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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
__________________________
FORM 10-K
__________________________
(Mark One)

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

For the fiscal year ended September 30, 2022
OR

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

For the transition period from _________ to __________
Commission file number 814-00237
__________________________
GLADSTONE CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
__________________________

Maryland | 54-2040781
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.)
1521 Westbranch Drive, Suite 100 McLean, Virginia | 22102
(Address of principal executive offices) | (Zip Code)

(703) 287-5800
(Registrant’s telephone number, including area code)
__________________________
Securities registered pursuant to Section 12(b) of the Act:

Title of each class |  | Symbol |  | Name of each exchange on which registered
Common Stock, $0.001 par value per share |  | GLAD |  | The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None
__________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer | 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12 b-2 of the Act). Yes o No x.
The aggregate market value of the voting common stock held by non-affiliates of the Registrant on March 31, 2022, based on the closing price on that date of $11.79 per share on the Nasdaq Global Select Market, was $383,627,092. For the purposes of calculating this amount only, all directors and executive officers of the Registrant have been treated as affiliates. There were 35,132,601 shares of the Registrant’s common stock, $0.001 par value per share, outstanding as of November 11, 2022.
Documents Incorporated by Reference. Portions of the Registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the Registrant’s 2023 Annual Meeting of Stockholders, which will be filed subsequent to the date hereof, are incorporated by reference into Part III of this Form 10-K. Such proxy statement will be filed with the Securities and Exchange Commission not later than 120 days following the end of the Registrant’s fiscal year ended September 30, 2022.

Table of Contents
GLADSTONE CAPITAL CORPORATION
FORM 10-K FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 2022
TABLE OF CONTENTS

PART I | ITEM 1 | Business | 3
| ITEM IA | Risk Factors | 20
| ITEM IB | Unresolved Staff Comments | 41
| ITEM 2 | Properties | 41
| ITEM 3 | Legal Proceedings | 41
| ITEM 4 | Mine Safety Disclosures | 41
PART II | ITEM 5 | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 42
| ITEM 6 | Reserved | 48
| ITEM 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 48
| ITEM 7A | Quantitative and Qualitative Disclosures About Market Risk | 66
| ITEM 8 | Financial Statements and Supplementary Data | 68
| ITEM 9 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 118
| ITEM 9A | Controls and Procedures | 118
| ITEM 9B | Other Information | 118
PART III | ITEM 10 | Directors, Executive Officers and Corporate Governance | 118
| ITEM 11 | Executive Compensation | 119
| ITEM 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 119
| ITEM 13 | Certain Relationships and Related Transactions, and Director Independence | 119
| ITEM 14 | Principal Accountant Fees and Services | 119
PART IV | ITEM 15 | Exhibits and Financial Statement Schedules | 120
| ITEM 16 | Form 10-K Summary | 122
SIGNATURES | 123

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FORWARD-LOOKING STATEMENTS
All statements contained herein, other than historical facts, may constitute “forward-looking statements.” These statements may relate to, among other things, our future operating results, our business prospects and the prospects of our portfolio companies, actual and potential conflicts of interest with Gladstone Management Corporation (the “Adviser”), our investment adviser, and its affiliates, the use of borrowed money to finance our investments, the adequacy of our financing sources and working capital, and our ability to co-invest, among other factors. In some cases, you can identify forward-looking statements by terminology such as “estimate,” “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “project,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative or variations of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include: (1) changes in the economy and the capital markets, including stock price volatility, inflation, rising interest rates and risks of recession; (2) risks associated with negotiation and consummation of pending and future transactions; (3) the loss of one or more of our executive officers, in particular David Gladstone, Terry Lee Brubaker or Robert L. Marcotte; (4) changes in our investment objectives and strategy; (5) availability, terms (including the possibility of interest rate volatility) and deployment of capital; (6) changes in our industry, interest rates, exchange rates or the general economy; (7) our business prospects and the prospects of our portfolio companies; (8) the degree and nature of our competition; (9) changes in governmental regulation, tax rates and similar matters; (10) our ability to exit investments in a timely manner; (11) our ability to maintain our qualification as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), and as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”); and (12) those factors described herein, including Item 1A. “Risk Factors,” of this Annual Report on Form 10-K (this “Annual Report”). We caution readers not to place undue reliance on any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements and future results could differ materially from historical performance. We have based forward-looking statements on information available to us on the date of this Annual Report. Except as required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Annual Report. 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 U.S. Securities and Exchange Commission’s (“SEC”) from time to time, including quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements contained in this Annual Report are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”).
In this Annual Report, the “Company, ” “we, ” “us, ” and “our” refer to Gladstone Capital Corporation and its wholly-owned subsidiaries unless the context otherwise indicates. Dollar amounts in tables, except per share amounts, are in thousands unless otherwise indicated.
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PART I
The information contained in this section should be read in conjunction with our accompanying Consolidated Financial Statements and the notes thereto appearing elsewhere in this Annual Report.
ITEM 1. BUSINESS
Overview
Organization
Gladstone Capital Corporation was incorporated under the Maryland General Corporation Law on May 30, 2001 and completed an initial public offering on August 24, 2001. We are an externally managed, closed-end, non-diversified management investment company that has elected to be treated as a BDC under the 1940 Act. In addition, we have elected to be treated for tax purposes as a RIC under the Code. We were established for the purpose of investing in debt and equity securities of established private businesses operating in the United States (“U.S.”).
As of September 30, 2022, shares of our common stock trade on the Nasdaq Global Select Market (“Nasdaq”) under the trading symbol “GLAD.”
Investment Adviser and Administrator
We are externally managed by the Adviser, an investment adviser registered with the SEC and an affiliate of ours, pursuant to an investment advisory and management agreement (as amended and / or restated from time to time, the “Advisory Agreement”). The Adviser manages our investment activities. We have also entered into an administration agreement with Gladstone Administration, LLC (the “Administrator”), an affiliate of ours and the Adviser, whereby we pay separately for administrative services (the “Administration Agreement”). Each of the Adviser and the Administrator are privately-held companies that are indirectly owned and controlled by David Gladstone, our chairman and chief executive officer. Mr. Gladstone and Terry Lee Brubaker, our vice chairman and chief operating officer, also serve on the board of directors of the Adviser, the board of managers of the Administrator, and serve as executive officers of the Adviser and the Administrator. The Administrator employs, among others, our chief financial officer and treasurer, chief valuation officer, chief compliance officer, general counsel and secretary (who also serves as the president of the Administrator) and their respective staffs. The Adviser and Administrator have extensive experience in our lines of business and also provide investment advisory and administrative services, respectively, to our affiliates, including: Gladstone Commercial Corporation (“Gladstone Commercial”), a publicly-traded real estate investment trust; Gladstone Investment Corporation (“Gladstone Investment”), a publicly-traded BDC and RIC; and Gladstone Land Corporation, a publicly-traded real estate investment trust (“Gladstone Land,” with “Gladstone Commercial,” and “Gladstone Investment,” collectively the “Affiliated Public Funds”). In the future, the Adviser and Administrator may provide investment advisory and administrative services, respectively, to other funds and companies, both public and private.
The Adviser was organized as a corporation under the laws of the State of Delaware on July 2, 2002, and is an SEC registered investment adviser under the Investment Advisors Act of 1940, as amended. The Administrator was organized as a limited liability company under the laws of the State of Delaware on March 18, 2005. The Adviser and Administrator are headquartered in McLean, Virginia, a suburb of Washington, D.C., at 1521 Westbranch Drive, McLean, Virginia 22102. The Adviser also has offices in other states.
Investment Objectives and Strategy
Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established lower middle market companies (which we generally define as companies with annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $3 million to $15 million) in the U.S. that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness, and make distributions to stockholders; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities, in connection with our debt investments, that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our objectives, our primary investment strategy is to invest in several categories of debt and equity securities, with each investment generally ranging from $8 million to $30 million, although investment size may vary, depending upon our total assets or available capital at the time of investment. We lend to borrowers that need funds for growth capital, to finance acquisitions, or to recapitalize or refinance their existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises. Our targeted portfolio companies are generally considered too small for the larger capital marketplace. We expect that our investment portfolio over time will consist of
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approximately 90.0% debt investments and 10.0% equity investments, at cost. As of September 30, 2022, our investment portfolio was made up of approximately 90.7% debt investments and 9.3% equity investments, at cost.
We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity. In July 2012, the SEC granted us an exemptive order (the “Co-Investment Order”) that expanded our ability to co-invest, under certain circumstances, with certain of our affiliates, including Gladstone Investment and any future BDC or registered closed-end management investment company that is advised (or sub-advised if it controls the fund) by the Adviser, or any combination of the foregoing, subject to the conditions in the Co-Investment Order. We believe the Co-Investment Order has enhanced and will continue to enhance our ability to further our investment objectives and strategies. If we are participating in an investment with one or more co-investors, whether or not an affiliate of ours, our investment is likely to be smaller than if we were investing alone.
In general, our investments in debt securities have a term of no more than seven years, accrue interest at variable rates (generally based on the 30-day London Interbank Offered Rate (“LIBOR”) or one-month term Secured Overnight Financing Rate (“SOFR”)) an d, to a lesser extent, at fixed rates. We seek debt instruments that pay interest monthly or, at a minimum, quarterly, may have a success fee or deferred interest provision and are primarily interest only, with all principal and any accrued but unpaid interest due at maturity. Generally, success fees accrue at a set rate and are contractually due upon a change of control of a portfolio company, typically from an exit or sale. Some debt securities have deferred interest whereby some portion of the interest payment is added to the principal balance so that the interest is paid, together with the principal, at maturity. This form of deferred interest is often called paid-in-kind (“PIK”) interest.
Typically, our equity investments consist of common stock, preferred stock, limited liability company interests, or warrants to purchase the foregoing. Often, these equity investments occur in connection with our original investment, recapitalizing a business, or refinancing existing debt.
Since our initial public offering in 2001 and through September 30, 2022, we have invested in approximately 268 different companies, while making 236 consecutive monthly or quarterly cash distributions to common stockholders. We expect that our investment portfolio will primarily include the following three categories of investments in private companies operating in the U.S.:
•Secured First Lien Debt Securities: We seek to invest a portion of our assets in secured first lien debt securities also known as senior loans, senior term loans, lines of credit and senior notes. Using its assets as collateral, the borrower typically uses first lien debt to cover a substantial portion of the funding needs of the business. These debt securities usually take the form of first priority liens on all, or substantially all, of the assets of the business. First lien debt securities may include investments sourced from the syndicated loan market.
•Secured Second Lien Debt Securities: We seek to invest a portion of our assets in secured second lien debt securities, also known as subordinated loans, subordinated notes and mezzanine loans. These secured second lien debt securities rank junior to the secured borrowers’ first lien debt securities and may be secured by second priority liens on all or a portion of the assets of the business. Additionally, we may receive other yield enhancements in addition to or in lieu of success fees such as warrants to buy common and preferred stock or limited liability interests in connection with these second lien secured debt securities. Second lien debt securities may include investments sourced from the syndicated loan market.
•Preferred and Common Equity/Equivalents: In some cases we will purchase equity securities which consist of preferred and common equity or limited liability company interests, or warrants or options to acquire such securities, and are in combination with our debt investment in a business. Additionally, we may receive equity investments derived from restructurings on some of our existing debt investments. In some cases, we will own a significant portion of the equity and in other cases we may have voting control of the businesses in which we invest.
Under the 1940 Act, we may not acquire any asset other than assets of the type listed in Section 55 of the 1940 Act, which are referred to as “qualifying assets” and generally include each of the investment types listed above, unless, at the time the acquisition is made, qualifying assets (other than certain assets related to our operations) represent at least 70.0% of our total assets. See “—Regulation as a BDC — Qualifying Assets.”
We expect that most, if not all, of the debt securities we acquire will not be rated by a credit rating agency. Investors should assume that these loans would be rated below “investment grade” quality. Investments rated below investment grade are often referred to as high yield securities or junk bonds and may be considered higher risk, as compared to investment-grade debt instruments. In addition, many of the debt securities we hold may not amortize prior to maturity.
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Investment Policies
We seek to achieve a high level of current income and capital gains through investments in debt securities and preferred or common stock that we generally acquire in connection with buyouts and other recapitalizations. The following investment policies, along with these investment objectives, may not be changed without the approval of our board of directors (the “Board of Directors”):
•We will at all times conduct our business so as to retain our status as a BDC. See “—Regulation as a BDC — Qualifying Assets.”
•We will at all times endeavor to conduct our business so as to retain our status as a RIC under the Code. See “—Material U.S. Federal Income Tax Considerations.”
With the exception of our policy to conduct our business as a BDC, these policies are not fundamental and may be changed without stockholder approval.
Investment Concentrations
As of September 30, 2022, our investment portfolio consisted of investments in 52 companies located in 24 states across 13 different industries, with an aggregate fair value of $649.6 million. The five largest investments at fair value as of September 30, 2022, totaled $174.5 million, or 26.9% of our total investment portfolio.
The following table outlines our investments by security type as of September 30, 2022 and 2021:

| September 30, 2022 |  | September 30, 2021
| Cost |  | Fair Value |  | Cost |  | Fair Value
Secured first lien debt | $ | 475,806 |  |  | 72.5 | % |  | $ | 463,858 |  |  | 71.4 | % |  | $ | 362,616 |  |  | 66.3 | % |  | $ | 337,394 |  |  | 60.5 | %
Secured second lien debt | 118,949 |  |  | 18.2 |  |  | 115,928 |  |  | 17.8 |  |  | 137,643 |  |  | 25.2 |  |  | 135,956 |  |  | 24.4 |
Unsecured debt | 293 |  |  | 0.0 |  |  | 55 |  |  | 0.0 |  |  | 293 |  |  | 0.1 |  |  | 10 |  |  | 0.0 |
Total debt investments | 595,048 |  |  | 90.7 |  |  | 579,841 |  |  | 89.2 |  |  | 500,552 |  |  | 91.6 |  |  | 473,360 |  |  | 84.9 |
Preferred equity | 34,505 |  |  | 5.3 |  |  | 27,046 |  |  | 4.2 |  |  | 29,230 |  |  | 5.3 |  |  | 29,246 |  |  | 5.2 |
Common equity/equivalents | 26,500 |  |  | 4.0 |  |  | 42,728 |  |  | 6.6 |  |  | 16,730 |  |  | 3.1 |  |  | 55,006 |  |  | 9.9 |
Total equity investments | 61,005 |  |  | 9.3 |  |  | 69,774 |  |  | 10.8 |  |  | 45,960 |  |  | 8.4 |  |  | 84,252 |  |  | 15.1 |
Total Investments | $ | 656,053 |  |  | 100.0 | % |  | $ | 649,615 |  |  | 100.0 | % |  | $ | 546,512 |  |  | 100.0 | % |  | $ | 557,612 |  |  | 100.0 | %

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Our investments at fair value consisted of the following industry classifications as of September 30, 2022 and 2021:

Industry Classification |  | September 30, 2022 |  | September 30, 2021
| Fair Value |  | Percentage of Total Investments |  | Fair Value |  | Percentage of Total Investments
Diversified/Conglomerate Service |  | $ | 148,907 |  |  | 22.9 | % |  | $ | 132,458 |  |  | 23.8 | %
Healthcare, Education, and Childcare |  | 136,401 |  |  | 21.0 |  |  | 92,680 |  |  | 16.6 |
Diversified/Conglomerate Manufacturing |  | 114,105 |  |  | 17.6 |  |  | 25,223 |  |  | 4.5 |
Aerospace and Defense |  | 88,649 |  |  | 13.6 |  |  | 79,749 |  |  | 14.3 |
Beverage, Food, and Tobacco |  | 64,283 |  |  | 9.9 |  |  | 48,385 |  |  | 8.7 |
Oil and Gas |  | 25,373 |  |  | 3.9 |  |  | 25,861 |  |  | 4.6 |
Automobile |  | 20,144 |  |  | 3.1 |  |  | 21,681 |  |  | 3.9 |
Personal and Non-Durable Consumer Products |  | 18,583 |  |  | 2.9 |  |  | 1,542 |  |  | 0.3 |
Telecommunications |  | 10,088 |  |  | 1.6 |  |  | 36,720 |  |  | 6.6 |
Machinery |  | 9,562 |  |  | 1.5 |  |  | 10,472 |  |  | 1.9 |
Textiles and Leather |  | 7,978 |  |  | 1.2 |  |  | 10,030 |  |  | 1.8 |
Diversified Natural Resources, Precious Metals, and Minerals |  | — |  |  | — |  |  | 47,134 |  |  | 8.4 |
Chemicals, Plastics, and Rubber |  | — |  |  | — |  |  | 10,062 |  |  | 1.8 |
Home and Office Furnishings, Housewares, and Durable Consumer Products |  | — |  |  | — |  |  | 10,025 |  |  | 1.8 |
Other, < 2.0% |  | 5,542 |  | 0.8 |  |  | 5,590 |  | 1.0 |
Total Investments |  | $ | 649,615 |  |  | 100.0 | % |  | $ | 557,612 |  |  | 100.0 | %

Our investments at fair value were included in the following U.S. geographic regions as of September 30, 2022 and 2021:

Location |  | September 30, 2022 |  | September 30, 2021
| Fair Value |  | Percentage of Total Investments |  | Fair Value |  | Percentage of Total Investments
South |  | $ | 326,524 |  |  | 50.3 | % |  | $ | 238,917 |  |  | 42.8 | %
West |  | 169,415 |  |  | 26.1 |  |  | 184,247 |  |  | 33.0 |
Midwest |  | 118,191 |  |  | 18.2 |  |  | 85,970 |  |  | 15.5 |
Northeast |  | 35,485 |  |  | 5.4 |  |  | 48,478 |  |  | 8.7 |
Total Investments |  | $ | 649,615 |  |  | 100.0 | % |  | $ | 557,612 |  |  | 100.0 | %

The geographic composition indicates the location of the headquarters for our portfolio companies. A portfolio company may have additional locations in other geographic regions.
Investment Process
Overview of Investment and Approval Process
To originate investments, the Adviser’s investment professionals use an extensive referral network comprised primarily of private equity sponsors, leveraged buyout funds, investment bankers, attorneys, accountants, commercial bankers, and business brokers. The Adviser’s investment professionals review information received from these and other sources in search of potential financing opportunities. If a potential opportunity matches our investment objectives, the investment professionals will seek an initial screening of the opportunity with our president, Robert L. Marcotte, to authorize the submission of an indication of interest (“IOI”) to the prospective portfolio company. If the prospective portfolio company passes this initial screening and the IOI is accepted by the prospective company, the investment professionals will seek approval to issue a letter of intent (“LOI”) to the prospective company from the Adviser’s investment committee, which currently is comprised of David Gladstone, Terry Lee Brubaker, Robert L. Marcotte, Laura Gladstone, and Jonathan Sateri. If this LOI is issued, then the Adviser and Gladstone Securities, LLC (“Gladstone Securities”) (collectively, the “Due Diligence Team”) will conduct a due diligence investigation and create a detailed profile summarizing the prospective portfolio company’s historical financial statements, industry, competitive position and management team, analyzing its
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conformity to our general investment criteria. The investment professionals then present this profile to the Adviser’s investment committee, which must approve each investment.
Prospective Portfolio Company Characteristics
We have identified certain characteristics that we believe are important in identifying and investing in prospective portfolio companies. The criteria listed below provide general guidelines for our investment decisions, although not all of these criteria may be met by each portfolio company.
•Growth-and-Income Orientation and Positive Cash Flow. Our investment philosophy places a premium on fundamental analysis from an investor’s perspective and has a distinct growth-and-income orientation. We typically invest in companies that generate growing sales and cash flow to provide some assurance that they will be able to service their debt and deleverage over time. We do not expect to invest in start-up companies or companies with what we believe to be cyclical industries or speculative business plans.
•Experienced Management. We typically require that the businesses in which we invest have experienced management teams. We also require the businesses to have proper incentives in place to induce management teams to succeed and align with our interests as an investor, including having significant equity or other interests in the financial performance of their respective companies.
•Strong Competitive Position in an Industry. We seek to invest in businesses that have developed strong market positions within their respective markets and that we believe are well-positioned to capitalize on growth opportunities. We seek businesses that demonstrate significant competitive advantages versus their competitors, which we believe will help to protect their market positions and profitability.
•Enterprise Collateral Value. The projected enterprise valuation of the business, based on market based comparable cash flow multiples, is an important factor in our investment analysis in determining the collateral coverage of our debt securities.
Extensive Due Diligence
The Due Diligence Team conducts what we believe are extensive due diligence investigations of our prospective portfolio companies and investment opportunities. The due diligence investigation typically begins with a review of publicly available information followed by in depth business analysis, including any of the following:
•a review of the prospective portfolio company’s historical and projected financial information, including a quality of earnings analysis;
•detailed review of the track record of the private equity firm or ownership group acquiring or controlling any prospective borrower;
•visits to the prospective portfolio company’s business site(s);
•interviews with the prospective portfolio company’s management, employees, customers, and vendors;
•review of loan documents and material contracts;
•background checks and a management capabilities assessment on the prospective portfolio company’s management team and controlling shareholders; and
•research on the prospective portfolio company’s products, services or particular industry and its competitive position therein.
Upon completion of a due diligence investigation and a decision to proceed with an investment, the Adviser’s investment professionals who have primary responsibility for the investment present the investment opportunity to the Adviser’s investment committee. The investment committee then determines whether to pursue the potential investment. Prior to the closing of an investment, additional due diligence may be conducted on our behalf by attorneys, independent accountants, and other outside advisers, as appropriate.
We also rely on the long-term relationships that the Adviser’s investment professionals have with leveraged buyout funds, investment bankers, commercial bankers, private equity sponsors, attorneys, accountants, and business brokers. In addition, the extensive direct experiences of our executive officers and managing directors in the operations of lower middle market companies and providing debt and equity capital to lower middle market companies plays a significant role in our investment evaluation and assessment of risk.
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Investment Structure
Once the Adviser has determined that an investment meets our standards and investment criteria, the Adviser works with the management of that company, the private equity firm or ownership group controlling any prospective borrower, and other capital providers to structure the transaction in a way that we believe will provide us with the greatest opportunity to maximize our return on the investment, while providing appropriate incentives to the shareholders and management of the company. As discussed above, the capital classes through which we typically structure a deal include secured first lien debt, secured second lien debt, and preferred and common equity or equivalents. Through its risk management process, the Adviser seeks to limit the downside risk of our investments by:
•seeking collateral or superior positions in the portfolio company’s capital structure where possible;
•negotiating covenants in connection with our investments that afford our portfolio companies as much flexibility as possible in managing their businesses, consistent with preserving our capital;
•securing board observation rights at the portfolio company;
•incorporating call protection into the investment structure where possible; and
•making investments with an expected total return (including both interest and potential equity appreciation) that it believes compensates us appropriately for the credit risk of the investment.
We expect to hold most of our debt investments until maturity or repayment, but may sell our investments (including our equity investments) earlier if a liquidity event takes place, such as the sale or recapitalization of a portfolio company. Occasionally, we may sell some or all of our investment interests in a portfolio company to a third party in a privately negotiated transaction to manage our credit or sector exposures or to enhance our portfolio yield.
Competitive Advantages
A large number of entities compete with us and make the types of investments that we seek to make in lower middle market privately-owned businesses. Such competitors include other BDCs, non-equity based investment funds, and other financing sources, including traditional financial services companies such as commercial banks. Many of our competitors are substantially larger than we are and have considerably greater funding sources or are able to access capital more cost effectively. In addition, certain of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments, serve a broader customer base, and establish a greater market share. Furthermore, many of these competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC or the regulatory requirements we must comply with as a publicly traded company. However, we believe that we have the following competitive advantages over many other providers of financing to lower middle market companies.
Management Expertise
Our Adviser has a separate investment committee for the Company and each of the Affiliated Public Funds. The Adviser’s investment committee for the Company is comprised of Messrs. Gladstone, Brubaker, Marcotte and Sateri and Ms. Gladstone, each of whom have a wealth of experience in our area of operation. Ms. Gladstone and Messrs. Gladstone, Brubaker and Sateri also serve on the Adviser’s investment committee for the other Affiliated Public Funds. Ms. Gladstone has over 20 years of experience in investing in middle market companies and previously held the role of managing director with the Company. Each of Messrs. Gladstone, Marcotte and Sateri have over 30 years of experience in investing in middle market companies and with operating in the BDC marketplace in general. Messrs. Gladstone and Brubaker also have principal management responsibility for the Adviser as its executive officers, and have worked together at the Gladstone Companies for more than 20 years. Mr. Brubaker has over 30 years of experience in acquisitions and operations of companies. These five individuals dedicate a significant portion of their time to managing our investment portfolio. Our senior management has extensive experience providing capital to lower middle market companies. In addition, we have access to the resources and expertise of the Adviser’s investment professionals and support staff who possess a broad range of transactional, financial, managerial, and investment skills.
Increased Access to Investment Opportunities Developed Through Extensive Research Capability and Network of Contacts
The Adviser seeks to identify potential investments through active origination and due diligence and through its dialogue with numerous private equity firms and other members of the financial community with whom the Adviser’s investment professionals have long-term relationships. We believe that the Adviser’s investment professionals have developed a broad network of contacts within the investment, commercial banking, private equity and investment management communities,
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and that their reputation, experience and focus on investing in lower middle market companies enables us to source and identify well-positioned prospective portfolio companies that provide attractive investment opportunities. Additionally, the Adviser expects to generate information from its professionals’ network of accountants, consultants, lawyers and management teams of portfolio companies and other contacts to support the Adviser’s investment activities.
Disciplined, Value and Income-Oriented Investment Philosophy with a Focus on Preservation of Capital
In making its investment decisions, the Adviser focuses on the risk and reward profile of each prospective portfolio company, seeking to minimize the risk of capital loss without foregoing the potential for capital appreciation. We expect the Adviser to use the same investment philosophy that its professionals use in the management of the other Affiliated Public Funds and to commit resources to manage downside exposure. The Adviser’s approach seeks to reduce our risk in investments by using some or all of the following approaches:
•focusing on companies with sustainable market positions and cash flow;
•investing in businesses with experienced and established management teams;
•engaging in extensive due diligence from the perspective of a long-term investor;
•investing in businesses backed by successful private equity sponsors or owner operators; and
•adopting flexible transaction structures by drawing on the experience of the investment professionals of the Adviser and its affiliates.
Longer Investment Horizon
Unlike private equity and private credit funds that are typically organized as finite-life partnerships (generally seven to ten years), we are not subject to standard periodic capital return requirements. These structures often force private equity and private credit funds to seek returns on their investments by causing their portfolio companies to pursue mergers, public equity offerings, or other liquidity events more quickly than might otherwise be optimal or desirable, potentially resulting in a lower overall return to investors and/or an adverse impact on their portfolio companies. In contrast, we are an exchange-traded corporation of perpetual duration. We believe that our flexibility to make investments with a long-term view and without the capital return requirements of traditional private investment vehicles provides us with the opportunity to achieve greater long-term returns on invested capital.
Flexible Transaction Structuring
We believe our management team’s broad expertise and years of combined experience enable the Adviser to identify, assess, and structure investments successfully across all levels of a company’s capital structure and manage potential risk and return at all stages of the economic cycle. We are not subject to many of the regulatory limitations that govern traditional lending institutions, such as banks. As a result, we are flexible in selecting and structuring investments, adjusting investment criteria and transaction structures and, in some cases, the types of securities in which we invest. We believe that this approach enables the Adviser to craft a financing structure which best fits the investment and growth profile of the underlying business and yields attractive investment opportunities that will continue to generate current income and capital gain potential throughout the economic cycle, including during turbulent periods in the capital markets.
Ongoing Management of Investments and Portfolio Company Relationships
The Adviser’s investment professionals actively oversee each investment by continuously evaluating the portfolio company’s performance and typically working collaboratively with the portfolio company’s management to identify and incorporate best resources and practices that help us achieve our projected investment performance.
Monitoring
The Adviser’s investment professionals monitor the financial performance, trends, and changing risks of each portfolio company on an ongoing basis to determine if each company is performing within expectations and to guide the portfolio company’s management in taking the appropriate courses of action. The Adviser employs various methods of evaluating and monitoring the performance of our investments in portfolio companies, which can include the following:
•monthly analysis of financial and operating performance;
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•frequent assessment of the portfolio company’s performance against its business plan and our investment expectations;
•attendance at and/or participation in the portfolio company’s board of directors or management meetings;
•assessment of portfolio company management, sponsor, governance, and strategic direction;
•assessment of the portfolio company’s industry and competitive environment; and
•review and assessment of the portfolio company’s operating outlook and financial projections.
Relationship Management
The Adviser’s investment professionals interact with various parties involved with a portfolio company, or investment, by actively engaging with internal and external constituents, including:
•management;
•boards of directors;
•private equity sponsors;
•capital partners; and
•advisers and consultants.
Managerial Assistance and Services
As a BDC, we make available significant managerial assistance, as defined in the 1940 Act, to our portfolio companies and provide other services (other than such managerial assistance) to such portfolio companies. Neither we, nor the Adviser, currently receive fees in connection with the managerial assistance we make available. At times, the Adviser may also provide other services to our portfolio companies under certain agreements and may receive fees for services other than managerial assistance. Such services may include: (i) assistance obtaining, sourcing or structuring credit facilities, long term loans or additional equity from unaffiliated third parties; (ii) negotiating important contractual financial relationships; (iii) consulting services regarding restructuring of the portfolio company and financial modeling as it relates to raising additional debt and equity capital from unaffiliated third parties; and (iv) taking a primary role in interviewing, vetting and negotiating employment contracts with candidates in connection with adding and retaining key portfolio company management team members. The Adviser non-contractually, unconditionally, and irrevocably credits 100% of any fees received for such services against the base management fee that we would otherwise be required to pay to the Adviser as discussed below in “—Transactions with Related Parties – Investment Advisory and Management Agreement – Base Management Fee.” However, pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees is retained by the Adviser in the form of reimbursement, at cost, for tasks completed by personnel of the Adviser, primarily for the valuation of portfolio companies.
Gladstone Securities also provides other services (such as investment banking and due diligence services) to certain of our portfolio companies and receives fees for the provision of such services; see “—Transactions with Related Parties – Other Transactions” below.
Valuation Process
In December 2020, the SEC adopted Rule 2a-5 under the 1940 Act, which permits a BDC’s board of directors to designate its investment adviser as a valuation designee to perform fair value determinations for its investment portfolio, subject to the active oversight of such board. The Board of Directors has approved investment valuation policies and procedures pursuant to Rule 2a-5 (the “Policy”) and, in July 2022, designated the Adviser to serve as the Board of Directors’ valuation designee.
The following is a general description of the Policy that the professionals of the Adviser and Administrator, with oversight and direction from our chief valuation officer, an employee of the Administrator who reports directly to our Board of Directors (collectively, the “Valuation Team”), use each quarter to determine the value of our investment portfolio. In accordance with the 1940 Act and SEC Rule 2a-5, our Board of Directors has the ultimate responsibility for reviewing and determining, in good faith, the fair value of our investments for which market quotations are not readily available based on the Policy and for overseeing the valuation designee. The Adviser values our investments in accordance with the requirements of the 1940 Act and accounting principles generally accepted in the U.S. (“GAAP”). There is no single standard for determining fair value (especially for privately-held businesses), as fair value depends upon the specific facts and circumstances of each individual investment. Each quarter, our Board of Directors reviews the Policy to determine if
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changes thereto are advisable and assesses whether the Valuation Team has applied the Policy consistently. With respect to the valuation of our investment portfolio, the Valuation Team performs the following steps each quarter:
•Each investment is initially assessed by the Valuation Team using the Policy, which may include:
•obtaining fair value quotes or utilizing input from third party valuation firms; and
•using techniques, such as total enterprise value, yield analysis, market quotes and other factors, including but not limited to: the nature and realizable value of the collateral, including external parties’ guaranties; any relevant offers or letters of intent to acquire the portfolio company; and the markets in which the portfolio company operates.
•Preliminary valuation conclusions are then discussed amongst the Valuation Team and with our management and documented for review by our Board of Directors. Fair value determinations and supporting material are sent to the Board of Directors in advance of its quarterly meetings.
•The Valuation Committee of the Board of Directors (comprised entirely of independent directors) meets to review the valuation determinations and supporting materials, discusses the information provided by our Valuation Team, determines whether the Valuation Team has followed the Policy and reviews other facts and circumstances. Then, the Valuation Committee and chief valuation officer present the Valuation Committee’s findings to the entire Board of Directors, so that the full Board of Directors may review and approve in good faith the Valuation Designee’s determination of the fair value of such investments in accordance with the Policy.
Fair value measurements of our investments may involve subjective judgment and estimates. Due to the inherent uncertainty in valuing these securities, the determinations of fair value of our investments may fluctuate from period to period and may differ materially from the values that could be obtained if a ready market for these securities existed. Our valuation policies, procedures and processes are more fully described in Note 2—Summary of Significant Accounting Policies in our accompanying Notes to Consolidated Financial Statements included elsewhere in this Annual Report.
Transactions with Related Parties
Investment Advisory and Management Agreement
In 2006, we entered into the Advisory Agreement, which was most recently amended and restated in April 2022. In accordance with the Advisory Agreement, we pay the Adviser fees as compensation for its services, consisting of a base management fee and an incentive fee. On July 12, 2022, our Board of Directors, including a majority of the directors who are not parties to the Advisory Agreement or interested persons of such party, unanimously approved the renewal of the Advisory Agreement through August 31, 2023. Mr. Gladstone, our chairman and chief executive officer, controls the Adviser. The Board of Directors considered the following factors as the basis for its decision to renew the Advisory Agreement: (1) the nature, extent and quality of services provided by the Adviser to our shareholders; (2) the investment performance of the Company and the Adviser; (3) the costs of the services to be provided and profits to be realized by the Adviser and its affiliates from the relationship with the Company; (4) the extent to which economies of scale will be realized as the Company and the Affiliated Public Funds grow and whether the fee level under the Advisory Agreement reflects the economies of scale for the Company’s investors; (5) the fee structure of the advisory and administrative agreements of comparable funds; (6) indirect profits to the Adviser created through the Company; and (7) in light of the foregoing considerations, the overall fairness of the advisory fees paid under the Advisory Agreement.
Based on the information reviewed and the considerations detailed above, our Board of Directors, including all of the directors who are not “interested persons” as that term is defined in the 1940 Act, concluded that the investment advisory fee rates and terms are fair and reasonable in relation to the services provided and approved the Advisory Agreement, as being in the best interests of our stockholders.
Base Management Fee
The base management fee is payable quarterly to the Adviser pursuant to our Advisory Agreement and is assessed at an annual rate of 1.75%, computed on the basis of the value of our average total assets at the end of the two most recently-completed quarters (inclusive of the current quarter), which are total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings and adjusted appropriately for any share issuances or repurchases during the period. Our Board of Directors may (as it has for the years ended September 30, 2022, 2021, and 2020) accept a non-contractual, unconditional and irrevocable credit from the Adviser to reduce the annual 1.75% base management fee on syndicated loan participations to 0.5%, to the extent that proceeds resulting from borrowings were used to purchase such syndicated loan participations.
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Additionally, pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies. The Adviser may also provide other services to our portfolio companies under certain agreements and may receive fees for services other than managerial assistance. The Adviser non-contractually, unconditionally, and irrevocably credits 100% of these fees against the base management fee that we would otherwise be required to pay to the Adviser; however, pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees is retained by the Adviser in the form of reimbursement, at cost, for tasks completed by personnel of the Adviser, primarily for the valuation of portfolio companies. Loan servicing fees that are payable to the Adviser pursuant to our revolving line of credit with KeyBank National Association (“KeyBank”), as administrative agent, lead arranger and lender (as amended and restated from time to time, our “Credit Facility") are also 100% credited against the base management fee as discussed below, “—Loan Servicing Fee Pursuant to Credit Agreement.”
Incentive Fee
The incentive fee consists of two parts: an income-based incentive fee and a capital gains-based incentive fee. The income-based incentive fee rewards the Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% of our net assets (2.0% during the period from April 1, 2020 through March 31, 2023), which we define as total assets less indebtedness and before taking into account any incentive fees payable or contractually due but not payable during the period, at the end of the immediately preceding calendar quarter, adjusted appropriately for any share issuances or repurchases during the period (the “hurdle rate”). The income-based incentive fee with respect to our pre-incentive fee net investment income is generally payable quarterly to the Adviser and is computed as follows:
•no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate;
•100.0% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875% (2.4375% during the period from April 1, 2020 through March 31, 2022, and 2.50% from April 1, 2022 through March 31, 2023) of our net assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter; and
•20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% (2.4375% during the period from April 1, 2020 through March 31, 2022, and 2.50% from April 1, 2022 through March 31, 2023) of our net assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter.
Quarterly Incentive Fee Based on Net Investment Income for the Period Ending March 31, 2023(A)
Pre-incentive fee net investment income
(expressed as a percentage of the value of net assets)
Percentage of pre-incentive fee net investment income
allocated to income-related portion of incentive fee
(A)After March 31, 2023, the 2.00% quarterly hurdle rate will revert back to 1.75% and the 2.50% quarterly excess incentive fee hurdle rate will revert back to 2.1875%.
The second part of the incentive fee is a capital gains-based incentive fee that is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date) and equals 20.0% of our “net realized capital gains” (as defined below) as of the end of the fiscal year. In determining the capital gains-based incentive fee payable to the Adviser, we calculate “net realized capital gains” at the end of each applicable year by subtracting the sum of our cumulative aggregate realized capital losses and our entire portfolio's aggregate unrealized capital depreciation from our cumulative aggregate realized capital gains. For this purpose, cumulative aggregate realized capital gains, if any, equals the sum of the differences between the net sales price of each investment, when sold, and the original cost of such investment since inception. Cumulative aggregate realized capital losses equals the sum of the
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amounts by which the net sales price of each investment, when sold, is less than the original cost of such investment since inception. The entire portfolio’s aggregate unrealized capital depreciation, if any, equals the sum of the difference between the valuation of each investment as of the applicable calculation date and the original cost of such investment. At the end of the applicable fiscal year, the amount of capital gains that serves as the basis for our calculation of the capital gains-based incentive fee equals the cumulative aggregate realized capital gains less cumulative aggregate realized capital losses, less the entire portfolio’s aggregate unrealized capital depreciation, if any. If this number is positive at the end of such fiscal year, then the capital gains-based incentive fee for such year equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. No capital gains-based incentive fee has been recorded or paid since our inception through September 30, 2022, as cumulative unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.
In accordance with GAAP, a capital gains-based incentive fee accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital appreciation and depreciation. If such amount is positive at the end of a period, then GAAP requires us to record a capital gains-based incentive fee equal to 20.0% of such amount, less the aggregate amount of actual capital gains-based incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such period. GAAP requires that the capital gains-based incentive fee accrual consider the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that such unrealized capital appreciation will be realized in the future. No GAAP accrual for a capital gains-based incentive fee has been recorded from our inception through September 30, 2022.
Our Board of Directors accepted non-contractual, unconditional and irrevocable credits from the Adviser to reduce the income-based incentive fee to the extent net investment income did not cover 100.0% of distributions to common stockholders for the years ended September 30, 2022, 2021, and 2020, which credits totaled $0.4 million, $0.5 million, and $3.0 million, respectively.
Loan Servicing Fee Pursuant to Credit Agreement
The Adviser also services the loans held by our wholly-owned subsidiary, Gladstone Business Loan, LLC (“Business Loan”) (the borrower under our Credit Facility), in return for which the Adviser receives a 1.5% annual fee payable monthly based on the monthly aggregate outstanding balance of loans pledged under our Credit Facility. Since Business Loan is a consolidated subsidiary of ours, and the total base management fee paid to the Adviser pursuant to the Advisory Agreement cannot exceed 1.75% of total assets (less any uninvested cash or cash equivalents resulting from borrowings and adjusted appropriately for any share issuances or repurchases during the period) during any given calendar year, we treat payment of the loan servicing fee pursuant to our Credit Facility as a pre-payment of the base management fee under the Advisory Agreement. Accordingly, these loan servicing fees are 100% non-contractually, unconditionally, and irrevocably credited back to us by the Adviser.
Administration Agreement
We reimburse the Administrator pursuant to the Administration Agreement for our allocable portion of the Administrator’s expenses incurred while performing services to us, which are primarily rent and salaries and benefits expenses of the Administrator’s employees, including our chief financial officer and treasurer, chief compliance officer, chief valuation officer and general counsel and secretary (who also serves as the Administrator’s president), and their respective staffs.
Our allocable portion of the Administrator’s expenses are generally derived by multiplying the Administrator’s total expenses by the approximate percentage of time during the current quarter the Administrator’s employees performed services for us in relation to their time spent performing services for all companies serviced by the Administrator. On July 12, 2022, our Board of Directors, including a majority of the directors who are not parties to the Administration Agreement or interested persons of either party, approved the renewal of the Administration Agreement through August 31, 2023.
Other Transactions
Mr. Gladstone also serves on the board of managers of our affiliate, Gladstone Securities, a privately-held broker-dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation. Gladstone Securities is 100% indirectly owned and controlled by Mr. Gladstone and has provided other services, such as investment banking and due diligence services, to certain of our portfolio companies, for which Gladstone Securities receives a fee. Any such fees paid by portfolio companies to Gladstone Securities do not impact the fees we pay to the
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Adviser or the non-contractual, unconditional, and irrevocable credits against the base management fee or incentive fee. For additional information refer to Note 4 — Related Party Transactions of our accompanying Notes to Consolidated Financial Statements.
Material U.S. Federal Income Tax Considerations
This is a general summary of certain material U.S. federal income tax considerations applicable to us, to our qualification and taxation as a RIC for U.S. federal income tax purposes under Subchapter M of the Code and to the ownership and disposition of our shares. This summary does not purport to be a complete description of all of the tax considerations relating thereto. In particular, we have not described certain considerations that may be relevant to certain types of stockholders subject to special treatment under U.S. federal income tax laws. This summary does not discuss any aspect of state, local or foreign tax laws, or the U.S. estate or gift tax.
RIC Status
To qualify for treatment as a RIC under Subchapter M of the Code, we must generally distribute to our stockholders, for each taxable year, at least 90.0% of our taxable ordinary income plus the excess of our realized net short-term capital gains over our realized net long-term capital losses (“Investment Company Taxable Income”). We refer to this as the “annual distribution requirement.” We must also meet several additional requirements, including:
•Business Development Company status. At all times during the taxable year, we must maintain our status as a BDC.
•Income source requirements. At least 90.0% of our gross income for each taxable year must be from dividends, interest, payments with respect to securities, loans, gains from sales or other dispositions of securities or other income (including certain deemed inclusions) derived with respect to our business of investing in securities, and net income derived from an interest in a qualified publicly traded partnership.
•Asset diversification requirements. As of the close of each quarter of our taxable year: (1) at least 50% of the value of our assets must consist of cash, cash items, U.S. government securities, the securities of other regulated investment companies and other securities to the extent that (a) we do not hold more than 10% of the outstanding voting securities of an issuer of such other securities and (b) such other securities of any one issuer do not represent more than 5% of our total assets, and (2) no more than 25% of the value of our total assets may be invested in the securities (other than U.S. government securities or the securities of other regulated investment companies) of (i) one issuer, (ii) two or more issuers that are controlled by us and are engaged in the same or similar or related trades or businesses, and (iii) one or more qualified publicly-traded partnerships.
Failure to Qualify as a RIC
If we are unable to qualify for treatment as a RIC, we would be subject to U.S. federal income tax on all of our taxable income at the regular corporate income tax rate and would be subject to any applicable state and local taxes, even if we distributed all of our Investment Company Taxable Income to our stockholders. We would not be able to deduct distributions to our stockholders, nor would we be required to make such distributions for U.S. federal income tax purposes. Distributions would be taxable to our stockholders as ordinary dividend income and, subject to certain limitations under the Code, would be eligible for the current maximum rate applicable to qualifying dividend income of individuals and other non-corporate U.S. stockholders to the extent of our current or accumulated earnings and profits. Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends received deduction, if applicable. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder’s adjusted tax basis, and then as capital gain. If we fail to meet the RIC requirements for more than two consecutive years and then seek to requalify as a RIC, we generally would be subject to corporate-level U.S. federal income tax on any unrealized appreciation with respect to our assets unless we make a special election to pay corporate-level U.S. federal income tax on any such unrealized appreciation during the succeeding five-year period.
Qualification as a RIC
If we qualify as a RIC and meet the annual distribution requirement, we will not be subject to U.S. federal income tax on the portion of our Investment Company Taxable Income and net capital gain (realized net long term capital gain in excess of realized net short term capital loss) that we timely distribute (or are deemed to timely distribute) to our stockholders. If we fail to distribute in a timely manner an amount at least equal to the sum of (1) 98.0% of our ordinary income for the calendar year, (2) 98.2% of our net capital gains for the one-year period ending on October 31 of the calendar year and (3)
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any income realized, but not distributed, in the preceding period (to the extent that income tax was not imposed on such amounts), less certain reductions, as applicable (together, the “excise tax distribution requirements”), we will be subject to a 4% nondeductible federal excise tax on the portion of the undistributed amounts of such income that are less than the amounts required to be distributed based on the excise tax distribution requirements. For the calendar years ended December 31, 2021, 2020, and 2019, we did not incur any excise taxes. As of September 30, 2022, our capital loss carryforward was $62.9 million.
If we acquire debt obligations that (i) were originally issued at a discount, (ii) bear interest at rates that are not either fixed rates or certain qualified variable rates, or (iii) are not unconditionally payable at least annually over the life of the obligation, we will be required to include in taxable income each year a portion of the original issue discount (“OID”) that accrues over the life of the obligation. Additionally, PIK interest, which is computed at the contractual rate specified in a loan agreement and is added to the principal balance of a loan, is also a non-cash source of income that we are required to include in taxable income each year. Both OID and PIK income will be included in our Investment Company Taxable Income even though we receive no cash corresponding to such amounts. As a result, we may be required to make additional distributions corresponding to such OID and PIK amounts in order to satisfy the annual distribution requirement and to continue to qualify as a RIC or to avoid the imposition of federal income and excise taxes. In this event, we may be required to sell investments or other assets to meet the RIC distribution requirements. For the year ended September 30, 2022, we recorded $0.5 million of OID income and the unamortized balance of OID investments as of September 30, 2022 totaled $0.9 million. As of September 30, 2022, we had six investments which had a PIK interest component and we recorded PIK interest income of $4.2 million during the year ended September 30, 2022.
Taxation of Our U.S. Stockholders
Distributions
For any period during which we qualify as a RIC for U.S. federal income tax purposes, distributions to our stockholders attributable to our Investment Company Taxable Income generally will be taxable as ordinary income to our stockholders to the extent of our current or accumulated earnings and profits. We first allocate our earnings and profits to distributions to our preferred stockholders, if any, and then to distributions to our common stockholders based on priority in our capital structure. Any distributions in excess of our earnings and profits will first be treated as a return of capital to the extent of the stockholder’s adjusted basis in his or her shares of stock and thereafter as capital gain. Distributions of our long-term capital gains, reported by us as such, will be taxable to our stockholders as long-term capital gains regardless of the stockholder’s holding period of the stock and whether the distributions are paid in cash or invested in additional stock. Corporate U.S. stockholders generally are eligible for the 50% dividends received deduction with respect to ordinary income dividends received from us, but only to the extent such amount is attributable to dividends received by us from taxable domestic corporations.
A RIC that has two or more classes of stock generally is required to allocate to each class proportionate amounts of each type of its income (such as ordinary income, capital gains, qualified dividend income and dividends qualifying for the dividends-received deduction) based upon the percentage of total distributions paid to each class for the tax year. Accordingly, for any tax year in which we have common shares and preferred shares, we intend to allocate capital gain distributions, distributions of qualified dividend income, and distributions qualifying for the dividends-received deduction, if any, between our common shares and preferred shares in proportion to the total distributions paid to each class with respect to such tax year.
Any distribution declared by us in October, November or December of any calendar year, payable to our stockholders of record on a specified date in such a month and actually paid during January of the following year, will be treated as if it were paid by us and received by our stockholders on December 31 of the previous year. In addition, we may elect (in accordance with Section 855(a) of the Code) to relate a distribution back to the prior taxable year if we (1) declare such distribution prior to the later of the extended due date for filing our return for that taxable year or the 15 th day of the ninth month following the close of the taxable year, (2) make the election in that return, and (3) distribute the amount in the 12-month period following the close of the taxable year but not later than the first regular distribution payment of the same type following the declaration. Any such election will not alter the general rule that a stockholder will be treated as receiving a distribution in the taxable year in which the distribution is made, subject to the October, November, December rule described above.
If a common stockholder participates in our “opt in” dividend reinvestment plan, then the common stockholder will have their cash dividends and distributions automatically reinvested in additional shares of our common stock, rather than receiving cash dividends and distributions. Any distributions reinvested under the plan will be taxable to the common
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stockholder to the same extent, and with the same character, as if the common stockholder had received the distribution in cash. The common stockholder will have an adjusted basis in the additional common shares purchased through the plan equal to the dollar amount that would have been received if the U.S. stockholder had received the dividend or distribution in cash, unless we were to issue new shares that are trading at or above net asset value, in which case, the U.S. stockholder’s basis in the new shares would generally be equal to their fair market value. The additional common shares will have a new holding period commencing on the day following the day on which the shares are credited to the common stockholder’s account. The plan agent purchases shares in the open market in connection with the obligations under the plan.
Sale of Our Shares
A U.S. stockholder generally will recognize taxable gain or loss if the U.S. stockholder sells or otherwise disposes of the shares of our common stock. Any gain arising from such sale or disposition generally will be treated as long-term capital gain or loss if the U.S. stockholder has held the shares for more than one year. Otherwise, it will be classified as short-term capital gain or loss. However, any capital loss arising from the sale or disposition of shares of our stock held for six months or less will be treated as long-term capital loss to the extent of the amount of capital gain dividends received, or undistributed capital gain deemed received, with respect to such shares. Under the tax laws in effect as of the date of this filing, individual U.S. stockholders are subject to a maximum federal income tax rate of 20% on their net capital gain (i.e. the excess of realized net long-term capital gain over realized net short-term capital loss for a taxable year) including any long-term capital gain derived from an investment in our shares. Such rate is lower than the maximum rate on ordinary income currently payable by individuals. Corporate U.S. stockholders currently are subject to federal income tax on net capital gain at the same rates applied to their ordinary income. Capital losses are subject to limitations on use for both corporate and non-corporate stockholders. Certain U.S. stockholders who are individuals, estates or trusts generally are also subject to a 3.8% Medicare tax on, among other things, dividends on and capital gain from the sale or other disposition of shares of our stock.
Backup Withholding and Other Required Withholding
We may be required to withhold U.S. federal income tax (i.e. backup withholding) from all taxable distributions to any non-corporate U.S. stockholder (i) who fails to furnish us with a correct taxpayer identification number or a certificate that such stockholder is exempt from backup withholding, or (ii) with respect to whom the Internal Revenue Service (“IRS”) notifies us that such stockholder has failed to properly report certain interest and dividend income to the IRS and to respond to notices to that effect. An individual’s taxpayer identification number is generally his or her social security number. Any amount withheld under backup withholding is allowed as a credit against the U.S. stockholder’s federal income tax liability, provided that proper information is timely provided to the IRS.
The Foreign Account Tax Compliance Act imposes a U.S. federal withholding tax on certain types of payments made to “foreign financial institutions” and certain other non-U.S. entities unless certain due diligence, reporting, withholding, and certification obligation requirements are satisfied.
Information Reporting
We will send to each of our U.S. stockholders, after the end of each calendar year, a notice providing, on a per share and per distribution basis, the amounts includible in the U.S. stockholder’s taxable income for such year as ordinary income and as long-term capital gain, if any. In addition, the U.S. federal tax status of each year’s distributions will generally be reported to the IRS (including the amount of dividends, if any, eligible for the preferential rates applicable to long-term capital gains).
Regulation as a BDC
We are a closed-end, non-diversified management investment company that has elected to be regulated as a BDC under Section 54 of the 1940 Act. As such, we are subject to regulation under the 1940 Act. The 1940 Act contains prohibitions and restrictions relating to transactions between BDCs and their affiliates, principal underwriters and affiliates of those affiliates or underwriters and requires that a majority of the directors be persons other than “interested persons,” as defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a BDC unless approved by a “vote of a majority of outstanding voting securities,” as defined in the 1940 Act.
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In general, a BDC must have been organized and have its principal place of business in the U.S. and must be operated for the purpose of making investments in qualifying assets, as described in Sections 55(a)(1) through (a)(3) of the 1940 Act.
Qualifying Assets
Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets, other than certain interests in furniture, equipment, real estate, or leasehold improvements (“Operating Assets”) represent at least 70.0% of total assets, exclusive of Operating Assets. The types of qualifying assets in which we may invest under the 1940 Act include the following:
(1)Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer is an eligible portfolio company. An eligible portfolio company is generally defined in the 1940 Act as any issuer which:
(a)is organized under the laws of, and has its principal place of business in, any state or states in the U.S.;
(b)is not an investment company (other than a small business investment company wholly owned by the BDC or otherwise excluded from the definition of investment company); and
(c)satisfies one of the following:
(i)it does not have any class of securities with respect to which a broker or dealer may extend margin credit;
(ii)it is controlled by the BDC and for which an affiliate of the BDC serves as a director;
(iii)it has total assets of not more than $4.0 million and capital and surplus of not less than $2 million;
(iv)it does not have any class of securities listed on a national securities exchange; or
(v)it has a class of securities listed on a national securities exchange, with an aggregate market value of outstanding voting and non-voting equity of less than $250.0 million.
(2)Securities received in exchange for or distributed on or with respect to securities described in (1) above, or pursuant to the exercise of options, warrants or rights relating to such securities.
(3)Cash, cash items, government securities or high quality debt securities maturing in one year or less from the time of investment.
As of September 30, 2022, 98.8% of our assets were qualifying assets.
Asset Coverage
Pursuant to Section 61(a)(3) of the 1940 Act, we are permitted to issue multiple classes of “senior securities representing indebtedness.” However, pursuant to Section 18(c) of the 1940 Act, we are permitted to issue only one class of “senior securities that is stock.” In either case, we may only issue such senior securities if such class of senior securities, after such issuance, has an asset coverage, as defined in Section 18(h) of the 1940 Act, of at least 150%.
In addition, our ability to pay dividends or distributions (other than dividends payable in our common stock) to holders of any class of our capital stock would be restricted if our “senior securities representing indebtedness” fail to have an asset coverage of at least 150% (measured at the time of declaration of such distribution and accounting for such distribution). The 1940 Act does not apply this limitation to privately arranged debt that is not intended to be publicly distributed, unless this limitation is specifically negotiated by the lender. In addition, our ability to pay dividends or distributions (other than dividends payable in our common stock) to our common stockholders would be restricted if our “senior securities that are stock” fail to have an asset coverage of at least 150% (measured at the time of declaration of such distribution and accounting for such distribution). If the value of our assets declines, we might be unable to satisfy these asset coverage requirements. To satisfy the 150% asset coverage requirement in the event that we are seeking to pay a distribution, we might either have to (i) liquidate a portion of our portfolio to repay a portion of our indebtedness or (ii) issue common stock. This may occur at a time when a sale of a portfolio asset may be disadvantageous, or when we have limited access to capital markets on agreeable terms. In addition, any amounts that we use to service our indebtedness or for offering costs will not be available for distributions to our stockholders. If we are unable to regain the requisite asset coverage through these methods, we may be forced to suspend the payment of such dividends or distributions.
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Significant Managerial Assistance
A BDC generally must make available significant managerial assistance to issuers of certain of its portfolio securities that the BDC counts as a qualifying asset for the 70.0% test described above. Making available significant managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company. Significant managerial assistance also includes the exercise of a controlling influence over the management and policies of the portfolio company. However, with respect to certain, but not all such securities, where the BDC purchases such securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available such managerial assistance, or the BDC may exercise such control jointly.
Summary Risk Factors
Below is a summary of the principal risk factors associated with an investment in our securities. In addition to the below, you should carefully consider the information included in “Risk Factors” beginning on page 20 of this Annual Report together with all of the other information included in this Annual Report and the other reports and documents filed or furnished by us with the SEC for a more detailed discussion of the principal risks as well as certain other risks that you should carefully consider before deciding to invest in our securities.
•Market conditions could negatively impact our business, results of operations, cash flows and financial condition.
•Volatility in the capital markets may make it more difficult to raise capital and may adversely affect the valuations of our investments.
•We may experience fluctuations in our quarterly and annual results based on the impact of inflation in the U.S.
•Market interest rates may have an effect on the value of our Securities.
•Changes in interest rates may negatively impact our investments and have an adverse effect on our business, financial condition, results of operations, and cash flows.
•The lack of liquidity of our privately held investments may adversely affect our business.
•Our investments in lower middle market companies are extremely risky and could cause you to lose all or a part of your investment.
•We often invest in transactions involving acquisitions, buyouts and recapitalizations of companies, which will subject us to the risks associated with change in control transactions.
•Our portfolio is concentrated in a limited number of companies and industries, which subjects us to an increased risk of significant loss if any one of these companies does not repay us or if the industries experience downturns.
•Any inability to renew, extend or replace our Credit Facility on terms favorable to us, or at all, could adversely impact our liquidity and ability to fund new investments or maintain distributions to our stockholders.
•We are subject to restrictions that may discourage a change of control. Certain provisions contained in our articles of incorporation and Maryland law may prohibit or restrict a change of control and adversely impact the price of our common stock.
•Our success depends on the Adviser’s ability to attract and retain qualified personnel in a competitive environment.
•Our incentive fee may induce the Adviser to make certain investments, including speculative investments.
•We may be obligated to pay the Adviser incentive compensation even if we incur a loss.
•The Adviser is not obligated to provide a credit of the base management fee or incentive fee, which could negatively impact our earnings and our ability to maintain our current level of distributions to our stockholders.
•There is a risk that you may not receive distributions or that distributions may not grow over time
•Investing in our securities may involve an above average degree of risk.
•Common shares of closed-end investment companies frequently trade at a discount to the net asset value (“NAV”) per share.
•The indentures under which the notes were issued contain limited protection for holders of the Notes.
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•Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, or the operations of businesses in which we invest, a compromise or corruption of our confidential information and/or damage to our business relationships, all of which could negatively impact our business, financial condition and operating results.
Code of Ethics
We, and all of the Gladstone Companies, have adopted a code of ethics and business conduct applicable to all of the officers, directors and personnel of such companies that complies with the guidelines set forth in Item 406 of Regulation S-K and Rule 17j-1 of the 1940 Act. As required by the 1940 Act, this code establishes procedures for personal investments, restricts certain transactions by such personnel and requires the reporting of certain transactions and holdings by such personnel. This code of ethics and business conduct is publicly available on the Investors section of our website under “Governance – Governance Documents” at www.GladstoneCapital.com. We intend to provide any required disclosure of any amendments to or waivers of the provisions of this code by posting information regarding any such amendment or waiver to our website or in a Current Report on Form 8-K.
Compliance Policies and Procedures
We and the Adviser have adopted and implemented written policies and procedures reasonably designed to prevent violation of the federal securities laws, and our Board of Directors is required to review these compliance policies and procedures annually to assess their adequacy and the effectiveness of their implementation. We have designated a chief compliance officer, John Dellafiora, Jr., who also serves as chief compliance officer for all of the Gladstone Companies.
Staffing
We do not currently have any employees and do not expect to have any employees in the foreseeable future. Currently, services necessary for our business are provided by individuals who are employees of the Adviser and the Administrator pursuant to the terms of the Advisory Agreement and the Administration Agreement, respectively. We expect that 25 to 30 full time employees of the Adviser and the Administrator will spend substantial time on our matters during the remainder of calendar year 2022 and all of calendar year 2023. As of September 30, 2022, the Adviser and the Administrator collectively had 71 full-time employees. A breakdown of these employees is summarized by functional area in the table below:

