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EX-32.1 - CERTIFICATION - SARATOGA INVESTMENT CORP.f10k2021ex32-1_saratoga.htm
EX-31.2 - CERTIFICATION - SARATOGA INVESTMENT CORP.f10k2021ex31-2_saratoga.htm
EX-31.1 - CERTIFICATION - SARATOGA INVESTMENT CORP.f10k2021ex31-1_saratoga.htm
EX-23.2 - CONSENT OF COHNREZNICK LLP FOR SARATOGA INVESTMENT CORP. CLO 2013-1, LTD - SARATOGA INVESTMENT CORP.f10k2021ex23-2_saratoga.htm
EX-23.1 - CONSENT OF ERNST & YOUNG LLP FOR SARATOGA INVESTMENT CORP - SARATOGA INVESTMENT CORP.f10k2021ex23-1_saratoga.htm
EX-4.10 - DESCRIPTION OF SECURITIES - SARATOGA INVESTMENT CORP.f10k2021ex4-10_saratoga.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Form 10-K

 

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the fiscal year ended February 28, 2021 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the transition period from __________ to __________ 

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
6.25% Notes due 2025   SAF   The New York Stock Exchange
7.25% Notes due 2025   SAK   The New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: None

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐   No ☒ 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐   No ☒ 

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

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

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of August 31, 2020 was approximately $154.8 million based upon a closing price of $17.14 reported for such date by the New York Stock Exchange. 

The number of outstanding common shares of the registrant as of May 5, 2021 was 11,199,995. 

DOCUMENTS INCORPORATED BY REFERENCE 

None. 

 

 

 

 

NOTE ABOUT REFERENCES

 

In this Annual Report on Form 10-K (the “Annual Report”), the “Company,” “we,” “us” and “our” refer to Saratoga Investment Corp. and its wholly-owned subsidiaries, Saratoga Investment Funding LLC, Saratoga Investment Corp. SBIC LP and Saratoga Investment Corp. SBIC II LP, unless the context otherwise requires. We refer to Saratoga Investment Advisors, LLC, our investment adviser, as “Saratoga Investment Advisors,” the “Investment Adviser” or the “Manager.”

 

NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

Some of the statements in this Annual Report constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “will” and “would” or the negative of these terms or other comparable terminology.

 

We have based the forward-looking statements included in this annual report on Form 10-K on information available to us on the date of this annual report on Form 10-K, and we assume no obligation to update any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. We undertake no obligation to revise or update any forward-looking statements occurring after the date of this Annual Report, whether as a result of new information, future events or otherwise, unless required by law or SEC rule or regulation. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

 

The forward-looking statements contained in this Annual Report involve risks and uncertainties, including statements as to:

 

our future operating results and the impact of the coronavirus (“COVID-19”) pandemic thereon;

 

the introduction, withdrawal, success and timing of business initiatives and strategies;

 

changes in political, economic or industry conditions, the interest rate environment or financial and capital markets, which could result in changes in the value of our assets;

 

pandemics or other serious public health events, such as the recent global outbreak of COVID-19;

 

the relative and absolute investment performance and operations of our Investment Manager;

 

the impact of increased competition;

 

our ability to turn potential investment opportunities into transactions and thereafter into completed and successful investments;

 

the unfavorable resolution of any future legal proceedings;

 

our business prospects and the prospects of our portfolio companies, including our and their ability to achieve our respective objectives as a result of the current COVID-19 pandemic;

 

the impact of investments that we expect to make and future acquisitions and divestitures;

 

our contractual arrangements and relationships with third parties;

 

the dependence of our future success on the general economy and its impact on the industries in which we invest and the impact of the COVID-19 pandemic thereon;

 

the ability of our portfolio companies to achieve their objectives;

 

our expected financings and investments;

 

 

 

 

our regulatory structure and tax status, including our ability to operate as a business development company (“BDC”), or to operate our small business investment company (“SBIC”) subsidiaries, and to continue to qualify to be taxed as a regulated investment company (“RIC”);

 

the adequacy of our cash resources and working capital;

 

the timing of cash flows, if any, from the operations of our portfolio companies and the impact of the COVID-19 pandemic thereon;

 

the impact of interest rate volatility on our results, particularly because we use leverage as part of our investment strategy;

 

the impact of legislative and regulatory actions and reforms and regulatory, supervisory or enforcement actions of government agencies relating to us or our Manager;

 

the impact of changes to tax legislation and, generally, our tax position;

 

our ability to access capital and any future financings by us;

 

the ability of our Manager to attract and retain highly talented professionals; and

 

the ability of our Manager to locate suitable investments for us and to monitor and effectively administer our investments and the impacts of the COVID-19 pandemic thereon.

 

Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. Important assumptions include our ability to originate new loans and investments, borrowing costs and levels of profitability and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this annual report on Form 10-K should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described in “Risk Factors” in this annual report on Form 10-K under Part 1A. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this annual report on Form 10-K.

 

 

 

 

PART I    
Item 1. Business   1
Item 1A. Risk Factors   26
Item 1B. Unresolved Staff Comments   58
Item 2. Properties   58
Item 3. Legal Proceedings   58
Item 4. Mine Safety Disclosures   58
     
PART II    
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities   59
Item 6. Selected Consolidated Financial Data   72
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations   75
Item 7A. Quantitative and Qualitative Disclosures About Market Risk   113
Item 8. Consolidated Financial Statements and Supplementary Data   114
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   114
Item 9A. Controls and Procedures   114
Item 9B. Other Information   114
       
PART III    
Item 10. Directors, Executive Officers and Corporate Governance   115
Item 11. Executive Compensation   117
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   118
Item 13. Certain Relationships and Related Transactions, and Director Independence   119
Item 14. Principal Accounting Fees and Services   120
     
PART IV    
Item 15. Exhibits, Consolidated Financial Statement Schedules   121
Item 16. Form 10-K Summary   124
     
Signatures   125

 

i

 

 

PART I

 

ITEM 1. BUSINESS

 

General

 

We are a specialty finance company that provides customized financing solutions to U.S middle-market businesses. We primarily invest in senior and unitranche leveraged loans and mezzanine debt and, to a lesser extent, equity issued by private U.S. middle-market companies, which we define as companies having annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) of between $2 million and $50 million, both through direct lending and through participation in loan syndicates. Our investment objective is to create attractive risk-adjusted returns by generating current income and long-term capital appreciation from our investments. Our investments generally provide financing for change of ownership transactions, strategic acquisitions, recapitalizations and growth initiatives in partnership with business owners, management teams and financial sponsors. Our investment activities are externally managed and advised by Saratoga Investment Advisors, LLC, a New York-based investment firm affiliated with Saratoga Partners, a middle market private equity investment firm.

 

Our portfolio is comprised primarily of investments in leveraged loans issued by middle market companies. Leveraged loans are generally senior debt instruments that rank ahead of subordinated debt with below investment grade or “junk” ratings or, if not rated, would be rated below investment grade or “junk” and, as a result, carry a higher risk of default. Leveraged loans also have the benefit of security interests on the assets of the portfolio company, which may rank ahead of, or be junior to, other security interests. Term loans are loans that do not allow the borrowers to repay all or a portion of the loans prior to maturity and then re-borrow such repaid amounts under the loan again. We also invest in mezzanine debt and make equity investments in middle market companies. Mezzanine debt is typically unsecured and subordinated to senior debt of the portfolio company.

 

While our primary focus is to generate current income and capital appreciation from our debt and equity investments in middle market companies, we may invest up to 30.0% of our portfolio in opportunistic investments in order to seek to enhance returns to stockholders. Such investments may include investments in distressed debt, including securities of companies in bankruptcy, foreign debt, private equity, securities of public companies that are not thinly traded and structured finance vehicles such as collateralized loan obligation funds. Although we have no current intention to do so, to the extent we invest in private equity funds, we will limit our investments in entities that are excluded from the definition of “investment company” under Section 3(c)(1) or Section 3(c)(7) of Investment Company Act of 1940, as amended (“1940 Act”), which includes private equity funds, to no more than 15% of its net assets.

 

As of February 28, 2021, we had total assets of $592.2 million and investments in 40 portfolio companies, including an investment in the subordinated notes of one collateralized loan obligation fund, Saratoga Investment Corp. CLO 2013-1, Ltd. (“Saratoga CLO”), which had a fair value of $31.4 million as of February 28, 2021 and investments in the Class F-R-3 Notes which as of February 28, 2021 had a fair value of $18.3 million. The overall portfolio composition as of February 28, 2021 consisted of 79.5% of first lien term loans, 4.4% of second lien term loans, 0.4% of unsecured term loans, 9.0% of structured finance securities and 6.7% of equity interests. As of February 28, 2021, the weighted average yield on all of our investments, including our investment in the subordinated notes of Saratoga CLO and Class F-R-3 Notes was approximately 9.1%. The weighted average yield of our investments is not the same as a return on investment for our stockholders and, among other things, is calculated before the payment of our fees and expenses. As of February 28, 2021, our total return based on market value was 7.63% and our total return based on net asset value per share was 7.42%. As of February 29, 2020, our total return based on market value was 9.28% and our total return based on net asset value was 26.22%. Total return based on market value is the change in the ending market value of the Company’s common stock plus dividends distributed during the period assuming participation in the Company’s dividend reinvestment plan divided by the beginning market value of the Company’s common stock. Total return based on NAV is the change in ending NAV per share plus dividends distributed per share paid during the period assuming participation in the Company’s dividend reinvestment plan divided by the beginning NAV per share. While total return based on NAV and total return based on market value reflect fund expenses, they do not reflect any sales load that may be paid by investors. As of February 28, 2021, approximately 100.0% of our first lien debt investments were fully collateralized in the sense that the portfolio companies in which we held such investments had an enterprise value or our investment had an asset coverage equal to or greater than the principal amount of the related debt investment. The Company uses enterprise value to assess the level of collateralization of its portfolio companies. The enterprise value of a portfolio company is determined by analyzing various factors, including EBITDA, cash flows from operations less capital expenditures and other pertinent factors, such as recent offers to purchase a portfolio company’s securities or other liquidation events. As a result, while we consider a portfolio company to be collateralized if its enterprise value exceeds the amount of our loan, we do not hold tangible assets as collateral in our portfolio companies that we would obtain in the event of a default. Our investment in the subordinated notes of Saratoga CLO represents a first loss position in a portfolio that, at February 28, 2021, was composed of $603.7 million in aggregate principal amount of predominantly senior secured first lien term loans. A first loss position means that we will suffer the first economic losses if losses are incurred on loans held by the Saratoga CLO. As a result, this investment is subject to unique risks. See Part I. Item 1A. “Risk Factors—Our investment in Saratoga CLO constitutes a leveraged investment in a portfolio of predominantly senior secured first lien term loans and is subject to additional risks and volatility.”

 

1

 

 

We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company (“BDC”) under the 1940 Act. As a BDC, we are required to comply with various regulatory requirements, including limitations on our use of debt. We finance our investments through borrowings. However, as a BDC, we are only generally allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200.0% after such borrowing, or, if we obtain the required approvals from our independent directors and/or stockholders, 150.0%. On April 16, 2018, as permitted by the Small Business Credit Availability Act, which was signed into law on March 23, 2018, our non-interested Board of Directors approved of our becoming subject to a minimum asset coverage ratio of 150.0% under Sections 18(a)(1) and 18(a)(2) of the 1940 Act. The 150.0% asset coverage ratio became effective on April 16, 2019.

 

We have 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 (the “Code”). As a RIC, we generally will not have to pay corporate-level U.S. federal income taxes on any net ordinary income or capital gains that we timely distribute to our stockholders if we meet certain source-of-income, annual distribution and asset diversification requirements.

 

In addition, we have two wholly-owned subsidiaries that are licensed as a small business investment company (“SBIC”) and regulated by the Small Business Administration (“SBA”). On March 28, 2012, our wholly-owned subsidiary, Saratoga Investment Corp. SBIC LP (“SBIC LP”), received an SBIC license from the SBA. On August 14, 2019, our wholly-owned subsidiary, Saratoga Investment Corp. SBIC II LP (“SBIC II LP”), also received an SBIC license from the SBA. The new license will provide up to $175.0 million in additional long-term capital in the form of SBA-guaranteed debentures. The SBIC LP and SBIC II LP are regulated by the SBA. As a result of the 2016 omnibus spending bill signed into law in December 2015, the maximum amount of SBA-guaranteed debentures that affiliated SBIC funds can have outstanding was increased from $225.0 million to $350.0 million. Our wholly-owned SBIC subsidiaries are able to borrow funds from the SBA against regulatory capital (which approximates equity capital) that is paid in and is subject to customary regulatory requirements including but not limited to an examination by the SBA. With this license approval, Saratoga will grow its SBA relationship from $150.0 million to $325.0 million of committed capital. See “Item 1. Business—Small Business Investment Company Regulations.”

 

We received exemptive relief from the U.S. Securities and Exchange Commission (“SEC”) to permit us to exclude the debt of SBIC LP and SBIC II LP guaranteed by the SBA from the definition of senior securities in the asset coverage test under the 1940 Act. This allows the Company increased flexibility under the asset coverage test by permitting it to borrow up to $325.0 million more than it would otherwise be able to absent the receipt of this exemptive relief.

 

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

 

During the fiscal year ended February 29, 2020, the Company sold its interest in SIA-Easy Ice, LLC. See Management’s Discussion and Analysis for additional discussion.

 

Corporate History and Information

 

We commenced operations, at the time known as GSC Investment Corp., on March 23, 2007 and completed an initial public offering of shares of common stock on March 28, 2007. Prior to July 30, 2010, we were externally managed and advised by GSCP (NJ), L.P., an entity affiliated with GSC Group, Inc. In connection with the consummation of a recapitalization transaction on July 30, 2010, we engaged Saratoga Investment Advisors (“SIA”) to replace GSCP (NJ), L.P. as our investment adviser and changed our name to Saratoga Investment Corp.

 

The recapitalization transaction consisted of (i) the private sale of 986,842 shares of our common stock for $15.0 million in aggregate purchase price to Saratoga Investment Advisors and certain of its affiliates and (ii) the entry into a $40.0 million senior secured revolving credit facility with Madison Capital Funding LLC (the “Credit Facility”). We used the net proceeds from the private sale of shares of our common stock and a portion of the funds available to us under the Credit Facility to pay the full amount of principal and accrued interest, including default interest, outstanding under our revolving securitized credit facility with Deutsche Bank AG, New York Branch. Specifically, in July 2009, we had exceeded permissible borrowing limits under the revolving securitized credit facility with Deutsche Bank, which resulted in an event of default under the revolving securitized credit facility. As a result of the event of default, Deutsche Bank had the right to accelerate repayment of the outstanding indebtedness under the revolving securitized credit facility and to foreclose and liquidate the collateral pledged under the revolving securitized credit facility. The revolving securitized credit facility with Deutsche Bank was terminated in connection with our payment of all amounts outstanding thereunder on July 30, 2010. In January 2011, we registered for public resale by Saratoga Investment Advisors and certain of its affiliates the 986,842 shares of our common stock issued to them in the recapitalization.

 

2

 

 

As noted above, on March 28, 2012, our wholly-owned subsidiary, SBIC LP, received an SBIC license from the SBA and on August 14, 2019, our wholly-owned subsidiary, SBIC II LP, also received an SBIC license from the SBA.

 

Our corporate offices are located at 535 Madison Avenue, New York, New York 10022. Our telephone number is (212) 906-7800. We maintain a website on the Internet at www.saratogainvestmentcorp.com. Information contained on our website is not incorporated by reference into this Annual Report, and you should not consider that information to be part of this Annual Report.

 

Saratoga Investment Advisors

 

General

 

Our Investment Adviser was formed in 2010 as a Delaware limited liability company and became our investment adviser in July 2010. Our Investment Adviser is led by four principals, Christian L. Oberbeck, Michael J. Grisius, Thomas V. Inglesby, and Charles G. Phillips, with 33, 31, 34 and 24 years of experience in leveraged finance, respectively. Our Investment Adviser is affiliated with Saratoga Partners, a middle market private equity investment firm. Saratoga Partners was established in 1984 to be the middle market private investment arm of Dillon Read & Co. Inc. and has been independent of Dillon Read and its successor entity, SBC Warburg Dillon Read, since 1998. Saratoga Partners has a 33-year history of private investments in middle market companies and focuses on public and private equity, preferred stock, and senior and mezzanine debt investments.

 

Our Relationship with Saratoga Investment Advisors

 

We utilize the personnel, infrastructure, relationships and experience of Saratoga Investment Advisors to enhance the growth of our business. We currently have no employees and each of our executive officers is also an officer of Saratoga Investment Advisors.

 

We have entered into an investment advisory and management agreement (the “Management Agreement”) with Saratoga Investment Advisors. Pursuant to the 1940 Act, the initial term of the Management Agreement was for two years from its effective date of July 30, 2010, with automatic, one-year renewals, subject to approval by our board of directors, a majority of whom must be our independent directors. Our board of directors approved the renewal of the Management Agreement for an additional one-year term at a telephonic meeting held on July 7, 2020. In reliance on certain exemptive relief provided by the SEC in connection with the global COVID-19 pandemic, our board undertook to ratify the Management Agreement at its next in-person meeting. Pursuant to the Management Agreement, Saratoga Investment Advisors implements our business strategy on a day-to-day basis and performs certain services for us under the direction of our board of directors. Saratoga Investment Advisors is responsible for, among other duties, performing all of our day-to-day functions, determining investment criteria, sourcing, analyzing and executing investment transactions, asset sales, financings and performing asset management duties.

 

Saratoga Investment Advisors has formed an investment committee to advise and consult with its senior management team with respect to our investment policies, investment portfolio holdings, financing and leveraging strategies and investment guidelines. We believe that the collective experience of the investment committee members across a variety of fixed income asset classes will benefit us. The investment committee must unanimously approve all investments in excess of $1.0 million made by us. In addition, all sales of our investments must be approved by all four of our investment committee members. The current members of the investment committee are Messrs. Oberbeck, Grisius, Inglesby, and Phillips.

 

We pay Saratoga Investment Advisors a fee for investment advisory and management services consisting of two components—a base management fee and an incentive fee. The base management fee is calculated at an annual rate of 1.75% of our average gross assets, which includes assets purchased with borrowed funds but excludes cash and cash equivalents. As a result, Saratoga Investment Advisors will benefit as we incur debt or use leverage to purchase assets. Our board of directors will monitor the conflicts presented by this compensation structure by approving the amount of leverage that we may incur.

 

In addition to the base management fee, we pay Saratoga Investment Advisors an incentive fee, which consists of two parts. First, we pay Saratoga Investment Advisors an incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows:

 

no incentive fee in any calendar quarter in which, our pre-incentive fee income does not exceed a fixed “hurdle rate” of 1.875% per quarter; and

 

3

 

 

100.0% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than or equal to 2.344% in any fiscal quarter is payable to the Investment Adviser. We refer to this portion of our pre-incentive fee net investment income (which exceeds the hurdle rate but is less than or equal to 2.344%) as the “catch-up.” The “catch-up” provision is intended to provide our Investment Adviser with an incentive fee of 20.0% on all of our pre-incentive fee net investment income as if a hurdle rate did not apply when our pre-incentive fee net investment income exceeds 2.344% in any fiscal quarter. Notwithstanding the foregoing, with respect to any period ending on or prior to December 31, 2010, our Investment Adviser was only entitled to 20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeded 1.875% in any fiscal quarter without any catch-up provision; and

 

20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.344% in any fiscal quarter is payable to the Investment Adviser (once the hurdle is reached and the catch-up is achieved, 20.0% of all pre-incentive fee net investment income thereafter is allocated to the Investment Adviser).

 

There is no accumulation of amounts from quarter to quarter on either the hurdle rate or the parameters set by the “catch-up” mechanism or any claw back of amounts previously paid to Saratoga Investment Advisors if subsequent quarters are below the quarterly hurdle or the “catch-up” parameters. Furthermore, there is no delay of payment to Saratoga Investment Advisors if prior quarters are below the quarterly hurdle or “catch-up.”

 

Pre-incentive fee net investment income means interest income, dividend income and other income (including any other fees, such as commitment, origination, structuring, diligence, managerial and consulting fees or other fees that we receive from portfolio companies) earned during the calendar quarter, minus our operating expenses for the quarter. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses, unrealized capital appreciation or depreciation, or realized gains or losses resulting from the extinguishment of our own debt.

 

The second part of the incentive fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Management Agreement) and equals 20.0% of our “incentive fee capital gains,” which equals our realized capital gains on a cumulative basis from May 31, 2010 through the end of the fiscal year, if any, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis on each investment in the Company’s portfolio, less the aggregate amount of any previously paid capital gain incentive fee. Importantly, the capital gains portion of the incentive fee is based on realized gains and realized and unrealized losses from May 31, 2010. Therefore, realized and unrealized losses incurred prior to such time will not be taken into account when calculating the capital gains portion of the incentive fee, and our Manager will be entitled to 20.0% of incentive fee capital gains that arise after May 31, 2010. In addition, for the purpose of the “incentive fee capital gains” calculations, the cost basis for computing realized gains and losses on investments held by us as of May 31, 2010 will equal the fair value of such investments as of such date.

 

We have also entered into a separate Administration Agreement (the “Administration Agreement”) with Saratoga Investment Advisors pursuant to which Saratoga Investment Advisors furnishes us with office facilities, equipment and clerical, bookkeeping and record keeping services. The Administration Agreement has an initial term of two years from its effective date of July 30, 2010, with automatic one-year renewals, subject to approval by our board of directors, a majority of whom must be our independent directors. On July 8, 2015, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to increase the cap on the payment or reimbursement of expenses by us thereunder to $1.3 million. On July 7, 2016, our board of directors approved the renewal of the Administration Agreement for an additional one-year term. On October 5, 2016, our board of directors determined to increase the cap on the payment or reimbursement of expenses by the Company under the Administration Agreement, from $1.3 million to $1.5 million, effective November 1, 2016. On July 11, 2017, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to increase the cap on the payment or reimbursement of expenses by the Company from $1.5 million to $1.75 million, effective August 1, 2017. On July 9, 2018, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to increase the cap on the payment or reimbursement of expenses by the Company from $1.75 million to $2.0 million, effective August 1, 2018. On July 9, 2019, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to increase the cap on the payment or reimbursement of expenses by the Company from $2.0 million to $2.225 million effective August 1, 2019. On July 7, 2020, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to increase the cap on the payment or reimbursement of expenses by the Company from $2.225 million to $2.775 million effective August 1, 2020. Under the Administration Agreement, Saratoga Investment Advisors also performs, or oversees the performance of our required administrative services, which include, among other things, being responsible for the financial records which we are required to maintain, preparing reports for our stockholders and reports required to be filed with the SEC. Payments under the Administration Agreement will be equal to an amount based upon the allocable portion of Saratoga Investment Advisors’ overhead in performing its obligations under the Administration Agreement, including rent and the allocable portion of the cost of our officers and their respective staffs relating to the performance of services under the Administration Agreement.

 

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Investments

 

Our portfolio is comprised primarily of investments in leveraged loans (both first and second lien term loans) issued by middle market companies. Investments in middle market companies are generally less liquid than equivalent investments in companies with larger capitalizations. These investments are sourced in both the primary and secondary markets through a network of relationships with commercial and investment banks, commercial finance companies and financial sponsors. The leveraged loans that we purchase are generally used to finance buyouts, strategic acquisitions, growth initiatives, recapitalizations and other types of transactions. Leveraged loans are generally senior debt instruments that rank ahead of subordinated debt which are invested by companies with below investment grade or “junk” ratings or, if not rated, would be rated below investment grade or “junk” and, as a result, carry a higher risk of default. Leveraged loans also have the benefit of security interests on the assets of the portfolio company, which may rank ahead of, or be junior to, other security interests. For a discussion of the risks pertaining to our secured investments, see Part I. Item 1A. “Risk Factors—Our investments may be risky, and you could lose all or part of your investment.”

 

As part of our long-term strategy, we also invest in mezzanine debt and make equity investments in middle market companies. Mezzanine debt is typically unsecured and subordinated to senior debt of the portfolio company. See Part I. Item 1A. “Risk Factors—If we make unsecured debt investments, we may lack adequate protection in the event our portfolio companies become distressed or insolvent and will likely experience a lower recovery than more senior debtholders in the event our portfolio companies default on their indebtedness.”

 

Substantially all of the debt investments held in our portfolio hold a non-investment grade rating by one or more rating agencies or, if not rated, would be rated below investment grade if rated, which are often referred to as “junk.” As of February 28, 2021, 85.4% of our debt portfolio at fair value consisted of debt securities for which issuers were not required to make principal payments until the maturity of such debt securities, which could result in a substantial loss to us if such issuers are unable to refinance or repay their debt at maturity. Such “interest-only” loans are structured such that the borrower makes only interest payments throughout the life of the loan and makes a large, “balloon payment” at the end of the loan term. The ability of a borrower to make or refinance a balloon payment may be affected by a number of factors, including the financial condition of the borrower, prevailing economic conditions, higher interest rates, and collateral values. If the interest-only loan borrower is unable to make or refinance a balloon payment, we may experience greater losses than if the loan were structured as amortizing. As of February 28, 2021, 14.7% of our interest-only loans provided for contractual PIK interest, which represents contractual interest added to a loan balance and due at the end of such loan’s term, and 73.4% of such investments elected to pay a portion of interest due in PIK. In addition, 95.0% of our debt investments at February 28, 2021, had variable interest rates that reset periodically based on benchmarks such as LIBOR and the prime rate. As a result, significant increases in such benchmarks in the future may make it more difficult for these borrowers to service their obligations under the debt investments that we hold.

 

As a BDC, we are required to comply with certain regulatory requirements. For instance, as a BDC, we may not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. See “Business—Business Development Company Regulations – Qualifying Assets.”

 

While our primary focus is to generate current income and capital appreciation from our debt and equity investments in middle market companies, we may invest up to 30.0% of the portfolio in opportunistic investments in order to seek to enhance returns to stockholders. Such investments may include investments in distressed debt, private equity, securities of public companies that are not thinly traded and structured finance vehicles such as collateralized loan obligation funds. Although we have no current intention to do so, to the extent we invest in private equity funds, we will limit our investments in entities that are excluded from the definition of “investment company” under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, which includes private equity funds, to no more than 15% of its net assets.

 

Leveraged loans

 

Our leveraged loan portfolio is comprised primarily of first lien and second lien term loans. First lien term loans are secured by a first priority perfected security interest on all or substantially all of the assets of the borrower and typically include a first priority pledge of the capital stock of the borrower. First lien term loans hold a first priority with regard to right of payment. Generally, first lien term loans offer floating rate interest payments, have a stated maturity of five to seven years, and have a fixed amortization schedule. First lien term loans generally have restrictive financial and negative covenants. Second lien term loans are secured by a second priority perfected security interest on all or substantially all of the assets of the borrower and typically include a second priority pledge of the capital stock of the borrower. Second lien term loans hold a second priority with regard to right of payment. Second lien term loans offer either floating rate or fixed rate interest payments, generally have a stated maturity of five to eight years and may or may not have a fixed amortization schedule. Second lien term loans that do not have fixed amortization schedules require payment of the principal amount of the loan upon the maturity date of the loan. Second lien term loans have less restrictive financial and negative covenants than those that govern first lien term loans.

 

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Mezzanine debt

 

Mezzanine debt usually ranks subordinate in priority of payment to senior debt and is often unsecured. However, mezzanine debt ranks senior to common and preferred equity in a borrowers’ capital structure. Mezzanine debt typically has fixed rate interest payments and a stated maturity of six to eight years and does not have fixed amortization schedules.

 

In some cases, our debt investments may provide for a portion of the interest payable to be payment-in-kind interest (“PIK”). To the extent interest is PIK, it will be payable through the increase of the principal amount of the obligation by the amount of interest due on the then-outstanding aggregate principal amount of such obligation.

 

Equity Investments

 

Equity investments may consist of preferred equity that is expected to pay dividends on a current basis or preferred equity that does not pay current dividends. Preferred equity at times may also have PIK interest payable. Preferred equity generally has a preference over common equity as to distributions on liquidation and dividends. In some cases, we may acquire common equity. In general, our equity investments are not control-oriented investments and we expect that in many cases we will acquire equity securities as part of a group of private equity investors in which we are not the lead investor.

 

Opportunistic Investments

 

Opportunistic investments may include investments in distressed debt, which may include securities of companies in bankruptcy, debt and equity securities of public companies that are not thinly traded, emerging market debt, structured finance vehicles such as collateralized loan obligation funds and debt of middle market companies located outside the United States.

 

On January 22, 2008, GSC Group, Inc., as asset manager, with Lehman Brothers raising the financing, entered into a collateral management agreement with Saratoga CLO. Saratoga CLO was structured with five tranches of debt, plus residual notes. Saratoga CLO’s five tranches of debt were purchased by a wide variety of CLO debt market participants. In addition, we purchased for $30.0 million all of the outstanding subordinated notes of Saratoga CLO.

 

Pursuant to its terms, the investment period for Saratoga CLO ended in January 2013, and certain restrictions in such terms limited portfolio reinvestment. As a result, the Company determined that it was in its best interest to refinance Saratoga CLO given its investment attractiveness. The Company did not originate any of the loan assets included in the formation of Saratoga CLO, nor has it done so since the subsequent refinancing transaction. Moreover, the Company does not expect to originate any of the loans in the Saratoga CLO portfolio prospectively. The Company has from time to time co-invested in loans with the Saratoga CLO. The Company currently has no co-investments between it and Saratoga CLO.

 

With respect to our advisory services to Saratoga CLO, and in particular the underwriting standards used when determining which investments qualify for inclusion in the Saratoga CLO, they are substantially similar to the process employed in selecting the Company’s investments. All of the credit metrics for a Saratoga CLO investment are reviewed and documented in the same manner as they would be for an investment for the Company, with some minor differences. For example, the Saratoga CLO investment process also includes multiple rating agency review and analysis of the loan investment and the assigned corporate ratings, which typically does not apply to a prospective investment of the Company. Lastly, a Saratoga CLO investment also considers the likely secondary liquidity of the loan in considering the investment, whereas the Company’s investments are generally illiquid.

 

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The Saratoga CLO investment period was initially refinanced in October 2013 and its reinvestment period extended to October 2016. On November 15, 2016, we completed a second refinancing of the Saratoga CLO with its reinvestment period extended to October 2018. On December 14, 2018, we completed a third refinancing and upsize of the Saratoga CLO (the “2013-1 Reset CLO Notes”). This refinancing, among other things, extended the non-call period and reinvestment period to January 20, 2020 and January 20, 2021, respectively, and extended its legal final date to January 20, 2030. Following this refinancing, the Saratoga CLO portfolio increased from approximately $300.0 million in aggregate principal amount to approximately $500.0 million of predominantly senior secured first lien term loans. As part of the refinancing of its liabilities, we also purchased $2.5 million in aggregate principal amount of the Class F-R-2 and $7.5 million aggregate principal amount of the Class G-R-2 notes tranches of the Saratoga CLO at par, with a coupon of LIBOR plus 8.75% and LIBOR plus 10.00%, respectively. We also redeemed our existing $4.5 million aggregate principal amount of the Class F Notes tranche of the Saratoga CLO at par. The Class F-R-2 Notes and Class G-R-2 Notes tranches are the seventh and eighth tranches in the capital structure of Saratoga CLO and are subordinated to the other debt classes of Saratoga CLO, respectively. The Class F-R-2 and Class G-R-2 tranches are senior to the subordinated notes, which is effectively the equity position in Saratoga CLO. As a result, the other tranches of debt in Saratoga CLO rank ahead of the $2.5 million Class F-R-2 tranche and $7.5 million Class G-R-2 tranche and ahead of the aggregate principal amount of our position in the subordinated notes, with respect to priority of payments in the event of a default or a liquidation. We also purchased an aggregate principal amount of $39.5 million of subordinated notes, which is in addition to the $30.0 million of subordinated notes issued in 2013 that were reset with an extended legal final date to January 20, 2030. Following the refinancing, Saratoga Investment Corp. owns 100% of the Class F-R-2, Class G-R-2 and the subordinated notes of the Saratoga CLO. After the reinvestment period ends in January 2021, the Company will consider refinancing the Saratoga CLO, subject to market conditions. A refinancing transaction entails finding existing and new investors that are willing to provide debt financing to Saratoga CLO which extends the investment period of the CLO on terms that are acceptable to it and in an amount sufficient to allow it to repay all of its existing debt holders. If Saratoga CLO is unable to refinance its indebtedness by January 2021, then Saratoga CLO will be required to use investment repayments by portfolio companies received thereafter to repay its outstanding indebtedness. On February 11, 2020, we entered into an unsecured loan agreement (“CLO 2013-1 Warehouse 2 Loan”) with Saratoga Investment Corp. CLO 2013-1 Warehouse 2, Ltd (“CLO 2013-1 Warehouse 2”), a wholly-owned subsidiary of Saratoga CLO, pursuant to which CLO 2013-1 Warehouse 2 may borrow from time to time up to $20.0 million from the Company in order to provide capital necessary to support warehouse activities. On October 23, 2020, the CLO 2013-1 Warehouse 2 Loan was increased to $25.0 million availability, which was immediately fully drawn and, which expires on August 20, 2021. The interest rate was also amended to be based on a pricing grid, starting at an annual rate of 3M USD LIBOR + 4.46%. On February 26, 2021, the Company completed the fourth refinancing of the Saratoga CLO. This refinancing, among other things, extended the Saratoga CLO reinvestment period to April 2024, and extended its legal maturity to April 2033. A non- call period ending February 2022 was also added. In addition, and as part of the refinancing, the Saratoga CLO has also been upsized from $500 million in assets to approximately $650 million. As part of this refinancing and upsizing, the Company invested an additional $14.0 million in all of the newly issued subordinated notes of the Saratoga CLO, and purchased $17.9 million in aggregate principal amount of the Class F-R-3 Notes tranche at par. Concurrently, the existing $2.5 million of Class F-R-2 Notes, $7.5 million of Class G-R-2 Notes and $25.0 million CLO 2013-1 Warehouse 2 Loan were repaid. The Company also paid $2.6 million of transaction costs related to the refinancing and upsizing on behalf of the Saratoga CLO, to be reimbursed from future equity distributions. As of February 28, 2021, there remained an outstanding receivable of $2.6 million for such transaction costs which is presented as due from affiliate on the Company’s consolidated statement of assets and liabilities.

 

At February 28, 2021, the aggregate fair value of our investments in Saratoga Investment Corp. CLO 2013-1 F-R-3 Notes and subordinated notes of the Saratoga CLO was $18.3 million and $31.4 million, respectively.

 

The terms of the subordinated notes of Saratoga CLO entitles the Company to the residual net interest income in Saratoga CLO, which is paid on a quarterly basis after payment of all expenses, assuming that the Saratoga CLO remains in compliance with its various debt and rating agency compliance tests. The Company’s investment in the subordinated notes of Saratoga CLO can be sold or transferred at any time. The Company has held 100% of the subordinated notes of Saratoga CLO since the inception of Saratoga CLO.

 

Generally, the interests of the holders of the various classes of securities issued by the Saratoga CLO are aligned with the interests of the Company as holder of the subordinated notes. The investors in the various debt tranches of the securities issued by the Saratoga CLO are interested in the regular payment of interest income from the Saratoga CLO and the overcollateralization of the underlying loan assets relative to the Saratoga CLO debt issued. On the other hand, the subordinated note holders might prefer purchasing higher yielding riskier assets that could increase returns while the returns of the holders of the debt securities remain unchanged.

 

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With respect to the collateral management agreement that the Company has entered into with Saratoga CLO, while the agreement is similar to the investment advisory and management agreement between the Company and Saratoga Investment Advisors in that it is an asset management agreement, there are material differences between the two. For example, pursuant to Section 15 of the 1940 Act, the Management Agreement with Saratoga Investment Advisors has an initial term of two years, with annual renewals to be approved by the Company’s board of directors. The contract can be terminated by the Company’s board of directors or stockholders with 60 days’ notice, with no penalty for termination. The collateral management agreement that the Company has entered into with Saratoga CLO, on the other hand, has no renewal requirement. The Saratoga CLO collateral management agreement may be terminated for cause at the direction of a majority of the most senior class of the Saratoga CLO securities then outstanding, excluding any securities held by the Company or any affiliate thereof or any other entity over which the Company or an affiliate thereof has discretionary authority over voting such securities, which securities are disregarded for this purpose. If the Saratoga CLO collateral management agreement is terminated, the manager remains in place until a new manager is appointed by the issuer at the direction of either (i) a majority of the Saratoga CLO subordinated notes, and not rejected by a majority of the most senior class of CLO securities then outstanding, or (ii) a majority of the most senior class of CLO securities then outstanding, and not rejected by a majority of the Saratoga CLO subordinated notes, in each case within 20 days of notice of a vote regarding the successor manager. If no successor investment manager shall have been appointed within 120 days after the date of notice of resignation by the investment manager, the resigning investment manager, a majority of the controlling class or a majority of the subordinated notes may petition any court of competent jurisdiction for the appointment of a successor investment manager without the approval of the holders of the notes. We receive a base management fee of 0.10% per annum and a subordinated management fee of 0.40% per annum of the outstanding principal amount of Saratoga CLO’s assets, paid quarterly to the extent of available proceeds. Prior to the second refinancing and the issuance of the 2013-1 Amended CLO Notes, we received a base management fee of 0.25% per annum and a subordinated management fee of 0.25% per annum of the outstanding principal amount of Saratoga CLO’s assets, paid quarterly to the extent of available proceeds. Following the third refinancing and the issuance of the 2013-1 Reset CLO Notes on December 14, 2018, we are no longer entitled to an incentive management fee equal to 20.0% of excess cash flow to the extent the Saratoga CLO subordinated notes receive an internal rate of return paid in cash equal to or greater than 12.0%.

 

The securities issued by the Saratoga CLO do not have any external credit enhancement features that would minimize the potential losses to the subordinated notes. Saratoga CLO recognized realized losses on extinguishment of debt of approximately $3.0 million, $1.2 million, $6.1 million and $3.4 million in the fiscal years ended February 28, 2021, February 28, 2019, February 28, 2017 and February 28, 2014, respectively, related to the February 2021, December 2018, November 2016 and October 2013 refinancing, primarily as a result of repurchasing securities at par at the refinancing that was previously issued at a discount, as well as the acceleration of the amortization of the legal and accounting costs associated with the refinancing. The cost of the refinancing was effectively borne by the Company as the holder of the subordinated notes in Saratoga CLO. The indenture for the Saratoga CLO contemplates the issuance of additional securities from time to time, pursuant to an amendment to the indenture and subject to various requirements and conditions, including the consent of the Company (in its capacity as investment manager) and the consent of the of the holders of a majority of the subordinated notes (all of which are held by the Company) and, except in certain limited circumstances, the consent of the holders of a majority (by principal amount) the Class A-1 Notes. The Saratoga CLO could also issue additional securities pursuant to a refinancing of the existing securities. The costs of any such future refinancing would effectively be borne by the Company as the holder of the subordinated notes in Saratoga CLO.

 

The Company does not believe that any representations or warranties made by the Company as manager of Saratoga CLO or investor in the subordinated notes could materially affect the Company. However, because the Company acts as the collateral manager to Saratoga CLO, it may be subject to claims by third-party investors in Saratoga CLO for alleged or actual negligent acts, errors or omissions or breach of fiduciary duties committed in the scope of performing its services as the collateral manager.

 

As of February 28, 2021, the Saratoga CLO portfolio consisted of $603.7 million in aggregate principal amount of primarily senior secured first lien term loans. At February 28, 2021, 98.7% of the Saratoga CLO portfolio consisted of such loans to 304 borrowers with an average exposure to each borrower of $1.9 million. The weighted average maturity of the portfolio is 4.65 years. In addition, Saratoga CLO held $114.1 million in cash at February 28, 2021. Our investments in the Saratoga CLO falls into our 30% “bucket” of non-qualifying assets under the 1940 Act and currently has an aggregate cost basis of approximately $33.8 million, which is net of all principal payments made by Saratoga CLO on the Company’s total investment in the subordinate notes of Saratoga CLO is $57.8 which consists of additional investments of $30 million in January 2008, $13.8 million in December 2018 and $14.0 million in February 2021.

 

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Prospective portfolio company characteristics

 

Our Investment Adviser generally selects portfolio companies with one or more of the following characteristics:

 

a history of generating stable earnings and strong free cash flow;

 

well-constructed balance sheets with the ability to withstand industry cycles, supported by sustainable enterprise values;

 

reasonable debt-to-cash flow multiples;

 

exceptional management with meaningful stake;

 

industry leadership with competitive advantages and sustainable market shares and growth prospects in attractive and healthy sectors; and

 

capital structures that provide appropriate terms and reasonable covenants.

 

Investment selection

 

In managing us, Saratoga Investment Advisors employs the same investment philosophy and portfolio management methodologies used by Saratoga Partners. Through this investment selection process, based on quantitative and qualitative analysis, Saratoga Investment Advisors seeks to identify portfolio companies with superior fundamental risk-reward profiles and strong, defensible business franchises with the goal of minimizing principal losses while maximizing risk-adjusted returns. Saratoga Investment Advisors’ investment process emphasizes the following:

 

bottoms-up, company-specific research and analysis;

 

capital preservation, low volatility and minimization of downside risk; and

 

investing with experienced management teams that hold meaningful equity ownership in their businesses.

 

Our Investment Adviser’s investment process generally includes the following steps:

 

Initial screening. A brief analysis identifies the investment opportunity and reviews the merits of the transaction. The initial screening memorandum provides a brief description of the company, its industry, competitive position, capital structure, financials, equity sponsor and deal economics. If the deal is determined to be attractive by the senior members of the deal team, the opportunity is fully analyzed.

 

Full analysis. A full analysis includes:

 

Business and Industry analysis—a review of the company’s business position, competitive dynamics within its industry, cost and growth drivers and technological and geographic factors. Business and industry research often includes meetings with industry experts, consultants, other investors, customers and competitors.

 

Company analysis—a review of the company’s historical financial performance, future projections, cash flow characteristics, balance sheet strength, liquidation value, legal, financial and accounting risks, contingent liabilities, market share analysis and growth prospects.

 

Structural/security analysis—a thorough legal document analysis including but not limited to an assessment of financial and negative covenants, events of default, enforceability of liens and voting rights.

 

Approval of the investment committee. The investment is then presented to the investment committee for approval. The investment committee must unanimously approve all investments in excess of $1 million made by us. In addition, all sales of our investments must be approved by all four of our investment committee members. The members of our investment committee are Christian L. Oberbeck, Michael J. Grisius, Thomas V. Inglesby, and Charles G. Phillips.

 

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Investment structure

 

In general, our Investment Adviser intends to select investments with financial covenants and terms that reduce leverage over time, thereby enhancing credit quality. These methods include:

 

maintenance leverage covenants requiring a decreasing ratio of debt to cash flow;

 

maintenance cash flow covenants requiring an increasing ratio of cash flow to the sum of interest expense and capital expenditures; and

 

debt incurrence prohibitions, limiting a company’s ability to re-lever.

 

In addition, limitations on asset sales and capital expenditures should prevent a company from changing the nature of its business or capitalization without our consent.

 

Our Investment Adviser seeks, where appropriate, to limit the downside potential of our investments by:

 

requiring a total return on our investments (including both interest and potential equity appreciation) that compensates us for credit risk;

 

requiring companies to use a portion of their excess cash flow to repay debt;

 

selecting investments with covenants that incorporate call protection as part of the investment structure; and

 

selecting investments with affirmative and negative covenants, default penalties, lien protection, change of control provisions and board rights, including either observation or participation rights.

 

Valuation process

 

We account for our investments at fair value in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), as approved in good faith using written policies and procedures adopted by our board of directors. Investments for which market quotations are readily available are recorded in our consolidated financial statements at such market quotations 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 Saratoga Investment Advisors, our audit committee and an independent valuation firm engaged by 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.

 

We undertake 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 Saratoga Investment Advisors and preliminary valuation conclusions are documented and discussed with the senior management; and

 

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

 

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

 

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

 

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

 

Our investment in Saratoga CLO is carried at fair value, which is based on a discounted cash flow model that utilizes prepayment, re-investment and loss assumptions 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 SIA and recommended to our board of directors. Specifically, we use Intex cash flow models, or an appropriate substitute, to form the basis for the valuation of our investment in Saratoga CLO. The models use a set of assumptions including projected default rates, recovery rates, reinvestment rate and prepayment rates in order to arrive at estimated valuations. The assumptions are based on available market data and projections provided by third parties as well as management estimates. We use the output from the Intex models (i.e., the estimated cash flows) to perform a discounted cash flow analysis on expected future cash flows to determine a valuation for our investment in Saratoga CLO.

 

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. Our 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.

 

Ongoing relationships with and monitoring of portfolio companies

 

Saratoga Investment Advisors will closely monitor each investment we make and, when appropriate, will conduct a regular dialogue with both the management team and other debtholders and seek specifically tailored financial reporting. In addition, in certain circumstances, senior investment professionals of Saratoga Investment Advisors may take board seats or board observation seats.

 

Distributions

 

Our distributions, if any, will be determined by our board of directors and paid out of assets legally available for distribution. Any such distributions generally will be taxable to our stockholders, including to those stockholders who receive additional shares of our common stock pursuant to our dividend reinvestment plan. Prior to January 2009, we paid quarterly dividends to our stockholders. However, in January 2009, we suspended the practice of paying quarterly dividends to our stockholders and thereafter paid five annual dividend distributions (December 2013, 2012, 2011, 2010 and 2009) to our stockholders since such time, which distributions were made with a combination of cash and the issuance of shares of our common stock as discussed more fully below.

 

On September 24, 2014, we announced the recommencement of quarterly dividends to our stockholders and have subsequently made distributions under this new policy. 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.

 

In order to maintain our qualification as a RIC, we must, for each fiscal year, timely distribute an amount equal to at least 90.0% of our ordinary net taxable income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses. In addition, we will be subject to a non-deductible 4% U.S. federal excise tax to the extent we do not distribute during the calendar year at least (1) 98.0% of our net ordinary income for the calendar year, (2) 98.2% of our capital gain net income for the one year period ending on October 31 of the calendar year and (3) any net ordinary income and capital gain net income that we recognized for preceding years, but were not distributed during such years, and on which we paid no U.S. federal income tax. For the 2020 calendar year, the Company did not make sufficient distributions such that we did incur the U.S. federal excise tax. We may elect to withhold from distribution a portion of our ordinary income for the 2021 calendar year and/or portion of the capital gains in excess of capital losses realized during the one-year period ending October 31, 2021, if any, and, if we do so, we would expect to incur U.S. federal excise taxes as a result.

 

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We may distribute taxable dividends that are payable in cash or shares of our common stock at the election of each stockholder. Under certain applicable provisions of the Code and the Treasury regulations and a revenue procedure issued by the Internal Revenue Service (“IRS”), a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC, subject to a limitation that the aggregate amount of cash to be distributed to all stockholders must be at least 20% of the aggregate declared distribution. If too many stockholders elect to receive their distributions in 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 the lesser of (a) the portion of the distribution such shareholder has elected to receive in cash or (b) an amount equal to his or her entire distribution times the percentage limitation on cash available for distribution. 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. Taxable stockholders receiving such distributions will be required to include the full amount of the dividend as ordinary income (or as long-term capital gain or qualified dividend income to the extent such distribution is properly reported as such) to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes. As a result of receiving distributions in the form of our common stock, a U.S. stockholder may be required to pay tax with respect to such distributions in excess of any cash received. If a U.S. stockholder sells the stock he or she receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our stock.

 

Competition

 

Our primary competitors in providing financing to private middle market companies include public and private investment funds (including private equity funds, mezzanine funds, BDCs and SBICs), commercial and investment banks and commercial financing companies. Additionally, alternative investment vehicles, such as hedge funds, frequently invest in middle-market companies. As a result, competition for investment opportunities at middle-market companies can be intense, and in the past couple of years we believe there has been an increase in the amount of debt capital available on average. This has resulted in a somewhat more competitive environment for making new investments. Many middle-market companies are still unable to raise senior debt financing through traditional large financial institutions, and we believe this approach to financing remains difficult as implementation of U.S. and international financial reforms, such as Basel 3, limits the capacity of large financial institutions to hold non-investment grade leveraged loans on their balance sheets. We believe that many of these financial institutions have de-emphasized their service and product offerings to middle-market companies in particular.

 

Many of our competitors are substantially larger and have considerably greater financial and marketing resources than us. For example, some competitors may have access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which may allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC or that the Code imposes on us as a RIC. We use the industry information available to the investment professionals of Saratoga Investment Advisors to assess investment risks and determine appropriate pricing for our investments in portfolio companies. In addition, we believe that the investment professionals of our Investment Adviser enable us to learn about, and compete effectively for, financing opportunities with attractive leveraged companies in the industries in which we seek to invest.

 

For additional information concerning the competitive risks we face, please see Part I. Item 1A. “Risk Factors—We operate in a highly competitive market for investment opportunities.”

 

Staffing

 

We do not currently have any employees and do not expect to have any employees in the future. Services necessary for our business are provided by individuals who are employees of Saratoga Investment Advisors, pursuant to the terms of the Management Agreement and the Administration Agreement. For a discussion of the Management Agreement, see “Business—Investment Advisory and Management Agreement” below. We reimburse Saratoga Investment Advisors for our allocable portion of expenses incurred by it in performing its obligations under the Administration Agreement, including rent and our allocable portion of the cost of our officers and their respective staffs, subject to certain limitations. For a discussion of the Administration Agreement, see “Business—Administration Agreement” below.

 

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Investment Advisory and Management Agreement

 

Saratoga Investment Advisors serves as our investment adviser. Our Investment Adviser was formed in 2010 as a Delaware limited liability company and became our investment advisor in July 2010. Subject to the overall supervision of our board of directors, Saratoga Investment Advisors manages our day-to-day operations and provides investment advisory and management services to us. Under the terms of the Management Agreement, Saratoga Investment Advisors:

 

determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes;

 

identifies, evaluates and negotiates the structure of the investments we make (including performing due diligence on our prospective portfolio companies);

 

closes and monitors the investments we make; and

 

determines the securities and other assets that we purchase, retain or sell.

 

Saratoga Investment Advisors services under the Management Agreement are not exclusive, and it is free to furnish similar services to other entities.

 

Management Fee and Incentive Fee

 

Pursuant to the Management Agreement with Saratoga Investment Advisors, we pay Saratoga Investment Advisors a fee for investment advisory and management services consisting of two components—a base management fee and an incentive fee.

 

The base management fee is paid quarterly in arrears, and equals 1.75% per annum of our gross assets (other than cash or cash equivalents but including assets purchased with borrowed funds) and calculated at the end of each fiscal quarter based on the average value of our gross assets (other than cash or cash equivalents but including assets purchased with borrowed funds) as of the end of such fiscal quarter and the end of the immediate prior fiscal quarter. Base management fees for any partial month or quarter are appropriately pro-rated.

 

The incentive fee has the following two parts:

 

The first part is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income for the immediately preceding fiscal quarter. Pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees such as commitment, origination, structuring, diligence, managerial and consulting fees or other fees that we receive from portfolio companies) accrued during the fiscal quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement, and any interest expense and dividends paid on any issued and outstanding preferred stock or debt security, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as market discount, debt instruments with PIK interest, preferred stock with PIK dividends and zero-coupon securities), accrued income that we have not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses, unrealized capital appreciation or depreciation or realized gains or losses resulting from the extinguishment of our own debt. Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets (defined as total assets less liabilities) at the end of the immediately preceding fiscal quarter, is compared to a “hurdle rate” of 1.875% per quarter, subject to a “catch up” provision. The base management fee is calculated prior to giving effect to the payment of any incentive fees.

 

We pay Saratoga Investment Advisors an incentive fee with respect to our pre-incentive fee net investment income in each fiscal quarter as follows: (A) no incentive fee in any fiscal quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate; (B) 100.0% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than or equal to 2.344% in any fiscal quarter is payable to Saratoga Investment Advisors; and (C) 20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.344% in any fiscal quarter. We refer to the amount specified in clause (B) as the “catch-up.” The “catch-up” provision is intended to provide Saratoga Investment Advisors with an incentive fee of 20.0% on all of our pre-incentive fee net investment income as if a hurdle rate did not apply when our pre-incentive fee net investment income exceeds 2.344% in any fiscal quarter. Notwithstanding the foregoing, with respect to any period ending on or prior to December 31, 2010, Saratoga Investment Advisors was only entitled to 20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeded 1.875% in any fiscal quarter without any catch-up provision. These calculations are appropriately pro-rated when such calculations are applicable for any period of less than three months.

 

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The following is a graphical representation of the calculation of the income-related portion of the incentive fee subsequent to any period ending after December 31, 2010:

 

Quarterly Incentive Fee Based on “Pre-Incentive Fee Net Investment Income”

 

Pre-Incentive Fee Net Investment Income

(expressed as a percentage of the value of net assets)

 

 

Percentage of Pre-Incentive Fee Net Investment

Income allocated to income-related portion of incentive fee

 

The second part of the incentive fee, the capital gains fee, is determined and payable in arrears as of the end of each fiscal year (or, upon termination of the Management Agreement), and is calculated at the end of each applicable fiscal year by subtracting (1) the sum of our cumulative aggregate realized capital losses and aggregate unrealized capital depreciation from (2) our cumulative aggregate realized capital gains, in each case calculated from May 31, 2010 on each investment in the Company’s portfolio. If such amount is positive at the end of such year, then the capital gains fee for such year is equal to 20.0% of such amount, less the cumulative aggregate amount of capital gains fees paid in all prior years. If such amount is negative, then there is no capital gains fee for such year.

 

Under the Management Agreement, the capital gains portion of the incentive fee is based on realized gains and realized and unrealized losses from May 31, 2010. Therefore, realized and unrealized losses incurred prior to such time will not be taken into account when calculating the capital gains portion of the incentive fee, and Saratoga Investment Advisors will be entitled to 20.0% of net capital gains that arise after May 31, 2010. In addition, the cost basis for computing our realized gains and losses on investments held by us as of May 31, 2010 equals the fair value of such investments as of such date.

 

Examples of Quarterly Incentive Fee Calculation

 

Example 1: Income Related Portion of Incentive Fee(1):

 

Assumptions

 

Hurdle rate(2) = 1.875%

 

Management fee(3) = 0.4375%

 

Other expenses (legal, accounting, custodian, transfer agent, etc.)(4) = 0.33%

 

Alternative 1

 

Additional Assumptions

 

Investment income (including interest, dividends, fees, etc.) = 1.25%

 

Pre-incentive fee net investment income (investment income–(management fee + other expenses)) = 0.4825% Pre-incentive fee net investment income does not exceed hurdle rate, therefore there is no incentive fee.

 

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Alternative 2

 

Additional Assumptions

 

Investment income (including interest, dividends, fees, etc.) = 3.0%

 

Pre-incentive fee net investment income (investment income–(management fee + other expenses)) = 2.2325%

 

Pre-incentive fee net investment income exceeds hurdle rate, but does not fully satisfy the “catch-up” provision, therefore the income related portion of the incentive fee is 0.3575%.

 

Incentive Fee = (100.0% × (pre-incentive fee net investment income–1.875%)
  = 100.0%(2.2325%–1.875%)
  = 100.0%(0.3575%)
  = 0.3575%

 

 

(1)The hypothetical amount of pre-incentive fee net investment income shown is based on a percentage of total net assets.

(2)Represents 7.5% hurdle rate.

(3)Represents 1.75% annualized management fee. For the purposes of this example, we have assumed that we have not incurred any indebtedness and that we maintain no cash or cash equivalents.

(4)The “catch-up” provision is intended to provide our Investment Adviser with an incentive fee of 20.0% on all pre-incentive fee net investment income as if a hurdle rate did not apply when our net investment income exceeds 2.344% in any fiscal quarter.

 

Alternative 3

 

Additional Assumptions

 

Investment income (including interest, dividends, fees, etc.) = 3.5%

 

Pre-Incentive Fee Net Investment Income (investment income–(management fee + other expenses) = 2.7325%

 

Pre-incentive fee net investment income exceeds the hurdle rate, and fully satisfies the “catch-up” provision, therefore the income related portion of the incentive fee is 0.5467%.

 

Incentive fee = 100.0% × pre-incentive fee net investment income (subject to “catch-up”)(4)
Incentive fee = 100.0% × “catch-up” + (20.0% × (Pre-incentive fee net investment income–2.344%))
Catch up = 2.344%–1.875%
  = 0.469%
Incentive fee = (100.0% × 0.469%) +(20.0% ×(2.7325%–2.344%))
  = 0.469% +(20.0% × 0.3885%)
  = 0.469% + 0.0777%
  = 0.5467%

 

Example 2: Capital Gains Portion of Incentive Fee:

 

Alternative 1

 

Assumptions(1)

 

Year 1: $20.0 million investment made in Company A (“Investment A”), and $30.0 million investment made in Company B (“Investment B”)

 

Year 2: Investment A is sold for $50.0 million and fair market value (“FMV”) of Investment B determined to be $32.0 million

 

Year 3: FMV of Investment B determined to be $25.0 million

 

Year 4: Investment B sold for $31.0 million

 

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The capital gains portion of the incentive fee, if any, calculated under the cumulative method would be:

 

Year 1: None

 

Year 2: $6 million (20.0% multiplied by $30.0 million realized capital gains on sale of Investment A)

 

Year 3: None; $5 million (20.0% multiplied by ($30.0 million realized cumulative capital gains less $5.0 million cumulative capital depreciation)) less $6.0 million (capital gains incentive fee paid in Year 2)

 

Year 4: $200,000; $6.2 million (20.0% multiplied by $31.0 million cumulative realized capital gains) less $6.0 million (capital gains incentive fee paid in Year 2)

 

Alternative 2

 

Assumptions(1)

 

 

(1)The examples assume that Investment A and Investment B were acquired by us subsequent to May 31, 2010. If Investment A and B were acquired by us prior to May 31, 2010, then the cost basis for computing our realized gains and losses on such investments would equal the fair value of such investments as of May 31, 2010.

 

Year 1: $20.0 million investment made in Company A (“Investment A”), $30.0 million investment made in Company B (“Investment B”) and $25.0 million investment made in Company C (“Investment C”)

 

Year 2: Investment A sold for $50.0 million, FMV of Investment B determined to be $25.0 million and FMV of Investment C determined to be $25.0 million

 

Year 3: FMV of Investment B determined to be $27.0 million and Investment C sold for $30.0 million

 

Year 4: FMV of Investment B determined to be $35.0 million

 

Year 5: Investment B sold for $20.0 million

 

The capital gains portion of the incentive fee, if any, calculated under the cumulative method would be:

 

Year 1: None

 

Year 2: $5.0 million (20.0% multiplied by $25.0 million ($30.0 million realized capital gains on Investment A less $5.0 million unrealized capital depreciation on Investment B))

 

Year 3: $1.4 million ($6.4 million (20.0% multiplied by $32.0 million ($35.0 million cumulative realized capital gains less $3.0 million unrealized capital depreciation)) less $5.0 million (capital gains incentive fee paid in Year 2))

 

Year 4: None

 

Year 5: None ($5.0 million (20.0% multiplied by $25.0 million (cumulative realized capital gains of $35.0 million less realized capital losses of $10.0 million)) less $6.4 million (cumulative capital gains incentive fee paid in Year 2 and Year 3))

 

The Management Agreement with Saratoga Investment Advisors was approved by our board of directors at an in-person meeting of the directors, including a majority of our independent directors, and was approved by our stockholders at the special meeting of stockholders held on July 30, 2010. Subsequent to then, our board of directors approved the renewal of the Management Agreement annually for an additional one-year term at an in-person meeting, with the last approval granted on July 7, 2020 at a telephonic meeting. In reliance on certain exemptive relief provided by the SEC in connection with the global COVID-19 pandemic, our board undertook to ratify the Management Agreement at its next in-person meeting.

 

In approving this Management Agreement, the directors considered, among other things, (i) the nature, extent and quality of the advisory and other services to be provided to us by Saratoga Investment Advisors; (ii) our investment performance and the investment performance of Saratoga Investment Advisors; (iii) the expected costs of the services to be provided by Saratoga Investment Advisors (including management fees, advisory fees and expense ratios) as compared to other companies within the industry, and the profits expected to be realized by Saratoga Investment Advisors; (iv) the limited potential for economies of scale in investment management associated with managing us; and (v) Saratoga Investment Advisors estimated pro forma profitability with respect to managing us.

 

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Payment of our expenses

 

The Management Agreement provides that all investment professionals of Saratoga Investment Advisors and its staff, when and to the extent engaged in providing investment advisory services required to be provided by Saratoga Investment Advisors, and the compensation and routine overhead expenses of such personnel allocable to such services, will be provided and paid for by Saratoga Investment Advisors and not by us.

 

We bear all costs and expenses of our operations and transactions, including those relating to:

 

organization;

 

calculating our net asset value (including the cost and expenses of any independent valuation firm);

 

expenses incurred by our Investment Adviser payable to third parties, including agents, consultants or other advisers, in monitoring financial and legal affairs for us and in monitoring our investments and performing due diligence on our prospective portfolio companies;

 

expenses incurred by our Investment Adviser payable for travel and due diligence on our prospective portfolio companies;

 

interest payable on debt, if any, incurred to finance our investments;

 

offerings of our common stock and other securities;

 

investment advisory and management fees;

 

fees payable to third parties, including agents, consultants or other advisers, relating to, or associated with, evaluating and making investments;

 

transfer agent and custodial fees;

 

federal and state registration fees;

 

all costs of registration and listing our common stock on any securities exchange;

 

federal, state and local taxes;

 

independent directors’ fees and expenses;

 

costs of preparing and filing reports or other documents required by governmental bodies (including the SEC and the SBA);

 

costs of any reports, proxy statements or other notices to common stockholders including printing costs;

 

our fidelity bond, directors and officers errors and omissions liability insurance, and any other insurance premiums;

 

direct costs and expenses of administration, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs; and

 

administration fees and all other expenses incurred by us or, if applicable, the administrator in connection with administering our business (including payments under the Administration Agreement based upon our allocable portion of the administrator’s overhead in performing its obligations under the Administration Agreement, including rent and the allocable portion of the cost of our officers and their respective staffs (including travel expenses)).

 

Duration and Termination

 

The Management Agreement will remain in effect continuously, unless terminated under the termination provisions of the agreement. The Management Agreement provides that it may be terminated at any time, without the payment of any penalty, upon 60 days written notice, by the vote of stockholders holding a majority of our outstanding voting securities, or by the vote of our directors or by Saratoga Investment Advisors.

 

The Management Agreement will, unless terminated as described above, continue in effect from year to year so long as it is approved at least annually by (i) the vote of the board of directors, or by the vote of stockholders holding a majority of our outstanding voting securities, and (ii) the vote of a majority of our directors who are not parties to the Management Agreement or “interested persons” (as such term is defined in Section 2(a)(19) of the 1940 Act) of any party to such agreement, in accordance with the requirements of the 1940 Act.

 

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Indemnification

 

Under the Management Agreement, Saratoga Investment Advisors and certain of its affiliates are not liable to us for any action taken or omitted to be taken by Saratoga Investment Advisors in connection with the performance of any of its duties or obligations under the agreement or otherwise as an investment adviser to us, except to the extent specified in Section 36(b) of the 1940 Act concerning loss resulting from a breach of fiduciary duty (as the same is finally determined by judicial proceedings) with respect to the receipt of compensation for services and except to the extent such action or omission constitutes gross negligence, willful misfeasance, bad faith or reckless disregard of its duties and obligations under the agreement.

 

We also provide indemnification to Saratoga Investment Advisors and certain of its affiliates for damages, liabilities, costs and expenses incurred by them in or by reason of any pending, threatened or completed action, suit, investigation or other proceeding arising out of or otherwise based upon the performance of any of its duties or obligations under the agreement or otherwise as an investment adviser to us. However, we would not provide indemnification against any liability to us or our security holders to which Saratoga Investment Advisors or such affiliates would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of any such person’s duties or by reason of the reckless disregard of its duties and obligations under the agreement.

 

Organization of the Investment Adviser

 

Saratoga Investment Advisors is registered as an investment adviser under the Investment Advisers Act of 1940. The principal executive offices of Saratoga Investment Advisors are located at 535 Madison Avenue, New York, New York 10022.

 

Administration Agreement

 

Pursuant to a separate Administration Agreement, Saratoga Investment Advisors, who also serves as our administrator, furnishes us with office facilities, equipment and clerical, book-keeping and record keeping services. Under the Administration Agreement, our administrator also performs, or oversees the performance of, our required administrative services, which include, among other things, being responsible for the financial records which we are required to maintain, preparing reports for our stockholders and reports required to be filed with the SEC. In addition, our administrator assists us in determining and publishing our net asset value, oversees the preparation and filing of our tax returns and the printing and dissemination of reports to our stockholders, and generally oversees the payment of our expenses and the performance of administrative and professional services rendered to us by others. Payments under the Administration Agreement equal an amount based upon our allocable portion of our administrator’s overhead in performing its obligations under the Administration Agreement, including rent and our allocable portion of the cost of our officers and their respective staffs relating to the performance of services under this agreement (including travel expenses). Our allocable portion is based on the proportion that our total assets bears to the total assets administered or managed by our administrator. Under the Administration Agreement, our administrator also provides managerial assistance, on our behalf, to those portfolio companies who accept our offer of assistance. The Administration Agreement may be terminated by either party without penalty upon 60 days written notice to the other party. Our board of directors, including a majority of independent directors, will annually review the compensation we pay to the Adviser to determine that the provisions of the Administrative Agreement are carried out satisfactorily and to determine, among other things, whether the fees payable under such agreement are reasonable in light of the services provided. Our board of directors reviews the methodology employed in determining how the expenses are allocated to us and any proposed allocation of administrative expenses among us and any affiliates of the Adviser. Our board of directors then assesses the reasonableness of such reimbursements for expenses allocated to us based on the breadth, depth and quality of the administrative services as compared to the estimated cost to us of obtaining similar services from third-party service providers known to be available. In addition, our board of directors considers whether any single third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, our board of directors compares the total amount paid to the Adviser for such services as a percentage of our net assets to the same ratio as reported by other comparable funds. The amount payable by us under the Administration Agreement was initially capped at $1.0 million for each annual term of the agreement. On July 8, 2015, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to increase the cap on the payment or reimbursement of expenses by the Company thereunder, which had not been increased since the inception of the agreement, to $1.3 million. On July 7, 2016, our board of directors approved the renewal of the Administration Agreement for an additional one-year term. On October 5, 2016, our board of directors determined to increase the cap on the payment or reimbursement of expenses by the Company under the Administration Agreement, from $1.3 million to $1.5 million, effective November 1, 2016. On July 11, 2017, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to increase the cap on the payment or reimbursement of expenses by the Company from $1.5 million to $1.75 million, effective August 1, 2017. On July 9, 2018, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to increase the cap on the payment or reimbursement of expenses by the Company from $1.75 million to $2.0 million, effective August 1, 2018. On July 9, 2019, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to increase the cap on the payment or reimbursement of expenses by the Company from $2.0 million to $2.225 million effective August 1, 2019. On July 7, 2020, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to increase the cap on the payment or reimbursement of expenses by the Company from $2.225 million to $2.775 million effective August 1, 2020.

 

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Indemnification

 

Under the Administration Agreement, Saratoga Investment Advisors and certain of its affiliates are not liable to us for any action taken or omitted to be taken by Saratoga Investment Advisors in connection with the performance of any of its duties or obligations under the agreement.

 

We also provide indemnification to Saratoga Investment Advisors and certain of its affiliates for damages, liabilities, costs and expenses incurred by them in or by reason of any pending, threatened or completed action, suit, investigation or other proceeding arising out of or otherwise based upon the performance of any of its duties or obligations under the agreement or otherwise as an administrator to us. However, we do not provide indemnification against any liability to us or our security holders to which Saratoga Investment Advisors or such affiliates would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of any such person’s duties or by reason of the reckless disregard of its duties and obligations under the agreement.

 

License Agreement

 

We entered into a trademark license agreement with Saratoga Investment Advisors, pursuant to which Saratoga Investment Advisors grants us a non-exclusive, royalty-free license to use the name “Saratoga.” Under this agreement, we have a right to use the “Saratoga” name, for so long as Saratoga Investment Advisors or one of its affiliates remains our Investment Adviser. Other than with respect to this limited license, we have no legal right to the “Saratoga” name. Saratoga Investment Advisors has the right to terminate the license agreement if it is no longer acting as our investment adviser. In the event the Management Agreement is terminated, we would be required to change our name to eliminate the use of the name “Saratoga.”

 

Business Development Company Regulations

 

We have elected to be treated as a BDC under the 1940 Act. As with other companies regulated by the 1940 Act, a BDC must adhere to certain substantive regulatory requirements. The 1940 Act contains prohibitions and restrictions relating to transactions between BDCs and their affiliates (including any investment advisers or sub-advisers), principal underwriters and affiliates of those affiliates or underwriters, and requires that a majority of the directors be persons other than “interested persons,” as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a BDC, unless approved by “a majority of our outstanding voting securities,” as defined in the 1940 Act. A majority of the outstanding voting securities of a company is defined under the 1940 Act as the lesser of: (i) 67.0% or more of such company’s stock present at a meeting if more than 50.0% of the outstanding stock of such company is present and represented by proxy or (ii) more than 50.0% of the outstanding stock of such company.

 

We do not intend to acquire securities issued by any investment company (i.e., mutual fund, registered closed-end fund or BDC) that exceed the limits imposed by the 1940 Act. Under these limits, except for registered money market funds, we generally cannot acquire more than 3% of the voting stock of any investment company, invest more than 5% of the value of our total assets in the securities of one investment company or invest more than 10% of the value of our total assets in the securities of more than one investment company. With regard to that portion of our portfolio invested in securities issued by investment companies, it should be noted that such investments might subject our stockholders to additional expenses.

 

We expect to be periodically examined by the SEC for compliance with the 1940 Act.

 

We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.

 

We and our investment adviser have adopted and implemented written policies and procedures reasonably designed to prevent violation of the federal securities laws and review these policies and procedures annually for their adequacy and the effectiveness of their implementation. We and our investment adviser have designated a chief compliance officer to be responsible for administering these policies and procedures.

 

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Qualifying assets

 

A BDC must have been organized and have its principal place of business in the United States and must be operated for the purpose of making investments in the types of securities described in (1), (2) or (3) below. Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70.0% of the company’s total assets. The principal categories of qualifying assets relevant to our business are the following:

 

(1)Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible portfolio company is defined in the 1940 Act as any issuer which:

 

(a)is organized under the laws of, and has its principal place of business in, the United States;

 

(b)is not an investment company (other than a small business investment company wholly-owned by the BDC) or a company that would be an investment company but for certain exclusions under the 1940 Act; and

 

(c)satisfies either of the following:

 

(i)does not have any class of securities listed on a national securities exchange;

 

(ii)has a class of securities listed on a national securities exchange but has an aggregate market value of outstanding voting and non-voting common equity of less than $250.0 million;

 

(iii)is controlled by a BDC or a group of companies including a BDC and the BDC has an affiliated person who is a director of the eligible portfolio company;

 

(iv)is a small and solvent company having total assets of not more than $4.0 million and capital and surplus of not less than $2.0 million; or

 

(v)meets such other criteria as may established by the SEC.

 

(2)Securities of any eligible portfolio company which we control.

 

(3)Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements.

 

(4)Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we already own at least 60.0% of the outstanding equity of the eligible portfolio company.

 

(5)Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise of options, warrants or rights relating to such securities.

 

(6)Cash, cash equivalents, U.S. Government securities or high-quality debt securities maturing in one year or less from the time of investment.

 

The regulations defining qualifying assets may change over time. We may adjust our investment focus as needed to comply with and/or take advantage of any regulatory, legislative, administrative or judicial actions in this area.

 

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Significant managerial assistance to portfolio companies

 

A BDC generally must offer to make available to the issuer of the securities in which it invests significant managerial assistance, except in circumstances where either (i) the BDC controls such issuer of securities or (ii) the BDC purchases such securities in conjunction with one or more other persons acting together and one of the other persons in the group makes available such managerial assistance. As a BDC we offer, and must provide upon request, managerial assistance to our portfolio companies. Making available significant managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees or those of its investment adviser, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. Pursuant to a separate Administration Agreement, our Investment Adviser provides such managerial assistance on our behalf to portfolio companies that request this assistance, recognizing that our involvement with each investment will vary based on factors including the size of the company, the nature of our investment, the company’s overall stage of development and our relative position in the capital structure. We may receive fees for these services.

 

Temporary investments

 

As a BDC, pending investment in other types of “qualifying assets,” as described above, our investments may consist of cash, cash equivalents, U.S. Government securities or high-quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as temporary investments, so that 70.0% of our assets are qualifying assets. Typically, we will invest in U.S. Treasury bills or in repurchase agreements, provided that such agreements are fully collateralized by cash or securities issued by the U.S. Government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if more than 25.0% of our total assets constitute repurchase agreements from a single counterparty, we would not meet the asset-diversification requirements in order to qualify as a regulated investment company (“RIC”) for U.S. federal income tax purposes. Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit. Our Investment Adviser will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions.

 

Indebtedness and senior securities

 

As a BDC, we are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of shares of stock, senior to our common stock, if our asset coverage, as defined in the 1940 Act, is at least equal to 200.0% immediately after each such issuance. On April 16, 2018, as permitted by the Small Business Credit Availability Act, which was signed into law on March 23, 2018, our non-interested Board of Directors approved of our becoming subject to a minimum asset coverage ratio of 150.0% under Sections 18(a)(1) and 18(a)(2) of the 1940 Act. The 150.0% asset coverage ratio became effective on April 16, 2019. “See Risk Factors – Recent legislation allows us to incur additional leverage.” We may also borrow amounts up to 5.0% of the value of our total assets for temporary or emergency purposes without regard to asset coverage.

 

The 1940 Act also limits the amount of warrants, options and rights to common stock that we may issue and the terms of such securities.

 

Common stock

 

We are generally not able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, warrants, options or rights to acquire our common stock, at a price below the current net asset value of the common stock if our board of directors determines that such sale is in our best interests and that of our stockholders, and our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our board of directors, closely approximates the market value of such securities (less any distributing commission or discount). We may also make rights offerings to our stockholders at prices per share less than the net asset value per share, subject to applicable requirements of the 1940 Act.

 

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Code of ethics

 

As a BDC, we and Saratoga Investment Advisors have each adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act and Rule 204A-1 under the Advisers Act, respectively, that establishes procedures for personal investments and restricts certain personal securities transactions. Personnel subject to each code may invest in securities for their personal investment accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance with the code’s requirements. In addition, each code of ethics is available on the EDGAR database on the SEC’s website at http://www.sec.gov. You may also obtain copies of the code of ethics, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-0102. Our code of ethics is also available on our corporate governance webpage at http://ir.saratogainvestmentcorp.com/corporate-governance.

 

Proxy voting policies and procedures

 

SEC registered investment advisers that have the authority to vote (client) proxies (which authority may be implied from a general grant of investment discretion) are required to adopt policies and procedures reasonably designed to ensure that the adviser votes proxies in the best interests of its clients. Registered investment advisers also must maintain certain records on proxy voting. In most cases, we will invest in securities that do not generally entitle us to voting rights in our portfolio companies. When we do have voting rights, we will delegate the exercise of such rights to our Investment Adviser.

 

Saratoga Investment Advisors has particular proxy voting policies and procedures in place. In determining how to vote, officers of Saratoga Investment Advisors will consult with each other, taking into account our interests and the interests of our investors, as well as any potential conflicts of interest. Saratoga Investment Advisors will consult with legal counsel to identify potential conflicts of interest. Where a potential conflict of interest exists, Saratoga Investment Advisors may, if it so elects, resolve it by following the recommendation of a disinterested third party, by seeking the direction of our independent directors or, in extreme cases, by abstaining from voting. While Saratoga Investment Advisors may retain an outside service to provide voting recommendations and to assist in analyzing votes, it will not delegate its voting authority to any third party.

 

An officer of Saratoga Investment Advisors will keep a written record of how all such proxies are voted. It will retain records of (1) proxy voting policies and procedures, (2) all proxy statements received (or it may rely on proxy statements filed on the SEC’s EDGAR system in lieu thereof), (3) all votes cast, (4) investor requests for voting information, and (5) any specific documents prepared or received in connection with a decision on a proxy vote. If it uses an outside service, Saratoga Investment Advisors may rely on such service to maintain copies of proxy statements and records, so long as such service will provide a copy of such documents promptly upon request.

 

Saratoga Investment Advisors’ proxy voting policies are not exhaustive and are designed to be responsive to the wide range of issues that may be subject to a proxy vote. In general, Saratoga Investment Advisors will vote our proxies in accordance with these guidelines unless: (1) it has determined otherwise due to the specific and unusual facts and circumstances with respect to a particular vote, (2) the subject matter of the vote is not covered by these guidelines, (3) a material conflict of interest is present, or (4) it finds it necessary to vote contrary to its general guidelines to maximize stockholder value or our best interests.

 

In reviewing proxy issues, Saratoga Investment Advisors generally will use the following guidelines:

 

Elections of Directors: In general, Saratoga Investment Advisors will vote in favor of the management-proposed slate of directors. If there is a proxy fight for seats on a portfolio company’s board of directors, or Saratoga Investment Advisors determines that there are other compelling reasons for withholding our vote, it will determine the appropriate vote on the matter. It may withhold votes for directors that fail to act on key issues, such as failure to: (1) implement proposals to declassify a board, (2) implement a majority vote requirement, (3) submit a rights plan to a stockholder vote or (4) act on tender offers where a majority of stockholders have tendered their shares. Finally, Saratoga Investment Advisors may withhold votes for directors of non-U.S. issuers where there is insufficient information about the nominees disclosed in the proxy statement.

 

Appointment of Auditors: We believe that a portfolio company remains in the best position to choose its independent auditors and Saratoga Investment Advisors will generally support management’s recommendation in this regard.

 

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Changes in Capital Structure: Changes in a portfolio company’s organizational documents may be required by state or federal regulation. In general, Saratoga Investment Advisors will cast our votes in accordance with the management on such proposals. However, Saratoga Investment Advisors will consider carefully any proposal regarding a change in corporate structure that is not required by state or federal regulation.

 

Corporate Restructurings, Mergers and Acquisitions: We believe proxy votes dealing with corporate reorganizations are an extension of the investment decision. Accordingly, Saratoga Investment Advisors will analyze such proposals on a case-by-case basis and vote in accordance with its perception of our interests.

 

Proposals Affecting Stockholder Rights: We will generally vote in favor of proposals that give stockholders a greater voice in the affairs of a portfolio company and oppose any measure that seeks to limit such rights. However, when analyzing such proposals, Saratoga Investment Advisors will balance the financial impact of the proposal against any impairment of stockholder rights as well as of our investment in the portfolio company.

 

Corporate Governance: We recognize the importance of good corporate governance. Accordingly, Saratoga Investment Advisors will generally favor proposals that promote transparency and accountability within a portfolio company.

 

Anti-Takeover Measures: Saratoga Investment Advisors will evaluate, on a case-by-case basis, any proposals regarding anti- takeover measures to determine the likely effect on stockholder value dilution.

 

Share Splits: Saratoga Investment Advisors will generally vote with management on share split matters.

 

Limited Liability of Directors: Saratoga Investment Advisors will generally vote with management on matters that could adversely affect the limited liability of directors.

 

Social and Corporate Responsibility: Saratoga Investment Advisors will review proposals related to social, political and environmental issues to determine whether they may adversely affect stockholder value. It may abstain from voting on such proposals where they do not have a readily determinable financial impact on stockholder value.

 

Privacy principles

 

We are committed to protecting the privacy of our stockholders. The following explains the privacy policies of Saratoga Investment Corp., Saratoga Investment Advisors and their affiliated companies.

 

We will safeguard, according to strict standards of security and confidentiality, all information we receive about our stockholders.

 

Generally, we do not receive any non-public personal information relating to our stockholders, although certain non-public personal information of our stockholders may become available to us. The only information we collect from stockholders is the holder’s name, address, number of shares and social security number. This information is used only so that we can send annual reports and other information about us to the stockholder and send the stockholder proxy statements or other information required by law. We restrict access to non-public personal information about our stockholders to our Investment Adviser’s and Administrator’s employees with a legitimate business need for the information. We maintain physical, electronic and procedural safeguards designed to protect the non-public personal information of our stockholders.

 

We do not share this information with any non-affiliated third party except as described below:

 

Authorized Employees of Saratoga Investment Advisors. It is our policy that only authorized employees of Saratoga Investment Advisors who need to know a stockholder’s personal information will have access to it.

 

Service Providers. We may disclose your personal information to companies that provide services on our behalf, such as recordkeeping, processing a stockholder’s trades, and mailing stockholder information. These companies are required to protect our stockholders’ information and use it solely for the purpose for which they received it.

 

Courts and Government Officials. If required by law, we may disclose a stockholder’s personal information in accordance with a court order or at the request of government regulators. Only that information required by law, subpoena, or court order will be disclosed.

 

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Compliance with applicable laws

 

As a BDC, we are periodically examined by the SEC for compliance with the 1940 Act.

 

We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.

 

We and Saratoga Investment Advisors are each required to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal securities laws, review these policies and procedures annually for their adequacy and the effectiveness of their implementation, and designate a chief compliance officer to be responsible for administering the policies and procedures.

 

The New York Stock Exchange (“NYSE”) Corporate Governance Regulations

 

The NYSE has adopted corporate governance regulations that listed companies must comply with. We are in compliance with such corporate governance listing standards applicable to BDCs.

 

Co-investment

 

We may be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our board of directors who are not interested persons and, in some cases, prior approval by the SEC. Thus, based on current SEC interpretations, co-investment transactions involving a BDC like us and an entity that is advised by Saratoga Investment Advisors or an affiliated adviser generally could not be effected without SEC relief. The staff of the SEC has, however, granted no-action relief to third parties permitting purchases of a single class of privately-placed securities provided that the adviser negotiates no term other than price and certain other conditions are met. As a result, currently we only expect to co-invest on a concurrent basis with affiliates of Saratoga Investment Advisors when each of us will own the same securities of the issuer and when no term is negotiated other than price. Any such investment would be made, subject to compliance with existing regulatory guidance, applicable regulations and our allocation procedures.

 

We may in the future submit an application for exemptive relief to the SEC to permit greater flexibility to negotiate the terms of co-investments because we believe that it will be advantageous for us to co-invest with affiliates of Saratoga Investment Advisors where such investment is consistent with the investment objective, investment positions, investment policies, investment strategies, investment restrictions, regulatory requirements and other pertinent factors applicable to us. However, there is no assurance that any application for exemptive relief, if made, would be granted by the SEC.

 

Small Business Investment Company Regulations

 

On March 28, 2012, our wholly-owned subsidiary, SBIC LP, received an SBIC license from the SBA. On August 14, 2019, our wholly-owned subsidiary, SBIC II LP, also received an SBIC license from the SBA.

 

The SBIC licenses allows our SBIC LP and SBIC II LP to obtain leverage by issuing SBA-guaranteed debentures, subject to the satisfaction of certain customary procedures. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi- annually and have a ten-year maturity. The principal amount of SBA-guaranteed debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed at the time of issuance at a market-driven spread over U.S. Treasury Notes with 10-year maturities.

 

SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under SBA regulations, SBICs may make loans to eligible small businesses and invest in the equity securities of small businesses. Under present SBA regulations, eligible small businesses include businesses that have a tangible net worth not exceeding $19.5 million and have average annual fully taxed net income not exceeding $6.5 million for the two most recent fiscal years. In addition, an SBIC must devote 25.0% of its investment activity to “smaller” concerns as defined by the SBA. A smaller concern is one that has a tangible net worth not exceeding $6.0 million and has average annual fully taxed net income not exceeding $2.0 million for the two most recent fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on such factors as the number of employees and gross sales. According to SBA regulations, SBICs may make long-term loans to small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services.

 

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SBIC LP and SBIC II LP are subject to regulation and oversight by the SBA, including requirements with respect to maintaining certain minimum financial ratios and other covenants. Receipt of an SBIC license does not assure that SBIC LP or SBIC II LP will receive SBA-guaranteed debenture funding, which is dependent upon SBIC LP and SBIC II LP continuing to be in compliance with SBA regulations and policies. The SBA, as a creditor, will have a superior claim to SBIC LP and SBIC II LP’s assets over our stockholders and debtholders in the event we liquidate SBIC LP or SBIC II LP or the SBA exercises its remedies under the SBA-guaranteed debentures issued by SBIC LP or SBIC II LP upon an event of default.

 

We received exemptive relief from the SEC to permit it to exclude the debt of SBIC LP and SBIC II LP guaranteed by the SBA from the definition of senior securities in the asset coverage test under the 1940 Act. This allows us increased flexibility under the asset coverage test by permitting it to borrow up to $325.0 million more than it would otherwise be able to absent the receipt of this exemptive relief. On April 16, 2018, as permitted by the Small Business Credit Availability Act, which was signed into law on March 23, 2018, our non-interested board of directors approved of our becoming subject to a minimum asset coverage ratio of 150.0% under Sections 18(a)(1) and 18(a)(2) of the 1940 Act. The 150.0% asset coverage ratio became effective on April 16, 2019.

 

In December 2015, the 2016 omnibus spending bill approved by Congress and signed into law by the President increased the amount of SBA-guaranteed debentures that affiliated SBIC funds can have outstanding from $225.0 million to $350.0 million, subject to SBA approval. Our wholly-owned SBIC subsidiaries may borrow funds from the SBA against regulatory capital (which approximates equity capital) that is paid in and is subject to customary regulatory requirements including but not limited to an examination by the SBA. With this license approval, Saratoga will grow its SBA relationship from $150.0 million to $325.0 million of committed capital. SBA regulations currently limit the amount of SBA-guaranteed debentures that an SBIC may issue to $150.0 million when it has at least $75.0 million in regulatory capital. Affiliated SBICs are permitted to issue up to a combined maximum amount of $350.0 million in SBA-guaranteed debentures when they have at least $175.0 million in combined regulatory capital.

 

As of February 28, 2021, we have funded SBIC LP with an aggregate total of $75.0 million of equity capital and have $124.0 million of SBA guaranteed debentures outstanding and have funded SBIC II LP with an aggregate total of $69.0 million of equity capital and have $34.0 million of SBA-guaranteed debentures outstanding. SBA debentures are non-recourse to us, have a 10-year maturity, and may be prepaid at any time without penalty. The interest rate of SBA debentures is fixed at the time of issuance, often referred to as pooling, at a market-driven spread over 10-year U.S. Treasury Notes. SBA current regulations limit the amount that SBIC LP and SBIC II LP may borrow to a maximum of $150.0 million and $175.0 million, respectively, which is up to twice its potential regulatory capital.

 

Available Information

 

We file with or submit to the SEC annual, quarterly and current periodic reports, proxy statements and other information meeting the informational requirements of the Securities Exchange of 1934, as amended (the “Exchange Act”). You may inspect and copy these reports, proxy statements and other information at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Copies of these reports, proxy and information statements and other information may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-0102. In addition, the SEC maintains an Internet website that contains reports, proxy and information statements and other information filed electronically by us with the SEC at http://www.sec.gov.

 

Our Internet address is http://www.saratogainvestmentcorp.com. We make available free of charge on our Internet website our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Information contained on our website is not incorporated by reference into this Annual Report, and you should not consider that information to be part of this Annual Report.

 

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ITEM 1A. RISK FACTORS

 

Investing in our securities involves a number of significant risks. In addition to other information contained in this Annual Report on Form 10-K, you should consider carefully the following information before making an investment in our securities. The risks set forth below are the principal risks with respect to the Company generally and with respect to business development companies, they may not be the only risks we face. This section nonetheless describes the principal risk factors associated with investment in the Company specifically, as well as those factors generally associated with investment in a company with investment objectives, investment policies, capital structure or trading markets similar to the Company’s. If any of the risks occur, our business, financial condition and results of operations could be materially adversely affected. In such case, our net asset value and the trading price of our securities could decline and you may lose all or part of your investment.

 

SUMMARY OF RISK FACTORS

 

The following is a summary of the principal risks that you should carefully consider before investing in our securities. These and other risk factors are described more fully in this “Item 1A. Risk Factors.”

 

Risks Related to Our Business and Structure

 

We employ leverage, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us.

 

We are exposed to risks associated with changes in interest rates including potential effects on our cost of capital and net investment income.

 

Changes relating to the LIBOR calculation process may adversely affect the value of our portfolio of LIBOR-indexed, floating- rate debt securities.

 

There are significant potential conflicts of interest which could adversely impact our investment returns.

 

Internal and external cyber threats, as well as other disasters, could impair our ability to conduct business effectively.

 

We will be subject to corporate-level U.S. federal income tax if we fail to qualify as a RIC.

 

Risks Related to the Current Environment

 

Global economic, political and market conditions may adversely affect our business, results of operations and financial condition, including our revenue growth and profitability.

 

Events outside of our control, including public health crises such as the ongoing COVID-19 pandemic, may negatively affect our results of operations and financial performance.

 

We are currently operating in a period of capital markets disruption and economic uncertainty.

 

Economic recessions or downturns could impair the ability of our portfolio companies to repay loans and harm our operating results.

 

Risks Related to Our Adviser and Its Affiliates

 

We may be obligated to pay Saratoga Investment Advisors incentive fees even if we incur a net loss, or there is a decline in the value of our portfolio.

 

The way in which the base management and incentive fees under the Management Agreement is determined may encourage Saratoga Investment Advisors to take actions that may not be in our best interests.

 

Saratoga Investment Advisors’ liability is limited under the Management Agreement and we will indemnify Saratoga Investments Advisors against certain liabilities, which may lead it to act in a riskier manner on our behalf than it would when acting for its own account.

 

Our ability to enter into transactions with our affiliates is restricted.

 

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Risks Related to Our Investments

 

A majority of our debt investments are not required to make principal payments until the maturity of such debt securities and are generally riskier than other types of loans.

 

The lack of liquidity in our investments may adversely affect our business.

 

Our investment in Saratoga CLO constitutes a leveraged investment in a portfolio of subordinated notes representing the lowest-rated securities issued by a pool of predominantly senior secured first lien term loans and is subject to additional risks and volatility. All losses in the pool of loans will be borne by our subordinated notes and only after the value of our subordinated notes is reduced to zero will the higher-rated notes issued by the pool bear any losses.

 

Investments in equity securities involve a substantial degree of risk.

 

Risks Related to Our Common Stock

 

We may choose to pay dividends in our own stock, in which case you may be required to pay tax in excess of the cash you receive.

 

Due to the COVID-19 pandemic or other disruptions in the economy, we may reduce or defer our dividends and choose to incur US federal excise tax in order preserve cash and maintain flexibility.

 

The market price of our common stock may fluctuate significantly.

 

There is a risk that you may not receive distributions or that our distributions may not grow over time.

 

Risks Related to Our Notes

 

The Notes are unsecured and therefore are effectively subordinated to any secured indebtedness we have incurred or may incur in the future.

 

An active trading market for the Public Notes may not develop or be sustained, which could limit the market price of the Public Notes or the ability to sell them.

 

Public health threats may affect the market for the Public Notes, impact the businesses in which we invest and affect our business, operating results and financial condition.

 

RISKS RELATED TO OUR BUSINESS AND STRUCTURE

 

We employ leverage, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us.

 

Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in us. We borrow from and issue senior debt securities to banks and other lenders that is secured by a lien on our assets. Holders of these senior securities have fixed dollar claims on our assets that are superior to the claims of the holders of our securities. Leverage is generally considered a speculative investment technique. Any increase in our income in excess of interest payable on our outstanding indebtedness would cause our net income to increase more than it would have had we not incurred leverage, while any decrease in our income would cause net income to decline more sharply than it would have had we not incurred leverage. Such a decline could negatively affect our ability to make common stock distributions or scheduled debt payments, including with respect to the Notes, as defined below. There can be no assurance that our leveraging strategy will be successful.

 

Our outstanding indebtedness imposes, and additional debt we may incur in the future will likely impose, financial and operating covenants that restrict our business activities, including limitations that could hinder our ability to finance additional loans and investments or to make the distributions required to maintain our status as a RIC. A failure to add new debt facilities or issue additional debt securities or other evidences of indebtedness in lieu of or in addition to existing indebtedness could have a material adverse effect on our business, financial condition or results of operations.

 

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As of February 28, 2021, there were no outstanding borrowings under the Credit Facility. As of February 28, 2021, we had issued $158.0 million in SBA-guaranteed debentures and $60.0 million, $43.1 million, $5.0 million, $5.0 million and $10.0 million, respectively in aggregate principal amount of the 6.25% notes due 2025 (the “6.25% 2025 Notes”), the 7.25% notes due 2025 (the “7.25% 2025 Notes,” and together with the 6.25% 2025 Notes, the “Public Notes”), the 7.75% notes due 2025 (the “7.75% 2025 Notes”), the 6.25% notes due 2027 (the “6.25% 2027 Notes), and the 6.25% notes due 2027 (the “Second 6.25% 2027 Notes,” and together with the Public Notes, the 7.75% 2025 Notes, and the 6.25% 2027 Notes, the “Notes”). We may incur additional indebtedness in the future, including, but not limited to, borrowings under the Credit Facility or the issuance of additional debt securities in one or more public or private offerings, although there can be no assurance that we will be successful in doing so. Our ability to service our debt depends largely on our financial performance and is subject to prevailing economic conditions and competitive pressures. The amount of leverage that we employ at any particular time will depend on our management’s and our board of directors’ assessment of market and other factors at the time of any proposed borrowing.

 

As a BDC, we are generally required to meet a coverage ratio at least equal to 150.0% of total assets to total borrowings and other senior securities, which include all of our borrowings (other than the Funds’ SBA leverage under the terms of SEC exemptive relief) and any preferred stock we may issue in the future. If this ratio declines below 150.0%, we may not be able to incur additional debt and may need to sell a portion of our investments to repay some debt when it is disadvantageous to do so, and we may not be able to make distributions to our stockholders.

 

The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns, net of expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing in the table below.

 

Assumed Return on Our Portfolio

(net of expenses)

 

Assumed Return on Portfolio (Net of Expenses)  -10.0%  -5.0%   0%   5%   10% 
Corresponding Return to Common Stockholder (1)   -22%   -13%   -4%   6%   15%

 

 

(1)Assumes $561.5 million in average total assets, $245.6 million in average debt outstanding, $304.2 million in average net assets and an average interest rate of 4.5%. Actual interest payments may be different. The various return scenarios above exclude borrowing costs, which are then separately deducted from the net return to common stockholders calculated base on average debt outstanding and average interest rate.

