GLADSTONE INVESTMENT CORPORATIONDE 10-K

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 “GAIN.” The following table reflects, by quarter, the high and low intraday sales prices per share of our common stock on Nasdaq, the 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 May 10, 2021. 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 March 31, 2020: 6/30/2019 $ 12.29 $ 12.70 $ 10.97 3 % (11 )% $ 0.2940 (C) 9/30/2019 12.39 12.54 11.07 1 (11 ) 0.2340 (C) 12/31/2019 12.51 15.34 11.85 23 (5 ) 0.2940 (C) 3/31/2020 11.17 13.99 6.43 25 (42 ) 0.2100 Fiscal Year ended March 31, 2021: 6/30/2020 $ 10.87 $ 11.51 $ 6.75 6 (38 ) $ 0.3000 (D) 9/30/2020 10.86 10.39 8.88 (4 ) (18 ) 0.2100 12/31/2020 11.11 10.80 8.16 (3 ) (27 ) 0.2100 3/31/2021 11.52 12.74 9.91 11 (14 ) 0.2100 Fiscal Year ending March 31, 2022: 6/30/2021 (through May 10, 2021) $ * $ 14.48 $ 12.27 * * $ 0.2700 (E) (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. (C) Includes a $0.09 per common share supplemental distribution paid in each of June 2019 and December 2019 and a $0.03 per common share supplemental distribution paid in September 2019. (D) Includes a $0.09 per common share supplemental distribution paid in June 2020. (E) Includes a $0.06 per common share supplemental distribution to be paid in June 2021. * Not yet available, as the NAV per share as of the end of this quarter has not yet been finalized. As of May 7, 2021, there were 20 record owners of our common stock. This number does not include stockholders for whom shares are held in “street name.” Distributions We generally intend to distribute, in the form of cash distributions, up to 100% of our Investment Company Taxable Income, if any, to our stockholders in the form of monthly distributions. We may retain some or all of our net realized long-term capital gains, if any, and designate them as a deemed distribution to supplement our equity capital and support the growth of our portfolio, but we may also distribute all or a portion of such gains to stockholders in cash. For the year ended March 31, 2021, we did not elect to retain long-term capital gains and to treat them as deemed distributions to common stockholders. For the year ended March 31, 2020, we elected to retain $38.0 million, or $1.15 per common share, of net long-term capital gains and to designate the retained amount as deemed distributions to common stockholders. As a result, each common stockholder (i) was required 50 Table of Contents to report their pro-rata share of the retained gain on their tax return as long-term capital gain, (ii) received a refundable tax credit for their pro-rata share of federal income tax paid by us on the retained gain, and (iii) increased the tax basis of their shares of common stock by an amount equal to the deemed distribution less the tax credit. We incurred $8.0 million, or $0.24 per common share, of federal income taxes on behalf of common stockholders for the year ended March 31, 2020. The Credit Facility also generally restricts distributions on our common stock to the sum of certain amounts, including, our net investment income, plus net capital gains, plus amounts elected by the Company to be considered as having been paid during the prior fiscal year in accordance with Section 855(a) of the Code. Recent Sales of Unregistered Securities We did not sell any unregistered securities during the fiscal year ended March 31, 2021. Purchases of Equity Securities The following table provides information with respect to the purchases made by or on behalf of the Company of our 6.25% Series D Cumulative Term Preferred Stock, par value $0.001 per share (the “Series D Term Preferred Stock”), during the fourth quarter of our fiscal year 2021. The Company elected to voluntarily redeem the entirety of the then issued and outstanding Series D Term Preferred Stock on March 3, 2021. On May 7, 2021, the Company executed and filed a Certificate of Elimination of 6.25% Series D Cumulative Term Preferred Stock, thereby removing the Certificate of Designation of the Series D Term Preferred Stock from the Company’s Amended and Restated Certificate of Incorporation. The Company does not have any existing publicly announced repurchase plans or programs. Period (a) Total Number of Shares of Series D Term Preferred Stock Purchased (b) Average Price Paid per Share of Series D Term Preferred Stock (c) Total Number of Shares of Series D Term Preferred Stock Purchased as Part of Publicly Announced Plans or Programs (d) Maximum Number of Shares of Series D Term Preferred Stock that May Yet Be Purchased Under the Plans or Programs January 1 through 31, 2021 — — — — February 1 through 28, 2021 — — — — March 1 through 31, 2021 2,300,000 $ 25.00 — — Total 2,300,000 $ 25.00 — — 51 Table of Contents Stock Performance Graph The following graph shows the total stockholder return on an investment of $100 in cash on March 31, 2016 for (i) our common stock, (ii) the Nasdaq’s 100 Total Return index (“Nasdaq 100 TR”), (iii) the Russell 1000 Total Return index (“Russell 1000 TR”) and (iv) the Wells Fargo BDC Total Return index (“WF BDC TR”). 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. GAIN Nasdaq 100 TR Russell 1000 TR WF BDC TR 3/31/2016 $ 100.00 $ 100.00 $ 100.00 $ 100.00 3/31/2017 141.58 122.77 117.43 127.63 3/31/2018 172.48 150.26 133.84 116.03 3/31/2019 215.52 170.33 145.31 127.23 3/31/2020 158.98 182.29 134.26 78.89 3/31/2021 271.30 307.86 216.07 148.17 52 Table of Contents Fees and Expenses The following table is intended to assist stockholders in understanding the costs and expenses that common stockholders will bear directly or indirectly. 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, common stockholders will indirectly bear such fees or expenses as investors in the Company. The following annualized percentages were calculated based on actual expenses, except with respect to capital gains-based incentive fees as discussed below, incurred in the quarter ended March 31, 2021 and average net assets for the quarter ended March 31, 2021. The table and examples below include all fees and expenses of our consolidated subsidiaries. Stockholder Transaction Expenses: Sales load or other commission (as a percentage of offering price) (1) — % Offering expenses (as a percentage of offering price) (1) — % Dividend reinvestment plan expenses (per sales transaction fee) (2) Up to $ 25 Transaction fee Total stockholder transaction expenses (as a percentage of offering price) (1) — % Annual expenses (as a percentage of net assets attributable to common stock) (3) : Base management fee (4) 3.38% Loan servicing fee (5) 1.97% Incentive fees (20% of realized capital gains and 20% of pre-incentive fee net investment income) (6) 5.70% Interest payments on borrowed funds (7) 1.78% Dividend expense on mandatorily redeemable preferred stock (8) 2.45% Other expenses (9) 1.59% Total annual expenses (10) 16.87% (1) The amounts set forth in the table above do not reflect the impact of any sales load or other commission or offering expenses borne by the Company and its common 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 or other commission. (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 also bear a transaction fee, plus per share 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) The base management fee is payable quarterly to the Adviser pursuant to our Advisory Agreement and is assessed at an annual rate of 2.0% computed on the basis of the value of our average gross assets at the end 53 Table of Contents 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, valued at the end of the applicable quarters within the respective period and adjusted appropriately for any share issuances or repurchases during the period. In accordance with the requirements of the SEC, the table above shows our base management fee as a percentage of average net assets attributable to common stockholders. For purposes of the table, the annualized base management fee has been converted to 3.38% of the average net assets for the quarter ended March 31, 2021 by dividing the total annualized amount of the base management fee by our average net assets for the quarter ended March 31, 2021. The base management fee for the quarter ended March 31, 2021 before application of any credits was $3.2 million. 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) 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; 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 and primarily related to the valuation of portfolio companies. For the quarter ended March 31, 2021, $0.4 million of these fees were non-contractually, unconditionally and irrevocably credited against the base management fee. See “ Item 1. Business — Transactions with Related Parties — Investment Advisory and Management Agreement ” for additional information. (5) The Adviser services the loans held by Business Investment in return for which the Adviser receives a 2.0% annual loan servicing fee based on the monthly aggregate balance of loans pledged under the Credit Facility. Since Business Investment is a consolidated subsidiary of ours, coupled with the fact that the total base management fee paid to the Adviser pursuant to the Advisory Agreement cannot exceed 2.0% of total assets (less any uninvested cash or cash equivalents resulting from borrowings) during any given calendar year, 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. The loan servicing fee for the three months ended March 31, 2021 was $1.8 million. See “ Item 1. Business—Transactions with Related Parties—Loan Servicing Fee Pursuant to Credit Facility ” and footnote 4 above for additional information. (6) The incentive fee payable to the Adviser under the Advisory Agreement consists of two parts: an income-based fee and a capital gains-based fee. The income-based incentive fee is payable quarterly in arrears, and equals 20% of the excess, if any, of our pre-incentive fee net investment income that exceeds a 1.75% quarterly hurdle rate 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, subject to a “catch-up” provision measured as of the end of each calendar quarter. The “catch-up” provision requires us to pay 100% 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% of the quarterly hurdle rate (or 2.1875%) in any calendar quarter. The catch-up provision is meant to provide our Adviser with 20% 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% of the quarterly hurdle rate in any calendar quarter. For the three months ended March 31, 2021, the income-based incentive fee was $1.7 million. 