UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


FORM 10-Q


(Mark One)


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


For the quarterly period ended September 30, 2022


OR


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


For the transition period from ________ to ________


Commission File Number 814-00908


PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.


(Exact name of Registrant as specified in its charter)


Maryland45-2460782(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)10 East 40thStreet, 42ndFloorNew York, NY10016(Address of principal executive offices)(Zip Code)


Registrant’s telephone number, including area code: (212) 448-0702


Prospect Sustainable Income Fund, Inc.


(Former name, former address and former fiscal year, if changed since last report)


Securities registered pursuant to Section 12(b) of the Act: Title of each classTrading Symbol(s)Name of each exchange on which registeredNoneNoneNone





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 x No o





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 o No o





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 definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.





Large accelerated fileroAccelerated fileroNon-accelerated filerxSmaller reporting companyoEmerging growth companyo


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. o





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





The number of shares of the issuer’s Common Stock, $0.001 par value per share, outstanding as of November 14, 2022 was 2,365,625.







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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 TABLE OF CONTENTS





PageForward-Looking Statements1PART IFINANCIAL INFORMATIONItem 1.Consolidated Financial Statements2Consolidated Statements of Assets and Liabilities as of September 30, 2022 (unaudited) and June 30, 20222Consolidated Statements of Operations for the three months ended September 30, 2022 and 2021 (unaudited)3Consolidated Statements of Changes in Net Assets for the three months ended September 30, 2022 and 2021 (unaudited)4Consolidated Statements of Cash Flows for the three months ended September 30, 2022 and 2021 (unaudited)5Consolidated Schedules of Investments as of September 30, 2022 (unaudited) and June 30, 20226Notes to Consolidated Financial Statements (unaudited)12Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations45Item 3.Quantitative and Qualitative Disclosures About Market Risk66Item 4.Controls and Procedures68PART IIOTHER INFORMATIONItem 1.Legal Proceedings69Item 1A.Risk Factors69Item 2.Unregistered Sales of Equity Securities and Use of Proceeds69Item 3.Default Upon Senior Securities69Item 4.Mine Safety Disclosures69Item 5.Other Information70Item 6.Exhibits70Signatures71







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Forward-Looking Statements


Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including, but not limited to, statements as to:


• our future operating results;


• our business prospects and the prospects of our portfolio companies;


• the impact of investments that we expect to make;


• 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;


• the impact of global health epidemics, including, but not limited to, the ongoing coronavirus  pandemic, on our and our portfolio companies’ business and the global economy;


• uncertainty surrounding the financial stability of the United States, Europe, and China;


• the impact of the ongoing conflict between Russia and Ukraine;


• the ability of our portfolio companies to achieve their objectives;


• difficulty in obtaining financing or raising capital, especially in the current credit and equity environment, and the impact of a protracted decline in the liquidity of credit markets on our and our portfolio companies’ business;


• the level and volatility of prevailing interest rates and credit spreads, magnified by the current turmoil in the credit markets;


• the impact of changes in London Interbank Offered Rate (“LIBOR”), the cessation of publication of certain LIBOR rates as of December 31, 2021 and in the future and the new use of the Secured Overnight Financing Rate (“SOFR”) on our operating results;


• adverse developments in the availability of desirable loan and investment opportunities whether they are due to competition, regulation or otherwise;


• a compression of the yield on our investments and the cost of our liabilities, as well as the level of leverage available to us;


• our regulatory structure and tax treatment, including our ability to operate as a business development company and a regulated investment company;


• the adequacy of our cash resources and working capital;


• the timing of cash flows, if any, from the operations of our portfolio companies;


• the ability of our investment adviser to locate suitable investments for us and to monitor and administer our investments;


• authoritative generally accepted accounting principles or policy changes from such standard-setting bodies as the Financial Accounting Standards Board, the Securities and Exchange Commission, Internal Revenue Service, and other authorities that we are subject to, as well as their counterparts in any foreign jurisdictions where we might do business; and


• any of the other risks, uncertainties and other factors we identify herein or in our Annual Report on Form 10-K for the year ended June 30, 2022.


Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “trend,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “potential,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve,” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may,” or similar expressions. The forward looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties and undue reliance should not be placed on them. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth as “Risk Factors” in this quarterly report on Form 10-Q, our annual report on Form 10-K and our other SEC filings.


We have based the forward-looking statements included in this report on information available to us on the date of this quarterly report on Form 10-Q, 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. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC, including quarterly reports on Form 10-Q, annual reports on Form 10-K, and current reports on Form 8-K.













1


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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES


PART I




Item 1. Consolidated Financial Statements







AssetsSeptember 30, 2022June 30, 2022(unaudited)Investments at fair value:Non-control/non-affiliate investments (amortized cost of $37,156,082 and $38,560,109, respectively)$33,817,029$35,809,997Total investments (Note 7 and 8)33,817,02935,809,997Cash2,273,7601,467,568Deferred financing costs (Note 10)389,771404,589Prepaid expenses and other assets218,068224,395Interest receivable142,325216,257Receivable for repayments of portfolio investments5,02233,940Total Assets36,845,97538,156,746LiabilitiesRevolving Credit Facility (Note 10)20,000,00020,500,000Due to Administrator (Note 4)396,642356,125Accrued legal fees109,992168,468Accrued audit fees146,573128,140Interest payable117,61696,712Distributions payable112,101100,836Accrued expenses117,603100,555Tax payable—4,935Total Liabilities21,000,52721,455,771Commitments and Contingencies (Note 9)——Net Assets$15,845,448$16,700,975Components of Net AssetsCommon Stock, par value $0.001 per share (75,000,000 shares authorized; 2,375,249 and 2,375,890 Class A shares issued and outstanding, respectively) (Note 3)$2,375$2,376Paid-in capital in excess of par (Note 3 and Note 6)25,119,46025,209,965Total distributable earnings (loss) (Note 6)(9,276,387)(8,511,366)Net Assets15,845,44816,700,975Net Asset Value Per Share (Note 11)$6.67$7.03





See notes to consolidated financial statements.





2




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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)





Three Months Ended September 30,20222021Investment IncomeInterest income from non-control/non-affiliate investments$606,873$745,393Interest income from structured credit securities188,640250,151Total Investment Income795,513995,544Operating ExpensesInterest expense and credit facility expenses (Note 10)269,258142,385Audit and tax expense138,43384,078Base management fees (Note 4)112,434182,198Legal expense68,4793,146Insurance expense60,98943,213Administrator Costs (Note 4)60,582169,197General and administrative57,60224,132Transfer agent’s fees and expenses55,03143,646Offering costs8,5135,307Valuation services5,00033,866Total Operating Expenses836,321731,168Expense limitation payment (Note 4)(112,434)(182,198)Total Net Operating Expenses723,887548,970Net Investment Income (Loss)71,626446,574Net Realized and Net Change in Unrealized Gains (Losses) on InvestmentsNet realized gains (losses):Non-control/non-affiliate investments——Net realized gains (losses)——Net change in unrealized (losses) gains:Non-control/non-affiliate investments(588,941)(298,723)Net change in unrealized (losses) gains(588,941)(298,723)Net Realized and Net Change in Unrealized (Losses) Gains on Investments(588,941)(298,723)Net Increase (Decrease) in Net Assets Resulting from Operations$(517,315)$147,851Net increase (decrease) in net assets resulting from operations per share (Note 11)(1)$(0.22)$0.06Distributions declared per share$0.14$0.17(1) For the three months ended September 30, 2022 and 2021, the weighted average common shares outstanding were 2,375,375 and 2,385,883, respectively.





See notes to consolidated financial statements.


3




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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
 (unaudited)





Common StockFor the Three Months Ended September 30, 2022SharesParPaid-in Capital in Excess of ParDistributable Earnings (Loss)Net AssetsBalance as of June 30, 20222,375,890$2,376$25,209,965$(8,511,366)$16,700,975Net decrease in net assets resulting from operationsNet investment income———71,62671,626Net change in unrealized losses on investments———(588,941)(588,941)Distributions to Shareholders (Note 5)Distributions from earnings———(247,706)(247,706)Return of capital distributions——(91,282)—(91,282)Capital TransactionsShares issued through reinvestment of distributions (Note 3)21,17721153,260—153,281Repurchase of common shares (Note 3)(21,818)(22)(152,483)—(152,505)Total Decrease for the three months ended September 30, 2022(641)(1)(90,505)(765,021)(855,527)Balance as of September 30, 20222,375,249$2,375$25,119,460$(9,276,387)$15,845,448


Common StockFor the Three Months Ended September 30, 2021SharesParPaid-in Capital in Excess of ParDistributable Earnings (Loss)Net AssetsBalance as of June 30, 2021(1)2,386,057$2,386$25,350,732$(5,405,311)$19,947,807Net decrease in net assets resulting from operationsNet investment loss———446,574446,574Net change in unrealized gains on investments———(298,723)(298,723)Distributions to Shareholders (Note 5)(1)Distributions from earnings———(203,790)(203,790)Return of capital distributions——(182,393)—(182,393)Capital TransactionsShares issued through reinvestment of distributions23,78424199,321—199,345Repurchase of common shares(24,081)(24)(200,571)—(200,595)Total Increase (Decrease) for the three months ended September 30, 2021(297)—(183,643)(55,939)(239,582)Balance as of September 30, 20212,385,760$2,386$25,167,089$(5,461,250)$19,708,225(1) Certain reclassifications have been made in the presentation of prior year and prior quarter amounts to conform to the presentation for the current fiscal year. In addition, we have not yet finalized return of capital estimates for the current period. See Note 2 and 6 within the accompanying notes to the consolidated financial statements for further discussion.








See notes to consolidated financial statements.



































4




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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)





Three Months Ended September 30,20222021Cash flows from operating activities:Net (decrease) increase in net assets resulting from operations$(517,315)$147,851Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:Amortization of offering costs8,5135,307Purchases of investments—(5,735,000)Repayments and sales of portfolio investments1,358,5875,517,172Net change in unrealized losses (gains) on investments588,941298,723Amortization of premiums (accretion of purchase discounts) on investments, net45,602(156,282)Amortization of deferred financing costs14,81814,818Payment-in-kind interest(162)(193)Changes in other assets and liabilities:(Increase) Decrease in operating assetsReceivable for repayments of portfolio investments28,918(38,419)Interest receivable73,932(60,738)Deferred offering costs (Note 4)(8,513)(5,307)Prepaid expenses and other assets6,32651,546Increase (Decrease) in operating liabilitiesDue to Adviser (Note 4)—(44,223)Accrued expenses17,0481,593Accrued legal fees(58,476)(42,809)Accrued audit fees18,43384,078Due to Administrator (Note 4)40,517(204,497)Due to Affiliates (Note 4)—(13,400)Interest payable20,9042,457Tax payable(4,935)—Net cash provided (used in) by operating activities1,633,138(177,323)Cash flows from financing activities:Distributions paid to stockholders(174,441)(203,769)Repurchase of common shares(152,505)(200,595)Repayments under Revolving Credit Facility (Note 10)(500,000)—Net cash (used in) provided by financing activities(826,946)(404,364)Net increase (decrease) in cash806,192(581,687)Cash at beginning of year1,467,5683,139,929Cash at end of year$2,273,760$2,558,242Supplemental disclosures:Cash paid for interest$233,536$125,110Non-cash financing activities:Value of shares issued through reinvestment of distributions$153,281$199,345


See notes to consolidated financial statements.


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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2022
 (unaudited)





September 30, 2022Portfolio Company / Security TypeIndustryAcquisition DateCoupon/Yield (b)FloorLegalMaturityPrincipal/ QuantityAmortized Cost (d)Fair Value (c)% of  Net AssetsNon-Control/Non-Affiliate Investments (less than 5.00% voting control):Senior Secured Loans-First Lien(g)(l)(m)Aventiv Technologies, LLC (f/k/a Securus Technologies Holdings, Inc.)(j)(k)Telecommunications7/31/20193ML+4.50% (8.17%)1.0011/1/2024$1,934,010$1,860,100$1,748,53911.04%BCPE North Star US Holdco 2, Inc.(i)Beverage, Food & Tobacco2/2/20223ML+4.00% (7.67%)0.756/9/20281,984,9621,984,5401,941,88912.26%CareerBuilder, LLC(i)(k)Services: Consumer7/27/20173ML+6.75% (10.42%)1.007/31/2023969,272950,691661,5284.17%DRI Holding Inc(i)Media: Broadcasting & Subscription12/16/20211ML+5.25% (8.37%)0.5012/21/20281,990,0001,990,0001,945,22512.28%DTI Holdco, Inc.(i)Services: Business4/21/20221M SOFR+4.75% (7.33%)0.754/26/20291,500,0001,471,7761,466,7009.26%First Brands Group(i)Automotive3/24/20216M SOFR+5.00% (8.37%)1.003/30/20271,231,2501,221,8781,219,3077.69%PetVet Care Centers, LLC(j)Healthcare & Pharmaceuticals11/22/20211ML+3.50% (6.62%)0.752/14/20251,484,6941,481,9121,378,9098.70%Quidditch Acquisition, Inc.(i)Beverage, Food & Tobacco3/21/20181ML+7.00% (9.52%)1.003/21/2025477,500473,277475,1133.00%RC Buyer, Inc.(i)Consumer goods: Durable7/27/20213ML + 3.50% (7.17%)0.757/28/20281,975,0001,970,8261,899,16011.99%Research Now Group, Inc. & Survey Sampling International LLC(j)Services: Business4/2/20196ML+5.50% (8.84%)1.0012/20/20241,935,2501,935,2501,774,62411.20%Rising Tide Holdings, Inc.(i)Consumer goods: Non-Durable5/26/20211ML + 4.75% (7.87%)0.756/1/2028987,500979,369824,2665.20%Rocket Software, Inc.(j)(k)High Tech Industries4/2/20191ML+4.25% (7.37%)—11/28/20252,028,5562,018,7171,945,04012.28%Shutterfly, LLC(i)Media: Diversified and Production7/1/20211ML+5.00% (8.16%)0.759/25/20261,980,0001,972,2481,653,30010.43%Sorenson Communications, LLC(i)Services: Consumer3/12/20213ML+5.50% (9.17%)0.753/17/20261,700,0001,686,1021,680,11010.60%Staples, Inc.(j)(k)Wholesale11/18/20193ML+5.00% (7.78%)—4/16/20261,944,7241,929,8111,737,99910.97%Upstream Newco, Inc.(i)Services: Consumer7/22/20213M SOFR+4.25% (8.06%)—11/20/20261,234,3751,234,3751,195,3697.54%ViaPath Technologies (f/k/a Global Tel*Link Corporation)(i)(k)Telecommunications4/5/20193ML+4.25% (7.06%)—11/29/20251,933,2691,900,7271,808,57311.41%Wellpath Holdings, Inc. (f/k/a Correct Care Solutions Group Holdings, LLC)(i)(k)Healthcare & Pharmaceuticals4/2/20191ML+5.50% (8.62%)—10/1/20252,028,3772,005,2541,955,96312.34%Total Senior Secured Loans-First Lien$29,066,853$27,311,614172.36%Senior Secured Loans-Second Lien(i)(l)(m)Inmar, Inc.(g)Media: Advertising, Printing & Publishing5/1/20171ML+8.00% (11.12%)1.005/1/2025$500,000$496,718$482,5003.05%Total Senior Secured Loans-Second Lien$496,718$482,5003.05%Senior Secured Notes(a)(j)(l)CURO Group Holdings Corp.Financial11/18/20217.50%N/A8/1/2028$1,000,000$1,004,381$567,6813.58%Total Senior Secured Notes$1,004,381$567,6813.58%Structured Subordinated Notes(a)(e)(i)(l)Apidos CLO XXIVStructured Finance5/17/201925.47%N/A10/20/2030$250,000$157,768$150,4030.94%Apidos CLO XXVIStructured Finance7/25/201919.74%N/A7/18/2029250,000186,087180,1631.14%California CLO IX, Ltd.Structured Finance12/13/201926.00%N/A7/16/2032500,000241,228243,0991.53%Carlyle Global Market Strategies CLO 2014-4-R, Ltd.Structured Finance4/7/201712.25%N/A7/15/2030250,000178,234148,1660.94%Carlyle Global Market Strategies CLO 2017-5, Ltd.Structured Finance12/18/201711.32%N/A1/22/2030500,000433,976352,2722.22%Galaxy XIX CLO, Ltd.Structured Finance12/5/201613.04%N/A7/24/2030250,000176,619125,5680.79%GoldenTree Loan Opportunities IX, Ltd.(n)Structured Finance7/19/2017—%N/A10/29/2029250,000168,841140,6140.89%Madison Park Funding XIII, Ltd.(n)Structured Finance11/6/2015—%N/A4/22/2030250,000144,809127,1020.80%Madison Park Funding XIV, Ltd.Structured Finance11/16/201518.55%N/A10/22/2030250,000180,212138,8610.88%


6


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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2022
 (unaudited)


September 30, 2022Portfolio Company / Security TypeIndustryAcquisition DateCoupon/Yield (b)FloorLegalMaturityPrincipal/ QuantityAmortized Cost (d)Fair Value (c)% of  Net AssetsOctagon Investment Partners XIV, Ltd.Structured Finance12/1/20172.52%N/A7/16/2029$850,000$441,264$345,0442.18%Octagon Investment Partners XV, Ltd.Structured Finance5/23/201918.84%N/A7/19/2030500,000288,808283,0001.79%Octagon Investment Partners XXI,Ltd.(k)Structured Finance1/6/201619.04%N/A2/14/2031387,538239,151178,8381.13%Octagon Investment Partners 30, Ltd.Structured Finance11/16/201710.73%N/A3/17/2030475,000387,163334,2602.11%Octagon Investment Partners 31, Ltd.Structured Finance12/20/201924.79%N/A7/20/2030250,000158,421146,2690.92%Octagon Investment Partners 36, Ltd.Structured Finance12/20/201925.35%N/A4/15/2031500,000377,323336,5862.12%Octagon Investment Partners 39, Ltd.Structured Finance1/9/202024.12%N/A10/21/2030250,000191,750187,8121.19%OZLM XII, Ltd.(n)Structured Finance1/17/2017—%N/A4/30/2027275,000161,89964,9910.41%Sound Point CLO II, Ltd.Structured Finance5/16/20196.45%N/A1/26/20311,500,000743,988555,4103.51%Sound Point CLO VII-R, Ltd.Structured Finance8/23/201916.00%N/A10/23/2031150,00057,68241,4120.26%Sound Point CLO XVIII, Ltd.Structured Finance5/16/20199.08%N/A1/21/2031250,000202,597164,8421.04%THL Credit Wind River 2013-1 CLO, Ltd.(n)Structured Finance11/1/2017—%N/A7/22/2030325,000216,823162,6611.03%Venture XXXIV CLO, Ltd.Structured Finance7/30/201920.36%N/A10/15/2031250,000211,397188,7621.19%Voya IM CLO 2013-1, Ltd.(k)Structured Finance6/9/20167.31%N/A10/15/2030278,312176,160133,6380.84%Voya CLO 2016-1, Ltd.Structured Finance1/22/201615.41%N/A1/21/2031250,000195,547172,7111.09%Total Structured Subordinated Notes$5,917,747$4,902,48430.94%Equity/Other(a)(i)(l)ACON IWP Investors I, L.L.C.(h)Healthcare & Pharmaceuticals4/30/2015N/AN/AN/A472,357$472,357$537,0003.39%FullBeauty Brands Holding, Common Stock(h)Retail2/7/2019N/AN/AN/A72$198,026$15,7500.10%Total Equity/Other$670,383$552,7503.49%Total Portfolio Investments$37,156,082$33,817,029213.42%


(a)    Indicates assets that the Company believes do not represent “qualifying assets” under Section 55(a) of the Investment Company Act of 1940, as amended (the “1940 Act”). Under the 1940 Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. Of the Company’s total investments as of September 30, 2022, 16% are non-qualifying assets as a percentage of total assets.


(b)    The majority of the investments bear interest at a rate that may be determined by reference to either London Interbank Offered Rate ("LIBOR" or "L") or Secured Overnight Financing Rate ("SOFR") which resets monthly, quarterly, or semiannually. For each such investment, the Company has provided the spread over LIBOR, SOFR or the prime lending rate ("Prime") and the current contractual interest rate in effect at September 30, 2022. Certain investments are subject to a LIBOR, SOFR or Prime interest rate floor. The one-month ("1ML"), three-month ("3ML"), and six-month ("6ML") LIBOR rates are based on the applicable LIBOR rate for each investment on its reset date. The one-month ("1M SOFR"), three-month ("3M SOFR") and six-month ("6M SOFR") SOFR rates are based on the applicable SOFR rate for each investment on its reset date.


(c)    Fair value is determined by the Company’s Board of Directors (see Note 2).


(d)    See Note 6 for a discussion of the tax cost of the portfolio.


(e)  The structured subordinated notes and preference/preferred shares are considered equity positions in the Collateralized Loan Obligations (“CLOs”), which is referred to as "Subordinated Structured Notes", or "SSN". The CLO equity investments are entitled to recurring distributions which are generally equal to the excess cash flow generated from the underlying investments after payment of the contractual payments to debt holders and fund expenses. The current estimated yield is calculated using amortized cost based on the current projections of this excess cash flow taking into account assumptions which have been made regarding expected prepayments, losses and future reinvestment rates. These assumptions are periodically reviewed and adjusted. Ultimately, the actual yield may be higher or lower than the estimated yield if actual results differ from those used for the assumptions.


(f)    This investment has contractual PIK interest. PIK income computed at the contractual rate is accrued into income and reflected as receivable up to the capitalization date.


(g)   Security is held by Prospect Flexible Funding, LLC, our SPV, and is pledged as collateral for the Credit Facility and such security is not available as collateral to our general creditors (see Note 10). The fair values of the investments held by the SPV at September 30, 2022 and June 30, 2022 were $27,794,114 and $29,382,034, respectively, representing 82% and 82% of our total investments, respectively.


(h)    Represents non-income producing security that has not paid interest or dividends in the year preceding the reporting date.


(i)    Investment(s) is (are) valued using significant unobservable inputs and are categorized as Level 3 investments in accordance with ASC 820. See Notes 2 and 8 within the accompanying notes to the consolidated financial statements.


(j)    Investment is categorized as Level 2 investments in accordance with ASC 820. See Note 2 within the accompanying notes to the consolidated financial statements.


7


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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2022
 (unaudited)


(k)     Acquisition date represents the date of the Company's initial investment. Follow-on acquisitions have occurred on the following dates to arrive at the Company's current investment (excluding effects of capitalized PIK interest, premium/original issue discount amortization/accretion, and partial repayments):


Portfolio CompanyInvestmentFollow-On Acquisition DatesFollow-On Acquisitions (Excluding initial investment cost)Aventiv Technologies, LLC (f/k/a Securus Technologies Holdings, Inc.)Senior Secured Loans-First Lien8/2/2019908,750CareerBuilder, LLCSenior Secured Loans-First Lien6/5/2020690,000Octagon Investment Partners XXI, Ltd.Structured Subordinated Notes2/14/201935,015Rocket Software, Inc.Senior Secured Loans-First Lien6/28/2019, 7/30/20191,327,272Staples, Inc.Senior Secured Loans-First Lien2/3/2020980,031ViaPath Technologies (f/k/a Global Tel*Link Corporation)Senior Secured Loans-First Lien7/9/2019, 7/16/20191,436,250Voya IM CLO 2013-1, Ltd.Structured Subordinated Notes10/17/2017, 7/1/201920,584Wellpath Holdings, Inc. (f/k/a Correct Care Solutions Group Holdings, LLC)Senior Secured Loans-First Lien4/10/2019, 7/25/20191,327,000


(l)     The securities in which the Company has invested were acquired in transactions that were exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). These securities may be resold only in transactions that are exempt from registration under the Securities Act.


(m)     Syndicated investments which were originated by a financial institution and broadly distributed.


(n)   The effective yield has been estimated to be 0% as expected future cash flows are anticipated to not be sufficient to repay the investment at cost. If the expected investment proceeds increase, there is a potential for future investment income from the investment. Distributions, once received, will be recognized as return of capital, and when called, any remaining unamortized investment costs will be written off if the actual distributions are less than the amortized investment cost. To the extent that the cost basis of the SSN is fully recovered, any future distributions will be recorded as realized gains.








See notes to consolidated financial statements.


