What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-02 compared with 2023-02-01 · 150 added, 385 removed, 298 unchanged (64% of the section changed)

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(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 (12) those factors described in Item 1A.

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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 December 31, 2022, our investment portfolio was comprised of 77.2 % in debt investments and 22.8 % in equity investments, at cost.

As of June 30, 2023, our investment portfolio was comprised of 77.5% in debt investments and 22.5% 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 $4 million to $15 million) (“Lower Middle Market”) in the U.S.

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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.

Our shares of common stock, our 5.00% Notes due 2026 (“5.00% 2026 Notes”), our 4.875% Notes due 2028 ("4.875% 2028 Notes) and our 8.00% Notes due 2028 (“8.00% 2028 Notes”) are traded on the Nasdaq Global Select Market (“Nasdaq”) under the trading symbols “GAIN,” “GAINN,” "GAINZ" and “GAINL,” respectively.

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 nine months ended December 31, 2022, we invested in one new portfolio company and exited two portfolio companies.

From our initial public offering in June 2005 through December 31, 2022, we invested in 56 companies, excluding investments in syndicated loans, for a total of approximately $1.6 billion, before giving effect to principal repayments and divestitures.

During the three months ended June 30, 2023, we invested in one new portfolio company.

From our initial public offering in June 2005 through June 30, 2023, we invested in 57 companies, excluding investments in syndicated loans, for a total of approximately $1.6 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.

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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 December 31, 2022, we had unrecognized, contractual success fees of $53.1 million, or $1.59 per common share.

As a result, as of June 30, 2023, we had unrecognized, contractual success fees of $56.5 million, or $1.68 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 December 31, 2022, we completed sales of 29 portfolio companies that we acquired under our buyout strategy (which excludes investments in syndicated loans).

From inception through June 30, 2023, we completed sales of 29 portfolio companies that we acquired under our buyout strategy (which excludes investments in syndicated loans).

In the aggregate, these sales have generated $261.1 million in net realized gains and $40.4 million in other income upon exit, for a total increase to our net assets of $301.6 million.

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The 29 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 100.0% from March 2011 through December 31, 2022, and allowed us to declare and pay 17 supplemental distributions to common stockholders through December 31, 2022.

Capital Raising Efforts

The successful exits, in part, enabled us to increase the monthly distribution by 100.0% from March 2011 through June 30, 2023, and allowed us to declare and pay 19 supplemental distributions to common stockholders through June 30, 2023.

Capital Raising

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.

During the nine months ended December 31, 2022, we sold 241,978 shares of our common stock under our "at-the-market" program (the "Common Stock ATM Program") for gross proceeds of approximately $3.5 million.

During the year ended March 31, 2023, we sold 386,482 shares of our common stock under our "at-the-market" program (the "Common Stock ATM Program") for gross proceeds of approximately $5.5 million.

During the three months ended June 30, 2023, we issued our 8.00% 2028 Notes for gross proceeds of $74.8 million.

Refer to “ Liquidity and Capital Resources — Revolving Line of Credit ” for further discussion of the Credit Facility and to “ Liquidity and Capital Resources — Equity — Common Stock ” further discussion of our common stock.

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 December 31, 2022, the closing market price of our common stock was $ 12.91 per share, representing a 3.9 % discount to our net asset value (“NAV”) of $ 13.43 per share as of December 31, 2022.

Although we have been able to access the capital markets historically, market conditions 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, 2023, the closing market price of our common stock was $13.04 per share, representing a 0.4% premium to our net asset value (“NAV”) of $12.99 per share as of June 30, 2023.

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.

ATM sales during the nine months ended December 31, 2022 were above our then-current estimated NAV per share.

Regulatory Compliance

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).

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).

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%, which was effective as of April 10, 2019, one year after the date of the Board of Directors’ approval.

As of December 31, 2022, our asset coverage ratio on our senior securities representing indebtedness was 250.5%.

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, 2023, our asset coverage ratio on our senior securities representing indebtedness was 211.0%.

Investment Highlights

Investment Activity

During the nine months ended December 31, 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.

- Atlanta, LLC ("J.R.

Hobbs"), an existing portfolio company.

In July 2022, we invested an additional $39.1 million in the form of secured first lien debt in Dema/Mai to fund the acquisition of Dema Plumbing, a plumbing and mechanical systems installation and service provider to single-family residential homebuilders.

• 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.

• In August 2022, in conjunction with a refinancing at Ginsey Home Solutions, Inc.