54 Table of Contents The capital gains-based incentive fee equals 20% of our net realized capital gains in excess of unrealized depreciation since our inception, if any, computed as all realized capital gains net of all realized capital losses and unrealized depreciation since our inception, less any prior payments, measured at the end of each calendar year and payable at the end of each fiscal year. During the three months ended March 31, 2021, we recorded capital gains-based incentive fees of $3.6 million in accordance with GAAP, which were not contractually due under the terms of the Advisory Agreement. No credits were applied to incentive fees for the three months ended March 31, 2021; however, the Adviser may credit such fees in the future. Examples of how the incentive fee would be calculated 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 1.75%. • Assuming pre-incentive fee net investment income of 2.00%, the income-based incentive fee would be as follows: = 100.0% &times; (2.00% - 1.75%) = 0.25% • Assuming pre-incentive fee net investment income of 2.30%, the income-based incentive fee would be as follows: = (100.0% &times; (“catch-up”: 2.1875% - 1.75%)) + (20.0% &times; (2.30% - 2.1875%)) = (100.0% &times; 0.4375%) + (20.0% &times; 0.1125%) = 0.4375% + 0.0225% = 0.46% • 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: = 20.0% &times; (6.0% - 1.0%) = 20.0% &times; 5.0% = 1.0% For a more detailed discussion of the calculation of the two-part incentive fee, including the capital gains-based incentive fee calculation under GAAP, see “ Item 1. Business — Transactions with Related Parties — Investment Advisory and Management Agreement . ” (7) Includes amortization of deferred financing costs. As of March 31, 2021, we had $22.4 million in borrowings outstanding under our Credit Facility, $127.9 million of 2026 Notes, at cost, and $5.1 million of secured borrowings. See “ Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Revolving Line of Credit ” 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 the Credit Facility and the 2026 Notes. (8) Includes dividends paid on our Series E Term Preferred Stock and amortization of deferred financing costs. See “ Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Equity—Term Preferred Stock ” for additional information. (9) 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 our Administrator for the current fiscal year in performing its obligations under the Administration Agreement. See “ Item 1. Business—Transactions with Related Parties—Administration Agreement ” for additional information. 55 Table of Contents (10) Total annualized gross expenses, based on actual amounts incurred for the three months ended March 31, 2021 (except as set forth in footnote 9), would be $63.0 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 and the loan servicing fee, total annualized expenses after fee credits, based on actual amounts incurred for the three months ended March 31, 2021 (except as set forth in footnote 9), would be $54.3 million or 14.52% as a percentage of average net assets. Example The following example demonstrates 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 that our annual operating expenses would remain at the levels set forth in the table above. The example below and the expenses in the table above should not be considered a representation of our future expenses, and actual expenses may be greater or less than those shown. While the example assumes, as required by the SEC, a 5.0% annual return, our performance will vary and may result in a return greater or less than 5.0%. Dollar amounts in the table below are not in thousands. 1 Year 3 Years 5 Years 10 Years Common stockholders would pay the following expenses on a $1,000 investment: assuming a 5% annual return consisting entirely of ordinary income (1)(2) $ 117 $ 329 $ 513 $ 875 assuming a 5% annual return consisting entirely of capital gains (2)(3) $ 126 $ 350 $ 542 $ 906 (1) For purposes of this example, we have assumed that the entire amount of the assumed 5.0% annual return would constitute ordinary income. Because the assumed 5.0% annual return is significantly below the hurdle rate of 7.0% (annualized) 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 5.0% annual return. (2) While the example assumes reinvestment of all distributions at NAV per share, participants in the dividend reinvestment plan will receive a number of shares of our common stock determined by dividing the total dollar amount of the distribution payable to a participant by the market price per share of our common stock at the close of trading on the valuation date for the distribution, and this price per share may differ from NAV per share. 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 additional information regarding our dividend reinvestment plan. (3) For purposes of this example, we have assumed that the entire amount of the assumed 5.0% annual return would constitute capital gains and that no accumulated capital losses or unrealized depreciation 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 as of the end of each of our last ten fiscal years. The annual 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 March 31, 2021, is included elsewhere in this Annual Report. 56 Table of Contents Class and Year Total Amount Outstanding Exclusive of Treasury Securities (1) Asset Coverage Per Unit (2) Involuntary Liquidating Preference Per Unit (3) Average Market Value Per Unit (4) 7.125% Series A Cumulative Term Preferred Stock (5) March 31, 2021 — N/A — N/A March 31, 2020 — N/A — N/A March 31, 2019 — N/A — N/A March 31, 2018 — N/A — N/A March 31, 2017 — N/A — N/A March 31, 2016 $ 40,000,000 $ 2,214 $ 25.00 $ 25.60 March 31, 2015 40,000,000 2,301 25.00 25.78 March 31, 2014 40,000,000 2,978 25.00 26.53 March 31, 2013 40,000,000 2,725 25.00 26.92 March 31, 2012 40,000,000 2,676 25.00 24.97 6.75% Series B Cumulative Term Preferred Stock (6) March 31, 2021 — N/A — N/A March 31, 2020 — N/A — N/A March 31, 2019 — N/A — N/A March 31, 2018 $ 41,400,000 $ 2,373 $ 25.00 $ 25.20 March 31, 2017 41,400,000 2,356 25.00 26.00 March 31, 2016 41,400,000 2,214 25.00 24.43 March 31, 2015 41,400,000 2,301 25.00 25.38 6.50% Series C Cumulative Term Preferred Stock due 2022 (7) March 31, 2021 — N/A — N/A March 31, 2020 — N/A — N/A March 31, 2019 — N/A — N/A March 31, 2018 40,250,000 $ 2,373 $ 25.00 $ 25.33 March 31, 2017 40,250,000 2,356 25.00 25.64 March 31, 2016 40,250,000 2,214 25.00 23.92 6.25% Series D Cumulative Term Preferred Stock due 2023 (8) March 31, 2021 — N/A — N/A March 31, 2020 $ 57,500,000 $ 2,938 $ 25.00 $ 20.46 March 31, 2019 57,500,000 3,091 25.00 25.38 March 31, 2018 57,500,000 2,373 25.00 25.22 March 31, 2017 57,500,000 2,356 25.00 25.43 6.375% Series E Cumulative Term Preferred Stock due 2025 (9) March 31, 2021 $ 94,371,325 $ 2,486 $ 25.00 $ 25.44 March 31, 2020 74,750,000 2,938 25.00 19.52 March 31, 2019 74,750,000 3,091 25.00 25.55 Revolving credit facilities March 31, 2021 $ 22,400,000 $ 3,980 — N/A March 31, 2020 49,200,000 9,935 — N/A March 31, 2019 53,000,000 9,976 — N/A March 31, 2018 107,000,000 5,257 — N/A March 31, 2017 69,700,000 6,613 — N/A March 31, 2016 95,000,000 4,838 — N/A March 31, 2015 118,800,000 2,301 — N/A 57 Table of Contents Class and Year Total Amount Outstanding Exclusive of Treasury Securities (1) Asset Coverage Per Unit (2) Involuntary Liquidating Preference Per Unit (3) Average Market Value Per Unit (4) March 31, 2014 61,250,000 2,978 — N/A March 31, 2013 31,000,000 2,725 — N/A March 31, 2012 — N/A — N/A Short-term loan March 31, 2021 — N/A — N/A March 31, 2020 — N/A — N/A March 31, 2019 — N/A — N/A March 31, 2018 — N/A — N/A March 31, 2017 — N/A — N/A March 31, 2016 — N/A — N/A March 31, 2015 — N/A — N/A March 31, 2014 — N/A — N/A March 31, 2013 $ 58,016,000 $ 2,725 — N/A March 31, 2012 76,005,000 2,676 — N/A 2026 Notes (10) March 31, 2021 $ 127,937,500 $ 3,980 $ 25.00 $ 25.85 Secured borrowings (11) March 31, 2021 $ 5,095,785 $ 3,980 — N/A March 31, 2020 5,095,785 9,935 — N/A March 31, 2019 5,095,785 9,976 — N/A March 31, 2018 5,095,785 5,257 — N/A March 31, 2017 5,095,785 6,613 — N/A March 31, 2016 5,095,785 4,838 — N/A March 31, 2015 5,095,785 2,301 — N/A March 31, 2014 5,000,000 2,978 — N/A March 31, 2013 5,000,000 2,725 — N/A (1) Total amount of each class of senior securities outstanding as of the dates presented. (2) Asset coverage is the ratio of the carrying value of our total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness (including interest payable and guaranties). 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 and our 2026 Notes because the other senior securities are not registered for public trading. Average market value per unit is the average of the closing price of the shares on Nasdaq during the last 10 trading days of the period. (5) Our Series A Term Preferred Stock was issued in March 2012 and redeemed in September 2016. (6) Our Series B Term Preferred Stock was issued in November 2014 and redeemed in August 2018. (7) Our Series C Term Preferred Stock was issued in May 2015 and redeemed in August 2018. (8) Our Series D Term Preferred Stock was issued in September 2016 and redeemed in March 2021. (9) Our Series E Term Preferred Stock was issued in August 2018. (10) Our 2026 Notes were issued in March 2021. (11) In August 2012, we entered into a participation agreement with a third-party related to $5.0 million of our secured second lien term debt investment in Ginsey Home Solutions, Inc. (“Ginsey”). In May 2014, we amended the agreement with the third-party to include an additional $0.1 million. Accounting Standards Codification Topic 860, “ Transfers and Servicing ” requires us to treat the participation as a financing-type transaction. Specifically, the third-party has a senior claim to our remaining investment in the event of default by Ginsey which, in part, resulted in the loan participation bearing a rate of interest lower than the 58 Table of Contents contractual rate established at origination. Therefore, our accompanying Consolidated Statements of Assets and Liabilities reflect the entire secured second lien term debt investment in Ginsey and a corresponding $5.1 million secured borrowing liability. The secured borrowing has a stated fixed interest rate of 7.0% and a maturity date of January 3, 2025. 