8




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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2022





June 30, 2022Portfolio Company / Security TypeIndustryAcquisition DateCoupon/Yield (b)FloorLegalMaturityPrincipal/ QuantityAmortized Cost (d)Fair Value (c)% of  Net AssetsNon-Control/Non-Affiliate Investments (less than 5.00% voting control):Senior Secured Loans-First Lien(g)(l)(m)Amerilife Holdings, LLC(i)(k)Banking, Finance, Insurance & Real Estate2/6/20201ML+4.00% (5.67%)—3/18/2027$735,131$734,193$735,1314.40%Aventiv Technologies, LLC (f/k/a Securus Technologies Holdings, Inc.)(j)(k)Telecommunications7/31/20193ML+4.50% (6.75%)1.0011/1/20241,939,0861,856,2641,792,40010.73%BCPE North Star US Holdco 2, Inc.(i)Beverage, Food & Tobacco2/2/20223ML+4.00% (6.25%)0.756/9/20281,989,9751,989,5341,964,70211.76%CareerBuilder, LLC(i)(k)Services: Consumer7/27/20173ML+6.75% (9.00%)1.007/31/2023969,272945,068661,5283.96%DRI Holding Inc(i)Media: Broadcasting & Subscription12/16/20211ML+5.25% (6.92%)0.5012/21/20281,995,0001,995,0001,960,08011.74%DTI Holdco, Inc.(i)Services: Business4/21/20221M SOFR+4.75% (6.28%)0.754/26/20291,500,0001,470,6941,495,1358.95%Excelitas Technologies Corp.(i)High Tech Industries7/21/20213ML+3.50% (5.75%)1.0012/2/2024494,819494,819481,9532.89%First Brands Group(i)Automotive3/24/20213M SOFR+5.00% (6.29%)1.003/30/20271,234,3751,224,4781,217,0877.29%PetVet Care Centers, LLC(i)Healthcare & Pharmaceuticals11/22/20211ML+3.50% (5.17%)0.752/14/20251,488,5201,485,4431,407,8878.43%Quidditch Acquisition, Inc.(i)Beverage, Food & Tobacco3/21/20181ML+7.00% (8.67%)1.003/21/2025478,750474,097421,0012.52%RC Buyer, Inc.(i)Consumer goods: Durable7/27/20213ML + 3.50% (5.75%)0.757/28/20281,975,0001,970,6451,911,60311.45%Research Now Group, Inc. & Survey Sampling International LLC(j)Services: Business4/2/20196ML+5.50% (6.50%)1.0012/20/20241,940,3291,940,3291,777,17910.64%Rising Tide Holdings, Inc.(i)Consumer goods: Non-Durable5/26/20211ML + 4.75% (6.42%)0.756/1/2028990,000981,508914,0675.47%Rocket Software, Inc.(j)(k)High Tech Industries4/2/20191ML+4.25% (5.92%)—11/28/20252,033,8112,023,1891,896,52911.36%Shutterfly, LLC(j)Media: Diversified and Production7/1/20213ML+5.00% (7.25%)0.759/25/20261,980,0001,971,7581,702,82910.20%Sorenson Communications, LLC(i)Services: Consumer3/12/20213ML+5.50% (7.75%)0.753/17/20261,750,0001,735,0911,738,59110.41%Staples, Inc.(j)(k)Wholesale11/18/20193ML+5.00% (6.29%)—4/16/20261,949,7491,933,7761,760,22210.54%Upstream Newco, Inc.(i)Services: Consumer7/22/20211M SOFR+4.25% (5.89%)—11/20/20261,237,5001,237,5001,214,1117.27%ViaPath Technologies (f/k/a Global Tel*Link Corporation)(i)(k)Telecommunications4/5/20191ML+4.25% (5.92%)—11/29/20251,938,2911,903,1571,823,85710.92%Wellpath Holdings, Inc. (f/k/a Correct Care Solutions Group Holdings, LLC)(i)(k)Healthcare & Pharmaceuticals4/2/20193ML+5.50% (7.07%)—10/1/20252,033,6452,008,5832,004,89212.00%Total Senior Secured Loans-First Lien$30,375,126$28,880,784172.93%Senior Secured Loans-Second Lien(i)(l)(m)FullBeauty Brands Holding(f)Retail2/7/20197.00% (6.00% PIK plus 1.00% cash)—1/31/2025$13,180$11,098$10,2140.06%Inmar, Inc.(g)Media: Advertising, Printing & Publishing5/1/20171ML+8.00% (9.67%)1.005/1/2025500,000496,398501,2503.00%Total Senior Secured Loans-Second Lien$507,496$511,4643.06%Senior Secured Notes(a)(j)(l)CURO Group Holdings Corp.Financial11/18/20217.50%N/A8/1/2028$1,000,000$1,004,570$650,0003.89%Total Senior Secured Notes$1,004,570$650,0003.89%Structured Subordinated Notes(a)(e)(i)(l)Apidos CLO XXIVStructured Finance5/17/201921.71%N/A10/20/2030$250,000$155,872$152,9410.92%Apidos CLO XXVIStructured Finance7/25/201918.11%N/A7/18/2029250,000185,058188,8001.13%California CLO IX, Ltd.Structured Finance12/13/201925.84%N/A7/16/2032500,000235,293248,2711.49%Carlyle Global Market Strategies CLO 2014-4-R, Ltd.Structured Finance4/7/20179.89%N/A7/15/2030250,000180,136149,7390.90%Carlyle Global Market Strategies CLO 2017-5, Ltd.Structured Finance12/18/20178.77%N/A1/22/2030500,000439,704371,4922.22%


9


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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2022


June 30, 2022Portfolio Company / Security TypeIndustryAcquisition DateCoupon/Yield (b)FloorLegalMaturityPrincipal/ QuantityAmortized Cost (d)Fair Value (c)% of  Net AssetsGalaxy XIX CLO, Ltd.Structured Finance12/5/201616.04%N/A7/24/2030$250,000$177,029$131,4140.79%GoldenTree Loan Opportunities IX, Ltd.(n)Structured Finance7/19/2017—%N/A10/29/2029250,000173,284141,5200.85%Madison Park Funding XIII, Ltd.Structured Finance11/6/20154.47%N/A4/22/2030250,000150,692147,1660.88%Madison Park Funding XIV, Ltd.Structured Finance11/16/201514.39%N/A10/22/2030250,000179,237144,0100.86%Octagon Investment Partners XIV, Ltd.Structured Finance12/1/20174.30%N/A7/16/2029850,000461,544369,9382.22%Octagon Investment Partners XV, Ltd.Structured Finance5/23/201918.20%N/A7/19/2030500,000288,992284,9531.71%Octagon Investment Partners XXI,Ltd.(k)Structured Finance1/6/201615.66%N/A2/14/2031387,538237,864186,2441.12%Octagon Investment Partners 30, Ltd.Structured Finance11/16/201710.25%N/A3/17/2030475,000395,982358,8332.15%Octagon Investment Partners 31, Ltd.Structured Finance12/20/201925.52%N/A7/20/2030250,000158,869160,9260.96%Octagon Investment Partners 36, Ltd.Structured Finance12/20/201921.52%N/A4/15/2031500,000378,007358,7792.15%Octagon Investment Partners 39, Ltd.Structured Finance1/9/202021.53%N/A10/21/2030250,000189,691195,7031.17%OZLM XII, Ltd.(n)Structured Finance1/17/2017—%N/A4/30/2027275,000161,89934,7950.21%Sound Point CLO II, Ltd.Structured Finance5/16/20199.65%N/A1/26/20311,500,000766,586603,5433.61%Sound Point CLO VII-R, Ltd.Structured Finance8/23/201912.73%N/A10/23/2031150,00057,60444,6360.27%Sound Point CLO XVIII, Ltd.Structured Finance5/16/201910.66%N/A1/21/2031250,000208,570178,1521.07%THL Credit Wind River 2013-1 CLO, Ltd.Structured Finance11/1/20172.03%N/A7/22/2030325,000224,218165,3680.99%Venture XXXIV CLO, Ltd.Structured Finance7/30/201917.29%N/A10/15/2031250,000209,499191,1741.14%Voya IM CLO 2013-1, Ltd.(k)Structured Finance6/9/20166.58%N/A10/15/2030278,312179,004135,4870.81%Voya CLO 2016-1, Ltd.Structured Finance1/22/201612.98%N/A1/21/2031250,000197,172182,8651.09%Total Structured Subordinated Notes$5,991,806$5,126,74930.71%Equity/Other(a)(i)(l)ACON IWP Investors I, L.L.C.(h)Healthcare & Pharmaceuticals4/30/2015N/AN/AN/A472,357$472,357$641,0003.84%FullBeauty Brands Holding, Common Stock(h)Retail2/7/2019N/AN/AN/A72$208,754$——%Total Equity/Other$681,111$641,0003.84%Total Portfolio Investments$38,560,109$35,809,997214.43%


(a)    Indicates assets that the Company believes do not represent “qualifying assets” under Section 55(a) of the Investment Company Act of 1940, as amended (the “1940 Act”). Under the 1940 Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. Of the Company’s total investments as of June 30, 2022, 17% are non-qualifying assets as a percentage of total assets.


(b)    The majority of the investments bear interest at a rate that may be determined by reference to either London Interbank Offered Rate ("LIBOR" or "L") or Secured Overnight Financing Rate ("SOFR") which resets monthly, quarterly, or semiannually. For each such investment, the Company has provided the spread over LIBOR, SOFR or the prime lending rate ("Prime") and the current contractual interest rate in effect at June 30, 2022. Certain investments are subject to a LIBOR, SOFR or Prime interest rate floor. The one-month ("1ML"), three-month ("3ML"), and six-month ("6ML") LIBOR rates are based on the applicable LIBOR rate for each investment on its reset date. The one-month ("1M SOFR") and three-month ("3M SOFR") SOFR rates are based on the applicable SOFR rate for each investment on its reset date.


(c)    Fair value is determined by the Company’s Board of Directors (see Note 2).


(d)    See Note 6 for a discussion of the tax cost of the portfolio.


(e)  The structured subordinated notes and preference/preferred shares are considered equity positions in the Collateralized Loan Obligations (“CLOs”), which is referred to as "Subordinated Structured Notes", or "SSN". The CLO equity investments are entitled to recurring distributions which are generally equal to the excess cash flow generated from the underlying investments after payment of the contractual payments to debt holders and fund expenses. The current estimated yield is calculated using amortized cost based on the current projections of this excess cash flow taking into account assumptions which have been made regarding expected prepayments, losses and future reinvestment rates. These assumptions are periodically reviewed and adjusted. Ultimately, the actual yield may be higher or lower than the estimated yield if actual results differ from those used for the assumptions.


(f)    This investment has contractual PIK interest. PIK income computed at the contractual rate is accrued into income and reflected as receivable up to the capitalization date.


(g)   Security is held by Prospect Flexible Funding, LLC, our SPV, and is pledged as collateral for the Credit Facility and such security is not available as collateral to our general creditors (see Note 10). The fair values of the investments held by the SPV at June 30, 2022 and June 30, 2021 were $29,382,034 and $30,361,804, respectively, representing 82% and 80% of our total investments, respectively.


(h)    Represents non-income producing security that has not paid interest or dividends in the year preceding the reporting date.


(i)    Investment(s) is (are) valued using significant unobservable inputs and are categorized as Level 3 investments in accordance with ASC 820. See Notes 2 and 8 within the accompanying notes to the consolidated financial statements.


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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2022


(j)    Investment is categorized as Level 2 investments in accordance with ASC 820. See Note 2 within the accompanying notes to the consolidated financial statements.


(k)     Acquisition date represents the date of the Company's initial investment. Follow-on acquisitions have occurred on the following dates to arrive at the Company's current investment (excluding effects of capitalized PIK interest, premium/original issue discount amortization/accretion, and partial repayments):


Portfolio CompanyInvestmentFollow-On Acquisition DatesFollow-On Acquisitions (Excluding initial investment cost)Amerilife Holdings, LLCSenior Secured Loans-First Lien11/2/202085,227Aventiv Technologies, LLC (f/k/a Securus Technologies Holdings, Inc.)Senior Secured Loans-First Lien8/2/2019908,750CareerBuilder, LLCSenior Secured Loans-First Lien6/5/2020690,000Octagon Investment Partners XXI, Ltd.Structured Subordinated Notes2/14/201935,015Rocket Software, Inc.Senior Secured Loans-First Lien6/28/2019, 7/30/20191,327,272Staples, Inc.Senior Secured Loans-First Lien2/3/2020980,031ViaPath Technologies (f/k/a Global Tel*Link Corporation)Senior Secured Loans-First Lien7/9/2019, 7/16/20191,436,250Voya IM CLO 2013-1, Ltd.Structured Subordinated Notes10/17/2017, 7/1/201920,584Wellpath Holdings, Inc. (f/k/a Correct Care Solutions Group Holdings, LLC)Senior Secured Loans-First Lien4/10/2019, 7/25/20191,327,000


(l)     The securities in which the Company has invested were acquired in transactions that were exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). These securities may be resold only in transactions that are exempt from registration under the Securities Act.


(m)     Syndicated investments which were originated by a financial institution and broadly distributed.


(n)   The effective yield has been estimated to be 0% as expected future cash flows are anticipated to not be sufficient to repay the investment at cost. If the expected investment proceeds increase, there is a potential for future investment income from the investment. Distributions, once received, will be recognized as return of capital, and when called, any remaining unamortized investment costs will be written off if the actual distributions are less than the amortized investment cost. To the extent that the cost basis of the SSN is fully recovered, any future distributions will be recorded as realized gains.








See notes to consolidated financial statements.


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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022







NOTE 1 - NATURE OF OPERATIONS


Prospect Floating Rate and Alternative Income Fund, Inc. (formerly known as Triton Pacific Investment Corporation, Inc., TP Flexible Income Fund, Inc., Prospect Flexible Income Fund, Inc. and Prospect Sustainable Income Fund, Inc.) (the “Company”, “PFLOAT”, “our”, “us”, “we”), incorporated in Maryland on April 29, 2011, is an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). Our investment objective is to generate current income and, as a secondary objective, capital appreciation by targeting investment opportunities with favorable risk-adjusted returns. Under normal market conditions, we will invest at least 80% of our net assets (plus any borrowings for investment purposes) in floating rate loans and other income producing investments. The Company utilizes an ESG responsibility screen, in addition to analyzing companies' financial performance.  We intend to meet our investment objective by primarily lending to and investing in the debt of privately-owned U.S. middle market companies, which we define as companies with annual revenue between $50 million and $2.5 billion. We expect that at least 70% of our portfolio of investments will consist primarily of syndicated senior secured first lien loans, syndicated senior secured second lien loans, and to a lesser extent, subordinated debt, and that up to 30% of our portfolio of investments will consist of other securities, including private equity (both common and preferred), dividend-paying equity, royalties, and the equity and junior debt tranches of a type of pools of broadly syndicated loans known as collateralized loan obligations (“CLOs”), which we also refer to as subordinated structured notes (“SSNs”). Pursuant to our Articles of Incorporation, as amended, restated and supplemented, the Company is authorized to issue 75,000,000 shares of common stock with a par value of $0.001 per share. Additionally, the Company is authorized to issue 25,000,000 shares of preferred stock with a par value of $0.001 per share. The Company previously offered for sale a maximum of $300,000,000 of shares of common stock on a “best efforts” basis pursuant to a registration statement on Form N-2 filed with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as amended (the "Securities Act"), that was dated and became effective on October 27, 2020 (the “Offering”). The Company's initial registration statement on Form N-2 was declared effective on September 4, 2012 and the Company commenced the Offering on such date. On June 25, 2014, the Company met its minimum offering requirement of $2,500,000 and released all shares held in escrow. On and effective February 19, 2021, the Company terminated the Offering and, as a result, the Company's Amended and Restated Dealer Manager Agreement, dated August 6, 2020, with Triton Pacific Securities, LLC (“TPS”) terminated in accordance with its terms and TPS ceased serving as the Company's dealer manager effective as of such date.  Effective September 19, 2022, the Company engaged Preferred Capital Securities, LLC (“PCS”) as the Company’s dealer manager for the Company’s offering to “accredited investors” (within the meaning of Rule 501(a) under the Securities Act) of shares of its common stock (the “Private Offering”) on the terms and conditions set forth in the Company’s confidential private placement memorandum. The Company is relying on the exemption provided by Rule 506(b) of Regulation D and Section 4(a)(2) of the Securities Act in connection with the Private Offering.





On March 31, 2019, Pathway Capital Opportunity Fund, Inc. (“PWAY”) merged with and into us (the “Merger”).  As the combined surviving company, we were renamed TP Flexible Income Fund, Inc. (we were formerly known as Triton Pacific Investment Corporation, Inc. (“TPIC”)). In connection with the Merger, Prospect Flexible Income Management, LLC (“PFIM”), an affiliate of PWAY, became our investment adviser, and Prospect Administration LLC (the "Administrator"), an affiliate of PFIM and our new investment advisor, Prospect Capital Management L.P. (the “Adviser”), became our administrator.





Although PWAY merged into us in connection with the Merger, PWAY is considered the accounting survivor of the Merger and its historical financial statements are included and discussed in this report. The Company adopted PWAY’s fiscal year end of June 30. The Merger was a tax free business combination. Consistent with tax free business combinations of investment companies, for financial reporting purposes, the reverse merger accounting was recorded at fair value; however, the cost basis of the investments received from TPIC was carried forward to align ongoing financial reporting of the Company’s realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes. Further, the components of net assets of the Company reflect the combined components of net assets of both PWAY and TPIC.





For financial reporting purposes, the Merger was treated as a recapitalization of PWAY followed by the reverse acquisition of


TPIC by PWAY for a purchase price equivalent to the fair value of TPIC’s net assets.





In accordance with the accounting and presentation for reverse acquisitions, the historical financial statements of the Company, prior to the date of the Merger reflect the financial positions and results of operations of PWAY, with the exception of the components of net assets described above, with the results of operations of TPIC being included commencing on April 1, 2019.





On and effective August 5, 2020, the Company changed its name to Prospect Flexible Income Fund, Inc. from TP Flexible Income Fund, Inc. by filing Articles of Amendment to its Fourth Articles of Amendment and Restatement, as amended and


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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


supplemented. On and effective January 10, 2022, the Company changed its name to Prospect Sustainable Income Fund, Inc. from Prospect Flexible Income Fund, Inc. To effectuate the name change, the Company amended its Fourth Articles of Amendment and Restated, as amended and supplemented, and amended and restated its Second Amended and Restated Bylaws. On and effective September 16, 2022, the Company changed its name to Prospect Floating Rate and Alternative Income Fund, Inc. from Prospect Sustainable Income Fund, Inc. by filing Articles of Amendment to its Fourth Articles of Amendment and Restatement, as amended and supplemented, and amended and restated its Third Amended and Restated Bylaws.





On April 20, 2021, we entered into an investment advisory agreement (the “Investment Advisory Agreement”) with the Adviser, which was approved by our Board of Directors, including by all of the directors who are not “interested persons” (as defined in the 1940 Act). Our stockholders approved the Investment Advisory Agreement at a Special Meeting of Stockholders held on March 31, 2021. The Investment Advisory Agreement replaced our prior investment advisory agreement, dated March 31, 2019 (the “Former Investment Advisory Agreement”), with PFIM, our former investment adviser, which terminated effective April 20, 2021. The Investment Advisory Agreement is identical in all material respects to the Former Investment Advisory Agreement, except for its date of effectiveness, term and the Adviser serving as our investment adviser instead of PFIM. As such, the Former Investment Advisory Agreement and the Investment Advisory Agreement contain the same terms, provisions, conditions and fee rates, and provide for the same management services to be conducted by the Adviser as were conducted by PFIM. On November 5, 2021, we amended and restated the Investment Advisory Agreement (the “Amended and Restated Advisory Agreement”) to reduce the advisory fees payable thereunder, effective as of January 1, 2022 and until the one year anniversary of the listing of our common stock on a national securities exchange. The Amended and Restated Advisory Agreement was unanimously approved by our Board of Directors, including by all of the directors who are not “interested persons” (as defined in the 1940 Act), and became effective on January 1, 2022. Until such effective date, the advisory fees payable to the Adviser are as set forth in the Investment Advisory Agreement. See “Note 4 - Related Party Transactions and Arrangements - Investment Advisory Agreement” for additional information.


The Adviser was formed in Delaware as a private investment management firm and is registered as an investment adviser with the SEC under the Investment Advisers Act of 1940, as amended, or the Advisers Act. The Adviser oversees the management of our activities and is responsible for making the investment decisions with respect to our investment portfolio, subject to the oversight of our Board of Directors.





On May 16, 2019, we formed a wholly-owned subsidiary TP Flexible Funding, LLC (the “SPV”), a Delaware limited liability company and a bankruptcy remote special purpose entity, which holds certain of our portfolio loan investments that are used as collateral for the revolving credit facility at the SPV. This subsidiary has been consolidated since operations commenced.  On and effective August 5, 2020, the Company changed the name of the SPV to Prospect Flexible Funding, LLC.







NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES


Basis of Presentation and Consolidation. The accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) pursuant to the requirements for reporting on Form 10-Q, ASC 946, Financial Services - Investment Companies (“ASC 946”), and Articles 3, 6, and 12 of Regulation S-X. Under the 1940 Act, ASC 946, and the regulations pursuant to Article 6 of Regulation S-X, we are precluded from consolidating any entity other than another investment company or an operating company which provides substantially all of its services to benefit us. Our consolidated financial statements include the accounts of PFLOAT and the SPV. All intercompany balances and transactions have been eliminated in consolidation.


Reclassifications. Certain reclassifications have been made in the presentation of prior consolidated financial statements and accompanying notes to conform to the presentation as of and for the three months ended September 30, 2022.


Management Estimates and Assumptions. The preparation of the consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of income, expenses, and gains and losses during the reported period. Changes in the economic environment, financial markets, creditworthiness of the issuers of our investment portfolio and any other parameters used in determining these estimates could cause actual results to differ, and these differences could be material.


Cash. All cash balances are maintained with high credit quality financial institutions which are members of the Federal Deposit Insurance Corporation ("FDIC"). Cash held at financial institutions, has exceeded the FDIC insured limit. The Company has not incurred any losses on these accounts, and the credit risk exposure is mitigated by the financial strength of the banking institutions where the amounts are held.


Investment Transactions. Investments are recognized when we assume an obligation to acquire a financial instrument and assume the risks for gains or losses related to that instrument. Investments are derecognized when we assume an obligation to


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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


sell a financial instrument and forego the risks for gains or losses related to that instrument. Specifically, we record all security transactions at fair value on a trade date basis and changes in fair value are recognized in unrealized appreciation (depreciation) on investments on the Consolidated  Statements of Operations . Amounts for investments traded but not yet settled are reported in Payable for investments purchased and Receivable for investments sold on the Consolidated Statements of Assets and Liabilities . As of September 30, 2022, we have no assets going through foreclosure.


Valuation of Portfolio Investments. As a BDC, and in accordance with the 1940 Act, we fair value our investment portfolio on a quarterly basis, with any unrealized gains and losses reflected in net increase (decrease) in net assets resulting from operations on our Consolidated Statements of Operations . To value our investments, we follow the guidance of ASC 820, Fair Value Measurement (“ASC 820”), that defines fair value, establishes a framework for measuring fair value in conformity with GAAP, and requires disclosures about fair value measurements. In accordance with ASC 820, the fair value of our investments is defined as the price that we would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market in which that investment is transacted.


ASC 820 classifies the inputs used to measure these fair values into the following hierarchy:


Level 1. Quoted prices in active markets for identical assets or liabilities, accessible by us at the measurement date.


Level 2. Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.


Level 3. Unobservable inputs for the asset or liability.


In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each investment.


Our Board of Directors has established procedures for the valuation of our investment portfolio. These procedures are detailed below.


Investments for which market quotations are readily available are valued at such market quotations.


For most of our investments, market quotations are not available. With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, due to factors such as volume and frequency of price quotes, our Board of Directors has approved a multi-step valuation process each quarter, as described below.


1. Each portfolio company or investment is reviewed by our investment professionals with independent valuation firms engaged by our Board of Directors.


2. The independent valuation firms prepare independent valuations for each investment based on their own independent assessments and issue their report.


3. The Audit Committee of our Board of Directors reviews and discusses with the independent valuation firms the valuation reports, and then makes a recommendation to the Board of Directors of the value for each investment.


4. The Board of Directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of the Investment Adviser, the respective independent valuation firm and the Audit Committee.





Our non-CLO investments that are classified as Level 3 are valued utilizing a yield technique, enterprise value (“EV”) technique, net asset value technique, asset recovery technique, discounted cash flow technique, or a combination of techniques, as appropriate. The yield technique uses loan spreads for loans and other relevant information implied by market data involving identical or comparable assets or liabilities. Under the EV technique, the EV of a portfolio company is first determined and allocated over the portfolio company’s securities in order of their preference relative to one another (i.e., “waterfall” allocation). To determine the EV, we typically use a market (multiples) valuation approach that considers relevant and applicable market trading data of guideline public companies, transaction metrics from precedent merger and acquisitions transactions, and/or a discounted cash flow technique. The net asset value technique, an income approach, is used to derive a value of an underlying investment by dividing a relevant earnings stream by an appropriate capitalization rate. For this purpose, we consider capitalization rates for similar properties as may be obtained from guideline public companies and/or relevant transactions. The asset recovery technique is intended to approximate the net recovery value of an investment based on, among other things, assumptions regarding liquidation proceeds based on a hypothetical liquidation of a portfolio company’s assets. The discounted cash flow technique converts future cash flows or earnings to a range of fair values from which a single estimate may be


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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


derived utilizing an appropriate discount rate. The fair value measurement is based on the net present value indicated by current market expectations about those future amounts.





In applying these methodologies, additional factors that we consider in valuing our investments may include, as we deem relevant: security covenants, call protection provisions, and information rights; the nature and realizable value of any collateral; the portfolio company’s ability to make payments; the principal markets in which the portfolio company does business; publicly available financial ratios of peer companies; the principal market; and enterprise values, among other factors.





Our investments in CLOs are classified as Level 3 fair value measured securities under ASC 820 and are valued using a discounted multi-path cash flow model. The CLO structures are analyzed to identify the risk exposures and to determine an appropriate call date (i.e., expected maturity). These risk factors are sensitized in the multi-path cash flow model using Monte Carlo simulations, which is a simulation used to model the probability of different outcomes, to generate probability-weighted (i.e., multi-path) cash flows from the underlying assets and liabilities. These cash flows are discounted using appropriate market discount rates, and relevant data in the CLO market as well as certain benchmark credit indices are considered, to determine the value of each CLO investment. In addition, we generate a single-path cash flow utilizing our best estimate of expected cash receipts, and assess the reasonableness of the implied discount rate that would be effective for the value derived from the multi-path cash flows. We are not responsible for and have no influence over the asset management of the portfolios underlying the CLO investments we hold, as those portfolios are managed by non-affiliated third-party CLO collateral managers. The main risk factors are default risk, prepayment risk, interest rate risk, downgrade risk, and credit spread risk.


Investment Risks


Our investments are subject to a variety of risks. Those risks include the following:


Market Risk


Market risk represents the potential loss that can be caused by a change in the fair value of the financial instrument.


Credit Risk


Credit risk represents the risk that we would incur if the counterparties failed to perform pursuant to the terms of their agreements with us.


Credit Spread Risk


Credit spread risk represents the risk that with higher interest rates comes a higher risk of defaults.


Default Risk


Default risk is the risk that a borrower will be unable to make the required payments on their debt obligation.


Downgrade Risk


Downgrade risk results when rating agencies lower their rating on a bond which are usually accompanied by bond price declines.


Liquidity Risk


Liquidity risk represents the possibility that we may not be able to rapidly adjust the size of our investment positions in times of high volatility and financial stress at a reasonable price.


Interest Rate Risk


Interest rate risk represents a change in interest rates, which could result in an adverse change in the fair value of an interest-bearing financial instrument.


Prepayment Risk


Many of our debt investments allow for prepayment of principal without penalty. Downward changes in interest rates may cause prepayments to occur at a faster than expected rate, thereby effectively shortening the maturity of the security and making us less likely to fully earn all of the expected income of that security and reinvesting in a lower yielding instrument.


Other Risks


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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


Political developments, including civil conflicts and war, sanctions or other measures by the United States or other governments, natural disasters, public health crises and other events outside the Company’s control can directly or indirectly have a material adverse impact on the Company and our portfolio companies.


Structured Credit Related Risk


CLO investments may be riskier and less transparent to us than direct investments in underlying companies. CLOs typically will have no significant assets other than their underlying senior secured loans. Therefore, payments on CLO investments are and will be payable solely from the cash flows from such senior secured loans.


Investment Classification . We are a non-diversified company within the meaning of the 1940 Act. As required by the 1940 Act, we classify our investments by level of control. As defined in the 1940 Act, “Control Investments” are those where there is the ability or power to exercise a controlling influence over the management or policies of a company. Control is generally deemed to exist when a company or individual possesses or has the right to acquire within 60 days or less, a beneficial ownership of more than 25% of the voting securities of an investee company. Under the 1940 Act, “Affiliate Investments” are defined by a lesser degree of influence and are deemed to exist through the possession outright or via the right to acquire within 60 days or less, beneficial ownership of 5% or more of the outstanding voting securities of another person. “Non-Control/Non-Affiliate Investments” are those that are neither Control Investments nor Affiliate Investments.


As a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). As of September 30, 2022 and June 30, 2022, our qualifying assets as a percentage of total assets stood at 83.65% and 83.18%, respectively.


Revenue Recognition. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Accretion of such purchase discounts or amortization of such premiums is calculated using the effective interest method as of the settlement date and adjusted only for material amendments or prepayments. Upon the prepayment of a loan or bond, any unamortized discount or premium is recorded as interest income. The Company records dividend income on the ex-dividend date. The Company does not accrue as a receivable interest or dividends on loans and securities if it has reason to doubt its ability to collect such income. Loans are placed on non-accrual status when there is reasonable doubt that principal or interest will be collected. Unpaid accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans are either applied to the cost basis or interest income, depending upon management’s judgment of the collectibility of the loan receivable. Non-accrual loans are restored to accrual status when past due principal and interest is paid and in management’s judgment, is likely to remain current and future principal and interest collections when due are probable. Interest received and applied against cost while a loan is on non-accrual, and PIK interest capitalized but not recognized while on non-accrual, is recognized prospectively on the effective yield basis through maturity of the loan when placed back on accrual status, to the extent deemed collectible by management. As of  September 30, 2022 and June 30, 2022, the Company did not have any loans on non-accrual status. Upfront structuring fees are recorded as fee income when earned. The Company records prepayment premiums on loans and securities as fee income when it receives such amounts.





Some of our loans and other investments may have contractual payment-in-kind (“PIK”) interest or dividends. PIK income computed at the contractual rate is accrued into income and reflected as receivable up to the capitalization date. PIK investments offer issuers the option at each payment date of making payments in cash or in additional securities. When additional securities are received, they typically have the same terms, including maturity dates and interest rates as the original securities issued. On these payment dates, we capitalize the accrued interest (reflecting such amounts in the basis as additional securities received). PIK generally becomes due at maturity of the investment or upon the investment being called by the issuer. At the point that we believe PIK is not fully expected to be realized, the PIK investment will be placed on non-accrual status. When a PIK investment is placed on non-accrual status, the accrued, uncapitalized interest or dividends are reversed from the related receivable through interest or dividend income, respectively. We do not reverse previously capitalized PIK interest or dividends. Upon capitalization, PIK is subject to the fair value estimates associated with their related investments. PIK investments on non-accrual status are restored to accrual status if we believe that PIK is expected to be realized.


