UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2022

OR

oTRANSITION 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)

Maryland	45-2460782
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
10 East 40th Street, 42nd Floor New York, NY	10016
(Address of principal executive offices)	(Zip Code)

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

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	None	None

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 x 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 filer	o	Accelerated filer	o
Non-accelerated filer	x	Smaller reporting company	o
		Emerging growth company	o

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 February 13, 2023 was 2,384,891.

PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.

TABLE OF CONTENTS

		Page
	Forward-Looking Statements	1
PART I	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements	3
	Consolidated Statements of Assets and Liabilities as of December 31, 2022 (unaudited) and June 30, 2022	3
	Consolidated Statements of Operations for the three and six months ended December 31, 2022 and 2021 (unaudited)	4
	Consolidated Statements of Changes in Net Assets for the three and six months ended December 31, 2022 and 2021 (unaudited)	5
	Consolidated Statements of Cash Flows for the six months ended December 31, 2022 and 2021 (unaudited)	7
	Consolidated Schedules of Investments as of December 31, 2022 (unaudited) and June 30, 2022	8
	Notes to Consolidated Financial Statements (unaudited)	14
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	48
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	68
Item 4.	Controls and Procedures	69
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	69
Item 1A.	Risk Factors	69
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70
Item 3.	Default Upon Senior Securities	70
Item 4.	Mine Safety Disclosures	70
Item 5.	Other Information	70
Item 6.	Exhibits	71
	Signatures	72

Forward-Looking Statements

Some of the statements in this quarterly report on Form 10-Q (the "Quarterly Report") constitute forward-looking statements, which relate to future events or our performance or financial condition. The forward-looking statements contained in this Quarterly Report involve risks, uncertainties and other factors, some of which are beyond our control, including, but not limited to, statements as to:                                    

•our, or our portfolio companies’, future operating results;

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

•the return or impact of current or future investments that we expect to make;

•our contractual arrangements and relationships with third parties;

•the willingness of our investment adviser to waive fees;

•the dependence of our future success on the general economy and its impact on the industries in which we invest;

•the economic effects of the ongoing conflict between Russia and Ukraine and the ensuing geopolitical uncertainty on our and our portfolio companies’ business and the global economy;

•the impact of any current or future global health pandemics on the broader economy and on our and our portfolio companies' business and financial condition;

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

•the financial condition and ability of our current and prospective 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;

•our ability to extend the ramp period of our revolving credit facility;

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

•the phase-out and cessation of the London Interbank Offered Rate (“LIBOR”) and the use of the Secured Overnight Financing Rate (“SOFR”) as a replacement rate 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;

•the impact of changes in laws or regulations governing our operations or the operations of our portfolio companies;

•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;

•the timing, form and amount of any dividend distributions;

•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 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, 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, and we assume no obligation to update any such forward-looking statements. Actual results could differ

1

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.

2

PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(unaudited)

PART I

Item 1. Consolidated Financial Statements

Assets	December 31, 2022		June 30, 2022
	(unaudited)
Investments at fair value:
Non-control/non-affiliate investments (amortized cost of $36,335,066 and $38,560,109, respectively)	$	32,217,778	$	35,809,997
Total investments (Note 8 and 9)	32,217,778		35,809,997
Restricted cash	684,602		—
Deferred financing costs (Note 11)	375,437		404,589
Interest receivable	217,120		216,257
Prepaid expenses and other assets	174,963		224,395
Cash	134,157		1,467,568
Receivable for repayments of portfolio investments	10,079		33,940
Total Assets	33,814,136		38,156,746
Liabilities
Revolving Credit Facility (Note 11)	17,800,000		20,500,000
Due to Administrator (Note 5)	622,360		356,125
Accrued audit fees	180,700		128,140
Interest payable	135,472		96,712
Distributions payable	106,123		100,836
Accrued expenses	101,351		100,555
Accrued legal fees	100,167		168,468
Tax payable	—		4,935
Total Liabilities	19,046,173		21,455,771
Commitments and Contingencies (Note 10)	—		—
Net Assets	$	14,767,963	$	16,700,975
Components of Net Assets
Common Stock, par value $0.001 per share (75,000,000 shares authorized; 2,371,542 and 2,375,890 Class A shares issued and outstanding, respectively) (Note 4)	$	2,372	$	2,376
Paid-in capital in excess of par (Note 4 and Note 7)	24,878,298		25,188,341
Total distributable earnings (loss) (Note 7)	(10,112,707)		(8,489,742)
Net Assets	14,767,963		16,700,975
Net Asset Value Per Share (Note 12)	$	6.23	$	7.03

See notes to consolidated financial statements.

3

PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three Months Ended December 31,				Six Months Ended December 31,
	2022		2021		2022		2021
Investment Income
Interest income from non-control/non-affiliate investments	$	692,405	$	552,003	$	1,299,279	$	1,297,396
Interest income from structured credit securities	179,255		207,776		367,895		457,927
Total Investment Income	871,660		759,779		1,667,174		1,755,323
Operating Expenses
Interest expense and credit facility expenses (Note 11)	320,992		141,686		590,250		284,071
Audit and tax expense	37,400		80,147		175,833		164,225
Base management fees (Note 5)	105,950		184,999		218,384		367,197
Legal expense	30,088		34,835		98,567		37,981
Insurance expense	43,104		43,104		104,093		86,317
Administrator Costs (Note 5)	235,719		153,885		296,300		323,082
General and administrative	(12,698)		1,646		44,903		25,778
Transfer agent’s fees and expenses	56,213		41,168		111,244		84,814
Offering costs	4,281		45,366		12,794		50,673
Valuation services	5,000		751		10,000		34,617
Total Operating Expenses	826,049		727,587		1,662,368		1,458,755
Expense limitation payment (Note 5)	(105,950)		(184,999)		(218,384)		(367,197)
Total Net Operating Expenses	720,099		542,588		1,443,984		1,091,558
Net Investment Income (Loss)	151,561		217,191		223,190		663,765
Net Realized and Net Change in Unrealized Losses on Investments
Net realized losses:
Non-control/non-affiliate investments	(147,942)		—		(147,942)		—
Net realized losses	(147,942)		—		(147,942)		—
Net change in unrealized losses:
Non-control/non-affiliate investments	(778,235)		(113,341)		(1,367,176)		(412,064)
Net change in unrealized losses	(778,235)		(113,341)		(1,367,176)		(412,064)
Net Realized and Net Change in Unrealized Losses on Investments	(926,177)		(113,341)		(1,515,118)		(412,064)
Net (Decrease) Increase in Net Assets Resulting from Operations	$	(774,616)	$	103,850	$	(1,291,928)	$	251,701
Net (decrease) increase in net assets resulting from operations per share (Note 12)(1)	$	(0.33)	$	0.04	$	(0.54)	$	0.11
Distributions declared per share	$	0.12	$	0.16	$	0.26	$	0.32
(1) For the three months ended December 31, 2022 and 2021, the weighted average common shares outstanding were 2,373,798 and 2,383,928, respectively. For the six months ended December 31, 2022 and 2021, the weighted average common shares outstanding were 2,374,492 and 2,384,784, respectively.