59 Table of Contents 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 included herein are in thousands unless otherwise indicated. OVERVIEW General We were incorporated under the General Corporation Law of the State of Delaware on February 18, 2005. On June 22, 2005, we completed our initial public offering and commenced operations. 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. For U.S. federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of the Code. To continue to qualify as a RIC for U.S. 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: (i) achieve and grow current income by investing in debt securities of established businesses 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 (ii) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses, generally, in combination with the aforementioned debt securities, that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our objectives, our investment strategy is to invest in several categories of debt and equity securities, with individual investments generally totaling up to $40 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 75% in debt securities and 25% in equity securities, at cost. As of March 31, 2021, our investment portfolio was comprised of 74.4% in debt securities and 25.6% in equity securities, at cost. We focus on investing in Lower Middle Market businesses in the U.S. that meet certain criteria, including: 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 portfolio company, reasonable capitalization of the portfolio company, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples, and the potential to realize appreciation and gain liquidity in our equity position, if any. We anticipate that liquidity in our equity position will be achieved through a merger or acquisition of the portfolio company, a public offering of the portfolio company’s stock or, to a lesser extent, by exercising our right to require the portfolio company to repurchase our warrants, though there can be no assurance that we will always have these rights. We invest in portfolio companies that need funds for growth capital, to finance acquisitions, including management buyouts, recapitalize or, to a lesser extent, refinance their existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises. We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity, and have opportunistically made several co-investments with Gladstone Capital pursuant to 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. 60 Table of Contents Business Portfolio Activity While the business environment remains competitive, we continue to see new investment opportunities consistent with our investment strategy of providing a combination of debt and equity in support of management and independent sponsor-led buyouts of Lower Middle Market companies in the U.S. During the year ended March 31, 2021, we invested in one new portfolio company and exited one portfolio company. From our initial public offering in June 2005 through March 31, 2021, we invested in 53 companies, excluding investments in syndicated loans, for a total of approximately $1.4 billion, before giving effect to principal repayments and divestitures. The majority of the debt securities in our portfolio have a success fee component, which enhances the yield on our debt investments. Unlike PIK income, we generally do not recognize success fees as income until payment has been received. Due to the contingent nature of success fees, there are no guarantees that we will be able to collect any or all of these success fees or know the timing of any such collections. As a result, as of March 31, 2021, we had unrecognized, contractual success fees of $46.2 million, or $1.39 per common share. Consistent with GAAP, we generally have not recognized success fee receivables and related income in our accompanying Consolidated Financial Statements until earned. From inception through March 31, 2021, we completed sales of 23 portfolio companies that we acquired under our buyout strategy (which excludes investments in syndicated loans). In the aggregate, these sales have generated $238.4 million in net realized gains and $31.4 million in other income upon exit, for a total increase to our net assets of $269.8 million. We believe, in aggregate, these transactions were equity-oriented investment successes and exemplify our investment strategy of striving to achieve returns through current income on the debt portion of our investments and capital gains from the equity portion. The 23 liquidity events have offset any realized losses since inception, which were primarily incurred during the 2008-2009 recession in connection with the sale of performing syndicated loans at a realized loss to pay off a former lender. The successful exits, in part, enabled us to increase the monthly distribution by 75.0% from March 2011 through March 31, 2021 and allowed us to declare and pay 11 supplemental distributions to common stockholders through March 31, 2021. Capital Raising Efforts We have been able to meet our capital needs through extensions of and increases to the Credit Facility and by accessing the capital markets in the form of public offerings of registered notes, as well as common and preferred stock. We have successfully extended the Credit Facility’s revolving period multiple times, most recently to February 2024, and currently have a total commitment amount of $180.0 million (with a potential total commitment of $300.0 million through additional commitments from new or existing lenders). During the year ended March 31, 2021, we issued our 2026 Notes for gross proceeds of $127.9 million, and sold 155,560 shares of our common stock under our at-the-market program (the “Common Stock ATM Program”) for gross proceeds of approximately $1.8 million, and 784,853 shares of our Series E Term Preferred Stock under our preferred stock at-the-market program (the “Series E ATM Program”) for gross proceeds of approximately $19.3 million. During the year ended March 31, 2020, we sold 227,004 shares of our common stock under our Common Stock ATM Program for gross proceeds of approximately $3.1 million. Additionally, we issued approximately 3.0 million shares of our Series E Term Preferred Stock for gross proceeds of $74.8 million in August 2018. Refer to “ Liquidity and Capital Resources.” Although we have been able to access the capital markets historically, market conditions, including the impact of COVID-19, may continue to affect the trading price of our common stock and thus our ability to finance new investments through the issuance of common equity. On March 31, 2021, the closing market price of our common stock was $12.23 per share, representing a 6.2% premium to our NAV of $11.52 per share as of March 31, 2021. When our common stock trades below NAV, our ability to issue additional equity is constrained by provisions of the 1940 Act, which generally prohibits the issuance and sale of our common stock at an issuance price below the then current NAV per share without stockholder approval, other than through sales to our then existing stockholders pursuant to a rights offering. 61 Table of Contents At our 2020 Annual Meeting of Stockholders held on August 20, 2020, our stockholders approved a proposal authorizing us, with the subsequent approval of our Board of Directors, to issue and sell shares of our common stock at a price below our then current NAV per share, provided that the number of common shares issued and sold pursuant to such authority does not exceed 25.0% of our then outstanding common stock immediately prior to each such sale. This August 2020 stockholder authorization is in effect for one year from the date of stockholder approval. We sought and obtained stockholder approval concerning similar proposals at each Annual Meeting of Stockholders since 2008, and with our Board of Directors’ subsequent approval, we issued shares of our common stock in three offerings at a price below the then current NAV per share, once in May 2017, once in March 2015, and once in October 2012. Certain sales under the previous Common Stock ATM Program in March and April of 2018 were also below the then current estimated NAV per share. The resulting proceeds, in part, have allowed us to (i) grow our portfolio by making new investments, (ii) generate additional income through these new investments, (iii) ensure continued compliance with regulatory tests and (iv) increase our debt capital while still complying with our applicable debt-to-equity ratios. Refer to “Liquidity and Capital Resources — Equity — Common Stock” for further discussion of our common stock. 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 asset coverage (as defined in Sections 18 and 61 of the 1940 Act) of at least 150% on each of our senior securities representing indebtedness and our senior securities that are stock (such as our two series of term preferred stock currently outstanding). 