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 May 31, 2022

 

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
6.00% Notes due 2027   SAT   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 July 6, 2022 was 11,984,898.

 

 

 

 

 

 

TABLE OF CONTENTS

 

      Page
PART I.   FINANCIAL INFORMATION 1
       
Item 1.   Consolidated Financial Statements 1
       
    Consolidated Statements of Assets and Liabilities as of May 31, 2022 (unaudited) and February 28, 2022 1
       
    Consolidated Statements of Operations for the three months ended May 31, 2022 (unaudited) and May 31, 2021 (unaudited) 2
       
    Consolidated Statements of Changes in Net Assets for three months ended May 31, 2022 (unaudited) and May 31, 2021 (unaudited) 3
       
    Consolidated Statements of Cash Flows for the three months ended May 31, 2022 (unaudited) and May 31, 2021 (unaudited) 4
       
    Consolidated Schedules of Investments as of May 31, 2022 (unaudited) and February 28, 2022 5
       
    Notes to Consolidated Financial Statements as of May 31, 2022 (unaudited) 16
       
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 89
       
Item 3.   Quantitative and Qualitative Disclosures About Market Risk 127
       
Item 4.   Controls and Procedures 128
       
PART II.   OTHER INFORMATION 129
       
Item 1.   Legal Proceedings 129
       
Item 1A.   Risk Factors 129
       
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 129
       
Item 3.   Defaults Upon Senior Securities 129
       
Item 4.   Mine Safety Disclosures 129
       
Item 5.   Other Information 129
       
Item 6.   Exhibits 130
       
Signatures 132

 

i

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

 

Saratoga Investment Corp.

Consolidated Statements of Assets and Liabilities

 

   May 31,
2022
   February 28,
2022
 
   (unaudited)     
ASSETS        
Investments at fair value        
Non-control/Non-affiliate investments (amortized cost of $732,722,272 and $654,965,044, respectively)  $745,481,455   $668,358,516 
Affiliate investments (amortized cost of $53,468,875 and $46,224,927, respectively)   56,045,678    48,234,124 
Control investments (amortized cost of $96,356,420 and $95,058,356, respectively)   93,006,013    100,974,715 
Total investments at fair value (amortized cost of $882,547,567 and $796,248,327, respectively)   894,533,146    817,567,355 
Cash and cash equivalents   94,939,634    47,257,801 
Cash and cash equivalents, reserve accounts   6,550,220    5,612,541 
Interest receivable (net of reserve of $733,379 and $0, respectively)   5,325,756    5,093,561 
Due from affiliate (See Note 7)   105,637    90,968 
Management fee receivable   362,777    362,549 
Other assets   220,209    254,980 
Total assets  $1,002,037,379   $876,239,755 
           
LIABILITIES          
Revolving credit facility  $25,000,000   $12,500,000 
Deferred debt financing costs, revolving credit facility   (1,075,765)   (1,191,115)
SBA debentures payable   217,000,000    185,000,000 
Deferred debt financing costs, SBA debentures payable   (4,891,468)   (4,344,983)
7.25% Notes Payable 2025   43,125,000    43,125,000 
Deferred debt financing costs, 7.25% notes payable 2025   (996,761)   (1,078,201)
7.75% Notes Payable 2025   5,000,000    5,000,000 
Deferred debt financing costs, 7.75% notes payable 2025   (170,551)   (184,375)
4.375% Notes Payable 2026   175,000,000    175,000,000 
Premium on 4.375% notes payable 2026   1,033,136    1,086,013 
Deferred debt financing costs, 4.375% notes payable 2026   (3,183,076)   (3,395,435)
4.35% Notes Payable 2027   75,000,000    75,000,000 
Discount on 4.35% notes payable 2027   (470,120)   (499,263)
Deferred debt financing costs, 4.35% notes payable 2027   (1,636,102)   (1,722,908)
6.25% Notes Payable 2027   15,000,000    15,000,000 
Deferred debt financing costs, 6.25% notes payable 2027   (398,281)   (416,253)
6.00% Notes Payable 2027   97,500,000    - 
Deferred debt financing costs, 6.00% notes payable 2027   (3,276,855)   - 
Base management and incentive fees payable   8,637,481    12,947,025 
Deferred tax liability   1,578,323    1,249,015 
Accounts payable and accrued expenses   1,020,841    799,058 
Current income tax payable   2,690,196    2,820,036 
Interest and debt fees payable   5,129,247    2,801,621 
Directors fees payable   108,566    70,000 
Due to manager   77,757    263,814 
Excise tax payable   -    630,183 
Total liabilities   656,801,568    520,459,232 
           
Commitments and contingencies (See Note 9)          
           
NET ASSETS          
Common stock, par value $0.001, 100,000,000 common shares authorized, 12,031,998 and 12,131,350 common shares issued and outstanding, respectively   12,032    12,131 
Capital in excess of par value   325,433,869    328,062,246 
Total distributable earnings (deficit)   19,789,910    27,706,146 
Total net assets   345,235,811    355,780,523 
Total liabilities and net assets  $1,002,037,379   $876,239,755 
NET ASSET VALUE PER SHARE  $28.69   $29.33 

 

See accompanying notes to consolidated financial statements.

 

1

 

 

Saratoga Investment Corp.

Consolidated Statements of Operations

(unaudited)

 

   For the three months ended 
   May 31,
2022
   May 31,
2021
 
INVESTMENT INCOME        
Interest from investments        
Interest income:        
Non-control/Non-affiliate investments  $13,851,146   $11,236,737 
Affiliate investments   1,050,148    340,512 
Control investments   1,546,130    1,854,985 
Payment-in-kind interest income:          
Non-control/Non-affiliate investments   85,681    176,766 
Affiliate investments   -    - 
Control investments   73,221    77,675 
Total interest from investments   16,606,326    13,686,675 
Interest from cash and cash equivalents   717    522 
Management fee income   815,964    818,232 
Dividend Income*   300,129    398,616 
Structuring and advisory fee income   851,728    1,301,875 
Other income*   104,268    610,070 
Total investment income   18,679,132    16,815,990 
           
OPERATING EXPENSES          
Interest and debt financing expenses   6,871,513    4,340,912 
Base management fees   3,802,063    2,758,908 
Incentive management fees expense (benefit)   (1,903,985)   5,262,536 
Professional fees   417,325    507,061 
Administrator expenses   750,000    693,750 
Insurance   87,310    86,318 
Directors fees and expenses   110,000    92,000 
General and administrative   667,416    490,651 
Income tax expense (benefit)   (98,732)   27,919 
Total operating expenses   10,702,910    14,260,055 
NET INVESTMENT INCOME   7,976,222    2,555,935 
           
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS          
Net realized gain (loss) from investments:          
Non-control/Non-affiliate investments   162,509    1,910,141 
Affiliate investments   -    - 
Control investments   -    - 
Net realized gain (loss) from investments   162,509    1,910,141 
Income tax (provision) benefit from realized gain on investments   69,250    - 
Net change in unrealized appreciation (depreciation) on investments:          
Non-control/Non-affiliate investments   (634,289)   5,448,887 
Affiliate investments   567,606    3,062,348 
Control investments   (9,266,766)   8,301,342 
Net change in unrealized appreciation (depreciation) on investments   (9,333,449)   16,812,577 
Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments   (361,951)   (230,144)
Net realized and unrealized gain (loss) on investments   (9,463,641)   18,492,574 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS  $(1,487,419)  $21,048,509 
           
WEIGHTED AVERAGE - BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE  $(0.12)  $1.88 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED   12,112,372    11,170,045 

 

*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 three months ended 
   May 31,
2022
   May 31,
2021
 
INCREASE (DECREASE) FROM OPERATIONS:          
Net investment income  $7,976,222   $2,555,935 
Net realized gain from investments   162,509    1,910,141 
Realized losses on extinguishment of debt   -    - 
Income tax (provision) benefit from realized gain on investments   69,250    - 
Net change in unrealized appreciation (depreciation) on investments   (9,333,449)   16,812,577 
Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments   (361,951)   (230,144)
Net increase (decrease) in net assets resulting from operations   (1,487,419)   21,048,509 
           
DECREASE FROM SHAREHOLDER DISTRIBUTIONS:          
Total distributions to shareholders   (6,428,817)   (4,799,405)
Net decrease in net assets from shareholder distributions   (6,428,817)   (4,799,405)
           
CAPITAL SHARE TRANSACTIONS:          
Stock dividend distribution   1,108,680    914,102 
Repurchases of common stock   (3,734,316)   (1,003,420)
Repurchase fees   (2,840)   (800)
Net increase (decrease) in net assets from capital share transactions   (2,628,476)   (90,118)
Total increase (decrease) in net assets   (10,544,712)   16,158,986 
Net assets at beginning of period   355,780,523    304,185,770 
Net assets at end of period  $345,235,811   $320,344,756 

 

See accompanying notes to consolidated financial statements.

 

3

 

 

Saratoga Investment Corp.

