Saratoga(SAR) - 2023 Q1 - Quarterly Report

Filing Information Details the company's filing status, stock exchange listings, and outstanding common shares as of the reporting date - Saratoga Investment Corp. filed a Quarterly Report on Form 10-Q for the period ended May 31, 2022[1][2] Trading Information | Title of each class | Trading Symbol(s) | Name of each exchange on which registered | | :--- | :--- | :--- | | Common Stock, par value $0.001 per share | SAR | The New York Stock Exchange | | 7.25% Notes due 2025 | SAK | The New York Stock Exchange | | 6.00% Notes due 2027 | SAT | The New York Stock Exchange | - The registrant is a non-accelerated filer and is not an emerging growth company or a shell company[4][5] - As of July 6, 2022, the number of outstanding common shares was 11,984,898[5] PART I. FINANCIAL INFORMATION Presents the unaudited consolidated financial statements and management's discussion and analysis for the quarter Item 1. Consolidated Financial Statements Presents Saratoga Investment Corp.'s unaudited consolidated financial statements, including assets, operations, cash flows, and detailed notes for the quarter Consolidated Statements of Assets and Liabilities Details the company's financial position, including investments, cash, liabilities, and net assets as of May 31, 2022 | ASSETS ($ in millions) | May 31, 2022 (unaudited) | February 28, 2022 ($ in millions) | | :--- | :--- | :--- | | Investments at fair value | $894.53 | $817.57 | | Cash and cash equivalents | $94.94 | $47.26 | | Cash and cash equivalents, reserve accounts | $6.55 | $5.61 | | Total assets | $1,002.04 | $876.24 | | LIABILITIES ($ in millions) | | | | Revolving credit facility | $25.00 | $12.50 | | SBA debentures payable | $217.00 | $185.00 | | 6.00% Notes Payable 2027 | $97.50 | - | | Total liabilities | $656.80 | $520.46 | | NET ASSETS ($ in millions) | | | | Total net assets | $345.24 | $355.78 | | NET ASSET VALUE PER SHARE | $28.69 | $29.33 | - Total assets increased by approximately $125.8 million from February 28, 2022, to May 31, 2022, primarily driven by an increase in investments at fair value and cash and cash equivalents[10] - Total liabilities significantly increased by approximately $136.3 million, largely due to increased revolving credit facility borrowings, SBA debentures, and the issuance of 6.00% Notes Payable 2027[10] - Net asset value per share decreased from $29.33 to $28.69 during the period[11] Consolidated Statements of Operations Summarizes the company's financial performance, including investment income, operating expenses, and net assets from operations | ($ in millions) | For the three months ended May 31, 2022 (unaudited) | For the three months ended May 31, 2021 (unaudited) | | :--- | :--- | :--- | | Total investment income | $18.68 | $16.82 | | Total operating expenses | $10.70 | $14.26 | | NET INVESTMENT INCOME | $7.98 | $2.56 | | Net realized gain (loss) from investments | $0.16 | $1.91 | | Net change in unrealized appreciation (depreciation) on investments | $(9.33) | $16.81 | | NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | $(1.49) | $21.05 | | WEIGHTED AVERAGE - BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE | $(0.12) | $1.88 | - Net investment income significantly increased to $7.98 million for the three months ended May 31, 2022, from $2.56 million in the prior year, driven by higher investment income and lower operating expenses[13] - The company reported a net decrease in net assets of $1.49 million for the three months ended May 31, 2022, compared to a net increase of $21.05 million in the prior year, primarily due to a substantial net change in unrealized depreciation on investments[13] - Basic and diluted earnings per common share shifted from a gain of $1.88 in the prior year to a loss of $(0.12) for the current period[13] Consolidated Statements of Changes in Net Assets Outlines the changes in the company's net assets, reflecting operational results, shareholder distributions, and capital share transactions | ($ in millions) | For the three months ended May 31, 2022 (unaudited) | For the three months ended May 31, 2021 (unaudited) | | :--- | :--- | :--- | | Net increase (decrease) in net assets resulting from operations | $(1.49) | $21.05 | | Total distributions to shareholders | $(6.43) | $(4.80) | | Net increase (decrease) in net assets from capital share transactions | $(2.63) | $(0.09) | | Total increase (decrease) in net assets | $(10.54) | $16.16 | | Net assets at end of period | $345.24 | $320.34 | - The company experienced a total decrease in net assets of $10.54 million for the three months ended May 31, 2022, a significant shift from a $16.16 million increase in the prior year[16] - Shareholder distributions increased to $6.43 million in 2022 from $4.80 million in 2021[16] - Capital share transactions resulted in a net decrease of $2.63 million