Number of Individuals |  | Functional Area
13 |  | Executive management
20 |  | Accounting, administration, compliance, human resources, legal and treasury
38 |  | Investment management, portfolio management and due diligence

The Adviser and the Administrator aim to attract and retain capable advisory and administrative personnel, respectively, by offering competitive base salaries and bonus structure and by providing employees with appropriate opportunities for professional growth.
Available Information
We file with or furnish to the SEC copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other information meeting the information requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and make such reports and any amendments thereto available free of charge through the Investors section of our website at www.GladstoneCapital.com as soon as reasonably practicable after such materials are electronically filed with or furnished to the SEC. Information contained on our website is not incorporated by reference into this Annual Report. The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
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ITEM 1A. RISK FACTORS
You should carefully consider these risk factors, together with all of the other information included in this Annual Report and the other reports and documents filed or furnished by us with the SEC. The risks set out below are not the only risks we face. Additional risks and uncertainties not presently known to us, or not presently deemed material by us, may also impair our operations and performance. If any of the following events occur, our business, financial condition, results of operations and cash flows could be materially and adversely affected. If that happens, the trading price of our securities and our NAV could decline, and you may lose all or part of your investment. The risk factors described below are the principal risk factors associated with an investment in our securities as well as those factors generally associated with an investment company with investment objectives, investment policies, capital structure or trading markets similar to ours.
Risks Related to the Economy
Market conditions could negatively impact our business, results of operations, cash flows and financial condition.
The market in which we operate is affected by a number of factors that are largely beyond our control but can nonetheless have a potentially significant, negative impact on us. These factors include, among other things:
•changes in interest rates and credit spreads;
•the availability of credit, including the price, terms, and conditions under which it can be obtained;
•the quality, pricing, and availability of suitable investments and credit losses with respect to our investments;
•the ability to obtain accurate market-based valuations;
•loan values relative to the value of the underlying assets;
•default rates on the loans underlying our investments and the amount of related losses;
•prepayment rates, delinquency rates and the timing and amount of servicer advances;
•competition;
•the actual and perceived state of the economy and capital markets generally;
•amendments or repeals of legislation, or changes in regulations or regulatory interpretations thereof, and transitions of government, including uncertainty regarding any of the foregoing;
•the national and global political environment, including foreign relations and trading policies;
•the impact of potential changes to the Code; and
•the attractiveness of other types of investments relative to investments in lower middle market companies generally.
Changes in these factors are difficult to predict, and a change in one factor could affect other factors, which could result in adverse effects to our business, results of operations, financial condition, and cash flows.
Volatility in the capital markets may make it more difficult to raise capital and may adversely affect the valuations of our investments.
Given the volatility and dislocation that the capital markets have experienced from time to time, many BDCs have faced, and may in the future face, a challenging environment in which to raise capital. We may in the future have difficulty accessing debt and equity capital, and a severe disruption in the global financial markets or deterioration in credit and financing conditions could have a material adverse effect on our business, financial condition, results of operations, and cash flows. In addition, significant changes in the capital markets have had, and may in the future have, a negative effect on the valuations of our investments and on the potential for liquidity events involving our investments. Additionally, volatility in the U.S. repo market may affect other financial markets worldwide. An inability to raise capital, and any required sale of our investments for liquidity purposes or failure of our portfolio companies to realize liquidity events, could have a material adverse impact on our business, financial condition, results of operations, or cash flows.
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We may experience fluctuations in our quarterly and annual results based on the impact of inflation in the U.S.
Certain of our portfolio companies are in industries that have been and, in the future, may be impacted by inflation, such as consumer goods and services and manufacturing. Our portfolio companies may not be able to pass on to customers increases in their costs of operations which could greatly affect their operating results, impacting their ability to repay our loans. In addition, any projected future decreases in our portfolio companies’ operating results due to inflation could adversely impact the fair value of those investments. Any decreases in the fair value of our investments could result in future unrealized losses and therefore reduce our net assets resulting from operations.
Public health threats, including the COVID-19 pandemic, may adversely impact the businesses in which we invest and affect our business, operating results and financial condition.
Public health threats, such as COVID-19 or any other illness, may disrupt the operations of the businesses in which we invest. Such threats can create economic and political uncertainties and can contribute to global economic instability. In the event of a future public health threat, our portfolio companies may face limitations on their business activities for an unknown period of time, including shutdowns that may be requested or mandated by governmental authorities, or that they may experience disruptions in their supply chains or decreased consumer demand. Certain of our portfolio companies have experienced increases in health and safety expenses, payroll costs and other operating expenses and future increases are possible. These adverse economic impacts may decrease the value of the collateral securing our loans in such portfolio companies, as well as the value of our equity investments. In addition, these adverse impacts could cause certain of our portfolio companies to have difficulty meeting their debt service requirements, which in turn could lead to an increase in defaults, and/or could diminish the ability of certain of our portfolio companies to engage in liquidity events. These negative impacts on our portfolio companies and their performance may reduce the interest income we receive and/or increase realized and unrealized losses related to our investments, which may, in turn, adversely impact our business, financial condition or results of operations.
Risks Related to Interest Rates
Market interest rates may have an effect on the value of our securities.
One of the factors that influences the price of our securities is the distribution yield on our securities (as a percentage of the price of our securities) relative to market interest rates. An increase in market interest rates such as the current increases may lead prospective purchasers of our securities to expect a higher distribution yield. In addition, higher interest rates have increased our borrowing costs. As a result, higher market interest rates could cause the market price of our securities to decrease.
Changes in interest rates may negatively impact our investments and have an adverse effect on our business, financial condition, results of operations, and cash flows.
Generally, interest rate fluctuations and changes in credit spreads on floating rate loans may have a negative impact on our investments and investment opportunities and, accordingly, may have a material adverse effect on our rate of return on invested capital, our net investment income, our NAV and the market price of our securities. As interest rates increase, generally, the cost of borrowing under our Credit Facility increases, which may affect our ability to make new investments on favorable terms or at all. A substantial portion of our debt investments have variable interest rates that reset periodically and are generally based on LIBOR (including LIBOR replacement language), or to a lesser extent, SOFR. As interest rates have increased, the operating performance of some of our portfolio companies has been affected by increasing debt service obligations and, therefore, may affect our results of operations. In addition, to the extent that further increases in interest rates make it difficult or impossible to make payments on outstanding indebtedness to us or other financial sponsors or refinance debt that is maturing in the near term, some of our portfolio companies may be unable to repay such debt at maturity and may be forced to sell assets, undergo a recapitalization or seek bankruptcy protection. Rising interest rates could also cause borrowers to shift cash from other productive uses to the payment of interest, which may have a material adverse effect on their business and operations and could, over time, lead to increased defaults. Additionally, as interest rates increase and the corresponding risk of a default by borrowers increases, the liquidity of higher interest rate loans may decrease as fewer investors may be willing to purchase such loans in the secondary market in light of the increased risk of a default by the borrower and the heightened risk of a loss of an investment in such loans. Decreases in credit spreads on debt that pays a floating rate of return would have an impact on the income generation of our floating rate assets. Trading prices for debt that pays a fixed rate of return tend to fall as interest rates rise. Trading prices tend to fluctuate more for fixed rate securities that have longer maturities. There can be no guarantee the Federal Reserve Board will implement additional rate increases at a gradual pace, nor can there be any assurance that markets will not adversely react to rate increases.
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Additional increases in interest rates could have a negative effect on our investments, which could negatively impact our operating results, financial condition, and cash flows.
A substantial portion of our debt investments have variable interest rates that reset periodically and are generally based on LIBOR (including LIBOR replacement language), and to a lesser extent, SOFR. Accordingly, reduced interest rates will result in a decrease in our total investment income unless offset by interest rate floors or an increase in the spread of our debt investments with variable interest rates. In addition, our net investment income could decrease if there is no reduction or credit to the base management or incentive fees that we pay to the Adviser. In addition, when interest rates decline, borrowers may refinance their loans at lower interest rates, which could shorten the average life of the loans and reduce the associated returns on the investment, as well as require the Adviser and its investment professionals to incur management time and expense to re-deploy such proceeds, including on terms that may not be as favorable as our existing loans.
The interest rates of some of our term loans to our portfolio companies are priced using a spread over LIBOR, which will be phased out in the future.
LIBOR is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. In general, our investments in debt securities have a term of five to seven years, accrue interest at variable rates based on LIBOR and, to a lesser extent, at fixed rates. As of September 30, 2022, based on the total principal balance of debt outstanding, our portfolio consisted 75.0% of loans at variable rates using a spread over LIBOR, 13.5% of loans at variable rates using a spread over SOFR, and 11.5% of loans at fixed rates.
As a result of concerns about the accuracy of the calculation of LIBOR, a number of British Bankers’ Association (the “BBA”) member banks entered into settlements with certain regulators and law enforcement agencies with respect to the alleged manipulation of LIBOR. Actions by the BBA, regulators or law enforcement agencies as a result of these or future events, may result in changes to the manner in which LIBOR is determined (to the extent it continues beyond 2023). Potential changes, or uncertainty related to such potential changes may adversely affect the market for LIBOR-based securities, including our portfolio of LIBOR-indexed, floating-rate debt securities and our borrowings.
On July 27, 2017, the U.K Financial Conduct Authority (“FCA”) announced that it would phase out LIBOR as a benchmark by the end of 2021. As of December 31, 2021, all non-U.S. dollar LIBOR publications have been phased out. The phase out of a majority of the U.S. dollar publications is delayed until June 30, 2023. The Alternative Reference Rates Committee (“ARRC”) of the Federal Reserve Bank of New York previously confirmed that this constitutes a “benchmark transition event” and established “benchmark replacement dates” in ARRC standard LIBOR transition provisions that exist in many U.S. law contracts using LIBOR. There is currently no definitive information regarding the future utilization of LIBOR.
The ARRC has identified SOFR as its preferred alternative rate for LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by the U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. Other jurisdictions have also proposed their own alternative to LIBOR, including the Sterling Overnight Index Average for Sterling markets, the Euro Short Term Rate for Euros and Tokyo Overnight Average Rate for Japanese Yens. Although SOFR appears to be the preferred replacement rate for U.S. dollar LIBOR, it is not possible to predict whether SOFR will attain market traction as a LIBOR replacement tool, and the future of LIBOR is still uncertain. The effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR or other reference rates that may be enacted in the United States, United Kingdom or elsewhere cannot be predicted at this time, and it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes in views or alternatives may have on the financial markets for financial instruments based on LIBOR.
To date, the majority of the loan agreements with our portfolio companies have already been amended to include fallback language providing a mechanism for the parties to negotiate a new reference interest rate in the event that LIBOR ceases to exist, and our credit facility has been similarly amended. Factors such as the pace of the transition to replacement or reformed rates, the specific terms and parameters for and market acceptance of any alternative reference rate, prices of and the liquidity of trading markets for products based on alternative reference rates, and our ability to transition and develop appropriate systems and analytics for one or more alternative reference rates could also have a material adverse effect on our business, financial condition and results of operations. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have a material adverse effect on our business, financial condition and results of operations.
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A change in interest rates may adversely affect our profitability and our hedging strategy may expose us to additional risks.
We anticipate using a combination of equity and long-term and short-term borrowings to finance our investment activities. As a result, a portion of our income will depend upon the spread between the rate at which we borrow funds and the rate at which we loan these funds. An increase or decrease in interest rates could reduce the spread between the rate at which we invest and the rate at which we borrow, and thus, adversely affect our profitability if we have not appropriately hedged against such event. Alternatively, interest rate hedging arrangements may limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio.
As of September 30, 2022, based on the total principal balance of debt outstanding, our portfolio consisted of approximately 88.5% of loans at variable rates with floors and approximately 11.5% at fixed rates.
As of September 30, 2022, we did not have any hedging arrangements, such as interest rate hedges. Adverse developments resulting from changes in interest rates or any future hedging transactions could have a material adverse effect on our business, financial condition and results of operations. Our ability to receive payments pursuant to an interest rate cap agreement is linked to the ability of the counter-party to that agreement to make the required payments. To the extent that the counter-party to the agreement is unable to pay pursuant to the terms of the agreement, we may lose the hedging protection of the arrangement.
Also, the fair value of certain of our debt investments is based, in part, on the current market yields or interest rates of similar securities. A change in interest rates could have a significant impact on our determination of the fair value of these debt investments. In addition, a change in interest rates could also have an impact on the fair value of any hedging arrangements then in effect that could result in the recording of unrealized appreciation or depreciation in future periods. Therefore, adverse developments resulting from changes in interest rates could have a material adverse effect on our business, financial condition, results of operations, and cash flows. Refer to “Quantitative and Qualitative Disclosures About Market Risk” for additional information on interest rate fluctuations.
Risks Related to Our Investments
We operate in a highly competitive market for investment opportunities.
There is competitive pressure in the BDC and investment company marketplace for first and second lien secured debt, resulting in lower yields for increasingly riskier investments. A large number of entities compete with us and make the types of investments that we seek to make in lower middle market companies. We compete with public and private buyout funds, public and private credit funds and other BDCs, commercial and investment banks, commercial financing companies, and, to the extent that they provide an alternative form of financing, hedge funds. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which would allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC. The competitive pressures we face could have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time and we can offer no assurance that we will be able to identify and make investments that are consistent with our investment objectives. We do not seek to compete based on the interest rates we offer, and we believe that some of our competitors may make loans with interest rates that will be comparable to or lower than the rates we offer. We may lose investment opportunities if we do not match our competitors’ pricing, terms, and structure. However, if we match our competitors’ pricing, terms, and structure, we may experience decreased net interest income and increased risk of credit loss.
Our investments in lower middle market companies are extremely risky and could cause you to lose all or a part of your investment.
Investments in lower middle market companies are subject to a number of significant risks including the following:
•Lower middle market companies are likely to have greater exposure to economic downturns than larger businesses. Our portfolio companies may have fewer resources than larger businesses, and thus any economic downturns or recessions are more likely to have a material adverse effect on them and the end markets in which they operate. If one of our portfolio companies is adversely impacted by a recession, its ability to repay our loan or engage in a liquidity event, such as a sale, recapitalization or initial public offering would be diminished.
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•Lower middle market companies may have limited financial resources and may not be able to repay the loans we make to them. Our strategy includes providing financing to portfolio companies that typically do not have readily available access to financing. While we believe that this provides an attractive opportunity for us to generate profits, this may make it difficult for the portfolio companies to repay their loans to us upon maturity. A borrower’s ability to repay its loan may be adversely affected by numerous factors, including the failure to meet its business plan, a downturn in its industry, or negative economic conditions, including those created by the current market environment. Deterioration in a borrower’s financial condition and prospects usually will be accompanied by deterioration in the value of any collateral and a reduction in the likelihood of us realizing on any guaranties we may have obtained from the borrower’s management. As of September 30, 2022, there were no loans on non-accrual status. For any loans that are placed on non-accrual status in the future, we cannot assure you that our efforts to improve profitability and cash flows of these companies will prove successful. Although we will sometimes seek to be the senior, secured lender to a borrower, in some of our portfolio companies we expect to be subordinated to a senior lender, and our interest in any collateral would, accordingly, likely be subordinate to another lender’s security interest.
•Lower middle market companies typically have narrower product lines and smaller market shares than large businesses. Because our target portfolio companies are lower middle market businesses, they will tend to be more vulnerable to competitors’ actions, supply chain issues and market conditions, as well as general economic downturns. In addition, our portfolio companies may face intense competition, including competition from companies with greater financial resources, more extensive development, manufacturing, marketing, and other capabilities and a larger number of qualified managerial, or technical personnel.
•There is generally little or no publicly available information about these businesses. Because we seek to invest in privately owned businesses, there is generally little or no publicly available operating and financial information about our potential portfolio companies. As a result, we rely on our officers, the Adviser and its employees, Gladstone Securities and certain consultants to perform due diligence investigations of these portfolio companies, their operations, and their prospects. We may not learn all of the material information we need to know regarding these businesses through our investigations to make a well-informed investment decision.
•Lower middle market companies generally have less predictable operating results. We expect that our portfolio companies may have significant variations in their operating results, may from time to time be exposed to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, may require substantial additional capital to support their operations, to finance expansion or to maintain their competitive position, may otherwise have a weak financial position, or may be adversely affected by changes in the business cycle. Our portfolio companies may not meet net income, cash flow, and other coverage tests typically imposed by their senior lenders. A borrower’s failure to satisfy financial or operating covenants imposed by senior lenders could lead to defaults and, potentially, foreclosure on its senior credit facility, which could additionally trigger cross-defaults in other agreements. If this were to occur, it is possible that the borrower’s ability to repay any of our loans would be jeopardized.
•Lower middle market companies are more likely to be dependent on one or two persons. Typically, the success of a lower middle market business also depends on the management talents and efforts of one or two persons or a small group of persons. The death, disability, or resignation of one or more of these persons could have a material adverse impact on our certain of our portfolio companies and, in turn, on us.
•Lower middle market companies may have limited operating histories. While we intend to target stable companies with proven track records, we may make loans to new companies that meet our other investment criteria. Portfolio companies with limited operating histories will be exposed to all of the operating risks that new businesses face and may be particularly susceptible to, among other risks, market downturns, competitive pressures and the departure of key executive officers.
•Debt securities of lower middle market companies typically are not rated by a credit rating agency. Typically, a lower middle market private business cannot or will not expend the resources to have its debt securities rated by a credit rating agency. We expect that most, if not all, of the debt securities we acquire will be unrated. Investors should assume that these loans would be at rates below “investment grade” quality. Investments rated below investment grade are often referred to as high yield securities or junk bonds and may be considered high risk as compared to investment-grade debt instruments.
•Lower middle market companies may be highly leveraged. Some of our portfolio companies may be highly leveraged, which may have adverse consequences to these companies and to us as an investor. These companies m ay be subject to restrictive financial and operating covenants and the leverage may impair these companies’ ability to finance their future operations and capital needs. As a result, these companies’ flexibility to respond to
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changing business and economic conditions and to take advantage of business opportunities may be limited. Further, a leveraged company’s income and net assets will tend to increase or decrease at a greater rate than if borrowed money were not used.
•Lower middle market companies may operate in regulated industries or provide services to governments. Some of our portfolio companies may operate in regulated industries and/or provide services to federal, state or local governments, or operate in industries that provide services to regulated industries or federal, state or local governments, any of which could lead to delayed payments for services or subject the company to changing payment and reimbursement rates or other terms.
Because the majority of the loans we make and equity securities we receive when we make loans are not publicly traded, there is uncertainty regarding the value of our privately held securities.
The majority of our portfolio investments are, and we expect will continue to be, in the form of securities that are not publicly traded. The fair value of securities and other investments that are not publicly traded may not be readily determinable. In valuing our investment portfolio, several techniques are used, including, a total enterprise value approach, a yield analysis, market quotes, and independent third party assessments. Currently, ICE Data Pricing and Reference Data, LLC provides estimates of fair value on our proprietary debt investments and we use another independent valuation firm to provide valuation inputs for our significant equity investments, including earnings multiple ranges, as well as other information. In addition to these techniques, other factors are considered when determining fair value of our investments, including: the nature and realizable value of the collateral, including external parties’ guaranties; any relevant offers or letters of intent to acquire the portfolio company; and the markets in which the portfolio company operates.
Fair value measurements of our investments may involve subjective judgments and estimates and due to the inherent uncertainty of determining these fair values, the determination of fair value may fluctuate from period to period. Additionally, changes in the market environment and other events that may occur over the life of the investment may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities, and any investments that include OID or PIK interest may have unreliable valuations because their continuing accruals require ongoing judgments about the collectability of their deferred payments and the value of their underlying collateral. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which it is recorded.
Our NAV would be adversely affected if the fair value of our investments are higher than the values that we ultimately realize upon the disposal of such securities.
The valuation process for certain of our portfolio holdings creates a conflict of interest.
A substantial portion of our portfolio investments are made in the form of securities for which market quotations are not readily available. In connection with valuing these investments, the Valuation Team prepares portfolio company valuations based upon the most recent portfolio company financial statements available and projected financial results of each portfolio company. The participation of the Adviser’s investment professionals in our valuation process, and the pecuniary interest in the Adviser by Mr. Gladstone, may result in a conflict of interest as the management fees that we pay the Adviser are based on our total assets less uninvested cash or cash equivalents from borrowings, and adjusted appropriately for any share issuances or repurchases during the period.
The lack of liquidity of our privately held investments may adversely affect our business.
We will generally make investments in private companies whose securities are not traded in any public market. Substantially all of the investments we presently hold are, and the investments we expect to acquire in the future will be, subject to legal and other restrictions on resale and will otherwise be less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to quickly obtain cash equal to the value at which we record our investments if the need arises. This could cause us to miss important investment opportunities. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may record substantial realized losses upon liquidation. We may also face other restrictions on our ability to liquidate an investment in a portfolio company to the extent that we, the Adviser, or our respective officers, employees or affiliates have material non-public information regarding such portfolio company.
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Due to the uncertainty inherent in valuing these securities, the Valuation Team’s determinations of fair value may differ materially from the values that could be obtained if a ready market for these securities existed. Our NAV could be materially affected if the Valuation Team’s determinations regarding the fair value of our investments are materially different from the values that we ultimately realize upon our disposal of such securities.
When we are a debt or minority equity investor in a portfolio company, which we expect will generally be the case, we may not be in a position to control the entity, and its management may make decisions that could decrease the value of our investment.
We anticipate that most of our investments will continue to be either debt or minority equity investments in our portfolio companies. Therefore, we generally will not be involved in the day-to-day operations and decision making of our portfolio companies, even though we may have board observation rights and our debt agreement may contain certain restrictive covenants. As a result, we are and will remain subject to the risk that a portfolio company may make business decisions with which we disagree, and the shareholders and management of such company may take risks or otherwise act in ways that do not serve our best interests. As a result, a portfolio company may make decisions that could decrease the value of our debt investments.
In addition, we will generally not be in a position to control any portfolio company by investing in its debt securities. This is particularly true when we invest in syndicated loans, which are loans made by a larger group of investors whose investment objectives may not be completely aligned with ours. As of September 30, 2022, syndicated investments made up approximately 2.3% of our portfolio at cost, or $14.9 million. We therefore are subject to the risk that other lenders in these investments may make decisions that could decrease the value of our portfolio holdings.
We often invest in transactions involving acquisitions, buyouts and recapitalizations of companies, which will subject us to the risks associated with change in control transactions.
Our strategy, in part, includes making debt and minority equity investments in companies in connection with acquisitions, buyouts, and recapitalizations, which subjects us to the risks associated with change in control transactions. Change in control transactions often present a number of uncertainties. Companies undergoing change in control transactions often face challenges retaining key employees and maintaining relationships with customers and suppliers. While we hope to avoid many of these difficulties by participating in transactions where the management team is retained and by conducting thorough due diligence in advance of our decision to invest, if our portfolio companies experience one or more of these problems, we may not realize the value that we expect in connection with our investments, which would likely harm our operating results, financial condition, and cash flows.
Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies and/or we could be subject to lender liability claims.
We invest primarily in debt securities issued by our portfolio companies. In some cases portfolio companies will be permitted to have other debt that ranks equally with, or senior to, the debt securities in which we invest. By their terms, such debt instruments may provide that the holders thereof are entitled to receive payment of interest and principal on or before the dates on which we are entitled to receive payments in respect of the debt securities in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization, or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution in respect of our investment. Furthermore, in the case of debt ranking equally with debt securities in which we invest, we would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization, or bankruptcy of a portfolio company.
In addition, even though we have structured some of our investments as senior loans, if one of our portfolio companies were to go bankrupt, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might re-characterize our debt investments and subordinate all, or a portion, of our claims to that of other creditors. After repaying such senior creditors, such portfolio company may not have any remaining assets to use to repay its obligation to us. We may also be subject to lender liability claims for actions taken by us with respect to a borrower’s business, in instances in which we exercised control over the borrower or as a result of actions taken in rendering significant managerial assistance.
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Prepayments of our investments by our portfolio companies could adversely impact our results of operations and reduce our return on equity.
In addition to risks associated with delays in investing our capital, we are also subject to the risk that investments we make in our portfolio companies may be repaid prior to maturity. For the year ended September 30, 2022, we received unscheduled repayments of investments totaling $151.2 million. We will generally first use any proceeds from prepayments to repay any borrowings outstanding on our Credit Facility. In the event that funds remain after repayment of our outstanding borrowings, then we will generally reinvest these proceeds in government securities, pending their future investment in new debt and/or equity securities. These government securities will typically have substantially lower yields than the debt securities being prepaid and we could experience significant delays in reinvesting these amounts. In addition, once the proceeds have been reinvested in new portfolio companies, the yields on such new investments may also be lower than the yields on the debt securities being repaid. As a result, our results of operations could be materially adversely affected if one or more of our portfolio companies elect to prepay amounts owed to us. Additionally, prepayments could negatively impact our return on equity, which could result in a decline in the market price of our common stock.
Our portfolio is concentrated in a limited number of companies and industries, which subjects us to an increased risk of significant loss if any one of these companies does not repay us or if the industries experience downturns.
As of September 30, 2022, we had investments in 52 portfolio companies, of which our five largest investments comprised approximately $174.5 million, or 26.9% of our total investment portfolio, at fair value. A consequence of a concentration in a limited number of investments is that the aggregate returns we realize may be substantially adversely affected by the unfavorable performance of a small number of such investments or a substantial write-down of any one investment. Beyond our regulatory and income tax diversification requirements, we do not have fixed guidelines for industry concentration and our investments could potentially be concentrated in relatively few industries. In addition, while we do not intend to invest 25.0% or more of our total assets in a particular industry or group of industries at the time of investment, it is possible that as the values of our portfolio companies change, one industry or a group of industries may comprise in excess of 25.0% of the value of our total assets. As of September 30, 2022, our largest industry concentrations of our total investments at fair value were in diversified/conglomerate service companies, representing 22.9%; healthcare, education, and childcare companies, representing 21.0%; and diversified/conglomerate manufacturing companies, representing 17.6%. Therefore, we are susceptible to the economic circumstances in these industries, and a downturn in one or more of these industries could have a material adverse effect on our results of operations and financial condition.
Volatility of oil and natural gas prices could impair certain of our portfolio companies’ operations and ability to satisfy obligations to their respective lenders and investors, including us, which could negatively impact our financial condition.
Our portfolio includes a concentration of companies related to the oil and gas industry with the fair value of these investments representing approximately $25.4 million, or 3.9% of our total portfolio at fair value as of September 30, 2022. These businesses provide services to oil and gas companies and are indirectly impacted by the prices of, and demand for, oil and natural gas, which have from time to time experienced volatility, including rapid and significant changes in prices, and such volatility could continue or increase in the future. A substantial decline in oil and natural gas demand or prices may adversely affect the business, financial condition, cash flows, liquidity or results of operations of these portfolio companies and might impair their ability to meet capital expenditure obligations and financial commitments. Any decline in oil prices, especially for a prolonged period, could therefore have a material adverse effect on our business, financial condition and results of operations.
The disposition of our investments may result in contingent liabilities.
Currently, all of our investments involve private securities. In connection with the disposition of an investment in private securities, we may be required to make representations about the business and financial affairs of the underlying portfolio company typical of those made in connection with the sale of a business. We may also be required to indemnify the purchasers of such investment to the extent that any such representations turn out to be inaccurate or with respect to certain potential liabilities. These arrangements may result in contingent liabilities that ultimately yield funding obligations that must be satisfied through our return of certain distributions previously made to us.
Portfolio company litigation or other litigation or claims against us or our personnel could result in additional costs and the diversion of management time and resources.
In the course of investing in and providing significant managerial assistance to certain of our portfolio companies, certain persons employed by the Adviser may serve as directors on the boards of such companies. To the extent that litigation
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arises out of our investments in these companies or otherwise, even if without merit, we or such employees may be named as defendants in such litigation, which could result in additional costs, including defense costs, and the diversion of management time and resources. We may be unable to accurately estimate our exposure to litigation risk if we record balance sheet reserves for probable loss contingencies. As a result, any reserves we establish to cover any settlements or judgments may not be sufficient to cover our actual financial exposure, which may have a material impact on our results of operations, financial condition, or cash flows.
While we believe we would have valid defenses to potential claims brought due to our investment in any portfolio company, and will defend any such claims vigorously, we may nevertheless expend significant amounts of money in defense costs and expenses. Further, if we enter into settlements or suffer an adverse outcome in any litigation, we could be required to pay significant amounts. In addition, if any of our portfolio companies become subject to direct or indirect claims or other obligations, such as defense costs or damages in litigation or settlement, our investment in such companies could diminish in value and we could suffer indirect losses. Further, these matters could cause us to expend significant management time and effort in connection with assessment and defense of any claims.
Any unrealized depreciation we experience on our investment portfolio may be an indication of future realized losses, which could reduce our income available for distribution.
As a BDC we are required to carry our investments at market value or, if no market value is ascertainable, at fair value. We will record decreases in the market values or fair values of our investments as unrealized depreciation. Since our inception, we have, at times, incurred a cumulative net unrealized depreciation of our portfolio. Any unrealized depreciation in our investment portfolio could result in realized losses in the future and ultimately in reductions of our income available for distribution to stockholders in future periods.
Risks Related to Our External Financing
In addition to regulatory limitations on our ability to raise capital, our Credit Facility contains various covenants which, if not complied with, could accelerate our repayment obligations under the facility, thereby materially and adversely affecting our liquidity, financial condition, results of operations and ability to pay distributions.
We will have a continuing need for capital to finance our investments. As of September 30, 2022, we had $141.8 million in borrowings, at cost, outstanding under our Credit Facility, which provides for maximum borrowings of $225.0 million, with a revolving period end date of October 31, 2023 (the “Revolving Period End Date”). Our Credit Facility permits us to fund additional loans and investments as long as we are within the conditions set forth in the credit agreement. Our Credit Facility contains covenants that require our wholly-owned subsidiary, Business Loan, to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions) and restrict material changes to our credit and collection policies without lenders’ consent. The Credit Facility also limits distributions to our stockholders on a fiscal year basis to the sum of our net investment income, net capital gains and amounts deemed to have been paid during the prior year in accordance with Section 855(a) of the Code. We are also subject to certain limitations on the type of loan investments we can make, including restrictions on geographic concentrations, sector concentrations, loan size, interest rate type, payment frequency and status, average life and lien property. Our Credit Facility further requires us to comply with other financial and operational covenants, which obligate us to, among other things, maintain certain financial ratios, including asset and interest coverage, and a minimum number of 25 obligors in the borrowing base. Additionally, we are required to maintain (i) a minimum net worth (defined in our Credit Facility to include any outstanding mandatorily redeemable preferred stock) of $325.0 million plus 50.0% of all equity and subordinated debt raised after May 13, 2021 less 50% of any equity and subordinated debt retired or redeemed after May 13, 2021, which equates to $336.7 million as of September 30, 2022, (ii) asset coverage with respect to “senior securities representing indebtedness” of at least 150% (or such percentage as may be set forth in Section 18 of the 1940 Act, as modified by Section 61 of the 1940 Act), and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code. Continued compliance with the covenants in our Credit Facility depends on many factors, some of which are beyond our control.
Given the continued uncertainty in the capital markets, the cumulative unrealized depreciation in our portfolio may increase in future periods and threaten our ability to comply with the minimum net worth covenant and other covenants under our Credit Facility. Our failure to satisfy these covenants could result in foreclosure by our lenders, which would accelerate our repayment obligations under the facility and thereby have a material adverse effect on our business, liquidity, financial condition, results of operations and ability to pay distributions to our stockholders.
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Any inability to renew, extend or replace our Credit Facility on terms favorable to us, or at all, could adversely impact our liquidity and ability to fund new investments or maintain distributions to our stockholders.
If our Credit Facility is not renewed or extended by the Revolving Period End Date, all principal and interest will be due and payable on or before October 31, 2025. Subject to certain terms and conditions, our Credit Facility may be expanded to a total of $250.0 million through the addition of other lenders to the facility. However, if additional lenders are unwilling to join the facility on its terms, we will be unable to expand the facility and thus will continue to have limited availability to finance new investments under our Credit Facility. There can be no guarantee that we will be able to renew, extend or replace our Credit Facility upon its Revolving Period End Date on terms that are favorable to us, if at all. Our ability to expand our Credit Facility, and to obtain replacement financing at or before the Revolving Period End Date, will be constrained by then-current economic conditions affecting the credit markets. In the event that we are not able to expand our Credit Facility, or to renew, extend or refinance our Credit Facility by the Revolving Period End Date, this could have a material adverse effect on our liquidity and ability to fund new investments, our ability to make distributions to our stockholders and our ability to qualify as a RIC under the Code.
If we are unable to secure replacement financing, we may be forced to sell certain assets on disadvantageous terms, which may result in realized losses, and such realized losses could materially exceed the amount of any unrealized depreciation on these assets as of our most recent balance sheet date, which would have a material adverse effect on our results of operations. In addition to selling assets, or as an alternative, we may issue equity in order to repay amounts outstanding under our Credit Facility. Depending on the trading prices of our common stock, such an equity offering could have a substantial dilutive impact on our existing stockholders’ interest in our earnings, assets and voting interest in us. If we are not able to renew, extend or refinance our Credit Facility prior to its maturity, it could result in significantly higher interest rates and related charges and may impose significant restrictions on the use of borrowed funds to fund investments or maintain distributions to stockholders.
Our business plan is dependent upon external financing, which is constrained by the limitations of the 1940 Act.
We sold 430,425 and 2,737,521 common shares under our at-the-market program during the years ended September 30, 2022 and 2021, respectively. Additionally, we completed a private placement of $50.0 million aggregate principal amount of our 3.75% notes due 2027 (the “2027 Notes”) in November 2021, an offering of $100.0 million aggregate principal amount of our 5.125% notes due 2026 (the “2026 Notes”) in December 2020, and an offering of an additional $50.0 million aggregate principal amount of the 2026 Notes in March 2021. However, there can be no assurance that we will be able to raise additional capital through issuing equity or debt in the near future. Our business requires a substantial amount of cash to operate and grow. We may acquire such additional capital from the following sources:
•Senior Securities. We may issue “senior securities representing indebtedness” (such as borrowings under our Credit Facility and our notes payable) and “senior securities that are stock” (such as preferred stock) up to the maximum amount permitted by the 1940 Act. The 1940 Act currently permits us, as a BDC, to issue such senior securities in amounts such that our asset coverage, as defined in Section 18(h) of the 1940 Act, is at least 150% on such senior security immediately after each issuance of such senior security. As a result of issuing senior securities (in whatever form), we will be exposed to the risks associated with leverage. Although borrowing money for investments increases the potential for gain, it also increases the risk of a loss. A decrease in the value of our investments will have a greater impact on the value of our common stock to the extent that we have borrowed money to make investments. There is a possibility that the costs of borrowing could exceed the income we receive on the investments we make with such borrowed funds. In addition, our ability to pay distributions, issue senior securities or repurchase shares of our common stock would be restricted if the asset coverage on each of our senior securities is not at least 150%. If the aggregate value of our assets declines, we might be unable to satisfy that 150% requirement. To satisfy the 150% asset coverage requirement in the event that we are seeking to pay a distribution, we might either have to (i) liquidate a portion of our loan portfolio to repay a portion of our indebtedness or (ii) issue common stock. This may occur at a time when a sale of a portfolio asset may be disadvantageous, or when we have limited access to capital markets on agreeable terms. In addition, any amounts that we use to service our indebtedness or for offering expenses will not be available for distributions to stockholders. Furthermore, if we have to issue common stock at below NAV per common share, any non-participating stockholders will be subject to dilution, as described below. Pursuant to Section 61(a)(3) of the 1940 Act, we are permitted to issue multiple classes of “senior securities representing indebtedness.” However, pursuant to Section 18(c) of the 1940 Act, we are permitted to issue only one class of “senior securities that are stock.”
•Common and Convertible Preferred Stock. Because we are constrained in our ability to issue debt or senior securities for the reasons given above, we are dependent on the issuance of equity as a financing source. If we
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raise additional funds by issuing more common stock, the percentage ownership of our stockholders at the time of the issuance would decrease and our existing common stockholder may experience dilution. In addition, under the 1940 Act, we will generally not be able to issue additional shares of our common stock at a price below NAV per common share to purchasers, other than to our existing stockholders through a rights offering, without first obtaining the approval of our stockholders and our independent directors. If we were to sell shares of our common stock below our then-current NAV per common share, such sales would result in an immediate dilution to the NAV per common share. This dilution would occur as a result of the sale of shares at a price below the then-current NAV per share of our common stock and a proportionately greater decrease in a stockholder’s interest in our earnings and assets and voting percentage than the increase in our assets resulting from such issuance. For example, if we issue and sell an additional 10.0% of our common stock at a 5.0% discount to NAV, a stockholder who does not participate in that offering for its proportionate interest will suffer NAV dilution of up to 0.5% or $5 per $1,000 of NAV. This imposes constraints on our ability to raise capital when our common stock is trading below NAV per common share. As noted above, the 1940 Act prohibits the issuance of multiple classes of “senior securities that are stock.”
We financed certain of our investments with borrowed money and capital from the issuance of senior securities, which will magnify the potential for gain or loss on amounts invested and may increase the risk of investing in us.
The use of leverage, including through the issuance of senior securities that are debt or stock, magnifies the potential for gain or loss on amounts invested, and, if we incur additional leverage, this potential will be further magnified. As of September 30, 2022, we incurred leverage through the Credit Facility, the 2026 Notes, and the 2027 Notes. From time to time, we intend to incur additional leverage to the extent permitted under the 1940 Act. The use of leverage is generally considered a speculative investment technique and increases the risks associated with investing in our securities. In the future, we may borrow from, and issue senior securities, to banks and other lenders. Holders of these senior securities will have fixed dollar claims on our assets that are superior to the claims of our common stockholders, and we would expect such holders to seek recovery against our assets in the event of a default.

| Assumed Return on Our Portfolio (Net of Expenses)
| (10.0) | % | (5.0) | % | 0.0 | % | 5.0 | % | 10.0 | %
Corresponding return to common stockholder(A) | (26.69) | % | (16.22) | % | (5.74) | % | 4.73 | % | 15.21 | %