Consolidated Statements of Cash Flows

(unaudited)

 

   For the three months ended 
   May 31,
2022
   May 31,
2021
 
Operating activities          
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS  $(1,487,419)  $21,048,509 
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   1,322,915    (191,699)
Net accretion of discount on investments   (350,408)   (321,106)
Amortization of deferred debt financing costs   798,768    470,314 
Income tax expense (benefit)   (37,823)   27,919 
Net realized (gain) loss from investments   (162,509)   (1,910,141)
Net change in unrealized (appreciation) depreciation on investments   9,333,449    (16,812,577)
Net change in provision for deferred taxes on unrealized appreciation (depreciation) on investments   361,951    230,144 
Proceeds from sales and repayments of investments   10,088,607    14,941,409 
Purchases of investments   (97,197,844)   (119,166,038)
(Increase) decrease in operating assets:          
Interest receivable   (232,195)   (2,398,700)
Due from affiliate   (14,669)   119,000 
Management and incentive fee receivable   (228)   (818,232)
Other assets   34,771    78,581 
Increase (decrease) in operating liabilities:          
Base management and incentive fees payable   (4,309,544)   4,171,274 
Accounts payable and accrued expenses   221,783    236,250 
Current tax payable   (129,840)   - 
Interest and debt fees payable   2,327,626    (882,442)
Directors fees payable   38,566    21,500 
Excise tax payable   (630,183)   (691,672)
Due to manager   (186,057)   88,948 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES   (80,210,283)   (101,758,759)
           
Financing activities          
Borrowings on debt   44,500,000    49,000,000 
Issuance of notes   97,500,000    50,000,000 
Payments of deferred debt financing costs   (4,112,912)   (2,289,179)
Payments of cash dividends   (5,320,137)   (3,885,303)
Repurchases of common stock   (3,734,316)   (1,003,420)
Repurchases fees   (2,840)   (800)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES   128,829,795    91,821,298 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND CASH AND CASH EQUIVALENTS, RESERVE ACCOUNTS   48,619,512    (9,937,461)
CASH AND CASH EQUIVALENTS AND CASH AND CASH EQUIVALENTS, RESERVE ACCOUNTS, BEGINNING OF PERIOD   52,870,342    29,915,074 
CASH AND CASH EQUIVALENTS AND CASH AND CASH EQUIVALENTS, RESERVE ACCOUNTS, END OF PERIOD  $101,489,854   $19,977,613 
           
Supplemental information:          
Interest paid during the period  $3,589,281   $4,753,043 
Cash paid for taxes   374    692,740 
Supplemental non-cash information:          
Payment-in-kind interest income and other adjustments to cost   (1,322,915)   191,699 
Net accretion of discount on investments   350,408    321,106 
Amortization of deferred debt financing costs   798,768    470,314 
Stock dividend distribution   1,108,680    914,102 

 

See accompanying notes to consolidated financial statements.

 

4

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

May 31, 2022

(unaudited)

 

Company(1)   Industry   Investment Interest Rate/
Maturity
  Original Acquisition Date   Principal/
Number of Shares
    Cost     Fair Value (c)     % of
Net Assets
 
Non-control/Non-affiliate investments - 213.8% (b)                            
Targus Holdings, Inc. (h)   Consumer Products   Common Stock   12/31/2009     210,456     $ 1,589,630     $ 699,494       0.2 %
        Total Consumer Products                 1,589,630       699,494       0.2 %
Schoox, Inc. (h), (i)   Corporate Education Software   Series 1 Membership Interest   12/8/2020     1,050       475,698       3,448,050       1.0 %
        Total Corporate Education Software                 475,698       3,448,050       1.0 %
GreyHeller LLC (h)   Cyber Security   Common Stock   11/10/2021     7,857,689       1,906,275       2,374,651       0.7 %
        Total Cyber Security                 1,906,275       2,374,651       0.7 %
New England Dental Partners   Dental Practice Management   First Lien Term Loan
(3M USD LIBOR+8.00%), 9.61% Cash, 11/25/2025
  11/25/2020   $ 6,555,000       6,507,634       6,519,603       1.9 %
New England Dental Partners (j)   Dental Practice Management   Delayed Draw Term Loan
(3M USD LIBOR+8.00%), 9.61% Cash, 11/25/2025
  11/25/2020   $ 2,150,000       2,134,277       2,138,390       0.6 %
        Total Dental Practice Management                 8,641,911       8,657,993       2.5 %
PDDS Buyer, LLC (d)   Dental Practice Management Software   First Lien Term Loan
(3M USD LIBOR+5.50%), 7.11% Cash, 7/15/2024
  7/15/2019   $ 49,000,000       48,786,954       49,000,000       14.2 %
PDDS Buyer, LLC (h)   Dental Practice Management Software   Series A-1 Preferred Shares   8/10/2020     1,755,831       2,000,000       9,994,778       2.9 %
        Total Dental Practice Management Software                 50,786,954       58,994,778       17.1 %
Exigo, LLC   Direct Selling Software   First Lien Term Loan
(1M USD LIBOR+5.75%), 6.87% Cash, 3/16/2027
  3/16/2022   $ 25,000,000       24,794,011       24,750,000       7.2 %
Exigo, LLC (j)   Direct Selling Software   Delayed Draw Term Loan
(1M USD LIBOR+5.75%), 6.87% Cash, 3/16/2027
  3/16/2022   $ -       -       -       0.0 %
Exigo, LLC (j)   Direct Selling Software   Revolving Credit Facility
(1M USD LIBOR+5.75%), 6.87% Cash, 3/16/2027
  3/16/2022   $ 208,333       208,333       206,250       0.1 %
Exigo, LLC (h), (i)   Direct Selling Software   Common Units   3/16/2022     1,041,667       1,041,667       1,041,667       0.3 %
        Total Direct Selling Software                 26,044,011       25,997,917       7.6 %
C2 Educational Systems   Education Services   First Lien Term Loan
(3M USD LIBOR+8.50%), 10.11% Cash, 5/31/2023
  5/31/2017   $ 18,500,000       18,487,150       18,413,050       5.3 %
C2 Education Systems, Inc. (h)   Education Services   Series A-1 Preferred Stock   5/18/2021     3,127       499,904       611,355       0.2 %
Zollege PBC   Education Services   First Lien Term Loan
(3M USD LIBOR+5.50%), 7.11% Cash, 5/11/2026
  5/11/2021   $ 16,000,000       15,884,618       15,804,800       4.6 %
Zollege PBC (j)   Education Services   Delayed Draw Term Loan
(3M USD LIBOR+5.50%), 7.11% Cash, 5/11/2026
  5/11/2021   $ 500,000       496,063       481,700       0.1 %
Zollege PBC (h)   Education Services   Class A Units   5/11/2021     250,000       250,000       200,342       0.1 %
        Total Education Services                 35,617,735       35,511,247       10.3 %
Destiny Solutions Inc. (h), (i)   Education Software   Limited Partner Interests   5/16/2018     3,065       3,969,291       8,339,265       2.4 %
Identity Automation Systems (d)   Education Software   First Lien Term Loan
(3M USD LIBOR+9.24%), 10.99% Cash, 5/8/2024
  8/25/2014   $ 16,831,875       16,831,875       16,784,746       4.9 %
Identity Automation Systems (h)   Education Software   Common Stock Class A-2 Units   8/25/2014     232,616       232,616       544,519       0.2 %
Identity Automation Systems (h)   Education Software   Common Stock Class A-1 Units   3/6/2020     43,715       171,571       204,866       0.1 %
GoReact   Education Software   First Lien Term Loan
(3M USD LIBOR+7.50%), 9.50% Cash, 1/17/2025
  1/17/2020   $ 8,000,000       7,927,226       7,992,800       2.3 %
GoReact (j)   Education Software   Delayed Draw Term Loan
(3M USD LIBOR+7.50%), 9.50% Cash, 1/17/2025
  1/18/2022   $ 2,000,000       2,000,000       1,998,200       0.6 %
        Total Education Software                 31,132,579       35,864,396       10.5 %
TG Pressure Washing Holdings, LLC (h)   Facilities Maintenance   Preferred Equity   8/12/2019     488,148       488,148       499,634       0.1 %
        Total Facilities Maintenance                 488,148       499,634       0.1 %
Davisware, LLC   Field Service Management   First Lien Term Loan
(3M USD LIBOR+7.00%), 9.00% Cash, 7/31/2024
  9/6/2019   $ 6,000,000       5,960,141       5,954,400       1.7 %
Davisware, LLC (j)   Field Service Management   Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 9.00% Cash, 7/31/2024
  9/6/2019   $ 977,790       975,859       970,359       0.3 %
        Total Field Service Management                 6,936,000       6,924,759       2.0 %
GDS Software Holdings, LLC   Financial Services   First Lien Term Loan
(3M USD LIBOR+7.00%), 8.61% Cash, 12/30/2026
  12/30/2021   $ 22,713,926       22,586,066       22,566,286       6.5 %
GDS Software Holdings, LLC (j)   Financial Services   Delayed Draw Term loan
(3M USD LIBOR+7.00%), 8.61% Cash, 12/30/2026
  12/30/2021   $ 1,500,000       1,485,719       1,490,250       0.4 %
GDS Software Holdings, LLC  (h)   Financial Services   Common Stock Class A Units   8/23/2018     250,000       250,000       503,775       0.1 %
        Total Financial Services                 24,321,785       24,560,311       7.0 %
Ascend Software, LLC   Financial Services Software   First Lien Term Loan
(3M USD LIBOR+7.50%), 9.11% Cash, 12/15/2026
  12/15/2021   $ 6,000,000       5,945,623       5,940,000       1.7 %
Ascend Software, LLC (j)   Financial Services Software   Delayed Draw Term Loan
(3M USD LIBOR+7.50%), 9.11% Cash, 12/15/2026
  12/15/2021   $ 1,300,000       1,287,170       1,287,000       0.4 %
        Total Financial Services Software                 7,232,793       7,227,000       2.1 %
Ohio Medical, LLC (h)   Healthcare Products Manufacturing   Common Stock   1/15/2016     5,000       380,353       634,183       0.2 %
        Total Healthcare Products Manufacturing                 380,353       634,183       0.2 %
Axiom Parent Holdings, LLC (h)   Healthcare Services   Common Stock Class A Units   6/19/2018   $ 400,000       400,000       1,269,248       0.4 %
Axiom Purchaser, Inc. (d)   Healthcare Services   First Lien Term Loan
(3M USD LIBOR+6.00%), 7.75% Cash, 6/19/2023
  6/19/2018   $ 7,500,000       7,484,272       7,479,750       2.2 %
Axiom Purchaser, Inc. (d)   Healthcare Services   Delayed Draw Term Loan
(3M USD LIBOR+6.00%), 7.75% Cash, 6/19/2023
  6/19/2018   $ 4,500,000       4,486,480       4,487,850       1.3 %
ComForCare Health Care (d)   Healthcare Services   First Lien Term Loan
(3M USD LIBOR+6.25%), 7.86% Cash, 1/31/2025
  1/31/2017   $ 25,000,000       24,908,782       25,000,000       7.2 %
        Total Healthcare Services                 37,279,534       38,236,848       11.1 %