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 result, our asset coverage requirements for senior securities changed from 200% to 150%, effective as of April 10, 2019, one year after the date of the Board of Directors’ approval. As of March 31, 2021, our asset coverage ratio on our senior securities representing indebtedness was 398.0% and our asset coverage on our senior securities that are stock was 248.6%. Investment Highlights Investment Activity During the fiscal year ended March 31, 2021, the following significant transactions occurred: • In July 2020, we invested $46.9 million in Mason West, LLC (“Mason West”) through a combination of secured first lien debt and preferred equity. Mason West, headquartered in Placentia, California, is a provider of engineered seismic restraint and vibration isolation solutions. In September 2020, Mason West repaid $7.0 million of secured first lien debt and redeemed $3.1 million of preferred equity. • In September 2020, we invested an additional $8.0 million in PSI Molded Plastics, Inc. (“PSI Molded”) in the form of preferred equity and also amended certain terms of our existing debt. • In December 2020, we recapitalized our investment in Old World Christmas, Inc. (“Old World”) and invested an additional $27.0 million in the form of secured first lien debt. In connection with this investment, Old World paid dividend income of $3.2 million and additional equity proceeds of $10.8 million, resulting in a $7.5 million return of preferred equity cost basis and a realized gain of $3.3 million. • In December 2020, we invested an additional $3.0 million in Galaxy Technologies, Inc. (“Galaxy”) in the form of secured second lien debt. In connection with this investment, Galaxy purchased SBS Industries, LLC (a subsidiary of SBS Industries Holdings, Inc. (“SBS Industries”), one of our other portfolio companies). SBS Industries used proceeds from the sale to partially repay our $11.4 million first lien debt, resulting in a realized loss of $8.5 million. 62 Table of Contents • In December 2020, we sold our investment in Frontier Packaging, Inc. (“Frontier”), which resulted in dividend income of $0.9 million, success fee income of $0.2 million, and a realized gain of $14.0 million. In connection with the sale, we received net cash proceeds of $26.0 million, including the repayment of our debt investment of $9.5 million at par. Recent Developments Distributions and Dividends In April 2021, our Board of Directors declared the following monthly and supplemental cash distributions to common stockholders and monthly dividends to holders of our Series E Term Preferred Stock: Record Date Payment Date Distribution per Common Share Dividend per Share of Series E Term Preferred Stock April 23, 2021 April 30, 2021 $ 0.07 $ 0.13281250 May 19, 2021 May 28, 2021 0.07 0.13281250 June 8, 2021 June 17, 2021 0.06 (A) — June 18, 2021 June 30, 2021 0.07 0.13281250 Total for the Quarter: $ 0.27 $ 0.39843750 (A) Represents a supplemental distribution to common stockholders. 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) and, to a lesser extent, at fixed rates. Most U.S. dollar LIBOR are currently anticipated to be phased out in June 2023. LIBOR may transition to a new standard rate, SOFR, which will incorporate certain overnight repo market data collected from multiple data sets. To attain an equivalent one-month rate, we currently intend to adjust the SOFR to minimize the difference between the interest that a borrower would be paying using LIBOR versus what it will be paying using SOFR. We are currently monitoring the transition and cannot assure you whether SOFR will become a standard rate for variable rate debt. We expect we will need to continue to renegotiate a limited number of loan agreements with our portfolio companies to include fallback language providing a mechanism for the parties to negotiate a new reference interest rate in the event that LIBOR ceases to exists. Assuming that SOFR replaces LIBOR and is appropriately adjusted to equate to one-month LIBOR, we expect that there should be minimal impact on our operations. COVID-19 Impact We continue to closely monitor and work with our portfolio companies to navigate the significant challenges created by the continuing COVID-19 pandemic, and remain focused on ensuring the safety of the Adviser’s and Administrator’s personnel and of the employees of our portfolio companies, while also managing our ongoing business activities. While we are closely monitoring all of our portfolio companies, our portfolio continues to be diverse from a geographic and industry perspective. Through proactive measures and continued diligence, the management teams of our portfolio companies continue to demonstrate their ability to respond effectively and efficiently to the challenges posed by COVID-19 and related orders imposed by state and local governments, including paused or reversed reopening orders. We believe we have sufficient levels of liquidity to support our existing portfolio companies, as necessary, and selectively deploy capital in new investment opportunities. 63 Table of Contents RESULTS OF OPERATIONS Comparison of the Fiscal Year Ended March 31, 2021 to the Fiscal Year Ended March 31, 2020 For the Fiscal Years Ended March 31, 2021 2020 $ Change % Change INVESTMENT INCOME Interest income $ 47,164 $ 49,554 $ (2,390 ) (4.8 )% Dividend and success fee income 9,463 12,370 (2,907 ) (23.5 ) Total investment income 56,627 61,924 (5,297 ) (8.6 ) EXPENSES Base management fee 12,115 12,145 (30 ) (0.2 ) Loan servicing fee 7,082 6,859 223 3.3 Incentive fee 8,778 (2,380 ) 11,158 468.8 Administration fee 1,619 1,476 143 9.7 Interest and dividend expense 13,114 12,317 797 6.5 Amortization of deferred financing costs and discounts 1,750 1,492 258 17.3 Other 4,262 4,948 (686 ) (13.9 ) Expenses before credits from Adviser 48,720 36,857 11,863 32.2 Credits to fees from Adviser (10,031 ) (11,295 ) 1,264 (11.2 ) Total expenses, net of credits to fees 38,689 25,562 13,127 51.4 NET INVESTMENT INCOME 17,938 36,362 (18,424 ) (50.7 ) REALIZED AND UNREALIZED GAIN (LOSS), NET OF TAXES Net realized gain on investments 11,374 44,803 (33,429 ) (74.6 ) Taxes on deemed distribution of long-term capital gains — (10,260 ) 10,260 NM Net realized loss on other (782 ) — (782 ) NM Net unrealized appreciation (depreciation) of investments 13,924 (78,139 ) 92,063 NM Net realized and unrealized gain (loss), net of taxes on deemed distribution of long-term capital gains 24,516 (43,596 ) 68,112 NM NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 42,454 $ (7,234 ) $ 49,688 NM BASIC AND DILUTED PER COMMON SHARE: Net investment income $ 0.54 $ 1.11 $ (0.57 ) (51.4 )% Net (decrease) increase in net assets resulting from operations 1.28 (0.22 ) 1.50 NM NM = Not Meaningful 64 Table of Contents Investment Income Total investment income decreased by 8.6% for the year ended March 31, 2021 as compared to the prior year. This decrease was primarily due to a decrease in dividend and success fee income, as well as a decrease in interest income. Interest income from our investments in debt securities decreased 4.8% for the year ended March 31, 2021, as compared to the prior year. During the year ended March 31, 2020, we received $2.1 million of past due interest upon the exit of our investment in Alloy Die Casting Co. (“ADC”). Generally, the level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period, multiplied by the weighted-average yield. The weighted-average principal balance of our interest-bearing investment portfolio during the year ended March 31, 2021 was $398.1 million, compared to $374.3 million during the prior year. This increase was primarily due to the origination of $93.8 million of new debt investments, $86.3 million of follow-on debt investments to existing portfolio companies, and $35.0 million of loans placed back on accrual status, partially offset by the pay-off, restructuring, or write-off of $109.2 million of debt investments and $47.9 million of loans placed on non-accrual status after March 31, 2019, and their respective impact on the weighted-average principal balance when considering the timing of new investments, pay-offs, restructurings, write-offs, and accrual status changes, as applicable. The weighted-average yield on our interest-bearing investments, excluding cash and cash equivalents and receipts recorded as other income, was 11.9% and 13.2% for the year ended March 31, 2021 and 2020, respectively. The weighted-average yield may vary from period to period, based on the current stated interest rate on interest-bearing investments. As of March 31, 2021, our loans to B+T Group Acquisition, Inc. (“B+T”), Horizon Facilities Services, Inc. (“Horizon”) and The Mountain Corporation (“The Mountain”) were on non-accrual status, with an aggregate debt cost basis of $61.1 million. As of March 31, 2020, certain of our loans B+T, The Mountain, PSI Molded, and SOG Specialty Knives & Tools, LLC (“SOG”) were on non-accrual status, with an aggregate debt cost basis of $63.5 million. Dividend and success fee income for the year ended March 31, 2021 decreased 23.5% from the prior year. During the year ended March 31, 2021, dividend and success fee income consisted of $7.1 million of dividend income and $2.4 million of success fee income. During the year ended March 31, 2020, dividend and success fee income consisted of $9.4 million of dividend income and $2.9 million of success fee income. As of March 31, 2021 and 2020, no single investment represented greater than 10% of our total investment portfolio at fair value. Expenses Total expenses, net of any non-contractual, unconditional, and irrevocable credits from the Adviser, increased 51.4% for the year ended March 31, 2021, as compared to the prior year, primarily due to an increase in the capital gains-based incentive fee, interest and dividend expense, and a decrease in credits to fees from Adviser, partially offset by a decrease in the income-based incentive fee and in other expenses. In accordance with GAAP, we recorded a capital gains-based incentive fee of $5.0 million during the year ended March 31, 2021, compared to a reversal of the capital gains-based incentive fee of $6.7 million during the year ended March 31, 2020. The capital gains-based incentive fee and any reversal is a result of the net impact of net realized gains (losses) and net unrealized appreciation (depreciation) on investments during the respective periods. The income-based incentive fee decreased during the year ended March 31, 2021, as compared to the prior year, as the decrease in pre-incentive fee net investment income more than offset the decrease in net assets, which drives the hurdle rate. 65 Table of Contents The base management fee, loan servicing fee, incentive fee, and their related non-contractual, unconditional, and irrevocable credits are computed quarterly, as described under “ Transactions with the Adviser ” in Note 4 – Related Party Transactions in the accompanying Notes to Consolidated Financial Statements and are summarized in the following table: Year Ended March 31, 2021 2020 Average total assets subject to base management fee (A) $ 605,750 $ 607,250 Multiplied by annual base management fee of 2.0% 2.0 % 2.0 % Base management fee (B) 12,115 12,145 Credits to fees from Adviser—other (B) (2,949 ) (4,436 ) Net base management fee $ 9,166 $ 7,709 Loan servicing fee (B) $ 7,082 $ 6,859 Credits to base management fee—loan servicing fee (B) (7,082 ) (6,859 ) Net loan servicing fee $ — $ — Incentive fee – income-based $ 3,746 $ 4,338 Incentive fee – capital gains-based (C) 5,032 (6,718 ) Total incentive fee (B) 8,778 (2,380 ) Credits to fees from Adviser—other (B) — — Net total incentive fee $ 8,778 $ (2,380 ) (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 applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods. (B) Reflected as a line item on our accompanying Consolidated Statement of Operations . (C) The capital gains-based incentive fees are recorded in accordance with GAAP and do not necessarily reflect amounts contractually due under the terms of the Advisory Agreement. Interest and dividend expense increased 6.5% during the year ended March 31, 2021, as compared to the prior year, due to a higher weighted-average balance outstanding on the Credit Facility, partially offset by a decrease in the effective interest rate. The weighted-average balance outstanding on the Credit Facility during the year ended March 31, 2021 was $82.6 million, as compared to $38.4 million in the prior year. The effective interest rate on the Credit Facility, excluding the impact of deferred financing costs, during the year ended March 31, 2021 was 4.3%, as compared to 9.4% in the prior year. This decrease in the effective interest rate on the Credit Facility was primarily a result of the decrease in unused commitment fee on the undrawn portion of the Credit Facility and a decrease in LIBOR. Other expenses decreased 13.9% during the year ended March 31, 2021, as compared to the prior year, primarily due to a decrease in bad debt expense and tax expense. Realized and Unrealized Gain (Loss), net of Taxes Net Realized Gain (Loss) on Investments During the year ended March 31, 2021, we recorded net realized gains on investments of $11.4 million, primarily related to a $14.3 million realized gain from the exit of Frontier, a $3.5 million realized gain from the recapitalization of Old World, and gains from previous exits, partially offset by an $8.5 million realized loss 66 Table of Contents related to the partial write-off of a debt investment in SBS Industries. During the year ended March 31, 2020, we recorded net realized gains on investments of $44.8 million, primarily related to a $50.0 million realized gain from the exit of Nth Degree, Inc. (“Nth Degree”), a $20.4 million realized gain from the exit of ADC, and a $3.2 million realized gain from the exit of Jackrabbit Inc. (“Jackrabbit”), partially offset by a $14.5 million realized loss from the exit of B-Dry, LLC (“B-Dry”), a $13.0 million realized loss from the exit of Meridian, and a $2.7 million realized loss from the exit of Tread Corporation (“Tread”). Taxes on Deemed Distribution of Long-Term Capital Gains We did not elect to retain long-term capital gains and to treat them as deemed distributions to common stockholders for the year ended March 31, 2021. For the year ended March 31, 2020, we elected to retain $38.0 million of long-term capital gains and to treat them as deemed distributions to common stockholders. We incurred $8.0 million of federal income taxes on behalf of common stockholders for the year ended March 31, 2020. In addition, we incurred Virginia state taxes related to the deemed distribution of $2.3 million for the year ended March 31, 2020. Refer to Note 9 — Distributions to Common Stockholders in the accompanying Notes to Consolidated Financial Statements for additional information. Net Realized Gain (Loss) on Other During the year ended March 31, 2021, we recorded a net realized loss on other of $0.8 million which primarily related to unamortized deferred issuance costs written off upon the redemption of our Series D Term Preferred Stock in March 2021. During the year ended March 31, 2020, there were no realized gains or losses on other. 67 Table of Contents Net Unrealized Appreciation (Depreciation) of Investments During the year ended March 31, 2021, we recorded net unrealized appreciation of investments of $13.9 million. The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the year ended March 31, 2021 were as follows: Year Ended March 31, 2021 Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized (Appreciation) Depreciation Net Gain (Loss) Pioneer Square Brands, Inc. $ — $ 26,410 $ — $ 26,410 Old World Christmas, Inc. 3,544 6,840 — 10,384 SOG Specialty Knives & Tools, LLC — 6,364 — 6,364 Educators Resource, Inc. — 5,631 — 5,631 Frontier Packaging, Inc. 14,321 2,534 (11,869 ) 4,986 Schylling, Inc. — 3,604 — 3,604 Head Country, Inc. — 2,974 — 2,974 Ginsey Home Solutions, Inc. — 2,131 — 2,131 Diligent Delivery Systems — 1,877 — 1,877 ImageWorks Display and Marketing Group, Inc. — 1,554 — 1,554 Horizon Facilities Services, Inc. — 963 — 963 Cambridge Sound Management, Inc. 739 — — 739 Alloy Die Casting Co. 576 — — 576 Mason West, LLC — (1,432 ) — (1,432 ) Galaxy Tool Holding Corporation — (1,528 ) — (1,528 ) PSI Molded Plastics, Inc. — (1,752 ) — (1,752 ) The Maids International, LLC — (1,779 ) — (1,779 ) The Mountain Corporation — (1,986 ) — (1,986 ) Nth Degree Investment Group, LLC 113 (3,649 ) — (3,536 ) D.P.M.S., Inc. — (5,045 ) — (5,045 ) SBS Industries Holdings, Inc. (8,470 ) 2,463 — (6,007 ) Brunswick Bowling Products, Inc. — (20,542 ) — (20,542 ) Other, net (<$1.0 million, net ) 551 172 (11 ) 712 Total $ 11,374 $ 25,804 $ (11,880 ) $ 25,298 The primary drivers of net unrealized appreciation of investments of $13.9 million for the year ended March 31, 2021 were increased performance of certain of our portfolio companies and an increase in comparable multiples used to estimate the fair value of a majority of our portfolio companies, partially offset by the reversal of previously recorded unrealized appreciation upon the exit of one of our investments and a decrease in performance of certain of our other portfolio companies. The decrease in the performance of a limited number of our portfolio companies was driven by the continued impact COVID-19 has had or is expected to have on those portfolio companies and the markets in which they operate, including government restrictions on the portfolio companies’ ability to operate under historical conditions, shutdowns, demand for products, and general economic outlook. 68 Table of Contents During the year ended March 31, 2020, we recorded net unrealized depreciation of investments of $78.1 million. The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the year ended March 31, 2020 were as follows: Year Ended March 31, 2020 Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized (Appreciation) Depreciation Net Gain (Loss) Alloy Die Casting Co. $ 20,355 $ 8,823 $ (12,635 ) $ 16,543 Galaxy Tool Holding Corporation — 12,849 — 12,849 Nth Degree Investment Group, LLC 49,975 1,978 (40,847 ) 11,106 Counsel Press, Inc. — 3,874 — 3,874 D.P.M.S., Inc. — 3,681 — 3,681 Old World Christmas, Inc. — 3,679 — 3,679 Tread Corporation (2,726 ) — 3,380 654 Drew Foam Companies, Inc. 565 — — 565 B-Dry, LLC (14,452 ) — 14,699 247 The Maids International, LLC — (1,301 ) — (1,301 ) Jackrabbit, Inc. 3,198 — (4,547 ) (1,349 ) B+T Group Acquisition, Inc. — (1,534 ) — (1,534 ) Frontier Packaging, Inc. (1,649 ) — (1,649 ) PSI Molded Plastics, Inc. — (1,904 ) — (1,904 ) Diligent Delivery Systems — (2,192 ) — (2,192 ) The Mountain Corporation — (2,597 ) — (2,597 ) Pioneer Square Brands, Inc. — (3,200 ) — (3,200 ) SOG Specialty Knives & Tools, LLC — (3,449 ) — (3,449 ) Brunswick Bowling Products, Inc. — (3,900 ) — (3,900 ) Educators Resource, Inc. — (4,460 ) — (4,460 ) Edge Adhesives Holdings, Inc. — (4,741 ) — (4,741 ) Meridian Rack & Pinion, Inc. (13,040 ) (5,796 ) 13,041 (5,795 ) Horizon Facilities Services, Inc. — (7,381 ) — (7,381 ) SBS Industries Holdings, Inc. — (8,948 ) — (8,948 ) Ginsey Home Solutions, Inc. — (9,426 ) — (9,426 ) J.R. Hobbs Co.—Atlanta, LLC — (22,822 ) — (22,822 ) Other, net (<$1.0 million, net ) 928 (684 ) (130 ) 114 Total $ 44,803 $ (51,100 ) $ (27,039 ) $ (33,336 ) The primary drivers of net unrealized depreciation of investments of $78.1 million for the year ended March 31, 2020 were decreased performance of certain of our portfolio companies, a decrease in comparable multiples used to estimate the fair value of a majority of our portfolio companies, and the reversal of previously recorded unrealized appreciation of certain investments upon their exit, partially offset by the reversal of previously recorded unrealized depreciation upon the exit of certain of our investments and an increase in performance of certain of our other portfolio companies. In part, the decrease in multiples used to estimate the fair value, and to a lesser extent the performance of certain of our portfolio companies was driven by the impact COVID-19 has had or is expected to have on our portfolio companies and the markets in which they operate, including government restrictions on the portfolio companies’ ability to operate under historical conditions, shutdowns, demand for products, and general economic outlook. Across our entire investment portfolio, we recorded $14.5 million of net unrealized appreciation on our equity investments and $0.6 million of net unrealized depreciation on our debt investments for the year ended March 31, 2021. At March 31, 2021, the fair value of our investment portfolio was less than our cost basis by $29.7 million, 69 Table of Contents as compared to March 31, 2020, when the fair value of our investment portfolio was less than our cost basis by $43.7 million, representing net unrealized appreciation of $13.9 million for the year ended March 31, 2021. Our entire portfolio was fair valued at 95.5% of cost as of March 31, 2021. The comparison of the fiscal year ended March 31, 2020 to the fiscal year ended March 31, 2019 can be found in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020 located within Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, which is incorporated by reference herein. LIQUIDITY AND CAPITAL RESOURCES Operating Activities Cash inflows from operating activities are primarily generated from