See notes to consolidated financial statements.

4

PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(unaudited)

	Common Stock
For the Three Months Ended December 31, 2022	Shares	Par		Paid-in Capital in Excess of Par		Distributable Earnings (Loss)		Net Assets
Balance as of September 30, 2022(1)	2,375,249	$	2,375	$	25,097,836	$	(9,254,763)	$	15,845,448
Net decrease in net assets resulting from operations
Net investment income	—	—		—		151,561		151,561
Net realized losses on investments	—	—		—		(147,942)		(147,942)
Net change in unrealized losses on investments	—	—		—		(778,235)		(778,235)
Distributions to Shareholders (Note 6)
Distributions from earnings	—	—		—		(239,157)		(239,157)
Return of capital distributions	—	—		(41,628)		—		(41,628)
Capital Transactions
Shares issued through reinvestment of distributions (Note 4)	19,727	20		133,728		—		133,748
Repurchase of common shares (Note 4)	(23,434)	(23)		(155,809)		—		(155,832)
Tax Reclassification of Net Assets (Note 7)	—	—		(155,829)		155,829		—
Total Decrease for the three months ended December 31, 2022	(3,707)	(3)		(219,538)		(857,944)		(1,077,485)
Balance as of December 31, 2022	2,371,542	$	2,372	$	24,878,298	$	(10,112,707)	$	14,767,963
(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 3 and 7 within the accompanying notes to the consolidated financial statements for further discussion.

	Common Stock
For the Three Months Ended December 31, 2021	Shares	Par		Paid-in Capital in Excess of Par		Distributable Earnings (Loss)		Net Assets
Balance as of September 30, 2021(1)	2,385,760	$	2,386	$	25,167,089	$	(5,461,250)	$	19,708,225
Net increase in net assets resulting from operations
Net investment income	—	—		—		217,191		217,191
Net change in unrealized losses on investments	—	—		—		(113,341)		(113,341)
Distributions to Shareholders (Note 6)
Distributions from earnings	—	—		—		(93,141)		(93,141)
Return of capital distributions	—	—		(279,645)		—		(279,645)
Capital Transactions
Shares issued through reinvestment of distributions	20,627	21		170,520		—		170,541
Repurchase of common shares	(24,286)	(24)		(200,097)		—		(200,121)
Tax Reclassification of Net Assets (Note 7)	—	—		(318,847)		318,847
Total Increase (Decrease) for the three months ended December 31, 2021	(3,659)	(3)		(628,069)		329,556		(298,516)
Balance as of December 31, 2021	2,382,101	$	2,383	$	24,539,020	$	(5,131,694)	$	19,409,709
(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 3 and 7 within the accompanying notes to the consolidated financial statements for further discussion.

See notes to consolidated financial statements.

5

PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(unaudited)

	Common Stock
For the Six Months Ended December 31, 2022	Shares	Par		Paid-in Capital in Excess of Par		Distributable Earnings (Loss)		Net Assets
Balance as of June 30, 2022(1)	2,375,890	$	2,376	$	25,188,341	$	(8,489,742)	$	16,700,975
Net decrease in net assets resulting from operations
Net investment income	—	—		—		223,190		223,190
Net realized losses on investments	—	—		—		(147,942)		(147,942)
Net change in unrealized losses on investments	—	—		—		(1,367,176)		(1,367,176)
Distributions to Shareholders (Note 6)
Distributions from earnings	—	—		—		(486,866)		(486,866)
Return of capital distributions	—	—		(132,910)		—		(132,910)
Capital Transactions
Shares issued through reinvestment of distributions (Note 4)	40,904	41		286,988		—		287,029
Repurchase of common shares (Note 4)	(45,252)	(45)		(308,292)		—		(308,337)
Tax Reclassification of Net Assets (Note 7)	—	—		(155,829)		155,829		—
Total Decrease for the six months ended December 31, 2022	(4,348)	(4)		(310,043)		(1,622,965)		(1,933,012)
Balance as of December 31, 2022	2,371,542	$	2,372	$	24,878,298	$	(10,112,707)	$	14,767,963
(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 3 and 7 within the accompanying notes to the consolidated financial statements for further discussion.

	Common Stock
For the Six Months Ended December 31, 2021	Shares	Par		Paid-in Capital in Excess of Par		Distributable Earnings (Loss)		Net Assets
Balance as of June 30, 2021(1)	2,386,057	$	2,386	$	25,350,732	$	(5,405,311)	$	19,947,807
Net increase in net assets resulting from operations
Net investment income	—	—		—		663,765		663,765
Net change in unrealized losses on investments	—	—		—		(412,064)		(412,064)
Distributions to Shareholders (Note 6)
Distributions from earnings	—	—		—		(296,931)		(296,931)
Return of capital distributions	—	—		(462,038)		—		(462,038)
Capital Transactions
Shares issued through reinvestment of distributions	44,411	45		369,841		—		369,886
Repurchase of common shares	(48,367)	(48)		(400,668)		—		(400,716)
Tax Reclassification of Net Assets (Note 7)	—	—		(318,847)		318,847		—
Total Increase (Decrease) for the six months ended December 31, 2021	(3,956)	(3)		(811,712)		273,617		(538,098)
Balance as of December 31, 2021	2,382,101	$	2,383	$	24,539,020	$	(5,131,694)	$	19,409,709
(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 3 and 7 within the accompanying notes to the consolidated financial statements for further discussion.