  

5

 

 

Company(1)   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     2,487       2,816,693       3,912,271       1.1 %
HemaTerra Holding Company, LLC (d)   Healthcare Software   First Lien Term Loan
(3M USD LIBOR+8.25%), 9.86% Cash, 1/31/2026
  4/15/2019   $ 35,910,000       35,636,083       35,550,900       10.3 %
HemaTerra Holding Company, LLC (d)   Healthcare Software   Delayed Draw Term Loan
(3M USD LIBOR+8.25%), 9.86% Cash, 1/31/2026
  4/15/2019   $ 13,965,000       13,881,774       13,825,350       4.0 %
Procurement Partners, LLC   Healthcare Software   First Lien Term Loan
(3M USD LIBOR+5.50%), 7.11% Cash, 11/12/2025
  11/12/2020   $ 35,125,000       34,848,066       34,896,688       10.1 %
Procurement Partners, LLC (j)   Healthcare Software   Delayed Draw Term Loan
(3M USD LIBOR+5.50%), 7.11% Cash, 11/12/2025
  11/12/2020   $ 1,200,000       1,188,650       1,192,200       0.3 %
Procurement Partners Holdings LLC (h)   Healthcare Software   Class A Units   11/12/2020     550,986       550,986       630,757       0.2 %
        Total Healthcare Software                 88,922,252       90,008,166       26.0 %
Roscoe Medical, Inc. (h)   Healthcare Supply   Common Stock   3/26/2014     5,081       508,077       -       0.0 %
        Total Healthcare Supply                 508,077       -       0.0 %
Book4Time, Inc. (a), (d)   Hospitality/Hotel   First Lien Term Loan
(3M USD LIBOR+8.50%), 10.25%, 12/22/2025
  12/22/2020   $ 3,136,517       3,113,515       3,103,270       0.9 %
Book4Time, Inc. (a)   Hospitality/Hotel   Delayed Draw Term Loan
(3M USD LIBOR+8.50%), 10.25%, 12/22/2025
  12/22/2020   $ 2,000,000       1,980,015       1,978,800       0.6 %
Book4Time, Inc. (a), (h), (i)   Hospitality/Hotel   Class A Preferred Shares   12/22/2020     200,000       156,826       216,744       0.1 %
Knowland Group, LLC (k)   Hospitality/Hotel   Second Lien Term Loan
(3M USD LIBOR+8.00%), 10.00% Cash/1.00% PIK, 5/9/2024
  11/9/2018   $ 15,878,989       15,878,989       10,059,339       2.9 %
Sceptre Hospitality Resources, LLC   Hospitality/Hotel   First Lien Term Loan
(3M USD LIBOR+8.00%), 9.61% Cash, 9/2/2026
  4/27/2020   $ 6,000,000       5,954,100       5,904,000       1.7 %
Sceptre Hospitality Resources, LLC (j)   Hospitality/Hotel   Delayed Draw Term Loan
(3M USD LIBOR+8.00%), 9.61% Cash, 9/2/2026
  9/2/2021   $ 750,000       742,524       738,000       0.2 %
        Total Hospitality/Hotel                 27,825,969       22,000,153       6.4 %
Granite Comfort, LP   HVAC Services and Sales   First Lien Term Loan
(3M USD LIBOR+7.00%), 8.61% Cash, 11/16/2025
  11/16/2020   $ 33,000,000       32,734,758       33,059,400       9.6 %
Granite Comfort, LP(j)   HVAC Services and Sales   Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 8.61% Cash, 11/16/2025
  11/16/2020   $ 2,000,000       1,981,632       2,003,600       0.6 %
        Total HVAC Services and Sales                 34,716,390       35,063,000       10.2 %
AgencyBloc, LLC   Insurance Software   First Lien Term Loan
(3M USD BSBY+8.00%), 9.52% Cash, 10/1/2026
  10/1/2021   $ 9,000,000       8,930,595       8,862,300       2.6 %
Panther ParentCo LLC (h)   Insurance Software   Class A Units   10/1/2021     2,000,000       2,000,000       2,334,414       0.7 %
        Total Insurance Software                 10,930,595       11,196,714       3.3 %
Vector Controls Holding Co., LLC (d)   Industrial Products   First Lien Term Loan
(3M USD LIBOR+6.50%), 8.11% Cash, 3/6/2025
  3/6/2013   $ 4,746,986       4,746,986       4,705,213       1.4 %
Vector Controls Holding Co., LLC (h)   Industrial Products   Warrants to Purchase Limited Liability Company Interests, Expires 11/30/2027   5/31/2015     343       -       3,978,000       1.2 %
        Total Industrial Products                 4,746,986       8,683,213       2.6 %
LogicMonitor, Inc. (d)   IT Services   First Lien Term Loan
(3M USD LIBOR+5.00), 6.61% Cash, 5/17/2023
  3/20/2020   $ 43,000,000       42,851,422       43,000,000       12.5 %
           Total IT Services                 42,851,422       43,000,000       12.5 %
Centerbase, LLC   Legal Software   First Lien Term Loan
(Daily USD SOFR+7.75%), 8.75% Cash, 1/18/2027
  1/18/2022   $ 21,408,000       21,186,767       21,193,920       6.1 %
          Total Legal Software                 21,186,767       21,193,920       6.1 %
Madison Logic, Inc.   Marketing Orchestration Software   First Lien Term Loan
(1M USD LIBOR+5.50%), 6.62% Cash, 11/22/2026
  12/10/2021   $ 28,843,373       28,722,334       28,704,925       8.3 %
Madison Logic, Inc. (j)   Marketing Orchestration Software   Revolving Credit Facility
(1M USD LIBOR+5.50%), 6.62% Cash, 11/22/2026
  12/10/2021   $ -       -       -       0.0 %
        Total Marketing Orchestration Software                 28,722,334       28,704,925       8.3 %
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       12,148,027       12,151,200       3.5 %
inMotionNow, Inc. (d)   Marketing Services   Delayed Draw Term Loan
(3M USD LIBOR+7.50)  10.00% Cash, 5/15/2024
  5/15/2019   $ 5,000,000       4,976,703       4,980,000       1.4 %
          Total Marketing Services                 17,124,730       17,131,200       4.9 %
Chronus LLC   Mentoring Software   First Lien Term Loan
(3M USD LIBOR+5.25), 6.86% Cash, 8/26/2026
  8/26/2021   $ 15,000,000       14,870,093       14,920,500       4.3 %
Chronus LLC (h)   Mentoring Software   Series A Preferred Stock   8/26/2021     3,000       3,000,000       3,389,432       1.0 %
        Total Mentoring Software                 17,870,093       18,309,932       5.3 %

  

6

 

 