in 2022, primarily due to common stock repurchases, compared to a $0.09 million decrease in 2021[16] Consolidated Statements of Cash Flows Presents the company's cash inflows and outflows from operating, investing, and financing activities for the reporting period | ($ in millions) | For the three months ended May 31, 2022 (unaudited) | For the three months ended May 31, 2021 (unaudited) | | :--- | :--- | :--- | | NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | $(80.21) | $(101.76) | | NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | $128.83 | $91.82 | | NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND CASH AND CASH EQUIVALENTS, RESERVE ACCOUNTS | $48.62 | $(9.94) | | CASH AND CASH EQUIVALENTS AND CASH AND CASH EQUIVALENTS, RESERVE ACCOUNTS, END OF PERIOD | $101.49 | $19.98 | - Net cash used in operating activities decreased to $80.21 million in 2022 from $101.76 million in 2021, primarily due to lower purchases of investments[19] - Net cash provided by financing activities significantly increased to $128.83 million in 2022 from $91.82 million in 2021, driven by higher borrowings on debt and issuance of notes[19] - The company reported a net increase in cash and cash equivalents of $48.62 million in 2022, a reversal from a $9.94 million decrease in 2021, resulting in an ending balance of $101.49 million[19] Consolidated Schedules of Investments Details the composition and fair value of the company's investment portfolio, categorized by type and industry concentration | Investment Type | Amortized Cost ($ in millions) (May 31, 2022) | Fair Value ($ in millions) (May 31, 2022) | % of Net Assets (May 31, 2022) | | :--- | :--- | :--- | :--- | | Non-control/Non-affiliate investments | $732.72 | $745.48 | 213.8% | | Affiliate investments | $53.47 | $56.05 | 16.2% | | Control investments | $96.36 | $93.01 | 26.8% | | TOTAL INVESTMENTS | $882.55 | $894.53 | 256.8% | - Total investments at fair value increased from $817.57 million as of February 28, 2022, to $894.53 million as of May 31, 2022[10][21][36] - Non-control/Non-affiliate investments constitute the largest portion of the portfolio at 213.8% of net assets, followed by Control investments at 26.8% and Affiliate investments at 16.2%[21][24][25] - Key industries for non-control/non-affiliate investments include Dental Practice Management Software (17.1%), Education Software (10.5%), and Education Services (10.3%)[21] Notes to Consolidated Financial Statements Provides detailed explanations of the company's accounting policies, investment valuations, related party transactions, and other financial disclosures Note 1. Organization Describes Saratoga Investment Corp.'s corporate structure, regulatory status, management, and key subsidiaries - Saratoga Investment Corp. is a Maryland-incorporated non-diversified closed-end management investment company, regulated as a Business Development Company (BDC) and elected to be treated as a Regulated Investment Company (RIC) for U.S. federal income tax purposes[45] - The company is externally managed by Saratoga Investment Advisors, LLC (the "Manager")[48] - The company operates wholly-owned subsidiaries, Saratoga Investment Corp. SBIC, LP and Saratoga Investment Corp. SBIC II LP, which hold Small Business Investment Company (SBIC) licenses from the SBA, providing access to additional long-term capital[50] - In October 2021, the company established Saratoga Investment Funding II LLC (SIF II) for a $50.0 million senior secured revolving credit facility with Encina Lender Finance, LLC, and formed Saratoga Senior Loan Fund I JV LLC (SLF JV) as a co-managed joint venture[51][52] Note 2. Summary of Significant Accounting Policies Outlines the key accounting principles and estimates used in preparing the consolidated financial statements, including investment valuation and revenue recognition - The consolidated financial statements are prepared in conformity with U.S. GAAP, applying ASC Topic 946 for investment companies, and include wholly-owned special purpose financing subsidiaries[54][55] - The company does not consolidate its investment in SLF JV because it is not a wholly-owned investment company subsidiary and both members have equal decision-making authority[57] - Investments are accounted for at fair value in accordance with ASC 820, utilizing a multi-step valuation process involving the Manager, an independent valuation firm, and board approval, with fair value measurements classified into a three-level hierarchy[65][66][67] - Loans are generally placed on non-accrual status when collectability is doubtful; as of May 31, 2022, one investment with a fair value of approximately $10.1 million (1.12% of the portfolio) was on non-accrual status, compared to none at February 28, 2022[75] - The company has elected to be treated as a RIC for U.S. federal income tax purposes, requiring timely