discount Rate (%)   10.0% - 15.00%    13.8% 
           Recovery Rate (%)   35.0% - 70.0%    70.0% 
           Prepayment Rate (%)   20.0%    20.0% 
Equity interests   37,007   Enterprise Value Waterfall  EBITDA Multiples (x)   4.0x - 14.0x    9.7x 
           Revenue Multiples (x)   0.5x - 38.3x    4.6x 
Total  $554,313                 

 

*The weighted average in the table above is calculated based on each investment’s fair value weighting, using the applicable unobservable input.

 

For investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the earnings before interest, tax, depreciation and amortization (“EBITDA”) or revenue valuation multiples, in isolation, would result in a significantly higher (lower) fair value measurement. For investments utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, and prepayment rate, in isolation, would result in a significantly lower (higher) fair value measurement while a significant increase (decrease) in recovery rate, in isolation, would result in a significantly higher (lower) fair value measurement. For investments utilizing a market quote in deriving a value, a significant increase (decrease) in the market quote, in isolation, would result in a significantly higher (lower) fair value measurement.

 

The composition of our investments as of August 31, 2021 at amortized cost and fair value was as follows (dollars in thousands):

 

   Investments at
Amortized
Cost
   Amortized Cost
Percentage of
Total Portfolio
   Investments at
Fair Value
   Fair Value
Percentage of
Total Portfolio
 
First lien term loans  $494,441    77.1%  $493,593    74.1%
Second lien term loans   49,757    7.8    44,868    6.7 
Unsecured term loans   2,759    0.4    2,688    0.4 
Structured finance securities   43,880    6.8    44,436    6.7 
Equity interests   50,772    7.9    80,512    12.1 
Total  $641,609    100.0%  $666,097    100.0%

 

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The composition of our investments as of February 28, 2021 at amortized cost and fair value was as follows (dollars in thousands):

 

   Investments at Amortized Cost   Amortized Cost Percentage of Total Portfolio   Investments at Fair Value   Fair Value Percentage of Total Portfolio 
First lien term loans  $441,590    80.3%  $440,456    79.5%
Second lien term loans   29,891    5.4    24,930    4.4 
Unsecured term loans   2,261    0.4    2,141    0.4 
Structured finance securities   51,722    9.4    49,779    9.0 
Equity interests   24,550    4.5    37,007    6.7 
Total  $550,014    100.0%  $554,313    100.0%

 

For loans and debt securities for which market quotations are not available, we determine their fair value based on third party indicative broker quotes, where available, or the inputs that a hypothetical market participant would use to value the security in a current hypothetical sale using a market comparables valuation technique. In applying the market comparables valuation technique, we determine the fair value based on such factors as market participant inputs including synthetic credit ratings, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. If, in our judgment, the market comparables technique is not sufficient or appropriate, we may use additional techniques such as an asset liquidation or expected recovery model.

 

For equity securities of portfolio companies and partnership interests, we determine the fair value using an enterprise value waterfall valuation technique. Under the enterprise value waterfall valuation technique, we determine the enterprise fair value of the portfolio company and then waterfall the enterprise value over the portfolio company’s securities in order of their preference relative to one another. To estimate the enterprise value of the portfolio company, we weigh some or all of the traditional market valuation techniques and factors based on the individual circumstances of the portfolio company in order to estimate the enterprise value. The techniques for performing investments may be based on, among other things: valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of the portfolio company, third party valuations of the portfolio company, considering offers from third parties to buy the company, estimating the value to potential strategic buyers and considering the value of recent investments in the equity securities of the portfolio company. For non-performing investments, we may estimate the liquidation or collateral value of the portfolio company’s assets and liabilities. We also take into account historical and anticipated financial results.

 

Our investment in Saratoga CLO is carried at fair value, which is based on a discounted cash flow valuation technique that utilizes prepayment, re-investment and loss inputs based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for equity interests in collateralized loan obligation funds similar to Saratoga CLO, when available, as determined by our Manager and recommended to our board of directors. Specifically, we use Intex cash flows, or an appropriate substitute, to form the basis for the valuation of our investment in Saratoga CLO. The cash flows use a set of inputs including projected default rates, recovery rates, reinvestment rates and prepayment rates in order to arrive at estimated valuations. The inputs are based on available market data and projections provided by third parties as well as management estimates. In connection with the refinancing of the Saratoga CLO liabilities, we ran Intex models based on inputs about the refinanced Saratoga CLO’s structure, including capital structure, cost of liabilities and reinvestment period. We use the output from the Intex models (i.e., the estimated cash flows) to perform a discounted cash flow analysis on expected future cash flows to determine a valuation for our investment in Saratoga CLO at August 31, 2021. The inputs at August 31, 2021 for the valuation model include:

 

Default rate: 2%

 

Recovery rate: 35% -70%

 

Discount rate: 10% – 15%

 

Prepayment rate: 20%

 

Reinvestment rate / price: L+365bps / $99.25

 

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Investment Concentration

 

Set forth is a brief description of each portfolio company in which the fair value of our investment represents greater than 5% of our total assets as of August 31, 2021.