See notes to consolidated financial statements.

6

PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Six Months Ended December 31,
	2022		2021
Cash flows from operating activities:
Net (decrease) increase in net assets resulting from operations	$	(1,291,928)	$	251,701
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:
Amortization of offering costs	12,794		50,673
Purchases of investments	—		(10,236,250)
Repayments and sales of portfolio investments	2,066,272		10,114,598
Net change in unrealized losses on investments	1,367,176		412,064
Net realized losses on investments	147,942		—
Amortization of premiums (accretion of purchase discounts) on investments, net	10,991		(120,338)
Amortization of deferred financing costs	29,152		29,635
Payment-in-kind interest	(162)		(385)
Changes in other assets and liabilities:
(Increase) Decrease in operating assets
Receivable for repayments of portfolio investments	23,861		6,465
Interest receivable	(863)		(67,146)
Deferred offering costs (Note 5)	(12,794)		(50,673)
Prepaid expenses and other assets	49,432		149,020
Increase (Decrease) in operating liabilities
Due to Adviser (Note 5)	—		(44,223)
Accrued expenses	796		(41,599)
Accrued legal fees	(68,301)		(28,690)
Accrued audit fees	52,560		(2,853)
Due to Administrator (Note 5)	266,235		(50,611)
Payable for investments purchased	—		2,000,000
Due to Affiliates (Note 5)	—		(23,258)
Interest payable	38,760		1,523
Tax payable	(4,935)		—
Net cash provided (used in) by operating activities	2,686,988		2,349,653
Cash flows from financing activities:
Distributions paid to stockholders	(327,460)		(380,992)
Repurchase of common shares	(308,337)		(400,716)
Repayments under Revolving Credit Facility (Note 11)	(2,700,000)		—
Net cash (used in) provided by financing activities	(3,335,797)		(781,708)
Net (decrease) increase in cash and restricted cash	(648,809)		1,567,945
Cash and restricted cash at beginning of period	1,467,568		3,139,929
Cash and restricted cash at end of period	$	818,759	$	4,707,874
Supplemental disclosures:
Cash paid for interest	$	522,338	$	252,913
Non-cash financing activities:
Value of shares issued through reinvestment of distributions	$	287,029	$	369,886
Beginning of the period
Cash	$	1,467,568	$	3,139,929
Restricted cash	—		—
Cash and restricted cash at beginning of period	$	1,467,568	$	3,139,929
End of the period
Cash	$	134,157	$	4,707,874
Restricted cash	684,602		—
Cash and restricted cash at end of period	$	818,759	$	4,707,874

See notes to consolidated financial statements.

7

PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2022

(unaudited)

							December 31, 2022
Portfolio Company / Security Type	Industry	Acquisition Date	Coupon/Yield (b)		Floor	Legal Maturity	Principal/ Quantity		Amortized Cost (d)		Fair Value (c)		% of Net Assets
Non-Control/Non-Affiliate Investments (less than 5.00% voting control):
Senior Secured Loans-First Lien(f)(k)(l)
Aventiv Technologies, LLC (f/k/a Securus Technologies Holdings, Inc.)(i)(j)	Telecommunications	7/31/2019	3ML+4.50% (9.23%)		1.00	11/1/2024	$	1,928,934	$	1,863,934	$	1,477,600	10.01	%
BCPE North Star US Holdco 2, Inc.(h)	Beverage, Food & Tobacco	2/2/2022	3ML+4.00% (8.73%)		0.75	6/9/2028	1,979,953		1,979,549		1,910,060		12.93	%
CareerBuilder, LLC(h)(j)	Services: Consumer	7/27/2017	3ML+6.75% (11.48%)		1.00	7/31/2023	969,272		956,314		663,951		4.50	%
DRI Holding Inc(h)	Media: Broadcasting & Subscription	12/16/2021	1ML+5.25% (9.63%)		0.50	12/21/2028	1,985,000		1,985,000		1,965,631		13.30	%
DTI Holdco, Inc.(h)	Services: Business	4/21/2022	3M SOFR+4.75% (8.84%)		0.75	4/26/2029	1,496,250		1,469,108		1,435,054		9.72	%
First Brands Group(h)	Automotive	3/24/2021	6M SOFR+5.00% (8.37%)		1.00	3/30/2027	1,228,125		1,219,278		1,228,102		8.32	%
PetVet Care Centers, LLC(i)	Healthcare & Pharmaceuticals	11/22/2021	1ML+3.50% (7.88%)		0.75	2/14/2025	1,480,867		1,478,380		1,396,310		9.45	%
RC Buyer, Inc.(h)	Consumer goods: Durable	7/27/2021	3ML + 3.50% (8.23%)		0.75	7/28/2028	1,975,000		1,971,006		1,869,733		12.65	%
Research Now Group, Inc. & Survey Sampling International LLC(h)	Services: Business	4/2/2019	6ML+5.50% (8.84%)		1.00	12/20/2024	1,930,170		1,930,170		1,684,937		11.41	%
Rising Tide Holdings, Inc.(h)	Consumer goods: Non-Durable	5/26/2021	3ML + 4.75% (9.48%)		0.75	6/1/2028	985,000		977,230		719,641		4.87	%
Rocket Software, Inc.(h)(j)	High Tech Industries	4/2/2019	1ML+4.25% (8.63%)		—	11/28/2025	2,023,300		2,014,246		1,950,209		13.21	%
Shutterfly, LLC(h)	Media: Diversified and Production	7/1/2021	1ML+5.00% (9.38%)		0.75	9/25/2026	1,960,000		1,952,738		1,386,244		9.39	%
Sorenson Communications, LLC(h)	Services: Consumer	3/12/2021	3ML+5.50% (10.23%)		0.75	3/17/2026	1,650,000		1,637,114		1,631,188		11.05	%
Staples, Inc.(i)(j)	Wholesale	11/18/2019	3ML+5.00% (9.44%)		—	4/16/2026	1,939,698		1,925,846		1,808,222		12.24	%
Upstream Newco, Inc.(h)	Services: Consumer	7/22/2021	3M SOFR+4.25% (9.09%)		—	11/20/2026	1,231,250		1,231,250		1,163,654		7.88	%
ViaPath Technologies (f/k/a Global Tel*Link Corporation)(h)(j)	Telecommunications	4/5/2019	3M SOFR+4.25% (8.49%)		—	11/29/2025	1,928,247		1,898,297		1,845,643		12.50	%
Wellpath Holdings, Inc. (f/k/a Correct Care Solutions Group Holdings, LLC)(h)(j)	Healthcare & Pharmaceuticals	4/2/2019	3ML+5.50% (9.91%)		—	10/1/2025	2,023,108		2,001,925		1,976,909		13.39	%
Total Senior Secured Loans-First Lien									$	28,491,385	$	26,113,088	176.82	%
Senior Secured Loans-Second Lien(f)(h)(k)(l)
Inmar, Inc.	Media: Advertising, Printing & Publishing	5/1/2017	1ML+8.00% (12.38%)		1.00	5/1/2025	$	500,000	$	497,038	$	467,500	3.17	%
Total Senior Secured Loans-Second Lien									$	497,038	$	467,500	3.17	%
Senior Secured Notes (a)(i)(k)
CURO Group Holdings Corp.	Financial	11/18/2021	7.50	%	N/A	8/1/2028	$	750,000	$	753,146	$	351,447	2.38	%
Total Senior Secured Notes									$	753,146	$	351,447	2.38	%
Structured Subordinated Notes (a)(e)(h)(k)
Apidos CLO XXIV	Structured Finance	5/17/2019	27.71	%	N/A	10/20/2030	$	250,000	$	162,561	$	151,424	1.03	%
Apidos CLO XXVI	Structured Finance	7/25/2019	19.41	%	N/A	7/18/2029	250,000		189,669		180,853		1.22	%
California CLO IX, Ltd.	Structured Finance	12/13/2019	28.93	%	N/A	7/16/2032	500,000		255,969		248,978		1.69	%
Carlyle Global Market Strategies CLO 2014-4-R, Ltd.	Structured Finance	4/7/2017	14.53	%	N/A	7/15/2030	250,000		178,322		154,649		1.05	%
Carlyle Global Market Strategies CLO 2017-5, Ltd.	Structured Finance	12/18/2017	12.43	%	N/A	1/22/2030	500,000		434,423		354,878		2.40	%
Galaxy XIX CLO, Ltd.	Structured Finance	12/5/2016	10.86	%	N/A	7/24/2030	250,000		175,946		124,657		0.85	%
GoldenTree Loan Opportunities IX, Ltd.	Structured Finance	7/19/2017	2.70	%	N/A	10/29/2029	250,000		169,046		145,284		0.98	%
Madison Park Funding XIII, Ltd.(m)	Structured Finance	11/6/2015	—	%	N/A	4/22/2030	250,000		141,071		121,770		0.83	%
Madison Park Funding XIV, Ltd.	Structured Finance	11/16/2015	21.60	%	N/A	10/22/2030	250,000		185,662		142,273		0.96	%
Octagon Investment Partners XIV, Ltd.	Structured Finance	12/1/2017	0.06	%	N/A	7/16/2029	850,000		429,668		324,141		2.19	%