 

Substantially all of our assets are subject to security interests under our Credit Facility or claims of the SBA with respect to SBA-guaranteed debentures we may issue and if we default on our obligations thereunder, we may suffer adverse consequences, including the foreclosure on our assets.

 

Substantially all of our assets are pledged as collateral under the Credit Facility or are subject to a superior claim over the holders of our common stock or the Notes by the SBA pursuant to the SBA-guaranteed debentures. If we default on our obligations under the Credit Facility or the SBA-guaranteed debentures, Madison Capital Funding and/or the SBA may have the right to foreclose upon and sell, or otherwise transfer, the collateral subject to their security interests or superior claim. In such event, we may be forced to sell our investments to raise funds to repay our outstanding borrowings in order to avoid foreclosure and these forced sales may be at times and at prices we would not consider advantageous. Moreover, such deleveraging of our company could significantly impair our ability to effectively operate our business in the manner in which we have historically operated.

 

In addition, if Madison Capital Funding exercises its right to sell the assets pledged under the Credit Facility, such sales may be completed at distressed sale prices, thereby diminishing or potentially eliminating the amount of cash available to us after repayment of the amounts outstanding under the Credit Facility.

 

We are exposed to risks associated with changes in interest rates including potential effects on our cost of capital and net investment income.

 

General interest rate fluctuations and changes in credit spreads on floating rate loans may have a substantial negative impact on our investments and investment opportunities and, accordingly, may have a material adverse effect on our rate of return on invested capital. In addition, an increase in interest rates would make it more expensive to use debt to finance our investments. Decreases in credit spreads on debt that pays a floating rate of return would have an impact on the income generation of our floating rate assets. Trading prices for debt that pays a fixed rate of return tend to fall as interest rates rise. Trading prices tend to fluctuate more for fixed rate securities that have longer maturities. Although we have no policy governing the maturities of our investments, under current market conditions we expect that we will invest in a portfolio of debt generally having maturities of up to ten years. This means that we will be subject to greater risk (other things being equal) than an entity investing solely in shorter-term securities.

 

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Because we may borrow to fund our investments, a portion of our net investment income may be dependent upon the difference between the interest rate at which we borrow funds and the interest rate at which we invest these funds. A portion of our investments will have fixed interest rates, while a portion of our borrowings will likely have floating interest rates. As a result, a significant change in market interest rates could have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds could increase, which would reduce our net investment income. We may hedge against such interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts, subject to applicable legal requirements, including without limitation, all necessary registrations (or exemptions from registration) with the Commodity Futures Trading Commission. These activities may limit our ability to participate in the benefits of lower interest rates with respect to the hedged borrowings. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations.

 

Changes relating to the LIBOR calculation process may adversely affect the value of our portfolio of LIBOR-indexed, floating- rate debt securities.

 

LIBOR, the London Interbank Offered Rate, is the basic rate of interest used in lending transactions between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. We typically use LIBOR as a reference rate in floating-rate loans we extend to portfolio companies such that the interest due to us pursuant to a term loan extended to a portfolio company is calculated using LIBOR. The terms of our debt investments generally include minimum interest rate floors which are calculated based on LIBOR. Further, the borrowings of the senior secured revolving credit facility entered into with Madison Capital Funding LLC (the “Credit Facility”) Credit Facility typically use LIBOR as a reference rate.

 

In the recent past, concerns have been publicized that some of the member banks surveyed by the British Bankers’ Association (“BBA”) in connection with the calculation of The London Inter-bank Offered Rate (“LIBOR”) across a range of maturities and currencies may have been under-reporting or otherwise manipulating the inter-bank lending rate applicable to them in order to profit on their derivative positions or to avoid an appearance of capital insufficiency or adverse reputational or other consequences that may have resulted from reporting inter-bank lending rates higher than those they actually submitted. A number of BBA member banks entered into settlements with their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and investigations by regulators and governmental authorities in various jurisdictions are ongoing.

 

Actions by the ICE Benchmark Administration, regulators or law enforcement agencies as a result of these or future events, may result in changes to the manner in which LIBOR is determined. Potential changes, or uncertainty related to such potential changes may adversely affect the market for LIBOR-based securities, including our portfolio of LIBOR-indexed, floating-rate debt securities. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based securities or the value of our portfolio of LIBOR-indexed, floating-rate debt securities, loans, and other financial obligations or extensions of credit held by or due to us.

 

On July 27, 2017, the U.K. Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. We have exposure to LIBOR, including in financial instruments that mature after 2021. Our exposure arises from the value of our portfolio of LIBOR-indexed, floating-rate debt securities. The Company intends to monitor the developments with respect to the scheduled phasing out of LIBOR after 2021 and work with its portfolio companies and lenders to ensure such transition away from LIBOR will have minimal impact on its financial condition, but can provide no assurances regarding the impact of the discontinuation of LIBOR.

 

In the United States, the Federal Reserve Board and the Federal Reserve Bank of New York, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index calculated by short-term repurchase agreements, backed by Treasury securities called the Secured Overnight Financing Rate (“SOFR”). The Federal Reserve Bank of New York began publishing SOFR in April 2018. In addition, on March 25, 2020, the U.K. Financial Conduct Authority stated that, although the central assumption that firms cannot rely on LIBOR being published after the end of 2021 has not changed, the outbreak of COVID-19 has impacted the timing of many firms’ transition planning, and the U.K. Financial Conduct Authority will continue to assess the impact of the COVID-19 outbreak on transition timelines and update the marketplace as soon as possible. Furthermore, on November 30, 2020, the Intercontinental Exchange, Inc. (“ICE”) announced that the ICE Benchmark Administration Limited, a wholly owned subsidiary of ICE and the administrator of LIBOR, announced its plan to extend the date that most U.S. LIBOR values would cease being computed from December 31, 2021 to June 30, 2023. Despite this extension of the U.S. LIBOR transition deadline for certain LIBOR values, U.S. regulators continue to urge financial institutions to stop entering into new LIBOR transactions by the end of 2021.

 

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Although SOFR appears to be the preferred replacement rate for U.S. dollar LIBOR, at this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or other reforms to LIBOR that may be enacted in the United States, United Kingdom or elsewhere or, whether the COVID-19 outbreak will have further effect on LIBOR transition plans. The elimination of LIBOR or any other changes or reforms to the determination or supervision of LIBOR could have an adverse impact on the market for or value of any LIBOR-indexed, floating-rate debt securities, loans, and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations.

 

Uncertainty about U.S. Presidential Administration initiatives could negatively impact our business, financial condition and results of operations.

 

The U.S. government has recently called for significant changes to U.S. trade, healthcare, immigration, foreign and government regulatory policy. In this regard, there is significant uncertainty with respect to legislation, regulation and government policy at the federal level, as well as the state and local levels. Recent events have created a climate of heightened uncertainty and introduced new and difficult-to-quantify macroeconomic and political risks with potentially far-reaching implications. There has been a corresponding meaningful increase in the uncertainty surrounding interest rates, inflation, foreign exchange rates, trade volumes and fiscal and monetary policy. To the extent the U.S. Congress or the current administration implements changes to U.S. policy, those changes may impact, among other things, the U.S. and global economy, international trade and relations, unemployment, immigration, corporate taxes, healthcare, the U.S. regulatory environment, inflation and other areas. Although we cannot predict the impact, if any, of these changes to our business, they could adversely affect our business, financial condition, operating results and cash flows. Until we know what policy changes are made and how those changes impact our business and the business of our competitors over the long term, we will not know if, overall, we will benefit from them or be negatively affected by them.

 

A particular area identified as subject to potential change, amendment or repeal includes the Dodd-Frank Act, including the Volcker Rule and various swaps and derivatives regulations, credit risk retention requirements and the authorities of the Federal Reserve, the Financial Stability Oversight Council and the SEC. Given the uncertainty associated with the manner in which and whether the provisions of the Dodd-Frank Act will be implemented, repealed, amended, or replaced, the full impact such requirements will have on our business, results of operations or financial condition is unclear. The changes resulting from the Dodd-Frank Act or any changes to the regulations already implemented thereunder may require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements. Failure to comply with any such laws, regulations or principles, or changes thereto, may negatively impact our business, results of operations or financial condition. While we cannot predict what effect any changes in the laws or regulations or their interpretations would have on us as a result of recent financial reform legislation, these changes could be materially adverse to us and our stockholders.

 

There are significant potential conflicts of interest which could adversely impact our investment returns.

 

Our executive officers and directors, and the members of our Investment Adviser, serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as we do or of investment funds managed by our affiliates. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in the best interests of us or our stockholders. For example, Christian L. Oberbeck, our chief executive officer and managing member of our Investment Adviser, is the managing partner of Saratoga Partners, a middle market private equity investment firm. In addition, the principals of our Investment Adviser may manage other funds which may from time to time have overlapping investment objectives with those of us and accordingly invest in, whether principally or secondarily, asset classes similar to those targeted by us. If this should occur, the principals of our Investment Adviser will face conflicts of interest in the allocation of investment opportunities to us and such other funds. Although our investment professionals will endeavor to allocate investment opportunities in a fair and equitable manner, we and our common stockholders could be adversely affected in the event investment opportunities are allocated among us and other investment vehicles managed or sponsored by, or affiliated with, our executive officers, directors and Investment Adviser, and the members of our Investment Adviser.

 

Changes in laws or regulations governing our operations, or changes in the interpretation thereof, and any failure by us to comply with laws or regulations governing our operations may adversely affect our business.

 

We are subject to regulation at the local, state and federal level. New legislation may be enacted or new interpretations, rulings or regulations could be adopted, including those governing the types of investments we are permitted to make, any of which could harm us and our stockholders, potentially with retroactive effect. In addition, any change to the SBA’s current debenture program could have a significant impact on our ability to obtain low-cost leverage and, therefore, our competitive advantage over other funds.

 

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Legal, tax and regulatory changes could occur that may adversely affect us. For example, from time to time the market for private equity transactions has been (and is currently being) adversely affected by a decrease in the availability of senior and subordinated financings for transactions, in part in response to credit market disruptions and/or regulatory pressures on providers of financing to reduce or eliminate their exposure to the risks involved in such transactions.

 

Additionally, any changes to the laws and regulations governing our operations related to permitted investments may cause us to alter our investment strategy in order to meet our investment objectives. Such changes could result in material differences to the strategies and plans set forth in this Annual Report and may shift our investment focus from the areas of expertise of our Investment Adviser to other types of investments in which our Investment Adviser may have little or no expertise or experience. Any such changes, if they occur, could have a material adverse effect on our results of operations and the value of your investment.

 

Legislative or other actions relating to taxes could have a negative effect on the Company.

 

Legislative or other actions relating to taxes could have a negative effect on the Company and its investors. The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. We cannot predict with certainty how any changes in the tax laws might affect the Company, its investments or its investors. New legislation and any U.S. Treasury regulations, administrative interpretations or court decisions interpreting such legislation could significantly and negatively affect the Company’s ability to qualify for tax treatment as a RIC or the U.S. federal income tax consequences to the Company and its investors of such qualification, or could have other adverse consequences. You are urged to consult with your tax advisor with respect to the impact of the status of any legislative, regulatory or administrative developments and proposals and their potential effect on your investment in our securities.

 

There is uncertainty surrounding potential legal, regulatory and policy changes by new presidential administrations in the United States that may directly affect financial institutions and the global economy.

 

As a result of the November 2020 elections in the United States, the Democratic Party gained control of both the Presidency and the Senate from the Republican Party. Therefore, changes in federal policy, including tax policies, and at regulatory agencies are expected to occur over time through policy and personnel changes, which may lead to changes involving the level of oversight and focus on the financial services industry or the tax rates paid by corporate entities. The nature, timing and economic and political effects of potential changes to the current legal and regulatory framework affecting financial institutions remain highly uncertain. Uncertainty surrounding future changes may adversely affect our operating environment and therefore our business, financial condition, results of operations and growth prospects.

 

Changes to United States tariff and import/export regulations may have a negative effect on our portfolio companies and, in turn, harm us.

 

There has been ongoing discussion and commentary regarding potential significant changes to United States trade policies, treaties and tariffs. The current U.S. presidential administration, along with Congress, has created significant uncertainty about the future relationship between the United States and other countries with respect to the trade policies, treaties and tariffs. These developments, or the perception that any of them could occur, may have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global trade and, in particular, trade between the impacted nations and the United States. Any of these factors could depress economic activity and restrict our portfolio companies’ access to suppliers or customers and have a material adverse effect on their business, financial condition and results of operations, which in turn would negatively impact us.

 

We are dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to pay dividends.

 

Our business is dependent on our and third parties’ communications and information systems. Any failure or interruption of those systems, including as a result of the termination of an agreement with any third-party service providers, could cause delays or other problems in our activities. Our financial, accounting, data processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control and adversely affect our business. There could be:

 

sudden electrical or telecommunications outages;

 

natural disasters such as earthquakes, tornadoes and hurricanes;

 

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disease pandemics or other serious public health events, such as the recent global outbreak of COVID-19 (more commonly known as the Coronavirus);

 

events arising from local or larger scale political or social matters, including terrorist acts; and

 

cyber-attacks.

 

These events, in turn, could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to pay dividends to our stockholders.

 

Our ability to enter into transactions involving derivatives and financial commitment transactions may be limited.

 

Through comprehensive new global regulatory regimes impacting derivatives (e.g., the Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), European Market Infrastructure Regulation (“EMIR”), Markets in Financial Investments Regulation (“MIFIR”)/Markets in Financial Instruments Directive (“MIFID II”)), certain over-the-counter derivatives transactions in which we may engage are either now or will soon be subject to various requirements, such as mandatory central clearing of transactions which include additional margin requirements and in certain cases trading on electronic platforms, pre-and post-trade transparency reporting requirements and mandatory bi-lateral exchange of initial margin for non-cleared swaps. The Dodd-Frank Act also created new categories of regulated market participants, such as “swap dealers,” “security-based swap dealers,” “major swap participants,” and “major security-based swap participants” who are subject to significant new capital, registration, recordkeeping, reporting, disclosure, business conduct and other regulatory requirements. The EU and some other jurisdictions are implementing similar requirements. Because these requirements are new and evolving (and some of the rules are not yet final), their ultimate impact remains unclear. However, even if the Company itself is not located in a particular jurisdiction or directly subject to the jurisdiction’s derivatives regulations, we may still be impacted to the extent we enter into a derivatives transaction with a regulated market participant or counterparty that is organized in that jurisdiction or otherwise subject to that jurisdiction’s derivatives regulations.

 

Based on information available as of the date of this Annual Report, the effect of such requirements will be likely to (directly or indirectly) increase our overall costs of entering into derivatives transactions. In particular, new margin requirements, position limits and significantly higher capital charges resulting from new global capital regulations, even if not directly applicable to us, may cause an increase in the pricing of derivatives transactions entered into by market participants to whom such requirements apply or affect our overall ability to enter into derivatives transactions with certain counterparties. Such new global capital regulations and the need to satisfy the various requirements by counterparties are resulting in increased funding costs, increased overall transaction costs, and significantly affecting balance sheets, thereby resulting in changes to financing terms and potentially impacting our ability to obtain financing. Administrative costs, due to new requirements such as registration, recordkeeping, reporting, and compliance, even if not directly applicable to us, may also be reflected in our derivatives transactions. New requirements to trade certain derivatives transactions on electronic trading platforms and trade reporting requirements may lead to (among other things) fragmentation of the markets, higher transaction costs or reduced availability of derivatives, and/or a reduced ability to hedge, all of which could adversely affect the performance of certain of our trading strategies. In addition, changes to derivatives regulations may impact the tax and/or accounting treatment of certain derivatives, which could adversely impact us.

 

In November 2020, the SEC adopted new rules regarding the ability of a BDC (or a registered investment company) to use derivatives and other transactions that create future payment or delivery obligations. BDCs that use derivatives would be subject to a value-at-risk leverage limit, certain other derivatives risk management program and testing requirements and requirements related to board reporting. These new requirements would apply unless the BDC qualified as a “limited derivatives user,” as defined in the SEC’s adopted rules. A BDC that enters into reverse repurchase agreements or similar financing transactions would need to aggregate the amount of indebtedness associated with the reverse repurchase agreements or similar financing transactions could either (i) comply with the asset coverage requirements of the Section 18 of the 1940 Act when engaging in reverse repurchase agreements or (ii) choose to treat such agreements as derivative transactions under the adopted rule. Under the adopted rule, a BDC may enter into an unfunded commitment agreement that is not a derivatives transaction, such as an agreement to provide financing to a portfolio company, if the BDC has a reasonable belief, at the time it enters into such an agreement, that it will have sufficient cash and cash equivalents to meet its obligations with respect to all of its unfunded commitment agreements, in each case as it becomes due. If the BDC cannot meet this test, it is required to treat unfunded commitments as a derivatives transaction subject to the requirements of the rule. Collectively, these requirements may limit our ability to use derivatives and/or enter into certain other financial contracts.

 

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Internal and external cyber threats, as well as other disasters, could impair our ability to conduct business effectively.

 

The occurrence of a disaster, such as a cyber-attack against us or against a third-party that has access to our data or networks, a natural catastrophe, an industrial accident, failure of our disaster recovery systems, or consequential employee error, could have an adverse effect on our ability to communicate or conduct business, negatively impacting our operations and financial condition. This adverse effect can become particularly acute if those events affect our electronic data processing, transmission, storage, and retrieval systems, or impact the availability, integrity, or confidentiality of our data.

 

We depend heavily upon computer systems to perform necessary business functions. Despite our implementation of a variety of security measures, our computer systems, networks, and data, like those of other companies, could be subject to cyber-attacks and unauthorized access, use, alteration, or destruction, such as from physical and electronic break-ins or unauthorized tampering, malware and computer virus attacks, or system failures and disruptions. If one or more of these events occurs, it could potentially jeopardize the confidential, proprietary, and other information processed, stored in, and transmitted through our computer systems and networks. Such an attack could cause interruptions or malfunctions in our operations, which could result in financial losses, litigation, regulatory penalties, client dissatisfaction or loss, reputational damage, and increased costs associated with mitigation of damages and remediation. If unauthorized parties gain access to such information and technology systems, they may be able to steal, publish, delete or modify private and sensitive information, including nonpublic personal information related to stockholders (and their beneficial owners) and material nonpublic information. The systems we have implemented to manage risks relating to these types of events could prove to be inadequate and, if compromised, could become inoperable for extended periods of time, cease to function properly or fail to adequately secure private information. Breaches such as those involving covertly introduced malware, impersonation of authorized users and industrial or other espionage may not be identified even with sophisticated prevention and detection systems, potentially resulting in further harm and preventing them from being addressed appropriately. The failure of these systems or of disaster recovery plans for any reason could cause significant interruptions in our and our investment advisor’s operations and result in a failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to stockholders, material nonpublic information and other sensitive information in our possession.

 

A disaster or a disruption in the infrastructure that supports our business, including a disruption involving electronic communications or other services used by us or third parties with whom we conduct business, or directly affecting our headquarters, could have a material adverse impact on our ability to continue to operate our business without interruption. Our disaster recovery programs may not be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for our losses, if at all.

 

Third parties with which we do business may also be sources of cybersecurity or other technological risk. We outsource certain functions and these relationships allow for the storage and processing of our information, as well as client, counterparty, employee, and borrower information. While we engage in actions to reduce our exposure resulting from outsourcing, ongoing threats may result in unauthorized access, loss, exposure, destruction, or other cybersecurity incident that affects our data, resulting in increased costs and other consequences as described above.

 

In addition, cybersecurity has become a top priority for regulators around the world, and some jurisdictions have enacted laws requiring companies to notify individuals of data security breaches involving certain types of personal data. If we fail to comply with the relevant laws and regulations, we could suffer financial losses, a disruption of our businesses, liability to investors, regulatory intervention or reputational damage.

 

We and our service providers are currently impacted by quarantines and similar measures being enacted by governments in response to the global COVID-19 pandemic, which are obstructing the regular functioning of business workforces (including requiring employees to work from external locations and their homes). Policies of extended periods of remote working, whether by us or by our service providers, could strain technology resources, introduce operational risks and otherwise heighten the risks described above. Remote working environments may be less secure and more susceptible to hacking attacks, including phishing and social engineering attempts that seek to exploit the COVID-19 pandemic. Accordingly, the risks described above are heightened under current conditions.

 

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Cybersecurity risks and cyber incidents may adversely affect our business or the business of our portfolio companies by causing a disruption to our operations or the operations of our portfolio companies, a compromise or corruption of our confidential information or the confidential information of our portfolio companies and/or damage to our business relationships or the business relationships of our portfolio companies, all of which could negatively impact the business, financial condition and operating results of us or our portfolio companies.

 

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of the information resources of us or our portfolio companies. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems or those of our portfolio companies for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation and damage to business relationships. As our and our portfolio companies’ reliance on technology has increased, so have the risks posed to our information systems, both internal and those provided by third-party service providers, and the information systems of our portfolio companies. We have implemented processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, but these measures, as well as our increased awareness of the nature and extent of a risk of a cyber-incident, do not guarantee that a cyber-incident will not occur and/or that our financial results, operations or confidential information will not be negatively impacted by such an incident.

 

Regulations governing our operation as a BDC will affect our ability to raise additional capital.

 

Our business requires a substantial amount of additional capital. We may acquire additional capital from the issuance of senior securities or other indebtedness or the issuance of additional shares of our common stock. However, we may not be able to raise additional capital in the future on favorable terms or at all. We may issue debt securities or preferred securities, which we refer to collectively as “senior securities,” and we may borrow money from banks or other financial institutions, up to the maximum amount permitted by the 1940 Act.

 

We are generally permitted to incur indebtedness or issue senior securities in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 150% after each issuance of senior securities. Compliance with these requirements may unfavorably limit our investment opportunities and reduce our ability in comparison to other companies to profit from favorable spreads between the rates at which we can borrow and the rates at which we can lend. As a business development company, therefore, we may need to issue equity more frequently than our privately-owned competitors, which may lead to greater stockholder dilution. With respect to stock that is a senior security, we must make provisions to prohibit any dividend distribution to our stockholders or the repurchase of certain of our securities, unless we meet the applicable asset coverage ratios at the time of the dividend distribution or repurchase. If the value of our assets declines, we may be unable to satisfy the asset coverage test. If that happens, we may be required to liquidate a portion of our investments and repay a portion of our indebtedness at a time when such sales may be disadvantageous in order to make dividend distributions or repurchase certain of our securities.

 

We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, or issue warrants, options or rights to acquire our common stock, at a price below the current net asset value of the common stock if our board of directors determines that such sale is in our best interests and the best interests of our stockholders, and the holders of a majority of our outstanding voting securities have approved such issuances within the prior year. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our board of directors, closely approximates the market value of such securities (less any commission or discount). If our common stock trades at a discount to net asset value, this restriction could adversely affect our ability to raise capital. We do not currently have stockholder approval of issuances below net asset value.

 

Legislation that took effect in 2018 would allow us to incur additional leverage.

 

The 1940 Act generally prohibits us from incurring indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). However, the Small Business Credit Availability Act, which was signed into law on March 23, 2018, has modified the 1940 Act by allowing a BDC to increase the maximum amount of leverage it may incur from an asset coverage ratio of 200% to an asset coverage ratio of 150%, if certain requirements are met. Under the legislation, we were allowed to increase our leverage capacity once the majority of our independent directors approved an increase in our leverage capacity, with such approval becoming effective after one year. On April 16, 2018, our non-interested board of directors approved of our becoming subject to a minimum asset coverage ratio of 150% under Sections 18(a)(1) and 18(a)(2) of the 1940 Act. The 150% asset coverage ratio became effective on April 16, 2019. We are required to make certain disclosures on our website and in SEC filings regarding, among other things, the receipt of approval to increase our leverage, our leverage capacity and usage, and risks related to leverage.

 

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Leverage magnifies the potential for loss on investments in our indebtedness and on invested equity capital. As we use leverage to partially finance our investments, our stockholders will experience increased risks of investing in our securities. If the value of our assets increases, then leveraging would cause the net asset value attributable to our common stock to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged our business. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net investment income to increase more than it would without the leverage, while any decrease in our income would cause net investment income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to pay common stock dividends, scheduled debt payments or other payments related to our securities. Increased leverage may also cause a downgrade of our credit rating. Leverage is generally considered a speculative investment technique. See “Risk Factors—Risks Related to Our Business and Structure—We employ leverage, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us.”

 

The agreement governing our Credit Facility contains various covenants that, among other things, limits our discretion in operating our business and provides for certain minimum financial covenants.

 

The agreement governing the Credit Facility contains customary default provisions such as the termination or departure of certain “key persons” of Saratoga Investment Advisors, a material adverse change in our business and the failure to maintain certain minimum loan quality and performance standards. An event of default under the facility would result, among other things, in termination of the availability of further funds under the facility and an accelerated maturity date for all amounts outstanding under the facility, which would likely disrupt our business and, potentially, the portfolio companies whose loans we financed through the facility. This could reduce our revenues and, by delaying any cash payment allowed to us under the facility until the lender has been paid in full, reduce our liquidity and cash flow and impair our ability to grow our business and maintain our status as a RIC.

 

Each loan origination under the facility is subject to the satisfaction of certain conditions. We cannot assure you that we will be able to borrow funds under the facility at any particular time or at all.

 

We will be subject to corporate-level U.S. federal income tax if we fail to qualify as a RIC.

 

We intend to maintain our qualification as a RIC under the Code. As a RIC, we do not pay U.S. federal income taxes on our income (including realized gains) that is timely distributed to our stockholders, provided that we satisfy certain source-of-income, annual distribution and asset–diversification requirements.

 

The source-of-income requirement is satisfied if we derive at least 90.0% of our annual gross income from interest, dividends, payments with respect to certain securities loans, gains from the sale or other disposition of securities or options thereon or foreign currencies, or other income derived with respect to our business of investing in such securities or currencies, and net income from interests in “qualified publicly traded partnerships,” as defined in the Code.

 

The annual distribution requirement is satisfied if we timely distribute to our stockholders on an annual basis an amount equal to at least 90.0% of our ordinary net taxable income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses. We are subject to certain asset coverage ratio requirements under the 1940 Act and covenants under our borrowing agreements that could, under certain circumstances, restrict us from making the required distributions. In such case, if we are unable to obtain cash from other sources or are prohibited from making distributions, we may be subject to corporate-level U.S. federal income tax.

 

The asset-diversification requirements will be satisfied if we diversify our holdings so that at the end of each quarter of the taxable year: (i) at least 50.0% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other regulated investment companies, and other securities if such other securities of any one issuer do not represent more than 5.0% of the value of our assets or more than 10% of the outstanding voting securities of the issuer; and (ii) no more than 25.0% of the value of our assets is invested in the securities, other than U.S. government securities or securities of other regulated investment companies, of one issuer or of two or more issuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same or similar or related trades or businesses or in certain publicly traded partnerships.

 

Failure to meet these tests may result in our having to (i) dispose of certain investments quickly or (ii) raise additional capital to prevent the loss of our RIC qualification. Because most of our investments will be in private companies, any such dispositions could be made at disadvantageous prices and may result in substantial losses. If we raise additional capital to satisfy the asset- diversification requirements, it could take us time to invest such capital. During this period, we will invest the additional capital in temporary investments, such as cash and cash equivalents, which we expect will earn yields substantially lower than the interest income that we anticipate receiving in respect of investments in leveraged loans and mezzanine debt.

 

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If we fail to qualify as a RIC for any reason, all of our taxable income will be subject to corporate-level U.S. federal income tax at regular corporate rates. The resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution to our common stockholders or payment of our outstanding indebtedness including the Notes. Such a failure would have a material adverse effect on our results of operations and financial condition.

 

Because we intend to distribute between 90% and 100% of our income to our stockholders in connection with our election to be treated as a RIC, we will continue to need additional capital to finance our growth. If additional funds are unavailable or not available on favorable terms, our ability to grow will be impaired.

 

In order to qualify for the tax benefits available to RICs and to minimize corporate-level U.S. federal income taxes, we intend to distribute to our stockholders between 90% and 100% of our annual taxable income and capital gains, except that we may retain certain net capital gains for investment and treat such amounts as deemed distributions to our stockholders. If we elect to treat any amounts as deemed distributions, we must pay U.S. federal income taxes at the corporate rate on such deemed distributions on behalf of our stockholders. As a result of these requirements, we will likely need to raise capital from other sources to grow our business. As a BDC, we generally are required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, to total senior securities, which includes all of our borrowings and any outstanding preferred stock, of at least 150% as of April 16, 2019; These requirements limit the amount that we may borrow. Because we will continue to need capital to grow our investment portfolio, these limitations may prevent us from incurring debt and require us to raise additional equity at a time when it may be disadvantageous to do so.

 

While we expect to be able to borrow and to issue additional debt and equity securities, we cannot assure you that debt and equity financing will be available to us on favorable terms, or at all. Also, as a BDC, we generally are not permitted to issue equity securities priced below net asset value without stockholder approval. If additional funds are not available to us, we could be forced to curtail or cease new investment activities, and our net asset value and share price could decline.

 

We may have difficulty paying our required distributions if we recognize income before or without receiving cash in respect of such income.

 

For U.S. federal income tax purposes, we may be required to recognize taxable income in circumstances in which we do not receive a corresponding payment in cash. For example, we may on occasion hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with PIK or, in certain cases, increasing interest rates or issued with warrants) and we must include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. We may also have to include in income other amounts that we have not yet received in cash, such as deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock. In addition, we may be required to accrue for U.S. federal income tax purposes amounts attributable to our investment in Saratoga CLO, a collateralized loan obligation fund, that may differ from the distributions paid in respect of our investment in the subordinated notes of such collateralized loan obligation fund because of the factors set forth above or because distributions on the subordinated notes are contractually required to be diverted for reinvestment or to pay down outstanding indebtedness.

 

Because original issue discount will be included in the Company’s “investment company taxable income” for the year of the accrual, we may be requested to make distributions to shareholders to satisfy the annual distribution requirement applicable to RICs, even where we have not received any corresponding cash amount. As a result, we may have difficulty meeting the annual distribution requirement necessary to maintain favorable tax treatment. If we are not able to obtain cash from other sources, and choose not to make a qualifying share distribution, we may become subject to corporate-level income tax. Additionally, because investments with a deferred payment feature may have the effect of deferring a portion of the borrower’s payment obligation until maturity of the debt investment, it may be difficult for us to identify and address developing problems with borrowers in terms of their ability to repay us.

 

We operate in a highly competitive market for investment opportunities.

 

A number of entities compete with us to make the types of investments that we make in private middle market companies. We compete with other BDCs, public and private funds (including SBICs), commercial and investment banks, commercial financing companies, insurance companies, high-yield investors, hedge funds, and, to the extent they provide an alternative form of financing, private equity funds. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than us. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments that could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC. As a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we cannot assure you that we will be able to identify and make investments that meet our investment objective.

 

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While we do not seek to compete primarily based on the interest rates we offer, we believe that some our competitors may make loans with interest rates that are comparable or lower than the rates we offer.

 

We may lose investment opportunities if we do not match our competitors’ pricing, terms and structure. If we match our competitors’ pricing, terms and structure, we may experience decreased net interest income and increased risk of credit loss. As a result of operating in such a competitive environment, we may make investments that are on better terms to our portfolio companies than we originally anticipated, which may impact our return on these investments.

 

We are a non-diversified investment company within the meaning of the 1940 Act, and therefore we are not limited with respect to the proportion of our assets that may be invested in securities of a single issuer.

 

We are classified as a non-diversified investment company within the meaning of the 1940 Act, which means that we are not limited by the 1940 Act with respect to the proportion of our assets that we may invest in securities of a single issuer. Although we seek to maintain a diversified portfolio in accordance with our business strategies, to the extent that we assume large positions in the securities of a small number of issuers, our net asset value may fluctuate to a greater extent than that of a diversified investment company as a result of changes in the financial condition or the market’s assessment of the issuer. We may also be more susceptible to any single economic or regulatory occurrence than a diversified investment company. Beyond our RIC asset-diversification requirements, we do not have fixed guidelines for diversification, and our investments could be concentrated in relatively few portfolio companies.

 

Our financial condition and results of operations depend on our ability to manage future investments effectively.

 

Our ability to achieve our investment objective depends on our ability to acquire suitable investments and monitor and administer those investments, which depends, in turn, on Saratoga Investment Advisors’ ability to identify, invest in and monitor companies that meet our investment criteria.

 

Accomplishing this result on a cost-effective basis is largely a function of Saratoga Investment Advisors’ structuring of the investment process and its ability to provide competent, attentive and efficient service to us. Our executive officers and the officers and employees of Saratoga Investment Advisors have substantial responsibilities in connection with their roles at Saratoga Partners as well as responsibilities under the Management Agreement. They may also be called upon to provide managerial assistance to our portfolio companies. These demands on their time, which will increase as the number of investments grow, may distract them or slow the rate of investment. In order to grow, Saratoga Investment Advisors may need to hire, train, supervise and manage new employees. However, we cannot assure you that any such employees will contribute to the work of Saratoga Investment Advisors. Any failure to manage our future growth effectively could have a material adverse effect on our business and financial condition.

 

We may experience fluctuations in our quarterly and annual results.

 

We could experience fluctuations in our quarterly operating results due to a number of factors, including the interest rate payable on the debt investments we make, the default rate on such investments, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, changes in our portfolio composition, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods. In addition, any of these factors could negatively impact our ability to achieve our investment objectives, which may cause the net asset value of our common stock to decline.

 

Terrorist attacks, acts of war, or natural disasters may affect any market for our common stock, impact the businesses in which we invest and harm our business, operating results and financial condition.

 

Portfolio investments may be affected by force majeure events (i.e., events beyond the control of the party claiming that the event has occurred, including, without limitation, acts of God, fire, flood, earthquakes, war, terrorism and labor strikes). Some force majeure events may adversely affect the ability of a party (including a portfolio company or a counterparty to us or a portfolio company) to perform its obligations until it is able to remedy the force majeure event. In addition, the cost to a portfolio company of repairing or replacing damaged assets resulting from such force majeure event could be considerable. Additionally, a major governmental intervention into industry, including the nationalization of an industry or the assertion of control over one or more companies or its assets, could result in a loss to us, including if its investment in such issuer is cancelled, unwound or acquired (which could be without what we consider to be adequate compensation). To the extent we are exposed to investments in portfolio companies that as a group are exposed to such force majeure events, the risks and potential losses to us are enhanced.

 

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Substantially all of our portfolio investments are recorded at fair value as approved in good faith by our board of directors; such valuations are inherently uncertain and may be materially higher or lower than the values that we ultimately realize upon the disposal of such investments.

 

Substantially all of our portfolio is, and we expect will continue to be, comprised of investments that are not publicly traded. The value of investments that are not publicly traded may not be readily determinable. We value these investments quarterly at fair value as approved in good faith by our board of directors. Saratoga Investment Advisors may utilize the services of an independent valuation firm to aid it in determining fair value of investments for which market quotations are not readily available. The types of factors that may be considered in valuing our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings, the markets in which the portfolio company does business, market yield trend analysis, comparison to publicly traded companies, discounted cash flow and other relevant factors. Because such valuations, and particularly valuations of private investments and private companies are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these investments existed. Our 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.

 

Our board of directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse.

 

Our board of directors has the authority to modify or waive our current investment objective, operating policies and strategies without prior notice and without stockholder approval. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, financial condition, and value of our common stock. However, the effects might be adverse, which could negatively impact our ability to pay dividends and cause you to lose all or part of your investment.

 

We have limited experience in managing a SBIC and any failure to comply with SBA regulations, resulting from our lack of experience or otherwise, could have an adverse effect on our operations.

 

On March 28, 2012, our wholly-owned subsidiary, Saratoga Investment Corp. SBIC, LP, received a license from the SBA to operate as an SBIC under Section 301(c) of the Small Business Investment Act of 1958 and is regulated by the SBA. On August 14, 2019, our wholly-owned subsidiary, SBIC II LP, also received an SBIC license from the SBA.

 

The SBA places certain limitations on the financing terms of investments by SBICs in portfolio companies and prohibits SBICs from providing funds for certain purposes or to businesses in a few prohibited industries. Compliance with SBIC requirements may cause our SBIC subsidiaries to forego attractive investment opportunities that are not permitted under SBA regulations.

 

Further, SBA regulations require that an SBIC be periodically examined and audited by the SBA to determine its compliance with the relevant SBA regulations. The SBA prohibits, without prior SBA approval, a “change of control” of an SBIC or transfers that would result in any person (or a group of persons acting in concert) owning 10% or more of a class of capital stock of an SBIC. If our SBIC subsidiaries fail to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit its use of debentures, declare outstanding debentures immediately due and payable, and/or limit it from making new investments. In addition, the SBA can revoke or suspend a license for willful or repeated violation of, or willful or repeated failure to observe, any provision of the Small Business Investment Act of 1958 or any rule or regulation promulgated thereunder. These actions by the SBA would, in turn, negatively affect us because our SBIC subsidiaries are our wholly-owned subsidiaries. We do not have any prior experience managing a SBIC. Our lack of experience in complying with SBA regulations may hinder our ability to take advantage of our SBIC subsidiaries’ access to SBA-guaranteed debentures.

 

Any failure to comply with SBA regulations could have an adverse effect on our operations.

 

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RISKS RELATED TO THE CURRENT ENVIRONMENT

 

Global economic, political and market conditions may adversely affect our business, results of operations and financial condition, including our revenue growth and profitability.

 

We and our portfolio companies are subject to regulation by laws at the U.S. federal, state and local levels. These laws and regulations, as well as their interpretation, could change from time to time, including as the result of interpretive guidance or other directives from the U.S. President and others in the executive branch, and new laws, regulations and interpretations could also come into effect. Any such new or changed laws or regulations could have a material adverse effect on our business, and political uncertainty could increase regulatory uncertainty in the near term.

 

The effects of legislative and regulatory proposals directed at the financial services industry or affecting taxation, could negatively impact the operations, cash flows or financial condition of us and our portfolio companies, impose additional costs on us or our portfolio companies, intensify the regulatory supervision of us or our portfolio companies or otherwise adversely affect our business or the business of our portfolio companies. In addition, if we do not comply with applicable laws and regulations, we could lose any licenses that we then hold for the conduct of business and could be subject to civil fines and criminal penalties.

 

Over the last several years, there also has been an increase in regulatory attention to the extension of credit outside of the traditional banking sector, raising the possibility that some portion of the non-bank financial sector will be subject to new regulation. While it cannot be known at this time whether any regulation will be implemented or what form it will take, increased regulation of non-bank credit extension could negatively impact our operations, cash flows or financial condition, impose additional costs on us, intensify the regulatory supervision of us or otherwise adversely affect our business, financial condition and results of operations.

 

On May 24, 2018, the President of the United States signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act, which increased from $50 billion to $250 billion the asset threshold for designation of “systemically important financial institutions” or “SIFIs” subject to enhanced prudential standards set by the Federal Reserve Board, staggering application of this change based on the size and risk of the covered bank holding company. On May 30, 2018, the Federal Reserve Board voted to consider changes to the Volcker Rule that would loosen compliance requirements for all banks. The effect of this change and any further rules or regulations are and could be complex and far-reaching, and the change and any future laws or regulations or changes thereto could negatively impact our operations, cash flows or financial condition, impose additional costs on us, intensify the regulatory supervision of us or otherwise adversely affect our business, financial condition and results of operations.

 

Although we cannot predict the impact, if any, of these changes to our business, they could adversely affect our business, financial condition, operating results and cash flows. Until we know what policy changes are made and how those changes impact business and the business of our competitors over the long term, we will not know if, overall, it will benefit from them or be negatively affected by them.

 

In 2010, a financial crisis emerged in Europe, triggered by high budget deficits and rising direct and contingent sovereign debt, which created concerns about the ability of certain nations to continue to service their sovereign debt obligations. Risks resulting from such debt crisis, including any austerity measures taken in exchange for bailout of certain nations, and any future debt crisis in Europe or any similar crisis elsewhere could have a detrimental impact on the global economic recovery, sovereign and non-sovereign debt in certain countries and the financial condition of financial institutions generally. On January 31, 2020, the United Kingdom (the “UK”) ended its membership in the European Union (“Brexit”). Under the terms of the withdrawal agreement negotiated and agreed between the UK and the European Union, the UK’s departure from the European Union was followed by a transition period (the “Transition Period”), which ran until December 31, 2020 and during which the UK continued to apply European Union law and was treated for all material purposes as if it were still a member of the European Union. On December 24, 2020, the European Union and UK governments signed a trade deal that became provisionally effective on January 1, 2021 and that now governs the relationship between the UK and European Union (the “Trade Agreement”). The Trade Agreement implements significant regulation around trade, transport of goods and travel restrictions between the UK and the European Union. Notwithstanding the foregoing, the longer-term economic, legal, political and social implications of Brexit are unclear at this stage and are likely to continue to lead to ongoing political and economic uncertainty and periods of increased volatility in both the UK and in wider European markets for some time. In particular, Brexit could lead to calls for similar referendums in other European jurisdictions, which could cause increased economic volatility in the European and global markets. This mid- to long-term uncertainty could have adverse effects on the economy generally and on our ability to earn attractive returns. In particular, currency volatility could mean that our returns are adversely affected by market movements and could make it more difficult, or more expensive, for us to execute prudent currency hedging policies. Potential decline in the value of the British Pound and/or the Euro against other currencies, along with the potential further downgrading of the UK’s sovereign credit rating, could also have an impact on the performance of certain investments made in the UK or Europe.

 

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Events outside of our control, including public health crises such as the ongoing COVID-19 pandemic, may negatively affect our results of operations and financial performance.

 

Periods of market volatility have occurred and could continue to occur in response to pandemics or other events outside of our control. These types of events have adversely affected and could continue to adversely affect operating results for us and for our portfolio companies. For example, the COVID-19 pandemic has delivered a shock to the global economy. This outbreak has led and for an unknown period of time will continue to lead to disruptions in local, regional, national and global markets and economies affected thereby, including a recession and a steep increase in unemployment in the United States.

 

With respect to the U.S. credit markets (in particular for middle market loans), this outbreak has resulted in, and until fully resolved is likely to continue to result in, the following among other things: (i) government imposition of various forms of shelter-in-place orders and the closing of “non-essential” businesses, resulting in significant disruption to the businesses of many middle-market loan borrowers including supply chains, demand and practical aspects of their operations, as well as in lay-offs of employees, and, while these effects are hoped to be temporary, some effects could be persistent or even permanent; (ii) increased draws by borrowers on revolving lines of credit; (iii) increased requests by borrowers for amendments and waivers of their credit agreements to avoid default, increased defaults by such borrowers and/or increased difficulty in obtaining refinancing at the maturity dates of their loans; (iv) volatility and disruption of these markets including greater volatility in pricing and spreads and difficulty in valuing loans during periods of increased volatility, and liquidity issues; and (v) rapidly evolving proposals and/or actions by state and federal governments to address problems being experienced by the markets and by businesses and the economy in general which will not necessarily adequately address the problems facing the loan market and middle market businesses.

 

While several countries, as well as certain states, counties and cities in the United States, have relaxed initial public health restrictions with the view to partially or fully reopening their economies, many cities have since experienced a surge in the reported number of cases, hospitalizations and deaths related to the COVID-19 pandemic. These surges have led to the re-introduction of such restrictions and business shutdowns in certain states in the United States and globally and could continue to lead to the re-introduction of such restrictions elsewhere. Health advisors warn that recurring COVID-19 outbreaks will continue if reopening is pursued too soon or in the wrong manner, which may lead to the re-introduction or continuation of certain public health restrictions (such as instituting quarantines, prohibitions on travel and the closure of offices, businesses, schools, retail stores and other public venues). Additionally, as of late December 2020, travelers from the United States are not allowed to visit Canada, Australia or the majority of countries in Europe, Asia, Africa and South America. These continued travel restrictions may prolong the global economic downturn. In addition, although the Federal Food and Drug Administration authorized vaccines produced by Pfizer-BioNTech and Moderna for emergency use starting in December 2020, and Janssen starting in February 2021, it remains unclear how quickly the vaccines will be distributed nationwide and globally or when “herd immunity” will be achieved and the restrictions that were imposed to slow the spread of the virus will be lifted entirely. Delays in distributing the vaccines could lead people to continue to self-isolate and not participate in the economy at pre-pandemic levels for a prolonged period of time. Even after the COVID-19 pandemic subsides, the U.S. economy and most other major global economies may continue to experience a recession, and we anticipate our business and operations could be materially adversely affected by a prolonged recession in the United States and other major markets.

 

This outbreak is having, and any future outbreaks could have, an adverse impact on the markets and the economy in general, which could have a material adverse impact on, among other things, the ability of lenders to originate loans, the volume and type of loans originated, and the volume and type of amendments and waivers granted to borrowers and remedial actions taken in the event of a borrower default, each of which could negatively impact the amount and quality of loans available for investment by us and returns to us, among other things. As of the date of this Annual Report, it is impossible to determine the scope of this outbreak, or any future outbreaks, how long any such outbreak, market disruption or uncertainties may last, the effect any governmental actions will have or the full potential impact on us and our portfolio companies. Any potential impact to our results of operations will depend to a large extent on future developments and new information that could emerge regarding the duration and severity of COVID-19 and the actions taken by authorities and other entities to contain COVID-19 or treat its impact, all of which are beyond our control. These potential impacts, while uncertain, could adversely affect our and our portfolio companies’ operating results.

 

If the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, loan non-accruals, problem assets, and bankruptcies may increase. In addition, collateral for our loans may decline in value, which could cause loan losses to increase and the net worth and liquidity of loan guarantors could decline, impairing their ability to honor commitments to us. An increase in loan delinquencies and non-accruals or a decrease in loan collateral and guarantor net worth could result in increased costs and reduced income which would have a material adverse effect on our business, financial condition or results of operations. Additionally, oil prices collapsed to an 18-year low on supply glut concerns, as shutdowns across the global economy sharply reduced oil demand while Saudi Arabia and Russia engaged in a price war. Central banks and governments have responded with liquidity injections to ease the strain on financial systems and stimulus measures to buffer the shock to businesses and consumers. These measures have helped stabilize certain portions of the financial markets over the short term, but volatility will likely remain elevated until the health crisis itself is under control (via fewer new cases, lower infection rates and/or verified treatments). There are still many unknowns and new information is incoming daily, compounding the difficulty of modeling outcomes for epidemiologists and economists alike.

 

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We cannot be certain as to the duration or magnitude of the economic impact of the COVID-19 pandemic in the markets in which we and our portfolio companies operate, including with respect to travel restrictions, business closures, mitigation efforts (whether voluntary, suggested, or mandated by law) and corresponding declines in economic activity that may negatively impact the U.S. economy and the markets for the various types of goods and services provided by U.S. middle market companies. Depending on the duration, magnitude and severity of these conditions and their related economic and market impacts, certain portfolio companies may suffer declines in earnings and could experience financial distress, which could cause them to default on their financial obligations to us and their other lenders.

 

We will also be negatively affected if our operations and effectiveness or the operations and effectiveness of a portfolio company (or any of the key personnel or service providers of the foregoing) is compromised or if necessary or beneficial systems and processes are disrupted.

 

Any public health emergency, including the COVID-19 pandemic or any outbreak of other existing or new epidemic diseases, or the threat thereof, and the resulting financial and economic market uncertainty could have a significant adverse impact on us and the fair value of our investments. Our valuations, and particularly valuations of private investments and private companies, are inherently uncertain, may fluctuate over short periods of time and are often based on estimates, comparisons and qualitative evaluations of private information that may not show the complete impact of the COVID-19 pandemic and the resulting measures taken in response thereto. These potential impacts, while uncertain, could adversely affect our and our portfolio companies’ operating results.

 

We are currently operating in a period of capital markets disruption and economic uncertainty.

 

The U.S. capital markets have experienced extreme volatility and disruption following the global outbreak of COVID-19 that began in December 2019. The global impact of the outbreak is rapidly evolving, and many countries have reacted by instituting quarantines, prohibitions on travel and the closure of offices, businesses, schools, retail stores and other public venues. Businesses have also implementing similar precautionary measures. Such measures, as well as the general uncertainty surrounding the dangers and impact of COVID-19, have created significant disruption in supply chains and economic activity. The impact of COVID-19 has led to significant volatility and declines in the global public equity markets and it is uncertain how long this volatility will continue. As COVID-19 continues to spread, the potential impacts, including a global, regional or other economic recession, are increasingly uncertain and difficult to assess. Some economists and major investment banks have expressed concern that the continued spread of the virus globally could lead to a world-wide economic downturn.

 

Disruptions in the capital markets caused by the COVID-19 pandemic have increased the spread between the yields realized on risk-free and higher risk securities, resulting in illiquidity in parts of the capital markets. These and future market disruptions and/or illiquidity would be expected to have an adverse effect on our business, financial condition, results of operations and cash flows. Unfavorable economic conditions also would be expected to increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events have limited and could continue to limit our investment originations, limit our ability to grow and have a material negative impact on our operating results and the fair values of our debt and equity investments.

 

In addition, due to the outbreak in the United States, certain personnel of our Investment Adviser are currently working remotely, which may introduce additional operational risk to us. Staff members of certain of our other service providers may also work remotely during the COVID-19 outbreak. An extended period of remote working could lead to service limitations or failures that could impact us or our performance.

 

Further, current market conditions resulting from the COVID-19 pandemic may make it difficult for us to obtain debt capital on favorable terms and any failure to do so could have a material adverse effect on our business. The debt capital that will be available to us in the future, if at all, may be at a higher cost and on less favorable terms and conditions than what we would otherwise expect, including being at a higher cost in rising rate environments. If we are unable to raise debt, then our equity investors may not benefit from the potential for increased returns on equity resulting from leverage and we may be limited in our ability to make or fund commitments to portfolio companies. An inability to obtain indebtedness could have a material adverse effect on our business, financial condition or results of operations.

 

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Further downgrades of the U.S. credit rating, automatic spending cuts, or another government shutdown could negatively impact our liquidity, financial condition and earnings.

 

U.S. debt ceiling and budget deficit concerns have increased the possibility of additional credit-rating downgrades and economic slowdowns, or a recession in the United States. Although U.S. lawmakers passed legislation to raise the federal debt ceiling on multiple occasions, ratings agencies have lowered or threatened to lower the long-term sovereign credit rating on the United States. The impact of this or any further downgrades to the U.S. government’s sovereign credit rating or its perceived creditworthiness could adversely affect the U.S. and global financial markets and economic conditions. Absent further quantitative easing by the Federal Reserve, these developments could cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms. In addition, disagreement over the federal budget has caused the U.S. federal government to shut down for periods of time. Continued adverse political and economic conditions could have a material adverse effect on our business, financial condition and results of operations.

 

Economic recessions or downturns could impair the ability of our portfolio companies to repay loans and harm our operating results.

 

Many of our portfolio companies are susceptible to economic slowdowns or recessions (including industry specific downturns) and may be unable to repay our debt investments during these periods. The global outbreak of COVID-19 has disrupted economic markets, and the prolonged economic impact is uncertain. Many manufacturers of goods in China and other countries in Asia have seen a downturn in production due to the suspension of business and temporary closure of factories in an attempt to curb the spread of the illness. As the impact of COVID-19 spreads to other parts of the world, similar impacts may occur with respect to affected countries. In the past, instability in the global capital markets resulted in disruptions in liquidity in the debt capital markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit market and the failure of major domestic and international financial institutions. In particular, in past periods of instability, the financial services sector was negatively impacted by significant write-offs as the value of the assets held by financial firms declined, impairing their capital positions and abilities to lend and invest. In addition, continued uncertainty surrounding the negotiation of trade deals between Britain and the European Union following the United Kingdom’s exit from the European Union and uncertainty between the United States and other countries, including China, with respect to trade policies, treaties, and tariffs, among other factors, have caused disruption in the global markets. There can be no assurance that market conditions will not worsen in the future.

 

In an economic downturn, we may have non-performing assets or non-performing assets may increase, and the value of our portfolio is likely to decrease during these periods. Adverse economic conditions may also decrease the value of any collateral securing some of our debt investments and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing our investments and harm our operating results.

 

The occurrence of recessionary conditions and/or negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our investments, and our ongoing operations, costs and profitability. Any such unfavorable economic conditions, including rising interest rates, may also increase our funding costs, limit our access to capital markets or negatively impact our ability to obtain financing, particularly from the debt markets. In addition, any future financial market uncertainty could lead to financial market disruptions and could further impact our ability to obtain financing. These events could limit our investment originations, limit our ability to grow and negatively impact our operating results and financial condition.

 

RISKS RELATED TO OUR ADVISER AND ITS AFFILIATES

 

We may be obligated to pay Saratoga Investment Advisors incentive fees even if we incur a net loss, or there is a decline in the value of our portfolio.

 

Saratoga Investment Advisors is entitled to incentive fees for each fiscal quarter in an amount equal to a percentage of the excess of our investment income for that quarter (before deducting incentive compensation, but net of operating expenses and certain other items) above a threshold return for that quarter. Our pre-incentive fee net investment income, for incentive compensation purposes, excludes realized and unrealized capital gains or losses that we may incur in the fiscal quarter, even if such capital gains or losses result in a net gain or loss on our consolidated statements of operations for that quarter. Thus, we may be required to pay Saratoga Investment Advisors incentive fees for a fiscal quarter even if there is a decline in the value of our portfolio or we incur a net loss for that quarter.

 

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Under the terms of the Management Agreement, we may have to pay incentive fees to Saratoga Investment Advisors in connection with the sale of an investment that is sold at a price higher than the fair value of such investment on May 31, 2010, even if we incur a loss on the sale of such investment.

 

Incentive fees on capital gains paid to Saratoga Investment Advisors under the Management Agreement equals 20.0% of our “incentive fee capital gains,” which equals our realized capital gains on a cumulative basis from May 31, 2010 through the end of the fiscal year, if any, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis on each investment in the Company’s portfolio, less the aggregate amount of any previously paid capital gain incentive fee. Under the Management Agreement, the capital gains portion of the incentive fee is based on realized gains and realized and unrealized losses from May 31, 2010. Therefore, realized and unrealized losses incurred prior to such time will not be taken into account when calculating the capital gains portion of the incentive fee, and Saratoga Investment Advisors will be entitled to 20.0% of the incentive fee capital gains that arise after May 31, 2010. In addition, the cost basis for computing realized gains and losses on investments held by us as of May 31, 2010 will equal the fair value of such investments as of such date. See our Form 10-Q for the quarter ended May 31, 2010 that was filed with the SEC on July 15, 2010 for the fair value and other information related to our investments as of such date. As a result, we may be required to pay incentive fees to Saratoga Investment Advisors on the sale of an investment even if we incur a realized loss on such investment, so long as the investment is sold for an amount greater than its fair value as of May 31, 2010.

 

The way in which the base management and incentive fees under the Management Agreement is determined may encourage Saratoga Investment Advisors to take actions that may not be in our best interests.

 

The incentive fee payable by us to our Investment Adviser may create an incentive for it to make investments on our behalf that are risky or more speculative than would be the case in the absence of such compensation arrangement, which could result in higher investment losses, particularly during cyclical economic downturns. The way in which the incentive fee payable to our Investment Adviser is determined, which is calculated separately in two components as a percentage of the income (subject to a hurdle rate) and as a percentage of the realized gain on invested capital, may encourage our Investment Adviser to use leverage to increase the return on our investments or otherwise manipulate our income so as to recognize income in quarters where the hurdle rate is exceeded.

 

Moreover, we pay Saratoga Investment Advisors a base management fee based on our total assets, including any investments made with borrowings, which may create an incentive for it to cause us to incur more leverage than is prudent, or not to repay our outstanding indebtedness when it may be advantageous for us to do so, in order to maximize its compensation. Under certain circumstances, the use of leverage may increase the likelihood of default, which would disfavor the holders of our securities.

 

The incentive fee payable by us to our Investment Adviser also may create an incentive for our Investment Adviser to invest on our behalf in instruments that have a deferred interest feature. Under these investments, we would accrue the interest over the life of the investment but would not receive the cash income from the investment until the end of the investment’s term, if at all. Our net investment income used to calculate the income portion of our incentive fee, however, includes accrued interest. Thus, a portion of the incentive fee would be based on income that we have not yet received in cash and may never receive in cash if the portfolio company is unable to satisfy such interest payment obligation to us. Consequently, while we may make incentive fee payments on income accruals that we may not collect in the future and with respect to which we do not have a “claw back” right against our Investment Adviser per se, the amount of accrued income written off in any period will reduce the income in the period in which such write-off was taken and may thereby reduce such period’s incentive fee payment.

 

In addition, Saratoga Investment Advisors receives a quarterly income incentive fee based, in part, on our pre-incentive fee net investment income, if any, for the immediately preceding calendar quarter. This income incentive fee is subject to a fixed quarterly hurdle rate before providing an income incentive fee return to Saratoga Investment Advisors. This fixed hurdle rate was determined when then current interest rates were relatively low on a historical basis. Thus, if interest rates rise, it would become easier for our investment income to exceed the hurdle rate and, as a result, more likely that Saratoga Investment Advisors will receive an income incentive fee than if interest rates on our investments remained constant or decreased. However, if we repurchase our outstanding debt securities, including the Notes, and such repurchase results in our recording a net gain or loss on the extinguishment of debt for financial reporting and tax purposes, such net gain or loss will not be included in our pre-incentive fee net investment income for purposes of determining the income incentive fee payable to our Investment Adviser under the Management Agreement. Moreover, our Investment Adviser receives the incentive fee based, in part, upon net capital gains realized on our investments. Unlike the portion of the incentive fee based on income, there is no performance threshold applicable to the portion of the incentive fee based on net capital gains. As a result, our Investment Adviser may have a tendency to invest more in investments that are likely to result in capital gains as compared to income producing securities. Such a practice could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns.

 

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Our board of directors will seek to ensure that Saratoga Investment Advisors is acting in our best interests and that any conflict of interest faced by Saratoga Investment Advisors in its capacity as our Investment Adviser does not negatively impact us.

 

The base management fee we pay to Saratoga Investment Advisors may induce it to influence our leverage, which may be contrary to our interest.

 

We pay Saratoga Investment Advisors a quarterly base management fee based on the value of our total assets (including any assets acquired with leverage). Accordingly, Saratoga Investment Advisors has an economic incentive to increase our leverage. Our board of directors monitors the conflicts presented by this compensation structure by approving the amount of leverage that we incur. If our leverage is increased, we will be exposed to increased risk of loss, bear the increase cost of issuing and servicing such senior indebtedness, and will be subject to any additional covenant restrictions imposed on us in an indenture or other instrument or by the applicable lender.

 

Saratoga Investment Advisors’ liability is limited under the Management Agreement and we will indemnify Saratoga Investments Advisors against certain liabilities, which may lead it to act in a riskier manner on our behalf than it would when acting for its own account.

 

Saratoga Investment Advisors has not assumed any responsibility to us other than to render the services described in the Management Agreement. Pursuant to the Management Agreement, Saratoga Investment Advisors and its officers and employees are not liable to us for their acts under the Management Agreement absent willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties. We have agreed to indemnify, defend and protect Saratoga Investment Advisors and its officers and employees with respect to all damages, liabilities, costs and expenses resulting from acts of Saratoga Investment Advisors not arising out of willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties under the Management Agreement. These protections may lead Saratoga Investment Advisors to act in a riskier manner when acting on our behalf than it would when acting for its own account.

 

Our ability to enter into transactions with our affiliates is restricted.

 

Because we have elected to be treated as a BDC, we are prohibited under the 1940 Act from participating in certain transactions with certain of our affiliates without the prior approval of our independent directors and, in some cases, the SEC. Any person that owns, directly or indirectly, 5.0% or more of our outstanding voting securities is our affiliate for purposes of the 1940 Act and we are generally prohibited from buying or selling any securities (other than any security of which we are the issuer) from or to such affiliate, absent the prior approval of our independent directors. The 1940 Act also prohibits certain “joint” transactions with certain of our affiliates, which could include investments in the same portfolio company, without prior approval of our independent directors and, in some cases, the SEC. If a person acquires more than 25.0% of our voting securities, we are prohibited from buying or selling any security (other than any security of which we are the issuer) from or to such person or certain of that person’s affiliates, or entering into prohibited joint transactions with such person, absent the prior approval of the SEC. Similar restrictions limit our ability to transact business with our officers, directors or Investment Adviser or their affiliates. As a result of these restrictions, we may be prohibited from buying or selling any security (other than any security of which we are the issuer) from or to any portfolio company of a private equity fund managed by our Investment Adviser without the prior approval of the SEC, which may limit the scope of investment opportunities that would otherwise be available to us.

 

RISKS RELATED TO OUR INVESTMENTS

 

If we make unsecured debt investments, we may lack adequate protection in the event our portfolio companies become distressed or insolvent and will likely experience a lower recovery than more senior debtholders in the event our portfolio companies default on their indebtedness.

 

We make unsecured debt investments in portfolio companies. Unsecured debt investments are unsecured and junior to other indebtedness of the portfolio company. As a consequence, the holder of an unsecured debt investment may lack adequate protection in the event the portfolio company becomes distressed or insolvent and will likely experience a lower recovery than more senior debtholders in the event the portfolio company defaults on its indebtedness. In addition, unsecured debt investments of middle- market companies are often highly illiquid and in adverse market conditions may experience steep declines in valuation even if they are fully performing.

 

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If we invest in the securities and other obligations of distressed or bankrupt companies, such investments may be subject to significant risks, including lack of income, extraordinary expenses, uncertainty with respect to satisfaction of debt, lower-than expected investment values or income potentials and resale restrictions.

 

We are authorized to invest in the securities and other obligations of distressed or bankrupt companies. At times, distressed debt obligations may not produce income and may require us to bear certain extraordinary expenses (including legal, accounting, valuation and transaction expenses) in order to protect and recover our investment. Therefore, to the extent we invest in distressed debt, our ability to achieve current income may be diminished which may affect our ability to make distributions on our common stock or make interest and principal payments of the Notes.

 

We also will be subject to significant uncertainty as to when and in what manner and for what value the distressed debt we invest in will eventually be satisfied (e.g., through a liquidation of the obligor’s assets, an exchange offer or plan of reorganization involving the distressed debt securities or a payment of some amount in satisfaction of the obligation). In addition, even if an exchange offer is made or plan of reorganization is adopted with respect to distressed debt held by us, there can be no assurance that the securities or other assets received by us in connection with such exchange offer or plan of reorganization will not have a lower value or income potential than may have been anticipated when the investment was made.

 

Moreover, any securities received by us upon completion of an exchange offer or plan of reorganization may be restricted as to resale. As a result of our participation in negotiations with respect to any exchange offer or plan of reorganization with respect to an issuer of distressed debt, we may be restricted from disposing of such securities if we are in possession of material non-public information relating to the issuer.

 

Second priority liens on collateral securing loans that we make to our portfolio companies may be subject to control by senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us.

 

Certain loans that we make to portfolio companies will be secured on a second priority basis by the same collateral securing senior secured debt of such companies. The first priority liens on the collateral will secure the portfolio company’s obligations under any outstanding senior debt and may secure certain other future debt that may be permitted to be incurred by the company under the agreements governing the loans. The holders of obligations secured by the first priority liens on the collateral will generally control the liquidation of and be entitled to receive proceeds from any realization of the collateral to repay their obligations in full before us. In addition, the value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from the sale or sales of all of the collateral would be sufficient to satisfy the loan obligations secured by the second priority liens after payment in full of all obligations secured by the first priority liens on the collateral. If such proceeds are not sufficient to repay amounts outstanding under the loan obligations secured by the second priority liens, then we, to the extent not repaid from the proceeds of the sale of the collateral, will only have an unsecured claim against the company’s remaining assets, if any.

 

The rights we may have with respect to the collateral securing the loans we make to our portfolio companies with senior debt outstanding may also be limited pursuant to the terms of one or more intercreditor agreements that we enter into with the holders of senior debt. Under such an intercreditor agreement, at any time that obligations that have the benefit of the first priority liens are outstanding, any of the following actions that may be taken with respect to the collateral will be at the direction of the holders of the obligations secured by the first priority liens: the ability to cause the commencement of enforcement proceedings against the collateral; the ability to control the conduct of such proceedings; the approval of amendments to collateral documents; releases of liens on the collateral; and waivers of past defaults under collateral documents. We may not have the ability to control or direct such actions, even if our rights are adversely affected.

 

A majority of our debt investments are not required to make principal payments until the maturity of such debt securities and are generally riskier than other types of loans.

 

As of February 28, 2021, 85.4% of our debt portfolio consisted of “interest-only” loans, which are structured such that the borrower makes only interest payments throughout the life of the loan and makes a large, “balloon payment” at the end of the loan term. The ability of a borrower to make or refinance a balloon payment may be affected by a number of factors, including the financial condition of the borrower, prevailing economic conditions, interest rates, and collateral values. If the interest-only loan borrower is unable to make or refinance a balloon payment, we may experience greater losses than if the loan were structured as amortizing.

 

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We may be exposed to higher risks with respect to our investments that include PIK interest, particularly our investments in interest- only loans.

 

To the extent our portfolio investments permit PIK interest and our portfolio companies elect to pay PIK interest, we will be exposed to higher risks, including the following:

 

Because PIK interest results in an increase in the size of the loan balance of the underlying loan, our exposure to potential loss increases when we receive PIK interest;

 

PIK instruments may have higher yields, which reflect the payment deferral and credit risk associated with these instruments;

 

PIK accruals may create uncertainty about the source of our distributions to stockholders;

 

PIK instruments may have unreliable valuations because their continuing accruals require continuing judgments about the collectability of the deferred payments and the value of the collateral.

 

To the extent our investments are structured as interest-only loans, PIK interest will increase the size of the balloon payment due at the end of the loan term. PIK interest payments on such loans may increase the probability and magnitude of a loss on our investment, particularly with respect to our interest-only loans. As of February 28, 2021, 14.7% of our interest-only loans provided for contractual PIK interest, which represents contractual interest added to a loan balance and due at the end of such loan’s term, and 73.4% of such investments elected to pay a portion of interest due in PIK. As of February 28, 2021, 0.4% of the Company’s interest-only loans are loans that pay contractual PIK interest only.

 

The lack of liquidity in our investments may adversely affect our business.

 

We primarily make investments in private companies. A portion of these securities may be subject to legal and other restrictions on resale, transfer, pledge or other disposition or will otherwise be less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments. In addition, we may face other restrictions on our ability to liquidate an investment in a business entity to the extent that we or our Investment Adviser has or could be deemed to have material non-public information regarding such business entity.

 

We may not have the funds to make additional investments in our portfolio companies which could impair the value of our portfolio.

 

After our initial investment in a portfolio company, we may be called upon from time to time to provide additional funds to such company or have the opportunity to increase our investment through the exercise of a warrant to purchase common stock. There is no assurance that we will make, or will have sufficient funds to make, follow-on investments. Any decisions not to make a follow-on investment or any inability on our part to make such an investment may have a negative impact on a portfolio company in need of such an investment, may result in a missed opportunity for us to increase our participation in a successful operation or may reduce the expected yield on the investment. Even if we have sufficient capital to make a desired follow-on investment, we may elect not to make a follow-on investment because we may not want to increase our level of risk, because we prefer other opportunities or because we are inhibited by compliance with BDC requirements, SBA regulations or the desire to maintain our RIC tax treatment. Our ability to make follow-on investments may also be limited by our Investment Adviser allocation policy.

 

The debt securities in which we invest are subject to credit risk and prepayment risk.

 

An issuer of a debt security may be unable to make interest payments and repay principal. We could lose money if the issuer of a debt obligation is, or is perceived to be, unable or unwilling to make timely principal and/or interest payments, or to otherwise honor its obligations. Substantially all of the debt investments held in our portfolio hold a non-investment grade rating by one or more rating agencies or, if not rated, would be rated below investment grade if rated, which are often referred to as “junk.”

 

Certain debt instruments may contain call or redemption provisions which would allow the issuer thereof to prepay principal prior to the debt instrument’s stated maturity. This is known as prepayment risk. Prepayment risk is greater during a falling interest rate environment as issuers can reduce their cost of capital by refinancing higher interest debt instruments with lower interest debt instruments. An issuer may also elect to refinance their debt instruments with lower interest debt instruments if the credit standing of the issuer improves. To the extent debt securities in our portfolio are called or redeemed, we may receive less than we paid for such security and we may be forced to reinvest in lower yielding securities or debt securities of issuers of lower credit quality.

 

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Our investment in Saratoga CLO constitutes a leveraged investment in a portfolio of subordinated notes representing the lowest-rated securities issued by a pool of predominantly senior secured first lien term loans and is subject to additional risks and volatility. All losses in the pool of loans will be borne by our subordinated notes and only after the value of our subordinated notes is reduced to zero will the higher-rated notes issued by the pool bear any losses.

 

At February 28, 2021, our investment in the subordinated notes of Saratoga CLO, a collateralized loan obligation fund, had a fair value of $31.4 million and constituted 5.7% of our portfolio. This investment constitutes a first loss position in a portfolio that, as of February 28, 2021, was composed of $603.7 million in aggregate principal amount of primarily senior secured first lien term loans and $114.1 million in uninvested cash. In addition, as of February 28, 2021, we also own $17.9 million in aggregate principal of the F-R-3 Notes with a fair value of $17.9 million in the Saratoga CLO, that only rank senior to the subordinated notes. A first loss position means that we will suffer the first economic losses if the value of Saratoga CLO decreases. First loss positions typically carry a higher risk and earn a higher yield. Interest payments generated from this portfolio will be used to pay the administrative expenses of Saratoga CLO and interest on the debt issued by Saratoga CLO before paying a return on the subordinated notes.

 

Principal payments will be similarly applied to pay administrative expenses of Saratoga CLO and for reinvestment or repayment of Saratoga CLO debt before paying a return on, or repayment of, the subordinated notes. In addition, 80.0% of our fixed management fee and 100.0% our incentive management fee for acting as the collateral manager of Saratoga CLO is subordinated to the payment of interest and principal on Saratoga CLO debt. Any losses on the portfolio will accordingly reduce the cash flow available to pay these management fees and provide a return on, or repayment of, our investment. Depending on the amount and timing of such losses, we may experience smaller than expected returns and, potentially, the loss of our entire investment.

 

As the manager of the portfolio of Saratoga CLO, we will have some ability to direct the composition of the portfolio, but our discretion is limited by the terms of the debt issued by Saratoga CLO which may limit our ability to make investments that we feel are in the best interests of the subordinated notes, and the availability of suitable investments. The performance of Saratoga CLO’s portfolio is also subject to many of the same risks sets forth in this Annual Report with respect to portfolio investments in leveraged loans.

 

In the event that a bankruptcy court orders the substantive consolidation of us with Saratoga CLO, the creditors of Saratoga CLO, including the holders of $603.7 million aggregate principal amount of debt, as of February 28, 2021 issued by Saratoga CLO, would have claims against the consolidated bankruptcy estate, which would include our assets.

 

We believe that we have observed and will observe certain formalities and operating procedures that are generally recognized requirements for maintaining our separate existence and that our assets and liabilities can be readily identified as distinct from those of Saratoga CLO. However, we cannot assure you that a bankruptcy court would agree in the event that we or Saratoga CLO became a debtor in connection with a bankruptcy proceeding. If a bankruptcy court concludes that substantive consolidation of us with Saratoga CLO is warranted, the creditors of Saratoga CLO would have claims against the consolidated bankruptcy estate.

 

Substantive consolidation means that our assets are placed in a single bankruptcy estate with those of Saratoga CLO, rather than kept separate, and that the creditors of Saratoga CLO have a claim against that single estate (including our assets), as opposed to retaining their claims against only Saratoga CLO.

 

Our investments in Saratoga CLO have a different risk profile than would direct investments made by us, including less information available and fewer rights regarding repayment compared to companies we invest in directly as well as complicated accounting and tax implications.

 

Due to our investments in the Saratoga CLO being primarily broadly syndicated loans, there may be less information available to us on those companies as compared to most investments that we make directly. For example, we will typically have fewer rights relating to how such companies manage their cash flow to repay debt, the inclusion of protective covenants, default penalties, lien protection, change of control provisions and board observation rights in deal terms, and our general ability to oversee the company’s operations. Our investment in Saratoga CLO is also subject to the risk of leverage associated with the debt issued by Saratoga CLO and the repayment priority of senior debt holders in Saratoga CLO.

 

The accounting and tax implications of such investments are complicated. In particular, reported earnings from the equity tranche investment of Saratoga CLO are recorded U.S. GAAP based upon an effective yield calculation. Current taxable earnings on these investments, however, will generally not be determinable until after the end of the fiscal year of Saratoga CLO that ends within the Company’s fiscal year, even though the investment is generating cash flow. In general, the U.S. federal income tax treatment of investment in Saratoga CLO may result in higher distributable earnings in the early years and a capital loss at maturity, while for reporting purposes the totality of cash flows are reflected in a constant yield to maturity.

 

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The senior loan portfolio of Saratoga CLO may be concentrated in a limited number of industries or borrowers, which may subject Saratoga CLO, and in turn us, to a risk of significant loss if there is a downturn in a particular industry in which Saratoga CLO is concentrated.

 

Saratoga CLO has senior loan portfolios that may be concentrated in a limited number of industries or borrowers. A downturn in any particular industry or borrower in which Saratoga CLO is heavily invested may subject Saratoga CLO, and in turn us, to a risk of significant loss and could significantly impact the aggregate returns we realize. If an industry in which Saratoga CLO is heavily invested suffers from adverse business or economic conditions, a material portion of our investment in Saratoga CLO could be affected adversely, which, in turn, could adversely affect our financial position and results of operations. For example, as of February 28, 2021, Saratoga CLO’s investments in the banking, finance, insurance & real estate industry represented approximately 17.9% of the fair value of Saratoga CLO’s portfolio. Companies in the banking, finance, insurance & real estate industry are subject to general economic downturns and business cycles and will often suffer reduced revenues and rate pressures during periods of economic uncertainty. In addition, investments in business service represented approximately 9.4% of the fair value of Saratoga CLO’s portfolio. Changes in healthcare or other laws and regulations applicable to the businesses of some of the companies in which Saratoga CLO invests may occur that could increase their compliance and other costs of doing business, require significant systems enhancements, or render their products or services less profitable or obsolete, any of which could have a material adverse effect on their results of operations. There has also been an increased political and regulatory focus on healthcare laws in recent years, and new legislation could have a material effect on the business and operations of companies in which Saratoga CLO invests.

 

Failure by Saratoga CLO to satisfy certain debt compliance ratios may entitle senior debtholders to additional payments, which may harm our operating results by reducing payments we would otherwise be entitled to receive from Saratoga CLO.

 

The failure by Saratoga CLO to satisfy certain debt compliance ratios, specifically those with respect to adequate collateralization and/or interest coverage tests, could lead to a reduction in its payments to us. In the event that Saratoga CLO failed these certain tests, senior debt holders may be entitled to additional payments that would, in turn, reduce the payments we would otherwise be entitled to receive. Separately, we may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial covenants, with Saratoga CLO or any other investment we may make. If any of these occur, it could materially and adversely affect our operating results and cash flows.

 

Downgrades by rating agencies of broadly syndicated loans could adversely impact the financial performance of Saratoga CLO and its ability to pay equity distributions in the future.

 

Ratings agencies have recently undergone reviews of CLO tranches and their broadly syndicated loans in light of the COVID-19 pandemic’s adverse impact on the economic market. Such reviews have, in some cases, resulted in downgrades of broadly syndicated loans. Such downgrades of broadly syndicated loans, as well as downgrades of broadly syndicated loans in the future, could adversely impact the financial performance of Saratoga CLO, thereby limiting Saratoga CLO’s ability to pay equity distributions and subordinated management fees to the Company in the future. The full extent of downgrades by ratings agencies of broadly syndicated loans is currently unknown, thereby resulting in a high degree of uncertainty with respect to Saratoga CLO’s financial performance and ability to pay equity distributions and subordinated management fees to the Company in the future.

 

Available information about privately held companies is limited.

 

We invest primarily in privately-held companies. Generally, little public information exists about these companies, and we are required to rely on the ability of our Investment Adviser’s investment professionals to obtain adequate information to evaluate the potential returns from investing in these companies. These companies and their financial information are not subject to the Sarbanes- Oxley Act of 2002 and other rules that govern public companies. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose money on our investments.

 

When we are a debt or minority equity investor in a portfolio company, we may not be in a position to control the entity, and its management may make decisions that could decrease the value of our investment.

 

We make both debt and minority equity investments; therefore, we are subject to the risk that a portfolio company may make business decisions with which we disagree, and the stockholders and management of such company may take risks or otherwise act in ways that do not serve our interests. As a result, a portfolio company may make decisions that could decrease the value of our portfolio holdings.

 

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Our portfolio companies may incur debt or issue equity securities that rank equally with, or senior to, our investments in such companies.

 

Our portfolio companies usually will have, or may be permitted to incur, other debt, or issue other equity securities that rank equally with, or senior to, our investments. By their terms, such instruments may provide that the holders are entitled to receive payment of dividends, interest or principal on or before the dates on which we are entitled to receive payments in respect of our investments. These debt instruments will usually prohibit the portfolio companies from paying interest on or repaying our investments in the event and during the continuance of a default under such debt. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of securities ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying such holders, the portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debtor ranking equally with our investments, we would have to share on an equal basis any distributions with other holders in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.

 

There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.

 

If one of our portfolio companies were to go bankrupt, even though we may have structured our interest as senior debt, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might re-characterize our debt holding and subordinate all or a portion of our claim to that of other creditors. In addition, lenders can be subject to lender liability claims for actions taken by them where they become too involved in the borrower’s business or exercise control over the borrower. It is possible that we could become subject to a lender’s liability claim, including as a result of actions taken if we actually render significant managerial assistance.

 

Investments in equity securities involve a substantial degree of risk.

 

We purchase common stock and other equity securities. Although equity securities have historically generated higher average total returns than fixed-income securities over the long-term, equity securities also have experienced significantly more volatility in those returns and in recent years have significantly underperformed relative to fixed-income securities. The equity securities we acquire may fail to appreciate and may decline in value or become worthless and our ability to recover our investment will depend on our portfolio company’s success. Investments in equity securities involve a number of significant risks, including:

 

any equity investment we make in a portfolio company could be subject to further dilution as a result of the issuance of additional equity interests and to serious risks as a junior security that will be subordinate to all indebtedness or senior securities in the event that the issuer is unable to meet its obligations or becomes subject to a bankruptcy process;

 

to the extent that the portfolio company requires additional capital and is unable to obtain it, we may not recover our investment in equity securities; and

 

in some cases, equity securities in which we invest will not pay current dividends, and our ability to realize a return on our investment, as well as to recover our investment, will be dependent on the success of our portfolio companies. Even if the portfolio companies are successful, our ability to realize the value of our investment may be dependent on the occurrence of a liquidity event, such as a public offering or the sale of the portfolio company. It is likely to take a significant amount of time before a liquidity event occurs or we can sell our equity investments. In addition, the equity securities we receive or invest in may be subject to restrictions on resale during periods in which it could be advantageous to sell.

 

There are special risks associated with investing in preferred securities, including:

 

preferred securities may include provisions that permit the issuer, at its discretion, to defer distributions for a stated period without any adverse consequences to the issuer. If we own a preferred security that is deferring its distributions, we may be required to report income for U.S. federal income tax purposes even though we have not received any cash payments in respect of such income;

 

preferred securities are subordinated with respect to corporate income and liquidation payments, and are therefore subject to greater risk than debt;

 

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preferred securities may be substantially less liquid than many other securities, such as common securities or U.S. government securities; and

 

preferred security holders generally have no voting rights with respect to the issuing company, subject to limited exceptions.

 

Our investments in foreign debt, including that of emerging market issuers, may involve significant risks in addition to the risks inherent in U.S. investments.

 

Although there are limitations on our ability to invest in foreign debt, we may, from time to time, invest in debt of foreign companies, including the debt of emerging market issuers. Investing in foreign companies may expose us to additional risks not typically associated with investing in U.S. companies. These risks include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the United States, higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility.

 

Investments in the debt of emerging market issuers may subject us to additional risks such as inflation, wage and price controls, and the imposition of trade barriers. Furthermore, economic conditions in emerging market countries are, to some extent, influenced by economic and securities market conditions in other emerging market countries. Although economic conditions are different in each country, investors’ reaction to developments in one country can have effects on the debt of issuers in other countries.

 

Although most of our investments will be U.S. dollar-denominated, our investments that are denominated in a foreign currency will be subject to the risk that the value of a particular currency will change in relation to one or more other currencies. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation, and political developments.

 

We may employ hedging techniques to minimize these risks, but we cannot assure you that we will fully hedge against these risks or that such strategies will be effective. As a result, a change in currency exchange rates may adversely affect our profitability.

 

We may expose ourselves to risks if we engage in hedging transactions.

 

We may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates. Use of these hedging instruments may expose us to counter-party credit risk. Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, such hedging can establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions may also limit the opportunity for gain if the values of the portfolio positions should increase. Moreover, it may not be possible to hedge against an exchange rate or interest rate fluctuation that is generally anticipated at an acceptable price.

 

The success of our hedging transactions will depend on our ability to correctly predict movements in currencies and interest rates.

 

Therefore, while we may enter into such transactions to seek to reduce currency exchange rate and interest rate risks, unanticipated changes in currency exchange rates or interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in non-U.S. currencies because the value of those securities is likely to fluctuate as a result of factors not entirely related to currency fluctuations. To the extent we engage in hedging transactions, we also face the risk that counterparties to the derivative instruments we hold may default, which may expose us to unexpected losses from positions where we believed that our risk had been appropriately hedged.

 

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Our investments may be risky, and you could lose all or part of your investment.

 

Substantially all of our debt investments hold a non-investment grade rating by one or more rating agencies (which non- investment grade debt is commonly referred to as “high yield” and “junk” debt) or, where not rated by any rating agency, would be below investment grade or “junk”, if rated. A below investment grade or “junk” rating means that, in the rating agency’s view, there is an increased risk that the obligor on such debt will be unable to pay interest and repay principal on its debt in full. We also invest in debt that defers or pays PIK interest. To the extent interest payments associated with such debt are deferred, such debt will be subject to greater fluctuations in value based on changes in interest rates, such debt could produce taxable income without a corresponding cash payment to us, and since we generally do not receive any cash prior to maturity of the debt, the investment will be of greater risk.

 

In addition, private middle market companies in which we invest are exposed to a number of significant risks, including:

 

limited financial resources and an inability to meet their obligations, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of us realizing any guarantees we may have obtained in connection with our investment;

 

shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns;

 

dependence on the management talents and efforts of a small group of persons; the death, disability, resignation or termination of one or more of which could have a material adverse impact on the company and, in turn, on us;

 

less predictable operating results and, possibly, substantial additional capital requirements to support their operations, finance expansion or maintain their competitive position; and

 

difficulty accessing the capital markets to meet future capital needs.

 

In addition, our executive officers, directors and our Investment Adviser may, in the ordinary course of business, be named as defendants in litigation arising from our investments in the portfolio companies.

 

Our portfolio may continue to be concentrated in a limited number of industries, which may subject us to a risk of significant loss if there is a downturn in a particular industry in which a number of our investments are concentrated.

 

Our portfolio may continue to be concentrated in a limited number of industries. A downturn in any particular industry in which we are invested could significantly impact the aggregate returns we realize.

 

As of February 28, 2021, our investments in the education software industry represented approximately 15.9% of the fair value of our portfolio and our investments in the IT services industry represented approximately 13.2% of the fair value of our portfolio. In addition, we may from time to time invest a relatively significant percentage of our portfolio in industries we do not necessarily target. If an industry in which we have significant investments suffers from adverse business or economic conditions, as these industries have to varying degrees, a material portion of our investment portfolio could be affected adversely, which, in turn, could adversely affect our financial position and results of operations.

 

A number of our portfolio companies are in the Software-as-a-Service industry and such companies are subject to additional risks that are unique to that industry, and the financial results of our portfolio companies in the Software-as-a-Service industry could materially adversely affect our financial results.

 

A number of our portfolio companies are in the Software-as-a-Service (“SAAS”) industry and such companies are subject to additional risks that are unique to the SAAS industry. For example, such portfolio companies may be subject to consumer protection laws that are enforced by regulators such as the Federal Trade Commission (“FTC”) and private parties, and include statutes that regulate the collection and use of information for marketing purposes. Any new legislation or regulations regarding the Internet, mobile devices, software sales or export and/or the cloud or SAAS industry, and/or the application of existing laws and regulations to the Internet, mobile devices, software sales or export and/or the cloud or SAAS industry, could create new legal or regulatory burdens on our portfolio companies that could have a material adverse effect on their respective operations. As a result, our SAAS portfolio companies may incur significant operating losses and negative cash flows because of their respective life cycles, resulting in an adverse impact on their operations and on their ability to repay their debt. Because our SAAS portfolio companies are generally investments that are underwritten and valued on “recurring revenue” rather than EBITDA, the fair value determinations of such companies are inherently uncertain and may fluctuate over short periods of time. They are also subject to the risks that their customers have financial difficulties that make them unable or unwilling to pay for the software and services that drive a portfolio company’s recurring revenue projections. There is often less collateral securing our loans to these companies as compared to our other portfolio companies, which could impair our ability to be repaid if the portfolio companies default on their obligations or otherwise encounter financial difficulties. For these reasons, our financial results could be materially adversely affected if our portfolio companies in the SAAS industry encounter financial difficulty and fail to repay their obligations. As of February 28, 2021, our current total investments in SAAS companies were $300.4 million, or 54.2% of total investments.

 

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If our primary investments are deemed not to be qualifying assets, we could be precluded from investing in our desired manner or deemed to be in violation of the 1940 Act.

 

In order to maintain our status as a BDC, we may not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70.0% of our total assets are qualifying assets. We believe that most of the investments that we may acquire in the future will constitute qualifying assets. However, we may be precluded from investing in what we believe are attractive investments if such investments are not qualifying assets for purposes of the 1940 Act. If we do not invest a sufficient portion of our assets in qualifying assets, we could violate the 1940 Act provisions applicable to BDCs and be precluded from making follow-on investments in existing portfolio companies (which could result in the dilution of our position) or required to dispose of investments at inappropriate times in order to come into compliance with the 1940 Act. If we need to dispose of such investments quickly, it could be difficult to dispose of such investments on favorable terms. We may not be able to find a buyer for such investments and, even if we do find a buyer, we may have to sell the investments at a substantial loss. Any such outcomes would have a material adverse effect on our business, financial condition, results of operations and cash flows. Furthermore, any failure to comply with the requirements imposed on BDCs by the 1940 Act could cause the SEC to bring an enforcement action against us and/or expose us to claims of private litigants. If we do not maintain our status as a BDC, we would be subject to regulation as a registered closed-end investment company under the 1940 Act. As a registered closed-end investment company, we would be subject to substantially more regulatory restrictions under the 1940 Act, which would significantly decrease our operating flexibility.

 

RISKS RELATED TO OUR COMMON STOCK

 

Investing in our common stock may involve an above average degree of risk.

 

The investments we make in accordance with our investment objective may result in a higher amount of risk than alternative investment options and volatility or loss of principal. Our investments in portfolio companies may be highly speculative and aggressive, and therefore, an investment in our common stock may not be suitable for someone with lower risk tolerance.

 

We may choose to pay dividends in our own stock, in which case you may be required to pay tax in excess of the cash you receive.

 

We have in the past, and may in the future, distribute taxable dividends that are payable to our stockholders in part through the issuance of shares of our common stock. For example, on October 30, 2013, our board of directors declared a dividend of $2.65 per share to shareholders payable in cash or shares of our common stock. Under certain applicable provisions of the Code and the Treasury regulations and a revenue procedure issued by the IRS, a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC, subject to a limitation that the aggregate amount of cash to be distributed to all stockholders must be at least 20% of the aggregate declared distribution. If too many stockholders elect to receive their distributions in cash, we must allocate the cash available for distribution among the shareholders electing to receive cash (with the balance of the distribution paid in shares of our common stock). If we decide to make any distributions consistent with this revenue procedure that are payable in part in our stock, taxable stockholders receiving such dividends will be required to include the full amount of the dividend (whether received in cash, our stock, or a combination thereof) as ordinary income (or as long-term capital gain to the extent such distribution is properly reported as a capital gain dividend) to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of any cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale.

 

Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. If a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our stock.

 

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Due to the COVID-19 pandemic or other disruptions in the economy, we may reduce or defer our dividends and choose to incur US federal excise tax in order preserve cash and maintain flexibility.

 

As a BDC, we are not required to make any distributions to shareholders other than in connection with our election to be taxed as a RIC under subchapter M of the Code. In order to maintain our tax treatment as a RIC, we must distribute to shareholders for each taxable year at least 90% of our investment company taxable income (i.e., net ordinary income plus realized net short-term capital gains in excess of realized net long-term capital losses). If we qualify for taxation as a RIC, we generally will not be subject to corporate-level US federal income tax on our investment company taxable income and net capital gains (i.e., realized net long- term capital gains in excess of realized net short-term capital losses) that we timely distribute to shareholders. We will be subject to a nondeductible 4% U.S. federal excise tax on undistributed earnings of a RIC unless we distribute each calendar year at least the sum of (i) 98.0% of our net ordinary income for the calendar year, (ii) 98.2% of our capital gain net income for the one-year period ending on October 31 of the calendar year, and (iii) any net ordinary income and capital gain net income that we recognized for preceding years, but were not distributed during such years, and on which we paid no U.S. federal income tax.

 

Under the Code, we may satisfy certain of our RIC distributions with dividends paid after the end of the current calendar year. In particular, if we pay a distribution in January of the following year that was declared in October, November, or December of the current year and is payable to shareholders of record in the current year, the dividend will be treated for all US federal tax purposes as if it were paid on December 31 of the current year. In addition, under the Code, we may pay dividends, referred to as “spillover dividends,” that are paid during the following taxable year that will allow us to maintain our qualification for taxation as a RIC and eliminate our liability for corporate-level U.S. federal income tax. Under these spillover dividend procedures, because our taxable year ends on February 28 or 29, we may defer distribution of income earned during the current taxable year until February of the following taxable year. For example, we may defer distributions of income earned during the year ended February 28, 2021 until as late as February 28, 2022. If we choose to carry-over this distribution of income in the form of a spillover dividend, we will incur the 4% U.S. federal excise tax on some or all of the distribution.

 

Due to the COVID-19 pandemic or other disruptions in the economy, we anticipate that we may take certain actions with respect to the timing and amounts of our distributions in order to preserve cash and maintain flexibility. For example, we may not be able to increase our dividends. In addition, we may reduce our dividends and/or defer our dividends to the following taxable year. If we defer our dividends, we may choose to utilize the spillover dividend rules discussed above and incur the 4% U.S. federal excise tax on such amounts. To further preserve cash, we may combine these reductions or deferrals of dividends with one or more distributions that are payable partially in our stock as discussed above under “We may choose to pay dividends in our own stock, in which case you may be required to pay tax in excess of the cash you receive.”

 

The market price of our common stock may fluctuate significantly.

 

The market price and liquidity of the market for our common stock may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include:

 

significant volatility in the market price and trading volume of securities of BDCs or other companies in our sector, which are not necessarily related to the operating performance of these companies;

 

changes in regulatory policies, accounting pronouncements or tax rules, particularly with respect to RICs, BDCs or SBICs;

 

loss of RIC qualification;

 

changes in the value of our portfolio of investments;

 

any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;

 

departure of any of Saratoga Investment Advisors’ key personnel;

 

operating performance of companies comparable to us;

 

general economic trends and other external factors; or

 

loss of a major funding source.

 

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Our business and operation could be negatively affected if we become subject to any securities litigation or shareholder activism, which could cause us to incur significant expense, hinder execution of investment strategy and impact our stock price.

 

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Shareholder activism, which could take many forms or arise in a variety of situations, has been increasing in the BDC space recently. While we are currently not subject to any securities litigation or shareholder activism, due to the potential volatility of our stock price and for a variety of other reasons, we may in the future become the target of securities litigation or shareholder activism. Securities litigation and shareholder activism, including potential proxy contests, could result in substantial costs and divert management’s and our board of directors’ attention and resources from our business.

 

Additionally, such securities litigation and shareholder activism could give rise to perceived uncertainties as to our future, adversely affect our relationships with service providers and make it more difficult to attract and retain qualified personnel. Also, we may be required to incur significant legal fees and other expenses related to any securities litigation and activist shareholder matters. Further, our stock price could be subject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties of any securities litigation and shareholder activism.

 

There is a risk that you may not receive distributions or that our distributions may not grow over time.

 

As a BDC for 1940 Act purposes and a RIC for U.S. federal income tax purposes, we intend to make distributions out of assets legally available for distribution to our stockholders once such distributions are authorized by our board of directors and declared by us. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or periodically increase our dividend rate. In addition, due to the asset coverage test that is applicable to us as a BDC, and provisions contained in the agreements governing our borrowings, we may be limited in our ability to make distributions. Further, if we invest a greater amount of assets in equity securities that do not pay current dividends, it could reduce the amount available for distribution.

 

Provisions of our governing documents and the Maryland General Corporation Law could deter future takeover attempts and have an adverse impact on the price of our common stock.

 

We are governed by our charter and bylaws, which we refer to as our “governing documents.”

 

Our governing documents and the Maryland General Corporation Law contain provisions that may have the effect of delaying, deferring or preventing a future transaction or change in control of us that might involve a premium price for our stockholders or otherwise be in their best interest.

 

Our charter provides for the classification of our board of directors into three classes of directors, serving staggered three-year terms, which may render a change of control of us or removal of our incumbent management more difficult. Furthermore, any and all vacancies on our board of directors will be filled generally only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy will serve for the remainder of the full term until a successor is elected and qualifies.

 

Our board of directors is authorized to create and issue new series of shares, to classify or reclassify any unissued shares of stock into one or more classes or series, including preferred stock and, without stockholder approval, to amend our charter to increase or decrease the number of shares of stock that we have authority to issue, which could have the effect of diluting a stockholder’s ownership interest. Prior to the issuance of shares of stock of each class or series, including any reclassified series, our board of directors is required by our governing documents to set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series of shares of stock.

 

Our governing documents also provide that our board of directors has the exclusive power to adopt, alter or repeal any provision of our bylaws, and to make new bylaws. The Maryland General Corporation Law also contains certain provisions that may limit the ability of a third party to acquire control of us, such as:

 

The Maryland Business Combination Act, which, subject to certain limitations, prohibits certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of the common stock or an affiliate thereof) for five years after the most recent date on which the stockholder becomes an interested stockholder and, thereafter, imposes special minimum price provisions and special stockholder voting requirements on these combinations; and

 

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The Maryland Control Share Acquisition Act, which provides that “control shares” of a Maryland corporation (defined as shares of common stock which, when aggregated with other shares of common stock controlled by the stockholder, entitles the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares of common stock.