("Ginsey"), our $13.3 million secured second lien debt investment was reduced to $12.2 million and converted to secured first lien debt.

The reduction in our cost basis was the result of a $5.1 million payment made by Ginsey to extinguish our secured borrowing liability, which was partially offset by an additional investment in Ginsey of $4.0 million.

• In October 2022, we invested an additional $8.4 million in the form of secured first lien debt in Nocturne to fund an add-on acquisition.

• In November 2022, our $1.5 million secured second lien debt investment in Country Club Enterprises, LLC ("CCE") was repaid at par.

In connection with the repayment, we received success fee income of $1.1 million and our $1.0 million guaranty was released.

• In December 2022, we recapitalized our investment in Old World Christmas, Inc.

During the three months ended June 30, 2023, the following significant transactions occurred:

• In May 2023, we invested $15.3 million in a new portfolio company, Home Concepts Acquisition, Inc.

("Home Concepts"), in the form of $12.0 million of secured first lien debt and $3.3 million of preferred equity.

Home Concepts, headquartered in Santa Barbara, California, is a leading home improvement advertising publication focusing on connecting homeowners to high-quality residential repair and remodeling businesses.

• In June 2023, we recapitalized our investment in Old World Christmas, Inc.

("Old World") and invested an additional $2.5 million in the form of secured first lien debt.

In connection with this investment, we received proceeds of $17.9 million, of which $13.4 million was recognized as a realized gain and $4.5 million was recognized as dividend income.

• In December 2022, we entered into a new $3.2 million secured second lien term loan with The Mountain Corporation ("The Mountain"), replacing our previously outstanding second lien term loan and second lien delayed draw term loan with an aggregate cost basis of $13.2 million, which resulted in a realized loss of $10.0 million.

The new term loan has a stated interest rate of LIBOR + 10.3% and matures October 1, 2024.

In connection with this investment, we received proceeds of $2.2 million, of which $1.9 million was recognized as dividend income and $0.3 million was recognized as a realized gain.

• In June 2023, we invested an additional $30.0 million in the form of $25.0 million of secured second lien debt and $5.0 million of common equity in Nth Degree Investment Group, LLC to fund an add-on acquisition.

• In June 2023, we received a $1.5 million escrow settlement in connection with our December 2021 exit of SOG Specialty Knives & Tools, LLC, of which $0.6 million was recognized as a return of cost basis and $0.9 million as a realized gain.

As a result of the escrow release, there are no remaining assets held by Gladstone SOG Investments, Inc.

Recent Developments

Distributions and Dividends

In January 2023, our Board of Directors declared the following monthly cash distributions to common stockholders:

In July 2023, our Board of Directors declared the following monthly cash distributions to common stockholders:

Payment Date Distribution per Common Share

January 20, 2023 January 31, 2023 $ 0.08

February 17, 2023 February 28, 2023 0.08

March 3, 2023 March 15, 2023 0.24 (A)

March 17, 2023 March 31, 2023 0.08

July 21, 2023 July 31, 2023 $ 0.08

August 23, 2023 August 31, 2023 0.08

September 7, 2023 September 15, 2023 0.12 (A)

September 21, 2023 September 29, 2023 0.08

Total for the Quarter:

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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.

dollar LIBOR are currently anticipated to be phased out in June 2023.

LIBOR is expected to 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 res pond 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.

As of June 30, 2023, the 30-day London Interbank Offered Rate ("LIBOR") is no longer readily available and each of our debt investments has transitioned from LIBOR as the applicable reference rate to 30-day Secured Overnight Financing Rate ("SOFR").

We anticipate originating future variable rate debt instruments using SOFR.

We experienced minimal impacts on our operations as a result of the transition to SOFR.

Impact of Inflation

We believe the effects of inflation on our historical results of operations and financial condition have been immaterial.

During the nine months ended December 31, 2022, general inflationary pressures and certain commodity price volatility have impacted our portfolio companies to varying degrees;

We believe the effects of inflation on our historical results of operations and financial condition have not been significant.

During the three months ended June 30, 2023, general inflationary pressures and certain commodity price volatility have impacted certain of 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.