_____________
(A)The hypothetical return to common stockholders is calculated by multiplying our total assets as of September 30, 2022 by the assumed rates of return and subtracting all interest on our debt to be paid during the 12 months following September 30, 2022, and then dividing the resulting difference by our total net assets attributable to common stock as of September 30, 2022. Based on $661.0 million in total assets, $141.8 million drawn on our Credit Facility (at cost),$150.0 million in our 2026 Notes payable (at cost), $50.0 million in our 2027 Notes payable (at cost), and $315.5 million in net assets, each as of September 30, 2022.
Based on an aggregate outstanding indebtedness of $341.8 million at cost as of September 30, 2022 and the effective annual cash interest rate of 5.3% as of that date, our investment portfolio at fair value would have had to produce an annual return of at least 2.8% to cover annual interest payments on the outstanding debt.
Risks Related to Our Regulation and Structure
We will be subject to corporate-level tax if we are unable to satisfy Code requirements for RIC qualification.
To maintain our qualification as a RIC, we must meet income source, asset diversification, and annual distribution requirements. The annual distribution requirement is satisfied if we distribute at least 90.0% of our Investment Company Taxable Income to our stockholders on an annual basis. Because we use leverage, we are subject to certain asset coverage ratio requirements under the 1940 Act and could, under certain circumstances, be restricted from making distributions necessary to qualify as a RIC. Warrants we receive with respect to debt investments generally create OID, which we must recognize as ordinary income over the term of the debt investment. Similarly, PIK interest which is accrued generally over the term of the debt investment but not paid in cash, is recognized as ordinary income. Both OID and PIK interest will increase the amounts we are required to distribute to maintain our RIC status. Because such OIDs and PIK interest will not produce distributable cash for us at the same time as we are required to make distributions, we will need to use cash from other sources to satisfy such distribution requirements. For the year ended September 30, 2022, we recognized $0.5 million of OID income and the unamortized balance of OID investments as of September 30, 2022 totaled $0.9 million. As of
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September 30, 2022, we had six investments which had a PIK interest component and we recorded PIK interest income of $4.2 million during the year ended September 30, 2022. We collected $2.4 million in PIK interest in cash for the year ended September 30, 2022. Additionally, we must meet asset diversification and income source requirements at the end of each calendar quarter. If we fail to meet these tests, we may need to quickly dispose of certain investments to prevent the loss of RIC status. Since most of our investments will be illiquid, such dispositions, if even possible, may not be made at prices advantageous to us and may result in substantial losses. If we fail to qualify as a RIC as of a calendar quarter or annually for any reason and become fully subject to U.S. federal corporate income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution, and the actual amount distributed. Such a failure would have a material adverse effect on us and our common stock.
Some of our debt investments may include success fees that would generate payments to us if the business is ultimately sold. Because the satisfaction of these success fees, and the ultimate payment of these fees, is uncertain, we generally only recognize them as income when the payment is received. Success fee amounts are characterized as ordinary income for tax purposes and, as a result, we are required to distribute such amounts to our stockholders in order to maintain RIC status.
If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a BDC or be precluded from investing according to our current business strategy.
As a BDC, we may not acquire any assets other than qualifying assets unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets, exclusive of Operating Assets, are qualifying assets, as defined in Section 55(a) of the 1940 Act.
We believe that most of the investments that we may acquire in the future will constitute qualifying assets. However, we may be precluded from investing in what we believe to be attractive investments if such investments are not qualifying assets for purposes of the 1940 Act. If we do not invest a sufficient portion of our assets in qualifying assets, we could violate the 1940 Act provisions applicable to BDCs. As a result of such violation, specific rules under the 1940 Act could prevent us, for example, from making follow-on investments in existing portfolio companies (which could result in the dilution of our position) or could require us to dispose of investments at disadvantageous times in order to come into compliance with the 1940 Act. If we need to dispose of such investments quickly, it could be difficult to dispose of such investments on favorable terms. We may not be able to find a buyer for such investments and, even if we do find a buyer, we may have to sell the investments at a substantial loss. Any such outcomes would have a material adverse effect on our business, financial condition, results of operations and cash flows.
If we do not maintain our status as a BDC, we would be subject to regulation as a registered closed-end investment company under the 1940 Act. As a registered closed-end investment company, we would be subject to substantially more regulatory restrictions under the 1940 Act, which would significantly decrease our operating flexibility.
We are subject to restrictions that may discourage a change of control. Certain provisions contained in our articles of incorporation and Maryland law may prohibit or restrict a change of control and adversely impact the price of our common stock.
Our Board of Directors is divided into three classes, with the term of the directors in each class expiring every third year. At each annual meeting of stockholders, the successors to the class of directors whose term expires at such meeting will be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. After election, a director may only be removed by our stockholders for cause. Election of directors for staggered terms with limited rights to remove directors makes it more difficult for a hostile bidder to acquire control of us. The existence of this provision may negatively impact the price of our securities and may discourage third-party bids to acquire our securities. This provision may reduce any premiums paid to stockholders in a change in control transaction.
Certain provisions of Maryland law applicable to us prohibit business combinations with:
•any person who beneficially owns 10.0% or more of the voting power of our common stock (an “interested stockholder”);
•an affiliate of ours who at any time within the two-year period prior to the date in question was an interested stockholder; or
•an affiliate of an interested stockholder.
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These prohibitions last for five years after the most recent date on which the interested stockholder became an interested stockholder. Thereafter, any business combination with the interested stockholder must be recommended by our Board of Directors and approved by the affirmative vote of at least 80.0% of the votes entitled to be cast by holders of our outstanding shares of common stock and two-thirds of the votes entitled to be cast by holders of our common stock other than shares held by the interested stockholder. These requirements could have the effect of inhibiting a change in control even if a change in control were in our stockholders’ interest. These provisions of Maryland law do not apply, however, to business combinations that are approved or exempted by our Board of Directors prior to the time that someone becomes an interested stockholder.
Our articles of incorporation permit our Board of Directors to issue up to 50.0 million shares of capital stock. In addition, our Board of Directors, without any action by our stockholders, may amend our articles of incorporation from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series of stock that we have authority to issue. Our Board of Directors may classify or reclassify any unissued common stock or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms or conditions of redemption of any such stock. Thus, our Board of Directors could authorize the issuance of preferred stock with terms and conditions that could have a priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our common stock.
We may not be permitted to declare a dividend or make any distribution to stockholders or repurchase shares until such time as we satisfy the asset coverage tests under the provisions of the 1940 Act that apply to BDCs.
Regulations governing our operation as a BDC and RIC will affect our ability to raise, and the way in which we raise, additional capital or borrow for investment purposes, which may have a negative effect on our growth. As a result of the annual distribution requirement to qualify as a RIC, we may need to periodically access the capital markets to raise cash to fund new investments. We may issue “senior securities representing indebtedness,” including borrowing money from banks or other financial institutions or “senior securities that are stock,” such as preferred stock, only in amounts such that our asset coverage on each senior security, as defined in the 1940 Act, equals at least 150% after each such incurrence or issuance. Further, we may not be permitted to declare a dividend or make any distribution to our outstanding stockholders or repurchase shares until such time as we satisfy these tests. Our ability to issue different types of securities is also limited. Compliance with these requirements may unfavorably limit our investment opportunities and reduce our ability in comparison to other companies to profit from favorable spreads between the rates at which we can borrow and the rates at which we can lend. As a BDC, therefore, we intend to issue equity at a rate more frequent than our privately owned competitors, which may lead to greater stockholder dilution. We have incurred leverage to generate capital to make additional investments. If the value of our assets declines, we may be unable to satisfy the asset coverage test under the 1940 Act, which could prohibit us from paying distributions and could prevent us from qualifying as a RIC. If we cannot satisfy the asset coverage test, we may be required to sell a portion of our investments and, depending on the nature of our debt financing, repay a portion of our indebtedness at a time when such sales and repayments may be disadvantageous.
Risks Related to Our External Management
We are dependent upon our key management personnel and the key management personnel of the Adviser, particularly David Gladstone, Terry Lee Brubaker and Robert L. Marcotte, and on the continued operations of the Adviser, for our future success.
We have no employees. Our chief executive officer, chief operating officer, chief financial officer and treasurer, and the employees of the Adviser, do not spend all of their time managing our activities and our investment portfolio. We are particularly dependent upon David Gladstone, Terry Lee Brubaker, and Robert L. Marcotte for their experience, skills and networks. Our executive officers and the employees of the Adviser allocate some, and in some cases a material portion, of their time to businesses and activities that are not related to our business. We have no separate facilities and are completely reliant on the Adviser, which has significant discretion as to the implementation and execution of our business strategies and risk management practices. We are subject to the risk of discontinuation of the Adviser’s operations or termination of the Advisory Agreement and the risk that, upon such event, no suitable replacement will be found. We believe that our success depends to a significant extent upon the Adviser and that discontinuation of its operations or the loss of its key management personnel could have a material adverse effect on our ability to achieve our investment objectives.
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Our success depends on the Adviser’s ability to attract and retain qualified personnel in a competitive environment.
The Adviser experiences competition in attracting and retaining qualified personnel, particularly investment professionals and senior executives, and we may be unable to maintain or grow our business if we cannot attract and retain such personnel. The Adviser’s ability to attract and retain personnel with the requisite credentials, experience and skills depends on several factors including its ability to offer competitive wages, benefits and professional growth opportunities. The Adviser competes with investment funds (such as private equity funds and mezzanine funds) and traditional financial services companies for qualified personnel, many of which have greater resources than us. Searches for qualified personnel may divert management’s time from the operation of our business. Strain on the existing personnel resources of the Adviser, in the event that it is unable to attract experienced investment professionals and senior executives, could have a material adverse effect on our business.
The Adviser can resign on 60 days’ notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations.
The Adviser has the right to resign under the Advisory Agreement at any time upon not less than 60 days’ written notice, whether we have found a replacement or not. If the Adviser resigns, we may not be able to find a new investment adviser or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption, our financial condition, business and results of operations as well as our ability to pay distributions are likely to be adversely affected and the market price of our common stock may decline. In addition, the coordination of our internal management and investment activities is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by the Adviser and its affiliates. Even if we are able to retain comparable management, whether internal or external, the integration of such management and their lack of familiarity with our investment objective may result in additional costs and time delays that may adversely affect our business, financial condition, results of operations and cash flows.
The Adviser's liability is limited under the Advisory Agreement, and we are required to indemnify our investment adviser against certain liabilities, which may lead the Adviser to act in a riskier manner on our behalf than it would when acting for its own account.
The Adviser has not assumed any responsibility to us other than to render the services described in the Advisory Agreement, and it will not be responsible for any action of our Board of Directors in declining to follow the Adviser’s advice or recommendations. Pursuant to the Advisory Agreement, the Adviser and its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with the Adviser will not be liable to us for their acts under the Advisory Agreement, absent willful misfeasance, bad faith or gross negligence in the performance of their duties or by reason of the reckless disregard of their duties and obligations under the Advisory Agreement. We have agreed to indemnify, defend and protect the Adviser and its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with the Adviser with respect to all damages, liabilities, costs and expenses arising out of or otherwise based upon the performance of any of the Adviser’s duties or obligations under the Advisory Agreement or otherwise as an investment adviser for us, and not arising out of willful misfeasance, bad faith or gross negligence in the performance of their duties or by reason of the reckless disregard of their duties and obligations under the Advisory Agreement. These protections may lead the Adviser to act in a riskier manner when acting on our behalf than it would when acting for its own account.
Our incentive fee may induce the Adviser to make certain investments, including speculative investments.
The management compensation structure that has been implemented under the Advisory Agreement may cause the Adviser to invest in high-risk investments or take other risks. In addition to its management fee, the Adviser is entitled under the Advisory Agreement to receive incentive compensation based in part upon our achievement of specified levels of income. In evaluating investments and other management strategies, the opportunity to earn incentive compensation based on net income may lead the Adviser to place undue emphasis on the maximization of net income at the expense of other criteria, such as preservation of capital, maintaining sufficient liquidity, or management of credit risk or market risk, in order to achieve higher incentive compensation. Investments with higher yield potential are generally riskier or more speculative. This could result in increased risk to the value of our investment portfolio.
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We may be obligated to pay the Adviser incentive compensation even if we incur a loss.
The Advisory Agreement entitles the Adviser to incentive compensation for each fiscal quarter in an amount equal to a percentage of the excess of our investment income for that quarter (before deducting incentive compensation, net operating losses and certain other items) above a threshold return for that quarter. When calculating our incentive compensation, our pre-incentive fee net investment income excludes realized and unrealized capital losses that we may incur in the fiscal quarter, even if such capital losses result in a net loss on our statement of operations for that quarter. Thus, we may be required to pay the Adviser incentive compensation for a fiscal quarter even if there is a decline in the value of our portfolio or we incur a net loss for that quarter.
We may be required to pay the Adviser incentive compensation on income accrued, but not yet received in cash.
That part of the incentive fee payable by us that relates to our net investment income is computed and paid on income that may include interest that has been accrued but not yet received in cash, such as debt instruments with PIK interest or OID. If a portfolio company defaults on a loan, it is possible that such accrued interest previously used in the calculation of the incentive fee will become uncollectible. Consequently, we may make incentive fee payments on income accruals that we may not collect in the future and with respect to which we do not have a clawback right against the Adviser. Our OID investments totaled $53.8 million as of September 30, 2022, at cost, which are primarily syndicated loan and certain participation investments. For the year ended September 30, 2022, we recognized $0.5 million of OID income and the unamortized balance of OID investments as of September 30, 2022 totaled $0.9 million. As of September 30, 2022, we had six investments which had a PIK interest component and we recorded PIK interest income of $4.2 million during the year ended September 30, 2022. We collected $2.4 million in PIK interest in cash for the year ended September 30, 2022.
The Adviser’s failure to identify and invest in securities that meet our investment criteria or perform its responsibilities under the Advisory Agreement would likely adversely affect our ability for future growth.
Our ability to achieve our investment objectives will depend on our ability to grow, which in turn will depend on the Adviser’s ability to identify and invest in securities that meet our investment criteria. Accomplishing this result on a cost-effective basis will be largely a function of the Adviser’s structuring of the investment process, its ability to provide competent and efficient services to us, and our access to financing on acceptable terms. The Adviser’s senior management team has substantial responsibilities under the Advisory Agreement. In order to grow, the Adviser will need to hire, train, supervise, and manage new employees successfully. Any failure to manage our future growth effectively would likely have a material adverse effect on our business, financial condition, and results of operations.
There are significant potential conflicts of interest, including with the Adviser, which could impact our investment returns.
Our executive officers and directors, and the officers and directors of the Adviser, serve or may serve as officers, directors, or principals of entities that operate in the same or a related line of business as we do or of investment funds managed by our affiliates. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in our or our stockholders’ best interests. For example, Mr. Gladstone, our chairman and chief executive officer, is the chairman of the board and chief executive officer of each of the Gladstone Companies. In addition, Mr. Brubaker, our vice chairman and chief operating officer, is the vice chairman and chief operating officer of each of the Gladstone Companies. Mr. Marcotte is an executive managing director of the Adviser. Moreover, the Adviser may establish or sponsor other investment vehicles which from time to time may have potentially overlapping investment objectives with ours and accordingly may invest in, whether principally or secondarily, asset classes we target. While the Adviser generally has broad authority to make investments on behalf of the investment vehicles that it advises, the Adviser has adopted investment allocation procedures to address these potential conflicts and intends to direct investment opportunities to us or the Affiliated Public Fund with the investment strategy that most closely fits the investment opportunity. Nevertheless, the management of the Adviser may face conflicts in the allocation of investment opportunities to other entities it manages. As a result, it is possible that we may not be given the opportunity to participate in certain investments made by other funds managed by the Adviser. In certain circumstances, we may make investments in a portfolio company in which one of our affiliates has or will have an investment, subject to satisfaction of any regulatory restrictions and, where required, to the prior approval of our Board of Directors. As of September 30, 2022, our Board of Directors has approved the following types of co-investment transactions:
•Our affiliate, Gladstone Commercial, may, under certain circumstances, lease property to portfolio companies that we do not control. We may pursue such transactions only if (i) the portfolio company is not controlled by us or any of our affiliates, (ii) the portfolio company satisfies the tenant underwriting criteria of Gladstone Commercial, and (iii) the transaction is approved by a majority of our independent directors and a majority of the independent
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directors of Gladstone Commercial. We expect that any such negotiations between Gladstone Commercial and our portfolio companies would result in lease terms consistent with the terms that the portfolio companies would be likely to receive were they not portfolio companies of ours.
•We may invest simultaneously with our affiliate Gladstone Investment in senior loans in the broadly syndicated market whereby neither we nor any affiliate has the ability to dictate the terms of the loans.
•Pursuant to the Co-Investment Order, under certain circumstances, we may co-invest with Gladstone Investment and any future BDC or closed-end management investment company that is advised by the Adviser (or sub-advised by the Adviser if it controls the fund), or any combination of the foregoing, subject to the conditions included therein.
Certain of our officers, who are also officers of the Adviser, may from time to time serve as directors of certain of our portfolio companies. If an officer serves in such capacity with one of our portfolio companies, such officer will owe fiduciary duties to stockholders of the portfolio company, which duties may from time to time conflict with the interests of our stockholders.
In the course of our investing activities, we will pay base management and incentive fees to the Adviser and will reimburse the Administrator for certain expenses it incurs. As a result, investors in our common stock will invest on a “gross” basis and receive distributions on a “net” basis after expenses, resulting in, among other things, a lower rate of return than one might achieve through our investors themselves making direct investments. As a result of this arrangement, there may be times when the management team of the Adviser has interests that differ from those of our stockholders, giving rise to a conflict. In addition, as a BDC, we make available significant managerial assistance to our portfolio companies and provide other services to such portfolio companies. While, neither we nor the Adviser currently receives fees in connection with managerial assistance, the Adviser and Gladstone Securities have, at various times, provided other services to certain of our portfolio companies and received fees for these other services.
The Adviser is not obligated to provide a credit of the base management fee or incentive fee, which could negatively impact our earnings and our ability to maintain our current level of distributions to our stockholders.
The Advisory Agreement provides for a base management fee based on our total assets and an incentive fee which consists of two parts: an income-based incentive fee and a capital gains-based incentive fee. Our Board of Directors has historically accepted and may accept in the future quarterly or annual non-contractual, unconditional and irrevocable credits to reduce the annual base management fee. Further, our Board of Directors has accepted on a quarterly basis non-contractual, unconditional and irrevocable credits from the Adviser to reduce the income-based incentive fee to the extent net investment income did not cover 100.0% of distributions to common stockholders. Any waived fees may not be recouped by the Adviser in the future. However, the Adviser is not required to issue these or other credits of fees under the Advisory Agreement, and to the extent our investment portfolio grows in the future, we expect these management and incentive fees will increase. If the Adviser does not issue these credits in future quarters, it could negatively impact our earnings and may compromise our ability to maintain our current level of distributions to our stockholders, which could have a material adverse impact on our stock price.
Our business model is dependent upon developing and sustaining strong referral relationships with investment bankers, business brokers and other intermediaries and any change in our referral relationships may impact our business plan.
We are dependent upon informal relationships with investment bankers, business brokers and traditional lending institutions to provide us with deal flow. If we fail to maintain our relationship with such funds or institutions, or if we fail to establish strong referral relationships with other funds, we will not be able to grow our portfolio of investments and fully execute our business plan.
Our base management fee may induce the Adviser to incur leverage.
The fact that our base management fee is payable based upon our total assets, which would include any investments made with proceeds of borrowings, may encourage the Adviser to use leverage to make additional investments. Under certain circumstances, the use of increased leverage may increase the likelihood of default, which would disfavor holders of our securities. Given the subjective nature of the investment decisions made by the Adviser on our behalf, we will not be able to monitor this potential conflict of interest.
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Risks Related to an Investment in Our Securities
There is a risk that you may not receive distributions or that distributions may not grow over time.
We intend to distribute at least 90.0% of our Investment Company Taxable Income to our stockholders by paying monthly distributions. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. Furthermore, we expect to retain some or all net realized long-term capital gains by first offsetting them with realized capital losses, and secondly through a deemed distribution to supplement our equity capital and support the growth of our portfolio, although our Board of Directors may determine in certain cases to distribute these gains to our common stockholders. In addition, our Credit Facility restricts the amount of distributions we are permitted to make. We cannot assure you that we will achieve investment results or maintain a tax status that will allow or require any specified level of cash distributions.
Investing in our securities may involve an above average degree of risk.
The investments we make in accordance with our investment objectives may result in a higher amount of risk than alternative investment options and a higher risk of volatility or loss of principal. Our investments in portfolio companies may be highly speculative, and therefore, an investment in our securities may not be suitable for someone with lower risk tolerance.
Distributions to our stockholders have included and may in the future include a return of capital.
Quarterly, our Board of Directors declares monthly distributions based on then-current estimates of taxable income for each fiscal year, which may differ, and in the past have differed, from actual results. Because our distributions are based on estimates of taxable income that may differ from actual results, future distributions payable to our stockholders may also include a return of capital. Moreover, to the extent that we distribute amounts that exceed our current and accumulated earnings and profits, these distributions constitute a return of capital to the extent of the common stockholder’s adjusted tax basis in its shares of our common stock. A return of capital represents a return of a stockholder’s original investment in shares of our common stock and should not be confused with a distribution from earnings and profits. Although return of capital distributions may not be taxable, such distributions may increase an investor’s tax liability for capital gains upon the sale of shares of our common stock by reducing the investor’s tax basis in its shares of our common stock. Such returns of capital reduce our asset base and also adversely impact our ability to raise debt capital as a result of the leverage restrictions under the 1940 Act, which could have material adverse impact on our ability to make new investments.
Common shares of closed-end investment companies frequently trade at a discount to NAV.
Shares of closed-end investment companies frequently trade at a discount to NAV per common share. Since our inception, our common stock has at times traded above NAV, and at times below NAV per share. This characteristic of shares of closed-end investment companies is separate and distinct from the risk that our NAV per share will decline. As with any stock, the price of our common stock will fluctuate with market conditions and other factors. If shares are sold, the price received may be more or less than the original investment. Whether investors will realize gains or losses upon the sale of shares of our common stock will not depend directly upon our NAV, but will depend upon the market price of the shares at the time of sale. Since the market price of our common stock will be affected by such factors as the relative demand for and supply of the shares in the market, general market and economic conditions and other factors beyond our control, we cannot predict whether the shares will trade at, below, or above our NAV.
Under the 1940 Act, we are generally not able to issue additional shares of our common stock at a price below NAV per share to purchasers other than our existing stockholders through a rights offering without first obtaining the approval of our common stockholders and our independent directors. Additionally, when our common stock is trading below its NAV per share, our dividend yield may exceed the weighted average returns that we would expect to realize on new investments that would be made with the proceeds from the sale of such stock, making it unlikely that we would determine to issue additional shares in such circumstances. Thus, for as long as our common stock may trade below NAV, we will be subject to significant constraints on our ability to raise capital through the issuance of common stock. Additionally, an extended period of time in which we are unable to raise capital may restrict our ability to grow and adversely impact our ability to increase or maintain our distributions.
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Common stockholders may incur dilution if we sell shares of our common stock in one or more offerings at prices below the then-current NAV per share of our common stock.
Absent stockholder approval, we are not able to access the capital markets in an offering at prices below the then-current NAV per share due to restrictions applicable to BDCs under the 1940 Act. Should we decide to issue shares of common stock at a price below NAV per share in the future, we will seek the requisite approval of our stockholders at such time.
If we were to sell shares of our common stock below NAV per share, such sales would result in an immediate dilution to the NAV per share. This dilution would occur as a result of the sale of shares at a price below the then-current NAV per share of our common stock and a proportionately greater decrease in a stockholder’s interest in our earnings and assets and voting interest in us than the increase in our assets resulting from such issuance. The greater the difference between the sale price and the NAV per share at the time of the offering, the more significant the dilutive impact would be. Because the number of shares of common stock that could be so issued and the timing of any issuance is not currently known, the actual dilutive effect, if any, cannot be currently predicted. However, if, for example, we sold an additional 10.0% of our common stock at a 5.0% discount to NAV, a stockholder who did not participate in that offering for its proportionate interest would suffer NAV dilution of up to 0.5% or $5 per $1,000 of NAV.
Risks Related to the 2026 Notes and the 2027 Notes (collectively, the “Notes”)
The Notes are unsecured and therefore are effectively subordinated to any secured indebtedness we have incurred or may incur in the future and rank pari passu with, or equal to, all outstanding and future unsecured indebtedness issued by us and our general liabilities (total liabilities, less debt).
The Notes are not secured by any of our assets or any of the assets of our subsidiaries. As a result, the Notes are subordinated to any secured indebtedness we or our subsidiaries have currently incurred and may incur in the future (or any indebtedness that is initially unsecured to which we subsequently grant security) to the extent of the value of the assets securing such indebtedness. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness and the secured indebtedness of our subsidiaries may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the Notes. In addition, the Notes rank pari passu with, or equal to, all outstanding and future unsecured, unsubordinated indebtedness issued by us and our general liabilities (total liabilities, less debt).
The Notes are structurally subordinated to the indebtedness and other liabilities of our subsidiaries.
The Notes are obligations exclusively of the Company and not of any of our subsidiaries. None of our subsidiaries is a guarantor of the Notes and the Notes are not required to be guaranteed by any subsidiaries we may acquire or create in the future. Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors of our subsidiaries will have priority over our equity interests in such subsidiaries (and therefore the claims of our creditors, including holders of the Notes) with respect to the assets of such subsidiaries. Even if we are recognized as a creditor of one or more of our subsidiaries, our claims would still be effectively subordinated to any security interests in the assets of any such subsidiary and to any indebtedness or other liabilities of any such subsidiary senior to our claims. Consequently, the Notes are structurally subordinated to all indebtedness and other liabilities of any of our subsidiaries and any subsidiaries that we may in the future acquire or establish. As of September 30, 2022, there was $141.8 million outstanding under the Credit Facility. Borrowings under the Credit Facility are the obligation of Business Loan, and are structurally senior to the Notes. In addition, our subsidiaries may incur substantial additional indebtedness in the future, all of which would be structurally senior to the Notes.
The indentures under which the Notes were issued contain limited protection for holders of the Notes.
The indentures under which the Notes were issued offer limited protection to holders of the Notes. The terms of the indentures do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have an adverse impact on your investment in the Notes. In particular, the terms of the indenture and the Notes do not place any restrictions on our or our subsidiaries’ ability to:
•issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the Notes to the extent of the value of the assets securing such debt, (3) indebtedness that is guaranteed by one or more of our subsidiaries and which therefore is structurally senior to the Notes and (4) securities, indebtedness or obligations issued or incurred
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by our subsidiaries that would be senior to our equity interests in our subsidiaries and therefore rank structurally senior to the Notes with respect to the assets of our subsidiaries, in each case, other than an incurrence of indebtedness or other obligation that would cause a violation of Section 18(a)(1)(A) as modified by Section 61(a)(2) of the 1940 Act or any successor provisions, whether or not we continue to be subject to such provisions of the 1940 Act, which generally prohibit us from incurring additional debt or issuing additional debt or preferred securities, unless our asset coverage, as defined in the 1940 Act, equals at least 150% after such incurrence or issuance;
•pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities ranking junior in right of payment to the Notes, including preferred stock and any subordinated indebtedness, other than, dividends, purchases, redemptions or payments that would cause our asset coverage to fall below the threshold specified in Section 18(a)(1)(B) as modified by Section 61(a)(2) of the 1940 Act or any successor provisions, giving effect to any no-action relief granted by the SEC to another BDC and upon which we may reasonably rely (or to us if we determine to seek such similar SEC no-action or other relief) permitting the BDC to declare any cash dividend or distribution notwithstanding the prohibition contained in Section 18(a)(1)(B) as modified by Section 61(a)(2) of the 1940 Act in order to maintain the BDC’s status as a RIC under Subchapter M of the Code;
•sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets);
•enter into transactions with affiliates;
•create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions;
•make investments; or
•create restrictions on the payment of dividends or other amounts to us from our subsidiaries.
Furthermore, the terms of the indenture and the Notes do not protect holders of the Notes in the event that we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, if any, as they do not require that we or our subsidiaries adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow, or liquidity.
Our ability to recapitalize, incur additional debt (including additional debt that matures prior to the maturity of the Notes), and take a number of other actions that are not limited by the terms of the Notes may have important consequences for you as a holder of the Notes, including making it more difficult for us to satisfy our obligations with respect to the Notes or negatively affecting the trading value of the Notes.
Other debt we issue or incur in the future could contain more protections for its holders than the indenture and the Notes, including additional covenants and events of default. The issuance or incurrence of any such debt with incremental protections could affect the market for, trading levels and prices of the Notes.
We cannot assure you an active trading market for the Notes will develop or be maintained.
We have not listed, and do not intend to list in the future, the Notes on any securities exchange or for quotation of the Notes on any automated dealer quotation system. If the Notes are traded, they may trade at a discount to their purchase price depending on prevailing interest rates, the market for similar securities, our credit ratings, our financial condition, performance and prospects, general economic conditions or other relevant factors. Accordingly, we cannot assure you that a liquid trading market will develop and/or be maintained for the Notes, that a holder will be able to sell its Notes at a particular time or that the price received when a holder sells its Notes will be favorable. To the extent an active trading market does not develop or is not maintained, the liquidity and trading price for the Notes may be harmed. Accordingly, the holder of a Note may be required to bear the financial risk of an investment in the Notes for an indefinite period of time.
If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the Notes.
Any default under the agreements governing our indebtedness, including a default under the Credit Facility or other indebtedness to which we may be a party, that is not waived by the required lenders or holders, and the remedies sought by the holders of such indebtedness could make us unable to pay principal and interest on the Notes and substantially decrease the market value of such notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal and interest on our indebtedness, or if we otherwise fail to comply with
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the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under the Credit Facility or other debt we may incur in the future could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to refinance or restructure our debt, including the Notes, sell assets, reduce or delay capital investments, seek to raise additional capital or seek to obtain waivers from the required lenders under the Credit Facility or other debt that we may incur in the future to avoid being in default. If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under the Notes or our other debt. If we breach our covenants under the Credit Facility or other debt and seek a waiver, we may not be able to obtain a waiver from the required lenders or holders. If this occurs, we would be in default under the Credit Facility or other debt, the lenders or holders could exercise their rights as described above, and we could be forced into bankruptcy or liquidation. If we are unable to repay debt, lenders having secured obligations, including the lenders under the Credit Facility, could proceed against the collateral securing the debt. Because the Credit Facility has, and any future credit facilities will likely have, customary cross-default provisions, if the indebtedness under the Notes or the Credit Facility or under any future credit facility is accelerated, we may be unable to repay or finance the amounts due.
We may choose to redeem the Notes when prevailing interest rates are relatively low.
The Notes may be redeemed in whole or in part at any time or from time to time at the Company’s option prior to maturity at par plus a “make-whole” premium, if applicable. If prevailing rates are lower at the time of redemption, and we redeem the Notes, you likely would not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as the interest rate on the Notes being redeemed.
We may not be able to repurchase the Notes upon a Change of Control Repurchase Event.
We may not be able to repurchase the Notes upon a Change of Control Repurchase Event (as defined in the indenture governing the Notes) because we may not have sufficient funds. We would not be able to borrow under our Credit Facility to finance such a repurchase of the Notes, and we expect that any future credit facility would have similar limitations. Upon a Change of Control Repurchase Event, holders of the Notes may require us to repurchase for cash some or all of the Notes at a repurchase price equal to 100% of the aggregate principal amount of the Notes being repurchased, plus accrued and unpaid interest to, but not including, the repurchase date. The terms of our Credit Facility also provide that certain change of control events will constitute an event of default thereunder entitling the lenders to accelerate any indebtedness outstanding under our Credit Facility at that time and to terminate our Credit Facility. Our failure to purchase such tendered Notes upon the occurrence of such Change of Control Repurchase Event would cause an event of default under the indenture governing the Notes and a cross-default under the agreements governing the Credit Facility, which may result in the acceleration of such indebtedness requiring us to repay that indebtedness immediately. If the holders of the Notes exercise their right to require us to repurchase Notes upon a Change of Control Repurchase Event, the financial effect of this repurchase could cause a default under our current and future debt instruments, and we may not have sufficient funds to repay any such accelerated indebtedness.
A downgrade, suspension or withdrawal of the credit rating assigned by a rating agency to us or the Notes or change in the debt markets could cause the liquidity or market value of the Notes to decline significantly.
Any credit rating assigned to us or the Notes represents an assessment by the assigning rating agency of our ability to pay our debts when due. Consequently, real or anticipated changes in our credit ratings will generally affect the market value of the Notes. These credit ratings may not reflect the potential impact of risks relating to the structure or marketing of the Notes. Credit ratings are paid for by the issuer and are not a recommendation to buy, sell or hold any security, and may be revised or withdrawn at any time by the issuing organization in its sole discretion.
General Risk Factors
Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, or the operations of businesses in which we invest, a compromise or corruption of our confidential information and/or damage to our business relationships, all of which could negatively impact our business, financial condition and operating results.
Maintaining our network security is of critical importance because our systems store highly confidential financial models and portfolio company information. Although we have implemented, and will continue to implement, security measures,
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our technology platform may be vulnerable to intrusion, computer viruses, ransomware attacks, phishing schemes, or similar disruptive problems caused by cyber-attacks. A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources or those of our portfolio companies. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems or those of our portfolio companies for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, costs to repair system damage, increased cybersecurity protection and insurance costs, litigation and damage to our business relationships or those of our portfolio companies. As our and our portfolio companies’ reliance on technology has increased, so have the risks posed to our information systems, both internal and those provided to us by third-party service providers, and the information systems of our portfolio companies. We have implemented processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, but these measures, as well as our increased awareness of the nature and extent of a risk of a cyber incident, do not guarantee that a cyber incident will not occur and/or that our financial results, operations, stock price or confidential information will not be negatively impacted by such an incident. In addition, any such incident, disruption or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties, disrupt our operations, and damage our and our Adviser’s reputations, resulting in a loss of confidence in our services and our Adviser’s services, which could adversely affect our business.
We are dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to pay dividends.
Our business is dependent on our and third parties’ communications and information systems. Any failure or interruption of those systems, including as a result of the termination of an agreement with any third-party service providers, could cause delays or other problems in our activities. Our financial, accounting, data processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control and adversely affect our business. There could be:
•sudden electrical or telecommunications outages;
•natural disasters such as earthquakes, tornadoes and hurricanes;
•disease pandemics;
•events arising from local or larger scale political or social matters, including terrorist acts; and
•cyber-attacks.
These events, in turn, could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to pay dividends to our stockholders.
Changes in laws or regulations governing our operations, or changes in the interpretation thereof, and any failure by us to comply with laws or regulations governing our operations may adversely affect our business.
We and our portfolio companies are subject to regulation by laws at the local, state and federal levels. These laws and regulations, as well as their interpretation, may be changed from time to time. Accordingly, any change in these laws or regulations, or their interpretation, or any failure by us or our portfolio companies to comply with these laws or regulations may adversely affect our business. For additional information regarding the regulations to which we are subject, see “Business—Material U.S. Federal Income Tax Considerations” and “Business—Regulation as a BDC.”
We may experience fluctuations in our quarterly and annual operating results.
We may experience fluctuations in our quarterly and annual operating results due to a number of factors, including, among others, variations in our investment income, the interest rates payable on the debt securities we acquire, the default rates on such securities, variations in and the timing of the recognition of realized and unrealized gains or losses, the level of our expenses, the degree to which we encounter competition in our markets, and general economic conditions, including the impacts of the COVID-19 pandemic or other public health emergencies. The majority of our portfolio companies are in industries that are directly impacted by inflation, such as manufacturing and consumer goods and services. Our portfolio companies may not be able to pass on to customers increases in their costs of production which could greatly affect their operating results, impacting their ability to repay our loans. In addition, any projected future decreases in our portfolio companies’ operating results due to inflation could adversely impact the fair value of those investments. Any decreases in
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the fair value of our investments could result in future realized and unrealized losses and therefore reduce our net assets resulting from operations. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We do not own any real estate or other physical properties material to our operations. The Adviser is the current leaseholder of all properties in which we operate. We occupy these premises pursuant to the Advisory and Administration Agreements with the Adviser and Administrator, respectively.
ITEM 3. LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on Nasdaq under the symbol “GLAD.” The following table reflects, by quarter, the high and low intraday sales prices per share of our common stock on the Nasdaq, the high and low intraday sales prices as a percentage of NAV per share and quarterly distributions declared per common share for each fiscal quarter during the last two completed fiscal years and the current fiscal year through November 11, 2022.

Quarter Ended/ Ending |  |  |  | Sales Prices |  | Premium / (Discount) of High to NAV(B) |  | Premium (Discount) of Low to NAV(B) |  | Declared Common Stock Distributions
| NAV(A) |  | High |  | Low |  |  |
Fiscal Year ended September 30, 2021: |  |  |  |  |  |  |  |  |  |  |  |
12/31/2020 |  | $ | 7.61 |  |  | $ | 9.22 |  |  | $ | 6.97 |  |  | 21.2 | % |  | (8.4) | % |  | $ | 0.195 |
3/31/2021 |  | 8.11 |  |  | 10.39 |  |  | 8.60 |  |  | 28.1 |  |  | 6.0 |  |  | 0.195 |
6/30/2021 |  | 8.52 |  |  | 11.96 |  |  | 10.00 |  |  | 40.4 |  |  | 17.4 |  |  | 0.195 |
9/30/2021 |  | 9.28 |  |  | 12.05 |  |  | 11.01 |  |  | 29.8 |  |  | 18.6 |  |  | 0.195 |
Fiscal Year ended September 30, 2022: |  |  |  |  |  |  |  |  |  |  |  |
12/31/2021 |  | $ | 9.44 |  |  | $ | 12.58 |  |  | $ | 10.26 |  |  | 33.3 | % |  | 8.7 | % |  | $ | 0.195 |
3/31/2022 |  | 9.49 |  |  | 12.19 |  |  | 9.92 |  |  | 28.5 |  |  | 4.5 |  |  | 0.195 |
6/30/2022 |  | 9.12 |  |  | 12.78 |  |  | 9.43 |  |  | 40.1 |  |  | 3.4 |  |  | 0.203 |
9/30/2022 |  | 9.08 |  |  | 11.19 |  |  | 8.21 |  |  | 23.2 |  |  | (9.6) |  |  | 0.203 |
Fiscal Year ending September 30, 2023: |  |  |  |  |  |  |  |  |  |  |  |
12/31/2022 (through 11/11/2022) |  | * |  | $ | 10.18 |  |  | $ | 8.23 |  |  | * |  | * |  | $ | 0.210 |

(A)NAV per share is determined as of the last day in the relevant quarter and therefore may not reflect the NAV per share on the date of the high and low intraday sales prices. The NAVs per share shown are based on outstanding shares at the end of each period.
(B)The premiums (discounts) set forth in these columns represent the high or low, as applicable, intraday sale prices per share for the relevant quarter minus the NAV per share as of the end of such quarter, and therefore may not reflect the premium (discount) to NAV per share on the date of the high and low intraday sales prices.
* Not yet available, as the NAV per share as of the end of this quarter has not yet been determined.
As of November 11, 2022, there were 38 record owners of our common stock.
Distributions
We generally intend to distribute in the form of cash distributions a minimum of 90.0% of our Investment Company Taxable Income, if any, on a quarterly basis to our stockholders in the form of monthly distributions. We generally intend to retain some or all of our long-term capital gains, if any, but generally intend to designate the retained amount as a deemed distribution, after giving effect to any prior year realized losses that are carried forward, to supplement our equity capital and support the growth of our portfolio. However, in certain cases, our Board of Directors may choose to distribute our net realized long-term capital gains, if any, by paying a one-time special distribution. Additionally, our Credit Facility contains a covenant that limits distributions to our stockholders on an annual basis to the sum of our net investment income, net capital gains and amounts deemed to have been paid during the prior year in accordance with Section 855(a) of the Code.
Recent Sales of Unregistered Securities
We did not sell any unregistered shares of stock during the fiscal year ended September 30, 2022. See “Capital Raising” below for information regarding the unregistered sale of the 2027 Notes in November 2021.
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Purchases of Equity Securities
We did not repurchase any shares of our stock during the fourth quarter ended September 30, 2022.
Stock Performance Graph
The following graph shows the total stockholder return on an investment of $100 in cash on September 29, 2017 for (i) our common stock, (ii) the Nasdaq’s 100 total return index (“Nasdaq 100 TR”), (iii) the Standard & Poor’s 500 total return index (the “S&P 500 TR”) and (iv) the Standard and Poor’s BDC index (“S&P BDC”). The graph and other information furnished under the heading “Stock Performance Graph” shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate it by reference and shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under, or to the liabilities of Section 18 of, the Exchange Act.
The returns on each investment assume reinvestment of dividends. This stock performance graph and the related textual information are not necessarily indicative of future performance.

| GLAD |  | Nasdaq 100 TR |  | S&P 500 TR |  | S&P BDC Index |
9/29/2017 | $ | 100.00 |  |  | $ | 100.00 |  |  | $ | 100.00 |  |  | $ | 100.00 |  |
9/28/2018 | 110.34 |  |  | 128.91 |  |  | 117.91 |  |  | 104.06 |  |
9/30/2019 | 124.31 |  |  | 132.44 |  |  | 122.93 |  |  | 112.05 |  |
9/30/2020 | 104.61 |  |  | 197.00 |  |  | 141.55 |  |  | 89.94 |  |
9/30/2021 | 172.54 |  |  | 255.27 |  |  | 184.02 |  |  | 138.81 |  |
9/30/2022 | 139.48 |  |  | 192.16 |  |  | 155.55 |  |  | 118.23 |  |

Fees and Expenses
The following table is intended to assist you in understanding the costs and expenses that an investor in the Company will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this Annual Report contains a reference to fees or expenses paid by “us” or the “Company,” or that “we” will pay fees or expenses, stockholders will indirectly bear such fees or expenses. The following annualized percentages were calculated based on actual expenses incurred in the quarter ended September 30, 2022 and average net assets for the quarter ended September 30, 2022.
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Stockholder Transaction Expenses:
Sales load (as a percentage of offering price)(1) | — | %
Offering expenses (as a percentage of offering price)(1) | — | %
Dividend reinvestment plan expenses(2) | Up to a $25.00 Transaction Fee
Total stockholder transaction expenses(1) | — | %
Annual expenses (as a percentage of net assets attributable to common stock)(3): |
Base Management fee(4) | 3.48 | %
Loan servicing fee(5) | 2.20 | %
Incentive fee (20% of realized capital gains and 20% of pre-incentive fee net investment income)(6) | 2.37 | %
Interest payments on borrowed funds(7) | 5.22 | %
Other expenses(8) | 1.18 | %
Total annual expenses(9) | 14.45 | %

__________
(1)The amounts set forth in this table do not reflect the impact of any sales load, sales commission or other offering expenses borne by the Company and its stockholders. If applicable, the prospectus or prospectus supplement relating to an offering of our common stock will disclose the offering price and the estimated offering expenses and total stockholder transaction expenses borne by the Company and its common stockholders as a percentage of the offering price. In the event that shares of our common stock are sold to or through underwriters, the applicable prospectus or prospectus supplement will also disclose the applicable sales load.
(2)The expenses of the dividend reinvestment plan, if any, are included in stock record expenses, a component of “other expenses.” If a participant elects by written notice to the plan agent prior to termination of his or her account to have the plan agent sell part or all of the shares held by the plan agent in the participant’s account and remit the proceeds to the participant, the plan agent is authorized to deduct a transaction fee, plus per share brokerage commissions, from the proceeds. The participants in the dividend reinvestment plan will bear a pro rata share of brokerage commissions incurred with respect to open market purchases, if any. See “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Distributions and Dividends to Stockholders—Dividend Reinvestment Plan” for information on the dividend reinvestment plan.
(3)The percentages presented in this table are gross of credits to any fees.
(4)In accordance with our Advisory Agreement, our annual base management fee is 1.75% (0.4375% quarterly) of our average gross assets, which are defined as total assets of the Company, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, and adjusted appropriately for any share issuances or repurchases. In accordance with the requirements of the SEC, the table above shows the Company’s management fee as a percentage of average net assets attributable to common shareholders. For purposes of the table, the gross base management fee has been converted to 3.48% of the average net assets as of September 30, 2022 by dividing the total dollar amount of the management fee by our average net assets. The base management fee for the quarter ended September 30, 2022 before application of any credits was $2.7 million. From time to time, the Adviser has non-contractually, unconditionally and irrevocably agreed to reduce the 1.75% base management fee on syndicated loan participations to 0.5%, to the extent that proceeds resulting from borrowings were used to purchase such syndicated loan participations. For the quarter ended September 30, 2022, this credit to the base management fee was $34 thousand.
Under the Advisory Agreement, the Adviser has provided and continues to provide managerial assistance to our portfolio companies. It may also provide services other than managerial assistance to our portfolio companies and receive fees therefor. Such services may include: (i) assistance obtaining, sourcing or structuring credit facilities, long term loans or additional equity from unaffiliated third parties; (ii) negotiating important contractual financial relationships; (iii) consulting services regarding restructuring of the portfolio company and financial modeling as it relates to raising additional debt and equity capital from unaffiliated third parties; and (iv) primary role in interviewing, vetting and negotiating employment contracts with candidates in connection with adding and retaining key portfolio company management team members. Generally, at the end of each quarter, 100.0% of the fees for such services are non-contractually, unconditionally and irrevocably credited against the base management fee that we would otherwise be required to pay to the Adviser; however, a small percentage of certain of such fees, primarily for valuation of the portfolio company, is retained by the Adviser in the form of reimbursement at cost for certain tasks completed by personnel of the Adviser. For the quarter ended September 30, 2022, the base management fee credit was $1.2 million. See “Item 1. Business — Transactions with Related Parties — Investment Advisory and Management Agreement” for additional information.
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(5)The Adviser services, administers and collects on the loans held by Business Loan in return for which the Adviser receives a 1.5% annual loan servicing fee payable monthly by Business Loan based on the monthly aggregate balance of loans held by Business Loan in accordance with the Credit Facility. For the three months ended September 30, 2022, the total loan servicing fee was $1.7 million. The entire loan servicing fee paid to the Adviser by Business Loan is generally non-contractually, unconditionally and irrevocably credited against the base management fee otherwise payable to the Adviser since Business Loan is a consolidated subsidiary of the Company, and overall, the base management fee (including any loan servicing fee) cannot exceed 1.75% of total assets (including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings) during any given fiscal year pursuant to the Advisory Agreement. See “Item 1. Business—Transactions with Related Parties—Loan Servicing Fee Pursuant to Credit Facility” and footnote 4 above for additional information.
(6)In accordance with our Advisory Agreement, the incentive fee consists of two parts: an income-based fee and a capital gains-based fee. The income-based fee is payable quarterly in arrears, and equals 20.0% of the excess, if any, of our pre-incentive fee net investment income that exceeds a 1.75% quarterly (7.0% annualized) hurdle rate of our net assets (2.0% quarterly and 8.0% annualized during the period from April 1, 2020 through March 31, 2023), subject to a “catch-up” provision measured as of the end of each calendar quarter. The “catch-up” provision requires us to pay 100.0% of our pre-incentive fee net investment income with respect to that portion of such income, if any, that exceeds the hurdle rate but is less than 125.0% of the quarterly hurdle rate (or 2.1875%, 2.4375% during the period from April 1, 2020 through March 31, 2022, and 2.5% during the period from April 1, 2022 through March 31, 2023) in any calendar quarter (8.75% annualized, 9.75% annualized during the period from April 1, 2020 through March 31, 2022, 10.0% annualized during the period from April 1, 2022 through March 31, 2023). The catch-up provision is meant to provide the Adviser with 20.0% of our pre-incentive fee net investment income as if a hurdle rate did not apply when our pre-incentive fee net investment income exceeds 125.0% of the quarterly hurdle rate in any calendar quarter (8.75% annualized, 9.75% annualized during the period from April 1, 2020 through March 31, 2022, and 10.0% annualized during the period from April 1, 2022 through March 31, 2023). The income-based incentive fee is computed and paid on income that may include interest that is accrued but not yet received in cash. Our pre-incentive fee net investment income used to calculate this part of the income-based incentive fee is also included in the amount of our gross assets used to calculate the 1.75% base management fee (see footnote 4 above). The capital gains-based incentive fee equals 20.0% of our net realized capital gains since our inception, if any, computed net of all realized capital losses and unrealized capital depreciation since our inception, less any prior payments, and is payable at the end of each fiscal year. We have not recorded any capital gains-based incentive fee from our inception through September 30, 2022. The income-based incentive fee for the quarter ended September 30, 2022 was $1.9 million.
From time to time, the Adviser has non-contractually, unconditionally and irrevocably agreed to waive a portion of the incentive fees, to the extent net investment income did not cover 100.0% of the distributions to common stockholders during the period. There was no incentive fee credit for the quarter ended September 30, 2022. There can be no guarantee that the Adviser will continue to credit any portion of the fees under the Advisory Agreement in the future.
Examples of how the incentive fee would be calculated (during the period from April 1, 2022 through March 31, 2023) are as follows:
•Assuming pre-incentive fee net investment income of 0.55%, there would be no income-based incentive fee because such income would not exceed the hurdle rate of 2.00%.
•Assuming pre-incentive fee net investment income of 2.10%, the income-based incentive fee would be as follows:
= 100% x (2.10% - 2.00%)
= 0.10%
•Assuming pre-incentive fee net investment income of 2.60%, the income-based incentive fee would be as follows:
= (100% x (“catch - up”: 2.50% - 2.00%)) + (20% x (2.60% - 2.50%))
= (100% x 0.50%) + (20% x 0.10%)
= 0.50%+ 0.02%
= 0.52%
•Assuming net realized capital gains of 6% and realized capital losses and unrealized capital depreciation of 1%, the capital gains-based incentive fee would be as follows:
= 20% x (6% - 1%)
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= 20% x 5%
= 1%
For a more detailed discussion of the calculation of the two-part incentive fee, see “Item 1. Business — Transactions with Related Parties — Investment Advisory and Management Agreement.”
(7)Includes amortization of deferred financing costs. As of September 30, 2022, we had $141.8 million in borrowings outstanding under our Credit Facility and $197.6 million in notes payable, net. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources— Revolving Line of Credit” for additional information regarding the Credit Facility and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations— Liquidity and Capital Resources—Notes Payable” for additional information regarding our notes payable.
(8)Includes our overhead expenses, including payments under the Administration Agreement based on our projected allocable portion of overhead and other expenses estimated to be incurred by the Administrator in performing its obligations under the Administration Agreement for the current fiscal year. See “Item 1. Business—Transactions with Related Parties—Administration Agreement” for additional information.
(9)Total annualized gross expenses, based on actual amounts incurred for the quarter ended September 30, 2022 (except as set forth in footnote 9), would be $45.6 million. After all non-contractual, unconditional and irrevocable credits described in footnote 4, footnote 5, and footnote 6 above are applied to the base management fee, the loan servicing fee, and the incentive fee, total annualized expenses, based on actual amounts incurred for the quarter ended September 30, 2022, would be $33.8 million or 10.73% as a percentage of net assets.
Examples
The following examples demonstrate the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed we would have no additional leverage and that our quarterly operating expenses would remain at the levels set forth in the table above and are gross of credits to any fees. The amounts set forth below do not reflect the impact of sales load or offering expenses to be borne by the Company or its stockholders. In the prospectus supplement relating to an offering of securities pursuant to the applicable prospectus, the examples below will be restated to reflect the impact of the estimated offering expenses borne by the Company and its stockholders and, if applicable, the impact of the applicable sales load. The examples below and the expenses in the table above should not be considered a representation of our future expenses, and actual expenses (including the cost of debt, incentive fees, if any, and other expenses) may be greater or less than those shown. While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%.

| 1 Year |  | 3 Years |  | 5 Years |  | 10 Years
You would pay the following expenses on a $1,000 investment: |  |  |  |  |  |  |
assuming a 5% annual return consisting entirely of ordinary income (1)(2) | $ | 127 |  |  | $ | 352 |  |  | $ | 544 |  |  | $ | 909 |
assuming a 5% annual return consisting entirely of capital gains (2)(3) | $ | 136 |  |  | $ | 373 |  |  | $ | 572 |  |  | $ | 937 |

(1)While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. Additionally, we have assumed that the entire amount of such 5% annual return would constitute ordinary income as we have not historically realized positive capital gains (computed net of all realized capital losses) on our investments. Because the assumed 5% annual return is significantly below the hurdle rate of 7% (annualized, 8% annualized during the period from April 1, 2020 through March 31, 2023) that we must achieve under the Advisory Agreement to trigger the payment of an income-based incentive fee, we have assumed, for purposes of this example, that no income-based incentive fee would be payable if we realized a 5% annual return on our investments.
(2)While the example assumes reinvestment of all dividends and distributions at NAV, participants in our dividend reinvestment plan will receive a number of shares of our common stock, determined by dividing the total dollar amount of the dividend payable to a participant by the average cost of shares of our common stock purchased in the open market in the period beginning on or before the payment date of the distribution and ending when the plan agent has expended for such purchases all of the cash that would have been otherwise payable to participants. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital
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Resources—Distributions and Dividends to Stockholders—Dividend Reinvestment Plan” for additional information regarding our dividend reinvestment plan.
(3)For purposes of this example, we have assumed that the entire amount of such 5% annual return would constitute capital gains and that no accumulated capital losses or unrealized depreciation exist that would have to be overcome first before a capital gains based incentive fee is payable.
Senior Securities
Information about our senior securities is shown in the following table for the audited periods as of our last ten fiscal years. The information has been derived from our audited financial statements for each respective period, which have been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm. The report of our independent registered public accounting firm, PricewaterhouseCoopers LLP, on the senior securities table as of September 30, 2022, is included elsewhere in this Annual Report.