 

In addition, the provisions of the Maryland Business Combination Act will not apply, however, if our board of directors adopts a resolution that any business combination between us and any other person will be exempt from the provisions of the Maryland Business Combination Act. Although our board of directors has adopted such a resolution, there can be no assurance that this resolution will not be altered or repealed in whole or in part at any time. If the resolution is altered or repealed, the provisions of the Maryland Business Combination Act may discourage others from trying to acquire control of us.

 

As permitted by Maryland law, our bylaws contain a provision exempting from the Maryland Control Share Acquisition Act any and all acquisitions by any person of our common stock. Although our bylaws include such a provision, such a provision may also be amended or eliminated by our board of directors at any time in the future, subject to obtaining confirmation from the SEC that it does not object to us being subject to the Maryland Control Share Acquisition Act.

 

Our common stock may trade at a discount to our net asset value per share.

 

Common stock of BDCs, as closed-end investment companies, frequently trade at a discount to net asset value. Our common stock has traded at a discount to our net asset value since shortly after our initial public offering. The risk that our common stock may continue to trade at a discount to our net asset value is separate and distinct from the risk that our net asset value per share may decline.

 

Stockholders may incur dilution if we sell shares of our common stock in one or more offerings at prices below the then current net asset value per share of our common stock.

 

The 1940 Act prohibits us from selling shares of our common stock at a price below the current net asset value per share of such stock, with certain exceptions. One such exception is prior stockholder approval of issuances below net asset value provided that our board of directors makes certain determinations. We do not currently have stockholder approval of issuances below net asset value.

 

If we were to sell shares of our common stock below net asset value per share, such sales would result in an immediate dilution to the net asset value per share. This dilution would occur as a result of the sale of shares at a price below the then current net asset value per share of our common stock and a proportionately greater decrease in a stockholder’s interest in our earnings and assets and voting interest in us than the increase in our assets resulting from such issuance.

 

Because the number of shares of common stock that could be so issued and the timing of any issuance is not currently known, the actual dilutive effect cannot be predicted.

 

The issuance of subscription rights, warrants or convertible debt that are exchangeable for our common stock, will cause your economic interest and voting power in us to be diluted as a result of our offering of any such securities.

 

Stockholders who do not fully exercise rights, warrants or convertible debt issued to them in any offering of subscription rights, warrants or convertible debt to purchase our common stock should expect that they will, at the completion of the offering, own a smaller proportional economic interest and have diminished voting power in us than would otherwise be the case if they fully exercised their rights, warrants or convertible debt. We cannot state precisely the amount of any such dilution in share ownership or voting power because we do not know what proportion of the common stock would be purchased as a result of any such offering.

 

In addition, if the subscription price, warrant price or convertible debt price is less than our net asset value per share of common stock at the time of such offering, then our stockholders would experience an immediate dilution of the aggregate net asset value of their shares as a result of the offering. The amount of any such decrease in net asset value is not predictable because it is not known at this time what the subscription price, warrant price, convertible debt price or net asset value per share will be on the expiration date of such offering or what proportion of our common stock will be purchased as a result of any such offering. The risk of dilution is greater if there are multiple rights offerings. However, our board of directors will make a good faith determination that any offering of subscription rights, warrants or convertible debt would result in a net benefit to existing stockholders.

 

Finally, our common stockholders will bear all costs and expenses incurred by us in connection with any proposed offering of subscription rights, warrants or convertible debt that are exchangeable for our common stock, whether or not such offering is actually completed by us.

 

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RISKS RELATED TO OUR NOTES

 

The Notes are unsecured and therefore are effectively subordinated to any secured indebtedness we have incurred or may incur in the future.

 

The Notes are not secured by any of our assets or any of the assets of our subsidiaries, including our wholly- owned subsidiaries. As a result, the Notes are effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the Notes.

 

The Notes are structurally subordinated to the indebtedness and other liabilities of our subsidiaries.

 

The Notes are obligations exclusively of Saratoga Investment Corp., and not of any of our subsidiaries. None of our subsidiaries is a guarantor of the Notes and the Notes are not required to be guaranteed by any subsidiary we may acquire or create in the future, including indebtedness under the Credit Facility. Any assets of our subsidiaries are not directly available to satisfy the claims of our creditors, including holders of the Notes. Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors of our subsidiaries will have priority over our equity interests in such entities (and therefore the claims of our creditors, including holders of the Notes) with respect to the assets of such entities. Even if we are recognized as a creditor of one or more of these entities, our claims would still be effectively subordinated to any security interests in the assets of any such entity and to any indebtedness or other liabilities of any such entity senior to our claims. Consequently, the Notes are structurally subordinated to all indebtedness and other liabilities of any of our subsidiaries and portfolio companies with respect to which we hold equity investments. In addition, our subsidiaries and these entities may incur substantial indebtedness in the future, all of which would be structurally senior to the Notes. As of February 28, 2021, there were no outstanding borrowings under the Credit Facility and we had the ability to borrow up to $45.0 million under the Credit Facility, subject to certain conditions. As of February 28, 2021, we had $158.0 million in SBA-guaranteed debentures outstanding. The indebtedness under the Credit Facility and to SBA-guaranteed debentures is structurally senior to the Notes.

 

The indenture under which the Notes are issued contains limited protection for holders of the Notes.

 

The indenture under which the Notes are issued offers limited protection to holders of the Notes.

 

The terms of the indenture and the Notes do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have a material adverse impact on your investment in the Notes. In particular, the terms of the indenture and the Notes do not place any restrictions on our or our subsidiaries’ ability to:

 

issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the Notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore is structurally senior to the Notes and (4) securities, indebtedness or obligations issued or incurred by our subsidiaries or the portfolio companies with respect to which we hold an equity investment that would be senior to our equity interests in those entities and therefore rank structurally senior to the Notes with respect to the assets of these entities, in each case other than an incurrence of indebtedness or other obligation that would cause a violation of Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions (whether or not we are subject thereto), but giving effect, in each case, to any exemptive relief granted to us by the SEC. Currently, these provisions generally prohibit us from making additional borrowings, including through the issuance of additional debt or the sale of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowings, or, once the approval we received from our independent directors becomes effective on April 16, 2019, 150% (after deducting the amount of such dividend, distribution or purchase price, as the case may be);

 

sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets);

 

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enter into transactions with affiliates;

 

create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions;

 

make investments; or

 

create restrictions on the payment of dividends or other amounts to us from our subsidiaries.

 

In addition, the indenture does not require us to offer to purchase the Notes in connection with a change of control or any other event.

 

Furthermore, the terms of the indenture and the Notes do not protect holders of the Notes in the event that we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, if any, as they do not require that we adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow, or liquidity.

 

Our ability to recapitalize, incur additional debt and take a number of other actions that are not limited by the terms of the Notes may have important consequences for you as a holder of the Notes, including making it more difficult for us to satisfy our obligations with respect to the Notes or negatively affecting the trading value of the Notes.

 

Other debt we issue or incur in the future could contain more protections for its holders than the indenture and the Notes, including additional covenants and events of default. For example, the indenture under which the Notes is issued do not contain cross-default provisions that are contained in the Credit Facility. The issuance or incurrence of any such debt with incremental protections could affect the market for and trading levels and prices of the Notes.

 

An active trading market for the Public Notes may not develop or be sustained, which could limit the market price of the Public Notes or the ability to sell them.

 

Although the 6.25% 2025 Notes are listed on the NYSE under the symbol “SAF” and the 7.25% 2025 Notes are listed on the NYSE under the symbol “SAK”, we cannot provide any assurances that an active trading market will develop or be maintained for the Public Notes or that the Public Notes will be able to be sold. At various times, the Public Notes may trade at a discount from their initial offering price depending on prevailing interest rates, the market for similar securities, our credit ratings, if any, general economic conditions, our financial condition, performance and prospects and other factors. Accordingly, we cannot provide any assurance that a liquid trading market will develop for the Public Notes, or that the Public Notes will be able to be sold at a particular time or at a favorable price. To the extent an active trading market does not develop, the liquidity and trading price for the Public Notes may be harmed. At the same time, the trading market for the Public Notes may also be very volatile, and many of the risk factors related to our common stock and outlined above in “Risks Related to Our Common Stock” could also be applicable to the Public Notes.

 

Public health threats may affect the market for the Public Notes, impact the businesses in which we invest and affect our business, operating results and financial condition.

 

Public health threats, such as COVID-19 or any other illness, may disrupt the operations of the businesses in which we invest. Such threats can create economic and political uncertainties and can contribute to global economic instability. A public health threat poses the risk that our portfolio companies may have significantly reduced or be prevented from conducting business activities for an unknown period of time, including shutdowns that may be requested or mandated by governmental authorities. We cannot estimate the impact that a public health threat could have on our portfolio companies, but it could disrupt their businesses and their ability to make interest or dividend payments and decrease the overall value of our investments which adversely impact our business, financial condition or results of operations. Additionally, as a result of the volatile market conditions that may result from public health threats, such as COVID-19 or any other illness, we cannot provide any assurance that the Public Notes will trade at a favorable price.

 

We may choose to redeem the Public Notes when prevailing interest rates are relatively low.

 

On or after August 31, 2021 and June 24, 2022, we may choose to redeem the 6.25% 2025 Notes and 7.25% 2025 Notes, respectively, from time to time, especially when prevailing interest rates are lower than the rate borne by the Public Notes. If prevailing rates are lower at the time of redemption, you would not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as the interest rate on the Public Notes being redeemed. Our redemption right also may adversely impact your ability to sell the Public Notes as the optional redemption date or period approaches.

 

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If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the Notes.

 

Any default under the agreements governing our indebtedness, including a default under the Credit Facility or other indebtedness to which we may be a party that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the Notes and substantially decrease the market value of the Public Notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness, including the Notes. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lender under the Credit Facility or other debt we may incur in the future could elect to terminate its commitment, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. In addition, any such default may constitute a default under the Notes, which could further limit our ability to repay our debt, including the Notes. If our operating performance declines, we may in the future need to seek to obtain waivers from the lender under the Credit Facility or other debt that we may incur in the future to avoid being in default. If we breach our covenants under the Credit Facility or other debt and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under the Credit Facility or other debt, the lender could exercise its rights as described above, and we could be forced into bankruptcy or liquidation. If we are unable to repay debt, lenders having secured obligations could proceed against the collateral securing the debt.

 

Because the Credit Facility has, and any future credit facilities will likely have, customary cross-default provisions, if the indebtedness under the Notes, the Credit Facility or under any future credit facility is accelerated, we may be unable to repay or finance the amounts due.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

We do not own any real estate or other physical properties important to our operations, however, an affiliate of our Investment Adviser leases office space for our executive offices at 535 Madison Avenue, New York, New York 10022.

 

ITEM 3. LEGAL PROCEEDINGS

 

Neither we nor our wholly-owned subsidiaries, Saratoga Investment Funding LLC and Saratoga Investment Corp. SBIC LP and Saratoga Investment Corp. SBIC II LP, are currently subject to any material legal proceedings.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Price range of common stock

 

Our common stock is traded on the New York Stock Exchange under the symbol “SAR.” The following table lists the high and low closing sales prices for the Company’s common stock and such closing sales prices’ percentage of premium or discount to the net asset value (“NAV”) for the two most recent fiscal years and the current fiscal year to date.

 

       Price Range   Percentage of High Closing Sales Price as a Premium (Discount) to    Percentage of Low Closing Sales Price as a Premium (Discount) to 
   NAV(1)   High   Low   NAV(2)   NAV(2) 
Fiscal Year Ending February 28, 2022                    
First Quarter through May 4, 2021  $       *   $26.54   $22.66    *    *. 
Fiscal Year Ended February 28, 2021                         
First Quarter  $25.11   $24.97   $8.40    (0.6)%   (66.5)%
Second Quarter  $26.68   $18.71   $15.08    (29.9)%   (43.5)%
Third Quarter  $26.84   $22.67   $16.21    (15.5)%   (39.6)%
Fourth Quarter  $27.25   $24.20   $20.43    (11.2)%   (25.0)%
Fiscal Year Ended February 29, 2020                         
First Quarter  $24.06   $25.60   $22.27    6.4%   (7.4)%
Second Quarter  $24.47   $25.50   $23.31    4.2%   (4.7)%
Third Quarter  $25.30   $26.23   $24.00    3.7%   (5.1)%
Fourth Quarter  $27.13   $28.35   $22.91    4.5%   (15.5)%

 

 

*Net asset value has not yet been calculated for this period.

(1)Net asset value per share is determined as of the last day in the relevant quarter and therefore may not reflect the net asset value per share on the date of the high and low sales prices.

(2)Calculated as the respective high or low closing sales price divided by the quarter end net asset value and subtracting 1.

 

On September 24, 2014, the Company announced the approval of an open market share repurchase plan that allowed it to repurchase up to 200,000 shares of its common stock at prices below its NAV as reported in its then most recently published consolidated financial statements (the “Share Repurchase Plan”). On October 7, 2015, our board of directors extended the Share Repurchase Plan for another year and increased the number of shares the Company is permitted to repurchase at prices below its NAV, as reported in its then most recently published consolidated financial statements, to 400,000 shares of its common stock. On October 5, 2016, our board of directors extended the Share Repurchase Plan for another year to October 15, 2017 and increased the number of shares the Company is permitted to repurchase at prices below its NAV, as reported in its then most recently published consolidated financial statements, to 600,000 shares of its common stock. On October 10, 2017, January 8, 2019 and January 7, 2020, our board of directors extended the Share Repurchase Plan for another year to October 15, 2018, January 15, 2020 and January 15, 2021, respectively, each time leaving the number of shares unchanged at 600,000 shares of its common stock. On May 4, 2020, our board of directors increased the Share Repurchase Plan to 1.3 million shares of common stock. On January 5, 2021, our board of directors extended the Shares Repurchase Plan for another year to January 15, 2022, leaving the number of shares unchanged at 1.3 million shares of common stock. As of February 28, 2021, the Company purchased 408,812 shares of common stock, at the average price of $17.84 for approximately $7.3 million pursuant to the Share Repurchase Plan. During the year ended February 28, 2021 the Company purchased 190,321 shares of common stock, at the average price $18.96 for approximately $3.6 million pursuant to the Share Repurchase Plan.

 

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As shown in the table below, as of February 28, 2021, we had purchased 408,812 shares of common stock pursuant to this repurchase plan.

  

Period  Total Number of Shares (or Units) Purchased   Average Price per Share (or Unit)   Total Number of Shares (or Units) Purchased as Part of Publicly
Announced Plans or Programs
   Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs 
March 1, 2015 through                
November 30, 2015   2,500   $15.59    2,500    397,500 
December 1, 2015 through                   
December 31, 2015   -   $-    2,500    397,500 
January 1, 2016 through                   
January 31, 2016   4,200   $13.86    6,700    393,300 
February 1, 2016 through                   
February 29, 2016   18,717   $13.86    25,417    374,583 
March 1, 2016 through                   
March 31, 2016   16,282   $14.57    41,699    358,301 
April 1, 2016 through                   
April 30, 2016   7,858   $16.22    49,557    350,443 
May 1, 2016 through                   
May 31, 2016   21,357   $16.29    70,914    329,086 
June 1, 2016 through                   
June 30, 2016   8,310   $16.50    79,224    320,776 
July 1, 2016 through                   
July 31, 2016   19,212   $17.31    98,436    301,564 
August 1, 2016 through                   
August 31, 2016   40,058   $17.44    138,494    261,506 
September 1, 2016 through                   
September 30, 2016   40,221   $18.04    178,715    221,285 
October 1, 2016 through                   
October 31, 2016   27,076   $18.10    205,791    394,209 
November 1, 2016 through                   
November 30, 2016   8,600   $18.24    214,391    385,609 
December 1, 2016 through                   
December 31, 2016   4,100   $18.57    218,491    381,509 
January 1, 2017 through                   
February 29, 2020   -    -    218,491    381,509 
March 1, 2020 through                   
February 28, 2021   190,321   $18.96    408,812    891,188 
Total   408,812   $17.84           

 

Holders

 

The last reported closing sale price of our common stock on May 4, 2021 was $25.51 per share, which represents a discount of approximately 6.4% to the NAV reported as of February 28, 2021. As of May 4, 2021, there were 11 holders of record of our common stock.

 

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Dividend Policy

 

The following table summarizes our dividends or distributions declared during fiscal 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020 and 2021:

 

Date Declared  Record Date   Payment Date   Amount
per
Share(2)
   Percentage
Paid in
Cash
 
Fiscal Year Ended 2009:                 
May 22, 2008  May 30, 2008   June 13, 2008   $3.90     20.0%
August 19, 2008  August 29, 2008   September 15, 2008    3.90     20.0%
December 8, 2008  December 18, 2008   December 29, 2008    2.50     20.0%
Total          $10.30       
                    
Fiscal Year Ended 2010:                   
November 13, 2009  November 25, 2009   December 31, 2009   $18.25 (1)   20.0%
Total          $18.25       
                    
Fiscal Year Ended 2011:                   
November 12, 2010  November 19, 2010   December 29, 2010   $4.40 (1)   20.0%
Total          $4.40       
                    
Fiscal Year Ended 2012:                   
November 15, 2011  November 25, 2011   December 30, 2011   $3.00 (1)   20.0%
Total          $3.00       
                    
Fiscal Year Ended 2013:                   
November 9, 2012  November 20, 2012   December 31, 2012   $4.25 (1)   20.0%
Total          $4.25       
                    
Fiscal Year Ended 2014:                   
October 30, 2013  November 13, 2013   December 27, 2013   $2.65 (1)   20.0%
Total          $2.65       
                    
Fiscal Year Ended 2015:                   
September 24, 2014  November 3, 2014   November 28, 2014   $0.18 (1)   66.9%
September 24, 2014  February 2, 2015   February 27, 2015    0.22 (1)   66.2%
Total          $0.40       
                    
Fiscal Year Ended 2016:                   
April 9, 2015  May 4, 2015   May 29, 2015   $0.27 (1)   61.3%
May 14, 2015  May 26, 2015   June 5, 2015    1.00 (1)   61.7%
July 8, 2015  August 3, 2015   August 31, 2015    0.33 (1)   65.7%
October 7, 2015  November 2, 2015   November 30, 2015    0.36 (1)   56.3%
January 12, 2016  February 1, 2016   February 29, 2016    0.40 (1)   61.6%
Total          $2.36       
                    

 

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Fiscal Year Ended 2017:                   
March 31, 2016  April 15, 2016   April 27, 2016   $0.41 (1)   62.7%
July 7, 2016  July 29, 2016   August 9, 2016    0.43 (1)   61.5%
August 8, 2016  August 24, 2016   September 5, 2016    0.20 (1)   63.3%
October 5, 2016  October 31, 2016   November 9, 2016    0.44 (1)   60.0%
January 12, 2017  January 31, 2017   February 9, 2017    0.45 (1)   60.5%
Total          $1.93       
                    
Fiscal Year Ended 2018:                   
February 28, 2017  March 15, 2017   March 28, 2017   $0.46 (1)   76.7%
May 30, 2017  June 15, 2017   June 27, 2017    0.47 (1)   81.2%
August 28, 2017  September 15, 2017   September 26, 2017    0.48 (1)   76.4%
November 29, 2017  December 15, 2017   December 27, 2017    0.49 (1)   82.4%
Total          $1.90       
                    
Fiscal Year Ended 2019:                   
February 26, 2018  March 14, 2018   March 26, 2018   $0.50 (1)   83.9%
May 30, 2018  June 15, 2018   June 27, 2018    0.51 (1)   84.0%
August 28, 2018  September 17, 2018   September 27, 2018    0.52 (1)   85.1%
November 27, 2018  December 17, 2018   January 2, 2019    0.53 (1)   85.4%
Total          $2.06       
                    
Fiscal Year Ended 2020:                   
February 26, 2019  March 14, 2019   March 28, 2019   $0.54 (1)   84.0%
May 28, 2019  June 13, 2019   June 27, 2019    0.55 (1)   83.5%
August 27, 2019  September 13, 2019   September 26, 2019    0.56 (1)   84.8%
January 7, 2020  January 24, 2020   February 6, 2020    0.56 (1)   85.5%
Total          $2.21       
                    
Fiscal Year Ended 2021:                   
July 7, 2020  January 24, 2020   August 12, 2020   $0.40 (1)   82.7%
October 7, 2020  October 26, 2020   November 10, 2020    0.41 (1)   82.4%
January 5, 2021  January 26, 2021   February 10, 2021    0.42 (1)   80.8%
Total          $1.23       

   

 

(1)This dividend was paid by a combination of shares of common stock and cash. Please see the discussion immediately following this table for more detail about the composition of this dividend.
(2)In each case, all of our distributions have been paid from our earnings and there has not been any return of capital to investors.

 

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Our distributions, if any, will be determined by our board of directors and paid out of assets legally available for distribution. Any such distributions generally will be taxable to our stockholders, including to those stockholders who receive additional shares of our common stock pursuant to our dividend reinvestment plan. Prior to January 2009, we paid quarterly dividends to our stockholders. However, in January 2009, we suspended the practice of paying quarterly dividends to our stockholders and thereafter, paid five annual dividend distributions (December 2013, 2012, 2011, 2010 and 2009) to our stockholders since such time, which distributions were made with a combination of cash and the issuance of shares of our common stock as discussed more fully below.

 

On September 24, 2014, we announced the recommencement of quarterly dividends to our stockholders. 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.

 

We are prohibited from making distributions that cause us to fail to maintain the asset coverage ratios stipulated by the 1940 Act, subject to certain exceptions, or that violate our debt covenants.

 

In order to maintain tax treatment as a RIC, we must for each fiscal year distribute an amount equal to at least 90.0% of our ordinary net taxable income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses. In addition, we will be subject to federal excise taxes to the extent we do not distribute during the calendar year at least (1) 98.0% of our net ordinary income for the calendar year, (2) 98.2% of our capital gain net income for the one-year period ending on October 31 of the calendar year and (3) any net ordinary income and capital gain net income that we recognized for preceding years, but were not distributed during such years, and on which we paid no U.S. federal income tax. For the 2019, 2018 and 2017 calendar year, the Company made distributions sufficient such that we did not incur any U.S. federal excise taxes. For the 2014, 2015 and 2016 calendar years, our distributions were insufficient such that we incurred U.S. federal excise taxes. We may elect to withhold from distribution a portion of our ordinary income for the 2021 calendar year and/or portion of the capital gains in excess of capital losses realized during the one-year period ending October 31, 2021, if any, and, if we do so, we would expect to incur U.S. federal excise taxes as a result.

 

In accordance with certain applicable provisions of the Code and the Treasury regulations and a revenue procedure issued by the IRS, a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC subject to a limitation that the aggregate amount of cash to be distributed to all stockholders must be at least 20% of the aggregate declared distribution. If too many stockholders elect to receive cash, the cash available for distribution must be allocated among the shareholders electing to receive cash (with the balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive the lesser of (a) the portion of the distribution such shareholder has elected to receive in cash or (b) an amount equal to his or her entire distribution times the percentage limitation on cash available for distribution. 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. Taxable stockholders receiving such distributions (whether received in cash, our stock, or a combination thereof) will be required to include the full amount of the dividend as ordinary income (or as long-term capital gain or qualified dividend income to the extent such distribution is properly reported as such) to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes.

 

On January 5, 2021, our board of directors declared a dividend of $0.42 per share, which was paid on February 10, 2021, to common stockholders of record as of January 26, 2021. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $3.8 million in cash and 41,388 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $21.75 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on January 28, 29 and February 1, 2, 3, 4, 5, 8, 9 and 10, 2021.

 

On October 7, 2020, our board of directors declared a dividend of $0.41 per share, which was paid on November 10, 2020, to common stockholders of record as of October 26, 2020. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $3.8 million in cash and 45,706 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $17.63 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on October 28, 29, 30 and November 2, 3, 4, 5, 6, 9 and 10, 2020.

 

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On July 7, 2020, the Company declared a dividend of $0.40 per share payable on August 12, 2020, to common stockholders of record on July 27, 2020. Shareholders have the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the Company’s DRIP. Based on shareholder elections, the dividend consisted of approximately $3.7 million in cash and 47,098 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $16.45 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on July 30, 31 and August 3, 4, 5, 6, 7, 10, 11 and 12, 2020.

 

On January 8, 2020, the Company declared a dividend of $0.56 per share, which was paid on February 6, 2020, to common stockholders of record on January 24, 2020. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the Company’s DRIP. Based on shareholder elections, the dividend consisted of approximately $5.4 million in cash and 35,682 newly issued shares of common stock, or 0.3% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $25.44 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on January 24, 27, 28, 29, 30, 31 and February 3, 4, 5 and 6, 2020.

 

On August 27, 2019, the Company declared a dividend of $0.56 per share, which was paid on September 26, 2019, to common stockholders of record on September 13, 2019. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the Company’s DRIP. Based on shareholder elections, the dividend consisted of approximately $4.5 million in cash and 34,575 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $23.34 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on September 13, 16, 17, 18, 19, 20, 23, 24, 25 and 26, 2019.

 

On May 28, 2019, the Company declared a dividend of $0.55 per share, which was paid on June 27, 2019, to common stockholders of record on June 13, 2019. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the Company’s DRIP. Based on shareholder elections, the dividend consisted of approximately $3.6 million in cash and 31,545 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $22.65 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on June 14, 17, 18, 19, 20, 21, 24, 25, 26 and 27, 2019.

 

On February 26, 2019, our board of directors declared a dividend of $0.54 per share, which was paid on March 28, 2019, to common stockholders of record as of March 14, 2019. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $3.5 million in cash and 31,240 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $21.36 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on March 15, 18, 19, 20, 21, 22, 25, 26, 27 and 28, 2019.

 

On November 27, 2018, the Company declared a dividend of $0.53 per share, which was paid on January 2, 2019, to common stockholders of record on December 17, 2018. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the Company’s DRIP. Based on shareholder elections, the dividend consisted of approximately $3.4 million in cash and 30,796 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $18.88 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on December 18, 19, 20, 21, 24, 26, 27, 28, 31, 2018 and January 2, 2019.

 

On August 28, 2018, our board of directors declared a dividend of $0.52 per share, which was paid on September 27, 2018, to common stockholders of record as of September 17, 2018. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $3.3 million in cash and 25,862 newly issued shares of common stock, or 0.3% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $22.35 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on September 14, 17, 18, 19, 20, 21, 24, 25, 26 and 27, 2018.

 

On May 30, 2018, our board of directors declared a dividend of $0.51 per share, which was paid on June 27, 2018, to common stockholders of record as of June 15, 2018. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $2.7 million in cash and 21,562 newly issued shares of common stock, or 0.3% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $23.72 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on June 14, 15, 18, 19, 20, 21, 22, 25, 26 and 27, 2018.

 

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On February 26, 2018, our board of directors declared a dividend of $0.50 per share, which was paid on March 26, 2018, to common stockholders of record as of March 14, 2018. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $2.6 million in cash and 25,354 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $19.91 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on March 13, 14, 15, 16, 19, 20, 21, 22, 23 and 26, 2018.

 

On November 29, 2017, our board of directors declared a dividend of $0.49 per share, which was paid on December 27, 2017, to common stockholders of record on December 15, 2017. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $2.5 million in cash and 25,435 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $21.14 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on December 13, 14, 15, 18, 19, 20, 21, 22, 26 and 27, 2017.

 

On August 28, 2017, our board of directors declared a dividend of $0.48 per share, which was paid on September 26, 2017, to common stockholders of record on September 15, 2017. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $2.2 million in cash and 33,551 newly issued shares of common stock, or 0.6% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $20.19 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on September 13, 14, 15, 18, 19, 20, 21, 22, 25 and 26, 2017.

 

On May 30, 2017, our board of directors declared a dividend of $0.47 per share, which was paid on June 27, 2017, to common stockholders of record on June 15, 2017. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $2.3 million in cash and 26,222 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $20.04 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on June 14, 15, 16, 19, 20, 21, 22, 23, 26 and 27, 2017.

 

On February 28, 2017, our board of directors declared a dividend of $0.46 per share, which was paid on March 28, 2017, to common stockholders of record as of March 15, 2017. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $2.0 million in cash and 29,096 newly issued shares of common stock, or 0.5% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $21.38 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on March 15, 16, 17, 20, 21, 22, 23, 24, 27 and 28, 2017.

 

On January 12, 2017, our board of directors declared a dividend of $0.45 per share, which was paid on February 9, 2017, to common stockholders of record as of January 31, 2017. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $1.6 million in cash and 50,453 newly issued shares of common stock, or 0.9% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $20.25 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on January 27, 30, 31 and February 1, 2, 3, 6, 7, 8 and 9, 2017.

 

On October 5, 2016, our board of directors declared a dividend of $0.44 per share, which was paid on November 9, 2016, to common stockholders of record as of October 31, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $1.5 million in cash and 58,548 newly issued shares of common stock, or 1.0% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $17.12 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on October 27, 28, 31 and November 1, 2, 3, 4, 7, 8 and 9, 2016.

 

On August 8, 2016, our board of directors declared a special dividend of $0.20 per share, which was paid on September 5, 2016, to common stockholders of record as of August 24, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $0.7 million in cash and 24,786 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $17.06 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on August 22, 23, 24, 25, 26, 29, 30, 31 and September 1 and 2, 2016.

 

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On July 7, 2016, our board of directors declared a dividend of $0.43 per share, which was paid on August 9, 2016, to common stockholders of record as of July 29, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $1.5 million in cash and 58,167 newly issued shares of common stock, or 1.0% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $16.32 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on July 27, 28, 29 and August 1, 2, 3, 4, 5, 8 and 9, 2016.

 

On March 31, 2016, our board of directors declared a dividend of $0.41 per share, which was paid on April 27, 2016, to common stockholders of record on April 15, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $1.5 million in cash and 56,728 newly issued shares of common stock, or 1.0% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $15.43 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on April 14, 15, 18, 19, 20, 21, 22, 25, 26 and 27, 2016.

 

On January 12, 2016, our board of directors declared a dividend of $0.40 per share, which was paid on February 29, 2016, to all stockholders of record on February 1, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $1.4 million in cash and 66,765 newly issued shares of common stock, or 1.2% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $13.11 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on February 16, 17, 18, 19, 22, 23, 24, 25, 26 and 29, 2016.

 

On October 7, 2015, our board of directors declared a dividend of $0.36 per share, which was paid on November 30, 2015, to common stockholders of record on November 2, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $1.1 million in cash and 61,029 newly issued shares of common stock, or 1.1% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $14.53 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on November 16, 17, 18, 19, 20, 23, 24, 25, 27 and 30, 2015.

 

On July 8, 2015, our board of directors declared a dividend of $0.33 per share, which was paid on August 31, 2015, to common stockholders of record on August 3, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $1.1 million in cash and 47,861 newly issued shares of common stock, or 0.9% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $15.28 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on August 18, 19, 20, 21, 24, 25, 26, 27, 28 and 31, 2015.

 

On May 14, 2015, our board of directors declared a special dividend of $1.00 per share, which was paid on June 5, 2015, to common stockholders of record on May 26, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $3.4 million in cash and 126,230 newly issued shares of common stock, or 2.3% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $16.47 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on May 22, 26, 27, 28, 29 and June 1, 2, 3, 4 and 5, 2015.

 

On April 9, 2015, our board of directors declared a dividend of $0.27 per share, which was paid on May 29, 2015, to common stockholders of record on May 4, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $0.9 million in cash and 33,766 newly issued shares of common stock, or 0.6% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $16.78 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on May 15, 18, 19, 20, 21, 22, 26, 27, 28 and 29, 2015.

 

On September 24, 2014, our board of directors declared a dividend of $0.22 per share, which was paid on February 27, 2015, to common stockholders of record on February 2, 2015. Shareholders have the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $0.8 million in cash and 26,858 newly issued shares of common stock, or 0.5% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $14.97 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on February 13, 17, 18, 19, 20, 23, 24, 25, 26 and 27, 2015.

 

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Also, on September 24, 2014, our board of directors declared a dividend of $0.18 per share, which was paid on November 28, 2014, to common stockholders of record on November 3, 2014. Shareholders had the option to receive payment of the dividend in cash or receive shares of common stock pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $0.6 million in cash and 22,283 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $14.37 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on November 14, 17, 18, 19, 20, 21, 24, 25, 26 and 28, 2014.

 

On October 30, 2013, our board of directors declared a dividend of $2.65 per share, which was paid on December 27, 2013, to common stockholders of record on November 13, 2013. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $2.5 million or $0.53 per share. Based on shareholder elections, the dividend consisted of approximately $2.5 million in cash and 649,500 shares of common stock, or 13.7% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 20.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $15.439 per share, which equaled the volume weighted average trading price per share of the common stock on December 11, 13, and 16, 2013.

 

On November 9, 2012, our board of directors declared a dividend of $4.25 per share, which was paid on December 31, 2012, to common stockholders of record on November 20, 2012. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $3.3 million or $0.85 per share. Based on shareholder elections, the dividend consisted of $3.3 million in cash and 853,455 shares of common stock, or 22.0% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 20.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $15.444 per share, which equaled the volume weighted average trading price per share of the common stock on December 14, 17 and 19, 2012.

 

On November 15, 2011, our board of directors declared a dividend of $3.00 per share, which was paid on December 30, 2011, to common stockholders of record on November 25, 2011. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to $2.0 million or $0.60 per share. Based on shareholder elections, the dividend consisted of $2.0 million in cash and 599,584 shares of common stock, or 18.0% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 20.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $13.12 per share, which equaled the volume weighted average trading price per share of the common stock on December 20, 21 and 22, 2011.

 

On November 12, 2010, we declared a dividend of $4.40 per share, which was paid on December 29, 2010. Stockholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to $1.2 million or $0.44 per share. Based on shareholder elections, the dividend consisted of $1.2 million in cash and 596,235 shares of common stock, or 22.0% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 10.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $17.8049 per share, which equaled the volume weighted average trading price per share of the common stock on December 20, 21 and 22, 2010.

 

On November 13, 2009, we declared a dividend of $18.25 per share, which was paid on December 31, 2009. Stockholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all stockholders was limited to $2.1 million or $0.25 per share. Based on shareholder elections, the dividend consisted of $2.1 million in cash and 864,872.5 shares of common stock, or 104.0% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 13.7% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to stockholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $1.5099 per share, which equaled the volume weighted average trading price per share of the common stock on December 24 and 28, 2009.

 

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Performance Graph

 

The following graph compares the return on our common stock with that of the Standard & Poor’s 500 Stock Index, the NASDAQ Financial 100 index and the Standard & Poor’s BDC Index, for the period from March 23, 2007, the date our common stock began trading, through February 28, 2021. The graph assumes that, on March 23, 2007, a person invested $100 in each of our common stock, the Standard & Poor’s 500 Stock Index, the NASDAQ Financial 100 index and the Standard & Poor’s BDC Index. The graph measures total shareholder return, which takes into account both changes in stock price and dividends. It assumes that dividends paid are reinvested in like securities.

 

 

Outstanding Securities and Debt

 

The following table shows our outstanding classes of securities and debt as of February 28, 2021.

 

           (d) 
(a)
Title of Class
  (b)
Amount Authorized
   (c)
Amount Held by us or for Our Account
   Amount Outstanding Exclusive of Amounts Shown Under (c) 
Securities:               
Common Stock   100,000,000    11,217,545    88,782,455 
Debt:               
Credit Facility  $45,000,000   $-   $45,000,000 
SBA Debentures  $325,000,000(1)  $158,000,000   $141,000,000 
6.25% 2025 Notes  $60,000,000   $60,000,000   $- 
7.25% 2025 Notes  $43,125,000   $43,125,000   $- 
7.75% 2025 Notes  $5,000,000   $5,000,000   $- 
6.25% 2027 Notes  $15,000,000   $15,000,000   $- 

 

 

(1)For more information regarding our limitations as to SBA debenture issuances, see “Item 1. Business - Small Business Investment Company Regulations.”

 

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FEES AND EXPENSES

 

The following table is intended to assist you in understanding the costs and expenses that an investor in this offering will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Moreover, the information set forth below does not include any transaction costs and expenses that investors will incur in connection with each offering of our securities pursuant to this prospectus. As a result, investors are urged to read the “Fees and Expenses” table contained in any corresponding prospectus supplement to fully understanding the actual transaction costs and expenses they will incur in connection with each such offering. Except where the context suggests otherwise, whenever this prospectus contains a reference to fees or expenses paid by “you,” “us” or “Saratoga Investment Corp.,” or that “we” will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in Saratoga Investment Corp.

 

Stockholder transaction expenses (as a percentage of offering price):    
Sales load paid  -%(1)
Offering expenses borne by us   -%(2)
Dividend reinvestment plan expenses   None    (3)
Total stockholder transaction expenses paid   -%
Annual estimated expenses (as a percentage of average net assets attributable to common stock):     
Management fees   3.0%(4)
Incentive fees payable under the Management Agreement   1.8%(5)
Interest payments on borrowed funds   4.5%(6)
Other expenses   2.3%(7)
Total annual expenses   11.6%(8)

 

 

(1)In the event that the shares of common stock to which this prospectus relates are sold to or through underwriters, a corresponding prospectus supplement will disclose the applicable sales load.
(2)The prospectus supplement corresponding to each offering will disclose the applicable offering expenses and total stockholder transaction expenses.
(3)The expenses associated with the administration of our dividend reinvestment plan are included in “Other expenses.” The participants in the dividend reinvestment plan will pay a pro rata share of brokerage commissions incurred with respect to open market purchases, if any, made by the administrator under the plan. For more details about the plan, see “Dividend Reinvestment Plan.”
(4)Our base management fee under the Management Agreement with Saratoga Investment Advisors is based on our gross assets, which is defined as our total assets, including those acquired using borrowings for investment purposes, but excluding cash and cash equivalents. See “Investment Advisory and Management Agreement.” The fact that our base management fee is payable based upon our gross assets, rather than our net assets (i.e., total assets after deduction of any liabilities, including borrowings) means that our base management fee as a percentage of net assets attributable to common stock will increase when we utilize leverage.
(5)The incentive fee consists of two parts. The first part is calculated and payable quarterly in arrears and equals 20% of our “pre-incentive fee net investment income” for the immediately preceding quarter, subject to a preferred return, or “hurdle,” and a “catch up” feature. For this purpose, “pre-incentive fee net investment income” means interest income, dividend income and any other income (including any other fees, such as commitment, origination, structuring, diligence, managerial and consulting fees or other fees that we receive from portfolio companies) accrued by us during the fiscal quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the administration agreement described below, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee).
The second part of the incentive fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Management Agreement) and equals 20% of our “incentive fee capital gains,” which equals our realized capital gains on a cumulative basis from May 31, 2010 through the end of the year, if any, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fee. Under the Management Agreement, the capital gains portion of the incentive fee is based on realized gains and realized and unrealized losses from May 31, 2010. Therefore, realized and unrealized losses incurred prior to such time will not be taken into account when calculating the capital gains portion of the incentive fee, and Saratoga Investment Advisors will be entitled to 20% of incentive fee capital gains that arise after May 31, 2010. In addition, the cost basis for computing realized gains and losses on investments held by us as of May 31, 2010 will equal the fair value of such investments as of such date. We estimate this as zero for purposes of this table as these fees are hard to predict, as they are based on capital gains and losses. See “Investment Advisory and Management Agreement.”

 

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(6)We may borrow funds from time to time to make investments to the extent we determine that the economic situation is conducive to doing so. The 4.5% figure in the table includes all expected borrowing costs that we expect to incur over the next twelve months in connection with the secured revolving credit facility we have with Madison Capital Funding LLC. The costs associated with our outstanding borrowings are indirectly borne by our stockholders. We do not expect to issue any preferred stock during the next twelve months and, therefore, have not included the cost of issuing and servicing preferred stock in the table. In addition, all of the commitment fees, interest expense, amortized financing costs of our Credit Facility, SBA debentures, the 6.25% 2025 Notes, the 6.25% 2027 Notes, the 7.25% 2025 Notes and the 7.75% 2025 Notes, and the fees and expenses of issuing and servicing any other borrowings or leverage that we expect to incur during the next twelve months are included in the table and expense example presentation below. On April 16, 2018, as permitted by the Small Business Credit Availability Act, which was signed into law on March 23, 2018, our non-interested board of directors approved of the Company becoming subject to a minimum asset coverage ratio of 150% under Sections 18(a)(1) and 18(a)(2) of the 1940 Act. The 150% asset coverage ratio became effective on April 16, 2019. See “Regulation” and “Risk Factors—Risks Related to Our Business and Structure—Recent legislation may allow us to incur additional leverage.”
(7)“Other expenses” are based on estimated amounts for the current fiscal year and include our overhead expenses, including payments under our administration agreement based on our allocable portion of overhead and other expenses incurred by Saratoga Investment Advisors in performing its obligations under the administration agreement. See “Administration Agreement.”
(8)This figure includes all of the fees and expenses of our wholly-owned subsidiaries, Saratoga Investment Corp SBIC, LP and Saratoga Investment Funding LLC. Furthermore, this table reflects all of the fees and expenses borne by us with respect to our investment in Saratoga CLO.

 

Example

 

The following example demonstrates the projected dollar amount of total cumulative expenses over various periods with respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed that we would have no additional leverage and our annual operating expenses would remain at the levels set forth in the table above. In the event that shares to which this prospectus relates are sold to or through underwriters, a corresponding prospectus supplement will restate this example to reflect the applicable sales load and offering expenses.

 

    1 Year   3 Years   5 years   10 years  
You would pay the following expenses on a $1,000 investment, assuming a 5% annual return on portfolio $128   $404   $708   $ 1,613  

 

This example and the expenses in the table above should not be considered a representation of our future expenses, and actual expenses (including the cost of debt, if any, and other expenses) may be greater or less than those shown.

 

The foregoing table is to assist you in understanding the various costs and expenses that an investor in our common stock will bear directly or indirectly. While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. The example assumes that the 5% annual return is generated entirely through the realization of capital gains on our assets and, as a result, triggers the payment of an incentive fee on such capital gains under the Management Agreement. The “pre-incentive fee net investment income” under the Management Agreement, which, assuming a 5% annual return, would either not be payable or have an insignificant impact on the expense amounts shown above, is not included in the example. If we achieve sufficient returns on our investments, including through the realization of capital gains, to trigger an incentive fee of a material amount, our expenses, and returns to our investors, would be higher.

 

While the example assumes reinvestment of all dividends and distributions at net asset value, participants in our dividend reinvestment plan will receive a number of shares of our common stock, determined by dividing the total dollar amount of the dividend payable to a participant by either (i) the greater of (x) the net asset value of our common stock or (y) 95% of the market price per share of our common stock at the close of trading on the payment date fixed by our board of directors in the event that we use newly issued shares to satisfy the share requirements of the dividend reinvestment plan or (ii) the average purchase price, including any brokerage charges or other charges, of all shares of common stock purchased by the administrator of the dividend reinvestment plan in the event that shares are purchased in the open market to satisfy the share requirements of the dividend reinvestment plan, which may be at, above or below net asset value. See “Dividend Reinvestment Plan” for additional information regarding our dividend reinvestment plan, which may be at, above or below net asset value.

 

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Sales of unregistered securities

 

On July 9, 2020, the Company issued $5.0 million aggregate principal amount of our 7.75% fixed-rate Notes due in 2025 (the “7.75% 2025 Notes”) for net proceeds of $4.8 million after deducting underwriting commissions of approximately $0.2 million. Offering costs incurred were approximately $0.1 million. Interest on the 7.75% Notes 2025 is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 7.75% per year, beginning August 31, 2020. The 7.75% Notes 2025 mature on July 9, 2025 and may be redeemed in whole or in part at any time or from time to time at our option. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $0.3 million related to the 7.75% Notes 2025 have been capitalized and are being amortized over the term of the Notes. As of February 28, 2021, the total 7.25% 2025 Notes outstanding was $5.0 million. The 7.75% 2025 Notes are unlisted and have a par value of $25.00 per share.

 

On December 29, 2020, the Company issued $5.0 million aggregate principal amount of our 6.25% fixed-rate Notes due in 2027 (the “6.25% Notes 2027”). Offering costs incurred were approximately $0.1 million. Interest on the 6.25% Notes 2027 is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 6.25% per year, beginning February 28, 2021. The 6.25% Notes 2027 mature on December 29, 2027 and may be redeemed in whole or in part at any time or from time to time at our option, on or after December 29, 2024. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $0.1 million related to the 6.25% Notes 2027 have been capitalized and are being amortized over the term of the Notes. The 6.25% 2027 Notes are unlisted and have a par value of $25.00 per share.

 

On January 28, 2021, the Company issued $10.0 million aggregate principal amount of our 6.25% fixed rate Notes due in 2027 (the “Second 6.25% Notes 2027”) for net proceeds of $9.7 million after deducting underwriting commissions of approximately $0.3 million. Offering costs incurred were approximately $0.0 million. Interest on the Second 6.25% Notes 2027 is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 6.25% per year, beginning February 28, 2021. The Second 6.25% Notes 2027 mature on January 28, 2027 and commencing January 28, 2023, may be redeemed in whole or in part at any time or from time to time at our option. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $0.3 million related to the Second 6.25% Notes 2027 have been capitalized and are being amortized over the term of the Notes. The Second 6.25% 2027 Notes are unlisted and have a par value of $25.00 per share.

 

Issuer purchases of equity securities

 

During the year ended February 28, 2021, we purchased 190,321 of our common stock in the open market. We did not make any purchases of our common stock in the open market during the years ended February 29, 2020, February 28, 2019.

 

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

 

The following selected financial and other data as of and for the years ended February 28, 2021, February 29, 2020, February 28, 2019, February 28, 2018 and February 28, 2017 are derived from our consolidated financial statements which have been audited by Ernst & Young LLP, an independent registered public accounting firm, whose report thereon is included within this Annual Report. The data should be read in conjunction with our consolidated financial statements and notes thereto, which are included elsewhere in this Annual Report, and Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

 

SARATOGA INVESTMENT CORP.

SELECTED CONSOLIDATED FINANCIAL DATA

(dollar amounts in thousands, except share and per share numbers)

 

   As of and for the   As of and for the   As of and for the   As of and for the   As of and for the 
   Year Ended   Year Ended   Year Ended   Year Ended   Year Ended 
   February 28,
2021
   February 29,
2020
   February 28,
2019
   February 28,
2018
   February 28,
2017
 
Consolidated Statements of Operations Data:                         
Investment income:                         
Interest from investments  $51,714   $48,047   $43,297   $35,110   $29,348 
Management fee, incentive fee and other income   5,936    10,401    4,411    3,505    3,809 
Total investment income   57,650    58,448    47,708    38,615    33,157 
Operating expenses:                         
Interest and debt financing expenses   13,587    14,683    13,126    10,939    9,888 
Base management and incentive management fees(1)   14,000    22,263    11,770    10,180    7,846 
Administrator expenses   2,545    2,131    1,896    1,646    1,367 
General and administrative and other expenses   3,707    3,548    3,641    3,133    2,896 
Income/excise tax expense (benefit)   6    962    (1,027)   (15)   45 
Excise tax expense (credit)   692    -    -    -    - 
Total operating expenses   34,537    43,587    29,406    25,883    22,042 
Net investment income*   23,113    14,861    18,302    12,732    11,115 
Realized and unrealized gain (loss) on investments:                         
Net realized gain (loss) from investments   (8,703)   42,877    4,874    (5,878)   12,368 
Income tax (provision) benefit from realized gain on investments   (3,895)   -    -    -    - 
Net change in unrealized appreciation (depreciation) on investments   4,966    (771)   (2,900)   10,825    (10,641)
Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments   (575)   355    (1,767)   -    - 
Total net gain on investments   (8,207)   42,461    207    4,947    1,727 
Realized loss on extinguishment of debt*   (128)   (1,583)   -    -    (1,455)
Net increase in net assets resulting from operations  $14,778   $55,739   $18,509   $17,679   $11,387 

 

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   As of and for the
Year Ended
   As of and for the
Year Ended
   As of and for the
Year Ended
   As of and for the
Year Ended
   As of and for the 
   February 28,
2021
   February 29,
2020
   February 28,
2019
   February 28,
2018
   Year Ended
2/29/2017
 
Per Share:                    
Adoption of ASC 606(2)  $-   $-   $(0.01)  $-   $- 
Earnings per common share—basic and diluted(3)   1.32    5.98    2.63    2.93    1.98 
Net investment income per share—basic and diluted(3)*   2.07    1.59    2.60    2.11    1.94 
Net realized and unrealized gain (loss) per share—basic and diluted(3)   (0.74)   4.56    0.03    0.82    0.30 
Realized loss on extinguishment of debt*   (0.01)   (0.17)             (0.26)
Dividends declared per common share(4)   1.23    2.21    2.06    1.90    1.93 
Issuance of common stock above net asset value(5)   -    -    0.15    -    - 
Dilutive impact of dividends paid in stock on net asset value per share and other items(6)   (0.10)   (0.26)   (0.05)   (0.04)   (0.14)
Repurchases of common stock(7)   0.13    -    -    -    - 
Net asset value per share  $27.25   $27.13   $23.62   $22.96   $21.97 
Total return based on market value(8)   7.63%   9.28%   16.11%   5.28%   80.83%
Total return based on net asset value(9)   7.31%   26.22%   13.33%   14.45%   12.62%
                          
Consolidated Statements of Assets and Liabilities Data:                         
Investment assets at fair value  $554,313   $485,632   $402,020   $342,694   $292,661 
Total assets   592,152    530,866    470,672    360,336    318,651 
Total debt outstanding, net of discount and/or deferred financing costs   274,050    204,879    277,151    206,486    181,476 
Total net assets   304,185    304,287    180,875    143,691    127,295 
Net asset value per common share  $27.25   $27.13   $23.62   $22.96   $21.97 
Common shares outstanding at end of year   11,161,416    11,217,545    7,657,156    6,257,029    5,794,600 
                          
Other Data:                         
Investments funded  $202,261   $204,643   $187,708   $107,697   $126,935 
Principal collections related to investment repayments or sales  $130,259   $167,253   $135,728   $66,312   $121,159 
Number of investments at year end   81    74    58    56    53 
Weighted average yield of income producing debt investments—Non-control/Non-affiliate(10)   9.47%   9.72%   10.93%   11.11%   10.66%
Weighted average yield on income producing debt investments—Affiliate(10)   11.43%   11.55%   13.56%   13.06%   0.12 
Weighted average yield on income producing debt investments—Control(10)   11.63%   11.23%   13.67%   16.97%   11.64%

 

 

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

 

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(1) See Note 6 to the consolidated financial statements contained elsewhere herein.
   
(2) See Note 2 to the consolidated financial statements contained elsewhere herein.
   
(3) For the years ended February 28, 2021, February 29, 2020, February 28, 2019, February 28, 2018 and February 28, 2017, amounts are calculated using weighted average common shares outstanding of 11,188,629, 9,319,192, 7,046,686, 6,024,040 and 5,582,453 respectively.
   
(4) Calculated using the shares outstanding at the ex-dividend date.

 

(5) The continuous issuance of common stock may cause an incremental increase in net asset value per share due to the sale of shares at the then prevailing public offering price and the receipt of net proceeds per share by the Company in excess of net asset value per share on each subscription closing date. The per share data was derived by computing (i) the sum of (A) the number of shares issued in connection with subscriptions and/or distribution reinvestment on each share transaction date multiplied by (B) the differences between the net proceeds per share and the net asset value per share on each share transaction date, divided by (ii) the total shares outstanding during the period.
   
(6) Represents the dilutive effect of issuing common stock below net asset value per share during the period in connection with the satisfaction of the Company’s annual RIC distribution requirement and may include the impact of the different share amounts used for different items (weighted average basic common shares outstanding for the corresponding year and actual common shares outstanding at the end of the year) in the per common share data calculation and rounding impacts. See “Price Range of Common Stock—Dividend Policy.”
   
(7) Represents the anti-dilutive impact on the net asset value per share (“NAV”) of the Company due to the repurchase of common shares. See Note 10, Stockholders’ Equity.
   
(8) Total investment return is calculated assuming a purchase of common shares at the current market value on the first day and a sale at the current market value on the last day of the periods reported. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Company’s DRIP. Total investment return does not reflect brokerage commissions.
   
(9) Total investment return is calculated assuming a purchase of common shares at the current net asset value on the first day and a sale at the current net asset value on the last day of the periods reported. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Company’s DRIP. Total investment return does not reflect brokerage commissions.
   
(10) The weighted average yield on income producing investments is higher than what investors in the Company will realize because it does not reflect the Company’s expenses and any sales load paid by investors.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K. In addition to historical information, the following discussion and other parts of this Annual Report contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under Part I. Item 1A. “Risk Factors” and “Note about Forward-Looking Statements” appearing elsewhere herein.

 

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or are within our control. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements.

 

The forward-looking statements contained in this Annual Report on Form 10-K involve risks and uncertainties, including statements as to:

 

our future operating results and the impact of COVID-19 pandemic thereon;

 

the introduction, withdrawal, success and timing of business initiatives and strategies;

 

changes in political, economic or industry conditions, the interest rate environment or financial and capital markets, which could result in changes in the value of our assets;

 

pandemics or other serious public health events, such as the recent global outbreak of COVID-19;

 

the relative and absolute investment performance and operations of our Manager;

 

the impact of increased competition;

 

our ability to turn potential investment opportunities into transactions and thereafter into completed and successful investments;

 

the unfavorable resolution of any future legal proceedings;

 

our business prospects and the prospects of our portfolio companies, including our and their ability to achieve our respective objectives vis a vie the current COVID-19 pandemic;

 

the impact of investments that we expect to make and future acquisitions and divestitures;

 

our contractual arrangements and relationships with third parties;

 

the dependence of our future success on the general economy and its impact on the industries in which we invest and the impact of the COVID-19 pandemic thereon;

 

the ability of our portfolio companies to achieve their objectives;

 

our expected financings and investments;

 

our regulatory structure and tax status, including our ability to operate as a business development company (“BDC”), or to operate our small business investment company (“SBIC”) subsidiaries, and to continue to qualify to be taxed as a regulated investment company (“RIC”);

 

the adequacy of our cash resources and working capital;

 

the timing of cash flows, if any, from the operations of our portfolio companies and the impact of the COVID-19 pandemic thereon;

 

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the impact of interest rate volatility on our results, particularly because we use leverage as part of our investment strategy;

 

the impact of legislative and regulatory actions and reforms and regulatory, supervisory or enforcement actions of government agencies relating to us or our Manager;

 

the impact of changes to tax legislation and, generally, our tax position;

 

our ability to access capital and any future financings by us;

 

the ability of our Manager to attract and retain highly talented professionals; and

 

the ability of our Manager to locate suitable investments for us and to monitor and effectively administer our investments and the impacts of the COVID-19 pandemic thereon.

 

Such forward-looking statements may include statements preceded by, followed by or that otherwise include terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “will” and “would” or the negative of these terms or other comparable terminology.

 

We have based the forward-looking statements included in this annual report on Form 10-K on information available to us on the date of this annual report on Form 10-K, and we assume no obligation to update any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law or SEC rule or regulation. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the U.S. Securities and Exchange Commission (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

 

The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto contained elsewhere in this annual report on Form 10-K.

 

OVERVIEW

 

We are a Maryland corporation that has elected to be treated as a BDC under the Investment Company Act of 1940, as amended (the “1940 Act”). Our investment objective is to create attractive risk-adjusted returns by generating current income and long-term capital appreciation from our investments. We invest primarily in senior and unitranche leveraged loans and mezzanine debt issued by private U.S. middle market companies, which we define as companies having earnings before interest, tax, depreciation and amortization (“EBITDA”) of between $2 million and $50 million, both through direct lending and through participation in loan syndicates. We may also invest up to 30.0% of the portfolio in opportunistic investments in order to seek to enhance returns to stockholders. Such investments may include investments in distressed debt, which may include securities of companies in bankruptcy, foreign debt, private equity, securities of public companies that are not thinly traded and structured finance vehicles such as collateralized loan obligation funds. Although we have no current intention to do so, to the extent we invest in private equity funds, we will limit our investments in entities that are excluded from the definition of “investment company” under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, which includes private equity funds, to no more than 15.0% of its net assets. We have elected and qualified to be treated as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).

 

Corporate History

 

We commenced operations, at the time known as GSC Investment Corp., on March 23, 2007 and completed an initial public offering of shares of common stock on March 28, 2007. Prior to July 30, 2010, we were externally managed and advised by GSCP (NJ), L.P., an entity affiliated with GSC Group, Inc. In connection with the consummation of a recapitalization transaction on July 30, 2010, as described below we engaged Saratoga Investment Advisors to replace GSCP (NJ), L.P. as our investment adviser and changed our name to Saratoga Investment Corp.

 

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As a result of the event of default under a revolving securitized credit facility with Deutsche Bank we previously had in place, in December 2008 we engaged the investment banking firm of Stifel, Nicolaus & Company to evaluate strategic transaction opportunities and consider alternatives for us. On April 14, 2010, GSC Investment Corp. entered into a stock purchase agreement with Saratoga Investment Advisors and certain of its affiliates and an assignment, assumption and novation agreement with Saratoga Investment Advisors, pursuant to which GSC Investment Corp. assumed certain rights and obligations of Saratoga Investment Advisors under a debt commitment letter Saratoga Investment Advisors received from Madison Capital Funding LLC, which indicated Madison Capital Funding’s willingness to provide GSC Investment Corp. with a $40.0 million senior secured revolving credit facility, subject to the satisfaction of certain terms and conditions. In addition, GSC Investment Corp. and GSCP (NJ), L.P. entered into a termination and release agreement, to be effective as of the closing of the transaction contemplated by the stock purchase agreement, pursuant to which GSCP (NJ), L.P., among other things, agreed to waive any and all accrued and unpaid deferred incentive management fees up to and as of the closing of the transaction contemplated by the stock purchase agreement but continued to be entitled to receive the base management fees earned through the date of the closing of the transaction contemplated by the stock purchase agreement.

 

On July 30, 2010, the transactions contemplated by the stock purchase agreement with Saratoga Investment Advisors and certain of its affiliates were completed, the private sale of 986,842 shares of our common stock for $15.0 million in aggregate purchase price to Saratoga Investment Advisors and certain of its affiliates closed, the Company entered into the Credit Facility, and the Company began doing business as Saratoga Investment Corp.

 

We used the net proceeds from the private sale transaction and a portion of the funds available to us under the Credit Facility to pay the full amount of principal and accrued interest, including default interest, outstanding under our revolving securitized credit facility with Deutsche Bank. The revolving securitized credit facility with Deutsche Bank was terminated in connection with our payment of all amounts outstanding thereunder on July 30, 2010.

 

On August 12, 2010, we effected a one-for-ten reverse stock split of our outstanding common stock. As a result of the reverse stock split, every ten shares of our common stock were converted into one share of our common stock. Any fractional shares received as a result of the reverse stock split were redeemed for cash. The total cash payment in lieu of shares was $230. Immediately after the reverse stock split, we had 2,680,842 shares of our common stock outstanding.

 

In January 2011, we registered for public resale of the 986,842 shares of our common stock issued to Saratoga Investment Advisors and certain of its affiliates.

 

On March 28, 2012, our wholly-owned subsidiary, Saratoga Investment Corp. SBIC, LP (“SBIC LP”), received an 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.

 

In May 2013, we issued $48.3 million in aggregate principal amount of our 7.50% fixed-rate unsecured notes due 2020 (the “2020 Notes”) for net proceeds of $46.1 million after deducting underwriting commissions of $1.9 million and offering costs of $0.3 million. The proceeds included the underwriters’ full exercise of their overallotment option. The 2020 Notes were listed on the NYSE under the trading symbol “SAQ” with a par value of $25.00 per share. The 2020 Notes were redeemed in full on January 13, 2017 and are no longer listed on the NYSE.

 

On May 29, 2015, we entered into a Debt Distribution Agreement with Ladenburg Thalmann & Co. through which we may offer for sale, from time to time, up to $20.0 million in aggregate principal amount of the 2020 Notes through an At-the-Market (“ATM”) offering. Prior to the 2020 Notes being redeemed in full, the Company sold 539,725 bonds with a principal of $13.5 million at an average price of $25.31 for aggregate net proceeds of $13.4 million (net of transaction costs).

 

On December 21, 2016, we issued $74.5 million in aggregate principal amount of our 6.75% fixed-rate unsecured notes due 2023 (the “2023 Notes”) for net proceeds of $71.7 million after deducting underwriting commissions of approximately $2.3 million and offering costs of approximately $0.5 million. The issuance included the exercise of substantially all of the underwriters’ option to purchase an additional $9.8 million aggregate principal amount of 2023 Notes within 30 days. The 2023 Notes were listed on the NYSE under the trading symbol “SAB” with a par value of $25.00 per share. On December 21, 2019 and February 7, 2020, the Company redeemed $50.0 million and $24.45 million, respectively, in aggregate principal amount of the $74.45 million in aggregate principal amount of issued and outstanding 2023 Notes.

 

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On March 16, 2017, we entered into an equity distribution agreement with Ladenburg Thalmann & Co. Inc., through which we may offer for sale, from time to time, up to $30.0 million of our common stock through an ATM offering. Subsequent to this, BB&T Capital Markets and B. Riley FBR, Inc. were also added to the agreement. On July 9, 2019, the amount of the common stock to be offered through this offering was increased to $70.0 million, and on October 8, 2019, the amount of the common stock to be offered was increased to $130.0 million. As of February 28, 2021, the Company sold 3,922,018 shares for gross proceeds of $97.1 million at an average price of $24.77 for aggregate net proceeds of $95.9 million (net of transaction costs). For the year ended February 28, 2021, there was no activity related to the ATM offerings.

 

On July 13, 2018, the Company issued 1,150,000 shares of its common stock priced at $25.00 per share (par value $0.001 per share) at an aggregate total of $28.75 million. The net proceeds, after deducting underwriting commissions of $1.15 million and offering costs of approximately $0.2 million, amounted to approximately $27.4 million. The Company also granted the underwriters a 30-day option to purchase up to an additional 172,500 shares of its common stock, which was not exercised.

 

On August 7, 2018, we entered into an unsecured loan agreement (“CLO 2013-1 Warehouse Loan”) with Saratoga Investment Corp. CLO 2013-1 Warehouse, Ltd (“CLO 2013-1 Warehouse”), a wholly-owned subsidiary of Saratoga Investment Corp. CLO 2013-1, Ltd. (“Saratoga CLO”), pursuant to which CLO 2013-1 Warehouse may borrow from time to time up to $20 million from us in order to provide capital necessary to support warehouse activities. The CLO 2013-1 Warehouse Loan, which expired on February 7, 2020, bears interest at an annual rate of 3M USD LIBOR + 7.5%. During the year ended February 28, 2019, the maximum amount invested by us in the CLO 2013-1 Warehouse Loan amounted to $20.0 million.

 

On August 28, 2018, the Company issued $40.0 million in aggregate principal amount of our 6.25% fixed-rate notes due 2025 (the “6.25% 2025 Notes”) for net proceeds of $38.7 million after deducting underwriting commissions of approximately $1.3 million. Offering costs incurred were approximately $0.3 million. The issuance included the full exercise of the underwriters’ option to purchase an additional $5.0 million aggregate principal amount of 6.25% 2025 Notes within 30 days. Interest on the 6.25% 2025 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 6.25% per year, beginning November 30, 2018. The 6.25% 2025 Notes mature on August 31, 2025 and commencing August 31, 2021, may be redeemed in whole or in part at any time or from time to time at our option. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $1.6 million related to the 6.25% 2025 Notes have been capitalized and are being amortized over the term of the 6.25% 2025 Notes.

 

On December 14, 2018, the Company completed the third refinancing of the Saratoga CLO (the “2013-1 Reset CLO Notes”). This refinancing, among other things, extended the Saratoga CLO reinvestment period to January 2021, and extended its legal maturity to January 2030. A non-call period of January 2020 was also added. In addition to and as part of the refinancing, the Saratoga CLO has also been upsized from $300 million in assets to approximately $500 million. As part of this refinancing and upsizing, the Company invested an additional $13.8 million in all of the newly issued subordinated notes of the Saratoga CLO, and purchased $2.5 million in aggregate principal amount of the Class F-R-2 Notes tranche and $7.5 million in aggregate principal amount of the Class G-R-2 Notes tranche at par. Concurrently, the existing $4.5 million of Class F notes and $20.0 million CLO 2013-1 Warehouse Loan were repaid.

 

On February 5, 2019, the Company completed a re-opening and up-sizing of its existing 6.25% 2025 Notes by issuing an additional $20.0 million in aggregate principal amount for net proceeds of $19.2 million after deducting underwriting commissions of approximately $0.6 million and discount of $0.2 million. Offering costs incurred were approximately $0.2 million. The issuance included the full exercise of the underwriters’ option to purchase an additional $2.5 million aggregate principal amount of 6.25% 2025 Notes within 30 days. Interest rate, interest payment dates and maturity remain unchanged from the existing 6.25% 2025 Notes issued in August 2018. The net proceeds from this offering were used for general corporate purposes in accordance with our investment objective and strategies. The financing costs and discount of $1.0 million related to the 6.25% 2025 Notes have been capitalized and are being amortized over the term of the 6.25% 2025 Notes. At February 28, 2021, the total 6.25% 2025 Notes outstanding was $60.0 million. The 6.25% 2025 Notes are listed on the NYSE under the trading symbol “SAF” with a par value of $25.00 per share.

 

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

 

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On June 24, 2020, the Company issued $37.5 million in aggregate principal amount of our 7.25% fixed-rate notes due 2025 (the “7.25% 2025 Notes”) for net proceeds of $36.3 million after deducting underwriting commissions of approximately $1.2 million. Offering costs incurred were approximately $0.3 million. On July 6, 2020, the underwriters exercised their option in full to purchase an additional $5.625 million in aggregate principal amount of its 7.25% unsecured notes due 2025. Net proceeds to the Company were $5.4 million after deducting underwriting commissions of approximately $0.2 million. Interest on the 7.25% 2025 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 7.25% per year, beginning August 31, 2020. The 7.25% 2025 Notes mature on June 30, 2025 and commencing June 24, 2022, may be redeemed in whole or in part at any time or from time to time at our option. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $1.6 million related to the 7.25% 2025 Notes have been capitalized and are being amortized over the term of the 7.25% 2025 Notes. The Company has received an investment grade private rating of “BBB” from Egan-Jones Ratings Company, an independent, unaffiliated rating agency. As of February 28, 2021, the total 7.25% 2025 Notes outstanding was $43.1 million. The 7.25% 2025 Notes are listed on the NYSE under the trading symbol “SAK” with a par value of $25.00 per share.

 

On July 9, 2020, the Company issued $5.0 million aggregate principal amount of our 7.75% fixed-rate Notes due in 2025 (the “7.75% 2025 Notes”) for net proceeds of $4.8 million after deducting underwriting commissions of approximately $0.2 million. Offering costs incurred were approximately $0.1 million. Interest on the 7.75% Notes 2025 is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 7.75% per year, beginning August 31, 2020. The 7.75% Notes 2025 mature on July 9, 2025 and may be redeemed in whole or in part at any time or from time to time at our option. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $0.3 million related to the 7.75% Notes 2025 have been capitalized and are being amortized over the term of the Notes. As of February 28, 2021, the total 7.25% 2025 Notes outstanding was $5.0 million. The 7.75% 2025 Notes are unlisted and have a par value of $25.00 per share.

 

On December 29, 2020, the Company issued $5.0 million aggregate principal amount of our 6.25% fixed-rate Notes due in 2027 (the “6.25% Notes 2027”). Offering costs incurred were approximately $0.1 million. Interest on the 6.25% Notes 2027 is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 6.25% per year, beginning February 28, 2021. The 6.25% Notes 2027 mature on December 29, 2027 and may be redeemed in whole or in part at any time or from time to time at our option, on or after December 29, 2024. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $0.1 million related to the 6.25% Notes 2027 have been capitalized and are being amortized over the term of the Notes. The 6.25% 2027 Notes are unlisted and have a par value of $25.00 per share.

 

On January 28, 2021, the Company issued $10.0 million aggregate principal amount of our 6.25% fixed rate Notes due in 2027 (the “Second 6.25% Notes 2027”) for net proceeds of $9.7 million after deducting underwriting commissions of approximately $0.3 million. Offering costs incurred were approximately $0.0 million. Interest on the Second 6.25% Notes 2027 is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 6.25% per year, beginning February 28, 2021. The Second 6.25% Notes 2027 mature on January 28, 2027 and commencing January 28, 2023, may be redeemed in whole or in part at any time or from time to time at our option. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $0.3 million related to the Second 6.25% Notes 2027 have been capitalized and are being amortized over the term of the Notes. The Second 6.25% 2027 Notes are unlisted and have a par value of $25.00 per share.

 

On February 26, 2021, the Company completed the fourth refinancing of the Saratoga CLO. This refinancing, among other things, extended the Saratoga CLO reinvestment period to April 2024, and extended its legal maturity to April 2033. A non-call period ending February 2022 was also added. In addition, and as part of the refinancing, the Saratoga CLO has also been upsized from $500 million in assets to approximately $650 million. As part of this refinancing and upsizing, the Company invested an additional $14.0 million in all of the newly issued subordinated notes of the Saratoga CLO, and purchased $17.9 million in aggregate principal amount of the Class F-R-3 Notes tranche at par. Concurrently, the existing $2.5 million of Class F-R-2 Notes, $7.5 million of Class G-R-2 Notes and $25.0 million CLO 2013-1 Warehouse 2 Loan were repaid. The Company also paid $2.6 million of transaction costs related to the refinancing and upsizing on behalf of the Saratoga CLO, to be reimbursed from future equity distributions. As of February 28, 2021, there remained an outstanding receivable of $2.6 million for such transaction costs which is presented as due from affiliate on the Company’s consolidated statement of assets and liabilities.

 

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COVID-19

 

On March 11, 2020, the World Health Organization declared the novel coronavirus, or COVID-19, as a pandemic, and on March 13, 2020 the United States declared a national emergency with respect to COVID-19. The outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and many countries, including the United States, have reacted by instituting quarantines, restricting travel and hospitality, and temporarily closing our limiting operations at many corporate offices, retail stores, restaurants, fitness clubs and manufacturing facilities and factories in affected jurisdictions. Such actions are creating disruption in global supply chains and adversely impacting a number of industries. The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19. Nevertheless, COVID-19 presents material uncertainty and risks with respect to the underlying value of the Company’s portfolio companies, the Company’s business, financial condition, results of operations and cash flows, such as the potential negative impact to financing arrangements, company decisions to delay, defer and/or modify the character of dividends in order to preserve liquidity, increased costs of operations, changes in law and/or regulation, and uncertainty regarding government and regulatory policy.

 

We have evaluated subsequent events from February 28, 2021 through May 5, 2021. However, as the discussion in this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations relates to the Company’s financial statements for the fiscal year end February 28, 2021, the analysis contained herein may not fully account for impacts relating to the COVID-19 pandemic. In that regard, for example, as of February 28, 2021, the Company valued its portfolio investments in conformity with U.S. GAAP based on the facts and circumstances known by the Company at that time, or reasonably expected to be known at that time. Due to the overall volatility that the COVID-19 pandemic has caused during the months that followed our February 28, 2021 valuation, any valuations conducted now or in the future in conformity with U.S. GAAP could result in a lower fair value of our portfolio. The potential impact to our results going forward will depend to a large extent on future developments and new information that may emerge regarding the duration and severity of COVID-19 and the actions taken by authorities and other entities to contain the coronavirus or treat its impact, all of which are beyond our control. Accordingly, the Company cannot predict the extent to which its financial condition and results of operations will be affected at this time.

 

Critical Accounting Policies

 

Basis of Presentation

 

The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make certain estimates and assumptions affecting amounts reported in the Company’s consolidated financial statements. We have identified investment valuation, revenue recognition and the recognition of capital gains incentive fee expense as our most critical accounting estimates. We continuously evaluate our estimates, including those related to the matters described below. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates under different assumptions or conditions. A discussion of our critical accounting policies follows.

 

Investment Valuation

 

The Company accounts for its investments at fair value in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 balance sheet 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.

 

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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 Saratoga Investment Advisors, the audit committee of our board of directors and a third party independent valuation firm. 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.

 

We undertake 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 Saratoga Investment Advisors and preliminary valuation conclusions are documented 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 CLO and the Class F-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 Saratoga Investment Advisors and an independent valuation firm (if applicable) will supplement the preliminary valuation to reflect any comments provided by the audit committee; and

 

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

 

Our investment in Saratoga CLO is carried at fair value, which is based on a discounted cash flows that utilizes prepayment, re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and market comparables for equity interests in collateralized loan obligation funds similar to Saratoga CLO, when available, as determined by Saratoga Investment Advisors 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 rate 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. We use the output from the Intex models (i.e., the estimated cash flows) to perform a discounted cash flow analysis on expected future cash flows to determine a valuation for our investment in Saratoga CLO.

 

Revenue Recognition

 

Income Recognition

 

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 over the life of the respective investment using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion of discounts and amortization of premiums on investments.

 

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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.

 

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. We stop accruing PIK interest if we do not expect the issuer to be able to pay all principal and interest when due.

 

Revenues

 

We generate revenue in the form of interest income and capital gains on the debt investments that we hold and capital gains, if any, on equity interests that we may acquire. We expect our debt investments, whether in the form of leveraged loans or mezzanine debt, to have terms of up to ten years, and to bear interest at either a fixed or floating rate. Interest on debt will be payable generally either quarterly or semi-annually. In some cases, our debt or preferred equity investments may provide for a portion or all of the interest to be PIK. To the extent interest is PIK, it will be payable through the increase of the principal amount of the obligation by the amount of interest due on the then-outstanding aggregate principal amount of such obligation. The principal amount of the debt and any accrued but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of commitment, origination, structuring or diligence fees, fees for providing managerial assistance or investment management services and possibly consulting fees. Any such fees will be generated in connection with our investments and recognized as earned. We may also invest in preferred equity or common equity securities that pay dividends on a current basis.

 

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

 

On August 7, 2018, we entered into an unsecured loan agreement, CLO 2013-1 Warehouse Loan, with Saratoga Investment Corp. CLO 2013-1 Warehouse, Ltd, a wholly-owned subsidiary of Saratoga CLO, pursuant to which CLO 2013-1 Warehouse may borrow from time to time up to $20 million from us in order to provide capital necessary to support warehouse activities. The CLO 2013-1 Warehouse Loan, which expires on February 7, 2020, bears interest at an annual rate of 3M USD LIBOR + 7.5%. During the year ended February 28, 2019, the maximum amount invested by us in the CLO 2013-1 Warehouse Loan amounted to $20.0 million.

 

On December 14, 2018, we completed a third refinancing and upsize of the Saratoga CLO. The third Saratoga CLO refinancing, among other things, extended its reinvestment period to January 2021, and extended its legal maturity date to January 2030. A non-call period of January 2020 was also added. Following this refinancing, the Saratoga CLO portfolio increased from approximately $300.0 million in aggregate principal amount to approximately $500.0 million of predominantly senior secured first lien term loans. In addition to refinancing its liabilities, we invested an additional $13.8 million in all of the newly issued subordinated notes of the Saratoga CLO and also purchased $2.5 million in aggregate principal amount of the Class F-R-2 and $7.5 million aggregate principal amount of the Class G-R-2 notes tranches at par, with a coupon of LIBOR plus 8.75% and LIBOR plus 10.00%, respectively. As part of this refinancing, we also redeemed our existing $4.5 million aggregate amount of the Class F notes tranche at par and the $20.0 million CLO 2013-1 Warehouse Loan was repaid.

 

On February 11, 2020, we entered into an unsecured loan agreement (“CLO 2013-1 Warehouse 2 Loan”) with Saratoga Investment Corp. CLO 2013-1 Warehouse 2, Ltd (“CLO 2013-1 Warehouse 2”), a wholly-owned subsidiary of Saratoga CLO, pursuant to which CLO 2013-1 Warehouse 2 may borrow from time to time up to $20.0 million from the Company in order to provide capital necessary to support warehouse activities. On October 23, 2020, the CLO 2013-1 Warehouse 2 Loan was increased to $25.0 million availability, which was immediately fully drawn and, which expires on August 20, 2021. The interest rate was also amended to be based on a pricing grid, starting at an annual rate of 3M USD LIBOR + 4.46%. During the fourth quarter ended February 28, 2021, the CLO 2013-1 Warehouse 2 Ltd was repaid in full.

 

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On February 26, 2021, the Company completed the fourth refinancing of the Saratoga CLO. This refinancing, among other things, extended the Saratoga CLO reinvestment period to April 2024, and extended its legal maturity to April 2033. A non-call period ending February 2022 was also added. In addition, and as part of the refinancing, the Saratoga CLO has also been upsized from $500 million in assets to approximately $650 million. As part of this refinancing and upsizing, the Company invested an additional $14.0 million in all of the newly issued subordinated notes of the Saratoga CLO, and purchased $17.9 million in aggregate principal amount of the Class F-R-3 Notes tranche at par. Concurrently, the existing $2.5 million of Class F-R-2 Notes, $7.5 million of Class G-R-2 Notes and $25.0 million CLO 2013-1 Warehouse 2 Loan were repaid. The Company also paid $2.6 million of transaction costs related to the refinancing and upsizing on behalf of the Saratoga CLO, to be reimbursed from future equity distributions. As of February 28, 2021, there remained an outstanding receivable of $2.6 million for such transaction costs which is presented as due from affiliate on the Company’s consolidated statement of assets and liabilities.

 

The Saratoga CLO remains effectively 100% owned and managed by Saratoga Investment Corp. We receive a base management fee of 0.10% per annum and a subordinated management fee of 0.40% per annum of the outstanding principal amount of Saratoga CLO’s assets, paid quarterly to the extent of available proceeds. Prior to the second refinancing and the issuance of the 2013-1 Amended CLO Notes, we received a base management fee of 0.25% per annum and a subordinated management fee of 0.25% per annum of the outstanding principal amount of Saratoga CLO’s assets, paid quarterly to the extent of available proceeds.

 

Following the third refinancing and the issuance of the 2013-1 Reset CLO Notes on December 14, 2018, we are no longer entitled to an incentive management fee equal to 20.0% of excess cash flow to the extent the Saratoga CLO subordinated notes receive an internal rate of return paid in cash equal to or greater than 12.0%.

 

Interest income on our investment in Saratoga CLO is recorded using the effective interest method in accordance with the provisions of ASC Topic 325-40, Investments-Other, Beneficial Interests in Securitized Financial Assets (“ASC 325-40”), 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.

 

ASC 606

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASC 606”), which supersedes the revenue recognition requirements in Revenue Recognition (ASC 605). Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In May 2016, ASU 2016-12 amended ASU 2014-09 and deferred the effective period for annual periods beginning after December 15, 2017. Management has concluded that the majority of its revenues associated with financial instruments are scoped out of ASC 606, and has concluded that the only significant impact relates to the timing of the recognition of the CLO incentive fee income. We adopted ASC 606 under the modified retrospective approach using the practical expedient provided for, therefore the presentation of prior periods has not been adjusted.

 

Expenses

 

Our primary operating expenses include the payment of investment advisory and management fees, professional fees, directors and officers insurance, fees paid to independent directors and administrator expenses, including our allocable portion of our administrator’s overhead. Our investment advisory and management fees compensate our Manager for its work in identifying, evaluating, negotiating, closing and monitoring our investments. We bear all other costs and expenses of our operations and transactions, including those relating to:

 

organization;

 

calculating our net asset value (including the cost and expenses of any independent valuation firm);

 

expenses incurred by our Manager payable to third parties, including agents, consultants or other advisers, in monitoring our financial and legal affairs and in monitoring our investments and performing due diligence on our prospective portfolio companies;

 

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expenses incurred by our Manager payable for travel and due diligence on our prospective portfolio companies;

 

interest payable on debt, if any, incurred to finance our investments;

 

offerings of our common stock and other securities;

 

investment advisory and management fees;

 

fees payable to third parties, including agents, consultants or other advisers, relating to, or associated with, evaluating and making investments;

 

transfer agent and custodial fees;

 

federal and state registration fees;

 

all costs of registration and listing our common stock on any securities exchange;

 

federal, state and local taxes;

 

independent directors’ fees and expenses;

 

costs of preparing and filing reports or other documents required by governmental bodies (including the U.S. Securities and Exchange Commission (“SEC”) and the SBA);

 

costs of any reports, proxy statements or other notices to common stockholders including printing costs;

 

our fidelity bond, directors and officers errors and omissions liability insurance, and any other insurance premiums;

 

direct costs and expenses of administration, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs; and

 

administration fees and all other expenses incurred by us or, if applicable, the administrator in connection with administering our business (including payments under the Administration Agreement based upon our allocable portion of the administrator’s overhead in performing its obligations under an Administration Agreement, including rent and the allocable portion of the cost of our officers and their respective staffs (including travel expenses)).

 

Pursuant to the investment advisory and management agreement that we had with GSCP (NJ), L.P., our former investment adviser and administrator, we had agreed to pay GSCP (NJ), L.P. as investment adviser a quarterly base management fee of 1.75% of the average value of our total assets (other than cash or cash equivalents but including assets purchased with borrowed funds) at the end of the two most recently completed fiscal quarters and an incentive fee.

 

The incentive fee had two parts:

 

A fee, payable quarterly in arrears, equal to 20.0% of our pre-incentive fee net investment income, expressed as a rate of return on the value of the net assets at the end of the immediately preceding quarter, that exceeded a 1.875% quarterly hurdle rate measured as of the end of each fiscal quarter. Under this provision, in any fiscal quarter, our investment adviser received no incentive fee unless our pre-incentive fee net investment income exceeded the hurdle rate of 1.875%. Amounts received as a return of capital were not included in calculating this portion of the incentive fee. Since the hurdle rate was based on net assets, a return of less than the hurdle rate on total assets could still have resulted in an incentive fee.

 

A fee, payable at the end of each fiscal year, equal to 20.0% of our net realized capital gains, if any, computed net of all realized capital losses and unrealized capital depreciation, in each case on a cumulative basis on each investment in the Company’s portfolio, less the aggregate amount of capital gains incentive fees paid to the investment adviser through such date.

 

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We deferred cash payment of any incentive fee otherwise earned by our former investment adviser if, during the then most recent four full fiscal quarters ending on or prior to the date such payment was to be made, the sum of (a) our aggregate distributions to our stockholders and (b) our change in net assets (defined as total assets less liabilities) (before taking into account any incentive fees payable during that period) was less than 7.5% of our net assets at the beginning of such period. These calculations were appropriately pro-rated for the first three fiscal quarters of operation and adjusted for any share issuances or repurchases during the applicable period. Such incentive fee would become payable on the next date on which such test had been satisfied for the most recent four full fiscal quarters or upon certain terminations of the investment advisory and management agreement. We commenced deferring cash payment of incentive fees during the quarterly period ended August 31, 2007 and continued to defer such payments through the quarterly period ended May 31, 2010. As of July 30, 2010, the date on which GSCP (NJ), L.P. ceased to be our investment adviser and administrator, we owed GSCP (NJ), L.P. $2.9 million in fees for services previously provided to us; of which $0.3 million has been paid by us. GSCP (NJ), L.P. agreed to waive payment by us of the remaining $2.6 million in connection with the consummation of the stock purchase transaction with Saratoga Investment Advisors and certain of its affiliates described elsewhere in this Annual Report.

 

The terms of the investment advisory and management agreement with Saratoga Investment Advisors, our current investment adviser, are substantially similar to the terms of the investment advisory and management agreement we had entered into with GSCP (NJ), L.P., our former investment adviser, except for the following material distinctions in the fee terms:

 

The capital gains portion of the incentive fee was reset with respect to gains and losses from May 31, 2010, and therefore losses and gains incurred prior to such time will not be taken into account when calculating the capital gains fee payable to Saratoga Investment Advisors and, as a result, Saratoga Investment Advisors will be entitled to 20.0% of net gains that arise after May 31, 2010. In addition, the cost basis for computing realized gains and losses on investments held by us as of May 31, 2010 equal the fair value of such investment as of such date. Under the investment advisory and management agreement with our former investment adviser, GSCP (NJ), L.P., the capital gains fee was calculated from March 21, 2007, and the gains were substantially outweighed by losses.

 

Under the “catch up” provision, 100.0% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income that exceeds 1.875% but is less than or equal to 2.344% in any fiscal quarter is payable to Saratoga Investment Advisors. This will enable Saratoga Investment Advisors to receive 20.0% of all net investment income as such amount approaches 2.344% in any quarter, and Saratoga Investment Advisors will receive 20.0% of any additional net investment income. Under the investment advisory and management agreement with our former investment adviser, GSCP (NJ), L.P. only received 20.0% of the excess net investment income over 1.875%.

 

We will no longer have deferral rights regarding incentive fees in the event that the distributions to stockholders and change in net assets is less than 7.5% for the preceding four fiscal quarters.

 

Capital Gains Incentive Fee

 

The Company records an expense accrual relating to the capital gains incentive fee payable by the Company to its Manager when the unrealized gains on its investments exceed all realized capital losses on its investments given the fact that a capital gains incentive fee would be owed to the Manager if the Company were to liquidate its investment portfolio at such time. The actual incentive fee payable to the Company’s Manager related to capital gains will be determined and payable in arrears at the end of each fiscal year and will include only realized capital gains for the period.

 

New Accounting Pronouncements

 

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

 

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SEC Disclosure Update and Simplification

 

In March 2019, the SEC adopted the final rule under SEC Release No. 33-10618, Fast Act Modernization and Simplification of Regulation S-K, amending certain disclosure requirements. The amendments are intended to simplify certain disclosure requirements and to provide for a consistent set of rules to govern incorporating information by reference and hyperlinking, improve readability and navigability of disclosure documents, and discourage repetition and disclosure of immaterial information. The Company has adopted the final rule, as applicable under SEC Release No. 33-10618 and determined the effect of the adoption of the simplification rules on financial statements will be limited to the modification and removal of certain disclosures.

 

SEC Rule 12b-2 Update

 

In March 2020, the SEC adopted a final rule under SEC Release No. 34-88365 (the “Final Rule”), amending the accelerated filer and large accelerated filer definitions in Exchange Act Rule 12b-2. The amendments include a provision under which a BDC will be excluded from the “accelerated filer” and “large accelerated filer” definitions if the BDC has (1) a public float of $75 million or more, but less than $700 million, and (2) has annual investment income of less than $100 million. In addition, BDCs are subject to the same transition provisions for accelerated filer and large accelerated filer status as other issuers, but instead substituting investment income for revenue. The amendments will reduce the number of issuers required to comply with the auditor attestation on the internal control over financial reporting requirement provided under Section 404(b) of the Sarbanes-Oxley Act of 2002. The Final Rule applies to annual report filings due on or after April 27, 2020. The Company has assessed the Final Rule, and concluded that effective February 28, 2021, it is no longer an accelerated filer. As a result, the Company has filed this Annual Report on Form 10-K for the fiscal year ending February 28, 2021 as a non-accelerated filer.

 

Portfolio and investment activity

 

Investment Portfolio Overview
             
   February 28,
2021
   February 29,
2020
   February 28,
2019
 
   ($ in millions) 
Number of investments(1)   81    74    58 
Number of portfolio companies(2)   40    35    31 
Average investment per portfolio company(2)  $12.6   $12.9   $11.8 
Average investment size(1)  $6.5   $6.3   $6.5 
Weighted average maturity(3)   3.2 yrs    3.1 yrs    3.6 yrs
Number of industries   31    28    24 
Non-performing or delinquent investments (fair value)  $2.1   $2.1   $5.7 
Fixed rate debt (% of interest earning portfolio)(3)  $23.3(4.8%)  $29.7(6.8%)  $55.7(16.3%)
Fixed rate debt (weighted average current coupon)(3)   9.8%   9.3%   10.4%
Floating rate debt (% of interest earning portfolio)(3)  $462.6(95.2%)  $404.4(93.2%)  $285.0(83.7%)
Floating rate debt (weighted average current spread over LIBOR)(3)(4)   7.4%   8.0%   8.6%

 

 

(1) Excludes our investment in the subordinated notes of Saratoga CLO.
(2) At February 28, 2021, excludes our investment in the subordinated notes of Saratoga CLO, Class F-R-3 Notes tranches of Saratoga CLO. At February 29, 2020, excludes our investment in the subordinated notes of Saratoga CLO, Class F-R-2 Notes and Class G-R-2 Notes tranches of Saratoga CLO and loan to Saratoga Investment Corp. CLO 2013-1 Warehouse 2, Ltd. At February 28, 2019, excludes our investment in the subordinated notes of Saratoga CLO, Class F-R-2 Notes and Class G-R-2 Notes tranches of Saratoga CLO. 
(3) Excludes our investment in the subordinated notes of Saratoga CLO and equity interests.
(4) Calculation uses either 1-month or 3-month LIBOR, depending on the contractual terms, and after factoring in any existing LIBOR floors.

 

During the fiscal year ended February 28, 2021, we invested $202.3 million in new or existing portfolio companies and had $130.3 million in aggregate amount of exits and repayments resulting in net investments of $72.0 million for the year.

 

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During the fiscal year ended February 29, 2020, we invested $204.6 million in new or existing portfolio companies and had $167.3 million in aggregate amount of exits and repayments resulting in net investments of $37.3 million for the year.

 

During the fiscal year ended February 28, 2019, we invested $187.7 million in new or existing portfolio companies and had $135.7 million in aggregate amount of exits and repayments resulting in net investments of $52.0 million for the year.

 

Portfolio Composition

 

Our portfolio composition at February 28, 2021, February 29, 2020 and February 28, 2019 at fair value was as follows:

 

   February 28, 2021   February 29, 2020   February 28, 2019 
   Percentage
of Total
Portfolio
   Weighted
Average
Current
Yield
   Percentage
of Total
Portfolio
   Weighted
Average
Current
Yield
   Percentage
of Total
Portfolio
   Weighted
Average
Current
Yield
 
Syndicated loans   -%   -%   -%   -%   -%   -%
First lien term loans   79.5    9.5    71.3    9.6    50.5    10.9 
Second lien term loans   4.4    12.3    15.1    10.7    31.3    11.7 
Unsecured term loans   0.4    -    0.9    9.3    0.5    - 
Structured finance securities   9.0    11.6    6.7    11.4    8.8    14.6 
Equity interests   6.7    -    6.0    -    8.9    3.1 
Total   100.0%   9.1%   100.0%   9.3%   100.0%   10.7%

 

At February 28, 2021, our investment in the subordinated notes of Saratoga CLO, a collateralized loan obligation fund, had a fair value of $31.4 million and constituted 5.7% of our portfolio. This investment constitutes a first loss position in a portfolio that, as of February 28, 2021 and February 29, 2020, was composed of $603.7 million and $528.4 million, respectively, in aggregate principal amount of primarily senior secured first lien term loans. In addition, as of February 28, 2021, we also own $17.9 million in aggregate principal of the F-R-3 Notes in the Saratoga CLO, that only rank senior to the subordinated notes.

 

This investment is subject to unique risks. (See “Part 1. Item 1A. Risk Factors—Our investment in Saratoga CLO constitutes a leveraged investment in a portfolio of predominantly senior secured first lien term loans and is subject to additional risks and volatility”). We do not consolidate the Saratoga CLO portfolio in our consolidated financial statements. Accordingly, the metrics below do not include the underlying Saratoga CLO portfolio investments. However, at February 28, 2021, $584.6 million or 98.7% of the Saratoga CLO portfolio investments in terms of market value had a CMR (as defined below) color rating of green or yellow and four Saratoga CLO portfolio investments were in default with a fair value of $0.8 million. At February 29, 2020, $494.2 million or 98.6% of the Saratoga CLO portfolio investments in terms of market value had a CMR (as defined below) color rating of green or yellow and two Saratoga CLO portfolio investment were in default with a fair value of $1.4 million. For more information relating to Saratoga CLO, see the audited financial statements for Saratoga CLO included elsewhere herein.

 

Saratoga Investment Advisors normally grades all of our investments using a credit and monitoring rating system (“CMR”). The CMR consists of a single component: a color rating. The color rating is based on several criteria, including financial and operating strength, probability of default, and restructuring risk. The color ratings are characterized as follows: (Green)—performing credit; (Yellow)—underperforming credit; (Red)—in principal payment default and/or expected loss of principal.

 

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Portfolio CMR distribution

 

The CMR distribution of our investments at February 28, 2021 and February 29, 2020 was as follows:

 

Saratoga Investment Corp.

 

 

   February 28, 2021   February 29, 2020 
Color Score  Investments at
Fair Value
   Percentage
of Total
Portfolio
   Investments at
Fair Value
   Percentage
of Total
Portfolio
 
   ($ in thousands) 
Green  $453,297    81.8%  $429,784    88.5%
Yellow   32,559    5.9    2,141    0.5 
Red   -    0.0    2,137    0.4 
N/A(1)   68,457    12.3    51,570    10.6 
Total  $554,313    100.0%  $485,632    100.0%

 

 

(1)Comprised of our investment in the subordinated notes of Saratoga CLO and equity interests.

 

The change in reserve from $1.2 million as of February 29, 2020 to $1.2 million as of February 28, 2021 primarily related to the increase in reserve for the year for our investments in My Alarm Center, LLC and Taco Mac, offset by the reversal of the full reserve for our investment in Roscoe Medical Inc.

 

The CMR distribution of Saratoga CLO investments at February 28, 2021 and February 29, 2020 was as follows:

 

Saratoga CLO

 

   February 28, 2021   February 29, 2020 
Color Score  Investments at
Fair Value
   Percentage
of Total
Portfolio
   Investments at
Fair Value
   Percentage
of Total
Portfolio
 
   ($ in thousands) 
Green  $514,183    86.8%  $456,767    91.1%
Yellow   70,415    11.9    37,446    7.5 
Red   6,921    1.2    6,787    1.4 
N/A(1)   501    0.1    0    0.0 
Total  $592,020    100.0%  $501,000    100.0%

 

 

(1)Comprised of Saratoga CLO’s equity interests.

 

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Portfolio composition by industry grouping at fair value

 

The following table shows our portfolio composition by industry grouping at fair value at February 28, 2021 and February 29, 2020:

 

Saratoga Investment Corp.