 

Hematerra Holdings Company, LLC

 

HemaTerra Holding Company, LLC (“HemaTerra”) provides SaaS-based software solutions addressing complex supply chain issues across a variety of medical environments, including blood, plasma, tissue, implants and DNA sample management, to customers in blood centers, hospitals, pharmaceuticals, and law enforcement settings.

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

 

The Company has a collateral management agreement with Saratoga CLO, pursuant to which the Company acts as its collateral manager. The Saratoga CLO invests primarily in senior secured first lien term loans. The Company also holds an investment in the subordinated note and Class F-2-R-3 Notes of the Saratoga CLO.

 

Note 4. Investment in Saratoga Investment Corp. CLO 2013-1, Ltd. (“Saratoga CLO”)

 

On January 22, 2008, the Company entered into a collateral management agreement with Saratoga CLO, pursuant to which the Company acts as its collateral manager. The Saratoga CLO was initially refinanced in October 2013 with its reinvestment period extended to October 2016. On November 15, 2016, the Company completed a second refinancing of the Saratoga CLO with its reinvestment period extended to October 2018.

 

On December 14, 2018, the Company completed a third refinancing and upsize of the Saratoga CLO (the “2013-1 Reset CLO Notes”). The third Saratoga CLO refinancing, among other things, extended its reinvestment period to January 2021, and extended its legal maturity date to January 2030. A non-call period ending January 2020 was also added. Following this refinancing, the Saratoga CLO portfolio increased from approximately $300.0 million in aggregate principal amount to approximately $500.0 million of predominantly senior secured first lien term loans. In addition to refinancing its liabilities, the Company invested an additional $13.8 million in all of the newly issued subordinated notes of the Saratoga CLO and also purchased $2.5 million in aggregate principal amount of the Class F-R-2 and $7.5 million aggregate principal amount of the Class G-R-2 notes tranches at par, with a coupon of 3M USD LIBOR plus 8.75% and 3M USD LIBOR plus 10.00%, respectively. As part of this refinancing, the Company also redeemed our existing $4.5 million aggregate amount of the Class F notes tranche at par.

 

On February 11, 2020, the Company entered into an unsecured loan agreement with Saratoga Investment Corp. CLO 2013-1 Warehouse 2, Ltd., (“CLO 2013-1 Warehouse 2”) a wholly-owned subsidiary Saratoga CLO.

 

On February 26, 2021, the Company completed the fourth refinancing of the Saratoga CLO. This refinancing, among other things, extended the Saratoga CLO reinvestment period to April 2024, and extended its legal maturity to April 2033. A non-call period ending February 2022 was also added. In addition, and as part of the refinancing, the Saratoga CLO has also been upsized from $500 million in assets to approximately $650 million. As part of this refinancing and upsizing, the Company invested an additional $14.0 million in all of the newly issued subordinated notes of the Saratoga CLO, and purchased $17.9 million in aggregate principal amount of the Class F-R-3 Notes tranche at par. Concurrently, the existing $2.5 million of Class F-R-2 Notes, $7.5 million of Class G-R-2 Notes and $25.0 million of the CLO 2013-1 Warehouse 2 Loan were repaid. The Company also paid $2.6 million of transaction costs related to the refinancing and upsizing on behalf of the Saratoga CLO, to be reimbursed from future equity distributions. As of August 31, 2021 the outstanding receivable of $2.6 million was repaid in full.

 

On August 9, 2021, the Company exchanged its existing $17.9 million Class F-R-3 Notes for $8.5 million Class F-1-R-3 Notes and $9.4 million Class F-2-R-3 Notes at par. On August 11, 2021, the Company sold its Class F-1-R-3 Notes to third parties, resulting in a realized loss of $0.1 million.