Class and Year |  | Total Amount Outstanding(1) |  | Asset Coverage per Unit (2) |  | Involuntary Liquidating Preference per Unit (3) |  | Average Market Value per Unit (4)
Revolving Credit Facilities |  |  |  |  |  |  |  |
September 30, 2022 |  | $ | 141,800,000 |  |  | $ | 1,904 |  |  | $ | — |  |  | N/A
September 30, 2021 |  | 50,500,000 |  |  | 2,307 |  |  | $ | — |  |  | N/A
September 30, 2020 |  | 128,000,000 |  |  | 2,026 |  |  | — |  |  | N/A
September 30, 2019 |  | 66,900,000 |  |  | 3,369 |  |  | — |  |  | N/A
September 30, 2018 |  | 110,000,000 |  |  | 3,590 |  |  | — |  |  | N/A
September 30, 2017 |  | 93,000,000 |  |  | 3,882 |  |  | — |  |  | N/A
September 30, 2016 |  | 71,300,000 |  |  | 4,623 |  |  | — |  |  | N/A
September 30, 2015 |  | 127,300,000 |  |  | 2,946 |  |  | — |  |  | N/A
September 30, 2014 |  | 36,700,000 |  |  | 3,054 |  |  | — |  |  | N/A
September 30, 2013 |  | 46,900,000 |  |  | 3,410 |  |  | — |  |  | N/A
Series 2016 Term Preferred Stock (5) |  |  |  |  |  |  |  |
September 30, 2013 |  | $ | 38,497,050 |  |  | $ | 3,410 |  |  | $ | 25.00 |  |  | $ | 25.49 |
Series 2021 Term Preferred Stock (6) |  |  |  |  |  |  |  |
September 30, 2016 |  | $ | 61,000,000 |  |  | $ | 2,495 |  |  | $ | 25.00 |  |  | $ | 25.55 |
September 30, 2015 |  | 61,000,000 |  |  | 1,993 |  |  | 25.00 |  |  | 25.02 |
September 30, 2014 |  | 61,000,000 |  |  | 3,054 |  |  | 25.00 |  |  | 24.45 |
Series 2024 Term Preferred Stock (7) |  |  |  |  |  |  |  |
September 30, 2019 |  | $ | 51,750,000 |  |  | $ | 2,385 |  |  | $ | 25.00 |  |  | $ | 24.99 |
September 30, 2018 |  | 51,750,000 |  |  | 2,444 |  |  | 25.00 |  |  | 25.63 |
September 30, 2017 |  | 51,750,000 |  |  | 2,496 |  |  | 25.00 |  |  | 25.09 |
6.125% Notes due 2023 (8) |  |  |  |  |  |  |  |
September 30, 2020 |  | 57,500,000 |  |  | 2,026 |  |  | — |  |  | 25.28 |
September 30, 2019 |  | 57,500,000 |  |  | 3,369 |  |  | — |  |  | 26.18 |
5.375% Notes due 2024 (9) |  |  |  |  |  |  |  |
September 30, 2021 |  | $ | 38,812,500 |  |  | $ | 2,307 |  |  | $ | — |  |  | $ | 25.33 |
September 30, 2020 |  | 38,812,500 |  |  | 2,026 |  |  | — |  |  | 24.49 |
5.125% Notes due 2026 |  |  |  |  |  |  |  |
September 30, 2022 |  | $ | 150,000,000 |  |  | $ | 1,904 |  |  | $ | — |  |  | N/A
September 30, 2021 |  | 150,000,000 |  |  | 2,307 |  |  | $ | — |  |  | N/A
3.75% Notes due 2027 |  |  |  |  |  |  |  |
September 30, 2022 |  | $ | 50,000,000 |  |  | $ | 1,904 |  |  | $ | — |  |  | N/A

(1)Total amount of each class of senior securities outstanding at the end of the period presented.
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(2)Asset coverage ratio for a class of our “senior securities representing indebtedness” means the ratio of the value of our total assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of “senior securities representing indebtedness” and asset coverage ratio for a class of our “senior securities that are stock” means the ratio of the value of our total assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of “senior securities representing indebtedness” plus the aggregate involuntary liquidation preference of a class of “senior security that is stock.” Asset coverage per unit is the asset coverage ratio expressed in terms of dollar amounts per one thousand dollars of indebtedness.
(3)The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security junior to it.
(4)Only applicable to our Term Preferred Stock, 6.125% notes due 2023 (the “2023 Notes”) and 5.375% notes due 2024 (“the 2024 Notes”) because the other senior securities are not registered for public trading. Average market value per unit is the average of the closing prices of the securities on the Nasdaq during the last 10 trading days of the period. Average market value per unit for our Series 2024 Term Preferred Stock for September 30, 2017 is the average of the closing prices of the shares on the Nasdaq during the last seven trading days of the period as the stock began trading on September 21, 2017.
(5)In November 2011, we issued 1,539,882 shares of 7.125% Series 2016 Term Preferred Stock (the “Series 2016 Term Preferred Stock”) through a public offering and subsequent exercise of an overallotment option. In May 2014, we voluntarily redeemed all outstanding shares of our Series 2016 Term Preferred Stock and therefore had no Series 2016 Term Preferred Stock outstanding at September 30, 2015.
(6)In May 2014, we issued 2,440,000 shares of 6.75% Series 2021 Term Preferred Stock (the “Series 2021 Term Preferred Stock”) through a public offering and subsequent exercise of an overallotment option. In September 2017, we voluntarily redeemed all outstanding shares of our Series 2021 Term Preferred Stock and therefore had no Series 2021 Term Preferred Stock outstanding at September 30, 2017.
(7)In September 2017, we issued 2,070,000 shares of Series 2024 Term Preferred Stock through a public offering and subsequent exercise of an overallotment option. In October 2019, we voluntarily redeemed all outstanding shares of our Series 2024 Term Preferred Stock.
(8)In November 2018, we completed a public debt offering of $57.5 million aggregate principal amount of the 2023 Notes, inclusive of the overallotment option. In January 2021, we voluntarily redeemed all of the 2023 Notes.
(9)In October 2019, we completed a public debt offering of $38.8 million aggregate principal amount of the 2024 Notes, inclusive of the overallotment option. In November 2021, we voluntarily redeemed all of the 2024 Notes.
ITEM 6. RESERVED
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of our financial condition and results of operations should be read in conjunction with our accompanying Consolidated Financial Statements and the notes thereto contained elsewhere in this Annual Report. Historical financial condition and results of operations and percentage relationships among any amounts in the financial statements are not necessarily indicative of financial condition, results of operations or percentage relationships for any future periods. Except per share amounts, dollar amounts in the tables included herein are in thousands unless otherwise indicated.
OVERVIEW
General
We were incorporated under the Maryland General Corporation Law on May 30, 2001. We operate as an externally managed, closed-end, non-diversified management investment company, and have elected to be treated as a BDC under the 1940 Act. In addition, for federal income tax purposes we have elected to be treated as a RIC under the Code. To continue to qualify as a RIC for federal income tax purposes and obtain favorable RIC tax treatment, we must meet certain requirements, including certain minimum distribution requirements.
We were established for the purpose of investing in debt and equity securities of established private businesses operating in the U.S. Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established lower middle market companies in the U.S. that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by
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investing in equity securities, in connection with our debt investments, that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our investment objectives, our primary investment strategy is to invest in several categories of debt and equity securities, with each investment generally ranging from $8 million to $30 million, although investment size may vary, depending upon our total assets or available capital at the time of investment. We expect that our investment portfolio over time will consist of approximately 90.0% debt investments and 10.0% equity investments, at cost. As of September 30, 2022, our investment portfolio was made up of approximately 90.7% debt investments and 9.3% equity investments, at cost.
We focus on investing in lower middle market companies (which we generally define as companies with annual earnings before interest, taxes, depreciation and amortization of $3 million to $15 million) in the U.S. that meet certain criteria, including the following: the sustainability of the business’ free cash flow and its ability to grow it over time, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the borrower, reasonable capitalization of the borrower, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples and, to a lesser extent, the potential to realize appreciation and gain liquidity in our equity position, if any. We lend to borrowers that need funds for growth capital or to finance acquisitions or recapitalize or refinance their existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises. Our targeted portfolio companies are generally considered too small for the larger capital marketplace.
We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity. In July 2012, the SEC granted us the Co-Investment Order that expanded our ability to co-invest, under certain circumstances, with certain of our affiliates, including Gladstone Investment, a BDC also managed by the Adviser, and any future BDC or registered closed-end management investment company that is advised (or sub-advised if it controls the fund) by the Adviser, or any combination of the foregoing, subject to the conditions in the Co-Investment Order. We believe the Co-Investment Order has enhanced and will continue to enhance our ability to further our investment objectives and strategies. If we are participating in an investment with one or more co-investors, whether or not an affiliate of ours, our investment is likely to be smaller than if we were investing alone.
Business
Portfolio and Investment Activity
In general, our investments in debt securities have a term of no more than seven years, accrue interest at variable rates (generally based on the 30-day LIBOR or one-month Term SOFR) and, to a lesser extent, at fixed rates. We seek debt instruments that pay interest monthly or, at a minimum, quarterly, may have a success fee or deferred interest provision and are primarily interest only, with all principal and any accrued but unpaid interest due at maturity. Generally, success fees accrue at a set rate and are contractually due upon a change of control of a portfolio company, typically from an exit or sale. Some debt securities have deferred interest whereby some portion of the interest payment is added to the principal balance so that the interest is paid, together with the principal, at maturity. This form of deferred interest is often called PIK interest.
Typically, our equity investments consist of common stock, preferred stock, limited liability company interests, or warrants to purchase the foregoing. Often, these equity investments occur in connection with our original investment, recapitalizing a business, or refinancing existing debt.
During the year ended September 30, 2022, we invested $215.3 million in 14 new portfolio companies and extended $59.6 million in investments to existing portfolio companies. In addition, during the year ended September 30, 2022, we exited eight portfolio companies through early payoffs or a restructure. We received a total of $175.8 million in combined net proceeds and principal repayments from the aforementioned portfolio company exits as well as principal repayments by existing portfolio companies during the year ended September 30, 2022. This activity resulted in a net increase in our overall portfolio by six portfolio companies to 52 and a net increase of $109.5 million in our portfolio at cost since September 30, 2021. From our initial public offering in August 2001 through September 30, 2022, we have made 609 different loans to, or investments in, 268 companies for a total of approximately $2.5 billion, before giving effect to principal repayments on investments and divestitures.
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During the year ended September 30, 2022, the following significant transactions occurred:
Proprietary Investments
•In October 2021, we invested $26.3 million in Engineering Manufacturing Technologies, LLC through secured first lien debt and equity.
•In November 2021, our investment in Lignetics, Inc. was sold, which resulted in the recognition of success fee income of $1.6 million and a realized gain of $13.4 million. In connection with the sale, we received net cash proceeds of approximately $47.2 million, including the repayment of our debt investment of $29.0 million at par.
•In November 2021, our investment in Prophet Brand Strategy paid off at par for net cash proceeds of $13.1 million. In conjunction with the payoff, we received a prepayment fee of $0.1 million.
•In November 2021, our investment in Effective School Solutions LLC paid off at par for net cash proceeds of $19.5 million. In conjunction with the payoff, we received a prepayment fee of $0.5 million.
•In November 2021, we invested $13.4 million in WB Xcel Holdings, LLC through secured first lien debt and equity.
•In December 2021, our investment in Phoenix Aromas & Essential Oils, LLC paid off at par for net cash proceeds of $10.0 million.
•In December 2021, we invested $10.0 million in Fix-it Group, Inc. through secured first lien debt.
•In December 2021, we invested $10.5 million in Workforce QA LLC through secured first lien debt and equity.
•In December 2021, we invested $30.0 million in Springfield, Inc. through secured second lien debt.
•In December 2021, we invested $16.8 million in HH-Inspire Acquisition, Inc. (“HH-Inspire”) through secured first lien debt and preferred equity. In June 2022, we invested an additional $11.5 million in HH-Inspire through secured first lien debt. In August 2022, we invested an additional $0.2 million in HH-Inspire through additional preferred equity. In September 2022, we invested an additional $8.0 million in HH-Inspire through secured first lien debt.
•In January 2022, our investment in Belnick, Inc. paid off at par for net cash proceeds of $10.0 million.
•In March 2022, we invested $5.0 million in Pansophic Learning Ltd., an existing portfolio company, through secured first lien debt.
•In March 2022, our investment in NetFortris Corp. was sold, which resulted in the recognition of success fee income of $3.2 million. In connection with the sale, we received net cash proceeds of $29.0 million, including the repayment of our debt investment of $28.8 million at par. We continue to retain an equity investment in NetFortris Holdings LLC with a cost basis of $0.8 million and fair value of $0.5 million as of September 30, 2022.
•In April 2022, we invested $12.0 million in Axios Industrial Group, LLC through secured first lien debt.
•In April 2022, we invested $14.4 million in Salvo Technologies, Inc. through secured first lien debt and membership units.
•In May 2022, we invested $21.8 million in Viva Railings, LLC through secured first lien debt.
•In June 2022, our investment in LWO Acquisitions Company LLC (“LWO”) was restructured upon emergence from Chapter 11 bankruptcy protection. As part of the restructuring, our existing $16.8 million debt investment in LWO was converted to $3.3 million of first lien debt and $6.8 million of common equity in Lonestar EMS, LLC. In conjunction with the restructuring, we recorded a net realized loss of approximately $8.5 million, including the write off of approximately $1.8 million in other receivables.
•In August 2022, we invested $28.8 million in Giving Home Health Care LLC through secured second lien debt and common equity warrants.
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•In August 2022, we invested $15.0 million in Sokol & Company Holdings, LLC through secured first lien debt and common equity.
•In August 2022, we invested an additional $2.5 million in Gray Matter Systems, LLC, an existing investment, through secured second lien debt.
•In September 2022, we invested an additional $10.5 million in Antenna Research Associates, Inc., an existing investment, through secured first lien debt.
•In September 2022, we extended Salt and Straw, LLC a $2.0 million line of credit commitment and an $11.5 million delayed draw term loan commitment. We funded $0.8 million on the line of credit at close.
•In September 2022, Unirac, Inc. was sold. In conjunction with the sale, we received net cash proceeds of $11.8 million, including the repayment of our debt investment at par and a $0.1 million prepayment penalty.
•In September 2022, we invested $15.0 million in Unirac Holdings, Inc. through secured first lien debt. We also extended Unirac Holdings, Inc. a $2.2 million line of credit commitment and a $2.8 million delayed draw term loan commitment, both of which were both unfunded at close.
Syndicated Investments
•In November 2021, our investment in Medical Solutions Holdings, Inc. paid off at par for net cash proceeds of $6.0 million.
•In January 2022, our investment in Keystone Acquisition Corp. paid off at par for net cash proceeds of $4.0 million.
Refer to Note 15—Subsequent Events in the accompanying Consolidated Financial Statements included elsewhere in this Annual Report for portfolio activity occurring subsequent to September 30, 2022.
Capital Raising
We have been able to meet our capital needs through extensions of and increases to our line of credit under the Credit Facility and by accessing the capital markets in the form of public equity offerings of common stock and public and private debt offerings. We have successfully extended the Credit Facility’s revolving period multiple times, most recently to October 2023, and currently have a total commitment amount of $225.0 million. We sold 430,425 and 2,737,521 common shares under our at-the-market program during the years ended September 30, 2022 and 2021, respectively. In November 2021, we completed a private placement of $50.0 million aggregate principal amount of the 2027 Notes. In December 2020, we completed an offering of $100.0 million aggregate principal amount of the 2026 Notes. In March 2021, we completed an offering of an additional $50.0 million aggregate principal amount of the 2026 Notes. Refer to “Liquidity and Capital Resources — Revolving Line of Credit,” “Liquidity and Capital Resources — Equity — Common Stock,” and “Liquidity and Capital Resources — Notes Payable” for further discussion.
Although we were able to access the capital markets historically and in recent years, market conditions may affect the trading price of our capital stock and thus may inhibit our ability to finance new investments through the issuance of equity in the future. When our common stock trades below NAV per common share, our ability to issue equity is constrained by provisions of the 1940 Act, which generally prohibits the issuance and sale of our common stock below NAV per common share without first obtaining approval from our stockholders and our independent directors, other than through sales to our then-existing stockholders pursuant to a rights offering. On September 30, 2022, the closing market price of our common stock was $8.49 per share, a 6.5% discount to our September 30, 2022 NAV per share of $9.08.
Regulatory Compliance
Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage limitations of the 1940 Act, which require us to have an asset coverage (as defined in Sections 18 and 61 of the 1940 Act) of at least 150% on our “senior securities representing indebtedness” and our “senior securities that are stock.”
On April 10, 2018, our Board of Directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) thereof, approved the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a
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result, the Company’s asset coverage requirements for senior securities changed from 200% to 150%, effective April 10, 2019.
As of September 30, 2022, our asset coverage on our “senior securities representing indebtedness” was 190.4%.
Recent Developments
Credit Facility
In October 2022, we entered into Amendment No. 3 to the Credit Facility to increase the commitment amount by $20.0 million from $225.0 million to $245.0 million, as permitted under the terms of the Credit Facility.
Distributions
In October 2022, our Board of Directors declared the following monthly cash distributions to common stockholders:

Record Date |  | Payment Date |  | Distribution per Common Share
October 21, 2022 |  | October 31, 2022 |  | $ | 0.07 |
November 18, 2022 |  | November 30, 2022 |  | 0.07 |
December 20, 2022 |  | December 30, 2022 |  | 0.07 |
|  | Total for the Quarter |  | $ | 0.21 |

Election of Director
Effective October 11, 2022, Paula Novara was elected to our Board of Directors. Ms. Novara also serves as head of human resources, facilities and office management and IT of the Adviser and certain of its affiliates.
LIBOR Transition
In general, our investments in debt securities have a term of five years, accrue interest at variable rates (based on the one-month LIBOR or SOFR) and, to a lesser extent, at fixed rates. Most U.S. dollar LIBOR are currently anticipated to be phased out in June 2023. LIBOR is currently expected to transition to a new standard rate, the SOFR, which will incorporate certain overnight repo market data collected from multiple data sets. The majority of the new variable rate debt investments that we made during the quarter ended September 30, 2022 are based on SOFR and certain of our other existing investments have been transitioned to SOFR. Further, the majority of our outstanding loan agreements for variable rate debt investments that are still based on one-month LIBOR have been amended to include LIBOR replacement language should LIBOR cease to exist. Assuming that SOFR replaces LIBOR, we expect that there should be minimal impact on our operations. In addition, our Credit Facility has been amended to update the reference rate from LIBOR to SOFR plus an 11 basis point credit spread adjustment.
Impact of Inflation
We believe the effects of inflation, if any, on our historical results of operations and financial condition have been immaterial. During the six months ended September 30, 2022, general inflationary pressures and certain commodity price volatility have impacted our portfolio companies to varying degrees; however, the broad based impact of these pricing changes have largely been mitigated by price adjustments without adverse sales implications, and thus, have not materially impacted our portfolio companies’ ability to service their indebtedness, including our loans. Notwithstanding the results to date, the cumulative effect of these inflationary pressures may, in the future, impact the profit margins or sales of certain portfolio companies and their ability to service their debts. We continue to monitor the current inflationary environment to anticipate any impact on our portfolio companies, including their availability to pay interest on our loans. We cannot assure you that our results of operations and financial condition or that of our portfolio companies will not be materially impacted by inflation in the future. See “Risk Factors— We may experience fluctuations in our quarterly and annual results based on the impact of inflation in the U.S.”
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RESULTS OF OPERATIONS
Comparison of the Year Ended September 30, 2022 to the Year Ended September 30, 2021

| For the Year Ended September 30,
| 2022 |  | 2021 |  | $ Change |  | % Change
INVESTMENT INCOME |  |  |  |  |  |  |
Interest income | $ | 53,988 |  |  | $ | 49,959 |  |  | $ | 4,029 |  |  | 8.1 | %
Other income | 9,162 |  |  | 3,835 |  |  | 5,327 |  |  | 138.9 |
Total investment income | 63,150 |  |  | 53,794 |  |  | 9,356 |  |  | 17.4 |
EXPENSES |  |  |  |  |  |  |
Base management fee | 10,247 |  |  | 8,674 |  |  | 1,573 |  |  | 18.1 |
Loan servicing fee | 6,329 |  |  | 5,579 |  |  | 750 |  |  | 13.4 |
Incentive fee | 7,511 |  |  | 5,746 |  |  | 1,765 |  |  | 30.7 |
Administration fee | 1,610 |  |  | 1,438 |  |  | 172 |  |  | 12.0 |
Interest expense | 12,966 |  |  | 11,513 |  |  | 1,453 |  |  | 12.6 |
Amortization of deferred financing costs | 1,175 |  |  | 1,347 |  |  | (172) |  |  | (12.8) |
Other expenses | 2,165 |  |  | 1,907 |  |  | 258 |  |  | 13.5 |
Expenses, before credits from Adviser | 42,003 |  |  | 36,204 |  |  | 5,799 |  |  | 16.0 |
Credit to base management fee – loan servicing fee | (6,329) |  |  | (5,579) |  |  | (750) |  |  | 13.4 |
Credit to fees from Adviser – other | (4,803) |  |  | (2,953) |  |  | (1,850) |  |  | 62.6 |
Total expenses, net of credits | 30,871 |  |  | 27,672 |  |  | 3,199 |  |  | 11.6 |
NET INVESTMENT INCOME | 32,279 |  |  | 26,122 |  |  | 6,157 |  |  | 23.6 |
NET REALIZED AND UNREALIZED GAIN (LOSS) |  |  |  |  |  |  |
Net realized gain (loss) on investments | 5,416 |  |  | 4,179 |  |  | 1,237 |  |  | 29.6 |
Net realized gain (loss) on other | (243) |  |  | (999) |  |  | 756 |  |  | (75.7) |
Net unrealized appreciation (depreciation) of investments | (17,538) |  |  | 55,347 |  |  | (72,885) |  |  | (131.7) |
Net unrealized appreciation (depreciation) of other | — |  |  | (350) |  |  | 350 |  |  | (100.0) |
Net gain (loss) from investments and other | (12,365) |  |  | 58,177 |  |  | (70,542) |  |  | (121.3) |
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | $ | 19,914 |  |  | $ | 84,299 |  |  | $ | (64,385) |  |  | (76.4) | %
PER BASIC AND DILUTED COMMON SHARE |  |  |  |  |  |  |
Net investment income | $ | 0.94 |  |  | $ | 0.79 |  |  | $ | 0.15 |  |  | 19.0 | %
Net increase (decrease) in net assets resulting from operations | $ | 0.58 |  |  | $ | 2.54 |  |  | $ | (1.96) |  |  | (77.2) | %

Investment Income
Interest income increased by 8.1% for the year ended September 30, 2022, as compared to the prior year. The increase was due primarily to an increase in the weighted average principal balance of our interest-bearing portfolio, partially offset by a decrease in the weighted average yield on our interest-bearing portfolio. The weighted average principal balance of our interest-bearing investment portfolio for the year ended September 30, 2022, was $517.0 million, compared to $462.8 million for the year ended September 30, 2021, an increase of $54.2 million, or 11.7%. The weighted average yield on our interest-bearing investments is based on the current stated interest rate on interest-bearing investments, which decreased slightly to 10.4% for the year ended September 30, 2022, compared to 10.6% for the year ended September 30, 2021, inclusive of any allowances on interest receivables made during those periods. The decrease in the weighted average yield was driven mainly by competitive marketplace conditions.
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As of September 30, 2022 and 2021, there were no loans on non-accrual status.
Other income increased by 138.9% during the year ended September 30, 2022, as compared to the prior year period primarily due to a $4.6 million increase in success fees received and a $1.2 million increase in dividend income year over year.
As of September 30, 2022 and 2021, no single investment represented greater than 10% of the total investment portfolio at fair value.
Expenses
Expenses, net of any non-contractual, unconditional and irrevocable credits to fees from the Adviser, increased $3.2 million, or 11.6%, for the year ended September 30, 2022 as compared to the prior year. This increase was primarily due to a $1.8 million increase in the net incentive fee and a $1.5 million increase in interest expense on borrowings.
Total interest expense on borrowings and notes payable increased by $1.5 million, or 12.6%, during the year ended September 30, 2022 compared to the prior year. This increase was driven by an increase in interest rates and a change in the composition of our overall debt financing. Interest expense on our notes payable increased by $1.0 million year over year with the issuance of the 2027 Notes in November 2021 and the 2026 Notes in December 2020 and March 2021, partially offset by the redemption of the 2023 Notes in January 2021 and the 2024 Notes in November 2021. Interest expense on our Credit Facility increased by $0.4 million period over period, driven primarily by an increase in the effective interest rate on our Credit Facility, partially offset by a decrease in the weighted average balance outstanding on our Credit Facility and a decrease in unused commitment fees, period over period. The effective interest rate on our Credit Facility, including unused commitment fees incurred, but excluding the impact of deferred financing costs, was 6.1% during the year ended September 30, 2022, compared to 5.0% during the prior year. The increase in the effective interest rate was driven primarily by an increase in interest rates. The weighted average balance outstanding on our Credit Facility was $56.1 million during the year ended September 30, 2022, as compared to $59.4 million in the prior year, a decrease of 5.6%.
The gross base management fee earned by the Adviser increased by $1.6 million, or 18.1%, during the year ended September 30, 2022, as compared to the prior year, resulting from an increase in average total assets subject to the base management fee year over year.
The income-based incentive fee increased by $1.8 million, or 30.7%, for the year ended September 30, 2022, as compared to the prior year, due to higher pre-incentive fee net investment income over the respective periods. Our Board of Directors accepted non-contractual, unconditional and irrevocable credits from the Adviser of $0.4 million and $0.5 million, to reduce the income-based incentive fee to the extent net investment income did not cover 100.0% of our distributions to common stockholders during the years ended September 30, 2022 and 2021, respectively.
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The base management, loan servicing and incentive fees, and associated non-contractual, unconditional and irrevocable credits, are computed quarterly, as described under “Transactions with the Adviser” in Note 4— Related Party Transactions of the Notes to Consolidated Financial Statements and are summarized in the following table:

| Year Ended September 30,
| 2022 |  | 2021
Average total assets subject to base management fee(A) | $ | 585,543 |  |  | $ | 495,657 |
Multiplied by annual base management fee of 1.75% | 1.75 | % |  | 1.75 | %
Base management fee (B) | 10,247 |  |  | 8,674 |
Portfolio company fee credit | (4,196) |  |  | (2,195) |
Syndicated loan fee credit | (170) |  |  | (307) |
Net Base Management Fee | $ | 5,881 |  |  | $ | 6,172 |
Loan servicing fee(B) | $ | 6,329 |  |  | $ | 5,579 |
Credit to base management fee – loan servicing fee(B) | (6,329) |  |  | (5,579) |
Net Loan Servicing Fee | $ | — |  |  | $ | — |
Incentive fee(B) | $ | 7,511 |  |  | $ | 5,746 |
Incentive fee credit | (437) |  |  | (451) |
Net Incentive Fee | $ | 7,074 |  |  | $ | 5,295 |
Portfolio company fee credit | $ | (4,196) |  |  | $ | (2,195) |
Syndicated loan fee credit | (170) |  |  | (307) |
Incentive fee credit | (437) |  |  | (451) |
Credit to Fees from Adviser—Other(B) | $ | (4,803) |  |  | $ | (2,953) |

(A)Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the two most recently completed quarters within the respective years and adjusted appropriately for any share issuances or repurchases during the period.
(B)Reflected, on a gross basis, as a line item on our accompanying Consolidated Statement of Operations located elsewhere in this Annual Report.
Realized Loss and Unrealized Appreciation
Net Realized Gain (Loss) on Investments
For the year ended September 30, 2022, we recorded a net realized gain on investments of $5.4 million, which resulted primarily from a $13.4 million realized gain recognized on the sale of our investment in Lignetics, Inc., partially offset by a $8.5 million realized loss recognized on the restructuring of our investment in LWO.
For the year ended September 30, 2021, we recorded a net realized gain on investments of $4.2 million, which resulted primarily from a $5.3 million net realized gain recognized from the exit of AG Transportation Holdings, LLC, a $0.6 million net realized gain from the exit of American Trailer Rental Group LLC and gains from previous exits of certain other investments, partially offset by a $2.4 million net realized loss on our investment in Edmentum Ultimate Holdings, LLC.
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Net Unrealized Appreciation of Investments
During the year ended September 30, 2022, we recorded net unrealized depreciation of investments in the aggregate amount of $17.5 million. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the year ended September 30, 2022 were as follows:

|  | Year Ended September 30, 2022
Portfolio Company |  | Realized Gain (Loss) |  | Unrealized Appreciation (Depreciation) |  | Reversal of Unrealized Depreciation (Appreciation) |  | Net Gain (Loss)
LWO Acquisitions Company LLC |  | $ | (8,496) |  |  | $ | (328) |  |  | $ | 14,119 |  |  | $ | 5,295 |
ENET Holdings, LLC |  | — |  |  | 4,785 |  |  | 447 |  |  | 5,232 |
NetFortris Holdings LLC |  | — |  |  | 3,949 |  |  | (284) |  |  | 3,665 |
WB Xcel Holdings, LLC |  | — |  |  | 2,937 |  |  | — |  |  | 2,937 |
Imperative Holdings Corporation |  | — |  |  | 2,195 |  |  | — |  |  | 2,195 |
R2i Holdings, LLC |  | — |  |  | 620 |  |  | — |  |  | 620 |
TNCP Intermediate HoldCo, LLC |  | — |  |  | 609 |  |  | — |  |  | 609 |
AG Transportation Holdings, LLC |  | 468 |  |  | — |  |  | — |  |  | 468 |
HH-Inspire Acquisition, Inc. |  | — |  |  | (277) |  |  | — |  |  | (277) |
Axios Industrial Group, LLC |  | — |  |  | (345) |  |  | — |  |  | (345) |
ALS Education, LLC |  | — |  |  | (351) |  |  | — |  |  | (351) |
GFRC Holdings, LLC |  | — |  |  | (357) |  |  | — |  |  | (357) |
SpaceCo Holdings, LLC |  | — |  |  | (359) |  |  | — |  |  | (359) |
Café Zupas |  | — |  |  | (386) |  |  | — |  |  | (386) |
Tailwind Smith Cooper Intermediate Corporation |  | — |  |  | (416) |  |  | — |  |  | (416) |
Viva Railings, L.L.C. |  | — |  |  | (436) |  |  | — |  |  | (436) |
PIC 360, LLC |  | — |  |  | (529) |  |  | — |  |  | (529) |
Eegee's LLC |  | — |  |  | (536) |  |  | — |  |  | (536) |
8th Avenue Food & Provisions, Inc. |  | — |  |  | (622) |  |  | — |  |  | (622) |
DKI Ventures, LLC |  | — |  |  | (645) |  |  | — |  |  | (645) |
Triple H Food Processors, LLC |  | — |  |  | (814) |  |  | — |  |  | (814) |
Ohio Armor Holdings, LLC |  | — |  |  | (1,136) |  |  | — |  |  | (1,136) |
Defiance Integrated Technologies, Inc. |  | — |  |  | (1,468) |  |  | (28) |  |  | (1,496) |
MCG Energy Solutions, LLC |  | — |  |  | (1,549) |  |  | — |  |  | (1,549) |
Lignetics, Inc. |  | 13,408 |  |  | — |  |  | (14,958) |  |  | (1,550) |
Engineering Manufacturing Technologies, LLC |  | — |  |  | (1,593) |  |  | — |  |  | (1,593) |
Targus Cayman HoldCo, Ltd. |  | — |  |  | (2,052) |  |  | — |  |  | (2,052) |
B+T Group Acquisition Inc. |  | — |  |  | (3,350) |  |  | — |  |  | (3,350) |
Encore Dredging Holdings, LLC |  | — |  |  | (3,353) |  |  | — |  |  | (3,353) |
Edge Adhesives Holdings, Inc. |  | — |  |  | (3,590) |  |  | — |  |  | (3,590) |
Lonestar EMS, LLC |  | — |  |  | (6,970) |  |  | — |  |  | (6,970) |
Other, net (<$500) |  | 36 |  |  | (124) |  |  | (343) |  |  | (431) |
Total: |  | $ | 5,416 |  |  | $ | (16,491) |  |  | $ | (1,047) |  |  | $ | (12,122) |

The primary driver of net unrealized depreciation of $17.5 million for the year ended September 30, 2022 was the reversal of unrealized depreciation associated with the exit of our investment in Lignetics, Inc., the decrease in comparable transaction multiples used to estimate the fair value of certain of our other portfolio companies, a pricing decrease in the broadly syndicated loan market, and the decline in the financial and operational performance of certain of our other portfolio companies, partially offset by the reversal of unrealized depreciation associated with the restructuring of our investment in LWO and unrealized appreciation recognized on ENET Holdings, LLC and NetFortris Holdings LLC.
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During the year ended September 30, 2021, we recorded net unrealized appreciation of investments in the aggregate amount of $55.3 million. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the year ended September 30, 2021 were as follows:
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|  | Year Ended September 30, 2021
Portfolio Company |  | Realized Gain (Loss) |  | Unrealized Appreciation (Depreciation) |  | Reversal of Unrealized Depreciation (Appreciation) |  | Net Gain (Loss)
Lignetics, Inc. |  | $ | — |  |  | $ | 14,420 |  |  | $ | — |  |  | $ | 14,420 |
Antenna Research Associates, Inc. |  | — |  |  | 9,306 |  |  | — |  |  | 9,306 |
B+T Group Acquisition Inc. |  | — |  |  | 6,453 |  |  | — |  |  | 6,453 |
AG Transportation Holdings, LLC |  | 5,289 |  |  | 6,788 |  |  | (7,934) |  |  | 4,143 |
Targus Cayman HoldCo, Ltd. |  | — |  |  | 4,125 |  |  | — |  |  | 4,125 |
Defiance Integrated Technologies, Inc. |  | — |  |  | 2,535 |  |  | — |  |  | 2,535 |
Imperative Holdings Corporation |  | — |  |  | 2,281 |  |  | — |  |  | 2,281 |
Leeds Novamark Capital I, L.P |  | — |  |  | 2,219 |  |  | — |  |  | 2,219 |
MCG Energy Solutions, LLC |  | — |  |  | 1,659 |  |  | — |  |  | 1,659 |
PIC 360, LLC |  | — |  |  | 1,641 |  |  | — |  |  | 1,641 |
Triple H Food Processors, LLC |  | — |  |  | 1,523 |  |  | — |  |  | 1,523 |
Encore Dredging Holdings, LLC |  | — |  |  | 1,443 |  |  | — |  |  | 1,443 |
TNCP Intermediate HoldCo, LLC |  | — |  |  | 1,252 |  |  | — |  |  | 1,252 |
Iten Defense, LLC |  | — |  |  | 798 |  |  | — |  |  | 798 |
Tailwind Smith Cooper Intermediate Corporation |  | — |  |  | 789 |  |  | — |  |  | 789 |
American Trailer Rental Group LLC |  | 598 |  |  | 1,213 |  |  | (1,042) |  |  | 769 |
EL Academies, Inc. |  | — |  |  | 760 |  |  | — |  |  | 760 |
Café Zupas |  | — |  |  | 746 |  |  | — |  |  | 746 |
DKI Ventures, LLC |  | — |  |  | 732 |  |  | — |  |  | 732 |
Sea Link International IRB, Inc. |  | — |  |  | 662 |  |  | — |  |  | 662 |
Canopy Safety Brands, LLC |  | — |  |  | 657 |  |  | — |  |  | 657 |
SpaceCo Holdings, LLC |  | — |  |  | 500 |  |  | — |  |  | 500 |
Keystone Acquisition Corp. |  | — |  |  | 481 |  |  | — |  |  | 481 |
Edmentum Ultimate Holdings, LLC |  | (2,351) |  |  | — |  |  | 2,770 |  |  | 419 |
Medical Solutions Holdings, Inc. |  | — |  |  | 406 |  |  | — |  |  | 406 |
R2i Holdings, LLC |  | — |  |  | 351 |  |  | — |  |  | 351 |
Belnick, Inc. |  | — |  |  | 350 |  |  | — |  |  | 350 |
Vertellus Holdings LLC |  | (41) |  |  | — |  |  | 313 |  |  | 272 |
Gray Matter Systems, LLC |  | — |  |  | 260 |  |  | — |  |  | 260 |
Unirac, Inc. |  | — |  |  | 238 |  |  | — |  |  | 238 |
ALS Education, LLC |  | — |  |  | 237 |  |  | — |  |  | 237 |
Magpul Industries Corp. |  | — |  |  | 210 |  |  | (210) |  |  | — |
Drive Chassis Holdco, LLC |  | — |  |  | 260 |  |  | (261) |  |  | (1) |
Precision International, LLC |  | 354 |  |  | (184) |  |  | (332) |  |  | (162) |
GFRC Holdings, LLC |  | — |  |  | (548) |  |  | — |  |  | (548) |
LWO Acquisitions Company LLC |  | — |  |  | (609) |  |  | — |  |  | (609) |
ENET Holdings, LLC |  | — |  |  | (674) |  |  | — |  |  | (674) |
NetFortris Corp. |  | — |  |  | (1,371) |  |  | — |  |  | (1,371) |
Other, net (<$500) |  | 330 |  |  | 72 |  |  | 62 |  |  | 464 |
Total: |  | $ | 4,179 |  |  | $ | 61,981 |  |  | $ | (6,634) |  |  | $ | 59,526 |

The primary driver of net unrealized appreciation of $55.3 million for the year ended September 30, 2021 was the improvement in the financial and operational performance across a number of our portfolio companies and an increase in comparable transaction multiples used to estimate the fair value of several of our portfolio companies, partially offset by the reversal of unrealized depreciation associated with the exit of our investment in AG Transportation Holdings, LLC and a decrease in performance of certain of our other portfolio companies.
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As of September 30, 2022, the fair value of our investment portfolio was less than its cost basis by approximately $6.4 million and our entire investment portfolio was valued at 99.0% of cost, as compared to cumulative net unrealized appreciation of $11.1 million and a valuation of our entire portfolio at 102.0% of cost as of September 30, 2021.
Net Unrealized (Appreciation) Depreciation of Other
During the year ended September 30, 2021, we recorded $0.4 million of unrealized depreciation on our Credit Facility at fair value. No such amounts were recorded during the year ended September 30, 2022.
The comparison of the fiscal year ended September 30, 2021 to the fiscal year ended September 30, 2020 can be found in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021, as filed with the SEC on November 15, 2021, located within Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Our cash flows from operating activities are primarily generated from the interest payments on debt securities that we receive from our portfolio companies, as well as net proceeds received through repayments or sales of our investments. We utilize this cash primarily to fund new investments, make interest payments on our Credit Facility and notes payable, make distributions to our stockholders, pay management and administrative fees to the Adviser and Administrator, and for other operating expenses.
Net cash used in operating activities for the year ended September 30, 2022 was $76.4 million as compared to $14.1 million for the year ended September 30, 2021. The change was primarily due to an increase in purchases of investments. Purchases of investments were $274.9 million during the year ended September 30, 2022 compared to $181.8 million during the year ended September 30, 2021.
Net cash used in operating activities for the year ended September 30, 2021 was $14.1 million as compared to $46.1 million for the year ended September 30, 2020. The change was primarily due to an increase in principal repayments and net proceeds from sales of investments. Repayments and net proceeds from sales were $142.7 million during the year ended September 30, 2021 compared to $78.8 million during the year ended September 30, 2020.
As of September 30, 2022, we had loans to, syndicated participations in or equity investments in 52 companies, with an aggregate cost basis of approximately $656.1 million. As of September 30, 2021, we had loans to, syndicated participations in or equity investments in 46 companies, with an aggregate cost basis of approximately $546.5 million.
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The following table summarizes our total portfolio investment activity during the years ended September 30, 2022 and 2021:

| Year Ended September 30,
| 2022 |  | 2021
Beginning investment portfolio, at fair value | $ | 557,612 |  |  | $ | 450,400 |
New investments | 215,254 |  |  | 138,992 |
Disbursements to existing portfolio companies | 59,644 |  |  | 42,849 |
Scheduled principal repayments | (8,838) |  |  | (4,854) |
Unscheduled principal repayments | (151,154) |  |  | (121,962) |
Net proceeds from sales of investments | (15,758) |  |  | (12,457) |
Net unrealized appreciation (depreciation) of investments | (16,491) |  |  | 61,981 |
Reversal of prior period net appreciation (depreciation) of investments | (1,047) |  |  | (6,634) |
Net realized gain (loss) on investments | 5,416 |  |  | 4,179 |
Increase in investment balance due to PIK interest (A) | 4,532 |  |  | 5,994 |
Net change in premiums, discounts and amortization | 445 |  |  | (876) |
Ending Investment Portfolio, at Fair Value | $ | 649,615 |  |  | $ | 557,612 |

(A)PIK interest is a non-cash source of income and is calculated at the contractual rate stated in a loan agreement and added to the principal balance of a loan.
The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of September 30, 2022.

Year Ending September 30, |  | Amount
2023(A) |  | $ | 17,708 |
2024 |  | 58,399 |
2025 |  | 80,786 |
2026 |  | 155,974 |
2027 |  | 246,348 |
Thereafter |  | 36,975 |
Total contractual repayments |  | $ | 596,190 |
Adjustments to cost basis of debt investments |  | (1,142) |
Investments in equity securities |  | 61,005 |
Investments held as of September 30, 2022 at Cost: |  | $ | 656,053 |

(A)Includes debt investments with contractual principal amounts totaling $0.3 million for which the maturity date has passed as of September 30, 2022.
Financing Activities
Net cash provided by financing activities for the year ended September 30, 2022 was $77.7 million, which consisted primarily of $91.3 million in net borrowings on our Credit Facility and $50.0 million in gross proceeds from the issuance of notes payable, partially offset by $38.8 million used in the redemption of our 2024 Notes and $27.3 million in distributions to common shareholders.
Net cash provided by financing activities for the year ended September 30, 2021 was $12.4 million, which consisted primarily of $150.0 million in gross proceeds from the issuance of notes payable and $26.9 million in gross proceeds from the issuance of common stock, partially offset by $77.5 million in net repayments on our Credit Facility, $57.5 million used in the redemption of our 2023 Notes, and $26.0 million in distributions to common shareholders.
Net cash provided by financing activities for the year ended September 30, 2020 was $32.8 million, which consisted primarily of $61.1 million in net borrowings on our Credit Facility and $38.8 million in gross proceeds from the issuance
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of notes payable, partially offset by $51.8 million used in the redemption of our Series 2024 Term Preferred Stock and $25.2 million in distributions to common shareholders.
Distributions to Stockholders
Common Stock Distributions
To qualify to be taxed as a RIC and thus avoid corporate level federal income tax on the income we distribute to our stockholders, we are required to distribute to our stockholders on an annual basis at least 90.0% of our Investment Company Taxable Income. Additionally, our Credit Facility has a covenant that generally restricts the amount of distributions to stockholders that we can pay out to be no greater than our aggregate net investment income, net capital gains and amounts elected to have been paid during the prior year in accordance with Section 855(a) of the Code. In accordance with these requirements, during the year ended September 30, 2022, we paid monthly cash distributions of $0.065 per common share for the months of October 2021 through March 2022 and paid monthly cash distributions of $0.0675 per common share for the months of April 2022 through September 2022. These distributions totaled an aggregate of $27.3 million. During the year ended September 30, 2021, we paid monthly cash distributions of $0.065 per common share for each month, which totaled an aggregate of $26.0 million. During the year ended September 30, 2020, we paid monthly cash distributions of $0.07 per common share for the months of October 2019 through March 2020 and paid monthly cash distributions of $0.065 per common share for the months of April 2020 through September 2020. These distributions totaled an aggregate of $25.2 million. In October 2022, our Board of Directors declared a monthly distribution of $0.07 per common share for each of October, November, and December 2022. Our Board of Directors declared these distributions to our stockholders based on our estimates of our Investment Company Taxable Income for the fiscal year ending September 30, 2023. From inception through September 30, 2022, we have paid 236 monthly or quarterly consecutive distributions to common stockholders totaling approximately $423.6 million or $21.83 per share.
For the fiscal years ended September 30, 2022, 2021, and 2020, distributions declared and paid exceeded taxable income available for common distributions resulting in a partial return of capital of approximately $1.4 million, $1.0 million, and $0.4 million, respectively.
Preferred Stock Dividends
On October 2, 2019, we voluntarily redeemed all 2,070,000 outstanding shares of our Series 2024 Term Preferred Stock at a redemption price of $25.00 per share which represents the liquidation preference per share, plus accrued and unpaid dividends through October 1, 2019 in the amount of $0.004166 per share, for a payment per share of $25.004166 and an aggregate redemption price of approximately $51.8 million.
In accordance with GAAP, we treated these monthly dividends as an operating expense. For federal income tax purposes, the dividends paid by us to preferred stockholders generally constituted ordinary income to the extent of our current and accumulated earnings and profits and is reported after the end of the calendar year based on tax information for the full fiscal year. Such a characterization made on an interim, quarterly basis may not be representative of the actual tax characterization for the full fiscal year.
Dividend Reinvestment Plan
Our common stockholders who hold their shares through our transfer agent, Computershare, Inc. (“Computershare”), have the option to participate in a dividend reinvestment plan offered by Computershare, as the plan agent. This is an “opt in” dividend reinvestment plan, meaning that common stockholders may elect to have their cash distributions automatically reinvested in additional shares of our common stock. Common stockholders who do make such election will receive their distributions in cash. Common stockholders who receive distributions in the form of stock will be subject to the same federal, state and local tax consequences as stockholders who elect to receive their distributions in cash. The common stockholder will have an adjusted basis in the additional common shares purchased through the plan equal to the amount of the reinvested distribution. The additional shares will have a new holding period commencing on the day following the date on which the shares are credited to the common stockholder’s account. Computershare purchases shares in the open market in connection with the obligations under the plan.
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Equity
Registration Statement
Our shelf registration statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock or preferred stock. As of September 30, 2022, we had the ability to issue up to an additional $295.5 million in securities under the registration statement.
Common Stock
In May 2021, we entered into an equity distribution agreement with Jefferies LLC, as amended in August 2022 (the “Jefferies Sales Agreement”) under which we have the ability to issue and sell, from time to time, shares of our common stock with an aggregate offering price of up to $60.0 million. During the year ended September 30, 2022, we sold 430,425 shares of our common stock under the Jefferies Sales Agreement, at a weighted-average price of $10.53 per share and raised $4.5 million of gross proceeds. Net proceeds, after deducting commissions and offering costs borne by us, were approximately $4.5 million. As of September 30, 2022, we had a remaining capacity to sell up to an additional $47.8 million of our common stock under the Jefferies Sales Agreement.
We anticipate issuing equity securities to obtain additional capital in the future. However, we cannot determine the timing or terms of any future equity issuances or whether we will be able to issue equity on terms favorable to us, or at all. To the extent that our common stock trades at a market price below our NAV per share, we will generally be precluded from raising equity capital through public offerings of our common stock, other than pursuant to stockholder and independent director approval or a rights offering to existing common stockholders.
On September 30, 2022, the closing market price of our common stock was $8.49 per share, a 6.5% discount to our September 30, 2022 NAV per share of $9.08.
Revolving Line of Credit
On May 13, 2021, we, through Business Loan, amended and restated the Credit Facility to, among other things, (i) decrease the commitment amount from $205.0 million to $175.0 million, (ii) extend the revolving period end date to October 31, 2023, (iii) extend the maturity date to October 31, 2025 (at which time all principal and interest will be due and payable if the Credit Facility is not extended by the revolving period end date), (iv) reduce the interest rate margin to 2.70% during the revolving period and 3.25% thereafter, with a LIBOR floor of 0.35%, (v) revise the unused fee to include an additional fee tier of 0.35% per annum on the daily undrawn amounts if the average unused amount is equal to or less than 35% during the applicable period, (vi) provide for certain excess concentration limits, including a reduced second lien limit and a new broadly syndicated loan limit and (vii) add customary LIBOR replacement language. We incurred fees of approximately $1.1 million in connection with this amendment and restatement, which are being amortized through our Credit Facility’s revolving period end date of October 31, 2023.
On September 12, 2022, we, through Business Loan, entered into Amendment No. 1 to the Credit Facility to update the reference rate from LIBOR to Term SOFR plus an 11 basis point credit spread adjustment. On September 20, 2022, we, through Business Loan, entered into Amendment No. 2 to the Credit Facility to increase the size of the credit facility by $50.0 million from $175.0 million to $225.0 million, as permitted under the terms of the Credit Facility.
Interest is payable monthly during the term of our Credit Facility. Available borrowings are subject to various constraints imposed under our Credit Facility, based on the aggregate loan balance pledged by Business Loan, which varies as loans are added and repaid, regardless of whether such repayments are prepayments or made as contractually required. Our Credit Facility also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account with KeyBank and with The Bank of New York Mellon Trust Company, N.A. as custodian. KeyBank, which also serves as the trustee of the account, generally remits the collected funds to us once a month.
Our Credit Facility contains covenants that require Business Loan to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions), and restrict material changes to our credit and collection policies without the lenders’ consents. Our Credit Facility generally limits distributions to our stockholders on a fiscal year basis to the sum of our net investment income, net capital gains and amounts elected to have been paid during the prior year in accordance with Section 855(a) of the Code. Business Loan is also subject to certain limitations on the type of loan investments it can apply as collateral towards the borrowing base to
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receive additional borrowing availability under our Credit Facility, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life, portfolio company leverage and lien property. Our Credit Facility further requires Business Loan to comply with other financial and operational covenants, which obligate Business Loan to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of 25 obligors required in the borrowing base.
Additionally, we are required to maintain (i) a minimum net worth (defined in our Credit Facility to include any outstanding mandatorily redeemable preferred stock) of $325.0 million plus 50.0% of all equity and subordinated debt raised after May 13, 2021 less 50% of any equity and subordinated debt retired or redeemed after May 13, 2021, which equates to $336.7 million as of September 30, 2022, (ii) asset coverage with respect to “senior securities representing indebtedness" of at least 150% (or such percentage as may be set forth in Section 18 of the 1940 Act, as modified by Section 61 of the 1940 Act), and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code.
As of September 30, 2022, and as defined in our Credit Facility, we had a net worth of $512.3 million, asset coverage on our “senior securities representing indebtedness” of 190.4% and an active status as a BDC and RIC. In addition, as of September 30, 2022, we had 33 obligors in our Credit Facility’s borrowing base and we were in compliance with all of our Credit Facility covenants. Refer to Note 5—Borrowings of the notes to our Consolidated Financial Statements included elsewhere in this Annual Report for additional information regarding our Credit Facility.
Notes Payable
In November 2021, we completed a private placement of $50.0 million aggregate principal amount of 3.75% Notes due 2027 (the “2027 Notes”) for net proceeds of approximately $48.5 million after deducting initial purchasers’ costs, commissions and offering expenses borne by us. The 2027 Notes will mature on May 1, 2027 and may be redeemed in whole or in part at any time or from time to time at the Company’s option prior to maturity at par plus a “make-whole” premium, if applicable. The 2027 Notes bear interest at a rate of 3.75% per year. Interest is payable semi-annually on May 1 and November 1 of each year (which equates to approximately $1.9 million per year).
In April 2022, pursuant to the registration rights agreement we entered into in connection with the 2027 Notes, we conducted an exchange offer through which we offered to exchange all of our then outstanding 2027 Notes (the “Restricted Notes”) that were issued on November 4, 2021, for an equal aggregate principal amount of our new 3.75% Notes due 2027 (the “Exchange Notes”) that had been registered with the SEC under the Securities Act. The terms of the Exchange Notes are identical to those of the outstanding Restricted Notes, except that the transfer restrictions and registration rights relating to the Restricted Notes do not apply to the Exchange Notes, and the Exchange Notes do not provide for the payment of additional interest in the event of a registration default.
In December 2020, we completed an offering of $100.0 million aggregate principal amount of 5.125% Notes due 2026 (the “2026 Notes”) for net proceeds of approximately $97.7 million after deducting underwriting discounts, commissions and offering expenses borne by us. In March 2021, we completed an offering of an additional $50.0 million aggregate principal amount of the 2026 Notes for net proceeds of approximately $50.6 million after adding premiums and deducting underwriting costs, commissions and offering expenses borne by us. The 2026 Notes will mature on January 31, 2026 and may be redeemed in whole or in part at any time or from time to time at the Company’s option prior to maturity at par plus a “make-whole” premium, if applicable. The 2026 Notes bear interest at a rate of 5.125% per year. Interest is payable semi-annually on January 31 and July 31 of each year (which equates to approximately $7.7 million per year).
In October 2019, we completed an offering of $38.8 million aggregate principal amount of 5.375% Notes due 2024 (the “2024 Notes”), inclusive of the overallotment option exercised by the underwriters, for net proceeds of approximately $37.5 million after deducting underwriting discounts, commissions and offering expenses borne by us. On November 1, 2021, we voluntarily redeemed the 2024 Notes with an aggregate principal amount outstanding of $38.8 million. The 2024 Notes would have otherwise matured on November 1, 2024.
In November 2018, we completed an offering of $57.5 million aggregate principal amount of 6.125% Notes due 2023 (the “2023 Notes”), inclusive of the overallotment option exercised by the underwriters, for net proceeds of $55.4 million after deducting underwriting discounts, commissions and offering expenses borne by us. On January 7, 2021, we voluntarily redeemed the 2023 Notes with an aggregate principal amount outstanding of $57.5 million. The redemption amount was $58.1 million inclusive of accrued interest through the date of redemption. In connection with the voluntary redemption of the 2023 Notes, we incurred a loss on extinguishment of debt of $1.2 million, which is primarily comprised of the unamortized deferred issuance costs at the time of redemption. The 2023 Notes would have otherwise matured on November 1, 2024.
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The indenture relating to the 2027 Notes and the 2026 Notes contains certain covenants, including (i) an inability to incur additional debt or issue additional debt or preferred securities unless the Company’s asset coverage meets the threshold specified in the 1940 Act after such borrowing, (ii) an inability to declare any dividend or distribution (except a dividend payable in our stock) on a class of our capital stock or to purchase shares of our capital stock unless the Company’s asset coverage meets the threshold specified in the 1940 Act at the time of (and giving effect to) such declaration or purchase, and (iii) if, at any time, we are not subject to the reporting requirements of the Exchange Act, we will provide the holders of the 2027 Notes and the 2026 Notes, as applicable, and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements.
Off-Balance Sheet Arrangements
We generally recognize success fee income when the payment has been received. As of September 30, 2022 and 2021, we had off-balance sheet success fee receivables on our accruing debt investments of $4.7 million and $11.7 million (or approximately $0.13 per common share and $0.34 per common share), respectively, that would be owed to us, generally upon a change of control of the portfolio companies. Consistent with GAAP, we generally have not recognized our success fee receivables and related income in our Consolidated Financial Statements until earned. Due to the contingent nature of our success fees, there are no guarantees that we will be able to collect all of these success fees or know the timing of such collections.
Contractual Obligations
We have lines of credit, delayed draw term loans, and an uncalled capital commitment with certain of our portfolio companies that have not been fully drawn. Since these commitments have expiration dates and we expect many will never be fully drawn, the total commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of the combined unused lines of credit, the unused delayed draw term loans, and the uncalled capital commitment as of September 30, 2022 and 2021 to be immaterial.
The following table shows our contractual obligations as of September 30, 2022, at cost:

Contractual Obligations(A) |  | Payments Due by Period
| Less than 1 Year |  | 1-3 Years |  | 3-5 Years |  | More than 5 Years |  | Total
Credit Facility(B) |  | $ | — |  |  | $ | — |  |  | $ | 141,800 |  |  | $ | — |  |  | $ | 141,800 |
Notes Payable |  | — |  |  | — |  |  | 200,000 |  |  | — |  |  | 200,000 |
Interest expense on debt obligations(C) |  | 18,755 |  |  | 37,509 |  |  | 6,297 |  |  | — |  |  | 62,561 |
Total |  | $ | 18,755 |  |  | $ | 37,509 |  |  | $ | 348,097 |  |  | $ | — |  |  | $ | 404,361 |

(A)Excludes our unused line of credit commitments, unused delayed draw term loans, and uncalled capital commitments to our portfolio companies in an aggregate amount of $74.8 million, at cost, as of September 30, 2022.
(B)Principal balance of borrowings outstanding under our Credit Facility, based on the maturity date following the current contractual revolver period end date.
(C)Includes estimated interest payments on our Credit Facility, 2027 Notes, and 2026 Notes. The amount of interest expense calculated for purposes of this table was based upon rates and balances as of September 30, 2022.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported consolidated amounts of assets and liabilities, including disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ materially from those estimates under different assumptions or conditions. We have identified our investment valuation policy (which has been approved by our Board of Directors) as our most critical accounting policy, which is described in Note 2—Summary of Significant Accounting Policies in the accompanying notes to our Consolidated Financial Statements included elsewhere in this Annual Report. Additionally, refer to Note 3—Investments in our accompanying Notes to Consolidated Financial Statements included elsewhere in this Annual Report for additional information regarding fair value measurements and our application of Financial Accounting Standards Board Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures.” We have also identified our revenue recognition policy as a critical accounting policy, which is described in Note 2—Summary of Significant
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Accounting Policies in our accompanying Notes to Consolidated Financial Statements included elsewhere in this Annual Report.
Investment Valuation
Credit Monitoring and Risk Rating
The Adviser monitors a wide variety of key credit statistics that provide information regarding our portfolio companies to help us assess credit quality and portfolio performance and, in some instances, used as inputs in our valuation techniques. Generally, we, through the Adviser, participate in periodic board meetings of our portfolio companies in which we hold board seats and also require them to provide annual audited and monthly unaudited financial statements. Using these statements or comparable information and board discussions, the Adviser calculates and evaluates certain credit statistics.
The Adviser risk rates all of our investments in debt securities. The Adviser does not risk rate our equity securities. For syndicated loans that have been rated by an SEC registered Nationally Recognized Statistical Rating Organization (“NRSRO"), the Adviser generally uses the average of two corporate level NRSRO’s risk ratings for such security. For all other debt securities, the Adviser uses a proprietary risk rating system. While the Adviser seeks to mirror the NRSRO systems, we cannot provide any assurance that the Adviser’s risk rating system will provide the same risk rating as an NRSRO would for these securities. The Adviser’s risk rating system is used to estimate the probability of default on debt securities and the expected loss if there is a default. The Adviser’s risk rating system uses a scale of 0 to >10, with >10 being the lowest probability of default. It is the Adviser’s understanding that most debt securities of medium-sized companies do not exceed the grade of BBB on an NRSRO scale, so there would be no debt securities in the middle market that would meet the definition of AAA, AA or A. Therefore, the Adviser’s scale begins with the designation >10 as the best risk rating which may be equivalent to a BBB from an NRSRO; however, no assurance can be given that a >10 on the Adviser’s scale is equal to a BBB or Baa2 on an NRSRO scale. The Adviser’s risk rating system covers both qualitative and quantitative aspects of the business and the securities we hold.
The following table reflects risk ratings for all proprietary loans in our portfolio as of September 30, 2022 and 2021, representing approximately 97.9% and 95.5%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period:

|  | As of September 30,
Rating |  | 2022 |  | 2021
Highest |  | 10.0 |  |  | 10.0 |
Average |  | 7.1 |  |  | 6.6 |
Weighted Average |  | 7.6 |  |  | 7.0 |
Lowest |  | 1.0 |  |  | 1.0 |

The following table reflects the risk ratings for all syndicated loans in our portfolio that were rated by an NRSRO as of September 30, 2022 and 2021, representing approximately 1.6% and 3.9%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period:

|  | As of September 30,
Rating |  | 2022 |  | 2021
Highest |  | 4.0 |  |  | 5.0 |
Average |  | 3.4 |  |  | 4.6 |
Weighted Average |  | 3.6 |  |  | 4.5 |
Lowest |  | 3.0 |  |  | 4.0 |

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The following table reflects the risk ratings for all syndicated loans in our portfolio that were not rated by an NRSRO as of September 30, 2022 and 2021, representing approximately 0.5% and 0.6%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period:

|  | As of September 30,
Rating |  | 2022 |  | 2021
Highest |  | 5.0 |  |  | 5.0 |
Average |  | 5.0 |  |  | 5.0 |
Weighted Average |  | 5.0 |  |  | 5.0 |
Lowest |  | 5.0 |  |  | 5.0 |

Tax Status
We intend to continue to maintain our qualification as a RIC under Subchapter M of the Code for federal income tax purposes and also to limit certain federal excise taxes imposed on RICs. Refer to Note 10—Federal and State Income Taxes in our accompanying Notes to Consolidated Financial Statements included elsewhere in this Annual Report for additional information regarding our tax status.
Recent Accounting Pronouncements
Refer to Note 2—Summary of Significant Accounting Policies in the notes to our accompanying Consolidated Financial Statements included elsewhere in this Annual Report for a description of recent accounting pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. The prices of securities held by us may decline in response to certain events, including those directly involving the companies whose securities are owned by us; conditions affecting the general economy; overall market changes, including due to inflation; local, regional or global political, social or economic instability; and interest rate fluctuations.
The primary risk we believe we are exposed to is interest rate risk. Because we borrow money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. We use a combination of debt and equity capital to finance our investing activities. We may use interest rate risk management techniques from time to time to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act.
All of our variable-rate debt investments have rates generally associated with either the current LIBOR, SOFR, or prime rate. As of September 30, 2022, our portfolio of debt investments on a principal basis consisted of the following:

Variable rates |  | 88.5 | %
Fixed rates |  | 11.5 |
Total |  | 100.0 | %

To illustrate the potential impact of changes in market interest rates on our net increase in net assets resulting from operations, we have performed the following hypothetical analysis, which assumes that our balance sheet and contractual
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interest rates remain constant as of September 30, 2022 and no further actions are taken to alter our existing interest rate sensitivity.