Interest income from investments in Structured Subordinated Notes (typically preferred shares, income notes or subordinated notes of CLO funds) is recorded based on an estimation of an effective yield to expected maturity utilizing assumed future cash flows in accordance with ASC 325-40, Beneficial Interest in the Securitized Financial Assets . The Company monitors the expected cash inflows from CLO equity investments, including the expected residual payments, and the estimated effective yield is determined and updated periodically.


Due from and to Adviser. Amounts due from PFIM and the Adviser are for amounts waived under the Former ELA and New ELA, respectively (as such terms are defined in Note 4) and amounts due to PFIM and the Adviser are for base management fees, incentive fees, operating expenses and offering and organization expenses paid on our behalf. All balances due from and to the Adviser are settled quarterly.


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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


Payment-In-Kind Interest. The Company has certain investments in its portfolio that contain a PIK interest provision, which represents contractual interest or dividends that are added to the principal balance and recorded as income. For the three months ended September 30, 2022 and 2021, PIK interest included in interest income totaled $162 and $193, respectively. The Company stops accruing PIK interest when it is determined that PIK interest is no longer collectible. To maintain RIC tax treatment, and to avoid corporate tax, substantially all of this income must be paid out to the stockholders in the form of distributions, even though the Company has not yet collected the cash.


Offering Costs and Expenses. The Company will incur certain costs and expenses in connection with registering to sell shares of its common stock. These costs and expenses principally relate to certain costs and expenses for advertising and sales, printing and marketing costs, professional and filing fees. Offering costs incurred by the Company were capitalized to deferred offering costs on the Consolidated Statements of Assets and Liabilities and amortized to expense over the 12 month period following such capitalization on a straight line basis prior to the termination of the Offering.  As of April 1, 2021 and following the termination of the offering, all offering costs are expensed as incurred.


Dividends and Distributions. Dividends and distributions to common stockholders are recorded on the record date. The amount, if any, to be paid as a monthly dividend or distribution is approved by our Board of Directors quarterly and generally depends on our earnings, financial condition, maintenance of our tax treatment as a RIC, compliance with applicable BDC regulations and such other factors as our Board of Directors deems relevant from time to time. Net realized capital gains, if any, are distributed at least annually. Our distributions may exceed our earnings, and therefore, portions of the distributions that we make may be a return of the money originally invested and represent a return of capital distribution to shareholders for tax purposes.


Financing Costs. We record origination expenses related to our Revolving Credit Facility as deferred financing costs. These expenses are deferred and amortized as part of interest expense using the straight-line method over the stated life of the obligation of our revolving credit facility. (See Note 10 for further discussion.)


Per Share Information. Net increase or decrease in net assets resulting from operations per share is calculated using the weighted average number of common shares outstanding for the period presented. As of September 30, 2022 and June 30, 2022, there were no issued convertible securities. (See Note 11 for further discussion.)


Net Realized and Net Change in Unrealized Gains or Losses. Gains or losses on the sale of investments are calculated by using the specific identification method. The Company measures realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized gains or losses when gains or losses are realized.


Federal and State Income Taxes. 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”), and intends to continue to comply with the requirements of the Code applicable to RICs. As a RIC, the Company is required to distribute at least 90% of its investment company taxable income and intends to distribute (or retain through a deemed distribution) all of its investment company taxable income and net capital gain to stockholders; therefore, the Company has made no provision for income taxes. The character of income and gains that the Company will distribute is determined in accordance with income tax regulations that may differ from GAAP. Book and tax basis differences relating to stockholder dividends and distributions and other permanent book and tax differences are reclassified to paid-in capital.


If the Company does not distribute (or is not deemed to have distributed) at least 98% of its annual ordinary income and 98.2% of its net capital gains in the calendar year earned, it will generally be required to pay an excise tax equal to 4% of the amount by which 98% of its annual ordinary income and 98.2% of its capital gains exceeds the distributions from such taxable income for the year. 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 from such taxable income, it accrues excise taxes, if any, on estimated excess taxable income. As of September 30, 2022, the Company expects to have excise tax due for the 2022 calendar year. As of September 30, 2022, the Company has accrued $0 of excise tax for this period.


If the Company fails to satisfy the annual distribution requirement or otherwise fails to qualify as a RIC in any taxable year, it would be subject to tax on all of its taxable income at regular corporate income tax rates. The Company would not be able to deduct distributions to stockholders, nor would it be required to make distributions. Distributions would generally be taxable to the Company’s individual and other non-corporate taxable stockholders as ordinary dividend income eligible for the reduced maximum rate applicable to qualified dividend income to the extent of its current and accumulated earnings and profits, provided certain holding period and other requirements are met. Subject to certain limitations under the Code, corporate distributions would be eligible for the dividends-received deduction. To qualify again to be taxed as a RIC in a subsequent year, the Company would be required to distribute to its shareholders its accumulated earnings and profits attributable to non-RIC


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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


years. In addition, if the Company failed to qualify as a RIC for a period greater than two taxable years, then, in order to qualify as a RIC in a subsequent year, it would be required to elect to recognize and pay tax on any net built-in gain (the excess of aggregate gain, including items of income, over aggregate loss that would have been realized if we had been liquidated) or, alternatively, be subject to taxation on such built-in gain recognized for a period of five years.


The Company follows ASC 740, Income Taxes (“ASC 740”). ASC 740 provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the consolidated financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing our tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. As of September 30, 2022, the Company did not record any unrecognized tax benefits or liabilities. Management’s determinations regarding ASC 740 may be subject to review and adjustment at a later date based upon factors including, but not limited to, an on-going analysis of tax laws, regulations and interpretations thereof. Although the Company files both federal and state income tax returns, its major tax jurisdiction is federal. The Company’s federal tax returns for the tax years ended December 31, 2018 and thereafter remain subject to examination by the Internal Revenue Service.


Recent Accounting Pronouncements





In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform. 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 is currently evaluating the impact of the optional guidance on the Company's consolidated financial statements and disclosures. The Company did not utilize the optional expedients and exceptions provided by ASU 2020-04 during the three months ended September 30, 2022.





In December 2020, the SEC adopted Rule 2a-5. The rule establishes a consistent, principles-based framework for boards of directors to use in creating their own specific processes in order to determine fair values in good faith. The effective date for compliance with Rule 2a-5 was September 8, 2022. Rule 2a-5's adoption did not have a significant impact on the Company’s financial statements and disclosures as our Board of Directors has chosen to continue to determine fair value in good faith.







NOTE 3 - SHARE TRANSACTIONS


Below is a summary of transactions with respect to shares of common stock of PFLOAT during the three months ended September 30, 2022 and 2021:


Three Months Ended September 30, 2022Three Months Ended September 30, 2021PFLOAT Class A Common SharesPFLOAT Class A Common SharesSharesAmountSharesAmountShares issued through reinvestment of distributions21,177$153,28123,784$199,345Repurchase of common shares(21,818)(152,505)(24,081)(200,595)Net increase/(decrease) from capital transactions(641)$776(297)$(1,250)


Status of Continuous Public Offering


The proceeds from the issuance of common stock pursuant to the Offering as presented on the accompanying Consolidated Statements of Changes in Net Assets and Consolidated Statements of Cash Flows are presented net of selling commissions and dealer manager fees. The table above is presented gross of selling commissions and dealer manager fees for the three months ended September 30, 2022 and 2021. On and effective February 19, 2021, the Company terminated the Offering.


The respective net increase/(decrease) increase from capital transactions during the three months ended September 30, 2022 and 2021 also includes reinvested stockholder distributions as noted in the tables above.


Share Repurchase Program


The Company intends to continue to conduct quarterly tender offers pursuant to its share repurchase program. The Company’s Board of Directors will consider the following factors, among others, in making its determination regarding whether to cause the Company to offer to repurchase shares of common stock and under what terms:





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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


•    the effect of such repurchases on the Company’s qualification as a RIC (including the consequences of any necessary asset sales);


•    the liquidity of the Company’s assets (including fees and costs associated with disposing of assets);


•    the Company’s investment plans and working capital requirements;


•    the relative economies of scale with respect to the Company’s size;


•    the Company’s history in repurchasing shares of common stock or portions thereof; and


•    the condition of the securities markets.


The Company currently intends to limit the number of shares of common stock to be repurchased during any calendar year to the number of shares of common stock it can repurchase with the proceeds it receives from the issuance of shares of common stock under its distribution reinvestment plan. At the discretion of the Company’s Board of Directors, the Company may also use cash on hand, cash available from borrowings and cash from the liquidation of securities investments as of the end of the applicable period to repurchase shares of common stock. In addition, the Company will limit the number of shares of common stock to be repurchased in any calendar year to 10% of the weighted average number of shares of common stock outstanding in the prior calendar year, or 2.5% in each calendar quarter, though the actual number of shares of common stock that the Company offers to repurchase may be less in light of the limitations noted above.


Our Board of Directors reserves the right, in its sole discretion, to limit the number of shares to be repurchased for each class by applying the limitations on the number of shares to be repurchased, noted above, on a per class basis. We further anticipate that we will offer to repurchase such shares on each date of repurchase at a price equal to the current net offering price or net asset value per share, as applicable, on each date of repurchase. If the amount of repurchase requests exceeds the number of shares we seek to repurchase, we will repurchase shares on a pro-rata basis. As a result, we may repurchase less than the full amount of shares that stockholders submit for repurchase. If we do not repurchase the full amount of the shares that stockholders have requested to be repurchased, or we determine not to make repurchases of our shares, stockholders may not be able to dispose of their shares. Any periodic repurchase offers will be subject in part to our available cash and compliance with the 1940 Act.


Special Repurchase Offer





At the 2019 Annual Meeting of TPIC's stockholders (the "2019 Annual Meeting"), TPIC’s stockholders approved a proposal allowing us to modify our asset coverage ratio requirement from 200% to 150%. Because our securities are not listed on a national securities exchange, pursuant to the requirements of the Small Business Credit Availability Act (the "SBCAA") we were required to conduct four quarterly tender offers (the "Special Repurchase Offer" or "Special Repurchase Offers") that, taken together, allowed all of the former stockholders of TPIC (the "Eligible Stockholders") as of March 15, 2019, the date of the 2019 Annual Meeting, to have those shares that such Eligible Stockholders held as of that date to be repurchased by us. PWAY stockholders who became our stockholders in connection with the Merger were not eligible to participate in these Special Repurchase Offers. In addition, shares of our common stock acquired after the date of the 2019 Annual Meeting were not eligible for repurchase in these Special Repurchase Offers. These Special Repurchase Offers were separate and apart from our share repurchase program discussed above.





The Special Repurchase Offer consisted of four quarterly tender offers, the first of which occurred in the second calendar quarter of 2019, the second of which occurred in the third calendar quarter of 2019, the third of which occurred in the fourth calendar quarter of 2019 and the last of which occurred in the first calendar quarter of 2020. Each of the four tender offers that were part of the Special Repurchase Offer allowed the Eligible Stockholders to tender for repurchase up to 25% of their shares held as of the date of the 2019 Annual Meeting.  The repurchase price for any shares tendered during the Special Repurchase Offer was equal to the net asset value per share of our common stock as of the date of each such repurchase.





The payment for the eligible shares that were tendered in each Special Repurchase Offer was paid promptly at the end of the applicable Special Repurchase Offer in accordance with the 1940 Act. At the discretion of our Board of Directors, we used cash on hand, cash available from borrowings, cash available from the issuance of new shares of our common stock and cash from the sale of our investments to fund the aggregate purchase price payable as a result of any Special Repurchase Offer.





Below is a summary of transactions with respect to shares of common stock during each tender offer:


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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


Quarterly Offer DateRepurchase Effective DateSharesRepurchasedPercentage of SharesTendered That WereRepurchasedRepurchase Price Per ShareAggregateConsideration forRepurchased SharesThree months ended September 30, 2022September 30, 2022August 1, 202221,8189%$6.99$152,505Total for the three months ended September 30, 202221,818$152,505Year ended June 30, 2022September 30, 2021August 2, 202124,08110%$8.33$200,595December 31, 2021November 4, 202124,28611%$8.24200,121March 31, 2022February 1, 202223,46212%$8.13190,747June 30, 2022May 9, 202223,19810%$7.87182,571Total for the year ended June 30, 202295,027$774,034Year ended June 30, 2021September 30, 2020July 22, 202028,78644%$8.25$237,488December 31, 2020November 2, 202026,98615%$8.49229,113March 31, 2021February 10, 202121,58810%$8.90192,133June 30, 2021May 10, 202123,66511%$8.50201,149Total for the year ended June 30, 2021101,025$859,883





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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


NOTE 4 - RELATED PARTY TRANSACTIONS AND ARRANGEMENTS


Administration Agreement


The Administrator, an affiliate of the Adviser, became the administrator for the Company pursuant to an administrative agreement, as amended and restated as of June 17, 2019 (the "Administration Agreement"). The Administrator performs, oversees and arranges for the performance of administrative services necessary for the operation of the Company. These services include, but are not limited to, accounting, finance and legal services. For providing these services, facilities and personnel, the Company reimburses the Administrator for the Company’s actual and allocable portion of expenses and overhead incurred by the Administrator in performing its obligations under the Administration Agreement, including rent and the Company’s allocable portion of the costs of its Chief Financial Officer and Chief Compliance Officer and her staff. For the three months ended September 30, 2022 and 2021, allocation of overhead from the Administrator to the Company was $60,582 and $169,197, respectively. During the three months ended September 30, 2022 and 2021, $8,750 and $7,500, respectively, of US Bank and BNY fees are being included within the Administrator costs incurred by the Company. As of September 30, 2022 and June 30, 2022, $396,642 and $356,125, respectively, was payable to the Administrator by the Company.


Investment Advisory Agreement





On April 20, 2021, the Company entered into the Investment Advisory Agreement with the Adviser, which was unanimously approved by the Company’s Board of Directors, including by all of the directors who are not “interested persons” (as defined in the 1940 Act), on February 18, 2021, subject to stockholder approval of the Investment Advisory Agreement. The Company’s stockholders approved the Investment Advisory Agreement at a Special Meeting of Stockholders held on March 31, 2021.





The Investment Advisory Agreement replaced the Former Investment Advisory Agreement with PFIM, the Company's former investment adviser, which terminated effective April 20, 2021. The Investment Advisory Agreement is identical in all material respects to the Former Investment Advisory Agreement, except for its date of effectiveness, term and the Adviser serving as the Company’s investment adviser instead of PFIM. As such, the Former Investment Advisory Agreement and the Investment Advisory Agreement contain the same terms, provisions, conditions and fee rates, and provide for the same management services to be conducted by the Adviser as were conducted by PFIM.





On November 5, 2021, we amended and restated the Investment Advisory Agreement to reduce the advisory fees payable thereunder, effective as of January 1, 2022 and until the one year anniversary of the listing of our common stock on a national securities exchange (the “Listing Anniversary”), as further discussed below. The Amended and Restated Advisory Agreement was unanimously approved by our Board of Directors, including by all of the directors who are not “interested persons” (as defined in the 1940 Act), and became effective on January 1, 2022. Under the Amended and Restated Advisory Agreement, we reduced the base management fee from an annual rate of 1.75% to 1.20% and eliminated the incentive fee payable thereunder, effective as of January 1, 2022 and until the Listing Anniversary. Until such effective date, the advisory fees payable to the Adviser were as set forth in the Investment Advisory Agreement. The Amended and Restated Advisory Agreement has an initial two-year term and may be continued thereafter for successive one-year periods if such continuance is approved in the manner provided for under Section 15 of the 1940 Act.





Each of these investment advisory agreements is further discussed below.





Former Investment Advisory Agreement





Pursuant to the Former Investment Advisory Agreement, we paid PFIM a fee for investment advisory and management services consisting of a base management fee and an incentive fee. The cost of both the base management fee payable to PFIM and any incentive fees it earned would ultimately be borne by our stockholders.





Base Management Fee . The base management fee was calculated at an annual rate of 1.75% (0.4375% quarterly) of our average total assets, which included any borrowings for investment purposes. For the first quarter of our operations following the Merger, the base management fee was calculated based on the average value of our total assets as of the date of the Former Investment Advisory Agreement and at the end of the calendar quarter in which the date of the Former Investment Advisory Agreement fell, and was appropriately adjusted for any share issuances or repurchases during the then current calendar quarter. Subsequently, the base management fee was payable quarterly in arrears, and was calculated based on the average value of our total assets at the end of the two most recently completed calendar quarters, and was appropriately adjusted for any share issuances or repurchases during the then current calendar quarter. Base management fees for any partial month or quarter was appropriately pro-rated. At PFIM’s option, the base management fee for any period could be deferred, without interest thereon, and paid to PFIM at any time subsequent to any such deferral as PFIM determined.


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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


During the three months ended September 30, 2022 and 2021, there were no base management fees incurred by PFIM. As of September 30, 2022 and June 30, 2022, the total base management fee due to PFIM was $0.


Incentive Fee . The incentive fee consisted of two parts: (1) the subordinated incentive fee on income and (2) the capital gains incentive fee.





Subordinated Incentive Fee on Income. The first part of the incentive fee, which is referred to as the subordinated incentive fee on income, was calculated and payable quarterly in arrears based upon our “pre-incentive fee net investment income” for the immediately preceding calendar quarter. For purposes of this fee, “pre-incentive fee net investment income” meant interest income, dividend income and distribution cash flows from equity investments and any other income (including any other fees, such as commitment, origination, structuring, diligence and consulting fees or other fees that we received) accrued during the calendar quarter, minus operating expenses for the quarter (including the base management fee, expenses reimbursed under the Former Investment Advisory Agreement and the Administration Agreement, any interest expense and dividends paid on any issued and outstanding preferred shares, but excluding the organization and offering expenses and incentive fees on income and capital gains). Pre-incentive fee net investment income included, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that we had not yet received in cash. Pre-incentive fee net investment income did not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. The subordinated incentive fee on income was subject to a quarterly fixed preferred return to investors, expressed as a rate of return on the value of our net assets at the end of the immediately preceding calendar quarter, of 1.5% (6.0% annualized), subject to a “catch up” feature. Operating expenses were included in the calculation of the subordinated incentive fee on income.





We would pay PFIM a subordinated incentive fee on income for each calendar quarter as follows:





• No incentive fee would be payable to PFIM in any calendar quarter in which our pre-incentive fee net investment income did not exceed the preferred return rate of 1.5%.





• 100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeded the preferred return but was less than or equal to 1.875% in any calendar quarter (7.5% annualized). We refer to this portion of our pre-incentive fee net investment income (which exceeded the preferred return but was less than or equal to 1.875%) as the “catch-up.” The effect of the “catch-up” provision was that, if our pre-incentive fee net investment income reached 1.875% in any calendar quarter, PFIM would receive 20.0% of our pre-incentive fee net investment income as if a preferred return did not apply.





• 20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeded 1.875% in any calendar quarter (7.5% annualized) would be payable to PFIM. This reflected that once the preferred return was reached and the catch-up was achieved, 20.0% of all pre-incentive fee net investment income thereafter would be allocated to PFIM.





Capital Gains Incentive Fee . The second part of the incentive fee, which is referred to as the capital gains incentive fee, was determined and payable in arrears as of the end of each calendar year (or upon termination of the Former Investment Advisory Agreement, as of the termination date), and equaled 20.00% of our realized capital gains for the calendar year, if any, computed net of all realized capital losses and unrealized capital depreciation at the end of such year. In determining the capital gains incentive fee payable to PFIM, we would calculate the aggregate realized capital gains, aggregate realized capital losses and aggregate unrealized capital depreciation, as applicable, with respect to each investment that has been in our portfolio. For the purpose of this calculation, an “investment” is defined as the total of all rights and claims which may be asserted against a portfolio company arising from our participation in the debt, equity, and other financial instruments issued by that company. Aggregate realized capital gains, if any, equaled the sum of the differences between the aggregate net sales price of each investment and the aggregate amortized cost basis of such investment when sold or otherwise disposed.





Aggregate realized capital losses equaled the sum of the amounts by which the aggregate net sales price of each investment was less than the aggregate amortized cost basis of such investment when sold or otherwise disposed. Aggregate unrealized capital depreciation equaled the sum of the differences, if negative, between the aggregate valuation of each investment and the aggregate amortized cost basis of such investment as of the applicable calendar year-end. At the end of the applicable calendar year, the amount of capital gains that served as the basis for our calculation of the capital gains incentive fee involved netting aggregate realized capital gains against aggregate realized capital losses on a since-inception basis and then reducing this amount by the aggregate unrealized capital depreciation. If this number was positive, then the capital gains incentive fee payable was equal to 20.00% of such amount, less the aggregate amount of any capital gains incentive fees paid since inception. Operating expenses were not taken into account when determining capital gains incentive fees.


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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


There were no incentive fees payable as of September 30, 2022 or June 30, 2022. During the three months ended September 30, 2022 and 2021, there were no incentive fees incurred.





Investment Advisory Agreement





Pursuant to the Investment Advisory Agreement, we pay the Adviser a fee for investment advisory and management services consisting of a base management fee and an incentive fee. The cost of both the base management fee payable to the Adviser and any incentive fees it earns will ultimately be borne by our stockholders. See "Amended and Restated Advisory Agreement" below for additional information.


Base Management Fee . The base management fee was calculated at an annual rate of 1.75% (0.4375% quarterly) of our average total assets, which includes any borrowings for investment purposes. For the first quarter of our operations commencing with the date of the Investment Advisory Agreement, the base management fee was calculated based on the average value of our total assets as of the date of the Investment Advisory Agreement and at the end of the calendar quarter in which the date of the Investment Advisory Agreement fell, and was appropriately adjusted for any share issuances or repurchases during the then current calendar quarter. Subsequently, the base management fee is payable quarterly in arrears, and is calculated based on the average value of our total assets at the end of the two most recently completed calendar quarters, and is appropriately adjusted for any share issuances or repurchases during the then current calendar quarter. Base management fees for any partial month or quarter is appropriately pro-rated. At the Adviser’s option, the base management fee for any period may be deferred, without interest thereon, and paid to the Adviser at any time subsequent to any such deferral as the Adviser determines.


During the three months ended September 30, 2022 and 2021, the total base management fee incurred by the Adviser was $112,434 and $182,198, respectively, which were waived by the Adviser. As of September 30, 2022 and June 30, 2022, the total base management fee due to the Adviser after the waiver was $0.


Incentive Fee- Subordinated Incentive Fee on Income. The first part of the incentive fee, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears based upon our “pre-incentive fee net investment income” for the immediately preceding calendar quarter. For purpose of this fee “pre-incentive fee net investment income” means interest income, dividend income and distribution cash flows from equity investments and any other income (including any other fees, such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive) accrued during the calendar quarter, minus operating expenses for the quarter (including the base management fee, expenses reimbursed under the Investment Advisory Agreement and the Administration Agreement, any interest expense and dividends paid on any issued and outstanding preferred shares, but excluding the organization and offering expenses and incentive fees on income and capital gains). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest 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 or unrealized capital appreciation or depreciation. 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 calendar quarter, is compared to a preferred return, or “hurdle,” of 1.5% per quarter (6.0% annualized) and a “catch-up” feature measured as of the end of each calendar quarter as discussed below. The subordinated incentive fee on income for each calendar quarter is paid to our Adviser as follows: (1) no incentive fee is payable to our Adviser in any calendar quarter in which our pre-incentive fee net investment income does not exceed the fixed preferred return rate of 1.5%; (2) 100% 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 fixed preferred return but is less than or equal to 1.875% in any calendar quarter (7.5% annualized); and (3) 20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 1.875% in any calendar quarter (7.5% annualized). This reflects that once the fixed preferred return is reached and the catch-up is achieved, 20.0% of all pre-incentive fee net investment income thereafter is allocated to our Adviser. These calculations are appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the current quarter.


Incentive Fee- Capital Gains Incentive Fee . The second part of the incentive fee, which is referred to as the capital gains incentive fee, is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date), and equals 20.00% of our realized capital gains for the calendar year, if any, computed net of all realized capital losses and unrealized capital depreciation at the end of such year; provided that the incentive fee determined as of December 31, 2021 will be calculated for a period of shorter than twelve calendar months to take into account any net realized capital gains, if any, computed net of all realized capital losses and unrealized capital depreciation for the period commencing as of the date of the Investment Advisory Agreement and ending on December 31, 2021. In determining the capital gains incentive fee payable to our Adviser, we calculate the aggregate realized capital gains, aggregate realized capital losses and aggregate unrealized capital depreciation, as applicable, with respect to each investment that has been in our portfolio. For the purpose of this calculation, an “investment” is defined as the total of all rights and claims which may be asserted against a portfolio company arising from our participation in the debt, equity, and other financial instruments issued by that company. Aggregate realized capital gains, if any, equal the sum of the differences between the aggregate net sales price of


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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


each investment and the aggregate amortized cost basis of such investment when sold or otherwise disposed. Aggregate realized capital losses equal the sum of the amounts by which the aggregate net sales price of each investment is less than the aggregate amortized cost basis of such investment when sold or otherwise disposed. Aggregate unrealized capital depreciation equals the sum of the differences, if negative, between the aggregate valuation of each investment and the aggregate amortized cost basis of such investment as of the applicable calendar year-end. At the end of the applicable calendar year, the amount of capital gains that serves as the basis for our calculation of the capital gains incentive fee involves netting aggregate realized capital gains against aggregate realized capital losses on a since-inception basis and then reducing this amount by the aggregate unrealized capital depreciation. If this number is positive, then the capital gains incentive fee payable is equal to 20.00% of such amount, less the aggregate amount of any capital gains incentive fees paid since inception. Operating expenses are not taken into account when determining capital gains incentive fees.


There were no incentive fees payable as of September 30, 2022 or June 30, 2022. During the three months ended September 30, 2022 and 2021, there were no incentive fees incurred.





Amended and Restated Advisory Agreement





On November 5, 2021, we amended and restated the Investment Advisory Agreement to reduce the base management fee from an annual rate of 1.75% (0.4375% quarterly) to 1.20% (0.30% quarterly) and eliminate the incentive fee payable thereunder, effective as of January 1, 2022 and until the Listing Anniversary. As such, until the Listing Anniversary, the base management fee will be calculated at an annual rate of 1.20% (0.30% quarterly) and the Adviser will not be entitled to any incentive fee.  Following the Listing Anniversary (1) the base management fee will be calculated at an annual rate of 1.75% (0.4375% quarterly), commencing with the first base management fee calculation that occurs after such anniversary, and (2) the Adviser will be entitled to receive the same incentive fee, including the subordinated incentive fee on income and the capital gains incentive fee, as set forth in the Investment Advisory Agreement and discussed above, commencing with the first calendar quarter after such anniversary. The Amended and Restated Advisory Agreement became effective on January 1, 2022. Until such effective date, the advisory fees payable to the Adviser were as set forth in the Investment Advisory Agreement. See “Investment Advisory Agreement” above.


Co-Investments


On January 13, 2020, (amended on August 2, 2022), the parent company of the Adviser received an exemptive order from the SEC (the “Order”),which superseded a prior co-investment exemptive order granted on February 10, 2014, granting the ability to negotiate terms other than price and quantity of co-investment transactions with other funds managed by the Adviser or certain affiliates, including Prospect Capital Corporation (“PSEC”) and Priority Income Fund, Inc. (“PRIS”), where co-investing would otherwise be prohibited under the 1940 Act, subject to the conditions included therein.


Under the terms of the relief permitting us to co-invest with other funds managed by our Investment Adviser or its affiliates, a “required majority” (as defined in Section 57(o) of the 1940 Act) of the Company’s independent directors must make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to the Company and its stockholders and do not involve overreaching of the Company or its stockholders on the part of any person concerned and (2) the transaction is consistent with the interests of the Company’s stockholders and is consistent with the Company’s investment objective and strategies. In certain situations where co-investment with one or more funds managed by the Adviser or its affiliates is not covered by the Order, such as when there is an opportunity to invest in different securities of the same issuer, the personnel of the Adviser or its affiliates will need to decide which fund will proceed with the investment. Such personnel will make these determinations based on policies and procedures, which are designed to reasonably ensure that investment opportunities are allocated fairly and equitably among affiliated funds over time and in a manner that is consistent with applicable laws, rules and regulations. Moreover, except in certain circumstances, when relying on the Order, the Company will be unable to invest in any issuer in which one or more funds managed or owned by the Adviser or its affiliates has previously invested.


