GLADSTONE INVESTMENT CORPORATIONDE 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All statements contained herein, other than historical facts, may constitute “forward-looking statements.” These statements may relate to, among other things, our future operating results, our business prospects and the prospects of our portfolio companies, actual and potential conflicts of interest with Gladstone Management Corporation (the “Adviser”) and its affiliates, the use of borrowed money to finance our investments, the adequacy of our financing sources and working capital, and our ability to co-invest, among other factors. In some cases, you can identify forward-looking statements by terminology such as “estimate,” “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “project,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative or variations of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include: (1) changes in the economy and the capital markets; (2) risks associated with negotiation and consummation of pending and future transactions; (3) the loss of one or more of our executive officers, in particular David Gladstone, David Dullum, or Terry Lee Brubaker; (4) changes in our investment objectives and strategy; (5) availability, terms (including the possibility of interest rate volatility) and deployment of capital; (6) changes in our industry, interest rates, exchange rates, regulation, or the general economy, including inflation; (7) our business prospects and the prospects of our portfolio companies; (8) the degree and nature of our competition; (9) changes in governmental regulation, tax rates and similar matters; (10) our ability to exit investments in a timely manner; (11) our ability to maintain our qualification as a regulated investment company (“RIC”) and as a business development company (“BDC”); (12) the impact of COVID-19 generally and on the economy, the capital markets and our portfolio companies, including the measures taken by governmental authorities to address it, which may precipitate or exacerbate other risks and/or uncertainties; and (13) those factors described in Item 1A. “Risk Factors” herein and the “Risk Factors” sections of our Annual Report on Form 10-K for the fiscal year ended March 31, 2022, filed with the U.S. Securities and Exchange Commission (“SEC”) on May 11, 2022 (the “Annual Report”). We caution readers not to place undue reliance on any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements and future results could differ materially from historical performance. We have based forward-looking statements on information available to us on the date of this Quarterly Report on Form 10-Q (the “Quarterly Report”). Except as required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC, including subsequent annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements contained in this Quarterly Report are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended. In this Quarterly Report, the “Company,” “we,” “us,” and “our” refer to Gladstone Investment Corporation and its wholly-owned subsidiaries unless the context otherwise indicates. Dollar amounts, except per share amounts, are in thousands, unless otherwise indicated. 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 Quarterly Report and in our 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. 40 Table of Contents 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 Investment Company Act of 1940, as amended (the “1940 Act”). For U.S. federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended (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 United States (“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 our 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 $70 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 investments and 25% in equity investments, at cost. As of June 30, 2022, our investment portfolio was comprised of 72.9% in debt investments and 27.1% in equity investments, at cost. We focus on investing in lower middle market private businesses (which we generally define as companies with annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $3 million to $20 million) (“Lower Middle Market”) 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 seek funds for management buyouts and/or growth capital to finance acquisitions, 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. In July 2012, the SEC granted us an exemptive order (the “Co-Investment Order”) that expanded our ability to co-invest, under certain circumstances, with certain of our affiliates, including Gladstone Capital and any future BDC or closed-end management investment company that is advised (or sub-advised if it controls the fund) by the Adviser, or any combination of the foregoing, subject to the conditions in the Co-Investment Order. We believe the Co-Investment Order has enhanced and will continue to enhance our ability to further our investment objectives and strategies. If we are participating