Basis Point Change(A) |  | Increase (Decrease) in Interest Income |  | Increase (Decrease) in Interest Expense |  | Net Increase (Decrease) in Net Assets Resulting from Operations(B)
Up 200 basis points |  | $ | 10,552 |  |  | $ | 2,836 |  |  | $ | 7,716 |
Up 100 basis points |  | 5,276 |  |  | 1,418 |  |  | 3,858 |
Up 50 basis points |  | 2,638 |  |  | 709 |  |  | 1,929 |
Down 50 basis points |  | (2,638) |  |  | (709) |  |  | (1,929) |
Down 100 basis points |  | (5,276) |  |  | (1,418) |  |  | (3,858) |
Down 200 basis points |  | (9,739) |  |  | (2,836) |  |  | (6,903) |

(A)Illustrates the potential impact of changes in market rates as compared to 30-day LIBOR of 3.14% and 30-day SOFR of 3.04% as of September 30, 2022.
(B)Excludes the potential impact of changes in incentive fees.
Although management believes that this analysis is indicative of our existing interest rate sensitivity, it does not adjust for potential changes in credit quality, size and composition of our loan portfolio on the balance sheet and other business developments, including any replacement of LIBOR, that could affect net increase in net assets resulting from operations or otherwise impact our results or operations. Accordingly, actual results could differ significantly from those in the hypothetical analysis in the table above.
We may also experience risk associated with investing in securities of companies with foreign operations. Some of our portfolio companies have operations located outside the U.S. These risks include fluctuations in foreign currency exchange rates, imposition of foreign taxes, changes in exportation regulations and political and social instability.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements

Management’s Annual Report on Internal Control over Financial Reporting | 69
Report of Independent Registered Public Accounting Firm (PCAOB ID 238) | 70
Consolidated Statements of Assets and Liabilities as of September 30, 202 2 and 2021 | 72
Consolidated Statements of Operations for the years ended September 30, 202 2, 202 1 and 2020 | 73
Consolidated Statements of Changes in Net Assets for the years ended September 30, 202 2, 202 1 and 2020 | 75
Consolidated Statements of Cash Flows for the years ended September 30, 202 2, 202 1 and 2020 | 76
Consolidated Schedules of Investments as of September 30, 202 2 and 2021 | 77
Notes to Consolidated Financial Statements | 90

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Management’s Annual Report on Internal Control over Financial Reporting
To the Stockholders and Board of Directors of Gladstone Capital Corporation:
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and include those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the dispositions of our assets; (2) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with appropriate authorizations; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of our management, we assessed the effectiveness of our internal control over financial reporting as of September 30, 2022, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on its assessment, management has concluded that our internal control over financial reporting was effective as of September 30, 2022.
November 14, 2022
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Gladstone Capital Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of assets and liabilities, including the consolidated schedules of investments, of Gladstone Capital Corporation and its subsidiaries (the “Company”) as of September 30, 2022 and 2021, and the related consolidated statements of operations, changes in net assets and cash flows for each of the three years in the period ended September 30, 2022, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2022 and 2021, and the results of its operations, changes in its net assets and its cash flows for each of the three years in the period ended September 30, 2022 in conformity with accounting principles generally accepted in the United States of America.
We have also previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of assets and liabilities, including the consolidated schedules of investments, of the Company as of September 30, 2020, 2019, 2018, 2017, 2016, 2015, 2014, and 2013, and the related consolidated statements of operations, changes in net assets and cash flows for the years ended September 30, 2019, 2018, 2017, 2016, 2015, 2014, and 2013 (none of which are presented herein), and we expressed unqualified opinions on those consolidated financial statements. In our opinion, the information set forth in the Senior Securities table of the Company for each of the ten years in the period ended September 30, 2022, appearing on pages 47-48 under Item 5 of this Form 10-K, is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our procedures included confirmation of securities owned as of September 30, 2022 and 2021 by correspondence with the custodian, agent banks and portfolio company investees; when replies were not received, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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Valuation of Level 3 Investments
As described in Notes 2 and 3 to the consolidated financial statements, the Company held $643.16 million of total level 3 investments at fair value as of September 30, 2022. Management uses significant unobservable inputs in estimating the fair value of its level 3 investments, including (i) with respect to investments valued using a total enterprise value, portfolio company earnings before interest, taxes, depreciation and amortization (“EBITDA”) and EBITDA multiples, revenue and revenue multiples, or a discounted cash flow analysis using estimated risk-adjusted discount rates; (ii) with respect to investments valued using a yield analysis, a modified discount rate; and (iii) with respect to investments valued using market quotations for which a limited market exists, the lower indicative bid price in the bid-to-ask price range. The principal considerations for our determination that performing procedures relating to the valuation of level 3 investments is a critical audit matter are (i) the significant judgment by management to determine the fair value of these level 3 investments using a total enterprise value or yield analysis due to the use of significant unobservable inputs, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to the EBITDA and EBITDA multiples and revenue and revenue multiples used in a total enterprise value and the modified discount rate used in a yield analysis, and (ii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, either (i) testing management’s process for determining the fair value estimate, including testing the completeness and accuracy of data provided by management, evaluating the appropriateness of management’s valuation methods, and evaluating the reasonableness of the EBITDA and EBITDA multiples and revenue and revenue multiples used in a total enterprise value and the modified discount rate used in a yield analysis by considering current and past performance of the investment, consistency of the unobservable inputs with external market data and evidence obtained in other areas of the audit, and management’s historical forecasting accuracy, or (ii) the involvement of professionals with specialized skill and knowledge to assist in developing an independent fair value estimate for certain level 3 investments and comparison of management’s estimate to the independently developed estimate. Developing an independent fair value estimate involved testing the completeness and accuracy of data provided by management and independently developing significant unobservable inputs related to the modified discount rate for those investments valued using a yield analysis and the EBITDA and EBITDA multiples or revenue and revenue multiples for those investments valued using a total enterprise value.
/s/ PricewaterhouseCoopers LLP
Washington, DC
November 14, 2022
We have served as the Company’s auditor since 2002.
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GLADSTONE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

| September 30, 2022 |  | September 30, 2021
ASSETS |  |  |
Investments, at fair value: |  |  |
Non-Control/Non-Affiliate investments (Cost of $571,736 and $447,566, respectively) | $ | 574,811 |  |  | $ | 454,601 |
Affiliate investments (Cost of $49,412 and $70,682, respectively) | 39,091 |  |  | 82,281 |
Control investments (Cost of $34,905 and $28,264, respectively) | 35,713 |  |  | 20,730 |
Cash and cash equivalents | 2,011 |  |  | 671 |
Restricted cash and cash equivalents | 96 |  |  | 175 |
Interest receivable, net | 2,737 |  |  | 2,361 |
Due from administrative agent | 3,199 |  |  | 2,951 |
Deferred financing costs, net | 836 |  |  | 1,033 |
Other assets, net | 2,474 |  |  | 1,697 |
TOTAL ASSETS | $ | 660,968 |  |  | $ | 566,500 |
LIABILITIES |  |  |
Line of credit at fair value (Cost of $141,800 and $50,500, respectively) | $ | 141,800 |  |  | $ | 50,500 |
Notes payable, net of unamortized deferred financing costs of $2,393 and $2,202, respectively | 197,607 |  |  | 186,611 |
Accounts payable and accrued expenses | 500 |  |  | 490 |
Interest payable | 2,517 |  |  | 1,797 |
Fees due to Adviser(A) | 2,104 |  |  | 2,255 |
Fee due to Administrator(A) | 423 |  |  | 382 |
Other liabilities | 530 |  |  | 6,026 |
TOTAL LIABILITIES | $ | 345,481 |  |  | $ | 248,061 |
Commitments and contingencies(B) |  |  |
NET ASSETS |  |  |
Common stock, $0.001 par value per share, 44,560,000 and 44,560,000 shares authorized, respectively, and 34,734,796 and 34,304,371 shares issued and outstanding, respectively | $ | 35 |  |  | $ | 34 |
Capital in excess of par value(C) | 395,542 |  |  | 392,494 |
Cumulative net unrealized appreciation (depreciation) of investments | (6,438) |  |  | 11,100 |
Under (over) distributed net investment income(C) | (500) |  |  | 149 |
Accumulated net realized losses | (73,152) |  |  | (85,338) |
Total distributable loss | (80,090) |  |  | (74,089) |
TOTAL NET ASSETS | $ | 315,487 |  |  | $ | 318,439 |
NET ASSET VALUE PER COMMON SHARE | $ | 9.08 |  |  | $ | 9.28 |

(A)Refer to Note 4—Related Party Transactions for additional information.
(B)Refer to Note 11—Commitments and Contingencies for additional information.
(C)Refer to Note 9—Distributions to Common Stockholders for additional information.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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GLADSTONE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

| Year ended September 30,
| 2022 |  | 2021 |  | 2020
INVESTMENT INCOME |  |  |  |  |
Interest income |  |  |  |  |
Non-Control/Non-Affiliate investments | $ | 43,771 |  |  | $ | 40,953 |  |  | $ | 37,469 |
Affiliate investments | 3,523 |  |  | 4,815 |  |  | 4,296 |
Control investments | 2,454 |  |  | 1,646 |  |  | 1,661 |
Cash and cash equivalents | 11 |  |  | — |  |  | 17 |
Total interest income (excluding PIK interest income) | 49,759 |  |  | 47,414 |  |  | 43,443 |
PIK interest income |  |  |  |  |
Non-Control/Non-Affiliate investments | 4,014 |  |  | 2,545 |  |  | 2,578 |
Affiliate investments | 215 |  |  | — |  |  | — |
Total PIK interest income | 4,229 |  |  | 2,545 |  |  | 2,578 |
Total interest income | 53,988 |  |  | 49,959 |  |  | 46,021 |
Success fee income |  |  |  |  |
Non-Control/Non-Affiliate investments | 3,231 |  |  | 202 |  |  | 350 |
Affiliate investments | 1,563 |  |  | — |  |  | — |
Total success fee income | 4,794 |  |  | 202 |  |  | 350 |
Dividend income |  |  |  |  |
Non-Control/Non-Affiliate investments | 2,181 |  |  | 1,645 |  |  | 166 |
Control investments | 1,281 |  |  | 611 |  |  | 559 |
Total dividend income | 3,462 |  |  | 2,256 |  |  | 725 |
Other income | 906 |  |  | 1,377 |  |  | 863 |
Total investment income | 63,150 |  |  | 53,794 |  |  | 47,959 |
EXPENSES |  |  |  |  |
Base management fee(A) | 10,247 |  |  | 8,674 |  |  | 7,568 |
Loan servicing fee(A) | 6,329 |  |  | 5,579 |  |  | 5,819 |
Incentive fee(A) | 7,511 |  |  | 5,746 |  |  | 5,251 |
Administration fee(A) | 1,610 |  |  | 1,438 |  |  | 1,430 |
Interest expense on line of credit and notes payable | 12,966 |  |  | 11,513 |  |  | 9,991 |
Amortization of deferred financing costs | 1,175 |  |  | 1,347 |  |  | 1,484 |
Professional fees | 803 |  |  | 806 |  |  | 877 |
Other general and administrative expenses | 1,362 |  |  | 1,101 |  |  | 1,228 |
Expenses, before credits from Adviser | 42,003 |  |  | 36,204 |  |  | 33,648 |
Credit to base management fee - loan servicing fee(A) | (6,329) |  |  | (5,579) |  |  | (5,819) |
Credit to fees from Adviser - other(A) | (4,803) |  |  | (2,953) |  |  | (5,033) |
Total expenses, net of credits | 30,871 |  |  | 27,672 |  |  | 22,796 |
NET INVESTMENT INCOME | 32,279 |  |  | 26,122 |  |  | 25,163 |
NET REALIZED AND UNREALIZED GAIN (LOSS) |  |  |  |  |
Net realized gain (loss): |  |  |  |  |
Non-Control/Non-Affiliate investments | 504 |  |  | 4,179 |  |  | (7,413) |
Affiliate investments | 13,408 |  |  | — |  |  | (63) |
Control investments | (8,496) |  |  | — |  |  | — |
Other | (243) |  |  | (999) |  |  | (1,407) |
Total net realized gain (loss) | 5,173 |  |  | 3,180 |  |  | (8,883) |
Net unrealized appreciation (depreciation): |  |  |  |  |

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Non-Control/Non-Affiliate investments | (3,960) |  |  | 33,786 |  |  | (11,355) |
Affiliate investments | (21,920) |  |  | 16,742 |  |  | (1,643) |
Control investments | 8,342 |  |  | 4,819 |  |  | (5,672) |
Other | — |  |  | (350) |  |  | 517 |
Total net unrealized appreciation (depreciation) | (17,538) |  |  | 54,997 |  |  | (18,153) |
Net realized and unrealized gain (loss) | (12,365) |  |  | 58,177 |  |  | (27,036) |
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | $ | 19,914 |  |  | $ | 84,299 |  |  | $ | (1,873) |
BASIC AND DILUTED PER COMMON SHARE: |  |  |  |  |
Net investment income | $ | 0.94 |  |  | $ | 0.79 |  |  | $ | 0.81 |
Net increase (decrease) in net assets resulting from operations | $ | 0.58 |  |  | $ | 2.54 |  |  | $ | (0.06) |
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING: |  |  |  |  |
Basic and Diluted | 34,351,663 |  | 33,234,482 |  | 31,040,852

(A)Refer to Note 4—Related Party Transactions for additional information.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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GLADSTONE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(DOLLAR AMOUNTS IN THOUSANDS)

| Year ended September 30,
| 2022 |  | 2021 |  | 2020
OPERATIONS |  |  |  |  |
Net investment income | $ | 32,279 |  |  | $ | 26,122 |  |  | $ | 25,163 |
Net realized gain (loss) on investments | 5,416 |  |  | 4,179 |  |  | (7,476) |
Net realized loss on other | (243) |  |  | (999) |  |  | (1,407) |
Net unrealized appreciation (depreciation) of investments | (17,538) |  |  | 55,347 |  |  | (18,670) |
Net unrealized appreciation (depreciation) of other | — |  |  | (350) |  |  | 517 |
Net increase (decrease) in net assets from operations | 19,914 |  |  | 84,299 |  |  | (1,873) |
DISTRIBUTIONS |  |  |  |  |
Distributions to common stockholders from net investment income ($0.76, $0.75, and $0.80 per share, respectively)(A) | (25,916) |  |  | (24,987) |  |  | (24,752) |
Distributions to common stockholders from return of capital ($0.04, $0.03, and $0.01 per share, respectively)(A) | (1,406) |  |  | (985) |  |  | (411) |
Net decrease in net assets from distributions | (27,322) |  |  | (25,972) |  |  | (25,163) |
CAPITAL TRANSACTIONS |  |  |  |  |
Issuance of common stock | 4,533 |  |  | 26,850 |  |  | 11,664 |
Offering costs for issuance of common stock | (77) |  |  | (481) |  |  | (215) |
Net increase (decrease) in net assets from capital transactions | 4,456 |  |  | 26,369 |  |  | 11,449 |
NET INCREASE (DECREASE) IN NET ASSETS | (2,952) |  |  | 84,696 |  |  | (15,587) |
NET ASSETS, BEGINNING OF YEAR | 318,439 |  |  | 233,743 |  |  | 249,330 |
NET ASSETS, END OF YEAR | $ | 315,487 |  |  | $ | 318,439 |  |  | $ | 233,743 |

(A)Refer to Note 9 – Distributions to Common Stockholders in the accompanying Notes to Consolidated Financial Statements for additional information.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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GLADSTONE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)

| Year ended September 30,
| 2022 |  | 2021 |  | 2020
CASH FLOWS FROM OPERATING ACTIVITIES |  |  |  |  |
Net increase (decrease) in net assets resulting from operations | $ | 19,914 |  |  | $ | 84,299 |  |  | $ | (1,873) |
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities: |  |  |  |  |
Purchase of investments | (274,898) |  |  | (181,841) |  |  | (149,906) |
Principal repayments on investments | 159,992 |  |  | 126,816 |  |  | 75,992 |
Proceeds from sale of investments | 15,848 |  |  | 15,848 |  |  | 2,763 |
Increase in investments due to paid-in-kind interest or other | (4,532) |  |  | (5,994) |  |  | (2,400) |
Net change in premiums, discounts and amortization | (445) |  |  | 876 |  |  | (329) |
Net realized loss (gain) on investments | (5,416) |  |  | (4,179) |  |  | 7,685 |
Net unrealized depreciation (appreciation) of investments | 17,538 |  |  | (55,347) |  |  | 18,670 |
Net realized loss (gain) on other | 243 |  |  | 999 |  |  | 1,407 |
Net unrealized depreciation (appreciation) of other | — |  |  | 350 |  |  | (517) |
Amortization of deferred financing costs | 1,175 |  |  | 1,347 |  |  | 1,484 |
Changes in assets and liabilities: |  |  |  |  |
Decrease (increase) in interest receivable, net | (376) |  |  | 640 |  |  | (376) |
Decrease (increase) in funds due from administrative agent | (248) |  |  | (848) |  |  | 723 |
Decrease (increase) in other assets, net | (787) |  |  | (941) |  |  | 255 |
Increase (decrease) in accounts payable and accrued expenses | 10 |  |  | 113 |  |  | (199) |
Increase (decrease) in interest payable | 720 |  |  | 616 |  |  | 339 |
Increase (decrease) in fees due to Adviser(A) | (151) |  |  | 569 |  |  | 234 |
Increase (decrease) in fee due to Administrator(A) | 41 |  |  | 53 |  |  | (37) |
Increase (decrease) in other liabilities | (5,029) |  |  | 2,562 |  |  | (6) |
Net cash provided by (used in) operating activities | (76,401) |  |  | (14,062) |  |  | (46,091) |
CASH FLOWS FROM FINANCING ACTIVITIES |  |  |  |  |
Proceeds from line of credit | 328,900 |  |  | 238,800 |  |  | 204,500 |
Repayments on line of credit | (237,600) |  |  | (316,300) |  |  | (143,400) |
Redemption of mandatorily redeemable preferred stock | — |  |  | — |  |  | (51,750) |
Proceeds from issuance of notes payable | 50,000 |  |  | 150,000 |  |  | 38,813 |
Redemption of notes payable | (38,813) |  |  | (57,500) |  |  | — |
Financing costs | (1,968) |  |  | (3,036) |  |  | (1,677) |
Proceeds from issuance of common stock | 4,533 |  |  | 26,850 |  |  | 11,664 |
Offering costs for issuance of common stock | (68) |  |  | (403) |  |  | (175) |
Distributions paid to common stockholders | (27,322) |  |  | (25,972) |  |  | (25,163) |
Net cash provided by (used in) financing activities | 77,662 |  |  | 12,439 |  |  | 32,812 |
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS RESTRICTED CASH, AND RESTRICTED CASH EQUIVALENTS | 1,261 |  |  | (1,623) |  |  | (13,279) |
CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND RESTRICTED CASH EQUIVALENTS, BEGINNING OF YEAR | 846 |  |  | 2,469 |  |  | 15,748 |
CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND RESTRICTED CASH EQUIVALENTS, END OF YEAR | $ | 2,107 |  |  | $ | 846 |  |  | $ | 2,469 |
CASH PAID DURING YEAR FOR INTEREST | $ | 12,246 |  |  | $ | 10,897 |  |  | $ | 9,652 |
NON-CASH ACTIVITIES(B) | 7,489 |  |  | 6,633 |  |  | — |

(A)Refer to Note 4—Related Party Transactions for additional information.
(B)Non-cash activities relate to estimated tax liabilities and escrows associated with portfolio company exits and the following transactions:
•In June 2022, our investment in LWO Acquisitions Company LLC was restructured, resulting in non-cash activity of $6.8 million and new investments in Lonestar EMS, LLC, which are listed on the accompanying Consolidated Schedule of Investments as of September 30, 2022.
•In June 2021, our investment in NetFortris Corp. was restructured. As part of the transaction, approximately $3.5 million of fees and accrued interest were capitalized to the term loan.
•Approximately $3.1 million of non-cash activities consists of estimated tax liabilities for portfolio company exits that occurred during the year ended September 30, 2021.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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GLADSTONE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2022
(DOLLAR AMOUNTS IN THOUSANDS)

Company and Investment(A)(B)(W)(K) |  | Principal/ Shares/ Units(J)(I) |  | Cost |  | Fair Value
NON-CONTROL/NON-AFFILIATE INVESTMENTS(M) – 182.2% |  |  |  |  |  |
Secured First Lien Debt – 131.2% |  |  |  |  |  |
Aerospace and Defense – 23.4% |  |  |  |  |  |
Antenna Research Associates, Inc. – Term Debt (SOFR + 10.0%, 13.0% Cash, 4.0% PIK, Due 11/2026)(E) |  | $ | 21,973 |  |  | $ | 21,973 |  |  | $ | 21,973 |
Ohio Armor Holdings, LLC – Term Debt (L + 8.0%, 11.1% Cash, Due 2/2026)(C) |  | 18,913 |  |  | 18,913 |  |  | 18,558 |
SpaceCo Holdings, LLC – Line of Credit, $100 available (L + 7.0%, 10.8% Cash, Due 12/2025)(C)(U) |  | 1,900 |  |  | 1,900 |  |  | 1,886 |
SpaceCo Holdings, LLC – Term Debt (L + 7.0%, 10.8% Cash, Due 12/2025)(C)(U) |  | 31,719 |  |  | 31,326 |  |  | 31,481 |
|  |  |  | 74,112 |  |  | 73,898 |
Beverage, Food, and Tobacco – 18.7% |  |  |  |  |  |
Café Zupas – Line of Credit, $4,000 available (L + 7.4%, 10.5% Cash, Due 12/2024)(C) |  | — |  |  | — |  |  | — |
Café Zupas – Delayed Draw Term Loan, $0 available (L + 7.4%, 10.5% Cash, Due 12/2024)(C) |  | 1,970 |  |  | 1,970 |  |  | 1,958 |
Café Zupas – Term Debt (L + 7.4%, 10.5% Cash, Due 12/2024)(C) |  | 23,460 |  |  | 23,460 |  |  | 23,313 |
Eegee’s LLC – Line of Credit, $1,000 available (L + 8.3%, 11.4% Cash, Due 6/2026)(C) |  | — |  |  | — |  |  | — |
Eegee’s LLC – Delayed Draw Term Loan, $4,500 available (L + 8.3%, 11.4% Cash, Due 6/2026)(C) |  | 3,000 |  |  | 3,000 |  |  | 2,910 |
Eegee’s LLC – Term Debt (L + 8.3%, 11.4% Cash, Due 6/2026)(C) |  | 17,000 |  |  | 17,000 |  |  | 16,490 |
Salt & Straw, LLC – Line of Credit, $1,200 available (L + 8.0%, 11.1% Cash, Due 9/2027)(C) |  | 800 |  |  | 800 |  |  | 800 |
Salt & Straw, LLC – Delayed Draw Term Loan, $11,500 available (L + 8.0%, 11.1% Cash, Due 9/2027)(C) |  | — |  |  | — |  |  | — |
Sokol & Company Holdings, LLC – Term Debt (SOFR + 7.0%, 10.0% Cash, Due 8/2027)(C)(AA) |  | 13,500 |  |  | 13,500 |  |  | 13,500 |
|  |  |  | 59,730 |  |  | 58,971 |
Buildings and Real Estate – 0.5% |  |  |  |  |  |
GFRC 360, LLC – Line of Credit, $500 available (L + 8.0%, 11.1% Cash, Due 9/2023)(C) |  | 700 |  |  | 700 |  |  | 681 |
GFRC 360, LLC – Term Debt (L + 8.0%, 11.1% Cash, Due 9/2023)(C) |  | 1,000 |  |  | 1,000 |  |  | 973 |
|  |  |  | 1,700 |  |  | 1,654 |
Diversified/Conglomerate Manufacturing – 22.3% |  |  |  |  |  |
Engineering Manufacturing Technologies, LLC – Line of Credit, $3,000 available (L + 8.3%, 11.4% Cash, Due 10/2026)(C) |  | — |  |  | — |  |  | — |
Engineering Manufacturing Technologies, LLC – Term Debt (L + 8.3%, 11.4% Cash, Due 10/2026)(C) |  | 22,500 |  |  | 22,500 |  |  | 22,134 |
Salvo Technologies, Inc. – Term Debt (SOFR + 9.5%, 12.5% Cash, Due 4/2027)(C)(AA) |  | 11,887 |  |  | 11,887 |  |  | 11,619 |
Viva Railings, LLC – Line of Credit, $4,000 available (L + 7.0%, 10.1% Cash, Due 5/2027)(C) |  | — |  |  | — |  |  | — |
Viva Railings, LLC – Term Debt (L + 7.0%, 10.1% Cash, Due 5/2027)(C) |  | 21,800 |  |  | 21,800 |  |  | 21,364 |
Unirac Holdings, Inc. – Line of Credit, $2,222 available (SOFR + 6.5%, 9.5% Cash, Due 9/2027) (C)(AA) |  | — |  |  | — |  |  | — |
Unirac Holdings, Inc. – Delayed Draw Term Loan, $2,778 available (SOFR + 6.5%, 9.5% Cash, Due 9/2027)(C)(AA) |  | — |  |  | — |  |  | — |
Unirac Holdings, Inc. – Term Debt (SOFR + 6.5%, 9.5% Cash, Due 9/2027)(C)(AA) |  | 15,000 |  |  | 14,628 |  |  | 15,000 |
|  |  |  | 70,815 |  |  | 70,117 |
Diversified/Conglomerate Service – 31.1% |  |  |  |  |  |
Axios Industrial Group, LLC – Term Debt (SOFR + 9.5%, 12.6% Cash, Due 10/2027)(C)(AA) |  | 9,000 |  |  | 9,000 |  |  | 8,741 |
Axios Industrial Group, LLC– Delayed Draw Term Loan, $5,000 available (SOFR + 9.5%, 12.6% Cash, Due 10/2027)(C)(AA) |  | 3,000 |  |  | 3,000 |  |  | 2,914 |
DKI Ventures, LLC – Term Debt (SOFR + 8.0%, 11.0% Cash, Due 12/2023)(C) |  | 5,915 |  |  | 5,915 |  |  | 4,554 |
ENET Holdings, LLC – Term Debt (L + 7.3%, 10.4% Cash, Due 4/2025)(C) |  | 24,360 |  |  | 24,360 |  |  | 23,142 |
Fix-It Group, LLC – Line of Credit, $3,000 available (L + 7.0%, 10.1% Cash, Due 12/2026)(C)(U) |  | — |  |  | — |  |  | — |
Fix-It Group, LLC – Term Debt (L + 7.0%, 10.1% Cash, Due 12/2026)(C)(U) |  | 10,000 |  |  | 10,000 |  |  | 9,950 |
Fix-It Group, LLC– Delayed Draw Term Loan, $10,000 available (L + 7.0%, 10.1% Cash, Due 12/2026)(C)(U) |  | — |  |  | — |  |  | — |

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GLADSTONE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2022
(DOLLAR AMOUNTS IN THOUSANDS)

MCG Energy Solutions, LLC – Line of Credit, $3,000 available (L + 7.5%, 10.6% Cash, Due 3/2026)(C) |  | — |  |  | — |  |  | — |
MCG Energy Solutions, LLC – Term Debt (L + 7.5%, 10.6% Cash, 3.5% PIK, Due 3/2026)(C) |  | 20,820 |  |  | 20,820 |  |  | 19,779 |
R2i Holdings, LLC – Line of Credit, $1,171 available (8.0% PIK, Due 12/2023)(F)(Y) |  | 829 |  |  | 829 |  |  | 829 |
R2i Holdings, LLC – Term Debt (8.0% PIK, Due 12/2023)(F)(Y) |  | 18,000 |  |  | 18,000 |  |  | 18,000 |
WorkforceQA, LLC– Line of Credit, $2,000 available (L + 6.5%, 9.6% Cash, Due 12/2026)(C)(U) |  | — |  |  | — |  |  | — |
WorkforceQA, LLC – Term Debt (L + 8.5%, 11.6% Cash, Due 12/2026)(C)(H)(U) |  | 10,000 |  |  | 10,000 |  |  | 9,975 |
|  |  |  | 101,924 |  |  | 97,884 |

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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GLADSTONE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2022
(DOLLAR AMOUNTS IN THOUSANDS)

Company and Investment(A)(B)(W)(K) |  | Principal/ Shares/ Units(J)(I) |  | Cost |  | Fair Value
Healthcare, Education, and Childcare - 31.3% |  |  |  |  |  |
ALS Education, LLC – Line of Credit, $3,000 available (L + 7.0%, 10.1% Cash, Due 5/2025)(C) |  | — |  |  | — |  |  | — |
ALS Education, LLC – Term Debt (L + 7.0%, 10.1% Cash, Due 5/2025)(C) |  | 19,690 |  |  | 19,690 |  |  | 19,468 |
HH-Inspire Acquisition, Inc. – Line of Credit, $1,500 available (L + 6.8%, 9.9% Cash, Due 12/2026)(C)(U) |  | 1,500 |  |  | 1,500 |  |  | 1,489 |
HH-Inspire Acquisition, Inc. – Term Debt (L + 6.8%, 9.9% Cash, Due 12/2026)(C)(U) |  | 16,000 |  |  | 16,000 |  |  | 15,880 |
HH-Inspire Acquisition, Inc. – Term Debt (L + 6.8%, 9.9% Cash, Due 12/2026)(C)(U) |  | 8,000 |  |  | 8,000 |  |  | 7,940 |
HH-Inspire – Delayed Draw Term Loan, $0 available (L + 6.8%, 9.9% Cash, Due 12/2026)(C)(U) |  | 10,000 |  |  | 10,000 |  |  | 9,925 |
Pansophic Learning Ltd. – Term Debt (L + 7.3%, 10.4% Cash, Due 3/2027)(C) |  | 28,000 |  |  | 27,961 |  |  | 27,825 |
Pansophic Learning Ltd. – Term Debt (L + 7.3%, 10.4% Cash, Due 3/2027)(C) |  | 5,000 |  |  | 4,993 |  |  | 4,969 |
Turn Key Health Clinics, LLC – Line of Credit, $1,500 available (L + 7.3%, 10.4% Cash, Due 6/2026)(C) |  | 500 |  |  | 500 |  |  | 495 |
Turn Key Health Clinics, LLC – Term Debt (L + 7.3%, 10.4% Cash, Due 6/2026)(C) |  | 11,000 |  |  | 11,000 |  |  | 10,890 |
|  |  |  | 99,644 |  |  | 98,881 |
Machinery -1.7% |  |  |  |  |  |
Arc Drilling Holdings LLC – Line of Credit, $1,000 available (L + 8.0%, 11.1% Cash, Due 11/2022)(C) |  | — |  |  | — |  |  | — |
Arc Drilling Holdings LLC – Term Debt (L + 9.5%, 12.6% Cash, 3.0% PIK, Due 11/2022)(C) |  | 5,625 |  |  | 5,625 |  |  | 5,350 |
|  |  |  | 5,625 |  |  | 5,350 |
Printing and Publishing – 0.0% |  |  |  |  |  |
Chinese Yellow Pages Company – Line of Credit, $0 available (PRIME + 4.0%, 10.3% Cash, Due 2/2015)(E)(V)(Q) |  | 107 |  |  | 107 |  |  | — |
Telecommunications – 2.2% |  |  |  |  |  |
B+T Group Acquisition, Inc.(S) – Line of Credit, $0 available (L + 11.0%, 14.1% Cash, Due 12/2024)(C) |  | 1,200 |  |  | 1,200 |  |  | 1,146 |
B+T Group Acquisition, Inc.(S) – Term Debt (L + 11.0%, 14.1% Cash, Due 12/2024)(C) |  | 6,000 |  |  | 6,000 |  |  | 5,730 |
|  |  |  | 7,200 |  |  | 6,876 |
Total Secured First Lien Debt |  |  |  | $ | 420,857 |  |  | $ | 413,631 |
Secured Second Lien Debt – 34.3% |  |  |  |  |  |
Automobile – 3.5% |  |  |  |  |  |
Sea Link International IRB, Inc. – Term Debt (14.5% PIK, Due 12/2025)(C)(F) |  | $ | 11,719 |  |  | $ | 11,679 |  |  | $ | 11,074 |
Beverage, Food, and Tobacco – 1.0% |  |  |  |  |  |
8 th Avenue Food & Provisions, Inc. – Term Debt (L + 7.8%, 10.9% Cash, Due 10/2026)(D) |  | 3,682 |  |  | 3,698 |  |  | 3,020 |

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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GLADSTONE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2022
(DOLLAR AMOUNTS IN THOUSANDS)

Company and Investment(A)(B)(W)(K) |  | Principal/ Shares/ Units(J)(I) |  | Cost |  | Fair Value
Diversified/Conglomerate Manufacturing – 10.8% |  |  |  |  |  |
Springfield, Inc. – Term Debt (L + 10.0%, 13.1% Cash, Due 12/2026)(C) |  | 30,000 |  |  | 30,000 |  |  | 29,738 |
Tailwind Smith Cooper Intermediate Corporation – Term Debt (L + 9.0%, 12.1% Cash, Due 5/2027)(D) |  | 5,000 |  |  | 4,829 |  |  | 4,313 |
|  |  |  | 34,829 |  |  | 34,051 |
Diversified/Conglomerate Service – 2.3% |  |  |  |  |  |
CHA Holdings, Inc. – Term Debt (L + 8.8%, 12.5% Cash, Due 4/2026)(D)(U) |  | 3,000 |  |  | 2,967 |  |  | 2,700 |
Gray Matter Systems, LLC – Term Debt (11.3% Cash, Due 12/2026)(C)(F) |  | 2,100 |  |  | 2,069 |  |  | 2,084 |
Gray Matter Systems, LLC – Delayed Draw Term Loan, $4,000 available (11.3% Cash, Due 12/2026)(C)(F) |  | 2,500 |  |  | 2,476 |  |  | 2,481 |
|  |  |  | 7,512 |  |  | 7,265 |
Healthcare, Education, and Childcare – 9.1% |  |  |  |  |  |
Giving Home Health Care, LLC – Term Debt (12.5% Cash, Due 2/2028)(C)(F) |  | 28,800 |  |  | 28,800 |  |  | 28,800 |
Machinery – 0.2% |  |  |  |  |  |
CPM Holdings, Inc. – Term Debt (L + 8.3%, 11.4% Cash, Due 11/2026)(D) |  | 798 |  |  | 798 |  |  | 758 |
Oil and Gas – 7.4% |  |  |  |  |  |
Imperative Holdings Corporation – Term Debt (L + 10.3%, 13.4% Cash, Due 9/2024)(C) |  | 24,016 |  |  | 23,968 |  |  | 23,295 |
Total Secured Second Lien Debt |  |  |  | $ | 111,284 |  |  | $ | 108,263 |
Unsecured Debt – 0.0% |  |  |  |  |  |
Diversified/Conglomerate Service – 0.0% |  |  |  |  |  |
Frontier Financial Group Inc. – Convertible Debt (6.0%, Due 6/2022)(E)(F) |  | $ | 198 |  |  | $ | 198 |  |  | $ | 55 |
Preferred Equity – 5.6% |  |  |  |  |  |
Automobile – 0.0% |  |  |  |  |  |
Sea Link International IRB, Inc. – Preferred Stock(E)(G) |  | 98,039 |  |  | 98 |  |  | 153 |
Beverage, Food, and Tobacco – 0.0% |  |  |  |  |  |
Triple H Food Processors, LLC – Preferred Stock(E)(G) |  | 75 |  |  | 75 |  |  | 120 |
Buildings and Real Estate – 0.2% |  |  |  |  |  |
GFRC 360, LLC – Preferred Stock(E)(G) |  | 1,000 |  |  | 1,025 |  |  | 551 |
Diversified/Conglomerate Manufacturing – 0.8% |  |  |  |  |  |
Salvo Technologies, Inc. – Preferred Stock(E)(G) |  | 2,500 |  |  | 2,500 |  |  | 2,584 |
Diversified/Conglomerate Service – 2.6% |  |  |  |  |  |
Frontier Financial Group Inc. – Preferred Stock(E)(G) |  | 766 |  |  | 500 |  |  | — |
Frontier Financial Group Inc. – Preferred Stock Warrant(E)(G) |  | 168 |  |  | — |  |  | — |
MCG Energy Solutions, LLC – Preferred Stock(E) |  | 7,000,000 |  |  | 7,000 |  |  | 8,151 |
|  |  |  | 7,500 |  |  | 8,151 |
Healthcare, Education, and Childcare – 0.3% |  |  |  |  |  |
HH-Inspire Acquisition, Inc. – Preferred Stock(E)(G) |  | 854,848 |  |  | 956 |  |  | 945 |
Oil and Gas – 0.6% |  |  |  |  |  |
FES Resources Holdings LLC – Preferred Equity Units(E)(G) |  | 6,350 |  |  | 6,350 |  |  | — |
Imperative Holdings Corporation – Preferred Equity Units(E)(G) |  | 1,474,225 |  |  | 632 |  |  | 2,028 |
|  |  |  | 6,982 |  |  | 2,028 |
Telecommunications – 1.1% |  |  |  |  |  |
B+T Group Acquisition, Inc.(S) – Preferred Stock(E)(G) |  | 6,130 |  |  | 2,024 |  |  | 2,718 |
NetFortris Holdings LLC – Preferred Stock(E)(G) |  | 7,890,860 |  |  | 789 |  |  | 469 |
|  |  |  | 2,813 |  |  | 3,187 |
Total Preferred Equity |  |  |  | $ | 21,949 |  |  | $ | 17,719 |

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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GLADSTONE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2022
(DOLLAR AMOUNTS IN THOUSANDS)

Company and Investment(A)(B)(W)(K) |  | Principal/ Shares/ Units(J)(I) |  | Cost |  | Fair Value
Common Equity – 11.1% |  |  |  |  |  |
Aerospace and Defense – 4.7% |  |  |  |  |  |
Antenna Research Associates, Inc. – Common Equity Units(E)(G) |  | 4,283 |  |  | $ | 4,283 |  |  | $ | 13,734 |
Ohio Armor Holdings, LLC – Common Equity(E)(G) |  | 100 |  |  | 1,000 |  |  | 1,017 |
|  |  |  | 5,283 |  |  | 14,751 |
Automobile – 0.0% |  |  |  |  |  |
Sea Link International IRB, Inc.– Common Equity Units(E)(G) |  | 823,333 |  |  | 823 |  |  | 105 |
Beverage, Food, and Tobacco – 0.7% |  |  |  |  |  |
Sokol & Company Holdings, LLC - Common Stock(E)(G) |  | 1,500,000 |  |  | 1,500 |  |  | 1,500 |
Triple H Food Processors, LLC – Common Stock(E)(G) |  | 250,000 |  |  | 250 |  |  | 672 |
|  |  |  | 1,750 |  |  | 2,172 |
Buildings and Real Estate – 0.0% |  |  |  |  |  |
GFRC 360, LLC – Common Stock Warrants(E)(G) |  | 45.0 | % |  | — |  |  | — |
Diversified/Conglomerate Manufacturing – 0.6% |  |  |  |  |  |
Engineering Manufacturing Technologies, LLC – Common Stock(E)(G) |  | 6,000 |  |  | 3,000 |  |  | 1,773 |
Diversified/Conglomerate Service – 0.1% |  |  |  |  |  |
WorkforceQA, LLC – Common Stock(E)(G) |  | 500 |  |  | 500 |  |  | 456 |
Healthcare, Education, and Childcare – 2.5% |  |  |  |  |  |
Giving Home Health Care, LLC - Warrant(E)(G) |  | 10,667 |  |  | 19 |  |  | 19 |
GSM MidCo LLC – Common Stock(E)(G) |  | 767 |  |  | 767 |  |  | 1,359 |
Leeds Novamark Capital I, L.P. – Limited Partnership Interest ($843 uncalled capital commitment)(G)(L)(R) |  | 3.5 | % |  | 1,223 |  |  | 6,397 |
|  |  |  | 2,009 |  |  | 7,775 |
Machinery – 0.0% |  |  |  |  |  |
Arc Drilling Holdings LLC – Common Stock(E)(G) |  | 15,000 |  |  | 1,500 |  |  | — |
Oil and Gas – 0.0% |  |  |  |  |  |
FES Resources Holdings LLC – Common Equity Units(E)(G) |  | 6,233 |  |  | — |  |  | — |
Total Safety Holdings, LLC – Common Equity(E)(G) |  | 435 |  |  | 499 |  |  | 50 |
|  |  |  | 499 |  |  | 50 |
Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.0% |  |  |  |  |  |
Funko Acquisition Holdings, LLC(S) – Common Units(G)(T) |  | 4,239 |  |  | 22 |  |  | 58 |
Telecommunications – 0.0% |  |  |  |  |  |
B+T Group Acquisition, Inc.(S) – Common Stock Warrant(E)(G) |  | 1.5 | % |  | — |  |  | 25 |
Textiles and Leather – 2.5% |  |  |  |  |  |
Targus Cayman HoldCo, Ltd. – Common Stock(G)(Y)(Z) |  | 3,076,414 |  |  | 2,062 |  |  | 7,978 |
Total Common Equity |  |  |  | $ | 17,448 |  |  | $ | 35,143 |
Total Non-Control/Non-Affiliate Investments |  |  |  | $ | 571,736 |  |  | $ | 574,811 |

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
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GLADSTONE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2022
(DOLLAR AMOUNTS IN THOUSANDS)

Company and Investment(A)(B)(W)(K) |  | Principal/ Shares/ Units(J)(I) |  | Cost |  | Fair Value
AFFILIATE INVESTMENTS(N) - 12.4% |  |  |  |  |  |
Secured First Lien Debt – 11.0% |  |  |  |  |  |
Diversified/Conglomerate Manufacturing – 0.8% |  |  |  |  |  |
Edge Adhesives Holdings, Inc. (S) – Term Debt (L + 5.5%, 8.6% Cash, Due 8/2024)(E) |  | $ | 6,140 |  |  | $ | 6,140 |  |  | $ | 2,550 |
Diversified/Conglomerate Service – 10.2% |  |  |  |  |  |
Encore Dredging Holdings, LLC – Line of Credit, $3,000 available (L + 8.3%, 11.4% Cash, Due 12/2025)(C) |  | — |  |  | — |  |  | — |
Encore Dredging Holdings, LLC – Term Debt (L + 7.0%, 10.1% Cash, 1.5% PIK, Due 12/2025)(C) |  | 23,611 |  |  | 23,611 |  |  | 22,962 |
Encore Dredging Holdings, LLC – Term Debt (L + 7.0%, 10.1% Cash, 2.5% PIK, Due 12/2025)(C) |  | 4,532 |  |  | 4,532 |  |  | 4,407 |
Encore Dredging Holdings, LLC – Delayed Draw Term Loan, $0 available (L + 7.0%, 10.1% Cash, 1.5% PIK, Due 12/2025)(C) |  | 5,023 |  |  | 5,023 |  |  | 4,885 |
|  |  |  | 33,166 |  |  | 32,254 |
Total Secured First Lien Debt |  |  |  | $ | 39,306 |  |  | $ | 34,804 |
Preferred Equity – 1.2% |  |  |  |  |  |
Diversified/Conglomerate Manufacturing – 0.0% |  |  |  |  |  |
Edge Adhesives Holdings, Inc. (S) – Preferred Stock(E)(G) |  | 5,466 |  |  | $ | 5,466 |  |  | $ | — |
Diversified/Conglomerate Service – 0.9% |  |  |  |  |  |
Encore Dredging Holdings, LLC (S) – Preferred Stock(E)(G) |  | 3,840,000 |  |  | 3,840 |  |  | 2,842 |
Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.3% |  |  |  |  |  |
Canopy Safety Brands, LLC – Preferred Stock(E)(G) |  | 500,000 |  |  | 500 |  |  | 798 |
Total Preferred Equity |  |  |  | $ | 9,806 |  |  | $ | 3,640 |
Common Equity – 0.2% |  |  |  |  |  |
Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.2% |  |  |  |  |  |
Canopy Safety Brands, LLC – Common Stock(E)(G) |  | 800,000 |  |  | 300 |  |  | 647 |
Total Common Equity |  |  |  | $ | 300 |  |  | $ | 647 |
Total Affiliate Investments |  |  |  | $ | 49,412 |  |  | $ | 39,091 |

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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GLADSTONE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2022
(DOLLAR AMOUNTS IN THOUSANDS)