Allocation of Expenses


The cost of valuation services for CLOs is initially borne by PRIS, which then allocates to the Company its proportional share of such expense. During the three months ended September 30, 2022 and 2021, PRIS incurred $0 and $14,017, respectively, in expenses related to valuation services that are attributable to the Company. The Company reimburses PRIS for these expenses and includes them as part of Valuation services on the Consolidated  Statements of Operations . As of September 30, 2022 and June 30, 2022, $0 of expense is due to PRIS.


Officers and Directors


Certain officers and directors of the Company are also officers and directors of the Adviser and its affiliates. There were no fees paid to the independent directors of the Company as the Company did not exceed the minimum net asset value required (i.e.,


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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


greater than $100 million) to receive a fee for the three months ended September 30, 2022 and 2021. The officers do not receive any direct compensation from the Company.





Expense Limitation and Expense Reimbursement Agreements


Former Expense Limitation Agreement with PFIM


Concurrently with the closing of the Merger, we entered into an expense limitation agreement, dated March 31, 2019 (the "Former ELA") with PFIM. On April 30, 2020, the Company's Board of Directors approved extending the Former ELA for an additional 12-month term ending on April 30, 2021. On and effective February 17, 2021, the Former ELA was terminated in accordance with its terms.


Pursuant to the Former ELA, PFIM, in its sole discretion, could waive a portion or all of the investment advisory fees that it was entitled to receive pursuant to the Investment Advisory Agreement in order to limit our Operating Expenses (as defined below) to an annual rate, expressed as a percentage of our average quarterly net assets, equal to 8.00% (the “Annual Limit”). For purposes of the Former ELA, the term “Operating Expenses” with respect to the Company, was defined to include all expenses necessary or appropriate for the operation of the Company, including but not limited to PFIM’s base management fee, any and all costs and expenses that qualified as line item “organization and offering” expenses in the consolidated financial statements of the Company as the same were filed with the SEC and other expenses described in the Former Investment Advisory Agreement, but did not include any portfolio transaction or other investment-related costs (including brokerage commissions, dealer and underwriter spreads, prime broker fees and expenses and dividend expenses related to short sales), interest expenses and other financing costs, extraordinary expenses and acquired fund fees and expenses. Upfront shareholder transaction expenses (such as sales commissions, dealer manager fees, and similar expenses) were not Operating Expenses. During the three months ended September 30, 2022 and 2021, there were no base management fees incurred by PFIM.


Any amount waived pursuant to the Former ELA is subject to repayment to PFIM (a “Former ELA Reimbursement”) by us within the three years following the end of the quarter in which the waiver was made by PFIM. Although the Former ELA terminated effective February 17, 2021, PFIM maintains its right to repayment for any waiver it has made under the Former ELA, subject to the Repayment Limitations (discussed below).


A Former ELA Reimbursement can be made solely in the event that we have sufficient excess cash on hand at the time of any proposed ELA Reimbursement and shall be limited to the lesser of (i) the excess of the Annual Limit applicable to such quarter over the Company’s actual Operating Expenses for such quarter and (ii) the amount of Former ELA Reimbursement which, when added to the Company’s expenses for such quarter, permits the Company to pay the then-current aggregate quarterly distribution to its shareholders, at a minimum annualized rate of at least 6.00% (based on the gross offering prices of Company shares) (the “Distribution”) from the sum of (x) the Company’s net investment income (loss) for such quarter plus (y) the Company’s net realized gains (losses) for such quarter (collectively, the “Repayment Limitations”). For the purposes of the calculations pursuant to (i) and (ii) of the preceding sentence, any Former ELA Reimbursement will be treated as an expense of the Company for such quarter, without regard to the GAAP treatment of such expense. To the extent the Company books accruals for any such reimbursements, such accruals shall be booked in accordance with GAAP.  In the event that the Company is unable to make a full payment of any Former ELA Reimbursements due for any applicable quarter because the Company does not have sufficient excess cash on hand, any such unpaid amount shall become a payable of the Company for accounting purposes and shall be paid when the Company has sufficient cash on hand (subject to the Repayment Limitations); provided, that in the case of any Former ELA Reimbursements, such payment shall be made no later than the date that is three years following the end of the quarter in which the applicable waiver was made by our Adviser.


The following table provides information regarding liabilities incurred by PFIM pursuant to the Former ELA:


Period EndedFormer ELA Reimbursement Payable to PFIMFormer ELA Reimbursement Payment to PFIMUnreimbursed Former ELA ReimbursementOperating Expense RatioAnnualized Distribution RateEligible to be Repaid ThroughSeptember 30, 2019$157,409—$157,4092.84%6.00%September 30, 2022December 31, 2019182,205—182,2053.68%6.00%December 31, 2022March 31, 2020185,935—185,9353.39%7.00%March 31, 2023June 30, 2020182,915—182,9153.76%7.00%June 30, 2023September 30, 2020183,386—183,3864.33%7.00%September 30, 2023December 31, 2020————%—%N/AMarch 31, 2021————%—%N/AJune 30, 2021————%—%N/ATotal$891,850$891,850








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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


Expense Limitation Agreement with the Adviser





On and effective April 20, 2021, we entered into a new expense limitation agreement with the Adviser, which replaced the Former ELA with PFIM and was amended and restated on July 7, 2021 to extend the period during which the Adviser will be required to waive its investment advisory fees under the Investment Advisory Agreement, from September 30, 2021 to June 30, 2022 (the "First Amended and Restated ELA"). On August 23, 2022, we entered into the Second Amended and Restated Expense Limitation Agreement (the "Second Amended and Restated ELA" and, together with the First Amended and Restated ELA, the "New ELA") to extend the period during which the Adviser will be required to waive its investment advisory fees under the Investment Advisory Agreement from June 30, 2022 to December 31, 2022, as discussed below. Other than this change, the terms and conditions of the Second Amended and Restated ELA are identical to those of the First Amended and Restated ELA. The New ELA has an initial term ending on the first full month following the one-year anniversary of its effective date and may be continued thereafter for successive one-year periods in accordance with its terms.





Pursuant to the New ELA, our Adviser will waive a portion or all of the investment advisory fees that it is entitled to receive pursuant to the Investment Advisory Agreement, from the effective date of the New ELA through December 31, 2022, in order to limit our Operating Expenses (as defined below) to an annual rate, expressed as a percentage of our average quarterly net assets, equal to 8.00% (the “Annual Limit”). After December 31, 2022, such waiver may be made at our Adviser’s option and in its sole discretion. For purposes of the New ELA, the term “Operating Expenses” with respect to the Company, is defined to include all expenses necessary or appropriate for the operation of the Company, including but not limited to our Adviser’s base management fee, any and all costs and expenses that qualify as line item “organization and offering” expenses in the consolidated financial statements of the Company as the same are filed with the SEC and other expenses described in the Investment Advisory Agreement, but does not include any portfolio transaction or other investment-related costs (including brokerage commissions, dealer and underwriter spreads, prime broker fees and expenses and dividend expenses related to short sales), interest expenses and other financing costs, extraordinary expenses and acquired fund fees and expenses. Upfront shareholder transaction expenses, such as sales commissions, dealer manager fees and similar expenses, are not Operating Expenses. Our Adviser waived fees, pursuant to the New ELA, in an amount of $112,434 and $182,198 for the three months ended September 30, 2022 and 2021, respectively.





Any amount waived pursuant to the New ELA is subject to repayment to our Adviser (an “ELA Reimbursement”) by us within the three years of the date on which the waiver was made by our Adviser.  If the New ELA is terminated or expires pursuant to its terms, our Adviser will maintain its right to repayment for any waiver it has made under the New ELA, subject to the Repayment Limitations (discussed below).





Any ELA Reimbursement can be made solely in the event that we have sufficient excess cash on hand at the time of any proposed ELA Reimbursement and shall be limited to the lesser of (i) the excess of the Annual Limit applicable to such quarter over the Company’s actual Operating Expenses for such quarter and (ii) the amount of ELA Reimbursement which, when added to the Company’s expenses for such quarter, permits the Company to pay the then-current aggregate quarterly distribution to its shareholders, at a minimum annualized rate of at least 6.00% (based on the gross offering prices of Company shares) (the “Distribution”) from the sum of (x) the Company’s net investment income (loss) for such quarter plus (y) the Company’s net realized gains (losses) for such quarter (collectively, the “Repayment Limitations”). For the purposes of the calculations pursuant to (i) and (ii) of the preceding sentence, any ELA Reimbursement will be treated as an expense of the Company for such quarter. In the event that the Company is unable to make a full payment of any ELA Reimbursements due for any applicable quarter because the Company does not have sufficient excess cash on hand, any such unpaid amount shall become a payable of the Company for accounting purposes and shall be paid when the Company has sufficient cash on hand (subject to the Repayment Limitations); provided, that in the case of any ELA Reimbursements, such payment shall be made no later than the date that is three years after the date on which the applicable waiver was made by our Adviser.





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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


Period EndedELA Reimbursement Payable to the AdviserELA Reimbursement Payment to the AdviserUnreimbursed ELA ReimbursementOperating Expense RatioAnnualized Distribution RateEligible to be Repaid ThroughJune 30, 2021$144,073$—$144,0734.04%8.11%June 30, 2024September 30, 2021182,198—182,1982.97%7.08%September 30, 2024December 31, 2021184,999—184,9993.00%7.10%December 31, 2024March 31, 2022125,720—125,7202.70%7.22%March 31, 2025June 30, 2022118,220—118,2203.52%7.87%June 30, 2025September 30, 2022112,434—112,4343.48%7.38%September 30, 2025Total$867,644$867,644





Dealer Manager Agreement





The Company and its Adviser entered into a dealer manager agreement, as amended, with TPS, which terminated effective February 19, 2021 in accordance with its terms in connection with the termination of the Company's continuous public offering of its common stock.  TPS ceased serving as the Company's dealer manager effective as of such date. Pursuant to the terms of this dealer manager agreement, the Company would pay the dealer manager a fee of up to 9% of gross proceeds raised in the Company's offering, some of which would be re-allowed to other participating broker-dealers.  In addition to the upfront selling commissions and dealer manager fees, PFIM could pay TPS a fee (the "Additional Selling Commissions") equal to no more than 1.0% of the net asset value per share per year. TPS would reallow all or a portion of the Additional Selling Commissions to participating broker-dealers. TPS is an affiliated entity of the Triton Pacific Adviser, LLC, our former investment adviser (the “TPIC Adviser”), and is partially owned by one of our former directors, Craig Faggen. For the three months ended September 30, 2022 and 2021, there were no dealer manager related expenses incurred by the Company.





License Agreement


We entered into a license agreement with an affiliate of our Adviser, pursuant to which the affiliate granted us a non-exclusive, royalty free license to use the “Prospect” name. Under this license agreement, we have the right to use such name for so long as our Adviser or another affiliate of the Adviser is our investment adviser. Other than with respect to this limited license, we have no legal right to the “Prospect” name or logo.





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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022







NOTE 5 - DISTRIBUTIONS


As of September 30, 2022 and June 30, 2022, distributions payable is $112,101 and $100,836, respectively, which is presented as Distributions payable on the Consolidated Statements of Assets and Liabilities .


The following table reflects the cash distributions per share that the Company declared on its common stock during the three months ended September 30, 2022 and 2021:


DistributionsFor the Three Months EndedPFLOAT Class A Common Shares, per sharePFLOAT Class A Common Shares, Amount DistributedSeptember 30, 2022(1)July 29, 2022$0.05305$126,365August 26, 20220.04244100,522September 30, 20220.04720112,101Total for the Three Months Ended September 30, 2022$338,988(1) Beginning March 2022,  record dates are recorded as of the close of business of the last Friday at the end of the month.


DistributionsFor the Three Months EndedPFLOAT Class A Common Shares, per sharePFLOAT Class A Common Shares, Amount DistributedSeptember 30, 2021July 2, 9, 16, 23, and 30, 2021$0.06505$155,328August 6, 13, 20, and 27, 20210.05204123,740September 3, 10, 17, and 24, 20210.04488107,115Total for the Three Months Ended September 30, 2021$386,183(1) Beginning March 2022,  record dates are recorded as of the close of business of the last Friday at the end of the month.


The following PFLOAT distributions were previously declared and have record dates subsequent to September 30, 2022:


Record DatePayment datePFLOAT Class A Common Shares, per shareOctober 28, 2022November 4, 2022$0.03776


The Company has adopted an “opt in” distribution reinvestment plan for its stockholders. As a result, if the Company makes a cash distribution, its stockholders will receive distributions in cash unless they specifically “opt in” to the distribution reinvestment plan so as to have their cash distributions reinvested in additional shares of the Company’s common stock. However, certain state authorities or regulators may impose restrictions from time to time that may prevent or limit a stockholder’s ability to participate in the distribution reinvestment plan.


The Company may fund its cash distributions to stockholders from any sources of funds legally available to it, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to the Company on account of preferred and common equity investments in portfolio companies and expense reimbursements from the Adviser. The Company has not established limits on the amount of funds it may use from available sources to make distributions.


During the three months ended September 30, 2022 and 2021 the Company's officers and directors did not purchase any shares of our stock.








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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022







NOTE 6 - INCOME TAXES





While our fiscal year end for financial reporting purposes is June 30 of each year, our tax year end is December 31 of each year. The information presented in this footnote is based on our tax year end for each period presented, unless otherwise specified.





For income tax purposes, distributions made to stockholders are reported as ordinary income, capital gains, non-taxable return of capital, or combination thereof.





For the tax year ending December 31, 2022, the tax character of distributions paid to stockholders through September 30, 2022 is expected to be ordinary income and return of capital. However, due to the difference between our fiscal and tax year ends, the final determination of the tax character of distributions between ordinary income and capital gains will not be made until we file our tax return for the tax year ending December 31, 2022.





The tax character of distributions paid to the Company's shareholders during the tax years ended December 31, 2021 and 2020 were as follows:


Tax Year EndedDecember 31, 2021December 31, 2020Ordinary income$647,336$315,994Return of capital926,8441,232,806Total distributions paid to stockholders$1,574,180(1)$1,548,800(2)


(1) For the tax year ended December 31, 2021, $97,268 of the 2020 declared distributions are allocable to 2021 for federal income tax purposes and was reported on the 2021 Form 1099-DIV. For the tax year ended December 31, 2021, $80,441 of the 2021 declared distributions are allocable to 2022 for federal income tax purposes and will be reported on the 2022 Form 1099-DIV.


(2) For the tax year ended December 31, 2020, $97,268 of the 2020 declared distributions are allocable to 2021 for federal income tax purposes and was  reported on the 2021 Form 1099-DIV.





We generate certain types of income that may be exempt from U.S. withholding tax when distributed to non-U.S. stockholders. Under IRC Section 871(k), a RIC is permitted to designate distributions of qualified interest income and short-term capital gains as exempt from U.S. withholding tax when paid to non-U.S. stockholders with proper documentation. For the 2021 calendar year, 69.34% of our taxable dividends qualified as interest related dividends which are exempt from U.S. withholding tax applicable to non-U.S. stockholders. For the 2022 calendar year, we estimated at June 30, 2022 that 66.16% of our taxable dividends qualified as interest related dividends which are exempt from U.S. withholding tax applicable to non-U.S. stockholders. The final percentages will be determined with the filing of Form 1099-DIV.





Under IRC Section 163(j), a RIC is permitted to designate distributions attributable to net business interest income as section 163(j) interest dividends. For the 2021 calendar year, 48.94% of our taxable ordinary dividends qualified as section 163(j) interest dividends. For the 2022 calendar year, we estimated at June 30, 2022 that 45.08% of our taxable ordinary dividends qualified as section 163(j) interest dividends. These percentages are based on the best estimates available at the time of this filing. The final percentages will be determined with the filing of Form 1099-DIV.





As of August 27, 2021 when our prior Form 10-K was filed for the year ended June 30, 2021, we estimated our distributions for the fiscal and tax years disclosed therein to be distributions of return of capital. Subsequent to our filing date, we obtained more information from our underlying investments as to the character of the distributions for the tax year ended December 31, 2021, which resulted in changes to distributions previously disclosed in our Form 10-K filing. As a result of the change, our total distributable loss on our Consolidated Statements of Assets and Liabilities for the year ended June 30, 2021 changed from $5,054,906 to $5,405,311, with $350,405 being reclassified to ordinary income from return of capital.





The Company's cost basis of investments as of September 30, 2022 for tax purposes was $35,917,232, resulting in an estimated net unrealized loss of $2,100,201. The gross unrealized gains and losses of as September 30, 2022 were $577,377 and $2,677,578, respectively. As of June 30, 2022, the cost basis of investments for tax purposes was $37,358,892, resulting in an estimated net unrealized loss of $1,548,895. As of June 30, 2022, the gross unrealized gains and losses were $811,407 and $2,360,302, respectively.





Taxable income generally differs from net increase (decrease) in net assets resulting from operations for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized gains or losses, as unrealized gains or losses are generally not included in taxable income until they are realized. The


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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


following reconciles the net increase (decrease) in net assets resulting from operations to taxable income for the tax years ended December 31, 2021 and 2020.





Tax Year Ended December 31, 2021Tax Year Ended December 31, 2020Net increase (decrease) in net assets resulting from operations$483,361$92,077Net realized (gains) losses on investments41,280845,773Net change in unrealized (gains) losses on investments124,952(744,114)Other temporary book-to-tax differences231,758(935,070)Permanent differences318,847579,507Taxable income (loss) before deductions for distributions$1,200,198(1)$(161,827)





(1) Final determination of permanent difference will not be final until we file our return for the tax year ended December 31, 2021.





Capital losses in excess of capital gains earned in a tax year may generally be carried forward and used to offset capital gains, subject to certain limitations. For the tax year ended December 31, 2021 and December 31, 2020, we had capital loss carryforwards of $4,164,261 and $4,185,434, respectively, available for use in later tax years. The unused balance each year will be carried forward and utilized as gains are realized, subject to limitations. While our ability to utilize losses in the future depends upon a variety of factors that cannot be known in advance, some of the Company’s capital loss carryforwards may become permanently unavailable due to limitations by the Code.





In general, we make certain adjustments to the classification of net assets as a result of permanent book-to-tax differences, which may include merger-related items, differences in the book and tax basis of certain assets and liabilities, amortization of offering costs, expense payments, nondeductible federal excise taxes and net operating losses, among other items. During the tax year ended December 31, 2021, we increased overdistributed net investment income by $318,847 and decreased capital in excess of par value by $318,847. During the tax year ended December 31, 2020, we increased overdistributed net investment income by $772,054  and decreased capital in excess of par value by $772,054. Due to the difference between our fiscal and tax year end, the reclassifications for the taxable year ended December 31, 2021 are being recorded in the fiscal year ending June 30, 2022 and the reclassifications for the taxable year ended December 31, 2020 were recorded in the fiscal year ended June 30, 2021. The reclassifications, if any, for the taxable year ended December 31, 2022 will be recorded in the fiscal year ending June 30, 2023 once we file our tax return for the tax year ended December 31, 2022.


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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022







NOTE 7 - INVESTMENT PORTFOLIO





The original cost basis of debt placement and equity securities acquired, including follow-on investments for existing portfolio companies, payment-in-kind interest, and structuring fees, totaled $162 and $5,735,000 during the three months ended September 30, 2022 and 2021, respectively. Debt repayments and considerations from sales of equity securities of approximately $1,358,587 and $5,517,172 were received during the three months ended September 30, 2022 and 2021, respectively.





As of September 30, 2022 and June 30, 2022, 97% and 96%, respectively, of the Company's portfolio was invested in floating rate investments based on fair value, totaling $32,696,598 and $34,508,783, respectively. As of September 30, 2022 and June 30, 2022, 95% and 96%, respectively, of the Company's portfolio was invested in floating rate investments based on amortized cost, totaling $35,481,318 and $36,863,330, respectively.


The following tables summarize the composition of the Company’s investment portfolio at amortized cost and fair value as of September 30, 2022 and June 30, 2022:


September 30, 2022Investments at Amortized Cost(1)Investments at Fair ValueFair Value Percentage of Total PortfolioSenior Secured Loans-First Lien$29,066,853$27,311,61481%Senior Secured Loans-Second Lien496,718482,5001%Senior Secured Notes1,004,381567,6812%Structured Subordinated Notes5,917,7474,902,48414%Equity/Other670,383552,7502%Total Portfolio Investments$37,156,082$33,817,029100%June 30, 2022Investments at Amortized Cost(1)Investments at Fair ValueFair Value Percentage of Total PortfolioSenior Secured Loans-First Lien$30,375,126$28,880,78481%Senior Secured Loans-Second Lien507,496511,4641%Senior Secured Notes1,004,570650,0002%Structured Subordinated Notes5,991,8065,126,74914%Equity/Other681,111641,0002%Total Portfolio Investments$38,560,109$35,809,997100%(1) Amortized cost represents the original cost adjusted for PIK interest and the amortization of premiums and/or accretion of discounts, as applicable, on investments.


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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of September 30, 2022 and June 30, 2022:


September 30, 2022IndustryInvestments at Fair ValuePercentage of PortfolioStructured Finance$4,902,48414%Healthcare & Pharmaceuticals3,871,87211%Telecommunications3,557,11211%Services: Consumer3,537,00710%Services: Business3,241,32410%Beverage, Food & Tobacco2,417,0027%Media: Broadcasting & Subscription1,945,2256%High Tech Industries1,945,0406%Consumer goods: Durable1,899,1606%Wholesale1,737,9995%Media: Diversified and Production1,653,3005%Automotive1,219,3074%Consumer goods: Non-Durable824,2662%Financial567,6812%Media: Advertising, Printing & Publishing482,5001%Retail15,7500 %Total$33,817,029100%June 30, 2022IndustryInvestments at Fair ValuePercentage of PortfolioStructured Finance$5,126,74914%Healthcare & Pharmaceuticals4,053,77911%Telecommunications3,616,25710%Services: Consumer3,614,23010%Services: Business3,272,3149%Beverage, Food & Tobacco2,385,7037%High Tech Industries2,378,4827%Media: Broadcasting & Subscription1,960,0806%Consumer goods: Durable1,911,6035%Wholesale1,760,2225%Media: Diversified and Production1,702,8295%Automotive1,217,0873%Consumer goods: Non-Durable914,0673%Banking, Finance, Insurance & Real Estate735,1312%Financial650,0002%Media: Advertising, Printing & Publishing501,2501%Retail10,2140 %Total$35,809,997100%





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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS


The following table presents the fair value of our investments that are measured at fair value on a recurring basis disaggregated into the three levels of the ASC 820 valuation hierarchy as of September 30, 2022 and June 30, 2022, respectively:


As of September 30, 2022Level 1Level 2Level 3TotalPortfolio InvestmentsSenior Secured Loans-First Lien$—$8,585,111$18,726,503$27,311,614Senior Secured Loans-Second Lien——482,500482,500Senior Secured Notes—567,681—567,681Structured Subordinated Notes——4,902,4844,902,484Equity/Other——552,750552,750Total Portfolio Investments$—$9,152,792$24,664,237$33,817,029As of June 30, 2022Level 1Level 2Level 3TotalPortfolio InvestmentsSenior Secured Loans-First Lien$—$8,929,159$19,951,625$28,880,784Senior Secured Loans-Second Lien——511,464511,464Senior Secured Notes—650,000—650,000Structured Subordinated Notes——5,126,7495,126,749Equity/Other——641,000641,000Total Portfolio Investments$—$9,579,159$26,230,838$35,809,997





Investments for which market quotations are readily available are typically valued at such market quotations. In order to validate market quotations, management and the independent valuation firm look at a number of factors to determine if the quotations are representative of fair value, including the source and nature of the quotations. These investments are classified as Level 1 or Level 2  in the fair value hierarchy.


The fair value of debt investments specifically classified as Level 2 in the fair value hierarchy are generally valued by an independent pricing agent or more than one principal market maker, if available, otherwise a principal market maker or a primary market dealer. We generally value over-the-counter securities by using the prevailing bid and ask prices from dealers during the relevant period end, which were provided by an independent pricing agent and screened for validity by such service.





In determining the range of values for debt instruments where market quotations are not available, and are therefore classified as Level 3 in the fair value hierarchy, except CLOs and debt investments in controlling portfolio companies, management and the independent valuation firm estimated corporate and security credit ratings and identified corresponding yields to maturity for each loan from relevant market data. A discounted cash flow technique was then applied using the appropriate yield to maturity as the discount rate, to determine a range of values. In determining the range of values for equity investments of portfolio companies , the enterprise value was determined by applying a market approach such as using earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples, net income and/or book value multiples for similar guideline public companies and/or similar recent investment transactions and/or an income approach, such as the discounted cash flow technique. The enterprise value technique may also be used to value debt investments which are credit impaired. For stressed debt and equity investments, asset recovery analysis was used.


In determining the range of values for our investments in CLOs, the independent valuation firm uses a discounted multi-path cash flow model. The valuations were accomplished through the analysis of the CLO deal structures to identify the risk exposures from the modeling point of view as well as to determine an appropriate call date (i.e., expected maturity). These risk factors are sensitized in the multi-path cash flow model using Monte Carlo simulations to generate probability-weighted (i.e., multi-path) cash flows for the underlying assets and liabilities. These cash flows are discounted using appropriate market discount rates, which consider relevant data in the CLO market and certain benchmark credit indices, to determine the value of each CLO investment. In addition, we generate a single-path cash flow utilizing our best estimate of expected cash receipts, and


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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


assess the reasonableness of the implied discount rate that would be effective for the value derived from the corresponding multi-path cash flow model.


Our portfolio consists of residual interests in CLOs, which involve a number of significant risks. CLOs are typically very highly levered (10 - 14 times), and therefore the residual interest tranches that we invest in are subject to a higher degree of risk of total loss. In particular, investors in CLO residual interests indirectly bear risks of the underlying loan investments held by such CLOs. We generally have the right to receive payments only from the CLOs, and generally do not have direct rights against the underlying borrowers or the entity that sponsored the CLOs. While the CLOs we target generally enable the investor to acquire interests in a pool of senior loans without the expenses associated with directly holding the same investments, the prices of indices and securities underlying our CLOs will rise or fall. These prices (and, therefore, the prices of the CLOs) will be influenced by the same types of political and economic events that affect issuers of securities and capital markets generally. The failure by a CLO investment in which we invest to satisfy financial covenants, including with respect to adequate collateralization and/or interest coverage tests, could lead to a reduction in its payments to us. In the event that a CLO fails certain tests, holders of debt senior to us would 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 with a defaulting 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.


The interests we have acquired in CLOs are generally thinly traded or have only a limited trading market. CLOs are typically privately offered and sold, even in the secondary market. As a result, investments in CLOs may be characterized as illiquid securities. In addition to the general risks associated with investing in debt securities, CLO residual interests carry additional risks, including, but not limited to: (i) the possibility that distributions from collateral securities will not be adequate to make interest or other payments; (ii) the quality of the collateral may decline in value or default; (iii) our investments in CLO tranches will likely be subordinate to other senior classes of note tranches thereof; and (iv) the complex structure of the security may not be fully understood at the time of investment and may produce disputes with the CLO investment or unexpected investment results. Our net asset value may also decline over time if our principal recovery with respect to CLO residual interests is less than the cost of those investments. Our CLO investments and/or the CLOs’ underlying senior secured loans may prepay more quickly than expected, which could have an adverse impact on our value. These investments are classified as Level 3 in the fair value hierarchy.


An increase in interest rates would materially increase the CLO’s financing costs. Since most of the collateral positions within the CLOs have interest rate floors, there may not be corresponding increases in investment income (if interest rates increase but stay below the interest rate floor of such investments) resulting in materially smaller distribution payments to the residual interest investors.


We hold more than a 10% interest in certain foreign corporations that are treated as controlled foreign corporations (“CFC”) for U.S. federal income tax purposes (including our residual interest tranche investments in CLOs). Therefore, we are treated as receiving a deemed distribution (taxable as ordinary income) each year from such foreign corporations in an amount equal to our pro rata share of the corporation’s income for that tax year (including both ordinary earnings and capital gains). We are required to include such deemed distributions from a CFC in our taxable income and we are required to distribute at least 90% of such income to maintain our RIC status, regardless of whether or not the CFC makes an actual distribution during such year.