Company(1)   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/1.00% PIK, 5/29/2023
  5/29/2018   $ 10,036,289       9,993,648       9,939,941       2.9 %
        Total Non-profit Services                 9,993,648       9,939,941       2.9 %
Emily Street Enterprises, L.L.C.   Office Supplies   Senior Secured Note
(3M USD LIBOR+8.50%), 10.11% Cash, 12/31/2023
  12/28/2012   $ 3,300,000       3,300,000       3,252,150       0.9 %
Emily Street Enterprises, L.L.C. (h)   Office Supplies   Warrant Membership Interests
Expires 12/28/2022
  12/28/2012     49,318       400,000       507,642       0.1 %
          Total Office Supplies                 3,700,000       3,759,792       1.0 %
Apex Holdings Software Technologies, LLC   Payroll Services   First Lien Term Loan
(3M USD LIBOR+8.00%), 9.61% Cash, 9/21/2024
  9/21/2016   $ 16,500,000       16,492,637       16,488,450       4.7 %
        Total Payroll Services                 16,492,637       16,488,450       4.7 %
Buildout, Inc.   Real Estate Services   First Lien Term Loan
(3M USD LIBOR+7.00%), 8.61% Cash, 7/9/2025
  7/9/2020   $ 14,000,000       13,904,509       13,904,800       4.0 %
Buildout, Inc.   Real Estate Services   Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 8.61% Cash, 7/9/2025
  2/12/2021   $ 38,500,000       38,190,646       38,238,200       11.0 %
Buildout, Inc. (h), (i)   Real Estate Services   Limited Partner Interests   7/9/2020     1,205       1,205,308       1,256,264       0.4 %
        Total Real Estate Services                 53,300,463       53,399,264       15.4 %
LFR Chicken LLC   Restaurant   First Lien Term Loan
(1M USD LIBOR+7.00%), 8.12% Cash, 11/19/2026
  11/19/2021   $ 12,000,000       11,893,721       11,851,200       3.4 %
LFR Chicken LLC (j)   Restaurant   Delayed Draw Term Loan
(1M USD LIBOR+7.00%), 8.12% Cash, 11/19/2026
  11/19/2021   $ 9,000,000       8,912,727       8,888,400       2.6 %
LFR Chicken LLC (h)   Restaurant   Series B Preferred Units   11/19/2021     497,183       1,000,000       1,196,146       0.3 %
TMAC Acquisition Co., LLC   Restaurant   Unsecured Term Loan
8.00% PIK, 9/01/2023
  3/1/2018   $ 2,979,312       2,979,312       2,785,387       0.8 %
        Total Restaurant                 24,785,760       24,721,133       7.1 %
Pepper Palace, Inc. (d)   Specialty Food Retailer   First Lien Term Loan
(3M USD LIBOR+6.25%), 7.86% Cash, 6/30/2026
  6/30/2021   $ 33,745,000       33,458,240       28,828,353       8.3 %
Pepper Palace, Inc. (j)   Specialty Food Retailer   Delayed Draw Term Loan
(3M USD LIBOR+6.25%), 7.86% Cash, 6/30/2026
  6/30/2021   $ -       -       -       0.0 %
Pepper Palace, Inc. (j)   Specialty Food Retailer   Revolving Credit Facility
(3M USD LIBOR+6.25%), 7.86% 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       157,598       -0.1 %
          Total Specialty Food Retailer                 34,458,240       28,985,951       8.2 %
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       25,864,509       25,706,200       7.3 %
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       988,700       0.3 %
        Total Sports Management                 26,864,509       26,694,900       7.6 %
Avionte Holdings, LLC (h)   Staffing Services   Class A Units   1/8/2014     100,000       100,000       2,059,840       0.6 %
        Total Staffing Services                 100,000       2,059,840       0.6 %
JDXpert   Talent Acquisition Software   First Lien Term Loan
(3M USD LIBOR+8.50%), 10.11% Cash, 5/2/2027
  5/2/2022   $ 6,000,000       5,940,044       5,940,000          
JDXpert (j)   Talent Acquisition Software   Delayed Draw Term Loan
(3M USD LIBOR+8.50%), 10.11% Cash, 5/2/2027
  5/2/2022   $ -       -       -          
Jobvite, Inc. (d)   Talent Acquisition Software   Second Lien Term Loan
(3M USD LIBOR+7.50%), 9.11% Cash, 1/6/2027
  7/6/2021   $ 20,000,000       19,847,950       19,576,000       5.7 %
        Total Talent Acquisition Software                 25,787,994       25,516,000       5.7 %
National Waste Partners (d)   Waste Services   Second Lien Term Loan
10.00% Cash, 11/13/2022
  2/13/2017   $ 9,000,000       9,000,000       8,993,700       2.6 %
        Total Waste Services                 9,000,000       8,993,700       2.6 %
Sub Total Non-control/Non-affiliate investments                     732,722,272       745,481,455       213.8 %
Affiliate investments - 16.2% (b)                                        
Artemis Wax Corp. (d), (f), (j)   Consumer Services   Delayed Draw Term Loan
(1M USD LIBOR+9.00%), 11.00% Cash, 5/20/2026
  5/20/2021   $ 30,000,000       29,741,794       29,949,000       8.7 %
Artemis Wax Corp. (f)   Consumer Services   Delayed Draw Term Loan
(1M USD LIBOR+6.50%), 8.50% Cash, 5/20/2026
  5/19/2022   $ 6,000,000       5,940,132       5,989,800       1.7 %
Artemis Wax Corp. (f), (h)   Consumer Services   Series B-1 Preferred Stock   5/20/2021     934,463       1,500,000       2,837,765       0.8 %
Artemis Wax Corp. (f), (h)   Consumer Services   Series C Preferred Stock   5/20/2021     5,745       5,745,485       5,745,481       1.7 %
          Total Consumer Services                 42,927,411       44,522,046       12.9 %

  

7

 

   

Company(1)   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
(3M USD LIBOR+10.00%), 11.61% Cash, 6/30/2026
  6/30/2021   $ 5,500,000       5,452,434       5,513,200       1.6 %
Axero Holdings, LLC (f), (j)   Employee Collaboration Software   Delayed Draw Term Loan
(3M USD LIBOR+10.00%), 11.61% Cash, 6/30/2026
  6/30/2021   $ 1,100,000       1,089,030       1,102,640       0.3 %
Axero Holdings, LLC (f), (j)   Employee Collaboration Software   Revolving Credit Facility
(3M USD LIBOR+10.00%), 11.61% Cash, 6/30/2026
  2/3/2022   $ -       -       -       0.0 %
Axero Holdings, LLC (f), (h)   Employee Collaboration Software   Series A Preferred Units   6/30/2021     2,000,000       2,000,000       2,275,000       0.6 %
Axero Holdings, LLC (f), (h)   Employee Collaboration Software   Series B Preferred Units   6/30/2021     2,000,000       2,000,000       2,632,792       0.8 %
          Total Employee Collaboration Software                 10,541,464       11,523,632       3.3 %
Sub Total Affiliate investments                     53,468,875       56,045,678       16.2 %
Control investments - 26.8% (b)                                        
Netreo Holdings, LLC (g)   IT Services   First Lien Term Loan
(3M USD LIBOR +8.00%), 9.61% Cash
12/31/2025
  7/3/2018   $ 5,466,933       5,444,758       5,463,653       1.5 %
Netreo Holdings, LLC (d), (g), (j)   IT Services   Delayed Draw Term Loan
(3M USD LIBOR +8.00%), 9.61% Cash,
12/31/2025
  5/26/2020   $ 16,019,435       15,968,598       16,009,823       4.6 %
Netreo Holdings, LLC (g), (h)   IT Services   Common Stock Class A Unit   7/3/2018     4,600,677       8,344,500       18,270,011       5.3 %
          Total IT Services                 29,757,856       39,743,487       11.4 %
Saratoga Investment Corp. CLO 2013-1, Ltd. (a), (e), (g)   Structured Finance Securities   Other/Structured Finance Securities
5.15%, 4/20/2033
  1/22/2008   $ 111,000,000       30,973,564       24,117,794       7.0 %
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%), 11.61%, 4/20/2033
  8/9/2021   $ 9,375,000       9,375,000       9,375,000       2.7 %
        Total Structured Finance Securities                 40,348,564       33,492,794       9.7 %
Saratoga Senior Loan Fund I JV, LLC (a), (g), (j)   Investment Fund   Unsecured Loan
10.00%, 6/15/2023
  2/17/2022   $ 13,125,000       13,125,000       13,125,000       3.8 %
Saratoga Senior Loan Fund I JV, LLC (a), (g)   Investment Fund   Membership Interest   2/17/2022     13,125,000       13,125,000       6,644,732       1.9 %
        Total Investment Fund                 26,250,000       19,769,732       5.7 %
Sub Total Control investments                     96,356,420       93,006,013       26.8 %
TOTAL INVESTMENTS - 256.8% (b)                   $ 882,547,567     $ 894,533,146       256.8 %

 

   Number of Shares   Cost   Fair Value   % of
Net Assets
 
Cash and cash equivalents and cash and cash equivalents, reserve accounts - 29.4% (b)                
U.S. Bank Money Market (l)   101,489,854   $101,489,854   $101,489,854    29.4%
Total cash and cash equivalents and cash and cash equivalents, reserve accounts   101,489,854   $101,489,854   $101,489,854    29.4%

  

(1)Securities are exempt from registration under Rule 144A of the Securities Act of 1933, as amended, and are restricted securities.