Company and Investment(A)(B)(W)(K) |  | Principal/ Shares/ Units(J)(I) |  | Cost |  | Fair Value
CONTROL INVESTMENTS(O) – 11.3% |  |  |  |  |  |
Secured First Lien Debt – 4.9% |  |  |  |  |  |
Diversified/Conglomerate Manufacturing – 1.0% |  |  |  |  |  |
Lonestar EMS, LLC – Term Debt (8.0% Cash, Due 6/2027)(E)(F) |  | $ | 3,250 |  |  | $ | 3,250 |  |  | $ | 3,030 |
Personal and Non-Durable Consumer Products (Manufacturing Only) – 3.6% |  |  |  |  |  |
WB Xcel Holdings, LLC - Line of Credit, $32 available (L + 10.5%, 13.6% Cash, Due 11/2026)(E) |  | 1,468 |  |  | 1,468 |  |  | 1,468 |
WB Xcel Holdings, LLC - Term Loan (L + 10.5%, 13.6% Cash, Due 11/2026)(E) |  | 9,925 |  |  | 9,925 |  |  | 9,925 |
|  |  |  | 11,393 |  |  | 11,393 |
Printing and Publishing – 0.3% |  |  |  |  |  |
TNCP Intermediate HoldCo, LLC – Line of Credit, $1,000 available (8.0% Cash, Due 10/2024)(E)(F) |  | 1,000 |  |  | 1,000 |  |  | 1,000 |
Total Secured First Lien Debt |  |  |  | $ | 15,643 |  |  | $ | 15,423 |
Secured Second Lien Debt – 2.4% |  |  |  |  |  |
Automobile– 2.4% |  |  |  |  |  |
Defiance Integrated Technologies, Inc. – Term Debt (L + 9.5%, 12.6% Cash, Due 5/2026)(E) |  | $ | 7,665 |  |  | $ | 7,665 |  |  | $ | 7,665 |
Unsecured Debt – 0.0% |  |  |  |  |  |
Diversified/Conglomerate Manufacturing – 0.0% |  |  |  |  |  |
LWO Acquisitions Company LLC – Term Debt (Due 6/2023)(E)(P) |  | $ | 95 |  |  | $ | 95 |  |  | $ | — |
Preferred Equity – 1.8% |  |  |  |  |  |
Personal and Non-Durable Consumer Products (Manufacturing Only) – 1.8% |  |  |  |  |  |
WB Xcel Holdings, LLC - Preferred Stock(E)(G) |  | 333 |  |  | $ | 2,750 |  |  | $ | 5,687 |
Common Equity – 2.2% |  |  |  |  |  |
Automobile– 0.4% |  |  |  |  |  |
Defiance Integrated Technologies, Inc. – Common Stock(E)(G) |  | 33,321 |  |  | $ | 580 |  |  | $ | 1,147 |
Diversified/Conglomerate Manufacturing – 0.0% |  |  |  |  |  |
Circuitronics EMS Holdings LLC – Common Units(E)(G) |  | 921,000 |  |  | 921 |  |  | — |
Lonestar EMS, LLC – Common Units(E)(G) |  | 100 | % |  | 6,750 |  |  | — |
|  |  |  | 7,671 |  |  | — |
Machinery – 1.1% |  |  |  |  |  |
PIC 360, LLC – Common Equity Units(E)(G) |  | 750 |  |  | 1 |  |  | 3,454 |
Printing and Publishing – 0.7% |  |  |  |  |  |
TNCP Intermediate HoldCo, LLC – Common Equity Units(E)(G) |  | 790,000 |  |  | 500 |  |  | 2,337 |
Total Common Equity |  |  |  | $ | 8,752 |  |  | $ | 6,938 |
Total Control Investments |  |  |  | $ | 34,905 |  |  | $ | 35,713 |
TOTAL INVESTMENTS – 205.9% |  |  |  | $ | 656,053 |  |  | $ | 649,615 |

(A)Certain of the securities listed in this schedule are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $577.6 million at fair value, are pledged as collateral under our revolving line of credit, as described further in Note 5—Borrowings in the accompanying Notes to Consolidated Financial Statements. Under the Investment Company Act of 1940, as amended (the “1940 Act”), we may not acquire any non-qualifying assets unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. As of September 30, 2022, our investments in Leeds Novamark Capital I, L.P. (“Leeds”) and Funko Acquisition Holdings, LLC (“Funko”) are considered non-qualifying assets under Section 55 of the 1940 Act. Such non-qualifying assets represent 1.0% of total investments, at fair value, as of September 30, 2022.
(B)Unless indicated otherwise, all cash interest rates are indexed to 30-day London Interbank Offered Rate (“LIBOR” or “L”), which was 3.14% as of September 30, 2022. If applicable, paid-in-kind (“PIK”) interest rates are noted separately from the cash interest rate. Certain securities are subject to an interest rate floor. The cash interest rate is the greater of the floor or LIBOR plus a spread. Due dates represent the contractual maturity date.
(C)Fair value was based on an internal yield analysis or on estimates of value submitted by ICE Data Pricing and Reference Data, LLC (“ICE”).
(D)Fair value was based on the indicative bid price on or near September 30, 2022, offered by the respective syndication agent’s trading desk.
(E)Fair value was based on the total enterprise value of the portfolio company, which was then allocated to the portfolio company’s securities in order of their relative priority in the capital structure.
(F)Debt security has a fixed interest rate.
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CONSOLIDATED SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2022
(DOLLAR AMOUNTS IN THOUSANDS)
(G)Security is non-income producing.
(H)The Company has entered into an agreement that entitles it to the "last out" tranche of the first lien secured loan, whereby the "first out" tranche will receive priority as to the "last out" tranche with respect to payments of principal, interest, and any other amounts due thereunder. Therefore, the Company receives a higher interest rate than the contractual stated interest rate of LIBOR plus 6.50% (Floor 1.0%) per the credit agreement and the Consolidated Schedule of Investments above reflects such higher rate.
(I)Represents the principal balance for debt investments and the number of shares/units held for equity investments. Warrants are represented as a percentage of ownership, as applicable.
(J)Where applicable, aggregates all shares of a class of stock owned without regard to specific series owned within such class (some series of which may or may not be voting shares) or aggregates all warrants to purchase shares of a class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase.
(K)Category percentages represent the fair value of each category and subcategory as a percentage of net assets as of September 30, 2022.
(L)There are certain limitations on our ability to withdraw our partnership interest prior to dissolution of the entity, which must occur no later than May 9, 2024 or two years after all outstanding leverage has matured.
(M)Non-Control/Non-Affiliate investments, as defined by the 1940 Act, are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.
(N)Affiliate investments, as defined by the 1940 Act, are those in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities.
(O)Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.
(P)Debt security does not have a stated interest rate that is payable thereon.
(Q)Investment maturity date has passed. Investment continues to make applicable interest payments.
(R)Fair value was based on net asset value provided by the fund as a practical expedient.
(S)One of our affiliated funds, Gladstone Investment Corporation, co-invested with us in this portfolio company pursuant to an exemptive order granted by the U.S. Securities and Exchange Commission.
(T)Our investment in Funko was valued using Level 2 inputs within the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures" (“ASC 820”) fair value hierarchy. Our common units in Funko are convertible to class A common stock in Funko, Inc. upon meeting certain requirements. Fair value was based on the closing market price of shares of Funko, Inc. as of the reporting date, less a discount for lack of marketability. Funko, Inc. is traded on the Nasdaq Global Select Market under the trading symbol “FNKO.” Refer to Note 3—Investments in the accompanying Notes to Consolidated Financial Statements for additional information.
(U)The cash interest rate on this investment was indexed to 90-day LIBOR, which was 3.75% as of September 30, 2022.
(V)The cash interest rate on this investment was indexed to the U.S. Prime Rate (“PRIME”), which was 6.25% as of September 30, 2022.
(W)Unless indicated otherwise, all of our investments are valued using Level 3 inputs within the ASC 820 fair value hierarchy. Refer to Note 3—Investments in the accompanying Notes to Consolidated Financial Statements for additional information.
(X)Cumulative gross unrealized depreciation for federal income tax purposes is $52.3 million; cumulative gross unrealized appreciation for federal income tax purposes is $35.2 million. Cumulative net unrealized depreciation is $17.1 million, based on a tax cost of $666.7 million.
(Y)Fair value was based on the expected exit or payoff amount, where such event has occurred or is expected to occur imminently.
(Z)Investment was exited subsequent to September 30, 2022. Refer to Note 15 – Subsequent Events in the accompanying Notes to the Consolidated Financial Statements for additional information.
(AA)The cash interest rate on this investment was indexed to the 30-day Secured Overnight Financing Rate (“SOFR”), which was 3.04% as of September 30, 2022.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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GLADSTONE CAPITAL CORPORATION CONSOLIDATED SCHEDULE OF INVESTMENTS SEPTEMBER 30, 2021 (DOLLAR AMOUNTS IN THOUSANDS)
Company and Investment(A)(B)(W)(K) |  | Principal/ Shares/ Units(J)(I) |  | Cost |  | Fair Value
NON-CONTROL/NON-AFFILIATE INVESTMENTS(M) – 142.8% |  |  |  |  |  |
Secured First Lien Debt – 95.5% |  |  |  |  |  |
Aerospace and Defense – 20.3% |  |  |  |  |  |
Antenna Research Associates, Inc. – Term Debt (L + 10.0%, 12.0% Cash, 4.0% PIK, Due 11/2023)(E) |  | $ | 11,763 |  |  | $ | 11,763 |  |  | $ | 11,763 |
Ohio Armor Holdings, LLC – Term Debt (L + 8.0%, 9.0% Cash, Due 2/2026)(C) |  | 19,500 |  |  | 19,500 |  |  | 19,549 |
SpaceCo Holdings, LLC – Line of Credit, $1,300 available (L + 6.8%, 7.8% Cash, Due 12/2025)(C) |  | 700 |  |  | 700 |  |  | 700 |
SpaceCo Holdings, LLC – Term Debt (L + 6.8%, 7.8% Cash, Due 12/2025)(C) |  | 32,544 |  |  | 32,044 |  |  | 32,544 |
|  |  |  | 64,007 |  |  | 64,556 |
Beverage, Food, and Tobacco – 13.5% |  |  |  |  |  |
Café Zupas – Line of Credit, $4,000 available (L + 7.4%, 8.9% Cash, Due 12/2024)(C) |  | — |  |  | — |  |  | — |
Café Zupas – Delayed Draw Term Debt, $3,030 available (L + 7.4%, 8.9% Cash, Due 12/2024)(C) |  | 1,970 |  |  | 1,970 |  |  | 1,987 |
Café Zupas – Term Debt (L + 7.4%, 8.9% Cash, Due 12/2024)(C) |  | 24,000 |  |  | 24,000 |  |  | 24,210 |
Eegee’s LLC – Line of Credit, $1,000 available (L + 7.3%, 8.3% Cash, Due 6/2026)(C) |  | — |  |  | — |  |  | — |
Eegee’s LLC – Delayed Draw Term Debt, $7,500 available (L + 7.3%, 8.3% Cash, Due 6/2026)(C) |  | — |  |  | — |  |  | — |
Eegee’s LLC – Term Debt (L + 7.3%, 8.3% Cash, Due 6/2026)(C) |  | 17,000 |  |  | 17,000 |  |  | 16,936 |
|  |  |  | 42,970 |  |  | 43,133 |
Buildings and Real Estate – 0.5% |  |  |  |  |  |
GFRC 360, LLC – Line of Credit, $500 available (L + 8.0%, 9.0% Cash, Due 9/2022)(C) |  | 700 |  |  | 700 |  |  | 699 |
GFRC 360, LLC – Term Debt (L + 8.0%, 9.0% Cash, Due 9/2022)(C) |  | 1,000 |  |  | 1,000 |  |  | 999 |
|  |  |  | 1,700 |  |  | 1,698 |
Diversified/Conglomerate Manufacturing – 3.8% |  |  |  |  |  |
Unirac, Inc. – Line of Credit, $1,003 available (L + 7.0%, 8.0% Cash, Due 6/2026)(C)(U) |  | 251 |  |  | 251 |  |  | 250 |
Unirac, Inc. – Delayed Draw Term Debt, $1,254 available (L + 7.0%, 8.0% Cash, Due 6/2026)(C)(U) |  | — |  |  | — |  |  | — |
Unirac, Inc. – Term Debt (L + 7.0%, 8.0% Cash, Due 6/2026)(C)(U) |  | 11,921 |  |  | 11,652 |  |  | 11,891 |
|  |  |  | 11,903 |  |  | 12,141 |
Diversified/Conglomerate Service – 21.3% |  |  |  |  |  |
DKI Ventures, LLC – Line of Credit, $2,500 available (L + 8.3%, 9.3% Cash, 2.0% PIK, Due 12/2021)(C) |  | — |  |  | — |  |  | — |
DKI Ventures, LLC – Term Debt (L + 8.3%, 9.3% Cash, 2.0% PIK, Due 12/2023)(C) |  | 5,739 |  |  | 5,724 |  |  | 5,008 |
ENET Holdings, LLC – Term Debt (L + 8.8%, 10.2% Cash, Due 12/2022)(C) |  | 1,000 |  |  | 1,000 |  |  | 785 |
ENET Holdings, LLC – Term Debt (L + 8.8%, 10.2% Cash, Due 4/2025)(C) |  | 29,000 |  |  | 29,000 |  |  | 22,765 |
MCG Energy Solutions, LLC – Line of Credit, $3,000 available (L + 7.5%, 8.5% Cash, Due 3/2026)(C) |  | — |  |  | — |  |  | — |
MCG Energy Solutions, LLC – Term Debt (L + 7.5%, 8.5% Cash, 1.5% PIK, Due 3/2026)(C) |  | 20,129 |  |  | 20,129 |  |  | 19,927 |
MCG Energy Solutions, LLC – Delayed Draw Term Debt, $3,000 available (L + 7.5%, 8.5% Cash, 1.5% PIK, Due 3/2026)(C) |  | — |  | ` | — |  |  | — |
R2i Holdings, LLC – Line of Credit, $1,171 available (8.0% Cash, Due 12/2021)(C)(F) |  | 829 |  |  | 829 |  |  | 803 |
R2i Holdings, LLC – Term Debt (8.0% Cash, Due 12/2021)(C)(F) |  | 19,000 |  |  | 19,000 |  |  | 18,406 |
|  |  |  | 75,682 |  |  | 67,694 |
Healthcare, Education, and Childcare – 24.9% |  |  |  |  |  |
ALS Education, LLC – Line of Credit, $3,000 available (L + 7.0%, 8.5% Cash, Due 5/2025)(C) |  | — |  |  | — |  |  | — |
ALS Education, LLC – Term Debt (L + 7.0%, 8.5% Cash, Due 5/2025)(C) |  | 20,680 |  |  | 20,680 |  |  | 20,809 |
Effective School Solutions LLC – Line of Credit, $2,000 available (L + 7.3%, 8.3% Cash, Due 12/2025)(C) |  | — |  |  | — |  |  | — |
Effective School Solutions LLC – Term Debt (L + 7.3%, 8.3% Cash, Due 12/2025)(C) |  | 19,000 |  |  | 19,000 |  |  | 19,095 |
Effective School Solutions LLC – Delayed Draw Term Debt, $3,200 available (L + 7.3%, 8.3% Cash, Due 12/2025)(C) |  | — |  |  | — |  |  | — |
EL Academies, Inc. – Delayed Draw Term Debt, $0 available (L + 8.0%, 9.0% Cash, Due 8/2022)(C) |  | 16,000 |  |  | 16,000 |  |  | 16,000 |
EL Academies, Inc. – Term Debt (L + 8.0%, 9.0% Cash, Due 8/2022)(C) |  | 12,000 |  |  | 12,000 |  |  | 12,000 |
Turn Key Health Clinics, LLC – Line of Credit, $1,500 available (L + 7.3%, 8.3% Cash, Due 6/2026)(C) |  | 500 |  |  | 500 |  |  | 499 |
Turn Key Health Clinics, LLC – Term Debt (L + 7.3%, 8.3% Cash, Due 6/2026)(C) |  | 11,000 |  |  | 11,000 |  |  | 10,986 |
|  |  |  | 79,180 |  |  | 79,389 |

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GLADSTONE CAPITAL CORPORATION CONSOLIDATED SCHEDULE OF INVESTMENTS SEPTEMBER 30, 2021 (DOLLAR AMOUNTS IN THOUSANDS)
Company and Investment(A)(B)(W)(K) |  | Principal/ Shares/ Units(J)(I) |  | Cost |  | Fair Value
Machinery – 1.8% |  |  |  |  |  |
Arc Drilling Holdings LLC – Line of Credit, $875 available (L + 8.0%, 9.3% Cash, Due 11/2022)(C) |  | 125 |  |  | 125 |  |  | 122 |
Arc Drilling Holdings LLC – Term Debt (L + 9.5%, 10.8% Cash, 3.0% PIK, Due 11/2022)(C) |  | 5,824 |  |  | 5,824 |  |  | 5,577 |
|  |  |  | 5,949 |  |  | 5,699 |
Printing and Publishing – 0.0% |  |  |  |  |  |
Chinese Yellow Pages Company – Line of Credit, $0 available (PRIME + 4.0%, 7.3% Cash, Due 2/2015)(E)(V)(Q) |  | $ | 107 |  |  | 107 |  |  | — |
Telecommunications – 9.4% |  |  |  |  |  |
B+T Group Acquisition, Inc.(S) – Line of Credit, $0 available (L + 11.0%, 13.0% Cash, Due 12/2021)(C) |  | 1,200 |  |  | 1,200 |  |  | 1,158 |
B+T Group Acquisition, Inc.(S) – Term Debt (L + 11.0%, 13.0% Cash, Due 12/2021)(C) |  | 6,000 |  |  | 6,000 |  |  | 5,790 |
NetFortris Corp. – Term Debt (L + 11.0%, 4.0% Cash, 7.5% PIK, Due 5/2021)(C)(Q) |  | 27,350 |  |  | 26,946 |  |  | 22,837 |
|  |  |  | 34,146 |  |  | 29,785 |
Total Secured First Lien Debt |  |  |  | $ | 315,644 |  |  | $ | 304,095 |
Secured Second Lien Debt – 30.6% |  |  |  |  |  |
Automobile – 3.3% |  |  |  |  |  |
Sea Link International IRB, Inc. – Term Debt (11.3% Cash, 2.0% PIK, Due 3/2023)(C)(F) |  | $ | 10,893 |  |  | $ | 10,893 |  |  | $ | 10,376 |
Beverage, Food, and Tobacco – 1.1% |  |  |  |  |  |
8th Avenue Food & Provisions, Inc. – Term Debt (L + 7.8%, 7.8% Cash, Due 10/2026)(D) |  | 3,682 |  |  | 3,702 |  |  | 3,646 |
Chemicals, Plastics, and Rubber – 3.2% |  |  |  |  |  |
Phoenix Aromas & Essential Oils, LLC – Term Debt (L + 9.3%, 10.3% Cash, Due 5/2024)(C) |  | 10,012 |  |  | 9,986 |  |  | 10,062 |
Diversified/Conglomerate Manufacturing – 1.5% |  |  |  |  |  |
Tailwind Smith Cooper Intermediate Corporation – Term Debt (L + 9.0%, 9.1% Cash, Due 5/2027)(D) |  | 5,000 |  |  | 4,801 |  |  | 4,701 |
Diversified/Conglomerate Service – 8.7% |  |  |  |  |  |
CHA Holdings, Inc. – Term Debt (L + 8.8%, 9.8% Cash, Due 4/2026)(D)(U) |  | 3,000 |  |  | 2,960 |  |  | 2,700 |
Gray Matter Systems, LLC – Term Debt (12.0% Cash, Due 12/2026)(C)(F) |  | 8,100 |  |  | 8,064 |  |  | 8,130 |
Keystone Acquisition Corp. – Term Debt (L + 9.3%, 10.3% Cash, Due 5/2025)(D)(U) |  | 4,000 |  |  | 3,954 |  |  | 3,790 |
Prophet Brand Strategy – Delayed Draw Term Debt, $5,000 available (L + 8.5%, 10.5% Cash, Due 2/2025)(Y)(Z) |  | — |  |  | — |  |  | — |
Prophet Brand Strategy – Term Debt (L + 8.5%, 10.5% Cash, Due 2/2025)(Y)(Z) |  | 13,000 |  |  | 13,000 |  |  | 13,130 |
|  |  |  | 27,978 |  |  | 27,750 |
Healthcare, Education, and Childcare – 1.8% |  |  |  |  |  |
Medical Solutions Holdings, Inc. – Term Debt (L + 8.4%, 9.4% Cash, Due 6/2025)(C) |  | 3,000 |  |  | 2,974 |  |  | 2,940 |
Medical Solutions Holdings, Inc. – Term Debt (L + 8.8%, 9.8% Cash, Due 6/2025)(C) |  | 3,000 |  |  | 2,957 |  |  | 2,940 |
|  |  |  | 5,931 |  |  | 5,880 |
Home and Office Furnishings, Housewares and Durable Consumer Products – 3.2% |  |  |  |  |  |
Belnick, Inc. – Term Debt (11.0% Cash, Due 8/2023)(C)(F) |  | 10,000 |  |  | 10,000 |  |  | 10,025 |
Machinery – 0.2% |  |  |  |  |  |
CPM Holdings, Inc. – Term Debt (L + 8.3%, 8.3% Cash, Due 11/2026)(D) |  | 798 |  |  | 798 |  |  | 790 |
Oil and Gas – 7.6% |  |  |  |  |  |
Imperative Holdings Corporation – Term Debt (L + 10.3%, 12.3% Cash, 1.8% PIK, Due 9/2022)(C) |  | 26,569 |  |  | 26,569 |  |  | 24,178 |
Total Secured Second Lien Debt |  |  |  | $ | 100,658 |  |  | $ | 97,408 |
Unsecured Debt – 0.0% |  |  |  |  |  |
Diversified/Conglomerate Service – 0.0% |  |  |  |  |  |
Frontier Financial Group Inc. – Convertible Debt (6.0%, Due 6/2022)(E)(F) |  | $ | 198 |  |  | $ | 198 |  |  | $ | 10 |
Preferred Equity – 5.7% |  |  |  |  |  |
Automobile – 0.0% |  |  |  |  |  |
Sea Link International IRB, Inc. – Preferred Stock(E)(G) |  | 98,039 |  |  | 98 |  |  | 127 |
Beverage, Food, and Tobacco – 0.0% |  |  |  |  |  |
Triple H Food Processors, LLC – Preferred Stock(E)(G) |  | 75 |  |  | 75 |  |  | 102 |
Buildings and Real Estate – 0.3% |  |  |  |  |  |
GFRC 360, LLC – Preferred Stock(E)(G) |  | 1,000 |  |  | 1,025 |  |  | 864 |

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GLADSTONE CAPITAL CORPORATION CONSOLIDATED SCHEDULE OF INVESTMENTS SEPTEMBER 30, 2021 (DOLLAR AMOUNTS IN THOUSANDS)
Company and Investment(A)(B)(W)(K) |  | Principal/ Shares/ Units(J)(I) |  | Cost |  | Fair Value
Diversified/Conglomerate Service – 2.8% |  |  |  |  |  |
Frontier Financial Group Inc. – Preferred Stock(E)(G) |  | 766 |  |  | 500 |  |  | — |
Frontier Financial Group Inc. – Preferred Stock Warrant(E)(G) |  | 168 |  |  | — |  |  | — |
MCG Energy Solutions, LLC – Preferred Stock(E) |  | 7,000,000 |  |  | 7,000 |  |  | 8,861 |
|  |  |  | 7,500 |  |  | 8,861 |
Oil and Gas – 0.5% |  |  |  |  |  |
FES Resources Holdings LLC – Preferred Equity Units(E)(G) |  | 6,350 |  |  | 6,350 |  |  | — |
Imperative Holdings Corporation – Preferred Equity Units(E)(G) |  | 13,740 |  |  | 632 |  |  | 1,551 |
|  |  |  | 6,982 |  |  | 1,551 |
Telecommunications – 2.1% |  |  |  |  |  |
B+T Group Acquisition, Inc.(S) – Preferred Stock(E)(G) |  | 6,130 |  |  | 2,024 |  |  | 5,691 |
NetFortris Corp. – Preferred Stock(E)(G) |  | 7,890,860 |  |  | 789 |  |  | 914 |
|  |  |  | 2,813 |  |  | 6,605 |
Total Preferred Equity |  |  |  | $ | 18,493 |  |  | $ | 18,110 |
Common Equity – 11.0% |  |  |  |  |  |
Aerospace and Defense – 4.8% |  |  |  |  |  |
Antenna Research Associates, Inc. – Common Equity Units(E)(G) |  | 4,283 |  |  | $ | 4,283 |  |  | $ | 13,444 |
Ohio Armor Holdings, LLC – Common Equity(E)(G) |  | 1,000 |  |  | 1,000 |  |  | 1,749 |
|  |  |  | 5,283 |  |  | 15,193 |
Automobile– 0.1% |  |  |  |  |  |
Sea Link International IRB, Inc.– Common Equity Units(E)(G) |  | 823,333 |  |  | 823 |  |  | 300 |
Beverage, Food, and Tobacco – 0.5% |  |  |  |  |  |
Triple H Food Processors, LLC – Common Stock(E)(G) |  | 250,000 |  |  | 250 |  |  | 1,504 |
Buildings and Real Estate – 0.0% |  |  |  |  |  |
GFRC 360, LLC – Common Stock Warrants(E)(G) |  | 45.0 | % |  | — |  |  | — |
Healthcare, Education, and Childcare – 2.3% |  |  |  |  |  |
GSM MidCo LLC – Common Stock(E)(G) |  | 767 |  |  | 767 |  |  | 924 |
Leeds Novamark Capital I, L.P. – Limited Partnership Interest ($843 uncalled capital commitment)(G)(L)(R) |  | 3.5 | % |  | 1,358 |  |  | 6,487 |
|  |  |  | 2,125 |  |  | 7,411 |
Machinery – 0.0% |  |  |  |  |  |
Arc Drilling Holdings LLC – Common Stock(E)(G) |  | 15,000 |  |  | 1,500 |  |  | — |
Oil and Gas – 0.0% |  |  |  |  |  |
FES Resources Holdings LLC – Common Equity Units(E)(G) |  | 6,233 |  |  | — |  |  | — |
Total Safety Holdings, LLC – Common Equity(E)(G) |  | 435 |  |  | 499 |  |  | 132 |
|  |  |  | 499 |  |  | 132 |
Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.0% |  |  |  |  |  |
Funko Acquisition Holdings, LLC(S) – Common Units(G)(T) |  | 6,290 |  |  | 30 |  |  | 78 |
Telecommunications – 0.1% |  |  |  |  |  |
B+T Group Acquisition, Inc.(S) – Common Stock Warrant(E)(G) |  | 1.5 | % |  | — |  |  | 330 |
NetFortris Corp. – Common Stock Warrant(E)(G) |  | 1 |  |  | 1 |  |  | — |
|  |  |  | 1 |  |  | 330 |
Textiles and Leather – 3.2% |  |  |  |  |  |
Targus Cayman HoldCo, Ltd. – Common Stock(E)(G) |  | 3,076,414 |  |  | 2,062 |  |  | 10,030 |
Total Common Equity |  |  |  | $ | 12,573 |  |  | $ | 34,978 |
Total Non-Control/Non-Affiliate Investments |  |  |  | $ | 447,566 |  |  | $ | 454,601 |
AFFILIATE INVESTMENTS(N) – 25.8% |  |  |  |  |  |
Secured First Lien Debt – 9.1% |  |  |  |  |  |
Diversified/Conglomerate Manufacturing – 1.7% |  |  |  |  |  |
Edge Adhesives Holdings, Inc. (S) – Term Debt (L + 10.5%, 12.5% Cash, Due 2/2022)(C) |  | $ | 5,540 |  |  | $ | 5,540 |  |  | $ | 5,540 |
Diversified/Conglomerate Service – 7.4% |  |  |  |  |  |
Encore Dredging Holdings, LLC – Line of Credit, $3,000 available (L + 8.0%, 9.0% Cash, Due 12/2025)(C) |  | — |  |  | — |  |  | — |
Encore Dredging Holdings, LLC – Term Debt (L + 8.0%, 9.0% Cash, Due 12/2025)(C) |  | 23,500 |  |  | 23,500 |  |  | 23,618 |

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GLADSTONE CAPITAL CORPORATION CONSOLIDATED SCHEDULE OF INVESTMENTS SEPTEMBER 30, 2021 (DOLLAR AMOUNTS IN THOUSANDS)
Company and Investment(A)(B)(W)(K) |  | Principal/ Shares/ Units(J)(I) |  | Cost |  | Fair Value
Encore Dredging Holdings, LLC – Delayed Draw Term Debt, $5,000 available (L + 8.0%, 9.0% Cash, Due 12/2025)(C) |  | — |  |  | — |  |  | — |
|  |  |  | 23,500 |  |  | 23,618 |
Total Secured First Lien Debt |  |  |  | $ | 29,040 |  |  | $ | 29,158 |
Secured Second Lien Debt – 9.6% |  |  |  |  |  |
Diversified Natural Resources, Precious Metals and Minerals – 9.6% |  |  |  |  |  |
Lignetics, Inc. – Term Debt (L + 9.8%, 11.8% Cash, Due 6/2026)(Y)(Z) |  | $ | 6,000 |  |  | $ | 6,000 |  |  | $ | 6,540 |
Lignetics, Inc. – Term Debt (L + 9.8%, 11.8% Cash, Due 6/2026)(Y)(Z) |  | 8,000 |  |  | 8,000 |  |  | 8,633 |
Lignetics, Inc. – Term Debt (L + 9.8%, 11.8% Cash, Due 6/2026)(Y)(Z) |  | 3,300 |  |  | 3,300 |  |  | 3,491 |
Lignetics, Inc. – Term Debt (L + 9.8%, 11.8% Cash, Due 6/2026)(Y)(Z) |  | 3,000 |  |  | 3,000 |  |  | 3,199 |
Lignetics, Inc. – Term Debt (L + 9.8%, 11.8% Cash, Due 6/2026)(Y)(Z) |  | 2,500 |  |  | 2,500 |  |  | 2,500 |
Lignetics, Inc. – Term Debt (L + 9.8%, 11.8% Cash, Due 6/2026)(Y)(Z) |  | 6,200 |  |  | 6,200 |  |  | 6,200 |
|  |  |  | 29,000 |  |  | 30,563 |
Total Secured Second Lien Debt |  |  |  | $ | 29,000 |  |  | $ | 30,563 |
Preferred Equity – 3.4% |  |  |  |  |  |
Diversified/Conglomerate Manufacturing – 0.0% |  |  |  |  |  |
Edge Adhesives Holdings, Inc.(S) – Preferred Stock(E)(G) |  | 5,466 |  |  | $ | 5,466 |  |  | $ | — |
Diversified/Conglomerate Service– 1.4% |  |  |  |  |  |
Encore Dredging Holdings, LLC – Preferred Stock(E)(G) |  | 3,200,000 |  |  | 3,200 |  |  | 4,525 |
Diversified Natural Resources, Precious Metals and Minerals – 1.8% |  |  |  |  |  |
Lignetics, Inc. – Preferred Stock(G)(Y)(Z) |  | 78,097 |  |  | 1,321 |  |  | 5,602 |
Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.2% |  |  |  |  |  |
Canopy Safety Brands, LLC – Preferred Stock(E)(G) |  | 500,000 |  |  | 500 |  |  | 739 |
Total Preferred Equity |  |  |  | $ | 10,487 |  |  | $ | 10,866 |
Common Equity – 3.7% |  |  |  |  |  |
Diversified Natural Resources, Precious Metals and Minerals – 3.5% |  |  |  |  |  |
Lignetics, Inc. – Common Stock(G)(Y)(Z) |  | 152,603 |  |  | $ | 1,855 |  |  | $ | 10,969 |
Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.2% |  |  |  |  |  |
Canopy Safety Brands, LLC – Common Stock(E)(G) |  | 800,000 |  |  | 300 |  |  | 725 |
Total Common Equity |  |  |  | $ | 2,155 |  |  | $ | 11,694 |
Total Affiliate Investments |  |  |  | $ | 70,682 |  |  | $ | 82,281 |
CONTROL INVESTMENTS(O) – 6.5% |  |  |  |  |  |
Secured First Lien Debt – 1.3% |  |  |  |  |  |
Diversified/Conglomerate Manufacturing – 0.9% |  |  |  |  |  |
LWO Acquisitions Company LLC – Term Debt (L + 7.5%, 10.0% Cash, Due 6/2021)(E)(Q) |  | $ | 6,000 |  |  | $ | 6,000 |  |  | $ | 2,841 |
LWO Acquisitions Company LLC – Term Debt (Due 6/2021)(E)(P)(Q) |  | 10,632 |  |  | 10,632 |  |  | — |
|  |  |  | 16,632 |  |  | 2,841 |
Printing and Publishing – 0.4% |  |  |  |  |  |
TNCP Intermediate HoldCo, LLC – Line of Credit, $700 available (8.0% Cash, Due 10/2024)(E)(F) |  | 1,300 |  |  | 1,300 |  |  | 1,300 |
Total Secured First Lien Debt |  |  |  | $ | 17,932 |  |  | $ | 4,141 |
Secured Second Lien Debt – 2.5% |  |  |  |  |  |
Automobile– 2.5% |  |  |  |  |  |
Defiance Integrated Technologies, Inc. – Term Debt (L + 9.5%, 11.0% Cash, Due 5/2026)(E) |  | $ | 7,985 |  |  | $ | 7,985 |  |  | $ | 7,985 |
Unsecured Debt – 0.0% |  |  |  |  |  |
Diversified/Conglomerate Manufacturing – 0.0% |  |  |  |  |  |
LWO Acquisitions Company LLC – Term Debt (Due 6/2023)(E)(P) |  | $ | 95 |  |  | $ | 95 |  |  | $ | — |
Preferred Equity – 0.1% |  |  |  |  |  |
Automobile– 0.1% |  |  |  |  |  |
Defiance Integrated Technologies, Inc. – Preferred Stock(E)(G) |  | 6,043 |  |  | $ | 250 |  |  | $ | 270 |
Common Equity – 2.6% |  |  |  |  |  |
Automobile– 0.8% |  |  |  |  |  |
Defiance Integrated Technologies, Inc. – Common Stock(E)(G) |  | 33,231 |  |  | $ | 580 |  |  | $ | 2,623 |
Diversified/Conglomerate Manufacturing – 0.0% |  |  |  |  |  |
LWO Acquisitions Company LLC – Common Units(E)(G) |  | 921,000 |  |  | 921 |  |  | — |

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GLADSTONE CAPITAL CORPORATION CONSOLIDATED SCHEDULE OF INVESTMENTS SEPTEMBER 30, 2021 (DOLLAR AMOUNTS IN THOUSANDS)
Company and Investment(A)(B)(W)(K) |  | Principal/ Shares/ Units(J)(I) |  | Cost |  | Fair Value
Machinery – 1.3% |  |  |  |  |  |
PIC 360, LLC – Common Equity Units(E)(G) |  | 750 |  |  | 1 |  |  | 3,983 |
Printing and Publishing – 0.5% |  |  |  |  |  |
TNCP Intermediate HoldCo, LLC – Common Equity Units(E)(G) |  | 790,000 |  |  | 500 |  |  | 1,728 |
Total Common Equity |  |  |  | $ | 2,002 |  |  | $ | 8,334 |
Total Control Investments |  |  |  | $ | 28,264 |  |  | $ | 20,730 |
TOTAL INVESTMENTS – 175.1% |  |  |  | $ | 546,512 |  |  | $ | 557,612 |

(1)Certain of the securities listed in this schedule are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $512.0 million at fair value, are pledged as collateral under our revolving line of credit, as described further in Note 5—Borrowings in the accompanying Notes to Consolidated Financial Statements. Under the Investment Company Act of 1940, as amended (the “1940 Act”), we may not acquire any non-qualifying assets unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. As of September 30, 2021, our investments in Leeds Novamark Capital I, L.P. (“Leeds”) and Funko Acquisition Holdings, LLC (“Funko”) are considered non-qualifying assets under Section 55 of the 1940 Act. Such non-qualifying assets represent 1.2% of total investments, at fair value, as of September 30, 2021.
(2)Unless indicated otherwise, all cash interest rates are indexed to 30-day London Interbank Offered Rate (“LIBOR” or “L”), which was 0.08% as of September 30, 2021. If applicable, paid-in-kind (“PIK”) interest rates are noted separately from the cash interest rate. Certain securities are subject to an interest rate floor. The cash interest rate is the greater of the floor or LIBOR plus a spread. Due dates represent the contractual maturity date.
(3)Fair value was based on an internal yield analysis or on estimates of value submitted by ICE Data Pricing and Reference Data, LLC (“ICE”).
(4)Fair value was based on the indicative bid price on or near September 30, 2021, offered by the respective syndication agent’s trading desk.
(5)Fair value was based on the total enterprise value of the portfolio company, which was then allocated to the portfolio company’s securities in order of their relative priority in the capital structure.
(6)Debt security has a fixed interest rate.
(7)Security is non-income producing.
(8)Reserved.
(9)Represents the principal balance for debt investments and the number of shares/units held for equity investments. Warrants are represented as a percentage of ownership, as applicable.
(10)Where applicable, aggregates all shares of a class of stock owned without regard to specific series owned within such class (some series of which may or may not be voting shares) or aggregates all warrants to purchase shares of a class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase.
(11)Category percentages represent the fair value of each category and subcategory as a percentage of net assets as of September 30, 2021.
(12)There are certain limitations on our ability to withdraw our partnership interest prior to dissolution of the entity, which must occur no later than May 9, 2024 or two years after all outstanding leverage has matured.
(13)Non-Control/Non-Affiliate investments, as defined by the 1940 Act, are those that are neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.
(14)Affiliate investments, as defined by the 1940 Act, are those in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and outstanding voting securities.
(15)Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.
(16)Debt security does not have a stated interest rate that is payable thereon.
(17)Investment maturity date has passed. Investment continues to make applicable interest payments.
(18)Fair value was based on net asset value provided by the fund as a practical expedient.
(19)One of our affiliated funds, Gladstone Investment Corporation, co-invested with us in this portfolio company pursuant to an exemptive order granted by the U.S. Securities and Exchange Commission.
(20)Our investment in Funko was valued using Level 2 inputs within the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) fair value hierarchy. Our common units in Funko are convertible to class A common stock in Funko, Inc. upon meeting certain requirements. Fair value was based on the closing market price of shares of Funko, Inc. as of the reporting date, less a discount for lack of marketability. Funko, Inc. is traded on the Nasdaq Global Select Market under the trading symbol “FNKO.” Refer to Note 3—Investments in the accompanying Notes to Consolidated Financial Statements for additional information.
(21)The cash interest rate on this investment was indexed to 90-day LIBOR, which was 0.13% as of September 30, 2021.
(22)The cash interest rate on this investment was indexed to the U.S. Prime Rate (“PRIME”), which was 3.25% as of September 30, 2021.
(23)Unless indicated otherwise, all of our investments are valued using Level 3 inputs within the ASC 820 fair value hierarchy. Refer to Note 3—Investments in the accompanying Notes to Consolidated Financial Statements for additional information.
(24)Cumulative gross unrealized depreciation for federal income tax purposes is $59.4 million; cumulative gross unrealized appreciation for federal income tax purposes is $57.7 million. Cumulative net unrealized depreciation is $1.7 million, based on a tax cost of $559.3 million.
(25)Fair value was based on the expected exit or payoff amount, where such event has occurred or is expected to occur imminently.
(26)Investment was exited subsequent to September 30, 2021.
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GLADSTONE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND AS OTHERWISE
INDICATED)
NOTE 1. ORGANIZATION
Gladstone Capital Corporation was incorporated under the Maryland General Corporation Law on May 30, 2001 and completed an initial public offering on August 24, 2001. The terms “the Company,” “we,” “our” and “us” all refer to Gladstone Capital Corporation and its consolidated subsidiaries. We are an externally managed, closed-end, non-diversified management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), and are applying the guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 “Financial Services-Investment Companies” (“ASC 946”). In addition, we have elected to be treated for U.S. federal income tax purposes as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”). We were established for the purpose of investing in debt and equity securities of established private businesses operating in the United States (“U.S.”). Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established lower middle market companies (which we generally define as companies with annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $3 million to $15 million) in the U.S. that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities, in connection with our debt investments, that we believe can grow over time to permit us to sell our equity investments for capital gains.
Gladstone Business Loan, LLC (“Business Loan”), a wholly-owned subsidiary of ours, was established on February 3, 2003, for the sole purpose of holding certain investments pledged as collateral under our line of credit. The financial statements of Business Loan are consolidated with those of Gladstone Capital Corporation.
We are externally managed by Gladstone Management Corporation (the “Adviser”), an affiliate of ours and an SEC registered investment adviser, pursuant to an investment advisory and management agreement (as amended and/or restated from time to time, the “Advisory Agreement”). Administrative services are provided by Gladstone Administration, LLC (the “Administrator”), an affiliate of ours and the Adviser, pursuant to an administration agreement (the “Administration Agreement”). Refer to Note 4—Related Party Transactions for additional information regarding these arrangements.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
We prepare our Consolidated Financial Statements and the accompanying notes in accordance with accounting principles generally accepted in the U.S. (“GAAP”) and conform to Regulation S-X. Management believes it has made all necessary adjustments so that our accompanying Consolidated Financial Statements are presented fairly and that all such adjustments are of a normal recurring nature. Our accompanying Consolidated Financial Statements include our accounts and the accounts of our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Consolidation
In accordance with Article 6 of Regulation S-X, we do not consolidate portfolio company investments. Under the investment company rules and regulations pursuant to the American Institute of Certified Public Accountants Audit and Accounting Guide for Investment Companies, codified in ASC 946, we are precluded from consolidating any entity other than another investment company, except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries.
Use of Estimates
Preparing financial statements requires management to make estimates and assumptions that affect the amounts reported in our accompanying Consolidated Financial Statements and these Notes to Consolidated Financial Statements. Actual results may differ from those estimates.
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Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation in the Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements. Reclassifications did not impact net increase in net assets resulting from operations, total assets, total liabilities, or total net assets, or Consolidated Statements of Cash Flows classifications.
Classification of Investments
In accordance with the provisions of the 1940 Act applicable to BDCs, we classify portfolio investments on our accompanying Consolidated Financial Statements into the following categories:
•Control Investments—Control investments are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities of such portfolio company;
•Affiliate Investments—Affiliate investments are those in which we own, with the power to vote, between 5.0% and 25.0% of the issued and outstanding voting securities that are not classified as Control investments; and
•Non-Control/Non-Affiliate Investments—Non-Control/Non-Affiliate investments are those that are neither control nor affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.
Cash and cash equivalents
We consider all short-term, highly liquid investments that are both readily convertible to cash and have a maturity of three months or less at the time of purchase to be cash equivalents. Cash is carried at cost, which approximates fair value. We place our cash with financial institutions, and at times, cash held in checking accounts may exceed the Federal Deposit Insurance Corporation insured limit. We seek to mitigate this concentration of credit risk by depositing funds with major financial institutions.
Restricted Cash and Cash Equivalents
Restricted cash is cash held in escrow that was generally received as part of an investment exit. Restricted cash is carried at cost, which approximates fair value.
Investment Valuation Policy
Accounting Recognition
We record our investments at fair value in accordance with the FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) and the 1940 Act. Investment transactions are recorded on the trade date. Realized gains or losses are generally measured by the difference between the net proceeds from the repayment or sale and the cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, and include investments charged off during the period, net of recoveries. Unrealized appreciation or depreciation primarily reflects the change in investment fair values, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.
Board Responsibility
In December 2020, the SEC adopted Rule 2a-5 under the 1940 Act, which permits a BDC’s board of directors to designate its investment adviser as a valuation designee to perform fair value determinations for its investment portfolio, subject to the active oversight of such board. Our board of directors (the “Board of Directors”) has approved investment valuation policies and procedures pursuant to Rule 2a-5 (the “Policy”) and, in July 2022, designated the Adviser to serve as the Board of Directors’ valuation designee.
In accordance with the 1940 Act and SEC Rule 2a-5, our Board of Directors has the ultimate responsibility for reviewing and determining, in good faith, the fair value of our investments for which market quotations are not readily available based on our Policy and for overseeing the valuation designee. Such review and oversight includes receiving written fair value determinations and supporting materials provided by the valuation designee, in coordination with the Administrator
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and with the oversight by the Company’s chief valuation officer (collectively, the “Valuation Team”). The Valuation Committee of our Board of Directors (comprised entirely of independent directors) meets to review the valuation determinations and supporting materials, discusses the information provided by the Valuation Team, determines whether the Valuation Team has followed the Policy, and reviews other facts and circumstances, including current valuation risks, conflicts of interest, material valuation matters, appropriateness of valuation methodologies, back-testing results, price challenges/overrides, and ongoing monitoring and oversight of pricing services. After the Valuation Committee concludes its meeting, it and the chief valuation officer, representing the Valuation Designee, present the Valuation Committee’s findings to the entire Board of Directors so that the full Board of Directors may review and approve in good faith the Valuation Designee’s determined fair values of such investments in accordance with the Policy.
There is no single standard for determining fair value (especially for privately-held businesses), as fair value depends upon the specific facts and circumstances of each individual investment. In determining the fair value of our investments, the Valuation Team, led by the chief valuation officer, uses the Policy, and each quarter the Valuation Committee and Board of Directors review the Policy to determine if changes thereto are advisable and whether the Valuation Team has applied the Policy consistently.
Use of Third Party Valuation Firms
The Valuation Team engages third party valuation firms to provide independent assessments of fair value of certain of our investments.
ICE Data Pricing and Reference Data, LLC (“ICE”), a valuation specialist, generally provides estimates of fair value on our proprietary debt investments. The Valuation Team generally assigns ICE’s estimates of fair value to our debt investments where we do not have the ability to effectuate a sale of the applicable portfolio company. The Valuation Team corroborates ICE’s estimates of fair value using one or more of the valuation techniques discussed below. The Valuation Team’s estimate of value on a specific debt investment may significantly differ from ICE’s. When this occurs, our Valuation Committee and Board of Directors review whether the Valuation Team has followed the Policy and whether the Valuation Team’s recommended fair value is reasonable in light of the Policy and other facts and circumstances before determining fair value.
We may engage other independent valuation firms to provide earnings multiple ranges, as well as other information, and evaluate such information for incorporation into the total enterprise value (“TEV”) of certain of our investments. Generally, at least once per year, we engage an independent valuation firm to value or review the valuation of each of our significant equity investments, which includes providing the information noted above. The Valuation Team evaluates such information for incorporation into our TEV, including review of all inputs provided by the independent valuation firm. The Valuation Team then makes a recommendation to our Valuation Committee and Board of Directors as to the fair value. Our Board of Directors reviews the recommended fair value, and whether it is reasonable in light of the Policy, and other relevant facts and circumstances before determining fair value.
Valuation Techniques
In accordance with ASC 820, the Valuation Team uses the following techniques when valuing our investment portfolio:
•Total Enterprise Value — In determining the fair value using a TEV, the Valuation Team first calculates the TEV of the portfolio company by incorporating some or all of the following factors: the portfolio company’s ability to make payments and other specific portfolio company attributes; the earnings of the portfolio company (the trailing or projected 12 month revenue or EBITDA); EBITDA multiples obtained from our indexing methodology whereby the original transaction EBITDA multiple at the time of our closing is indexed to a general subset of comparable disclosed transactions and EBITDA multiples from recent sales to third parties of similar securities in similar industries; a comparison to publicly traded securities in similar industries, and other pertinent factors. The Valuation Team generally reviews industry statistics and may use outside experts when gathering this information. Once the TEV is determined for a portfolio company, the Valuation Team generally allocates the TEV to the portfolio company’s securities based on the facts and circumstances of the securities, which typically results in the allocation of fair value to securities based on the order of their relative priority in the capital structure. Generally, the Valuation Team uses TEV to value our equity investments and, in the circumstances where we have the ability to effectuate a sale of a portfolio company, our debt investments.
TEV is primarily calculated using EBITDA and EBITDA multiples; however, TEV may also be calculated using revenue and revenue multiples or a discounted cash flow (“DCF”) analysis whereby future expected cash flows of
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the portfolio company are discounted to determine a net present value using estimated risk-adjusted discount rates, which incorporate adjustments for nonperformance and liquidity risks.
•Yield Analysis — The Valuation Team generally determines the fair value of our debt investments for which we do not have the ability to effectuate a sale of the applicable portfolio company using the yield analysis, which includes a DCF calculation and assumptions that the Valuation Team believes market participants would use, including, estimated remaining life, current market yield, current leverage, and interest rate spreads. This technique develops a modified discount rate that incorporates risk premiums including increased probability of default, increased loss upon default and increased liquidity risk. Generally, the Valuation Team uses the yield analysis to corroborate both estimates of value provided by ICE and market quotes.
•Market Quotes — For our investments for which a limited market exists, we generally base fair value on readily available and reliable market quotations which are corroborated by the Valuation Team (generally by using the yield analysis described above). In addition, the Valuation Team assesses trading activity for similar investments and evaluates variances in quotations and other market insights to determine if any available quoted prices are reliable. Typically, the Valuation Team uses the lower indicative bid price (“IBP”) in the bid-to-ask price range obtained from the respective originating syndication agent’s trading desk on or near the valuation date. The Valuation Team may take further steps to consider additional information to validate that price in accordance with the Policy. For securities that are publicly traded, we generally base fair value on the closing market price of the securities we hold as of the reporting date. For restricted securities that are publicly traded, we generally base fair value on the closing market price of the securities we hold as of the reporting date less a discount for the restriction, which includes consideration of the nature and term to expiration of the restriction.
•Investments in Funds — For equity investments in other funds for which we cannot effectuate a sale of the fund, the Valuation Team generally determines the fair value of our invested capital at the net asset value (“NAV”) provided by the fund. Any invested capital that is not yet reflected in the NAV provided by the fund is valued at par value. The Valuation Team may also determine fair value of our investments in other investment funds based on the capital accounts of the underlying entity.
In addition to the valuation techniques listed above, the Valuation Team may also consider other factors when determining the fair value of our investments, including: the nature and realizable value of the collateral, including external parties’ guaranties, any relevant offers or letters of intent to acquire the portfolio company, timing of expected loan repayments, and the markets in which the portfolio company operates.
Fair value measurements of our investments may involve subjective judgments and estimates and due to the uncertainty inherent in valuing these securities, the determinations of fair value may fluctuate from period to period and may differ materially from the values that could be obtained if a ready market for these securities existed. Our NAV could be materially affected if the determinations regarding the fair value of our investments are materially different from the values that we ultimately realize upon our disposal of such securities. Additionally, changes in the market environment and other events that may occur over the life of the investment may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which it is recorded.
Refer to Note 3—Investments for additional information regarding fair value measurements and our application of ASC 820.
Revenue Recognition
Interest Income Recognition
Interest income, including the amortization of premiums, acquisition costs and amendment fees, the accretion of original issue discounts (“OID”), and paid-in-kind (“PIK”) interest, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due or if our qualitative assessment indicates that the debtor is unable to service its debt or other obligations, we will place the loan on non-accrual status and cease recognizing interest income on that loan for financial reporting purposes until the borrower has demonstrated the ability and intent to pay contractual amounts due. However, we remain contractually entitled to this interest. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis depending upon management's judgment. Generally, non-accrual loans are restored to accrual status when past due principal and interest are paid and, in management’s judgment, are likely to remain current, or due to a restructuring such that the interest income is deemed to be collectible. As of September 30, 2022 and 2021, there were no loans on non-accrual status.
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We currently hold, and we expect to hold in the future, some loans in our portfolio that contain OID or PIK provisions. We recognize OID for loans originally issued at discounts and recognize the income over the life of the obligation based on an effective yield calculation. PIK interest, computed at the contractual rate specified in a loan agreement, is added to the principal balance of a loan and recorded as income over the life of the obligation. Thus, the actual collection of PIK income may be deferred until the time of debt principal repayment. To maintain our ability to be taxed as a RIC, we may need to pay out both OID and PIK non-cash income amounts in the form of distributions, even though we have not yet collected the cash on either.
As of September 30, 2022 and 2021, we held four and six OID loans, respectively, primarily from syndicated loans as well as some participation interests in our portfolio. We recorded OID income of $0.5 million, $0.3 million, and $0.3 million during the years ended September 30, 2022, 2021, and 2020, respectively. The unamortized balance of OID investments as of September 30, 2022 and 2021 totaled $0.9 million and $1.1 million, respectively. As of September 30, 2022 and 2021, we had six and seven investments which had a PIK interest component, respectively. We recorded PIK interest income of $4.2 million, $2.5 million, and $2.6 million during the years ended September 30, 2022, 2021, and 2020, respectively. We collected $2.4 million, $3.4 million, and $0.1 million of PIK interest in cash during the years ended September 30, 2022, 2021, and 2020, respectively.
Success Fee Income Recognition
We record success fees as income when earned, which often occurs upon receipt of cash. Success fees are generally contractually due upon a change of control in a portfolio company, typically resulting from an exit or sale, and are non-recurring.
Dividend Income Recognition
We accrue dividend income on preferred and common equity securities to the extent that such amounts are expected to be collected and if we have the option to collect such amounts in cash or other consideration.
Deferred Financing and Offering Costs
Deferred financing and offering costs consist of costs incurred to obtain financing, including lender fees and legal fees. Certain costs associated with our Credit Facility (as defined below) are deferred and amortized using the straight-line method, which approximates the effective interest method, over the term of our Credit Facility’s revolving period. Costs associated with the issuance of our notes payable are presented as discounts to the principal amount of the notes payable and are amortized using the straight-line method, which approximates the effective interest method, over the term of the notes. Costs associated with the issuance of our mandatorily redeemable preferred stock are presented as discounts to the liquidation value of the mandatorily redeemable preferred stock and are amortized using the straight-line method, which approximates the effective interest method, over the term of the respective series of preferred stock. Refer to Note 5 — Borrowings and Note 6 — Mandatorily Redeemable Preferred Stock for further discussion.
Related Party Fees
We are party to the Advisory Agreement with the Adviser, which is owned and controlled by our chairman and chief executive officer. In accordance with the Advisory Agreement, we pay the Adviser fees as compensation for its services, consisting of a base management fee and an incentive fee. Additionally, we pay the Adviser a loan servicing fee as compensation for its services as servicer under the terms of our revolving line of credit with KeyBank National Association (“KeyBank”), as administrative agent, lead arranger and lender (as amend and/or restated from time to time, our “Credit Facility”). These fees are accrued at the end of the quarter when the services are performed and generally paid the following quarter.
We are also party to the Administration Agreement with the Administrator, which is owned and controlled by our chairman and chief executive officer, whereby we pay separately for administrative services. Refer to Note 4— Related Party Transactions for additional information regarding these related party fees and agreements.
Income Taxes
We intend to continue to qualify for treatment as a RIC under subchapter M of the Code, which generally allows us to avoid paying corporate income taxes on any income or gains that we distribute to our stockholders. We intend to continue
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to distribute sufficient dividends to eliminate taxable income. Refer to Note 10— Federal and State Income Taxes for additional information regarding our RIC requirements.
ASC 740, “Income Taxes” 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 authorities. Tax positions not deemed to satisfy the “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current fiscal year. We have evaluated the implications of ASC 740, for all open tax years and in all major tax jurisdictions, and determined that there is no material impact on our accompanying Consolidated Financial Statements. Our federal tax returns for fiscal years 2019 to 2021 remain subject to examination by the Internal Revenue Service (“IRS”).
Distributions
Distributions to stockholders are recorded on the ex-dividend date. We are required to pay out at least 90.0% of our Investment Company Taxable Income (as defined below), which is generally our net ordinary income plus the excess of our net short-term capital gains over net long-term capital losses for each taxable year as a distribution to our stockholders in order to maintain our ability to be taxed as a RIC under Subchapter M of the Code. It is our policy to pay out as a distribution up to 100.0% of those amounts. The amount to be paid is determined by our Board of Directors each quarter and is based on the annual earnings estimated by our management. Based on that estimate, a distribution is declared each quarter and is paid out monthly over the course of the respective quarter. Refer to Note 9—Distributions to Common Stockholders for further information.
Our transfer agent, Computershare, Inc., offers a dividend reinvestment plan for our common stockholders. This is an “opt in” dividend reinvestment plan, meaning that common stockholders may elect to have their cash distributions automatically reinvested in additional shares of our common stock. Common stockholders who do not make such election will receive their distributions in cash. Common stockholders who receive distributions in the form of stock will be subject to the same federal, state and local tax consequences as stockholders who elect to receive their distributions in cash. As plan agent, Computershare, Inc. purchases shares in the open market in connection with the obligations under the plan.
Recent Accounting Pronouncements
In June 2022, the FASB issued Accounting Standards Update 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions” (“ASU 2022-03”), which clarifies the measurement and presentation of fair value for equity securities subject to contractual restrictions that prohibit the sale of the equity security. ASU 2022-03 is effective for annual reporting periods beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted. Our adoption of ASU 2022-03 did not have a material impact on our financial position, results of operations or cash flows.
In August 2021, the FASB issued Accounting Standards Update 2021-06, “Presentation of Financial Statements (Topic 205): Financial Services – Depository and Lending (Topic 942), and Financial Services – Investment Companies (Topic 946)” (“ASU 2021-06”), which codifies SEC final rules. ASU 2021-06 is effective immediately. Our adoption of ASU 2021-06 did not have a material impact on our financial position, results of operations or cash flows.
NOTE 3. INVESTMENTS
In accordance with ASC 820, the fair value of each investment is determined to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between willing market participants on the measurement date. This fair value definition focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of a financial instrument as of the measurement date.
•Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical financial instruments in active markets;
•Level 2 — inputs to the valuation methodology include quoted prices for similar financial instruments in active or inactive markets, and inputs that are observable for the financial instrument, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers; and
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•Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are those inputs that reflect assumptions that market participants would use when pricing the financial instrument and can include the Valuation Team’s assumptions based upon the best available information.
When a determination is made to classify our investments within Level 3 of the valuation hierarchy, such determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (or components that are actively quoted and can be validated to external sources). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. Investments in funds measured using NAV as a practical expedient are not categorized within the fair value hierarchy.
As of September 30, 2022, all of our investments were valued using Level 3 inputs within the ASC 820 fair value hierarchy, except for our investment in Funko Acquisition Holdings, LLC (“Funko”), which was valued using Level 2 inputs, and our investment in Leeds Novamark Capital I, L.P. (“Leeds”), which was valued using NAV as a practical expedient. As of September 30, 2021, all of our investments were valued using Level 3 inputs within the ASC 820 fair value hierarchy, except for our investment in Funko, which was valued using Level 2 inputs, and our investment in Leeds, which was valued using NAV as a practical expedient.
We transfer investments in and out of Level 1, 2, and 3 of the valuation hierarchy as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. During the years ended September 30, 2022 and 2021, there were no investments transferred into or out of Levels 1, 2 or 3 of the valuation hierarchy.
As of September 30, 2022 and 2021, our investments, by security type, at fair value were categorized as follows within the ASC 820 fair value hierarchy:

|  |  |  | Fair Value Measurements
|  | Fair Value |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
As of September 30, 2022: |  |  |  |  |  |  |  |
Secured first lien debt |  | $ | 463,858 |  |  | $ | — |  |  | $ | — |  |  | $ | 463,858 |
Secured second lien debt |  | 115,928 |  |  | — |  |  | — |  |  | 115,928 |
Unsecured debt |  | 55 |  |  | — |  |  | — |  |  | 55 |
Preferred equity |  | 27,046 |  |  | — |  |  | — |  |  | 27,046 |
Common equity/equivalents |  | 36,331 |  | (A) | — |  |  | 58 |  | (B) | 36,273 |
Total Investments as of September 30, 2022: |  | $ | 643,218 |  |  | $ | — |  |  | $ | 58 |  |  | $ | 643,160 |

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|  | Fair Value |  | Fair Value Measurements
|  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
As of September 30, 2021: |  |  |  |  |  |  |  |
Secured first lien debt |  | $ | 337,394 |  |  | $ | — |  |  | $ | — |  |  | $ | 337,394 |
Secured second lien debt |  | 135,956 |  |  | — |  |  | — |  |  | 135,956 |
Unsecured debt |  | 10 |  |  | — |  |  | — |  |  | 10 |
Preferred equity |  | 29,246 |  |  | — |  |  | — |  |  | 29,246 |
Common equity/equivalents |  | 48,519 |  | (A) | — |  |  | 78 |  | (B) | 48,441 |
Total Investments as of September 30, 2021: |  | $ | 551,125 |  |  | $ | — |  |  | $ | 78 |  |  | $ | 551,047 |

(A)Excludes our investment in Leeds with a fair value of $6.4 million and $6.5 million as of September 30, 2022 and 2021, respectively. Leeds was valued using NAV as a practical expedient.
(B)Fair value was determined based on the closing market price of shares of Funko, Inc. (our units in Funko can be converted into common shares of Funko, Inc.) at the reporting date less a discount for lack of marketability as our investment was subject to certain restrictions.
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The following table presents our portfolio investments, valued using Level 3 inputs within the ASC 820 fair value hierarchy and carried at fair value as of September 30, 2022 and 2021 by caption on our accompanying Consolidated Statements of Assets and Liabilities, and by security type:

| Total Recurring Fair Value Measurements Reported in Consolidated Statements of Assets and Liabilities Using Significant Unobservable Inputs (Level 3) |
| September 30, 2022 |  | September 30, 2021 |
Non-Control/Non-Affiliate Investments |  |  |  |
Secured first lien debt | $ | 413,631 |  |  | $ | 304,095 |  |
Secured second lien debt | 108,263 |  |  | 97,408 |  |
Unsecured debt | 55 |  |  | 10 |  |
Preferred equity | 17,719 |  |  | 18,110 |  |
Common equity/equivalents | 28,688 |  | (A) | 28,413 |  | (B)
Total Non-Control/Non-Affiliate Investments | $ | 568,356 |  |  | $ | 448,036 |  |
Affiliate Investments |  |  |  |
Secured first lien debt | $ | 34,804 |  |  | $ | 29,158 |  |
Secured second lien debt | — |  |  | 30,563 |  |
Preferred equity | 3,640 |  |  | 10,866 |  |
Common equity/equivalents | 647 |  |  | 11,694 |  |
Total Affiliate Investments | $ | 39,091 |  |  | $ | 82,281 |  |
Control Investments |  |  |  |
Secured first lien debt | $ | 15,423 |  |  | $ | 4,141 |  |
Secured second lien debt | 7,665 |  |  | 7,985 |  |
Preferred equity | 5,687 |  |  | 270 |  |
Common equity/equivalents | 6,938 |  |  | 8,334 |  |
Total Control Investments | $ | 35,713 |  |  | $ | 20,730 |  |
Total Investments at Fair Value Using Level 3 Inputs | $ | 643,160 |  |  | $ | 551,047 |  |

(A)Excludes our investments in Leeds and Funko with fair values of $6.4 million and $58 thousand, respectively, as of September 30, 2022. Leeds was valued using NAV as a practical expedient, and Funko was valued using Level 2 inputs.
(B)Excludes our investments in Leeds and Funko with fair values of $6.5 million and $78 thousand, respectively, as of September 30, 2021. Leeds was valued using NAV as a practical expedient, and Funko was valued using Level 2 inputs.
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In accordance with ASC 820, the following table provides quantitative information about our Level 3 fair value measurements of our investments as of September 30, 2022 and 2021. The table below is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements. The weighted average calculations in the table below are based on the principal balances for all debt related calculations and on the cost basis for all equity related calculations for the particular input.

| Quantitative Information about Level 3 Fair Value Measurements
|  |  |  |  |  |  |  |  | Range / Weighted Average as of
| September 30, 2022 |  | September 30, 2021 |  | Valuation Techniques/ Methodologies |  | Unobservable Input |  | September 30, 2022 |  | September 30, 2021
Secured first lien debt(A) | $ | 423,912 |  |  | $ | 321,490 |  |  | Yield Analysis |  | Discount Rate |  | 8.0%–29.5% / 11.8% |  | 7.5%–31.2% / 12.4%
| 39,946 |  |  | 15,904 |  |  | TEV |  | EBITDA multiple |  | 4.8x–6.7x / 6.2x |  | 5.4x–5.9x / 5.9x
|  |  |  |  |  |  | EBITDA |  | $800–$10,257 / $7,605 |  | $620–$10,209 / $9,255
|  |  |  |  |  |  | Revenue multiple |  | 0.3x–0.6x / 0.5x |  | 0.3x–0.3x / 0.3x
|  |  |  |  |  |  | Revenue |  | $11,514–$16,320 / $14,656 |  | $9,968–$9,968 / $9,968
Secured second lien debt | 97,472 |  |  | 106,464 |  |  | Yield Analysis |  | Discount Rate |  | 11.5%–15.4% / 13.8% |  | 10.1%—23.7% / 14.7%
| 10,791 |  |  | 21,507 |  |  | Market Quote |  | IBP |  | 82.0%–95.0% / 86.5% |  | 90.0%–99.0% / 95.7%
| 7,665 |  |  | 7,985 |  |  | TEV |  | EBITDA multiple |  | 5.6x–5.6x / 5.6x |  | 6.0x–6.0x / 6.0x
|  |  |  |  |  |  | EBITDA |  | $3,299–$3,299 / $3,299 |  | $3,125–$3,125 / $3,125
Unsecured debt | 55 |  |  | 10 |  |  | TEV |  | Revenue multiple |  | 0.3x–1.3x / l.0x |  | 0.3x–1.4x / l.0x
|  |  |  |  |  |  | Revenue |  | $764–$11,514 / $4,249 |  | $752–$9,968 / $3,740
Preferred and common equity / equivalents(B) | 63,319 |  |  | 77,687 |  |  | TEV |  | EBITDA multiple |  | 4.1x–11.0x / 6.5x |  | 3.7x–9.5x / 7.2x
|  |  |  |  |  |  | EBITDA |  | $800–$74,512 / $11,742 |  | $620–$62,547 / $14,788
|  |  |  |  |  |  | Revenue multiple |  | 0.3x–4.4x / 1.4x |  | 0.3x–4.0x / 2.0x
|  |  |  |  |  |  | Revenue |  | $764–$42,926 / $19,963 |  | $752–$144,889 / $29,437
Total Level 3 Investments, at Fair Value | $ | 643,160 |  |  | $ | 551,047 |  |  |  |  |  |  |  |  |

(A)Fair value as of September 30, 2022 includes one proprietary debt investment totaling $18.8 million, which was valued using the expected payoff amount as the unobservable input. Fair value as of September 30, 2021 includes two proprietary debt investments totaling $43.7 million, which were valued using the expected payoff amount as the unobservable input.
(B)Fair value as of September 30, 2022 includes one syndicated equity investment totaling $8.0 million, which was valued using the expected payoff amount as the unobservable input. Fair value as of September 30, 2021 includes one proprietary equity investment totaling $16.6 million, which was valued using the expected payoff amount as the unobservable input. Fair value as of September 30, 2022 excludes our investments in Leeds and Funko with fair values of $6.4 million and $58 thousand, respectively, as of September 30, 2022. Fair value as of September 30, 2021 excludes our investments in Leeds and Funko with fair values of $6.5 million and $78 thousand, respectively, as of September 30, 2021. Leeds was valued using NAV as a practical expedient and Funko was valued using Level 2 inputs as of both September 30, 2022 and 2021.
Fair value measurements can be sensitive to changes in one or more of the valuation inputs. Changes in discount rates, EBITDA or EBITDA multiples (or revenue or revenue multiples), each in isolation, may change the fair value of certain of our investments. Generally, an increase/(decrease) in market yields, discount rates, or a (decrease)/increase in EBITDA or EBITDA multiples (or revenue or revenue multiples) may result in a (decrease)/increase, respectively, in the fair value of certain of our investments.
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Changes in Level 3 Fair Value Measurements of Investments
The following tables provide the changes in fair value, broken out by security type, during the years ended September 30, 2022 and 2021 for all investments for which we determine fair value using unobservable (Level 3) inputs.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Year Ended September 30, 2022 |  | Secured First Lien Debt |  | Secured Second Lien Debt |  | Unsecured Debt |  | Preferred Equity |  | Common Equity/ Equivalents |  | Total
Fair Value as of September 30, 2021 |  | $ | 337,394 |  |  | $ | 135,956 |  |  | $ | 10 |  |  | $ | 29,246 |  |  | $ | 48,441 |  |  | $ | 551,047 |
Total gains (losses): |  |  |  |  |  |  |  |  |  |  |  |
Net realized gain (loss)(A) |  | (8,471) |  |  | — |  |  | (25) |  |  | — |  |  | 13,876 |  |  | 5,380 |
Net unrealized appreciation (depreciation)(B) |  | (693) |  |  | 267 |  |  | 20 |  |  | (3,166) |  |  | (12,968) |  |  | (16,540) |
Reversal of prior period net depreciation (appreciation) on realization(B) |  | 13,967 |  |  | (1,601) |  |  | 25 |  |  | (4,309) |  |  | (9,113) |  |  | (1,031) |
New investments, repayments and settlements:(C) |  |  |  |  |  |  |  |  |  |  |  |
Issuances/originations |  | 204,970 |  |  | 62,570 |  |  | 25 |  |  | 6,846 |  |  | 5,019 |  |  | 279,430 |
Settlements/repayments |  | (77,898) |  |  | (81,264) |  |  | — |  |  | (250) |  |  | — |  |  | (159,412) |
Net proceeds from sales |  | 1,339 |  |  | — |  |  | — |  |  | (1,321) |  |  | (15,732) |  |  | (15,714) |
Transfers |  | (6,750) |  |  | — |  |  | — |  |  | — |  |  | 6,750 |  |  | — |
Fair Value as of September 30, 2022 |  | $ | 463,858 |  |  | $ | 115,928 |  |  | $ | 55 |  |  | $ | 27,046 |  |  | $ | 36,273 |  |  | $ | 643,160 |

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Year Ended September 30, 2021 |  | Secured First Lien Debt |  | Secured Second Lien Debt |  | Unsecured Debt |  | Preferred Equity |  | Common Equity/ Equivalents |  | Total
Fair Value as of September 30, 2020 |  | $ | 213,468 |  |  | $ | 196,986 |  |  | $ | 4,299 |  |  | $ | 7,000 |  |  | $ | 23,881 |  |  | $ | 445,634 |
Total gains (losses): |  |  |  |  |  |  |  |  |  |  |  | — |
Net realized gain (loss)(A) |  | — |  |  | — |  |  | — |  |  | — |  |  | 3,849 |  |  | 3,849 |
Net unrealized appreciation (depreciation)(B) |  | 2,246 |  |  | 7,931 |  |  | (7) |  |  | 11,948 |  |  | 37,578 |  |  | 59,696 |
Reversal of prior period net depreciation (appreciation) on realization(B) |  | 72 |  |  | (763) |  |  | 133 |  |  | — |  |  | (6,069) |  |  | (6,627) |
New investments, repayments and settlements:(C) |  |  |  |  |  |  |  |  |  |  |  |
Issuances/originations |  | 166,517 |  |  | 9,607 |  |  | 113 |  |  | 10,298 |  |  | 1,300 |  |  | 187,835 |
Settlements/repayments |  | (24,909) |  |  | (97,805) |  |  | (4,528) |  |  | — |  |  | — |  |  | (127,242) |
Net proceeds from sales |  | — |  |  | — |  |  | — |  |  | — |  |  | (12,098) |  |  | (12,098) |
Transfers |  | (20,000) |  |  | 20,000 |  |  | — |  |  | — |  |  | — |  |  | — |
Fair Value as of September 30, 2021 |  | $ | 337,394 |  |  | $ | 135,956 |  |  | $ | 10 |  |  | $ | 29,246 |  |  | $ | 48,441 |  |  | $ | 551,047 |

(A)Included in net realized gain (loss) on investments on our accompanying Consolidated Statements of Operations for the corresponding period.
(B)Included in net unrealized appreciation (depreciation) on investments on our accompanying Consolidated Statements of Operations for the corresponding period.
(C)Includes increases in the cost basis of investments resulting from new portfolio investments, accretion of discounts, PIK, and other non-cash disbursements to portfolio companies, as well as decreases in the cost basis of investments resulting from principal repayments or sales, the amortization of premiums and acquisition costs and other cost-basis adjustments.
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Investment Activity
Proprietary Investments
As of September 30, 2022 and 2021, we held 46 and 38 proprietary investments with an aggregate fair value of $630.8 million and $525.9 million, or 97.1% and 94.3% of the total portfolio at fair value, respectively. The following significant proprietary investment transactions occurred during the year ended September 30, 2022:
•In October 2021, we invested $26.3 million in Engineering Manufacturing Technologies, LLC through secured first lien debt and equity.
•In November 2021, our investment in Lignetics, Inc. was sold, which resulted in the recognition of success fee income of $1.6 million and a realized gain of $13.4 million. In connection with the sale, we received net cash proceeds of approximately $47.2 million, including the repayment of our debt investment of $29.0 million at par.
•In November 2021, our investment in Prophet Brand Strategy paid off at par for net cash proceeds of $13.1 million. In conjunction with the payoff, we received a prepayment fee of $0.1 million.
•In November 2021, our investment in Effective School Solutions LLC paid off at par for net cash proceeds of $19.5 million. In conjunction with the payoff, we received a prepayment fee of $0.5 million.
•In November 2021, we invested $13.4 million in WB Xcel Holdings, LLC through secured first lien debt and equity.
•In December 2021, our investment in Phoenix Aromas & Essential Oils, LLC paid off at par for net cash proceeds of $10.0 million.
•In December 2021, we invested $10.0 million in Fix-it Group, Inc. through secured first lien debt.
•In December 2021, we invested $10.5 million in Workforce QA LLC through secured first lien debt and equity.
•In December 2021, we invested $30.0 million in Springfield, Inc. through secured second lien debt.
•In December 2021, we invested $16.8 million in HH-Inspire Acquisition, Inc. (“HH-Inspire”) through secured first lien debt and preferred equity. In June 2022, we invested an additional $11.5 million in HH-Inspire through secured first lien debt. In August 2022, we invested an additional $0.2 million in HH-Inspire through additional preferred equity. In September 2022, we invested an additional $8.0 million in HH-Inspire through secured first lien debt.
•In January 2022, our investment in Belnick, Inc. paid off at par for net cash proceeds of $10.0 million.
•In March 2022, we invested $5.0 million in Pansophic Learning Ltd., an existing portfolio company, through secured first lien debt.
•In March 2022, our investment in NetFortris Corp. was sold, which resulted in the recognition of success fee income of $3.2 million. In connection with the sale, we received net cash proceeds of $29.0 million, including the repayment of our debt investment of $28.8 million at par. We continue to retain an equity investment in NetFortris Holdings LLC with a cost basis of $0.8 million and fair value of $0.5 million as of September 30, 2022.
•In April 2022, we invested $12.0 million in Axios Industrial Group, LLC through secured first lien debt.
•In April 2022, we invested $14.4 million in Salvo Technologies, Inc. through secured first lien debt and membership units.
•In May 2022, we invested $21.8 million in Viva Railings, LLC through secured first lien debt.
•In June 2022, our investment in LWO Acquisitions Company LLC (“LWO”) was restructured upon emergence from Chapter 11 bankruptcy protection. As part of the restructuring, our existing $16.8 million debt investment in LWO was converted to $3.3 million of first lien debt and $6.8 million of common equity in Lonestar EMS, LLC. In conjunction with the restructuring, we recorded a net realized loss of approximately $8.5 million, including the write off of approximately $1.8 million in other receivables.
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•In August 2022, we invested $28.8 million in Giving Home Health Care LLC through secured second lien debt and common equity warrants.
•In August 2022, we invested $15.0 million in Sokol & Company Holdings, LLC through secured first lien debt and common equity.
•In August 2022, we invested an additional $2.5 million in Gray Matter Systems, LLC, an existing investment, through secured second lien debt.
•In September 2022, we invested an additional $10.5 million in Antenna Research Associates, Inc., an existing investment, through secured first lien debt.
•In September 2022, we extended Salt and Straw, LLC a $2.0 million line of credit commitment and an $11.5 million delayed draw term loan commitment. We funded $0.8 million on the line of credit at close.
•In September 2022, Unirac, Inc. was sold. In conjunction with the sale, we received net cash proceeds of $11.8 million, including the repayment of our debt investment at par and a $0.1 million prepayment penalty.
•In September 2022, we invested $15.0 million in Unirac Holdings, Inc. through secured first lien debt. We also extended Unirac Holdings, Inc. a $2.2 million line of credit commitment and a $2.8 million delayed draw term loan commitment, both of which were both unfunded at close.
Syndicated Investments
As of September 30, 2022 and 2021, we held six and eight syndicated investments with an aggregate fair value of $18.8 million and $31.7 million, or 2.9% and 5.7% of the total portfolio at fair value, respectively. The following significant syndicated investment transactions occurred during the year ended September 30, 2022:
•In November 2021, our investment in Medical Solutions Holdings, Inc. paid off at par for net cash proceeds of $6.0 million.
•In January 2022, our investment in Keystone Acquisition Corp. paid off at par for net cash proceeds of $4.0 million.
Investment Concentrations
As of September 30, 2022, our investment portfolio consisted of investments in 52 portfolio companies located in 24 states in 13 different industries, with an aggregate fair value of $649.6 million. The five largest investments at fair value as of September 30, 2022 totaled $174.5 million, or 26.9% of our total investment portfolio, as compared to the five largest investments at fair value as of September 30, 2021 totaling $166.2 million, or 29.8% of our total investment portfolio. As of September 30, 2022 and 2021, our average investment by obligor was $12.6 million and $11.9 million at cost, respectively.
The following table outlines our investments by security type as of September 30, 2022 and 2021:

| September 30, 2022 |  | September 30, 2021
| Cost |  | Fair Value |  | Cost |  | Fair Value
Secured first lien debt | $ | 475,806 |  |  | 72.5 | % |  | $ | 463,858 |  |  | 71.4 | % |  | $ | 362,616 |  |  | 66.3 | % |  | $ | 337,394 |  |  | 60.5 | %
Secured second lien debt | 118,949 |  |  | 18.2 |  |  | 115,928 |  |  | 17.8 |  |  | 137,643 |  |  | 25.2 |  |  | 135,956 |  |  | 24.4 |
Unsecured debt | 293 |  |  | 0.0 |  |  | 55 |  |  | 0.0 |  |  | 293 |  |  | 0.1 |  |  | 10 |  |  | 0.0 |
Total debt investments | 595,048 |  |  | 90.7 |  |  | 579,841 |  |  | 89.2 |  |  | 500,552 |  |  | 91.6 |  |  | 473,360 |  |  | 84.9 |
Preferred equity | 34,505 |  |  | 5.3 |  |  | 27,046 |  |  | 4.2 |  |  | 29,230 |  |  | 5.3 |  |  | 29,246 |  |  | 5.2 |
Common equity/equivalents | 26,500 |  |  | 4.0 |  |  | 42,728 |  |  | 6.6 |  |  | 16,730 |  |  | 3.1 |  |  | 55,006 |  |  | 9.9 |
Total equity investments | 61,005 |  |  | 9.3 |  |  | 69,774 |  |  | 10.8 |  |  | 45,960 |  |  | 8.4 |  |  | 84,252 |  |  | 15.1 |
Total Investments | $ | 656,053 |  |  | 100.0 | % |  | $ | 649,615 |  |  | 100.0 | % |  | $ | 546,512 |  |  | 100.0 | % |  | $ | 557,612 |  |  | 100.0 | %

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Our investments at fair value consisted of the following industry classifications as of September 30, 2022 and 2021:

Industry Classification |  | September 30, 2022 |  | September 30, 2021
| Fair Value |  | Percentage of Total Investments |  | Fair Value |  | Percentage of Total Investments
Diversified/Conglomerate Service |  | $ | 148,907 |  |  | 22.9 | % |  | $ | 132,458 |  |  | 23.8 | %
Healthcare, Education, and Childcare |  | 136,401 |  |  | 21.0 |  |  | 92,680 |  |  | 16.6 |
Diversified/Conglomerate Manufacturing |  | 114,105 |  |  | 17.6 |  |  | 25,223 |  |  | 4.5 |
Aerospace and Defense |  | 88,649 |  |  | 13.6 |  |  | 79,749 |  |  | 14.3 |
Beverage, Food, and Tobacco |  | 64,283 |  |  | 9.9 |  |  | 48,385 |  |  | 8.7 |
Oil and Gas |  | 25,373 |  |  | 3.9 |  |  | 25,861 |  |  | 4.6 |
Automobile |  | 20,144 |  |  | 3.1 |  |  | 21,681 |  |  | 3.9 |
Personal and Non-Durable Consumer Products |  | 18,583 |  |  | 2.9 |  |  | 1,542 |  |  | 0.3 |
Telecommunications |  | 10,088 |  |  | 1.6 |  |  | 36,720 |  |  | 6.6 |
Machinery |  | 9,562 |  |  | 1.5 |  |  | 10,472 |  |  | 1.9 |
Textiles and Leather |  | 7,978 |  |  | 1.2 |  |  | 10,030 |  |  | 1.8 |
Diversified Natural Resources, Precious Metals, and Minerals |  | — |  |  | — |  |  | 47,134 |  |  | 8.4 |
Chemicals, Plastics, and Rubber |  | — |  |  | — |  |  | 10,062 |  |  | 1.8 |
Home and Office Furnishings, Housewares, and Durable Consumer Products |  | — |  |  | — |  |  | 10,025 |  |  | 1.8 |
Other, < 2.0% |  | 5,542 |  | 0.8 |  |  | 5,590 |  | 1.0 |
Total Investments |  | $ | 649,615 |  |  | 100.0 | % |  | $ | 557,612 |  |  | 100.0 | %

Our investments at fair value were included in the following U.S. geographic regions as of September 30, 2022 and 2021:

Location |  | September 30, 2022 |  | September 30, 2021
| Fair Value |  | Percentage of Total Investments |  | Fair Value |  | Percentage of Total Investments
South |  | $ | 326,524 |  |  | 50.3 | % |  | $ | 238,917 |  |  | 42.8 | %
West |  | 169,415 |  |  | 26.1 |  |  | 184,247 |  |  | 33.0 |
Midwest |  | 118,191 |  |  | 18.2 |  |  | 85,970 |  |  | 15.5 |
Northeast |  | 35,485 |  |  | 5.4 |  |  | 48,478 |  |  | 8.7 |
Total Investments |  | $ | 649,615 |  |  | 100.0 | % |  | $ | 557,612 |  |  | 100.0 | %

The geographic composition indicates the location of the headquarters for our portfolio companies. A portfolio company may have additional locations in other geographic regions.
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Investment Principal Repayments
The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of September 30, 2022:

Year Ending September 30, |  | Amount
2023(A) |  | $ | 17,708 |
2024 |  | 58,399 |
2025 |  | 80,786 |
2026 |  | 155,974 |
2027 |  | 246,348 |
Thereafter |  | 36,975 |
Total contractual repayments |  | $ | 596,190 |
Adjustments to cost basis of debt investments |  | (1,142) |
Investments in equity securities |  | 61,005 |
Investments held as of September 30, 2022 at Cost: |  | $ | 656,053 |

(A)Includes debt investments with contractual principal amounts totaling $0.3 million for which the maturity date has passed as of September 30, 2022.
Receivables from Portfolio Companies
Receivables from portfolio companies represent non-recurring costs incurred on behalf of such portfolio companies and are included in other assets on our accompanying Consolidated Statements of Assets and Liabilities. We generally maintain an allowance for uncollectible receivables from portfolio companies when the receivable balance becomes 90 days or more past due or if it is determined, based upon management’s judgment, that the portfolio company is unable to pay its obligations. We write-off accounts receivable when we have exhausted collection efforts and have deemed the receivables uncollectible. As of September 30, 2022 and 2021, we had gross receivables from portfolio companies of $0.5 million and $0.7 million, respectively. The allowance for uncollectible receivables was $0 as of each of September 30, 2022 and 2021.
NOTE 4. RELATED PARTY TRANSACTIONS
Transactions with the Adviser
We have been externally managed by the Adviser pursuant to the Advisory Agreement since October 1, 2004 pursuant to which we pay the Adviser a base management fee and an incentive fee for its services. On July 12, 2022, our Board of Directors, including a majority of the directors who are not parties to the Advisory Agreement or interested persons of such party, unanimously approved the renewal of the Advisory Agreement through August 31, 2023.
We also pay the Adviser a loan servicing fee for its role of servicer pursuant to our Credit Facility. The entire loan servicing fee paid to the Adviser by Business Loan is non-contractually, unconditionally and irrevocably credited against the base management fee otherwise payable to the Adviser, since Business Loan is a consolidated subsidiary of ours, and overall, the base management fee (including any loan servicing fee) cannot exceed 1.75% of total assets (including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings) during any given fiscal year pursuant to the Advisory Agreement.
Two of our executive officers, David Gladstone (our chairman and chief executive officer) and Terry Lee Brubaker (our vice chairman and chief operating officer), serve as directors and executive officers of the Adviser, which is 100% indirectly owned and controlled by Mr. Gladstone. Robert Marcotte (our president) also serves as executive vice president of private equity (debt) of the Adviser. Michael LiCalsi, our general counsel and secretary (who also serves as the Administrator’s president, general counsel and secretary), is also the executive vice president of administration of our Adviser.
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The following table summarizes the base management fee, incentive fee, and loan servicing fee and associated non-contractual, unconditional and irrevocable credits reflected in our accompanying Consolidated Statements of Operations:

| Year Ended September 30,
| 2022 |  | 2021 |  | 2020
Average total assets subject to base management fee(A) | $ | 585,543 |  |  | $ | 495,657 |  |  | $ | 432,457 |
Multiplied by annual base management fee of 1.75% | 1.75 | % |  | 1.75 | % |  | 1.75 | %
Base management fee(B) | 10,247 |  |  | 8,674 |  |  | 7,568 |
Portfolio company fee credit | (4,196) |  |  | (2,195) |  |  | (1,589) |
Syndicated loan fee credit | (170) |  |  | (307) |  |  | (406) |
Net Base Management Fee | $ | 5,881 |  |  | $ | 6,172 |  |  | $ | 5,573 |
Loan servicing fee(B) | $ | 6,329 |  |  | $ | 5,579 |  |  | $ | 5,819 |
Credit to base management fee - loan servicing fee(B) | (6,329) |  |  | (5,579) |  |  | (5,819) |
Net Loan Servicing Fee | $ | — |  |  | $ | — |  |  | $ | — |
Incentive fee (B) | $ | 7,511 |  |  | $ | 5,746 |  |  | $ | 5,251 |
Incentive fee credit | (437) |  |  | (451) |  |  | (3,038) |
Net Incentive Fee | $ | 7,074 |  |  | $ | 5,295 |  |  | $ | 2,213 |
Portfolio company fee credit | $ | (4,196) |  |  | $ | (2,195) |  |  | $ | (1,589) |
Syndicated loan fee credit | (170) |  |  | (307) |  |  | (406) |
Incentive fee credit | (437) |  |  | (451) |  |  | (3,038) |
Credit to Fees from Adviser—Other(B) | $ | (4,803) |  |  | $ | (2,953) |  |  | $ | (5,033) |

(A)Average total assets subject to the base management fee is defined in the Advisory Agreement as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the two most recently completed quarters within the respective years and adjusted appropriately for any share issuances or repurchases during the period.
(B)Reflected as a line item on our accompanying Consolidated Statements of Operations.
Base Management Fee
The base management fee is payable quarterly to the Adviser pursuant to our Advisory Agreement and is assessed at an annual rate of 1.75%, computed on the basis of the value of our average total assets at the end of the two most recently-completed quarters (inclusive of the current quarter), which are total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings and adjusted appropriately for any share issuances or repurchases during the period.
Additionally, pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies. The Adviser may also provide other services to our portfolio companies under certain agreements and may receive fees for services other than managerial assistance. Such services may include: (i) assistance obtaining, sourcing or structuring credit facilities, long term loans or additional equity from unaffiliated third parties; (ii) negotiating important contractual financial relationships; (iii) consulting services regarding restructuring of the portfolio company and financial modeling as it relates to raising additional debt and equity capital from unaffiliated third parties; and (iv) taking a primary role in interviewing, vetting and negotiating employment contracts with candidates in connection with adding and retaining key portfolio company management team members. The Adviser non-contractually, unconditionally, and irrevocably credits 100% of any fees for such services against the base management fee that we would otherwise be required to pay to the Adviser; however, pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees, totaling $8 thousand, $0.1 million, and $0.1 million for the years ended September 30, 2022, 2021, and 2020, respectively, was retained by the Adviser in the form of reimbursement, at cost, for tasks completed by personnel of the Adviser primarily for the valuation of portfolio companies.
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Our Board of Directors accepted a non-contractual, unconditional, and irrevocable credit from the Adviser to reduce the annual base management fee on syndicated loan participations to 0.5%, to the extent that proceeds resulting from borrowings were used to purchase such syndicated loan participations, for each of the years ended September 30, 2022 and 2021.
Loan Servicing Fee
The Adviser also services the loans held by Business Loan (the borrower under the Credit Facility), in return for which the Adviser receives a 1.5% annual fee payable monthly based on the aggregate outstanding balance of loans pledged under our Credit Facility. As discussed in the notes to the table above, we treat payment of the loan servicing fee pursuant to the Credit Facility as a pre-payment of the base management fee under the Advisory Agreement. Accordingly, these loan servicing fees are 100% non-contractually, unconditionally and irrevocably credited back to us by the Adviser.
Incentive Fee
The incentive fee consists of two parts: an income-based incentive fee and a capital gains-based incentive fee. The income-based incentive fee rewards the Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% (2.0% during the period from April 1, 2020 through March 31, 2023) of our net assets, which we define as total assets less indebtedness and before taking into account any incentive fees payable or contractually due but not payable during the period, at the end of the immediately preceding calendar quarter, adjusted appropriately for any share issuances or repurchases during the period (the “hurdle rate”). The income-based incentive fee with respect to our pre-incentive fee net investment income is generally payable quarterly to the Adviser and is computed as follows:
•no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate;
•100.0% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875% (2.4375% during the period from April 1, 2020 through March 31, 2022 and 2.50% from April 1, 2022 through March 31, 2023) of our net assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter; and
•20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% (2.4375% during the period from April 1, 2020 through March 31, 2022 and 2.50% from April 1, 2022 through March 31, 2023) of our net assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter.
On April 12, 2022, our Board of Directors approved an amendment of the Advisory Agreement which extended the temporary revision to the hurdle rate through March 31, 2023 and increased the excess incentive fee hurdle rate from 2.1875% per quarter (8.75% annualized) to 2.50% per quarter (10.0% annualized), up from the 2.4375% per quarter (9.75% annualized) in effect since April 1, 2020.
The second part of the incentive fee is a capital gains-based incentive fee that is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date) and equals 20.0% of our “net realized capital gains” (as defined herein) as of the end of the fiscal year. In determining the capital gains-based incentive fee payable to the Adviser, we calculate “net realized capital gains” at the end of each applicable year by subtracting the sum of our cumulative aggregate realized capital losses and our entire portfolio’s aggregate unrealized capital depreciation from our cumulative aggregate realized capital gains. For this purpose, cumulative aggregate realized capital gains, if any, equals the sum of the differences between the net sales price of each investment, when sold, and the original cost of such investment since inception. Cumulative aggregate realized capital losses equals the sum of the amounts by which the net sales price of each investment, when sold, is less than the original cost of such investment since inception. The entire portfolio’s aggregate unrealized capital depreciation, if any, equals the sum of the difference between the valuation of each investment as of the applicable calculation date and the original cost of such investment. At the end of the applicable fiscal year, the amount of capital gains that serves as the basis for our calculation of the capital gains-based incentive fee equals the cumulative aggregate realized capital gains less cumulative aggregate realized capital losses, less the entire portfolio’s aggregate unrealized capital depreciation, if any. If this number is positive at the end of such fiscal year, then the capital gains-based incentive fee for such year equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. No capital gains-based incentive fee has been recorded or paid since our inception through September 30, 2022, as cumulative unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.
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In accordance with GAAP, a capital gains-based incentive fee accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital appreciation and depreciation. If such amount is positive at the end of a period, then GAAP requires us to record a capital gains- based incentive fee equal to 20.0% of such amount, less the aggregate amount of actual capital gains-based incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such period. GAAP requires that the capital gains-based incentive fee accrual consider the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that such unrealized capital appreciation will be realized in the future. No GAAP accrual for a capital gains-based incentive fee has been recorded from our inception through September 30, 2022.
Our Board of Directors accepted non-contractual, unconditional and irrevocable credits from the Adviser to reduce the income-based incentive fee to the extent net investment income did not 100.0% cover distributions to common stockholders for the years ended September 30, 2022, 2021, and 2020.
Transactions with the Administrator
We have entered into the Administration Agreement with the Administrator to provide administrative services. We reimburse the Administrator pursuant to the Administration Agreement for the portion of expenses the Administrator incurs while performing services for us. The Administrator’s expenses are primarily rent and the salaries, benefits and expenses of the Administrator’s employees, including: our chief financial officer and treasurer, chief compliance officer, chief valuation officer, and general counsel and secretary (who also serves as the Administrator’s president, general counsel and secretary) and their respective staffs. Two of our executive officers, David Gladstone (our chairman and chief executive officer) and Terry Lee Brubaker (our vice chairman and chief operating officer) serve as members of the board of managers and executive officers of the Administrator, which is 100% indirectly owned and controlled by Mr. Gladstone. Another of our officers, Michael LiCalsi (our general counsel and secretary), serves as the Administrator’s president as well as the executive vice president of administration for the Adviser.
Our allocable portion of the Administrator’s expenses is generally derived by multiplying the Administrator’s total expenses by the approximate percentage of time during the current quarter the Administrator’s employees performed services for us in relation to their time spent performing services for all companies serviced by the Administrator. On July 12, 2022, our Board of Directors, including a majority of the directors who are not parties to the Administration Agreement or interested persons of either party, approved the renewal of the Administration Agreement through August 31, 2023.
Other Transactions
Gladstone Securities, LLC (“Gladstone Securities”), a privately-held broker-dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation, which is 100% indirectly owned and controlled by Mr. Gladstone, our chairman and chief executive officer, has provided other services, such as investment banking and due diligence services, to certain of our portfolio companies, for which Gladstone Securities receives a fee. Any such fees paid by portfolio companies to Gladstone Securities do not impact the fees we pay to the Adviser or the non-contractual, unconditional and irrevocable credits against the base management fee or incentive fee. Gladstone Securities received fees from portfolio companies totaling $1.1 million, $0.8 million, and $0.9 million during the years ended September 30, 2022, 2021, and 2020, respectively.
Related Party Fees Due
Amounts due to related parties on our accompanying Consolidated Statements of Assets and Liabilities were as follows:

| September 30, 2022 |  | September 30, 2021
Base management fee due to (from) Adviser | $ | (189) |  |  | $ | 385 |
Loan servicing fee due to Adviser | 423 |  |  | 343 |
Incentive fee due to (from) Adviser | 1,870 |  |  | 1,527 |
Total fees due to (from) Adviser | 2,104 |  |  | 2,255 |
Fee due to Administrator | 423 |  |  | 382 |
Total Related Party Fees Due | $ | 2,527 |  |  | $ | 2,637 |

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In addition to the above fees, other operating expenses due to the Adviser as of September 30, 2022 and 2021, totaled $44 thousand and $35 thousand, respectively. In addition, net expenses payable to Gladstone Investment Corporation (for reimbursement purposes), which includes certain co-investment expenses, totaled $13 thousand and $38 thousand as of September 30, 2022 and 2021, respectively. These amounts are generally settled in the quarter subsequent to being incurred and are included in other liabilities on the accompanying Consolidated Statements of Assets and Liabilities as of September 30, 2022 and 2021.
NOTE 5. BORROWINGS
Revolving Line of Credit
On May 13, 2021, we, through Business Loan, amended and restated the Credit Facility to, among other things, (i) decrease the commitment amount from $205.0 million to $175.0 million, (ii) extend the revolving period end date to October 31, 2023, (iii) extend the maturity date to October 31, 2025 (at which time all principal and interest will be due and payable if the Credit Facility is not extended by the revolving period end date), (iv) reduce the interest rate margin to 2.70% during the revolving period and 3.25% thereafter, with a LIBOR floor of 0.35%, (v) revise the unused fee to include an additional fee tier of 0.35% per annum on the daily undrawn amounts if the average unused amount is equal to or less than 35% during the applicable period, (vi) provide for certain excess concentration limits, including a reduced second lien limit and a new broadly syndicated loan limit and (vii) add customary LIBOR replacement language. We incurred fees of approximately $1.1 million in connection with this amendment and restatement, which are being amortized through our Credit Facility’s revolving period end date of October 31, 2023.
On September 12, 2022, we, through Business Loan, entered into Amendment No. 1 to the Credit Facility to update the reference rate from LIBOR to SOFR plus an 11 basis point credit spread adjustment. On September 20, 2022, we, through Business Loan, entered into Amendment No. 2 to the Credit Facility to increase the size of the credit facility by $50.0 million from $175.0 million to $225.0 million, as permitted under the terms of the Credit Facility.
The following tables summarize noteworthy information related to our Credit Facility:

| As of September 30,
2022 |  | 2021
Commitment amount | $ | 225,000 |  |  | $ | 175,000 |
Borrowings outstanding, at cost | 141,800 |  |  | 50,500 |
Availability(A) | 60,068 |  |  | 103,897 |

| Year Ended September 30,
2022 |  | 2021 |  | 2020
Weighted average borrowings outstanding, at cost | $ | 56,122 |  |  | $ | 59,382 |  |  | $ | 103,504 |
Weighted average interest rate(B) | 6.1 | % |  | 5.0 | % |  | 4.3 | %
Commitment (unused) fees incurred | $ | 1,105 |  |  | $ | 1,194 |  |  | $ | 541 |

(A)Available borrowings are subject to various constraints imposed under our Credit Facility, based on the aggregate loan balance pledged by Business Loan, which varies as loans are added and repaid, regardless of whether such repayments are prepayments or made as contractually required.
(B)Includes unused commitment fees and excludes the impact of deferred financing costs.
Our Credit Facility also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account with KeyBank. KeyBank is also the trustee of the account and generally remits the collected funds to us once each month. Amounts collected in the lockbox account with KeyBank are presented as Due from administrative agent on the accompanying Consolidated Statement of Assets and Liabilities as of September 30, 2022 and 2021.
Our Credit Facility contains covenants that require Business Loan to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions), and restrict material changes to our credit and collection policies without the lenders’ consent. Our Credit Facility also generally limits distributions to our stockholders on a fiscal year basis to the sum of our net investment income, net capital gains and amounts elected to have been paid during the prior year in accordance with Section 855(a) of the Code. Business Loan is
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also subject to certain limitations on the type of loan investments it can apply as collateral towards the borrowing base to receive additional borrowing availability under our Credit Facility, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life and lien property. Our Credit Facility further requires Business Loan to comply with other financial and operational covenants, which obligate Business Loan to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of 25 obligors required in the borrowing base.
Additionally, we are required to maintain (i) a minimum net worth (defined in our Credit Facility to include any outstanding mandatorily redeemable preferred stock) of $325.0 million plus 50.0% of all equity and subordinated debt raised after May 13, 2021 less 50% of any equity and subordinated debt retired or redeemed after May 13, 2021, which equates to $336.7 million as of September 30, 2022, (ii) asset coverage with respect to “senior securities representing indebtedness” of at least 150% (or such percentage as may be set forth in Section 18 of the 1940 Act, as modified by Section 61 of the 1940 Act), and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code.
As of September 30, 2022, and as defined in our Credit Facility, we had a net worth of $512.3 million, asset coverage on our “senior securities representing indebtedness” of 190.4%, calculated in accordance with the requirements of Section 18 and 61 of the 1940 Act, and an active status as a BDC and RIC. In addition, we had 33 obligors in our Credit Facility’s borrowing base as of September 30, 2022. As of September 30, 2022, we were in compliance with all of our Credit Facility covenants.
Fair Value
We elected to apply the fair value option of ASC 825, “Financial Instruments,” specifically for the Credit Facility, which was consistent with our application of ASC 820 to our investments. Generally, the fair value of our Credit Facility is determined using a yield analysis which includes a DCF calculation and the assumptions that the Valuation Team believes market participants would use, including the estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. As of September 30, 2022, the discount rate used to determine the fair value of our Credit Facility was one-month Term SOFR, plus 2.81% per annum, plus a 0.50% unused commitment fee. As of September 30, 2021, the discount rate used to determine the fair value of our Credit Facility was 30-day LIBOR, plus 2.97% per annum, plus a 1.00% unused commitment fee. Generally, an increase or decrease in the discount rate used in the DCF calculation may result in a corresponding decrease or increase, respectively, in the fair value of our Credit Facility. As of September 30, 2022 and 2021, our Credit Facility was valued using Level 3 inputs and any changes in its fair value are recorded in net unrealized depreciation (appreciation) of other on our accompanying Consolidated Statements of Operations.
The following tables present our Credit Facility carried at fair value as of September 30, 2022 and 2021, on our accompanying Consolidated Statements of Assets and Liabilities for Level 3 of the hierarchy established by ASC 820 and the changes in fair value of our Credit Facility during the years ended September 30, 2022 and 2021:

| Total Recurring Fair Value Measurement Reported in Consolidated Statements of Assets and Liabilities Using Significant Unobservable Inputs (Level 3) As of September 30,
| 2022 |  | 2021
Credit Facility | $ | 141,800 |  |  | $ | 50,500 |

Fair Value Measurements Using Significant Unobservable Data Inputs (Level 3)

| Year Ended September 30,
| 2022 |  | 2021
Fair value as of September 30, 2021 and 2020, respectively | $ | 50,500 |  |  | $ | 127,650 |
Borrowings | 328,900 |  |  | 238,800 |
Repayments | (237,600) |  |  | (316,300) |
Net unrealized appreciation (depreciation) (A) | — |  |  | 350 |
Fair Value as of September 30, 2022 and 2021, respectively | $ | 141,800 |  |  | $ | 50,500 |