If we acquire shares in “passive foreign investment companies” (“PFICs”) (including residual interest tranche investments in CLOs that are PFICs), we may be subject to federal income tax on a portion of any “excess distribution” or gain from the disposition of such shares even if such income is distributed as a taxable dividend to our stockholders. Certain elections may be available to mitigate or eliminate such tax on excess distributions, but such elections (if available) will generally require us to recognize our share of the PFIC’s income for each year regardless of whether we receive any distributions from such PFICs. We must nonetheless distribute such income to maintain our status as a RIC.


Legislation known as FATCA and regulations thereunder impose a withholding tax of 30% on payments of U.S. source interest and dividends to certain non-U.S. entities, including certain non-U.S. financial institutions and investment funds, unless such non-U.S. entity complies with certain reporting requirements regarding its United States account holders and its United States owners. Most CLOs in which we invest will be treated as non-U.S. financial entities for this purpose, and therefore will be required to comply with these reporting requirements to avoid the 30% withholding. If a CLO in which we invest fails to properly comply with these reporting requirements, it could reduce the amounts available to distribute to residual interest and junior debt holders in such CLO vehicle, which could materially and adversely affect our operating results and cash flows.


If we are required to include amounts in income prior to receiving distributions representing such income, we may have to sell some of our investments at times and/or at prices management would not consider advantageous, raise additional debt or equity capital or forgo new investment opportunities for this purpose.


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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


A portion of the Company’s portfolio is concentrated in CLOs, which is subject to a risk of loss if that sector experiences a market downturn. The Company is subject to credit risk in the normal course of pursuing its investment objectives. The Company’s maximum risk of loss from credit risk for the portfolio of CLO investments is the inability of the CLOs collateral managers to return up to the cost value due to defaults occurring in the underlying loans of the CLOs.





Investments in CLOs residual interests generally offer less liquidity than other investment grade or high-yield corporate debt, and may be subject to certain transfer restrictions. The Company’s ability to sell certain investments quickly in response to changes in economic and other conditions and to receive a fair price when selling such investments may be limited, which could prevent the Company from making sales to mitigate losses on such investments. In addition, CLOs are subject to the possibility of liquidation upon an event of default of certain minimum required coverage ratios, which could result in full loss of value to the CLOs interests and junior debt investors.





The fair value of the Company’s investments may be significantly affected by changes in interest rates. The Company’s investments in senior secured loans through CLOs are sensitive to interest rate levels and volatility. In the event of a significant rising interest rate environment and/or economic downturn, loan defaults may increase and result in credit losses which may adversely affect the Company’s cash flow, fair value of its investments and operating results. In the event of a declining interest rate environment, a faster than anticipated rate of prepayments is likely to result in a lower than anticipated yield.





The significant unobservable input used to value our investments based on the yield technique and discounted cash flow technique is the market yield (or applicable discount rate) used to discount the estimated future cash flows expected to be received from the underlying investment, which includes both future principal and interest/dividend payments. Increases or decreases in the market yield (or applicable discount rate) would result in a decrease or increase, respectively, in the fair value measurement. Management and the independent valuation firms may consider the following factors when selecting market yields or discount rates: risk of default, rating of the investment and comparable company investments, and call provisions.


The significant unobservable inputs used to value our investments based on the EV analysis may include market multiples of specified financial measures such as EBITDA, net income, or book value of identified guideline public companies, implied valuation multiples from precedent M&A transactions, and/or discount rates applied in a discounted cash flow technique. The independent valuation firm identifies a population of publicly traded companies with similar operations and key attributes to that of the portfolio company. Using valuation and operating metrics of these guideline public companies and/or as implied by relevant precedent transactions, a range of multiples of the latest twelve months EBITDA, or other measure such as net income or book value, is typically calculated. The independent valuation firm utilizes the determined multiples to estimate the portfolio company’s EV generally based on the latest twelve months EBITDA of the portfolio company (or other meaningful measure). Increases or decreases in the multiple would result in an increase or decrease, respectively, in EV which would result in an increase or decrease in the fair value measurement of the debt of controlled companies and/or equity investment, as applicable. In certain instances, a discounted cash flow analysis may be considered in estimating EV, in which case, discount rates based on a weighted average cost of capital and application of the capital asset pricing model may be utilized.


Changes in market yields, discount rates, EBITDA multiples, each in isolation, may change the fair value measurement of certain of our investments. Generally, an increase in market yields, discount rates, or a decrease in EBITDA (or other) multiples may result in a decrease in the fair value measurement of certain of our investments.


Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of our investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that we may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which we have recorded it. Our investments are subject to market risk as a result of economic and political developments, including impacts from the coronavirus ("COVID-19") pandemic, the ongoing conflict between Russia and Ukraine, rising interest and inflation rates and related market volatility. Market risk is directly impacted by the volatility and liquidity in the markets in which certain investments are traded and can affect the fair value of our investments.


In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the unrealized gains or losses reflected in the currently assigned valuations.








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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


Changes in Valuation Techniques


During the three months ended September 30, 2022, the valuation methodology for DTI Holdco, Inc. ("DTI Holdco”) for the First Lien Term Loan changed from solely using the yield method approach to using a combination of the yield method approach and market quotes, since market quotes were more active in the current period. As a result of widening market spreads and a decrease in the quoted price of the First Lien Term Loan, the fair value of our investment in DTI Holdco First Lien Term Loan decreased to $1,466,700 as of September 30, 2022, a discount of $(5,076) from its amortized cost, compared to the $24,441 unrealized appreciation recorded at June 30, 2022.


During the three months ended September 30, 2022, the valuation methodology for Shutterfly, LLC (“Shutterfly”) for the First Lien Term Loan changed from solely using market quotes to using a combination of the yield method approach and market quotes, since market quotes were less active in the current period. As a result of a decrease in the yield method price of the First Lien Term Loan, the fair value of our investment in Shutterfly decreased to $1,653,300 as of September 30, 2022, a discount of $(318,948) from its amortized cost, compared to the $(268,929) unrealized depreciation recorded at June 30, 2022.


During the three months ended September 30, 2022, the valuation methodology for Rising Tide Holdings, Inc. (“Rising Tide”) for the First Lien Term Loan changed from using a combination of the yield method approach and market quotes to relying solely on the yield method approach, since market quotes were less active in the current period. As a result of widened credit market spreads, the fair value of our investment in Rising Tide decreased to $824,266 as of September 30, 2022, a discount of $(155,103) from its amortized cost, compared to the $(67,441) unrealized depreciation recorded at June 30, 2022.


As of September 30, 2022 and June 30, 2022, there were no loans on non-accrual status.





The following table shows industries that comprise of greater than 10% of our portfolio at fair value as of September 30, 2022 and June 30, 2022:





September 30, 2022June 30, 2022CostFair Value% of PortfolioCostFair Value% of  PortfolioHealthcare & Pharmaceuticals$3,959,523$3,871,87211.4%$3,966,383$4,053,77911.3%Telecommunications3,760,8273,557,11210.5%3,759,4213,616,25710.1%Services: Consumer3,871,1683,537,00710.5%3,917,6593,614,23010.1%All Other Industries25,564,56422,851,03867.6%26,916,64624,525,73168.5%Total$37,156,082$33,817,029100.0%$38,560,109$35,809,997100.0%





As of September 30, 2022 investments in Tennessee, Massachusetts and California comprised 11.4%, 10.9% and 10.6%, respectively, of our investments at fair value, with a cost of $3,976,080, $3,948,528 and $3,962,248, respectively, and a fair value of $3,855,123, $3,683,039 and $3,598,525, respectively. As of June 30, 2022 investments in Massachusetts, Tennessee and California comprised 11.6%, 10.9% and 10.2%, respectively, of our investments at fair value, with a cost of $4,451,784, $3,979,228 and $3,966,758, respectively, and a fair value of $4,138,704, $3,916,495 and $3,662,909, respectively.


The following is a reconciliation for the three months ended September 30, 2022 and 2021 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:








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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


Non-Control/Non-Affiliate Investments (less than 5.00% voting control)SeniorSecuredLoans -First LienSeniorSecuredLoans -Second LienStructuredSubordinatedNotesEquity/OtherTotalFair Value at June 30, 2022$19,951,625$511,464$5,126,749$641,000$26,230,838Net realized gains on investments—————Net change in unrealized gains (losses) on investments(225,003)(18,186)(150,209)(77,522)(470,920)Net realized and unrealized gains (losses) on investments(225,003)(18,186)(150,209)(77,522)(470,920)Purchases of investments—————Payment-in-kind interest—162——162Accretion (amortization) of purchase discount and premium, net15,1912,402(74,056)—(56,463)Repayments and sales of portfolio investments(1,310,252)(13,342)—(10,728)(1,334,322)Transfers into Level 3(1)1,702,829———1,702,829Transfers out of Level 3(1)(1,407,887)———(1,407,887)Fair Value at September 30, 2022$18,726,503$482,500$4,902,484$552,750$24,664,237Net change in unrealized gains (losses) attributable to Level 3 investments still held at the end of the period$(236,930)$(19,070)$(150,209)$(77,522)$(483,731)(1)Transfers are assumed to have occurred at the beginning of the quarter during which the asset was transferred. During the quarter ended September 30, 2022, one of our first lien loans transferred out of Level 3 to Level 2 due to increased observability of the inputs. During the quarter ended September 30, 2022, one of our first lien loans transferred out of Level 2 to Level 3 due to decreased observability of the inputs.


Non-Control/Non-Affiliate Investments (less than 5.00% voting control)SeniorSecuredLoans -First LienSeniorSecuredLoans -Second LienSenior Secured NotesStructuredSubordinatedNotesEquity/OtherTotalFair Value at June 30, 2021$23,105,139$495,856$951,073$5,626,202$893,000$31,071,270Net realized gains on investments——————Net change in unrealized gains (losses) on investments(75,976)13,63014,31725,197(128,000)(150,832)Net realized and unrealized gains (losses) on investments(75,976)13,63014,31725,197(128,000)(150,832)Purchases of investments3,745,000————3,745,000Payment-in-kind interest—193———193Accretion (amortization) of purchase discount and premium, net75,4383204,508(67,551)—12,715Repayments and sales of portfolio investments(3,870,444)————(3,870,444)Transfers out of Level 3(1)(742,613)————(742,613)Fair Value at September 30, 2021$22,236,544$509,999$969,898$5,583,848$765,000$30,065,289Net change in unrealized gains (losses) attributable to Level 3 investments still held at the end of the period$(25,899)$13,630$14,317$25,197$(128,000)$(100,755)(1)Transfers are assumed to have occurred at the beginning of the quarter during which the asset was transferred. During the quarter ended September 30, 2021, one of our first lien loans transferred out of Level 3 to Level 2 due to increased observability of the inputs.


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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


The following table provides quantitative information regarding significant unobservable inputs used in the fair value measurement of Level 3 investments as of September 30, 2022:


Unobservable InputsAsset CategoryFair ValuePrimary Valuation TechniqueInputsRangeWeighted AverageSenior Secured First Lien Debt$1,136,641Market quotesIndicative dealer quotes65.00%-100.00%81.31%Senior Secured First Lien Debt17,589,862Discounted Cash Flow (Yield Analysis)Market Yield8.59%-14.47%11.02%Senior Secured Second Lien Debt482,500Market quotesIndicative dealer quotes95.50%-97.50%96.50%Equity/Other552,750Enterprise Value Waterfall (Market Approach)EBITDA multiples (x)5.25x-8.75x8.18xSubordinated Structured Notes4,902,484Discounted Cash FlowDiscount Rate9.50%- 34.67%(1)23.51%(1)$24,664,237(1) Represents the implied discount rate based on our internally generated single-cash flows that is derived from the fair value estimated by the corresponding multi-path cash flow model utilized by the independent valuation firm.


The following table provides quantitative information regarding significant unobservable inputs used in the fair value measurement of Level 3 investments as of June 30, 2022:


Unobservable InputsAsset CategoryFair ValuePrimary Valuation TechniqueInputsRangeWeighted AverageSenior Secured First Lien Debt$2,490,416Market quotesIndicative dealer quotes65.83%-95.08%86.46%Senior Secured First Lien Debt17,461,209Discounted Cash Flow (Yield Analysis)Market Yield7.59%-10.89%9.36%Senior Secured Second Lien Debt511,464Market quotesIndicative dealer quotes75.00%-100.50%99.8%Equity/Other641,000Enterprise Value Waterfall (Market Approach)EBITDA multiples (x)7.75x-8.75x8.25xSubordinated Structured Notes5,126,749Discounted Cash FlowDiscount Rate7.02%- 33.22%(1)20.04%(1)$26,230,838(1) Represents the implied discount rate based on our internally generated single-cash flows that is derived from the fair value estimated by the corresponding multi-path cash flow model utilized by the independent valuation firm.


For the three months ended September 30, 2022 and 2021 there were no structuring fees recognized as part of interest income on the Consolidated Statements of Operations . For the three months ended September 30, 2022 and 2021, there was accelerated original issue discounts due to repayments of $3,020 and $190,966, respectively, included in interest income.




NOTE 9 - COMMITMENTS AND CONTINGENCIES


The Company enters into contracts that contain a variety of indemnification provisions. The Company’s maximum exposure under these arrangements is unknown; however, the Company has not had prior claims or losses pursuant to these contracts. Management has reviewed the Company’s existing contracts and expects the risk of loss to the Company to be remote.


The Company has a conditional obligation to reimburse the Adviser and PFIM for any amounts funded by the Adviser and PFIM under the Expense Limitation Agreement and Former Expense Limitation Agreement for any payments made by the Adviser and PFIM, respectively. The Expense Limitation Agreement and Former Expense Limitation Agreement payments are subject to repayment by the Company within the three years following the end of the quarter in which the payment was made by the Adviser or PFIM; provided that any such repayments shall be subject to the then-applicable expense limitation, if any, and the limit that was in effect at the time when the Adviser or PFIM made the payment that is subject to repayment.


The Company is not currently subject to any material legal proceedings and, to the Company’s knowledge, no material legal proceedings are threatened against the Company. From time to time, the Company may be a party to certain legal proceedings


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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


in the ordinary course of business, including proceedings relating to the enforcement of the Company’s rights under contracts with its portfolio companies. While the outcome of any legal proceedings cannot be predicted with certainty, the Company does not expect that any such proceedings will have a material adverse effect upon its financial condition or results of operations.





As of September 30, 2022 and June 30, 2022, there was no unfunded commitment made by the Company.




NOTE 10 - REVOLVING CREDIT FACILITY





On May 16, 2019, the Company established a $50 million senior secured revolving credit facility (the “Credit Facility”) with Royal Bank of Canada, a Canadian chartered bank, acting as administrative agent. In connection with the Credit Facility, the SPV, as borrower, and each of the other parties thereto entered into a Revolving Loan Agreement, dated as of May 16, 2019 (the “Loan Agreement”).





The Credit Facility matures on May 21, 2029 and, initially, bore interest at a rate of three-month LIBOR plus 1.55%. On May 11, 2020, in connection with an extension of the ramp period for the Credit Facility from May 15, 2020 to November 15, 2020, the Company agreed to the increased interest rate of three-month LIBOR plus 2.20% on the Credit Facility for the period from May 16, 2020 through November 15, 2020. Effective November 10, 2020, the end date of the ramp period of the Credit Facility was extended again, from November 15, 2020 to May 14, 2021. As a result, the interest rate on borrowings under the Credit Facility of the three-month LIBOR plus 2.20% was extended through May 14, 2021. On May 11, 2021, the end date of the ramp period of the Credit Facility was further extended from May 14, 2021 to November 15, 2021. As a result, the interest rate on borrowings under the Credit Facility of the three-month LIBOR plus 2.20% was extended through November 15, 2021. On August 26, 2021, the end date of the ramp period of the Credit Facility was further extended from November 15, 2021 to August 25, 2022.  In exchange, the interest rate on borrowings under the Credit Facility of the three-month LIBOR plus 2.20% was extended permanently. On July 6, 2022, the end date of the ramp period of the Credit Facility was further extended from August 25, 2022 to August 25, 2023.  In connection with such extension, the interest rate on borrowings under the Credit Facility was amended from three-month LIBOR plus 2.20% to Secured Overnight Financing Rate (“SOFR”) plus 2.20%. The Credit Facility is secured by substantially all of the SPV’s properties and assets. Under the Loan Agreement, the SPV has made certain customary representations and warranties and is required to comply with various covenants, including reporting requirements and other customary requirements for similar credit facilities.  The Loan Agreement includes usual and customary events of default for credit facilities of this nature. On November 7, 2022, Royal Bank of Canada granted a waiver through January 31, 2023 of any non-compliance with certain waterfall provisions in the Loan Agreement that may have occurred prior to November 7, 2022, which waiver is effective for so long as we (i) maintain compliance with a market value ratio test and an overcollateralization test on certain determination dates and (ii) maintain or improve a maximum Moody’s weighted average rating test.  As of September 30, 2022, we were in compliance with the applicable covenants.





As of September 30, 2022 and June 30, 2022, we had $20,000,000 and $20,500,000, respectively, outstanding on our Credit Facility. As of September 30, 2022 and June 30, 2022, the investments used as collateral for the Credit Facility had an aggregate fair value of $27,794,114 and $29,382,034, respectively, which represents 82% of our total investments for each period. These securities are not available as collateral to the Company's general creditors. The fair value of the Credit Facility was $20,000,000 and is categorized as Level 2 under ASC 820 as of September 30, 2022. The fair value of the revolving credit facility is equal to its carrying value as the Credit Facility is repriced to a market rate of interest frequently.


In connection with the origination of the Credit Facility, we incurred $588,355 in fees, all of which are being amortized over the term of the facility. As of September 30, 2022 and June 30, 2022, $389,771 and $404,589, respectively, remains to be amortized and is reflected as deferred financing costs on the Consolidated Statements of Assets and Liabilities .





During the three months ended September 30, 2022 and 2021, we recorded $269,258 and $142,385 respectively, of interest costs and amortization of financing costs on the Credit Facility as interest expense.





For the three months ended September 30, 2022 and 2021,  the average stated interest rate (i.e., rate in effect plus the spread) was 5.03% and 2.33%, respectively. For the three months ended September 30, 2022 and 2021, average outstanding borrowings under the Credit Facility was $20,103,261 and $21,000,000, respectively.


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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


NOTE 11- FINANCIAL HIGHLIGHTS


The following is a schedule of financial highlights for each of the three months ended September 30, 2022 and 2021:


Three Months Ended September 30,20222021(unaudited)(unaudited)Per Share Data(a):Net asset value at beginning of period$7.03$8.36Net investment (loss) income0.030.19Net realized and unrealized (losses) on investments(0.25)(0.13)Net increase (decrease) in net assets resulting from operations(0.22)0.06Distributions(b)Return of capital distributions(0.04)(0.08)Distributions from net investment income(0.10)(0.09)Total Distributions(0.14)(0.17)Other(c)—0.01Net asset value at end of period$6.67$8.26Total return based on net asset value(d)(3.16)%0.74%Supplemental Data:Net assets at end of period$15,845,448$19,708,225Average net assets$16,273,212$19,828,016Average shares outstanding2,375,3752,385,883Ratio to average net assets:Total annual expenses20.56%14.75%Total annual expenses (after expense limitation agreement)17.79%11.07%Net investment (loss) income1.76%9.01%Portfolio Turnover—%14.56%(a) Calculated based on weighted average shares outstanding.(b) The per share data for distributions is the actual amount of distributions paid or payable per share of common stock outstanding during the year. Distributions per share are rounded to the nearest $0.01.(c)  The amount shown represents the balancing figure derived from the other figures in the schedule, and is primarily attributable to the accretive effects from the sales of the Company’s shares and the effects of share repurchases during the period.(d) Total return is based upon the change in net asset value per share between the opening and ending net asset values per share during the period and assumes that distributions are reinvested in accordance with the Company’s distribution reinvestment plan. The computation does not reflect the sales load for any class of shares. Total return based on market value is not presented since the Company’s shares are not publicly traded. Total return has not been annualized.





























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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


The following is a schedule of financial highlights for each of the five years ended in the period ended June 30, 2022:


Year EndedYear EndedYear EndedYear EndedJune 30, 2022June 30, 2021June 30, 2020June 30, 2019(e)Per Share Data(a):Net asset value at beginning of year$8.36$8.28$9.88$9.89Net investment income (loss)0.31(0.08)0.240.91Net realized and unrealized (losses) gains on investments(1.05)0.82(1.22)(1.11)Net increase (decrease) in net assets resulting from operations(0.74)0.74(0.98)(0.20)Distributions(b)Return of capital distributions(f)(0.16)(0.46)(0.57)(0.54)Distributions from net investment income(f)(0.43)(0.19)(0.15)(0.03)Total Distributions(0.59)(0.65)(0.72)(0.57)Offering costs———0.61Other(c)—(0.01)0.100.15Net asset value at end of year$7.03$8.36$8.28$9.88Total return based on net asset value(d)(9.60)%9.03%(10.13)%7.52%Supplemental Data:Net assets at end of year$16,700,975$19,947,807$19,558,400$23,410,715Average net assets$18,912,658$20,055,524$21,234,189$12,536,923Average shares outstanding2,380,2292,377,4612,366,0051,297,582Ratio to average net assets:Total annual expenses15.70%20.07%16.41%23.48%Total annual expenses (after expense support agreement/expense limitation agreement)12.47%18.44%13.07%9.11%Net investment income (loss)3.95%(0.93)%2.67%2.15%Portfolio Turnover35.34%17.83%24.56%93.42%(a) Calculated based on weighted average shares outstanding.(b) The per share data for distributions is the actual amount of distributions paid or payable per share of common stock outstanding during the year. Distributions per share are rounded to the nearest $0.01.(c)  The amount shown represents the balancing figure derived from the other figures in the schedule, and is primarily attributable to the accretive effects from the sales of the Company’s shares and the effects of share repurchases during the year.(d) Total return is based upon the change in net asset value per share between the opening and ending net asset values per share during the year and assumes that distributions are reinvested in accordance with the Company’s distribution reinvestment plan. The computation does not reflect the sales load for any class of shares. Total return based on market value is not presented since the Company’s shares are not publicly traded.(e) Data presented for the year ended June 30, 2019 includes the shareholder activity of PWAY Class A and Class I shares, prior to the Merger and conversion into shares of the Company. The net asset value per share at beginning of year has been adjusted by the exchange ratio used in the Merger.(f) The amounts reflected for the year ended June 30, 2022 have not been finalized. The amounts reflected for the year ended June 30, 2021 were updated based on tax information received subsequent to our Form 10-K filing for the year ended June 30, 2021. Certain reclassifications have been made in the presentation of prior period amounts. See Note 2 and Note 6 within the accompanying notes to the consolidated financial statements for further discussion.





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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


Year EndedYear EndedJune 30, 2018(e)June 30, 2018(e)PWAY Class APWAY Class IPer Share Data(a):Net asset value at beginning of year$13.53$13.53Net investment (loss) income0.790.81Net realized and unrealized (losses) on investments(0.80)(0.79)Net increase (decrease) in net assets resulting from operations(0.01)0.02Distributions(b)Return of capital distributions(f)(0.62)(0.62)Distributions from net investment income(f)(0.24)(0.24)Total Distributions(0.86)(0.86)Offering costs——Other(c)0.050.04Net asset value at end of year$12.71$12.73Total return based on net asset value(d)0.18%0.33%Supplemental Data:Net assets at end of year$7,933,028$420,136Average net assets$8,314,166$439,787Average shares outstanding622,68332,914Ratio to average net assets:Total annual expenses22.69%22.43%Total annual expenses (after expense support agreement/expense limitation agreement)8.91%8.73%Net investment income5.92%6.04%Portfolio Turnover37.42%37.42%(a) Calculated based on weighted average shares outstanding.(b) The per share data for distributions is the actual amount of distributions paid or payable per share of common stock outstanding during the year. Distributions per share are rounded to the nearest $0.01.(c)  The amount shown represents the balancing figure derived from the other figures in the schedule, and is primarily attributable to the accretive effects from the sales of the Company’s shares and the effects of share repurchases during the year.(d) Total return is based upon the change in net asset value per share between the opening and ending net asset values per share during the year and assumes that distributions are reinvested in accordance with the Company’s distribution reinvestment plan. The computation does not reflect the sales load for any class of shares. Total return based on market value is not presented since the Company’s shares are not publicly traded.(e) The per share data and total return include the shareholder activity prior to PWAY’s conversion to an interval fund. PWAY Class A Shares include the activity for Class R shares prior to such conversion and PWAY Class I Shares include activity for PWAY Class I Shares and Class RIA shares prior to such conversion.





























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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) September 30, 2022


Information about our senior securities is shown in the following table since June 30, 2019.


Revolving Credit FacilityTotal Amount OutstandingAsset Coverage per Unit(1)Involuntary Liquidating Preference per Unit(2)Average Market Value per Unit(2)September 30, 2022$20,000,000$1,792——June 30, 2022$20,500,000$1,815——March 31, 2022$21,000,000$1,895——December 31, 2021$21,000,000$1,924——September 30, 2021$21,000,000$1,938——June 30, 2021$21,000,000$1,950——March 31, 2021$21,000,000$1,971——December 31, 2020$21,000,000$1,976——September 30, 2020$21,000,000$1,947——June 30, 2020$21,000,000$1,931——March 31, 2020$21,000,000$1,914——December 31, 2019$21,000,000$2,018——September 30, 2019$15,500,000$2,461——June 30, 2019$5,500,000$5,256——(1) The asset coverage ratio is calculated as our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by secured senior securities representing indebtedness. This asset coverage ratio is multiplied by $1,000 to determine the Asset Coverage Per Unit.(2) This column is inapplicable.







NOTE 12 - NET INCREASE (DECREASE) IN NET ASSETS PER SHARE





The following information sets forth the computation of net increase in net assets resulting from operations per share during the three months ended September 30, 2022 and 2021.


Three Months Ended September 30,20222021Net (decrease)/increase in net assets resulting from operations$(517,315)$147,851Weighted average common shares outstanding2,375,3752,385,883Net (decrease)/increase in net assets resulting from operations per share$(0.22)$0.06







NOTE 13 - SUBSEQUENT EVENTS


Management has evaluated all known subsequent events through the date of issuance of these consolidated financial statements and notes the following:


Issuance of Common Stock


For the period beginning October 1, 2022 and ending November 14, 2022, the Company issued 13,809 shares pursuant to its distribution reinvestment plan in the amount of $94,391.


Repurchase Offer


On September 23, 2022, under our share repurchase program, we made a tender offer to purchase up to the number of shares of our issued and outstanding Class A common stock we could repurchase with the cash we retained during the quarter ended June 30, 2022 as a result of issuing shares through our distribution reinvestment plan to those shareholders who elected to receive their distributions in the form of additional shares rather than in cash. The total cash retained during the quarter ended June 30, 2022 as a result of issuing shares through our distribution reinvestment plan prior to this tender offer was approximately $155,836. The tender offer was for cash at a price equal to the net asset value per share as of October 21, 2022. The Offer expired at 4:00 P.M., Eastern Time, on October 24, 2022, and a total of 205,580 Shares were validly tendered and not withdrawn pursuant to the Offer as of such date. In accordance with the terms of the Offer, the Company purchased 23,434 Shares validly tendered and not withdrawn at a price equal to $6.65 per Share for an aggregate purchase price of approximately $155,836.


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Credit Facility





On November 7, 2022, we paid down $2,200,000 on the Credit Facility. As of November 14, 2022, there was a $17,800,000 outstanding Credit Facility balance.


Distributions





On November 14, 2022, the Board of Directors declared distributions for the months of November 2022, December 2022 and January 2023, which reflect a targeted annualized distribution rate of 7.0% based on the current net asset value. The distributions have monthly record dates as of the close of business of the last Friday at the end of each month in November 2022, December 2022 and January 2023 and equal a weekly amount of $0.00895 per share of common stock. The distributions will be payable monthly to stockholders of record as of the monthly record dates set forth below.