cash collections of interest and other income from our portfolio companies, as well as from cash proceeds received from repayments of debt investments and from sales of equity investments. These cash collections are principally used to fund new investments, pay distributions to our common stockholders, make interest payments on the Credit Facility and the 2026 Notes, make dividend payments on our mandatorily redeemable preferred stock, pay management and incentive fees to the Adviser, and for other operating expenses. We may also use cash inflows from operating activities to repay outstanding borrowings under the Credit Facility. Net cash used in operating activities for the year ended March 31, 2021 was $29.7 million, as compared to net cash provided by operating activities of $35.3 million for the year ended March 31, 2020. This change was primarily due to decreases in principal repayments of investments and net proceeds from the sale of investments and a decline in Other liabilities, principally due to $13.3 million of tax payments made related to prior year deemed distributions, partially offset by a decline in purchases of investments, and an increase in Fees due to Adviser related to the prior year payment of $8.1 million of capital gains-based incentive fees that were contractually due period over period. Purchases of investments totaled $95.3 million during the year ended March 31, 2021, compared to $145.4 million during the year ended March 31, 2020. Repayments and net proceeds from the sale of investments totaled $51.8 million during the year ended March 31, 2021, compared to $169.9 million during the year ended March 31, 2020. Net cash provided by operating activities for the year ended March 31, 2020 was $35.3 million, as compared to net cash provided by operating activities of $93.6 million for the year ended March 31, 2019. This change was primarily due to higher purchases of investments, a decrease in Fees due to Adviser related to the payment of $8.1 million of capital gains-based incentive fees that were contractually due, and a decline in Other liabilities due to a $10.5 million federal tax payment made related to the March 31, 2019 deemed distribution, partially offset by increased repayments and net proceeds from the sale of investments period over period. Purchases of investments totaled $145.4 million during the year ended March 31, 2020, compared to $91.9 million during the year ended March 31, 2019. Repayments and net proceeds from the sale of investments totaled $169.9 million during the year ended March 31, 2020, compared to $154.7 million during the year ended March 31, 2019. 70 Table of Contents As of March 31, 2021, we had equity investments in, or loans to, 28 companies with an aggregate cost basis of $663.6 million. As of March 31, 2020, we had equity investments in, or loans to, 28 companies with an aggregate cost basis of $609.6 million. The following table summarizes our total portfolio investment activity for the years ended March 31, 2021 and 2020: Years Ended March 31, 2021 2020 Beginning investment portfolio, at fair value $ 565,924 $ 624,172 New investments 46,902 79,080 Disbursements to existing portfolio companies 48,370 66,369 Unscheduled principal repayments (20,734 ) (79,997 ) Net proceeds from sales of investments (29,689 ) (89,184 ) Net realized gain on investments 9,114 43,605 Net unrealized appreciation (depreciation) of investments 25,805 (51,100 ) Reversal of net unrealized appreciation of investments (11,881 ) (27,039 ) Amortization of premiums, discounts, and acquisition costs, net 18 18 Ending investment portfolio, at fair value $ 633,829 $ 565,924 The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of March 31, 2021: Amount For the fiscal years ending March 31: 2022 $ 38,670 2023 119,200 2024 118,350 2025 165,278 2026 52,250 Thereafter — Total contractual repayments $ 493,748 Adjustments to cost basis of debt investments (30 ) Investments in equity securities 169,845 Total cost basis of investments held as of March 31, 2021: $ 663,563 Financing Activities Net cash provided by financing activities for the year ended March 31, 2021 was $28.1 million, which was primarily a result of $127.9 million in gross proceeds from the issuance of our 2026 Notes, $19.3 million of gross proceeds from the issuance of mandatorily redeemable preferred stock under the Series E ATM program, and $1.8 million of gross proceeds from the issuance of common stock under the Common Stock ATM Program, partially offset by the redemption of our Series D Term Preferred Stock of $57.5 million, $30.9 million in distributions to common stockholders, $26.8 million of net repayments on our Credit Facility, and $5.7 million of deferred financing and offering costs. Net cash used in financing activities for the year ended March 31, 2020 was $34.9 million, which was primarily a result of $33.9 million in distributions to common stockholders and $3.8 million of net repayments on our Credit Facility, partially offset by $3.1 million of net proceeds from the issuance of common stock under the Common Stock ATM Program. 71 Table of Contents Net cash used in financing activities for the year ended March 31, 2019 was $94.0 million, which was primarily a result of the redemption of our Series B Term Preferred Stock and Series C Term Preferred Stock of $81.7 million, $54.0 million of net repayments on the Credit Facility, and $30.5 million in distributions to common stockholders, partially offset by $72.1 million of net proceeds from the issuance of our Series E Term Preferred Stock and $1.8 million of net proceeds from the issuance of common stock under the Common Stock ATM Program. Distributions and Dividends 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, among other requirements, to distribute to our stockholders on an annual basis at least 90% of our Investment Company Taxable Income, determined without regard to the dividends paid deduction. Additionally, the Credit Facility generally restricts the amount of distributions to stockholders that we can pay out to be no greater than the sum of certain amounts, including our net investment income, plus net capital gains, plus amounts elected by the Company to be considered as having been paid during the prior fiscal year in accordance with Section 855(a) of the Code. In accordance with these requirements, our Board of Directors declared, and we paid, monthly cash distributions of $0.07 per common share and a supplemental distribution of $0.09 per common share in June 2020. See also “ Recent Developments—Distributions and Dividends ” for a discussion of cash distributions to common stockholders declared by our Board of Directors in April 2021. For each of the fiscal years ended March 31, 2021 and 2020, Investment Company Taxable Income exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $16.1 million and $17.9 million, respectively, of the first distributions paid subsequent to fiscal year-end as having been paid in the prior year. In addition, for each of the fiscal years ended March 31, 2021 and 2020, net capital gains exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $8.5 million and $5.3 million, respectively, of the first distributions paid subsequent to fiscal year-end as having been paid in the prior year. For the year ended March 31, 2021, we recorded $2.0 million of net adjustments for estimated permanent book-tax differences to reflect tax character, which decreased Capital in excess of par value and Accumulated net realized gain in excess of distributions and increased Underdistributed net investment income. For the year ended March 31, 2020, we recorded $6.5 million of net adjustments for estimated permanent book-tax differences to reflect tax character, which decreased Capital in excess of par value and increased Underdistributed net investment income and Accumulated net realized gain in excess of distributions. Preferred Stock Dividends Our Board of Directors declared and we paid monthly cash dividends of (i) $0.13020833 per share to holders of our Series D Term Preferred Stock per month for April 2020 through February 2021 and $0.008680555 per share of our Series D Term Preferred Stock for the period from March 1, 2021 up to, but excluding, the redemption date of March 3, 2021, and (ii) $0.1328125 per share to holders of our Series E Term Preferred Stock for each of the twelve months from April 2020 through March 2021. In accordance with GAAP, we treat these monthly dividends as an operating expense. See also “ Recent Developments—Distributions and Dividends ” for a discussion of dividends to preferred stockholders declared by our Board of Directors in April 2021. 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 72 Table of Contents 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. Any distributions reinvested under the plan will be taxable to a common stockholder to the same extent, and with the same character, as if the common stockholder had received the distribution in cash. The common stockholder generally 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. The additional common 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. The Computershare dividend reinvestment plan is not open to holders of our preferred stock. Registration Statement On June 14, 2019, we filed a registration statement on Form N-2 (File No. 333-232124), which the SEC declared effective on July 24, 2019. The 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, preferred stock, or debt securities, including through concurrent, separate offerings of such securities. As of March 31, 2021, we had the ability to issue up to $147.5 million in securities under the registration statement. Equity Common Stock In December 2019, we entered into equity distribution agreements with Wedbush Securities, Inc., Cantor Fitzgerald & Co., and Ladenburg Thalmann & Co., Inc. (each, a “Common Stock ATM Sales Agent”), under which we have the ability to issue and sell shares of our common stock, from time to time, through the Common Stock Sales Agents, up to an aggregate offering price of $35.0 million in the Common Stock ATM Program. As of March 31, 2021, we had remaining capacity to sell up to $30.1 million of common stock under the Common Stock ATM Program. During