distribution of at least 90% of its investment company taxable income to avoid corporate federal income taxes[87][88] Note 3. Investments Provides a detailed breakdown of the company's investment portfolio by type, fair value, and significant concentrations Investment Portfolio by Fair Value | Investment Type | Fair Value ($ in thousands) (May 31, 2022) | | :--- | :--- | | First lien term loans | $718,090 | | Second lien term loans | $38,629 | | Unsecured term loans | $15,910 | | Structured finance securities | $33,493 | | Equity interests | $88,411 | | Total | $894,533 | Investment Portfolio by Amortized Cost and Fair Value | Investment Type | Amortized Cost ($ in thousands) (May 31, 2022) | Fair Value ($ in thousands) (May 31, 2022) | | :--- | :--- | :--- | | First lien term loans | $722,260 | $718,090 | | Second lien term loans | $44,727 | $38,629 | | Unsecured term loans | $16,104 | $15,910 | | Structured finance securities | $40,349 | $33,493 | | Equity interests | $59,108 | $88,411 | | Total | $882,548 | $894,533 | - The company's investment portfolio is primarily composed of first lien term loans, representing 80.3% of the fair value as of May 31, 2022[116] - Significant unobservable inputs for Level 3 fair value measurements include market yield (6.6%-12.5% for first lien term loans), discount rate (10.0%-16.0% for structured finance securities), and EBITDA/Revenue multiples (4.0x-28.6x / 1.0x-14.5x for equity interests)[112] - Top portfolio company concentrations (greater than 5% of total assets) include HemaTerra Holdings Company, LLC, Buildout, Inc., and PDDS Buyer, LLC[120][121][122][123] Note 4. Investment in Saratoga Investment Corp. CLO 2013-1, Ltd. ("Saratoga CLO") Details the company's investment in Saratoga CLO, including its refinancing, extended maturity, and financial performance - Saratoga CLO underwent its fourth refinancing on February 26, 2021, extending its reinvestment period to April 2024 and legal maturity to April 2033, and upsizing assets from $500 million to approximately $650 million[127] - The Company invested an additional $14.0 million in newly issued subordinated notes and purchased $17.9 million in Class F-R-3 Notes tranche as part of the refinancing[127] - As of May 31, 2022, the Company's investments in Saratoga CLO's subordinated notes and Class F-2-R-3 Notes were $111.0 million and $9.4 million (aggregate principal), with fair values of $24.1 million and $9.4 million, respectively[132] - For the three months ended May 31, 2022, Saratoga CLO reported a net investment loss of $(0.29) million and a net decrease in net assets of $(24.89) million, primarily due to net change in unrealized depreciation on investments[141] Note 5. Investment in SLF JV Describes the formation and investment structure of Saratoga Senior Loan Fund I JV LLC (SLF JV) and the company's ownership stake - Saratoga Senior Loan Fund I JV LLC (SLF JV) was formed on October 26, 2021, as a co-managed joint venture with TJHA JV I LLC, with equal voting interests on all material decisions[189][190] - The Company committed $43.75 million of a combined $50.0 million financing to SLF JV, resulting in an 87.5% ownership[191] - As of May 31, 2022, the Company's investment in SLF JV included an unsecured note of $13.1 million (fair value $13.1 million) and membership interest of $13.1 million (fair value $6.6 million)[191] - SLF JV invests in SLF 2021, a wholly-owned subsidiary, which makes investments in broadly syndicated first and second lien term loans or bonds[189][193] Note 6. Income Taxes Explains the company's tax treatment as a RIC, its taxable subsidiaries, and the impact on deferred tax assets and liabilities - The Company has elected to be treated as a RIC for U.S. federal income tax purposes, and its wholly-owned Taxable Blockers file standalone C Corporation tax returns, potentially incurring current and deferred federal and state income tax expense[195][196] Deferred Tax Assets and Liabilities | ($ in millions) | May 31, 2022 | February 28, 2022 | | :--- | :--- | :--- | | Total deferred tax assets | $2.02 | $1.99 | | Total deferred tax liabilities | $(1.66) | $(1.29) | | Valuation allowance on net deferred tax assets | $(1.95) | $(1.95) | | Net deferred tax liability | $(1.58) | $(1.25) | - As of May 31, 2022, a valuation allowance of $1.9 million was recorded on deferred tax assets, reflecting the federal and state tax effect of net operating losses and unrealized losses not expected to be realized[198] Net Tax Provision | ($ in thousands) | For the three months ended May 31, 2022 | For the three months ended May 31, 2021 | | :--- | :--- | :--- | | Current Federal | $213,842 | - | | Current State | $(78,503) | - | | Deferred Federal | $(296,071) | $(127,850) | | Deferred State | $(33,236) | $(130,213) | | Net tax provision | $(193,968) | $(258,063) | Note 7. Agreements and Related Party Transactions