Record DatePayment datePFLOAT Class A Common Shares, per shareNovember 25, 2022December 2, 2022$0.03580December 31, 2022January 6, 2023$0.04475January 27, 2023February 3, 2023$0.03580


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Item 2: 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 quarterly report on Form 10-Q (the "Quarterly Report"). In addition to historical information, the following discussion and other parts of this Quarterly Report contain forward-looking information that involves risks and uncertainties. Our actual results may differ significantly from any results expressed or implied by these forward-looking statements due to the factors discussed in Part II, “Item 1A. Risk Factors” and “Forward-Looking Statements” appearing elsewhere herein.





The terms “PFLOAT,” “the Company,” “we,” “us” and “our” mean Prospect Floating Rate and Alternative Income Fund, Inc. unless the context specifically requires otherwise.




Overview


We are an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). Our investment objective is to generate current income and, as a secondary objective, capital appreciation by targeting investment opportunities with favorable risk-adjusted returns. Under normal market conditions, we will invest at least 80% of our net assets (plus any borrowings for investment purposes) in floating rate loans and other income producing investments. We will provide shareholders with 60 days' advanced notice prior to changing this 80% investment policy. The Company utilizes an ESG responsibility screen, in addition to analyzing companies' financial performance. Additional information regarding the company's ESG criteria can be found in the Company's Responsible Investment Policy, which is available on the Company's website at www.pfloat.com. We intend to meet our investment objective by primarily lending to and investing in the debt of privately-owned U.S. middle market companies, which we define as companies with annual revenue between $50 million and $2.5 billion. We have elected and intend to continue to qualify annually to be taxed for U.S. federal income tax purposes as a regulated investment company ("RIC") under the Internal Revenue Code of 1986, as amended (the "Code").





On March 31, 2019, Pathway Capital Opportunity Fund, Inc. (“PWAY”) merged with and into us (the “Merger”).  As the combined surviving company, we were renamed as TP Flexible Income Fund, Inc. (we were formerly known as Triton Pacific Investment Corporation, Inc. (“TPIC”)). In connection with our adoption of a policy to invest, under normal market conditions, at least 80% of our net assets (plus any borrowings for investment purposes) in floating rate loans and other income producing investments, effective September 16, 2022, we changed our name to Prospect Floating Rate and Alternative Income Fund, Inc. In connection with the Merger, Prospect Flexible Income Management, LLC ("PFIM"), an affiliate of PWAY, became our investment adviser, and Prospect Administration LLC (the "Administrator" or "Prospect Administration"), an affiliate of PFIM and our new investment adviser, Prospect Capital Management L.P. (the "Adviser"), became our administrator. Although PWAY merged with and into us, PWAY is considered the accounting survivor of the Merger and its historical financial statements are included and discussed herein and in other applicable reports that we file with the SEC.





On April 20, 2021, we entered into an investment advisory agreement (the "Investment Advisory Agreement") with the Adviser, which was approved by our Board of Directors, including by all of the directors who are not “interested persons” (as defined in the 1940 Act). Our stockholders approved the Investment Advisory Agreement at a Special Meeting of Stockholders held on March 31, 2021. The Investment Advisory Agreement replaces our prior investment advisory agreement, dated March 31, 2019 (the “Former Investment Advisory Agreement”), with PFIM, our former investment adviser, which terminated effective April 20, 2021. The Investment Advisory Agreement is identical in all material respects to the Former Investment Advisory Agreement, except for its date of effectiveness, term and the Adviser serving as our investment adviser instead of PFIM. As such, the Former Investment Advisory Agreement and the Investment Advisory Agreement contain the same terms, provisions, conditions and fee rates, and provide for the same management services to be conducted by the Adviser as were conducted by PFIM.





On November 5, 2021, we amended and restated the Investment Advisory Agreement (the "Amended and Restated Advisory Agreement") to reduce the base management fee from an annual rate of 1.75% to 1.20% and eliminate the incentive fee payable to the Adviser thereunder, effective as of January 1, 2022 and until the one year anniversary of the listing of the Company’s common stock on a national securities exchange (the “Listing Anniversary”). Following the Listing Anniversary (1) the base management fee will be calculated at an annual rate of 1.75% commencing with the first base management fee calculation that occurs thereafter, and (2) the Adviser will be entitled to receive an incentive fee, if any, under the Amended and Restated Advisory Agreement commencing with the first calendar quarter thereafter. The Amended and Restated Advisory Agreement was unanimously approved by Company’s Board of Directors, including by all of the directors who are not “interested


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persons” (as defined in the 1940 Act), and became effective on January 1, 2022. Until such effective date, the advisory fees payable to the Adviser were as set forth in the Investment Advisory Agreement.





For additional information regarding the Amended and Restated Advisory Agreement, please refer to “Investment Advisory Fees” below.





We previously publicly offered for sale a maximum amount of $300,000,000 in shares of common stock on a "best efforts" basis with Triton Pacific Securities, LLC (the "Dealer Manager") serving as the dealer manager for the offering pursuant to a dealer manager agreement, as amended. The Dealer Manager was not required to sell any specific number or dollar amount of shares but would use its best efforts to sell the shares offered. Effective February 19, 2021, the offering was terminated and, as a result, the dealer manager agreement terminated in accordance with its terms and the Dealer Manager ceased serving as our dealer manager effective as of such date. Effective September 19, 2022, we engaged Preferred Capital Securities, LLC (“PCS”) as our dealer manager for our offering to “accredited investors” (within the meaning of Rule 501(a) under the Securities Act of 1933, as amended (the “Securities Act”)) of shares of our common stock (the “Private Offering”) on the terms and conditions set forth in our confidential private placement memorandum. We are relying on the exemption provided by Rule 506(b) of Regulation D and Section 4(a)(2) of the Securities Act in connection with our Private Offering.





As of November 14, 2022, we have sold a total of 2,365,625 shares of common stock, including 395,618 shares issued pursuant to our distribution reinvestment plan, for gross proceeds of approximately $31,676,638, including the reduction due to ($4,466,622) in shares repurchased pursuant to the Company’s share repurchase program and 14,815 shares of common stock sold to Triton Pacific Adviser, LLC, our former investment adviser (the “TPIC Adviser”) in exchange for gross proceeds of $200,003. As a result of the Merger, the Company issued 775,193 shares.


Our Adviser


Our Adviser is a Delaware limited liability company and is registered as an investment adviser under the Advisers Act. Our Adviser is led by John F. Barry III and M. Grier Eliasek, two senior executives with significant investment advisory and business experience. Mr. Barry currently controls our Adviser.


First Quarter Highlights


Investment Transactions


We seek to be a long-term investor with our portfolio companies. During the three months ended September 30, 2022, there were no purchased investment securities (excluding short-term securities).  During the same three month period ended September 30, 2022, sales and redemptions of investment securities (excluding short-term securities) were $1,358,587, resulting in a total net portfolio decline of $(1,358,587).


Debt Issuances and Redemptions


During the three months ended September 30, 2022, we paid down $500,000 on our Credit Facility (as defined herein) for a total of $20,000,000 outstanding on our credit facility as of September 30, 2022. See "Credit Facility".


On September 23, 2022, under our share repurchase program, we made a tender offer to purchase up to the number of shares of our issued and outstanding Class A common stock we could repurchase with the cash we retained during the quarter ended June 30, 2022 as a result of issuing shares through our distribution reinvestment plan to those shareholders who elected to receive their distributions in the form of additional shares rather than in cash. The total cash retained during the quarter ended June 30, 2022 as a result of issuing shares through our distribution reinvestment plan prior to this tender offer was approximately $155,836. The tender offer was for cash at a price equal to the net asset value per share as of October 21, 2022. The Offer expired at 4:00 P.M., Eastern Time, on October 24, 2022, and a total of 205,580 Shares were validly tendered and not withdrawn pursuant to the Offer as of such date. In accordance with the terms of the Offer, the Company purchased 23,434 Shares validly tendered and not withdrawn at a price equal to $6.65 per Share for an aggregate purchase price of approximately $155,836.


Equity Issuances


As part of the distribution reinvestment plan, we issued 5,972, 8,457, 6,748, 7,528 and 6,281 shares of our common stock on July 1, 2022, August 5, 2022, September 2, 2022, October 7, 2022 and November 4, 2022, respectively.


Investments


Our investment objective is to meet our investment objective by generating current income and, as a secondary objective, capital appreciation by targeting investment opportunities with favorable risk-adjusted returns. Under normal market conditions, we will invest at least 80% of our net assets (plus any borrowings for investment purposes) in floating rate loans and other income producing investments. To determine our investable universe, we will first seek to screen out certain issuers based


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on ESG industry screening criteria determined by the Fund. We intend to meet our investment objective by primarily lending to and investing in the debt of privately-owned U.S. middle market companies. We may on occasion invest in smaller or larger companies if an attractive opportunity presents itself, especially when there are dislocations in the capital markets. We expect to focus primarily on making investments in syndicated senior secured first lien loans, syndicated senior secured second lien loans, and to a lesser extent, subordinated debt, of middle market companies in a broad range of industries. Syndicated secured loans refer to commercial loans provided by a group of lenders that are structured, arranged, and administered by one or several commercial or investment banks, known as arrangers. These loans are then sold (or syndicated) to other banks or institutional investors. Syndicated secured loans may have a first priority lien on a borrower’s assets (i.e., senior secured first lien loans), a second priority lien on a borrower’s assets (i.e., senior secured second lien loans), or a lower lien or unsecured position on the borrower’s assets (i.e., subordinated debt). We expect our target credit investments will typically have initial maturities between three and ten years and generally range in size between $1 million and $100 million, although the investment size will vary with the size of our capital base. We expect that the majority of our debt investments will bear interest at floating interest rates, but our portfolio may also include fixed-rate investments. We also expect to make our investments directly through the primary issuance by the borrower or in the secondary market.


We will generally source our investments primarily through our Adviser. We believe the investment management team of our Adviser has a significant amount of experience in the credit business, including originating, underwriting, principal investing and loan structuring. Our Adviser has access to 114 professionals, 47 of whom perform investment advisory functions.


We expect to dynamically allocate our assets in varying types of investments based on our analysis of the credit markets, which may result in our portfolio becoming more concentrated in particular types of credit instruments (such as senior secured loans) and less invested in other types of credit instruments. The loans in which we intend to invest are often rated by a nationally recognized ratings organization, and generally carry a rating below investment grade (rated lower than “Baa3” by Moody’s Investors Service or lower than “BBB-” by Standard & Poor’s Corporation - also known as “high yield” or “junk bonds”). However, we may also invest in non-rated debt securities.


To seek to enhance our returns, we may employ leverage as market conditions permit and at the discretion of our Adviser, but in no event will leverage employed exceed the maximum amount permitted by the 1940 Act.


As part of our investment objective to generate current income, we expect that at least 70% of our investments will consist primarily of syndicated senior secured first lien loans, syndicated senior secured second lien loans, and to a lesser extent, subordinated debt. We expect that up to 30% of our investments will consist of other securities, including private equity (both common and preferred), dividend-paying equity, royalties, and the equity and junior debt tranches of collateralized loan obligations ("CLOs"), which we also refer to as subordinated structured notes ("SSNs"). The senior secured loans underlying our CLO investments are expected typically to be BB or B rated (non-investment grade, which are often referred to as “high yield” or “junk”) and in limited circumstances, unrated, senior secured loans.


As a BDC, we are subject to certain regulatory restrictions in making our investments. For example, we have in the past and expect in the future to co-invest on a concurrent basis with certain affiliates, consistent with applicable regulations and our allocation procedures. On January 13, 2020, (amended on August 2, 2022), the parent company of the Adviser received an exemptive order from the SEC granting the ability to negotiate terms, other than price and quantity, of co-investment transactions with other funds managed by our Adviser or certain affiliates, including us, Prospect Capital Corporation and Priority Income Fund, Inc., subject to certain conditions included therein. Under the terms of the Order permitting us to co-invest with other funds managed by our Adviser or its affiliates, a majority of our independent directors who have no financial interest in the transaction must make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching of us or our stockholders on the part of any person concerned and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objective and strategies. The Order also imposes reporting and record keeping requirements and limitations on transactional fees. We may only co-invest with certain entities affiliated with our Adviser in negotiated transactions originated by our Adviser or its affiliates in accordance with such Order and existing regulatory guidance. See Note 4 of the Consolidated Financial Statements. These co-investment transactions may give rise to conflicts of interest or perceived conflicts of interest among us and the other participating accounts. To mitigate these conflicts, our Adviser and its affiliates will seek to allocate portfolio transactions for all of the participating investment accounts, including us, on a fair and equitable basis, taking into account such factors as the relative amounts of capital available for new investments, the applicable investment programs and portfolio positions, the clients for which participation is appropriate and any other factors deemed appropriate. We intend to make all of our investments in compliance with the 1940 Act and in a manner that will not jeopardize our status as a BDC or RIC.


As a BDC, we are permitted under the 1940 Act to borrow funds to finance portfolio investments. To enhance our opportunity for gain, we intend to employ leverage as market conditions permit. At the 2019 Annual Meeting, TPIC’s stockholders approved a proposal allowing us to modify our asset coverage ratio requirement from 200% to 150%. As a result, we were


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allowed to increase our leverage capacity effective as of March 16, 2019. The use of leverage, although it may increase returns, may also increase the risk of loss to our investors, particularly if the level of our leverage is high and the value of our investments declines.


Revenues


We generate revenue in the form of dividends, interest and capital gains on the debt securities, equity interests and CLOs that we hold. In addition, we may generate revenue from our portfolio companies in the form of commitment, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance and possibly consulting fees and performance-based fees. Any such fees will be recognized as earned.


Expenses


Our primary operating expenses will be the payment of advisory fees and other expenses under the Investment Advisory Agreement with the Adviser. The advisory fees will compensate our Adviser for its work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments.


We will bear all other expenses of our operations and transactions, including (without limitation) fees and expenses relating to:


•    corporate and organizational expenses relating to offerings of our common stock, subject to limitations included in the investment advisory and management services agreement;


•    the cost of calculating our net asset value, including the cost of any third-party valuation services;


•    the cost of effecting sales and repurchase of shares of our common stock and other securities;


•    investment advisory fees;


•    fees payable to third parties relating to, or associated with, making investments and valuing investments, including fees and expenses associated with performing due diligence reviews of prospective investments;


•    transfer agent and custodial fees;


•    fees and expenses associated with marketing efforts;


•    federal and state registration fees;


•    federal, state and local taxes;


•    independent directors’ fees and expenses;


•    costs of proxy statements, stockholders’ reports and notices;


•    fidelity bond, directors and officers/errors and omissions liability insurance and other insurance premiums;


•    direct costs such as printing, mailing, long distance telephone, and staff;


•    fees and expenses associated with independent audits and outside legal costs, including compliance with the Sarbanes-Oxley Act;


•    costs associated with our reporting and compliance obligations under the 1940 Act and applicable federal and state securities laws;


•    brokerage commissions for our investments;


•    legal, accounting and other costs associated with structuring, negotiating, documenting and completing our investment transactions;


•    all other expenses incurred by our Adviser, in performing its obligations, subject to the limitations included in the Investment Advisory Agreement; and


•    all other expenses incurred by either our Administrator or us in connection with administering our business, including payments to our Administrator under the Administration Agreement (as defined herein) that will be based upon our allocable portion of its overhead and other expenses incurred in performing its obligations under the Administration Agreement, including rent and our allocable portion of the costs of compensation and related expenses of our chief executive officer, chief compliance officer and chief financial officer and their respective staffs.


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Reimbursement of our Administrator for Administrative Services


We will reimburse our Administrator for the administrative expenses necessary for its performance of services to us. Such costs will be reasonably allocated to us on the basis of assets, revenues, time records or other reasonable methods. However, such reimbursement is made in an amount equal to the lower of the Administrator’s actual costs or the amount that we would be required to pay for comparable administrative services in the same geographic location. We will not reimburse our Administrator for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of our Administrator.




Portfolio and Investment Activity


During the three months ended September 30, 2022, we did not purchase investment securities (excluding short-term securities).  During the same three month period ended September 30, 2022, sales and redemptions of investment securities (excluding short-term securities) were $1,358,587, resulting in a total net portfolio decline of $(1,358,587) . As of September 30, 2022, our investment portfolio, with a total fair value of $33,817,029, consisted of interests in 46 investments (82% in senior secured loans, 2% in senior secured notes, 2% in equity/other and 14% in CLO - subordinated notes).


Our financial condition, including the fair value and performance of certain of our portfolio investments, may be materially impacted after September 30, 2022 by circumstances and events that are not yet known. To the extent our portfolio investments are adversely impacted by the COVID-19 pandemic, the ongoing conflict between Russia and Ukraine, rising interest rates, inflationary pressures, or by other factors, we may experience a material adverse impact on our future net investment income, the underlying value of our investments, our financial condition and the financial condition of our portfolio investments. For additional information concerning risks and their potential impact on our business and our operating results, see “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022, filed on September 6, 2022.


During the three months ended September 30, 2021, we purchased investment securities (excluding short-term securities) of $5,735,000. During the same three month period, sales and redemptions of investment securities (excluding short-term securities) were $5,517,172, resulting in a total net portfolio growth of $217,828 for the three months ended September 30, 2021. As of September 30, 2021, our investment portfolio, with a total fair value of $37,917,890, consisted of interests in 50 investments (80% in senior secured loans, 3% in senior secured notes, 2% in equity/other and 15% in CLO - subordinated notes).


Portfolio Holdings


As of September 30, 2022, our investment portfolio, with a total fair value of $33,817,029, consisted of interests in 22 portfolio companies and 24 structured subordinated notes. The following table presents certain selected information regarding our portfolio composition and weighted average yields as of September 30, 2022 and June 30, 2022:


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As of September 30, 2022As of June 30, 2022Amortized CostFair ValueAs Percent of Total Fair ValueAmortized CostFair ValueAs Percent of Total Fair ValueSenior Secured Loans-First Lien$29,066,853$27,311,61481%$30,375,126$28,880,78481%Senior Secured Loans-Second Lien496,718482,5001%507,496511,4641%Equity/Other670,383552,7502%681,111641,0002%Senior Secured Notes1,004,381567,6812%1,004,570650,0002%Structured subordinated notes5,917,7474,902,48414%5,991,8065,126,74914%Total$37,156,082$33,817,029100%$38,560,109$35,809,997100%Number of portfolio companies2224Number of Structured subordinated notes2424% Variable Rate (based on fair value)(1)98%98%% Fixed Rate (based on fair value)(1)2%2%% Weighted Average Yield Variable Rate (based on principal outstanding)(1)(2)9%7%% Weighted Average Yield Fixed Rate (based on principal outstanding)(1)7%7%% Weighted Average Yield on Structured Subordinated Notes (based on cost)13%12%% Weighted Average Yield on Fixed Rate Debt, Variable Rate Debt and Structured Subordinated Notes (based on cost)(3)9%8%(1)The interest rate by type information is calculated using the Company’s debt portfolio and excludes equity investments.(2)The interest rate by type information is calculated using the Company’s debt portfolio and excludes structured subordinated notes.(3)The interest rate by type information is calculated excluding the Company’s equity investments.





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The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of September 30, 2022 and June 30, 2022:





September 30, 2022IndustryInvestments at Amortized CostPercentage of PortfolioInvestments at Fair ValuePercentage of PortfolioStructured Finance$5,917,74716%$4,902,48414%Healthcare & Pharmaceuticals3,959,52311%3,871,87211%Telecommunications3,760,82711%3,557,11211%Services: Consumer3,871,16810%3,537,00710%Services: Business3,407,0269%3,241,32410%Beverage, Food & Tobacco2,457,8177%2,417,0027%Media: Broadcasting & Subscription1,990,0005%1,945,2256%High Tech Industries2,018,7175%1,945,0406%Consumer goods: Durable1,970,8265%1,899,1606%Wholesale1,929,8115%1,737,9995%Media: Diversified and Production1,972,2485%1,653,3005%Automotive1,221,8783%1,219,3074%Consumer goods: Non-Durable979,3693%824,2662%Financial1,004,3813%567,6812%Media: Advertising, Printing & Publishing496,7181%482,5001%Retail198,0261%15,7500 %Total$37,156,082100%$33,817,029100%





June 30, 2022IndustryInvestments at Amortized CostPercentage of PortfolioInvestments at Fair ValuePercentage of PortfolioStructured Finance$5,991,80616%$5,126,74914%Healthcare & Pharmaceuticals3,966,38310%4,053,77911%Telecommunications3,759,42110%3,616,25710%Services: Consumer3,917,65910%3,614,23010%Services: Business3,411,0239%3,272,3149%Beverage, Food & Tobacco2,463,6316%2,385,7037%High Tech Industries2,518,0087%2,378,4827%Media: Broadcasting & Subscription1,995,0005%1,960,0806%Consumer goods: Durable1,970,6455%1,911,6035%Wholesale1,933,7765%1,760,2225%Media: Diversified and Production1,971,7585%1,702,8295%Automotive1,224,4783%1,217,0873%Consumer goods: Non-Durable981,5083%914,0673%Banking, Finance, Insurance & Real Estate734,1932%735,1312%Financial1,004,5703%650,0002%Media: Advertising, Printing & Publishing496,3981%501,2501%Retail219,8520 %10,2140 %Total$38,560,109100%$35,809,997100%


As of September 30, 2022 and June 30, 2022, we did not “control” any of our portfolio companies, as defined in the 1940 Act.


The following table shows the composition of our investment portfolio by level of control as of September 30, 2022 and June 30, 2022:


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September 30, 2022June 30, 2022Level of ControlCost% of PortfolioFair Value(1)% of PortfolioCost% of PortfolioFair Value(1)% of PortfolioAffiliate$——%$——%$——%$——%Non-Control/Non-Affiliate37,156,082100%33,817,029100%38,560,109100%35,809,997100%Total Investments$37,156,082100%$33,817,029100%$38,560,109100%$35,809,997100%(1) As of September 30, 2022 and June 30, 2022, the fair value of our investments were impacted by the uncertainty surrounding the impact of the COVID-19 pandemic.







Net Asset Value


During the three months ended September 30, 2022, our net asset value decreased by $(855,527), or $(0.36) per share. The decrease was primarily attributable to a decrease in net realized and net change in unrealized gains of $(588,941), or $(0.25) per weighted average share. For the three months ended September 30, 2022, the decrease was primarily offset by $0.11 per share related to principal payments and the accelerated interest attributing to distributions being higher than that of our net investment income of $71,626. The following table shows the calculation of net asset value per share as of September 30, 2022 and June 30, 2022.


September 30, 2022June 30, 2022Net assets$15,845,448$16,700,975Shares of common stock issued and outstanding2,375,2492,375,890Net asset value per share$6.67$7.03







Results of Operations


Investment Income


For the three months ended September 30, 2022 and 2021, we generated $795,513 and $995,544, respectively, in investment income in the form of interest and fees earned on our debt portfolio. Such revenues were primarily cash income and non-cash portions related to the accretion of discounts. For the three months ended September 30, 2022, investment income was lower due to approximately $191,000 in accelerated accretion of discounts. Although there were benefits to interest income due to the rising LIBOR and SOFR rates, our income from our structured subordinated notes decreased due to 3 additional investments with an effective yield estimated to be 0% as expected future cash flows are anticipated to not be sufficient to repay the investment at cost.


For the three months ended September 30, 2022 and 2021, PIK interest included in interest income totaled $162 and $193, respectively. For the three months ended September 30, 2022, PIK interest included in interest income was lower because a PIK investment was fully repaid.


Operating Expenses


Total operating expenses before expense limitation support totaled $836,321 and $731,168 for the three months ended September 30, 2022 and 2021, respectively. These operating expenses consisted primarily of interest and credit facility expense, offering costs, base management fees, administrator costs, legal expense, valuation services and audit and tax expense.


The base management fees for the three months ended September 30, 2022 and 2021, respectively, were $112,434 and $182,198. Base management fees were lower for the three months ended September 30, 2022 due to the reduction in the annual rate of 1.75% (0.4375% quarterly) to 1.20% (0.30% quarterly).


The interest and credit facility expense for the three months ended September 30, 2022 and 2021, respectively, were $269,258 and $142,385. The interest and credit facility expenses were higher for the three months ended September 30, 2022 due to an increase in the three-month interest rates. The interest expense is monitored during our monthly reporting.


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The offering costs for the three months ended September 30, 2022 and 2021, respectively, were $8,513 and $5,307. The offering costs were higher for the three months ended September 30, 2022 because we are currently incurring initial costs associated with launching a private placement offering.


The legal expenses for the three months ended September 30, 2022 and 2021, respectively, were $68,479 and $3,146. The legal expenses for the three months ended  September 30, 2021 decreased due to a reduction in time incurred with external third party legal service providers. The legal expenses for the three months ended September 30, 2022 were higher due to additional costs associated with our Private Offering with PCS.


The valuation services for the three months ended September 30, 2022 and 2021, respectively, were $5,000 and $33,866. The valuation costs for the three months ended September 30, 2022 were lower due to leveraging the valuation services provided for co-investments.


The general and administrative expense for the three months ended September 30, 2022 and 2021, respectively, were $57,602 and $24,132. The general and administrative expense for the three months ended September 30, 2022 were lower due to the reduction in third party vendor usage.


Pursuant to the expense limitation support payment (discussed below), the sponsor reimbursed the Company $(112,434) and $(182,198) for the three months ended September 30, 2022 and 2021, respectively.





Net Investment Income (Loss)


Our net investment income (loss) totaled $71,626 and $446,574 for the three months ended September 30, 2022 and 2021, respectively. The net investment income for the three months ended September 30, 2022 was lower due to an increase in offering costs, interest and credit facility expense and legal expenses.


Net Realized Gains/Losses from Investments


We measure realized gains or losses by the difference between the net proceeds from the disposition and the amortized cost basis of investment, without regard to unrealized gains or losses previously recognized.


For the three months ended September 30, 2022 and 2021, respectively, we received proceeds from sales and repayments on unaffiliated investments of $1,358,587 and $5,517,172, from which we realized gains (losses) of $0.


Net Unrealized Gains/Losses on Investments


Net change in unrealized gains (losses) on investments reflects the net change in the fair value of our investment portfolio. For the three months ended September 30, 2022 and 2021, respectively, net change in unrealized gains (losses) totaled $(588,941) and $(298,723), respectively. For the three months ended September 30, 2022, the fair value of our investments was negatively impacted by uncertainty surrounding the impact of the COVID-19 pandemic and its effect on the supply chain, labor shortages, market yields and fundamental portfolio company performance.


Financial Condition, Liquidity and Capital Resources


We generate cash primarily from the net proceeds of offerings of our common stock, and from cash flows from fees (such as management fees), interest and dividends earned from our investments and principal repayments and proceeds from sales of our investments. Our primary use of funds is investments in companies, payments of our expenses and distributions to holders of our common stock.





We believe that our current cash on hand and our anticipated cash flows from operations will be adequate to meet our cash needs for our daily operations.


We previously publicly offered for sale a maximum amount of $300,000,000 in shares of common stock on a "best efforts" basis. The Dealer Manager was not required to sell any specific number or dollar amount of shares but would use its best efforts to sell the shares offered.  The minimum investment in shares of our common stock in the offering was $5,000. Effective February 19, 2021, the offering was terminated and, as a result, the dealer manager agreement terminated in accordance with its terms and the Dealer Manager ceased serving as our dealer manager effective as of such date. Effective September 19, 2022, we engaged PCS as our dealer manager for our Private Offering. We are relying on the exemption provided by Rule 506(b) of Regulation D and Section 4(a)(2) of the Securities Act in connection with our Private Offering.


To the extent we offer shares of our common stock and our net asset value increases, we will sell at a price necessary to ensure that shares are not sold at a price per share, after deduction of selling commissions and dealer manager fees, that is below our net asset value per share. In connection with each closing, our Board of Directors or a committee thereof is required, within 48


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hours of the time that each closing and sale is made, to make the determination that we are not selling shares of our common stock at a price per share which, after deducting upfront selling commissions, if any, is below the then-current net asset value per share of the applicable class. Promptly following any such adjustment to the offering price per share and to the extent we are conducting a public offering, we will file a prospectus supplement with the SEC disclosing the adjusted offering price, and we appropriately publish the updated information.