 

   February 28, 2021   February 29, 2020* 
   Investments At
Fair Value
   Percentage
of Total
Portfolio
   Investments At
Fair Value
   Percentage
of Total
Portfolio
 
   ($ in thousands) 
Education Software  $88,090    15.9%  $96,055    19.8%
IT Services   73,087    13.2    62,541    12.9 
Structured Finance Securities(1)   49,779    9.0    34,675    7.1 
Healthcare Services   42,410    7.7    28,455    5.9 
Education Services   40,384    7.1    36,365    7.5 
Healthcare Software   28,972    5.2    30,764    6.3 
Sports Management   25,469    4.6    25,740    5.3 
Dental Practice Management Software   23,659    4.3    -    0.0 
Payroll Services   18,333    3.3    19,055    3.9 
Real Estate Services   18,032    3.3    -    0.0 
Marketing Services   17,372    3.1    14,200    2.9 
Hospitality/Hotel   17,080    3.1    14,894    3.1 
HVAC Services and Sales   14,894    2.7    -    0.0 
Property Management   14,578    2.6    11,503    2.4 
Corporate Governance   13,265    2.4    9,090    1.9 
Cyber Security   13,174    2.4    9,982    2.1 
Industrial Products   9,047    1.6    10,779    2.2 
Waste Services   9,000    1.6    9,000    1.9 
Dental Practice Management   7,133    1.3    -    0.0 
Facilities Maintenance   6,193    1.1    5,375    1.1 
Non-profit Services   5,554    1.0    5,555    1.1 
Healthcare Supply   5,422    1.0    2,137    0.4 
Field Service Management   4,018    0.7    2,970    0.6 
Office Supplies   3,610    0.7    3,799    0.8 
Restaurant   2,141    0.4    2,140    0.4 
Corporate Education Software   1,050    0.2    -    0.0 
Staffing Services   925    0.2    922    0.2 
Healthcare Products Manufacturing   567    0.1    7,717    1.6 
Consumer Products   475    0.1    418    0.1 
Financial Services   419    0.1    32,090    6.6 
Consumer Services   181    0.0    1,997    0.4 
Metals   -    0.0    3,130    0.6 
Construction Management Services   -    0.0    4,284    0.9 
Total  $554,313    100.0%  $485,632    100.0%

 

 

*Certain reclassifications have been made to previously reported industry groupings to show results on a consistent basis across periods.

 

(1)As of February 28, 2021, comprised of our investment in the subordinated notes and Class F-R-3 Notes of Saratoga CLO. As of February 29, 2020, comprised of our investment in the subordinated notes, Class F-R-2 Notes and Class G-R-2 Notes of Saratoga CLO and Saratoga Investment Corp. CLO 2013-1 Warehouse 2, Ltd.

 

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The following table shows Saratoga CLO’s portfolio composition by industry grouping at fair value at February 28, 2021 and February 29, 2020:

 

Saratoga CLO

 

   February 28, 2021   February 29, 2020 
   Investments
at
Fair Value
   Percentage
of Total
Portfolio
   Investments
at
Fair Value
   Percentage
of Total
Portfolio
 
   ($ in thousands) 
Banking, Finance, Insurance & Real Estate  $105,326    17.9%  $87,957    17.6%
Services: Business   55,588    9.4   45,735    9.1 
High Tech Industries   50,106    8.5   32,897    6.6 
Healthcare & Pharmaceuticals   46,689    7.9   39,978    8.0 
Services: Consumer   31,604    5.4   28,327    5.6 
Telecommunications   29,878    5.1   28,317    5.6 
Aerospace & Defense   25,952    4.4   25,093    5.0 
Chemicals, Plastics, & Rubber   23,302    3.9   14,689    2.9 
Hotel, Gaming & Leisure   20,515    3.4   16,883    3.4 
Media: Advertising, Printing & Publishing   19,826    3.3   19,808    4.0 
Consumer goods: Non-durable   19,343    3.3   15,700    3.1 
Automotive   19,159    3.2   13,820    2.8 
Containers, Packaging & Glass   18,822    3.2   15,753    3.1 
Beverage, Food & Tobacco   17,998    3.1   21,637    4.3 
Consumer goods: Durable   13,143    2.2   11,674    2.3 
Retail   12,880    2.2   14,538    2.9 
Capital Equipment   9,961    1.7   9,551    1.9 
Media: Broadcasting & Subscription   9,426    1.6   7,959    1.6 
Utilities: Oil & Gas   8,235    1.4   7,306    1.5 
Forest Products & Paper   6,954    1.2   5,385    1.1 
Transportation: Consumer   6,183    1.0   1,914    0.4 
Metals & Mining   6,127    1.0   4,112    0.8 
Media: Diversified & Production   6,035    1.0   2,711    0.5 
Wholesale   5,841    1.0   1,928    0.4 
Transportation: Cargo   5,812    1.0   7,054    1.4 
Construction & Building   5,362    0.9   7,617    1.5 
Energy: Electricity   4,547    0.8   3,357    0.7 
Utilities: Electric   4,209    0.7   4,752    1.0 
Energy: Oil & Gas   2,208    0.4   3,559    0.7 
Environmental Industries   989    0.2   989    0.2 
                     
Total  $592,020    100.3%  $501,000    100.0%

 

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Portfolio composition by geographic location at fair value

 

The following table shows our portfolio composition by geographic location at fair value at February 28, 2021 and February 29, 2020. The geographic composition is determined by the location of the corporate headquarters of the portfolio company.

 

    February 28, 2021   February 29, 2020 
    Investments at
Fair Value
   Percentage
of Total
Portfolio
   Investments at
Fair Value
   Percentage
of Total
Portfolio
 
    ($ in thousands) 
Southeast    $167,397    30.2%  $165,353    34.0%
West     145,907    26.3    99,390    20.5 
Midwest     110,125    19.9    75,528    15.5 
Southwest     39,334    7.1    61,456    12.7 
Northwest     13,174    2.4    9,981    2.1 
Northeast     7,314    1.3    18,047    3.7 
Other(1)     71,062    12.8    55,877    11.5 
Total    $554,313    100.0%  $485,632    100.0%

 

 

(1)As of February 28, 2021, comprised of our investments in the subordinated notes, F-R-3 Notes of Saratoga CLO and foreign investments. As of February 29, 2020, comprised of our investment in the subordinated notes, Class F-R-2 Notes and Class G-R-2 Notes of Saratoga CLO, Saratoga Investment Corp. CLO 2013-1 Warehouse 2, Ltd and foreign investments.

 

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Results of operations

 

Operating results for the fiscal years ended February 28, 2021, February 29, 2020 and February 28, 2019 were as follows:

 

   For the Year Ended 
   February 28,
2021
   February 29,
2020
   February 28,
2019
 
   ($ in thousands) 
Total investment income  $57,650   $58,448   $47,708 
Total operating expenses   34,537    43,587    29,406 
Net investment income   23,113    14,861    18,302 
Net realized gains (losses) from investments   (8,704)   42,877    4,874 
Income tax (provision) benefit from realized gain on investments   (3,895)          
Net change in unrealized appreciation (depreciation) on investments   4,966    (771)   (2,900)
Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments   (574)   355    (1,767)
Loss on extinguishment of debt*   (129)   (1,583)   - 
Net increase in net assets resulting from operations  $14,777   $55,739   $18,509 

 

 

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

 

Investment income

 

The composition of our investment income for the fiscal years ended February 28, 2021, February 29, 2020 and February 28, 2019 were as follows:

 

   For the Year Ended 
   February 28, 2021   February 29, 2020   February 28, 2019 
   ($ in thousands) 
Interest from investments  $51,714   $48,047   $43,297 
Interest from cash and cash equivalents   14    536    65 
Management fee income   2,508    2,504    1,722 
Incentive fee income   -    -    633 
Structuring and advisory fee income   2,157    5,286    1,355 
Other income   1,257    2,075    636 
Total investment income  $57,650   $58,448   $47,708 

 

For the fiscal year ended February 28, 2021, total investment income decreased $0.8 million, or 1.4% compared to the fiscal year ended February 29, 2020. Interest income from investments increased $3.7 million, or 7.6%, to $51.7 million for the year ended February 28, 2021 from $48.0 million for the fiscal year ended February 29, 2020. This reflects an increase of 14.1% in total investments to $554.3 million at February 28, 2021 from $485.6 million at February 29, 2020, offset by the reduction in LIBOR during this same period. At February 28, 2021, the weighted average current yield on investments was 9.1% compared to 9.3% at February 29, 2020, which offset some of the interest income increase.

 

For the fiscal year ended February 29, 2020, total investment income increased $10.7 million, or 22.5% compared to the fiscal year ended February 28, 2019. Interest income from investments increased $4.7 million, or 11.0%, to $48.0 million for the year ended February 29, 2020 from $43.3 million for the fiscal year ended February 28, 2019. This reflects an increase of 20.8% in total investments to $485.6 million at February 29, 2020 from $402.0 million at February 28, 2019. At February 29, 2020, the weighted average current yield on investments was 9.3% compared to 10.7% at February 28, 2019, which offset some of the interest income increase.

 

For the fiscal year ended February 28, 2021 and February 29, 2020, total PIK income was $2.6 million and $4.5 million, respectively. This decrease was primarily due to our sale in Easy Ice, LLC, which primarily generated PIK interest income. The Company sold its interest in Easy Ice, LLC during the end of the year ended February 29, 2020.

 

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For the fiscal year ended February 29, 2020 and February 28, 2019, total PIK income was $4.5 million and $4.2 million, respectively. This increase was primarily due to the increase in investment in Easy Ice, LLC, which primarily generated PIK interest income. The Company sold its interest in Easy Ice, LLC during the year ended February 29, 2020.

 

Following the third refinancing of the CLO on December 14, 2018, the Company is no longer entitled to receive the incentive fee. For the years ended February 28, 2019 incentive fee income of $0.6 million, was recognized related to the Saratoga CLO, reflecting the 12.0% hurdle rate that has been achieved.

 

For the fiscal year ended February 28, 2021, February 29, 2020 and February 28, 2019, total structuring and advisory fee income was $2.2 million, $5.3 million and $1.4 million, respectively. Structuring and advisory fee income represents fee income earned and received performing certain investment and advisory activities during the closing of new investments.

 

For the fiscal year ended February 28, 2021, February 29, 2020 and February 28, 2019, other income was $1.3 million, $2.1 million and $0.6 million, respectively. Other income includes dividends received, origination fees and prepayment income fees and is recorded in the consolidated statements of operations when earned.

 

Operating expenses

 

The composition of our operating expenses for the years ended February 28, 2021, February 29, 2020 and February 28, 2019 were as follows:

 

   For the Year Ended 
   February 28,
2021
   February 29,
2020
   February 28,
2019
 
   ($ in thousands) 
Interest and debt financing expenses  $13,587   $14,683   $13,126 
Base management fees   9,098    8,099    6,879 
Incentive management fees   4,904    14,164    4,891 
Professional fees   1,706    1,684    1,849 
Administrator expenses   2,546    2,131    1,896 
Insurance   285    260    253 
Directors fees and expenses   290    278    291 
General and administrative and other expenses   1,428    1,326    1,248 
Income tax benefit   1    962    (1,027)
Excise tax expense (credit)   692    -    - 
Total operating expenses  $34,537   $43,587   $29,406 

 

For the year ended February 28, 2021, total operating expenses decreased $9.0 million, or 20.8% compared to the year ended February 29, 2020. For the year ended February 29, 2020, total operating expenses increased $14.2 million, or 48.2% compared to the year ended February 28, 2019.

 

For the year ended February 28, 2021, the decrease in interest and debt financing expenses is primarily attributable to a lower blended cost of borrowings, with the higher-yield 2023 Notes being replaced with the lower-cost 2025 Notes and increased lower-cost SBA debentures.

 

Total average outstanding debt decreased from $273.8 million for the year ended February 29, 2020 to $264.2 million for the year ended February 28, 2021. For the year ended February 28, 2021, the weighted average interest rate on our outstanding indebtedness was 4.46% compared to 4.71% for the year ended February 29, 2020. The decrease in weighted average interest rate and average outstanding debt was primarily due to the issuance of the lower-cost 2025 Notes and the repayment of the higher-cost 2023 Notes, and the issuance of new SBA debentures that carry a lower interest rate. The average outstanding borrowings of the 2023 Notes decreased $63.2 million from $63.2 for the year ended February 29, 2020 to $0 million for the year ended February 28, 2021. On December 21, 2019 and February 7, 2020, the Company redeemed $50.0 million and $24.45 million, respectively, in aggregate principal amounts of $74.45 million in aggregate principal amounts issued and outstanding 2023 Notes. At February 28, 2021 and February 29, 2020, the SBA debentures represented 56.2% and 71.4% of overall debt, respectively.

 

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For the years ended February 29, 2020 and February 28, 2019, the increase in interest and debt financing expenses is primarily attributable to an increase in total outstanding debt. The increase is primarily attributable to an increase in average outstanding debt from $249.3 million for the year ended February 28, 2019 to $273.8 million for the year ended February 29, 2020. For the year ended February 29, 2020, the weighted average interest rate on our outstanding indebtedness was 4.71% compared to the 4.62% for the year ended February 28, 2019. The increase in weighted average interest rate was primarily driven by the issuance of the 2025 Notes which carry a fixed rate of 6.25%, versus the SBA debentures that carry a lower interest rate. At February 29, 2020 and February 28, 2019, the SBA debentures represented 71.4% and 52.7% of overall debt, respectively.

 

For the year ended February 28, 2021, base management fees increased $1.0 million, or 12.3% compared to the fiscal year ended February 29, 2020. The increase in base management fees results from the 12.3% increase in the average value of our total assets, less cash and cash equivalents, from $462.8 million as of February 29, 2020 to $519.9 million as of February 28, 2021.

 

For the year ended February 29, 2020, base management fees increased $1.2 million, or 17.7% compared to the fiscal year ended February 28, 2019. The increase in base management fees results from the 17.7% increase in the average value of our total assets, less cash and cash equivalents, from $393.1 million as of February 28, 2019 to $462.8 million as of February 29, 2020.

 

For the year ended February 28, 2021, incentive management fees decreased $9.3 million, or 65.4% compared to the fiscal year ended February 29, 2020. The first part of the incentive management fees decreased this year from $5.8 million for the year ended February 29, 2020 to $5.4 million for the year ended February 28, 2021,as higher average net equity during this period resulted in an increase to the net investment income hurdle rate pursuant to the Management Agreement. The incentive management fees related to capital gains decreased from $8.4 million expense for the fiscal year ended February 29, 2020 to $(0.5) million benefit for the fiscal year ended February 28, 2021, reflecting a reversal of incentive fee accrual due to an increase in unrealized depreciation on investments during the year ended February 28, 2021.

 

For the year ended February 29, 2020, incentive management fees increased $9.3 million, or 189.6% compared to the fiscal year ended February 28, 2019. The first part of the incentive management fees increased this year from $4.6 million for the year ended February 28, 2019 to $5.8 million for the year ended February 29, 2020, as higher average total assets of 17.7% has led to increased net investment income above the hurdle rate pursuant to the investment advisory and management agreement. The incentive management fees related to capital gains increased from $0.3 million for the fiscal year ended February 28, 2019 to $8.4 million for the fiscal year ended February 29, 2020, reflecting the net realized and unrealized gain on investments this year, primarily related to our Censis Technologies, Inc, and Easy Ice, LLC investments and also including the impact of the deferred taxes on unrealized appreciation.

 

For the year ended February 28, 2021, professional fees increased $0.02 million, or 1.3% compared to the fiscal year ended February 29, 2020. This increase primarily relates to increased legal and accounting fees this year, as investment activities continue to grow.

 

For the year ended February 29, 2020, professional fees decreased $0.2 million, or 8.9% compared to the fiscal year ended February 28, 2019. This decrease primarily relates to decreased legal and accounting fees this year, as the shelf registration statement last year led to higher fees.

 

For the year ended February 28, 2021, administrator expenses increased $0.4 million, or 19.5% compared to the fiscal year ended February 29, 2020, which reflects an increase to the cap on the payment or reimbursement of expenses by the Company from $2.225 million to $2.775 million, effective August 1, 2020.

 

For the year ended February 29, 2020, administrator expenses increased $0.2 million, or 12.4% compared to the fiscal year ended February 28, 2019, which reflects an increase to the cap on the payment or reimbursement of expenses by the Company from $2.0 million to $2.225 million, effective August 1, 2019.

 

As discussed above, the decrease in interest and debt financing expenses for the years ended February 28, 2021, versus February 29, 2020, is primarily attributable to the change in mix in lower-yield borrowings outstanding, while the increase versus, the year ended February 28, 2019 is primarily attributable to an increase in the average amount of outstanding debt as compared to the prior years.

 

94

 

 

For the fiscal years ended February 28, 2021, February 29, 2020 and February 28, 2019, the average borrowings outstanding under the Credit Facility was approximately $1.8 million, $0.6 million and $3.4 million, respectively, and the average weighted average interest rate on the outstanding borrowing under the Credit Facility was 0.17%, 6.66% and 7.10%, respectively.

 

For the fiscal years ended February 28, 2021, February 29, 2020 and February 28, 2019, the average borrowings outstanding of SBA debentures was $169.3 million, $150.0 million and $146.0 million, respectively. For the years ended February 28, 2021, February 29, 2020 and February 28, 2019, the weighted average interest rate on the outstanding borrowings of the SBA debentures was 3.25%, 3.23% and 3.20%, respectively.

 

During the year ended February 28, 2021 and February 29, 2020, the average dollar amount of our 6.25% fixed-rate 2025 Notes outstanding was $60.0 million and $60.0 million, respectively.

 

During the year ended February 28, 2021 and February 29, 2020, the average dollar amount of our 7.25% fixed-rate 2025 Notes outstanding was $43.1 million and $0.0 million, respectively.

 

During the year ended February 28, 2021 and February 29, 2020, the average dollar amount of our 7.75% fixed-rate 2025 Notes outstanding was $5.0 million and $0.0 million, respectively.

 

During the year ended February 28, 2021 and February 29, 2020, the average dollar amount of our 6.25% fixed-rate 2027 Notes outstanding was $7.0 million and $0.0 million, respectively.

 

As discussed above, during the fourth quarter of 2020 fiscal year, the Company redeemed $74.45 million in aggregate principal amount of issued and outstanding 2023 Notes. During the years ended February 28, 2021, February 29, 2020 and February 28, 2019, the average dollar amount of our 6.75% fixed-rate 2023 Notes outstanding was $0.0 million, $63.2 million and $74.5 million, respectively.

 

For the years ended February 28, 2021, February 29, 2020 and February 28, 2019, we recognized income tax expense (benefit) of $0.0 million, $1.0 million and $(1.0) million, respectively. This relates to net deferred federal and state income tax expense (benefit) with respect to operating gains and losses and income derived from equity investments held in the taxable blockers.

 

For the year ended February 28, 2021, we accrued excise taxes of $0.7 million on undistributed taxable income as of December 31, 2020.

 

Net realized gains (losses) on sales of investments

 

For the fiscal year ended February 28, 2021, the Company had $130.3 million of sales, repayments, exits or restructurings resulting in $8.7 million of net realized loss. The most significant realized gains and losses during the year ended February 28, 2021 were as follows (dollars in thousands):

 

Fiscal year ended February 28, 2021

 

Issuer  Asset Type  Gross Proceeds   Cost   Net
Realized
Gain (Loss)
 
Elyria Foundry Company, L.L.C.  Equity Interests  $959   $9,685   $(8,726)

 

The $8.7 million of net realized losses was from the sales of the equity positions in Elyria Foundry Company, L.L.C.

 

For the fiscal year ended February 29, 2020, the Company had $167.3 million of sales, repayments, exits or restructurings resulting in $42.9 million of net realized gains. The most significant realized gains and losses during the year ended February 29, 2020 were as follows (dollars in thousands)

 

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Fiscal year ended February 29, 2020

 

Issuer  Asset Type  Gross Proceeds   Cost   Net
Realized
Gain
 
Easy Ice, LLC  Equity Interests  $41,928   $10,703   $31,225 
Censis Technologies, Inc.  Equity Interests   12,280    999    11,281 

 

The $31.2 million and $11.3 million of net realized gains was from the sales of the equity position in Easy Ice, LLC and Censis Technologies, Inc., respectively.

 

For the fiscal year ended February 28, 2019, the Company had $135.7 million of sales, repayments, exits or restructurings resulting in $4.9 million of net realized gains. The most significant realized gains and losses during the year ended February 28, 2019 were as follows (dollars in thousands):

 

Fiscal year ended February 28, 2019

 

Issuer  Asset Type  Gross Proceeds   Cost   Net
Realized
Gain (Loss)
 
HMN Holdco, LLC  Equity Interests  $642   $62   $580 
HMN Holdco, LLC  Equity Interests   4,539    438    4,101 

 

For the year ended February 28, 2019, the $4.7 million of net realized gains on our investments in HMN Holdco, LLC was due to a refinancing transaction that included the sale of our equity position.

 

Net change in unrealized appreciation (depreciation) on investments

 

For the year ended February 28, 2021, our investments had a net change in unrealized appreciation of $5.0 million versus a net change in unrealized depreciation of $0.8 million for the year ended February 29, 2020. The most significant cumulative changes in unrealized appreciation (depreciation) for the year ended February 28, 2021, were the following (dollars in thousands):

 

Fiscal year ended February 28, 2021

 

Issuer  Asset Type  Cost   Fair Value   Total Unrealized Appreciation (Depreciation)   YTD Change in Unrealized Appreciation (Depreciation) 
ArbiterSports, LLC  First Term Lien Loan   26,801    25,469    (1,332)   (1,306)
C2 Educational Systems  First Term Lien Loan   15,998    13,499    (2,499)   (2,517)
Elyria Foundry Company, L.L.C.  Equity Interests   9,685    730    (8,955)   7,745 
Knowland Group, LLC  Second Lien Term Loan   15,768    10,788    (4,980)   (4,873)
My Alarm Center, LLC  Equity Interests   712    181    (531)   1,816 
Netreo Holdings, LLC  First Term Lien Loan & Equity Interests   9,632    15,220    5,588    1,832 
Passageways, Inc.  First Term Lien Loan & Equity Interests   10,953    13,264    2,311    1,173 
Roscoe Medical, Inc.  Second Lien Term Loan & Equity Interests   5,649    5,422    (227)   2,343 
Saratoga Investment Corp. CLO 2013-1, Ltd.  Structured Finance Securities   33,847    31,450    (2,397)   (1,434)
Village Realty Holdings LLC  First Term Lien Loan & Equity Interests   12,394    14,577    2,183    2,038 

 

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The $1.3 million net change in unrealized depreciation in our investment in ArbiterSports, LLC was driven by disruptions to its business due to COVID-related shutdowns.

 

The $2.5 million net change in unrealized depreciation in our investment C2 Education Systems was driven by disruptions to its business due to COVID-related shutdowns.

 

The $7.7 million net unrealized loss reversal in our investment in Elyria Foundry Company, L.L.C. was due to the realization of this investment, which resulted in a net unrealized appreciation during FY21.

 

The $4.9 million net change in unrealized depreciation in our investment in Knowland Group, LLC was driven by disruptions to its business due to COVID-related shutdowns.

 

The $1.8 million net change in unrealized depreciation in our investment in My Alarm Center, LLC was driven by increasing leverage levels combined with declining market conditions in the sector.

 

The $1.8 million net change in unrealized appreciation in our investment in Netreo Holdings, LLC was driven by growth and improved financial performance.

 

The $1.2 million net change in unrealized appreciation in our investment in Passageways, Inc. was driven by growth and improved financial performance.

 

The $2.3 million net change in unrealized appreciation in our investment in Roscoe Medical, Inc. was driven by continued improvement in the company’s performance.

 

The $1.4 million of unrealized depreciation in our investment in Saratoga Investment Corp. CLO 2013-1, Ltd. was driven by a reduction in base interest rates during FY 2021, along with expenses resulting from the recapitalization of the CLO.

 

The $2.0 million net change in unrealized appreciation in our investment in Village Realty Holdings, LLC was driven by increased customer demand during its peak season this year.

 

For the year ended February 29, 2020, our investments had a net change in unrealized depreciation of $0.8 million versus a net change in unrealized depreciation of $2.9 million for the year ended February 28, 2019. The most significant cumulative changes in unrealized appreciation (depreciation) for the year ended February 29, 2020, were the following (dollars in thousands):

 

Fiscal year ended February 29, 2020

 

Issuer  Asset Type  Cost   Fair Value   Total Unrealized Appreciation (Depreciation)   YTD Change
in Unrealized
Appreciation (Depreciation)
 
Easy Ice, LLC  Second Term Lien Loan & Equity Interests  $-   $-   $-   $(3,817)
GreyHeller LLC  First Term Lien Loan & Equity Interests   7,821    9,981    2,160    1,331 
Netreo Holdings, LLC  First Term Lien Loan & Equity Interests   8,273    12,029    3,756    1,655 

 

The $3.8 million net change in unrealized depreciation in our investment in Easy Ice, LLC was driven by the completion of a sales transaction. In recognizing a realized gain as a result of the sale, unrealized appreciation was adjusted to zero, which resulted in a $3.8 million change in unrealized depreciation for the year.

 

The $1.3 million net change in unrealized appreciation in our investment GreyHeller LLC was driven by increased operating margins and an increase in overall financial performance.

 

The $1.7 million net change in unrealized appreciation in our investment in Netreo Holdings, LLC was driven by growth and improved financial performance.

 

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For the year ended February 28, 2019, our investments had a net change in unrealized depreciation of $2.9 million versus a net change in unrealized appreciation of $10.8 million for the year ended February 28, 2018. The most significant cumulative net change in unrealized appreciation (depreciation) for the year ended February 28, 2019, were the following (dollars in thousands):

 

Fiscal year ended February 28, 2019
Issuer  Asset Type  Cost   Fair Value   Total Unrealized Appreciation (Depreciation)   YTD Change in Unrealized Appreciation 
Elyria Foundry Company, L.L.C.  Equity Interests  $9,685   $1,804   $(7,881)  $(1,630)
Roscoe Medical, Inc.  Second Lien Term Loan Interests   4,189    2,499    (1,690)   (1,419)
Netreo Holdings, LLC  Equity Interests   3,150    5,179    2,029    2,029 
My Alarm Center, LLC  Equity Interests   2,358    1,113    (1,245)   (1,274)

 

The $1.6 million net change in unrealized depreciation in our investment in Elyria Foundry, L.L.C. was driven by changes in oil and gas end markets since year-end and increased labor costs, negatively impacting the Company’s performance.

 

The $1.4 million net change in unrealized depreciation in our investment in Roscoe Medical, Inc. was driven by decreased operating margins and reduced overall financial performance.

 

The $2.0 million net change in unrealized appreciation in our investment in Netreo Holdings, LLC was driven by growth and improved financial performance.

 

The $1.3 million net change in unrealized depreciation in our investment in My Alarm Center, LLC was driven by the issuance of new securities senior to existing investments.

 

Changes in net assets resulting from operations

 

For the fiscal years ended February 28, 2021, February 29, 2020 and February 28, 2019, we recorded a net increase in net assets resulting from operations of $14.8 million, $55.7 million and $18.5 million, respectively. Based on 11,188,629 weighted average common shares outstanding as of February 28, 2021, our per share net increase in net assets resulting from operations was $1.32 for the fiscal year ended February 28, 2021. This compares to a per share net increase in net assets resulting from operations of $5.98 for the fiscal year ended February 29, 2020 (based on 9,319,192 weighted average common shares outstanding as of February 29, 2020), and a per share net increase in net assets resulting from operations of $2.63 for the fiscal year ended February 28, 2019 (based on 7,046,686 weighted average common shares outstanding as of February 28, 2019).

 

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

 

We intend to continue to generate cash primarily from cash flows from operations, including interest earned from our investments in debt in middle market companies, interest earned from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less, future borrowings and future offerings of securities.

 

Although we expect to fund the growth of our investment portfolio through the net proceeds from future equity offerings, including our dividend reinvestment plan (“DRIP”), and issuances of senior securities or future borrowings, to the extent permitted by the 1940 Act, we cannot assure you that our plans to raise capital will be successful. In this regard, because our common stock has historically traded at a price below our current net asset value per share and we are limited in our ability to sell our common stock at a price below net asset value per share, we have been and may continue to be limited in our ability to raise equity capital.

 

In addition, we intend to distribute to our stockholders substantially all of our operating taxable income in order to satisfy the distribution requirement applicable to RICs under the Code. In satisfying this distribution requirement, in accordance with certain applicable provisions of the Code and the Treasury regulations and a revenue procedure issued by the Internal Revenue Service (“IRS”), a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC subject to a limitation that the aggregate amount of cash to be distributed to all stockholders must be at least 20% of the aggregate declared distribution. We may rely on the revenue procedure in future periods to satisfy our RIC distribution requirement.

 

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Also, as a BDC, we generally are required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, to total senior securities, which include all of our borrowings and any outstanding preferred stock, of at least 200.0%, reduced to 150.0% effective April 16, 2019 following the approval received from the non-interested board of directors on April 16, 2018. This requirement limits the amount that we may borrow. Our asset coverage ratio, as defined in the 1940 Act, was 347.1% as of February 28, 2021 and 607.1% as of February 29, 2020. To fund growth in our investment portfolio in the future, we anticipate needing to raise additional capital from various sources, including the equity markets and other debt-related markets, which may or may not be available on favorable terms, if at all.

 

Consequently, we may not have the funds or the ability to fund new investments, to make additional investments in our portfolio companies, to fund our unfunded commitments to portfolio companies, to pay dividends or to repay borrowings. Also, the illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these investments, we may realize significantly less than their recorded value.

 

Madison revolving credit facility

 

Below is a summary of the terms of the senior secured revolving credit facility we entered into with Madison Capital Funding LLC (the “Credit Facility”) on June 30, 2010, which was most recently amended on September 14, 2020.

 

Availability. The Company can draw up to the lesser of (i) $40.0 million (the “Facility Amount”) and (ii) the product of the applicable advance rate (which varies from 50.0% to 75.0% depending on the type of loan asset) and the value, determined in accordance with the Credit Facility (the “Adjusted Borrowing Value”), of certain “eligible” loan assets pledged as security for the loan (the “Borrowing Base”), in each case less (a) the amount of any undrawn funding commitments the Company has under any loan asset and which are not covered by amounts in the Unfunded Exposure Account referred to below (the “Unfunded Exposure Amount”) and outstanding borrowings. Each loan asset held by the Company as of the date on which the Credit Facility was closed was valued as of that date and each loan asset that the Company acquires after such date will be valued at the lowest of its fair value, its face value (excluding accrued interest) and the purchase price paid for such loan asset. Adjustments to the value of a loan asset will be made to reflect, among other things, changes in its fair value, a default by the obligor on the loan asset, insolvency of the obligor, acceleration of the loan asset, and certain modifications to the terms of the loan asset.

 

The Credit Facility contains limitations on the type of loan assets that are “eligible” to be included in the Borrowing Base and as to the concentration level of certain categories of loan assets in the Borrowing Base such as restrictions on geographic and industry concentrations, asset size and quality, payment frequency, status and terms, average life, and collateral interests. In addition, if an asset is to remain an “eligible” loan asset, the Company may not make changes to the payment, amortization, collateral and certain other terms of the loan assets without the consent of the administrative agent that will either result in subordination of the loan asset or be materially adverse to the lenders.

 

Collateral. The Credit Facility is secured by substantially all of the assets of the Company (other than assets held by our SBIC subsidiaries) and includes the subordinated notes (“CLO Notes”) issued by Saratoga CLO and the Company’s rights under the CLO Management Agreement (as defined below).

 

Interest Rate and Fees. Under the Credit Facility, funds are borrowed from or through certain lenders at the greater of the prevailing LIBOR rate and 1.00%, plus an applicable margin of 4.75%. At the Company’s option, funds may be borrowed based on an alternative base rate, which in no event will be less than 2.00%, and the applicable margin over such alternative base rate is 3.75%. In addition, the Company pays the lenders a commitment fee of 0.75% per year on the unused amount of the Credit Facility for the duration of the Revolving Period (defined below). Accrued interest and commitment fees are payable monthly. The Company was also obligated to pay certain other fees to the lenders in connection with the closing of the Credit Facility.

 

Revolving Period and Maturity Date. The Company may make and repay borrowings under the Credit Facility for a period of three years following the closing of the Credit Facility (the “Revolving Period”). The Revolving Period may be terminated at an earlier time by the Company or, upon the occurrence of an event of default, by action of the lenders or automatically. All borrowings and other amounts payable under the Credit Facility are due and payable in full five years after the end of the Revolving Period.

 

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Collateral Tests. It is a condition precedent to any borrowing under the Credit Facility that the principal amount outstanding under the Credit Facility, after giving effect to the proposed borrowings, not exceed the lesser of the Borrowing Base or the Facility Amount (the “Borrowing Base Test”). In addition to satisfying the Borrowing Base Test, the following tests must also be satisfied (together with Borrowing Base Test, the “Collateral Tests”):

 

Interest Coverage Ratio. The ratio (expressed as a percentage) of interest collections with respect to pledged loan assets, less certain fees and expenses relating to the Credit Facility, to accrued interest and commitment fees and any breakage costs payable to the lenders under the Credit Facility for the last 6 payment periods must equal at least 175.0%.

 

Overcollateralization Ratio. The ratio (expressed as a percentage) of the aggregate Adjusted Borrowing Value of “eligible” pledged loan assets plus the fair value of certain ineligible pledged loan assets and the CLO Notes (in each case, subject to certain adjustments) to outstanding borrowings under the Credit Facility plus the Unfunded Exposure Amount must equal at least 200.0%.

 

Weighted Average FMV Test. The aggregate adjusted or weighted value of “eligible” pledged loan assets as a percentage of the aggregate outstanding principal balance of “eligible” pledged loan assets must be equal to or greater than 72.0% and 80.0% during the one-year periods prior to the first and second anniversary of the closing date, respectively, and 85.0% at all times thereafter.

 

The Credit Facility also requires payment of outstanding borrowings or replacement of pledged loan assets upon the Company’s breach of its representation and warranty that pledged loan assets included in the Borrowing Base are “eligible” loan assets. Such payments or replacements must equal the lower of the amount by which the Borrowing Base is overstated as a result of such breach or any deficiency under the Collateral Tests at the time of repayment or replacement. Compliance with the Collateral Tests is also a condition to the discretionary sale of pledged loan assets by the Company.

 

Priority of Payments. During the Revolving Period, the priority of payments provisions of the Credit Facility require, after payment of specified fees and expenses and any necessary funding of the Unfunded Exposure Account, that collections of principal from the loan assets and, to the extent that these are insufficient, collections of interest from the loan assets, be applied on each payment date to payment of outstanding borrowings if the Borrowing Base Test, the Overcollateralization Ratio and the Interest Coverage Ratio would not otherwise be met. Similarly, following termination of the Revolving Period, collections of interest are required to be applied, after payment of certain fees and expenses, to cure any deficiencies in the Borrowing Base Test, the Interest Coverage Ratio and the Overcollateralization Ratio as of the relevant payment date.

 

Reserve Account. The Credit Facility requires the Company to set aside an amount equal to the sum of accrued interest, commitment fees and administrative agent fees due and payable on the next succeeding three payment dates (or corresponding to three payment periods). If for any monthly period during which fees and other payments accrue, the aggregate Adjusted Borrowing Value of “eligible” pledged loan assets which do not pay cash interest at least quarterly exceeds 15.0% of the aggregate Adjusted Borrowing Value of “eligible” pledged loan assets, the Company is required to set aside such interest and fees due and payable on the next succeeding six payment dates. Amounts in the reserve account can be applied solely to the payment of administrative agent fees, commitment fees, accrued and unpaid interest and any breakage costs payable to the lenders.

 

Unfunded Exposure Account. With respect to revolver or delayed draw loan assets, the Company is required to set aside in a designated account (the “Unfunded Exposure Account”) 100.0% of its outstanding and undrawn funding commitments with respect to such loan assets. The Unfunded Exposure Account is funded at the time the Company acquires a revolver or delayed draw loan asset and requests a related borrowing under the Credit Facility. The Unfunded Exposure Account is funded through a combination of proceeds of the requested borrowing and other Company funds, and if for any reason such amounts are insufficient, through application of the priority of payment provisions described above.

 

Operating Expenses. The priority of payments provision of the Credit Facility provides for the payment of certain operating expenses of the Company out of collections on principal and interest during the Revolving Period and out of collections on interest following the termination of the Revolving Period in accordance with the priority established in such provision. The operating expenses payable pursuant to the priority of payment provisions is limited to $350,000 for each monthly payment date or $2.5 million for the immediately preceding period of twelve consecutive monthly payment dates. This ceiling can be increased by the lesser of 5.0% or the percentage increase in the fair market value of all the Company’s assets only on the first monthly payment date to occur after each one-year anniversary following the closing of the Credit Facility. Upon the occurrence of a Manager Event (described below), the consent of the administrative agent is required in order to pay operating expenses through the priority of payments provision.

 

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Events of Default. The Credit Facility contains certain negative covenants, customary representations and warranties and affirmative covenants and events of default. The Credit Facility does not contain grace periods for breach by the Company of certain covenants, including, without limitation, preservation of existence, negative pledge, change of name or jurisdiction and separate legal entity status of the Company covenants and certain other customary covenants. Other events of default under the Credit Facility include, among other things, the following:

 

an Interest Coverage Ratio of less than 150.0%;

 

an Overcollateralization Ratio of less than 175.0%;

 

the filing of certain ERISA or tax liens;

 

the occurrence of certain “Manager Events” such as:

 

failure by Saratoga Investment Advisors and its affiliates to maintain collectively, directly or indirectly, a cash equity investment in the Company in an amount equal to at least $5.0 million at any time prior to the third anniversary of the closing date;

 

failure of the Management Agreement between Saratoga Investment Advisors and the Company to be in full force and effect;

 

indictment or conviction of Saratoga Investment Advisors or any “key person” for a felony offense, or any fraud, embezzlement or misappropriation of funds by Saratoga Investment Advisors or any “key person” and, in the case of “key persons,” without a reputable, experienced individual reasonably satisfactory to Madison Capital Funding appointed to replace such key person within 30 days;

 

resignation, termination, disability or death of a “key person” or failure of any “key person” to provide active participation in Saratoga Investment Advisors’ daily activities, all without a reputable, experienced individual reasonably satisfactory to Madison Capital Funding appointed within 30 days; or

 

occurrence of any event constituting “cause” under the Collateral Management Agreement between the Company and Saratoga CLO (the “CLO Management Agreement”), delivery of a notice under Section 12(c) of the CLO Management Agreement with respect to the removal of the Company as collateral manager or the Company ceases to act as collateral manager under the CLO Management Agreement.

 

Conditions to Acquisitions and Pledges of Loan Assets. The Credit Facility imposes certain additional conditions to the acquisition and pledge of additional loan assets. Among other things, the Company may not acquire additional loan assets without the prior written consent of the administrative agent until such time that the administrative agent indicates in writing its satisfaction with Saratoga Investment Advisors’ policies, personnel and processes relating to the loan assets.

 

Fees and Expenses. The Company paid certain fees and reimbursed Madison Capital Funding LLC for the aggregate amount of all documented, out-of-pocket costs and expenses, including the reasonable fees and expenses of lawyers, incurred by Madison Capital Funding LLC in connection with the Credit Facility and the carrying out of any and all acts contemplated thereunder up to and as of the date of closing of the stock purchase transaction with Saratoga Investment Advisors and certain of its affiliates. These amounts totaled $2.0 million.

 

On February 24, 2012, we amended our senior secured revolving credit facility with Madison Capital Funding LLC to, among other things:

 

expand the borrowing capacity under the Credit Facility from $40.0 million to $45.0 million;

 

extend the period during which we may make and repay borrowings under the Credit Facility from July 30, 2013 to February 24, 2015 (the “Revolving Period”). The Revolving Period may, upon the occurrence of an event of default, by action of the lenders or automatically, be terminated. All borrowings and other amounts payable under the Credit Facility are due and payable five years after the end of the Revolving Period; and

 

remove the condition that we may not acquire additional loan assets without the prior written consent of the administrative agent.

 

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On September 17, 2014, we entered into a second amendment to the Revolving Facility with Madison Capital Funding LLC to, among other things:

 

extend the commitment termination date from February 24, 2015 to September 17, 2017;

 

extend the maturity date of the Revolving Facility from February 24, 2020 to September 17, 2022 (unless terminated sooner upon certain events);

 

reduce the applicable margin rate on base rate borrowings from 4.50% to 3.75%, and on LIBOR borrowings from 5.50% to 4.75%; and

 

reduce the floor on base rate borrowings from 3.00% to 2.25%; and on LIBOR borrowings from 2.00% to 1.25%.

 

On May 18, 2017, we entered into a third amendment to the Credit Facility with Madison Capital Funding LLC to, among other things:

 

extend the commitment termination date from September 17, 2017 to September 17, 2020;

 

extend the final maturity date of the Credit Facility from September 17, 2022 to September 17, 2025;

 

reduce the floor on base rate borrowings from 2.25% to 2.00%;

 

reduce the floor on LIBOR borrowings from 1.25% to 1.00%; and

 

reduce the commitment fee rate from 0.75% to 0.50% for any period during which the ratio of advances outstanding to aggregate commitments, expressed as a percentage, is greater than or equal to 50%.

 

On April 24, 2020, we entered into a fourth amendment to the Credit Facility with Madison Capital Funding LLC to, among other things:

 

permit certain amendments related to the Paycheck Protection Program (“Permitted PPP Amendment”) to Loan Asset Documents;

 

exclude certain debt and interest amounts allowed by the Permitted PPP Amendments from certain calculations related to Net Leverage Ratio, Interest Coverage Ratio and EBITDA; and

 

exclude such Permitted PPP Amendments from constituting a Material Modification.

 

On September 14, 2020, we entered into a fifth amendment to the Credit Facility to, among other things:

 

extend the commitment termination date of the Credit Facility from September 17, 2020 to September 17, 2021, with no change to the maturity date of September 17, 2025.

 

provide for the transition away from the LIBOR Rate in the market, and

 

expand the definition of “Eligible Loan Asset” to allow investments with certain recurring revenue features to qualify as Collateral and be included in the borrowing base.

 

As of February 28, 2021, we had no outstanding borrowings under the Credit Facility and $158.0 million of SBA-guaranteed debentures outstanding (which are discussed below). As of February 29, 2020, we had no outstanding borrowings under the Credit Facility and $150.0 million of SBA-guaranteed debentures outstanding. Our borrowing base under the Credit Facility at February 28, 2021 and February 29, 2020 was $38.9 million and $35.6 million, respectively.

 

Our asset coverage ratio, as defined in the 1940 Act, was 347.1% as of February 28, 2021 and 607.1% as of February 29, 2020.

 

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SBA-guaranteed debentures

 

In addition, we, through two wholly-owned subsidiaries, sought and obtained licenses from the SBA to operate an SBIC. In this regard, on March 28, 2012, our wholly-owned subsidiary, Saratoga Investment Corp. SBIC LP, received a license from the SBA to operate as an SBIC under Section 301(c) of the Small Business Investment Act of 1958 and on August 14, 2019, our wholly-owned subsidiary, Saratoga Investment Corp. SBIC II LP, also received a license. SBICs are designated to stimulate the flow of private equity capital to eligible small businesses. Under SBA regulations, SBICs may make loans to eligible small businesses and invest in the equity securities of small businesses.

 

The SBIC license allows our SBIC subsidiaries to obtain leverage by issuing SBA-guaranteed debentures. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and have a ten-year maturity. The principal amount of SBA-guaranteed debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed on a semi-annual basis at a market-driven spread over U.S. Treasury Notes with 10-year maturities.

 

SBA regulations previously limited the amount that our SBIC subsidiary may borrow to a maximum of $150.0 million when it has at least $75.0 million in regulatory capital, receives a capital commitment from the SBA and has been through an examination by the SBA subsequent to licensing. This maximum has been increased by SBA regulators for new licenses to $175.0 million of SBA debentures when it has at least $87.5 million in regulatory capital. The new license will provide up to $175.0 million in additional long-term capital in the form of SBA-guaranteed debentures. The SBIC LP and SBIC II LP are regulated by the SBA. As a result of the 2016 omnibus spending bill signed into law in December 2015, the maximum amount of SBA-guaranteed debentures that affiliated SBIC funds can have outstanding was increased from $225.0 million to $350.0 million. Our wholly-owned SBIC subsidiaries are able to borrow funds from the SBA against regulatory capital (which approximates equity capital) that is paid in and is subject to customary regulatory requirements including but not limited to an examination by the SBA. With this license approval, Saratoga will grow its SBA relationship from $150.0 million to $325.0 million of committed capital.

 

We received exemptive relief from the SEC to permit us to exclude the debt of our SBIC subsidiaries guaranteed by the SBA from the definition of senior securities in the asset coverage test under the 1940 Act. This allows us increased flexibility under the asset coverage test by permitting us to borrow up to $325.0 million more than we would otherwise be able to absent the receipt of this exemptive relief. On April 16, 2018, as permitted by the Small Business Credit Availability Act, which was signed into law on March 23, 2018, our non-interested board of directors approved of our becoming subject to a minimum asset coverage ratio of 150.0% from 200% under Sections 18(a)(1) and 18(a)(2) of the Investment Company Act, as amended. The 150.0% asset coverage ratio became effective on April 16, 2019.

 

As of February 28, 2021, our SBIC LP subsidiary had $75.0 million in regulatory capital and $124.0 million SBA-guaranteed debentures outstanding and our SBIC II LP subsidiary had $69.0 million in regulatory capital and $34.0 million SBA-guaranteed debentures outstanding.

 

Unsecured notes

 

In May 2013, the Company issued $48.3 million in aggregate principal amount of 7.50% fixed-rate notes due 2020 (the “2020 Notes”). The 2020 Notes were redeemed in full on January 13, 2017 and are no longer listed on the NYSE.

 

On May 29, 2015, we entered into a Debt Distribution Agreement with Ladenburg Thalmann & Co. through which we may offer for sale, from time to time, up to $20.0 million in aggregate principal amount of the 2020 Notes through an ATM offering. Prior to the 2020 Notes being redeemed in full, the Company had sold 539,725 bonds with a principal of $13.5 million at an average price of $25.31 for aggregate net proceeds of $13.4 million (net of transaction costs).

 

On December 21, 2016, we issued $74.5 million in aggregate principal amount of our 2023 Notes for net proceeds of $71.7 million after deducting underwriting commissions of approximately $2.3 million and offering costs of approximately $0.5 million. The net proceeds from the offering were used to repay all of the outstanding indebtedness under the 2020 Notes on January 13, 2017, which amounted to $61.8 million, and for general corporate purposes in accordance with our investment objective and strategies. On December 21, 2019 and February 7, 2020, the Company redeemed $50.0 million and $24.5 million, respectively, in aggregate principal amount of the $74.5 million in aggregate principal amount of issued and outstanding 2023 Notes and are no longer listed on the NYSE.

 

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On August 28, 2018, the Company issued $40.0 million in aggregate principal amount of our 6.25% fixed-rate notes due 2025 (the “6.25% 2025 Notes”) for net proceeds of $38.7 million after deducting underwriting commissions of approximately $1.3 million. Offering costs incurred were approximately $0.3 million. The issuance included the full exercise of the underwriters’ option to purchase an additional $5.0 million aggregate principal amount of 6.25% 2025 Notes within 30 days. Interest on the 6.25% 2025 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 6.25% per year, beginning November 30, 2018. The 6.25% 2025 Notes mature on August 31, 2025 and commencing August 28, 2021, may be redeemed in whole or in part at any time or from time to time at our option. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $1.6 million related to the 6.25% 2025 Notes have been capitalized and are being amortized over the term of the 6.25% 2025 Notes. The 6.25% 2025 Notes are listed on the NYSE under the trading symbol “SAF” with a par value of $25.00 per share.

 

On February 5, 2019, the Company completed a re-opening and up-sizing of its existing 6.25% 2025 Notes by issuing an additional $20.0 million in aggregate principal amount for net proceeds of $19.2 million after deducting underwriting commissions of approximately $0.6 million and discount of $0.2 million. Offering costs incurred were approximately $0.2 million. The issuance included the full exercise of the underwriters’ option to purchase an additional $2.5 million aggregate principal amount of 6.25% 2025 Notes within 30 days. Interest rate, interest payment dates and maturity remain unchanged from the existing 6.25% 2025 Notes issued in August 2018. The net proceeds from this offering were used for general corporate purposes in accordance with our investment objective and strategies. The financing costs and discount of $1.0 million related to the 6.25% 2025 Notes have been capitalized and are being amortized over the term of the 6.25% 2025 Notes.

 

At February 28, 2021, the total 6.25% 2025 Notes outstanding was $60.0 million.

 

In connection with the issuance of the 6.25% 2025 Notes, we agreed to the following covenants for the period of time during which the notes are outstanding:

 

we will not violate (whether or not we are subject to) Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, but giving effect to any exemptive relief granted to us by the SEC. These provisions generally prohibit us from making additional borrowings, including through the issuance of additional debt or the sale of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowings, or, if we obtain the required approvals from our independent directors and/or stockholders, 150% (after deducting the amount of such dividend, distribution or purchase price, as the case may be).

 

we will not declare any dividend (except a dividend payable in our stock), or declare any other distribution, upon a class of our capital stock, or purchase any such capital stock, unless, in every such case, at the time of the declaration of any such dividend or distribution, or at the time of any such purchase, we have an asset coverage (as defined in the 1940 Act) of at least 150.0%, as such obligation may be amended or superseded, after deducting the amount of such dividend, distribution or purchase price, as the case may be, and in each case giving effect to (i) any exemptive relief granted to us by the SEC, and (ii) any SEC no-action relief granted by the SEC to another BDC (or to us if we determine to seek such similar no-action or other relief) permitting the BDC to declare any cash dividend or distribution notwithstanding the prohibition contained in Section 18(a)(1)(B) as modified by such provisions of Section 61(a) of the 1940 Act as may be applicable to us from time to time, as such obligation may be amended or superseded, in order to maintain such BDC’s status as a regulated investment company under Subchapter M of the Code.

 

if, at any time, we are not subject to the reporting requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, or the Exchange Act, to file any periodic reports with the SEC, we agree to furnish to holders of the 6.25% 2025 Notes and the Trustee, for the period of time during which the 6.25% 2025 Notes are outstanding, our audited annual consolidated financial statements, within 90 days of our fiscal year end, and unaudited interim consolidated financial statements, within 45 days of our fiscal quarter end (other than our fourth fiscal quarter). All such financial statements will be prepared, in all material respects, in accordance with applicable United States generally accepted accounting principles.

 

 

104

 

 

On June 24, 2020, the Company issued $37.5 million in aggregate principal amount of our 7.25% fixed-rate notes due 2025 (the “7.25% 2025 Notes”) for net proceeds of $36.3 million after deducting underwriting commissions of approximately $1.2 million. Offering costs incurred were approximately $0.3 million. On July 6, 2020, the underwriters exercised their option in full to purchase an additional $5.625 million in aggregate principal amount of its 7.25% unsecured notes due 2025. Net proceeds to the Company were $5.4 million after deducting underwriting commissions of approximately $0.2 million. Interest on the 7.25% 2025 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 7.25% per year, beginning August 31, 2020. The 7.25% 2025 Notes mature on June 30, 2025 and commencing June 24, 2022, may be redeemed in whole or in part at any time or from time to time at our option. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $1.6 million related to the 7.25% 2025 Notes have been capitalized and are being amortized over the term of the 7.25% 2025 Notes. The Company has received an investment grade private rating of “BBB+” from Egan-Jones Ratings Company, an independent, unaffiliated rating agency. The 7.25% 2025 Notes are listed on the NYSE under the trading symbol “SAK” with a par value of $25.00 per share. At February 28, 2021, the total 7.25% 2025 Notes outstanding was $43.1 million.

 

On July 9, 2020, the Company issued $5.0 million aggregate principal amount of our 7.75% fixed-rate Notes due in 2025 (the “7.75% 2025 Notes”) for net proceeds of $4.8 million after deducting underwriting commissions of approximately $0.2 million. Offering costs incurred were approximately $0.1 million. Interest on the 7.75% Notes 2025 is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 7.75% per year, beginning August 31, 2020. The 7.75% Notes 2025 mature on July 9, 2025 and may be redeemed in whole or in part at any time or from time to time at our option. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $0.3 million related to the 7.75% Notes 2025 have been capitalized and are being amortized over the term of the Notes. The 7.75% 2025 Notes are unlisted and have a par value of $25.00 per share.

 

At February 28, 2021, the total 7.75% 2025 Notes outstanding was $5.0 million.

 

On December 29, 2020, the Company issued $5.0 aggregate principal amount of our 6.25% fixed-rate Notes due in 2027 (the “6.25% Notes 2027”). Offering costs incurred were approximately $0.1 million. Interest on the 6.25% Notes 2027 is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 6.25% per year, beginning February 28, 2021. The 6.25% Notes 2027 mature on December 29, 2027 and may be redeemed in whole or in part at any time or from time to time at our option, on or after December 29, 2024. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $0.1 million related to the 6.25% Notes 2027 have been capitalized and are being amortized over the term of the Notes.

 

On January 28, 2021, the Company issued $10.0m aggregate principal amount of our 6.25% fixed rate Notes due in 2027 (the “Second 6.25% Notes 2027”) for net proceeds of $9.7 million after deducting underwriting commissions of approximately $0.3 million. Offering costs incurred were approximately $0.0 million. Interest on the 6.25% Notes 2027 is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 6.25% per year, beginning February 28, 2021. The 6.25% Notes 2027 mature on January 28, 2027 and commencing January 28, 2023, may be redeemed in whole or in part at any time or from time to time at our option. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $0.3 million related to the 6.25% Notes 2027 have been capitalized and are being amortized over the term of the Notes.

 

At February 28, 2021, the total 6.25% 2025 Notes outstanding was $15.0 million.

 

At February 28, 2021 and February 29, 2020, the fair value of total cash and cash equivalents, cash and cash equivalents in reserve accounts and total investments by major category are as follows:

 

   February 28, 2021   February 29, 2020 
   Fair Value   Percentage of Total   Fair Value   Percentage of Total 
   ($ in thousands) 
Cash and cash equivalents  $18,828    3.2%  $24,599    4.7%
Cash and cash equivalents, reserve accounts   11,087    1.9    14,851    2.8 
First lien term loans   440,456    75.4    346,233    66.0 
Second lien term loans   24,930    4.3    73,570    14.0 
Unsecured term loans   2,141    0.4    4,346    0.8 
Structured finance securities   49,779    8.5    32,470    6.2 
Equity interests   37,007    6.3    29,013    5.5 
Total  $584,228    100.0%  $525,082    100.0%

 

105

 

 

On July 13, 2018, the Company issued 1,150,000 shares of its common stock priced at $25.00 per share (par value $0.001 per share) at an aggregate total of $28.75 million. The net proceeds, after deducting underwriting commissions of $1.15 million and offering costs of approximately $0.2 million, amounted to approximately $27.4 million. The Company also granted the underwriters a 30-day option to purchase up to an additional 172,500 shares of its common stock, which was not exercised.

 

On March 16, 2017, we entered into an equity distribution agreement with Ladenburg Thalmann & Co. Inc., through which we may offer for sale, from time to time, up to $30.0 million of our common stock through an ATM offering. Subsequent to this, BB&T Capital Markets and B. Riley FBR, Inc. were also added to the agreement. On July 9, 2019, the amount of the common stock to be offered through this offering was increased to $70.0 million, and on October 8, 2019, the amount of the common stock to be offered was increased to $130.0 million. As of February 28, 2021, the Company sold 3,922,018 shares for gross proceeds of $97.1 million at an average price of $24.77 for aggregate net proceeds of $95.9 million (net of transaction costs). For the year ended February 28, 2021, there was no activity related to the ATM offerings.

 

On September 24, 2014, the Company announced the approval of an open market share repurchase plan that allowed it to repurchase up to 200,000 shares of its common stock at prices below its NAV as reported in its then most recently published consolidated financial statements (the “Share Repurchase Plan”). On October 7, 2015, our board of directors extended the Share Repurchase Plan for another year and increased the number of shares the Company is permitted to repurchase at prices below its NAV, as reported in its then most recently published consolidated financial statements, to 400,000 shares of its common stock. On October 5, 2016, our board of directors extended the Share Repurchase Plan for another year to October 15, 2017 and increased the number of shares the Company is permitted to repurchase at prices below its NAV, as reported in its then most recently published consolidated financial statements, to 600,000 shares of its common stock. On October 10, 2017, January 8, 2019 and January 7, 2020, our board of directors extended the Share Repurchase Plan for another year to October 15, 2018, January 15, 2020 and January 15, 2021, respectively, each time leaving the number of shares unchanged at 600,000 shares of its common stock. On May 4, 2020, our board of directors increased the Share Repurchase Plan to 1.3 million shares of common stock. On January 5, 2021, our board of directors extended the Shares Repurchase Plan for another year to January 15, 2022, leaving the number of shares unchanged at 1.3 million shares of common stock. As of February 28, 2021, the Company purchased 408,812 shares of common stock, at the average price of $17.84 for approximately $7.3 million pursuant to the Share Repurchase Plan. During the year ended February 28, 2021 the Company purchased 190,321 shares of common stock, at the average price $18.96 for approximately $3.6 million pursuant to the Share Repurchase Plan.

 

On January 5, 2021, our board of directors declared a dividend of $0.42 per share, which was paid on February 10, 2021, to common stockholders of record as of January 26, 2021. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $3.8 million in cash and 41,388 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $21.75 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on January 28, 29 and February 1, 2, 3, 4, 5, 8, 9 and 10, 2021.

 

On October 7, 2020, our board of directors declared a dividend of $0.41 per share, which was paid on November 10, 2020, to common stockholders of record as of October 26, 2020. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $3.8 million in cash and 45,706 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $17.63 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on October 28, 29, 30 and November 2, 3, 4, 5, 6, 9 and 10, 2020.

 

On July 7, 2020, the Company declared a dividend of $0.40 per share payable on August 12, 2020, to common stockholders of record on July 27, 2020. Shareholders have the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the Company’s DRIP. Based on shareholder elections, the dividend consisted of approximately $3.7 million in cash and 47,098 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $16.45 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on July 30, 31 and August 3, 4, 5, 6, 7, 10, 11 and 12, 2020.

 

During the three months ended May 31, 2020, there were no dividends declared.

 

106

 

 

On January 7, 2020, the Company declared a dividend of $0.56 per share, which was paid on February 6, 2020, to common stockholders of record on January 24, 2020. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the Company’s DRIP. Based on shareholder elections, the dividend consisted of approximately $5.4 million in cash and 35,682 newly issued shares of common stock, or 0.3% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $25.44 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on January 24, 27, 28, 29, 30, 31 and February 3, 4, 5 and 6, 2020.

 

On August 27, 2019, the Company declared a dividend of $0.56 per share, which was paid on September 26, 2019, to common stockholders of record on September 13, 2019. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the Company’s DRIP. Based on shareholder elections, the dividend consisted of approximately $4.5 million in cash and 34,575 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $23.34 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on September 13, 16, 17, 18, 19, 20, 23, 24, 25 and 26, 2019.

 

On May 28, 2019, our board of directors declared a dividend of $0.55 per share, which was paid on June 27, 2019, to common stockholders of record as of June 13, 2019. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $3.6 million in cash and 31,545 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $22.65 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on June 14, 17, 18, 19, 20, 21, 24, 25, 26 and 27, 2019.

 

On February 26, 2019, our board of directors declared a dividend of $0.54 per share, which was paid on March 28, 2019, to common stockholders of record as of March 14, 2019. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $3.5 million in cash and 31,240 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $21.36 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on March 15, 18, 19, 20, 21, 22, 25, 26, 27 and 28, 2019.

 

On November 27, 2018, our board declared a dividend of $0.53 per share payable on January 2, 2019, to common stockholders of record on December 17, 2018. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the Company’s DRIP. Based on shareholder elections, the dividend consisted of approximately $3.4 million in cash and 30,796 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $18.88 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on December 18, 19, 20, 21, 24, 26, 27, 28, 31, 2018 and January 2, 2019.

 

On August 28, 2018, our board of directors declared a dividend of $0.52 per share, which was paid on September 27, 2018, to common stockholders of record as of September 17, 2018. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $3.3 million in cash and 25,862 newly issued shares of common stock, or 0.3% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $22.35 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on September 14, 17, 18, 19, 20, 21, 24, 25, 26 and 27, 2018.

 

On May 30, 2018, our board of directors declared a dividend of $0.51 per share, which was paid on June 27, 2018, to common stockholders of record as of June 15, 2018. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $2.7 million in cash and 21,562 newly issued shares of common stock, or 0.3% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $23.72 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on June 14, 15, 18, 19, 20, 21, 22, 25, 26 and 27, 2018.

 

107

 

 

On February 26, 2018, our board of directors declared a dividend of $0.50 per share, which was paid on March 26, 2018, to common stockholders of record as of March 14, 2018. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $2.6 million in cash and 25,354 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $19.91 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on March 13, 14, 15, 16, 19, 20, 21, 22, 23 and 26, 2018.

 

On November 29, 2017, our board of directors declared a dividend of $0.49 per share payable on December 27, 2017, to common stockholders of record on December 15, 2017. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $2.5 million in cash and 25,435 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $21.14 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on December 13, 14, 15, 18, 19, 20, 21, 22, 26 and 27, 2017.

 

On August 28, 2017, our board of directors declared a dividend of $0.48 per share payable on September 26, 2017, to common stockholders of record on September 15, 2017. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $2.2 million in cash and 33,551 newly issued shares of common stock, or 0.6% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $20.19 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on September 13, 14, 15, 18, 19, 20, 21, 22, 25 and 26, 2017.

 

On May 30, 2017, our board of directors declared a dividend of $0.47 per share which was paid on June 27, 2017, to common stockholders of record on June 15, 2017. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $2.3 million in cash and 26,222 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $20.04 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on June 14, 15, 16, 19, 20, 21, 22, 23, 26 and 27, 2017.

 

On February 28, 2017, our board of directors declared a dividend of $0.46 per share, which was paid on March 28, 2017, to common stockholders of record as of March 15, 2017. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $2.0 million in cash and 29,096 newly issued shares of common stock, or 0.5% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $21.38 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on March 15, 16, 17, 20, 21, 22, 23, 24, 27 and 28, 2017.

 

On January 12, 2017, our board of directors declared a dividend of $0.45 per share, which was paid on February 9, 2017, to common stockholders of record as of January 31, 2017. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $1.6 million in cash and 50,453 newly issued shares of common stock, or 0.9% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $20.25 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on January 27, 30, 31 and February 1, 2, 3, 6, 7, 8 and 9, 2017.

 

On October 5, 2016, our board of directors declared a dividend of $0.44 per share, which was paid on November 9, 2016, to common stockholders of record as of October 31, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $1.5 million in cash and 58,548 newly issued shares of common stock, or 1.0% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $17.12 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on October 27, 28, 31 and November 1, 2, 3, 4, 7, 8 and 9, 2016.

 

108

 

 

On August 8, 2016, our board of directors declared a special dividend of $0.20 per share, which was paid on September 5, 2016, to common stockholders of record as of August 24, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $0.7 million in cash and 24,786 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $17.06 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on August 22, 23, 24, 25, 26, 29, 30, 31 and September 1 and 2, 2016.

 

On July 7, 2016, our board of directors declared a dividend of $0.43 per share, which was paid on August 9, 2016, to common stockholders of record as of July 29, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $1.5 million in cash and 58,167 newly issued shares of common stock, or 1.0% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $16.32 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on July 27, 28, 29 and August 1, 2, 3, 4, 5, 8 and 9, 2016.

 

On March 31, 2016, our board of directors declared a dividend of $0.41 per share, which was paid on April 27, 2016, to common stockholders of record as of April 15, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $1.5 million in cash and 56,728 newly issued shares of common stock, or 1.0% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $15.43 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on April 14, 15, 18, 19, 20, 21, 22, 25, 26 and 27, 2016.

 

On January 12, 2016, our board of directors declared a dividend of $0.40 per share, which was paid on February 29, 2016, to common stockholders of record as of February 1, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $1.4 million in cash and 66,765 newly issued shares of common stock, or 1.2% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $13.11 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on February 16, 17, 18, 19, 22, 23, 24, 25, 26 and 29, 2016.

 

On October 7, 2015, our board of directors declared a dividend of $0.36 per share, which was paid on November 30, 2015, to common stockholders of record as of November 2, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $1.1 million in cash and 61,029 newly issued shares of common stock, or 1.1% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $14.53 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on November 16, 17, 18, 19, 20, 23, 24, 25, 27 and 30, 2015.

 

On July 8, 2015, our board of directors declared a dividend of $0.33 per share, which was paid on August 31, 2015, to common stockholders of record as of August 3, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $1.1 million in cash and 47,861 newly issued shares of common stock, or 0.9% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $15.28 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on August 18, 19, 20, 21, 24, 25, 26, 27, 28 and 31, 2015.

 

On May 14, 2015, our board of directors declared a special dividend of $1.00 per share, which was paid on June 5, 2015, to common stockholders of record on as of May 26, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $3.4 million in cash and 126,230 newly issued shares of common stock, or 2.3% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $16.47 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on May 22, 26, 27, 28, 29 and June 1, 2, 3, 4, and 5, 2015.

 

109

 

 

On April 9, 2015, our board of directors declared a dividend of $0.27 per share, which was paid on May 29, 2015, to common stockholders of record as of May 4, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $0.9 million in cash and 33,766 newly issued shares of common stock, or 0.6% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $16.78 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on May 15, 18, 19, 20, 21, 22, 26, 27, 28 and 29, 2015.

 

On September 24, 2014, our board of directors declared a dividend of $0.22 per share, which was paid on February 27, 2015, to common stockholders of record on February 2, 2015. Shareholders have the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $0.8 million in cash and 26,858 newly issued shares of common stock, or 0.5% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $14.97 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on February 13, 17, 18, 19, 20, 23, 24, 25, 26 and 27, 2015.

 

Also, on September 24, 2014, our board of directors declared a dividend of $0.18 per share, which was paid on November 28, 2014, to common stockholders of record on November 3, 2014. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $0.6 million in cash and 22,283 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $14.37 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on November 14, 17, 18, 19, 20, 21, 24, 25, 26 and 28, 2014.

 

On October 30, 2013, our board of directors declared a dividend of $2.65 per share, which was paid on December 27, 2013, to common stockholders of record as of November 13, 2013. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $2.5 million or $0.53 per share. This dividend was declared in reliance on certain private letter rulings issued by the IRS concluding that a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC subject to a limitation on the aggregate amount of cash to be distributed to all stockholders, which limitation must be at least 20.0% of the aggregate declared distribution. Based on shareholder elections, the dividend consisted of approximately $2.5 million in cash and 649,500 shares of common stock, or 13.7% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 20.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $15.439 per share, which equaled the volume weighted average trading price per share of the common stock on December 11, 13 and 16, 2013.

 

On November 9, 2012, our board of directors declared a dividend of $4.25 per share, which was paid on December 31, 2012, to common stockholders of record as of November 20, 2012. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $3.3 million or $0.85 per share. Based on shareholder elections, the dividend consisted of $3.3 million in cash and 853,455 shares of common stock, or 22.0% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 20.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $15.444 per share, which equaled the volume weighted average trading price per share of the common stock on December 14, 17 and 19, 2012.

 

On November 15, 2011, our board of directors declared a dividend of $3.00 per share, which was paid on December 30, 2011, to common stockholders of record as of November 25, 2011. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to $2.0 million or $0.60 per share. Based on shareholder elections, the dividend consisted of $2.0 million in cash and 599,584 shares of common stock, or 18.0% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 20.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $13.117067 per share, which equaled the volume weighted average trading price per share of the common stock on December 20, 21 and 22, 2011.

 

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On November 12, 2010, our board of directors declared a dividend of $4.40 per share to shareholders payable in cash or shares of our common stock, in accordance with the provisions of the IRS Revenue Procedure 2010-12, which allows a publicly-traded regulated investment company to satisfy its distribution requirements with a distribution paid partly in common stock provided that at least 10.0% of the distribution is payable in cash. The dividend was paid on December 29, 2010 to common shareholders of record on November 19, 2010. Based on shareholder elections, the dividend consisted of $1.2 million in cash and 596,235 shares of common stock, or 22.0% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 10.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $17.8049 per share, which equaled the volume weighted average trading price per share of the common stock on December 20, 21 and 22, 2010.

 

On November 13, 2009, our board of directors declared a dividend of $18.25 per share, which was paid on December 31, 2009, to common stockholders of record as of November 25, 2009. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to $2.1 million or $0.25 per share. Based on shareholder elections, the dividend consisted of $2.1 million in cash and 864,872.5 shares of common stock, or 104.0% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 13.7% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $1.5099 per share, which equaled the volume weighted average trading price per share of the common stock on December 24 and 28, 2009.

 

We cannot provide any assurance that these measures will provide sufficient sources of liquidity to support our operations and growth.

 

Contractual obligations

 

The following table shows our payment obligations for repayment of debt and other contractual obligations at February 28, 2021:

 

       Payment Due by Period 
Long-Term Debt Obligations  Total   Less Than
1 Year
   1 - 3
Years
   3 - 5
Years
   More Than
5 Years
 
   ($ in thousands) 
Revolving credit facility  $-   $-   $-   $-   $- 
SBA debentures   158,000    -    14,000    39,000    105,000 
6.25% 2025 Notes   60,000    -    -    60,000    - 
7.25% 2025 Notes   43,125    -    -    43,125    - 
7.75% 2025 Notes   5,000    -    -    5,000    - 
6.25% 2027 Notes   15,000    -    -    -    15,000 
Total Long-Term Debt Obligations  $281,125   $-   $14,000   $147,125   $120,000 

 

Off-balance sheet arrangements

 

At February 28, 2021 and February 29, 2020, the Company’s off-balance sheet arrangements consisted of $58.8 million and $64.1 million, respectively, of unfunded commitments outstanding to provide debt financing to its portfolio companies or to fund limited partnership interests. Such commitments are generally up to the Company’s discretion to approve, or the satisfaction of certain financial and nonfinancial covenants and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Company’s consolidated statements of assets and liabilities and are not reflected in the Company’s consolidated statements of assets and liabilities.

 

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A summary of the unfunded commitments outstanding as of February 28, 2021 and February 29, 2020 is shown in the table below (dollars in thousands):

 

   February 28,
2021
   February 29,
2020
 
At Company’s discretion          
Book4Time, Inc.  $2,000   $- 
CLEO Communications Holding, LLC   630    - 
GreyHeller LLC   15,000    - 
inMotionNow, Inc.   -    3,000 
Netreo Holdings, LLC   10,000    - 
Omatic Software, LLC   -    1,000 
Passageways, Inc.   5,000    5,000 
PDDS Buyer, LLC   -    5,000 
Saratoga Investment Corp. CLO 2013-1 Warehouse 2, Ltd.   -    17,500 
Top Gun Pressure Washing, LLC   3,175    5,000 
Village Realty Holdings LLC   10,000    10,000 
Total   45,805    46,500 
           
At portfolio company’s discretion - satisfaction of certain financial and nonfinancial covenants required          
ArbiterSports, LLC   -    1,000 
Axiom Purchaser, Inc.   -    1,000 
CoConstruct, LLC   -    3,500 
Davisware, LLC   -    2,000 
GoReact   2,000    2,000 
Granite Comfort, LP   -    - 
HemaTerra Holding Company, LLC   2,000    4,000 
New England Dental Partners   6,000    - 
Passageways, Inc.   2,000    3,000 
Procurement Partners, LLC   1,000    - 
Village Realty Holdings LLC   -    1,124 
    13,000    17,624 
Total  $58,805   $64,124 

 

Recent Developments

 

Saratoga Investment Corp. announced on March 10, 2021, that it has closed a public offering of $50.0 million aggregate principal amount of its 4.375% notes due 2026 (the “Notes”), which resulted in net proceeds to the Company of approximately $48.8 million based on a public offering price of 100% of the aggregate principal amount of the Notes, after deducting payment of underwriting discounts and commissions and estimated offering expenses payable by the Company.

 

The Notes will mature on February 28, 2026, and may be redeemed in whole or in part at any time or from time to time at the Company’s option at par plus a “make-whole” premium, if applicable. The Notes will bear interest at a rate of 4.375% per year payable semi-annually on February 28 and August 28 of each year, beginning August 28, 2021.

 

On March 22, 2021, the Company declared a dividend of $0.43 per share payable on April 22, 2021, to common stockholders of record on April 8, 2021. Shareholders have the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the Company’s DRIP. Based on shareholder elections, the dividend consisted of approximately $3.9 million in cash and 38,580 newly issued shares of common stock, or 0.3% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $23.69 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on April 9, 12, 13, 14, 15, 16, 19, 20, 21 and 22, 2021.

 

Subsequent to February 28, 2021, the global outbreak of the coronavirus pandemic has adversely affected some of the Company’s investments and continues to have adverse consequences on the U.S. and global economies. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual portfolio companies, remains uncertain. At the time of this filing, there is no indication of a reportable subsequent event impacting the Company’s financial statements for the year ended February 28, 2021. The Company cannot predict the extent to which its financial condition and results of operations will be adversely affected at this time. The potential impact to our results will depend to a large extent on future developments and new information that may emerge regarding the duration and severity of COVID-19. The Company continues to observe and respond to the evolving COVID-19 environment and its potential impact on areas across its business.

 

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our business activities contain elements of market risk. We consider our principal market risk to be the fluctuation in interest rates. Managing this risk is essential to our business. Accordingly, we have systems and procedures designed to identify and analyze our risks, to establish appropriate policies and thresholds and to continually monitor this risk and thresholds by means of administrative and information technology systems and other policies and processes. In addition, U.S. and global capital markets and credit markets have experienced a higher level of stress due to the global COVID-19 pandemic, which has resulted in an increase in the level of volatility across such markets and a general decline in value of the securities held by us.

 

Interest rate risk is defined as the sensitivity of our current and future earnings to interest rate volatility, including relative changes in different interest rates, variability of spread relationships, the difference in re-pricing intervals between our assets and liabilities and the effect that interest rates may have on our cash flows. Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income earned on interest earning assets and our interest expense incurred in connection with our interest-bearing debt and liabilities. Changes in interest rates can also affect, among other things, our ability to acquire leveraged loans, high yield bonds and other debt investments and the value of our investment portfolio.

 

Our investment income is affected by fluctuations in various interest rates, including LIBOR and the prime rate. A large portion of our portfolio is, and we expect will continue to be, comprised of floating rate investments that utilize LIBOR. In connection with the COVID-19 pandemic, the U.S. Federal Reserve and other central banks have reduced certain interest rates and LIBOR has decreased. A prolonged reduction in interest rates will reduce our gross investment income and could result in a decrease in our net investment income if such decreases in LIBOR are not offset by a corresponding increase in the spread over LIBOR that we earn on any portfolio investments, a decrease in in our operating expenses, including with respect to our income incentive fee, or a decrease in the interest rate of our floating interest rate liabilities tied to LIBOR. Our interest expense is affected by fluctuations in LIBOR only on our revolving credit facility. At February 28, 2021, we had $281.0 million of borrowings outstanding. There were no borrowings outstanding under the revolving credit facility as of February 28, 2021.

 

We have analyzed the potential impact of changes in interest rates on interest income from investments. Assuming that our investments as of February 28, 2021 were to remain constant for a full fiscal year and no actions were taken to alter the existing interest rate terms, a hypothetical change of a 1.0% increase in interest rates would cause a corresponding increase of approximately $0.5 million to our interest income. Conversely, a hypothetical change of a 1.0% decrease in interest rates would cause a corresponding decrease of approximately $0.03 million to our interest income.

 

Changes in interest rates would have no impact to our current interest and debt financing expense, as all our borrowings except for our credit facility are fixed rate, and our credit facility is currently undrawn.

 

Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size and composition of the assets on the statements of assets and liabilities and other business developments that could magnify or diminish our sensitivity to interest rate changes, nor does it account for divergences in LIBOR and the commercial paper rate, which have historically moved in tandem but, in times of unusual credit dislocations, have experienced periods of divergence. Accordingly, no assurances can be given that actual results would not materially differ from the potential outcome simulated by this estimate.

 

For further information, the following table shows the approximate annualized increase or decrease in the components of net investment income due to hypothetical base rate changes in interest rates, assuming no changes in our investments and borrowings as of February 28, 2021.

 

    Increase   (Increase)   Increase   Increase 
Basis   (Decrease)   Decrease   (Decrease) in Net   (Decrease) in Net 
Point   in Interest   in Interest   Investment   Investment 
Change   Income   Expense   Income   Income per Share 
    ($ in thousands)     
-100   $(34)  $    -   $(34)  $(0.00)
-50    (34)   -    (34)   (0.00)
-25    (34)   -    (34)   (0.00)
25    45    -    45    0.00 
50    103    -    103    0.01 
100    507    -    507    0.05 
200    3,028    -    3,028    0.27 
300    7,414    -    7,414    0.66 
400    12,122    -    12,122    1.09 

 

The table above assumes no defaults or prepayments by portfolio companies over the next twelve months. The hypothetical results would also be impacted by the changes in the amount of debt outstanding under our Credit Facility, with an increase (decrease) in the debt outstanding under the Credit Facility resulting in an (increase) decrease in the hypothetical interest expense.

 

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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Our consolidated financial statements are annexed to this Annual Report beginning on page F-1. In addition, the Financial Statements of Saratoga Investment Corp. CLO 2013-1, Ltd. are annexed to this Annual Report beginning on page S-1.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of disclosure controls and procedures

 

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on that evaluation, our chief executive officer and our chief financial officer have concluded that our current disclosure controls and procedures are effective in facilitating timely decisions regarding required disclosure of any material information relating to us that is required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

Management’s annual report on internal control over financial reporting

 

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with U.S. GAAP. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that the receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with polices or procedures may deteriorate.

 

Under the supervision and with participation of our Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the Company’s evaluation under the framework in Internal Control—Integrated Framework (2013), management concluded that the Company’s internal control over financial reporting was effective as of February 28, 2021.

 

Changes in internal controls over financial reporting

 

There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of Exchange Act) that occurred during our most recently completed fiscal year that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Director and Executive Officer Information

 

Directors

 

The following table sets forth the names, ages and positions held by each of our directors, followed by a brief biography of each individual, including the business experience of each individual during the past five years and the specific qualifications that led to the conclusion that each individual should serve as a director.

 

Name  Age  Position 

Director

Since

  Term
Expires
 
Interested Directors             
Christian L. Oberbeck  61  Chairman of the Board, Chief Executive Officer and President  2010  2021 
Henri J. Steenkamp  45  Chief Financial Officer, Chief Compliance Officer, Treasurer and Secretary  2020  2023 
Independent Directors             
Steven M. Looney  71  Director  2007  2022 
Charles S. Whitman III  79  Director  2007  2022 
G. Cabell Williams  67  Director  2007  2023 

 

Christian L. Oberbeck—Mr. Oberbeck has over 36 years of experience in leveraged finance, from distressed debt to private equity, and has been involved in originating, structuring, negotiating, consummating, managing and monitoring investments in a broad array of businesses. Mr. Oberbeck is the Managing Member of Saratoga Investment Advisors, LLC, the Company’s investment adviser and the Chairman of the Board, Chief Executive Officer and President of the Company. Mr. Oberbeck is also the Managing Partner of Saratoga Partners, a middle market private equity investment firm.

 

Prior to assuming full management responsibility for Saratoga Partners in 2008, Mr. Oberbeck had co-managed Saratoga Partners since 1995. Mr. Oberbeck joined Dillon Read and Saratoga Partners from Castle Harlan, Inc., a corporate buyout firm which he had joined at its founding in 1987 and was a Managing Director, leading successful investments in manufacturing and financial services companies. Prior to that, he worked in the Corporate Development Group of Arthur Young and in corporate finance at Blyth Eastman Paine Webber. Mr. Oberbeck has been a director of numerous middle market companies.

 

Mr. Oberbeck graduated from Brown University in 1982 with a BS in Physics and a BA in Mathematics. In 1985, he earned an MBA from Columbia University. Mr. Oberbeck’s qualifications as a director include his extensive experience in the investment and finance industry, as well as his intimate knowledge of the Company’s operations, gained through his service as an executive officer.

 

Steven M. Looney—Mr. Looney is a Managing Director of Peale Davies & Co. Inc., a strategic advisory firm specializing in change management and revenue enhancement for middle market enterprises, and is a CPA and an attorney. Mr. Looney has served as a consultant and director to numerous companies in the healthcare, manufacturing and services industries. Between 2000 and 2005, he served as Senior Vice President and Chief Financial Officer of PCCI, Inc., a private IT staffing and outsourcing firm. Between 1992 and 2000, Mr. Looney worked at WH Industries as Chief Financial and Administrative Officer. Mr. Looney is a trustee of Excellent Education for Everyone, a nonprofit organization and founder of its affiliate, Education Moms. Mr. Looney graduated summa cum laude from the University of Washington with a B.A. degree in accounting and received a J.D. from the University of Washington School of Law where he was a member of the law review. He began his career at the United States Securities and Exchange Commission. Mr. Looney’s qualifications as director include his experience as a Managing Director of Peale Davies & Co., as Chief Financial and Administrative Officer of WH Industries and as General Counsel and Chief Compliance Officer of A.G. Becker-Warburg Paribas Becker, as well as his financial, accounting and legal expertise.

 

Charles S. Whitman III—Mr. Whitman is senior counsel (retired) at Davis Polk & Wardwell LLP. Mr. Whitman was a partner in Davis Polk’s Corporate Department for 28 years, representing clients in a broad range of corporate finance matters, including shelf registrations, securities compliance for financial institutions, foreign asset privatizations, and mergers and acquisitions. From 1971 to 1973, Mr. Whitman served as Executive Assistant to three successive Chairmen of the SEC. Mr. Whitman graduated from Harvard College and graduated magna cum laude from Harvard Law School with a LL.B. Mr. Whitman also received an LL.M. from Cambridge University in England. Mr. Whitman’s qualifications as director include his 28 years of experience representing clients, including AT&T, Exxon Mobil, General Motors and BP, in securities matters as a partner in Davis Polk’s corporate department.

 

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Henri J. Steenkamp—Mr. Steenkamp, 45 years old, is a Director of the Board and Chief Financial Officer, Chief Compliance Officer, Treasurer and Secretary of the Company and of Saratoga Investment Advisors LLC, the Company’s investment adviser. Prior to this, Mr. Steenkamp had served as the Chief Financial Officer of MF Global Holdings Ltd., a broker in commodities and derivatives, from April 2011. Prior to that, Mr. Steenkamp held the position of Chief Accounting Officer and Global Controller at MF Global for four years. He joined MF Global, then Man Financial, in 2006 as Vice President of External Reporting and Accounting Policy. After MF Global filed for bankruptcy protection in October 2011, he continued to serve as Chief Financial Officer of the holding company through January 2013.

 

Before joining MF Global, Mr. Steenkamp spent eight years with PricewaterhouseCoopers (“PwC”), including four years in Transaction Services in its New York office, managing a variety of capital-raising transactions on a global basis. His focus was also on the SEC registration and public company filing process, including technical accounting. He spent four years with PwC in South Africa, where he served as an auditor primarily for SEC registrants and assisted South African companies as they went public in the U.S. Mr. Steenkamp is a chartered accountant and holds an honors degree in Finance. Mr. Steenkamp’s qualifications as director include his extensive experience in the investment and finance industry, as well as his intimate knowledge of the Company’s operations, gained through his service as the Company’s Chief Financial Officer, Chief Compliance Officer, Treasurer and Secretary.

 

G. Cabell Williams—Mr. Williams has served as the Managing General Partner of Williams and Gallagher, a private equity partnership located in Chevy Chase, Maryland since 2004. Mr. Williams is a Partner, Senior Manager and Director of Farragut Capital Partners, which is a Mezzanine Fund based out of Chevy Chase, Maryland. In 2004, Mr. Williams concluded a 23-year career at Allied Capital Corporation, a business development company based in Washington, DC, which was acquired by Ares Capital Corporation in 2010. While at Allied, Mr. Williams held a variety of positions, including President, CIO and finally Managing Director following Allied’s merger with its affiliates in 1998. From 1991 to 2004, Mr. Williams either led or co-managed the firm’s Private Equity Group. For the nine years prior to 1999, Mr. Williams led Allied’s Mezzanine investment activities. For 15 years, Mr. Williams served on Allied’s Investment Committee where he was responsible for reviewing and approving all of the firm’s investments. Prior to 1991, Mr. Williams ran Allied’s Minority Small Business Investment Company. He also founded Allied Capital Commercial Corporation, a real estate investment vehicle. Mr. Williams has served on the board of directors of various public and private companies. Mr. Williams attended The Landon School, and graduated from Mercersburg Academy and Rollins College, receiving a B.S. in Business Administration from the latter. Mr. Williams’ qualifications as director include his 28 years of experience managing investment activities at Allied Capital, where he served in a variety of positions, including President, CIO and Managing Director.

 

Code of Business Conduct and Ethics

 

We have adopted a Code of Business Conduct and Ethics which applies to, among others, our executive officers, including our principal executive officer and principal financial officer, as well as every officer, director and employee of the Company. Requests for copies should be sent in writing to Saratoga Investment Corp., 535 Madison Avenue, New York, New York 10022. The Company’s Code of Business Conduct and Ethics is also available on our website at www.saratogainvestmentcorp.com.

 

If we make any substantive amendment to, or grant a waiver from, a provision of our Code of Business Conduct and Ethics, we will promptly disclose the nature of the amendment or waiver on our website at www.saratogainvestmentcorp.com.

 

Practices and Policies Regarding Hedging, Speculative Trading and Pledging of Securities

 

Our insider trading policy generally prohibits the Company’s and our Investment Adviser’s directors, officers and employees from engaging in any short-term trading, short sales and other speculative transactions involving our securities, including buying or selling puts or calls or other derivative securities based on our securities. In addition, such persons are generally prohibited under our insider trading policy from entering into hedging or monetization transactions or similar arrangements, as well as pledging our securities in a margin account or as collateral for a loan, except in limited circumstances that are pre-approved by our chief compliance officer. 

 

Nomination of Directors

 

There have been no material changes to the procedures by which stockholders may recommend nominees to our board of directors implemented since the filing of our Proxy Statement for our 2018 Annual Meeting of Stockholders.

 

Audit Committee

 

The current members of the audit committee are Steven M. Looney (Chairman), Charles S. Whitman III and G. Cabell Williams. The board of directors has determined that Mr. Looney is an “audit committee financial expert” as defined under Item 407 of Regulation S-K of the Securities Exchange Act of 1934 and that each of Messrs. Whitman and Williams are “financially literate” as required by NYSE corporate governance standards. All of these members are independent directors.

 

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ITEM 11. EXECUTIVE COMPENSATION

 

Executive Compensation

 

Currently, none of our executive officers are compensated by us. We currently have no employees, and each of our executive officers is also an employee of Saratoga Investment Advisors. Services necessary for our business are provided by individuals who are employees of Saratoga Investment Advisors, pursuant to the terms of the Management Agreement and the Administration Agreement.

 

Director Compensation

 

Our independent directors receive an annual fee of $70,000. They also receive $3,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting and receive $1,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each committee meeting. In addition, the chairman of the audit committee receives an annual fee of $12,500 and the chairman of each other committee receives an annual fee of $6,000 for their additional services in these capacities. In addition, we have purchased directors’ and officers’ liability insurance on behalf of our directors and officers. Independent directors have the option to receive their directors’ fees in the form of our common stock issued at a price per share equal to the greater of net asset value or the market price at the time of payment. No compensation is paid to directors who are “interested persons.”

 

The following table sets forth information concerning total compensation earned by or paid to each of our directors during the fiscal year ended February 28, 2021:

 

   Fees Earned or Paid in Cash   Total 
Interested Directors          
Christian L. Oberbeck(1)  $-   $- 
Henri J. Steenkamp(1)   -    - 
Independent Directors          
Steven M. Looney  $97,000   $97,000 
Charles S. Whitman III   92,000    92,000 
G. Cabell Williams   92,000    92,000 

 

 

(1)No compensation was paid to directors who are interested persons of us as defined in the 1940 Act.

 

Compensation Committee Interlocks and Insider Participation

 

The current members of the compensation committee are G. Cabell Williams (Chairman), Steven M. Looney and Charles S. Whitman III. All of these members are independent directors. The compensation committee is responsible for overseeing the Company’s compensation policies generally and making recommendations to the board of directors with respect to incentive compensation and equity-based plans of the Company that are subject to board of directors approval, evaluating executive officer performance and reviewing the Company’s management succession plan, overseeing and setting compensation for the Company’s directors and, as applicable, its executive officers and, as applicable, preparing the report on executive officer compensation that SEC rules require to be included in our Annual Report on Form 10-K. Currently, none of our executive officers are compensated by the Company and as such the compensation committee is not required to produce a report on executive officer compensation for inclusion in our Annual Report on Form 10-K.

 

During fiscal year ended February 28, 2021 none of the Company’s executive officers served on the board of directors (or a compensation committee thereof or other board committee performing equivalent functions) of any entities that had one or more executive officers serve on the compensation committee or on the board of directors. No current or past executive officers or employees of the Company or its affiliates serve on the compensation committee.

 

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth, as of May 4, 2021, the beneficial ownership of each current director, the nominees for director, the Company’s executive officers, each person known to us to beneficially own 5.0% or more of the outstanding shares of our common stock, and the executive officers and directors as a group.

 

The percentage ownership is based on 11,199,995 shares of common stock outstanding as of May 4, 2021. Shares of common stock that are subject to warrants or other convertible securities currently exercisable or exercisable within 60 days thereof, are deemed outstanding for the purposes of computing the percentage ownership of the person holding these options or convertible securities, but are not deemed outstanding for computing the percentage ownership of any other person. Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power with respect to securities. To our knowledge, unless otherwise indicated in the footnotes to this table, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned. Unless otherwise indicated by footnote, the address for each listed individual is Saratoga Investment Corp., 535 Madison Avenue, New York, New York 10022.

 

Name of Beneficial Owners  Number of
Shares of
Common
Stock
Beneficially
Owned
   Percent of
Class
 
Interested Directors        
Christian L. Oberbeck   1,535,792(1)   13.7%
Henri J. Steenkamp   18,093    * 
Independent Directors          
Steven M. Looney   2,508    * 
Charles S. Whitman III   3,400    * 
G. Cabell Williams   69,940    * 
All Directors as a Group   1,629,733    14.6%
Owners of 5% or more of our common stock          
Black Diamond Capital Management, L.L.C.(2)   910,818    8.1%
Elizabeth Oberbeck(3)   549,183    4.9%
Thomas V. Inglesby   354,236    3.2%
Michael J. Grisius   167,215    1.5%

 

 

*Less than 1.0%

 

Mr. Oberbeck, Mr. Grisius and Mr. Inglesby are affiliates who make up 18.4% of the ownership of SAR.

 

(1)Includes 722,868 shares of common stock directly held by Mr. Oberbeck, 217,774 shares of common stock held by CLO Partners LLC, an entity wholly owned by Mr. Oberbeck, 44,869 shares of common stock directly held by Mr. Oberbeck's children, for which Mr. Oberbeck retains the voting rights, 1,100 shares of common stock directly held by Mr. Oberbeck's wife, for which Mr. Oberbeck retains the voting rights, and 549,183 shares of common stock directly held by Elizabeth Oberbeck. See footnote 3 below.

 

(2)Based on information included in Amendment No. 9 to Schedule 13G filed by Black Diamond Capital Management, L.L.C. with the SEC on February 16, 2021. The address of Black Diamond Capital Management, L.L.C. is One Sound Shore Drive, Suite 200, Greenwich, CT 06830.

 

(3)Based on information included in Amendment No. 2 to Schedule 13D filed on January 16, 2020, which amends and supplements the statements on Schedule 13D originally filed with the Securities and Exchange Commission on October 27, 2014 and amended by Amendment No. 1 on April 2, 2019. The original 13D was filed jointly by Christian L. Oberbeck, Elizabeth Oberbeck, Saratoga Investment Advisors and CLO Partners LLC on November 4, 2014. Pursuant to an Agreement Relating to Shares of Common Stock of Saratoga Investment Corp. (the “Transfer Agreement”), Christian L. Oberbeck transferred 744,183 shares of common stock beneficially owned by him to Elizabeth Oberbeck. Elizabeth Oberbeck has full ownership rights with respect to the shares, including without limitation, the right to (A) receive any cash and/or stock dividends and distributions paid on or with respect to the shares and (B) sell the shares in accordance with the provisions of the Transfer Agreement and receive all proceeds therefrom. However, pursuant to the terms of the Transfer Agreement, Christian L. Oberbeck has retained the right to vote the shares, except that Elizabeth Oberbeck has retained the right to vote the shares on all matters submitted to shareholders with respect to any matter that could give rise to dissenters or other rights of an objecting shareholder under Maryland General Corporation Law. The Transfer Agreement also contains a right of first refusal that requires Elizabeth Oberbeck to offer Christian L. Oberbeck the opportunity to purchase any shares of Common Stock owned by her prior to her intended sale of the shares. Any such purchases may be made either directly by Mr. Oberbeck or through entities affiliated with him.

 

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Transactions with Related Persons

 

We have entered into a Management Agreement with Saratoga Investment Advisors, LLC. We have also entered into a license agreement with Saratoga Investment Advisors, LLC, pursuant to which Saratoga Investment Advisors has agreed to grant us a non-exclusive, royalty-free license to use the name “Saratoga.” In addition, pursuant to the terms of the Administration Agreement, Saratoga Investment Advisors, LLC provides us with the office facilities and administrative services necessary to conduct our day-to-day operations. Mr. Oberbeck, our chief executive officer, is the primary investor in and controls Saratoga Investment Advisors, LLC.

 

Review, Approval or Ratification of Transactions with Related Persons

 

The Audit Committee of our board is required to review and approve any transactions with related persons (as such term is defined in Item 404 of Regulation S-K).

 

Director Independence

 

In accordance with rules of the NYSE, the board of directors annually determines the independence of each director. No director is considered independent unless the board of directors has determined that he or she has no material relationship with the Company. The Company monitors the status of its directors and officers through the activities of the Company’s Nominating and Corporate Governance Committee and through a questionnaire to be completed by each director no less frequently than annually, with updates periodically if information provided in the most recent questionnaire has changed.

 

In order to evaluate the materiality of any such relationship, the board of directors uses the definition of director independence set forth in the NYSE Listed Company Manual. Section 303A.00 of the NYSE Listed Company Manual provides that business development companies, or BDCs, such as the Company, are required to comply with all of the provisions of Section 303A applicable to domestic issuers other than Sections 303A.02, the section that defines director independence.