the year ended March 31, 2021, we sold 155,560 shares of our common stock under the Common Stock ATM Program at a weighted-average gross price of $11.39 per share and raised approximately $1.8 million of gross proceeds. The weighted-average net price per share, after deducting commissions and offering costs borne by us, was $11.17 and resulted in total net proceeds of approximately $1.7 million. These sales were above our then current estimated NAV per share. During the year ended March 31, 2020, we sold 227,004 shares of our common stock under the Common Stock ATM Program at a weighted-average gross price of $13.80 per share and raised approximately $3.1 million of gross proceeds. The weighted-average net price per share, after deducting commissions and offering costs borne by us, was $13.55 and resulted in total net proceeds of approximately $3.1 million. These sales were above our then current estimated NAV per share. During the year ended March 31, 2019, we sold 168,824 shares of our common stock under the Common Stock ATM Program at a weighted-average gross price of $11.09 per share and raised approximately $1.9 million of gross proceeds. The weighted-average net price per share, after deducting commissions and offering costs borne by us, was $10.87 and resulted in total net proceeds of approximately $1.8 million. Certain of these sales were below our then-current estimated NAV per share during the sales period, with a discount of $0.002 per share, when comparing the sales price per share, after deducting commissions, to the then-current estimated NAV per share; however, the net dilutive effect (after commissions and offering costs borne by us) of these sales was $0.00 per common share as a result of the small number of shares sold at a slight discount to NAV per share and resulting rounding. In aggregate, the sales during the year ended March 31, 2019 were above our then-current estimated NAV per share. 73 Table of Contents 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. When our common stock is trading at a price below NAV per share, the 1940 Act places regulatory constraints on our ability to obtain additional capital by issuing common stock. Generally, the 1940 Act provides that we may not issue and sell our common stock at a price below our NAV per common share, other than to our then existing common stockholders pursuant to a rights offering, without first obtaining approval from our stockholders and our independent directors and meeting other stated requirements. On March 31, 2021, the closing market price of our common stock was $12.23 per share, representing a 6.2% premium to our NAV per share of $11.52 as of March 31, 2021. At our 2020 Annual Meeting of Stockholders held on August 20, 2020, our stockholders approved a proposal authorizing us with the subsequent approval of our Board of Directors, to issue and sell shares of our common stock at a price below our then current NAV per common share for a period of one year from the date of such approval, provided that the number of shares issued and sold pursuant to such authority does not exceed 25.0% of our then-outstanding common stock immediately prior to each such sale. At our 2021 Annual Meeting of Stockholders, scheduled to take place in August 2021, we intend to ask our stockholders to vote in favor of a similar proposal so that it may be in effect for another year. Term Preferred Stock In August 2018, we completed a public offering of 2,990,000 shares of our Series E Term Preferred Stock at a public offering price of $25.00 per share. Gross proceeds totaled $74.8 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were $72.1 million. Total underwriting discounts and offering costs related to this offering were $2.7 million, which have been recorded as discounts to the liquidation value on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized over the period ending August 31, 2025, the mandatory redemption date. Our Series E Term Preferred Stock is not convertible into our common stock or any other security and provides for a fixed dividend equal to 6.375% per year, payable monthly (which equates to $6.0 million per year). We are required to redeem all outstanding shares of our Series E Term Preferred Stock on August 31, 2025, for cash at a redemption price equal to $25.00 per share, plus an amount equal to accumulated but unpaid dividends, if any, to, but excluding, the date of redemption. In addition, two other potential mandatory redemption triggers are as follows: (1) upon the occurrence of certain events that would constitute a change in control of us, we would be required to redeem all of our outstanding Series E Term Preferred Stock, and (2) if we fail to maintain asset coverage as required by Sections 18 and 61 of the 1940 Act (which is currently 150%) and are unable to correct such failure within a specific amount of time, we are required to redeem a portion of our outstanding Series E Term Preferred Stock or otherwise cure the asset coverage redemption trigger (we may also redeem additional securities to cause asset coverage to be up to 200%). We may also voluntarily redeem all or a portion of our Series E Term Preferred Stock at our sole option at the redemption price at any time. In August 2018, we used the proceeds from the issuance of our Series E Term Preferred Stock, along with borrowings under the Credit Facility, to voluntarily redeem all outstanding shares of our Series B Term Preferred Stock and Series C Term Preferred Stock, each of which had a liquidation preference of $25.00 per share. In connection with the voluntary redemption of our Series B Term Preferred Stock and our Series C Term Preferred Stock, we incurred a loss on extinguishment of debt of $1.7 million, which was recorded in Realized loss on other in our accompanying Consolidated Statements of Operations and which was primarily comprised of unamortized deferred issuance costs at the time of redemption. In May 2020, we entered into sales agreements with Wedbush Securities, Inc. and Virtu Americas LLC (each a “Series E ATM Sales Agent”), under which we have the ability to issue and sell shares of our Series E Term Preferred Stock, from time to time, through the Series E ATM Sales Agents, up to $50.0 million aggregate liquidation preference in the Series E ATM Program. As of March 31, 2021, we had remaining capacity to sell up to $30.4 million of our Series E Term Preferred Stock under the Series E ATM Program. 74 Table of Contents During the year ended March 31, 2021, we sold 784,853 shares of our Series E Term Preferred Stock under the Series E ATM Program with an aggregate liquidation preference of $19.6 million. The weighted-average gross price per share net of discounts was $24.56 and resulted in gross proceeds of approximately $19.3 million. After deducting commissions and offering costs borne by us, net proceeds totaled approximately $19.1 million. In March 2021, we used a portion of the proceeds from the issuance of our 2026 Notes, to voluntarily redeem all outstanding shares of our Series D Term Preferred Stock, which had a liquidation preference of $25.00 per share. In connection with the voluntary redemption, we incurred a loss on extinguishment of debt of $0.8 million, which was recorded in Realized loss on other in our accompanying Consolidated Statements of Operations and which was primarily comprised of unamortized deferred issuance costs at the time of redemption. Our mandatorily redeemable preferred stock has a preference over our common stock with respect to dividends, whereby no distributions are payable on our common stock unless the stated dividends, including any accrued and unpaid dividends, on the mandatorily redeemable preferred stock have been paid in full. The Series E Term Preferred Stock are considered liabilities in accordance with GAAP and, as such, affect our asset coverage, exposing us to additional leverage risks. The asset coverage on our senior securities that are stock (our Series E Term Preferred Stock) as of March 31, 2021 was 248.6%, calculated pursuant to Sections 18 and 61 of the 1940 Act. Revolving Line of Credit On March 8, 2021, we, through our wholly-owned subsidiary, Business Investment, entered into Amendment No. 6 to the Fifth Amended and Restated Credit Agreement, originally entered into on April 30, 2013, with KeyBank National Association (“KeyBank”) as administrative agent, lead arranger, managing agent and lender, the Adviser, as servicer, and certain other lenders party thereto. The revolving period was extended to February 29, 2024, and if not renewed or extended by such date, all principal and interest will be due and payable on February 28, 2026 (two years after the revolving period end date). As of March 31, 2021, the Credit Facility provided two one-year extension options that may be exercised on or before the first and second anniversary of March 8, 2021, subject to approval by all lenders. Additionally, as part of this amendment, the COVID-19 Relief Period (described below) was extended to September 30, 2021. We incurred fees of approximately $1.0 million in connection with this amendment. On August 10, 2020, we, through Business Investment, entered into Amendment No. 5 to the Credit Facility. Among other things, Amendment No. 5 amended the Credit Facility to (i) add LIBOR replacement language; (ii) implement a 0.5% LIBOR floor; (iii) reduce the facility size from $200.0 million to $180.0 million, which may be expanded to $300.0 million through additional commitments; and (iv) provide certain other changes to existing terms and covenants. In addition, Amendment No. 5 provided for certain temporary changes during the COVID-19 Relief Period (August 10, 2020 until March 31, 2021, which may be extended, subject to certain conditions) including: (i) amending the definition of “Effective Advance Rate,” provided that during such period the overall effective advance rate does not exceed 55%; and (ii) removing or changing certain “Excess Concentration Limits” (as defined in the Credit Facility). Advances under the Credit Facility generally bear interest at 30-day LIBOR, subject to a floor of 0.5%, plus 2.85% per annum until February 29, 2024, with the margin then increasing to 3.10% for the period from February 29, 2024 to February 28, 2025, and increasing further to 3.35% thereafter. The Credit Facility has an unused commitment fee on the daily unused commitment amount of 0.50% per annum if the average unused commitment amount for the period is less than or equal to 50% of the total commitment amount, 0.75% per annum if the average unused commitment amount for the period is greater than 50% but less than or equal to 65% of the total commitment amount, and 1.00% per annum if the average unused commitment amount for the period is greater than 65% of the total commitment amount. 