in an investment with one or more co-investors, whether or not an affiliate of ours, our investment is likely to be smaller than if we were investing alone. We are externally managed by the Adviser, an investment adviser registered with the SEC and an affiliate of ours, pursuant to an investment advisory and management agreement (the “Advisory Agreement”). The Adviser manages our investment activities. We have also entered into an administration agreement with Gladstone Administration, LLC, an affiliate of ours and the Adviser, whereby we pay separately for administrative services. Our shares of common stock, our 5.00% Notes due 2026 (“2026 Notes”), and our 4.875% Notes due 2028 (“2028 Notes”) are traded on the Nasdaq Global Select Market (“Nasdaq”) under the trading symbols “GAIN,” “GAINN,” and “GAINZ,” respectively. 41 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 three months ended June 30, 2022, we invested in one new portfolio company and exited one portfolio company. From our initial public offering in June 2005 through June 30, 2022, we invested in 56 companies, excluding investments in syndicated loans, for a total of approximately $1.5 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 paid-in-kind (“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 June 30, 2022, we had unrecognized, contractual success fees of $49.0 million, or $1.47 per common share. Consistent with accounting principles generally accepted in the U.S. (“GAAP”), we have not recognized success fee receivables and related income in our accompanying Consolidated Financial Statements until earned. From inception through June 30, 2022, we completed sales of 28 portfolio companies that we acquired under our buyout strategy (which excludes investments in syndicated loans). In the aggregate, these sales have generated $267.3 million in net realized gains and $39.4 million in other income upon exit, for a total increase to our net assets of $306.6 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 28 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 87.5% from March 2011 through June 30, 2022, and allowed us to declare and pay 16 supplemental distributions to common stockholders through June 30, 2022. Capital Raising Efforts We have been able to meet our capital needs through extensions of and increases to the Fifth Amended and Restated Credit Agreement dated April 30, 2013, as amended from time to time (the “Credit Facility”), and by accessing the capital markets in the form of public offerings of unsecured 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, 2022, we issued our 2028 Notes for gross proceeds of $134.6 million. Refer to “ Liquidity and Capital Resources — Revolving Line of Credit ” for further discussion of the Credit Facility. Although we have been able to access the capital markets historically, market conditions, including the impact of COVID-19, inflation, and rising interest rates, 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 June 30, 2022, the closing market price of our common stock was $14.08 per share, representing a 4.8% premium to our net asset value (“NAV”) of $13.44 per share as of June 30, 2022. 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. 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 previously outstanding series of term preferred stock). 42 Table of Contents 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 June 30, 2022, our asset coverage ratio on our senior securities representing indebtedness was 261.9%. Investment Highlights Investment Activity During the three months ended June 30, 2022, the following significant transactions occurred: • In May 2022, we invested an additional $6.4 million in the form of secured first lien debt in Nocturne Villa Rentals, Inc. ("Nocturne") to fund an add-on acquisition. • In June 2022, we sold our investment in Bassett Creek Services, Inc. ("Bassett Creek"), which resulted in success fee income of $3.0 million and a realized gain on preferred equity of $4.7 million. In connection with the sale, we received net cash proceeds of $57.6 million, including the repayment of our debt investment of $48.0 million at par. • In June 2022, we invested $21.0 million in a new portfolio company, Dema/Mai Holdings, Inc. (“Dema/Mai”), in the form of preferred equity to acquire Mai Mechanical, LLC, a leading provider of plumbing and mechanical services focused on multi-family residential construction headquartered in Denver, Colorado, from J.R. Hobbs Co. - Atlanta, LLC ("J.R. Hobbs"), an existing portfolio company. Subsequent to June 30, 2022, in July 2022, we invested an additional $39.1 million in the form of secured first lien debt in Dema/Mai to fund an add-on acquisition of Dema Plumbing, a plumbing and mechanical systems installation and service provider to single-family residential homebuilders. Refer to Note 13 – Subsequent Events in the accompanying Notes to Consolidated Financial Statements for further discussion of