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RESULTS OF OPERATIONS

Comparison of the Three Months Ended December 31, 2022 to the Three Months Ended December 31, 2021

For the Three Months Ended December 31,

Comparison of the Three Months Ended June 30, 2023 to the Three Months Ended June 30, 2022

For the Three Months Ended June 30,

2023 2022 $ Change % Change

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Administration fee 522 380 142 37.4 %

Interest and dividend expense 4,074 3,918 156 4.0 %

Interest expense 4,974 3,784 1,190 31.4 %

Amortization of deferred financing costs and discounts 545 448 97 21.7 %

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Net realized gain on investments 1,155 4,452 (3,297) (74.1) %

Net unrealized appreciation (depreciation) of investments 3,366 (20,102) 23,468 NM

Net realized and unrealized gain (loss) 7,210 1,947 5,263 270.3 %

Net unrealized (depreciation) appreciation of investments (809) 212 (1,021) NM

Net realized and unrealized gain 346 4,664 (4,318) (92.6) %

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 8,786 $ 12,035 $ (3,249) (27.0) %

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Investment Income

Total investment income increased 29.0% for the three months ended December 31, 2022, as compared to the prior year period, due to an increase in interest income, as well as an increase in dividend and success fee income.

Interest income from our investments in debt securities increased 20.4% for the three months ended December 31, 2022, as compared to the prior year period.

Total investment income increased $1.0 million, or 5.2%, for the three months ended June 30, 2023, as compared to the prior year period, due to an increase in interest income, partially offset by a decrease in dividend and success fee income.

Interest income from our investments in debt securities increased $5.7 million, or 44.4%, for the three months ended June 30, 2023, as compared to the prior 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.

The weighted-average principal balance of our interest-bearing investment portfolio during the three months ended December 31, 2022 was $474.1 million, compared to $443.6 million for the prior year period.

This increase was primarily due to the $105.4 million of follow-on debt investments in existing portfolio companies, the origination of $39.1 million of new debt investments, and $14.9 million of loans returned to accrual status, partially offset by $92.7 million of pay-offs, restructurings, or write-offs of debt investments, and $9.2 million of loans placed on non-accrual status, after September 30, 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 13.4% for the three months ended December 31, 2022, compared to 11.9% for the prior year period.

The weighted-average principal balance of our interest-bearing investment portfolio during the three months ended June 30, 2023 was $495.3 million, compared to $431.0 million for the prior year period.

This increase was primarily due to the $70.7 million of follow-on debt investments in existing portfolio companies, the origination of $51.1 million of new debt investments, and $14.9 million of loans returned to accrual status, partially offset by $92.7 million of pay-offs, restructurings, or write-offs of debt investments, and $9.2 million of loans placed on non-accrual status, after March 31, 2022, 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 14.7% for the three months ended June 30, 2023, compared to 11.9% 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.

As of December 31, 2022, our loans to Edge Adhesives Holdings, Inc.

As of June 30, 2023, our loans to Edge Adhesives Holdings, Inc.

("Edge"), J.R.

Hobbs and The Mountain were on non-accrual status, with an aggregate debt cost basis of $66.6 million.

As of December 31, 2021, our loans to J.R.

– Atlanta, LLC ("J.R.

Hobbs") and The Mountain Corporation ("The Mountain") were on non-accrual status, with an aggregate debt cost basis of $66.9 million.

As of June 30, 2022, our loans to J.R.

Hobbs, The Mountain and SFEG Holdings, Inc.

("SFEG") were on non-accrual status, with an aggregate debt cost basis of $81.3 million.

Dividend and success fee income for the three months ended December 31, 2022 increased $2.1 million from the prior year period.

During the three months ended December 31, 2022, dividend and success fee income consisted of $4.5 million of dividend income and $1.1 million of success fee income.

During the three months ended December 31, 2021, dividend and success fee income consisted of $3.4 million of success fee income.

As of December 31, 2022 and March 31, 2022, no single investment represented greater than 10% of the total investment portfolio at fair value.

Total expenses, net of any non-contractual, unconditional, and irrevocable credits from the Adviser, increased 56.1% during the three months ended December 31, 2022, as compared to the prior year period, primarily due to a decrease in the incentive fee.

In accordance with GAAP, we recorded a $1.4 million capital gains-based incentive fee during the three months ended December 31, 2022, compared to a capital gains-based incentive fee of $0.4 million during the three months ended December 31, 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 $0.3 million for the three months ended December 31, 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.

were on non-accrual status, with an aggregate debt cost basis of $77.3 million.

Dividend and success fee income for the three months ended June 30, 2023 decreased $4.6 million, or 70.9%, from the prior year period.

During the three months ended June 30, 2023, dividend and success fee income consisted of $1.9 million of dividend income.