We may borrow funds to make investments at any time, including before we have fully invested the proceeds of our offering, to the extent we determine that additional capital would allow us to take advantage of investment opportunities, or if our Board of Directors determines that leveraging our portfolio would be in our best interests and the best interests of our stockholders. We have not yet decided, however, whether, and to what extent, we will finance portfolio investments using debt. We do not currently anticipate issuing any preferred stock.





The North American Securities Administrators Association, in its Omnibus Guidelines Statement of Policy adopted on March 29, 1992 and as amended on May 7, 2007 and from time to time, requires that our sponsor and its affiliates have an aggregate financial net worth, exclusive of home, automobile and home furnishings, of 5% of the first $20,000 of both the gross amount of securities currently being offered and the gross amount of any originally issued direct participation program sold by our sponsor and its affiliates within the last 12 months, plus 1% of all amounts in excess of the first $20,000.  Based on these requirements, our sponsor and its affiliates have an aggregate net worth in excess of those amounts required by the Omnibus Guidelines Statement of Policy.





For the three months ended September 30, 2022 and 2021 our operating activities provided (used) $1,633,138 and $(177,323) of cash, respectively. The change is primarily driven by decreased expenses and higher cash income for the current year. For the the three months ended September 30, 2022 and 2021, operating activities included the purchases of investments totaling $0 and $(5,735,000), respectively, which was offset by the repayments and sales of portfolio investments of $1,358,587 and $5,517,172, respectively. Financing activities (used) provided $(826,946) and $(404,364) of cash during the three months ended September 30, 2022 and 2021, respectively, which included dividend payments of $(174,441) and $(203,769), respectively.  For the three months ended September 30, 2022 and 2021, we repaid $500,000 and $0, respectively, under the credit facility.







Credit Facility





On May 16, 2019, we established a $50 million senior secured revolving credit facility (the “Credit Facility”) with Royal Bank of Canada, a Canadian chartered bank (“RBC”), acting as administrative agent. In connection with the credit facility, our wholly owned financing subsidiary, Prospect Flexible Funding, LLC (the "SPV"), as borrower, and each of the other parties thereto, entered into a Revolving Loan Agreement, dated as of May 16, 2019 (the “Loan Agreement”).  The SPV is a wholly-owned subsidiary of the Company that was formed to facilitate the transactions under the Credit Facility.  Under the terms of the Credit Facility, the SPV holds certain of the securities that would otherwise be owned by the Company to be used as the borrowing base and collateral under the Credit Facility.  Income paid on these investments is distributed to the Company pursuant to a waterfall after taxes, fees, expenses, and debt service. The lenders under the Credit Facility have a security interest in the investments held by the SPV.  Although these investments are owned by the SPV, because the SPV is a wholly-owned subsidiary of the Company, the Company is subject to all of the benefits and risks associated with the Credit Facility and the investments held by the SPV.





The Credit Facility matures on May 21, 2029 and interest on borrowings under the Credit Facility when established was three-month LIBOR plus 1.55%. On May 11, 2020, the Company agreed to the increased interest rate of three-month LIBOR plus 2.20% on the Credit Facility for the period between May 16, 2020 to November 15, 2020. Effective November 10, 2020, the end date of the ramp period of the Credit Facility was extended from November 15, 2020 to May 14, 2021.  As a result, the interest rate on borrowings under the Credit Facility of the three-month LIBOR plus 2.20% was extended from the period between May 16, 2020 to November 15, 2020 to the period between May 16, 2020 to May 14, 2021. On May 11, 2021, the end date of the ramp period of the Credit Facility was further extended from May 14, 2021 to November 15, 2021. Effective August 26, 2021, the end date of the ramp period of the Credit Facility was further extended from November 15, 2021 to August 25, 2022. In exchange, the interest rate on borrowings under the Credit Facility of the three-month LIBOR plus 2.20% was extended permanently. On July 6, 2022, the end date of the ramp period of the Credit Facility was further extended from August 25, 2022 to August 25, 2023.  In connection with such extension, the interest rate on borrowings under the Credit Facility was amended from three-month LIBOR plus 2.20% to Secured Overnight Financing Rate (“SOFR”) plus 2.20%.The Credit Facility is secured by substantially all of the SPV’s properties and assets. Under the Loan Agreement, the SPV has made certain customary representations and warranties and is required to comply with various covenants, including reporting requirements and other customary requirements for similar credit facilities. The Loan Agreement includes usual and customary events of default for credit facilities of this nature. The Loan Agreement includes usual and customary events of default for credit


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facilities of this nature. On November 7, 2022, Royal Bank of Canada granted a waiver through January 31, 2023 of any non-compliance with certain waterfall provisions in the Loan Agreement that may have occurred prior to November 7, 2022, which waiver is effective for so long as we (i) maintain compliance with a market value ratio test and an overcollateralization test on certain determination dates and (ii) maintain or improve a maximum Moody’s weighted average rating test.  As of September 30, 2022, we were in compliance with the applicable covenants. As of September 30, 2022, we had $20,000,000 outstanding on our Credit Facility with $30,000,000 capital remaining available under the Credit Facility. As of September 30, 2022, the investments used as collateral for the Credit Facility had an aggregate fair value of $27,794,114, which represents 82% of our total investments. These securities are not available as collateral to the Company's general creditors.





Recent Developments


Management has evaluated all known subsequent events through the date the accompanying consolidated financial statements were available to be issued on November 14, 2022 and notes the following:


Covid-19


As the novel coronavirus, or COVID-19, pandemic has evolved from its emergence in early 2020, so has its global impact. Many countries have at times re-instituted, or strongly encouraged, varying levels of quarantines and restrictions on travel and in some cases have at times limited operations of certain businesses and taken other restrictive measures designed to help slow the spread of COVID-19 and its variants. Governments and businesses have also instituted vaccine mandates and testing requirements for employees. While vaccine availability and uptake has increased, the longer-term macro-economic effects on global supply chains, inflation, labor shortages and wage increases continue to impact many industries, including the collateral underlying certain of our loans. Moreover, with the potential for new strains of COVID-19 or outbreaks of other infectious diseases, governments and businesses may re-impose aggressive measures to help slow the spread of infectious diseases in the future. For this reason, among others, as the COVID-19 pandemic continues, the potential global impacts are uncertain and difficult to assess.


Issuance of Common Stock


For the period beginning October 1, 2022 and ending November 14, 2022, the Company issued 13,809 shares pursuant to its distribution reinvestment plan in the amount of $94,391.


Repurchase Offer


On September 23, 2022, under our share repurchase program, we made a tender offer to purchase up to the number of shares of our issued and outstanding Class A common stock we could repurchase with the cash we retained during the quarter ended June 30, 2022 as a result of issuing shares through our distribution reinvestment plan to those shareholders who elected to receive their distributions in the form of additional shares rather than in cash. The total cash retained during the quarter ended June 30, 2022 as a result of issuing shares through our distribution reinvestment plan prior to this tender offer was approximately $155,836. The tender offer was for cash at a price equal to the net asset value per share as of October 21, 2022. The Offer expired at 4:00 P.M., Eastern Time, on October 24, 2022, and a total of 205,580 Shares were validly tendered and not withdrawn pursuant to the Offer as of such date. In accordance with the terms of the Offer, the Company purchased 23,434 Shares validly tendered and not withdrawn at a price equal to $6.65 per Share for an aggregate purchase price of approximately $155,836.


Credit Facility


On November 7, 2022, we paid down $2,200,000 on the Credit Facility. As of November 14, 2022, there was a $17,800,000 outstanding Credit Facility balance.


Reference Rate Reform





LIBOR and certain other floating rate benchmark indices to which our floating rate loans and other loan agreements are tied are the subject of recent national, international and regulatory guidance and proposals for reform. As of December 31, 2021, the ICE Benchmark Association, or IBA, ceased publication of all non-USD LIBOR and the one-week and two-month USD LIBOR and, as previously announced, intends to cease publication of remaining U.S. dollar LIBOR settings immediately after June 30, 2023. Further, on March 15, 2022, the Consolidated Appropriations Act of 2022, which includes the Adjustable Interest Rate (LIBOR) Act, was signed into law in the U.S. This legislation establishes a uniform benchmark replacement process for financial contracts maturing after June 30, 2023 that do not contain clearly defined or practicable fallback provisions. The legislation also creates a safe harbor that shields lenders from litigation if they choose to utilize a replacement rate recommended by the Board of Governors of the Federal Reserve.





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The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee composed of large U.S. financial institutions, has identified the Secured Overnight Financing Rate, or SOFR, a new index calculated using short-term repurchase agreements backed by U.S. Treasury securities, as its preferred alternative rate for USD LIBOR. As of November 14, 2022, one-month SOFR is utilized as the floating benchmark rate on 3 of our loans and three-month SOFR is utilized as the floating benchmark rate on 1 of our loans. As of November 14, 2022, the one-month SOFR was 3.81% and one-month USD LIBOR was 3.89%, while the three-month SOFR was 4.23% and three-month LIBOR was 4.64%.





At this time, it is not possible to predict how markets will respond to SOFR or other alternative reference rates as the transition away from USD LIBOR proceeds.


Distributions





On November 14, 2022, the Board of Directors declared distributions for the months of November 2022, December 2022 and January 2023, which reflect a targeted annualized distribution rate of 7.0% based on the current net asset value. The distributions have monthly record dates as of the close of business of the last Friday at the end of each month in November 2022, December 2022 and January 2023 and equal a weekly amount of $0.00895 per share of common stock. The distributions will be payable monthly to stockholders of record as of the monthly record dates set forth below.





Record DatePayment datePFLOAT Class A Common Shares, per shareNovember 25, 2022December 2, 2022$0.03580December 31, 2022January 6, 2023$0.04475January 27, 2023February 3, 2023$0.03580




Distributions


General


We elected to be treated, beginning with our fiscal year ending December 31, 2012, and intend to qualify annually thereafter, as a RIC under the Code. To maintain RIC tax treatment, we must, among other things, distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to our stockholders. In order to avoid certain excise taxes imposed on RICs, we must distribute during each calendar year an amount at least equal to the sum of: (i) 98% of our ordinary income for the calendar year, (ii) 98.2% of our recognized capital gains in excess of recognized capital losses for the one-year period generally ending on October 31 of the calendar year and (iii) any ordinary income or capital gains recognized but not distributed in preceding years and on which we paid no federal income tax.


While we intend to distribute any income and capital gains in the manner necessary to minimize imposition of the 4% U.S. federal excise tax, sufficient amounts of our taxable income and capital gains may not be distributed to avoid entirely the imposition of the tax. In that event, we will be liable for the tax only on the amount by which we do not meet the foregoing distribution requirement.


Our Board of Directors has authorized, and has declared, cash distributions on our common stock on a monthly basis since the second quarter of 2015 (in our capacity as TPIC). The amount of each such distribution is subject to our Board of Directors’ discretion and applicable legal restrictions related to the payment of distributions. We calculate each stockholder’s specific distribution amount for the month using record and declaration dates, and distributions will begin to accrue on the date we accept subscriptions for shares of our common stock. From time to time, we may also pay interim distributions at the discretion of our Board of Directors. Each year a statement on Internal Revenue Service Form 1099-DIV (or any successor form) identifying the source of the distribution (i.e.,(i) paid from investment company taxable income, which is generally our net ordinary income plus our realized net short-term capital gains in excess of realized net long-term capital gains, (ii) paid from net capital gain on the sale of securities, which is our realized net long-term capital gains in excess of realized net-short term capital losses, and/or (iii) a return of paid-in capital surplus, which is generally a nontaxable distribution) will be mailed to our stockholders. Our distributions may exceed our earnings, especially during the period before we have substantially invested the proceeds from our offering. As a result, a portion of the distributions we make may represent a return of capital for tax purposes.





We have adopted an “opt in” distribution reinvestment plan for our common stockholders. As a result, when we make a distribution, stockholders will receive distributions in cash unless they specifically “opt in” to the distribution reinvestment plan so as to have their cash distributions reinvested in additional shares of our common stock. Any distributions reinvested under the plan will nevertheless remain taxable to U.S. stockholders.





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Related Party Transactions





License Agreement





We entered into a license agreement with an affiliate of our Adviser, pursuant to which the affiliate granted us a non-exclusive, royalty free license to use the “Prospect” name. Under this license agreement, we have the right to use such name for so long as our Adviser or another affiliate of the Adviser is our investment adviser. Other than with respect to this limited license, we have no legal right to the “Prospect” name or logo.





Investment Advisory Agreement





We have entered into the Investment Advisory Agreement with our Adviser, pursuant to which we would pay our Adviser a fee for its services under the Investment Advisory Agreement consisting of two components - a base management fee and an incentive fee. Under the Amended and Restated Advisory Agreement, we reduced the base management fee from an annual rate of 1.75% to 1.20% and eliminated the incentive fee payable thereunder, effective as of January 1, 2022 and until the Listing Anniversary. Until such January 1, 2022 effective date, the advisory fees payable to the Adviser were as set forth in the Investment Advisory Agreement. The cost of any advisory fees payable to the Adviser will ultimately be borne by our stockholders. See “-Investment Advisory Fees.”





Certain members of our senior management hold an equity interest in our Adviser.  Members of our senior management also serve as principals of other investment managers affiliated with our Adviser that do and may in the future manage investment funds, accounts or other investment vehicles with investment objectives similar to ours.





Administration Agreement





Pursuant to the agreement and plan of merger, as amended and restated, between TPIC and PWAY, the Administrator, an affiliate of the Adviser, became the administrator for the Company pursuant to an administrative agreement, as amended and restated as of June 17, 2019 (the "Administration Agreement").The Administrator performs, oversees and arranges for the performance of administrative services necessary for the operation of the Company. These services include, but are not limited to, accounting, finance and legal services. For providing these services, facilities and personnel, the Company reimburses the Administrator for the Company’s actual and allocable portion of expenses and overhead incurred by the Administrator in performing its obligations under the Administration Agreement, including rent and the Company’s allocable portion of the costs of its Chief Financial Officer and Chief Compliance Officer and her staff. For the three months ended September 30, 2022 and 2021, allocation of overhead from the Administrator to the Company was $60,582 and $169,197, respectively. As of September 30, 2022 and June 30, 2022, $396,642 and $356,125, respectively, was payable to the Administrator by the Company.


Co-Investments


On January 13, 2020, (amended on August 2, 2022), the parent company of the Adviser received an exemptive order from the SEC (the “Order”),which superseded a prior co-investment exemptive order granted on February 10, 2014, granting the ability to negotiate terms other than price and quantity of co-investment transactions with other funds managed by the Adviser or certain affiliates, including Prospect Capital Corporation (“PSEC”) and Priority Income Fund, Inc. (“PRIS”), where co-investing would otherwise be prohibited under the 1940 Act, subject to the conditions included therein.


Under the terms of the relief permitting us to co-invest with other funds managed by our Investment Adviser or its affiliates, a “required majority” (as defined in Section 57(o) of the 1940 Act) of the Company’s independent directors must make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to the Company and its stockholders and do not involve overreaching of the Company or its stockholders on the part of any person concerned and (2) the transaction is consistent with the interests of the Company’s stockholders and is consistent with the Company’s investment objective and strategies. In certain situations where co-investment with one or more funds managed by the Adviser or its affiliates is not covered by the Order, such as when there is an opportunity to invest in different securities of the same issuer, the personnel of the Adviser or its affiliates will need to decide which fund will proceed with the investment. Such personnel will make these determinations based on policies and procedures, which are designed to reasonably ensure that investment opportunities are allocated fairly and equitably among affiliated funds over time and in a manner that is consistent with applicable laws, rules and regulations. Moreover, except in certain circumstances, when relying on the Order, the Company will be unable to invest in any issuer in which one or more funds managed or owned by the Adviser or its affiliates has previously invested.


Allocation of Expenses


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The cost of valuation services for CLOs is initially borne by PRIS, which then allocates to the Company its proportional share of such expense. During the three months ended September 30, 2022 and 2021, PRIS incurred $0 and $14,017, respectively, in expenses related to valuation services that are attributable to the Company. The Company reimburses PRIS for these expenses and includes them as part of Valuation services on the Consolidated  Statements of Operations . As of September 30, 2022 and June 30, 2022, $0 of expense is due to PRIS, which is presented as part of Due to Affiliates on the Consolidated  Statements of Assets and Liabilities .


Officers and Directors


Certain officers and directors of the Company are also officers and directors of the Adviser and its affiliates. There were no fees paid to the independent directors of the Company as the Company did not exceed the minimum net asset value required (i.e., greater than $100 million) to receive a fee for the three months ended September 30, 2022. The officers do not receive any direct compensation from the Company.





Dealer Manager Agreement





The Company and its Adviser entered into a dealer manager agreement, as amended, with Triton Pacific Securities, LLC ("TPS"), which terminated effective February 19, 2021 in accordance with its terms in connection with the termination of the Company's continuous public offering of its common stock.  TPS ceased serving as the Company's dealer manager effective as of such date. Pursuant to the terms of this dealer manager agreement, the Company would pay the dealer manager a fee of up to 9% of gross proceeds raised in the Company's offering, some of which would be re-allowed to other participating broker-dealers.  In addition to the upfront selling commissions and dealer manager fees, PFIM could pay TPS a fee (the "Additional Selling Commissions") equal to no more than 1.0% of the net asset value per share per year. TPS would reallow all or a portion of the Additional Selling Commissions to participating broker-dealers. TPS is an affiliated entity of the Triton Pacific Adviser, LLC, our former investment adviser (the “TPIC Adviser”), and is partially owned by one of our former directors, Craig Faggen.





Expense Limitation Agreement





The Company entered into an expense limitation agreement, dated March 31, 2019 (the "Former ELA"), with PFIM, which was terminated effective February 17, 2021 in accordance with its terms. On and effective April 20, 2021, the Company entered into a new expense limitation agreement with the Adviser, which was amended and restated on July 7, 2021 to extend the period during which the Adviser will be required to waive its investment advisory fees under the Investment Advisory Agreement, from September 30, 2021 to June 30, 2022 (the "First Amended and Restated ELA"). On August 23, 2022, the Company entered into the Second Amended and Restated Expense Limitation Agreement (the "Second Amended and Restated ELA" and, together with the First Amended and Restated ELA, the "New ELA") to extend the period during which the Adviser will be required to waive its investment advisory fees under the Investment Advisory Agreement from June 30, 2022 to December 31, 2022, as discussed below. Other than this change, the terms and conditions of the Second Amended and Restated ELA are identical to those of the First Amended and Restated ELA. Pursuant to the terms of each expense limitation agreement the applicable investment adviser, in its sole discretion, could waive a portion or all of the investment advisory fees that it was entitled to receive under its investment advisory agreement with the Company in order to limit the Company's operating expenses to an annual rate, expressed as a percentage of the Company's average quarterly net assets, equal to 8.00%. In addition, under the New ELA, the Adviser has agreed to waive its investment advisory fees to the extent necessary to limit the Company's operating expenses to such annual rate from the effective date of the New ELA through December 31, 2022. The Former ELA did not contain this guaranteed waiver.  Other than this guaranteed waiver, the terms and conditions of the New ELA are substantially similar to those of the Former ELA. See “Expense Limitation Agreement” below.







Expense Limitation Agreement





Former Expense Limitation Agreement with PFIM


Concurrently with the closing of the Merger, we entered into the Former ELA with PFIM. On and effective February 17, 2021, the Former ELA was terminated in accordance with its terms.


Pursuant to the Former ELA, PFIM, in its sole discretion, could waive a portion or all of the investment advisory fees that it was entitled to receive pursuant to the Former Investment Advisory Agreement in order to limit our Operating Expenses (as defined below) to an annual rate, expressed as a percentage of our average quarterly net assets, equal to 8.00% (the “Annual Limit”). For purposes of the Former ELA, the term “Operating Expenses” with respect to the Company, is defined to include all expenses necessary or appropriate for the operation of the Company, including but not limited to PFIM’s base management fee, any and all costs and expenses that qualify as line item “organization and offering” expenses in the consolidated financial statements of the Company as the same are filed with the SEC and other expenses described in the Former Investment Advisory


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Agreement, but does not include any portfolio transaction or other investment-related costs (including brokerage commissions, dealer and underwriter spreads, prime broker fees and expenses and dividend expenses related to short sales), interest expenses and other financing costs, extraordinary expenses and acquired fund fees and expenses. Upfront shareholder transaction expenses (such as sales commissions, dealer manager fees, and similar expenses) are not Operating Expenses. On April 30, 2020, the Company's Board of Directors approved extending the Expense Limitation Agreement for an additional 12-month term ending on April 30, 2021. During the three months ended September 30, 2022, there were no base management fees incurred by PFIM.


Any amount waived pursuant to the Former ELA is subject to repayment to PFIM (a “Former ELA Reimbursement”) by us within the three years following the end of the quarter in which the waiver was made by PFIM. Although the Former ELA was terminated effective February 17, 2021, PFIM maintains its right to repayment for any waiver it has made under the Former ELA, subject to the Former Repayment Limitations (discussed below).


Any Former ELA Reimbursement can be made solely in the event that we have sufficient excess cash on hand at the time of any proposed Former ELA Reimbursement and shall be limited to the lesser of (i) the excess of the Annual Limit applicable to such quarter over the Company’s actual Operating Expenses for such quarter and (ii) the amount of Former ELA Reimbursement which, when added to the Company’s expenses for such quarter, permits the Company to pay the then-current aggregate quarterly distribution to its shareholders, at a minimum annualized rate of at least 6.00% (based on the gross offering prices of Company shares) (the “Distribution”) from the sum of (x) the Company’s net investment income (loss) for such quarter plus (y) the Company’s net realized gains (losses) for such quarter (collectively, the “Former Repayment Limitations”). For the purposes of the calculations pursuant to (i) and (ii) of the preceding sentence, any Former ELA Reimbursement will be treated as an expense of the Company for such quarter, without regard to the GAAP treatment of such expense. In the event that the Company is unable to make a full payment of any Former ELA Reimbursements due for any applicable quarter because the Company does not have sufficient excess cash on hand, any such unpaid amount shall become a payable of the Company for accounting purposes and shall be paid when the Company has sufficient cash on hand (subject to the Repayment Limitations); provided, that in the case of any Former ELA Reimbursements, such payment shall be made no later than the date that is three years following the end of the quarter in which the applicable waiver was made by PFIM.





Expense Limitation Agreement with the Adviser


On and effective April 20, 2021, we entered into the new expense limitation agreement with the Adviser, which replaced the Former ELA with PFIM and was amended and restated on July 7, 2021 to extend the period during which the Adviser will be required to waive its investment advisory fees under the Investment Advisory Agreement, from September 30, 2021 to June 30, 2022. On August 23, 2022, we entered into the Second Amended and Restated ELA to extend the period during which the Adviser will be required to waive its investment advisory fees under the Investment Advisory Agreement from June 30, 2022 to December 31, 2022, as discussed below. The New ELA has an initial term ending on the first full month following the one-year anniversary of its effective date and may be continued thereafter for successive one-year periods in accordance with its terms.


Pursuant to the New ELA, our Adviser will waive a portion or all of the investment advisory fees that it is entitled to receive pursuant to the Investment Advisory Agreement, from the effective date of the New ELA through December 31, 2022, in order to limit our Operating Expenses (as defined below) to an annual rate, expressed as a percentage of our average quarterly net assets, equal to 8.00% (the “Annual Limit”). After December 31, 2022, such waiver may be made at our Adviser’s option and in its sole discretion. For purposes of the New ELA, the term “Operating Expenses” with respect to the Company, is defined to include all expenses necessary or appropriate for the operation of the Company, including but not limited to our Adviser’s base management fee, any and all costs and expenses that qualify as line item “organization and offering” expenses in the consolidated financial statements of the Company as the same are filed with the SEC and other expenses described in the Investment Advisory Agreement, but does not include any portfolio transaction or other investment-related costs (including brokerage commissions, dealer and underwriter spreads, prime broker fees and expenses and dividend expenses related to short sales), interest expenses and other financing costs, extraordinary expenses and acquired fund fees and expenses. Upfront shareholder transaction expenses (such as sales commissions, dealer manager fees, and similar expenses) are not Operating Expenses. Our Adviser waived fees, pursuant to the New ELA, in an amount of $112,434 and $182,198 for the three months ended September 30, 2022 and 2021, respectively.


Any amount waived pursuant to the New ELA is subject to repayment to our Adviser (an “ELA Reimbursement”) by us within the three years of the date on which the waiver was made by our Adviser.  If the New ELA is terminated or expires pursuant to its terms, our Adviser will maintain its right to repayment for any waiver it has made under the New ELA, subject to the Repayment Limitations (discussed below).


Any ELA Reimbursement can be made solely in the event that we have sufficient excess cash on hand at the time of any proposed ELA Reimbursement and shall be limited to the lesser of (i) the excess of the Annual Limit applicable to such quarter over the Company’s actual Operating Expenses for such quarter and (ii) the amount of ELA Reimbursement which, when


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added to the Company’s expenses for such quarter, permits the Company to pay the then-current aggregate quarterly distribution to its shareholders, at a minimum annualized rate of at least 6.00% (based on the gross offering prices of Company shares) (the “Distribution”) from the sum of (x) the Company’s net investment income (loss) for such quarter plus (y) the Company’s net realized gains (losses) for such quarter (collectively, the “Repayment Limitations”). For the purposes of the calculations pursuant to (i) and (ii) of the preceding sentence, any ELA Reimbursement will be treated as an expense of the Company for such quarter, without regard to the GAAP treatment of such expense. In the event that the Company is unable to make a full payment of any ELA Reimbursements due for any applicable quarter because the Company does not have sufficient excess cash on hand, any such unpaid amount shall become a payable of the Company for accounting purposes and shall be paid when the Company has sufficient cash on hand (subject to the Repayment Limitations); provided, that in the case of any ELA Reimbursements, such payment shall be made no later than the date that is three years after the date on which the applicable waiver was made by our Adviser.


Investment Advisory Fees





Overview





On April 20, 2021, the Company entered into the Investment Advisory Agreement with the Adviser, which was unanimously approved by the Company’s Board of Directors, including by all of the directors who are not “interested persons” (as defined in the 1940 Act), on February 18, 2021, subject to stockholder approval of the Investment Advisory Agreement. The Company’s stockholders approved the Investment Advisory Agreement at a Special Meeting of Stockholders held on March 31, 2021.





The Investment Advisory Agreement replaced the Former Investment Advisory Agreement with PFIM, the Company's former investment adviser, which terminated effective April 20, 2021. The Investment Advisory Agreement is identical in all material respects to the Former Investment Advisory Agreement, except for its date of effectiveness, term and the Adviser serving as the Company’s investment adviser instead of PFIM. As such, the Former Investment Advisory Agreement and the Investment Advisory Agreement contain the same terms, provisions, conditions and fee rates, and provide for the same management services to be conducted by the Adviser as were conducted by PFIM.





On November 5, 2021, we amended and restated the Investment Advisory Agreement to reduce the advisory fees payable thereunder, effective as of January 1, 2022 and until the one year anniversary of the listing of our common stock on a national securities exchange (the “Listing Anniversary”), as further discussed below. The Amended and Restated Advisory Agreement was unanimously approved by our Board of Directors, including by all of the directors who are not “interested persons” (as defined in the 1940 Act), and became effective on January 1, 2022. Until such effective date, the advisory fees payable to the Adviser were as set forth in the Investment Advisory Agreement. The Amended and Restated Advisory Agreement has an initial two-year term and may be continued thereafter for successive one-year periods if such continuance is approved in the manner provided for under Section 15 of the 1940 Act.





Each of these investment advisory agreements is further discussed below.





Former Investment Advisory Agreement





Pursuant to the Former Investment Advisory Agreement, we paid PFIM a fee for investment advisory and management services consisting of a base management fee and an incentive fee. The cost of both the base management fee payable to PFIM and any incentive fees it earned would ultimately be borne by our stockholders.