 

8

 

 

(a)Represents an investment that is not a “qualifying asset” under Section 55(a) of the Investment Company Act of 1940, as amended (the 1940 Act”). As of May 31, 2022, non-qualifying assets represent 5.8% of the Company’s portfolio at fair value. As a BDC, the Company generally has to invest at least 70% of its total assets in qualifying assets.

 

(b)Percentages are based on net assets of $345,235,811 as of May 31, 2022.

 

(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).

 

(d)These securities are either fully or partially pledged as collateral under a senior secured revolving credit facility (see Note 8 to the consolidated financial statements).

 

(e)This investment does not have a stated interest rate that is payable thereon. As a result, the 5.15% 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 1940 Act, this portfolio company is an “affiliate” as we own between 5.0% and 25.0% of the outstanding voting securities. Transactions during the quarter ended May 31, 2022 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.  $5,940,000   $-   $880,798   $      -   $    -   $134,348 
Axero Holdings, LLC   1,089,000    -    169,350    -    -    433,258 
Total  $7,029,000   $-   $1,050,148   $-   $-   $567,606 

 

(g)As defined in the 1940 Act, we “control” this portfolio company because we own more than 25% of the portfolio company’s outstanding voting securities. Transactions during the quarter ended May 31, 2022 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  $2,475,000   $-   $444,031   $-   $       -   $(657,884)
Saratoga Investment Corp. CLO 2013-1, Ltd.   -    -    592,681    815,964    -    (3,237,550)
Saratoga Investment Corp. CLO 2013-1, Ltd. Class F-2-R-3 Note   -    -    254,514    -    -    - 
Saratoga Senior Loan Fund I JV, LLC   -    -    328,125    -    -    - 
Saratoga Senior Loan Fund I JV, LLC   -    -    -    -    -    (5,371,332)
Total  $2,475,000   $-   $1,619,351   $815,964   $-   $(9,266,766)

 

(h)Non-income producing at May 31, 2022.

 

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

 

(j)All or a portion of this investment has an unfunded commitment as of May 31, 2022. (See Note 9 to the consolidated financial statements).

 

(k)As of May 31, 2022, there were no investments 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 May 31, 2022.

  

BSBY - Bloomberg Short-Term Bank Yield

LIBOR - London Interbank Offered Rate

SOFR - Secured Overnight Financing Rate

  

3M USD BSBY - The 3 month USD BSBY rate as of May 31, 2022 was 1.56%. 

1M USD LIBOR - The 1 month USD LIBOR rate as of May 31, 2022 was 1.12%.

3M USD LIBOR - The 3 month USD LIBOR rate as of May 31, 2022 was 1.63%.

Daily USD SOFR - The daily USD SOFR rate as of May 31, 2022 was 0.79%

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

  

See accompanying notes to consolidated financial statements.

 

9

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2022

 

Company(1)  Industry  Investment Interest
Rate/Maturity
  Original
Acquisition
Date
  Principal/
Number of
Shares
   Cost   Fair Value (c)   % of
Net Assets
 
Non-control/Non-affiliate investments - 187.4% (b)                   
Targus Holdings, Inc. (h)  Consumer Products  Common Stock  12/31/2009   210,456   $1,589,630   $692,535    0.2%
      Total Consumer Products           1,589,630    692,535    0.2%
Schoox, Inc. (h), (i)  Corporate Education Software  Series 1 Membership Interest  12/8/2020   1,050    475,698    3,305,839    0.9%
      Total Corporate Education Software           475,698    3,305,839    0.9%
GreyHeller LLC (h)  Cyber Security  Common Stock  11/10/2021   6,742,392    1,635,704    1,635,704    0.5%
      Total Cyber Security           1,635,704    1,635,704    0.5%
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    6,502,672    6,404,891    1.8%
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    2,132,639    1,997,715    0.6%
      Total Dental Practice Management           8,635,311    8,402,606    2.4%
PDDS Buyer, LLC (d)  Dental Practice Management Software  First Lien Term Loan
(3M USD LIBOR+5.50%), 6.00% Cash, 7/15/2024
  7/15/2019  $28,000,000    27,943,852    27,938,400    7.9%
PDDS Buyer, LLC (h)  Dental Practice Management Software  Series A-1 Preferred Shares  8/10/2020   1,755,831    2,000,000    7,099,940    2.0%
      Total Dental Practice Management Software        29,943,852    35,038,340    9.9%
C2 Educational Systems  Education Services  First Lien Term Loan
(3M USD LIBOR+8.50%), 10.00% Cash, 5/31/2023
  5/31/2017  $18,500,000    18,484,747    18,220,650    5.1%
C2 Education Systems, Inc. (h)  Education Services  Series A-1 Preferred Stock  5/18/2021   3,127    499,904    599,296    0.2%
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    15,877,908    15,794,300    4.4%
Zollege PBC (j)  Education Services  Delayed Draw Term Loan
(3M USD LIBOR+5.50%), 6.50% Cash, 5/11/2026
  5/11/2021  $500,000    495,811    493,950    0.1%
Zollege PBC (h)  Education Services  Class A Units  5/11/2021   250,000    250,000    201,218    0.1%
      Total Education Services           35,608,370    35,309,414    9.9%
Destiny Solutions Inc. (h), (i)  Education Software  Limited Partner Interests  5/16/2018   3,065    3,969,291    7,632,061    2.1%
Identity Automation Systems (d)  Education Software  First Lien Term Loan
(3M USD LIBOR+9.24%), 10.99% Cash, 5/8/2024
  8/25/2014  $16,941,250    16,941,250    16,941,250    4.8%
Identity Automation Systems (h)  Education Software  Common Stock Class A-2 Units  8/25/2014   232,616    232,616    801,923    0.2%
Identity Automation Systems (h)  Education Software  Common Stock Class A-1 Units  3/6/2020   43,715    171,571    200,820    0.1%
GoReact  Education Software  First Lien Term Loan
(3M USD LIBOR+7.50%), 9.50% Cash, 1/17/2025
  1/17/2020  $8,000,000    7,920,033    8,080,000    2.3%
GoReact (j)  Education Software  Delayed Draw Term Loan
(3M USD LIBOR+7.50%), 9.50% Cash, 1/17/2025
  1/18/2022  $-    -    -    0.0%
      Total Education Software           29,234,761    33,656,054    9.5%
TG Pressure Washing Holdings, LLC (h)  Facilities Maintenance  Preferred Equity  8/12/2019   488,148    488,148    482,036    0.1%
      Total Facilities Maintenance           488,148    482,036    0.1%
Davisware, LLC  Field Service Management  First Lien Term Loan
(3M USD LIBOR+7.00%), 9.00% Cash, 7/31/2024
  9/6/2019  $6,000,000    5,954,705    6,003,000    1.7%
Davisware, LLC (j)  Field Service Management  Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 9.00% Cash, 7/31/2024
  9/6/2019  $977,790    975,504    978,279    0.3%
      Total Field Service Management           6,930,209    6,981,279    2.0%
GDS Software Holdings, LLC  Financial Services  First Lien Term Loan
(3M USD LIBOR+7.00%), 8.00% Cash, 12/30/2026
  12/30/2021  $22,713,926    22,579,864    22,570,829    6.3%
GDS Software Holdings, LLC (j)  Financial Services  Delayed Draw Term loan
(3M USD LIBOR+7.00%), 8.00% Cash, 12/30/2026
  12/18/2021  $500,000    495,031    496,850    0.1%
GDS Software Holdings, LLC  (h)  Financial Services  Common Stock Class A Units  8/23/2018   250,000    250,000    472,009    0.1%
      Total Financial Services           23,324,895    23,539,688    6.5%
Ascend Software, LLC  Financial Services Software  First Lien Term Loan
(3M USD LIBOR+7.50%), 8.50% Cash, 12/15/2026
  12/15/2021  $6,000,000    5,942,482    5,940,000    1.7%
Ascend Software, LLC (j)  Financial Services Software  Delayed Draw Term Loan
(3M USD LIBOR+7.50%), 8.50% Cash, 12/15/2026
  12/15/2021  $-    -    -    0.0%
      Total Financial Services Software           5,942,482    5,940,000    1.7%
Ohio Medical, LLC (h)  Healthcare Products Manufacturing  Common Stock  1/15/2016   5,000    380,353    714,271    0.2%
      Total Healthcare Products Manufacturing           380,353    714,271    0.2%

 

10

 

 

Company(1)  Industry  Investment Interest
Rate/Maturity
  Original
Acquisition
Date
  Principal/
Number of
Shares
   Cost   Fair Value (c)   % of
Net Assets
 