8

PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2022

(unaudited)

							December 31, 2022
Portfolio Company /  Security Type	Industry	Acquisition Date	Coupon/Yield (b)		Floor	Legal Maturity	Principal/ Quantity		Amortized Cost (d)		Fair Value (c)		% of Net Assets
Octagon Investment Partners XV, Ltd.	Structured Finance	5/23/2019	16.93	%	N/A	7/19/2030	$	500,000	$	290,767	$	273,157	1.85	%
Octagon Investment Partners XXI,Ltd.(j)	Structured Finance	1/6/2016	19.88	%	N/A	2/14/2031	387,538		240,139		181,896		1.23	%
Octagon Investment Partners 30, Ltd.	Structured Finance	11/16/2017	7.23	%	N/A	3/17/2030	475,000		379,486		324,346		2.20	%
Octagon Investment Partners 31, Ltd.	Structured Finance	12/20/2019	12.16	%	N/A	7/20/2030	250,000		155,669		145,167		0.98	%
Octagon Investment Partners 36, Ltd.	Structured Finance	12/20/2019	24.93	%	N/A	4/15/2031	500,000		382,312		336,771		2.28	%
Octagon Investment Partners 39, Ltd.	Structured Finance	1/9/2020	24.07	%	N/A	10/21/2030	250,000		197,597		188,210		1.27	%
OZLM XII, Ltd. (m)	Structured Finance	1/17/2017	—	%	N/A	4/30/2027	275,000		161,899		1,418		0.01	%
Sound Point CLO II, Ltd.	Structured Finance	5/16/2019	5.05	%	N/A	1/26/2031	1,500,000		737,106		537,166		3.64	%
Sound Point CLO VII-R, Ltd.	Structured Finance	8/23/2019	16.03	%	N/A	10/23/2031	150,000		58,413		41,939		0.28	%
Sound Point CLO XVIII, Ltd.	Structured Finance	5/16/2019	8.02	%	N/A	1/21/2031	250,000		200,669		158,555		1.07	%
THL Credit Wind River 2013-1 CLO, Ltd.(m)	Structured Finance	11/1/2017	—	%	N/A	7/22/2030	325,000		211,324		129,910		0.88	%
Venture XXXIV CLO, Ltd.	Structured Finance	7/30/2019	20.95	%	N/A	10/15/2031	250,000		215,675		189,143		1.28	%
Voya IM CLO 2013-1, Ltd.(j)	Structured Finance	6/9/2016	3.08	%	N/A	10/15/2030	278,312		173,570		131,189		0.89	%
Voya CLO 2016-1, Ltd.	Structured Finance	1/22/2016	14.32	%	N/A	1/21/2031	250,000		196,151		174,094		1.18	%
Total Structured Subordinated Notes									$	5,923,114	$	4,761,868	32.24	%
Equity/Other(a)(g)(h)(k)
ACON IWP Investors I, L.L.C.	Healthcare & Pharmaceuticals	4/30/2015	N/A		N/A	N/A	472,357		$	472,357	$	511,000	3.46	%
FullBeauty Brands Holding, Common Stock	Retail	2/7/2019	N/A		N/A	N/A	72		198,026		12,875		0.09	%
Total Equity/Other									$	670,383	$	523,875	3.55	%
Total Portfolio Investments									$	36,335,066	$	32,217,778	218.16	%

(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 December 31, 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 December 31, 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 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 3).