significant investment activity that occurred subsequent to June 30, 2022. The following significant investment activity occurred subsequent to June 30, 2022. Also refer to Note 13 – Subsequent Events in the accompanying Notes to Consolidated Financial Statements . • In July 2022, we recapitalized our investment in Horizon Facilities Services, Inc. ("Horizon") and invested an additional $30.0 million in the form of secured first lien debt. In connection with this investment, we received equity proceeds of $12.3 million, which were recognized as a $10.1 million return of preferred equity cost basis and a realized gain of $2.2 million, as well as dividend income of $3.1 million and success fee income of $1.7 million. Recent Developments Distributions and Dividends In July 2022, our Board of Directors declared the following monthly cash distributions to common stockholders: Record Date Payment Date Distribution per Common Share July 22, 2022 July 29, 2022 $ 0.075 August 23, 2022 August 31, 2022 0.075 September 22, 2022 September 30, 2022 0.075 Total for the Quarter: $ 0.225 43 Table of Contents 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 London Interbank Offered Rate (“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, the Secured Overnight Financing 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 have amended all outstanding 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 exist. 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 have demonstrated their ability to respond effectively and efficiently to the challenges posed by COVID-19, including its variants, related orders imposed by state and local governments, including paused or reversed reopening orders, and operating challenges, including but not limited to, labor shortages, supply chain delays and increased material costs. We believe we have sufficient levels of liquidity to support our existing portfolio companies, as necessary, and continue our buyout strategy by deploying capital in new investment opportunities. Impact of Inflation We believe the effects of inflation, if any, on our historical results of operations and financial condition have been immaterial. During the three months ended June 30, 2022, general inflationary pressures and certain commodity price volatility have impacted our portfolio companies to varying degrees; however, the broad based impact of these pricing changes have largely been mitigated by price adjustments without adverse sales implications, and thus, have not materially impacted our portfolio companies’ ability to service their indebtedness, including our loans. Notwithstanding the results to date, we expect that the cumulative effect of these inflationary pressures may impact the profit margins or sales of certain portfolio companies and their ability to service their debts. We continue to monitor the current inflationary environment to anticipate any impact on our portfolio companies, including their availability to pay interest on our loans. We cannot assure you that our results of operations and financial condition or that of our portfolio companies will not be materially impacted by inflation in the future. 44 Table of Contents RESULTS OF OPERATIONS Comparison of the Three Months Ended June 30, 2022 to the Three Months Ended June 30, 2021 For the Three Months Ended June 30, 2022 2021 $ Change % Change INVESTMENT INCOME Interest income $ 12,741 $ 15,992 $ (3,251) (20.3) % Dividend and success fee income 6,556 2,034 4,522 222.3 % Total investment income 19,297 18,026 1,271 7.1 % EXPENSES Base management fee 3,563 3,320 243 7.3 % Loan servicing fee 1,758 1,868 (110) (5.9) % Incentive fee 3,009 12,248 (9,239) (75.4) % Administration fee 380 399 (19) (4.8) % Interest and dividend expense 3,784 3,804 (20) (0.5) % Amortization of deferred financing costs and discounts 448 456 (8) (1.8) % Other 1,492 1,354 138 10.2 % Expenses before credits from Adviser 14,434 23,449 (9,015) (38.4) % Credits to fees from Adviser (2,508) (3,119) 611 (19.6) % Total expenses, net of credits to fees 11,926 20,330 (8,404) (41.3) % NET INVESTMENT INCOME (LOSS) 7,371 (2,304) 9,675 NM REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain on investments 4,452 1,929 2,523 130.8 % Net unrealized appreciation of investments 212 47,514 (47,302) (99.6) % Net realized and unrealized gain 4,664 49,443 (44,779) (90.6) % NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 12,035 $ 47,139 $ (35,104) (74.5) % WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING Basic and diluted 33,205,023 33,205,023 — — BASIC AND DILUTED PER COMMON SHARE: Net investment income (loss) $ 0.22 $ (0.07) $ 0.29 NM Net increase in net assets resulting from operations $ 0.36 $ 1.42 $ (1.06) (74.6) % NM = Not Meaningful Investment Income Total investment income increased 7.1% for the three months ended June 30, 2022, as compared to the prior year period, due to an increase in dividend and success fee income, partially offset by a decrease in interest income. Interest income from our investments in debt securities decreased 20.3% for the three months ended June 30, 2022, as compared to the prior year period. During the three months ended June 30, 2021, we received $2.3 million of past due interest from certain loans that were previously on non-accrual status compared to no such collection in the current year period. 