Axiom Parent Holdings, LLC (h)  Healthcare Services  Common Stock Class A Units  6/19/2018   400,000    400,000    1,032,934    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    9,974,217    10,013,000    2.8%
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    5,977,846    6,007,800    1.7%
ComForCare Health Care (d)  Healthcare Services  First Lien Term Loan
(3M USD LIBOR+7.25%), 8.25% Cash, 1/31/2025
  1/31/2017  $25,000,000    24,903,581    25,000,000    7.0%
      Total Healthcare Services           41,255,644    42,053,734    11.8%
TRC HemaTerra, LLC (h)  Healthcare Software  Class D Membership Interests  4/15/2019   2,487    2,816,693    3,788,769    1.1%
HemaTerra Holding Company, LLC (d)  Healthcare Software  First Lien Term Loan
(3M USD LIBOR+8.25%), 9.25% Cash, 1/31/2026
  4/15/2019  $36,000,000    35,715,061    35,640,000    10.0%
HemaTerra Holding Company, LLC (d)  Healthcare Software  Delayed Draw Term Loan
(3M USD LIBOR+8.25%), 9.25% Cash, 1/31/2026
  4/15/2019  $14,000,000    13,912,744    13,860,000    3.9%
Procurement Partners, LLC  Healthcare Software  First Lien Term Loan
(3M USD LIBOR+5.50%), 6.50% Cash, 11/12/2025
  11/12/2020  $35,125,000    34,827,633    34,998,550    9.8%
Procurement Partners, LLC (j)  Healthcare Software  Delayed Draw Term Loan
(3M USD LIBOR+5.50%), 6.50% Cash, 11/12/2025
  11/12/2020  $1,200,000    1,188,047    1,195,680    0.3%
Procurement Partners Holdings LLC (h)  Healthcare Software  Class A Units  11/12/2020   550,986    550,986    643,044    0.2%
      Total Healthcare Software           89,011,164    90,126,043    25.3%
Roscoe Medical, Inc. (h)  Healthcare Supply  Common Stock  3/26/2014   5,081    508,077    52,853    0.0%
Roscoe Medical, Inc.  Healthcare Supply  Second Lien Term Loan
11.25% Cash, 3/31/2022
  3/26/2014  $5,141,413    5,141,413    5,141,413    1.4%
      Total Healthcare Supply           5,649,490    5,194,266    1.4%
Book4Time, Inc. (a), (d)  Hospitality/Hotel  First Lien Term Loan
(3M USD LIBOR+8.50%), 10.25%, 12/22/2025
  12/22/2020  $3,136,517    3,111,278    3,112,052    0.9%
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    198,638    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  $15,878,989    15,878,989    10,592,873    3.0%
Sceptre Hospitality Resources, LLC  Hospitality/Hotel  First Lien Term Loan
(1M USD LIBOR+8.00%), 9.00% Cash, 9/2/2026
  4/27/2020  $6,000,000    5,952,460    6,021,000    1.7%
Sceptre Hospitality Resources, LLC (j)  Hospitality/Hotel  Delayed Draw Term Loan
(1M USD LIBOR+8.00%), 9.00% Cash, 9/2/2026
  9/2/2021  $-    -    -    0.0%
      Total Hospitality/Hotel           25,099,553    19,924,563    5.7%
Granite Comfort, LP  HVAC Services and Sales  First Lien Term Loan
(1M USD LIBOR+8.00%), 9.00% Cash, 11/16/2025
  11/16/2020  $28,000,000    27,764,146    27,977,600    7.9%
Granite Comfort, LP(j)  HVAC Services and Sales  Delayed Draw Term Loan
(1M USD LIBOR+8.00%), 9.00% Cash, 11/16/2025
  11/16/2020  $2,000,000    1,980,805    1,998,400    0.6%
      Total HVAC Services and Sales           29,744,951    29,976,000    8.5%
AgencyBloc, LLC  Insurance Software  First Lien Term Loan
(3M USD BSBY+8.00%), 9.00% Cash, 10/1/2026
  10/1/2021  $9,000,000    8,925,938    8,920,800    2.5%
Panther ParentCo LLC (h)  Insurance Software  Class A Units  10/1/2021   2,000,000    2,000,000    2,000,000    0.6%
      Total Insurance Software           10,925,938    10,920,800    3.1%
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  $5,008,186    5,008,186    5,008,186    1.4%
Vector Controls Holding Co., LLC (h)  Industrial Products  Warrants to Purchase Limited Liability Company Interests, Expires 11/30/2027  5/31/2015   343    -    3,418,993    1.0%
      Total Industrial Products           5,008,186    8,427,179    2.4%
LogicMonitor, Inc. (d)  IT Services  First Lien Term Loan
(3M USD LIBOR+5.00), 6.00% Cash, 5/17/2023
  3/20/2020  $43,000,000    42,806,801    43,000,000    12.1%
      Total IT Services           42,806,801    43,000,000    12.1%
Centerbase, LLC  Legal Software  First Lien Term Loan
(Daily USD SOFR+7.50%), 8.50% Cash, 1/18/2027
  1/18/2022  $7,500,000    7,409,860    7,425,000    2.1%
      Total Legal Software           7,409,860    7,425,000    2.1%
Madison Logic, Inc.  Marketing Orchestration Software  First Lien Term Loan
(1M USD LIBOR+5.75%), 6.75% Cash, 11/22/2026
  12/10/2021  $28,915,663    28,782,977    28,776,867    8.1%

 

11

 

 

Company(1)  Industry  Investment Interest
Rate/Maturity
  Original
Acquisition
Date
  Principal/
Number of
Shares
   Cost   Fair Value (c)   % of
Net Assets
 
Madison Logic, Inc. (j)  Marketing Orchestration Software  Revolving Credit Facility
(1M USD LIBOR+5.75%), 6.75% Cash, 11/22/2026
  12/10/2021  $-    -    -    0.0%
      Total Marketing Orchestration Software           28,782,977    28,776,867    8.1%
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    12,139,533    12,290,280    3.5%
inMotionNow, Inc. (d)  Marketing Services  Delayed Draw Term Loan
(3M USD LIBOR+7.50)  10.00% Cash, 5/15/2024
  5/15/2019  $5,000,000    4,972,992    5,037,000    1.4%
      Total Marketing Services           17,112,525    17,327,280    4.9%
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    14,861,338    14,938,500    4.2%
Chronus LLC (h)  Mentoring Software  Series A Preferred Stock  8/26/2021   3,000    3,000,000    3,382,625    1.0%
      Total Mentoring Software           17,861,338    18,321,125    5.2%
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  $10,010,685    9,955,082    10,038,714    2.8%
      Total Non-profit Services           9,955,082    10,038,714    2.8%
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    3,278,880    0.9%
Emily Street Enterprises, L.L.C. (h)  Office Supplies  Warrant Membership Interests
Expires 12/28/2022
  12/28/2012   49,318    400,000    446,927    0.1%
      Total Office Supplies           3,700,000    3,725,807    1.0%
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  $17,000,000    16,990,006    17,000,000    4.7%
      Total Payroll Services           16,990,006    17,000,000    4.7%
Buildout, Inc.  Real Estate Services  First Lien Term Loan
(3M USD LIBOR+7.00%), 8.00% Cash, 7/9/2025
  7/9/2020  $14,000,000    13,897,546    13,904,800    3.9%
Buildout, Inc.  Real Estate Services  Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 8.00% Cash, 7/9/2025
  2/12/2021  $38,500,000    38,173,998    38,238,200    10.6%
Buildout, Inc. (h), (i)  Real Estate Services  Limited Partner Interests  7/9/2020   1,205    1,205,308    1,363,014    0.4%
      Total Real Estate Services           53,276,852    53,506,014    14.9%
LFR Chicken LLC  Restaurant  First Lien Term Loan
(1M USD LIBOR+7.00%), 8.00% Cash, 11/19/2026
  11/19/2021  $12,000,000    11,886,588    11,880,000    3.3%
LFR Chicken LLC (j)  Restaurant  Delayed Draw Term Loan
(1M USD LIBOR+7.00%), 8.00% Cash, 11/19/2026
  11/19/2021  $-    -    -    0.0%
LFR Chicken LLC (h)  Restaurant  Series B Preferred Units  11/19/2021   497,183    1,000,000    999,984    0.3%
TMAC Acquisition Co., LLC  Restaurant  Unsecured Term Loan
8.00% PIK, 9/01/2023
  3/1/2018  $2,979,312    2,979,312    2,805,541    0.8%
      Total Restaurant           15,865,900    15,685,525    4.4%
Pepper Palace, Inc. (d)  Specialty Food Retailer  First Lien Term Loan
(3M USD LIBOR+6.25%), 7.25% Cash, 6/30/2026
  6/30/2021  $33,830,000    33,531,592    33,261,656    9.2%
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  $-    -    (33,600)   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  $-    -    (42,000)   0.0%
Pepper Palace, Inc. (h)  Specialty Food Retailer  Membership Interest  6/30/2021   1,000,000    1,000,000    827,050    0.1%
      Total Specialty Food Retailer           34,531,592    34,013,106    9.3%
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    25,846,091    25,667,199    7.1%

 

12

 

 

Company(1)  Industry  Investment Interest
Rate/Maturity
  Original
Acquisition
Date
  Principal/
Number of
Shares
   Cost   Fair Value (c)   % of
Net Assets
 