 

Section 303A.00 provides that a director of a BDC shall be considered to be independent if he or she is not an “interested person” of the Company, as defined in Section 2(a)(19) of the 1940 Act. Section 2(a)(19) of the 1940 Act defines an “interested person” to include, among other things, any person who has, or within the last two years had, a material business or professional relationship with the Company.

 

The board of directors has determined that each of the directors is independent and has no relationship with the Company, except as a director and stockholder of the Company, with the exception of Messrs. Oberbeck and Grisius who are interested persons of the Company due to their positions as officers of the Company and its Investment Adviser.

 

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Independent Registered Public Accounting Firm

 

For the years ended February 28, 2021 and February 29, 2020, the Company incurred the following fees for services provided by Ernst & Young LLP, including expenses:

 

   Fiscal Year Ended
February 28,
2021
   Fiscal Year Ended
February 29,
2020
 
Audit Fees  $525,000   $647,000 
Tax Fees   42,800    42,000 
Total Fees  $567,800   $689,000 

 

In addition to the services listed above, Ernst & Young LLP provided audit services to the Company’s subsidiaries. For the year ended February 29, 2020 Ernst Young LLP was the auditor for Saratoga Investment Corp. CLO 2013-1, Ltd. The following are the related fees:

 

   Fiscal Year Ended
February 28,
2021
  

Fiscal Year Ended
February 29,

2020

 
CLO Audit Fees  $-   $65,000 
Tax Services for Company’s Subsidiaries   -    - 
All Other Fees   29,000    28,000 
Total Fees  $29,000   $93,000 

 

Audit Fees. Audit fees include fees for services that normally would be provided by the accountant in connection with statutory and regulatory filings or engagements and that generally only the independent accountant can provide. In addition to fees for the audit of our annual consolidated financial statements, the audit of the effectiveness of our internal control over financial reporting and the review of our quarterly consolidated financial statements in accordance with generally accepted auditing standards, this category contains fees for comfort letters, statutory audits, consents, and assistance with and review of documents filed with the SEC.

 

Audit Related Fees. Audit related fees are assurance related services that traditionally are performed by the independent accountant, such as attest services that are not required by statute or regulation.

 

Tax Fees. Tax fees include services in conjunction with preparation of the Company’s tax return.

 

All Other Fees. Fees for other services would include fees for products and services other than the services reported above.

 

It is the policy of the audit committee to pre-approve all audit, review or attest engagements and permissible non-audit services to be performed by our independent registered public accounting firm.

 

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PART IV

 

ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

 

The following documents are filed or incorporated by reference as part of this Annual Report:

 

1. Consolidated Financial Statements

 

The following consolidated financial statements of the Company are filed herewith:

 

Report of Independent Registered Public Accounting Firm   F-2
     
Consolidated Statements of Assets and Liabilities as of February 28, 2021 and February 29, 2020   F-3
     
Consolidated Statements of Operations for the years ended February 28, 2021, February 29, 2020 and February 28, 2019   F-4
     
Consolidated Schedules of Investments as of February 28, 2021 and February 29, 2020   F-7
     
Consolidated Statements of Changes in Net Assets for the years ended February 28, 2021, February 29, 2020 and February 28, 2019   F-5
     
Consolidated Statements of Cash Flows for the years ended February 28, 2021, February 29, 2020 and February 28, 2019   F-6
     
Notes to Consolidated Financial Statements   F-17

 

2. Financial Statement Schedules

 

Reference is made to the Index to Other Financial Statements on page S-1.

 

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3. Exhibits required to be filed by Item 601 of Regulation S-K

 

The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:

 

EXHIBIT INDEX

  

Exhibit
Number

  Description
3.1(a)   Articles of Incorporation of Saratoga Investment Corp. (incorporated by reference to Saratoga Investment Corp.’s Form 10-Q for the quarterly period ended May 31, 2007).
     
3.1(b)   Articles of Amendment of Saratoga Investment Corp. (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed August 3, 2010).
     
3.1(c)   Articles of Amendment of Saratoga Investment Corp. (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed August 13, 2010).
     
3.2   Third Amended and Restated Bylaws of Saratoga Investment Corp (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 10-Q filed January 6, 2021).
     
4.1   Specimen certificate of Saratoga Investment Corp.’s common stock, par value $0.001 per share. (incorporated by reference to Saratoga Investment Corp.’s Registration Statement on Form N-2, File No. 333-169135, filed on September 1, 2010).
     
4.2   Registration Rights Agreement dated July 30, 2010 between GSC Investment Corp., GSC CDO III L.L.C., and the investors party thereto (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on August 3, 2010).
     
4.3   Dividend Reinvestment Plan (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on September 24, 2014).
     
4.4   Form of Indenture by and between the Company and U.S. Bank National Association, as trustee (incorporated by reference to Saratoga Investment Corp.’s Pre-Effective Amendment No. 2 to the Registration Statement on Form N-2, File No. 333-186323 filed April 30, 2013).
     
4.5   Form of Second Supplemental Indenture between the Company and U.S. Bank National Association (incorporated by reference to Amendment No. 2 to Saratoga Investment Corp.’s Registration Statement on Form N-2, File No. 333- 214182, filed on December 12, 2016).
     
4.6   Form of Global Note (incorporated by reference to Exhibit 4.5 hereto, and Exhibit A therein).
     
4.7   Form of Third Supplemental Indenture between the Company and U.S. Bank National Association (incorporated by reference to Post-Effective Amendment No. 9 to the Registrant’s Registration Statement on Form N-2, File No. 333-216344, filed on August 28, 2018).
     
4.8   Form of Global Note (incorporated by reference to Exhibit 4.7 hereto, and Exhibit A therein).
     
4.9   Form of Articles Supplementary Establishing and Fixing the Rights and Preferences of Preferred Stock (incorporated by reference to Saratoga Investment Corp.’s registration statement on Form N-2 Pre-Effective Amendment No. 1, File No. 333-196526, filed on December 5, 2014).
     
4.10*   Description of Securities.
     
4.11   Fourth Supplemental Indenture between the Company and U.S. Bank National Association, as trustee, relating to the 7.25% Note due 2025 (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (File No. 814-00732) filed on June 24, 2020).
     
4.12   Form of 7.25% Notes due 2025 (incorporated by reference to Exhibit 4.11 hereto).
     
4.13   Eighth Supplemental Indenture between the Company and U.S. Bank National Association, as trustee, relating to the 4.375% Note due 2026 (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (File No. 814-00732) filed on March 10, 2021).

 

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4.14   Form of 4.375% Notes due 2026 (incorporated by reference to Exhibit 4.13 hereto).
     
10.1   Investment Advisory and Management Agreement dated July 30, 2010 between GSC Investment Corp. and Saratoga Investment Advisors, LLC (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on August 3, 2010).
     
10.2   Custodian Agreement dated March 21, 2007 between GSC Investment LLC and U.S. Bank National Association (incorporated by reference to Saratoga Investment Corp.’s Form 10-Q for the quarterly period ended May 31, 2007).
     
10.3   Administration Agreement dated July 30, 2010 between GSC Investment Corp. and Saratoga Investment Advisors, LLC (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on August 3, 2010).
     
10.4   Trademark License Agreement dated July 30, 2010 between Saratoga Investment Advisors, LLC and GSC Investment Corp. (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on August 3, 2010).
     
10.5   Credit, Security and Management Agreement dated July 30, 2010 by and among GSC Investment Funding LLC, Saratoga Investment Corp., Saratoga Investment Advisors, LLC, Madison Capital Funding LLC and U.S. Bank National Association (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on August 3, 2010).
     
10.6   Form of Indemnification Agreement between Saratoga Investment Corp. and each officer and director of Saratoga Investment Corp. (incorporated by reference to Amendment No. 2 to Saratoga Investment Corp.’s Registration Statement on Form N-2 filed on January 12, 2007).
     
10.7   Amendment No. 1 to Credit, Security and Management Agreement dated February 24, 2012 by and among Saratoga Investment Funding LLC, Saratoga Investment Corp., Saratoga Investment Advisors, LLC, Madison Capital Funding LLC and U.S. Bank National Association (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on February 29, 2012).
     
10.8   Amended and Restated Indenture, dated as of November 15, 2016, among Saratoga Investment Corp. CLO 2013-1, Ltd., Saratoga Investment Corp. CLO 2013-1, Inc. and U.S. Bank National Association. (incorporated by reference to Saratoga Investment Corp.’s Registration Statement on Form N-2, File No. 333-216344, filed on February 28, 2017).
     
10.9   Amended and Restated Collateral Management Agreement, dated October 17, 2013, by and between Saratoga Investment Corp. and Saratoga Investment Corp. CLO 2013-1, Ltd. (incorporated by reference to Saratoga Investment Corp.’s Registration Statement on Form N-2, File No. 333-196526, filed on December 5, 2014).
     
10.10   Amendment No. 2 to Credit, Security and Management Agreement dated September 17, 2014 by and among Saratoga Investment Funding LLC, Saratoga Investment Corp., Saratoga Investment Advisors, LLC, Madison Capital Funding LLC and U.S. Bank National Association (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on September 18, 2014).
     
10.11   Amendment No. 3 to Credit, Security and Management Agreement, dated May 18, 2017, by and among Saratoga Investment Funding LLC, Saratoga Investment Corp., Saratoga Investment Advisors, LLC, Madison Capital Funding LLC and U.S. Bank National Association (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on May 18, 2017).
     
10.12   Equity Distribution Agreement dated March 16, 2017, by and among Saratoga Investment Corp., Saratoga Investment Advisors, LLC, Ladenburg Thalmann and Co. Inc. and BB&T Capital Markets, a division of BB&T Securities, LLC (incorporated by reference to Saratoga Investment Corp.’s Post-Effective Amendment No. 1 to the Registration Statement on Form N-2, File No. 333-216344, filed on March 16, 2017).
     
10.13   Amendment No. 1 to the Equity Distribution Agreement dated October 12, 2017, by and among Saratoga Investment Corp., Saratoga Investment Advisors, LLC, Ladenburg Thalmann and Co. Inc., BB&T Capital Markets, a division of BB&T Securities, LLC, and FBR Capital Markets & Co. (incorporated by reference to Saratoga Investment Corp.’s Post-Effective Amendment No. 2 to the Registration Statement on Form N-2, File No. 333-216344, filed on October 12, 2017).

 

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10.14   Amendment No. 2 to the Equity Distribution Agreement dated January 11, 2018, by and among Saratoga Investment Corp., Saratoga Investment Advisors, LLC, Ladenburg Thalmann and Co. Inc., BB&T Capital Markets, a division of BB&T Securities, LLC, and FBR Capital Markets & Co. (incorporated by reference to Saratoga Investment Corp.’s Post-Effective Amendment No. 3 to Saratoga Investment Corp.’s Registration Statement on Form N-2, File No. 333- 216344, filed on January 11, 2018).
     
10.15   Amendment No. 3 to the Equity Distribution Agreement dated October 16, 2018, by and among Saratoga Investment Corp., Saratoga Investment Advisors, LLC, Ladenburg Thalmann and Co. Inc., BB&T Capital Markets, a division of BB&T Securities, LLC, and B. Riley FBR, Inc. (incorporated by reference to Post-Effective Amendment No. 1 to the registrant’s Registration Statement on Form N-2, File No. 333-227116, filed on October 16, 2018).
     
10.16   Amendment No. 4 to the Equity Distribution Agreement dated July 11, 2019, by and among Saratoga Investment Corp., Saratoga Investment Advisors, LLC, Ladenburg Thalmann and Co. Inc., BB&T Capital Markets, a division of BB&T Securities, LLC, and B. Riley FBR, Inc. (incorporated by reference to Post-Effective Amendment No. 5 to the registrant’s Registration Statement on Form N-2, File No. 333-227116, filed on July 12, 2019).
     
10.17   Amendment No. 5 to the Equity Distribution Agreement dated October 10, 2019, by and among Saratoga Investment Corp., Saratoga Investment Advisors, LLC, Ladenburg Thalmann and Co. Inc., BB&T Capital Markets, a division BB&T Securities, LLC, and B. Riley FBR, Inc. (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on October 10, 2019).
     
10.18   Amendment No. 4 to Credit, Security and Management Agreement, dated April 24, 2020, by and among Saratoga Investment Funding LLC, Saratoga Investment Corp., Saratoga Investment Advisors, LLC, Madison Capital Funding LLC and U.S. Bank National Association (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on April 29, 2020).
     
10.19   Amendment No. 5 to Credit, Security and Management Agreement, dated September 14, 2020, by and among Saratoga Investment Funding LLC, Saratoga Investment Corp., Saratoga Investment Advisors, LLC, Madison Capital Funding LLC and U.S. Bank National Association (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on September 17, 2020).
     
10.20   Amended and Restated Collateral Management Agreement, dated February 26, 2021, by and between Saratoga Investment Corp. and Saratoga Investment Corp. CLO 2013-1, Ltd. (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on March 4, 2021).
     
10.21   Amended and Restated Collateral Administration Agreement, dated February 26, 2021, by and between Saratoga Investment Corp., Saratoga Investment Corp. CLO 2013-1, Ltd. and U.S. Bank National Association (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on March 4, 2021).
     
11   Computation of Per Share Earnings (included in Note 11 to the consolidated financial statements contained in this report).
     
14   Code of Ethics of the Company adopted under Rule 17j-1 (incorporated by reference to Amendment No.7 to Saratoga Investment Corp.’s Registration Statement on Form N-2, File No. 333-138051, filed on March 22, 2007).
     
21.1   List of Subsidiaries (Incorporated by reference to Saratoga Investment Corp.’s Annual Report on Form 10-K filed on May 6, 2020).
23.1*  

Consent of Ernst & Young LLP for Saratoga Investment Corp.

23.2*   Consent of CohnReznick LLP for Saratoga Investment Corp. CLO 2013-1, Ltd.
31.1*   Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
31.2*   Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
32.1*   Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
32.2*   Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

 

 

*Filed herewith

 

ITEM 16. FORM 10-K SUMMARY

 

None.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  SARATOGA INVESTMENT CORP.
     
Date: May 5, 2021 By: /s/ CHRISTIAN L. OBERBECK
    Christian L. Oberbeck
    Chief Executive Officer

 

  By: /s/ HENRI J. STEENKAMP
    Henri J. Steenkamp
    Chief Financial Officer and Chief Compliance Officer

 

KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below hereby constitutes and appoints Christian L. Oberbeck and Henri J. Steenkamp, and each of them (with full power to each of them to act alone), his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign this report and any and all amendments thereto, and to file the same, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature   Title   Date
         
/s/ CHRISTIAN L. OBERBECK   Chairman of the Board of Directors,
Chief Executive Officer
  May 5, 2021
Christian L. Oberbeck   (Principal Executive Officer)    
         
/s/ HENRI J. STEENKAMP   Chief Financial Officer
(Principal Accounting Officer and
  May 5, 2021
Henri J. Steenkamp   Principal Financial Officer),
Member of the Board of Directors
   
         
/s/ STEVEN M. LOONEY   Member of the Board of Directors   May 5, 2021
Steven M. Looney        
         
/s/ CHARLES S. WHITMAN III   Member of the Board of Directors   May 5, 2021
Charles S. Whitman III        
         
/s/ G. CABELL WILLIAMS   Member of the Board of Directors   May 5, 2021
Cabell Williams        

 

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

    PAGE
Reports of Independent Registered Public Accounting Firm   F-2
Consolidated Statements of Assets and Liabilities as of February 28, 2021 and February 29, 2020   F-3
Consolidated Statements of Operations for the years ended February 28, 2021, February 29, 2020 and February 28, 2019   F-4
Consolidated Statements of Changes in Net Assets for the years ended February 28, 2021, February 29, 2020 and February 28, 2019   F-5
Consolidated Statements of Cash Flows for the years ended February 28, 2021, February 29, 2020 and February 28, 2019   F-6
Consolidated Schedule of Investment for the year ended February 28, 2021, February 29, 2020   F-7
Notes to Consolidated Financial Statements   F-17

 

F-1

 

 

Report of Independent Registered Public Accounting Firm

 

The Shareholders and the Board of Directors of Saratoga Investment Corp.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated statements of assets and liabilities of Saratoga Investment Corp. (the “Company”), including the consolidated schedules of investments, as of February 28, 2021 and February 29, 2020, the related consolidated statements of operations, changes in net assets, and cash flows for each of the three years in the period ended February 28, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at February 28, 2021 and February 29, 2020, and the results of its operations, changes in its net assets and its cash flows for each of the three years in the period ended February 28, 2021, in conformity with US generally accepted accounting principles.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of investments owned as of February 28, 2021 and February 29, 2020 by correspondence with the portfolio companies, custodians and debt agents. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matter

 

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which is relates.

 

  Valuation of investments using significant unobservable inputs
   
  Description of the Matter At February 28, 2021, the fair value of the Company's investments categorized in Level 3 of the fair value hierarchy (Level 3 investments) totaled $554,312,715. Management determines the fair value of these investments by applying the valuation techniques described in Notes 2 and 3 to the consolidated financial statements and using significant unobservable inputs and assumptions. The selection of the valuation techniques and the significant unobservable inputs and assumptions used by management requires subjective judgments and estimates. The valuation techniques used by the Company include market comparables, discounted cash flows and enterprise value waterfalls. The significant unobservable inputs used to measure fair value include market yields, EBITDA multiples, revenue multiples, discount rates, recovery rates and prepayment rates.
     
    Auditing the fair value of the Company's Level 3 investments was complex and involved auditor judgment, as the valuation techniques selected and the significant unobservable inputs and assumptions used by the Company are highly judgmental and require estimation, and the selection of such techniques, inputs and assumptions has a significant effect on the fair value measurement of such investments.
     
  How We Addressed the Matter in Our Audit To test the valuation of the Company’s Level 3 investments, we gained an understanding of the valuation techniques, significant unobservable inputs and assumptions used by the Company to value the Level 3 investments and reviewed the information considered by the Board of Directors relating to the fair value of each investment. For a sample of Level 3 investments, we evaluated the valuation techniques used, tested the significant unobservable inputs and assumptions, and tested the mathematical accuracy of the related valuation models. For this sample of Level 3 investments, we agreed the significant inputs and underlying data used in the Company’s valuations (for example, deal terms, portfolio company operating results, market yields) to transaction agreements, most recently available portfolio company financial statements or other financial information, information available from third-party sources and market data, as applicable. We involved our valuation specialists to assist in developing independent estimates of fair value for a sample of investments by using portfolio company and market information, and we compared such estimates to the Company’s fair value of these investments. We also searched for and evaluated information that corroborated or contradicted the Company’s valuations of Level 3 investments.

 

/s/ Ernst & Young LLP

 

We have served as the Company’s auditor since 2006.

 

New York, New York

May 5, 2021

F-2

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

 

Saratoga Investment Corp.

Consolidated Statements of Assets and Liabilities

 

   February 28,
2021
   February 29,
2020
 
ASSETS          
Investments at fair value          
Non-control/Non-affiliate investments (amortized cost of $471,328,212 and $418,006,725, respectively)  $469,946,494   $420,442,928 
Affiliate investments (amortized cost of $17,331,707 and $23,998,917, respectively)   19,367,740    18,485,854 
Control investments (amortized cost of $61,353,761 and $44,293,619, respectively)   64,998,481    46,703,192 
Total investments at fair value (amortized cost of $550,013,680 and $486,299,261, respectively)   554,312,715    485,631,974 
Cash and cash equivalents   18,828,047    24,598,905 
Cash and cash equivalents, reserve accounts   11,087,027    14,851,447 
Interest receivable (net of reserve of $1,152,086 and $1,238,049, respectively)   4,223,630    4,810,456 
Due from affiliate (See Note 6)   2,719,000    - 
Management fee receivable   34,644    272,207 
Other assets   947,315    701,007 
Total assets  $592,152,378   $530,865,996 
           
LIABILITIES          
Revolving credit facility  $-   $- 
Deferred debt financing costs, revolving credit facility   (639,982)   (512,628)
SBA debentures payable   158,000,000    150,000,000 
Deferred debt financing costs, SBA debentures payable   (2,642,622)   (2,561,495)
6.25% Notes Payable 2025   60,000,000    60,000,000 
Deferred debt financing costs, 6.25% notes payable 2025   (1,675,064)   (2,046,735)
7.25% Notes Payable 2025   43,125,000    - 
Deferred debt financing costs, 7.25% notes payable 2025   (1,401,307)   - 
7.75% Notes Payable 2025   5,000,000    - 
Deferred debt financing costs, 7.75% notes payable 2025   (239,222)   - 
6.25% Notes Payable 2027   15,000,000    - 
Deferred debt financing costs, 6.25% notes payable 2027   (476,820)   - 
Base management and incentive fees payable   6,556,674    15,800,097 
Deferred tax liability   1,922,664    1,347,363 
Accounts payable and accrued expenses   1,750,266    1,713,157 
Interest and debt fees payable   2,645,784    2,234,042 
Directors fees payable   70,500    61,500 
Due to manager   279,065    543,842 
Excise tax payable   691,672    - 
Total liabilities   287,966,608    226,579,143 
           
Commitments and contingencies (See Note 8)          
           
NET ASSETS          
Common stock, par value $0.001, 100,000,000 common shares authorized, 11,161,416 and 11,217,545 common shares issued and outstanding, respectively   11,161    11,218 
Capital in excess of par value   304,874,957    289,476,991 
Total distributable earnings (deficit)   (700,348)   14,798,644 
Total net assets   304,185,770    304,286,853 
Total liabilities and net assets  $592,152,378   $530,865,996 
NET ASSET VALUE PER SHARE  $27.25   $27.13 

 

See accompanying notes to consolidated financial statements.

 

F-3

 

 

Saratoga Investment Corp.

Consolidated Statements of Operations

 

   For the year ended 
   February 28,
2021
   February 29,
2020
   February 28,
2019
 
INVESTMENT INCOME               
Interest from investments               
Interest income:               
Non-control/Non-affiliate investments  $41,621,899   $36,252,113   $33,329,539 
Affiliate investments   1,656,263    1,230,578    963,289 
Control investments   5,848,980    6,175,120    4,785,044 
Payment-in-kind interest income:               
Non-control/Non-affiliate investments   2,251,499    816,041    780,112 
Affiliate investments   172,626    167,836    150,284 
Control investments   162,658    3,405,307    3,288,902 
Total interest from investments   51,713,925    48,046,995    43,297,170 
Interest from cash and cash equivalents   14,609    536,053    64,024 
Management fee income   2,507,626    2,503,804    1,722,180 
Incentive fee income   -    -    633,232 
Structuring and advisory fee income*   2,157,405    5,286,475    1,355,393 
Other income*   1,256,691    2,074,864    635,964 
Total investment income   57,650,256    58,448,191    47,707,963 
                
OPERATING EXPENSES               
Interest and debt financing expenses   13,587,201    14,682,611    13,125,718 
Base management fees   9,098,495    8,098,995    6,879,324 
Incentive management fees expense (benefit)   4,903,499    14,163,776    4,891,004 
Professional fees   1,705,942    1,684,089    1,849,424 
Administrator expenses   2,545,833    2,131,250    1,895,833 
Insurance   285,529    259,981    253,141 
Directors fees and expenses   290,000    277,500    290,500 
General & administrative   1,428,293    1,326,457    1,224,462 
Income tax expense (benefit)   667    961,995    (1,027,118)
Excise tax expense (credit)   691,672    -    - 
Other expense   -    -    23,466 
Total operating expenses   34,537,131    43,586,654    29,405,754 
NET INVESTMENT INCOME   23,113,125    14,861,537    18,302,209 
                
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS               
Net realized gain (loss) from investments:               
Non-control/Non-affiliate investments   22,207    11,651,990    4,874,305 
Affiliate investments   (8,726,013)   -    - 
Control investments   -    31,225,165    - 
Net realized gain (loss) from investments   (8,703,806)   42,877,155    4,874,305 
Income tax (provision) benefit from realized gain on investments   (3,895,354)   -    - 
Net change in unrealized appreciation (depreciation) on investments:               
Non-control/Non-affiliate investments   (3,817,921)   3,060,964    (5,152,206)
Affiliate investments   7,549,096    1,538,572    (853,588)
Control investments   1,235,147    (5,370,450)   3,105,485 
Net change in unrealized appreciation (depreciation) on investments   4,966,322    (770,914)   (2,900,309)
Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments   (574,634)   354,349    (1,766,835)
Net realized and unrealized gain (loss) on investments   (8,207,472)   42,460,590    207,161 
Realized losses on extinguishment of debt*   (128,617)   (1,583,266)   - 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS  $14,777,036   $55,738,861   $18,509,370 
                
WEIGHTED AVERAGE - BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE  $1.32   $5.98   $2.63 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED   11,188,629    9,319,192    7,046,686 

 

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

 

See accompanying notes to consolidated financial statements.

 

F-4

 

 

Saratoga Investment Corp.

Consolidated Statements of Changes in Net Assets

 

   For the year ended 
   February 28,
2021
   February 29,
2020
   February 28,
2019
 
INCREASE (DECREASE) FROM OPERATIONS:               
Net investment income  $23,113,125   $14,861,537   $18,302,209 
Net realized gain from investments   (8,703,806)   42,877,155    4,874,305 
Realized losses on extinguishment of debt   (128,617)   (1,583,266)   - 
Income tax (provision) benefit from realized gain on investments   (3,895,354)   -    - 
Net change in unrealized appreciation (depreciation) on investments   4,966,322    (770,914)   (2,900,309)
Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments   (574,634)   354,349    (1,766,835)
Net increase (decrease) in net assets resulting from operations   14,777,036    55,738,861    18,509,370 
                
DECREASE FROM SHAREHOLDER DISTRIBUTIONS:               
Total distributions to shareholders   (13,746,998)   (20,097,580)   (14,188,588)
Net decrease in net assets from shareholder distributions   (13,746,998)   (20,097,580)   (14,188,588)
                
CAPITAL SHARE TRANSACTIONS:               
Proceeds from issuance of common stock   -    85,904,441    32,150,157 
Stock dividend distribution   2,481,084    3,096,492    2,175,893 
Repurchases of common stock   (3,608,459)   -    - 
Repurchase fees   (3,746)   -    - 
Offering costs   -    (1,230,548)   (1,397,712)
Net increase in net assets from capital share transactions   (1,131,121)   87,770,385    32,928,338 
Total increase (decrease) in net assets   (101,083)   123,411,666    37,249,120 
Net assets at beginning of period   304,286,853    180,875,187    143,691,367 
Cumulative effect of the adoption of ASC 606 (See Note 2)   -    -    (65,300)
Net assets at beginning of period, as adjusted   304,286,853    180,875,187    143,626,067 
Net assets at end of period  $304,185,770   $304,286,853   $180,875,187 

 

See accompanying notes to consolidated financial statements.

 

F-5

 

 

Saratoga Investment Corp.

Consolidated Statements of Cash Flows

 

   For the year ended 
   February 28,
2021
   February 29,
2020
   February 28,
2019
 
Operating activities               
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS  $14,777,036   $55,738,861   $18,509,370 
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   973,606    (3,045,533)   (4,149,105)
Net accretion of discount on investments   (1,390,128)   (1,069,710)   (1,222,735)
Amortization of deferred debt financing costs   1,372,662    1,340,299    1,187,613 
Realized Loss on extinguishment of debt   128,617    1,583,266    - 
Income tax expense (benefit)   667    961,995    (1,027,118)
Net realized (gain) loss from investments   8,703,806    (42,877,155)   (4,874,305)
Net change in unrealized (appreciation) depreciation on investments   (4,966,322)   770,914    2,900,309 
Net change in provision for deferred taxes on unrealized appreciation (depreciation) on investments   574,634    (354,349)   1,766,835 
Proceeds from sales and repayments of investments   130,259,061    167,252,601    135,727,976 
Purchases of investments   (202,260,764)   (204,643,371)   (187,707,807)
(Increase) decrease in operating assets:               
Interest receivable   586,826    (1,063,852)   (699,479)
Due from affiliate   (2,719,000)   1,673,747    (1,673,747)
Management and incentive fee receivable   237,563    269,887    (309,070)
Cumulative effect of the adoption of ASC 606 (See Note 2)   -    -    (65,300)
Other assets   (265,997)   (128,982)   (89,865)
Increase (decrease) in operating liabilities:               
Base management and incentive fees payable   (9,243,423)   9,115,312    907,841 
Accounts payable and accrued expenses   37,109    97,714    691,131 
Interest and debt fees payable   411,742    (990,629)   220,317 
Directors fees payable   9,000    (500)   18,500 
Excise tax payable   691,672    -    - 
Due to manager   (264,777)   224,751    (91,280)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES   (62,346,410)   (15,144,734)   (39,979,919)
                
Financing activities               
Borrowings on debt   41,000,000    20,200,000    45,590,000 
Paydowns on debt   (33,000,000)   (20,200,000)   (33,250,000)
Issuance of notes   63,125,000    -    60,000,000 
Repayments of notes   -    (74,450,500)   - 
Payments of deferred debt financing costs   (3,435,749)   (755,136)   (2,878,120)
Proceeds from issuance of common stock   -    85,897,846    32,150,157 
Payments of cash dividends   (11,265,914)   (17,001,088)   (12,012,695)
Repurchases of common stock   (3,608,459)   -    - 
Repurchases fees   (3,746)   -    - 
Payments of offering costs   -    (1,190,430)   (1,302,520)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES   52,811,132    (7,499,308)   88,296,822 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND CASH AND CASH EQUIVALENTS, RESERVE ACCOUNTS   (9,535,278)   (22,644,042)   48,316,903 
CASH AND CASH EQUIVALENTS AND CASH AND CASH EQUIVALENTS, RESERVE ACCOUNTS, BEGINNING OF PERIOD   39,450,352    62,094,394    13,777,491 
CASH AND CASH EQUIVALENTS AND CASH AND CASH EQUIVALENTS, RESERVE ACCOUNTS, END OF PERIOD  $29,915,074   $39,450,352   $62,094,394 
                
Supplemental information:               
Interest paid during the period  $11,802,800   $14,332,943   $11,717,786 
Cash paid for taxes   4,140,241    18,390    66,295 
Supplemental non-cash information:               
Payment-in-kind interest income and other adjustments to cost   (973,606)   3,045,533    4,149,105 
Net accretion of discount on investments   1,390,128    1,069,710    1,222,735 
Amortization of deferred debt financing costs   1,372,662    1,340,299    1,187,613 
Stock dividend distribution   2,481,084    3,096,492    2,175,893 

 

See accompanying notes to consolidated financial statements.

 

F-6

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2021

 

Company   Industry   Investment Interest Rate/Maturity   Original Acquisition Date   Principal/
Number of Shares
    Cost     Fair Value (c)     % of
Net Assets
 
Non-control/Non-affiliate investments - 154.5% (b)                                      
Targus Holdings, Inc. (d), (h)   Consumer Products   Common Stock   12/31/2009     210,456       1,589,630     $ 475,116     0.2 %
        Total Consumer Products                 1,589,630       475,116     0.2 %
My Alarm Center, LLC (k)   Consumer Services   Preferred Equity Class A Units
8.00% PIK
  7/14/2017     2,227       2,357,879       -     0.0 %
My Alarm Center, LLC (h)   Consumer Services   Preferred Equity Class B Units   7/14/2017     1,797       1,796,880       -     0.0 %
My Alarm Center, LLC (h)   Consumer Services   Preferred Equity Class Z Units   9/12/2018     676       712,343       181,240     0.1 %
My Alarm Center, LLC (h)   Consumer Services   Common Stock   7/14/2017     96,224       -       -     0.0 %
        Total Consumer Services                 4,867,102       181,240     0.1 %
Schoox, Inc. (h), (i)   Corporate Education Software   Series 1 Membership Interest   12/8/2020     226,782       1,050,000       1,050,000     0.3 %
        Total Corporate Education Software                 1,050,000       1,050,000     0.3 %
Passageways, Inc.   Corporate Governance   First Lien Term Loan
(3M USD LIBOR+7.00%), 8.75% Cash, 12/31/2025
  7/5/2018   $ 5,000,000     $ 4,972,250       5,050,000     1.7 %
Passageways, Inc. (j)   Corporate Governance   Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 8.75% Cash, 12/31/2025
  1/3/2020   $ 5,000,000       4,980,871       5,050,000     1.7 %
Passageways, Inc. (h)   Corporate Governance   Series A Preferred Stock   7/5/2018     2,027,205       1,000,000       3,164,579     1.0 %
        Total Corporate Governance                 10,953,121       13,264,579     4.4 %
New England Dental Partners   Dental Practice Management   First Lien Term Loan
(3M USD LIBOR+8.00%), 8.50% Cash, 11/25/2025
  11/25/2020   $ 6,555,000       6,491,331       6,489,450     2.1 %
New England Dental
Partners (j)
  Dental Practice Management   Delayed Draw Term Loan
(3M USD LIBOR+8.00%), 8.50% Cash, 11/25/2025
  11/25/2020   $ 650,000       644,419       643,500     0.2 %
        Total Dental Practice Management                 7,135,750       7,132,950     2.3 %
PDDS Buyer, LLC   Dental Practice Management Software   First Lien Term Loan
(3M USD LIBOR+7.00%), 9.50% Cash, 7/15/2024
  7/15/2019   $ 14,000,000       13,895,777       14,278,600     4.7 %
PDDS Buyer, LLC   Dental Practice Management Software   Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 9.50% Cash, 7/15/2024
  7/15/2019   $ 7,000,000       6,938,964       7,139,300     2.3 %
PDDS Buyer, LLC (h)   Dental Practice Management Software   Series A-1 Preferred Shares   8/10/2020     1,755,831       2,000,000       2,240,946     0.7 %
        Total Dental Practice Management Software                 22,834,741       23,658,846     7.7 %
C2 Educational Systems (d)   Education Services   First Lien Term Loan
(3M USD LIBOR+8.50%), 10.00% Cash, 5/31/2023
  5/31/2017   $ 16,000,000       15,998,379       13,499,200     4.4 %
Texas Teachers of Tomorrow, LLC (h), (i)   Education Services   Common Stock   12/2/2015     750       750,000       1,011,596     0.3 %
Texas Teachers of Tomorrow, LLC (d)   Education Services   First Lien Term Loan
(3M USD LIBOR+7.25%), 9.75% Cash, 6/28/2024
  6/28/2019   $ 25,947,024       25,748,711       25,874,372     8.5 %
        Total Education Services                 42,497,090       40,385,168     13.2 %
Destiny Solutions Inc. (d)   Education Software   First Lien Term Loan
(3M USD LIBOR+7.50%), 9.50% Cash, 10/24/2024
  5/16/2018   $ 43,500,000       43,204,446       43,630,500     14.3 %
Destiny Solutions Inc. (h), (i)   Education Software   Limited Partner Interests   5/16/2018     2,342       2,468,464       3,069,267     1.0 %
Identity Automation
Systems (d)
  Education Software   First Lien Term Loan
(3M USD LIBOR+9.24%), 10.99% Cash, 5/8/2024
  8/25/2014   $ 17,247,500       17,247,500       17,357,884     5.7 %
Identity Automation
Systems (h)
  Education Software   Common Stock Class A-2 Units   8/25/2014     232,616       232,616       725,726     0.2 %
Identity Automation
Systems (h)
  Education Software   Common Stock Class A-1 Units   3/6/2020     43,715       171,571       185,553     0.1 %

 

See accompanying notes to consolidated financial statements.

 

F-7

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2021

 

Company   Industry   Investment Interest Rate/Maturity   Original Acquisition Date   Principal/
Number of Shares
    Cost     Fair Value (c)     % of
Net Assets
 
GoReact   Education Software   First Lien Term Loan
(3M USD LIBOR+7.50%), 9.50% Cash, 1/17/2025
  1/17/2020   $ 5,000,000       4,940,297       5,100,000     1.7 %
GoReact (j)   Education Software   Delayed Draw Term Loan
(3M USD LIBOR+7.50%), 9.50% Cash, 1/17/2025
  1/17/2020   $ -       -       -     0.0 %
Kev Software Inc. (a)   Education Software   First Lien Term Loan
(1M USD LIBOR+8.63%), 9.63% Cash, 9/13/2023
  9/13/2018   $ 17,835,914       17,745,629       18,021,407     5.9 %
        Total Education Software                 86,010,523       88,090,337     28.9 %
Davisware, LLC   Field Service Management   First Lien Term Loan
(3M USD LIBOR+7.00%), 9.00% Cash, 7/31/2024
  9/6/2019   $ 3,000,000       2,977,590       3,030,000     1.0 %
Davisware, LLC   Field Service Management   Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 9.00% Cash, 7/31/2024
  9/6/2019   $ 977,790       974,399       987,568     0.3 %
        Total Field Service Management                 3,951,989       4,017,568     1.3 %
GDS Software Holdings, LLC (h)   Financial Services   Common Stock Class A Units   8/23/2018     250,000       250,000       418,531     0.1 %
        Total Financial Services                 250,000       418,531     0.1 %
Ohio Medical, LLC (h)   Healthcare Products Manufacturing   Common Stock   1/15/2016     5,000       380,353       566,592     0.2 %
        Total Healthcare Products Manufacturing                 380,353       566,592     0.2 %
Axiom Parent Holdings,
LLC (h)
  Healthcare Services   Common Stock Class A Units   6/19/2018     400,000       400,000       1,415,301     0.5 %
Axiom Purchaser, Inc. (d)   Healthcare Services   First Lien Term Loan
(3M USD LIBOR+6.00%), 7.75% Cash, 6/19/2023
  6/19/2018   $ 10,000,000       9,955,177       10,059,000     3.3 %
Axiom Purchaser, Inc. (d)   Healthcare Services   Delayed Draw Term Loan
(3M USD LIBOR+6.00%), 7.75% Cash, 6/19/2023
  6/19/2018   $ 6,000,000       5,961,748       6,035,400     2.0 %
ComForCare Health Care   Healthcare Services   First Lien Term Loan
(3M USD LIBOR+7.75%), 8.75% Cash, 1/31/2025
  1/31/2017   $ 25,000,000       24,871,639       24,900,000     8.2 %
        Total Healthcare Services                 41,188,564       42,409,701     14.0 %
TRC HemaTerra, LLC (h)   Healthcare Software   Class D Membership Interests   4/15/2019     2,000,000       2,000,000       2,572,002     0.8 %
HemaTerra Holding Company, LLC   Healthcare Software   First Lien Term Loan
(3M USD LIBOR+6.75%), 9.25% Cash, 4/15/2024
  4/15/2019   $ 6,000,000       5,956,593       6,060,000     2.0 %
HemaTerra Holding Company, LLC (d), (j)   Healthcare Software   Delayed Draw Term Loan
(3M USD LIBOR+6.75%), 9.25% Cash, 4/15/2024
  4/15/2019   $ 12,000,000       11,914,035       12,120,000     4.0 %
Procurement Partners, LLC   Healthcare Software   First Lien Term Loan
(3M USD LIBOR+6.50%), 7.50% Cash, 11/12/2025
  11/12/2020   $ 8,000,000       7,924,230       7,920,000     2.6 %
Procurement Partners,
LLC (j)
  Healthcare Software   Delayed Draw Term Loan
(3M USD LIBOR+6.50%), 7.50% Cash, 11/12/2025
  11/12/2020   $ -       -       -     0.0 %
Procurement Partners Holdings LLC (h)   Healthcare Software   Class A Units   11/12/2020     300,000       300,000       300,000     0.1 %
        Total Healthcare Software                 28,094,858       28,972,002     9.5 %
Roscoe Medical, Inc. (d), (h)   Healthcare Supply   Common Stock   3/26/2014     5,081       508,077       280,346     0.1 %
Roscoe Medical, Inc.   Healthcare Supply   Second Lien Term Loan
11.25% Cash, 6/28/2021
  3/26/2014   $ 5,141,413       5,141,413       5,141,413     1.7 %
        Total Healthcare Supply                 5,649,490       5,421,759     1.8 %
Book4Time, Inc. (a)   Hospitality/Hotel   First Lien Term Loan
(3M USD LIBOR+8.50%), 10.25%, 12/22/2025
  12/22/2020   $ 3,136,517       3,105,788       3,105,152     1.0 %
Book4Time, Inc. (a), (j)   Hospitality/Hotel   Delayed Draw Term Loan
(3M USD LIBOR+8.50%), 10.25%, 12/22/2025
  12/22/2020   $ -       -       -     0.0 %
Book4Time, Inc. (a), (i)   Hospitality/Hotel   Class A Preferred Shares   12/22/2020     200,000       156,826       156,826     0.1 %
Knowland Group, LLC   Hospitality/Hotel   Second Lien Term Loan
(3M USD LIBOR+8.00%), 10.00% Cash, 5/9/2024
  11/9/2018   $ 15,767,918       15,767,918       10,788,409     3.5 %
Sceptre Hospitality Resources, LLC   Hospitality/Hotel   First Lien Term Loan
(1M USD LIBOR+9.00%), 10.00% Cash, 4/27/2025
  4/27/2020   $ 3,000,000       2,973,387       3,030,000     1.0 %
        Total Hospitality/Hotel                 22,003,919       17,080,387     5.6 %
Granite Comfort, LP   HVAC Services and Sales   First Lien Term Loan
(1M USD LIBOR+9.00%), 10.00% Cash, 11/16/2025
  11/16/2020   $ 7,000,000       6,932,689       6,950,300     2.3 %
Granite Comfort, LP   HVAC Services and Sales   Delayed Draw Term Loan
(1M USD LIBOR+9.00%), 10.00% Cash, 11/16/2025
  11/16/2020   $ 8,000,000       7,922,181       7,943,200     2.6 %
        Total HVAC Services and Sales                 14,854,870       14,893,500     4.9 %

 

See accompanying notes to consolidated financial statements.

 

F-8

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2021

 

Company   Industry   Investment Interest Rate/Maturity   Original Acquisition Date   Principal/
Number of Shares
    Cost     Fair Value (c)     % of
Net Assets
 
Vector Controls Holding Co., LLC (d)   Industrial Products   First Lien Term Loan
11.50% (9.75% Cash/1.75% PIK), 3/6/2022
  3/6/2013   $ 7,021,046       7,021,046       7,021,046     2.3 %
Vector Controls Holding Co., LLC (d), (h)   Industrial Products   Warrants to Purchase Limited Liability Company Interests, Expires 11/30/2027   5/31/2015     343       -       2,025,598     0.7 %
        Total Industrial Products                 7,021,046       9,046,644     3.0 %
CLEO Communications Holding, LLC (d)   IT Services   First Lien Term Loan
(3M USD LIBOR+8.00%), 9.00% Cash/2.00% PIK, 3/31/2022
  3/31/2017   $ 14,073,964       14,064,807       14,176,704     4.7 %
CLEO Communications Holding, LLC (d), (j)   IT Services   Delayed Draw Term Loan
(3M USD LIBOR+8.00%), 9.00% Cash/2.00% PIK, 3/31/2022
  3/31/2017   $ 20,451,756       20,388,504       20,601,054     6.8 %
LogicMonitor, Inc.   IT Services   First Lien Term Loan
(3M USD LIBOR+5.00), 6.00% Cash, 5/17/2023
  3/20/2020   $ 23,000,000       22,865,749       23,089,700     7.6 %
        Total IT Services                 57,319,060       57,867,458     19.1 %
inMotionNow, Inc.   Marketing Services   First Lien Term Loan
(3M USD LIBOR+7.50), 10.00% Cash, 5/15/2024
  5/15/2019   $ 12,200,000       12,116,232       12,322,000     4.1 %
inMotionNow, Inc.   Marketing Services   Delayed Draw Term Loan
(3M USD LIBOR+7.50) 10.00% Cash, 5/15/2024
  5/15/2019   $ 5,000,000       4,960,820       5,050,000     1.7 %
        Total Marketing Services                 17,077,052       17,372,000     5.8 %
Omatic Software, LLC   Non-profit Services   First Lien Term Loan
(3M USD LIBOR+8.00%), 9.75% Cash, 5/29/2023
  5/29/2018   $ 5,500,000       5,470,787       5,554,450     1.8 %
        Total Non-profit Services                 5,470,787       5,554,450     1.8 %
Emily Street Enterprises, L.L.C.   Office Supplies   Senior Secured Note
(3M USD LIBOR+8.50%), 10.00% Cash, 12/31/2023
  12/28/2012   $ 3,300,000       3,300,000       3,287,460     1.1 %
Emily Street Enterprises, L.L.C. (h)   Office Supplies   Warrant Membership Interests
Expires 12/28/2022
  12/28/2012     49,318       400,000       322,853     0.1 %
        Total Office Supplies                 3,700,000       3,610,313     1.2 %
Apex Holdings Software Technologies, LLC   Payroll Services   First Lien Term Loan
(3M USD LIBOR+8.00%), 9.00% Cash, 9/21/2024
  9/21/2016   $ 18,000,000       17,981,413       17,368,200     5.7 %
Apex Holdings Software Technologies, LLC   Payroll Services   Delayed Draw Term Loan
(3M USD LIBOR+8.00%), 9.00% Cash, 9/21/2024
  10/1/2018   $ 1,000,000       994,557       964,900     0.3 %
        Total Payroll Services                 18,975,970       18,333,100     6.0 %
Village Realty Holdings LLC   Property Management   First Lien Term Loan
(3M USD LIBOR+6.50%), 8.75% Cash, 10/8/2024
  10/8/2019   $ 7,250,000       7,189,591       7,395,000     2.4 %
Village Realty Holdings
LLC (j)
  Property Management   Delayed Draw Term Loan
(3M USD LIBOR+6.50%), 8.75% Cash, 10/8/2024
  10/8/2019   $ 4,876,322       4,838,617       4,973,850     1.6 %
V Rental Holdings LLC (h)   Property Management   Class A-1 Membership Units   10/8/2019     122,578       365,914       2,208,681     0.7 %
        Total Property Management                 12,394,122       14,577,531     4.7 %
Buildout, Inc.   Real Estate Services   First Lien Term Loan
(3M USD LIBOR+7.75%), 9.25% Cash, 7/9/2025
  7/9/2020   $ 14,000,000       13,873,317       13,952,400     4.6 %
Buildout, Inc.   Real Estate Services   Delayed Draw Term Loan
(3M USD LIBOR+7.75%), 9.25% Cash, 7/9/2025
  2/12/2021   $ 3,000,000       2,970,361       2,989,800     1.0 %
Buildout, Inc. (h), (i)   Real Estate Services   Limited Partner Interests   7/9/2020     1,071       1,071,301       1,090,002     0.4 %
        Total Real Estate Services                 17,914,979       18,032,202     6.0 %
TMAC Acquisition Co.,
LLC (k)
  Restaurant   Unsecured Term Loan
8.00% PIK, 9/01/2023
  3/1/2018   $ 2,261,017       2,261,017       2,140,911     0.7 %
        Total Restaurant                 2,261,017       2,140,911     0.7 %
ArbiterSports, LLC (d)   Sports Management   First Lien Term Loan
(3M USD LIBOR+6.50%), 8.25% Cash, 2/21/2025
  2/21/2020   $ 26,000,000       25,800,743       24,525,800     8.1 %
ArbiterSports, LLC (d)   Sports Management   Delayed Draw Term Loan
(3M USD LIBOR+6.50%), 8.25% Cash, 2/21/2025
  2/21/2020   $ 1,000,000       1,000,000       943,300     0.3 %
        Total Sports Management                 26,800,743       25,469,100     8.4 %
Avionte Holdings, LLC (h)   Staffing Services   Class A Units   1/8/2014     100,000       100,000       924,509     0.3 %
        Total Staffing Services                 100,000       924,509     0.3 %
National Waste Partners (d)   Waste Services   Second Lien Term Loan
10.00% Cash, 2/13/2022
  2/13/2017   $ 9,000,000       8,981,436       9,000,000     3.0 %
        Total Waste Services                 8,981,436       9,000,000     3.0 %
Sub Total Non-control/Non-affiliate investments         471,328,212       469,946,494     154.5 %

 

See accompanying notes to consolidated financial statements.

 

F-9

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2021

 

Company   Industry   Investment Interest Rate/Maturity   Original Acquisition Date   Principal/
Number of Shares
    Cost     Fair Value (c)     % of
Net Assets
 
Affiliate investments - 6.4% (b)                          
GreyHeller LLC (f)   Cyber Security   First Lien Term Loan
(3M USD LIBOR+11.00%), 12.00% Cash, 12/31/2025
  11/17/2016   $ 7,000,000       6,988,549       7,000,000     2.3 %
GreyHeller LLC (d), (f), (j)   Cyber Security   Delayed Draw Term Loan
(3M USD LIBOR+11.00%), 12.00% Cash, 12/31/2025
  10/19/2020   $ 2,250,000       2,233,173       2,250,000     0.7 %
GreyHeller LLC (f), (h)   Cyber Security   Series A Preferred Units   11/17/2016     850,000       850,000       3,924,291     1.3 %
        Total Cyber Security                 10,071,722       13,174,291     4.3 %
Top Gun Pressure Washing, LLC (f)   Facilities Maintenance   First Lien Term Loan
(3M USD LIBOR+7.00%), 9.50% Cash, 8/12/2024
  8/12/2019   $ 5,000,000       4,961,639       4,491,500     1.5 %
Top Gun Pressure Washing, LLC (f), (j)   Facilities Maintenance   Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 9.50% Cash, 8/12/2024
  8/12/2019   $ 1,825,000       1,810,198       1,639,397     0.6 %
TG Pressure Washing Holdings, LLC (f), (h)   Facilities Maintenance   Preferred Equity   8/12/2019     488,148       488,148       62,552     0.0 %
        Total Facilities Maintenance                 7,259,985       6,193,449     2.1 %
Sub Total Affiliate investments         17,331,707       19,367,740     6.4 %
                           
Control investments - 21.4% (b)                          
Netreo Holdings, LLC (g)   IT Services   First Lien Term Loan
(3M USD LIBOR +6.25%), 9.00% Cash/2.75% PIK,
12/31/2025
  7/3/2018   $ 5,296,555       5,268,156       5,349,521     1.8 %
Netreo Holdings, LLC (g), (j)   IT Services   Delayed Draw Term Loan
(3M USD LIBOR +6.25%), 9.00% Cash/2.75% PIK,
12/31/2020
  5/26/2020   $ 1,223,203       1,213,962       1,235,435     0.4 %
Netreo Holdings, LLC (g), (h)   IT Services   Common Stock Class A Unit   7/3/2018     3,150,000       3,150,000       8,634,768     2.8 %
        Total IT Services                 9,632,118       15,219,724     5.0 %
Saratoga Investment Corp. CLO 2013-1, Ltd. (a), (e), (g)   Structured Finance Securities   Other/Structured Finance Securities
11.72%, 1/20/2030
  1/22/2008   $ 111,000,000       33,846,643       31,449,732     10.3 %
Saratoga Investment Corp. CLO 2013-1, Ltd. Class F-R-3 Note (a), (g)   Structured Finance Securities   Other/Structured Finance Securities
(3M USD LIBOR+10.00%), 10.19%, 4/20/2033
  2/26/2021   $ 17,875,000       17,875,000       18,329,025     6.1 %
        Total Structured Finance Securities                 51,721,643       49,778,757     16.4 %
Sub Total Control investments         61,353,761       64,998,481     21.4 %
TOTAL INVESTMENTS - 182.2% (b)       $ 550,013,680     $ 554,312,715     182.2 %

 

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

 

 

(a)Represents an ineligible investment as defined under Section 55(a) of the Investment Company Act of 1940, as amended. As of February 28, 2021 non-qualifying assets represent 9.5% of the Company’s portfolio at fair value. As a BDC, the Company can only invest 30% of its portfolio in non-qualifying assets.

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

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

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

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

 

See accompanying notes to consolidated financial statements.

 

F-10

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 28, 2021

 

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

 

Company  Purchases   Sales   Total Interest from Investments   Management Fee Income   Net Realized
Gain (Loss) from Investments
   Net Change in Unrealized Appreciation (Depreciation) 
Elyria Foundry Company, L.L.C.  $-   $(2,309,806)  $172,626   $-   $(8,726,013)  $7,745,228 
GreyHeller LLC   2,227,500    -    987,969    -    -    942,175 
Top Gun Pressure Washing, LLC   1,806,750    -    668,294    -    -    (712,711)
TG Pressure Washing Holdings, LLC   138,148    -    -                   -    -    (425,596)
Total  $4,172,398   $(2,309,806)  $1,828,889   $-   $(8,726,013)  $7,549,096 

 

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

 

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

 

(h)Non-income producing at February 28, 2021.
(i)Includes securities issued by an affiliate of the Company.
(j)All or a portion of this investment has an unfunded commitment as of February 28, 2021. (see Note 8 to the consolidated financial statements).
(k)As of February 28, 2021, the investment was on non-accrual status. The fair value of these investments was approximately $2.1 million, which represented 0.4% of the Company’s portfolio (see Note 2 to the consolidated financial statements).
(l)Included within cash and cash equivalents and cash and cash equivalents, reserve accounts in the Company’s consolidated statements of assets and liabilities as of February 28, 2021.

 

LIBOR - London Interbank Offered Rate

 

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

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

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

 

See accompanying notes to consolidated financial statements.

 

F-11

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 29, 2020

 

Company  Industry  Investment Interest Rate/Maturity  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
Non-control/Non-affiliate investments - 138.2% (b)                                  
CoConstruct, LLC  Construction Management Services  First Lien Term Loan
(3M USD LIBOR+7.50%), 10.00% Cash, 7/5/2024
  7/5/2019  $4,200,000    4,161,917    4,284,000   1.4 %
CoConstruct, LLC (j)  Construction Management Services  Delayed Draw Term Loan
(3M USD LIBOR+7.50%), 10.00% Cash, 7/5/2024
  7/5/2019  $-    -    -   0.0 %
      Total Construction Management Services           4,161,917    4,284,000   1.4 %
Targus Holdings, Inc. (h)  Consumer Products  Common Stock   12/31/2009   210,456    1,589,630    417,619   0.1 %
      Total Consumer Products           1,589,630    417,619   0.1 %
My Alarm Center, LLC (k)  Consumer Services  Preferred Equity Class A Units
8.00% PIK
  7/14/2017   2,227    2,357,879    -   0.0 %
My Alarm Center, LLC (h)  Consumer Services  Preferred Equity Class B Units   7/14/2017   1,797    1,796,880    -   0.0 %
My Alarm Center, LLC (h)  Consumer Services  Preferred Equity Class Z Units   9/12/2018   676    712,343    1,997,158   0.6 %
My Alarm Center, LLC (h)  Consumer Services  Common Stock   7/14/2017   96,224    -    -   0.0 %
      Total Consumer Services           4,867,102    1,997,158   0.60 %
Passageways, Inc.  Corporate Governance  First Lien Term Loan
(3M USD LIBOR+7.00%), 8.75% Cash, 7/5/2023
  7/5/2018  $5,000,000    4,961,214    5,034,500   1.7 %
Passageways, Inc. (j)  Corporate Governance  Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 8.75% Cash, 7/5/2023
  1/3/2020  $2,000,000    1,991,001    2,013,800   0.7 %
Passageways, Inc. (h)  Corporate Governance  Series A Preferred Stock   7/5/2018   2,027,205    1,000,000    2,042,180   0.8 %
      Total Corporate Governance           7,952,215    9,090,480   0.03  
C2 Educational Systems (d)  Education Services  First Lien Term Loan
(3M USD LIBOR+7.00%), 8.50% Cash, 5/31/2020
  5/31/2017  $16,000,000    15,981,853    16,000,000   5.3 %
Texas Teachers of Tomorrow, LLC (h), (i)  Education Services  Common Stock   12/2/2015   750,000    750,000    703,910   0.2 %
Texas Teachers of Tomorrow, LLC (d)  Education Services  First Lien Term Loan
(3M USD LIBOR+7.25%), 9.75% Cash, 6/28/2024
  6/28/2019  $19,661,200    19,483,213    19,661,200   6.5 %
      Total Education Services           36,215,066    36,365,110   12.0 %
Destiny Solutions Inc. (d)  Education Software  First Lien Term Loan
(3M USD LIBOR+7.25%), 9.25% Cash, 10/23/2024
  5/16/2018  $36,000,000    35,686,318    35,888,400   11.8 %
Destiny Solutions Inc. (h), (i)  Education Software  Limited Partner Interests   5/16/2018   2,342    2,468,464    2,805,839   0.9 %
Identity Automation
Systems (h)
  Education Software  Common Stock Class A Units   8/25/2014   232,616    232,616    860,269   0.4 %
Identity Automation
Systems (d)
  Education Software  First Lien Term Loan
(3M USD LIBOR+9.24%), 10.99% Cash, 5/8/2024
  8/25/2014  $15,422,500    15,389,090    15,524,289   5.1 %
EMS LINQ, Inc.  Education Software  First Lien Term Loan
(1M USD LIBOR+8.50%), 10.02% Cash, 8/9/2024
  8/9/2019  $14,925,000    14,780,293    14,823,510   4.8 %
GoReact  Education Software  First Lien Term Loan
(3M USD LIBOR+7.50%), 9.50% Cash, 1/17/2025
  1/17/2020  $5,000,000    4,930,819    4,950,000   1.6 %
GoReact (j)  Education Software  Delayed Draw Term Loan
(3M USD LIBOR+7.50%), 9.50% Cash, 1/17/2025
  1/17/2020  $-    -    -   0.0 %
Kev Software Inc. (a)  Education Software  First Lien Term Loan
(1M USD LIBOR+8.63%), 10.15% Cash, 9/13/2023
  9/13/2018  $21,231,923    21,086,573    21,202,198   7.0 %
      Total Education Software           94,574,173    96,054,505   31.6 %
Davisware, LLC  Field Service Management  First Lien Term Loan
(3M USD LIBOR+7.00%), 9.00% Cash, 7/31/2024
  9/6/2019  $3,000,000    2,971,896    2,970,000   1.0 %
Davisware, LLC (j)  Field Service Management  Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 9.00% Cash, 7/31/2024
  9/6/2019  $-    -    -   0.0 %
      Total Field Service Management           2,971,896    2,970,000   1.0 %

 

F-12

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 29, 2020

 

Company  Industry  Investment Interest Rate/Maturity  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
GDS Holdings US, Inc. (d)  Financial Services  First Lien Term Loan
(3M USD LIBOR+7.00%), 8.50% Cash, 8/23/2023
  8/23/2018  $7,500,000    7,444,170    7,650,000   2.5 %
GDS Holdings US, Inc. (d)  Financial Services  Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 8.50% Cash, 8/23/2023
  8/23/2018  $1,000,000    990,526    1,020,000   0.3 %
GDS Software Holdings, LLC (h)  Financial Services  Common Stock Class A Units   8/23/2018   250,000    250,000    421,291   0.1 %
FMG Suite Holdings, LLC (d)  Financial Services  Second Lien Term Loan
(1M USD LIBOR+8.00%), 9.52% Cash, 11/16/2023
  5/16/2018  $23,000,000    22,863,835    23,000,000   7.6 %
      Total Financial Services           31,548,531    32,091,291   10.5 %
Ohio Medical, LLC (h)  Healthcare Products Manufacturing  Common Stock   1/15/2016   5,000    500,000    416,550   0.1 %
Ohio Medical, LLC  Healthcare Products Manufacturing  Senior Subordinated Note
12.00% Cash, 7/15/2021
  1/15/2016  $7,300,000    7,274,482    7,300,000   2.4 %
      Total Healthcare Products Manufacturing           7,774,482    7,716,550   2.5 %
Axiom Parent Holdings, LLC (h)  Healthcare Services  Common Stock Class A Units   6/19/2018   400,000    400,000    428,706   0.1 %
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    9,936,612    9,944,000   3.3 %
Axiom Purchaser, Inc. (d), (j)  Healthcare Services  Delayed Draw Term Loan
(3M USD LIBOR+6.00%), 7.75% Cash, 6/19/2023
  6/19/2018  $3,000,000    2,977,619    2,983,200   1.0 %
ComForCare Health Care  Healthcare Services  First Lien Term Loan
(3M USD LIBOR+7.50%), 8.96% Cash, 1/31/2022
  1/31/2017  $15,000,000    14,929,216    15,099,000   5.0 %
      Total Healthcare Services           28,243,447    28,454,906   9.4 %
HemaTerra Holding Company, LLC  Healthcare Software  First Lien Term Loan
(3M USD LIBOR+6.75%), 9.25% Cash, 4/15/2024
  4/15/2019  $6,000,000    5,944,473    6,120,000   2.0 %
HemaTerra Holding Company, LLC (j)  Healthcare Software  Delayed Draw Term Loan
(3M USD LIBOR+6.75%), 9.25% Cash, 4/15/2024
  4/15/2019  $10,000,000    9,912,295    10,200,000   3.4 %
TRC HemaTerra, LLC (h)  Healthcare Software  Class D Membership Interests   4/15/2019   2,000,000    2,000,000    2,259,190   0.7 %
PDDS Buyer, LLC  Healthcare Software  First Lien Term Loan
(3M USD LIBOR+7.00%), 9.50% Cash, 7/15/2024
  7/15/2019  $12,000,000    11,888,585    12,184,800   4.0 %
PDDS Buyer, LLC (j)  Healthcare Software  Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 9.50% Cash, 7/15/2024
  7/15/2019  $-    -    -   0.0 %
      Total Healthcare Software           29,745,353    30,763,990   10.1 %
Roscoe Medical, Inc. (h)  Healthcare Supply  Common Stock   3/26/2014   5,081    508,077    -   0.0 %
Roscoe Medical, Inc. (k)  Healthcare Supply  Second Lien Term Loan
11.25% Cash, 3/28/2021
  3/26/2014  $4,200,000    4,200,000    2,136,960   0.7 %
      Total Healthcare Supply           4,708,077    2,136,960   0.7 %
Knowland Group, LLC  Hospitality/Hotel  Second Lien Term Loan
(3M USD LIBOR+8.00%), 10.00% Cash, 5/9/2024
  11/9/2018  $15,000,000    15,000,000    14,893,500   4.9 %
      Total Hospitality/Hotel           15,000,000    14,893,500   4.9 %
Vector Controls Holding Co., LLC (d)  Industrial Products  First Lien Term Loan
10.50% (9.00% Cash/1.50% PIK), 3/6/2022
  3/6/2013  $7,849,846    7,849,846    7,928,345   2.6 %
Vector Controls Holding Co., LLC (h)  Industrial Products  Warrants to Purchase Limited Liability Company Interests, Expires 11/30/2027   5/31/2015   343    -    2,850,231   0.9 %
      Total Industrial Products           7,849,846    10,778,576   3.5 %
CLEO Communications Holding, LLC  IT Services  First Lien Term Loan
(3M USD LIBOR+8.00%), 9.46% Cash/2.00% PIK, 3/31/2022
  3/31/2017  $13,791,686    13,773,206    14,048,211   4.6 %
CLEO Communications Holding, LLC  IT Services  Delayed Draw Term Loan
(3M USD LIBOR+8.00%), 9.46% Cash/2.00% PIK, 3/31/2022
  3/31/2017  $20,041,560    19,919,746    20,414,333   6.7 %
Erwin, Inc. (d)  IT Services  Second Lien Term Loan
(3M USD LIBOR+11.50%), 12.96% Cash/1.00% PIK, 8/28/2021
  2/29/2016  $16,049,804    15,990,286    16,049,804   5.3 %
      Total IT Services           49,683,238    50,512,348   16.6 %
inMotionNow, Inc.  Marketing Services  First Lien Term Loan
(3M USD LIBOR+7.25), 9.75% Cash, 5/15/2024
  5/15/2019  $12,200,000    12,094,364    12,200,000   4.1 %
inMotionNow, Inc. (j)  Marketing Services  Delayed Draw Term Loan
(3M USD LIBOR+7.25) 9.75% Cash, 5/15/2024
  5/15/2019  $2,000,000    1,981,329    2,000,000   0.0 %
      Total Marketing Services           14,075,693    14,200,000   4.1 %

 

F-13

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 29, 2020

 

Company  Industry  Investment Interest Rate/Maturity  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
Omatic Software, LLC  Non-profit Services  First Lien Term Loan
(3M USD LIBOR+8.00%), 9.75% Cash, 5/29/2023
  5/29/2018  $5,500,000    5,459,192    5,554,999   1.9 %
Omatic Software, LLC (j)  Non-profit Services  Delayed Draw Term Loan
(3M USD LIBOR+8.00%), 9.75% Cash, 5/29/2023
  5/29/2018  $-    -    -   0.0 %
      Total Non-profit Services           5,459,192    5,554,999   1.9 %
Emily Street Enterprises, L.L.C.  Office Supplies  Senior Secured Note
(3M USD LIBOR+8.50%), 10.00% Cash, 4/22/2020
  12/28/2012  $3,300,000    3,299,987    3,300,000   1.1 %
Emily Street Enterprises, L.L.C. (h)  Office Supplies  Warrant Membership Interests
Expires 12/28/2022
  12/28/2012   49,318    400,000    499,464   0.2 %
      Total Office Supplies        3,699,987    3,799,464   1.3 %
Apex Holdings Software Technologies, LLC  Payroll Services  First Lien Term Loan
(3M USD LIBOR+8.00%), 9.46% Cash, 9/21/2021
  9/21/2016  $18,000,000   $17,951,463   $17,589,600   5.8 %
Apex Holdings Software Technologies, LLC  Payroll Services  Delayed Draw Term Loan
(3M USD LIBOR+8.00%), 9.46% Cash, 9/21/2021
  10/1/2018  $1,500,000    1,491,938    1,465,800   0.5 %
      Total Payroll Services           19,443,401    19,055,400   6.3 %
Village Realty Holdings LLC  Property Management  First Lien Term Loan
(3M USD LIBOR+6.50%), 8.75% Cash, 10/8/2024
  10/8/2019  $7,250,000    7,180,560    7,264,500   2.4 %
Village Realty Holdings LLC (j)  Property Management  Delayed Draw Term Loan
(3M USD LIBOR+6.50%), 8.75% Cash, 10/8/2024
  10/8/2019  $3,876,322    3,838,783    3,884,075   1.4 %
V Rental Holdings LLC (h)  Property Management  Class A-1 Membership Units   10/8/2019   116,700    338,229    354,280   0.1 %
      Total Property Management           11,357,572    11,502,855   3.9 %
TMAC Acquisition Co., LLC  Restaurant  Unsecured Term Loan
8.00% PIK, 9/01/2023
  3/1/2018  $2,261,017    2,261,017    2,140,880   0.7 %
      Total Restaurant          2,261,017    2,140,880   0.7 %
ArbiterSports, LLC  Sports Management  First Lien Term Loan
(3M USD LIBOR+6.50%), 8.25% Cash, 2/21/2025
  2/21/2020  $26,000,000    25,765,288    25,740,000   8.6 %
Arbiter Sports, LLC (j)  Sports Management  Delayed Draw Term Loan
(3M USD LIBOR+6.50%), 8.25% Cash, 2/21/2025
  2/21/2020  $-    -    -   0.0 %
      Total Sports Management           25,765,288    25,740,000   8.6 %
Avionte Holdings, LLC (h)  Staffing Services  Class A Units
  1/8/2014   100,000    100,000    922,337   0.3 %
      Total Staffing Services           100,000    922,337   0.3 %
National Waste Partners (d)  Waste Services  Second Lien Term Loan
10.00% Cash, 2/13/2022
  2/13/2017  $9,000,000    8,959,602    9,000,000   3.0 %
      Total Waste Services           8,959,602    9,000,000   3.0 %
Sub Total Non-control/Non-affiliate investments                  418,006,725    420,442,928   138.2 %
                                
Affiliate investments - 6.0% (b)                               
GreyHeller LLC (f)  Cyber Security  First Lien Term Loan
(3M USD LIBOR+11.00%), 12.46% Cash, 11/16/2021
  11/17/2016  $7,000,000    6,971,109    7,000,000   2.2 %
GreyHeller LLC (f), (h)  Cyber Security  Series A Preferred Units   11/17/2016   850,000    850,000    2,981,503   1.0 %
      Total Cyber Security           7,821,109    9,981,503   3.2 %
Top Gun Pressure Washing, LLC (f)  Facilities Maintenance  First Lien Term Loan
(3M USD LIBOR+7.00%), 9.50% Cash, 8/12/2024
  8/12/2019  $5,000,000    4,952,729    5,024,500   1.7 %
Top Gun Pressure Washing, LLC (f), (j)  Facilities Maintenance  Delayed Draw Term Loan
(3M USD LIBOR+7.00%), 9.50% Cash, 8/12/2024
  8/12/2019  $-    -    -   0.0 %
TG Pressure Washing Holdings, LLC (f), (h)  Facilities Maintenance  Preferred Equity   8/12/2019  350,000    350,000    350,000   0.1 %
      Total Facililties Maintenance           5,302,729    5,374,500   1.8 %
Elyria Foundry Company, L.L.C. (f), (h)  Metals  Common Stock   7/30/2010   60,000    9,685,028    1,939,800   0.6 %
Elyria Foundry Company, L.L.C. (d), (f)  Metals  Second Lien Term Loan
15.00% PIK, 8/10/2022
  7/30/2010  $1,190,051    1,190,051    1,190,051   0.4 %
      Total Metals           10,875,079    3,129,851   1.0 %
Sub Total Affiliate investments                  23,998,917    18,485,854   6.0 %

 

F-14

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 29, 2020

 

Company  Industry  Investment Interest Rate/Maturity  Original Acquisition Date  Principal/
Number of Shares
   Cost   Fair Value (c)   % of
Net Assets
 
Control investments - 15.4% (b)                               
Netreo Holdings, LLC (g)  IT Services  First Lien Term Loan
(3M USD LIBOR +6.25%), 9.00% Cash/2.00% PIK,
7/3/2023
  7/3/2018  $5,162,734    5,123,191    5,265,989   1.7 %
Netreo Holdings, LLC (g), (h)  IT Services  Common Stock Class A Unit   7/3/2018   3,150,000    3,150,000    6,762,672   2.3 %
      Total IT Services           8,273,191    12,028,661   4.0 %
Saratoga Investment Corp. CLO 2013-1, Ltd. (a), (e), (g)  Structured Finance Securities  Other/Structured Finance Securities
10.97%, 1/20/2030
  1/22/2008  $69,500,000    23,520,428    22,557,240   7.4 %
Saratoga Investment Corp. CLO 2013-1, Ltd. Class F-R-2 Note (a), (g)  Structured Finance Securities  Other/Structured Finance Securities
(3M USD LIBOR+8.75%), 10.21%, 1/20/2030
  12/14/2018  $2,500,000    2,500,000    2,478,000   0.8 %
Saratoga Investment Corp. CLO 2013-1, Ltd. Class G-R-2 Note (a), (g)  Structured Finance Securities  Other/Structured Finance Securities
(3M USD LIBOR+10.00%), 11.46%, 1/20/2030
  12/14/2018  $7,500,000    7,500,000    7,434,750   2.4 %
Saratoga Investment Corp. CLO 2013-1 Warehouse 2, Ltd. (a), (g), (j)  Structured Finance Securities  Unsecured Loan
(3M USD LIBOR+7.50%), 8.96%, 8/20/2021
  2/18/2020  $2,500,000    2,500,000    2,204,541   0.8 %
      Total Structured Finance Securities           36,020,428    34,674,531   11.4 %
Sub Total Control investments                  44,293,619    46,703,192   15.4 %
TOTAL INVESTMENTS - 159.6% (b)                 $486,299,261   $485,631,974   159.6 %

 

   Number of Shares   Cost   Fair Value  % of
Net Assets
 
Cash and cash equivalents and cash and cash equivalents, reserve accounts - 13.0% (b)                   
U.S. Bank Money Market (l)   39,450,352   $39,450,352   $39,450,352   13.0%
Total cash and cash equivalents and cash and cash equivalents, reserve accounts   39,450,352   $39,450,352   $39,450,352   13.0%

 

 

*Certain reclassifications have been made to previously reported industry groupings to show results on a consistent basis across periods.

 

(a)Represents a non-qualifying investment as defined under Section 55(a) of the Investment Company Act of 1940, as amended. As of February 29, 2020, non-qualifying assets represent 11.5% of the Company’s portfolio at fair value. As a BDC, the Company can only invest 30% of its portfolio in non-qualifying assets.

(b)Percentages are based on net assets of $304,286,853 as of February 29, 2020.

(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 7 to the consolidated financial statements).

(e)This investment does not have a stated interest rate that is payable thereon. As a result, the 10.97% 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-15

 

 

Saratoga Investment Corp.

Consolidated Schedule of Investments

February 29, 2020

 

(f)As defined in the Investment Company Act, this portfolio company is an Affiliate as we own between 5.0% and 25.0% of the voting securities. Transactions during the year ended February 29, 2020 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) 
GreyHeller LLC  $-   $             -   $961,322   $             -   $             -   $1,331,201 
Elyria Foundry Company, L.L.C.   -    -    167,835    -    -    135,600 
Top Gun Pressure Washing, LLC   4,950,000    -    269,257    -    -    71,771 
TG Pressure Washing Holdings, LLC   350,000    -    -    -    -    - 
Total  $5,300,000   $-   $1,398,414   $-   $-   $1,538,572 

 

(g)As defined in the Investment Company Act, we “Control” this portfolio company because we own more than 25% of the portfolio company’s outstanding voting securities. Transactions during the year ended February 29, 2020 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) 
Easy Ice, LLC  $-   $(65,219,080)  $3,335,320   $-   $31,225,165   $(3,816,610)
Easy Ice Masters, LLC   -    (4,169,121)   382,066    -    -    (51,436)
Netreo Holdings, LLC   -    -    578,617    -    -    1,654,603 
Saratoga Investment Corp. CLO 2013-1, Ltd.   -    -    4,058,715    2,503,804    -    (2,840,298)
Saratoga Investment Corp. CLO 2013-1, Ltd. Class F-R-2 Notes   -    -    280,689    -    -    (5,500)
Saratoga Investment Corp. CLO 2013-1, Ltd. Class G-R-2 Notes   -    -    937,378    -    -    (15,750)
Saratoga Investment Corp. CLO 2013-1 Warehouse 2, Ltd (j)   2,500,000    -    7,642    -    -    (295,459)
Total  $2,500,000   $(69,388,201)  $9,580,427   $2,503,804   $31,225,165   $(5,370,450)

 

(h)Non-income producing at February 29, 2020.
(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 29, 2020. (see Note 8 to the consolidated financial statements).
(k)As of February 29, 2020, the investment was on non-accrual status. The fair value of these investments was approximately $2.1 million, which represented 0.4% of the Company’s portfolio (see Note 2 to the consolidated financial statements).
(l)Included within cash and cash equivalents and cash and cash equivalents, reserve accounts in the Company’s consolidated statements of assets and liabilities as of February 29, 2020.

 

LIBOR - London Interbank Offered Rate

 

1M USD LIBOR - The 1 month USD LIBOR rate as of February 29, 2020 was 1.52%.

3M USD LIBOR - The 3 month USD LIBOR rate as of February 29, 2020 was 1.46%.

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

 

See accompanying notes to consolidated financial statements.

 

F-16

 

 

SARATOGA INVESTMENT CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

February 28, 2021

 

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 as a regulated investment company (“RIC”) under subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Company expects to continue to qualify and to elect to be treated, for tax purposes, as a RIC. The Company’s investment objective is to generate current income and, to a lesser extent, capital appreciation from its investments.

 

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

 

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

 

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

 

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

 

The Company has established wholly-owned subsidiaries, SIA-Avionte, Inc., SIA-GH, Inc., SIA-MAC, SIA-PP Inc., Inc., SIA-TG, Inc., SIA-TT, Inc., SIA-Vector, Inc. and SIA-VR, Inc., which are structured as Delaware entities, or tax blockers (“Taxable Blockers”), to hold equity or equity-like investments in portfolio companies organized as limited liability companies, or LLCs (or other forms of pass through entities). Tax Blockers are consolidated for accounting purposes, but are not consolidated for 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 December 31, 2019, the Company’s second lien term loans in Easy Ice, LLC and Easy Ice Masters, LLC were repaid at par, and its preferred equity was sold in a change of control transaction. In addition to the second lien term loans of $27.9 million and the preferred equity of $10.7 million being repaid in full including all accrued interest, the Company also received approximately $35.6 million of additional proceeds, interest and fees. The Company recognized a gain of $31.2 million, which is included in the net realized gain (loss) from investments in the Company’s consolidated statement of operations from the sale. The SIA-Easy Ice, LLC Taxable Blocker was sold as part of this transaction.

 

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

 

F-17

 

 

Note 2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

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

 

The Company, SBIC LP and SBIC II LP are all considered to be investment companies for financial reporting purposes and have applied the guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, “Financial Services — Investment Companies” (“ASC 946”). There have been no changes to the Company, SBIC LP or SBIC II LP’s status as investment companies during the year ended February 28, 2021.

 

Use of Estimates in the Preparation of Financial Statements

 

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

 

Cash and Cash Equivalents

 

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

 

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

 

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

 

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

 

As of February 28, 2021, the Company did not exceed any of these limitations.

 

Cash and Cash Equivalents, Reserve Accounts

 

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

 

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

 

F-18

 

 

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:

 

   February 28,
2021
   February 29,
2020
   February 28,
2019
 
Cash and cash equivalents  $18,828,047   $24,598,905   $30,799,068 
Cash and cash equivalents, reserve accounts   11,087,027    14,851,447    31,295,326 
Total cash and cash equivalents and cash and cash equivalents, reserve accounts  $29,915,074   $39,450,352   $62,094,394 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

F-19

 

 

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

 

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

 

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

 

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 February 28, 2021, certain investments in two portfolio companies, including preferred equity interests, were on non-accrual status with a fair value of approximately $2.1 million, or 0.4% of the fair value of our portfolio. At February 29, 2020, certain investments in four portfolio companies, including preferred equity interests, were on non-accrual status with a fair value of approximately $2.1 million, or 0.4% of the fair value of our portfolio.

 

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

 

F-20

 

 

Adoption of ASC 606

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASC 606”), which supersedes the revenue recognition requirements in Revenue Recognition (“ASC 605”). In May 2016, ASU 2016-12 amended ASU 2014-09 and deferred the effective period for annual periods beginning after December 15, 2017.

 

Under the new guidance, the Company recognizes revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. Under this standard, revenue is based on a contract with a determinable transaction price and distinct performance obligations with probable collectability. Revenues cannot be recognized until the performance obligation(s) are satisfied and control is transferred to the customer. Management has concluded that the majority of its revenues associated with financial instruments are scoped out of ASC 606, and has concluded that the only significant impact relates to the timing of the recognition of the CLO incentive fee income. The adoption of ASC 606 did not have an impact on the Company’s management fee income or investment income.

 

The Company adopted ASC 606 to all applicable contracts under the modified retrospective approach using the practical expedient provided for within paragraph 606-10-65-1(f)(4); therefore, the presentation of prior year periods has not been adjusted. The Company recognized the cumulative effect of initially adopting ASC 606 as an adjustment to the opening balance of components of equity as of March 1, 2018.

 

Incentive Fee Income

 

Incentive fee income is recognized based on the performance of Saratoga CLO during the period, subject to the achievement of minimum return levels in accordance with the terms set out in the investment management agreement between the Company and Saratoga CLO. Incentive fee income is realized in cash on a quarterly basis. Once realized, such fees are no longer subject to reversal.

 

Upon the adoption of ASC 606, the Company recognizes incentive fee income only when the amount is realized and no longer subject to reversal. Therefore, the Company no longer recognizes unrealized incentive fee income in the consolidated financial statements. The adoption of ASC 606 results in the delayed recognition of unrealized incentive fee income in the consolidated financial statements until it becomes realized at the end of the measurement period and all uncertainties are eliminated, which is typically quarterly.

 

The Company adopted ASC 606 for incentive fee income using the modified retrospective approach with an effective date of March 1, 2018. The cumulative effect of the adoption resulted in the reversal of $0.07 million of unrealized incentive fee income and is presented as a reduction to the opening balances of components of equity as of March 1, 2018.

 

In conjunction with the third refinancing and issuance of the Saratoga CLO’s 2013-1 Reset CLO Notes (the “2013-1 Reset CLO Notes”) on December 14, 2018, the Company is no longer entitled to receive an incentive management fee from Saratoga CLO. See Note 4 for additional information. Prior to the refinancing, the Company received $0.6 million in incentive fees from the Saratoga CLO and is reported as incentive fee income on the Company’s consolidated statement of operations for the year ended February 28, 2019.

 

For the year ended February 28, 2019, the impact on the consolidated statement of operations without the adoption of ASC 606 is shown in the table below:

 

Consolidated Statements of Operations

 

   For the Year Ended February 28, 2019 
   As Reported   Adjustments   Without
Adoption of
ASC 606
 
Incentive fee income  $633,232   $(65,300)  $567,932 
Total investment income   47,707,963    (65,300)   47,642,663 
NET INVESTMENT INCOME   18,302,209    (65,300)   18,236,909 
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS   18,509,370    (65,300)   18,444,070 
WEIGHTED AVERAGE - BASIC AND DILUTED EARNINGS PER COMMON SHARE  $2.63   $(0.01)  $2.62 

 

F-21

 

 

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.

 

Structuring and Advisory Fee Income

 

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

 

Other Income

 

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

 

Deferred Debt Financing Costs

 

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

 

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

 

Contingencies

 

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

 

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

 

Income Taxes

 

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

 

In order to qualify as a RIC, among other requirements, the Company is required to timely distribute to its stockholders at least 90.0% of its investment company taxable income, as defined by the Code, for each fiscal tax year. The Company will be subject to a nondeductible U.S. federal excise tax of 4.0% on undistributed income if it does not distribute at least 98.0% of its ordinary income in any calendar year and 98.2% of its capital gain net income for each one-year period ending on October 31.

 

Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year dividend distributions into the next tax year and pay a 4.0% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions for excise tax purposes, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the year ended February 28, 2021, the excise tax accrual on estimated excess table income was $0.7 million.

 

F-22

 

 

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

 

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

 

FASB ASC Topic 740, Income Taxes, (“ASC 740”), provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense on the consolidated statements of operations. During the fiscal year ended February 28, 2021 the Company did not incur any interest or penalties. Although we file federal and state tax returns, our major tax jurisdiction is federal. The 2018, 2019 and 2020 federal tax years for the Company remain subject to examination by the IRS. At February 28, 2021, and February 29, 2020, 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 such capital gains for reinvestment.

 

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

 

Capital Gains Incentive Fee

 

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

 

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

 

F-23

 

 

New Accounting Pronouncements

 

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

 

SEC Rule 12b-2 Update

 

In March 2020, the SEC adopted a final rule under SEC Release No. 34-88365 (the “Final Rule”), amending the accelerated filer and large accelerated filer definitions in Exchange Act Rule 12b-2. The amendments include a provision under which a BDC will be excluded from the “accelerated filer” and “large accelerated filer” definitions if the BDC has (1) a public float of $75 million or more, but less than $700 million, and (2) has annual investment income of less than $100 million. In addition, BDCs are subject to the same transition provisions for accelerated filer and large accelerated filer status as other issuers, but instead substituting investment income for revenue. The amendments will reduce the number of issuers required to comply with the auditor attestation on the internal control over financial reporting requirement provided under Section 404(b) of the Sarbanes-Oxley Act of 2002. The Final Rule applies to annual report filings due on or after April 27, 2020. The Company has assessed the Final Rule, and concluded that effective February 28, 2021, it is no longer an accelerated filer. As a result, the Company has filed this Annual Report on Form 10-K for the fiscal year ending February 28, 2021 as a non-accelerated filer.

 

SEC Disclosure Update and Simplification

 

In March 2019, the U.S. Securities Exchange Commission (the “SEC”) adopted the final rule under SEC Release No. 33-10618, Fast Act Modernization and Simplification of Regulation S-K, amending certain disclosure requirements. The amendments are intended to simplify certain disclosure requirements and to provide for a consistent set of rules to govern incorporating information by reference and hyperlinking, improve readability and navigability of disclosure documents, and discourage repetition and disclosure of immaterial information. The Company has adopted the final rule, as applicable under SEC Release No. 33-10618 and determined the effect of the adoption of the simplification rules on financial statements will be limited to the modification and removal of certain 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.

 

F-24

 

 

Note 3. Investments

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

F-25

 

 

The following table presents fair value measurements of investments, by major class, as of February 29, 2020 (dollars in thousands), according to the fair value hierarchy:

 

   Fair Value Measurements 
   Level 1   Level 2   Level 3   Total 
First lien term loans  $          -   $          -   $346,233   $346,233 
Second lien terms loans   -    -    73,570    73,570 
Unsecured term loans   -    -    4,346    4,346 
Structured finance securities   -    -    32,470    32,470 
Equity interests   -    -    29,013    29,013 
Total  $-   $-   $485,632   $485,632 

 

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the year ended February 28, 2021 (dollars in thousands):

 

   First lien term loans   Second lien term loans   Unsecured term loans   Structured finance securities   Equity interests   Total 
Balance as of February 29, 2020  $346,233   $73,570   $4,346   $32,470   $29,013   $485,632 
Payment-in-kind and other adjustments to cost   828    1,993    -    (3,674)   (120)   (973)
Net accretion of discount on investments   1,147    243    -    -    -    1,390 
Net change in unrealized appreciation (depreciation) on investments   (4,267)   (3,053)   295    (892)   12,883    4,966 
Purchases   142,970    -    22,500    31,875    4,916    202,261 
Sales and repayments   (46,477)   (47,823)   (25,000)   (10,000)   (959)   (130,259)
Net realized gain (loss) from investments   22    -    -    -    (8,726)   (8,704)
Balance as of February 28, 2021  $440,456   $24,930   $2,141   $49,779   $37,007   $554,313 
Net change in unrealized appreciation (depreciation) for the year relating to those Level 3 assets that were still held by the Company at the end of the year  $(3,866)  $(2,832)  $-   $(979)  $5,137   $(2,540)

 

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

 

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

 

Transfers and restructurings, if any, are recognized at the beginning of the period in which they occur. There were no restructures in or out of Levels 1, 2, or 3 during the year ended February 28, 2021.

 

F-26

 

 

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the year ended February 29, 2020 (dollars in thousands):

 

   First lien term loans   Second lien term loans   Unsecured term loans   Structured finance securities   Equity interests   Total 
Balance as of February 28, 2019  $202,846   $125,786   $2,100   $35,328   $35,960   $402,020 
Payment-in-kind and other adjustments to cost   673    2,874    45    4    (550)   3,046 
Net accretion of discount on investments   799    271    -    -    -    1,070 
Net change in unrealized appreciation (depreciation) on investments   2,614    99    (299)   (2,862)   (323)   (771)
Purchases   197,059    -    2,500    -    5,084    204,643 
Sales and repayments   (56,890)   (55,460)   -    -    (54,903)   (167,253)
Net realized gain (loss) from investments   (868)   -    -    -    43,745    42,877 
Balance as of February 29, 2020  $346,233   $73,570   $4,346   $32,470   $29,013   $485,632 
Net change in unrealized appreciation (depreciation) for the year relating to those Level 3 assets that were still held by the Company at the end of the year  $1,546   $140   $(299)  $(2,863)  $4,069   $2,593 

 

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

 

Transfers and restructurings, if any, are recognized at the beginning of the period in which they occur. There were no restructures in or out of Levels 1, 2, or 3 during the year ended February 29, 2020.

 

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

 

   Fair Value   Valuation Technique  Unobservable Input  Range   Weighted Average* 
First lien term loans  $440,456   Market Comparables  Market Yield (%)   5.8% - 18.7%    9.7% 
           EBITDA Multiples (x)   6.8x    6.8x 
           Revenue Multiples (x)   4.1x - 8.0x    7.5x 
                      
Second lien term loans   24,930   Market Comparables  Market Yield (%)   10.0% - 24.5%    16.5% 
           EBITDA Multiples (x)   7.5x    7.5x 
                      
Unsecured term loans   2,141   Market Comparables  Market Yield (%)   31.1%    31.1% 
           EBITDA Multiples (x)   5.2x    5.2x 
                      
Structured finance securities   49,779   Discounted Cash Flow  Discount Rate (%)   10.0% - 15.0%    13.8% 
           Recovery Rate (%)   35.0% - 70.0%    70.0% 
           Prepayment Rate (%)   20.0%    20.0% 
                      
Equity interests   37,007   Enterprise Value Waterfall  EBITDA Multiples (x)   4.0x - 14.0x    9.7x 
           Revenue Multiples (x)   0.5x - 38.3x    4.6x 
Total  $554,313                 

 

 

*The weighted average in the table above is calculated based on each investment’s fair value weighting, using the applicable unobservable input, excluding the recovery rate for Structured finance securities.

 

F-27

 

 

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of February 29, 2020 were as follows (dollars in thousands):

 

   Fair Value   Valuation Technique  Unobservable Input  Range   Weighted Average* 
First lien term loans  $346,233   Market Comparables  Market Yield (%)   7.8% - 12.5%    9.7% 
           EBITDA Multiples (x)   0.0x    0.0x 
                      
Second lien term loans   73,570   Market Comparables  Market Yield (%)   9.5% - 85.1%    13.0% 
           EBITDA Multiples (x)   5.0x    5.0x 
                      
Unsecured term loans   4,346   Market Comparables  Market Yield (%)   18.3% - 21.3%    19.8% 
           EBITDA Multiples (x)   5.2x    5.2x 
                      
Structured finance securities   32,470   Discounted Cash Flow  Discount Rate (%)   9.25% - 16.00%    14.2% 
           Recovery Rate (%)   35.0% - 70.0%    70.0% 
           Prepayment Rate (%)   20.0%    20.0% 
                      
Equity interests   29,013   Enterprise Value Waterfall  EBITDA Multiples (x)   4.0x - 14.0x    6.5x 
Total  $485,632      Revenue Multiples (x)   1.0x - 40.7x    7.3x 

 

 
*The weighted average in the table above is calculated based on each investment’s fair value weighting, using the applicable unobservable input, excluding the recovery rate for Structured finance securities.

 

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

 

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

 

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

 

F-28

 

 

The composition of our investments as of February 29, 2020 at amortized cost and fair value was as follows (dollars in thousands):

 

   Investments at Amortized Cost   Amortized Cost Percentage of Total Portfolio   Investments at Fair Value   Fair Value Percentage of Total Portfolio 
First lien term loans  $343,100    70.5%  $346,233    71.3%
Second lien term loans   75,478    15.5    73,570    15.1 
Unsecured term loans   4,761    1.0    4,346    0.9 
Structured finance securities   33,521    6.9    32,470    6.7 
Equity interests   29,439    6.1    29,013    6.0 
Total  $486,299    100.0%  $485,632    100.0%

 

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

 

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

 

Our investment in Saratoga CLO is carried at fair value, which is based on a discounted cash flow valuation technique that utilizes prepayment, re-investment and loss inputs based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for equity interests in collateralized loan obligation funds similar to Saratoga CLO, when available, as determined by our Manager and recommended to our board of directors. Specifically, we use Intex cash flows, or an appropriate substitute, to form the basis for the valuation of our investment in Saratoga CLO. The cash flows use a set of inputs including projected default rates, recovery rates, reinvestment rates and prepayment rates in order to arrive at estimated valuations. The inputs are based on available market data and projections provided by third parties as well as management estimates. In connection with the refinancing of the Saratoga CLO liabilities, we ran Intex models based on inputs about the refinanced Saratoga CLO’s structure, including capital structure, cost of liabilities and reinvestment period. We use the output from the Intex models (i.e., the estimated cash flows) to perform a discounted cash flow analysis on expected future cash flows to determine a valuation for our investment in Saratoga CLO at February 28, 2021. The inputs at February 28, 2021 for the valuation model include:

 

Default rate: 2.0%

 

Recovery rate: 35-70%

 

Discount rate: 15.0%

 

Prepayment rate: 20.0%

 

Reinvestment rate / price: L+365bps / $99.00

 

F-29

 

 

Investment Concentration

 

Set forth is a brief description of each portfolio company in which the fair value of our investment represents greater than 5% of our total assets as of February 28, 2021.

 

CLEO Communications Holding, LLC

 

CLEO Communications Holding, LLC (“Cleo”) is a provider of technology enabled data communication and integration platform for daily business transactions. Cleo’s platform allows for the automation of business-to-business transaction information for customers operating in the retail, manufacturing, logistics and the healthcare verticals. The platform also allows for internal application-to-application communication, allowing customers’ core enterprise software applications to easily share and transfer data.

 

Destiny Solutions Inc.

 

Destiny Solutions provides a SaaS-based student lifecycle management (“SLM”) software solution used by higher education institutions to manage their continuing education (“CE”) and non-degree educational programs for “non-traditional” students who fall outside of the “traditional” student profile. Traditional students are full-time students working toward an undergraduate, graduate, or doctorate degree. Destiny’s software acts as the ERP, CRM, e-commerce platform, and student information management system for non-traditional student programs.

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

 

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

 

F-30

 

 

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

 

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

 

On August 7, 2018, the Company entered into an unsecured loan agreement (“CLO 2013-1 Warehouse Loan”) with Saratoga Investment Corp. CLO 2013-1 Warehouse, Ltd. (“CLO 2013-1 Warehouse”), a wholly-owned subsidiary of Saratoga CLO, pursuant to which CLO 2013-1 Warehouse may borrow from time to time up to $20 million from the Company in order to provide capital necessary to support warehouse activities. The CLO 2013-1 Warehouse Loan, which expired on February 7, 2020, bears interest at an annual rate of 3M USD LIBOR + 7.5%. Interest accrued on the investment in the CLO 2013-1 Warehouse Loan is included in interest income on the Company’s consolidated statement of operations. During the year ended February 28, 2019, the maximum amount invested by the Company in the CLO 2013-1 Warehouse Loan amounted to $20.0 million and at February 29, 2020, the Company no longer held an investment in the CLO 2013-1 Warehouse Loan.

 

On December 14, 2018, the Company completed a third refinancing and upsize of the Saratoga CLO (the “2013-1 Reset CLO Notes”). The third Saratoga CLO refinancing, among other things, extended its reinvestment period to January 2021, and extended its legal maturity date to January 2030. A non-call period ending January 2020 was also added. Following this refinancing, the Saratoga CLO portfolio increased from approximately $300.0 million in aggregate principal amount to approximately $500.0 million of predominantly senior secured first lien term loans. In addition to refinancing its liabilities, the Company invested an additional $13.8 million in all of the newly issued subordinated notes of the Saratoga CLO and also purchased $2.5 million in aggregate principal amount of the Class F-R-2 and $7.5 million aggregate principal amount of the Class G-R-2 notes tranches at par, with a coupon of 3M USD LIBOR plus 8.75% and 3M USD LIBOR plus 10.00%, respectively. As part of this refinancing, the Company also redeemed our existing $4.5 million aggregate amount of the Class F notes tranche at par and the $20.0 million CLO 2013-Warehouse loan was repaid.