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. 45 Table of Contents The weighted-average principal balance of our interest-bearing investment portfolio during the three months ended June 30, 2022 was $431.0 million, compared to $466.1 million for the prior year period. This decrease was primarily due to the $64.2 million of loans placed on non-accrual status and $48.9 million of pay-offs, restructurings, or write-offs of debt investments, partially offset by the $50.5 million of follow-on debt investments to existing portfolio companies, $44.5 million of loans returned to accrual status, and the origination of $21.6 million of new debt investments after March 31, 2021, and their respective impact on the weighted-average principal balance when considering 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 dividend and success fee income, was 11.9% for the three months ended June 30, 2022, compared to 13.8% for the prior year period. The weighted-average yield may vary from period to period, based on the current stated interest rate on interest-bearing investments, coupled with any collection of past due interest during the period. During the three months ended June 30, 2021, we collected $2.3 million in past due interest from portfolio companies that were previously on non-accrual status, including $1.3 million from B+T Group Acquisition, Inc., $1.0 million from SOG Speciality Knives & Tools, LLC and $0.1 million from PSI Molded Plastics, Inc. We had no collections of past due interest during three months ended June 30, 2022. As of June 30, 2022, our loans to J.R. Hobbs, The Mountain Corporation (“The Mountain”), and SFEG Holdings, Inc. ("SFEG") were on non-accrual status, with an aggregate debt cost basis of $77.3 million. As of June 30, 2021, our loans to The Mountain and SFEG were on non-accrual status, with an aggregate debt cost basis of $28.7 million. Dividend and success fee income for the three months ended June 30, 2022 increased $4.5 million from the prior year period. During the three months ended June 30, 2022, dividend and success fee income consisted of $5.0 million of success fee income and $1.6 million of dividend income. During the three months ended June 30, 2021, dividend and success fee income consisted primarily of $2.0 million of success fee income. As of June 30, 2022 and March 31, 2022, no single investment represented greater than 10% of the total investment portfolio at fair value. Expenses Total expenses, net of any non-contractual, unconditional, and irrevocable credits from the Adviser, decreased 41.3% during the three months ended June 30, 2022, as compared to the prior year period, primarily due to a decrease in the incentive fee. In accordance with GAAP, we recorded a $0.9 million capital gains-based incentive fee during the three months ended June 30, 2022, compared to $10.3 million recorded during the three months ended June 30, 2021. The capital gains-based incentive fee was a result of the net impact of net realized gains and net unrealized appreciation (depreciation) on investments during the respective periods. The income-based incentive fee increased by $0.1 million for the three months ended June 30, 2022, as compared to the prior year period, primarily due to an increase in pre-incentive fee net investment income, coupled with an increase in net assets, which drives the hurdle rate. 46 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: Three Months Ended June 30, 2022 2021 Average total assets subject to base management fee (A) $ 712,600 $ 664,000 Multiplied by prorated annual base management fee of 2.0% 0.5 % 0.5 % Base management fee (B) $ 3,563 $ 3,320 Credits to fees from Adviser - other (B) (750) (1,251) Net base management fee $ 2,813 $ 2,069 Loan servicing fee (B) $ 1,758 $ 1,868 Credits to base management fee - loan servicing fee (B) (1,758) (1,868) Net loan servicing fee $ — $ — Incentive fee – income-based $ 2,076 $ 1,938 Incentive fee – capital gains-based (C) 933 10,310 Total incentive fee (B) $ 3,009 $ 12,248 Credits to fees from Adviser - other (B) — — Net total incentive fee $ 3,009 $ 12,248 (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 Consolidated Statements 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 decreased 0.5% during the three months ended June 30, 2022, as compared to the prior year period, due to a decrease in dividend expense, partially offset by an increase in interest expense. Dividend expense decreased by $1.5 million as a result of the 6.375% Series E Cumulative Term Preferred Stock (“Series E Term Preferred Stock”) redemption August 2021. Interest