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    999,997    987,200    0.3%
      Total Sports Management           26,846,088    26,654,399    7.4%
Avionte Holdings, LLC (h)  Staffing Services  Class A Units  1/8/2014   100,000    100,000    1,912,328    0.5%
      Total Staffing Services           100,000    1,912,328    0.5%
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    19,841,684    19,652,000    5.5%
      Total Talent Acquisition Software           19,841,684    19,652,000    5.5%
National Waste Partners (d)  Waste Services  Second Lien Term Loan
10.00% Cash, 11/13/2022
  2/13/2017  $9,000,000    9,000,000.0    9,000,000.0    2.5%
      Total Waste Services           9,000,000    9,000,000    2.5%
Sub Total Non-control/Non-affiliate investments           654,965,044    668,358,516    187.4%
Affiliate investments - 13.5% (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  $30,000,000    29,727,282    30,000,000    8.4%
Artemis Wax Corp. (f), (h)  Consumer Services  Series B-1 Preferred Stock  5/20/2021   934,463    1,500,000    2,687,573    0.8%
Artemis Wax Corp. (f), (h)  Consumer Services  Series C Preferred Stock  5/20/2021   5,547    5,546,609    5,546,605    1.6%
      Total Consumer Services           36,773,891    38,234,178    10.8%
Axero Holdings, LLC (f)  Employee Collaboration Software  First Lien Term Loan
(3M USD LIBOR+10.00%), 11.00% Cash, 6/30/2026
  6/30/2021  $5,500,000    5,451,036    5,482,950    1.5%
Axero Holdings, LLC (f), (j)  Employee Collaboration Software  Delayed Draw Term Loan
(3M USD LIBOR+10.00%), 11.00% Cash, 6/30/2026
  6/30/2021  $-    -    -    0.0%
Axero Holdings, LLC (f), (j)  Employee Collaboration Software  Revolving Credit Facility
(3M USD LIBOR+10.00%), 11.00% Cash, 6/30/2026
  2/3/2022  $-    -    -    0.0%
Axero Holdings, LLC (f), (h)  Employee Collaboration Software  Series A Preferred Units  6/30/2021   2,000,000    2,000,000    2,198,000    0.5%
Axero Holdings, LLC (f), (h)  Employee Collaboration Software  Series B Preferred Units  6/30/2021   2,000,000    2,000,000    2,318,996    0.7%
      Total Employee Collaboration Software           9,451,036    9,999,946    2.7%
Sub Total Affiliate investments           46,224,927    48,234,124    13.5%
Control investments - 28.3% (b)                       
Netreo Holdings, LLC (g)  IT Services  First Lien Term Loan
(3M USD LIBOR +8.00%), 9.00% Cash
12/31/2025
  7/3/2018  $5,432,440    5,409,201    5,421,575    1.4%
Netreo Holdings, LLC (d), (g), (j)  IT Services  Delayed Draw Term Loan
(3M USD LIBOR +8.00%), 9.00% Cash,
12/31/2025
  5/26/2020  $13,433,515    13,406,530    13,406,648    3.8%
Netreo Holdings, LLC (g), (h)  IT Services  Common Stock Class A Unit  7/3/2018   4,600,677    8,344,500    18,975,523    5.3%
      Total IT Services           27,160,231    37,803,746    10.5%
Saratoga Investment Corp. CLO 2013-1, Ltd. (a), (e), (g)  Structured Finance Securities  Other/Structured Finance Securities
9.27%, 4/20/2033
  1/22/2008  $111,000,000    32,273,125    28,654,905    8.1%
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%), 10.17%, 4/20/2033
  8/9/2021  $9,375,000    9,375,000    9,375,000    2.6%
      Total Structured Finance Securities           41,648,125    38,029,905    10.7%
Saratoga Senior Loan Fund I JV, LLC (a), (g), (j)  Investment Fund  Unsecured Loan
10.00%, 6/15/2023
  2/17/2022  $13,125,000    13,125,000    13,125,000    3.7%
Saratoga Senior Loan Fund I JV, LLC (a), (g), (j)  Investment Fund  Membership Interest  2/17/2022   13,125,000    13,125,000    12,016,064    3.4%
      Total Investment Fund           26,250,000    25,141,064    7.1%
Sub Total Control investments           95,058,356    100,974,715    28.3%
TOTAL INVESTMENTS - 229.2% (b)          $796,248,327   $817,567,355    229.2%

 

13

 

 

   Number of
Shares
   Cost   Fair Value   % of
Net Assets
 
Cash and cash equivalents and cash and cash equivalents, reserve accounts - 14.9% (b)                
U.S. Bank Money Market (k)   52,870,342   $52,870,342   $52,870,342    14.9%
Total cash and cash equivalents and cash and cash equivalents, reserve accounts   52,870,342   $52,870,342   $52,870,342    14.9%

 

(1)Securities are exempt from registration under Rule 144A of the Securities Act of 1933, as amended, and are restricted securities.

 

(a)Represents an investment that is not a “qualifying asset” under Section 55(a) of the Investment Company Act of 1940, as amended (the 1940 Act”). As of February 28, 2022, non-qualifying assets represent 6.7% of the Company’s portfolio at fair value. As a BDC, the Company generally has to invest at least 70% of its total assets in qualifying assets.

 

(b)Percentages are based on net assets of $355,780,523 as of February 28, 2022.

 

(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).

 

(d)These securities are either fully or partially pledged as collateral under a senior secured revolving credit facility (see Note 8 to the consolidated financial statements).

 

(e)This investment does not have a stated interest rate that is payable thereon. As a result, the 9.27% 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.

 

14

 

 

(f)As defined in the 1940 Act, this portfolio company is an “affiliate” as we own between 5.0% and 25.0% of the outstanding voting securities. GreyHeller, LLC is no longer an affiliate as of February 28, 2022. Transactions during the year ended February 28, 2022 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.  $36,200,000   $-   $1,919,100   $                 -   $-   $1,460,287 
Axero Holdings, LLC   9,445,000    -    416,092    -    -    548,910 
GreyHeller, LLC   8,910,000    (26,428,457)   973,278    -    7,328,457    (3,102,569)
Top Gun   -    -    -    -    -    1,066,536 
Total  $54,555,000   $(26,428,457)  $3,308,471   $-   $7,328,457   $(26,836)

 

(g)As defined in the 1940 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, 2022 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  $17,074,500   $-   $1,814,735   $-   $-   $5,055,909 
Saratoga Investment Corp. CLO 2013-1, Ltd.   -    -    4,372,958    3,262,591    -    (1,221,309)
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    -    539,564    -    -    - 
Saratoga Senior Loan Fund I JV, LLC   13,125,000    -    126,389    -    -    - 
Saratoga Senior Loan Fund I JV, LLC   13,125,000    -    -    -    -    (1,108,936)
Total  $61,199,500   $(26,375,000)  $7,672,863   $3,262,591   $(139,867)  $2,271,639 

 

(h)Non-income producing at February 28, 2022.

 

(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, 2022. (See Note 9 to the consolidated financial statements).

 

(k)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, 2022.

 

BSBY - Bloomberg Short-Term Bank Yield

LIBOR - London Interbank Offered Rate

SOFR - Secured Overnight Financing Rate

 

3M USD BSBY - The 3 month USD BSBY rate as of February 28, 2022 was 0.50%.

1M USD LIBOR - The 1 month USD LIBOR rate as of February 28, 2022 was 0.24%.

3M USD LIBOR - The 3 month USD LIBOR rate as of February 28, 2022 was 0.50%.

Daily USD SOFR - The daily USD SOFR rate as of February 28, 2022 was 0.05%

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

 

See accompanying notes to consolidated financial statements.

 

15

 

 

SARATOGA INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

May 31, 2022

(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 the initial public offering (“IPO”) on March 28, 2007. The Company has elected to be treated for U.S. federal income tax purposes as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). 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). In February 2022, SIA-GH, Inc., SIA-TT Inc. and SIA-VR, Inc. received an approved plan of liquidation following the sale of equity held by each of the portfolio companies. Tax Blockers are consolidated for accounting purposes, but are not consolidated for U.S. federal income tax purposes and may incur U.S. federal income tax expenses 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. SBIC II LP’s SBIC license provides up to $175.0 million in additional long-term capital in the form of SBA debentures.

 

The Company has formed a wholly owned special purpose entity, Saratoga Investment Funding II LLC, a Delaware limited liability company (“SIF II”), for the purpose of entering into a $50.0 million senior secured revolving credit facility with Encina Lender Finance, LLC (the “Lender”), supported by loans held by SIF II and pledged to the Lender under the credit facility (the “Encina Credit Facility”). The Encina Credit Facility closed on October 4, 2021. During the first two years following the closing date, SIF II may request an increase in the commitment amount under the Encina Credit Facility to up to $75.0 million. The terms of the Encina Credit Facility require a minimum drawn amount of $12.5 million at all times during the first six months following the closing date, which increases to the greater of $25.0 million or 50% of the commitment amount in effect at any time thereafter. The term of the Encina Credit Facility is three years. Advances under the Encina Credit Facility bear interest at a floating rate per annum equal to LIBOR plus 4.0%, with LIBOR having a floor of 0.75%, with customary provisions related to the selection by the Lender and the Company of a replacement benchmark rate. Concurrently with the closing of the Encina Credit Facility, all remaining amounts outstanding on the Company’s existing revolving credit facility with Madison Capital Funding, LLC were repaid and the revolving credit facility terminated.