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.

As of June 30, 2023 and March 31, 2023, no single investment represented greater than 10% of the total investment portfolio at fair value.

Total expenses, net of any non-contractual, unconditional, and irrevocable credits from the Adviser, decreased $0.1 million, or 0.6%, during the three months ended June 30, 2023, as compared to the prior year period, primarily due to a decrease in incentive fees and other expense, as well as an increase in credits from the Advisor, partially offset by increased interest expense on borrowings.

In accordance with GAAP, during the three months ended June 30, 2023 and 2022, we recorded a $0.1 million and $0.9 million capital gains-based incentive fees, respectively.

The capital gains-based incentive fee is 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, 2023, 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.

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 December 31,

Three Months Ended June 30,

Average total assets subject to base management fee (A)

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(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 4.0% during the three months ended December 31, 2022, as compared to the prior year period, due to an increase in interest expense.

Interest expense increased by $0.2 million primarily due to higher interest expense related to the Credit Facility.

The weighted-average balance outstanding on the Credit Facility during the three months ended December 31, 2022 was $26.1 million as compared to $21.2 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 December 31, 2022 was 12.8%, as compared to 11.1% in the prior year period.

The increase in the effective interest rate on the Credit Facility was primarily a result of an increase in interest rates on the drawn portion of the Credit Facility.

Interest expense increased $1.2 million, or 31.4%, during the three months ended June 30, 2023, as compared to the prior year period, primarily due to higher interest expense related to the 8.00% 2028 Notes issued during the quarter and borrowings on the Credit Facility.

The weighted-average balance outstanding under the Credit Facility during the three months ended June 30, 2023 was $43.6 million, compared to no weighted-average outstanding balance 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, 2023 was 11.2%, as compared to 1.0% in the prior year period.

The increase in the effective interest rate on the Credit Facility was primarily a result of an increase in interest rates and an increase in the drawn portion of the Credit Facility.

Other expenses decreased $0.5 million, or 35.1%, during the three months ended June 30, 2023, as compared to the prior year period, due to a decrease in tax expense and bad debt expense.

Realized and Unrealized Gain (Loss)

The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the three months ended December 31, 2022 and 2021 were as follows:

Three Months Ended December 31, 2022

The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the three months ended June 30, 2023 and 2022 were as follows:

Three Months Ended June 30, 2023

Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized (Appreciation) Depreciation Net Gain (Loss)

Brunswick Bowling Products, Inc.

$ — $ 7,275 $ — $ 7,275

Mason West, LLC — 5,281 — 5,281

Old World Christmas, Inc.

13,371 (8,601) — 4,770

Dema/Mai Holdings, Inc.

— 3,877 — 3,877

Nth Degree Investment Group, LLC $ — $ 7,051 $ — $ 7,051

Schylling, Inc.

— 2,977 — 2,977

PSI Molded Plastics, Inc.

— 2,976 — 2,976

The Mountain Corporation (10,000) — 10,000 —

ImageWorks Display and Marketing Group, Inc.

— (920) — (920)

Educators Resources, Inc.

— (1,299) — (1,299)

- Atlanta, LLC — (2,398) — (2,398)

Galaxy Technologies Holding, Inc.

— (3,255) — (3,255)

B+T Group Acquisition, Inc.

— (3,747) — (3,747)

Nocturne Villas Rentals, Inc.

Galaxy Technologies Holdings, Inc.

— 3,481 — 3,481

Horizon Facilities Service, Inc.

SFEG Holdings, Inc.

— 2,986 — 2,986

Other, net (<$1.0 million, net) 473 (197) 1 277

Total $ 3,844 $ (6,635) $ 10,001 $ 7,210

Three Months Ended December 31, 2021

Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized (Appreciation) Depreciation Net Gain (Loss)

Mason West, LLC — 2,945 — 2,945

Brunswick Bowling Products, Inc.

— 2,598 — 2,598

Horizon Facilities Service, Inc.

— 5,129 — 5,129

Schylling, Inc.

— 2,931 — 2,931

ImageWorks Display and Marketing Group, Inc.

Nocturne Villas Rentals, Inc.

— 2,472 — 2,472

The Maids International, LLC — 1,946 — 1,946

- Atlanta, LLC — (1,575) — (1,575)

Mason West, LLC — (3,390) — (3,390)

Pioneer Square Brands, Inc.

Educators Resources, Inc.