Base Management Fee . The base management fee was calculated at an annual rate of 1.75% (0.4375% quarterly) of our average total assets, which included any borrowings for investment purposes. For the first quarter of our operations following the Merger, the base management fee was calculated based on the average value of our total assets as of the date of the Former Investment Advisory Agreement and at the end of the calendar quarter in which the date of the Former Investment Advisory Agreement fell, and was appropriately adjusted for any share issuances or repurchases during the then current calendar quarter. Subsequently, the base management fee was payable quarterly in arrears, and was calculated based on the average value of our total assets at the end of the two most recently completed calendar quarters, and was appropriately adjusted for any share issuances or repurchases during the then current calendar quarter. Base management fees for any partial month or quarter was appropriately pro-rated. At PFIM’s option, the base management fee for any period could be deferred, without interest thereon, and paid to PFIM at any time subsequent to any such deferral as PFIM determined.


During the three months ended September 30, 2022 and 2021, there were no base management fees incurred by PFIM. As of September 30, 2022 and June 30, 2022, the total base management fee due to PFIM was $0.


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Incentive Fee . The incentive fee consisted of two parts: (1) the subordinated incentive fee on income and (2) the capital gains incentive fee.





Subordinated Incentive Fee on Income. The first part of the incentive fee, which is referred to as the subordinated incentive fee on income, was calculated and payable quarterly in arrears based upon our “pre-incentive fee net investment income” for the immediately preceding calendar quarter. For purposes of this fee, “pre-incentive fee net investment income” meant interest income, dividend income and distribution cash flows from equity investments and any other income (including any other fees, such as commitment, origination, structuring, diligence and consulting fees or other fees that we received) accrued during the calendar quarter, minus operating expenses for the quarter (including the base management fee, expenses reimbursed under the Former Investment Advisory Agreement and the Administration Agreement, any interest expense and dividends paid on any issued and outstanding preferred shares, but excluding the organization and offering expenses and incentive fees on income and capital gains). Pre-incentive fee net investment income included, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that we had not yet received in cash. Pre-incentive fee net investment income did not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. The subordinated incentive fee on income was subject to a quarterly fixed preferred return to investors, expressed as a rate of return on the value of our net assets at the end of the immediately preceding calendar quarter, of 1.5% (6.0% annualized), subject to a “catch up” feature. Operating expenses were included in the calculation of the subordinated incentive fee on income.





We would pay PFIM a subordinated incentive fee on income for each calendar quarter as follows:





• No incentive fee would be payable to PFIM in any calendar quarter in which our pre-incentive fee net investment income did not exceed the preferred return rate of 1.5%.





• 100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeded the preferred return but was less than or equal to 1.875% in any calendar quarter (7.5% annualized). We refer to this portion of our pre-incentive fee net investment income (which exceeded the preferred return but was less than or equal to 1.875%) as the “catch-up.” The effect of the “catch-up” provision was that, if our pre-incentive fee net investment income reached 1.875% in any calendar quarter, PFIM would receive 20.0% of our pre-incentive fee net investment income as if a preferred return did not apply.





• 20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeded 1.875% in any calendar quarter (7.5% annualized) would be payable to PFIM. This reflected that once the preferred return was reached and the catch-up was achieved, 20.0% of all pre-incentive fee net investment income thereafter would be allocated to PFIM.





Capital Gains Incentive Fee . The second part of the incentive fee, which is referred to as the capital gains incentive fee, was determined and payable in arrears as of the end of each calendar year (or upon termination of the Former Investment Advisory Agreement, as of the termination date), and equaled 20.00% of our realized capital gains for the calendar year, if any, computed net of all realized capital losses and unrealized capital depreciation at the end of such year. In determining the capital gains incentive fee payable to PFIM, we would calculate the aggregate realized capital gains, aggregate realized capital losses and aggregate unrealized capital depreciation, as applicable, with respect to each investment that has been in our portfolio. For the purpose of this calculation, an “investment” is defined as the total of all rights and claims which may be asserted against a portfolio company arising from our participation in the debt, equity, and other financial instruments issued by that company. Aggregate realized capital gains, if any, equaled the sum of the differences between the aggregate net sales price of each investment and the aggregate amortized cost basis of such investment when sold or otherwise disposed.





Aggregate realized capital losses equaled the sum of the amounts by which the aggregate net sales price of each investment was less than the aggregate amortized cost basis of such investment when sold or otherwise disposed. Aggregate unrealized capital depreciation equaled the sum of the differences, if negative, between the aggregate valuation of each investment and the aggregate amortized cost basis of such investment as of the applicable calendar year-end. At the end of the applicable calendar year, the amount of capital gains that served as the basis for our calculation of the capital gains incentive fee involved netting aggregate realized capital gains against aggregate realized capital losses on a since-inception basis and then reducing this amount by the aggregate unrealized capital depreciation. If this number was positive, then the capital gains incentive fee payable was equal to 20.00% of such amount, less the aggregate amount of any capital gains incentive fees paid since inception. Operating expenses were not taken into account when determining capital gains incentive fees.


There were no incentive fees payable as of September 30, 2022 or June 30, 2022. During the three months ended September 30, 2022 and 2021, there were no incentive fees incurred.





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Investment Advisory Agreement


Pursuant to the Investment Advisory Agreement, we pay the Adviser a fee for investment advisory and management services consisting of a base management fee and an incentive fee. The cost of both the base management fee payable to the Adviser and any incentive fees it earns will ultimately be borne by our stockholders. See "Amended and Restated Advisory Agreement" below for additional information.


Base Management Fee . The base management fee is calculated at an annual rate of 1.75% (0.4375% quarterly) of our average total assets, which includes any borrowings for investment purposes. For the first quarter of our operations following the date of Investment Advisory Agreement, the base management fee was calculated based on the average value of our total assets as of the date of the Investment Advisory Agreement and at the end of the calendar quarter in which the date of the Investment Advisory Agreement fell, and was appropriately adjusted for any share issuances or repurchases during the then current calendar quarter. Subsequently, the base management fee is payable quarterly in arrears, and is calculated based on the average value of our total assets at the end of the two most recently completed calendar quarters, and is appropriately adjusted for any share issuances or repurchases during the then current calendar quarter. Base management fees for any partial month or quarter is appropriately pro-rated. At the Adviser’s option, the base management fee for any period may be deferred, without interest thereon, and paid to the Adviser at any time subsequent to any such deferral as the Adviser determines.


The total base management fee incurred by the Adviser was $112,434 and $182,198, during the three months ended September 30, 2022 and 2021, respectively, which were waived by the Adviser. As of September 30, 2022 and June 30, 2022, the total base management fee due to the Adviser after the waiver was $0.





Incentive Fee . The incentive fee consists of two parts: (1) the subordinated incentive fee on income and (2) the capital gains incentive fee.


Subordinated Incentive Fee on Income. The first part of the incentive fee, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears based upon our “pre-incentive fee net investment income” for the immediately preceding calendar quarter. For purposes of this fee, “pre-incentive fee net investment income” means interest income, dividend income and distribution cash flows from equity investments and any other income (including any other fees, such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive) accrued during the calendar quarter, minus operating expenses for the quarter (including the base management fee, expenses reimbursed under the Investment Advisory Agreement and the Administration Agreement, any interest expense and dividends paid on any issued and outstanding preferred shares, but excluding the organization and offering expenses and incentive fees on income and capital gains). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest 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 or unrealized capital appreciation or depreciation. The subordinated incentive fee on income is subject to a quarterly fixed preferred return to investors, expressed as a rate of return on the value of our net assets at the end of the immediately preceding calendar quarter, of 1.5% (6.0% annualized), subject to a “catch up” feature. Operating expenses are included in the calculation of the subordinated incentive fee on income.


We will pay our Adviser a subordinated incentive fee on income for each calendar quarter as follows:


•    No incentive fee will be payable to our Adviser in any calendar quarter in which our pre-incentive fee net investment income does not exceed the preferred return rate of 1.5%.


•    100% 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 preferred return but is less than or equal to 1.875% in any calendar quarter (7.5% annualized). We refer to this portion of our pre-incentive fee net investment income (which exceeds the preferred return but is less than or equal to 1.875%) as the “catch-up.” The effect of the “catch-up” provision is that, if our pre-incentive fee net investment income reaches 1.875% in any calendar quarter, our Adviser will receive 20.0% of our pre-incentive fee net investment income as if a preferred return did not apply.


•    20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 1.875% in any calendar quarter (7.5% annualized) will be payable to our Adviser. This reflects that once the preferred return is reached and the catch-up is achieved, 20.0% of all pre-incentive fee net investment income thereafter will be allocated to our Adviser.


Capital Gains Incentive Fee . The second part of the incentive fee, which is referred to as the capital gains incentive fee, is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date), and equals 20.00% of our realized capital gains for the calendar year, if any, computed net of all realized capital losses and unrealized capital depreciation at the end of such year; provided that the incentive fee


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determined as of December 31, 2021 will be calculated for a period of shorter than twelve calendar months to take into account any net realized capital gains, if any, computed net of all realized capital losses and unrealized capital depreciation for the period commencing as of the date of the Investment Advisory Agreement and ending on December 31, 2021. In determining the capital gains incentive fee payable to the Adviser, we calculate the aggregate realized capital gains, aggregate realized capital losses and aggregate unrealized capital depreciation, as applicable, with respect to each investment that has been in our portfolio. For the purpose of this calculation, an “investment” is defined as the total of all rights and claims which may be asserted against a portfolio company arising from our participation in the debt, equity, and other financial instruments issued by that company. Aggregate realized capital gains, if any, equal the sum of the differences between the aggregate net sales price of each investment and the aggregate amortized cost basis of such investment when sold or otherwise disposed. Aggregate realized capital losses equal the sum of the amounts by which the aggregate net sales price of each investment is less than the aggregate amortized cost basis of such investment when sold or otherwise disposed. Aggregate unrealized capital depreciation equals the sum of the differences, if negative, between the aggregate valuation of each investment and the aggregate amortized cost basis of such investment as of the applicable calendar year-end. At the end of the applicable calendar year, the amount of capital gains that serves as the basis for our calculation of the capital gains incentive fee involves netting aggregate realized capital gains against aggregate realized capital losses on a since-inception basis and then reducing this amount by the aggregate unrealized capital depreciation. If this number is positive, then the capital gains incentive fee payable is equal to 20.00% of such amount, less the aggregate amount of any capital gains incentive fees paid since inception. Operating expenses are not taken into account when determining capital gains incentive fees.


There were no incentive fees payable as of September 30, 2022 or June 30, 2022. During the three months ended September 30, 2022 and 2021, there were no incentive fees incurred.





Amended and Restated Advisory Agreement





On November 5, 2021, we amended and restated the Investment Advisory Agreement to reduce the base management fee from an annual rate of 1.75% (0.4375% quarterly) to 1.20% (0.30% quarterly) and eliminate the incentive fee payable thereunder, effective as of January 1, 2022 and until the Listing Anniversary. As such, until the Listing Anniversary, the base management fee will be calculated at an annual rate of 1.20% (0.30% quarterly) and the Adviser will not be entitled to any incentive fee.  Following the Listing Anniversary (1) the base management fee will be calculated at an annual rate of 1.75% (0.4375% quarterly), commencing with the first base management fee calculation that occurs after such anniversary, and (2) the Adviser will be entitled to receive the same incentive fee, including the subordinated incentive fee on income and the capital gains incentive fee, as set forth in the Investment Advisory Agreement and discussed above, commencing with the first calendar quarter after such anniversary. The Amended and Restated Advisory Agreement became effective on January 1, 2022. Until such effective date, the advisory fees payable to the Adviser were as set forth in the Investment Advisory Agreement.  See “Investment Advisory Agreement” above.







Asset Coverage


In accordance with the 1940 Act, the Company is currently only allowed to borrow amounts such that its “asset coverage,” as defined in the 1940 Act, is at least 150% after such borrowing. “Asset coverage” generally refers to a company’s total assets, less all liabilities and indebtedness not represented by “senior securities,” as defined in the 1940 Act, divided by total senior securities representing indebtedness and, if applicable, preferred stock. “Senior securities” for this purpose includes borrowings from banks or other lenders, debt securities and preferred stock.


On March 23, 2018, an amendment to Section 61(a) of the 1940 Act was signed into law to permit BDCs to reduce the minimum “asset coverage” ratio from 200% to 150%, so long as certain approval and disclosure requirements are satisfied. In addition, for BDCs like the Company whose securities are not listed on a national securities exchange, the Company is also required to offer to repurchase its outstanding shares at the rate of 25% per quarter over four calendar quarters. Under the existing 200% minimum asset coverage ratio, the Company is permitted to borrow up to one dollar for investment purposes for every one dollar of investor equity, and under the 150% minimum asset coverage ratio, the Company will be permitted to borrow up to two dollars for investment purposes for every one dollar of investor equity. In other words, Section 61(a) of the 1940 Act, as amended, permits BDCs to potentially increase their debt-to-equity ratio from a maximum of 1 to 1 to a maximum of 2 to 1.





At the 2019 Annual Meeting, stockholders approved the application to the Company of the 150% minimum asset coverage ratio set forth in Section 61(a)(2) of the 1940 Act. As a result, and subject to certain additional disclosure requirements and the repurchase obligations described above, the minimum asset coverage ratio applicable to the Company was reduced from 200% to 150%, effective as of March 16, 2019.





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Below is our quarterly asset coverage since June 30, 2019.





Revolving Credit FacilityTotal Amount OutstandingAsset Coverage per Unit(1)Involuntary Liquidating Preference per Unit(2)Average Market Value per Unit(2)September 30, 2022$20,000,000$1,792——June 30, 2022$20,500,000$1,815——March 31, 2022$21,000,000$1,895——December 31, 2021$21,000,000$1,924——September 30, 2021$21,000,000$1,938——June 30, 2021$21,000,000$1,950——March 31, 2021$21,000,000$1,971——December 31, 2020$21,000,000$1,976——September 30, 2020$21,000,000$1,947——June 30, 2020$21,000,000$1,931——March 31, 2020$21,000,000$1,914——December 31, 2019$21,000,000$2,018——September 30, 2019$15,500,000$2,461——June 30, 2019$5,500,000$5,256——(1) The asset coverage ratio is calculated as our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by secured senior securities representing indebtedness. This asset coverage ratio is multiplied by $1,000 to determine the Asset Coverage Per Unit.(2) This column is inapplicable.


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Critical Accounting Policies


Valuation of Portfolio Investments


As a BDC, and in accordance with the 1940 Act, we fair value our investment portfolio on a quarterly basis, with any unrealized gains and losses reflected in net increase (decrease) in net assets resulting from operations on our Consolidated Statements of Operations . To value our investments, we follow the guidance of ASC 820, Fair Value Measurement (“ASC 820”), that defines fair value, establishes a framework for measuring fair value in conformity with GAAP, and requires disclosures about fair value measurements. In accordance with ASC 820, the fair value of our investments is defined as the price that we would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market in which that investment is transacted.


ASC 820 classifies the inputs used to measure these fair values into the following hierarchy:


Level 1. Quoted prices in active markets for identical assets or liabilities, accessible by us at the measurement date.


Level 2. Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.


Level 3. Unobservable inputs for the asset or liability.


In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each investment.


Our Board of Directors has established procedures for the valuation of our investment portfolio. These procedures are detailed below.


Investments for which market quotations are readily available are valued at such market quotations.


For most of our investments, market quotations are not available. With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, due to factors such as volume and frequency of price quotes, our Board of Directors has approved a multi-step valuation process each quarter, as described below.


1. Each portfolio company or investment is reviewed by our investment professionals with independent valuation firms engaged by our Board of Directors.


2. The independent valuation firms prepare independent valuations for each investment based on their own independent assessments and issue their report.


3. The Audit Committee of our Board of Directors reviews and discusses with the independent valuation firms the valuation reports, and then makes a recommendation to the Board of Directors of the value for each investment.


4. The Board of Directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of the Investment Adviser, the respective independent valuation firm and the Audit Committee.





Our non-CLO investments that are classified as Level 3 are valued utilizing a yield technique, enterprise value (“EV”) technique, net asset value technique, asset recovery technique, discounted cash flow technique, or a combination of techniques, as appropriate. The yield technique uses loan spreads for loans and other relevant information implied by market data involving identical or comparable assets or liabilities. Under the EV technique, the EV of a portfolio company is first determined and allocated over the portfolio company’s securities in order of their preference relative to one another (i.e., “waterfall” allocation). To determine the EV, we typically use a market (multiples) valuation approach that considers relevant and applicable market trading data of guideline public companies, transaction metrics from precedent merger and acquisitions transactions, and/or a discounted cash flow technique. The net asset value technique, an income approach, is used to derive a value of an underlying investment by dividing a relevant earnings stream by an appropriate capitalization rate. For this purpose, we consider capitalization rates for similar properties as may be obtained from guideline public companies and/or relevant transactions. The asset recovery technique is intended to approximate the net recovery value of an investment based on, among other things, assumptions regarding liquidation proceeds based on a hypothetical liquidation of a portfolio company’s assets. The discounted cash flow technique converts future cash flows or earnings to a range of fair values from which a single estimate may be


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derived utilizing an appropriate discount rate. The fair value measurement is based on the net present value indicated by current market expectations about those future amounts.





In applying these methodologies, additional factors that we consider in valuing our investments may include, as we deem relevant: security covenants, call protection provisions, and information rights; the nature and realizable value of any collateral; the portfolio company’s ability to make payments; the principal markets in which the portfolio company does business; publicly available financial ratios of peer companies; the principal market; and enterprise values, among other factors.





Our investments in CLOs are classified as Level 3 fair value measured securities under ASC 820 and are valued using a discounted multi-path cash flow model. The CLO structures are analyzed to identify the risk exposures and to determine an appropriate call date (i.e., expected maturity). These risk factors are sensitized in the multi-path cash flow model using Monte Carlo simulations, which is a simulation used to model the probability of different outcomes, to generate probability-weighted (i.e., multi-path) cash flows from the underlying assets and liabilities. These cash flows are discounted using appropriate market discount rates, and relevant data in the CLO market as well as certain benchmark credit indices are considered, to determine the value of each CLO investment. In addition, we generate a single-path cash flow utilizing our best estimate of expected cash receipts, and assess the reasonableness of the implied discount rate that would be effective for the value derived from the multi-path cash flows. We are not responsible for and have no influence over the asset management of the portfolios underlying the CLO investments we hold, as those portfolios are managed by non-affiliated third-party CLO collateral managers. The main risk factors are default risk, prepayment risk, interest rate risk, downgrade risk, and credit spread risk.





Recent Accounting Pronouncements





For discussion of recent accounting pronouncements, refer to Note 2 within the accompanying notes to the consolidated financial statements.







Item 3: Quantitative and Qualitative Disclosures About Market Risk.





We are subject to financial market risks, including changes in interest rates and equity price risk. The economic effects of the ongoing conflict between Russia and Ukraine and the COVID-19 pandemic have introduced significant volatility in the financial markets and global supply chain disruptions, and the effects of this volatility and these disruptions have impacted and could continue to impact our market risks. For additional information concerning risks and their potential impact on our business and our operating results, see Part I, Item 1A. Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.





Interest rate sensitivity refers to the change in our earnings that may result from changes in the level of interest rates impacting some of the loans in our portfolio which have floating interest rates. Additionally, because we fund a portion of our investments with borrowings, our net investment income is affected by the difference between the rate at which we invest and the rate at which we borrow. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. See Part I, Item 1A. Risk Factors, “Risks Relating to Our Business - Rising interest rates may adversely affect the value of our portfolio investments which could have an adverse effect on our business, financial condition and results of operations” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.





Our debt investments may be based on floating rates or fixed rates. For our floating rate loans the rates are determined from the LIBOR, SOFR, EURO Interbank Offer Rate, the Federal Funds Rate or the Prime Rate. The floating interest rate loans may be subject to an interest rate floor. Our loans typically have durations of one, two, three, six or twelve months after which they reset to current market interest rates. As of September 30, 2022, 98% (based on fair value) of our investments paid variable interest rates and 2% paid fixed rates (considering interest rate flows for floating rate instruments, excluding our investments in equity and structured subordinated notes). A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to certain variable rate investments we hold and to declines in the value of any fixed rate investments we may hold in the future.





We also have a revolving credit facility that is based on floating SOFR rates. Interest on borrowings under the revolving credit


facility is three-month SOFR plus 220 basis points with no minimum SOFR floor and an outstanding balance of $20,000,000 as of September 30, 2022.


The following table shows the estimated annual impact of changes in interest rates (considering interest rate flows for floating rate instruments, excluding our investments in equity and structured subordinated notes) on our interest income, interest expense and net interest income, assuming no changes in our investment portfolio in effect as of September 30, 2022:


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Interest Rate Basis Point ChangeInterest IncomeInterest ExpenseNet Investment IncomeUp 300 basis points$948,033$600,000$348,033Up 200 basis points$649,846$400,000$249,846Up 100 basis points$351,659$200,000$151,659Down 100 basis points$(298,187)$(200,000)$(98,187)Down 200 basis points$(591,533)$(400,000)$(191,533)Down 300 basis points$(788,136)$(600,000)$(188,136)





Because we may borrow money to make investments, our net investment income may be dependent on the difference between the rate at which we borrow funds and the rate at which we invest these funds. In periods of increasing interest rates, our cost of funds would increase, which may reduce our net investment income. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.





We may also face risk due to the lack of liquidity in the marketplace which could prevent us from raising sufficient funds to adequately invest in a broad pool of assets. We are subject to other financial market risks, including changes in interest rates. However, at this time, with no portfolio investments, this risk is immaterial.





In addition, we may have risk regarding portfolio valuation. For discussion of critical accounting policies, estimates and risks regarding our portfolio valuation, refer to our Annual Report on Form 10-K for the year ended June 30, 2022.


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Item 4: Controls and Procedures


Evaluation of Disclosure Controls and Procedures





As of September 30, 2022, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the 1934 Act). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that, due to the material weakness in the Company’s internal control over financial reporting described in our Annual Report on Form 10-K, our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives.





Notwithstanding the material weakness, management believes that the financial statements included in this Quarterly Report on Form 10-Q present fairly in all material respects the Company’s financial condition, results of its operations, changes in its net assets and temporary equity and its cash flows for the periods presented.





Changes in Internal Control Over Financial Reporting





We have begun the process of, and we are focused on, enhancing effective internal controls measures to improve our internal control over financial reporting and remediate the material weakness. Our internal control remediation efforts include the following:





• Enhancing existing controls that address the completeness and accuracy of underlying data used in the performance of management review controls over the valuation of CLOs;


• Enhancing policies and procedures to retain adequate documentary evidence for certain management review controls over the valuation of CLOs, including precision of review and evidence of review procedures performed to demonstrate effective operation of such controls.





We believe our planned actions to enhance our processes and controls will address the material weakness, but these actions are subject to ongoing management evaluation, and we will need a period of execution to demonstrate remediation. We are committed to the continuous improvement of our internal control over financial reporting and will continue to diligently review our internal control over financial reporting.


Change in Internal Control Over Financial Reporting





There were no other changes in our internal control over financial reporting during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.










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PART II







Item 1. Legal Proceedings





From time to time, we may become involved in various investigations, claims and legal proceedings that arise in the ordinary course of our business. These matters may relate to intellectual property, employment, tax, regulation, contract or other matters. The resolution of such matters as may arise will be subject to various uncertainties and, even if such claims are without merit, could result in the expenditure of significant financial and managerial resources. We are not aware of any material legal proceedings as of September 30, 2022.







Item 1A. Risk Factors





In addition to the other information set forth in this report, you should carefully consider the factors discussed below, if any, and the risk factors in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2022 which could materially affect our business, financial condition or future results. The risks described in this report and in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.





Recent macroeconomic trends, including inflation and rising interest rates, may adversely affect our business, financial condition and results of operations.





During the three months ended September 30, 2022, inflation in the United States has accelerated and is currently expected to continue at an elevated level in the near-term. Rising inflation could have an adverse impact on any variable rate debt we may incur in the future, and our general and administrative expenses, as these costs could increase at a rate higher than our interest income and other revenue. The Federal Reserve has recently started raising interest rates to combat inflation and restore price stability and it is expected that rates will continue to rise throughout the remainder of calendar year 2022. To the extent our borrowing costs increase faster than the interest income earned from our floating-rate loans, such increases may adversely affect our cash flows.







Item 2. Unregistered Sales of Equity Securities and Use of Proceeds





In order to satisfy the reinvestment portion of our dividends for the three months ended September 30, 2022, we issued the following shares of common stock to stockholders of record on the dates noted below as part of our distribution reinvestment plan. These issuances were not subject to the registration requirements of the Securities Act of 1933, as amended.





Date of IssuanceRecord DateNumber of SharesPurchase Price per ShareAugust 5, 2022July 29, 20228,457$6.99September 2, 2022August 26, 20226,748$6.99October 7, 2022September 30, 20227,528$6.99





On September 23, 2022, under our share repurchase program, we made a tender offer to purchase up to the number of shares of our issued and outstanding Class A common stock we could repurchase with the cash we retained during the quarter ended June 30, 2022 as a result of issuing shares through our distribution reinvestment plan to those shareholders who elected to receive their distributions in the form of additional shares rather than in cash. The total cash retained during the quarter ended June 30, 2022 as a result of issuing shares through our distribution reinvestment plan prior to this tender offer was approximately $155,836. The tender offer was for cash at a price equal to the net asset value per share as of October 21, 2022. The offer expired at 4:00 P.M., Eastern Time, on October 24, 2022 and a total of 205,580 shares were validly tendered and not withdrawn pursuant to the offer. In accordance with the terms of the offer, the Company purchased 23,434 shares validly tendered and not withdrawn at a price equal to $6.65 per share for an aggregate purchase price of approximately $155,836.







Item 3: Default Upon Senior Securities


Not applicable.







Item 4. Mine Safety Disclosures





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Not applicable.







Item 5. Other Information





Not applicable.







Item 6. Exhibits





The following documents are filed as part of this report or hereby incorporated into this report by reference to exhibits previously filed with the SEC (according to the number assigned to them in Item 601 of Regulation S-K):








Exhibit No.  Description





3.1 Fourth Amended Articles of Incorporation(1)


3.2 Articles Supplementary(2)


3.3 Articles Supplementary(3)


3.4 Articles of Merger of the Registrant(4)


3.5 Articles of Amendment(5)


3.6 Articles of Amendment(6)


3.7 Third Amended and Restated Bylaws(7)


3.8 Articles of Amendment(8)


3.9 Fourth Amended and Restated Bylaws(9)


31.1 Certification by Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *


31.2 Certification by Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *


32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *


32.2 Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *


________________________


*    Filed herewith.





(1) Incorporated by reference to Exhibit 2(a) to the Post-Effective Amendment No. 7 to the Registrant’s Registration Statement on Form N-2 (SEC File No. 333-174873) filed with the SEC on November 1, 2013.


(2) Incorporated by reference to Exhibit 2(a)(1) to the Pre-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form N-2 (SEC File No. 333-206730) filed with the SEC on March 3, 2016.


(3) Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on September 23, 2019.


(4) Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on April 1, 2019.


(5) Incorporated by reference to Exhibit 2(a)(4) to the Post-Effective Amendment No. 3 to the Registrant’s Registration Statement on Form N-2 (SEC File No. 333-230251) filed with the SEC on August 8, 2020.


(6) Incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K, filed with the SEC on January 11, 2022.


(7) Incorporated by reference to Exhibit 3.2 to the Registrant's Current Report on Form 8-K, filed with the SEC on January 11, 2022.


(8) Incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K, filed with the SEC on September 21, 2022.


(9) Incorporated by reference to Exhibit 3.2 to the Registrant's Current Report on Form 8-K, filed with the SEC on September 21, 2022.


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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 on November 14, 2022.





PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.





By: /s/ M. Grier Eliasek


M. Grier Eliasek


Chief Executive Officer


(Principal Executive Officer)





By: /s/ Kristin Van Dask


Kristin Van Dask


Chief Financial Officer


(Principal Accounting and Financial Officer)








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