 

On October 26, 2021, the Company and TJHA JV I LLC (“TJHA”) entered into a Limited Liability Company Agreement (the “LLC Agreement”) to co-manage Saratoga Senior Loan Fund I JV LLC (“SLF JV”). SLF JV is under joint control and is not consolidated. SLF JV is invested in Saratoga Investment Corp Senior Loan Fund 2021-1 Ltd. (“SLF 2021”), which is a wholly owned subsidiary of SLF JV. SLF 2021 was formed for the purpose of making investments in a diversified portfolio of broadly syndicated first lien and second lien term loans or bonds in the primary and secondary markets.

 

16

 

 

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 wholly owned special purpose financing subsidiaries, Saratoga Investment Funding, LLC (previously known as GSC Investment Funding LLC), SIF II, SBIC LP, SBIC II LP, SIA-Avionte, Inc., SIA-AX, Inc., SIA-GH, Inc., SIA-MAC, Inc., SIA-PEP, Inc., SIA-PP, Inc., SIA-TG, Inc., SIA-TT Inc. and SIA-Vector, 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 May 31, 2022.

 

Principles of Consolidation

 

Under the investment company rules and regulations pursuant to ASC Topic 946, the Company is precluded from consolidating any entity other than another investment company.

 

The Company has determined that SLF JV is an investment company under ASC 946; however, in accordance with such guidance the Company will generally not consolidate its investment in a company other than a wholly-owned investment company subsidiary. SLF JV is not a wholly-owned investment company subsidiary as the Company and TJHA each have an equal 50% voting interest in SLF JV and thus neither party has a controlling financial interest. Furthermore, ASC 810 concludes that in a joint venture where both members have equal decision making authority, it is not appropriate for one member to consolidate the joint venture since neither has control. Accordingly, the Company does not consolidate its investment in SLF JV.

 

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 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 investment company’s total outstanding voting shares;

 

we were to hold securities in the investment company having an aggregate value in excess of 5.0% of the value of our total assets; or

 

we were to hold securities in investment companies having an aggregate value in excess of 10.0% of the value of our total assets.

 

As of May 31, 2022, the Company did not exceed any of these limitations.

 

17

 

 

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 revolving credit facilities. 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 revolving credit facilities.

 

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:

 

   May 31, 2022   May 31, 2021 
Cash and cash equivalents  $94,939,634   $317,932 
Cash and cash equivalents, reserve accounts   6,550,220    19,659,681 
Total cash and cash equivalents and cash and cash equivalents, reserve accounts  $101,489,854   $19,977,613 

 

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.

 

Investment Valuation

 

The Company accounts for its investments at fair value in accordance with the FASB ASC Topic 820, Fair Value Measurements and Disclosures (“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. We use a third-party independent valuation firm to value our investment in the subordinated notes of Saratoga Investment Corp. CLO 2013-1, Ltd. (“Saratoga CLO”) and the Class F-2-R-3 Notes tranche of the Saratoga CLO every quarter.

 

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

 

18

 

 

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 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.

 

The Company’s equity investment in SLF JV is measured using the proportionate share of the net asset value, or equivalent, of SLF JV as a practical expedient for fair value, provided by ASC 820.

 

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.

 

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 May 31, 2022, our investment in one portfolio company was on non-accrual status with a fair value of approximately $10.1 million, or 1.12% of the fair value of our portfolio. At February 28, 2022, there were no investments on non-accrual status.

 

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.

 

19

 

 

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

 

Dividend income is 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 for performing certain investment structuring and advisory activities during the closing of new investments.

 

Other Income

 

Other income includes prepayment income fees, and 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 the SBA debentures of SBIC LP and SBIC II LP are deferred and amortized using the straight-line method over the life of the debentures. Any discount or premium on the issuance of any debt is amortized using the effective interest method over the life of the respective debt security.

 

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.

 

Realized Loss on Extinguishment of Debt 

 

Upon the repayment of debt obligations that are deemed to be extinguishments, the difference between the principal amount due at maturity adjusted for any unamortized debt issuance costs is recognized as a loss (i.e., the unamortized debt issuance costs are recognized as a loss upon extinguishment of the underlying debt obligation).

 

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 reasonably believes that the likelihood of such an event is remote. Therefore, the Company has not accrued any liabilities in connection with such indemnifications.

 

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, and intends to qualify annually, to be treated for U.S. federal income tax purposes as a RIC under Subchapter M of the Code. By meeting these requirements, the Company will not be subject to corporate federal income taxes on ordinary income or capital gains timely distributed to stockholders. 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% 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% on undistributed income if it does not distribute at least (1) 98% 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 31 and (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.

 

20

 

 

Depending on the level of investment company taxable income earned in a tax year and the amount of net capital gains recognized in such tax year, the Company may choose to carry forward investment company taxable income and net capital gains 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 investment company 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. For the fiscal years ended February 28, 2022, 2021 and 2020, the excise tax accrual on estimated excess table income was $0.6 million, $0.7 million and $0.0 million, respectively.

 

In accordance with U.S. Treasury regulations and published guidance issued by the Internal Revenue Service (“IRS”), a publicly offered RIC may treat a distribution of its own stock as counting toward its RIC distribution requirements if each stockholder elects to receive his, her, or its entire distribution in either cash or stock of the RIC. This published guidance indicates that the rule will apply where the aggregate amount of cash to be distributed to all stockholders is not at least 20.0% of the aggregate declared distribution. Under the published guidance, if too many stockholders elect to receive cash, the cash available for distribution must be allocated among the stockholders electing to receive 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, 2022, the Company did not incur any interest or penalties. Although we file federal and state tax returns, our major tax jurisdiction is federal. The 2019, 2020, 2021 and 2022 federal tax years for the Company remain subject to examination by the IRS. As of May 31, 2022 and February 28, 2022, 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.

 

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 some or all of our net 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 by the Company to the Manager on the consolidated statements of assets and liabilities when the net realized and unrealized gain on its investments exceed all net realized and unrealized capital losses on its investments because 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 Manager related to capital gains will be determined and payable in arrears at the end of each fiscal year and only reflected those net realized capital gains net of realized and unrealized losses for the period.

 

21

 

 

Recent 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 Company has agreements that have LIBOR as a reference rate with certain portfolio companies and under the Encina Credit Facility. Many of these agreements (including the credit agreements relating to the Encina Credit Facility) include an alternative successor rate or language for choosing an alternative successor rate when LIBOR reference is no longer considered to be appropriate. With respect to other agreements, the Company intends to work with its portfolio companies to modify agreements to choose an alternative successor rate. Contract modifications are required to be evaluated in determining whether the modifications result in the establishment of new contracts or the continuation of existing contracts. 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 that 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.

 

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.

 

22

 

 

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 May 31, 2022 (dollars in thousands), according to the fair value hierarchy:

 

   Fair Value Measurements   Valued Using
Net Asset
     
   Level 1   Level 2   Level 3   Value*   Total 
First lien term loans   $                -   $                -   $718,090                     -   $718,090 
Second lien term loans   -    -    38,629    -    38,629 
Unsecured term loans    -    -    15,910    -    15,910 
Structured finance securities   -    -    33,493    -    33,493 
Equity interests   -    -    81,766    6,645    88,411 
Total  $-   $-   $887,888   $6,645   $894,533 

 

*The Company’s equity investment in SLF JV is measured using the proportionate share of the net asset value, or equivalent, as a practical expedient and thus has not been classified in the fair value hierarchy.

 

The following table presents fair value measurements of investments, by major class, as of February 28, 2022 (dollars in thousands), according to the fair value hierarchy:

 

   Fair Value Measurements   Valued Using
Net Asset
     
   Level 1   Level 2   Level 3   Value*   Total 
First lien term loans  $-   $-   $631,572   $-   $631,572 
Second lien term loans   -    -    44,386    -    44,386 
Unsecured loans   -    -    15,931    -    15,931 
Structured finance securities   -    -    38,030    -    38,030 
Equity interests   -    -    75,632    12,016    87,648 
Total  $-   $-   $805,551   $12,016   $817,567 

 

*The Company’s equity investment in SLF JV is measured using the proportionate share of the net asset value, or equivalent, as a practical expedient and thus has not been classified in the fair value hierarchy.

 

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the three months ended May 31, 2022 (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, 2022  $631,572   $44,386   $15,931   $38,030   $75,632   $805,551 
Payment-in-kind and other adjustments to cost   (221)   -    -    (1,300)   199    (1,322)
Net accretion of discount on investments   344    6    -    -    -    350 
Net change in unrealized appreciation (depreciation) on investments   (4,707)   (622)   (21)   (3,237)   4,623    (3,964)
Purchases   95,886    -    -    -    1,312    97,198 
Sales and repayments   (4,947)   (5,141)   -    -    -    (10,088)
Net realized gain (loss) from investments   163    -    -