expense increased by $1.5 million primarily due to the issuance of the 2028 Notes in August 2021, which was partially offset by lower interest expense related to the Credit Facility. There was no weighted-average balance outstanding on the Credit Facility during the three months ended June 30, 2022, as compared to $26.4 million in the prior year period. The effective interest rate on the Credit Facility, excluding the impact of deferred financing costs, during the three months ended June 30, 2022 was 1.0%, as compared to 9.3% in the prior year period. The decrease in the effective interest rate on the Credit Facility was a result of no borrowings outstanding on the Credit Facility and the 1.0% unused commitment fee on the undrawn portion of the Credit Facility. 47 Table of Contents Realized and Unrealized Gain (Loss) The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the three months ended June 30, 2022 and 2021 were as follows: Three Months Ended June 30, 2022 Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized (Appreciation) Depreciation Net Gain (Loss) Horizon Facilities Service, Inc. $ — $ 15,504 $ — $ 15,504 Nocturne Villa Rentals, Inc. — 6,147 — 6,147 Brunswick Bowling Products, Inc. — 4,903 — 4,903 Counsel Press, Inc. — 3,990 — 3,990 SFEG Holdings, Inc. — 3,108 — 3,108 Nth Degree Investment Group, LLC — 2,625 — 2,625 Old World Christmas, Inc. — (674) — (674) Educators Resource, Inc. — (939) — (939) ImageWorks Display and Marketing Group, Inc. — (1,132) — (1,132) The Maids International, LLC — (1,254) — (1,254) Mason West, LLC — (2,260) — (2,260) The Mountain Corporation — (2,846) — (2,846) Ginsey Home Solutions, Inc. — (2,850) — (2,850) J.R. Hobbs Co. - Atlanta, LLC — (5,158) — (5,158) B+T Group Acquisition, Inc. — (6,234) — (6,234) Bassett Creek Services, Inc. 4,728 — (12,250) (7,522) Other, net (<$1.0 million, net) (276) (468) — (744) Total $ 4,452 $ 12,462 $ (12,250) $ 4,664 Three Months Ended June 30, 2021 Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized (Appreciation) Depreciation Net Gain (Loss) B+T Group Acquisition, Inc. $ — $ 11,297 $ — $ 11,297 Old World Christmas, Inc. — 8,650 — 8,650 SOG Specialty Knives and Tools, LLC — 5,785 — 5,785 Educators Resource, Inc. — 5,204 — 5,204 Schylling, Inc. — 4,244 — 4,244 PSI Molded Plastics, Inc. — 3,633 — 3,633 Horizon Facilities Service, Inc. — 3,435 — 3,435 Bassett Creek Services, Inc. — 3,013 — 3,013 ImageWorks Display and Marketing Group, Inc. — 2,364 — 2,364 Counsel Press, Inc. — 2,141 — 2,141 Galaxy Tool Holding Corporation — 1,404 — 1,404 Brunswick Bowling Products, Inc. — 1,172 — 1,172 Head Country, Inc. 3,627 — (2,469) 1,158 Channel Technologies Group, LLC (1,841) — 1,841 — Diligent Delivery Systems — (669) — (669) The Maids International, LLC — (819) — (819) Mason West, LLC — (891) — (891) Pioneer Square Brands, Inc. — (1,462) — (1,462) Other, net (<$1.0 million, net) 143 (411) 52 (216) Total $ 1,929 $ 48,090 $ (576) $ 49,443 48 Table of Contents Net Realized Gain (Loss) on Investments During the three months ended June 30, 2022, we recorded net realized gains on investments of $4.5 million, primarily due to a $4.7 million realized gain from the exit of Bassett Creek Services, Inc. During the three months ended June 30, 2021, we recorded net realized gains on investments of $1.9 million, primarily related to a $3.6 million realized gain from the exit of Head Country, Inc. ("Head Country"), partially offset by a $1.8 million realized loss from the dissolution of Channel Technologies Group, LLC ("CTG"). Net Unrealized Appreciation (Depreciation) of Investments Net unrealized appreciation of investments of $0.2 million for the three months ended June 30, 2022 was primarily due to increased performance of certain of our other portfolio companies, driven partially by the reversal of the impact of COVID-19 on certain of our portfolio companies and the markets in which they operate. These amounts were partially offset by the reversal of unrealized appreciation of our investment in Bassett Creek upon its exit, decreased performance of certain of our other portfolio companies and decreased comparable transaction multiples used to estimate the fair value of certain of our portfolio companies. In part, the performance of certain of our portfolio companies was driven by the impact COVID-19, and its variants, 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, current and future shutdowns and reopening restrictions, operating challenges, including but not limited to, labor shortages, supply chain delays, increased material costs and demand for their products, and general economic outlook, or the reversal of such impact towards pre-COVID-19 levels. Net unrealized appreciation of investments of $47.5 million for the three months ended June 30, 2021 was primarily due to the increased performance of certain portfolio companies, the reversal of previously recorded unrealized depreciation of our investment in CTG upon its dissolution, and