Details the company's agreements with its Manager, including management fees, incentive fees, and administrative services - The Investment Advisory and Management Agreement with Saratoga Investment Advisors, LLC includes a base management fee of 1.75% per year on gross assets (excluding cash) and a two-part incentive management fee[204][205][206] - The incentive fee includes a quarterly component (20.0% of pre-incentive fee net investment income exceeding a 1.875% hurdle rate) and an annual capital gains component (20.0% of cumulative realized capital gains net of losses and depreciation since May 31, 2010)[205][206] - For the three months ended May 31, 2022, the company incurred a $(1.9) million benefit in incentive fees related to capital gains, compared to a $3.7 million expense in the prior year, and no incentive fees related to pre-incentive fee net investment income[207] - The Administration Agreement with the Manager provides for administrative services, with an expense cap increased to $3.275 million effective August 1, 2022[209] - The company recognized $0.8 million in management fee income from Saratoga CLO for the three months ended May 31, 2022 and 2021, and its investment in SLF JV had a fair value of $19.8 million as of May 31, 2022[214][217] Note 8. Borrowings Outlines the company's debt obligations, including revolving credit facilities, SBA debentures, and various unsecured notes - The company's asset coverage ratio, as defined in the 1940 Act, was 179.3% as of May 31, 2022, above the minimum requirement of 150%[219] - As of May 31, 2022, $25.0 million was outstanding under the $50.0 million Encina Credit Facility, which bears interest at LIBOR plus 4.0% (with a 0.75% LIBOR floor) and matures on October 4, 2024[224][226] - The company had $217.0 million in SBA-guaranteed debentures outstanding as of May 31, 2022, with a 10-year maturity and fixed interest rates, non-recourse to the company[233][237] Notes Outstanding | Note Type | Total Amount Outstanding ($ in millions) (May 31, 2022) | | :--- | :--- | | 7.25% Notes due 2025 | $43.13 | | 7.75% Notes due 2025 | $5.00 | | 4.375% Notes due 2026 | $175.00 | | 4.35% Notes due 2027 | $75.00 | | 6.25% Notes due 2027 | $15.00 | | 6.00% Notes due 2027 | $97.50 | - The 6.00% Notes due 2027, totaling $97.5 million, were issued in April/May 2022 and are listed on the NYSE under the trading symbol 'SAT'[271][272] Note 9. Commitments and Contingencies Details the company's contractual obligations and unfunded commitments, along with its liquidity position to cover these obligations Long-Term Debt Obligations | Long-Term Debt Obligations | Total ($ in thousands) | Less Than 1 Year ($ in thousands) | 1 - 3 Years ($ in thousands) | 3 - 5 Years ($ in thousands) | More Than 5 Years ($ in thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Revolving credit facility | $25,000 | $- | $25,000 | $- | $- | | SBA debentures | $217,000 | $- | $15,000 | $33,660 | $168,340 | | 7.25% 2025 Notes | $43,125 | $- | $- | $43,125 | $- | | 7.75% 2025 Notes | $5,000 | $- | $- | $5,000 | $- | | 4.375% 2026 Notes | $175,000 | $- | $- | $175,000 | $- | | 4.35% 2027 Notes | $75,000 | $- | $- | $75,000 | $- | | 6.25% 2027 Notes | $15,000 | $- | $- | $- | $15,000 | | 6.00% 2027 Notes | $97,500 | $- | $- | $97,500 | $- | | Total Long-Term Debt Obligations | $652,625 | $- | $40,000 | $429,285 | $183,340 | - As of May 31, 2022, the company had $96.0 million in unfunded commitments outstanding to provide debt financing or fund limited partnership interests to portfolio companies, an increase from $83.4 million at February 28, 2022[277][532] - The company believes its assets, including $94.9 million in cash and cash equivalents and $6.6 million in available borrowings under the Encina Credit Facility, provide adequate coverage for these unfunded commitments[278][534] Note 10. Directors Fees Details the compensation structure for independent directors, including annual fees, meeting fees, and stock options - Independent directors receive an annual fee of $70,000, plus $3,000 for each board meeting and $1,500 for each committee meeting attended, along with reimbursement for expenses[279] - The chairman of the Audit Committee receives an additional annual fee of $12,500, and other committee chairmen receive $6,000[279] - Independent directors have the option to receive their fees in common stock, issued at the greater of net asset value or market price[279] - For the three months ended May 31, 2022, directors' fees and expenses incurred were $0.1 million[279] Note 11. Stockholders' Equity Provides information on the company's share repurchase plan, equity distribution agreement, and changes in net assets - The company has an active Share Repurchase Plan, under which 142,177 shares of common stock were repurchased for approximately $3.8 million during the three months ended May 31, 