(d)    See Note 7 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) 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 11). The fair values of the investments held by the SPV at December 31, 2022 and June 30, 2022 were $26,580,588 and $29,382,034, respectively, representing 83% and 82% of our total investments, respectively.

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

(h)    Investment(s) is (are) valued using significant unobservable inputs and are categorized as Level 3 investments in accordance with ASC 820. See Notes 3 and 9 within the accompanying notes to the consolidated financial statements.

(i) Investment is categorized as Level 2 investments in accordance with ASC 820. See Note 3 within the accompanying notes to the consolidated financial statements.

(j)     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):

9

PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2022

(unaudited)

Portfolio Company	Investment	Follow-On Acquisition Dates	Follow-On Acquisitions (Excluding initial investment cost)
Aventiv Technologies, LLC (f/k/a Securus Technologies Holdings, Inc.)	Senior Secured Loans-First Lien	8/2/2019	908,750
CareerBuilder, LLC	Senior Secured Loans-First Lien	6/5/2020	690,000
Octagon Investment Partners XXI, Ltd.	Structured Subordinated Notes	2/14/2019	35,015
Rocket Software, Inc.	Senior Secured Loans-First Lien	6/28/2019, 7/30/2019	1,327,272
Staples, Inc.	Senior Secured Loans-First Lien	2/3/2020	980,031
ViaPath Technologies (f/k/a Global Tel*Link Corporation)	Senior Secured Loans-First Lien	7/9/2019, 7/16/2019	1,436,250
Voya IM CLO 2013-1, Ltd.	Structured Subordinated Notes	10/17/2017, 7/1/2019	20,584
Wellpath Holdings, Inc. (f/k/a Correct Care Solutions Group Holdings, LLC)	Senior Secured Loans-First Lien	4/10/2019, 7/25/2019	1,327,000

(k) 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.

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

(m) 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.

(n) As defined in the 1940 Act, we are deemed to be an “Affiliated company” of these portfolio companies because we own more than 5% of the portfolio company’s outstanding voting securities. There were no transactions with affiliated investments during the six months ended December 31, 2022 .

Affiliated Companies

Fair Value at June 30, 2022

Gross Additions (Cost)

Gross Reductions (Cost)

Net unrealized gains (losses)

Fair Value at December 31, 2022

Interest income

Dividend income

Other income

Net realized gains (losses)

—

—

—

—

—

—

—

—

—

Total

$

—

$

—

$

—

$

—

$

—

$

—

$

—

$

—

$

—

See notes to consolidated financial statements.

10

PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2022

							June 30, 2022
Portfolio Company / Security Type	Industry	Acquisition Date	Coupon/Yield (b)		Floor	Legal Maturity	Principal/ Quantity		Amortized Cost (d)		Fair Value (c)		% of Net Assets
Non-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 Estate	2/6/2020	1ML+4.00% (5.67%)		—	3/18/2027	$	735,131	$	734,193	$	735,131	4.40	%
Aventiv Technologies, LLC (f/k/a Securus Technologies Holdings, Inc.)(j)(k)	Telecommunications	7/31/2019	3ML+4.50% (6.75%)		1.00	11/1/2024	1,939,086		1,856,264		1,792,400		10.73	%
BCPE North Star US Holdco 2, Inc.(i)	Beverage, Food & Tobacco	2/2/2022	3ML+4.00% (6.25%)		0.75	6/9/2028	1,989,975		1,989,534		1,964,702		11.76	%
CareerBuilder, LLC(i)(k)	Services: Consumer	7/27/2017	3ML+6.75% (9.00%)		1.00	7/31/2023	969,272		945,068		661,528		3.96	%
DRI Holding Inc(i)	Media: Broadcasting & Subscription	12/16/2021	1ML+5.25% (6.92%)		0.50	12/21/2028	1,995,000		1,995,000		1,960,080		11.74	%
DTI Holdco, Inc.(i)	Services: Business	4/21/2022	1M SOFR+4.75% (6.28%)		0.75	4/26/2029	1,500,000		1,470,694		1,495,135		8.95	%
Excelitas Technologies Corp.(i)	High Tech Industries	7/21/2021	3ML+3.50% (5.75%)		1.00	12/2/2024	494,819		494,819		481,953		2.89	%
First Brands Group(i)	Automotive	3/24/2021	3M SOFR+5.00% (6.29%)		1.00	3/30/2027	1,234,375		1,224,478		1,217,087		7.29	%
PetVet Care Centers, LLC(i)	Healthcare & Pharmaceuticals	11/22/2021	1ML+3.50% (5.17%)		0.75	2/14/2025	1,488,520		1,485,443		1,407,887		8.43	%
Quidditch Acquisition, Inc.(i)	Beverage, Food & Tobacco	3/21/2018	1ML+7.00% (8.67%)		1.00	3/21/2025	478,750		474,097		421,001		2.52	%
RC Buyer, Inc.(i)	Consumer goods: Durable	7/27/2021	3ML + 3.50% (5.75%)		0.75	7/28/2028	1,975,000		1,970,645		1,911,603		11.45	%
Research Now Group, Inc. & Survey Sampling International LLC(j)	Services: Business	4/2/2019	6ML+5.50% (6.50%)		1.00	12/20/2024	1,940,329		1,940,329		1,777,179		10.64	%
Rising Tide Holdings, Inc.(i)	Consumer goods: Non-Durable	5/26/2021	1ML + 4.75% (6.42%)		0.75	6/1/2028	990,000		981,508		914,067		5.47	%
Rocket Software, Inc.(j)(k)	High Tech Industries	4/2/2019	1ML+4.25% (5.92%)		—	11/28/2025	2,033,811		2,023,189		1,896,529		11.36	%
Shutterfly, LLC(j)	Media: Diversified and Production	7/1/2021	3ML+5.00% (7.25%)		0.75	9/25/2026	1,980,000		1,971,758		1,702,829		10.20	%
Sorenson Communications, LLC(i)	Services: Consumer	3/12/2021	3ML+5.50% (7.75%)		0.75	3/17/2026	1,750,000		1,735,091		1,738,591		10.41	%
Staples, Inc.(j)(k)	Wholesale	11/18/2019	3ML+5.00% (6.29%)		—	4/16/2026	1,949,749		1,933,776		1,760,222		10.54	%
Upstream Newco, Inc.(i)	Services: Consumer	7/22/2021	1M SOFR+4.25% (5.89%)		—	11/20/2026	1,237,500		1,237,500		1,214,111		7.27	%
ViaPath Technologies (f/k/a Global Tel*Link Corporation)(i)(k)	Telecommunications	4/5/2019	1ML+4.25% (5.92%)		—	11/29/2025	1,938,291		1,903,157		1,823,857		10.92	%
Wellpath Holdings, Inc. (f/k/a Correct Care Solutions Group Holdings, LLC)(i)(k)	Healthcare & Pharmaceuticals	4/2/2019	3ML+5.50% (7.07%)		—	10/1/2025	2,033,645		2,008,583		2,004,892		12.00	%
Total Senior Secured Loans-First Lien									$	30,375,126	$	28,880,784	172.93	%
Senior Secured Loans-Second Lien(i)(l)(m)
FullBeauty Brands Holding(f)	Retail	2/7/2019	7.00% (6.00% PIK plus 1.00% cash)		—	1/31/2025	$	13,180	$	11,098	$	10,214	0.06	%
Inmar, Inc.(g)	Media: Advertising, Printing & Publishing	5/1/2017	1ML+8.00% (9.67%)		1.00	5/1/2025	500,000		496,398		501,250		3.00	%
Total Senior Secured Loans-Second Lien									$	507,496	$	511,464	3.06	%
Senior Secured Notes (a)(j)(l)
CURO Group Holdings Corp.	Financial	11/18/2021	7.50	%	N/A	8/1/2028	$	1,000,000	$	1,004,570	$	650,000	3.89	%
Total Senior Secured Notes									$	1,004,570	$	650,000	3.89	%
Structured Subordinated Notes (a)(e)(i)(l)
Apidos CLO XXIV	Structured Finance	5/17/2019	21.71	%	N/A	10/20/2030	$	250,000	$	155,872	$	152,941	0.92	%
Apidos CLO XXVI	Structured Finance	7/25/2019	18.11	%	N/A	7/18/2029	250,000		185,058		188,800		1.13	%
California CLO IX, Ltd.	Structured Finance	12/13/2019	25.84	%	N/A	7/16/2032	500,000		235,293		248,271		1.49	%
Carlyle Global Market Strategies CLO 2014-4-R, Ltd.	Structured Finance	4/7/2017	9.89	%	N/A	7/15/2030	250,000		180,136		149,739		0.90	%
Carlyle Global Market Strategies CLO 2017-5, Ltd.	Structured Finance	12/18/2017	8.77	%	N/A	1/22/2030	500,000		439,704		371,492		2.22	%