an increase in comparable transaction multiples used to estimate the fair value of certain of our portfolio companies, which were partially offset by the reversal of previously recorded unrealized appreciation of our investment in Head Country and a decline in performance of certain other portfolio companies. In part, the performance of certain of our portfolio companies was driven by the impact COVID-19, and its variants, 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, current and future shutdowns and reopening restrictions, as well as demand for their products and general economic outlook. Across our entire investment portfolio, we recorded net unrealized depreciation of $7.2 million on our debt positions and appreciation of $7.4 million on our equity positions, for the three months ended June 30, 2022 . As of June 30, 2022 , the fair value of our investment portfolio was more than the cost basis by $45.4 million, as compared to March 31, 2022, when the fair value of our investment portfolio was more than the cost basis by $45.1 million, representing net unrealized appreciation of $ 0.2 million for the three months ended June 30, 2022 . Our entire portfolio had a fair value of 107.0% of cost as of June 30, 2022 . LIQUIDITY AND CAPITAL RESOURCES Operating Activities Net cash provided by operating activities for the three months ended June 30, 2022 was $41.3 million, as compared to net cash provided by operating activities of $14.4 million for the three months ended June 30, 2021. This change was primarily due to an increase in principal repayments of investments and net proceeds from the sale of investments, partially offset by an increase in purchase of investments. Principal repayments and net proceeds from the sale of investments totaled $57.4 million during the three months ended June 30, 2022, compared to $21.8 million during the three months ended June 30, 2021. Purchases of investments were $27.8 million during the three months ended June 30, 2022, compared to $17.2 million during the three months ended June 30, 2021. As of June 30, 2022, we had equity investments in or loans to 26 portfolio companies with an aggregate cost basis of $644.2 million. As of June 30, 2021, we had equity investments in or loans to 27 portfolio companies with an aggregate cost basis of $660.8 million. 49 Table of Contents The following table summarizes our total portfolio investment activity during the three months ended June 30, 2022 and 2021: Three Months Ended June 30, 2022 2021 Beginning investment portfolio, at fair value $ 714,396 $ 633,829 New investments 21,000 9,950 Disbursements to existing portfolio companies 6,800 7,200 Unscheduled principal repayments (48,000) (14,060) Net proceeds from sales of investments (9,352) (7,648) Net realized gain on investments 4,452 1,804 Net unrealized appreciation (depreciation) of investments 12,462 48,090 Reversal of net unrealized appreciation of investments (12,250) (576) Amortization of premiums, discounts, and acquisition costs, net 5 5 Ending investment portfolio, at fair value $ 689,513 $ 678,594 The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of June 30, 2022: Amount For the remaining nine months ending March 31, 2023 $ 89,488 For the fiscal years ending March 31: 2024 53,268 2025 169,334 2026 78,231 2027 77,596 Thereafter 1,500 Total contractual repayments $ 469,417 Adjustments to cost basis of debt investments (8) Investments in equity securities 174,744 Total cost basis of investments held as of June 30, 2022: $ 644,153 Financing Activities Net cash used in financing activities for the three months ended June 30, 2022 was $11.5 million, which consisted primarily of $11.5 million in distributions to common stockholders. Net cash provided by financing activities for the three months ended June 30, 2021 was $10.5 million, which consisted primarily of $19.5 million of net borrowings under the Credit Facility, partially offset by $9.0 million in distributions to common stockholders. 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 taxable ordinary income plus the excess of our net short-term capital gains over net long-term capital losses (“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 $0.075 per common share for each of the three months from April through June 2022, and a supplemental distribution of $0.12 per common share in June 2022. See also “ Recent Developments - Distributions and Dividends ” for a discussion of cash distributions to common stockholders declared by our Board of Directors in July 2022. 