75 Table of Contents Interest is payable monthly during the term of the Credit Facility. Available borrowings are subject to various constraints and applicable advance rates, which are generally based on the size, characteristics, and quality of the collateral pledged by Business Investment. The Credit Facility also requires that any interest and 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 a month. Among other things, the Credit Facility contains covenants that require Business Investment to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions) and restrict certain material changes to our credit and collection policies without the lenders’ consent. The Credit Facility also generally seeks to restrict distributions to stockholders to the sum of (i) our net investment income, (ii) net capital gains, and (iii) amounts deemed by the Company to be considered as having been paid during the prior fiscal year in accordance with Section 855(a) of the Code. Loans eligible to be pledged as collateral are subject to certain limitations, including, among other things, restrictions on geographic concentrations, industry concentrations, loan size, payment frequency and status, average life, portfolio company leverage, and lien property. The Credit Facility also requires Business Investment to comply with other financial and operational covenants, which obligate Business Investment to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of obligors required in the borrowing base. Additionally, the Credit Facility contains a performance guaranty that requires the Company to maintain (i) a minimum net worth (defined in the Credit Facility to include our mandatory redeemable term preferred stock) of the greater of $210.0 million or $210.0 million plus 50% of all equity and subordinated debt raised minus 50% of any equity or subordinated debt redeemed or retired after November 16, 2016, which equated to $266.2 million as of March 31, 2021, (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 March 31, 2021, and as defined in the performance guaranty of the Credit Facility, we had a net worth of $597.1 million, asset coverage on our senior securities representing indebtedness of 398.0%, calculated in accordance with the requirements of Sections 18 and 61 of the 1940 Act, and an active status as a BDC and RIC. As of March 31, 2021, we had availability, after adjustments for various constraints based on collateral quality, of $157.6 million under the Credit Facility and were in compliance with all covenants under the Credit Facility. Notes Payable In March 2021, we completed a public offering of the 2026 Notes with an aggregate principal amount of $127.9 million, which resulted in net proceeds of approximately $123.8 million after deducting underwriting discounts, commissions and offering costs borne by us. The 2026 Notes are traded under the ticker symbol “GAINN” on Nasdaq. The 2026 Notes will mature on May 1, 2026 and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after May 1, 2023. The 2026 Notes bear interest at a rate of 5.00% per year (which equates to $6.4 million per year), payable quarterly in arrears. The indenture relating to 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 2026 Notes, as applicable, and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements. The 2026 Notes are recorded at the aggregate principal amount, less underwriting discounts, commissions, and offering costs, on our accompanying Consolidated Statements of Assets and Liabilities . Total underwriting discounts, commissions, and offering costs related to this offering were $4.1 million, which have been recorded 76 Table of Contents as discounts to the aggregate principal amount on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized over the period ending May 1, 2026, the maturity date. OFF-BALANCE SHEET ARRANGEMENTS Unlike PIK income, we generally do not recognize success fees as income until payment has been received. Due to the contingent nature of success fees, there are no guarantees that we will be able to collect any or all of these success fees or know the timing of any such collections. As a result, as of March 31, 2021 and 2020, we had unrecognized, contractual off-balance sheet success fee receivables of $46.2 million and $37.6 million (or approximately $1.39 and $1.14 per common share), respectively, on our debt investments. Consistent with GAAP, we have not recognized success fee receivables and related income in our accompanying Consolidated Financial Statements until earned. CONTRACTUAL OBLIGATIONS We have line of credit and delayed draw term loan commitments to certain of our portfolio companies that have not been fully drawn. Since these line of credit and delayed draw term loan commitments have expiration dates and we expect many will never be fully drawn, the total line of credit and delayed draw term loan commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of the combined unused line of credit and delayed draw term loan commitments as of March 31, 2021 to be immaterial. As of March 31, 2021, we have also extended a guaranty on behalf of one of our portfolio companies, CCE, whereby we have guaranteed $1.0 million of CCE’s obligations. As of March 31, 2021, we have not been required to make payments on this or any previous guaranties, and we consider the credit risks to be remote and the fair value of this guaranty to be immaterial. The following table shows our contractual obligations as of March 31, 2021, at cost/liquidation preference: Payments Due by Period Contractual Obligations (A) Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Credit Facility (B) $ 22,400 $ — $ — $ 22,400 $ — Notes payable 127,938 — — — 127,938 Mandatorily redeemable preferred stock 94,371 — — 94,371 — Secured borrowing 5,096 — — 5,096 — Interest payments on obligations (C) 72,049 15,133 30,274 26,109 533 Total $ 321,854 $ 15,133 $ 30,274 $ 147,976 $ 128,471 (A) Excludes unused line of credit and delayed draw term loan commitments and guaranties to our portfolio companies in the aggregate principal amount of $4.0 million. (B) Principal balance of borrowings outstanding under the Credit Facility, based on the maturity date following the current contractual revolving period end date. (C) Includes interest payments due on the Credit Facility, 2026 Notes, and secured borrowing and dividend obligations on each series of our mandatorily redeemable preferred stock, as applicable. The amount of interest payments calculated for purposes of this table was based upon rates and outstanding balances as of March 31, 2021. Dividend obligations on our mandatorily redeemable preferred stock assume quarterly declarations and monthly dividend payments through the date of mandatory redemption of each series. 77 Table of Contents Critical Accounting Policies 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 Consolidated Financial Statements included elsewhere in this Annual Report. Additionally, refer to Note 3 — Investments in the 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 Accounting Policies in the 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, are 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 equity securities. For loans that have been rated by a 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 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 Lower Middle Market companies do not exceed the grade of BBB on an NRSRO scale, so there would be no debt securities in the Lower 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 loans in our portfolio as of March 31, 2021 and 2020: As of March 31, Rating 2021 2020 Highest 9.0 9.0 Average 6.2 6.5 Weighted-average 6.6 6.9 Lowest 4.0 4.0 78 Table of Contents Tax Status We intend to continue to maintain our qualification as a RIC under Subchapter M of the Code for U.S. federal income tax purposes. As a RIC, we generally are not subject to U.S. federal income tax on the portion of our taxable income and gains distributed to our stockholders. To maintain our qualification as a RIC, we must maintain our status as a BDC and meet certain source-of-income and asset diversification requirements. In addition, to qualify to be taxed as a RIC, we must distribute to stockholders at least 90% of our Investment Company Taxable Income, determined without regard to the dividends paid deduction. Our policy generally is to make distributions to our stockholders in an amount up to 100% of Investment Company Taxable Income. We may retain some or all of our net long-term capital gains, if any, and designate them as deemed distributions, or distribute such gains to stockholders in cash. See “Business — Material U.S. Federal Income Tax Considerations” and “ — Liquidity and Capital Resources — Distributions and Dividends to Stockholders . ” In an effort to limit federal excise taxes, we have to distribute to stockholders, during each calendar year, an amount close to the sum of: (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our net capital gains (both long-term and short-term), if any, for the one-year period ending on October 31 of the calendar year, and (3) 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. Under the RIC Modernization Act, we are permitted to carryforward any capital losses that we may incur for an unlimited period, and such capital loss carryforwards will retain their character as either short-term or long-term capital losses. Our capital loss carryforward balance was $0 as of both March 31, 2021 and 2020. Recent Accounting Pronouncements Refer to Note 2 — Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements included elsewhere in this Annual Report for a description of recent accounting pronouncements.