11

PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2022

							June 30, 2022
Portfolio Company /  Security Type	Industry	Acquisition Date	Coupon/Yield (b)		Floor	Legal Maturity	Principal/ Quantity		Amortized Cost (d)		Fair Value (c)		% of Net Assets
Galaxy XIX CLO, Ltd.	Structured Finance	12/5/2016	16.04	%	N/A	7/24/2030	$	250,000	$	177,029	$	131,414	0.79	%
GoldenTree Loan Opportunities IX, Ltd.(n)	Structured Finance	7/19/2017	—	%	N/A	10/29/2029	250,000		173,284		141,520		0.85	%
Madison Park Funding XIII, Ltd.	Structured Finance	11/6/2015	4.47	%	N/A	4/22/2030	250,000		150,692		147,166		0.88	%
Madison Park Funding XIV, Ltd.	Structured Finance	11/16/2015	14.39	%	N/A	10/22/2030	250,000		179,237		144,010		0.86	%
Octagon Investment Partners XIV, Ltd.	Structured Finance	12/1/2017	4.30	%	N/A	7/16/2029	850,000		461,544		369,938		2.22	%
Octagon Investment Partners XV, Ltd.	Structured Finance	5/23/2019	18.20	%	N/A	7/19/2030	500,000		288,992		284,953		1.71	%
Octagon Investment Partners XXI,Ltd.(k)	Structured Finance	1/6/2016	15.66	%	N/A	2/14/2031	387,538		237,864		186,244		1.12	%
Octagon Investment Partners 30, Ltd.	Structured Finance	11/16/2017	10.25	%	N/A	3/17/2030	475,000		395,982		358,833		2.15	%
Octagon Investment Partners 31, Ltd.	Structured Finance	12/20/2019	25.52	%	N/A	7/20/2030	250,000		158,869		160,926		0.96	%
Octagon Investment Partners 36, Ltd.	Structured Finance	12/20/2019	21.52	%	N/A	4/15/2031	500,000		378,007		358,779		2.15	%
Octagon Investment Partners 39, Ltd.	Structured Finance	1/9/2020	21.53	%	N/A	10/21/2030	250,000		189,691		195,703		1.17	%
OZLM XII, Ltd. (n)	Structured Finance	1/17/2017	—	%	N/A	4/30/2027	275,000		161,899		34,795		0.21	%
Sound Point CLO II, Ltd.	Structured Finance	5/16/2019	9.65	%	N/A	1/26/2031	1,500,000		766,586		603,543		3.61	%
Sound Point CLO VII-R, Ltd.	Structured Finance	8/23/2019	12.73	%	N/A	10/23/2031	150,000		57,604		44,636		0.27	%
Sound Point CLO XVIII, Ltd.	Structured Finance	5/16/2019	10.66	%	N/A	1/21/2031	250,000		208,570		178,152		1.07	%
THL Credit Wind River 2013-1 CLO, Ltd.	Structured Finance	11/1/2017	2.03	%	N/A	7/22/2030	325,000		224,218		165,368		0.99	%
Venture XXXIV CLO, Ltd.	Structured Finance	7/30/2019	17.29	%	N/A	10/15/2031	250,000		209,499		191,174		1.14	%
Voya IM CLO 2013-1, Ltd.(k)	Structured Finance	6/9/2016	6.58	%	N/A	10/15/2030	278,312		179,004		135,487		0.81	%
Voya CLO 2016-1, Ltd.	Structured Finance	1/22/2016	12.98	%	N/A	1/21/2031	250,000		197,172		182,865		1.09	%
Total Structured Subordinated Notes									$	5,991,806	$	5,126,749	30.71	%
Equity/Other(a)(i)(l)
ACON IWP Investors I, L.L.C. (h)	Healthcare & Pharmaceuticals	4/30/2015	N/A		N/A	N/A	472,357		$	472,357	$	641,000	3.84	%
FullBeauty Brands Holding, Common Stock(h)	Retail	2/7/2019	N/A		N/A	N/A	72		208,754		—		—	%
Total Equity/Other									$	681,111	$	641,000	3.84	%
Total Portfolio Investments									$	38,560,109	$	35,809,997	214.43	%