50 Table of Contents For the fiscal year ended March 31, 2022, Investment Company Taxable Income exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $13.9 million of the first distributions paid subsequent to fiscal year-end as having been paid in the prior year. In addition, for the fiscal year ended March 31, 2022, net capital gains exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $15.7 million of the first distributions paid subsequent to fiscal year-end as having been paid in the prior year. For the year ended March 31, 2022, we recorded $2.8 million of net adjustments for estimated permanent book-tax differences to reflect tax character, which decreased Capital in excess of par value and Underdistributed net investment income and increased Accumulated net realized gain in excess of distributions. For the three months ended June 30, 2022, we recorded $0.9 million of net adjustments for estimated permanent book-tax differences to reflect tax cha racter, which decreased Capital in excess of par value and increased Overdistributed 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 $0.1328125 per share to holders of our Series E Term Preferred Stock per month from April through June 2021. In accordance with GAAP, we treated these monthly dividends as an operating expense. Dividend Reinvestment Plan Our common stockholders who hold their shares through our transfer agent, Computershare, Inc. (“Computershare”), have the option to participate in a dividend reinvestment plan offered by Computershare, as the plan agent. This is an “opt in” dividend reinvestment plan, meaning that common stockholders may elect to have their cash distributions automatically reinvested in additional shares of our common stock. Common stockholders who do 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. Equity Registration Statement On September 3, 2021, we filed a registration statement on Form N-2 (File No. 333-259302), which the SEC declared effective on October 15, 2021. 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 the date of this report, we have the ability to issue up to $300.0 million of the securities registered under the registration statement. 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 ATM Sales Agents, up to an aggregate offering price of $35.0 million in the Common Stock ATM Program. On August 11, 2021, we terminated the equity distribution agreements with each of the Common Stock ATM Sales Agents. We did not sell any shares of our common stock under the Common Stock ATM Program during the year ended March 31, 2022. 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 51 Table of Contents stated requirements. On June 30, 2022, the closing market price of our common stock was $14.08 per share, representing a 4.8% premium to our NAV per share of $13.44 as of June 30, 2022. 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 were amortized over the period ending August 31, 2025, the mandatory redemption date, prior to redemption in August 2021. Prior to redemption in August 2021, the Series E Term Preferred Stock provided for a fixed dividend equal to 6.375% per year, payable monthly. 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 had 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. On August 10, 2021, we terminated our sales agreements with each of the Series E ATM Sales Agents. We did not sell any shares of our Series E Term Preferred Stock under the Series E ATM Program during the year ended March 31, 2022. 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 Consolidated Statements of Operations and which was primarily comprised of unamortized deferred issuance costs at the time of redemption. Prior to redemption in March 2021, the Series D Term Preferred Stock provided for a fixed dividend equal to 6.25% per year, payable monthly, and would have otherwise been subject to mandatory redemption on September 30, 2023. In August 2021, we used a portion of the proceeds from the issuance of our 2028 Notes, to voluntarily redeem all outstanding shares of our Series E 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 $2.0 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. Revolving Line of Credit On March 8, 2021, we, through our wholly-owned subsidiary, Gladstone Business Investment, LLC (“Business Investment”), entered into Amendment No. 6 to the Credit Facility 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 June 30, 2022, the Credit Facility provided a one-year extension option that may be exercised on or before March 8, 2023, subject to approval by all lenders. 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. 52 Table of Contents 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. At June 30, 2022, we had no borrowings outstanding on the Credit Facility and as of the date of this report, we had $12.6 million outstanding under the Credit Facility. 