 

On February 11, 2020, the Company entered into an unsecured loan agreement with Saratoga Investment Corp. CLO 2013-1 Warehouse 2, Ltd., (“CLO 2013-1 Warehouse 2”) a wholly-owned subsidiary Saratoga CLO, pursuant to which CLO 2013-1 Warehouse 2 may borrow from time to time up to $20.0 million from the Company in order to provide capital necessary to support warehouse activities. On October 23, 2020, the CLO 2013-1 Warehouse 2 Loan was increased to $25.0 million availability, which was immediately fully drawn and, which expires on August 20, 2021. The interest rate was also amended to be based on a pricing grid, starting at an annual rate of 3M USD LIBOR + 4.46%.

 

On February 26, 2021, the Company completed the fourth refinancing of the Saratoga CLO. This refinancing, among other things, extended the Saratoga CLO reinvestment period to April 2024, and extended its legal maturity to April 2033. A non-call period ending February 2022 was also added. In addition, and as part of the refinancing, the Saratoga CLO has also been upsized from $500 million in assets to approximately $650 million. As part of this refinancing and upsizing, the Company invested an additional $14.0 million in all of the newly issued subordinated notes of the Saratoga CLO, and purchased $17.9 million in aggregate principal amount of the Class F-R-3 Notes tranche at par. Concurrently, the existing $2.5 million of Class F-R-2 Notes, $7.5 million of Class G-R-2 Notes and $25.0 million CLO 2013-1 Warehouse 2 Loan were repaid. The Company also paid $2.6 million of transaction costs related to the refinancing and upsizing on behalf of the Saratoga CLO, to be reimbursed from future equity distributions. As of February 28, 2021, there remained an outstanding receivable of $2.6 million for such transaction costs which is presented as due from affiliate on the Company’s consolidated statement of assets and liabilities.

 

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

 

For the years ended February 28, 2021, February 29, 2020 and February 28, 2019, we accrued management fee income of $2.5 million, $2.5 million and $1.7 million, respectively, and interest income of $3.5 million, $4.1 million and $2.9 million, respectively, from the Saratoga CLO.

 

F-31

 

 

Prior to the refinancing, incentive fee income of $0.6 million for the year ended February 28, 2019, was recognized related to the Saratoga CLO, reflecting the 12.0% hurdle rate that has been achieved. The incentive fee income from the Saratoga CLO is reported as incentive fee income on the Company’s consolidated statement of operations.

 

As of February 28, 2021, the Company determined that the fair value of its investment in the subordinated notes of Saratoga CLO was $31.4 million. The Company determines the fair value of its investment in the subordinated notes of Saratoga CLO based on the present value of the projected future cash flows of the subordinated notes over the life of Saratoga CLO. As of February 28, 2021, the fair value of its investment in the Class F-R-3 Notes was $18.3 million, As of February 28, 2021, Saratoga CLO had investments with a principal balance of $603.7 million and a weighted average spread over LIBOR of 3.8% and had debt with a principal balance of $611.0 million with a weighted average spread over LIBOR of 2.2%. As a result, Saratoga CLO earns a “spread” between the interest income it receives on its investments and the interest expense it pays on its debt and other operating expenses, which is distributed quarterly to the Company as the holder of its subordinated notes. As of February 28, 2021, the present value of the projected future cash flows of the subordinated notes was approximately $31.7 million, using a 15.0% discount rate. The Company’s total investment in the subordinate notes of Saratoga CLO is $57.8 which consists of additional investments of $30 million in January 2008, $13.8 million in December 2018 and $14.0 million in February 2021; to date the Company has since received distributions of $67.5 million, management fees of $24.9 million and incentive fees of $1.2 million. In conjunction with the third refinancing of the 2013-1 Reset CLO Notes on December 14, 2018, the Company is no longer entitled to receive an incentive management fee from Saratoga CLO.

 

As of February 29, 2020, the Company determined that the fair value of its investment in the subordinated notes of Saratoga CLO was $22.6 million. As of February 29, 2020, the fair value of its investment in the Class F-R-2 Notes and G-R-2 Notes of Saratoga CLO was $2.5 million and $7.4 million, respectively. As of February 29, 2020, Saratoga CLO had investments with a principal balance of $528.4 million and a weighted average spread over LIBOR of 4.0% and had debt with a principal balance of $475.1 million with a weighted average spread over LIBOR of 2.2%. As of February 29, 2020, the present value of the projected future cash flows of the subordinated notes, was approximately $22.9 million, using a 16.0% discount rate. For the fourth quarter ended February 28, 2021, the F-R-2 Notes and G-R-2 Notes were redeemed in full.

 

The separate audited financial statements of the Saratoga CLO as of February 28, 2021 and February 29, 2020, pursuant to Rule 3-09 of SEC rules Regulation S-X, and for the years ended February 28, 2021, February 29, 2020 and February 28, 2019, are presented on page S-1.

 

Note 5. Income Taxes

 

The Company intends to operate so as to qualify to be taxed as a RIC under Subchapter M of the Code and, as such, will not be subject to U.S. federal income tax on the portion of taxable income and gains distributed to stockholders.

 

The Company owns 100.0% of Saratoga CLO, an exempted company incorporated in the Cayman Islands. For financial reporting purposes, the Saratoga CLO is not included as part of the consolidated financial statements. For federal income tax purposes, the Company has requested and received approval from the IRS to treat the Saratoga CLO as a disregarded entity. As such, for U.S. federal income tax purposes and for purposes of meeting the RIC qualification and diversification tests, the results of operations of the Saratoga CLO are included with those of the Company to qualify as a RIC. The Company is required to meet certain income and asset diversification tests in addition to timely distributing at least 90.0% of its investment company taxable income, as defined by the Code. Because U.S. federal income tax regulations differ from U.S. GAAP, distributions as required in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences between these distributions and U.S. GAAP financial results may be permanent or temporary in nature. Permanent differences are reclassified among capital accounts in the consolidated financial statements to reflect their tax character. Differences in classification may also result from the treatment of short-term gains as ordinary income for U.S. federal income tax purposes. As of February 28, 2021 and February 29, 2020, the Company reclassified for book purposes amounts arising from permanent book/tax differences primarily related to nondeductible U.S. federal excise and capital gains tax and worthless securities losses (dollars in thousands):

 

   February 28,
2021
   February 29,
2020
 
Capital in excess of par value  $(16,529)  $(1,843)
Total distributable earnings (loss)   16,529    1,843 

 

F-32

 

 

For U.S federal income tax purposes, distributions paid to shareholders are reported as ordinary income, return of capital, long term capital gains or a combination thereof. The tax character of distributions paid for the years ended February 28, 2021, February 29, 2020 and February 28, 2019 was as follows (dollars in thousands):

 

   February 28,
2021
   February 29,
2020
   February 28,
2019
 
Ordinary income  $13,747   $15,292   $14,189 
Capital gains   -    4,806    - 
Total  $13,747   $20,098   $14,189 

 

For federal income tax purposes, as of February 28, 2021, the aggregate net unrealized appreciation for all securities was $12.2 million. The aggregate cost of securities for federal income tax purposes was $1.1 billion.

 

For federal income tax purposes, as of February 29, 2020, the aggregate net unrealized depreciation for all securities was $17.5 million. The aggregate cost of securities for federal income tax purposes was $969.4 million.

 

As of February 28, 2021 and February 29, 2020, the components of accumulated losses on a tax basis as detailed below differ from the amounts reflected per the Company’s consolidated statements of assets and liabilities by temporary book/tax differences primarily arising from the consolidation of the Saratoga CLO for U.S federal tax purposes, market discount and original issue discount income, interest income accrual on defaulted bonds, write-off of investments, and amortization of organizational expenditures and partnership interests (dollars in thousands).

 

   February 28,
2021
   February 29,
2020
 
Post October loss deferred  $-   $- 
Accumulated capital losses   (19,461)   - 
Other temporary differences   729    174 
Undistributed Long Term Gain   -    18,549 
Undistributed ordinary income   7,903    - 
Unrealized appreciation (depreciation)   12,176    (14,887)
Total components of accumulated losses  $1,347   $3,836 

 

At February 28, 2021, the Company had a short-term capital loss of $0.4 million and a long-term capital loss of $19.1 million, available to offset future capital gains. Post RIC-modernization act losses are deemed to arise on the first day of the fund’s following fiscal year and there is no expiration for these losses.

 

Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year dividend distributions into the next tax year and pay a 4.0% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions for excise tax purposes, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the calendar year ended December 31, 2020, the Company did not distribute at least 98% of its ordinary income and 98.2% of its capital gains and accrued $0.7 million in federal excise taxes on undistributed taxable income for the year ended February 28, 2021.

 

As of February 29, 2020, the Company had net capital gains of $21.9 million. The Company utilized $10.7 million of short-term capital loss carryovers and $4.3 million of long-term capital loss carryovers during the fiscal year ended February 29,2020. These prior years losses were deemed to arise on the first day of the Company’s fiscal year. As of February 29, 2020, the Company has no remaining capital loss carryovers.

 

Management has analyzed the Company’s tax positions taken on federal income tax returns for all open years (fiscal years 2018- 2021) and has concluded that no provision for uncertain income tax positions is required in the Company’s consolidated financial statements.

 

On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (the “Modernization Act”) was enacted, and the provisions with the Modernization were are effective for the Company for the year ended February 29, 2012. The Modernization Act was the first major piece of legislation affecting RICs since 1986 and it modernized several of the U.S. federal income and U.S. federal excise tax provisions related to RICs. Some highlights of the enacted provisions are as follows:

 

F-33

 

 

New capital losses may now be carried forward indefinitely and retain the character of the original loss. Under pre-enactment law, capital losses could be carried forward for eight years, and carried forward as short-term capital, irrespective of the character of the original loss.

 

The Modernization Act contains simplification provisions, which are aimed at preventing disqualification of a RIC for “inadvertent” failures of the asset diversification and/or qualifying income tests. Additionally, the Modernization Act exempts RICs from the preferential dividend rule and repealed the 60-day designation requirement for certain types of pay-through income and gains.

 

Finally, the Modernization Act contains several provisions aimed at preserving the character of distributions made by a fiscal year RIC during the portion of its taxable year ending after October 31 or December 31, reducing the circumstances under which a RIC might be required to file amended Forms 1099 to restate previously reported distributions.

 

SIA-Avionte, Inc., SIA-GH Inc., SIA-MAC, Inc., SIA-PP Inc., SIA-TG, Inc., SIA-TT, Inc., SIA-Vector, Inc., and SIA-VR, Inc., each 100% owned by the Company, are each filing standalone C Corporation tax returns for federal and state purposes. As separately regarded entities for tax purposes, these entities are taxed at normal corporate rates. For tax purposes, any distributions by the entities to the parent company would generally need to be distributed to the Company’s shareholders. Generally, such distributions of the entities’ income to the Company’s shareholders will be considered as qualified dividends for tax purposes. The entities’ taxable net income will differ from U.S. GAAP net income because of deferred tax temporary differences arising from net operating losses and unrealized appreciation and deprecation of securities held. Deferred tax assets and liabilities are measured using enacted corporate federal and state tax rates expected to apply to taxable income in the years in which those net operating losses are utilized and the unrealized gains and losses are realized. Deferred tax assets and deferred tax liabilities are netted off by entity, as allowed. The recoverability of deferred tax assets is assessed and a valuation allowance is recorded to the extent that it is more likely than not that any portion of the deferred tax asset will not be realized on the basis of a history of operating losses combined with insufficient projected taxable income or other taxable events in the taxable blockers.

 

The Company’s Easy Ice investment was sold during the year ended February 29, 2020. As part of the transaction, the actual legal entity, SIA-Easy Ice, LLC (“Tax Blocker”) that owned the preferred equity was sold. This Tax Blocker was a wholly-owned subsidiary of the Company. For purposes of tax accounting, the Company had an $8.0 million tax basis in the Tax Blocker.

 

The Company may distribute a portion of its realized net long term capital gains in excess of realized net short term capital losses to its stockholders, but may also decide to retain a portion, or all, of its net capital gains and elect to pay the 21% U.S. federal tax on the net capital gain, potentially in the form of a “deemed distribution” to its stockholders. Income tax (provision) relating to an election to retain its net capital gains, including in the form of a deemed distribution, is included as a component of income tax (provision) benefit from realized gains on investments, depending on the character of the underlying taxable income (ordinary or capital gains), on the consolidated statements of operations. During the year ended February 28, 2021, the Company paid federal tax of $3.9 million on the undistributed net capital gains it elected to retain for the tax year ended February 29, 2020.

 

Deferred tax assets and liabilities, and related valuation allowances, as of February 28, 2021, February 29, 2020 and February 28, 2019, were as follows:

 

   February 28,
2021
   February 29,
2020
   February 28,
2019
 
Total deferred tax assets  $2,108,556   $1,744,879   $2,533,426 
Total deferred tax liabilities   (1,987,120)   (1,412,486)   (1,766,835)
Valuation allowance on net deferred tax assets   (2,044,100)   (1,679,756)   (1,506,307)
Net deferred tax liability  $(1,922,664)  $(1,347,363)  $(739,716)

 

As of February 28, 2021, the valuation allowance on deferred tax assets was $2.0 million, which represents the federal and state tax effect of net operating losses and unrealized losses that we do not believe we will realize through future taxable income. Any adjustments to the Company’s valuation allowance will depend on estimates of future taxable income and will be made in the period such determination is made.

 

F-34

 

 

Net deferred tax (benefit) expense for the year ended February 28, 2021 includes $0.6 million net change in unrealized appreciation (depreciation) on investments and $0.0 million net change in total operating expense, in the consolidated statement of operations, respectively.

 

Net deferred tax (benefit) expense for the year ended February 29, 2020 includes $(0.4) million net change in unrealized appreciation (depreciation) on investments and $1.0 million net change in total operating expense, in the consolidated statement of operations, respectively.

 

Net deferred tax (benefit) expense for the year ended February 28, 2019 includes $1.8 million change in unrealized appreciation (depreciation) on investments and $(1.1) million net change in total operating expense, in the consolidated statement of operations, respectively.

 

Deferred tax temporary differences may include differences for state taxes and joint venture interests.

 

Federal and state income tax provisions (benefits) on investments are as follows:

 

   February 28,
2021
   February 29,
2020
   February 28,
2019
 
Current            
Federal  $ -   $ -   $ - 
State    -     -     - 
Net current expense    -     -     - 
Deferred               
Federal   461,503    480,415    686,445 
State   113,798    127,232    53,271 
Net deferred expense   575,301    607,647    739,716 
Net tax provision  $575,301   $607,647   $739,716 

 

The Company has federal net operating loss carryforwards of $0.1 million which will expire starting in 2038, with the remaining net operating loss carryforwards of $2.5 million having an indefinite life. In addition, the Company has state net operating loss carryforwards of $1.1 million, which begin to expire in fiscal year 2029.

 

Income tax expense was computed by applying the U.S. federal statutory rate of 21% combined with the weighted average state tax rate applicable to each taxable blocker based on the states they operate in.

 

Note 6. Agreements and Related Party Transactions

 

Investment Advisory and Management Agreement

 

On July 30, 2010, the Company entered into the Management Agreement with our Manager. The initial term of the Management Agreement was two years, with automatic, one-year renewals at the end of each year, subject to certain approvals by our board of directors and/or the Company’s stockholders. On July 7, 2020, our board of directors approved the renewal of the Management Agreement for an additional one-year term. Pursuant to the Management Agreement, our Manager implements our business strategy on a day-to-day basis and performs certain services for us, subject to oversight by our board of directors. Our Manager is responsible for, among other duties, determining investment criteria, sourcing, analyzing and executing investments transactions, asset sales, financings and performing asset management duties. Under the Management Agreement, we have agreed to pay our Manager a management fee for investment advisory and management services consisting of a base management fee and an incentive management fee.

 

Base Management Fee and Incentive Management Fee

 

The base management fee of 1.75% per year is calculated based on the average value of our gross assets (other than cash or cash equivalents, but including assets purchased with borrowed funds) at the end of the two most recently completed fiscal quarters. The base management fee is paid quarterly following the filing of the most recent 10-Q.

 

F-35

 

 

The incentive management fee consists of the following two parts:

 

The first, payable quarterly in arrears, equals 20.0% of our pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets at the end of the immediately preceding quarter, that exceeds a 1.875% quarterly hurdle rate measured as of the end of each fiscal quarter, subject to a “catch-up” provision. Under this provision, in any fiscal quarter, our Manager receives no incentive fee unless our pre-incentive fee net investment income exceeds the hurdle rate of 1.875%. Our Manager will receive 100.0% of pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than or equal to 2.344% in any fiscal quarter; and 20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.344% in any fiscal quarter. There is no accumulation of amounts on the hurdle rate from quarter to quarter, and accordingly there is no claw back of amounts previously paid if subsequent quarters are below the quarterly hurdle rate, and there is no delay of payment if prior quarters are below the quarterly hurdle rate.

 

The second part of the incentive fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Management Agreement) and equals 20.0% of our “incentive fee capital gains,” which equals our realized capital gains on a cumulative basis from May 31, 2010 through the end of the fiscal year, if any, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis on each investment in the Company’s portfolio, less the aggregate amount of any previously paid capital gain incentive fee. Importantly, the capital gains portion of the incentive fee is based on realized gains and realized and unrealized losses from May 31, 2010. Therefore, realized and unrealized losses incurred prior to such time will not be taken into account when calculating the capital gains portion of the incentive fee, and our Manager will be entitled to 20.0% of incentive fee capital gains that arise after May 31, 2010. In addition, for the purpose of the “incentive fee capital gains” calculations, the cost basis for computing realized gains and losses on investments held by us as of May 31, 2010 will equal the fair value of such investments as of such date.

 

For the years ended February 28, 2021, February 29, 2020 and February 28, 2019, the Company incurred $9.1 million, $8.1 million and $6.9 million in base management fees, respectively. For the years ended February 28, 2021, February 29, 2020 and February 28, 2019, the Company incurred $5.4 million, $5.8 million and $4.6 million in incentive fees related to pre-incentive fee net investment income. For the years ended February 28, 2021, February 29, 2020 and February 28, 2019, we accrued $0.0 million, $8.4 million and $0.3 million, respectively, in incentive fees related to capital gains.

 

The accrual is calculated using both realized and unrealized capital gains for the period. The actual incentive fee related to capital gains will be determined and payable in arrears at the end of the fiscal year and will include only realized capital gains for the period. As of February 28, 2021, the base management fees accrual was $2.4 million and the incentive fees accrual was $13.8 million and is included in base management and incentive fees payable in the accompanying consolidated statements of assets and liabilities. As of February 29, 2020, the base management fees accrual was $2.1 million and the incentive fees accrual was $13.7 million and is included in base management and incentive fees payable in the accompanying consolidated statements of assets and liabilities.

 

Administration Agreement

 

On July 30, 2010, the Company entered into a separate administration agreement (the “Administration Agreement”) with our Manager, pursuant to which our Manager, as our administrator, has agreed to furnish us with the facilities and administrative services necessary to conduct our day-to-day operations and provide managerial assistance on our behalf to those portfolio companies to which we are required to provide such assistance. The initial term of the Administration Agreement was two years, with automatic, one-year renewals at the end of each year subject to certain approvals by our board of directors and/or our stockholders. The amount of expenses payable or reimbursable thereunder by the Company was capped at $1.0 million for the initial two-year term of the Administration Agreement and subsequent renewals. On July 8, 2015, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to increase the cap on the payment or reimbursement of expenses by the Company thereunder, which had not been increased since the inception of the agreement, to $1.3 million. On July 7, 2016, our board of directors approved the renewal of the Administration Agreement for an additional one-year term. On October 5, 2016, our board of directors determined to increase the cap on the payment or reimbursement of expenses by the Company under the Administration Agreement, from $1.3 million to $1.5 million, effective November 1, 2016. On July 11, 2017, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to increase the cap on the payment or reimbursement of expenses by the Company from $1.5 million to $1.75 million, effective August 1, 2017. On July 9, 2018, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to increase the cap on the payment or reimbursement of expenses by the Company from $1.75 million to $2.0 million, effective August 1, 2018. On July 9, 2019, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to increase the cap on the payment or reimbursement of expenses by the Company from $2.0 million to $2.225 million effective August 1, 2019. On July 7, 2020, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to increase the cap on the payment or reimbursement of expenses by the Company from $2.225 million to $2.775 million effective August 1, 2020.

 

F-36

 

 

For the years ended February 28, 2021, February 29, 2020 and February 28, 2019, we recognized $2.5 million, $2.1 million and $1.9 million in administrator expenses, respectively, pertaining to bookkeeping, recordkeeping and other administrative services provided to us in addition to our allocable portion of rent and other overhead related expenses. As of February 28, 2021, $0.3 million of administrator expenses were accrued and included in due to manager in the accompanying consolidated statements of assets and liabilities. As of February 29, 2020, $0.5 million of administrator expenses were accrued and included in due to manager in the accompanying consolidated statements of assets and liabilities.

 

Saratoga CLO

 

On August 7, 2018, the Company entered into an unsecured loan agreement with CLO 2013-1 Warehouse, a wholly-owned subsidiary of Saratoga CLO, pursuant to which CLO 2013-1 Warehouse may borrow from time to time up to $20 million from the Company in order to provide capital necessary to support warehouse activities. The CLO 2013-1 Warehouse Loan, which expired on February 7, 2020, bears interest at an annual rate of 3M USD LIBOR + 7.5%.

 

On December 14, 2018, the Company completed the third refinancing and issuance of the 2013-1 Reset CLO Notes. This refinancing, among other things, extended the Saratoga CLO reinvestment period to January 2021, and extended its legal maturity to January 2030. A non-call period ending January 2020 was also added. In addition, and as part of the refinancing, the Saratoga CLO has also been upsized from $300 million in assets to approximately $500 million. As part of this refinancing and upsizing, the Company invested an additional $13.8 million in all of the newly issued subordinated notes of the Saratoga CLO, and purchased $2.5 million in aggregate principal amount of the Class F-R-2 Notes tranche and $7.5 million in aggregate principal amount of the Class G-R-2 Notes tranche at par. Concurrently, the existing $4.5 million of Class F notes and $20.0 million CLO 2013-1 Warehouse Loan were repaid. The Company also paid $2.0 million of transaction costs related to the refinancing and upsizing on behalf of the Saratoga CLO, to be reimbursed from future equity distributions. During the year ended February 29, 2020, the Company received full payment of $1.7 million from the Saratoga CLO for such transaction costs.

 

During the year ended February 28, 2019, the maximum amount invested by the Company in the CLO 2013-1 Warehouse Loan amounted to $20.0 million, with interest income of $0.5 million recognized related to the CLO 2013-1 Warehouse Loan and is included in interest from investments on the Company’s consolidated statement of operations for the year ended February 28, 2019.

 

On February 11, 20dedu20, we entered into an unsecured loan agreement (“CLO 2013-1 Warehouse 2 Loan”) with Saratoga Investment Corp. CLO 2013-1 Warehouse 2, Ltd (“CLO 2013-1 Warehouse 2”), a wholly-owned subsidiary of Saratoga Investment Corp. CLO 2013-1, Ltd. pursuant to which CLO 2013-1 Warehouse 2 may borrow from time to time up to $20.0 million from the Company in order to provide capital necessary to support warehouse activities. On October 23, 2020, the CLO 2013-1 Warehouse 2 Loan was increased to $25.0 million availability, which was immediately fully drawn and, which expires on August 20, 2021. The interest rate was also amended to be based on a pricing grid, starting at an annual rate of 3M USD LIBOR + 4.46%.

 

On February 26, 2021, the Company completed the fourth refinancing of the Saratoga CLO. This refinancing, among other things, extended the Saratoga CLO reinvestment period to April 2024, and extended its legal maturity to April 2033. A non-call period ending February 2022 was also added. In addition, and as part of the refinancing, the Saratoga CLO has also been upsized from $500 million in assets to approximately $650 million. As part of this refinancing and upsizing, the Company invested an additional $14.0 million in all of the newly issued subordinated notes of the Saratoga CLO, and purchased $17.9 million in aggregate principal amount of the Class F-R-3 Notes tranche at par. Concurrently, the existing $2.5 million of Class F-R-2 Notes, $7.5 million of Class G-R-2 Notes and $25.0 million CLO 2013-1 Warehouse 2 Loan were repaid. The Company also paid $2.6 million of transaction costs related to the refinancing and upsizing on behalf of the Saratoga CLO, to be reimbursed from future equity distributions. As of February 28, 2021, there remained an outstanding receivable of $2.6 million for such transaction costs which is presented as due from affiliate on the Company’s consolidated statement of assets and liabilities.

 

During the year ended February 28, 2021, the maximum amount invested by the Company in the CLO 2013-1 Warehouse 2 Loan amounted to $25.0 million, with interest income of $0.7 million recognized related to the CLO 2013-1 Warehouse 2 Loan and is included in interest from investments on the Company’s consolidated statement of operations for the year ended February 28, 2021.

 

For the years ended February 28, 2021, February 29, 2020 and February 28, 2019, we recognized $2.5 million, $2.5 million and $1.7 million in management fee income, respectively, related to the Saratoga CLO.

 

F-37

 

 

In conjunction with the third refinancing and issuance of the 2013-1 Reset CLO Notes on December 14, 2018, the Company is no longer entitled to receive an incentive management fee from Saratoga CLO. See Note 4 for additional information. For the year ended February 28, 2019, we recognized incentive fee income of $0.6 million related to the Saratoga CLO.

 

Due from Other Affiliate

 

As of February 28, 2021, there is an outstanding receivable from an affiliate of the Company totaling $0.1 million, relating to the reimbursement of deal expenses originally paid by the Company.

 

Note 7. Borrowings

 

Credit Facility

 

As a BDC, we are only allowed to employ leverage to the extent that our asset coverage, as defined in the 1940 Act, equals at least 200.0% after giving effect to such leverage, or, if we obtain the required approvals from our independent directors and/or stockholders, 150.0%. The amount of leverage that we employ at any time depends on our assessment of the market and other factors at the time of any proposed borrowing. Our asset coverage ratio, as defined in the 1940 Act, was 347.1% as of February 28, 2021 and 607.1% as of February 29, 2020. On April 16, 2018, as permitted by the Small Business Credit Availability Act, which was signed into law on March 23, 2018, our non-interested board of directors approved of our becoming subject to a minimum asset coverage ratio of 150.0% under Sections 18(a)(1) and 18(a)(2) of the Investment Company Act, as amended. The 150.0% asset coverage ratio became effective on April 16, 2019.

 

On April 11, 2007, we entered into a $100.0 million revolving securitized credit facility (the “Revolving Facility”). On May 1, 2007, we entered into a $25.7 million term securitized credit facility (the “Term Facility” and, together with the Revolving Facility, the “Facilities”), which was fully drawn at closing. In December 2007, we consolidated the Facilities by using a draw under the Revolving Facility to repay the Term Facility. In response to the market wide decline in financial asset prices, which negatively affected the value of our portfolio, we terminated the revolving period of the Revolving Facility effective January 14, 2009 and commenced a two-year amortization period during which all principal proceeds from the collateral were used to repay outstanding borrowings. A significant percentage of our total assets had been pledged under the Revolving Facility to secure our obligations thereunder. Under the Revolving Facility, funds were borrowed from or through certain lenders and interest was payable monthly at the greater of the commercial paper rate and our lender’s prime rate plus 4.00% plus a default rate of 2.00% or, if the commercial paper market was unavailable, the greater of the prevailing LIBOR rates and our lender’s prime rate plus 6.00% plus a default rate of 3.00%.

 

On July 30, 2010, we used the net proceeds from (i) the stock purchase transaction and (ii) a portion of the funds available to us under the $45.0 million senior secured revolving credit facility with Madison Capital Funding LLC (the “Credit Facility”), in each case, to pay the full amount of principal and accrued interest, including default interest, outstanding under the Revolving Facility. As a result, the Revolving Facility was terminated in connection therewith. Substantially all of our total assets, other than those held by SBIC LP, have been pledged under the Credit Facility to secure our obligations thereunder.

 

On February 24, 2012, we amended the Credit Facility to, among other things:

 

expand the borrowing capacity under the Credit Facility from $40.0 million to $45.0 million;

 

extend the period during which we may make and repay borrowings under the Credit Facility from July 30, 2013 to February 24, 2015 (the “Revolving Period”). The Revolving Period may, upon the occurrence of an event of default, by action of the lenders or automatically, be terminated. All borrowings and other amounts payable under the Credit Facility are due and payable five years after the end of the Revolving Period; and

 

remove the condition that we may not acquire additional loan assets without the prior written consent of Madison Capital Funding LLC.

 

On September 17, 2014, we entered into a second amendment to the Credit Facility to, among other things:

 

extend the commitment termination date from February 24, 2015 to September 17, 2017;

 

extend the maturity date of the Credit Facility from February 24, 2020 to September 17, 2022 (unless terminated sooner upon certain events);

 

F-38

 

 

reduce the applicable margin rate on base rate borrowings from 4.50% to 3.75%, and on LIBOR borrowings from 5.50% to 4.75%; and

 

reduce the floor on base rate borrowings from 3.00% to 2.25%; and on LIBOR borrowings from 2.00% to 1.25%.

 

On May 18, 2017, we entered into a third amendment to the Credit Facility to, among other things:

 

extend the commitment termination date from September 17, 2017 to September 17, 2020;

 

extend the final maturity date of the Credit Facility from September 17, 2022 to September 17, 2025 (unless terminated sooner upon certain events);

 

reduce the floor on base rate borrowings from 2.25% to 2.00%;

 

reduce the floor on LIBOR borrowings from 1.25% to 1.00%; and

 

reduce the commitment fee rate from 0.75% to 0.50% for any period during which the ratio of advances outstanding to aggregate commitments, expressed as a percentage, is greater than or equal to 50%.

 

On April 24, 2020, we entered into a fourth amendment to the Credit Facility to, among other things:

 

permit certain amendments related to the Paycheck Protection Program (“Permitted PPP Amendment”) to Loan Asset Documents;

 

exclude certain debt and interest amounts allowed by the Permitted PPP Amendments from certain calculations related to Net Leverage Ratio, Interest Coverage Ratio and EBITDA; and

 

exclude such Permitted PPP Amendments from constituting a Material Modification.

 

On September 14, 2020, we entered into a fifth amendment to the Credit Facility to, among other things:

 

extend the commitment termination date of the Credit Facility from September 17, 2020 to September 17, 2021, with no change to the maturity date of September 17, 2025.

 

provide for the transition away from the LIBOR Rate in the market, and

 

expand the definition of “Eligible Loan Asset” to allow investments with certain recurring revenue features to qualify as Collateral and be included in the borrowing base.

 

In addition to any fees or other amounts payable under the terms of the Credit Facility, an administrative agent fee per annum equal to $0.1 million is payable in equal monthly installments in arrears.

 

As of February 28, 2021 and February 29, 2020, there were no outstanding borrowings under the Credit Facility. During the applicable periods, the Company was in compliance with all of the limitations and requirements of the Credit Facility. Financing costs of $3.3 million related to the Credit Facility have been capitalized and are being amortized over the term of the facility. For the years ended February 28, 2021, February 29, 2020 and February 28, 2019, we recorded $0.5 million, $0.6 million and $0.7 million of interest expense, respectively, which includes commitment and administrative agent fees.

 

For the years ended February 28, 2021, February 29, 2020 and February 28, 2019, we recorded $0.1 million, $0.09 million and $0.1 million of amortization of deferred financing costs related to the Credit Facility and Revolving Facility, respectively. Interest expense and amortization of deferred financing costs are reported as interest and debt financing expense on the consolidated statements of operations. For the fiscal year ended February 28, 2021, the average borrowings outstanding and the weighted average interest rate on outstanding borrowings under the Credit Facility was approximately $1.8 million and 0.17%, respectively. For the fiscal year ended February 29, 2020, the average borrowings outstanding and the weighted average interest rate on outstanding borrowings under the Credit Facility was approximately $0.6 million and 6.66%, respectively. For the fiscal year ended February 28, 2019, the average borrowings outstanding and the weighted average interest rate on outstanding borrowings under the Credit Facility was approximately $3.4 million and 7.10%, respectively.

 

F-39

 

 

The Credit Facility contains limitations as to how borrowed funds may be used, such as restrictions on industry concentrations, asset size, weighted average life, currency denomination and collateral interests. The Credit Facility also includes certain requirements relating to portfolio performance, the violation of which could result in the limit of further advances and, in some cases, result in an event of default, allowing the lenders to accelerate repayment of amounts owed thereunder. The Credit Facility has an eight-year term, consisting of a three-year period (the “Revolving Period”), under which the Company may make and repay borrowings, and a final maturity five years from the end of the Revolving Period. Availability on the Credit Facility will be subject to a borrowing base calculation, based on, among other things, applicable advance rates (which vary from 50.0% to 75.0% of par or fair value depending on the type of loan asset) and the value of certain “eligible” loan assets included as part of the Borrowing Base. Funds may be borrowed at the greater of the prevailing one-month LIBOR rate and 1.00%, plus an applicable margin of 4.75%. At the Company’s option, funds may be borrowed based on an alternative base rate, which in no event will be less than 2.00%, and the applicable margin over such alternative base rate is 3.75%. In addition, the Company will pay the lenders a commitment fee of 0.75% per year (or 0.50% if the ratio of advances outstanding to aggregate commitments is greater than or equal to 50%) on the unused amount of the Credit Facility for the duration of the Revolving Period.

 

Our borrowing base under the Credit Facility was $38.9 million, subject to the Credit Facility cap of $45.0 million at February 28, 2021. For purposes of determining the borrowing base, most assets are assigned the values set forth in our most recent Annual Report on Form 10-K or Quarterly Report on Form 10-Q filed with the U.S. Securities and Exchange Commission (“SEC”). Accordingly, the February 28, 2021 borrowing base relies upon the valuations set forth in the Quarterly Report on Form 10-Q for the period ended November 30, 2020, as filed with the SEC on January 6, 2021. The valuations presented in this Annual Report on Form 10-K will not be incorporated into the borrowing base until after this Annual Report on Form 10-K is filed with the SEC.

 

SBA Debentures

 

Our wholly-owned SBIC subsidiaries are able to borrow funds from the SBA against regulatory capital (which approximates equity capital) that is paid in and is subject to customary regulatory requirements including but not limited to an examination by the SBA.

 

On August 14, 2019, the Company’s wholly-owned subsidiary, SBIC II LP, received an SBIC license from the SBA. The new license provides up to $175.0 million in additional long-term capital in the form of SBA debentures. As a result of the 2016 omnibus spending bill signed into law in December 2015, the maximum amount of SBA-guaranteed debentures that affiliated SBIC funds can have outstanding was increased from $225.0 million to $350.0 million. With this license approval, Saratoga will grow its SBA relationship from $150.0 million to $325.0 million of committed capital.

 

As of February 28, 2021, we have funded SBIC LP and SBIC II LP with an aggregate total of equity capital of $75.0 million and $69.0 million, respectively, and have $158.0 million in SBA-guaranteed debentures outstanding, of which $124.0 million is held in SBIC LP and $34.0 million held in SBIC II LP. SBA debentures are non-recourse to us, have a 10-year maturity, and may be prepaid at any time without penalty. The interest rate of SBA debentures is fixed at the time of issuance, often referred to as pooling, at a market-driven spread over 10-year U.S. Treasury Notes. SBA current regulations limit the amount that SBIC LP and SBIC II LP may borrow to a maximum of $150.0 million and $175.0 million, respectively, which is up to twice its potential regulatory capital.

 

SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under SBA regulations, SBICs may make loans to eligible small businesses and invest in the equity securities of small businesses. Under present SBA regulations, eligible small businesses include businesses that have a tangible net worth not exceeding $19.5 million and have average annual fully taxed net income not exceeding $6.5 million for the two most recent fiscal years. In addition, an SBIC must devote 25.0% of its investment activity to “smaller” concerns as defined by the SBA. A smaller concern is one that has a tangible net worth not exceeding $6.0 million and has average annual fully taxed net income not exceeding $2.0 million for the two most recent fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on such factors as the number of employees and gross sales. According to SBA regulations, SBICs may make long-term loans to small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services.

 

SBIC LP and SBIC II LP are subject to regulation and oversight by the SBA, including requirements with respect to maintaining certain minimum financial ratios and other covenants. Receipt of an SBIC license does not assure that SBIC II LP will receive SBA-guaranteed debenture funding, which is dependent upon SBIC II LP continuing to be in compliance with SBA regulations and policies. The SBA, as a creditor, will have a superior claim to SBIC LP and SBIC II LP assets over our stockholders and debtholders in the event we liquidate SBIC LP and SBIC II LP or the SBA exercises its remedies under the SBA-guaranteed debentures issued by SBIC LP and SBIC II LP upon an event of default.

 

F-40

 

 

The Company received exemptive relief from the SEC to permit it to exclude the debt of SBIC subsidiaries guaranteed by the SBA from the definition of senior securities in the asset coverage test under the 1940 Act. This allows the Company increased flexibility under the asset coverage test by permitting it to borrow up to $325.0 million more than it would otherwise be able to absent the receipt of this exemptive relief. On April 16, 2018, as permitted by the Small Business Credit Availability Act, which was signed into law on March 23, 2018, the non-interested board of directors of the Company approved of the Company becoming subject to a minimum asset coverage ratio of 150.0% from 200% under Sections 18(a)(1) and 18(a)(2) of the Investment Company Act, as amended. The 150.0% asset coverage ratio became effective on April 16, 2019.

 

At February 28, 2021 and February 29, 2020, there was $158.0 million and $150.0 million outstanding of SBA debentures, respectively. The carrying amount of the amount outstanding of SBA debentures approximates its fair value, which is based on a waterfall analysis showing adequate collateral coverage and would be classified as a Level 3 liability within the fair value hierarchy. Financing costs of $5.0 million and $1.5 million related to the SBA debentures issued by SBIC LP and SBIC II LP, respectively, have been capitalized and are being amortized over the term of the commitment and drawdown. During the year ended February 28, 2021, the Company repaid $26.0 million of SBA debentures, resulting in a realized loss on extinguishment of $0.1 million related to the acceleration of deferred debt financing costs.

 

For the years ended February 28, 2021, February 29, 2020 and February 28, 2019, we recorded $5.5 million, $4.8 million and $4.7 million of interest expense related to the SBA debentures, respectively. For the years ended February 28, 2021, February 29, 2020 and February 28, 2019, we recorded $0.6 million, $0.5 million and $0.5 million of amortization of deferred financing costs related to the SBA debentures, respectively. Interest expense and amortization of deferred financing costs are reported as interest and debt financing expense on the consolidated statements of operations. The weighted average interest rate during the years ended February 28, 2021, February 29, 2020 and February 28, 2019 on the outstanding borrowings of the SBA debentures was 3.25%, 3.23% and 3.20%, respectively. During the years ended February 28, 2021 and February 29, 2020, the average dollar amount of SBA debentures outstanding was $169.3 million and $150.0 million, respectively.

 

In December 2015, the 2016 omnibus spending bill approved by Congress and signed into law by the President increased the amount of SBA-guaranteed debentures that affiliated SBIC funds can have outstanding from $225.0 million to $350.0 million, subject to SBA approval. SBA regulations previously limited the amount of SBA-guaranteed debentures that an SBIC may issue to $150.0 million when it has at least $75.0 million in regulatory capital but this has increased to $175.0 million for new licenses when it has at least $87.5 million in regulatory capital. Affiliated SBICs are permitted to issue up to a combined maximum amount of $350.0 million in SBA-guaranteed debentures when they have at least $175.0 million in combined regulatory capital.

 

Notes

 

On May 10, 2013, the Company issued $42.0 million in aggregate principal amount of 7.50% fixed-rate notes due 2020 (the “2020 Notes”). The 2020 Notes will mature on May 31, 2020, and since May 31, 2016, may be redeemed in whole or in part at any time or from time to time at the Company’s option. Interest will be payable quarterly beginning August 15, 2013. On May 17, 2013, the Company closed an additional $6.3 million in aggregate principal amount of the 2020 Notes, pursuant to the full exercise of the underwriters’ option to purchase additional 2020 Notes. The 2020 Notes were redeemed in full on January 13, 2017.

 

On May 29, 2015, the Company entered into a Debt Distribution Agreement with Ladenburg Thalmann & Co. through which the Company may offer for sale, from time to time, up to $20.0 million in aggregate principal amount of the 2020 Notes through an At-the-Market (“ATM”) offering. Prior to the 2020 Notes being redeemed in full, the Company had sold 539,725 bonds with a principal of $13.5 million at an average price of $25.31 for aggregate net proceeds of $13.4 million (net of transaction costs).

 

On December 21, 2016, the Company issued $74.5 million in aggregate principal amount of our 6.75% fixed-rate notes due 2023 (the “2023 Notes”) for net proceeds of $71.7 million after deducting underwriting commissions of approximately $2.3 million and offering costs of approximately $0.5 million. The issuance included the exercise of substantially all of the underwriters’ option to purchase an additional $9.8 million aggregate principal amount of 2023 Notes within 30 days. Interest on the 2023 Notes is paid quarterly in arrears on March 15, June 15, September 15 and December 15, at a rate of 6.75% per year, beginning March 30, 2017. The 2023 Notes mature on December 30, 2023, and commencing December 21, 2019, may be redeemed in whole or in part at any time or from time to time at our option. The net proceeds from the offering were used to repay all of the outstanding indebtedness under the 2020 Notes, which amounted to $61.8 million, and for general corporate purposes in accordance with our investment objective and strategies. The remaining unamortized deferred debt financing costs of $1.5 million (including underwriting commissions and net of issuance premiums), was recorded within loss on debt extinguishment in the consolidated statements of operations in the fourth quarter of the fiscal year ended February 28, 2017, when the related 2020 Notes were extinguished.

 

F-41

 

 

On December 21, 2019 and February 7, 2020, the Company redeemed $50.0 million and $24.5 million, respectively, in aggregate principal amount of the $74.5 million in aggregate principal amount of issued and outstanding 2023 Notes. The 2023 Notes were listed on the NYSE under the trading symbol “SAB” with a par value of $25.00 per share, and have been delisted following the redemption.

 

For the year ended February 28, 2019, we recorded $5.0 million of interest expense and $0.4 million of amortization of deferred financing cost related to the 2023 Notes. Interest expense and amortization of deferred financing cost are reported as interest and debt financing expense on the consolidated statements of operations. During the years ended February 28, 2019 the average dollar amount of 2023 Notes outstanding was $74.5 million.

 

On August 28, 2018, the Company issued $40.0 million in aggregate principal amount of our 6.25% fixed-rate notes due 2025 (the “6.25% 2025 Notes”) for net proceeds of $38.7 million after deducting underwriting commissions of approximately $1.3 million. Offering costs incurred were approximately $0.3 million. The issuance included the full exercise of the underwriters’ option to purchase an additional $5.0 million aggregate principal amount of 6.25% 2025 Notes within 30 days. Interest on the 6.25% 2025 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 6.25% per year, beginning November 30, 2018. The 6.25% 2025 Notes mature on August 31, 2025 and commencing August 31, 2021, may be redeemed in whole or in part at any time or from time to time at our option. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $1.6 million related to the 6.25% 2025 Notes have been capitalized and are being amortized over the term of the 6.25% 2025 Notes.

 

On February 5, 2019, the Company completed a re-opening and up-sizing of its existing 6.25% 2025 Notes by issuing an additional $20.0 million in aggregate principal amount for net proceeds of $19.2 million after deducting underwriting commissions of approximately $0.6 million and discount of $0.2 million. Offering costs incurred were approximately $0.2 million. The issuance included the full exercise of the underwriters’ option to purchase an additional $2.5 million aggregate principal amount of 6.25% 2025 Notes within 30 days. Interest rate, interest payment dates and maturity remain unchanged from the existing 6.25% 2025 Notes issued in August 2018. The net proceeds from this offering were used for general corporate purposes in accordance with our investment objective and strategies. The financing costs and discount of $1.0 million related to the 6.25% 2025 Notes have been capitalized and are being amortized over the term of the 6.25% 2025 Notes.

 

As of February 28, 2021, the total 6.25% 2025 Notes outstanding was $60.0 million. The 6.25% 2025 Notes are listed on the NYSE under the trading symbol “SAF” with a par value of $25.00 per share. As of February 28, 2021, the carrying amount and fair value of the 6.25% 2025 Notes was $60.0 million and $61.2 million, respectively. The fair value of the 6.25% 2025 Notes, which are publicly traded, is based upon closing market quotes as of the measurement date and would be classified as a Level 1 liability within the fair value hierarchy.

 

As discussed above, during the fourth quarter of 2020 fiscal year, the Company redeemed $74.45 million in aggregate principal amount of issued outstanding 2023 Notes.

 

On June 24, 2020, the Company issued $37.5 million in aggregate principal amount of our 7.25% fixed-rate notes due 2025 (the “7.25% 2025 Notes”) for net proceeds of $36.3 million after deducting underwriting commissions of approximately $1.2 million. Offering costs incurred were approximately $0.3 million. On July 6, 2020, the underwriters exercised their option in full to purchase an additional $5.625 million in aggregate principal amount of its 7.25% 2025 Notes. Net proceeds to the Company were $5.4 million after deducting underwriting commissions of approximately $0.2 million. Interest on the 7.25% 2025 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 7.25% per year, beginning August 31, 2020. The 7.25% 2025 Notes mature on June 30, 2025 and commencing June 24, 2022, may be redeemed in whole or in part at any time or from time to time at our option. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $1.6 million related to the 7.25% 2025 Notes have been capitalized and are being amortized over the term of the 7.25% 2025 Notes.

 

As of February 28, 2021, the total 7.25% Notes 2025 outstanding was $43.1 million. The 7.25% 2025 Notes are listed on the NYSE under the trading symbol “SAK” with a par value of $25.00 per share. As of February 28, 2021, the carrying amount and fair value of the 7.25% 2025 Notes was $43.1 million and $45.7 million, respectively. The fair value of the 7.25% 2025 Notes, which are publicly traded, is based upon closing market quotes as of the measurement date and would be classified as a Level 1 liability within the fair value hierarchy.

 

F-42

 

 

For the years ended February 28, 2021 and February 29, 2020, we recorded $2.2 million and $0.0 million, respectively, of interest expense and $0.2 million and $0.0 million, respectively, of amortization of deferred financing costs related to the 7.25% 2025 Notes. Interest expense and amortization of deferred financing cost are reported as interest and debt financing expense on the consolidated statements of operations. For the year ended February 28, 2021 and February 29, 2020, the average dollar amount of 7.25% 2025 Notes outstanding was $43.1 million and $0.0 million, respectively.

 

On July 9, 2020, the Company issued $5.0 million aggregate principal amount of our 7.75% fixed-rate notes due in 2025 (the “7.75% Notes 2025”) for net proceeds of $4.8 million after deducting underwriting commissions of approximately $0.2 million. Offering costs incurred were approximately $0.1 million. Interest on the 7.75% Notes 2025 is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 7.75% per year, beginning August 31, 2020. The 7.75% Notes 2025 mature on July 9, 2025 and may be redeemed in whole or in part at any time or from time to time at our option. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $0.3 million related to the 7.75% Notes 2025 have been capitalized and are being amortized over the term of the Notes.

 

As of February 28, 2021, the total 7.75% Notes 2025 outstanding was $5.0 million. The 7.75% Notes 2025 are not listed and have a par value of $25.00 per share. The carrying amount of the amount outstanding of 7.75% 2025 Notes approximates its fair value, which is based on a waterfall analysis showing adequate collateral coverage and would be classified as a Level 3 liability within the fair value hierarchy.

 

For the years ended February 28, 2021 and February 29, 2020, we recorded $0.3 million and $0.0 million, respectively, of interest expense and $0.04 million and $0.0 million, respectively, of amortization of deferred financing costs related to the 7.75% 2025 Notes. Interest expense and amortization of deferred financing cost are reported as interest and debt financing expense on the consolidated statements of operations. For the year ended February 28, 2021 and February 29, 2020, the average dollar amount of 7.75% 2025 Notes outstanding was $5.0 million and $0.0 million, respectively.

 

On December 29, 2020, the Company issued $5.0 million aggregate principal amount of our 6.25% fixed-rate notes due in 2027 (the “6.25% Notes 2027”). Offering costs incurred were approximately $0.1 million. Interest on the 6.25% Notes 2027 is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 6.25% per year, beginning February 28, 2021. The 6.25% Notes 2027 mature on December 29, 2027 and may be redeemed in whole or in part at any time or from time to time at our option, on or after December 29, 2024. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $0.1 million related to the 6.25% Notes 2027 have been capitalized and are being amortized over the term of the Notes.

 

On January 28, 2021, the Company issued $10.0 million aggregate principal amount of our 6.25% fixed rate Notes due in 2027 (the “6.25% Notes 2027”) for net proceeds of $9.7 million after deducting underwriting commissions of approximately $0.3 million. Offering costs incurred were approximately $0.0 million. Interest on the 6.25% Notes 2027 is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 6.25% per year, beginning February 28, 2021. The 6.25% Notes 2027 mature on January 28, 2027 and commencing January 28, 2023, may be redeemed in whole or in part at any time or from time to time at our option. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of $0.3 million related to the 6.25% Notes 2027 have been capitalized and are being amortized over the term of the Notes.

 

As of February 28, 2021, the total 6.25% Notes 2027 outstanding was $15.0 million. The 6.25% 2027 Notes are not listed and have a par value of $25.00 per share. The carrying amount of the amount outstanding of 6.25% 2027 Notes approximates its fair value, which is based on a waterfall analysis showing adequate collateral coverage and would be classified as a Level 3 liability within the fair value hierarchy.

 

For the years ended February 28, 2021 and February 29, 2020, we recorded $0.1 million and $0.0 million, respectively, of interest expense and $0.01 million and $0.0 million, respectively, of amortization of deferred financing costs related to the 6.25% 2027 Notes. Interest expense and amortization of deferred financing cost are reported as interest and debt financing expense on the consolidated statements of operations. For the year ended February 28, 2021 and February 29, 2020, the average dollar amount of 6.25% 2027 Notes outstanding was $7.0 million and $0.0 million, respectively.

 

Senior Securities

 

Information about our senior securities is shown in the following table as of February 28/29 for the fiscal years indicated in the table, unless otherwise noted. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial condition, liquidity and capital resources” for more detailed information regarding the senior securities.

 

F-43

 

 

SENIOR SECURITIES

(dollar amounts in thousands, except per share data)

 

Class and Year (1)(2)  Total Amount Outstanding Exclusive of Treasury Securities(3)   Asset Coverage per Unit(4)   Involuntary Liquidating Preference per Share(5)   Average Market Value per Share(6) 
   (in thousands) 
Credit Facility with Madison Capital Funding                    
Fiscal year 2021 (as of February 28, 2021)  $-   $3,471    -    N/A 
Fiscal year 2020 (as of February 29, 2020)  $-   $6,071    -    N/A 
Fiscal year 2019 (as of February 28, 2019)  $-   $2,345    -    N/A 
Fiscal year 2018 (as of February 28, 2018)  $-   $2,930    -    N/A 
Fiscal year 2017 (as of February 28, 2017)  $-   $2,710    -    N/A 
Fiscal year 2016 (as of February 29, 2016)  $-   $3,025    -    N/A 
Fiscal year 2015 (as of February 28, 2015)  $9,600   $3,117    -    N/A 
Fiscal year 2014 (as of February 28, 2014)  $-   $3,348    -    N/A 
Fiscal year 2013 (as of February 28, 2013)  $24,300   $5,421    -    N/A 
Fiscal year 2012 (as of February 29, 2012)  $20,000   $5,834    -    N/A 
Fiscal year 2011 (as of February 28, 2011)  $4,500   $20,077    -    N/A 
Fiscal year 2010 (as of February 28, 2010)  $-   $-    -    N/A 
Fiscal year 2009 (as of February 28, 2009)  $-   $-    -    N/A 
Fiscal year 2008 (as of February 29, 2008)  $-   $-    -    N/A 
Fiscal year 2007 (as of February 28, 2007)  $-   $-    -    N/A 
7.50% Notes due 2020(7)                    
Fiscal year 2017 (as of February 28, 2017)  $-   $-    -    N/A 
Fiscal year 2016 (as of February 29, 2016)  $61,793   $3,025    -   $25.24(8)
Fiscal year 2015 (as of February 28, 2015)  $48,300   $3,117    -   $25.46(8)
Fiscal year 2014 (as of February 28, 2014)  $48,300   $3,348    -   $25.18(8)
Fiscal year 2013 (as of February 28, 2013)  $-   $-    -    N/A 
Fiscal year 2012 (as of February 29, 2012)  $-   $-    -    N/A 
Fiscal year 2011 (as of February 28, 2011)  $-   $-    -    N/A 
Fiscal year 2010 (as of February 28, 2010)  $-   $-    -    N/A 
Fiscal year 2009 (as of February 28, 2009)  $-   $-    -    N/A 
Fiscal year 2008 (as of February 29, 2008)  $-   $-    -    N/A 
Fiscal year 2007 (as of February 28, 2007)  $-   $-    -    N/A 
6.75% Notes due 2023(9)                    
Fiscal year 2020 (as of February 29, 2020)  $-   $-    -    N/A 
Fiscal year 2019 (as of February 28, 2019)  $74,451   $2,345    -   $25.74(10)
Fiscal year 2018 (as of February 28, 2018)  $74,451   $2,930    -   $26.05(10)
Fiscal year 2017 (as of February 28, 2017)  $74,451   $2,710    -   $25.89(10)
6.25% Notes due 2025                    
Fiscal year 2021 (as of February 28, 2021)  $60,000   $3,471    -   $24.24(11)
Fiscal year 2020 (as of February 29, 2020)  $60,000   $6,071    -   $25.75(11)
Fiscal year 2019 (as of February 28, 2019)  $60,000   $2,345    -   $24.97(11)
7.25% Notes due 2025                    
Fiscal year 2021 (as of February 28, 2021)  $43,125   $3,471    -   $25.77(11)
7.75% Notes due 2025                    
Fiscal year 2021 (as of February 28, 2021)  $5,000   $3,471    -   $25.00(12)
6.25% Notes due 2027                    
Fiscal year 2021 (as of February 28, 2021)  $15,000   $3,471    -   $25.00(12)

 

 

(1) We have excluded our SBA-guaranteed debentures from this table because the SEC has granted us exemptive relief that permits us to exclude such debentures from the definition of senior securities in the 150% asset coverage ratio we are required to maintain under the 1940 Act. 

 

F-44

 

 

(2) This table does not include the senior securities of our predecessor entity, GSC Investment Corp., relating to a revolving securitized credit facility with Deutsche Bank, in light of the fact that the Company was under different management during the time that such credit facility was outstanding.
   
(3) Total amount of senior securities outstanding at the end of the period presented.
   
(4) Asset coverage per unit is the ratio of our total assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness, calculated on a total basis.
   
(5) The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security junior to it. The “—” indicates information which the Securities and Exchange Commission expressly does not require to be disclosed for certain types of senior securities.
   
(6) Not applicable for credit facility because not registered for public trading.
   
(7) On January 13, 2017, the Company redeemed in full its 2020 Notes. The Company used a portion of the net proceeds from the 2023 Notes offering, which was completed in December 2016, to redeem the 2020 Notes in full.
   
(8) Based on the average daily trading price of the 2020 Notes on the NYSE.
   
(9) On December 21, 2019 and February 7, 2020, the Company redeemed $50.0 million and $24.45 million, respectively, in aggregate principal amount of the $74.45 million in aggregate principal amount of issued and outstanding 2023 Notes.
   
(10) Based on the average daily trading price of the 2023 Notes on the NYSE.
   
(11) Based on the average daily trading price of the 2025 Notes on the NYSE.
   
(12) The carrying value of this unlisted security approximates its fair value, based on a waterfall analysis showing adequate collateral coverage.

 

F-45

 

 

Note 8. Commitments and Contingencies

 

Contractual Obligations

 

The following table shows our payment obligations for repayment of debt and other contractual obligations at February 28, 2021:

 

       Payment Due by Period 
Long-Term Debt Obligations  Total   Less Than
1 Year
   1 - 3
Years
   3 - 5
Years
   More Than
5 Years
 
   ($ in thousands) 
Revolving credit facility  $-   $-   $-   $-   $- 
SBA debentures   158,000    -    14,000    39,000    105,000 
6.25% 2025 Notes   60,000    -    -    60,000    - 
7.25% 2025 Notes   43,125    -    -    43,125    - 
7.75% 2025 Notes   5,000    -    -    5,000    - 
6.25% 2027 Notes   15,000    -    -    -    15,000 
Total Long-Term Debt Obligations  $281,125   $-   $14,000   $147,125   $120,000 

 

Off-balance Sheet Arrangements

 

At February 28, 2021 and February 29, 2020, the Company’s off-balance sheet arrangements consisted of $58.8 million and $64.1 million, respectively, of unfunded commitments outstanding to provide debt financing to its portfolio companies or to fund limited partnership interests. Such commitments are generally up to the Company’s discretion to approve, or the satisfaction of certain financial and nonfinancial covenants and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Company’s consolidated statements of assets and liabilities and are not reflected in the Company’s consolidated statements of assets and liabilities.

 

A summary of the unfunded commitments outstanding as of February 28, 2021 and February 29, 2020 is shown in the table below (dollars in thousands):

 

   February 28,
2021
   February 29,
2020
 
At Company’s discretion          
Book4Time, Inc.  $2,000   $- 
CLEO Communications Holding, LLC   630    - 
GreyHeller LLC   15,000    - 
inMotionNow, Inc.   -    3,000 
Netreo Holdings, LLC   10,000    - 
Omatic Software, LLC   -    1,000 
Passageways, Inc.   5,000    5,000 
PDDS Buyer, LLC   -    5,000 
Saratoga Investment Corp. CLO 2013-1 Warehouse 2, Ltd.   -    17,500 
Top Gun Pressure Washing, LLC   3,175    5,000 
Village Realty Holdings LLC   10,000    10,000 
Total   45,805    46,500 
           
At portfolio company’s discretion - satisfaction of certain financial and nonfinancial covenants required          
ArbiterSports, LLC   -    1,000 
Axiom Purchaser, Inc.   -    1,000 
CoConstruct, LLC   -    3,500 
Davisware, LLC   -    2,000 
GoReact   2,000    2,000 
Granite Comfort, LP   -    - 
HemaTerra Holding Company, LLC   2,000    4,000 
New England Dental Partners   6,000    - 
Passageways, Inc.   2,000    3,000 
Procurement Partners, LLC   1,000    - 
Village Realty Holdings LLC   -    1,124 
    13,000    17,624 
Total  $58,805   $64,124 

 

F-46

 

 

Note 9. Directors Fees

 

The independent directors each receive an annual fee of $70,000. They also receive $3,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting and receive $1,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each committee meeting. In addition, the chairman of the Audit Committee receives an annual fee of $12,500 and the chairman of each other committee receives an annual fee of $6,000 for their additional services in these capacities. In addition, we have purchased directors’ and officers’ liability insurance on behalf of our directors and officers. Independent directors have the option to receive their directors’ fees in the form of our common stock issued at a price per share equal to the greater of net asset value or the market price at the time of payment. No compensation is paid to directors who are “interested persons” of the Company (as such term is defined in the 1940 Act). For the years ended February 28, 2021, February 29, 2020 and February 28, 2019, we incurred $0.3 million, $0.3 million and $0.3 million for directors’ fees and expenses, respectively. As of February 28, 2021 and February 29, 2020, $0.07 million and $0.06 million in directors’ fees and expenses were accrued and unpaid, respectively. As of February 28, 2021, we had not issued any common stock to our directors as compensation for their services.

 

F-47

 

 

Note 10. Stockholders’ Equity

 

On May 16, 2006, GSC Group, Inc. capitalized the LLC, by contributing $1,000 in exchange for 67 shares, constituting all of the issued and outstanding shares of the LLC.

 

On March 20, 2007, the Company issued 95,995.5 and 8,136.2 shares of common stock, priced at $150.00 per share, to GSC Group and certain individual employees of GSC Group, respectively, in exchange for the general partnership interest and a limited partnership interest in GSC Partners CDO III GP, LP, collectively valued at $15.6 million. At this time, the 6.7 shares owned by GSC Group in the LLC were exchanged for 6.7 shares of the Company.

 

On March 28, 2007, the Company completed its IPO of 725,000 shares of common stock, priced at $150.00 per share, before underwriting discounts and commissions. Total proceeds received from the IPO, net of $7.1 million in underwriter’s discount and commissions, and $1.0 million in offering costs, were $100.7 million.

 

On July 30, 2010, our Manager and its affiliates purchased 986,842 shares of common stock at $15.20 per share. Total proceeds received from this sale were $15.0 million.

 

On August 12, 2010, we effected a one-for-ten reverse stock split of our outstanding common stock. As a result of the reverse stock split, every ten shares of our common stock were converted into one share of our common stock. Any fractional shares received as a result of the reverse stock split were redeemed for cash. The total cash payment in lieu of shares was $230. Immediately after the reverse stock split, we had 2,680,842 shares of our common stock outstanding.

 

On September 24, 2014, the Company announced the approval of an open market share repurchase plan that allowed it to repurchase up to 200,000 shares of its common stock at prices below its NAV as reported in its then most recently published consolidated financial statements (the “Share Repurchase Plan”). On October 7, 2015, our board of directors extended the Share Repurchase Plan for another year and increased the number of shares the Company is permitted to repurchase at prices below its NAV, as reported in its then most recently published consolidated financial statements, to 400,000 shares of its common stock. On October 5, 2016, our board of directors extended the Share Repurchase Plan for another year to October 15, 2017 and increased the number of shares the Company is permitted to repurchase at prices below its NAV, as reported in its then most recently published consolidated financial statements, to 600,000 shares of its common stock. On October 10, 2017, January 8, 2019 and January 7, 2020, our board of directors extended the Share Repurchase Plan for another year to October 15, 2018, January 15, 2020 and January 15, 2021, respectively, each time leaving the number of shares unchanged at 600,000 shares of its common stock. On May 4, 2020, our board of directors increased the Share Repurchase Plan to 1.3 million shares of common stock. On January 5, 2021, our board of directors extended the Shares Repurchase Plan for another year to January 15, 2022, leaving the number of shares unchanged at 1.3 million shares of common stock. As of February 28, 2021, the Company purchased 408,812 shares of common stock, at the average price of $17.84 for approximately $7.3 million pursuant to the Share Repurchase Plan. During the year ended February 28, 2021 the Company purchased 190,321 shares of common stock, at the average price $18.96 for approximately $3.6 million pursuant to the Share Repurchase Plan.

 

On March 16, 2017, we entered into an equity distribution agreement with Ladenburg Thalmann & Co. Inc., through which we may offer for sale, from time to time, up to $30.0 million of our common stock through an ATM offering. Subsequent to this, BB&T Capital Markets and B. Riley FBR, Inc. were also added to the agreement. On July 9, 2019, the amount of the common stock to be offered through this offering was increased to $70.0 million, and on October 8, 2019, the amount of the common stock to be offered was increased to $130.0 million. As of February 28, 2021, the Company sold 3,922,018 shares for gross proceeds of $97.1 million at an average price of $24.77 for aggregate net proceeds of $95.9 million (net of transaction costs). For the year ended February 28, 2021, there was no activity related to the ATM offerings.

 

On July 13, 2018, the Company issued 1,150,000 shares of its common stock priced at $25.00 per share (par value $0.001 per share) at an aggregate total of $28.75 million. The net proceeds, after deducting underwriting commissions of $1.15 million and offering costs of approximately $0.2 million, amounted to approximately $27.4 million. The Company also granted the underwriters a 30-day option to purchase up to an additional 172,500 shares of its common stock, which was not exercised.

 

F-48

 

 

The Company adopted Rule 3-04/Rule 8-03(a)(5) under Regulation S-X (Note 2). Pursuant to the regulation, the Company has presented a reconciliation of the changes in each significant caption of stockholders’ equity as shown in the tables below:

 

           Capital
in Excess
   Total
Distributable
     
   Common Stock   of Par   Earnings     
   Shares   Amount   Value   (Loss)   Net Assets 
Balance at February 29, 2020   11,217,545   $11,218   $289,476,991   $14,798,644   $304,286,853 
Increase (Decrease) from Operations:                         
Net investment income   -    -    -    9,018,314    9,018,314 
Net realized gain (loss) from investments   -    -    -    8,480    8,480 
Net change in unrealized appreciation (depreciation) on investments   -    -    -    (31,950,369)   (31,950,369)
Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments   -    -    -    267,740    267,740 
Decrease from Shareholder Distributions:                         
Distributions of investment income – net   -    -    -    -    - 
Capital Share Transactions:                         
Proceeds from issuance of common stock   -    -    -    -    - 
Stock dividend distribution   -    -    -    -    - 
Repurchases of common stock   -    -    -    -    - 
Offering costs   -    -    -    -    - 
Balance at May 31, 2020   11,217,545   $11,218   $289,476,991   $(7,857,191)  $281,631,018 
Increase (Decrease) from Operations:                         
Net investment income   -    -    -    5,334,713    5,334,713 
Net realized gain (loss) from investments   -    -    -    11,929    11,929 
Net change in unrealized appreciation (depreciation) on investments   -    -    -    16,580,401    16,580,401 
Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments   -    -    -    (116,521)   (116,521)
Decrease from Shareholder Distributions:                         
Distributions of investment income – net   -    -    -    (4,487,015)   (4,487,015)
Capital Share Transactions:                         
Proceeds from issuance of common stock   -    -    -    -    - 
Stock dividend distribution   47,098    46    774,944    -    774,990 
Repurchases of common stock   (90,321)   (90)   (1,550,327)   -    (1,550,417)
Repurchase fees   -    -    (1,740)   -    (1,740)
Offering costs   -    -    -    -    - 
Balance at August 31, 2020   11,174,322   $11,174   $288,699,868   $9,466,316   $298,177,358 
Increase (Decrease) from Operations:                         
Net investment income   -    -    -    4,471,102    4,471,102 
Net realized gain (loss) from investments   -    -    -    1,798    1,798 
Income tax (provision) benefit from realized gain on investments                  (3,895,354)   (3,895,354)
Net change in unrealized appreciation (depreciation) on investments   -    -    -    5,998,830    5,998,830 
Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments   -    -    -    (210,057)   (210,057)
Decrease from Shareholder Distributions:                         
Distributions of investment income – net   -    -    -    (4,581,469)   (4,581,469)
Capital Share Transactions:                         
Proceeds from issuance of common stock   -    -    -    -    - 
Stock dividend distribution   45,706    46    805,883    -    805,929 
Repurchases of common stock   (50,000)   (50)   (914,194)   -    (914,244)
Repurchase fees   -    -    (1,003)   -    (1,003)
Offering costs   -    -    -    -    - 
Balance at November 30, 2020   11,170,028   $11,170   $288,590,554   $11,251,166   $299,852,890 
Increase (Decrease) from Operations:                         
Net investment income   -    -    -    4,288,996    4,288,996 
Net realized gain (loss) from investments   -    -    -    (8,726,013)   (8,726,013)
Income tax (provision) benefit from realized gain on investments   -    -    -    -    - 
Realized losses on extinguishment of debt                  (128,617)   (128,617)
Net change in unrealized appreciation (depreciation) on investments   -    -    -    14,337,460    14,337,460 
Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments   -    -    -    (515,796)   (515,796)
Decrease from Shareholder Distributions:                         
Distributions of investment income – net   -    -    -    (4,678,514)   (4,678,514)
Capital Share Transactions:                         
Proceeds from issuance of common stock   -    -    -    -    - 
Stock dividend distribution   41,388    41    900,124    -    900,165 
Repurchases of common stock   (50,000)   (50)   (1,143,748)   -    (1,143,798)
Repurchase fees   -    -    (1,003)   -    (1,003)
Offering costs   -    -    -    -    - 
Tax reclassification of stockholders’ equity in accordance with generally accepted accounting principles   -    -    16,529,030    (16,529,030)   - 
Balance at February 28, 2021   11,161,416   $11,161   $304,874,957   $(700,348)  $304,185,770 

 

F-49

 

 

Note 11. Earnings Per Share

 

In accordance with the provisions of FASB ASC Topic 260, “Earnings per Share” (“ASC 260”), basic earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.

 

The following information sets forth the computation of the weighted average basic and diluted net increase in net assets resulting from operations per share for the years ended February 28, 2021, February 29, 2020 and February 28, 2019 (dollars in thousands except share and per share amounts):

 

Basic and Diluted  February 28,
2021
   February 29,
2020
   February 28,
2019
 
Net increase in net assets resulting from operations  $14,777   $55,739   $18,509 
Weighted average common shares outstanding   11,188,629    9,319,192    7,046,686 
Weighted average earnings per common share  $1.32   $5.98   $2.63 

 

Note 12. Dividend

 

On January 5, 2021, our board of directors declared a dividend of $0.42 per share, which was paid on February 10, 2021, to common stockholders of record as of January 26, 2021. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $3.8 million in cash and 41,388 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $21.75 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on January 28, 29 and February 1, 2, 3, 4, 5, 8, 9 and 10, 2021.

 

On October 7, 2020, our board of directors declared a dividend of $0.41 per share, which was paid on November 10, 2020, to common stockholders of record as of October 26, 2020. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $3.8 million in cash and 45,706 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $17.63 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on October 28, 29, 30 and November 2, 3, 4, 5, 6, 9, and 10, 2020.

 

On July 7, 2020, our board of directors declared a dividend of $0.40 per share, which was paid on August 12, 2020, to common stockholders of record as of July 27, 2020. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder elections, the dividend consisted of approximately $3.7 million in cash and 47,098 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $16.45 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on July 30, 31 and August 3, 4, 5, 6, 7, 10, 11 and 12, 2020.

 

During the three months ended May 31, 2020, there were no dividends declared.

 

On January 7, 2020, the Company declared a dividend of $0.56 per share, which was paid on February 6, 2020, to common stockholders of record on January 24, 2020. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the Company’s DRIP. Based on shareholder elections, the dividend consisted of approximately $5.4 million in cash and 35,682 newly issued shares of common stock, or 0.3% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $25.44 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on January 24, 27, 28, 29, 30, 31 and February 3, 4, 5 and 6, 2020.

 

On August 27, 2019, the Company declared a dividend of $0.56 per share, which was paid on September 26, 2019, to common stockholders of record on September 13, 2019. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the Company’s DRIP. Based on shareholder elections, the dividend consisted of approximately $4.5 million in cash and 34,575 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $23.34 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on September 13, 16, 17, 18, 19, 20, 23, 24, 25 and 26, 2019.

 

F-50

 

 

On May 28, 2019, the Company declared a dividend of $0.55 per share, which was paid on June 27, 2019, to common stockholders of record on June 13, 2019. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the Company’s DRIP. Based on shareholder elections, the dividend consisted of approximately $3.6 million in cash and 31,545 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $22.65 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on June 14, 17, 18, 19, 20, 21, 24, 25, 26 and 27, 2019.

 

On February 26, 2019, our board of directors declared a dividend of $0.54 per share, which was paid on March 28, 2019, to common stockholders of record as of March 14, 2019. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to our DRIP. Based on shareholder elections, the dividend consisted of approximately $3.5 million in cash and 31,240 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $21.36 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on March 15, 18, 19, 20, 21, 22, 25, 26, 27 and 28, 2019.

 

On November 27, 2018, the Company declared a dividend of $0.53 per share, which was paid on January 2, 2019, to common stockholders of record on December 17, 2018. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the Company’s DRIP. Based on shareholder elections, the dividend consisted of approximately $3.4 million in cash and 30,797 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $18.88 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on December 18, 19, 20, 21, 24, 26, 27, 28, 31, 2018 and January 2, 2019.

 

On August 28, 2018, the Company declared a dividend of $0.52 per share, which was paid on September 27, 2018, to common stockholders of record as of September 17, 2018. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to our DRIP. Based on shareholder elections, the dividend consisted of approximately $3.3 million in cash and 25,863 newly issued shares of common stock, or 0.3% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $22.35 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on September 14, 17, 18, 19, 20, 21, 24, 25, 26 and 27, 2018.

 

On May 30, 2018, the Company declared a dividend of $0.51 per share, which was paid on June 27, 2018, to common stockholders of record as of June 15, 2018. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to our DRIP. Based on shareholder elections, the dividend consisted of approximately $2.7 million in cash and 21,563 newly issued shares of common stock, or 0.3% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $23.72 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on June 14, 15, 18, 19, 20, 21, 22, 25, 26 and 27, 2018.

 

On February 26, 2018, the Company declared a dividend of $0.50 per share, which was paid on March 26, 2018, to common stockholders of record as of March 14, 2018. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to our DRIP. Based on shareholder elections, the dividend consisted of approximately $2.6 million in cash and 25,355 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $19.91 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on March 13, 14, 15, 16, 19, 20, 21, 22, 23 and 26, 2018.

 

On November 29, 2017, the Company declared a dividend of $0.49 per share, which was paid on December 27, 2017, to common stockholders of record on December 15, 2017. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant the Company’s DRIP. Based on shareholder elections, the dividend consisted of approximately $2.5 million in cash and 25,435 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $21.14 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on December 13, 14, 15, 18, 19, 20, 21, 22, 26 and 27, 2017.

 

F-51

 

 

On August 28, 2017, the Company declared a dividend of $0.48 per share, which was paid on September 26, 2017, to common stockholders of record as of September 15, 2017. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to our DRIP. Based on shareholder elections, the dividend consisted of approximately $2.2 million in cash and 33,551 newly issued shares of common stock, or 0.6% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $20.19 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on September 13, 14, 15, 18, 19, 20, 21, 22, 25 and 26, 2017.

 

On May 30, 2017, the Company declared a dividend of $0.47 per share, which was paid on June 27, 2017, to common stockholders of record as of June 15, 2017. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to our DRIP. Based on shareholder elections, the dividend consisted of approximately $2.3 million in cash and 26,222 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $20.04 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on June 14, 15, 16, 19, 20, 21, 22, 23, 26 and 27, 2017.

 

On February 28, 2017, the Company declared a dividend of $0.46 per share, which was paid on March 28, 2017, to common stockholders of record as of March 15, 2017. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to our DRIP. Based on shareholder elections, the dividend consisted of approximately $2.0 million in cash and 29,096 newly issued shares of common stock, or 0.5% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $21.38 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on March 15, 16, 17, 20, 21, 22, 23, 24, 27 and 28, 2017.

 

On January 12, 2017, the Company declared a dividend of $0.45 per share, which was paid on February 9, 2017, to common stockholders of record as of January 31, 2017. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to our DRIP. Based on shareholder elections, the dividend consisted of approximately $1.6 million in cash and 50,453 newly issued shares of common stock, or 0.9% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $20.25 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on January 27, 30, 31 and February 1, 2, 3, 6, 7, 8 and 9, 2017.

 

On October 5, 2016, the Company declared a dividend of $0.44 per share, which was paid on November 9, 2016, to common stockholders of record as of October 31, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to our DRIP. Based on shareholder elections, the dividend consisted of approximately $1.5 million in cash and 58,548 newly issued shares of common stock, or 1.0% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $17.12 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on October 27, 28, 31 and November 1, 2, 3, 4, 7, 8 and 9, 2016.

 

On August 8, 2016, the Company declared a special dividend of $0.20 per share, which was paid on September 5, 2016, to common stockholders of record as of August 24, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to our DRIP. Based on shareholder elections, the dividend consisted of approximately $0.7 million in cash and 24,786 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $17.06 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on August 22, 23, 24, 25, 26, 29, 30, 31 and September 1 and 2, 2016.

 

On July 7, 2016, the Company declared a dividend of $0.43 per share, which was paid on August 9, 2016, to common stockholders of record as of July 29, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to our DRIP. Based on shareholder elections, the dividend consisted of approximately $1.5 million in cash and 58,167 newly issued shares of common stock, or 1.0% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $16.32 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on July 27, 28, 29 and August 1, 2, 3, 4, 5, 8 and 9, 2016.

 

F-52

 

 

On March 31, 2016, the Company declared a dividend of $0.41 per share, which was paid on April 27, 2016, to common stockholders of record as of April 15, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to our DRIP. Based on shareholder elections, the dividend consisted of approximately $1.5 million in cash and 56,728 newly issued shares of common stock, or 1.0% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $15.43 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock on April 14, 15, 18, 19, 20, 21, 22, 25, 26 and 27, 2016.

 

The following tables summarize dividends declared for the years ended February 28, 2021, February 29, 2020, February 28, 2019, February 28, 2018 and February 28, 2017 (dollars in thousands except for share amounts):

 

Date Declared  Record Date  Payment Date  Amount per Share   Total Amount* 
January 5, 2021  January 26, 2021  February 10, 2021   0.42    4,679 
October 7, 2020  October 26, 2020  November 10, 2020   0.41    4,581 
July 7, 2020  July 27, 2020  August 12, 2020   0.40    4,487 
Total dividends declared        $1.23   $13,747 

 

Date Declared  Record Date  Payment Date  Amount per Share   Total Amount* 
January 7, 2020  January 24, 2020  February 6, 2020  $0.56   $6,262 
August 27, 2019  September 13, 2019  September 26, 2019   0.56    5,323 
May 28, 2019  June 13, 2019  June 27, 2019   0.55    4,336 
February 26, 2019  March 14, 2019  March 28, 2019   0.54    4,176 
Total dividends declared        $2.21   $20,097 

 

Date Declared  Record Date  Payment Date  Amount per Share   Total Amount* 
November 27, 2018  December 17, 2018  January 2, 2019  $0.53   $3,980 
August 28, 2018  September 17, 2018  September 27, 2018   0.52    3,876 
May 30, 2018  June 15, 2018  June 27, 2018   0.51    3,204 
February 26, 2018  March 14, 2018  March 26, 2018   0.50    3,129 
Total dividends declared        $2.06   $14,189 

 

Date Declared  Record Date  Payment Date  Amount per Share   Total Amount* 
November 29, 2017  December 15, 2017  December 27, 2017  $0.49   $3,052 
August 28, 2017  September 15, 2017  September 26, 2017   0.48    2,866 
May 30, 2017  June 15, 2017  June 27, 2017   0.47    2,792 
February 28, 2017  March 15, 2017  March 28, 2017   0.46    2,666 
Total dividends declared        $1.90   $11,376 

 

Date Declared  Record Date  Payment Date  Amount per Share   Total Amount* 
January 12, 2017  January 31, 2017  February 9, 2017  $0.45   $2,585 
October 5, 2016  October 31, 2016  November 9, 2016   0.44    2,509 
August 8, 2016  August 24, 2016  September 5, 2016   0.20    1,151 
July 7, 2016  July 29, 2016  August 9, 2016   0.43    2,466 
March 31, 2016  April 15, 2016  April 27, 2016   0.41    2,346 
Total dividends declared        $1.93   $11,057 

 

 

*Total amount is calculated based on the number of shares outstanding at the date of record.

 

F-53

 

 

Note 13. Financial Highlights

 

The following is a schedule of financial highlights as of and for the years ended February 28, 2021, February 29, 2020, February 28, 2019, February 28, 2018 and February 28, 2017:

 

Per share data  February 28,
2021
   February 29,
2020
   February 28,
2019
   February 28,
2018
   February 28,
2017
 
Net asset value at beginning of period  $27.13   $23.62   $22.96   $21.97   $22.06 
Adoption of ASC 606   -         (0.01)   -    - 
Net asset value at beginning of period, as adjusted   27.13    23.62    22.95    21.97    22.06 
Net investment income(1)   2.07    1.59    2.60    2.11    1.94 
Net realized and unrealized gains (losses) on investments(1)   (0.74)   4.56    0.03    0.82    0.30 
Realized losses on extinguishment of debt*   (0.01)   (0.17)             (0.26)
Net increase in net assets resulting from operations   1.32    5.98    2.63    2.93    2.24 
Distributions declared from net investment income   (1.23)   (2.21)   (2.06)   (1.90)   (1.93)
Total distributions to stockholders   (1.23)   (2.21)   (2.06)   (1.90)   (1.93)
Issuance of common stock above net asset value(2)   -    -    0.15    -    - 
Repurchases of common stock(3)   0.13    -    -    -    - 
Dilution(4)   (0.10)   (0.26)   (0.05)   (0.04)   (0.14)
Net asset value at end of period  $27.25   $27.13   $23.62   $22.96   $21.97 
Net assets at end of period  $304,185,770   $304,286,853   $180,875,187   $143,691,367   $127,294,777 
Shares outstanding at end of period   11,161,416    11,217,545    7,657,156    6,257,029    5,794,600 
Per share market value at end of period  $23.08   $22.91   $23.04   $21.86   $22.74 
Total return based on market value(5)   7.63%   9.28%   16.11%   5.28%   80.83%
Total return based on net asset value(6)   7.31%   26.22%   13.33%   14.45%   12.62%
Ratio/Supplemental data:                         
Ratio of net investment income to average net assets(7)*   7.77%   6.31%   11.22%   9.37%   8.71%
Ratio of loss on extinguishment of debt to average net assets(7)   0.04%   0.67%   -    -    1.14%
Expenses:                         
Ratio of operating expenses to average net assets(7)   5.39%   6.25%   6.98%   7.81%   7.21%
Ratio of incentive management fees to average net assets(7)   1.65%   6.01%   3.00%   3.19%   2.31%
Ratio of interest and debt financing expenses to average net assets(7)   4.56%   6.23%   8.05%   8.05%   7.75%
Ratio of total expenses to average net assets(7)*   11.60%   18.49%   18.03%   19.05%   17.27%
Portfolio turnover rate(8)   25.26%   36.82%   35.26%   19.73%   43.76%
Asset coverage ratio per unit(9)   3,471    6,071    2,345    2,930    2,710 
Average market value per unit                         
Revolving Credit Facility(10)   N/A    N/A    N/A    N/A    N/A 
SBA Debentures Payable(10)   N/A    N/A    N/A     N/A    N/A 
7.50% Notes Payable 2020   N/A    N/A    N/A    N/A    N/A 
6.75% Notes Payable 2023(11)   N/A    N/A   $25.74   $26.05   $25.89 
6.25% Notes Payable 2025  $24.24   $25.75   $24.97     N/A     N/A 
7.25% Notes Payable 2025   25.77    N/A    N/A    N/A    N/A 
7.75% Notes Payable 2025(10)    N/A     N/A    N/A    N/A    N/A 
6.25% Notes Payable 2027(10)    N/A     N/A    N/A    N/A    N/A 

 

 

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

 

F-54

 

 

(1) Per share amounts are calculated using the weighted average shares outstanding during the period.
   
(2) The continuous issuance of common stock may cause an incremental increase in net asset value per share due to the sale of shares at the then prevailing public offering price and the receipt of net proceeds per share by the Company in excess of net asset value per share on each subscription closing date. The per share data was derived by computing (i) the sum of (A) the number of shares issued in connection with subscriptions and/or distribution reinvestment on each share transaction date multiplied by (B) the differences between the net proceeds per share and the net asset value per share on each share transaction date, divided by (ii) the total shares outstanding during the period.
   
(3) Represents the anti-dilutive impact on the net asset value per share (“NAV”) of the Company due to the repurchase of common shares. See Note 10, Stockholders’ Equity. See Note 12, Dividend.
   
(4) Represents the dilutive effect of issuing common stock below net asset value per share during the period in connection with the satisfaction of the Company’s annual RIC distribution requirement and may include the impact of the different share amounts used for different items (weighted average basic common shares outstanding for the corresponding year and actual common shares outstanding at the end of the year) in the per common share data calculation and rounding impacts. See Note 12, Dividend.
   
(5) Total investment return is calculated assuming a purchase of common shares at the current market value on the first day and a sale at the current market value on the last day of the periods reported. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Company’s DRIP. Total investment return does not reflect brokerage commissions.
   
(6) Total investment return is calculated assuming a purchase of common shares at the current net asset value on the first day and a sale at the current net asset value on the last day of the periods reported. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Company’s DRIP. Total investment return does not reflect brokerage commissions.
   
(7) Ratios are annualized.
   
(8) Portfolio turnover rate is calculated using the lesser of year-to-date sales or year-to-date purchases over the average of the invested assets at fair value.
   
(9) Asset coverage ratio per unit is the ratio of the carrying value of our total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. Asset coverage ratio per unit is expressed in terms of dollar amounts per $1,000 of indebtedness. Asset coverage ratio per unit does not include unfunded commitments. The inclusion of unfunded commitments in the calculation of the asset coverage ratio per unit would not cause us to be below the required amount of regulatory coverage.
   
(10) The Revolving Credit Facility, SBA Debentures, 7.75% Notes Payable 2025 and 6.25% Notes Payable 2027 are not registered for public trading.
   
(11) On December 21, 2019 and February 7, 2020, the Company redeemed $50.0 million and $24.5 million, respectively, in aggregate principal amount of the $74.5 million in aggregate principal amount of issued and outstanding 2023 Notes and are no longer listed on the NYSE.

 

F-55

 

 

Note 14. Selected Quarterly Data (Unaudited)

 

   2021 
($ in thousands, except per share numbers)  Qtr 4   Qtr 3   Qtr 2   Qtr 1 
Total investment income  $16,214   $14,283   $13,856   $13,297 
Net investment income   4,289    4,471    5,335    9,018 
Net realized and unrealized gain (loss)   5,096    1,895    16,476    (31,674)
Realized losses on extinguishment of debt*   (129)   -    -    - 
Net increase in net assets resulting from operations   9,256    6,366    21,811    (22,656)
Net investment income per common share  $0.38   $0.40   $0.48   $0.80 
Net realized and unrealized gain (loss) per common share  $0.46   $0.17   $1.48   $(2.82)
Dividends declared per common share  $0.42   $0.41   $0.40   $- 
Net asset value per common share  $27.25   $26.84   $26.68   $25.11 

 

 

   2020 
($ in thousands, except per share numbers)  Qtr 4   Qtr 3   Qtr 2   Qtr 1 
Total investment income  $17,613   $14,196   $13,888   $12,751 
Net investment income   1,649    4,575    4,956    3,681 
Net realized and unrealized gain (loss)   26,727    9,142    2,624    3,968 
Realized losses on extinguishment of debt*   (1,583)   -    -    - 
Net increase in net assets resulting from operations   26,793    13,717    7,580    7,649 
Net investment income per common share  $0.15   $0.46   $0.59   $0.48 
Net realized and unrealized gain (loss) per common share  $2.39   $0.91   $0.31   $0.51 
Dividends declared per common share  $0.56   $0.56   $0.55   $0.54 
Net asset value per common share  $27.13   $25.30   $24.47   $24.06 

 

 

   2019 
($ in thousands, except per share numbers)  Qtr 4   Qtr 3   Qtr 2   Qtr 1 
Total investment income  $12,984   $12,833   $11,403   $10,488 
Net investment income   4,091    5,139    5,145    3,927 
Net realized and unrealized gain (loss)   3,764    (1,470)   (2,002)   (85)
Net increase in net assets resulting from operations   7,855    3,669    3,143    3,842 
Net investment income per common share  $0.54   $0.69   $0.74   $0.63 
Net realized and unrealized gain (loss) per common share  $0.50   $(0.20)  $(0.29)  $(0.01)
Dividends declared per common share  $0.53   $0.52   $0.51   $0.50 
Net asset value per common share  $23.62   $23.13   $23.16   $23.06 

 

 

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

 

F-56

 

 

Note 15. Subsequent Events

 

The Company has evaluated subsequent events through the filing of this Form 10-K and determined that there have been no events that have occurred that would require adjustments to the Company’s consolidated financial statements and disclosures in the consolidated financial statements except for the following:

 

The Company announced on March 10, 2021, that it has closed a public offering of $50.0 million aggregate principal amount of its 4.375% notes due 2026 (the “Notes”), which resulted in net proceeds to the Company of approximately $48.8 million based on a public offering price of 100% of the aggregate principal amount of the Notes, after deducting payment of underwriting discounts and commissions and estimated offering expenses payable by the Company.

 

The Notes will mature on February 28, 2026, and may be redeemed in whole or in part at any time or from time to time at the Company’s option at par plus a “make-whole” premium, if applicable. The Notes will bear interest at a rate of 4.375% per year payable semi-annually on February 28 and August 28 of each year, beginning August 28, 2021.

 

On March 22, 2021, the Company declared a dividend of $0.43 per share payable on April 22, 2021, to common stockholders of record on April 8, 2021. Shareholders have the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the Company’s DRIP. Based on shareholder elections, the dividend consisted of approximately $3.9 million in cash and 38,580 newly issued shares of common stock, or 0.3% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $23.69 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on April 9,12, 13, 14, 15, 16, 19, 20, 21 and 22, 2021.

 

Subsequent to February 28, 2021, the global outbreak of the coronavirus pandemic has adversely affected some of the Company’s investments and continues to have adverse consequences on the U.S. and global economies. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual portfolio companies, remains uncertain. At the time of this filing, there is no indication of a reportable subsequent event impacting the Company’s financial statements for the year ended February 28, 2021. The Company cannot predict the extent to which its financial condition and results of operations will be adversely affected at this time. The potential impact to our results will depend to a large extent on future developments and new information that may emerge regarding the duration and severity of COVID-19. The Company continues to observe and respond to the evolving COVID-19 environment and its potential impact on areas across its business.

 

F-57

 

 

INDEX TO OTHER FINANCIAL STATEMENTS

Saratoga Investment Corp. CLO 2013-1, Ltd.

 

    PAGE
Report of Independent Auditors   S-2
Statements of Assets and Liabilities as of February 28, 2021 and February 29, 2020   S-3
Statements of Operations for the years ended February 28, 2021, February 29, 2020 and February 28, 2019   S-4
Schedules of Investments as of February 28, 2021 and February 29, 2020   S-7
Statements of Changes in Net Assets for the years ended February 28, 2021, February 29, 2020 and February 28, 2019   S-5
Statements of Cash Flows for the years ended February 28, 2021, February 29, 2020 and February 28, 2019   S-6
Notes to Financial Statements   S-28

 

IMPORTANT NOTE

 

In accordance with certain SEC rules, Saratoga Investment Corp. (the “Company”) is providing additional information regarding one of its portfolio companies, Saratoga Investment Corp. CLO 2013-1, Ltd. (“Saratoga CLO”). The Company owns 100% of the subordinated notes of the Saratoga CLO. The additional financial information regarding the Saratoga CLO does not directly impact the Company’s financial position, results of operations or cash flows.

 

S-1

 

 

Independent Auditor’s Report

 

 

To the Board of Directors
Saratoga Investment Corp. CLO 2013-1, Ltd.

 

We have audited the accompanying financial statements of Saratoga Investment Corp. CLO 2013-1, Ltd., which comprise the statement of assets and liabilities, including the schedule of investments, as of February 28, 2021, and the related statements of operations, changes in net assets and cash flows for the year then ended, and the related notes to the financial statements.

 

Management's Responsibility for the Financial Statements

 

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatements, whether due to fraud or error.

 

Auditor's Responsibility

 

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

In our opinion, the statements referred to above present fairly, in all material respects, the financial position of Saratoga Investment Corp. CLO 2013-1, Ltd. as of February 28, 2021, and the results of its operations, changes in net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

 

Report of Other Auditors

 

The financial statements of Saratoga Investment Corp., CLO 2013-1, Ltd. as of and for the year ended February 29, 2020 and for the year ended February 28, 2019 were audited by other auditors whose report dated May 6, 2020, expressed an unmodified opinion on those statements.

 

/s/ CohnReznick LLP

 

Chicago, Illinois
May 5, 2021

 

S-2

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Statements of Assets and Liabilities

 

   February 28, 2021   February 29, 2020 
         
ASSETS        
Investments at fair value        
Loans at fair value (amortized cost of $594,722,350 and $523,438,207, respectively)  $591,518,866   $500,999,677 
Equities at fair value (amortized cost of $527,124 and $2,566,752, respectively)   501,175    257 
Total investments at fair value (amortized cost of $595,249,474 and $526,004,959, respectively)   592,020,041    500,999,934 
Cash and cash equivalents   114,145,406    9,081,041 
Receivable from open trades   1,901,754    10,419,700 
Interest receivable (net of reserve of $35,000 and $307,705, respectively)   1,497,333    1,294,523 
Prepaid expenses and other assets   118,868    84,526 
Total assets  $709,683,402   $521,879,724 
           
LIABILITIES          
Interest payable  $124,233   $2,090,188 
Payable from open trades   66,298,568    36,673,471 
Accrued base management fee   6,930    54,441 
Accrued subordinated management fee   27,715    217,766 
Accounts payable and accrued expenses   809,760    81,822 
Due to Affiliate   2,600,000    - 
Loan payable, related party   -    2,500,000 
Loan payable, third party   -    2,600,000 
Saratoga Investment Corp. CLO 2013-1, Ltd. Notes:          
Class A-1FL-R-2 Senior Secured Floating Rate Notes   -    255,000,000 
Class A-1FXD-R-2 Senior Secured Fixed Rate Notes   -    25,000,000 
Class-A-2-R-2 Senior Secured Floating Rate Notes   -    40,000,000 
Class A-1-R-3 Senior Secured Floating Rate Notes   357,500,000    - 
Class A-2-R-3 Senior Secured Floating Rate Notes   65,000,000    - 
Class B-FL-R-3 Senior Secured Floating Rate Notes   60,500,000    - 
Class B-FXD-R-3 Senior Secured Fixed Rate Notes   11,000,000    - 
Class B-R-2 Senior Secured Floating Rate Notes   -    59,500,000 
Class C-FL-R-3 Deferrable Mezzanine Floating Rate Notes   26,000,000    - 
Class C-FXD-R-3 Deferrable Mezzanine Fixed Rate Notes   6,500,000    - 
Class C-R-2 Deferrable Mezzanine Floating Rate Notes   -    22,500,000 
Discount on Class C-R-2 Notes   -    (530,448)
Class D-R-2 Deferrable Mezzanine Floating Rate Notes   -    31,000,000 
Discount on Class D-R-2 Notes   -    (965,259)
Class D-R-3 Deferrable Mezzanine Floating Rate Notes   39,000,000    - 
Discount on Class D-R-3 Notes   (292,368)   - 
Class E-1-R-2 Deferrable Mezzanine Floating Rate Notes   -    27,000,000 
Class E-2-R-2 Deferrable Mezzanine Fixed Rate Notes   -    - 
Class E-R-3 Deferrable Mezzanine Floating Rate Notes   27,625,000    - 
Discount on Class E-R-3 Notes   (3,037,380)   - 
Class F-R-2 Deferrable Junior Floating Rate Notes   -    2,500,000 
Class F-R-3 Notes Deferrable Junior Floating Rate Notes   17,875,000    - 
Class G-R-2 Deferrable Junior Floating Rate Notes   -    7,500,000 
Deferred debt financing costs   (2,276,780)   (2,340,764)
Subordinated Notes   111,000,000    69,500,000 
Discount on Subordinated Notes   (48,039,412)   (22,899,324)
Total liabilities  $738,221,266   $556,981,893 
NET ASSETS          
Ordinary equity, par value $1.00, 250 ordinary shares authorized, 250 and 250 common shares issued and outstanding, respectively  $250   $250 
Total distributable earnings (loss)   (28,538,114)   (35,102,419)
Total net assets   (28,537,864)   (35,102,169)
Total liabilities and net assets  $709,683,402   $521,879,724 

 

See accompanying notes to financial statements.