2022, at an average price of $26.27 per share[285] - The Share Repurchase Plan was extended to January 15, 2023, with 1.3 million shares authorized for repurchase[285] - As of May 31, 2022, the company had sold 4,840,361 shares for gross proceeds of $124.0 million through its equity distribution agreement, with no shares sold during the current quarter[287] Stockholders' Equity Summary | | Common Stock Shares | Common Stock Amount ($ in thousands) | Capital in Excess of Par Value ($ in millions) | Total Distributable Earnings (Loss) ($ in millions) | Net Assets ($ in millions) | | :--- | :--- | :--- | :--- | :--- | :--- | | Balance at February 28, 2022 | 12,131,350 | $12,131 | $328.06 | $27.71 | $355.78 | | Net investment income | - | - | - | $7.98 | $7.98 | | Net realized gain (loss) from investments | - | - | - | $0.16 | $0.16 | | Net change in unrealized appreciation (depreciation) on investments | - | - | - | $(9.33) | $(9.33) | | Distributions of investment income – net | - | - | - | $(6.43) | $(6.43) | | Repurchases of common stock | (142,177) | $(142) | $(3.73) | - | $(3.73) | | Balance at May 31, 2022 | 12,031,998 | $12,032 | $325.43 | $19.79 | $345.24 | Note 12. Earnings Per Share Presents the basic and diluted earnings per common share for the reporting period and the prior year Earnings Per Share | | For the three months ended May 31, 2022 | For the three months ended May 31, 2021 | | :--- | :--- | :--- | | Net increase (decrease) in net assets resulting from operations ($ in thousands) | $(1,487) | $21,049 | | Weighted average common shares outstanding | 12,112,372 | 11,170,045 | | Weighted average earnings (loss) per common share | $(0.12) | $1.88 | - Basic and diluted earnings per share for the three months ended May 31, 2022, was a loss of $(0.12), a decrease from a gain of $1.88 in the prior year[293] Note 13. Dividend Details the dividend declaration, payment options, and composition for the current and prior periods - On May 26, 2022, the company declared a dividend of $0.53 per share, payable on June 29, 2022, to stockholders of record on June 14, 2022[294] - Shareholders have the option to receive dividends in cash or common stock through the company's dividend reinvestment plan (DRIP)[294] - The May 2022 dividend consisted of approximately $5.1 million in cash and 48,590 newly issued shares of common stock[294] - For the three months ended May 31, 2021, a dividend of $0.43 per share was declared, totaling $4.80 million[296] Note 14. Financial Highlights Presents key financial metrics and ratios, including net asset value, total return, and expense ratios for the reporting periods Financial Highlights | Per share data | May 31, 2022 | May 31, 2021 | | :--- | :--- | :--- | | Net asset value at beginning of period | $29.33 | $27.25 | | Net investment income | $0.66 | $0.23 | | Net realized and unrealized gain and losses on investments | $(0.78) | $1.65 | | Net increase in net assets resulting from operations | $(0.12) | $1.88 | | Distributions declared from net investment income | $(0.53) | $(0.43) | | Net asset value at end of period | $28.69 | $28.70 | | Per share market value at end of period | $26.57 | $25.55 | | Total return based on market value | (1.30)% | 12.71% | | Total return based on net asset value | (0.13)% | 7.24% | - Net asset value per share decreased from $29.33 at the beginning of the period to $28.69 at May 31, 2022[297] - The ratio of net investment income to average net assets was 7.42% for the three months ended May 31, 2022, while the ratio of total expenses to average net assets was 13.73%[297] - The asset coverage ratio per unit was 1,793 as of May 31, 2022[297] Note 15. Subsequent Events Reports significant events that occurred after the reporting period, such as debt redemptions - On June 14, 2022, the company initiated the redemption of all $43.125 million in aggregate principal amount of its outstanding 7.25% Notes due 2025, with the redemption date set for July 14, 2022[299] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operational results, and liquidity, covering investment strategy, historical context, COVID-19 impact, and portfolio activity OVERVIEW Introduces Saratoga Investment Corp. as a BDC and RIC, outlining its investment objective and strategy for middle market companies - Saratoga Investment Corp. operates as a Business Development Company (BDC) and has elected to be treated as a Regulated Investment Company (RIC) for U.S. federal income tax purposes[309] - The company's investment objective is to generate current income and long-term capital appreciation by primarily investing in senior and unitranche leveraged loans and mezzanine debt of private U.S. middle market companies (EBITDA between $2 million and $50 million)[309] - Up to 30.0% of the portfolio may be allocated to opportunistic investments, including distressed debt, foreign debt, private