(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 3).

(d)    See Note 7 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 11). The fair values of the investments held by the SPV at June 30, 2022 was $29,382,034 representing 82% of our total investments.

(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 3 and 9 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 3 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 Company	Investment	Follow-On Acquisition Dates	Follow-On Acquisitions (Excluding initial investment cost)
Amerilife Holdings, LLC	Senior Secured Loans-First Lien	11/2/2020	85,227
Aventiv Technologies, LLC (f/k/a Securus Technologies Holdings, Inc.)	Senior Secured Loans-First Lien	8/2/2019	908,750
CareerBuilder, LLC	Senior Secured Loans-First Lien	6/5/2020	690,000
Octagon Investment Partners XXI, Ltd.	Structured Subordinated Notes	2/14/2019	35,015
Rocket Software, Inc.	Senior Secured Loans-First Lien	6/28/2019, 7/30/2019	1,327,272
Staples, Inc.	Senior Secured Loans-First Lien	2/3/2020	980,031
ViaPath Technologies (f/k/a Global Tel*Link Corporation)	Senior Secured Loans-First Lien	7/9/2019, 7/16/2019	1,436,250
Voya IM CLO 2013-1, Ltd.	Structured Subordinated Notes	10/17/2017, 7/1/2019	20,584
Wellpath Holdings, Inc. (f/k/a Correct Care Solutions Group Holdings, LLC)	Senior Secured Loans-First Lien	4/10/2019, 7/25/2019	1,327,000

(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.

(o) As defined in the 1940 Act, we are deemed to be an “Affiliated company” of these portfolio companies because we own more than 5% of the portfolio company’s outstanding voting securities. During the year ended June 30, 2022, there were no transactions with affiliated investments.

Affiliated Companies

Fair Value at June 30, 2021

Gross Additions (Cost)

Gross Reductions (Cost)

Net unrealized gains (losses)

Fair Value at June 30, 2022

Interest income

Dividend income

Other income

Net realized gains (losses)

—

—

—

—

—

—

—

—

—

Total

$

—

$

—

$

—

$

—

$

—

$

—

$

—

$

—

$

—

See notes to consolidated financial statements.

13

PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) December 31, 2022

NOTE 1 - NATURE OF OPERATIONS

Prospect Floating Rate and Alternative 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 supplemented. On and effective January 10, 2022, the Company changed its name to Prospect Sustainable Income Fund, Inc.

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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) December 31, 2022

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 5 - 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 - GOING CONCERN MATTERS

The Company’s consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business for the foreseeable future. Because many of the costs of operating the Company are not proportional to the size of the Company’s investment portfolio, including accounting/auditing, legal, insurance and administrative costs (which includes the reimbursement of the compensation of the chief financial officer, chief compliance officer, treasurer, secretary and other administrative personnel of our Administrator, as defined in Note 5), the Company must raise sufficient capital in order to build a portfolio that generates sufficient revenue to cover the Company’s expenses. As of December 31, 2022, the Company has not raised sufficient capital to build a large enough portfolio to generate sufficient revenue to cover its operating expenses and has only been able to fund distributions to shareholders and pay a portion of the Company’s expenses through the Expense Limitation Agreement (as defined in Note 5) from the Adviser, which, after December 31, 2022, no longer requires our Adviser to waive fees.

On July 6, 2022, the end date of the ramp period of the Credit Facility (as defined in Note 11) was further extended from August 25, 2022 to August 25, 2023. Without a further extension of the ramp period on the Credit Facility or a refinancing of the Credit Facility, the Company may fail to comply with a covenant which may result in an event of default.

The Company is undertaking a number of actions in order to improve its financial position by seeking additional equity and refinancing the Credit Facility. At this time, the Company has sufficient collateral to repay the amounts under the Credit Facility, however, the Company would have to sell a significant number of investments to repay the amounts owed. These measures may not be successful.

The preceding circumstances raise substantial doubt about the Company’s ability to continue as a going concern for at least one year after February 13, 2023, the date the financial statements are issued. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

15

PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) December 31, 2022

NOTE 3 - 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 and six months ended December 31, 2022. (See Note 7 for further discussion.)

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 and Restricted Cash. All cash and restricted 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. The Company has restrictions on the uses of the cash held by Prospect Flexible Funding, LLC based on the terms of the Credit Facility (as defined in Note 11). Cash and restricted cash are carried at cost, which approximates fair value.

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. Specifically, we record all security transactions on a trade date basis. We determine the fair value of our investments on a quarterly basis (as discussed in Investment Valuation below), with quarter over quarter fluctuations in fair value reflected as a net change in unrealized gains (losses) from investments in the ConsolidatedStatements of Operations.

Investments are derecognized when we assume an obligation to sell a financial instrument and forego the risks for gains or losses related to that instrument. Realized gains or losses on the sale of investments are calculated using the specific identification method. Amounts for investments traded but not yet settled are reported in Due to Broker or Due from Broker in the Consolidated Statements of Assets and Liabilities. As of December 31, 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.