 

The Saratoga CLO remains 100.0% owned and managed by the Company. We receive a base management fee of 0.10% per annum and a subordinated management fee of 0.40% per annum of the outstanding principal amount of Saratoga CLO’s assets, paid quarterly to the extent of available proceeds. Following the third refinancing and the issuance of the 2013-1 Reset CLO Notes on December 14, 2018, we are no longer entitled to an incentive management fee equal to 20.0% of excess cash flow to the extent the Saratoga CLO subordinated notes receive an internal rate of return paid in cash equal to or greater than 12.0%.

 

For the three months ended August 31, 2021 and August 31, 2020, we accrued management fee income of $0.8 million and $0.6 million, respectively, and interest income of $1.3 million and $0.7 million, respectively, from the subordinated notes of Saratoga CLO.

 

For the six months ended August 31, 2021 and August 31, 2020, we accrued management fee income of $1.6 million and $1.3 million, respectively, and interest income of $2.4 million and $1.4 million, respectively, from the subordinated notes of the Saratoga CLO.

 

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As of August 31, 2021, the aggregate principal amounts of the Company’s investments in the subordinated notes and Class F-2-R-3 Notes of the Saratoga CLO was $111.0 million and $9.4 million, respectively, which had a corresponding fair value of $35.1 million and $9.4 million, respectively. The Company determines the fair value of its investment in the subordinated notes of Saratoga CLO based on the present value of the projected future cash flows of the subordinated notes over the life of Saratoga CLO. As of August 31, 2021, Saratoga CLO had investments with a principal balance of $658.7 million and a weighted average spread over LIBOR of 3.7% and had debt with a principal balance of $611.0 million with a weighted average spread over LIBOR of 2.2%. As a result, Saratoga CLO earns a “spread” between the interest income it receives on its investments and the interest expense it pays on its debt and other operating expenses, which is distributed quarterly to the Company as the holder of its subordinated notes. As of August 31, 2021, the present value of the projected future cash flows of the subordinated notes was approximately $35.6 million, using a 15.0% discount rate. The Company’s total investment in the subordinate notes of Saratoga CLO is $57.8 which consists of investments of $30 million in January 2008, $13.8 million in December 2018 and $14.0 million in February 2021; to date the Company has since received distributions of $68.4 million, management fees of $27.0 million and incentive fees of $1.2 million. In conjunction with the third refinancing of the 2013-1 Reset CLO Notes on December 14, 2018, the Company is no longer entitled to receive an incentive management fee from Saratoga CLO.

 

As of February 28, 2021, the Company determined that the fair value of its investment in the subordinated notes of Saratoga CLO was $31.4 million. The Company determines the fair value of its investment in the subordinated notes of Saratoga CLO based on the present value of the projected future cash flows of the subordinated notes over the life of Saratoga CLO. As of February 28, 2021, the fair value of its investment in the Class F-R-3 Notes was $18.3 million, As of February 28, 2021, Saratoga CLO had investments with a principal balance of $603.7 million and a weighted average spread over LIBOR of 3.8% and had debt with a principal balance of $611.0 million with a weighted average spread over LIBOR of 2.2%. As a result, Saratoga CLO earns a “spread” between the interest income it receives on its investments and the interest expense it pays on its debt and other operating expenses, which is distributed quarterly to the Company as the holder of its subordinated notes. As of February 28, 2021, the present value of the projected future cash flows of the subordinated notes was approximately $31.7 million, using a 15.0% discount rate.

 

Below is certain financial information from the separate financial statements of Saratoga CLO as of August 31, 2021 (unaudited) and February 28, 2021 and for the three and six months ended August 31, 2021 (unaudited) and August 31, 2020 (unaudited).

 

30

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Statements of Assets and Liabilities

 

   August 31,
2021
   February 28,
2021
 
   (unaudited)     
ASSETS        
Investments at fair value        
Loans at fair value (amortized cost of $650,634,393 and $594,722,350, respectively)  $646,261,753   $591,518,866 
Equities at fair value (amortized cost of $0 and $527,124, respectively)   -    501,175 
Total investments at fair value (amortized cost of $650,634,393 and $595,249,474, respectively)   646,261,753    592,020,041 
Cash and cash equivalents   11,897,501    114,145,406 
Receivable from open trades   8,802,545    1,901,754 
Interest receivable (net of reserve of $38,766 and $35,000, respectively)   1,987,100    1,497,333 
Prepaid expenses and other assets   37,581    118,868 
Total assets  $668,986,480   $709,683,402 
         &nb