 

S-3

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Statements of Operations

 

   For the year ended 
   February 28,
2021
   February 29,
2020
   February 28,
2019
 
INVESTMENT INCOME            
Total interest from investments  $27,100,908   $32,413,402   $23,413,966 
Interest from cash and cash equivalents   3,835    98,964    25,848 
Other income   729,235    416,089    623,032 
Total investment income   27,833,978    32,928,455    24,062,846 
EXPENSES               
Interest and debt financing expenses   25,903,182    28,511,147    19,612,756 
Base management fee   501,526    500,761    344,436 
Subordinated management fee   2,006,101    2,003,043    1,377,744 
Incentive fees   -    -    567,932 
Professional fees   454,136    322,170    345,407 
Trustee expenses   213,212    194,169    181,492 
Other expense   55,702    71,096    98,496 
Total expenses   29,133,859    31,602,386    22,528,263 
NET INVESTMENT INCOME (LOSS)   (1,299,881)   1,326,069    1,534,583 
                
REALIZED AND UNREALIZED LOSS ON INVESTMENTS               
Net realized loss from investments   (10,922,627)   (4,795,185)   (1,344,711)
Net change in unrealized depreciation on investments   21,775,577    (13,733,384)   (5,644,371)
Net realized and unrealized gain (loss) on investments   10,852,950    (18,528,569)   (6,989,082)
Realized losses on extinguishment of debt*   (2,988,764)   -    (1,199,851)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS  $6,564,305   $(17,202,500)  $(6,654,350)

 

 

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

 

See accompanying notes to financial statements.

 

S-4

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Statement of Changes

February 28, 2021

 

   For the year ended 
   February 28,
2021
   February 29,
2020
   February 28,
2019
 
INCREASE (DECREASE) FROM OPERATIONS:            
Net investment income (loss)  $(1,299,881)  $1,326,069   $1,534,583 
Net realized gain (loss) from investments   (10,922,627)   (4,795,185)   (1,344,711)
Realized losses on extinguishment of debt   (2,988,764)   -    (1,199,851)
Net change in unrealized appreciation (depreciation) on investments   21,775,577    (13,733,384)   (5,644,371)
Net increase (decrease) in net assets resulting from operations   6,564,305    (17,202,500)   (6,654,350)
Total increase (decrease) in net assets   6,564,305    (17,202,500)   (6,654,350)
Net assets at beginning of period   (35,102,169)   (17,899,669)   (11,245,319)
Net assets at end of period  $(28,537,864)  $(35,102,169)  $(17,899,669)

 

See accompanying notes to financial statements.

 

S-5

 

 

Saratoga Investment Corp. CLO 2013-1, Ltd.

Statement of Cash Flows

February 28, 2021

 

   For the year ended 
   February 28,
2021
   February 29,
2020
   February 28,
2019
 
Operating activities            
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS  $6,564,305   $(17,202,500)  $(6,654,350)
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   261,032    386,212    (178,424)
Net accretion of discount on investments   (2,346,642)   (1,623,059)   (725,719)
Amortization of discount and deferred debt financing costs   3,211,790    2,751,310    1,140,966 
Realized Loss on extinguishment of debt   2,988,764    -    1,199,851 
Net realized (gain) loss from investments   10,922,627    4,795,185    1,344,711 
Net change in unrealized (appreciation) depreciation on investments   (21,775,577)   13,733,384    5,644,371 
Proceeds from sales and repayments of investments   142,702,281    210,110,101    179,863,573 
Purchases of investments   (220,783,828)   (229,996,697)   (378,523,269)
(Increase) decrease in operating assets:               
Interest receivable   (202,810)   809,972    (450,567)
Receivable from open trades   8,517,946    (2,564,391)   4,540,262 
Other assets   (34,342)   (84,526)   - 
Increase (decrease) in operating liabilities:             - 
Interest and debt fees payable   (1,965,955)   (2,873,284)   3,773,044 
Payable for open trades   29,625,097    10,441,224    1,760,889 
Accrued base management fee   (47,511)   (53,978)   74,874 
Accrued subordinated management fee   (190,051)   (215,909)   299,496 
Accrued incentive fee   -    -    (65,300)
Accounts payable and accrued expenses   727,938    (1,139,288)   1,221,110 
Due to affiliate   2,600,000    (1,673,747)   1,673,747 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES   (39,224,936)   (14,399,991)   (184,060,735)
                
Financing activities               
Borrowings on debt   627,359,912    5,100,000    482,078,750 
Paydowns on debt   (475,100,000)   -    (282,400,000)
Deferred debt financing costs paid   (7,970,611)   (114,621)   (2,892,182)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES   144,289,301    4,985,379    196,786,568 
                
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   105,064,365    (9,414,612)   12,725,833 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   9,081,041    18,495,653    5,769,820 
CASH AND CASH EQUIVALENTS, END OF PERIOD  $114,145,406   $9,081,041   $18,495,653 
                
Supplemental Information:               
Interest paid during the period  $24,657,347   $28,633,121   $14,698,746 
                
Supplemental non-cash information:               
Paid-in-kind interest income and other adjustments to cost  $(261,032)  $(386,212)  $178,424 
Net accretion of discount on investments   2,346,642    1,623,059    725,719 
Amortization of deferred debt financing costs   3,211,790    2,751,310    1,140,966 

 

See accompanying notes to financial statements.

 

S-6

 

 

Saratoga Investment Corp. CLO 2013-1 Ltd.

Schedule of Investments

February 28, 2021

 

Issuer Name    Industry    Asset Name    Asset
Type
    Reference Rate/Spread    LIBOR Floor   Current Rate
(All In)
   Maturity Date    Principal/
Number of Shares
   Cost   Fair Value 
Covia Holdings C/S (Unimin)  Metals & Mining  Common Stock  Equity  -   -    -    -   -   49,312    385,327   $362,443 
Fusion Connect Warrant  Telecommunications  Warrants  Equity  -   -    -    -   -   32,832    -    328 
J Jill Common Stock  Retail  Common Stock  Equity  -   -    -    -   -   5,085    -    24,966 
McDermott International (Americas), Inc.  Energy: Oil & Gas  Lealand Finance (McDermott International) C/S - Cl  Equity  -   -    -    -   -   141,797    141,797    113,438 
ABB Con-Cise Optical Group LLC  Consumer goods: Non-durable  Term Loan B  Loan  6M USD LIBOR+   5.00%   1.00%   6.00%  6/15/2023   2,060,408   $2,046,779    1,952,875 
Adtalem Global Education Inc.  Services: Business  Adtalem Global Education T/L B (02/21)  Loan  1M USD LIBOR+   4.50%   0.75%   5.25%  2/12/2028   2,000,000    1,980,000    1,980,000 
Advisor Group, Inc.  Banking, Finance, Insurance & Real Estate  Advisor Group Holdings T/L B1  Loan  1M USD LIBOR+   4.50%   0.00%   4.61%  7/31/2026   995,000    994,026    996,383 
Aegis Sciences Corporation  Healthcare & Pharmaceuticals  Term Loan  Loan  3M USD LIBOR+   5.50%   1.00%   6.50%  5/9/2025   3,867,445    3,842,999    3,527,419 
Agiliti Health Inc.  Healthcare & Pharmaceuticals  Term Loan (09/20)  Loan  1M USD LIBOR+   2.75%   0.75%   3.50%  1/4/2026   500,000    495,337    497,500 
Agiliti Health Inc.  Healthcare & Pharmaceuticals  Term Loan (1/19)  Loan  1M USD LIBOR+   2.75%   0.00%   2.88%  1/4/2026   491,250    491,250    487,566 
Ahead Data Blue, LLC  Services: Business  Term Loan (10/20)  Loan  6M USD LIBOR+   5.00%   1.00%   6.00%  9/18/2027   3,000,000    2,885,073    3,017,250 
AI Convoy (Luxembourg) S.a.r.l.  Aerospace & Defense  AI Convoy (Luxembourg) USD T/L B  Loan  6M USD LIBOR+   3.50%   1.00%   4.50%  1/18/2027   1,488,750    1,482,360    1,486,353 
AIS HoldCo, LLC  Services: Business  Term Loan  Loan  3M USD LIBOR+   5.00%   0.00%   5.21%  8/15/2025   5,246,875    5,082,782    5,089,469 
Alchemy Copyrights, LLC  Media: Diversified & Production  Term Loan B  Loan  1M USD LIBOR+   3.25%   0.75%   4.00%  8/16/2027   498,750    495,356    498,750 
Alchemy US Holdco 1, LLC  Metals & Mining  Term Loan  Loan  1M USD LIBOR+   5.50%   0.00%   5.61%  10/10/2025   1,900,000    1,879,839    1,850,923 
Alion Science and Technology Corporation  Aerospace & Defense  Term Loan (2/21)  Loan  1M USD LIBOR+   2.75%   0.75%   3.50%  7/23/2024   3,990,000    3,974,081    3,998,299 
AlixPartners, LLP  Banking, Finance, Insurance & Real Estate  AlixPartners T/L B (01/21)  Loan  1M USD LIBOR+   2.75%   0.50%   3.25%  1/27/2028   250,000    249,375    249,888 
Allen Media, LLC  Media: Diversified & Production  Allen Media T/L B (1/20)  Loan  3M USD LIBOR+   5.50%   0.00%   5.75%  2/10/2027   2,977,027    2,964,383    2,971,460 
Altisource Solutions S.a r.l.  Banking, Finance, Insurance & Real Estate  Term Loan B (03/18)  Loan  3M USD LIBOR+   4.00%   1.00%   5.00%  4/3/2024   1,223,297    1,218,530    1,040,940 
Altium Packaging LLC  Containers, Packaging & Glass  Altium Packaging (Consolidated Container) T/L (01/  Loan  3M USD LIBOR+   2.75%   0.50%   3.25%  1/29/2028   500,000    497,500    499,000 
Altra Industrial Motion Corp.  Capital Equipment  Term Loan  Loan  1M USD LIBOR+   2.00%   0.00%   2.11%  10/1/2025   1,522,387    1,519,700    1,520,012 
American Greetings Corporation  Media: Advertising, Printing & Publishing  Term Loan  Loan  1M USD LIBOR+   4.50%   1.00%   5.50%  4/6/2024   4,230,503    4,228,066    4,239,302 
American Trailer World Corp  Automotive  American Trailer World T/L  Loan  1M USD LIBOR+   3.75%   0.75%   4.50%  2/17/2028   2,000,000    1,990,000    1,990,000 
AmeriLife Holdings LLC  Banking, Finance, Insurance & Real Estate  AmeriLife T/L  Loan  1M USD LIBOR+   4.00%   0.00%   4.12%  3/18/2027   1,492,642    1,484,080    1,490,149 
AmWINS Group, LLC  Banking, Finance, Insurance & Real Estate  AmWINS Group (2/21) T/L  Loan  1M USD LIBOR+   2.25%   0.75%   3.00%  2/17/2028   2,000,000    1,995,000    1,999,160 
Anastasia Parent LLC  Consumer goods: Non-durable  Term Loan  Loan  3M USD LIBOR+   3.75%   0.00%   4.00%  8/11/2025   977,500    974,191    669,891 
Anchor Glass Container Corporation  Containers, Packaging & Glass  Term Loan (07/17)  Loan  3M USD LIBOR+   2.75%   1.00%   3.75%  12/7/2023   480,088    478,981    407,076 
Anchor Packaging, LLC  Containers, Packaging & Glass  Term Loan B  Loan  1M USD LIBOR+   4.00%   0.00%   4.11%  7/10/2026   997,468    987,853    999,962 
APi Group DE, Inc. (J2 Acquisition)  Services: Business  Term Loan B  Loan  1M USD LIBOR+   2.50%   0.00%   2.61%  10/1/2026   990,000    985,758    990,000 
APLP Holdings Limited Partnership  Energy: Electricity  APLP Holdings T/L B (01/20)  Loan  1M USD LIBOR+   2.50%   1.00%   3.50%  4/14/2025   1,618,421    1,618,421    1,617,207 
Apollo Commercial Real Estate Finance, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan B  Loan  1M USD LIBOR+   2.75%   0.00%   2.86%  5/15/2026   3,000,000    2,960,051    2,925,000 
AppLovin Corporation  High Tech Industries  Applovin T/L B  Loan  1M USD LIBOR+   3.50%   0.00%   3.61%  8/15/2025   1,000,000    1,000,000    998,100 
Aramark Corporation  Services: Consumer  Term Loan  Loan  1M USD LIBOR+   1.75%   0.00%   1.86%  1/15/2027   2,481,250    2,401,701    2,454,105 
Arctic Glacier U.S.A., Inc.  Beverage, Food & Tobacco  Term Loan (3/18)  Loan  3M USD LIBOR+   3.50%   1.00%   4.50%  3/20/2024   3,350,967    3,337,028    3,140,124 
Aretec Group, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan (10/18)  Loan  1M USD LIBOR+   4.25%   0.00%   4.36%  10/1/2025   1,960,000    1,956,623    1,954,492 

 

See accompanying notes to financial statements.

 

S-7

 

 

Saratoga Investment Corp. CLO 2013-1 Ltd.

Schedule of Investments

February 28, 2021

 

Issuer Name    Industry    Asset Name    Asset
Type
    Reference Rate/Spread    LIBOR Floor   Current Rate
(All In)
   Maturity Date    Principal/
Number of Shares
   Cost   Fair Value 
ARISTOCRAT LEISURE LIMITED  Hotel, Gaming & Leisure  Term Loan (5/20)  Loan  2M USD LIBOR+   3.75%   1.00%   4.75%  10/19/2024   995,000    978,205    1,000,184 
ASG Technologies Group, Inc  High Tech Industries  Term Loan  Loan  1M USD LIBOR+   3.50%   1.00%   4.50%  7/31/2024   461,401    460,194    454,480 
ASP MSG Acquisition Co., Inc  Beverage, Food & Tobacco  Term Loan (2/17)  Loan  1M USD LIBOR+   4.00%   1.00%   5.00%  8/16/2023   3,830,991    3,793,847    3,835,779 
Aspen Dental Management, Inc.  Services: Consumer  Term Loan B  Loan  1M USD LIBOR+   2.75%   0.00%   2.86%  4/30/2025   1,950,276    1,944,024    1,926,872 
Asplundh Tree Expert, LLC  Services: Business  Term Loan  Loan  1M USD LIBOR+   2.50%   0.00%   2.61%  9/4/2027   997,500    992,854    998,128 
Asurion, LLC  Banking, Finance, Insurance & Real Estate  Term Loan B6  Loan  1M USD LIBOR+   3.00%   0.00%   3.11%  11/3/2023   328,929    327,483    328,244 
Asurion, LLC  Banking, Finance, Insurance & Real Estate  Term Loan B8  Loan  1M USD LIBOR+   3.25%   0.00%   3.36%  12/18/2026   1,525,365    1,515,790    1,520,362 
Avast Software S.R.O. (Sybil Finance)  High Tech Industries  Term Loan B (4/18)  Loan  3M USD LIBOR+   2.25%   1.00%   3.25%  9/29/2023   650,351    642,686    650,351 
Avaya, Inc.  Telecommunications  Term Loan B1  Loan  1M USD LIBOR+   4.25%   0.00%   4.36%  12/15/2027   1,755,766    1,745,975    1,760,437 
Avaya, Inc.  Telecommunications  Avaya T/L B-2  Loan  1M USD LIBOR+   4.00%   0.00%   4.11%  12/15/2027   1,000,000    1,000,000    1,001,250 
Avison Young (Canada) Inc  Services: Business  Term Loan  Loan  3M USD LIBOR+   5.00%   0.00%   5.19%  1/31/2026   3,441,108    3,392,968    3,441,108 
Avolon TLB Borrower 1 (US) LLC  Capital Equipment  Term Loan B3  Loan  1M USD LIBOR+   1.75%   0.75%   2.50%  1/15/2025   1,000,000    869,301    996,390 
Avolon TLB Borrower 1 (US) LLC  Capital Equipment  Term Loan B5  Loan  1M USD LIBOR+   2.50%   0.75%   3.25%  12/20/2027   500,000    495,171    500,625 
Azalea TopCo, Inc.  Services: Business  Incremental Term Loan  Loan  3M USD LIBOR+   4.00%   0.75%   4.75%  7/24/2026   500,000    495,287    501,250 
B&G Foods, Inc.  Beverage, Food & Tobacco  Term Loan  Loan  1M USD LIBOR+   2.50%   0.00%   2.61%  10/10/2026   706,458    700,750    706,960 
B.C. Unlimited Liability Co (Burger King)  Beverage, Food & Tobacco  Term Loan B4  Loan  1M USD LIBOR+   1.75%   0.00%   1.86%  11/19/2026   1,485,000    1,447,423    1,469,912 
Baldwin Risk Partners, LLC  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  1M USD LIBOR+   4.00%   0.75%   4.75%  10/14/2027   997,500    983,184    1,002,488 
BALL METALPACK, LLC (PE Spray)  Containers, Packaging & Glass  Term Loan  Loan  3M USD LIBOR+   4.50%   0.00%   4.69%  7/25/2025   3,904,887    3,891,579    3,887,823 
Bass Pro Group, LLC  Retail  Term Loan B (02/21)  Loan  1M USD LIBOR+   4.25%   0.75%   5.00%  2/26/2028   1,000,000    995,000    1,000,780 
Berry Plastics Holding Corporation  Chemicals, Plastics, & Rubber  Term Loan Y  Loan  1M USD LIBOR+   2.00%   0.00%   2.12%  7/1/2026   4,937,374    4,932,962    4,932,980 
Blackstone Mortgage Trust, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan B  Loan  1M USD LIBOR+   2.25%   0.00%   2.36%  4/23/2026   1,000,000    992,500    985,000 
Blackstone Mortgage Trust, Inc.  Banking, Finance, Insurance & Real Estate  Blackstone Mortgage T/L B-2  Loan  1M USD LIBOR+   4.75%   1.00%   5.75%  4/23/2026   1,494,994    1,484,017    1,498,731 
Blount International, Inc.  Forest Products & Paper  Term Loan B (09/18)  Loan  1M USD LIBOR+   3.75%   1.00%   4.75%  4/12/2023   3,418,806    3,416,907    3,422,225 
Blucora, Inc.  Services: Consumer  Term Loan (11/17)  Loan  3M USD LIBOR+   4.00%   1.00%   5.00%  5/22/2024   2,451,227    2,443,549    2,454,291 
Bombardier Recreational Products, Inc.  Consumer goods: Durable  Term Loan (1/20)  Loan  1M USD LIBOR+   2.00%   0.00%   2.12%  5/24/2027   1,485,050    1,473,875    1,475,620 
Boxer Parent Company, Inc.  High Tech Industries  Boxer Parent Company T/L (BMC Software) (2/21)  Loan  1M USD LIBOR+   3.75%   0.00%   3.90%  10/2/2025   528,897    528,897    528,829 
Bracket Intermediate Holding Corp  Healthcare & Pharmaceuticals  Term Loan  Loan  3M USD LIBOR+   4.25%   0.00%   4.49%  9/5/2025   977,500    974,177    975,868 
BrightSpring Health Services (Phoenix Guarantor)  Healthcare & Pharmaceuticals  Phoenix Guarantor (Brightspring) T/L (02/21)  Loan  6M USD LIBOR+   3.50%   0.00%   3.76%  3/5/2026   1,000,000    1,000,000    1,000,710 
BroadStreet Partners, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan B3  Loan  1M USD LIBOR+   3.25%   0.00%   3.36%  1/22/2027   2,009,429    2,007,872    1,996,207 
Brookfield WEC Holdings Inc.  Energy: Electricity  Brookfield WEC T/L (Westinghouse) (1/21)  Loan  1M USD LIBOR+   2.75%   0.50%   3.25%  8/1/2025   1,492,462    1,495,340    1,488,492 
Buckeye Partners, L.P.  Utilities: Oil & Gas  Buckeye Partners T/L (1/21)  Loan  1M USD LIBOR+   2.25%   0.00%   2.37%  11/1/2026   1,989,987    1,975,617    1,987,182 
BW Gas & Convenience Holdings LLC  Beverage, Food & Tobacco  Term Loan  Loan  1M USD LIBOR+   6.25%   0.00%   6.37%  11/18/2024   2,230,357    2,160,253    2,255,449 
Cable & Wireless Communications Limited  Telecommunications  Term Loan B-5  Loan  1M USD LIBOR+   2.25%   0.00%   2.36%  1/31/2028   2,000,000    2,000,000    1,988,220 
Callaway Golf Company  Retail  Term Loan B  Loan  1M USD LIBOR+   4.50%   0.00%   4.61%  1/4/2026   690,000    679,310    692,298 
Cardtronics Inc  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  1M USD LIBOR+   4.00%   1.00%   5.00%  6/29/2027   1,494,994    1,489,184    1,495,936 
CareerBuilder, LLC  Services: Business  Term Loan  Loan  3M USD LIBOR+   6.75%   1.00%   7.75%  7/31/2023   3,393,388    3,230,834    3,230,505 
CareStream Health, Inc.  Healthcare & Pharmaceuticals  Term Loan  Loan  6M USD LIBOR+   6.75%   1.00%   7.75%  5/8/2023   2,306,786    2,302,501    2,298,136 
Casa Systems, Inc  Telecommunications  Term Loan  Loan  6M USD LIBOR+   4.00%   1.00%   5.00%  12/20/2023   1,440,000    1,433,828    1,435,205 

 

See accompanying notes to financial statements.

 

S-8

 

 

Saratoga Investment Corp. CLO 2013-1 Ltd.

Schedule of Investments

February 28, 2021

 

Issuer Name    Industry    Asset Name    Asset
Type
    Reference Rate/Spread    LIBOR Floor   Current Rate
(All In)
   Maturity Date    Principal/
Number of Shares
   Cost   Fair Value 
Castle US Holding Corporation  Media: Advertising, Printing & Publishing  Term Loan B (USD)  Loan  3M USD LIBOR+   3.75%   0.00%   4.00%  1/27/2027   496,875    494,809    493,059 
Catalent Pharma Solutions, Inc.  Healthcare & Pharmaceuticals  Term Loan B3 (2/21)  Loan  1M USD LIBOR+   2.00%   0.50%   2.50%  5/18/2026   500,000    500,000    500,780 
CBI BUYER, INC.  Consumer goods: Durable  New Trojan Parent (Careismatic/CBI Buyer) 1st Lien  Loan  1M USD LIBOR+   3.25%   0.50%   3.75%  1/6/2028   1,000,000    997,597    1,000,630 
CCI Buyer, Inc  Telecommunications  Term Loan  Loan  3M USD LIBOR+   4.00%   0.75%   4.75%  12/17/2027   250,000    247,558    251,720 
CCS-CMGC Holdings, Inc.  Healthcare & Pharmaceuticals  Term Loan  Loan  1M USD LIBOR+   5.50%   0.00%   5.61%  9/25/2025   2,450,000    2,432,841    2,417,856 
Cengage Learning Acquisitions, Inc.  Media: Advertising, Printing & Publishing  Term Loan  Loan  6M USD LIBOR+   4.25%   1.00%   5.25%  6/7/2023   1,432,459    1,424,074    1,410,370 
CenturyLink, Inc.  Telecommunications  Term Loan B (1/20)  Loan  1M USD LIBOR+   2.25%   0.00%   2.36%  3/15/2027   2,970,000    2,967,083    2,957,170 
Chemours Company, (The)  Chemicals, Plastics, & Rubber  Term Loan  Loan  1M USD LIBOR+   1.75%   0.00%   1.87%  4/3/2025   989,822    940,018    979,617 
CITADEL SECURITIES LP  Banking, Finance, Insurance & Real Estate  Citadel Securities T/L B (01/21)  Loan  1M USD LIBOR+   2.50%   0.00%   2.61%  2/27/2028   5,000,000    4,993,750    4,970,300 
Clarios Global LP  Automotive  Term Loan B  Loan  1M USD LIBOR+   3.50%   0.00%   3.61%  4/30/2026   1,454,464    1,442,855    1,455,381 
Claros Mortgage Trust, Inc  Banking, Finance, Insurance & Real Estate  Term Loan B  Loan  1M USD LIBOR+   5.00%   1.00%   6.00%  8/9/2026   997,475    972,272    999,968 
CNT Holdings I Corp  Retail  Term Loan  Loan  6M USD LIBOR+   3.75%   0.75%   4.50%  11/8/2027   500,000    497,627    501,955 
Cole Haan  Consumer goods: Non-durable  Term Loan B  Loan  3M USD LIBOR+   5.50%   0.00%   5.69%  2/7/2025   950,000    942,246    874,000 
Compass Power Generation, LLC  Utilities: Electric  Term Loan B (08/18)  Loan  1M USD LIBOR+   3.50%   1.00%   4.50%  12/20/2024   1,802,012    1,798,648    1,796,390 
Concordia Healthcare Corp.  Healthcare & Pharmaceuticals  Term Loan  Loan  1M USD LIBOR+   5.50%   1.00%   6.50%  9/6/2024   1,159,370    1,118,148    1,156,472 
Connect Finco SARL  Telecommunications  Term Loan (1/21)  Loan  1M USD LIBOR+   3.50%   1.00%   4.50%  12/11/2026   2,977,500    2,831,053    2,987,058 
Consolidated Communications, Inc.  Telecommunications  Term Loan B (10/20)  Loan  1M USD LIBOR+   4.75%   1.00%   5.75%  10/2/2027   997,500    983,260    1,002,328 
CoreCivic, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan (12/19)  Loan  1M USD LIBOR+   4.50%   1.00%   5.50%  12/18/2024   3,454,545    3,404,660    3,340,822 
CPI Card Group  Banking, Finance, Insurance & Real Estate  Term Loan B (1st Lien)  Loan  3M USD LIBOR+   4.50%   1.00%   5.50%  8/17/2022   1,436,782    1,431,179    1,422,414 
CSC Holdings LLC (Neptune Finco Corp.)  Media: Broadcasting & Subscription  Term Loan B  Loan  1M USD LIBOR+   2.25%   0.00%   2.36%  1/15/2026   490,000    489,175    486,849 
CSC Holdings LLC (Neptune Finco Corp.)  Media: Broadcasting & Subscription  Term Loan B (03/17)  Loan  1M USD LIBOR+   2.25%   0.00%   2.36%  7/15/2025   1,954,315    1,936,120    1,941,925 
CSC Holdings LLC (Neptune Finco Corp.)  Media: Broadcasting & Subscription  Term Loan B-5  Loan  1M USD LIBOR+   2.50%   0.00%   2.61%  4/15/2027   495,000    495,000    492,911 
CTS Midco, LLC  High Tech Industries  Term Loan B  Loan  3M USD LIBOR+   6.00%   1.00%   7.00%  11/2/2027   2,000,000    1,942,014    2,002,500 
Daseke Inc  Transportation: Cargo  Replacement Term Loan  Loan  1M USD LIBOR+   5.00%   1.00%   6.00%  2/27/2024   1,935,738    1,928,854    1,939,978 
DCert Buyer, Inc.  High Tech Industries  DCert Buyer T/L (Digicert)  Loan  1M USD LIBOR+   4.00%   0.00%   4.11%  10/16/2026   1,500,000    1,500,000    1,500,540 
Dealer Tire, LLC  Automotive  Dealer Tire T/L B-1  Loan  1M USD LIBOR+   4.25%   0.00%   4.36%  12/12/2025   2,970,000    2,963,784    2,966,288 
Delek US Holdings, Inc.  Utilities: Oil & Gas  Term Loan B  Loan  1M USD LIBOR+   2.25%   0.00%   2.36%  3/31/2025   6,380,682    6,326,939    6,247,773 
Dell International LLC  High Tech Industries  Term Loan B-2  Loan  1M USD LIBOR+   1.75%   0.75%   2.00%  9/19/2025   2,530,374    2,528,058    2,537,763 
Delta 2 (Lux) S.a.r.l.  Hotel, Gaming & Leisure  Term Loan B  Loan  1M USD LIBOR+   2.50%   1.00%   3.50%  2/1/2024   818,289    817,549    813,175 
Delta Air Lines, Inc.  Transportation: Consumer  Term Loan B (4/20)  Loan  1M USD LIBOR+   4.75%   1.00%   5.75%  4/29/2023   2,243,737    2,240,713    2,257,761 
DHX Media Ltd.  Media: Broadcasting & Subscription  Term Loan  Loan  1M USD LIBOR+   4.25%   1.00%   5.25%  12/29/2023   279,282    278,315    278,584 
Diamond Sports Group, LLC  Media: Broadcasting & Subscription  Term Loan  Loan  1M USD LIBOR+   3.25%   0.00%   3.37%  8/24/2026   3,443,844    2,912,847    2,582,883 
Digital Room LLC  Media: Advertising, Printing & Publishing  Term Loan  Loan  6M USD LIBOR+   5.00%   0.00%   5.27%  5/21/2026   2,955,000    2,925,480    2,910,675 
Dole Food Company Inc.  Beverage, Food & Tobacco  Term Loan B  Loan  1M USD LIBOR+   2.75%   1.00%   3.75%  4/6/2024   456,250    455,172    456,410 
DRW Holdings, LLC  Banking, Finance, Insurance & Real Estate  DRW Holdings T/L (2/21)  Loan  1M USD LIBOR+   3.75%   0.00%   3.87%  2/24/2028   552,519    549,756    551,138 
DRW Holdings, LLC  Banking, Finance, Insurance & Real Estate  Term Loan B  Loan  1M USD LIBOR+   4.25%   0.00%   4.36%  11/29/2026   5,947,481    5,897,811    5,932,612 
DTZ U.S. Borrower, LLC  Construction & Building  Term Loan  Loan  1M USD LIBOR+   2.75%   0.00%   2.86%  8/21/2025   3,915,462    3,901,786    3,886,801 
EagleTree - Carbride Acquisition (Corsair Components)  Consumer goods: Durable  Term Loan  Loan  1M USD LIBOR+   3.75%   1.00%   4.75%  8/28/2024   2,868,047    2,867,816    2,868,047 

 

See accompanying notes to financial statements.

 

S-9

 

 

Saratoga Investment Corp. CLO 2013-1 Ltd.

Schedule of Investments

February 28, 2021

 

Issuer Name    Industry    Asset Name    Asset
Type
    Reference Rate/Spread    LIBOR Floor   Current Rate
(All In)
   Maturity Date    Principal/
Number of Shares
   Cost   Fair Value 
Edelman Financial Group Inc., The  Banking, Finance, Insurance & Real Estate  Term Loan B (06/18)  Loan  1M USD LIBOR+   3.00%   0.00%   3.11%  7/21/2025   1,225,000    1,220,875    1,214,502 
Electrical Components Inter., Inc.  Capital Equipment  Term Loan (6/18)  Loan  1M USD LIBOR+   4.25%   0.00%   4.36%  6/26/2025   1,950,000    1,947,116    1,903,083 
ELO Touch Solutions, Inc.  Media: Diversified & Production  Term Loan (12/18)  Loan  1M USD LIBOR+   6.50%   0.00%   6.61%  12/14/2025   2,558,602    2,457,436    2,564,999 
Encapsys, LLC (Cypress Performance Group)  Chemicals, Plastics, & Rubber  Term Loan B2  Loan  1M USD LIBOR+   3.25%   1.00%   4.25%  11/7/2024   492,284    488,655    492,284 
Endo Luxembourg Finance Company I S.a.r.l.  Healthcare & Pharmaceuticals  Term Loan B (4/17)  Loan  3M USD LIBOR+   4.25%   0.75%   5.00%  4/29/2024   3,896,646    3,879,939    3,869,057 
Endure Digital, Inc.  High Tech Industries  Endurance International T/L B  Loan  1M USD LIBOR+   3.50%   0.75%   4.25%  1/27/2028   2,500,000    2,487,500    2,481,250 
Ensemble RCM LLC  Services: Business  Term Loan  Loan  3M USD LIBOR+   3.75%   0.00%   3.96%  7/24/2026   3,000,000    2,992,500    3,004,230 
Enterprise Merger Sub Inc.  Healthcare & Pharmaceuticals  Term Loan B (06/18)  Loan  1M USD LIBOR+   3.75%   0.00%   3.86%  10/10/2025   4,900,000    4,891,890    4,204,200 
EVERI Payments Inc.  Hotel, Gaming & Leisure  Everi Payments T/L B  Loan  1M USD LIBOR+   2.75%   0.75%   3.50%  5/9/2024   3,000,000    3,000,000    2,988,120 
EyeCare Partners, LLC  Healthcare & Pharmaceuticals  EyeCare Partners T/L B  Loan  1M USD LIBOR+   3.75%   0.00%   3.86%  2/18/2027   1,987,838    1,986,442    1,956,032 
Finco I LLC  Banking, Finance, Insurance & Real Estate  FinCo T/L B (9/20) (Fortress Investment)  Loan  1M USD LIBOR+   2.50%   0.00%   2.61%  6/27/2025   1,822,272    1,815,715    1,821,142 
First Eagle Investment Management  Banking, Finance, Insurance & Real Estate  Refinancing Term Loan  Loan  3M USD LIBOR+   2.50%   0.00%   2.75%  2/1/2027   5,395,500    5,375,893    5,378,990 
Fitness International, LLC (LA Fitness)  Services: Consumer  Term Loan B (4/18)  Loan  1M USD LIBOR+   3.25%   1.00%   4.25%  4/18/2025   1,330,058    1,324,204    1,196,813 
Flex Acquisition Company (Hilex Poly/Novolex) T/L (02/21)  Containers, Packaging & Glass  Term Loan  Loan  3M USD LIBOR+   4.00%   0.50%   4.50%  3/2/2028   1,000,000    995,000    997,810 
FOCUS FINANCIAL PARTNERS, LLC  Banking, Finance, Insurance & Real Estate  Focus Financial T/L (1/20)  Loan  1M USD LIBOR+   2.00%   0.00%   2.11%  7/3/2024   500,000    499,435    497,815 
Franchise Group, Inc.  Services: Consumer  Franchise Group First Out T/L  Loan  6M USD LIBOR+   4.75%   0.75%   5.50%  10/25/2026   1,000,000    990,000    1,000,000 
Franklin Square Holdings, L.P.  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  1M USD LIBOR+   2.25%   0.00%   2.38%  8/1/2025   4,398,742    4,374,564    4,382,247 
Froneri International (R&R Ice Cream)  Beverage, Food & Tobacco  Term Loan B-2  Loan  1M USD LIBOR+   2.25%   0.00%   2.36%  1/29/2027   1,990,000    1,985,937    1,971,453 
Fusion Telecommunications International Inc.  Telecommunications  Take Back 2nd Out Term Loan  Loan  6M USD LIBOR+   1.00%   2.00%   3.00%  7/14/2025   813,105    795,920    412,651 
Gemini HDPE LLC  Chemicals, Plastics, & Rubber  Term Loan B (12/20)  Loan  3M USD LIBOR+   3.00%   0.50%   3.50%  12/31/2027   2,000,000    1,980,103    1,995,000 
General Nutrition Centers, Inc. (b)  Retail  Term Loan B2  Loan  Prime+   7.75%   0.75%   11.00%  3/4/2021   389,896    389,896    292,422 
Genesee & Wyoming, Inc.  Transportation: Cargo  Term Loan (11/19)  Loan  3M USD LIBOR+   2.00%   0.00%   2.25%  12/30/2026   1,488,750    1,482,600    1,489,986 
GEO Group, Inc., The  Banking, Finance, Insurance & Real Estate  Term Loan Refinance  Loan  1M USD LIBOR+   2.00%   0.75%   2.75%  3/22/2024   3,963,971    3,665,551    3,609,710 
GGP Inc.  Banking, Finance, Insurance & Real Estate  Term Loan B  Loan  1M USD LIBOR+   2.50%   0.00%   2.61%  8/27/2025   3,969,542    3,201,121    3,862,603 
GI Chill Acquisition LLC  Services: Business  Term Loan  Loan  3M USD LIBOR+   4.00%   0.00%   4.25%  8/1/2025   2,443,750    2,435,372    2,448,344 
Gigamon Inc.  Services: Business  Term Loan B  Loan  6M USD LIBOR+   3.75%   0.75%   4.50%  12/27/2024   2,930,400    2,913,040    2,930,400 
Global Business Travel (GBT) III Inc.  Hotel, Gaming & Leisure  Term Loan  Loan  1M USD LIBOR+   2.50%   0.00%   2.61%  8/13/2025   4,398,750    4,397,949    4,215,454 
Global Tel*Link Corporation  Telecommunications  Term Loan B  Loan  1M USD LIBOR+   4.25%   0.00%   4.36%  11/29/2025   5,000,167    4,764,345    4,675,956 
Go Wireless Holdings, Inc.  Telecommunications  Term Loan  Loan  1M USD LIBOR+   6.50%   1.00%   7.50%  12/22/2024   3,024,675    2,992,914    3,017,114 
Goodyear Tire & Rubber Company, The  Chemicals, Plastics, & Rubber  Second Lien Term Loan  Loan  1M USD LIBOR+   2.00%   0.00%   2.12%  3/3/2025   3,000,000    2,933,783    2,953,740 
Graham Packaging T/L (2/21)  Containers, Packaging & Glass  Term Loan  Loan  1M USD LIBOR+   3.75%   0.75%   4.50%  8/4/2027   979,661    972,912    980,660 
Greenhill & Co., Inc.  Banking, Finance, Insurance & Real Estate  Term Loan B  Loan  1M USD LIBOR+   3.25%   0.00%   3.36%  4/12/2024   3,419,615    3,393,171    3,398,243 
Grosvenor Capital Management Holdings, LLLP  Banking, Finance, Insurance & Real Estate  Term Loan B  Loan  1M USD LIBOR+   2.75%   1.00%   3.75%  3/31/2025   2,399,991    2,398,303    2,395,791 
Guidehouse LLP (fka PricewaterhouseCoopers)  Aerospace & Defense  Term Loan  Loan  1M USD LIBOR+   4.00%   0.00%   4.11%  5/1/2025   4,924,683    4,903,634    4,951,572 
Harbor Freight Tools USA, Inc.  Retail  Term Loan B (10/20)  Loan  1M USD LIBOR+   3.25%   0.75%   4.00%  10/20/2027   2,992,500    2,967,649    3,004,979 
Harland Clarke Holdings Corp.  Media: Advertising, Printing & Publishing  Term Loan  Loan  3M USD LIBOR+   4.75%   1.00%   5.75%  11/3/2023   1,612,899    1,607,974    1,536,738 
Helix Gen Funding, LLc  Energy: Electricity  Term Loan B (02/17)  Loan  1M USD LIBOR+   3.75%   1.00%   4.75%  6/3/2024   244,627    244,418    243,418 
Hillman Group Inc. (The) (New)  Consumer goods: Durable  Hillman Group T/L B-1 (2/21)  Loan  6M USD LIBOR+   2.75%   0.50%   3.25%  2/23/2028   3,523,207    3,514,399    3,523,207 

 

See accompanying notes to financial statements.

 

S-10

 

 

Saratoga Investment Corp. CLO 2013-1 Ltd.

Schedule of Investments

February 28, 2021

 

Issuer Name    Industry    Asset Name    Asset
Type
    Reference Rate/Spread    LIBOR Floor   Current Rate
(All In)
   Maturity Date    Principal/
Number of Shares
   Cost   Fair Value 
Hillman Group Inc. (The) (New)  Consumer goods: Durable  Hillman Group T/L B-2 (2/21)  Loan  6M USD LIBOR+   2.75%   0.50%   2.99%  2/23/2028   632,911    631,329    632,911 
Hillman Group Inc. (The) (New)(a)  Consumer goods: Durable  Unfunded Commitment  Loan  3M USD LIBOR+   2.75%   0.50%   0.00%  2/23/2028   -    (2,110)   - 
HLF Financing SARL (Herbalife)  Consumer goods: Non-durable  Term Loan B (08/18)  Loan  1M USD LIBOR+   2.50%   0.00%   2.61%  8/18/2025   3,910,000    3,897,913    3,912,111 
Holley Purchaser, Inc  Automotive  Term Loan B  Loan  3M USD LIBOR+   5.00%   0.00%   5.21%  10/24/2025   2,450,000    2,432,788    2,423,981 
Howden Group Holdings  Banking, Finance, Insurance & Real Estate  Term Loan (1/21)  Loan  3M USD LIBOR+   3.25%   0.75%   4.00%  11/12/2027   1,692,335    1,686,025    1,695,212 
Hudson River Trading LLC  Banking, Finance, Insurance & Real Estate  Term Loan B (01/20)  Loan  1M USD LIBOR+   3.00%   0.00%   3.11%  2/18/2027   5,940,000    5,920,701    5,925,150 
Idera, Inc.  High Tech Industries  Idera T/L (1/21)  Loan  1M USD LIBOR+   3.75%   0.75%   4.50%  6/28/2028   1,000,000    997,500    1,000,000 
Idera, Inc.  High Tech Industries  Term Loan B  Loan  6M USD LIBOR+   4.00%   1.00%   5.00%  6/27/2024   3,896,805    3,886,520    3,896,805 
INEOS US PETROCHEM LLC  Chemicals, Plastics, & Rubber  INEOS US Petrochem T/L (INEOS Quattro)  Loan  1M USD LIBOR+   2.75%   0.50%   3.25%  1/20/2026   1,000,000    995,073    1,003,750 
INFINITE BIDCO LLC  Wholesale  Infinite Bidco T/L  Loan  1M USD LIBOR+   3.75%   0.75%   4.50%  2/22/2028   1,500,000    1,496,250    1,500,000 
Inmar Acquisition Sub, Inc.  Services: Business  Term Loan B  Loan  3M USD LIBOR+   4.00%   1.00%   5.00%  5/1/2024   3,421,586    3,360,370    3,400,920 
Innophos, Inc.  Chemicals, Plastics, & Rubber  Term Loan B  Loan  1M USD LIBOR+   3.50%   0.00%   3.61%  2/4/2027   496,250    494,123    498,424 
Intermediate Dutch Holdings  Services: Business  Nielsen Consumer T/L B  Loan  1M USD LIBOR+   4.00%   0.00%   4.13%  2/3/2028   250,000    248,750    250,313 
Isagenix International, LLC  Beverage, Food & Tobacco  Term Loan  Loan  3M USD LIBOR+   5.75%   1.00%   6.75%  6/14/2025   2,622,582    2,586,650    1,652,227 
Ivory Merger Sub, Inc.  Healthcare & Pharmaceuticals  Term Loan  Loan  1M USD LIBOR+   3.50%   0.00%   3.62%  3/14/2025   957,262    954,285    944,100 
J Jill Group, Inc  Retail  Priming Term Loan  Loan  6M USD LIBOR+   5.00%   1.00%   6.00%  5/8/2024   1,779,081    1,776,970    1,138,612 
Jane Street Group  Banking, Finance, Insurance & Real Estate  Jane Street Group T/L (1/21)  Loan  1M USD LIBOR+   2.75%   0.00%   2.86%  1/31/2028   2,500,000    2,496,997    2,491,975 
Jefferies Finance LLC / JFIN Co-Issuer Corp  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  1M USD LIBOR+   3.00%   0.00%   3.13%  6/3/2026   3,796,822    3,781,950    3,789,380 
Journey Personal Care Corp.  Consumer goods: Non-durable  Journey Personal Care T/L B (Domtar)  Loan  6M USD LIBOR+   4.25%   0.75%   5.00%  2/19/2028   1,000,000    995,000    1,002,500 
JP Intermediate B, LLC  Consumer goods: Non-durable  Term Loan  Loan  3M USD LIBOR+   5.50%   1.00%   6.50%  11/15/2025   4,423,877    4,386,340    4,154,021 
KAR Auction Services, Inc.  Automotive  Term Loan B (09/19)  Loan  1M USD LIBOR+   2.25%   0.00%   2.44%  9/19/2026   246,875    246,391    243,172 
Kindred Healthcare, Inc.  Healthcare & Pharmaceuticals  Term Loan (6/18)  Loan  1M USD LIBOR+   4.50%   0.00%   4.63%  7/2/2025   1,979,747    1,962,749    1,982,222 
Klockner-Pentaplast of America, Inc.  Containers, Packaging & Glass  Klockner Pentaplast T/L (Kleopatra)  Loan  1M USD LIBOR+   4.75%   0.50%   5.25%  2/4/2026   1,500,000    1,492,500    1,500,945 
Kodiak BP, LLC  Construction & Building  Term Loan  Loan  1M USD LIBOR+   3.25%   0.75%   4.00%  2/26/2028   500,000    497,500    499,375 
KREF Holdings X LLC  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  3M USD LIBOR+   4.75%   1.00%   5.75%  8/4/2027   500,000    488,256    501,250 
Lakeland Tours, LLC  Hotel, Gaming & Leisure  2nd Out Take Back PIK Term Loan  Loan  3M USD LIBOR+   1.50%   1.25%   2.75%  9/25/2025   585,723    478,159    524,222 
Lakeland Tours, LLC  Hotel, Gaming & Leisure  Third Out PIK Term Loan  Loan  3M USD LIBOR+   1.50%   1.25%   2.75%  9/25/2025   777,562    451,283    515,780 
Lakeland Tours, LLC  Hotel, Gaming & Leisure  Holdco Fixed Term Loan  Loan  Fixed   13.25%   0.00%   13.25%  9/27/2027   763,381    128,938    277,359 
Lakeland Tours, LLC  Hotel, Gaming & Leisure  Priority Exit PIK Term Loan (9/20)  Loan  3M USD LIBOR+   6.00%   1.25%   7.25%  9/25/2023   306,588    292,181    306,076 
Lealand Finance Company B.V.  Energy: Oil & Gas  Exit Term Loan  Loan  1M USD LIBOR+   1.00%   0.00%   1.11%  6/30/2025   324,682    324,682    209,258 
Learfield Communications, Inc  Media: Advertising, Printing & Publishing  Initial Term Loan (A-L Parent)  Loan  1M USD LIBOR+   3.25%   1.00%   4.25%  12/1/2023   480,000    478,959    439,296 
Lifetime Brands, Inc  Consumer goods: Non-durable  Term Loan B  Loan  1M USD LIBOR+   3.50%   1.00%   4.50%  2/28/2025   2,905,639    2,876,036    2,878,413 
Liftoff Mobile, Inc.  Media: Advertising, Printing & Publishing  Liftoff Mobile T/L  Loan  1M USD LIBOR+   3.50%   0.75%   4.25%  2/17/2028   1,000,000    995,000    997,500 
Lightstone Generation LLC  Energy: Electricity  Term Loan B  Loan  3M USD LIBOR+   3.75%   1.00%   4.75%  1/30/2024   1,322,520    1,321,129    1,133,241 
Lightstone Generation LLC  Energy: Electricity  Term Loan C  Loan  3M USD LIBOR+   3.75%   1.00%   4.75%  1/30/2024   74,592    74,517    63,917 
Lindblad Expeditions, Inc.  Hotel, Gaming & Leisure  Cayman Term Loan  Loan  1M USD LIBOR+   3.50%   0.75%   4.25%  3/21/2025   98,191    98,037    90,827 
Lindblad Expeditions, Inc.  Hotel, Gaming & Leisure  US 2018 Term Loan  Loan  1M USD LIBOR+   3.50%   0.75%   4.25%  3/21/2025   392,764    392,147    363,307 
Liquidnet Holdings, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan B  Loan  6M USD LIBOR+   3.25%   1.00%   4.25%  7/11/2024   1,960,766    1,957,232    1,952,237 
LogMeIn, Inc.  High Tech Industries  Term Loan (8/20)  Loan  1M USD LIBOR+   4.75%   0.00%   4.87%  8/31/2027   4,000,000    3,927,780    3,996,680 
LPL Holdings, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan B1  Loan  1M USD LIBOR+   1.75%   0.00%   1.87%  11/11/2026   1,232,760    1,230,271    1,224,032 

 

See accompanying notes to financial statements.

 

S-11

 

 

Saratoga Investment Corp. CLO 2013-1 Ltd.

Schedule of Investments

February 28, 2021

 

Issuer Name    Industry    Asset Name    Asset
Type
    Reference Rate/Spread    LIBOR Floor   Current Rate
(All In)
   Maturity Date    Principal/
Number of Shares
   Cost   Fair Value 
MA FinanceCo LLC  High Tech Industries  Term Loan B4  Loan  3M USD LIBOR+   4.25%   1.00%   5.25%  5/29/2025   2,474,961    2,466,727    2,502,804 
Marriott Ownership Resorts, Inc.  Hotel, Gaming & Leisure  Term Loan (11/19)  Loan  1M USD LIBOR+   1.75%   0.00%   1.86%  8/29/2025   1,317,074    1,317,074    1,296,080 
Match Group, Inc, The  Services: Consumer  Term Loan (1/20)  Loan  3M USD LIBOR+   1.75%   0.00%   1.95%  2/15/2027   250,000    249,476    247,735 
Mayfield Agency Borrower Inc. (FeeCo)  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  1M USD LIBOR+   4.50%   0.00%   4.61%  2/28/2025   3,427,214    3,397,660    3,380,090 
McAfee, LLC  Services: Business  Term Loan B  Loan  1M USD LIBOR+   3.75%   0.00%   3.86%  9/30/2024   1,928,400    1,921,750    1,932,121 
McGraw-Hill Global Education Holdings, LLC  Media: Advertising, Printing & Publishing  Term Loan B  Loan  3M USD LIBOR+   4.75%   1.00%   5.75%  11/1/2024   2,544,391    2,364,344    2,538,666 
Meredith Corporation  Media: Advertising, Printing & Publishing  Term Loan B2  Loan  1M USD LIBOR+   2.50%   0.00%   2.61%  1/31/2025   578,738    577,965    575,555 
Mermaid Bidco Inc.  High Tech Industries  Term Loan 12/20  Loan  2M USD LIBOR+   4.25%   0.75%   5.00%  12/1/2027   500,000    497,584    501,565 
Messer Industries, LLC  Chemicals, Plastics, & Rubber  Term Loan B  Loan  3M USD LIBOR+   2.50%   0.00%   2.75%  3/1/2026   3,944,962    3,923,644    3,942,003 
Michaels Stores, Inc.  Retail  Term Loan B (9/20)  Loan  1M USD LIBOR+   3.50%   0.75%   4.25%  10/1/2027   2,571,414    2,565,167    2,567,557 
Midwest Physician Administrative Services LLC (Dupage Medical Group)  Healthcare & Pharmaceuticals  Term Loan (2/18)  Loan  1M USD LIBOR+   2.75%   0.75%   3.50%  8/15/2024   961,003    958,186    960,522 
Mitchell International, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan (7/20)  Loan  1M USD LIBOR+   4.25%   0.50%   4.75%  11/29/2024   997,500    944,391    1,000,991 
MKS Instruments, Inc.  High Tech Industries  Term Loan B6  Loan  1M USD LIBOR+   1.75%   0.00%   1.86%  2/2/2026   877,977    871,414    878,530 
MLN US Holdco LLC  Telecommunications  Term Loan  Loan  1M USD LIBOR+   4.50%   0.00%   4.61%  12/1/2025   980,000    978,728    913,605 
MMM Holdings, Inc.  Healthcare & Pharmaceuticals  Term Loan B  Loan  6M USD LIBOR+   5.75%   1.00%   6.75%  12/24/2026   6,724,026    6,605,313    6,730,347 
MRC Global Inc.  Metals & Mining  Term Loan B2  Loan  1M USD LIBOR+   3.00%   0.00%   3.11%  9/20/2024   484,961    484,234    477,687 
Murphy USA Inc.  Retail  Murphy Oil USA T/L (Quick Chek)  Loan  1M USD LIBOR+   1.75%   0.50%   2.25%  1/21/2028   250,000    249,384    250,938 
MW Industries, Inc. (Helix Acquisition Holdings)  Capital Equipment  Term Loan (2019 Incremental)  Loan  3M USD LIBOR+   3.75%   0.00%   4.00%  9/30/2024   2,842,097    2,802,381    2,740,265 
Natgasoline LLC  Chemicals, Plastics, & Rubber  Term Loan  Loan  1M USD LIBOR+   3.50%   0.00%   3.63%  11/14/2025   1,487,455    1,457,602    1,483,737 
National Mentor Holdings, Inc.  Healthcare & Pharmaceuticals  National Mentor /Civitas (2/21) T/L C  Loan  1M USD LIBOR+   4.00%   0.75%   4.75%  2/17/2028   87,464    87,026    87,289 
National Mentor Holdings, Inc.  Healthcare & Pharmaceuticals  Term Loan  Loan  1M USD LIBOR+   4.25%   0.00%   4.37%  3/9/2026   1,880,666    1,866,176    1,878,014 
National Mentor Holdings, Inc.  Healthcare & Pharmaceuticals  Term Loan C  Loan  3M USD LIBOR+   4.25%   0.00%   4.51%  3/9/2026   86,065    85,428    85,943 
National Mentor Holdings, Inc.  Healthcare & Pharmaceuticals  National Mentor/ Civitas (2/21) T/L  Loan  1M USD LIBOR+   4.00%   0.75%   4.75%  2/17/2028   2,623,907    2,610,787    2,618,659 
National Mentor/ Civitas (2/21) DDTL (a)  Healthcare & Pharmaceuticals  National Mentor (Civitas) T/L B (2/19)  Loan  1M USD LIBOR+   4.25%   0.00%   4.37%  3/9/2026   -    -    (577)
NeuStar, Inc.  Telecommunications  Term Loan B4 (03/18)  Loan  3M USD LIBOR+   3.50%   1.00%   4.50%  8/8/2024   2,641,566    2,611,256    2,542,032 
NeuStar, Inc.  Telecommunications  Term Loan B-5  Loan  3M USD LIBOR+   4.50%   1.00%   5.50%  8/8/2024   885,162    873,202    859,050 
Nexstar Broadcasting, Inc. (Mission Broadcasting)  Media: Broadcasting & Subscription  Nexstar Broadcasting T/L B4 (6/19)  Loan  1M USD LIBOR+   2.75%   0.00%   2.87%  9/18/2026   1,113,795    1,101,160    1,114,842 
Next Level Apparel, Inc.  Retail  Term Loan  Loan  3M PL WIBOR+   6.00%   1.00%   7.00%  8/9/2024   1,866,250    1,853,906    1,716,950 
NM Z Parent Inc (Zep Inc)  Chemicals, Plastics, & Rubber  Term Loan  Loan  6M USD LIBOR+   4.00%   1.00%   5.00%  8/9/2024   2,418,750    2,411,955    2,392,845 
NorthPole Newco S.a.r.l  Aerospace & Defense  Term Loan  Loan  3M USD LIBOR+   7.00%   0.00%   7.25%  3/3/2025   5,312,500    4,890,323    4,774,609 
Novetta Solutions, LLC  Aerospace & Defense  Term Loan  Loan  3M USD LIBOR+   5.00%   1.00%   6.00%  10/16/2022   1,899,870    1,894,609    1,889,193 
Novetta Solutions, LLC  Aerospace & Defense  Second Lien Term Loan  Loan  3M USD LIBOR+   8.50%   1.00%   9.50%  10/16/2023   1,000,000    995,635    997,500 
NPC International, Inc. (b)  Beverage, Food & Tobacco  Term Loan  Loan  Prime+   4.50%   1.00%   7.75%  4/19/2024   487,500    487,124    430,463 
Nuvei Technologies Corp.  High Tech Industries  US Term Loan  Loan  1M USD LIBOR+   4.00%   0.75%   4.75%  9/29/2025   250,000    249,712    251,563 
Owens & Minor  Healthcare & Pharmaceuticals  Term Loan B  Loan  1M USD LIBOR+   4.50%   0.00%   4.62%  5/2/2025   487,500    481,151    488,631 
Pacific Gas and Electric Company  Utilities: Electric  PG&E Corp T/L  Loan  1M USD LIBOR+   3.00%   0.50%   3.50%  6/18/2025   1,494,994    1,487,395    1,499,195 
PAE Holding Corp  Aerospace & Defense  Term Loan B (10/20)  Loan  3M USD LIBOR+   4.50%   0.75%   5.25%  10/14/2027   2,000,000    1,971,195    2,009,160 
Panther Guarantor II, L.P. (Forcepoint)  High Tech Industries  Panther Commercial T/L (1/21) (Forcepoint)  Loan  3M USD LIBOR+   4.50%   0.50%   4.71%  1/7/2028   500,000    496,307    499,375 
Pathway Partners Vet Management Company LLC  Services: Business  Term Loan  Loan  1M USD LIBOR+   3.75%   0.00%   3.86%  3/31/2027   496,437    485,943    496,934 
PaySafe Group PLC  Services: Business  Term Loan B1 (PI UK Holdco II)  Loan  1M USD LIBOR+   3.50%   1.00%   4.50%  1/3/2025   1,458,750    1,453,593    1,457,320 
PCI Gaming Authority  Hotel, Gaming & Leisure  Term Loan  Loan  1M USD LIBOR+   2.50%   0.00%   2.61%  5/29/2026   878,269    874,719    876,803 
Penn National Gaming  Hotel, Gaming & Leisure  Term Loan B-1  Loan  1M USD LIBOR+   2.25%   0.75%   3.00%  10/15/2025   1,782,979    1,722,678    1,780,109 
Peraton Corp.  Aerospace & Defense  Peraton T/L B  Loan  6M USD LIBOR+   3.75%   0.75%   4.50%  2/22/2028   1,811,655    1,802,597    1,818,449 
Peraton Corp. (a)  Aerospace & Defense  Unfunded Commitment  Loan  6M USD LIBOR+   3.75%   0.75%   4.50%  2/1/2028   -    (15,942)   11,956 
PGX Holdings, Inc.  Services: Consumer  Term Loan  Loan  12M USD LIBOR+   5.25%   1.00%   6.25%  9/29/2023   3,149,230    3,127,880    2,998,508 
Pitney Bowes Inc  Services: Business  Term Loan B  Loan  1M USD LIBOR+   5.50%   0.00%   5.62%  1/7/2025   2,887,500    2,625,587    2,875,459 

 

See accompanying notes to financial statements.

 

S-12

 

 

Saratoga Investment Corp. CLO 2013-1 Ltd.

Schedule of Investments

February 28, 2021

 

Issuer Name    Industry    Asset Name    Asset
Type
    Reference Rate/Spread    LIBOR Floor   Current Rate
(All In)
   Maturity Date    Principal/
Number of Shares
   Cost   Fair Value 
Pixelle Specialty Solutions LLC  Forest Products & Paper  Term Loan  Loan  1M USD LIBOR+   6.50%   1.00%   7.50%  10/31/2024   3,535,026    3,510,411    3,531,491 
Plastipak Holdings Inc.  Containers, Packaging & Glass  Plastipak Packaging T/L B (04/18)  Loan  1M USD LIBOR+   2.50%   0.00%   2.62%  10/14/2024   2,789,599    2,771,753    2,788,288 
Playtika Holding Corp.  High Tech Industries  Term Loan B (12/19)  Loan  6M USD LIBOR+   6.00%   1.00%   7.00%  12/10/2024   2,837,975    2,793,084    2,850,746 
PointClickCare Technologies, Inc.  High Tech Industries  Term Loan B  Loan  6M USD LIBOR+   3.00%   0.75%   3.75%  12/15/2027   500,000    497,597    502,500 
Polymer Process Holdings, Inc.  Containers, Packaging & Glass  Term Loan  Loan  1M USD LIBOR+   4.75%   0.75%   5.50%  2/12/2028   5,000,000    4,932,905    4,950,000 
PPD, Inc.  Healthcare & Pharmaceuticals  Term Loan (12/20)  Loan  1M USD LIBOR+   2.25%   0.50%   2.75%  1/13/2028   500,000    497,556    501,530 
Pre-Paid Legal Services, Inc.  Services: Business  Incremental Term Loan  Loan  1M USD LIBOR+   4.00%   0.75%   4.75%  5/1/2025   997,500    983,807    1,001,869 
Presidio, Inc.  Services: Business  Term Loan B (1/20)  Loan  3M USD LIBOR+   3.50%   0.00%   3.72%  1/22/2027   497,500    496,508    498,120 
Prime Security Services Borrower, LLC (ADT)  Services: Consumer  Term Loan (1/21)  Loan  12M USD LIBOR+   2.75%   0.75%   3.50%  9/23/2026   3,583,174    3,568,406    3,585,178 
Priority Payment Systems LLC  High Tech Industries  Term Loan  Loan  1M USD LIBOR+   6.50%   1.00%   7.50%  1/3/2023   1,690,068    1,685,378    1,681,615 
PriSo Acquisition Corporation  Construction & Building  Park River Holdings T/L (01/21)  Loan  3M USD LIBOR+   3.25%   0.75%   4.00%  12/28/2027   500,000    497,500    500,535 
Project Leopard T/L (Kofax)  High Tech Industries  Term Loan  Loan  3M USD LIBOR+   5.05%   1.00%   5.25%  7/8/2024   500,000    498,750    500,468 
Prometric Inc. (Sarbacane Bidco)  Services: Consumer  Term Loan  Loan  1M USD LIBOR+   3.00%   1.00%   4.00%  1/29/2025   486,338    484,893    472,961 
PUG LLC  Services: Consumer  Term Loan B (02/20)  Loan  1M USD LIBOR+   3.50%   0.00%   3.61%  2/12/2027   490,025    487,871    475,323 
Rackspace Technology Global, Inc.  High Tech Industries  Rackspace Technology Global T/L B  Loan  3M USD LIBOR+   2.75%   0.75%   3.50%  2/2/2028   500,000    497,527    499,615 
Radiology Partners Holdings, LLC  Healthcare & Pharmaceuticals  Term Loan  Loan  1M USD LIBOR+   4.25%   0.00%   4.37%  7/4/2025   1,432,727    1,427,557    1,426,466 
Ravago Holdings America  Chemicals, Plastics, & Rubber  Ravago (2/21) T/L  Loan  6M USD LIBOR+   2.50%   0.00%   2.75%  2/9/2028   1,000,000    997,500    999,380 
RealPage, Inc.  High Tech Industries  RealPage T/L (2/21)  Loan  1M USD LIBOR+   3.25%   0.50%   3.38%  2/17/2028   3,000,000    2,992,500    3,001,260 
Redstone Buyer, LLC  High Tech Industries  Term Loan  Loan  3M USD LIBOR+   5.00%   1.00%   6.00%  9/1/2027   997,500    979,386    1,009,141 
Renaissance Learning T/L (5/18)  Services: Consumer  Term Loan  Loan  1M USD LIBOR+   3.25%   0.00%   3.36%  5/30/2025   3,000,000    2,970,900    2,968,740 
Rent-A-Center, Inc.  Retail  Rent-A-Center T/L B (01/21)  Loan  1M USD LIBOR+   4.00%   0.75%   4.75%  1/17/2028   500,000    497,500    503,125 
REP WWEX (Worldwide Express) Aquisition Parent, LLC  Transportation: Consumer  Term Loan B  Loan  6M USD LIBOR+   4.00%   1.00%   5.00%  2/2/2024   1,927,839    1,926,592    1,932,658 
Research Now Group, Inc  Media: Advertising, Printing & Publishing  Term Loan  Loan  6M USD LIBOR+   5.50%   1.00%   6.50%  12/20/2024   3,887,330    3,796,436    3,881,499 
Resideo Funding Inc.  Services: Consumer  Resideo Funding T/L (1/21) (Resideo Technologies)  Loan  3M USD LIBOR+   2.25%   0.50%   2.75%  2/11/2028   1,500,000    1,496,250    1,496,250 
Resolute Investment Managers (American Beacon), Inc.  Banking, Finance, Insurance & Real Estate  Term Loan (10/20)  Loan  3M USD LIBOR+   3.75%   1.00%   4.75%  4/30/2024   2,651,324    2,651,324    2,657,952 
Rexnord LLC  Capital Equipment  Term Loan (11/19)  Loan  1M USD LIBOR+   1.75%   0.00%   1.86%  8/21/2024   862,069    862,069    860,724 
Reynolds Consumer Products LLC  Containers, Packaging & Glass  Reynolds Consumer Products T/L  Loan  1M USD LIBOR+   1.75%   0.00%   1.86%  1/29/2027   1,306,932    1,305,639    1,307,912 
Reynolds Group Holdings Inc.  Metals & Mining  Term Loan B2  Loan  1M USD LIBOR+   3.25%   0.00%   3.36%  2/5/2026   2,000,000    1,986,099    1,991,660 
Robertshaw US Holding Corp.  Consumer goods: Durable  Term Loan B  Loan  1M USD LIBOR+   3.50%   1.00%   4.50%  2/28/2025   972,500    970,927    916,581 
Rocket Software, Inc.  High Tech Industries  Term Loan (11/18)  Loan  1M USD LIBOR+   4.25%   0.00%   4.36%  11/28/2025   2,935,063    2,925,286    2,939,114 
RP Crown Parent, LLC  High Tech Industries  Term Loan B (07/20)  Loan  1M USD LIBOR+   3.00%   1.00%   4.00%  1/31/2026   1,990,000    1,981,157    1,992,488 
Russell Investments US Inst'l Holdco, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan (10/20)  Loan  6M USD LIBOR+   3.00%   1.00%   4.00%  6/2/2025   5,637,965    5,591,015    5,648,565 
RV Retailer LLC  Automotive  RVR Dealership Holdings T/L (RV Retailer)  Loan  3M USD LIBOR+   4.00%   0.75%   4.75%  1/28/2028   2,000,000    1,980,404    1,992,500 
Ryan Specialty Group LLC  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  1M USD LIBOR+   3.25%   0.75%   4.00%  9/1/2027   498,750    491,823    499,373 
Sally Holdings LLC  Retail  Term Loan B  Loan  1M USD LIBOR+   2.25%   0.00%   2.37%  7/5/2024   768,409    766,247    768,409 
Samsonite International S.A.  Consumer goods: Non-durable  Term Loan B2  Loan  1M USD LIBOR+   4.50%   1.00%   5.50%  4/25/2025   995,000    968,936    1,002,463 
Savage Enterprises, LLC  Energy: Oil & Gas  Term Loan B (02/20)  Loan  1M USD LIBOR+   3.00%   0.00%   3.12%  8/1/2025   1,769,504    1,754,769    1,771,999 
Schweitzer-Mauduit International, Inc.  High Tech Industries  Schweitzer-Mauduit T/L B  Loan  1M USD LIBOR+   4.00%   0.75%   4.75%  1/27/2028   1,000,000    990,000    997,500 
Seadrill Operating LP (b)  Energy: Oil & Gas  PIK Revolver  Loan  1M USD LIBOR+   0.00%   1.00%   1.00%  3/31/2021   25,683    25,656    27,224 
Seadrill Operating LP (b)  Energy: Oil & Gas  Term Loan B  Loan  1M USD LIBOR+   8.00%   1.00%   9.00%  3/31/2021   897,442    897,442    86,379 
Shutterfly Inc  Media: Advertising, Printing & Publishing  Term Loan B  Loan  3M USD LIBOR+   6.00%   1.00%   7.00%  9/25/2026   800,968    767,474    803,403 
Sirius Computer Solutions, Inc.  High Tech Industries  Term Loan 1/20  Loan  1M USD LIBOR+   3.50%   0.00%   3.61%  7/1/2026   1,970,100    1,966,584    1,970,809 

 

See accompanying notes to financial statements.

 

S-13

 

 

Saratoga Investment Corp. CLO 2013-1 Ltd.

Schedule of Investments

February 28, 2021

 

Issuer Name    Industry    Asset Name    Asset
Type
    Reference Rate/Spread    LIBOR Floor   Current Rate
(All In)
   Maturity Date    Principal/
Number of Shares
   Cost   Fair Value 
SMG US Midco 2, Inc.  Services: Business  Term Loan (01/20)  Loan  1M USD LIBOR+   2.50%   0.00%   2.61%  1/23/2025   495,000    495,000    470,869 
Sotheby's  Services: Business  Term Loan (1/21)  Loan  3M USD LIBOR+   4.75%   0.75%   5.50%  1/15/2027   3,289,283    3,230,819    3,312,571 
Specialty Pharma III Inc.  Services: Business  Term Loan  Loan  1M USD LIBOR+   4.50%   0.75%   5.25%  2/24/2028   2,000,000    1,980,000    1,980,000 
Spectrum Brands, Inc.  Consumer goods: Durable  Spectrum Brands T/L (2/21)  Loan  1M USD LIBOR+   2.00%   0.50%   2.50%  2/19/2028   500,000    498,750    501,250 
SRAM, LLC  Consumer goods: Durable  Term Loan  Loan  1M USD LIBOR+   2.75%   1.00%   3.75%  3/15/2024   2,221,329    2,219,239    2,225,505 
SS&C Technologies, Inc.  Services: Business  Term Loan B4  Loan  1M USD LIBOR+   1.75%   0.00%   1.86%  4/16/2025   178,883    178,618    178,212 
SS&C Technologies, Inc.  Services: Business  Term Loan B-5  Loan  1M USD LIBOR+   1.75%   0.00%   1.86%  4/16/2025   488,567    487,746    486,735 
SS&C Technologies, Inc.  Services: Business  Term Loan B3  Loan  1M USD LIBOR+   1.75%   0.00%   1.86%  4/16/2025   234,915    234,561    234,034 
Staples, Inc.  Wholesale  Term Loan (03/19)  Loan  3M USD LIBOR+   5.00%   0.00%   5.21%  4/16/2026   4,431,567    4,285,772    4,340,853 
Stats LLC  Hotel, Gaming & Leisure  Term Loan  Loan  3M USD LIBOR+   5.25%   0.00%   5.45%  7/10/2026   1,980,000    1,940,067    1,972,575 
Storable, Inc  High Tech Industries  Term Loan B  Loan  1M USD LIBOR+   3.25%   0.50%   3.75%  2/26/2028   500,000    498,750    500,000 
Syncsort Incorporated  High Tech Industries  Term Loan (1/21)  Loan  3M USD LIBOR+   4.75%   0.75%   5.50%  8/16/2024   1,935,450    1,922,522    1,939,476 
Teneo Holdings LLC  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  1M USD LIBOR+   5.25%   1.00%   6.25%  7/15/2025   2,468,750    2,392,146    2,471,836 
Tenneco Inc  Capital Equipment  Term Loan B  Loan  1M USD LIBOR+   3.00%   0.00%   3.11%  10/1/2025   1,470,000    1,459,901    1,440,233 
Ten-X, LLC  Banking, Finance, Insurance & Real Estate  Term Loan  Loan  1M USD LIBOR+   4.00%   1.00%   5.00%  9/27/2024   1,940,000    1,938,385    1,841,390 
The Octave Music Group, Inc (Touchtunes)  Services: Business  Term Loan B  Loan  1M USD LIBOR+   5.25%   1.00%   6.25%  5/29/2025   3,896,552    3,862,705    3,584,828 
Thor Industries, Inc.  Automotive  Term Loan (USD)  Loan  1M USD LIBOR+   3.75%   0.00%   3.88%  2/1/2026   2,935,080    2,874,260    2,937,839 
Tivity Health, Inc.  Healthcare & Pharmaceuticals  Term Loan A  Loan  1M USD LIBOR+   4.25%   0.00%   4.36%  3/7/2024   558,772    555,085    556,677 
Tivity Health, Inc.  Healthcare & Pharmaceuticals  Term Loan B  Loan  1M USD LIBOR+   5.25%   0.00%   5.36%  3/6/2026   1,064,955    1,044,356    1,060,461 
Tosca Services, LLC  Containers, Packaging & Glass  Term Loan (2/21)  Loan  1M USD LIBOR+   3.50%   0.75%   4.25%  8/18/2027   500,000    493,032    501,565 
Transdigm, Inc.  Aerospace & Defense  Term Loan G (02/20)  Loan  1M USD LIBOR+   2.25%   0.00%   2.36%  8/22/2024   4,065,230    4,068,753    4,014,415 
Travel Leaders Group, LLC  Hotel, Gaming & Leisure  Term Loan B (08/18)  Loan  1M USD LIBOR+   4.00%   0.00%   4.11%  1/25/2024   2,437,500    2,435,050    2,268,411 
TRC Companies, Inc.  Services: Business  Term Loan  Loan  1M USD LIBOR+   3.50%   1.00%   4.50%  6/21/2024   3,315,141    3,307,088    3,311,826 
TRC Companies, Inc.  Services: Business  TRC Companies T/L (1/21)  Loan  1M USD LIBOR+   4.50%   0.75%   5.25%  6/21/2024   2,479,433    2,468,047    2,485,631 
Trico Group LLC  Automotive  Term Loan B-3  Loan  3M USD LIBOR+   7.50%   1.00%   8.50%  2/2/2024   5,070,478    4,962,793    5,150,338 
Trident LS Merger Sub Corporation  Services: Consumer  Term Loan (03/18)  Loan  1M USD LIBOR+   3.25%   0.00%   3.36%  5/1/2025   2,000,000    2,004,987    1,999,500 
Truck Hero, Inc.  Transportation: Cargo  Term Loan (1/21)  Loan  1M USD LIBOR+   3.75%   0.75%   4.50%  1/29/2028   1,500,000    1,500,000    1,501,065 
TruGreen Limited Partnership  Services: Consumer  Term Loan  Loan  1M USD LIBOR+   4.00%   0.75%   4.75%  10/29/2027   973,980    966,347    980,068 
Twin River Worldwide Holdings, Inc.  Hotel, Gaming & Leisure  Term Loan B  Loan  3M USD LIBOR+   2.75%   0.00%   3.00%  5/10/2026   985,000    981,152    975,889 
Uber Technologies T/L B (2/21)  Transportation: Consumer  Term Loan  Loan  1M USD LIBOR+   3.50%   0.00%   3.62%  7/13/2023   1,989,610    1,941,468    1,992,097 
Ultimate Software Group, Inc. (The)  High Tech Industries  Term Loan 1/21  Loan  3M USD LIBOR+   3.25%   0.75%   4.00%  5/4/2026   1,000,000    1,000,000    1,005,690 
Unimin Corporation  Metals & Mining  Term Loan (12/20)  Loan  3M USD LIBOR+   4.00%   1.00%   5.00%  7/31/2026   496,815    466,608    476,232 
United Natural Foods, Inc  Beverage, Food & Tobacco  Term Loan B  Loan  1M USD LIBOR+   3.50%   0.00%   3.61%  10/22/2025   1,973,611    1,879,449    1,978,545 
United Road Services Inc.  Transportation: Cargo  Term Loan (10/17)  Loan  6M USD LIBOR+   5.75%   1.00%   6.75%  9/1/2024   952,506    944,697    880,592 
Univar Inc.  Chemicals, Plastics, & Rubber  Term Loan B3 (11/17)  Loan  1M USD LIBOR+   2.25%   0.00%   2.36%  7/1/2024   1,627,723    1,623,316    1,628,602 
Univision Communications Inc.  Media: Broadcasting & Subscription  2020 Replacement Term Loan  Loan  1M USD LIBOR+   3.75%   1.00%   4.75%  3/13/2026   2,517,037    2,508,528    2,527,433 
US Ecology, Inc.  Environmental Industries  Term Loan B  Loan  1M USD LIBOR+   2.50%   0.00%   2.61%  11/2/2026   495,000    494,095    496,445 
Utz Quality Foods, LLC  Beverage, Food & Tobacco  Term Loan B  Loan  1M USD LIBOR+   3.00%   0.00%   3.11%  1/13/2028   100,000    99,764    100,464 
Verifone Systems, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan (7/18)  Loan  3M USD LIBOR+   4.00%   0.00%   4.18%  8/20/2025   1,396,606    1,389,850    1,362,571 
VFH Parent LLC  Banking, Finance, Insurance & Real Estate  Term Loan B  Loan  1M USD LIBOR+   3.00%   0.00%   3.11%  3/1/2026   3,209,493    3,199,747    3,215,526 
Virence Intermediate Holdings LLC (Athenahealth / VVC Holding)  Healthcare & Pharmaceuticals  Athenahealth T/L B (01/21)  Loan  3M USD LIBOR+   4.25%   0.00%   4.45%  2/11/2026   3,965,000    3,935,495    3,986,570 
Virtus Investment Partners, Inc.  Banking, Finance, Insurance & Real Estate  Term Loan B  Loan  6M USD LIBOR+   2.25%   0.75%   3.00%  6/3/2024   2,406,176    2,405,891    2,407,692 
Vistra Energy Corp  Utilities: Electric  2018 Incremental Term Loan  Loan  1M USD LIBOR+   1.75%   0.00%   1.86%  12/31/2025   917,338    916,645    913,751 
Vizient, Inc  Healthcare & Pharmaceuticals  Term Loan B-6  Loan  1M USD LIBOR+   2.00%   0.00%   2.11%  5/6/2026   491,250    490,388    490,430 

 

See accompanying notes to financial statements.

 

S-14

 

 

Saratoga Investment Corp. CLO 2013-1 Ltd.

Schedule of Investments

February 28, 2021

 

Issuer Name    Industry    Asset Name    Asset
Type
    Reference Rate/Spread    LIBOR Floor   Current Rate
(All In)
   Maturity Date    Principal/
Number of Shares
   Cost   Fair Value 
VM Consolidated, Inc.  Construction & Building  Term Loan B1 (02/20)  Loan  1M USD LIBOR+   3.25%   0.00%   3.36%  2/28/2025   475,444    473,957    475,344 
Vouvray US Finance LLC  High Tech Industries  Term Loan  Loan  1M USD LIBOR+   3.00%   1.00%   4.00%  3/11/2024   481,250    481,250    417,605 
Warner Music Group Corp. (WMG Acquisition Corp.)  Hotel, Gaming & Leisure  Term Loan G  Loan  1M USD LIBOR+   2.13%   0.00%   2.24%  1/20/2028   250,000    249,702    250,403 
Wastequip, LLC (HPCC Merger/Patriot Container)  Environmental Industries  Term Loan (3/18)  Loan  1M USD LIBOR+   3.50%   1.00%   4.50%  3/15/2025   494,911    492,859    492,436 
WeddingWire, Inc.  Services: Consumer  Term Loan  Loan  2M USD LIBOR+   4.50%   0.00%   4.66%  12/19/2025   3,920,000    3,914,114    3,875,900 
West Corporation  Telecommunications  Term Loan B  Loan  1M USD LIBOR+   3.50%   1.00%   4.50%  10/10/2024   2,931,109    2,874,412    2,866,742 
West Corporation  Telecommunications  Term Loan B (Olympus Merger)  Loan  3M USD LIBOR+   4.00%   1.00%   5.00%  10/10/2024   1,224,748    1,166,274    1,207,062 
Western Dental Services, Inc.  Retail  Term Loan (12/18)  Loan  1M USD LIBOR+   5.25%   1.00%   6.25%  6/30/2023   424,019    424,421    416,598 
Western Digital Corporation  High Tech Industries  Term Loan B-4  Loan  1M USD LIBOR+   1.75%   0.00%   1.86%  4/29/2023   743,135    732,963    742,867 
Wirepath LLC  Consumer goods: Non-durable  Term Loan  Loan  3M USD LIBOR+   4.00%   0.00%   4.25%  8/5/2024   2,925,193    2,906,978    2,897,170 
WP CITYMD BIDCO LLC  Services: Consumer  Term Loan B (1/21)  Loan  6M USD LIBOR+   3.75%   0.75%   4.50%  8/13/2026   3,465,000    3,437,657    3,471,791 
Xperi Corporation  High Tech Industries  Term Loan  Loan  1M USD LIBOR+   4.00%   0.00%   4.11%  6/1/2025   2,854,798    2,706,612    2,874,439 
Zekelman Industries, Inc.  Metals & Mining  Term Loan (01/20)  Loan  1M USD LIBOR+   2.00%   0.00%   2.11%  1/25/2027   970,775    970,775    968,551 
                                              
                                      $595,249,474   $592,020,041 

 

   Number of Shares   Cost   Fair Value 
Cash and cash equivalents            
U.S. Bank Money Market (c)   114,145,406   $114,145,406   $114,145,406 
Total cash and cash equivalents   114,145,406   $114,145,406   $114,145,406 

 

(a)All or a portion of this investment has an unfunded commitment as of February 28, 2021
(b)As of February 28, 2021, the investment was in default and on non-accrual status.
(c)Included within cash and cash equivalents in Saratoga CLO's Statements of Assets and Liabilities as of February 28, 2021.

 

LIBOR—London Interbank Offered Rate

 

1W USD LIBOR—The 1 week USD LIBOR rate as of February 28, 2021 was 0.09%.

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

2M USD LIBOR—The 2 month USD LIBOR rate as of February 28, 2021 was 0.15%.

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

6M USD LIBOR—The 6 month USD LIBOR rate as of February 28, 2021 was 0.20%.

12M USD LIBOR - The 12 month USD LIBOR rate as of February 28, 2021 was 0.28%

3M PL WIBOR - The 3 month PL WIBOR rate as of February 28, 2021, was 0.21%

Prime—The Prime Rate as of February 28, 2021 was 3.25%.

 

See accompanying notes to financial statements.

 

S-15

 

 

Saratoga Investment Corp. CLO 2013-1 Ltd.

Schedule of Investments

February 29, 2020

 

Issuer Name  Industry  Asset Name  Asset
Type
  Reference Rate/Spread    LIBOR Floor   Current Rate (All In)   Maturity Date   Principal/
Number of Shares
   Cost   Fair Value 
Education Management II LLC  Services: Consumer  Education Management II A-2 Preferred Shares  Equity                  -  0.00%   0.00%   0.00%   -    18,975   $1,897,538   $190 
Education Management II LLC  Services: Consumer  Education Management II A-1 Preferred Shares  Equity                  -  0.00%   0.00%   0.00%   -    6,692    669,214    67 
1011778 B.C. Unlimited Liability Company  Beverage Food & Tobacco  Term Loan B4  Loan  1M USD LIBOR+  1.75%   0.00%   3.27%   11/19/2026   $500,000.00    498,790    491,665 
24 Hour Fitness Worldwide Inc.  Services: Consumer  Term Loan (5/18)  Loan  1M USD LIBOR+  3.50%   0.00%   5.02%   5/30/2025    2,959,950    2,949,872    1,943,710 
ABB Con-Cise Optical Group LLC  Consumer goods: Non-durable  Term Loan B  Loan  1M USD LIBOR+  5.00%   1.00%   6.52%   6/15/2023    2,081,927    2,062,239    1,969,149 
ADMI Corp.  Services: Consumer  Term Loan B  Loan  1M USD LIBOR+  2.75%   0.00%   4.27%   4/30/2025    1,970,000    1,962,286    1,924,848 
Advantage Sales & Marketing Inc.  Services: Business  First Lien Term Loan  Loan  1M USD LIBOR+  3.25%   1.00%   4.77%   7/23/2021    2,371,131    2,370,010    2,286,173 
Advantage Sales & Marketing Inc.  Services: Business  Term Loan B Incremental  Loan  1M USD LIBOR+  3.25%   1.00%   4.77%   7/23/2021    489,950    485,523    470,352 
Advisor Group Holdings Inc  Banking Finance Insurance & Real Estate  Term Loan (7/19)  Loan  1M USD LIBOR+  5.00%   0.00%   6.52%   7/31/2026    500,000    498,753    486,875 
Aegis Toxicology Sciences Corporation  Healthcare & Pharmaceuticals  Term Loan  Loan  3M USD LIBOR+  5.50%   1.00%   6.96%   5/9/2025    3,950,000    3,919,494    3,695,225 
Agiliti Health Inc.  Healthcare & Pharmaceuticals  Term Loan (1/19)  Loan  1M USD LIBOR+  3.00%   0.00%   4.52%   1/5/2026    496,250    496,250    486,325 
Agrofresh Inc.  Beverage Food & Tobacco  Term Loan  Loan  1M USD LIBOR+  4.75%   1.00%   6.27%   7/30/2021    2,889,487    2,886,790    2,677,601 
AI Convoy Bidco Limited  Aerospace & Defense  AI Convoy Bidco T/L B (USD)  Loan  3M USD LIBOR+  3.50%   1.00%   4.96%   1/29/2027    1,500,000    1,492,500    1,483,125 
AI Mistral (Luxembourg) Subco Sarl  High Tech Industries  Term Loan  Loan  1M USD LIBOR+  3.00%   1.00%   4.52%   3/11/2024    486,250    486,250    384,138 
AIS Holdco LLC  Services: Business  Term Loan  Loan  3M USD LIBOR+  5.00%   0.00%   6.46%   8/15/2025    2,421,875    2,411,617    2,228,125 
Alchemy US Holdco 1 LLC  Metals & Mining  Term Loan  Loan  1M USD LIBOR+  5.50%   0.00%   7.02%   10/10/2025    1,950,000    1,925,236    1,945,125 
Alion Science and Technology Corporation  Aerospace & Defense  Term Loan B (1st Lien)  Loan  1M USD LIBOR+  4.50%   1.00%   6.02%   8/19/2021    3,377,293    3,373,263    3,373,071 
Allen Media LLC  Media: Advertising Printing & Publishing  Allen Media T/L B (1/20)  Loan  3M USD LIBOR+  5.50%   0.00%   6.96%   2/10/2027    3,000,000    2,985,000    2,936,250 
Altisource S.a r.l.  Banking Finance Insurance & Real Estate  Term Loan B (03/18)  Loan  3M USD LIBOR+  4.00%   1.00%   5.46%   4/3/2024    1,454,005    1,446,493    1,353,141 
Altra Industrial Motion Corp.  Capital Equipment  Term Loan  Loan  1M USD LIBOR+  2.00%   0.00%   3.52%   10/1/2025    1,767,163    1,763,366    1,748,943 
American Dental Partners Inc.  Healthcare & Pharmaceuticals  Term Loan B  Loan  3M USD LIBOR+  4.25%   1.00%   5.71%   3/24/2023    990,000    982,019    982,575 
American Greetings Corporation  Media: Advertising Printing & Publishing  Term Loan  Loan  1M USD LIBOR+  4.50%   1.00%   6.02%   4/5/2024    4,889,524    4,886,331    4,788,702 
American Residential Services LLC  Services: Consumer  Term Loan B  Loan  1M USD LIBOR+  4.00%   1.00%   5.52%   6/30/2022    3,925,767    3,916,564    3,896,324 
AmeriLife Group LLC  Banking Finance Insurance & Real Estate  AmeriLife T/L  Loan  3M USD LIBOR+  4.00%   0.00%   5.46%   2/5/2027    838,710    836,613    832,419 
AmeriLife Group LLC(a)  Banking Finance Insurance & Real Estate  Unfunded Commitment  Loan  3M USD LIBOR+  4.00%   0.00%   4.00%   2/5/2027    -    -    - 
Amex GBT (2/20) T/L  Banking Finance Insurance & Real Estate  Term Loan  Loan  3M USD LIBOR+  4.00%   0.00%   5.46%   2/26/2027    2,993,363    2,933,496    2,926,012 
Amex GBT 2/20 D/T/L(a)  Banking Finance Insurance & Real Estate  Unfunded Commitment  Loan  3M USD LIBOR+  4.00%   0.00%   5.46%   2/26/2027    -    -    - 
Amynta Agency Borrower Inc.  Banking Finance Insurance & Real Estate  Term Loan  Loan  1M USD LIBOR+  4.50%   0.00%   6.02%   2/28/2025    3,462,357    3,425,731    3,224,320 

 

S-16

 

 

Saratoga Investment Corp. CLO 2013-1 Ltd.

Schedule of Investments

February 29, 2020

 

Issuer Name  Industry  Asset Name  Asset
Type
  Reference Rate/Spread    LIBOR Floor   Current Rate (All In)   Maturity Date   Principal/
Number of Shares
   Cost   Fair Value 
Anastasia Parent LLC  Consumer goods: Non-durable  Term Loan  Loan  1M USD LIBOR+  3.75%   0.00%   5.27%   8/11/2025    987,500    983,508    759,141 
Anchor Glass Container Corporation  Containers Packaging & Glass  Term Loan (07/17)  Loan  3M USD LIBOR+  2.75%   1.00%   4.21%   12/7/2023    485,063    483,537    354,789 
Api Group DE Inc  Services: Business  Term Loan B  Loan  1M USD LIBOR+  2.50%   0.00%   4.02%   10/1/2026    1,000,000    995,123    990,000 
APLP Holdings Limited Partnership  Utilities  APLP Holdings T/L B (Atlantic Power)  Loan  1M USD LIBOR+  2.75%   1.00%   4.27%   4/13/2023    2,000,000    2,000,000    1,977,500 
Aramark Services Inc.  Services: Consumer  Term Loan  Loan  1M USD LIBOR+  1.75%   0.00%   3.27%   1/15/2027    1,500,000    1,498,209    1,484,070 
Arctic Glacier U.S.A. Inc.  Beverage Food & Tobacco  Term Loan (3/18)  Loan  1M USD LIBOR+  3.50%   1.00%   5.02%   3/20/2024    3,350,967    3,332,339    3,225,306 
Aretec Group Inc.  Banking Finance Insurance & Real Estate  Term Loan (10/18)  Loan  1M USD LIBOR+  4.25%   0.00%   5.77%   10/1/2025    1,980,000    1,975,743    1,937,093 
ASG Technologies Group Inc.  High Tech Industries  Term Loan  Loan  1M USD LIBOR+  3.50%   1.00%   5.02%   7/31/2024    488,775    487,107    476,556 
AssetMark Financial Holdings Inc.  Banking Finance Insurance & Real Estate  Term Loan  Loan  3M USD LIBOR+  3.00%   0.00%   4.46%   11/14/2025    1,237,500    1,235,582    1,228,219 
Astoria Energy LLC  Energy: Electricity  Term Loan  Loan  1M USD LIBOR+  4.00%   1.00%   5.52%   12/24/2021    1,391,552    1,385,662    1,384,595 
Asurion LLC  Banking Finance Insurance & Real Estate  Term Loan B-4 (Replacement)  Loan  1M USD LIBOR+  3.00%   0.00%   4.52%   8/4/2022    1,876,925    1,872,057    1,853,069 
Asurion LLC  Banking Finance Insurance & Real Estate  Term Loan B6  Loan  1M USD LIBOR+  3.00%   0.00%   4.52%   11/3/2023    492,773    489,808    485,381 
Athenahealth Inc.  Healthcare & Pharmaceuticals  Term Loan B  Loan  1M USD LIBOR+  4.50%   0.00%   6.02%   2/11/2026    1,985,000    1,950,006    1,970,113 
Avaya Inc.  Telecommunications  Term Loan B  Loan  1M USD LIBOR+  4.25%   0.00%   5.77%   12/16/2024    3,169,156    3,138,355    3,010,698 
Avison Young (Canada) Inc.  Services: Business  Term Loan  Loan  3M USD LIBOR+  5.00%   0.00%   6.46%   1/30/2026    3,476,222    3,418,777    3,406,697 
B&G Foods Inc.  Beverage Food & Tobacco  Term Loan  Loan  1M USD LIBOR+  2.50%   0.00%   4.02%   10/10/2026    249,375    248,169    246,881 
Ball Metalpack Finco LLC  Containers Packaging & Glass  Term Loan  Loan  3M USD LIBOR+  4.50%   0.00%   5.96%   7/31/2025    3,944,937    3,928,266    3,432,096 
Bausch Health Companies Inc.  Healthcare & Pharmaceuticals  Term Loan B (05/18)  Loan  1M USD LIBOR+  3.00%   0.00%   4.52%   6/2/2025    25,355    25,274    25,161 
Berry Global Inc.  Chemicals Plastics & Rubber  Term Loan Y  Loan  1M USD LIBOR+  2.00%   0.00%   3.52%   7/1/2026    4,987,500    4,981,754    4,897,974 
Blount International Inc.  Forest Products & Paper  Term Loan B (09/18)  Loan  1M USD LIBOR+  3.75%   1.00%   5.27%   4/12/2023    3,453,781    3,450,952    3,432,195 
Blucora Inc.  Services: Consumer  Term Loan (11/17)  Loan  2M USD LIBOR+  3.00%   1.00%   4.50%   5/22/2024    955,900    953,639    946,341 
Bombardier Recreational Products Inc.  Consumer goods: Durable  Term Loan (1/20)  Loan  1M USD LIBOR+  2.00%   0.00%   3.52%   5/24/2027    995,000    985,847    978,214 
Boxer Parent Company Inc.  Services: Business  Term Loan  Loan  1M USD LIBOR+  4.25%   0.00%   5.77%   10/2/2025    2,475,000    2,454,363    2,374,070 
Bracket Intermediate Holding Corp.  Healthcare & Pharmaceuticals  Term Loan  Loan  3M USD LIBOR+  4.25%   0.00%   5.71%   9/5/2025    987,500    983,437    987,500 
Broadstreet Partners Inc.  Banking Finance Insurance & Real Estate  Term Loan B3  Loan  1M USD LIBOR+  3.25%   0.00%   4.77%   1/27/2027    2,024,614    2,022,736    2,002,687 
Brookfield WEC Holdings Inc.  Energy: Electricity  Term Loan 1/20  Loan  1M USD LIBOR+  3.00%   0.75%   4.52%   8/1/2025    497,487    496,370    488,627 
Buckeye Partners L.P.  Utilities: Oil & Gas  Term Loan  Loan  1M USD LIBOR+  2.75%   0.00%   4.27%   11/2/2026    1,000,000    995,334    989,170 

 

S-17

 

 

Saratoga Investment Corp. CLO 2013-1 Ltd.