equity, and structured finance vehicles, to enhance returns[309] Corporate History Traces the company's evolution, including its name change, SBIC licenses, significant debt issuances, and CLO refinancing - The company, originally GSC Investment Corp., changed its name to Saratoga Investment Corp. on July 30, 2010, following a recapitalization and change in investment adviser to Saratoga Investment Advisors[311][313] - The company's wholly-owned subsidiaries, Saratoga Investment Corp. SBIC, LP and Saratoga Investment Corp. SBIC II LP, obtained Small Business Investment Company (SBIC) licenses from the SBA in 2012 and 2019, respectively[316][326] - Significant debt issuances include 7.25% Notes due 2025 ($43.1 million outstanding), 7.75% Notes due 2025 ($5.0 million outstanding), 6.25% Notes due 2027 ($15.0 million outstanding), 4.375% Notes due 2026 ($175.0 million outstanding), 4.35% Notes due 2027 ($75.0 million outstanding), and 6.00% Notes due 2027 ($97.5 million outstanding)[328][329][330][331][333][335][338][341][471][474][476][478][480][481] - The Saratoga CLO underwent its fourth refinancing on February 26, 2021, expanding its assets to approximately $650 million and extending its legal maturity to April 2033[332] - In October 2021, the company established a new $50.0 million senior secured revolving credit facility with Encina Lender Finance, LLC and formed Saratoga Senior Loan Fund I JV LLC (SLF JV) as a co-managed joint venture[338][339] Recent COVID-19 Developments Discusses the ongoing impact of the COVID-19 pandemic on the company's business, portfolio companies, and the broader economy - The company is continuously monitoring the impact of the COVID-19 pandemic and its variants on its business, portfolio companies, employees, and financial markets, acknowledging the fluidity and uncertainty of long-term effects[345] - Portfolio companies have implemented liquidity plans, supported by internal cash reserves and shareholder backing, to address challenges posed by the pandemic and related restrictions[345] - The pandemic has caused widespread economic disruptions, including business shutdowns, reduced demand, supply chain issues, labor shortages, and commodity inflation, which are expected to persist[345] Critical Accounting Policies and Use of Estimates Explains the key accounting policies and estimates, such as investment valuation, revenue recognition, and capital gains incentive fee expense - Key accounting estimates include investment valuation, revenue recognition, and the recognition of capital gains incentive fee expense, which are continuously evaluated based on available information and reasonable assumptions[346] - Investments are valued at fair value using a multi-step process involving internal professionals, an independent valuation firm, and board approval, with methods including market comparables, discounted cash flows, and enterprise value waterfalls[348][350] - Revenue recognition policies detail accrual of interest income (adjusted for premium/discount), placement of loans on non-accrual status when collectability is doubtful, and recognition of payment-in-kind (PIK) interest[352][353][355] - The capital gains portion of the incentive fee was reset from May 31, 2010, meaning losses and gains prior to that date are excluded, and a 'catch-up' provision allows the Manager to receive 100% of pre-incentive fee net investment income between 1.875% and 2.344%[371] Portfolio and Investment Activity Summarizes the company's investment activities, portfolio composition by type and industry, and credit risk ratings Investment Activity (3 months ended May 31, 2022 vs 2021) | Metric | 3 months ended May 31, 2022 | 3 months ended May 31, 2021 | | :--- | :--- | :--- | | Investments in new/existing portfolio companies | $97.2 million | $119.2 million | | Exits and repayments | $10.1 million | $14.9 million | | Net investment | $87.1 million | $104.3 million | Portfolio Overview (May 31, 2022) | Metric | Value | | :--- | :--- | | Number of investments | 103 | | Number of portfolio companies | 47 | | Average investment per portfolio company | $18.1 million | | Average investment size | $8.5 million | | Weighted average maturity | 2.9 years | | Non-performing or delinquent investments (fair value) | $10.1 million | | Fixed rate debt (% of interest earning portfolio) | 1.5% | | Floating rate debt (% of interest earning portfolio) | 98.5% | Portfolio Composition by Type (Fair Value, May 31, 2022) | Investment Type | Percentage of Total Portfolio | Weighted Average Current Yield | | :--- | :--- | :--- | | First lien term loans | 80.3% | 8.6% | | Second lien term loans | 4.3% | 7.0% | | Unsecured term loans | 1.8% | 9.7% | | Structured finance securities | 3.7% | 8.0% | | Equity interests | 9.9% | - | | Total | 100.0% | 7.7% | Portfolio CMR Distribution (Fair Value, May 31, 2022) | Color