16

PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) December 31, 2022

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 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

17

PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) December 31, 2022

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

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 December 31, 2022 and June 30, 2022, our qualifying assets as a percentage of total assets stood at 83.33% 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

18

PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) December 31, 2022

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 December 31, 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 5) 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.

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 December 31, 2022 and 2021, PIK interest included in interest income totaled $0 and $193, respectively. For the six months ended December 31, 2022 and 2021, PIK interest included in interest income totaled $162 and $385, 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 11 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 December 31, 2022 and June 30, 2022, there were no issued convertible securities. (See Note 12 for further discussion.)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) December 31, 2022

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 December 31, 2022, the Company expects to have no excise tax due for the 2022 calendar year. As of December 31, 2022, the Company has accrued $0 of excise tax for this period. During the fiscal year ended June 30, 2022, the Company accrued $4,935 of excise tax and subsequently paid excise tax for the 2021 calendar year.

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 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 December 31, 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, 2019 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, 2024, as updated by ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 in December 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 six months ended December 31, 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) December 31, 2022

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 4 - SHARE TRANSACTIONS

Below is a summary of transactions with respect to shares of common stock of PFLOAT during the three and six months ended December 31, 2022:

	Three Months Ended December 31, 2022			Six Months Ended December 31, 2022
	PFLOAT Class A Common Shares			PFLOAT Class A Common Shares
	Shares	Amount		Shares	Amount
Shares issued through reinvestment of distributions	19,727	$	133,748	40,904	$	287,029
Repurchase of common shares	(23,434)	(155,832)		(45,252)	(308,337)
Net (decrease)/increase from capital transactions	(3,707)	$	(22,084)	(4,348)	$	(21,308)

Below is a summary of transactions with respect to shares of common stock of PFLOAT during the three and six months ended December 31, 2021:

	Three Months Ended December 31, 2021			Six Months Ended December 31, 2021
	PFLOAT Class A Common Shares			PFLOAT Class A Common Shares
	Shares	Amount		Shares	Amount
Shares issued through reinvestment of distributions	20,627	$	170,541	44,411	$	369,886
Repurchase of common shares	(24,286)	(200,121)		(48,367)	(400,716)
Net (decrease)/increase from capital transactions	(3,659)	$	(29,580)	(3,956)	$	(30,830)

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 and six months ended December 31, 2022 and 2021. On and effective February 19, 2021, the Company terminated the Offering.

The respective net increase/(decrease) from capital transactions during the three and six months ended December 31, 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:

•    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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) December 31, 2022

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.

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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) December 31, 2022

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

Quarterly Offer Date	Repurchase Effective Date	Shares Repurchased	Percentage of Shares Tendered That Were Repurchased		Repurchase Price Per Share		Aggregate Consideration for Repurchased Shares
Three months ended December 31, 2022
December 31, 2022	November 7, 2022	23,434	11	%	$	6.65	$	155,832
Total for the three months ended December 31, 2022		23,434					$	155,832
Six months ended December 31, 2022
December 31, 2022	November 7, 2022	23,434	11	%	$	6.65	$	155,832
September 30, 2022	August 1, 2022	21,818	9	%	$	6.99	152,505
Total for the six months ended December 31, 2022		45,252					$	308,337
Year ended June 30, 2022
September 30, 2021	August 2, 2021	24,081	10	%	$	8.33	$	200,595
December 31, 2021	November 4, 2021	24,286	11	%	$	8.24	200,121
March 31, 2022	February 1, 2022	23,462	12	%	$	8.13	190,747
June 30, 2022	May 9, 2022	23,198	10	%	$	7.87	182,571
Total for the year ended June 30, 2022		95,027					$	774,034
Year ended June 30, 2021
September 30, 2020	July 22, 2020	28,786	44	%	$	8.25	$	237,488
December 31, 2020	November 2, 2020	26,986	15	%	$	8.49	229,113
March 31, 2021	February 10, 2021	21,588	10	%	$	8.90	192,133
June 30, 2021	May 10, 2021	23,665	11	%	$	8.50	201,149
Total for the year ended June 30, 2021		101,025					$	859,883

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) December 31, 2022

NOTE 5 - 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 December 31, 2022 and 2021, allocation of overhead from the Administrator to the Company was $235,719 and $153,885, respectively. For the six months ended December 31, 2022 and 2021, allocation of overhead from the Administrator to the Company was $296,300 and $323,082, respectively. During the three months ended December 31, 2022 and 2021, $8,750 and $3,750, respectively, of US Bank and BNY fees are being included within the Administrator costs incurred by the Company. During the six months ended December 31, 2022 and 2021, $17,500 and $11,250, respectively, of US Bank and BNY fees are being included within the Administrator costs incurred by the Company. As of December 31, 2022 and June 30, 2022, $622,360 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) December 31, 2022

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 and six months ended December 31, 2022, there were no base management fees incurred by PFIM. As of December 31, 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

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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) December 31, 2022

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 December 31, 2022 or June 30, 2022. During the three and six months ended December 31, 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 December 31, 2022 and 2021, the total base management fee incurred by the Adviser was $105,950 and $184,999, respectively, which were waived by the Adviser. During the six months ended December 31, 2022 and 2021, the total base management fee incurred by the Adviser was $218,384 and $367,197, respectively, which were waived by the Adviser. As of December 31, 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

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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) December 31, 2022

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 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 December 31, 2022 or June 30, 2022. During the three and six months ended December 31, 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 December 31, 2022 and 2021, PRIS incurred $0 and $13,400, respectively, in expenses related to valuation services that are attributable to the Company. During the six months ended December 31, 2022 and 2021, PRIS incurred $0 and $27,417, respectively, in expenses related to valuation services that are attributable to the

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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) December 31, 2022

Company. The Company reimburses PRIS for these expenses and includes them as part of Valuation services on the ConsolidatedStatements of Operations. As of December 31, 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., greater than $100 million) to receive a fee for the three and six months ended December 31, 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 and six months ended December 31, 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:

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PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) December 31, 2022

Period Ended	Former ELA Reimbursement Payable to PFIM	Former ELA Reimbursement Payment to PFIM	Unreimbursed Former ELA Reimbursement	Operating Expense Ratio	Annualized Distribution Rate	Eligible to be Repaid Through
December 31, 2019	182,205	—	182,205