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(A)Included in net unrealized appreciation (depreciation) of other on our accompanying Consolidated Statements of Operations for the years ended September 30, 2022 and 2021.
The fair value of the collateral under our Credit Facility totaled approximately $577.6 million and $512.0 million as of September 30, 2022 and 2021, respectively.
Notes Payable
In November 2021, we completed a private placement of $50.0 million aggregate principal amount of 3.75% Notes due 2027 (the “2027 Notes”) for net proceeds of approximately $48.5 million after deducting initial purchasers’ costs, commissions and offering expenses borne by us. The 2027 Notes will mature on May 1, 2027 and may be redeemed in whole or in part at any time or from time to time at the Company’s option prior to maturity at par plus a “make-whole” premium, if applicable. The 2027 Notes bear interest at a rate of 3.75% per year. Interest is payable semi-annually on May 1 and November 1 of each year (which equates to approximately $1.9 million per year).
In April 2022, pursuant to the registration rights agreement we entered into in connection with the 2027 Notes, we conducted an exchange offer through which we offered to exchange all of our then outstanding 2027 Notes (the “Restricted Notes”) that were issued on November 4, 2021, for an equal aggregate principal amount of our new 3.75% Notes due 2027 (the “Exchange Notes”) that had been registered with the SEC under the Securities Act of 1933, as amended. The terms of the Exchange Notes are identical to those of the outstanding Restricted Notes, except that the transfer restrictions and registration rights relating to the Restricted Notes do not apply to the Exchange Notes, and the Exchange Notes do not provide for the payment of additional interest in the event of a registration default.
In December 2020, we completed an offering of $100.0 million aggregate principal amount of 5.125% Notes due 2026 (the “2026 Notes”) for net proceeds of approximately $97.7 million after deducting underwriting discounts, commissions and offering expenses borne by us. In March 2021, we completed an offering of an additional $50.0 million aggregate principal amount of the 2026 Notes for net proceeds of approximately $50.6 million after adding premiums and deducting underwriting costs, commissions and offering expenses borne by us. The 2026 Notes will mature on January 31, 2026 and may be redeemed in whole or in part at any time or from time to time at the Company’s option prior to maturity at par plus a “make-whole” premium, if applicable. The 2026 Notes bear interest at a rate of 5.125% per year. Interest is payable semi-annually on January 31 and July 31 of each year (which equates to approximately $7.7 million per year).
In October 2019, we completed an offering of $38.8 million aggregate principal amount of 5.375% Notes due 2024 (the “2024 Notes”), inclusive of the overallotment option exercised by the underwriters, for net proceeds of approximately $37.5 million after deducting underwriting discounts, commissions and offering expenses borne by us. On November 1, 2021, we voluntarily redeemed the 2024 Notes with an aggregate principal amount outstanding of $38.8 million. The 2024 Notes would have otherwise matured on November 1, 2024.
In November 2018, we completed an offering of $57.5 million aggregate principal amount of 6.125% Notes due 2023 (the “2023 Notes”), inclusive of the overallotment option exercised by the underwriters, for net proceeds of $55.4 million after deducting underwriting discounts, commissions and offering expenses borne by us. On January 7, 2021, we voluntarily redeemed the 2023 Notes with an aggregate principal amount outstanding of $57.5 million. The redemption amount was $58.1 million inclusive of accrued interest through the date of redemption. In connection with the voluntary redemption of the 2023 Notes, we incurred a loss on extinguishment of debt of $1.2 million, which is primarily comprised of the unamortized deferred issuance costs at the time of redemption. The 2023 Notes would have otherwise matured on November 1, 2024.
The indenture relating to the 2027 Notes and the 2026 Notes contains certain covenants, including (i) an inability to incur additional debt or issue additional debt or preferred securities unless the Company’s asset coverage meets the threshold specified in the 1940 Act after such borrowing, (ii) an inability to declare any dividend or distribution (except a dividend payable in our stock) on a class of our capital stock or to purchase shares of our capital stock unless the Company’s asset coverage meets the threshold specified in the 1940 Act at the time of (and giving effect to) such declaration or purchase, and (iii) if, at any time, we are not subject to the reporting requirements of the Exchange Act, we will provide the holders of the 2027 Notes and the 2026 Notes, as applicable, and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements.
The 2027 Notes and 2026 Notes are recorded at the principal amount, plus applicable premiums, less discounts and offering costs, on our Consolidated Statements of Assets and Liabilities.
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The fair value, based on a DCF analysis, of the 2027 Notes as of September 30, 2022 was $44.2 million. The fair value, based on a DCF analysis, of the 2026 Notes as of September 30, 2022 was $142.8 million. We consider the 2027 Notes and 2026 Notes to be Level 3 within the ASC 820 fair value hierarchy.
NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK
In September 2017, we completed a public offering of approximately 2.1 million shares of our Series 2024 Term Preferred Stock at a public offering price of $25.00 per share. The shares of our Series 2024 Term Preferred Stock were traded under the ticker symbol “GLADN” on Nasdaq as of September 30, 2019.
On October 2, 2019, we voluntarily redeemed all 2,070,000 outstanding shares of our Series 2024 Term Preferred Stock at a redemption price of $25.00 per share, which represents the liquidation preference per share, plus accrued and unpaid dividends through October 1, 2019 in the amount of $0.004166 per share, for a total payment per share of $25.004166 and an aggregate redemption price of approximately $51.8 million. In connection with the voluntary redemption of our Series 2024 Term Preferred Stock, we incurred a loss on extinguishment of debt of $1.4 million, which has been reflected in Realized loss on other in our accompanying Consolidated Statement of Operations and which is primarily comprised of the unamortized deferred issuance costs at the time of redemption.
NOTE 7. REGISTRATION STATEMENT AND COMMON EQUITY OFFERINGS
Our shelf registration statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock or preferred stock. As of September 30, 2022, we had the ability to issue up to an additional $295.5 million in securities under the registration statement.
Common Stock Offerings
In May 2021, we entered into an equity distribution agreement with Jefferies LLC, as amended in August 2022 (the “Jefferies Sales Agreement”) under which we have the ability to issue and sell, from time to time, shares of our common stock with an aggregate offering price of up to $60.0 million. During the year ended September 30, 2022, we sold 430,425 shares of our common stock under the Jefferies Sales Agreement, at a weighted-average price of $10.53 per share and raised $4.5 million of gross proceeds. Net proceeds, after deducting commissions and offering costs borne by us, were approximately $4.5 million. As of September 30, 2022, we had a remaining capacity to sell up to an additional $47.8 million of our common stock under the Jefferies Sales Agreement.
NOTE 8. NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE
The following table sets forth the computation of basic and diluted net increase (decrease) in net assets resulting from operations per weighted average common share for the years ended September 30, 2022, 2021, and 2020:

| Year Ended September 30,
2022 |  | 2021 |  | 2020
Numerator for basic and diluted net increase (decrease) in net assets resulting from operations per common share | $ | 19,914 |  |  | $ | 84,299 |  |  | $ | (1,873) |
Denominator for basic and diluted weighted average common shares | 34,351,663 |  | 33,234,482 |  | 31,040,852
Basic and diluted net increase (decrease) in net assets resulting from operations per common share | $ | 0.58 |  |  | $ | 2.54 |  |  | $ | (0.06) |

NOTE 9. DISTRIBUTIONS TO COMMON STOCKHOLDERS
To qualify to be taxed as a RIC under Subchapter M of the Code, we must generally distribute to our stockholders, for each taxable year, at least 90% of our taxable ordinary income plus the excess of our net short- term capital gains over net long-term capital losses (“Investment Company Taxable Income”). The amount to be paid out as distributions to our stockholders is determined by our Board of Directors quarterly and is based on management’s estimate of Investment Company Taxable Income. Based on that estimate, our Board of Directors declares three monthly distributions to common stockholders each quarter.
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The federal income tax characteristics of all distributions will be reported to stockholders on the IRS Form 1099 after the end of each calendar year. Estimates of tax characterization made on a quarterly basis may not be representative of the actual tax characterization of cash distributions for the full year. Estimates made on a quarterly basis are updated as of each interim reporting date.
For the calendar year ended December 31, 2021, 100.0% of distributions to common stockholders were deemed to be paid from ordinary income for 1099 stockholder reporting purposes. For the calendar year ended December 31, 2020, 97.3% of distributions to common stockholders were deemed to be paid from ordinary income and 2.7% of distributions to common stockholders were deemed to be a return of capital for 1099 stockholder reporting purposes.
We paid the following monthly distributions to common stockholders for the years ended September 30, 2022 and 2021:

Fiscal Year |  | Declaration Date |  | Record Date |  | Payment Date |  | Distribution per Common Share
2022 |  | October 12, 2021 |  | October 22, 2021 |  | October 29, 2021 |  | $ | 0.065 |
|  | October 12, 2021 |  | November 19, 2021 |  | November 30, 2021 |  | 0.065 |
|  | October 12, 2021 |  | December 23, 2021 |  | December 31, 2021 |  | 0.065 |
|  | January 11, 2022 |  | January 21, 2022 |  | January 31, 2022 |  | 0.065 |
|  | January 11, 2022 |  | February 18, 2022 |  | February 28, 2022 |  | 0.065 |
|  | January 11, 2022 |  | March 23, 2022 |  | March 31, 2022 |  | 0.065 |
|  | April 12, 2022 |  | April 22, 2022 |  | April 29, 2022 |  | 0.0675 |
|  | April 12, 2022 |  | May 20, 2022 |  | May 31, 2022 |  | 0.0675 |
|  | April 12, 2022 |  | June 22, 2022 |  | June 30, 2022 |  | 0.0675 |
|  | July 12, 2022 |  | July 22, 2022 |  | July 29, 2022 |  | 0.0675 |
|  | July 12, 2022 |  | August 23, 2022 |  | August 31, 2022 |  | 0.0675 |
|  | July 12, 2022 |  | September 22, 2022 |  | September 30, 2022 |  | 0.0675 |
|  | Year Ended September 30, 2022: |  | $ | 0.795 |
2021 |  | October 13, 2020 |  | October 23, 2020 |  | October 30, 2020 |  | $ | 0.065 |
|  | October 13, 2020 |  | November 20, 2020 |  | November 30, 2020 |  | 0.065 |
|  | October 13, 2020 |  | December 23, 2020 |  | December 31, 2020 |  | 0.065 |
|  | January 12, 2021 |  | January 22, 2021 |  | January 29, 2021 |  | 0.065 |
|  | January 12, 2021 |  | February 17, 2021 |  | February 26, 2021 |  | 0.065 |
|  | January 12, 2021 |  | March 18, 2021 |  | March 31, 2021 |  | 0.065 |
|  | April 13, 2021 |  | April 23, 2021 |  | April 30, 2021 |  | 0.065 |
|  | April 13, 2021 |  | May 19, 2021 |  | May 28, 2021 |  | 0.065 |
|  | April 13, 2021 |  | June 18, 2021 |  | June 30, 2021 |  | 0.065 |
|  | July 13, 2021 |  | July 23, 2021 |  | July 30, 2021 |  | 0.065 |
|  | July 13, 2021 |  | August 23, 2021 |  | August 31, 2021 |  | 0.065 |
|  | July 13, 2021 |  | September 22, 2021 |  | September 30, 2021 |  | 0.065 |
|  | Year Ended September 30, 2021: |  | $ | 0.78 |

Aggregate distributions declared and paid to our common stockholders were approximately $27.3 million and $26.0 million for the years ended September 30, 2022 and 2021, respectively, and were declared based on estimates of Investment Company Taxable Income. For the fiscal years ended September 30, 2022, 2021, and 2020, distributions declared and paid exceeded taxable income available for common distributions resulting in a partial return of capital of approximately $1.4 million, $1.0 million, and $0.4 million, respectively.
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The components of our net assets on a tax basis were as follows:

| Year Ended September 30,
2022 |  | 2021
Common stock | $ | 35 |  |  | $ | 34 |
Capital in excess of par value | 395,542 |  |  | 392,494 |
Cumulative net unrealized appreciation (depreciation) of investments | (6,438) |  |  | 11,100 |
Cumulative net unrealized appreciation of other | — |  |  | — |
Capital loss carryforward | (62,910) |  |  | (72,251) |
Post-October tax loss deferral | — |  |  | — |
Other temporary differences | (10,742) |  |  | (12,938) |
Net Assets | $ | 315,487 |  |  | $ | 318,439 |

We intend to retain some or all of our realized capital gains first to the extent we have available capital loss carryforwards and second, through treating the retained amount as a “deemed distribution.” As of September 30, 2022, we had $62.9 million of capital loss carryforwards that do not expire.
For the years ended September 30, 2022 and 2021, we recorded the following adjustments for permanent book-tax differences to reflect tax character. Results of operations, total net assets, and cash flows were not affected by these adjustments.

| Year Ended September 30,
| 2022 |  | 2021
Undistributed net investment income | $ | (5,606) |  |  | $ | 39 |
Accumulated net realized losses | 7,013 |  |  | 959 |
Capital in excess of par value | (1,407) |  |  | (998) |

NOTE 10. FEDERAL AND STATE INCOME TAXES
We intend to continue to maintain our qualifications as a RIC for federal income tax purposes. As a RIC, we are generally not subject to federal income tax on the portion of our taxable income and gains that we distribute to stockholders. To maintain our qualification as a RIC, we must meet certain source-of-income and asset diversification requirements. In addition, to qualify to be taxed as a RIC, we must also meet certain annual stockholder distribution requirements. To satisfy the RIC annual distribution requirement, we must distribute to stockholders at least 90.0% of our Investment Company Taxable Income. Our policy generally is to make distributions to our stockholders in an amount up to 100.0% of our Investment Company Taxable Income. Because we have distributed more than 90.0% of our Investment Company Taxable Income, no income tax provisions have been recorded for the years ended September 30, 2022, 2021, and 2020.
In an effort to limit certain federal excise taxes imposed on RICs, a RIC has to distribute to stockholders, during each calendar year, an amount close to the sum of (1) 98.0% of our ordinary income for the calendar year, (2) 98.2%, of our capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year and (3) any ordinary income and capital gains in excess of capital losses for preceding years that were not distributed during such years. No excise tax provisions have been recorded for the years ended September 30, 2022, 2021, and 2020.
Under the RIC Modernization Act, we are permitted to carry forward capital losses that we may incur in taxable years beginning after September 30, 2011 for an unlimited period, and such capital loss carryforwards will retain their character as either short-term or long-term capital losses.
NOTE 11. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
We are party to certain legal proceedings incidental to the normal course of our business. We are required to establish reserves for litigation matters where those matters present loss contingencies that are both probable and estimable. When
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loss contingencies are not both probable and estimable, we do not establish reserves. Based on current knowledge, we do not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our financial condition, results of operations or cash flows. Additionally, based on our current knowledge, we do not believe such loss contingencies are both probable and estimable and therefore, as of September 30, 2022 and 2021, we had no established reserves for such loss contingencies.
Escrow Holdbacks
From time to time, we enter into arrangements relating to exits of certain investments whereby specific amounts of the proceeds are held in escrow to be used to satisfy potential obligations, as stipulated in the sales agreements. We record escrow amounts in Restricted cash and cash equivalents, if received in cash but subject to potential obligations or other contractual restrictions, or as escrow receivables in Other assets, net, if not yet received in cash, on our accompanying Consolidated Statements of Assets and Liabilities. We establish reserves and holdbacks against escrow amounts if we determine that it is probable and estimable that a portion of the escrow amounts will not ultimately be released or received at the end of the escrow period. Reserves and holdbacks against escrow amounts were $0.2 million and $0.3 million as of September 30, 2022 and September 30, 2021, respectively.
Financial Commitments and Obligations
We have lines of credit, delayed draw term loans, and an uncalled capital commitment with certain of our portfolio companies that have not been fully drawn. Since these commitments have expiration dates and we expect many will never be fully drawn, the total commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of the combined unused lines of credit, the unused delayed draw term loans and the uncalled capital commitment as of September 30, 2022 and 2021 to be immaterial.
The following table summarizes the amounts of our unused lines of credit, delayed draw term loans and uncalled capital commitment, at cost, as of September 30, 2022 and 2021, which are not reflected as liabilities in the accompanying Consolidated Statements of Assets and Liabilities:

| As of September 30,
2022 |  | 2021
Unused line of credit commitments(A) | $ | 36,225 |  |  | $ | 25,549 |
Delayed draw term loans(A) | 37,778 |  |  | 27,984 |
Uncalled capital commitment | 843 |  |  | 843 |
Total | $ | 74,846 |  |  | $ | 54,376 |

(A)There may be specific covenant requirements that temporarily limit a portfolio company’s availability to draw on an unused line of credit commitment or a delayed draw term loan.
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NOTE 12. FINANCIAL HIGHLIGHTS

| As of and for the Year Ended September 30,
2022 |  | 2021 |  | 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016 |  | 2015 |  | 2014 |  | 2013
Per Common Share Data: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net asset value at beginning of period / year(A) | $ | 9.28 |  |  | $ | 7.40 |  |  | $ | 8.22 |  |  | $ | 8.32 |  |  | $ | 8.40 |  |  | $ | 8.62 |  |  | $ | 9.06 |  |  | $ | 9.51 |  |  | $ | 9.81 |  |  | $ | 8.98 |
Income from operations(B) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net investment income | 0.94 |  |  | 0.79 |  |  | 0.81 |  |  | 0.84 |  |  | 0.85 |  |  | 0.84 |  |  | 0.84 |  |  | 0.84 |  |  | 0.87 |  |  | 0.88 |
Net realized and unrealized gain (loss) on investments | (0.35) |  |  | 1.79 |  |  | (0.84) |  |  | (0.15) |  |  | (0.16) |  |  | (0.12) |  |  | (0.35) |  |  | (0.50) |  |  | (0.23) |  |  | 0.49 |
Net realized and unrealized gain (loss) on other | (0.01) |  |  | (0.04) |  |  | (0.03) |  |  | (0.01) |  |  | — |  |  | (0.05) |  |  | — |  |  | 0.06 |  |  | (0.11) |  |  | 0.16 |
Total from operations | 0.58 |  |  | 2.54 |  |  | (0.06) |  |  | 0.68 |  |  | 0.69 |  |  | 0.67 |  |  | 0.49 |  |  | 0.40 |  |  | 0.53 |  |  | 1.53 |
Distributions to common stockholders from(B)(C) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net Investment Income | (0.76) |  |  | (0.75) |  |  | (0.80) |  |  | (0.82) |  |  | (0.84) |  |  | (0.84) |  |  | (0.70) |  |  | (0.84) |  |  | (0.12) |  |  | (0.78) |
Realized gains | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (0.14) |  |  | — |  |  | — |  |  | — |
Return of capital | (0.04) |  |  | (0.03) |  |  | (0.01) |  |  | (0.02) |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (0.72) |  |  | (0.06) |
Total distributions | (0.80) |  |  | (0.78) |  |  | (0.81) |  |  | (0.84) |  |  | (0.84) |  |  | (0.84) |  |  | (0.84) |  |  | (0.84) |  |  | (0.84) |  |  | (0.84) |
Capital share transactions(B) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Issuance of common stock | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 0.06 |  |  | — |  |  | — |
Discounts, commissions, and offering costs | — |  |  | (0.01) |  |  | — |  |  | (0.01) |  |  | (0.01) |  |  | (0.04) |  |  | (0.05) |  |  | (0.01) |  |  | — |  |  | — |
Repurchase of common stock | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 0.02 |  |  | — |  |  | — |  |  | — |
Repayment of principal on employee notes | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 0.14 |
Net anti-dilutive (dilutive) effect of equity offering(D) | 0.02 |  |  | 0.15 |  |  | 0.05 |  |  | 0.07 |  |  | 0.08 |  |  | (0.02) |  |  | (0.05) |  |  | (0.06) |  |  | — |  |  | — |
Total capital share transactions | 0.02 |  |  | 0.14 |  |  | 0.05 |  |  | 0.06 |  |  | 0.07 |  |  | (0.06) |  |  | (0.08) |  |  | (0.01) |  |  | — |  |  | 0.14 |
Other, net(B)(E) | — |  |  | (0.02) |  |  | — |  |  | — |  |  | — |  |  | 0.01 |  |  | (0.01) |  |  | — |  |  | 0.01 |  |  | — |
Net asset value at end of period / year(A) | $ | 9.08 |  |  | $ | 9.28 |  |  | $ | 7.40 |  |  | $ | 8.22 |  |  | $ | 8.32 |  |  | $ | 8.40 |  |  | $ | 8.62 |  |  | $ | 9.06 |  |  | $ | 9.51 |  |  | $ | 9.81 |
Per common share market value at beginning of year | $ | 11.30 |  |  | $ | 7.41 |  |  | $ | 9.75 |  |  | $ | 9.50 |  |  | $ | 9.50 |  |  | $ | 8.13 |  |  | $ | 8.13 |  |  | $ | 8.77 |  |  | $ | 8.73 |  |  | $ | 8.75 |
Per common share market value at end of year | 8.49 |  |  | 11.30 |  |  | 7.41 |  |  | 9.75 |  |  | 9.50 |  |  | 9.50 |  |  | 8.13 |  |  | 8.13 |  |  | 8.77 |  |  | 8.73 |
Total return(F) | (19.16) | % |  | 64.93 | % |  | (15.75) | % |  | 12.55 | % |  | 9.53 | % |  | 27.90 | % |  | 11.68 | % |  | 2.40 | % |  | 9.62 | % |  | 9.90 | %
Common stock outstanding at end of year(A) | 34,734,796 |  | 34,304,371 |  | 31,566,850 |  | 30,345,923 |  | 28,501,980 |  | 26,160,684 |  | 23,344,422 |  | 21,131,622 |  | 21,000,160 |  | 21,000,160
Statement of Assets and Liabilities Data: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net assets at end of year | $ | 315,487 |  |  | $ | 318,439 |  |  | $ | 233,743 |  |  | $ | 249,330 |  |  | $ | 237,092 |  |  | $ | 219,650 |  |  | $ | 201,207 |  |  | $ | 191,444 |  |  | $ | 199,660 |  |  | $ | 205,992 |
Average net assets(G) | 320,838 |  |  | 275,509 |  |  | 235,266 |  |  | 239,851 |  |  | 234,092 |  |  | 215,421 |  |  | 193,228 |  |  | 198,864 |  |  | 201,009 |  |  | 189,599 |
Senior Securities Data: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Borrowings under line of credit, at cost | $ | 141,800 |  |  | $ | 50,500 |  |  | $ | 128,000 |  |  | $ | 66,900 |  |  | $ | 110,000 |  |  | $ | 93,000 |  |  | $ | 71,300 |  |  | $ | 127,300 |  |  | $ | 36,700 |  |  | $ | 46,900 |
Mandatorily redeemable preferred stock | — |  |  | — |  |  | — |  |  | 51,750 |  |  | 51,750 |  |  | 51,750 |  |  | 61,000 |  |  | 61,000 |  |  | 61,000 |  |  | 38,497 |
Notes Payable | 200,000 |  |  | 188,813 |  |  | 96,313 |  |  | 57,500 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |

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Ratios/Supplemental Data: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ratio of net expenses to average net assets(H)(I) | 9.62 | % |  | 10.04 | % |  | 9.69 | % |  | 10.61 | % |  | 9.61 | % |  | 8.26 | % |  | 10.16 | % |  | 10.24 | % |  | 9.06 | % |  | 9.37 | %
Ratio of net investment income to average net assets(J) | 10.06 |  |  | 9.48 |  |  | 10.70 |  |  | 10.25 |  |  | 9.86 |  |  | 9.95 |  |  | 10.08 |  |  | 8.90 |  |  | 9.14 |  |  | 9.70 |

(A)Based on actual shares outstanding at the end of the corresponding fiscal year.
(B)Based on weighted average basic per share data.
(C)The tax character of distributions is determined based on taxable income calculated in accordance with income tax regulations, which may differ from amounts determined under GAAP.
(D)During the fiscal years ended September 30, 2022, 2021, 2020, 2019, and 2018, the anti-dilution was a result of issuing common shares during the period at a price above the then-current NAV per share. During the fiscal years ended September 30, 2017, 2016, and 2015, the net dilution was a result of issuing common shares during the period at a price below the then-current NAV per share.
(E)Represents the impact of the different share amounts (weighted average shares outstanding during the fiscal year and shares outstanding at the end of the fiscal year) in the per share data calculations and rounding impacts.
(F)Total return equals the change in the ending market value of our common stock from the beginning of the fiscal year, taking into account distributions reinvested in accordance with the terms of our dividend reinvestment plan. Total return does not take into account distributions that may be characterized as a return of capital or any sales load paid by a stockholder. For further information on the estimated character of our distributions to common stockholders, refer to Note 9—Distributions to Common Stockholders.
(G)Computed using the average of the balance of net assets at the end of each month of the fiscal year.
(H)Ratio of net expenses to average net assets is computed using total expenses, net of credits from the Adviser, to the base management, loan servicing, and incentive fees.
(I)Had we not received any non-contractual, unconditional and irrevocable credits of fees from the Adviser, the ratio of net expenses to average net assets would have been 13.13%, 13.17%, 14.36%, 14.18%, 13.12%, 12.14%, 13.40%, 13.65%, 11.88%, and 10.18% for the fiscal years ended September 30, 2022, 2021, 2020, 2019, 2017, 2016, 2015, 2014, and 2013, respectively.
(J)Had we not received any non-contractual, unconditional and irrevocable credits of fees from the Adviser, the ratio of net investment income to average net assets would have been 6.61%, 6.40%, 6.11%, 6.74%, 6.41%, 6.13%, 6.90%, 5.55%, 6.37%, and 8.90% for the fiscal years ended September 30, 2022, 2021, 2020, 2019, 2018, 2017, 2016, 2015, 2014, and 2013, respectively.
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NOTE 13. UNCONSOLIDATED SIGNIFICANT SUBSIDIARIES
In accordance with the SEC’s Regulation S-X, we do not consolidate portfolio company investments. Further, in accordance with ASC 946, we are precluded from consolidating any entity other than another investment company, except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries.
We did not have any unconsolidated subsidiaries that met any of the significance conditions under Rule l-02(w)(2) of the SEC’s Regulation S-X as of or during at least one of the years ended September 30, 2022, 2021, and 2020.
NOTE 14. SUBSEQUENT EVENTS
Credit Facility
In October 2022, we entered into Amendment No. 3 to the Credit Facility to increase the commitment amount by $20.0 million from $225.0 million to $245.0 million, as permitted under the terms of the Credit Facility.
Portfolio Activity
In October 2022, our investment in Targus Cayman HoldCo Ltd. was sold for net proceeds of approximately $8.0 million including certain receivables.
In October and November 2022, we received distributions totaling $6.0 million from our investment in Leeds Novamark Capital I, L.P. related primarily to the sale of underlying assets in the fund.
Election of Director
Effective October 11, 2022, Paula Novara was elected to our Board of Directors. Ms. Novara also serves as head of human resources, facilities and office management and IT of the Adviser and certain of its affiliates.
Distributions
In October 2022, our Board of Directors declared the following monthly cash distributions to common stockholders:

Record Date |  | Payment Date |  | Distribution per Common Share
October 21, 2022 |  | October 31, 2022 |  | $ | 0.07 |
November 18, 2022 |  | November 30, 2022 |  | 0.07 |
December 20, 2022 |  | December 30, 2022 |  | 0.07 |
Total for the Quarter |  |  |  | $ | 0.21 |

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
a) Disclosure Controls and Procedures
As of September 30, 2022 (the end of the period covered by this report), we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness and design and operation of our disclosure controls and procedures. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective in timely alerting management, including the Chief Executive Officer and Chief Financial Officer, of material information about us required to be included in periodic SEC filings. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
b) Management’s Annual Report on Internal Control Over Financial Reporting
Refer to the Management’s Report on Internal Control over Financial Reporting located in Item 8 of this Form 10-K.
c) Attestation Report of the Registered Public Accounting Firm
Not Applicable.
d) Change in Internal Control over Financial Reporting
There were no changes in internal controls for the three months ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
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PART III
We will file a definitive Proxy Statement for our 2023 Annual Meeting of Stockholders (the “2023 Proxy Statement”) with the SEC, pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year. Accordingly, certain information required by Part III has been omitted under General Instruction G(3) to Form 10-K. Only those sections of the 2023 Proxy Statement that specifically address the items set forth herein are incorporated herein by reference.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is hereby incorporated by reference from our 2023 Proxy Statement under the caption “Election of Directors.”
We have adopted a Code of Business Conduct and Ethics (the “Code of Conduct”) that applies to all of our officers and directors and to the employees of our Adviser and our Administrator. The Code of Conduct is available in the Investors section of our website under “Governance – Governance Documents” at www.gladstonecapital.com.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference from our 2023 Proxy Statement under the captions “Executive Compensation” and “Director Compensation.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 is hereby incorporated by reference from our 2023 Proxy Statement under the caption “Security Ownership of Certain Beneficial Owners and Management.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is hereby incorporated by reference from our 2023 Proxy Statement under the captions “Certain Transactions” and “Information Regarding our Board of Directors and Corporate Governance—Director Independence.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is hereby incorporated by reference from our 2023 Proxy Statement under the caption “Independent Registered Public Accounting Firm Fees.”
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a.DOCUMENTS FILED AS PART OF THIS ANNUAL REPORT ON FORM 10-K
1.The following financial statements are filed herewith:

Management’s Annual Report on Internal Controls over Financial Reporting | 69
Report of Independent Registered Public Accounting Firm | 70
Consolidated Statements of Assets and Liabilities as of September 30, 202 2 and 2021 | 72
Consolidated Statements of Operations for the years ended September 30, 202 2, 202 1 and 2020 | 73
Consolidated Statements of Changes in Net Assets for the years ended September 30, 202 2, 202 1 and 2020 | 75
Consolidated Statements of Cash Flows for the years ended September 30, 202 2, 202 1 and 2020 | 76
Consolidated Schedules of Investments as of September 30, 202 2 and 2021 | 77
Notes to Consolidated Financial Statements | 90

2.The following financial statement schedule is filed herewith:

Schedule 12-14 Investments in and Advances to Affiliates as of September 30, 202 2 and 2021 | 124

No other financial statement schedules are filed herewith because (1) such schedules are not required or (2) the information has been presented in the aforementioned financial statements.
3.Exhibits
The following exhibits are filed as part of this report or are hereby incorporated by reference to exhibits previously filed with the SEC:

3.1 | Articles of Amendment and Restatement to the Articles of Incorporation, incorporated by reference to Exhibit 99.a.2 to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-63700), filed July 27, 2001.
3.2 | Articles Supplementary Establishing and Fixing the Rights and Preferences of Term Preferred Shares, including Appendix A thereto relating to the Term Preferred Shares, 7.125% Series 2016, incorporated by reference to Exhibit 2.a.2 to Post-Effective Amendment No. 5 to the Registration Statement on Form N-2 (File No. 333-162592), filed October 31, 2011.
3.3 | Certificate of Correction to Articles Supplementary Establishing and Fixing the Rights and Preferences of Term Preferred Shares, incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 814-00237), filed October 29, 2015.
3.4 | Articles Supplementary, incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 814-00237), filed September 21, 2017.
3.5 | Bylaws, incorporated by reference to Exhibit 99.b to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-63700), filed July 27, 2001.
3.6 | Amendment to Bylaws, incorporated by reference to Exhibit 3.3 to the Quarterly Report on Form 10-Q (File No. 814-00237), filed February 17, 2004.
3.7 | Second Amendment to Bylaws, incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K (File No. 814-00237), filed July 10, 2007.
3.8 | Third Amendment to Bylaws, incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K (File No. 814-00237), filed June 10, 2011.
3.9 | Fourth Amendment to Bylaws, incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 814-00237), filed November 29, 2016.

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4.1 | Form of Certificate for Common Stock, incorporated by reference to Exhibit 99.d.2 to Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2 (File No. 333-63700), filed August 23, 2001.
4.2 | Indenture between the Registrant and U.S. Bank National Association, dated as of November 6, 2018, incorporated by reference to Exhibit 2.d.l0 to Post-Effective Amendment No. 7 to the Registration Statement on Form N-2 (File No. 333-208637), filed November 6, 2018.
4.3 | Third Supplemental Indenture between Gladstone Capital Corporation and U.S. Bank National Association, dated as of December 15, 2020, incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K (File No. 814-00237), filed December 15, 2020.
4.4 | Fourth Supplemental Indenture between Gladstone Capital Corporation and U.S. Bank National Association, dated as of November 4, 2021, incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K (File No. 814-00237), filed November 4, 2021.
4.5* | Description of Securities.
10.1 | Stock Transfer Agency Agreement between the Registrant and The Bank of New York, incorporated by reference to Exhibit 99.k.1 to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-63700), filed July 27, 2001.
10.2 | Custody Agreement between the Registrant and The Bank of New York, dated as of May 5, 2006, incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q (File No. 814-00237), filed August 1, 2006.
10.3 | Administration Agreement between the Registrant and Gladstone Administration, LLC, dated as of October 1, 2006, incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K (File No. 814-00237), filed October 5, 2006.
10.4 | Custodial Agreement, incorporated by reference to Exhibit 2.j.2 to Post-Effective Amendment No. 1 to Form N-2 (File No. 333-185191), filed December 23, 2013.
10.5 | Amendment No. 1 to Custodial Agreement, incorporated by reference to Exhibit 2.j.3 to Post-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-185191), filed December 23, 2013.
10.6 | Amendment No. 2 to Custodial Agreement, incorporated by reference to Exhibit 2.j.4 to Post-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-185191), filed December 23, 2013.
10.7 | Fourth Amended and Restated Investment Advisory and Management Agreement between the Registrant and Gladstone Management Corporation, dated as of April 12, 2022, incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q (File No. 814-00237), filed on May 3, 2022.
10.8 | Sixth Amended and Restated Credit Agreement dated as of May 13, 2021 by and among Gladstone Business Loan, LLC as Borrower, Gladstone Management Corporation as Servicer, KeyBank National Association, as Administrative Agent and the financial institutions from the time to time party thereto, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 814-00237), filed May 13, 2021.
10.9* | Amendment No. 1 to the Sixth Amended and Restated Credit Agreement dated as of September 12, 2022 by and among Gladstone Business Loan, LLC as Borrower, Gladstone Management Corporation as Servicer, KeyBank National Association, as Administrative Agent and the financial institutions from the time to time party thereto.
10.10* | Amendment No. 2 to the Sixth Amended and Restated Credit Agreement dated as of September 20, 2022 by and among Gladstone Business Loan, LLC as Borrower, Gladstone Management Corporation as Servicer, KeyBank National Association, as Administrative Agent and the financial institutions from the time to time party thereto.
10.11* | Amendment No. 3 to the Sixth Amended and Restated Credit Agreement dated as of October 31, 2022 by and among Gladstone Business Loan, LLC as Borrower, Gladstone Management Corporation as Servicer, KeyBank National Association, as Administrative Agent and the financial institutions from the time to time party thereto.

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21* | Subsidiaries of the Registrant.
23.1* | Consent of PricewaterhouseCoopers LLP.
31.1* | Certification of Chief Executive Officer pursuant to section 302 of The Sarbanes-Oxley Act of 2002.
31.2* | Certification of Chief Financial Officer pursuant to section 302 of The Sarbanes-Oxley Act of 2002.
32.1** | Certification of Chief Executive Officer pursuant to section 906 of The Sarbanes-Oxley Act of 2002.
32.2** | Certification of Chief Financial Officer pursuant to section 906 of The Sarbanes-Oxley Act of 2002.
101.INS | XBRL Instance Document
101.SCH | XBRL Taxonomy Extension Schema Document
101.LAB | XBRL Taxonomy Extension Label Linkbase Document
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF | XBRL Definition Linkbase
104 | Cover Page Interactive Data File (formatted in iXBRL and contained in Exhibit 101)

* Filed herewith
** Furnished herewith
ITEM 16. FORM 10-K SUMMARY
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

| GLADSTONE CAPITAL CORPORATION
Date: November 14, 2022 | By: | /s/ NICOLE SCHALTENBRAND
|  | Nicole Schaltenbrand
|  | Chief Financial Officer and Treasurer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Date: November 14, 2022 | By: | /s/ DAVID GLADSTONE
|  | David Gladstone
|  | Chief Executive Officer and Chairman of the Board of Directors (principal executive officer)
Date: November 14, 2022 | By: | /s/ TERRY LEE BRUBAKER
|  | Terry Lee Brubaker
|  | Vice Chairman of the Board of Directors, Chief Operating Officer
Date: November 14, 2022 | By: | /s/ NICOLE SCHALTENBRAND
|  | Nicole Schaltenbrand
|  | Chief Financial Officer and Treasurer (principal financial and accounting officer)
Date: November 14, 2022 | By: | /s/ ANTHONY W. PARKER
|  | Anthony W. Parker
|  | Director
Date: November 14, 2022 | By: | /s/ JOHN OUTLAND
|  | John Outland
|  | Director
Date: November 14, 2022 | By: | /s/ MICHELA A. ENGLISH
|  | Michela A. English
|  | Director
Date: November 14, 2022 | By: | /s/ PAUL ADELGREN
|  | Paul Adelgren
|  | Director
Date: November 14, 2022 | By: | /s/ WALTER H. WILKINSON, JR.
|  | Walter H. Wilkinson, Jr.
|  | Director
Date: November 14, 2022 | By: | /s/ PAULA NOVARA
|  | Paula Novara
|  | Director

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SCHEDULE 12-14
GLADSTONE CAPITAL CORPORATION
INVESTMENTS IN AND ADVANCES TO AFFILIATES
(AMOUNTS IN THOUSANDS)

Company and Investment(A)(B)(I)(L)(M) |  | Principal/ Shares/Units(K) |  | Net Realized Gain (Loss) for Period |  | Amount of Investment Income(C) |  | Value as of September 30, 2021 |  | Gross Additions(D) |  | Gross Reductions(E) |  | Net Unrealized Appreciation (Depreciation) |  | Value as of September 30, 2022 |  |
AFFILIATE INVESTMENTS—12.4% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Secured First Lien Debt—11.0% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Diversified/Conglomerate Manufacturing—0.8% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Edge Adhesives Holdings, Inc.—Term Debt (L + 5.5%. 8.6% Cash, Due 8/2024) |  | $ | 6,140 |  |  | — |  |  | 534 |  |  | 5,540 |  |  | 600 |  |  | — |  |  | (3,590) |  |  | 2,550 |  |  |
Diversified/Conglomerate Service—10.2% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Encore Dredging Holdings, LLC—Line of Credit, $3,000 available (L + 8.3%, 11.4% Cash, Due 12/2025) |  | — |  |  | — |  |  | 128 |  |  | — |  |  | 3,000 |  |  | (3,000) |  |  | — |  |  | — |  |  |
Encore Dredging Holdings, LLC—Term Debt (L + 7.0%, 10.1% Cash, 1.5% PIK, Due 12/2025) |  | 23,611 |  |  | — |  |  | 2,273 |  |  | 23,618 |  |  | 111 |  |  | — |  |  | (767) |  |  | 22,962 |  |  |
Encore Dredging Holdings, LLC—Term Debt (L + 7.0%, 10.1% Cash, 2.5% PIK, Due 12/2025)(F) |  | 4,532 |  |  | — |  |  | 189 |  |  | — |  |  | 4,532 |  |  | — |  |  | (125) |  |  | 4,407 |  |  |
Encore Dredging Holdings, LLC—Delayed Draw Term Loan, $0 available (L + 7.0%, 10.1% Cash, 1.5% PIK, Due 12/2025) |  | 5,023 |  |  | — |  |  | 311 |  |  | — |  |  | 5,023 |  |  | — |  |  | (138) |  |  | 4,885 |  |  |
|  |  |  | — |  |  | $ | 2,901 |  |  | $ | 23,618 |  |  | $ | 12,666 |  |  | $ | (3,000) |  |  | $ | (1,030) |  |  | $ | 32,254 |  |  |
Total Secured First Lien Debt |  |  |  | $ | — |  |  | $ | 3,435 |  |  | $ | 29,158 |  |  | $ | 13,266 |  |  | (3,000) |  |  | $ | (4,620) |  |  | $ | 34,804 |  |  |
Secured Second Lien Debt—0.0% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Diversified Natural Resources, Precious Metals and Minerals—0.0% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Lignetics, Inc.—Term Debt(G) |  | $ | — |  |  | $ | — |  |  | $ | 613 |  |  | $ | 6,540 |  |  | $ | — |  |  | $ | (6,000) |  |  | $ | (540) |  |  | $ | — |  |  |
Lignetics, Inc.—Term Debt(G) |  | — |  |  | — |  |  | 729 |  |  | 8,633 |  |  | — |  |  | (8,000) |  |  | (633) |  |  | — |  |  |
Lignetics, Inc.—Term Debt(G) |  | — |  |  | — |  |  | 230 |  |  | 3,491 |  |  | — |  |  | (3,300) |  |  | (191) |  |  | — |  |  |
Lignetics, Inc.—Term Debt(G) |  | — |  |  | — |  |  | 204 |  |  | 3,199 |  |  | — |  |  | (3,000) |  |  | (199) |  |  | — |  |  |
Lignetics, Inc.—Term Debt(G) |  | — |  |  | — |  |  | 45 |  |  | 2,500 |  |  | — |  |  | (2,500) |  |  | — |  |  | — |  |  |
Lignetics, Inc.—Term Debt(G) |  | — |  |  | — |  |  | 89 |  |  | 6,200 |  |  | — |  |  | (6,200) |  |  | — |  |  | — |  |  |
|  |  |  | $ | — |  |  | $ | 1,910 |  |  | $ | 30,563 |  |  | $ | — |  |  | $ | (29,000) |  |  | $ | (1,563) |  |  | $ | — |  |  |
Preferred Equity —1.2% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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Company and Investment(A)(B)(I)(L)(M) |  | Principal/ Shares/Units(K) |  | Net Realized Gain (Loss) for Period |  | Amount of Investment Income(C) |  | Value as of September 30, 2021 |  | Gross Additions(D) |  | Gross Reductions(E) |  | Net Unrealized Appreciation (Depreciation) |  | Value as of September 30, 2022 |  |
Diversified/Conglomerate Manufacturing —0.0% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Edge Adhesives Holdings, Inc.—Preferred Stock |  | 5,466 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  |
Diversified/Conglomerate Service—0.9% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Encore Dredging Holdings, LLC—Preferred Stock |  | 3,840,000 |  |  | — |  |  | — |  |  | 4,525 |  |  | 640 |  |  | — |  |  | (2,323) |  |  | 2,842 |  |  |
Diversified Natural Resources, Precious Metals and Minerals—0.0% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Lignetics, Inc.—Preferred Stock(G) |  | — |  |  | — |  |  | — |  |  | 5,602 |  |  | — |  |  | (1,321) |  |  | (4,281) |  |  | — |  |  |
Personal and Non-Durable Consumer Products (Manufacturing Only)—0.3% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Canopy Safety Brands, LLC—Preferred Stock |  | 500,000 |  |  | — |  |  | — |  |  | 739 |  |  | — |  |  | — |  |  | 59 |  |  | 798 |  |  |
Total Preferred Equity |  |  |  | $ | — |  |  | $ | — |  |  | $ | 10,866 |  |  | $ | 640 |  |  | $ | (1,321) |  |  | $ | (6,545) |  |  | $ | 3,640 |  |  |
Common Equity—0.2% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Diversified Natural Resources, Precious Metals and Minerals—0.0% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Lignetics, Inc.—Common Stock(G) |  | — |  |  | $ | 13,408 |  |  | $ | — |  |  | $ | 10,969 |  |  | $ | — |  |  | $ | (1,855) |  |  | $ | (9,114) |  |  | $ | — |  |  |
Personal and Non-Durable Consumer Products (Manufacturing Only)—0.2% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Canopy Safety Brands, LLC—Common Stock |  | 800,000 |  |  | — |  |  | — |  |  | 725 |  |  | — |  |  | — |  |  | (78) |  |  | 647 |  |  |
Total Common Equity |  |  |  | $ | 13,408 |  |  | $ | — |  |  | $ | 11,694 |  |  | $ | — |  |  | $ | (1,855) |  |  | $ | (9,192) |  |  | $ | 647 |  |  |
TOTAL AFFILIATE INVESTMENTS |  |  |  | $ | 13,408 |  |  | $ | 5,345 |  |  | $ | 82,281 |  |  | $ | 13,906 |  |  | $ | (35,176) |  |  | $ | (21,920) |  |  | $ | 39,091 |  |  |
CONTROL INVESTMENTS—11.3% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Secured First Lien Debt—4.9% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Diversified/Conglomerate Manufacturing—1.0% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Lonestar EMS, LLC—Term Debt (8.0% Cash, Due 6/2027)(F)(J) |  | $ | 3,250 |  |  | $ | — |  |  | $ | 97 |  |  | $ | — |  |  | $ | 3,250 |  |  | $ | — |  |  | $ | (220) |  |  | $ | 3,030 |  |  |
LWO Acquisitions Company LLC—Term Debt(G) |  | — |  |  | $ | (6,000) |  |  | $ | 302 |  |  | $ | 2,841 |  |  | $ | — |  |  | $ | (6,000) |  |  | $ | 3,159 |  |  | $ | — |  |  |
LWO Acquisitions Company LLC—Term Debt(G) |  | — |  |  | (2,471) |  |  | — |  |  | — |  |  | 100 |  |  | (10,732) |  |  | 10,632 |  |  | — |  |  |
|  |  |  | $ | (8,471) |  |  | $ | 399 |  |  | $ | 2,841 |  |  | $ | 3,350 |  |  | $ | (16,732) |  |  | $ | 13,571 |  |  | $ | 3,030 |  |  |
Personal and Non-Durable Consumer Products (Manufacturing Only) —3.6% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
WB Xcel Holdings, LLC—Line of Credit, $32 available (L + 10.5%, 13.6% Cash, Due 11/2026)(F) |  | 1,468 |  |  | $ | — |  |  | $ | 83 |  |  | $ | — |  |  | $ | 1,468 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,468 |  |  |
WB Xcel Holdings, LLC—Term Loan (L + 10.5%, 13.6% Cash, Due 11/2026)(F) |  | 9,925 |  |  | — |  |  | 1,001 |  |  | — |  |  | 10,000 |  |  | (75) |  |  | — |  |  | 9,925 |  |  |
|  |  |  | $ | — |  |  | $ | 1,084 |  |  | $ | — |  |  | $ | 11,468 |  |  | $ | (75) |  |  | $ | — |  |  | $ | 11,393 |  |  |
Printing and Publishing—0.3% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
TNCP Intermediate HoldCo, LLC—-Line of Credit, $1,000 available (8.0% Cash, Due 10/2024)(J) |  | 1,000 |  |  | — |  |  | 89 |  |  | 1,300 |  |  | — |  |  | (300) |  |  | — |  |  | 1,000 |  |  |
Total Secured First Lien Debt |  |  |  | $ | (8,471) |  |  | $ | 1,572 |  |  | $ | 4,141 |  |  | $ | 14,818 |  |  | $ | (17,107) |  |  | $ | 13,571 |  |  | $ | 15,423 |  |  |
Secured Second Lien Debt—2.4% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Automobile—2.4% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Defiance Integrated Technologies, Inc.—Term Debt (L + 9.5%, 12.6% Cash, Due 5/2026) |  | $ | 7,665 |  |  | $ | — |  |  | $ | 882 |  |  | $ | 7,985 |  |  | $ | — |  |  | $ | (320) |  |  | $ | — |  |  | $ | 7,665 |  |  |

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Company and Investment(A)(B)(I)(L)(M) |  | Principal/ Shares/Units(K) |  | Net Realized Gain (Loss) for Period |  | Amount of Investment Income(C) |  | Value as of September 30, 2021 |  | Gross Additions(D) |  | Gross Reductions(E) |  | Net Unrealized Appreciation (Depreciation) |  | Value as of September 30, 2022 |  |
Unsecured Debt—0.0% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Diversified/Conglomerate Manufacturing—0.0% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
LWO Acquisitions Company LLC—Term Debt (Due 6/2023)(H) |  | $ | 95 |  |  | $ | (25) |  |  | $ | — |  |  | $ | — |  |  | $ | 25 |  |  | $ | (25) |  |  | $ | — |  |  | $ | — |  |  |
Preferred Equity—1.8% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Automobile– 0.0% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Defiance Integrated Technologies, Inc.—Preferred Stock(G) |  | — |  |  | $ | — |  |  | $ | 33 |  |  | $ | 270 |  |  | $ | — |  |  | $ | (250) |  |  | $ | (20) |  |  | $ | — |  |  |
Personal and Non-Durable Consumer Products (Manufacturing Only) —1.8% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
WB Xcel Holdings, LLC - Preferred Stock(F) |  | 333 |  |  | — |  |  | — |  |  | — |  |  | 2,750 |  |  | — |  |  | 2,937 |  |  | $ | 5,687 |  |  |
Total Preferred Equity |  |  |  | $ | — |  |  | $ | 33 |  |  | $ | 270 |  |  | $ | 2,750 |  |  | $ | (250) |  |  | $ | 2,917 |  |  | $ | 5,687 |  |  |
Common Equity—2.2% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Automobile– 0.4% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Defiance Integrated Technologies, Inc.—Common Stock |  | 33,321 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,623 |  |  | $ | — |  |  | $ | — |  |  | $ | (1,476) |  |  | $ | 1,147 |  |  |
Diversified/Conglomerate Manufacturing—0.0% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Circuitronics EMS Holdings LLC—Common Units |  | 921,000 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  |
Lonestar EMS, LLC - Common Units(F) |  | 100 | % |  | — |  |  | — |  |  | — |  |  | 6,750 |  |  | — |  |  | (6,750) |  |  | — |  |  |
|  |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 6,750 |  |  | $ | — |  |  | $ | (6,750) |  |  | $ | — |  |  |
Machinery—1.1% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
PIC 360, LLC—Common Equity Units |  | 750 |  |  | — |  |  | 1,248 |  |  | 3,983 |  |  | — |  |  | — |  |  | (529) |  |  | 3,454 |  |  |
Printing and Publishing—0.7% |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
TNCP Intermediate HoldCo, LLC—Common Equity Units |  | 790,000 |  |  | — |  |  | — |  |  | 1,728 |  |  | — |  |  | — |  |  | 609 |  |  | 2,337 |  |  |
Total Common Equity |  |  |  | $ | — |  |  | $ | 1,248 |  |  | $ | 8,334 |  |  | $ | 6,750 |  |  | $ | — |  |  | $ | (8,146) |  |  | $ | 6,938 |  |  |
TOTAL CONTROL INVESTMENTS |  |  |  | $ | (8,496) |  |  | $ | 3,735 |  |  | $ | 20,730 |  |  | $ | 24,343 |  |  | $ | (17,702) |  |  | $ | 8,342 |  |  | $ | 35,713 |  |  |

(A)Certain of the securities listed in this schedule are issued by affiliate(s) of the indicated portfolio company.
(B)Common stock, warrants, options, membership units and, in some cases, preferred stock are generally non-income producing and restricted.
(C)Represents the total amount of interest, dividends and other income credited to investment income for the portion of the fiscal year an investment was a control or affiliate investment, as appropriate.
(D)Gross additions include increases in investments resulting from new portfolio investments, paid-in-kind interest or dividends, the amortization of discounts and fees, and the exchange of one or more existing securities for one or more new securities.
(E)Gross reductions include decreases in investments resulting from principal collections related to investment repayments or sales, the amortization of premiums and acquisition costs, and the exchange of one or more existing securities for one or more new securities.
(F)New investment during the year ended September 30, 2022.
(G)Investment was exited/paid off during the year ended September 30, 2022.
(H)Debt security does not have a stated interest rate that is payable thereon.
(I)Interest rate percentages represent cash interest rates in effect at September 30, 2022, and due dates represent the contractual maturity date. Unless indicated otherwise, all cash interest rates are indexed to 30-day London Interbank Offered Rate (“L”), which was 3.14% as of September 30, 2022. If applicable, paid-in-kind interest rates are noted separately from the cash interest rates and any unused line of credit fees are excluded.
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(J)Debt security has a fixed interest rate.
(K)Represents the principal balance for debt investments and the number of shares/units held for equity investments as of September 30, 2022. Warrants are represented as a percentage of ownership, as applicable.
(L)Unless indicated otherwise, all of our investments are valued using Level 3 inputs within the FASB Accounting Standard Codification Topic 820, “Fair Value Measurements and Disclosures” fair value hierarchy. Refer to Note 3—Investments in the accompanying Notes to Consolidated Financial Statements for additional information.
(M)Category percentages represent the fair value of each category and subcategory as a percentage of net assets as of September 30, 2022.
** Information related to the amount of equity in the net profit and loss for the year for the investments listed has not been included in this schedule. This information is not considered to be meaningful due to the complex capital structures of the portfolio companies, with different classes of equity securities outstanding with different preferences in liquidation. These investments are not consolidated, nor are they accounted for under the equity method of accounting.
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