Score | Investments at Fair Value ($ in thousands) | Percentage of Total Portfolio | | :--- | :--- | :--- | | Green | $743,116 | 83.1% | | Yellow | $38,888 | 4.3% | | Red | $- | 0.0% | | N/A (CLO & Equity) | $112,529 | 12.6% | - Top industry groupings by fair value as of May 31, 2022, include Healthcare Software (10.1%), IT Services (9.1%), and Dental Practice Management Software (6.5%)[390] - The largest geographic concentrations by fair value as of May 31, 2022, are the Southeast (29.9%), West (23.9%), and Midwest (17.4%)[395] Results of operations Analyzes the company's financial performance, including investment income, operating expenses, net realized gains, and unrealized appreciation/depreciation Total Investment Income (3 months ended May 31, 2022 vs 2021) | Metric | 3 months ended May 31, 2022 ($ in thousands) | 3 months ended May 31, 2021 ($ in thousands) | | :--- | :--- | :--- | | Total investment income | $18,679 | $16,816 | | Interest from investments | $16,606 | $13,687 | | Management fee income | $816 | $818 | | Dividend Income | $300 | $399 | | Structuring and advisory fee income | $853 | $1,302 | | Other income | $104 | $610 | - Total investment income increased by $1.9 million (11.1%) to $18.7 million, primarily due to a $2.9 million (21.3%) increase in interest income from investments, partially offset by lower structuring and advisory fees and other income[397][400][401] Total Operating Expenses (3 months ended May 31, 2022 vs 2021) | Metric | 3 months ended May 31, 2022 ($ in thousands) | 3 months ended May 31, 2021 ($ in thousands) | | :--- | :--- | :--- | | Total operating expenses | $10,703 | $14,260 | | Interest and debt financing expenses | $6,872 | $4,341 | | Base management fees | $3,802 | $2,759 | | Incentive management fees expense (benefit) | $(1,903) | $5,263 | | Professional fees | $417 | $507 | - Total operating expenses decreased by $3.5 million (24.7%) to $10.7 million, mainly driven by a $7.1 million (135.5%) decrease in incentive management fees, despite a $2.5 million (58.3%) increase in interest and debt financing expenses[403][404][408] - Net realized gains from investments were $0.2 million for the three months ended May 31, 2022, primarily from escrow payments on prior sales[415][417] - The company recorded a net change in unrealized depreciation of $9.2 million for the three months ended May 31, 2022, a significant shift from $16.8 million in unrealized appreciation in the prior year, largely due to depreciation in Pepper Palace, SLF JV, and Saratoga CLO[422][424][425] Net Increase (Decrease) in Net Assets from Operations (3 months ended May 31, 2022 vs 2021) | Metric | 3 months ended May 31, 2022 ($ in thousands) | 3 months ended May 31, 2021 ($ in thousands) | | :--- | :--- | :--- | | Net increase (decrease) in net assets | $(1,487) | $21,049 | | EPS | $(0.12) | $1.88 | FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Assesses the company's financial health, liquidity sources, capital structure, and ability to meet its obligations and fund future investments - The company's primary sources of liquidity include cash flows from operations, the Encina Credit Facility, SBA debentures, and future offerings of debt and equity securities[434] - As of May 31, 2022, the company's asset coverage ratio was 179.3%, exceeding the 1940 Act requirement of 150%[437] - The Encina Credit Facility had $25.0 million outstanding borrowings as of May 31, 2022, with a commitment termination date of October 4, 2024[443][457] - The company had $217.0 million in SBA-guaranteed debentures outstanding as of May 31, 2022, through its SBIC subsidiaries, providing long-term, non-recourse capital[457][463] Unsecured Notes Outstanding (May 31, 2022) | Note Type | Total Amount Outstanding | | :--- | :--- | | 7.25% Notes due 2025 | $43.1 million | | 7.75% Notes due 2025 | $5.0 million | | 6.25% Notes due 2027 | $15.0 million | | 4.375% Notes due 2026 | $175.0 million | | 4.35% Notes due 2027 | $75.0 million | | 6.00% Notes due 2027 | $97.5 million | Contractual Obligations (May 31, 2022) | Long-Term Debt Obligations | Total ($ in thousands) | Less Than 1 Year ($ in thousands) | 1 - 3 Years ($ in thousands) | 3 - 5 Years ($ in thousands) | More Than 5 Years ($ in thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Revolving credit facility | $25,000 | $- | $25,000 | $- | $- | | SBA debentures | $217,000 | $- | $15,000 | $33,660 | $168,340 | | 7.25% 2025 Notes | $43,125 | $- | $- | $43,125 | $- | | 7.75% 2025 Notes | $5,000 | $- | $- | $5,000 | $- | | 4.375% 2026 Notes | $175,000 | $- | $- | $175,000 | $- | | 4.35% 2027 Notes | $75,000 | $- | $- | $75,000 | $- | | 6.25% 2027 Notes | $15,000 | $- | $- | $- | $15,000 | | 6.00% 2027 Notes | $97,500 | $- | $- | $97,500 | $- | | Total Long-Term Debt Obligations | $652,625 | $- | $40,000 | $429,285 | $183,340 | - Unfunded commitments outstanding