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 $286.3 million as of June 30, 2022, (ii) asset coverage with respect to senior securities representing indebtedness of at least 150% (or such percentage as may be set forth in Section 18 of the 1940 Act, as modified by Section 61 of the 1940 Act), and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code. As of June 30, 2022, and as defined in the performance guaranty of the Credit Facility, we had a net worth of $702.1 million, asset coverage on our senior securities representing indebtedness of 261.9%, calculated in compliance with the requirements of Sections 18 and 61 of the 1940 Act, and an active status as a BDC and RIC. As of June 30, 2022, we had availability, after adjustments for various constraints based on collateral quality, of $177.4 million under the Credit Facility and were in compliance with all covenants under the Credit Facility. As of the date of this report, we had $12.6 million outstanding under the Credit Facility. Notes Payable 5.00% Notes due 2026 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 Securities Exchange Act of 1934, as amended (the "Exchange 53 Table of Contents Act"), we will provide the holders of the 2026 Notes 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 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. 4.875% Notes due 2028 In August 2021, we completed a public offering of the 2028 Notes with an aggregate principal amount of $134.6 million, which resulted in net proceeds of approximately $131.3 million after deducting underwriting discounts, commissions and offering costs borne by us. The 2028 Notes are traded under the ticker symbol “GAINZ” on Nasdaq. The 2028 Notes will mature on November 1, 2028 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 November 1, 2023. The 2028 Notes bear interest at a rate of 4.875% per year (which equates to $6.6 million per year), payable quarterly in arrears. The indenture relating to the 2028 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 2028 Notes and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements. The 2028 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 $3.3 million, which have been recorded as discounts to the aggregate principal amount on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized over the period ending November 1, 2028, 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 June 30, 2022 and March 31, 2022, we had unrecognized, contractual off-balance sheet success fee receivables of $49.0 million and $50.5 million (or approximately $1.47 and $1.52 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 debt commitments to certain of our portfolio companies that have not been fully drawn. Since these line of credit and delayed draw term debt commitments have expiration dates and we expect many will never be fully drawn, the total line of credit and delayed draw term debt 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 debt commitments as of June 30, 2022 to be immaterial. As of June 30, 2022, we have extended a guaranty on behalf of one of our portfolio companies, Country Club Enterprises, LLC (“CCE”), whereby we have guaranteed $1.0 million of CCE’s obligations. As of June 30, 2022, we have not been required to make payments on this or any previous guaranty, and we consider the credit risks to be remote and the fair value of this guaranty to be immaterial. 54 Table of Contents The following table shows our contractual obligations as of June 30, 2022, at cost: 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) $ — $ — $ — $ — $ — Notes payable 262,488 — — 127,938 134,550 Secured borrowing 5,096 — 5,096 — — Interest payments on obligations (C) 75,653 15,143 30,115 19,664 10,731 Total $ 343,237 $ 15,143 $ 35,211 $ 147,602 $ 145,281 (A) Excludes unused line of credit and delayed draw term debt commitments and guaranties to our portfolio companies in the aggregate principal amount of $5.0 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, 2028 Notes, and secured borrowing, as applicable. The amount of interest payments calculated for purposes of this table was based upon rates and outstanding balances as of June 30, 2022. Critical Accounting Estimates The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported consolidated amounts of assets and liabilities, including disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ materially from those estimates under different assumptions or conditions. We have identified our investment valuation policy (which has been approved by our Board of Directors) as our most critical accounting policy, which is described in Note 2 — Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report. Additionally, refer to Note 3 — Investments in the accompanying Notes to Consolidated Financial Statements included elsewhere in this Quarterly 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 Quarterly 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. 55 Table of Contents The following table reflects risk ratings for all loans in our portfolio as of June 30, 2022 and March 31, 2022: Rating June 30, 2022 March 31, 2022 Highest 9.0 9.0 Average 6.5 6.5 Weighted-average 7.0 7.0 Lowest 3.0 3.0 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 “ — 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 June 30, 2022 and March 31, 2022. Recent Accounting Pronouncements Refer to Note 2 — Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report for a description of recent accounting pronouncements. 56 Table of Contents