Schedule of Investments

February 29, 2020

 

Issuer Name  Industry  Asset Name  Asset
Type
  Reference Rate/Spread    LIBOR Floor   Current Rate (All In)   Maturity Date   Principal/
Number of Shares
   Cost   Fair Value 
BW Gas & Convenience Holdings LLC  Beverage Food & Tobacco  Term Loan  Loan  1M USD LIBOR+  6.25%   0.00%   7.77%   11/18/2024    3,000,000    2,884,283    2,992,500 
Calceus Acquisition Inc.  Consumer goods: Non-durable  Term Loan B  Loan  1M USD LIBOR+  5.50%   0.00%   7.02%   2/12/2025    975,000    964,353    964,031 
Callaway Golf Company  Retail  Term Loan B  Loan  1M USD LIBOR+  4.50%   0.00%   6.02%   1/2/2026    697,500    684,758    696,196 
CareerBuilder LLC  Services: Business  Term Loan  Loan  1M USD LIBOR+  6.75%   1.00%   8.27%   7/31/2023    2,266,211    2,232,341    2,223,720 
CareStream Health Inc.  High Tech Industries  Term Loan  Loan  1M USD LIBOR+  6.25%   1.00%   7.77%   2/28/2021    2,362,278    2,356,691    2,263,062 
Casa Systems Inc.  Telecommunications  Term Loan  Loan  1M USD LIBOR+  4.00%   1.00%   5.52%   12/20/2023    1,455,000    1,446,052    1,236,750 
Castle US Holding Corporation  High Tech Industries  Term Loan B (USD)  Loan  1M USD LIBOR+  3.75%   0.00%   5.27%   1/27/2027    500,000    497,509    475,000 
CCS-CMGC Holdings Inc.  Healthcare & Pharmaceuticals  Term Loan  Loan  3M USD LIBOR+  5.50%   0.00%   6.96%   10/1/2025    2,475,000    2,453,876    2,338,875 
Cengage Learning Inc.  Media: Advertising Printing & Publishing  Term Loan  Loan  1M USD LIBOR+  4.25%   1.00%   5.77%   6/7/2023    1,447,458    1,435,195    1,329,447 
CenturyLink Inc.  Telecommunications  Term Loan B (1/20)  Loan  1M USD LIBOR+  2.25%   0.00%   3.77%   3/15/2027    3,000,000    2,996,438    2,922,180 
Citadel Securities LP  Banking Finance Insurance & Real Estate  Term Loan (2/20)  Loan  1M USD LIBOR+  2.75%   0.00%   4.27%   2/27/2026    992,500    991,371    983,816 
Clarios Global LP  Automotive  Term Loan B  Loan  1M USD LIBOR+  3.50%   0.00%   5.02%   4/30/2026    1,496,250    1,482,216    1,451,991 
Compass Power Generation L.L.C.  Utilities: Electric  Term Loan B (08/18)  Loan  1M USD LIBOR+  3.50%   1.00%   5.02%   12/20/2024    1,891,221    1,886,758    1,855,761 
Compuware Corporation  High Tech Industries  Term Loan (08/18)  Loan  1M USD LIBOR+  4.00%   0.00%   5.52%   8/22/2025    495,000    493,979    493,763 
Concordia International Corp.  Healthcare & Pharmaceuticals  Term Loan  Loan  3M USD LIBOR+  5.50%   1.00%   6.96%   9/6/2024    1,183,650    1,131,380    1,088,224 
Connect U.S. Finco LLC  Telecommunications  Delayed Draw Term Loan B  Loan  1M USD LIBOR+  4.50%   1.00%   6.02%   12/11/2026    2,000,000    1,984,055    1,980,000 
Consolidated Communications Inc.  Telecommunications  Term Loan B  Loan  1M USD LIBOR+  3.00%   1.00%   4.52%   10/5/2023    1,475,404    1,464,720    1,395,481 
Coral-US Co-Borrower LLC  Telecommunications  Term Loan B-5  Loan  1M USD LIBOR+  2.25%   0.00%   3.77%   1/31/2028    2,000,000    2,000,000    1,976,660 
Covia Holdings Corporation  Metals & Mining  Term Loan  Loan  3M USD LIBOR+  4.00%   1.00%   5.46%   6/2/2025    985,000    985,000    711,663 
CPI Acquisition Inc  Banking Finance Insurance & Real Estate  Term Loan B (1st Lien)  Loan  6M USD LIBOR+  4.50%   1.00%   5.90%   8/17/2022    1,436,782    1,427,762    1,089,957 
Crown Subsea Communications Holding Inc  Construction & Building  Term Loan  Loan  1M USD LIBOR+  6.00%   0.00%   7.52%   11/3/2025    1,655,837    1,640,398    1,649,627 
CSC Holdings LLC  Media: Broadcasting & Subscription  Term Loan B (03/17)  Loan  1M USD LIBOR+  2.25%   0.00%   3.77%   7/17/2025    1,974,620    1,952,260    1,941,308 
CSC Holdings LLC  Media: Broadcasting & Subscription  Term Loan B-5  Loan  1M USD LIBOR+  2.50%   0.00%   4.02%   4/15/2027    500,000    500,000    492,500 
CSC Holdings LLC  Media: Broadcasting & Subscription  Term Loan B  Loan  1M USD LIBOR+  2.25%   0.00%   3.77%   1/15/2026    495,000    493,968    486,031 
Cushman & Wakefield U.S. Borrower LLC  Construction & Building  Term Loan  Loan  1M USD LIBOR+  2.75%   0.00%   4.27%   8/21/2025    3,945,050    3,928,487    3,874,789 
Daseke Companies Inc.  Transportation: Cargo  Replacement Term Loan  Loan  1M USD LIBOR+  5.00%   1.00%   6.52%   2/27/2024    1,955,694    1,946,628    1,867,688 
DaVita Inc.  High Tech Industries  Term Loan B-1  Loan  1M USD LIBOR+  1.75%   0.00%   3.27%   8/12/2026    997,500    995,133    985,859 
Dealer Tire LLC  Automotive  Dealer Tire T/L B-1  Loan  1M USD LIBOR+  4.25%   0.00%   5.77%   12/12/2025    3,000,000    2,992,500    2,977,500 

 

S-18

 

 

Saratoga Investment Corp. CLO 2013-1 Ltd.

Schedule of Investments

February 29, 2020

 

Issuer Name  Industry  Asset Name  Asset
Type
  Reference Rate/Spread    LIBOR Floor   Current Rate (All In)   Maturity Date   Principal/
Number of Shares
   Cost   Fair Value 
Delek US Holdings Inc.  Utilities: Oil & Gas  Term Loan B  Loan  1M USD LIBOR+  2.25%   0.00%   3.77%   3/31/2025    6,446,003    6,379,073    6,317,083 
Dell International L.L.C.  High Tech Industries  Term Loan B-1  Loan  1M USD LIBOR+  2.00%   0.75%   3.52%   9/19/2025    3,814,430    3,809,967    3,766,292 
Delta 2 (Lux) SARL  Hotel Gaming & Leisure  Term Loan B  Loan  1M USD LIBOR+  2.50%   1.00%   4.02%   2/1/2024    1,318,289    1,315,922    1,275,445 
DHX Media Ltd.  Media: Broadcasting & Subscription  Term Loan  Loan  1M USD LIBOR+  4.25%   1.00%   5.77%   12/29/2023    279,282    278,012    267,413 
Diamond Sports Group LLC  Media: Broadcasting & Subscription  Term Loan  Loan  1M USD LIBOR+  3.25%   0.00%   4.77%   8/24/2026    997,500    992,773    907,725 
Digital Room Holdings Inc.  Media: Advertising Printing & Publishing  Term Loan  Loan  1M USD LIBOR+  5.00%   0.00%   6.52%   5/21/2026    2,985,000    2,944,957    2,790,975 
Dole Food Company Inc.  Beverage Food & Tobacco  Term Loan B  Loan  1M USD LIBOR+  2.75%   1.00%   4.27%   4/8/2024    468,750    467,304    461,522 
DRW Holdings LLC  Banking Finance Insurance & Real Estate  Term Loan B  Loan  1M USD LIBOR+  4.25%   0.00%   5.77%   11/27/2026    5,000,000    4,950,804    4,962,500 
DynCorp International Inc.  Aerospace & Defense  Term Loan B  Loan  1M USD LIBOR+  6.00%   1.00%   7.52%   8/18/2025    2,962,500    2,879,096    2,925,469 
Eagletree-Carbide Acquisition Corp.  Consumer goods: Durable  Term Loan  Loan  3M USD LIBOR+  4.25%   1.00%   5.71%   8/28/2024    4,927,385    4,901,606    4,804,200 
EIG Investors Corp.  High Tech Industries  Term Loan (06/18)  Loan  3M USD LIBOR+  3.75%   1.00%   5.21%   2/9/2023    2,199,416    2,186,449    2,160,926 
Encapsys LLC  Chemicals Plastics & Rubber  Term Loan B2  Loan  1M USD LIBOR+  3.25%   1.00%   4.77%   11/7/2024    497,428    492,831    491,832 
Endo Luxembourg Finance Company I S.a.r.l.  Healthcare & Pharmaceuticals  Term Loan B (4/17)  Loan  1M USD LIBOR+  4.25%   0.75%   5.77%   4/29/2024    3,937,025    3,914,795    3,766,985 
Energy Acquisition LP  Capital Equipment  Term Loan (6/18)  Loan  3M USD LIBOR+  4.25%   0.00%   5.71%   6/26/2025    1,970,000    1,957,901    1,811,179 
Envision Healthcare Corporation  Healthcare & Pharmaceuticals  Term Loan B (06/18)  Loan  1M USD LIBOR+  3.75%   0.00%   5.27%   10/10/2025    4,950,000    4,939,709    3,966,188 
EyeCare Partners LLC  Healthcare & Pharmaceuticals  EyeCare Partners T/L B  Loan  1M USD LIBOR+  3.75%   0.00%   5.27%   2/5/2027    1,621,622    1,619,618    1,583,789 
EyeCare Partners LLC(a)  Healthcare & Pharmaceuticals  EyeCare Partners Delayed Draw Term Loan  Loan  1M USD LIBOR+  3.75%   0.00%   5.27%   2/5/2027    -    -    - 
FinCo I LLC  Banking Finance Insurance & Real Estate  2018 Term Loan B  Loan  1M USD LIBOR+  2.00%   0.00%   3.52%   12/27/2022    360,538    359,905    356,752 
First Eagle Holdings Inc.  Banking Finance Insurance & Real Estate  Refinancing Term Loan  Loan  3M USD LIBOR+  2.50%   0.00%   3.96%   2/1/2027    5,450,000    5,426,720    5,338,275 
Fitness International LLC  Services: Consumer  Term Loan B (4/18)  Loan  1M USD LIBOR+  3.25%   0.00%   4.77%   4/18/2025    1,330,058    1,322,900    1,312,103 
Franklin Square Holdings L.P.  Banking Finance Insurance & Real Estate  Term Loan  Loan  1M USD LIBOR+  2.25%   0.00%   3.77%   8/1/2025    4,443,748    4,414,007    4,421,530 
Froneri International Ltd  Beverage Food & Tobacco  Term Loan B-2  Loan  1M USD LIBOR+  2.25%   0.00%   3.77%   1/29/2027    2,000,000    1,995,162    1,962,500 
Fusion Connect Inc.  Telecommunications  Exit Term Loan (1/20)  Loan  3M USD LIBOR+  9.50%   2.00%   11.50%   1/14/2025    1,500,000    1,470,716    1,495,005 
Fusion Connect Inc.  Telecommunications  Take Back 2nd Out Term Loan  Loan  6M USD LIBOR+  8.00%   2.00%   10.00%   7/14/2025    757,724    737,560    527,883 
GBT Group Services B.V.  Hotel Gaming & Leisure  Term Loan  Loan  3M USD LIBOR+  2.50%   0.00%   3.96%   8/13/2025    4,443,750    4,442,729    4,410,422 
GC EOS Buyer Inc.  Automotive  Term Loan B (06/18)  Loan  1M USD LIBOR+  4.50%   0.00%   6.02%   8/1/2025    2,962,500    2,940,820    2,888,438 
General Nutrition Centers Inc.  Retail  Term Loan B2  Loan  3M USD LIBOR+  8.75%   0.75%   10.21%   3/4/2021    930,446    929,986    856,010 

 

S-19

 

 

Saratoga Investment Corp. CLO 2013-1 Ltd.

Schedule of Investments

February 29, 2020

 

Issuer Name  Industry  Asset Name  Asset
Type
  Reference Rate/Spread    LIBOR Floor   Current Rate (All In)   Maturity Date   Principal/
Number of Shares
   Cost   Fair Value 
General Nutrition Centers Inc.  Retail  FILO Term Loan  Loan  1M USD LIBOR+  7.00%   0.00%   8.52%   1/3/2023    585,849    584,748    583,505 
Genesee & Wyoming Inc.  Transportation: Cargo  Term Loan (11/19)  Loan  3M USD LIBOR+  2.00%   0.00%   3.46%   12/30/2026    1,500,000    1,492,771    1,489,380 
GEO Group Inc. The  Banking Finance Insurance & Real Estate  Term Loan Refinance  Loan  1M USD LIBOR+  2.00%   0.75%   3.52%   3/25/2024    2,000,000    1,911,214    1,846,260 
GI Chill Acquisition LLC  Services: Business  Term Loan  Loan  3M USD LIBOR+  4.00%   0.00%   5.46%   8/6/2025    2,468,750    2,458,492    2,450,234 
GI Revelation Acquisition LLC  Services: Business  Term Loan  Loan  1M USD LIBOR+  5.00%   0.00%   6.52%   4/16/2025    1,231,867    1,226,730    1,155,652 
Gigamon Inc.  Services: Business  Term Loan B  Loan  1M USD LIBOR+  4.25%   1.00%   5.77%   12/27/2024    2,960,000    2,937,550    2,952,600 
Global Tel*Link Corporation  Telecommunications  Term Loan B  Loan  1M USD LIBOR+  4.25%   0.00%   5.77%   11/28/2025    3,039,750    3,039,750    2,886,668 
Go Wireless Inc.  Telecommunications  Term Loan  Loan  1M USD LIBOR+  6.50%   1.00%   8.02%   12/22/2024    3,202,597    3,161,265    3,005,093 
Goodyear Tire & Rubber Company The  Chemicals Plastics & Rubber  Second Lien Term Loan  Loan  1M USD LIBOR+  2.00%   0.00%   3.52%   3/7/2025    2,000,000    2,000,000    1,950,000 
Greenhill & Co. Inc.  Banking Finance Insurance & Real Estate  Term Loan B  Loan  1M USD LIBOR+  3.25%   0.00%   4.77%   4/12/2024    3,661,538    3,624,459    3,644,769 
Grosvenor Capital Management Holdings LLLP  Banking Finance Insurance & Real Estate  Term Loan B  Loan  1M USD LIBOR+  2.75%   1.00%   4.27%   3/28/2025    898,530    894,831    898,530 
Guidehouse LLP  Aerospace & Defense  Term Loan  Loan  1M USD LIBOR+  4.50%   0.00%   6.02%   5/1/2025    3,964,937    3,941,954    3,895,550 
Harland Clarke Holdings Corp.  Media: Advertising Printing & Publishing  Term Loan  Loan  3M USD LIBOR+  4.75%   1.00%   6.21%   11/3/2023    1,723,072    1,715,720    1,356,919 
HD Supply Waterworks Ltd.  Construction & Building  Term Loan  Loan  3M USD LIBOR+  2.75%   1.00%   4.21%   8/1/2024    488,750    487,883    481,419 
Helix Acquisition Holdings Inc.  Capital Equipment  Term Loan (2019 Incremental)  Loan  3M USD LIBOR+  3.75%   0.00%   5.21%   9/30/2024    2,977,500    2,925,219    2,754,188 
Helix Gen Funding LLC  Energy: Electricity  Term Loan B (02/17)  Loan  1M USD LIBOR+  3.75%   1.00%   5.27%   6/3/2024    264,030    263,694    253,799 
HLF Financing SaRL LLC  Consumer goods: Non-durable  Term Loan B (08/18)  Loan  1M USD LIBOR+  2.75%   0.00%   4.27%   8/18/2025    3,950,000    3,935,111    3,883,364 
Holley Purchaser Inc.  Automotive  Term Loan B  Loan  3M USD LIBOR+  5.00%   0.00%   6.46%   10/24/2025    2,475,000    2,454,070    2,301,750 
Hudson River Trading LLC  Banking Finance Insurance & Real Estate  Term Loan B (01/20)  Loan  1M USD LIBOR+  3.00%   0.00%   4.52%   2/18/2027    6,000,000    5,975,621    5,955,000 
Hyperion Refinance S.a.r.l.  Banking Finance Insurance & Real Estate  Tem Loan (12/17)  Loan  1M USD LIBOR+  3.50%   1.00%   5.02%   12/20/2024    1,709,781    1,701,824    1,691,623 
ICH US Intermediate Holdings II Inc.  Healthcare & Pharmaceuticals  Term Loan B  Loan  3M USD LIBOR+  5.75%   1.00%   7.21%   12/24/2026    5,000,000    4,803,288    4,875,000 
Idera Inc.  High Tech Industries  Term Loan B  Loan  1M USD LIBOR+  4.00%   1.00%   5.52%   6/28/2024    2,939,742    2,919,274    2,917,694 
Informatica LLC  High Tech Industries  Term Loan B (02/20)  Loan  1M USD LIBOR+  3.25%   0.00%   4.77%   2/25/2027    500,000    497,500    489,375 
Inmar Inc.  Services: Business  Term Loan B  Loan  3M USD LIBOR+  4.00%   1.00%   5.46%   5/1/2024    3,457,043    3,377,774    3,320,939 
Innophos Holdings Inc  Chemicals Plastics & Rubber  Term Loan B  Loan  1M USD LIBOR+  3.75%   0.00%   5.27%   2/4/2027    500,000    497,521    496,250 
ION Media Networks Inc.  Media: Broadcasting & Subscription  Term Loan B  Loan  1M USD LIBOR+  3.00%   0.00%   4.52%   12/18/2024    997,500    992,818    982,538 
Isagenix International LLC  Beverage Food & Tobacco  Term Loan  Loan  3M USD LIBOR+  5.75%   1.00%   7.21%   6/16/2025    2,796,876    2,750,718    1,118,750 
Jefferies Finance LLC / JFIN Co-Issuer Corp  Banking Finance Insurance & Real Estate  Term Loan  Loan  1M USD LIBOR+  3.25%   0.00%   4.77%   6/3/2026    3,229,359    3,211,489    3,172,846 

 

S-20

 

 

Saratoga Investment Corp. CLO 2013-1 Ltd.

Schedule of Investments

February 29, 2020

 

Issuer Name  Industry  Asset Name  Asset
Type
  Reference Rate/Spread    LIBOR Floor   Current Rate (All In)   Maturity Date   Principal/
Number of Shares
   Cost   Fair Value 
Jill Holdings LLC  Retail  Term Loan (1st Lien)  Loan  3M USD LIBOR+  5.00%   1.00%   6.46%   5/9/2022    1,800,290    1,796,697    1,458,235 
JP Intermediate B LLC  Consumer goods: Non-durable  Term Loan  Loan  3M USD LIBOR+  5.50%   1.00%   6.96%   11/20/2025    4,687,500    4,640,380    2,499,984 
KAR Auction Services Inc.  Automotive  Term Loan B (09/19)  Loan  1M USD LIBOR+  2.25%   0.00%   3.77%   9/19/2026    249,375    248,789    247,505 
Kindred Healthcare Inc.  Healthcare & Pharmaceuticals  Kindred Healthcare T/L (6/18)  Loan  1M USD LIBOR+  5.00%   0.00%   6.52%   7/2/2025    2,000,000    1,980,000    1,975,000 
Lakeland Tours LLC  Hotel Gaming & Leisure  Term Loan B  Loan  3M USD LIBOR+  4.25%   1.00%   5.71%   12/16/2024    2,457,482    2,450,618    2,248,596 
Lannett Company Inc.  Healthcare & Pharmaceuticals  Term Loan B  Loan  1M USD LIBOR+  5.38%   1.00%   6.89%   11/25/2022    2,379,293    2,356,101    2,343,175 
Learfield Communications LLC  Media: Advertising Printing & Publishing  Initial Term Loan (A-L Parent)  Loan  1M USD LIBOR+  3.25%   1.00%   4.77%   12/1/2023    485,000    483,577    439,531 
Lifetime Brands Inc.  Consumer goods: Non-durable  Term Loan B  Loan  1M USD LIBOR+  3.50%   1.00%   5.02%   2/28/2025    2,992,386    2,955,090    2,857,728 
Lighthouse Network LLC  Banking Finance Insurance & Real Estate  Term Loan B  Loan  1M USD LIBOR+  4.50%   1.00%   6.02%   12/2/2024    4,129,092    4,115,428    4,123,930 
Lightstone Holdco LLC  Energy: Electricity  Term Loan B  Loan  1M USD LIBOR+  3.75%   1.00%   5.27%   1/30/2024    1,322,520    1,320,692    1,164,651 
Lightstone Holdco LLC  Energy: Electricity  Term Loan C  Loan  1M USD LIBOR+  3.75%   1.00%   5.27%   1/30/2024    74,592    74,493    65,688 
Lindblad Expeditions Inc.  Hotel Gaming & Leisure  US 2018 Term Loan  Loan  1M USD LIBOR+  3.25%   0.00%   4.77%   3/27/2025    394,000    393,227    390,060 
Lindblad Expeditions Inc.  Hotel Gaming & Leisure  Cayman Term Loan  Loan  1M USD LIBOR+  3.25%   0.00%   4.77%   3/27/2025    98,500    98,307    97,515 
Liquidnet Holdings Inc.  Banking Finance Insurance & Real Estate  Term Loan B  Loan  1M USD LIBOR+  3.25%   1.00%   4.77%   7/15/2024    2,131,268    2,126,212    2,093,970 
LPL Holdings Inc.  Banking Finance Insurance & Real Estate  Term Loan B1  Loan  1M USD LIBOR+  1.75%   0.00%   3.27%   11/11/2026    1,245,213    1,242,233    1,243,133 
Marriott Ownership Resorts Inc.  Hotel Gaming & Leisure  Term Loan (11/19)  Loan  1M USD LIBOR+  1.75%   0.00%   3.27%   3/12/2026    1,500,000    1,500,000    1,432,500 
Match Group Inc.  Services: Consumer  Term Loan (1/20)  Loan  3M USD LIBOR+  1.75%   0.00%   3.21%   2/5/2027    250,000    249,377    248,438 
McAfee LLC  Services: Business  Term Loan B  Loan  1M USD LIBOR+  3.75%   0.00%   5.27%   9/30/2024    3,159,418    3,131,317    3,136,165 
McDermott International (Americas) Inc.(b)  Construction & Building  Term Loan B  Loan  3M USD LIBOR+  5.00%   1.00%   6.46%   5/12/2025    1,965,000    1,933,938    1,126,928 
McGraw-Hill Global Education Holdings LLC  Media: Advertising Printing & Publishing  Term Loan  Loan  1M USD LIBOR+  4.00%   1.00%   5.52%   5/4/2022    956,813    954,867    897,807 
Meredith Corporation  Media: Advertising Printing & Publishing  Term Loan B2  Loan  1M USD LIBOR+  2.50%   0.00%   4.02%   1/31/2025    578,738    577,724    572,227 
Messer Industries GMBH  Chemicals Plastics & Rubber  Term Loan B  Loan  3M USD LIBOR+  2.50%   0.00%   3.96%   3/2/2026    2,977,500    2,970,753    2,917,950 
Michaels Stores Inc.  Retail  Term Loan B  Loan  1M USD LIBOR+  2.50%   1.00%   4.02%   1/30/2023    2,599,163    2,590,493    2,393,387 
Midwest Physician Administrative Services LLC  Healthcare & Pharmaceuticals  Term Loan (2/18)  Loan  1M USD LIBOR+  2.75%   0.75%   4.27%   8/15/2024    970,910    967,282    951,492 
Milk Specialties Company  Beverage Food & Tobacco  Term Loan (2/17)  Loan  1M USD LIBOR+  4.00%   1.00%   5.52%   8/16/2023    3,899,905    3,848,164    3,696,798 
MKS Instruments Inc.  High Tech Industries  Term Loan B6  Loan  1M USD LIBOR+  1.75%   0.00%   3.27%   2/2/2026    887,425    879,526    875,001 
MLN US HoldCo LLC  Telecommunications  Term Loan  Loan  1M USD LIBOR+  4.50%   0.00%   6.02%   11/28/2025    990,000    988,165    932,144 

 

S-21

 

 

Saratoga Investment Corp. CLO 2013-1 Ltd.

Schedule of Investments

February 29, 2020

 

Issuer Name  Industry  Asset Name  Asset
Type
  Reference Rate/Spread    LIBOR Floor   Current Rate (All In)   Maturity Date   Principal/
Number of Shares
   Cost   Fair Value 
MRC Global (US) Inc.  Metals & Mining  Term Loan B2  Loan  1M USD LIBOR+  3.00%   0.00%   4.52%   9/20/2024    490,000    489,047    477,750 
NAI Entertainment Holdings LLC  Hotel Gaming & Leisure  Term Loan B  Loan  1M USD LIBOR+  2.50%   1.00%   4.02%   5/8/2025    870,833    869,104    855,594 
Natgasoline LLC  Chemicals Plastics & Rubber  Term Loan  Loan  6M USD LIBOR+  3.50%   0.00%   4.90%   11/14/2025    495,000    492,907    491,288 
National Mentor Holdings Inc.  Healthcare & Pharmaceuticals  Term Loan  Loan  1M USD LIBOR+  4.00%   0.00%   5.52%   3/9/2026    1,881,215    1,864,059    1,871,809 
National Mentor Holdings Inc.  Healthcare & Pharmaceuticals  Term Loan C  Loan  1M USD LIBOR+  4.00%   0.00%   5.52%   3/9/2026    104,662    103,730    104,139 
NeuStar Inc.  Telecommunications  Term Loan B4 (03/18)  Loan  1M USD LIBOR+  3.50%   1.00%   5.02%   8/8/2024    2,962,121    2,918,947    2,688,125 
NeuStar Inc.  Telecommunications  Term Loan B-5  Loan  1M USD LIBOR+  4.50%   1.00%   6.02%   8/8/2024    992,500    975,477    959,311 
Nexstar Broadcasting Inc.  Media: Broadcasting & Subscription  Term Loan  Loan  1M USD LIBOR+  2.75%   0.00%   4.27%   9/18/2026    249,375    248,222    247,298 
NMI Holdings Inc.  Banking Finance Insurance & Real Estate  Term Loan  Loan  1M USD LIBOR+  4.75%   1.00%   6.27%   5/23/2023    3,454,906    3,457,271    3,420,357 
NorthPole Newco S.a r.l  Aerospace & Defense  Term Loan  Loan  3M USD LIBOR+  7.00%   0.00%   8.46%   3/3/2025    4,812,500    4,371,041    4,162,813 
Novetta Solutions LLC  Aerospace & Defense  Term Loan  Loan  1M USD LIBOR+  5.00%   1.00%   6.52%   10/17/2022    1,919,870    1,911,097    1,878,478 
Novetta Solutions LLC  Aerospace & Defense  Second Lien Term Loan  Loan  1M USD LIBOR+  8.50%   1.00%   10.02%   10/16/2023    1,000,000    994,137    973,750 
NPC International Inc.(b)  Beverage Food & Tobacco  Term Loan  Loan  3M USD LIBOR+  3.50%   1.00%   4.96%   4/19/2024    487,500    487,124    237,544 
Octave Music Group Inc. The  Services: Business  Term Loan B  Loan  2M USD LIBOR+  5.25%   1.00%   6.75%   5/29/2025    5,000,000    4,950,000    4,937,500 
Office Depot Inc.  Retail  Term Loan B  Loan  1M USD LIBOR+  5.25%   1.00%   6.77%   11/8/2022    2,456,367    2,445,611    2,464,547 
Owens & Minor Distribution Inc.  Healthcare & Pharmaceuticals  Term Loan B  Loan  1M USD LIBOR+  4.50%   0.00%   6.02%   4/30/2025    492,500    484,678    413,700 
Patriot Container Corp.  Environmental Industries  Term Loan (3/18)  Loan  1M USD LIBOR+  3.50%   1.00%   5.02%   3/20/2025    500,000    497,500    492,500 
PCI Gaming Authority  Hotel Gaming & Leisure  Term Loan  Loan  1M USD LIBOR+  2.50%   0.00%   4.02%   5/29/2026    878,269    874,086    871,682 
Peraton Corp.  Aerospace & Defense  Term Loan  Loan  2M USD LIBOR+  5.25%   1.00%   6.75%   4/29/2024    2,447,449    2,437,345    2,386,263 
PGX Holdings Inc.  Services: Consumer  Term Loan  Loan  1M USD LIBOR+  5.25%   1.00%   6.77%   9/29/2020    3,564,650    3,555,767    1,782,325 
PI UK Holdco II Limited  Services: Business  Term Loan B1 (PI UK Holdco II)  Loan  1M USD LIBOR+  3.25%   1.00%   4.77%   1/3/2025    1,473,750    1,467,204    1,449,802 
Pixelle Specialty Solutions LLC  Forest Products & Paper  Term Loan  Loan  1M USD LIBOR+  6.50%   1.00%   8.02%   10/31/2024    2,000,000    1,960,340    1,953,120 
Plastipak Packaging Inc  Containers Packaging & Glass  Plastipak Packaging T/L B (04/18)  Loan  1M USD LIBOR+  2.50%   0.00%   4.02%   10/15/2024    2,944,583    2,921,203    2,885,691 
Playtika Holding Corp.  High Tech Industries  Trm Loan B (12/19)  Loan  1M USD LIBOR+  6.00%   1.00%   7.52%   12/10/2024    4,000,000    3,922,736    3,988,760 
Polymer Process Holdings Inc  Containers Packaging & Glass  Term Loan  Loan  1M USD LIBOR+  6.00%   0.00%   7.52%   4/30/2026    2,985,000    2,930,303    2,921,569 
Presidio Inc.  Services: Business  Term Loan B (1/20)  Loan  3M USD LIBOR+  3.50%   0.00%   4.96%   1/22/2027    500,000    498,787    495,000 
Prime Security Services Borrower LLC  Services: Consumer  Term Loan (Protection One/ADT)  Loan  1M USD LIBOR+  3.25%   1.00%   4.77%   9/23/2026    2,992,500    2,975,658    2,905,717 
Priority Payment Systems Holdings LLC  High Tech Industries  Term Loan  Loan  1M USD LIBOR+  5.00%   1.00%   6.52%   1/3/2023    2,472,719    2,462,039    2,404,720 

 

S-22

 

 

Saratoga Investment Corp. CLO 2013-1 Ltd.

Schedule of Investments

February 29, 2020

 

Issuer Name  Industry  Asset Name  Asset
Type
  Reference Rate/Spread    LIBOR Floor   Current Rate (All In)   Maturity Date   Principal/
Number of Shares
   Cost   Fair Value 
Project Accelerate Parent LLC  Services: Business  Term Loan  Loan  1M USD LIBOR+  4.25%   1.00%   5.77%   1/2/2025    1,965,000    1,957,491    1,940,438 
Prometric Holdings Inc.  Services: Consumer  Term Loan  Loan  1M USD LIBOR+  3.00%   1.00%   4.52%   1/29/2025    491,288    489,418    473,478 
Pug LLC  Services: Consumer  Pug T/L B (02/20)  Loan  1M USD LIBOR+  3.50%   0.00%   5.02%   2/12/2027    1,500,000    1,492,500    1,395,000 
Rackspace Hosting Inc.  High Tech Industries  Term Loan B  Loan  3M USD LIBOR+  3.00%   1.00%   4.46%   11/3/2023    1,476,064    1,467,715    1,403,486 
Radio Systems Corporation  Consumer goods: Durable  Term Loan  Loan  2M USD LIBOR+  2.75%   1.00%   4.25%   5/2/2024    1,462,500    1,462,500    1,449,703 
Radiology Partners Inc.  Healthcare & Pharmaceuticals  Term Loan  Loan  2M USD LIBOR+  4.25%   0.00%   5.75%   7/9/2025    1,432,727    1,426,403    1,413,386 
Research Now Group Inc.  Media: Advertising Printing & Publishing  Term Loan  Loan  3M USD LIBOR+  5.50%   1.00%   6.96%   12/20/2024    3,927,406    3,816,352    3,868,494 
Resolute Investment Managers Inc.  Banking Finance Insurance & Real Estate  Term Loan (10/17)  Loan  3M USD LIBOR+  3.25%   1.00%   4.71%   4/29/2022    2,680,466    2,681,757    2,673,765 
Rexnord LLC  Capital Equipment  Term Loan (11/19)  Loan  1M USD LIBOR+  1.75%   0.00%   3.27%   8/21/2024    862,069    862,069    858,431 
Reynolds Consumer Products Inc.  Containers Packaging & Glass  Reynolds Consumer Products T/L  Loan  3M USD LIBOR+  1.75%   0.00%   3.21%   2/4/2027    1,500,000    1,498,128    1,483,875 
RGIS Services LLC  Services: Business  Term Loan  Loan  3M USD LIBOR+  7.50%   1.00%   8.96%   3/31/2023    482,554    477,839    421,994 
Robertshaw US Holding Corp.  Consumer goods: Durable  Term Loan B  Loan  1M USD LIBOR+  3.25%   1.00%   4.77%   2/28/2025    982,500    980,484    884,250 
Rocket Software Inc.  High Tech Industries  Term Loan (11/18)  Loan  1M USD LIBOR+  4.25%   0.00%   5.77%   11/28/2025    3,970,000    3,953,381    3,817,393 
Russell Investments US Institutional Holdco Inc.  Banking Finance Insurance & Real Estate  Term Loan B  Loan  1M USD LIBOR+  2.75%   1.00%   4.27%   6/1/2023    5,637,965    5,554,276    5,553,396 
Sahara Parent Inc.  High Tech Industries  Term Loan B (11/18)  Loan  3M USD LIBOR+  6.25%   0.00%   7.71%   8/16/2024    1,955,250    1,938,956    1,877,040 
Sally Holdings LLC  Retail  Term Loan (Fixed)  Loan  1M USD LIBOR+  0.00%   0.00%   0.00%   7/5/2024    1,000,000    996,778    980,000 
Sally Holdings LLC  Retail  Term Loan B  Loan  1M USD LIBOR+  2.25%   0.00%   3.77%   7/5/2024    768,409    765,606    753,041 
Savage Enterprises LLC  Energy: Oil & Gas  Term Loan  Loan  1M USD LIBOR+  4.00%   0.00%   5.52%   8/1/2025    3,284,831    3,247,280    3,270,049 
SCS Holdings I Inc.  High Tech Industries  Term Loan 1/20  Loan  1M USD LIBOR+  3.50%   0.00%   5.02%   7/1/2026    1,990,000    1,985,537    1,976,329 
Seadrill Operating LP  Energy: Oil & Gas  Term Loan B  Loan  3M USD LIBOR+  6.00%   1.00%   7.46%   2/21/2021    905,168    891,491    288,359 
Shutterfly Inc.  Media: Advertising Printing & Publishing  Term Loan B  Loan  3M USD LIBOR+  6.00%   1.00%   7.46%   9/25/2026    870,968    829,352    827,968 
SMB Shipping Logistics LLC  Transportation: Consumer  Term Loan B  Loan  3M USD LIBOR+  4.00%   1.00%   5.46%   2/2/2024    1,947,873    1,946,123    1,913,785 
SMG US Midco 2 Inc.  Services: Business  Term Loan (01/20)  Loan  1M USD LIBOR+  2.50%   0.00%   4.02%   1/23/2025    500,000    500,000    495,000 
Snacking Investment BidCo Pty Limited  Beverage Food & Tobacco  Term Loan  Loan  1M USD LIBOR+  4.00%   1.00%   5.52%   12/18/2026    1,000,000    990,193    987,500 
Sotheby’s  Services: Business  Term Loan  Loan  1M USD LIBOR+  5.50%   1.00%   7.02%   1/15/2027    3,324,994    3,258,223    3,315,285 
SP PF Buyer LLC  Consumer goods: Durable  Term Loan B  Loan  1M USD LIBOR+  4.50%   0.00%   6.02%   12/19/2025    1,985,000    1,911,678    1,801,388 
SRAM LLC  Consumer goods: Durable  Term Loan  Loan  1M USD LIBOR+  2.75%   1.00%   3.72%   3/15/2024    1,769,661    1,762,426    1,756,388 

 

S-23

 

 

Saratoga Investment Corp. CLO 2013-1 Ltd.

Schedule of Investments

February 29, 2020

 

Issuer Name  Industry  Asset Name  Asset
Type
  Reference Rate/Spread    LIBOR Floor   Current Rate (All In)   Maturity Date   Principal/
Number of Shares
   Cost   Fair Value 
SS&C European Holdings S.A.R.L.  Services: Business  Term Loan B4  Loan  1M USD LIBOR+  1.75%   0.00%   3.27%   4/16/2025    199,839    199,466    196,841 
SS&C Technologies Inc.  Services: Business  Term Loan B-5  Loan  1M USD LIBOR+  1.75%   0.00%   3.27%   4/16/2025    493,682    492,653    486,000 
SS&C Technologies Inc.  Services: Business  Term Loan B3  Loan  1M USD LIBOR+  1.75%   0.00%   3.27%   4/16/2025    280,056    279,525    275,855 
Staples Inc.  Wholesale  Term Loan (03/19)  Loan  1M USD LIBOR+  5.00%   0.00%   6.52%   4/16/2026    1,960,188    1,960,188    1,928,334 
Stats Intermediate Holdings LLC  Hotel Gaming & Leisure  Term Loan  Loan  6M USD LIBOR+  5.25%   0.00%   6.65%   7/10/2026    2,000,000    1,953,068    1,920,000 
Steak N Shake Operations Inc.  Beverage Food & Tobacco  Term Loan  Loan  1M USD LIBOR+  3.75%   1.00%   5.27%   3/19/2021    824,991    823,352    662,740 
STG-Fairway Holdings LLC  Services: Business  STG Fairway T/L (First Advantage) (Fastball Merger  Loan  1M USD LIBOR+  3.50%   0.00%   5.02%   1/29/2027    500,000    497,500    496,040 
Sybil Software LLC  High Tech Industries  Term Loan B (4/18)  Loan  3M USD LIBOR+  2.25%   1.00%   3.71%   9/29/2023    263,565    262,651    261,918 
Teneo Holdings LLC  Banking Finance Insurance & Real Estate  Term Loan  Loan  1M USD LIBOR+  5.25%   1.00%   6.77%   7/11/2025    2,493,750    2,401,489    2,381,531 
Tenneco Inc  Capital Equipment  Term Loan B  Loan  1M USD LIBOR+  3.00%   0.00%   4.52%   10/1/2025    1,485,000    1,472,625    1,386,619 
Ten-X LLC  Banking Finance Insurance & Real Estate  Term Loan  Loan  1M USD LIBOR+  4.00%   1.00%   5.52%   9/30/2024    1,960,000    1,958,142    1,927,327 
Terex Corporation  Capital Equipment  Term Loan  Loan  1M USD LIBOR+  2.75%   0.75%   4.27%   1/31/2024    992,500    988,635    991,567 
TGG TS Acquisition Company  Media: Diversified & Production  Term Loan (12/18)  Loan  1M USD LIBOR+  6.50%   0.00%   8.02%   12/15/2025    2,766,667    2,639,073    2,711,333 
The Edelman Financial Center LLC  Banking Finance Insurance & Real Estate  Term Loan B (06/18)  Loan  1M USD LIBOR+  3.25%   0.00%   4.77%   7/21/2025    1,237,500    1,232,467    1,211,203 
The Knot Worldwide Inc  Services: Consumer  Term Loan  Loan  1M USD LIBOR+  4.50%   0.00%   6.02%   12/19/2025    3,960,000    3,952,856    3,890,700 
Thor Industries Inc.  Automotive  Term Loan (USD)  Loan  2M USD LIBOR+  3.75%   0.00%   5.25%   2/2/2026    2,031,203    2,018,102    2,000,735 
Tivity Health Inc.  Healthcare & Pharmaceuticals  Term Loan B  Loan  1M USD LIBOR+  5.25%   0.00%   6.77%   3/6/2026    2,334,338    2,281,664    2,209,288 
Tivity Health Inc.  Healthcare & Pharmaceuticals  Term Loan A  Loan  1M USD LIBOR+  4.25%   0.00%   5.77%   3/8/2024    1,600,000    1,586,231    1,504,000 
Transdigm Inc.  Aerospace & Defense  Term Loan G (02/20)  Loan  1M USD LIBOR+  2.25%   0.00%   3.77%   8/22/2024    4,106,293    4,111,126    4,013,901 
Travel Leaders Group LLC  Hotel Gaming & Leisure  Term Loan B (08/18)  Loan  1M USD LIBOR+  4.00%   0.00%   5.52%   1/25/2024    2,462,500    2,458,773    2,410,172 
TRC Companies Inc.  Services: Business  Term Loan  Loan  1M USD LIBOR+  3.50%   1.00%   5.02%   6/21/2024    3,376,818    3,366,553    3,250,188 
TRC Companies Inc.  Services: Business  Term Loan B  Loan  1M USD LIBOR+  5.00%   1.00%   6.52%   6/21/2024    997,500    982,926    980,044 
Trico Group LLC  Containers Packaging & Glass  Incremental Term Loan  Loan  3M USD LIBOR+  7.00%   1.00%   8.46%   2/2/2024    4,758,359    4,645,140    4,675,088 
Truck Hero Inc.  Transportation: Cargo  First Lien Term Loan  Loan  1M USD LIBOR+  3.75%   0.00%   5.27%   4/22/2024    2,927,444    2,910,795    2,874,984 
Trugreen Limited Partnership  Services: Consumer  Term Loan (03/19)  Loan  1M USD LIBOR+  3.75%   1.00%   5.27%   3/19/2026    981,396    972,628    981,396 
Twin River Worldwide Holdings Inc.  Hotel Gaming & Leisure  Term Loan B  Loan  1M USD LIBOR+  2.75%   0.00%   4.27%   5/11/2026    995,000    990,418    971,060 
United Natural Foods Inc.  Beverage Food & Tobacco  Term Loan B  Loan  1M USD LIBOR+  4.25%   0.00%   5.77%   10/22/2025    3,465,000    3,270,106    2,875,950 

 

S-24

 

 

Saratoga Investment Corp. CLO 2013-1 Ltd.

Schedule of Investments

February 29, 2020

 

Issuer Name  Industry  Asset Name  Asset
Type
  Reference Rate/Spread    LIBOR Floor   Current Rate (All In)   Maturity Date   Principal/
Number of Shares
   Cost   Fair Value 
Univar Solutions Inc.  Chemicals Plastics & Rubber  Term Loan B3 (11/17)  Loan  1M USD LIBOR+  2.25%   0.00%   3.77%   7/1/2024    1,627,723    1,621,989    1,603,307 
Univision Communications Inc.  Media: Broadcasting & Subscription  Term Loan  Loan  1M USD LIBOR+  2.75%   1.00%   4.27%   3/15/2024    2,746,369    2,735,251    2,634,565 
URS Holdco Inc.  Transportation: Cargo  Term Loan (10/17)  Loan  1M USD LIBOR+  5.75%   1.00%   7.27%   8/30/2024    984,169    973,856    821,778 
US Ecology Inc.  Environmental Industries  Term Loan B  Loan  1M USD LIBOR+  2.50%   0.00%   4.02%   11/2/2026    500,000    498,859    496,250 
VeriFone Systems Inc.  Banking Finance Insurance & Real Estate  Term Loan (7/18)  Loan  3M USD LIBOR+  4.00%   0.00%   5.46%   8/20/2025    5,431,250    5,403,194    5,214,000 
Verra Mobility Corp.  Construction & Building  Term Loan B1 (02/20)  Loan  1M USD LIBOR+  3.25%   0.00%   4.77%   2/28/2025    491,250    489,331    483,881 
VFH Parent LLC  Banking Finance Insurance & Real Estate  Term Loan B  Loan  1M USD LIBOR+  3.50%   0.00%   5.02%   3/2/2026    3,801,266    3,787,581    3,793,663 
Victory Capital Holdings Inc.  Banking Finance Insurance & Real Estate  Term Loan B (01/20)  Loan  1M USD LIBOR+  2.50%   0.00%   4.02%   7/1/2026    422,273    418,485    415,939 
Virtus Investment Partners Inc.  Banking Finance Insurance & Real Estate  Term Loan B  Loan  1M USD LIBOR+  2.25%   0.75%   3.77%   6/3/2024    3,218,500    3,217,979    3,213,479 
Vistra Operations Company LLC  Utilities: Electric  2018 Incremental Term Loan  Loan  1M USD LIBOR+  1.75%   0.00%   3.27%   12/31/2025    927,500    926,595    919,094 
Vizient Inc.  Healthcare & Pharmaceuticals  Term Loan B-6  Loan  1M USD LIBOR+  2.00%   0.00%   3.52%   5/6/2026    496,250    495,208    491,600 
VS Buyer T/L (Veeam Software)  High Tech Industries  Term Loan  Loan  3M USD LIBOR+  3.25%   0.00%   4.71%   2/28/2027    1,000,000    1,000,000    986,250 
Weight Watchers International Inc.  Services: Consumer  Term Loan B  Loan  3M USD LIBOR+  4.75%   0.75%   6.21%   11/29/2024    1,670,130    1,645,266    1,665,955 
West Corporation  Telecommunications  Term Loan B  Loan  1M USD LIBOR+  3.50%   1.00%   5.02%   10/10/2024    2,961,172    2,889,546    2,319,573 
West Corporation  Telecommunications  Term Loan B (Olympus Merger)  Loan  1M USD LIBOR+  4.00%   1.00%   5.52%   10/10/2024    1,237,374    1,164,156    981,002 
Western Dental Services Inc.  Retail  Term Loan (12/18)  Loan  1M USD LIBOR+  5.25%   1.00%   6.77%   6/30/2023    2,438,722    2,424,403    2,444,819 
Western Digital Corporation  High Tech Industries  Term Loan B-4  Loan  1M USD LIBOR+  1.75%   0.00%   3.27%   4/29/2023    903,135    885,248    892,975 
Winter Park Intermediate Inc.  Automotive  Term Loan  Loan  1M USD LIBOR+  4.75%   0.00%   6.27%   4/4/2025    1,984,953    1,966,855    1,951,864 
Wirepath LLC  Consumer goods: Non-durable  Term Loan  Loan  3M USD LIBOR+  4.00%   1.00%   5.46%   8/5/2024    2,955,118    2,931,790    2,766,730 
WP CityMD Bidco LLC  Services: Consumer  Term Loan B  Loan  3M USD LIBOR+  4.50%   1.00%   5.96%   8/13/2026    3,500,000    3,467,362    3,476,375 
YS Garments LLC  Retail  Term Loan  Loan  1W USD LIBOR+  6.00%   1.00%   7.57%   8/9/2024    1,937,500    1,921,365    1,908,438 
Zekelman Industries Inc  Metals & Mining  Term Loan (01/20)  Loan  1M USD LIBOR+  2.25%   0.00%   3.77%   1/19/2027    1,000,000    1,000,000    977,500 
Zep Inc.  Chemicals Plastics & Rubber  Term Loan  Loan  3M USD LIBOR+  4.00%   1.00%   5.46%   8/12/2024    2,443,750    2,434,999    1,840,461 
Zest Acquisition Corp.  Healthcare & Pharmaceuticals  Term Loan  Loan  1M USD LIBOR+  3.50%   0.00%   5.02%   3/14/2025    982,500    978,750    934,603 
                                       $526,004,959   $500,999,934 

 

S-25

 

 

Saratoga Investment Corp. CLO 2013-1 Ltd.

Schedule of Investments

February 29, 2020

 

   Number of Shares   Cost   Fair Value 
Cash and cash equivalents               
U.S. Bank Money Market (c)   9,081,041   $9,081,041   $9,081,041 
Total cash and cash equivalents   9,081,041   $9,081,041   $9,081,041 

 

 

(a) All or a portion of this investment has an unfunded commitment as of February 29, 2020 (see Note 6 in Notes to financial statements).
(b) As of February 29, 2020, the investment was in default and on non-accrual status.
(c) Included within cash and cash equivalents in Saratoga CLO’s Statements of Assets and Liabilities as of February 29, 2020.

 

LIBOR—London Interbank Offered Rate
 
1W USD LIBOR—The 1 week USD LIBOR rate as of February 29, 2020 was 1.57%.
1M USD LIBOR—The 1 month USD LIBOR rate as of February 29, 2020 was 1.52%.
2M USD LIBOR—The 2 month USD LIBOR rate as of February 29, 2020 was 1.50%.
3M USD LIBOR—The 3 month USD LIBOR rate as of February 29, 2020 was 1.46%.
6M USD LIBOR—The 6 month USD LIBOR rate as of February 29, 2020 was 1.40%.
Prime—The Prime Rate as of February 29, 2020 was 4.75%.

 

See accompanying notes to financial statements.

 

S-26

 

 

SARATOGA INVESTMENT CORP. CLO 2013-1, LTD.

 

NOTES TO FINANCIAL STATEMENTS

 

1. Organization and Purpose

 

Saratoga Investment Corp. CLO 2013-1, Ltd. (the “Issuer”, “we”, “our”, “us”, “CLO” and “Saratoga CLO”), an exempted company with limited liability incorporated under the laws of the Cayman Islands was formed on November 28, 2007 and commenced operations on January 22, 2008. The Issuer was established to acquire or participate in U.S. dollar-denominated corporate debt obligations.

 

On January 22, 2008, the Issuer issued $400.0 million of notes, consisting of Class A Floating Rate Senior Notes, Class B Floating Rate Senior Notes, Class C Deferrable Floating Rate Notes, Class D Deferrable Floating Rate Notes, Class E Deferrable Floating Rate Notes (collectively the “Secured Notes”), and Subordinated Notes. The notes were issued pursuant to an indenture, dated January 22, 2008 (the “Indenture”), with U.S. Bank National Association (the “Trustee”) servicing as the Trustee there under.

 

On October 17, 2013, in a refinancing transaction, the Issuer issued $284.9 million of notes (the “2013-1 CLO Notes”), consisting of Class X Floating Rate Senior Notes, Class A-1 Floating Rate Senior Notes, Class A-2 Floating Rate Senior Notes, Class B Floating Rate Senior Notes, Class C Deferrable Floating Rate Notes, Class D Deferrable Floating Rate Notes, Class E Deferrable Floating Rate Notes, and Class F Deferrable Floating Rate Notes. The 2013-1 CLO Notes were issued pursuant to the Indenture with the same Trustee. Proceeds of the issuance of the 2013-1 CLO Notes were used, along with existing assets held by the Trustee, to redeem all of the Secured Notes issued in 2008.

 

On November 15, 2016, the Issuer completed the second refinancing and the Issuer issued $282.4 million of notes (the “2013-1 Amended CLO Notes”), consisting of Class A-1 Floating Rate Senior Notes, Class A-2 Floating Rate Senior Notes, Class B Floating Rate Senior Notes, Class C Deferrable Floating Rate Notes, Class D Deferrable Floating Rate Notes, Class E Deferrable Floating Rate Notes, and Class F Deferrable Floating Rate Notes. The 2013-1 Amended CLO Notes were issued pursuant to the Indenture with the same Trustee. Proceeds of the issuance of the 2013-1 Amended CLO Notes were used, along with existing assets held by the Trustee, to redeem all of the 2013-1 CLO Notes issued in 2013.

 

On December 14, 2018, in a refinancing transaction, the Issuer issued $509.5 million of notes (the “2013-1 Reset CLO Notes”), consisting of Class A-1FL-R-2 Floating Rate Senior Notes, Class A-1FXD-R-2 Fixed Rate Senior Notes, Class A-2-R-2 Floating Rate Senior Notes, Class B-R-2 Floating Rate Senior Notes, Class C-R-2 Deferrable Mezzanine Floating Rate Notes, Class D-R-2 Deferrable Mezzanine Floating Rate Notes, Class E-1-R-2 Deferrable Mezzanine Floating Rate Notes, Class F-R-2 Deferrable Junior Floating Rate Notes, Class G-R-2 Deferrable Junior Floating Rate Notes, and Subordinated Notes. The 2013-1 Reset CLO Notes were issued pursuant to the Indenture with the same Trustee. Proceeds of the issuance of the 2013-1 Reset CLO Notes were used along with existing assets held by the Trustee to redeem all of the Secured Notes issued in 2016.

 

On February 26, 2021, in a refinancing transaction, the Issuer issued $722.0 million of notes (the “2013- 1 2021 Reset CLO Notes”), consisting of Class A-1-R-3 Senior Secured Floating Rate Notes, Class A-2- R-3 Senior Secured Floating Rate Notes, Class B-FL-R-3 Senior Secured Floating Rate Notes, Class B- FXD-R-3 Senior Secured Fixed Rate Notes, Class C-FL-R-3 Deferrable Mezzanine Floating Rate Notes, Class C-FXD-R-3 Deferrable Mezzanine Fixed Rate Notes, Class D-R-3 Deferrable Mezzanine Floating Rate Notes, Class E-R-3 Deferrable Mezzanine Floating Rate Notes, Class F-R-3 Deferrable Junior Floating Rate Notes, and Subordinated Notes. The 2013-1 2021 Reset CLO Notes were issued pursuant to the Indenture with the same Trustee. Proceeds of the issuance of the 2013-1 2021 Reset CLO Notes were used along with existing assets held by the Trustee to redeem all of the Secured Notes issued in 2018. As of February 28, 2021, Saratoga Investment Corp. owned 100% of the Class F-R-3 Notes and the Subordinated Notes of the CLO.

 

Pursuant to an investment management agreement (the “Investment Management Agreement”), Saratoga Investment Corp. (the “Investment Manager”), provides investment management services to the Issuer, and makes day-to-day investment decisions concerning the assets of the Issuer. The Investment Manager also performs certain administrative services on behalf of the Issuer under the Investment Management Agreement. The CLO remains 100.0% owned and managed by Saratoga Investment Corp.

 

S-27

 

 

2. Significant Accounting Policies

 

Basis of Presentation

 

The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and are stated in U.S. dollars. The following is a summary of the significant accounting policies followed by the Issuer in the preparation of its financial statements.

 

The Issuer is considered to be an investment company for financial reporting purposes and has applied the guidance in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, “Financial Services—Investment Companies.” There has been no change to the Issuer’s status as an investment company during the year ended February 28, 2021.

 

Use of Estimates

 

The preparation of the financial statements in conformity with U.S. GAAP requires the Investment Manager to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, including the fair value of investments, and the amounts of income and expenses during the reporting period. Actual results could differ from these estimates and such differences could be material.

 

Cash and Cash Equivalents

 

The Issuer defines cash and cash equivalents as highly liquid financial instruments with original maturities of three months or less. Cash and cash equivalents may include investments in money market mutual funds, which are carried at fair value. At February 28, 2021 and February 29, 2020, cash and cash equivalents amounted to $114.1 million and $9.1 million, respectively, and are swept on an overnight basis into a U.S. Bank money market deposit account held at the Trustee.

 

Valuation of Investments

 

The Issuer accounts for its investments at fair value in accordance with the FASB ASC Topic 820, Fair Value Measurement (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. ASC 820 requires the Issuer to assume that its investments are to be sold at the statement of assets and liabilities 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 the Investment Manager to approve a fair value determination to reflect significant events affecting the value of these investments. The Investment Manager values investments for which market quotations are not readily available at fair value. Determinations of fair value may involve significant judgments and estimates. The types of factors that may be considered in determining the fair value of investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments, market yield trend analysis, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flow and other relevant factors.

 

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. Our 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 are ultimately realized upon the disposal of such investments.

 

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 Issuer 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 over the life of the respective investment using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion of discounts and amortizations of premium on investments.

 

S-28

 

 

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 the Investment Manager’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.

 

Payment-in-Kind Interest

 

The Issuer holds debt 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. We stop accruing PIK interest if we do not expect the issuer to be able to pay all principal and interest when due.

 

Deferred Debt Financing Costs, net

 

The Issuer 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.

 

As of February 29, 2020, included in deferred debt financing costs of $2.3 million, respectively, are structuring fees of the investment bank, rating agency and legal fees, and other various closing costs associated with the issuance of the 2013-1 Reset CLO Notes on December 14, 2018. Such costs have been capitalized and amortized using an effective yield method as appropriate, over the life of the related notes.

 

Deferred debt financing costs of $1.2 million incurred in connection with the issuance of the 2013-1 Amended CLO Notes, were expensed when the 2013-1 Amended CLO Notes were extinguished on December 14, 2018.

 

New debt financing costs of $2.3 million were incurred with the issuance of the 2013-1 2021 Reset CLO Notes on February 26, 2021. These costs consist of structuring fees of the investment bank, rating agency and legal fees, and other various closing costs. Of that amount, $1.8 million has been capitalized and amortized using an effective yield method as appropriate, over the life of the related notes.

 

Unamortized deferred debt financing costs of $1.6 million incurred in connection with the issuance of the 2013- 1 Reset CLO Notes, were expensed when the 2013-1 Reset CLO Notes were extinguished on February 26, 2021 and included in Realized loss on extinguishment of debt.

 

Management Fees

 

The Issuer is externally managed by the Investment Manager pursuant to the Investment Management Agreement. As compensation for the performance of its obligations under the Investment Management Agreement, the Investment Manager is entitled to receive from the Issuer a base management fee (the “Base Management Fee”), a subordinated management fee (the “Subordinated Management Fee”) and an incentive management fee (the “Incentive Management Fee”). The Base Management Fee is payable in arrears quarterly (subject to availability of funds and to the satisfaction of payment obligations on the debt obligations of the Issuer (the “Priority of Payments”)) and prior to the second refinancing and the issuance of the 2013-1 Amended CLO Notes, was payable in an amount equal to 0.25% per annum of the fee basis amount at the beginning of the Collection period. The Subordinated Management Fee is payable in arrears quarterly (subject to availability of funds and to the Priority of Payments) and prior to the second refinancing and the issuance of the 2013-1 Amended CLO Notes, was payable in an amount equal to 0.25% per annum of the fee basis amount at the beginning of the Collection Period. Subsequent to the second refinancing and the issuance of the 2013-1 Amended CLO Notes, the Base Management Fee was changed to be payable in an amount equal to 0.10% per annum of the fee basis amount at the beginning of the Collection period, and the Subordinated Management Fees was changed to be payable in an amount equal to 0.40% per annum of the fee basis amount at the beginning of the Collection period. This remained unchanged during the third refinancing and the issuance of the 2013-1 Reset CLO Notes, as well as the fourth refinancing and issuance of the 2013-1 2021 Reset CLO Notes.

 

Prior to the third refinancing of the CLO, the Incentive Management Fee equaled 20.0% of the remaining interest proceeds and principal proceeds, if any, after the Subordinated Notes have realized the incentive management fee target return of 12.0%, in accordance with the Priority of Payments after making the prior distributions on the relevant payment date. The investment manager is no longer eligible to receive the incentive fee following the third refinancing of the CLO on December 14, 2018. For the year ended February 28, 2019, Incentive Management Fees of $0.6 million were accrued.

 

S-29

 

 

Expenses

 

The Issuer bears its own organizational and offering expenses, all expenses related to its investment program and expenses incurred in connection with its operations including, but not limited to, external legal, administrative, trustee, accounting, tax and audit expenses, costs related to trading, acquiring, monitoring or disposing of investments of the Issuer, and interest and other borrowing expenses, expenses of preparing and distributing reports, financial statements, and litigation or other extraordinary expenses. The Issuer has retained the Trustee to provide trustee services. Additionally, the Trustee performs loan administration, debt covenant compliance calculations, and monitoring and reporting services. For the years ended February 28, 2021, February 29, 2020 and February 28, 2019, the Issuer paid $0.2 million, $0.2 million and $0.2 million, respectively, for trustee services provided and is included on the statements of operations.

 

Interest Expense

 

The Issuer has issued rated and unrated notes to finance its operations. Interest on debt is calculated by the Trustee for the Issuer. Interest is accrued and generally paid quarterly. For the years ended February 28, 2021, February 29, 2020 and February 28, 2019, $7.9 million, $4.6 million and $2.0 million of payments to the Subordinated Notes were included in interest and debt financing expenses on the statements of operations, respectively. For the years ended February 28, 2021 and February 29, 2020, $3.2 million and $2.4 million, respectively, in discount amortization related to the Subordinated Notes is also included in interest and debt financing expenses on the Issuer’s statement of operations.

 

Risk Management

 

In the ordinary course of its business, the Issuer 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 Issuer 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.

 

The Issuer 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.

 

New Accounting Pronouncements

 

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

 

3. Fair Value Measurements

 

As noted above, the Issuer values all investments in accordance with ASC 820. ASC 820 requires enhanced disclosures about assets and liabilities that are measured and reported at fair value. 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 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.

 

S-30

 

 

Based on the observability of the inputs used in the valuation techniques, the Issuer 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 Issuer has the ability to access.

 

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

 

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. These inputs into the determination of fair value may require significant management judgment or estimation. 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 methodology.

 

In addition to using the above inputs in investment valuations, the Issuer continues to employ the valuation policy that is consistent with ASC 820 and the Investment Company Act of 1940 (“1940 Act”).

 

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

 

   Fair Value Measurements 
   Level 1   Level 2   Level 3   Total 
Term loans  $-   $519,375,121   $72,143,745   $591,518,866 
Equity interests   -    501,175    -    501,175 
Total  $-   $519,876,296   $72,143,745   $592,020,041 

 

The following table presents fair value measurements of investments, by major class, as of February 29, 2020, according to the fair value hierarchy:

 

   Fair Value Measurements 
   Level 1   Level 2   Level 3   Total 
Term loans  $-   $386,695,515   $114,304,162   $500,999,677 
Equity interests   -    257    -    257 
Total  $-   $386,695,772   $114,304,162   $500,999,934 

 

 

Transfers into or out of Level 1, 2 or 3 are recognized at the reporting date.

 

S-31

 

 

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the year ended February 28, 2021:

 

   Term Loans   Equity Interests   Total 
Balance as of February 29, 2020  $114,304,162   $        -   $114,304,162 
Payment-in-kind and other adjustments to cost   4,609,079    -    4,609,079 
Net accretion of discount on investments   83,123    -    83,123 
Net change in unrealized appreciation (depreciation) on investments   3,482,259    -    3,482,259 
Purchases   35,373,200    -    35,373,200 
Sales and repayments   (24,187,208)   -    (24,187,208)
Net realized gain (loss) from investments   (758,117)   -    (758,117)
Transfers in (1)   8,246,171    -    8,246,171 
Transfers out (2)   (69,008,924)   -    (69,008,924)
Balance as of February 28, 2021  $72,143,745   $-   $72,143,745 
Net change in unrealized appreciation (depreciation) for the year relating to those Level 3 assets that were still held by the Issuer at the end of the year  $285,753   $-   $285,753 

 

 
(1)The Issuer’s investment in Level 3 investments were classified as such during the year ended February 28, 2021, as market quotes for these investments are only provided by one trading desk.
(2)The Issuer’s investment in Level 2 investments were classified as such during the year ended February 28, 2021, as the number of observable market quotes for these investments increased.

 

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the year ended February 29, 2020:

 

   Term Loans   Equity Interests   Total 
Balance as of February 28, 2019  $96,991,665   $-   $96,991,665 
Payment-in-kind and other adjustments to cost   (1,283,130)   -    (1,283,130)
Net accretion of discount on investments   181,304    -    181,304 
Net change in unrealized appreciation (depreciation) on investments   (3,066,649)   -    (3,066,649)
Purchases   47,743,825    -    47,743,825 
Sales and repayments   (32,647,696)   -    (32,647,696)
Net realized gain (loss) from investments   200,062    -    200,062 
Transfers in (1)   36,803,366    -    36,803,366 
Transfers out (2)   (30,618,585)   -    (30,618,585)
Balance as of February 29, 2020  $114,304,162   $-   $114,304,162 
Net change in unrealized appreciation (depreciation) for the year relating to those Level 3 assets that were still held by the Issuer at the end of the year  $(3,263,424)  $-   $(3,263,424)

 

 
(1)The Issuer’s investment in Level 3 investments were classified as such during the year ended February 29, 2020, as market quotes for these investments are only provided by one trading desk.
(2)The Issuer’s investment in Level 2 investments were classified as such during the year ended February 29, 2020, as the number of observable market quotes for these investments increased.

 

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

 

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

 

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Significant unobservable inputs used in the fair value measurement of the Level 3 term loans and equity include market quotations available from multiple dealers. A significant increase (decrease) in the market quote, in isolation, would result in a significantly lower (higher) fair value measurement.

 

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

 

   Fair Value   Valuation Technique  Unobservable Inputs  Range (Weighted Average)*  
Term loans  $72,143,745   Market Comparables  Third-Party Bid  71.00% - 106.00% (88.5%)  
Total  $72,143,745            

 

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of February 29, 2020 were as follows:

 

   Fair Value   Valuation Technique  Unobservable Inputs  Range (Weighted Average)*  
Term loans  $114,304,162   Market Comparables  Third-Party Bid  94.50% - 100.50% (97.5%)  
Total  $114,304,162            

 

 

*Weighted average represents the arithmetic average of the inputs and is not weighted by the relative fair value or notional amount.

 

4. Financing

 

On January 22, 2008, the Issuer issued $400.0 million of notes, consisting of Class A Floating Rate Senior Notes, Class B Floating Rate Senior Notes, Class C Deferrable Floating Rate Notes, Class D Deferrable Floating Rate Notes, Class E Deferrable Floating Rate Notes (collectively the “Secured Notes”), and Subordinated Notes. The notes were issued pursuant to the Indenture.

 

The Secured Notes are limited recourse obligations of the Issuer. The Subordinated Notes are unsecured, limited recourse debt obligations of the Issuer.

 

On October 17, 2013, the Issuer issued $284.9 million of notes, consisting of Class X Floating Rate Senior Notes, Class A-1 Floating Rate Senior Notes, Class A-2 Floating Rate Senior Notes, Class B Floating Rate Senior Notes, Class C Deferrable Floating Rate Notes, Class D Deferrable Floating Rate Notes, Class E Deferrable Floating Rate Notes, and Class F Deferrable Floating Rate Notes. The 2013-1 CLO Notes were issued pursuant to the Indenture with the same Trustee. Proceeds of the issuance of the 2013-1 CLO Notes were used along with existing assets held by the Trustee to redeem all of the Secured Notes issued in 2008. The Subordinated Notes were not included in the refinancing transaction.

 

On November 15, 2016, the Issuer issued $282.4 million of the 2013-1 Amended CLO Notes, consisting of Class A-1 Floating Rate Senior Notes, Class A-2 Floating Rate Senior Notes, Class B Floating Rate Senior Notes, Class C Deferrable Floating Rate Notes, Class D Deferrable Floating Rate Notes, Class E Deferrable Floating Rate Notes, and Class F Deferrable Floating Rate Notes. The 2013-1 CLO Notes were issued pursuant to the Indenture with the same Trustee. Proceeds of the issuance of the 2013-1 Amended CLO Notes were used along with existing assets held by the Trustee to redeem all of the 2013-1 CLO Notes issued in 2013. The Subordinated Notes were not included in the refinancing transaction.

 

On December 14, 2018, in a refinancing transaction, the Issuer issued $509.5 million of notes consisting of Class A-1FL-R-2 Floating Rate Senior Notes, Class A-1FXD-R-2 Fixed Rate Senior Notes, Class A-2-R-2 Floating Rate Senior Notes, Class B-R-2 Floating Rate Senior Notes, Class C-R-2 Deferrable Mezzanine Floating Rate Notes, Class D-R-2 Deferrable Mezzanine Floating Rate Notes, Class E-1-R-2 Deferrable Mezzanine Floating Rate Notes, Class F-R-2 Deferrable Junior Floating Rate Notes, Class G-R-2 Deferrable Junior Floating Rate Notes, and Subordinated Notes. Proceeds net of issue discounts were used along with existing trust assets to redeem all of the rated note classes of the 2013-1 Amended CLO Notes. $30.0 million of Subordinated Notes issued in connection with the 2008 CLO Notes and 2013-1 CLO Notes were not redeemed and remained outstanding.

 

S-33

 

 

On February 26, 2021, in a refinancing transaction, the Issuer issued $722.0 million of notes consisting of Class A-1-R-3 Senior Secured Floating Rate Notes, Class A-2-R-3 Senior Secured Floating Rate Notes, Class B-FL-R-3 Senior Secured Floating Rate Notes, Class B-FXD-R-3 Senior Secured Fixed Rate Notes, Class C-FL-R-3 Deferrable Mezzanine Floating Rate Notes, Class C-FXD-R-3 Deferrable Mezzanine Fixed Rate Notes, Class D-R-3 Deferrable Mezzanine Floating Rate Notes, Class E-R-3 Deferrable Mezzanine Floating Rate Notes, Class F-R-3 Deferrable Junior Floating Rate Notes, and Subordinated Notes. Proceeds net of issue discounts were used along with existing trust assets to redeem all of the rated note classes of the 2013-1 Reset CLO Notes. $69.5m of Subordinated Notes issued in connection with the 2008 CLO Notes, 2013-1 CLO Notes, 2013-1 Amended CLO Notes and 2013-1 CLO Reset Notes were not redeemed and remained outstanding.

 

The 2013-1 2021 Reset CLO Notes are limited recourse obligations of the Issuer. The Subordinated Notes are unsecured, limited recourse debt obligations of the Issuer.

 

The relative order of seniority of payment of each class of securities is, as follows: first, Class A-1-R- 3 Notes, second, Class A-2-R-3 Notes, third Class B-FL-R-3 Notes, fourth, Class B-FXD-R-3 Notes, fifth, Class C-FL-R-3 Notes, sixth, Class C-FXD-R-3 Notes, seventh, Class D-R-3 Notes, eighth, Class E-R-3 Notes, ninth, Class F-R-3 Notes, and tenth the Subordinated Notes, with (a) each class of securities (other than the Subordinated Notes) in such list being senior to each other class of securities that follows such class of securities in such list and (b) each class of securities in such list being subordinate to each other class of securities that precedes such class of securities in such list. The Subordinated Notes are subordinated to the 2013-1 2021 Reset CLO Notes and are entitled to periodic payments from interest proceeds available in accordance with the Priority of Payments.

 

The table below sets forth certain information for each outstanding class of notes issued, pursuant to the loan agreements and Indenture on February 26, 2021 at February 28, 2021.

 

Description  Interest Rate   Maturity   Principal Amount   Amount
Outstanding
   Weighted Average
Interest Rate
 
Saratoga Investment Corp. CLO 2013-1, Ltd. Notes:                        
Class A-1-R-3 Senior Secured Floating Rate Notes   LIBOR + 1.32%  April 20, 2033   $357,500,000   $357,500,000    2.27%
Class A-2-R-3 Senior Secured Floating Rate Notes   LIBOR + 1.65%  April 20, 2033    65,000,000    65,000,000    2.77%
Class B-FL-R-3 Senior Secured Floating Rate Notes   LIBOR + 1.80%  April 20, 2033    60,500,000    60,500,000    2.99%
Class B-FXD-R-3 Senior Secured Fixed Rate Notes   2.54%  April 20, 2033    11,000,000    11,000,000    2.54%
Class C-FL-R-3 Deferrable Mezzanine Floating Rate Notes   LIBOR + 2.40%  April 20, 2033    26,000,000    26,000,000    3.98%
Class C-FXD-R-3 Deferrable Mezzanine Fixed Rate Notes   3.31%  April 20, 2033    6,500,000    6,500,000    6.13%
Class D-R-3 Deferrable Mezzanine Floating Rate Notes   LIBOR + 4.00%  April 20, 2033    39,000,000    39,000,000    6.29%
Class E-R-3 Deferrable Mezzanine Floating Rate Notes   LIBOR + 7.50%  April 20, 2033    27,625,000    27,625,000    11.54%
Class F-R-3 Notes Deferrable Junior Floating Rate Notes   LIBOR + 10.00%  April 20, 2033    17,875,000    17,875,000    15.29%
Subordinated Notes   N/A   April 20, 2033    111,000,000    111,000,000    N/A 
            $722,000,000   $722,000,000      

 

S-34

 

 

The table below sets forth certain information for each outstanding class of loans and notes issued, pursuant to the loan agreements and Indenture at February 29, 2020.

 

Description  Interest Rate   Maturity   Principal Amount   Amount
Outstanding
   Weighted Average
Interest Rate
 
Loan payable, related party   LIBOR + 7.50%  August 20, 2021   $20,000,000(1)  $2,500,000    9.17%
Loan payable, third party   LIBOR + 1.25%  August 11, 2021    80,000,000(1)   2,600,000    2.89%
Saratoga Investment Corp. CLO 2013-1, Ltd. Notes:                        
Class A-1FL-R-2 Senior Secured Floating Rate Notes   LIBOR + 1.25%  January 20, 2030    255,000,000    255,000,000    3.60%
Class A-1FXD-R-2 Senior Secured Fixed Rate Notes   4.19%  January 20, 2030    25,000,000    25,000,000    4.19%
Class A-2-R-2 Senior Secured Floating Rate Notes   LIBOR + 1.75%  January 20, 2030    40,000,000    40,000,000    4.11%
Class B-R-2 Senior Secured Floating Rate Notes   LIBOR + 2.30%  January 20, 2030    59,500,000    59,500,000    4.66%
Class C-R-2 Deferrable Mezzanine Floating Rate Notes   LIBOR + 2.75%  January 20, 2030    22,500,000    22,500,000    5.12%
Class D-R-2 Deferrable Mezzanine Floating Rate Notes   LIBOR + 3.75%  January 20, 2030    31,000,000    31,000,000    6.13%
Class E-1-R-2 Deferrable Mezzanine Floating Rate Notes   LIBOR + 5.87%(2)  January 20, 2030    27,000,000    27,000,000    8.27%
Class F-R-2 Deferrable Junior Floating Rate Notes   LIBOR + 8.75%  January 20, 2030    2,500,000    2,500,000    11.16%
Class G-R-2 Deferrable Junior Floating Rate Notes   LIBOR + 10.00%  January 20, 2030    7,500,000    7,500,000    12.42%
Subordinated Notes   N/A   January 20, 2030    69,500,000    69,500,000    N/A 
            $639,500,000   $544,600,000      

 

Description  Interest Rate   Maturity   Notional Amount   Amount
Outstanding
   Weighted Average
Interest Rate
 
Saratoga Investment Corp. CLO 2013-1, Ltd. Notes:                         
Class E-2-R-2 Deferrable Mezzanine Fixed Rate Notes(3)   0.00%   January 20, 2030   $27,000,000   $27,000,000    0.00%

 

 
(1)Represents total loan commitment.
(2)The spread in respect of the Class E-1-R-2 Notes will initially be 5.87%, and will step up to 8.00% in January 2022.
(3)There will be no return of principal on the Class E-2-R-2 Notes. The notional amount of the Class E-2-R-2 Notes will at all times be equal to the sum of the notional amount of the Class E-1-R-2 Notes and the amount of deferred interest, if any, on the Class E-2-R-2 Notes. The interest rate in respect of the Class E-2-R-2 Notes will initially be 0.00%, and will step up to 2.00% in January 2022.

 

S-35

 

 

The following table shows the fair value of the Issuer’s debt outstanding as of February 28, 2021:

 

Debt Security  February 28,
2021
 
Saratoga Investment Corp. CLO 2013-1, Ltd. Notes:     
Class A-1-R-3 Senior Secured Floating Rate Notes  $358,224,218 
Class A-2-R-3 Senior Secured Floating Rate Notes   65,207,720 
Class B-FL-R-3 Senior Secured Floating Rate Notes   60,708,949 
Class B-FXD-R-3 Senior Secured Fixed Rate Notes   11,013,911 
Class C-FL-R-3 Deferrable Mezzanine Floating Rate Notes   26,118,502 
Class C-FXD-R-3 Deferrable Mezzanine Fixed Rate Notes   6,513,328 
Class D-R-3 Deferrable Mezzanine Floating Rate Notes   39,312,843 
Class E-R-3 Deferrable Mezzanine Floating Rate Notes   28,116,015 
Class F-R-3 Notes Deferrable Junior Floating Rate Notes   18,329,025 
Subordinated Notes   31,449,732 
   $644,994,243 

 

The following table shows each outstanding class of notes issued, pursuant to the Indenture, at fair value at February 29, 2020:

 

Debt Security  February 29,
2020
 
Loan payable, related party  $2,204,541 
Loan payable, third party   2,600,000 
Saratoga Investment Corp. CLO 2013-1, Ltd. Notes:     
Class A-1FL-R-2 Senior Secured Floating Rate Notes   254,996,329 
Class A-1FXD-R-2 Senior Secured Fixed Rate Notes   25,011,552 
Class A-2-R-2 Senior Secured Floating Rate Notes   39,999,222 
Class B-R-2 Senior Secured Floating Rate Notes   59,498,460 
Class C-R-2 Deferrable Mezzanine Floating Rate Notes   22,499,284 
Class D-R-2 Deferrable Mezzanine Floating Rate Notes   30,998,536 
Class E-1-R-2 Deferrable Mezzanine Floating Rate Notes   27,126,547 
Class F-R-2 Deferrable Junior Floating Rate Notes   2,478,000 
Class G-R-2 Deferrable Junior Floating Rate Notes   7,434,750 
Subordinated Notes   22,557,240 
   $497,404,461 

 

These notes are fair valued based on a discounted cash flow model, specifically using Intex cash flow models, to form the basis for the valuation and would be classified as Level 3 liabilities within the fair value hierarchy.

 

The Indenture provides that payments on the Subordinated Notes shall rank subordinate in priority of payment to payments due on all classes of 2013-1 2021 Reset CLO Notes and subordinate in priority of payment to the payment of fees and expenses. Distributions on the Subordinated Notes are limited to the assets of the Issuer remaining after payment of all of the liabilities of the Issuer that rank senior in priority of payment to the Subordinated Notes. To the extent that the proceeds from the collateral are not sufficient to make distributions on the Subordinated Notes the Issuer will have no further obligation in respect of the Subordinated Notes.

 

Interest proceeds and, after the 2013-1 2021 Reset CLO Notes have been paid in full, principal proceeds, in each case will be distributed to the holders of the Subordinated Notes in accordance with the Indenture.

 

Distributions, if any, on the Subordinated Notes will be payable quarterly on the 20th day of each January, April, July and October of each calendar year or, if any such day is not a business day, on the next succeeding business day (each, a “Payment Date”), commencing on the first Payment Date, and on April 20, 2033 (or if any such day is not a business day, the next succeeding business day) (the “Stated Redemption Date”) (if not redeemed prior to such date) sequentially in order of seniority. At the Stated Redemption Date, the Subordinated Notes will be redeemed after payment in full of all of the 2013-1 2021 Reset CLO Notes and the payment of all administrative and other fees and expenses. The failure to pay interest proceeds or principal proceeds to the holders of the Subordinated Notes will not be an event of default under the Indenture.

 

S-36

 

 

As of February 28, 2021, the remaining unamortized discount on Class A-1-R-3 Notes, Class A-2-R- 3 Notes, Class B-FL-R-3 Notes, Class B-FXD-R-3 Notes, Class C-FL-R-3 Notes, Class C-FXD-R-3 Notes, Class D-R-3 Notes, Class E-R-3 Notes and Class F-R-3 Notes were $0.0 million, $0.0 million, $0.0 million, $0.0 million, $0.0 million, $0.0 million, $0.3 million, $3.0 million and $0.0 million, respectively.

 

As of February 29, 2020, the remaining unamortized discount on the Class A-1FL-R-21 Notes, Class A-1FXD-R-2 Notes, Class A-2-R-2 Notes, Class B-R-2 Notes, Class C-R-2 Notes, Class D-R-2 Notes, Class E-1-R-2 Notes, Class F-R-2 Notes and Class G-R-2 Notes were $0.0 million, $0.0 million, $0.0 million, $0.0 million, $0.5 million, $1.0 million, $0.0 million, $0.0 million and $0.0 million, respectively.

 

For the year ended February 28, 2021, costs associated with the 2013-1 CLO Notes of $1.8 million in remaining unamortized deferred debt financing costs and $1.3 million in unamortized discount, were recognized as additional amortization expense when the related notes were extinguished and recorded within realized loss on extinguishment of debt in the statement of operations.

 

For the year ended February 28, 2019, costs associated with the 2013-1 Amended CLO Notes of $0.9 million in remaining unamortized deferred debt financing costs and $0.3 million in unamortized discount, were recognized as additional amortization expense when the related notes were extinguished and recorded within realized loss on extinguishment of debt in the statement of operations.

 

As of February 28, 2021, remaining capitalized financing costs of $1.8 million related to the 2013-1 2021 Reset CLO Notes are being amortized over the term of the 2013-1 2021 Reset CLO Notes.

 

On February 11, 2020, CLO 2013-1 Warehouse 2, a wholly-owned subsidiary of Saratoga CLO entered into a loan payable with a third party, pursuant to which CLO 2013-1 Warehouse 2 may borrow from time to time up to $80 million in order to provide capital necessary to support warehouse activities. The loan payable, which expires on August 11, 2021, bears interest at an annual rate of 3M USD LIBOR + 1.25% through November 11, 2020 and 3M USD LIBOR + 1.75% thereafter. For the year ended February 29, 2021, the Saratoga CLO recognized interest expense of $0.2 million related to the loan payable, with a loan payable balance of $0.0 million as February 28, 2021.

 

5. Income Tax

 

Under the current laws, the Issuer is not subject to net income taxation in the United States or the Cayman Islands. Accordingly, no provision for income taxes has been made in the accompanying financial statements.

 

Pursuant to ASC Topic 740, Accounting for Uncertainty in Income Taxes, the Issuer adopted the provisions of the FASB relating to accounting for uncertainty in income taxes which clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position must meet before being recognized in the financial statements and applies to all open tax years as of the effective date. The Investment Manager has analyzed such tax positions for uncertain tax positions for tax years that may be open (2017—2020). The Issuer identifies its major tax jurisdictions as U.S. Federal, state and foreign jurisdictions where the Issuer makes investments. As of February 28, 2021 and February 29, 2020, there was no impact to the financial statements as a result of the Issuer’s accounting for uncertainty in income taxes. The Issuer does not have any unrecognized tax benefits or liabilities for the years ended February 28, 2021, February 29, 2020 and February 28, 2019. Also, the Issuer recognizes interest and, if applicable, penalties for any uncertain tax positions, as a component of income tax expense. No interest or penalty expense was recorded by the Issuer for the years ended February 28, 2021, February 29, 2020 and February 28, 2019.

 

6. Commitments and Contingencies

 

In the ordinary course of its business, the Issuer 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 Issuer. Based on its history and experience, the Investment Manager feels that the likelihood of such an event is remote. Therefore, the Issuer has not accrued any liabilities in connection with such indemnifications.

 

In the ordinary course of business, the Issuer 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 Issuer. As of February 28, 2021 and February 29, 2020, the Issuer is not subject to any material legal proceedings. Therefore, the Issuer has not accrued any liabilities in connection with such indemnifications.

 

S-37

 

 

The terms of Collateralized Debt Investments may require the Issuer to provide funding for any unfunded portion of a Collateralized Debt Investment at the request of the borrower. At February 28, 2021 and February 29, 2020, the Issuer had $4.3 million and $1.0 million of unfunded commitments outstanding, respectively.

 

7. Related-Party Transactions

 

In the ordinary course of business and as permitted per the terms of the Indenture, the Issuer may acquire or sell investments to or from related parties at the fair value at such time. For the years ended February 28, 2021, February 29, 2020 and February 28, 2019, the Issuer neither bought nor sold investments from related parties.

 

On February 11, 2020, CLO 2013-1 Warehouse 2, a wholly-owned subsidiary of Saratoga CLO entered into CLO 2013-1 Warehouse 2 Loan with the Company, pursuant to which CLO 2013- 1 Warehouse 2 may borrow from time to time up to $25.0 million from the Company in order to provide capital necessary to support warehouse activities. The CLO 2013-1 Warehouse 2 Loan, which expires on August 20, 2021, bears interest at an annual rate of 3M USD LIBOR + 7.5%. As of February 28, 2021, the CLO 2013-1 Warehouse 2 Loan was and interest payable repaid in full, with interest expense of $0.7 million and $0.01 million recognized and included in the interest and debt financing expenses in the Issuer’s statement of operations for the years ended February 28, 2021 and February 29, 2020, respectively.

 

The Subordinated Notes are wholly-owned by the Investment Manager. The Subordinated Notes do not have a stated coupon rate but are entitled to residual cash flows from the CLO’s investments after all of the other tranches of debt and certain other fees and expenses are paid. For the years ended February 28, 2021, February 29, 2020 and February 28, 2019, $7.9 million, $4.6 million and $2.0 million of payments to the Subordinated Notes were included in interest and debt financing expenses in the statements of operations, respectively. For the years ended February 28, 2021, February 29, 2020 and February 28, 2019, $3.2 million, $2.4 million and $0.5 million, respectively, in discount amortization related to the Subordinated Notes is also included in interest and debt financing expenses on the Issuer’s statement of operations.

 

In addition to refinancing its liabilities, the Investment Manager holds aggregate principal amounts of $17.9 million in Class F-R-3 Notes of the CLO tranches with a coupon of LIBOR plus 10.00% at February 28, 2021 and $2.5 million in Class F-R-2 Notes and $7.5 million in Class G-R-2 Notes of the CLO tranches with a coupon of LIBOR plus 8.75% and LIBOR plus 10.00% at February 29, 2020, respectively. For the years ended February 28, 2021, February 29, 2020 and February 28, 2019, payments for the Class F-R- 3, Class F-R-2 Notes and Class G-R-2 Notes totaling $0.0 million, $1.2 million and $0.3 million, respectively, are included in interest and debt financing expenses in the Issuer’s statement of operations. Expenses relating to the refinancing were paid for by the Company on behalf of Saratoga CLO and is included in due to affiliate on the statement of assets and liabilities. As of February 28, 2021, there is an outstanding due to affiliate related to those expenses of $2.6 million.

 

8. Shareholders’ Capital

 

Capital contributions and distributions shall be made at such time and in such amounts as determined by the Investment Manager and the Indenture.

 

The majority holder of the Subordinated Notes has various control rights over the CLO, including the ability to call the CLO prior to its legal maturity, replace the Investment Manager under certain circumstances, and refinance any of the outstanding debt tranches. The voting structure of the Subordinated Notes may require either majority or unanimous approval depending upon the issue.

 

The authorized share capital of the Issuer consists of 50,000 ordinary shares, 250 of which are owned by Maples Finance Limited and are held under the terms of a declaration of trust.

 

As of February 28, 2021 and February 29, 2020, net assets (deficit) were $(28.5) million and $(35.1) million, respectively. These amounts include accumulated losses of $35.1 million and $17.9 million, respectively, which includes cumulative net investment income or loss, cumulative amounts of gains and losses realized from investment transactions, net unrealized appreciation or depreciation of investments, as well as the cumulative effect of accounting mismatches between investments accounted for at fair value and amortized cost or accrual-basis assets and liabilities as discussed in Significant Accounting Policies, above. The Issuer’s investments continue to generate sufficient liquidity to satisfy its obligations on periodic payment dates as well as comply with all performance criteria as of the statements of assets and liabilities date.

 

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The Issuer elected early adoption of Rule 3-04/Rule 8-03(a)(5) under Regulation S-X. Pursuant to the regulation, the Issuer has presented a reconciliation of the changes in each significant caption of stockholders’ equity for each of the three fiscal years ended February 28, 2021, February 29, 2020 and February 28, 2019, as shown in the tables below:

 

   For the Year Ended February 28, 2021 
           Capital   Total     
   Common Stock   in Excess   Distributable   Net Assets 
   Shares   Amount   of Par Value   Earnings (Loss)   (Deficit) 
Balance at February 29, 2020   250   $250   $-   $(35,102,419)  $(35,102,169)
Increase (Decrease) from Operations:                         
Net investment income (loss)   -    -             -    (758,157)   (758,157)
Net realized gain (loss) from investments   -    -    -    (1,803,884)   (1,803,884)
Net change in unrealized appreciation (depreciation) on investments   -    -    -    (31,575,429)   (31,575,429)
Balance at May 31, 2020   250    250    -    (69,239,889)   (69,239,639)
Increase (Decrease) from Operations:                         
Net investment income   -    -    -    60,339    60,339 
Net realized gain (loss) from investments   -    -    -    (4,338,586)   (4,338,586)
Net change in unrealized appreciation (depreciation) on investments   -    -    -    26,457,779    26,457,779 
Balance at August 31, 2020   250    250    -    (47,060,357)   (47,060,107)
Increase (Decrease) from Operations:                         
Net investment income   -    -    -    221,123    221,123 
Net realized gain (loss) from investments   -    -    -    (3,089,206)   (3,089,206)
Net change in unrealized appreciation (depreciation) on investments   -    -    -    14,923,956    14,923,956 
Balance at November 30, 2020   250    250    -    (35,004,484)   (35,004,234)
Increase (Decrease) from Operations:                         
Net investment income (loss)                  (823,187)   (823,187)
Net realized gain (loss) from investments                  (1,690,951)   (1,690,951)
Net change in unrealized appreciation (depreciation) on investments                  11,969,271    11,969,271 
Realized losses on extinguishment of debt                  (2,988,763)   (2,988,763)
Balance at February 28, 2021   250    250    -    (28,538,114)   (28,537,864)

 

S-39

 

 

   For the Year Ended February 29, 2020 
           Capital   Total     
   Common Stock   in Excess   Distributable   Net Assets 
   Shares   Amount   of Par Value   Earnings (Loss)   (Deficit) 
Balance at February 28, 2019   250   $250   $-   $(17,899,919)  $(17,899,669)
Increase (Decrease) from Operations:                         
Net investment income (loss)   -    -    -    1,125,944    1,125,944 
Net realized gain (loss) from investments   -    -    -    (943,934)   (943,934)
Net change in unrealized appreciation (depreciation) on investments   -    -    -    (2,205,995)   (2,205,995)
Balance at May 31, 2019   250    250    -    (19,923,904)   (19,923,654)
Increase (Decrease) from Operations:                         
Net investment income (loss)   -    -    -    775,988    775,988 
Net realized gain (loss) from investments   -    -    -    (1,218,364)   (1,218,364)
Net change in unrealized appreciation (depreciation) on investments   -    -    -    (2,174,060)   (2,174,060)
Balance at August 31, 2019   250    250    -    (22,540,340)   (22,540,090)
Increase (Decrease) from Operations:                         
Net investment income (loss)   -    -             -    (712,398)   (712,398)
Net realized gain (loss) from investments   -    -    -    -    - 
Net change in unrealized appreciation (depreciation) on investments   -    -    -    (7,516,752)   (7,516,752)
Balance at November 30, 2019   250    250    -    (30,769,490)   (30,769,240)
Increase (Decrease) from Operations:                         
Net investment income (loss)   -    -    -    136,535    136,535 
Net realized gain (loss) from investments   -    -    -    (2,632,887)   (2,632,887)
Net change in unrealized appreciation (depreciation) on investments   -    -    -    (1,836,577)   (1,836,577)
Balance at February 29, 2020   250   $250   $-   $(35,102,419)  $(35,102,169)

 

S-40

 

 

   For the Year Ended February 28, 2019 
           Capital   Total     
   Common Stock   in Excess   Distributable   Net Assets 
   Shares   Amount   of Par Value   Earnings (Loss)   (Deficit) 
Balance at February 28, 2018   250   $250   $-   $(11,245,569)  $(11,245,319)
Increase (Decrease) from Operations:                         
Net investment income (loss)   -    -              -    474,449    474,449 
Net realized gain (loss) from investments   -    -    -    (1,157,929)   (1,157,929)
Net change in unrealized appreciation (depreciation) on investments   -    -    -    (110,177)   (110,177)
Balance at May 31, 2018   250    250    -    (12,039,226)   (12,038,976)
Increase (Decrease) from Operations:                         
Net investment income (loss)   -    -    -    191,126    191,126 
Net realized gain (loss) from investments   -    -    -    2,237    2,237 
Net change in unrealized appreciation (depreciation) on investments   -    -    -    (440,254)   (440,254)
Balance at August 31, 2018   250    250    -    (12,286,117)   (12,285,867)
Increase (Decrease) from Operations:                         
Net investment income (loss)   -    -    -    472,125    472,125 
Net realized gain (loss) from investments   -    -    -    11,948    11,948 
Net change in unrealized appreciation (depreciation) on investments   -    -    -    (4,467,273)   (4,467,273)
Balance at November 30, 2018   250    250    -    (16,269,317)   (16,269,067)
Increase (Decrease) from Operations:                         
Net investment income (loss)   -    -    -    396,883    396,883 
Net realized gain (loss) from investments   -    -    -    (200,967)   (200,967)
Net change in unrealized appreciation (depreciation) on investments   -    -    -    (626,667)   (626,667)
Realized losses on extinguishment of debt                  (1,199,851)   (1,199,851)
Balance at February 28, 2019   250   $250   $-   $(17,899,919)  $(17,899,669)

 

S-41

 

 

9. Financial Highlights

 

The following is a schedule of financial highlights for the years ended February 28, 2021, February 29, 2020, February 28, 2019, February 28, 2018 and February 28, 2017:

 

   February 28,
2021
   February 29,
2020
   February 28,
2019
   February 28,
2018
   February 28,
2017
 
Average subordinated notes’ capital balance(1)  $7,593,452   $20,177,254   $18,900,592   $17,262,714   $15,113,353 
Ratio and supplemental data:                         
Total return(2)   150.86%   (46.85)%   (22.41)%   0.33%   162.55%
Net investment income (loss)(3)   (17.12)%   0.90%   1.77%   8.08%   (34.62)%
Total expenses(3)   383.67%   156.62%   125.54%   95.41%   141.14%
Base management fee(3)   6.60%   2.48%   1.82%   1.75%   3.87%
Subordinated management fee(3)   26.42%   9.93%   7.29%   6.99%   6.04%

 

 

(1)Subordinated notes’ capital balance is calculated based on the sum of the subordinated notes outstanding amount and total net assets, net of ordinary equity.

(2)Total return is calculated based on a time-weighted rate of return methodology. Quarterly rates of return are compounded to derive the total return reflected above. Total return is calculated for the subordinated notes’ capital taken as a whole and assumes the purchase of the subordinated notes’ capital on the first day of the period and the sale of the last day of the period.
(3)Calculated based on the average subordinated notes’ capital balance.

 

10. Subsequent Events

 

The Investment Manager has evaluated events or transactions that have occurred since February 28, 2021 through May 5, 2021, the date the financial statements were available for issuance. The Investment Manager has determined that there are no material events that would require the disclosure in the financial statements, other than the following:

 

Subsequent to February 28, 2021, the global outbreak of the coronavirus pandemic has adversely affected some of the Issuer’s portfolio companies, the Issuer’s business, financial condition, results of operations and cash flows and continues to have adverse consequences on the U.S. and global economies. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual portfolio companies, remains uncertain. At the time of this filing, there is no indication of a reportable subsequent event impacting the Issuer’s financial statements for the year ended February 28, 2021. The Issuer cannot predict the extent to which its financial condition and results of operations will be adversely affected at this time. The potential impact to its results will depend to a large extent on future developments and new information that may emerge regarding the duration and severity of COVID-19. The Issuer continues to observe and respond to the evolving COVID-19 environment and its potential impact on areas across its business.

 

 

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