totaled $96.0 million as of May 31, 2022, which the company believes is adequately covered by its current assets and available borrowings[532][534] - Subsequent to the reporting period, on June 14, 2022, the company initiated the redemption of all $43.125 million of its 7.25% Notes due 2025, effective July 14, 2022[530] Item 3. Quantitative and Qualitative Disclosures About Market Risk Details the company's exposure to market risk, primarily interest rate fluctuations, and its potential impact on net interest income and portfolio value - The company's principal market risk is the fluctuation in interest rates, which affects net interest income and the value of its investment portfolio[537][538] - Substantially all of the company's portfolio consists of floating-rate investments tied to LIBOR, while most of its borrowings are fixed-rate, except for the Encina Credit Facility[539][541] Annualized Sensitivity of Net Investment Income to Hypothetical Interest Rate Changes (May 31, 2022) | Basis Point Change | Increase (Decrease) in Interest Income ($ in thousands) | Increase (Decrease) in Interest Expense ($ in thousands) | Increase (Decrease) in Net Investment Income ($ in thousands) | Increase (Decrease) in Net Investment Income per Share | | :--- | :--- | :--- | :--- | :--- | | -100 | $(3,375) | $- | $(3,375) | $(0.28) | | -50 | $(2,578) | $- | $(2,578) | $(0.21) | | -25 | $(1,348) | $- | $(1,348) | $(0.11) | | 25 | $1,571 | $- | $1,571 | $0.13 | | 50 | $3,322 | $- | $3,322 | $0.27 | | 100 | $6,978 | $(86) | $6,892 | $0.57 | | 200 | $14,697 | $(336) | $14,361 | $1.19 | | 300 | $22,416 | $(586) | $21,830 | $1.80 | | 400 | $30,136 | $(836) | $29,300 | $2.42 | - A hypothetical 1.0% increase in interest rates would lead to an approximate $7.0 million increase in interest income, while a 1.0% decrease would result in a $3.4 million decrease[540] Item 4. Controls and Procedures Management evaluated the effectiveness of disclosure controls and procedures, concluding they are effective, with no material changes to internal control over financial reporting during the quarter - The company's management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures and concluded they are effective as of May 31, 2022[547] - No changes in internal control over financial reporting occurred during the quarter ended May 31, 2022, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[547] PART II. OTHER INFORMATION Contains additional information not covered in the financial statements, including legal proceedings, risk factors, and exhibits Item 1. Legal Proceedings The company and its wholly-owned subsidiaries are not currently involved in any material legal proceedings - Neither Saratoga Investment Corp. nor its wholly-owned subsidiaries are currently subject to any material legal proceedings[549] Item 1A. Risk Factors This section refers to the comprehensive 'Risk Factors' discussed in the company's most recent Annual Report on Form 10-K, stating that no material changes to these risk factors occurred during the three months ended May 31, 2022 - No material changes to the risk factors discussed in 'Item 1A. Risk Factors' of the Annual Report on Form 10-K for the fiscal year ended February 28, 2022, occurred during the three months ended May 31, 2022[550] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable to the current report - This item is not applicable[551] Item 3. Defaults Upon Senior Securities This item is not applicable to the current report - This item is not applicable[552] Item 4. Mine Safety Disclosures This item is not applicable to the current report - This item is not applicable[553] Item 5. Other Information No other information is reported under this item - No other information is reported under this item[554] Item 6. Exhibits This section provides a comprehensive list of all exhibits filed as part of the Form 10-Q report, including corporate governance documents, debt indentures, various agreements, and certifications - The report includes an exhibit index listing various documents such as Articles of Incorporation, Bylaws, Specimen Common Stock Certificate, Registration Rights Agreement, Dividend Reinvestment Plan, Indentures for various notes, Investment Advisory and Management Agreement, Custodian Agreement, Administration Agreement, Trademark License Agreement, and Certifications[556][557][558] - Certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) and Section 906 of the Sarbanes-Oxley Act of 2002 are filed herewith[558] Signatures This section contains the required signatures of the company's authorized officers, certifying the submission of the Form 10-Q report - The report was duly caused to be signed on behalf of Saratoga Investment Corp. by Christian L. Oberbeck, Chief Executive Officer, and Henri J. Steenkamp, Chief Financial Officer and Chief Compliance Officer, on July 6, 2022[561][563]