— 1,021 — 1,021

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— 1,009 — 1,009

Galaxy Technologies Holdings, Inc.

— (4,464) — (4,464)

Other, net (<$1.0 million, net) 110 224 — 334

Total $ 22,049 $ 5,323 $ (25,425) $ 1,947

Net Realized Gain (Loss) on Investments

During the three months ended December 31, 2022, we recorded net realized gains on investments of $3.8 million, primarily due to a $13.4 million realized gain from the recapitalization of Old World and $0.5 million of realized gains related to prior period exits of certain investments, partially offset by the $10.0 million realized loss recognized in conjunction with the replacement of our existing investment in The Mountain.

During the three months ended December 31, 2021, we recorded net realized gains on investments of $22.0 million, primarily due to a $21.9 million realized gain from the exit of Pioneer Square Brands, Inc.

and realized gains related to prior period exits of certain investments.

Net Unrealized Appreciation (Depreciation) of Investments

Net unrealized appreciation of investments of $3.4 million for the three months ended December 31, 2022 was primarily due to the reversal of unrealized depreciation of our investment in The Mountain upon the replacement of the existing investment, partially offset by net unrealized depreciation across our portfolio.

The net unrealized depreciation was driven by decreased performance of certain of our portfolio companies and decreased comparable transaction multiples used to estimate the fair value of certain of our portfolio companies.

These amounts were partially offset by 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.

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 depreciation of investments of $20.1 million for the three months ended December 31, 2021 was primarily due to the reversal of previously recorded unrealized appreciation of our investment in Pioneer upon its exit and the decreased performance of certain of our portfolio companies.

These amounts were partially offset by the 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, and increased 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 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.

Across our entire investment portfolio, we recorded net unrealized appreciation of $7.2 million on our debt positions and depreciation of $3.9 million on our equity positions, for the three months ended December 31, 2022 .

As of December 31, 2022 , the fair value of our investment portfolio was more than the cost basis by $38.1 million, as compared to September 30, 2022, when the fair value of our investment portfolio was more than the cost basis by $34.7 million, representing net unrealized appreciation of $3.4 million for the three months ended December 31, 2022 .

Our entire portfolio had a fair value of 105.3% of cost as of December 31, 2022 .

Comparison of the Nine Months Ended December 31, 2022 to the Nine Months Ended December 31, 2021

For the Nine Months Ended December 31,

2022 2021 $ Change % Change

INVESTMENT INCOME

Interest income $ 43,045 $ 43,634 $ (589) (1.3) %

Dividend and success fee income 18,641 9,672 8,969 92.7 %

Total investment income 61,686 53,306 8,380 15.7 %

Base management fee 10,965 10,527 438 4.2 %

Loan servicing fee 5,754 5,430 324 6.0 %

Incentive fee 7,722 22,186 (14,464) (65.2) %

Administration fee 1,352 1,407 (55) (3.9) %

Interest and dividend expense 11,715 11,606 109 0.9 %

Amortization of deferred financing costs and discounts 1,350 1,355 (5) (0.4) %

Other 4,357 3,828 529 13.8 %

Expenses before credits from Adviser 43,215 56,339 (13,124) (23.3) %

Credits to fees from Adviser (8,885) (11,293) 2,408 (21.3) %

Total expenses, net of credits to fees 34,330 45,046 (10,716) (23.8) %

NET INVESTMENT INCOME 27,356 8,260 19,096 231.2 %

REALIZED AND UNREALIZED GAIN (LOSS)

Net realized gain on investments 10,598 24,442 (13,844) (56.6) %

Net realized loss on other — (1,998) 1,998 (100.0) %

Net unrealized appreciation (depreciation) of investments (7,065) 54,916 (61,981) (112.9) %

Net realized and unrealized gain (loss) 3,533 77,360 (73,827) (95.4) %

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 30,889 $ 85,620 $ (54,731) (63.9) %

WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING

Basic and diluted 33,246,811 33,205,023 41,788 NM

BASIC AND DILUTED PER COMMON SHARE:

Net investment income $ 0.82 $ 0.25 $ 0.57 228.0 %

Net increase in net assets resulting from operations $ 0.93 $ 2.58 $ (1.65) (64.0) %

NM = Not Meaningful

Investment Income

Total investment income increased 15.7% for the nine months ended December 31, 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 1.3% for the nine months ended December 31, 2022, as compared to the prior year period.

During the nine months ended December 31, 2021, we received $3.9 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.

The weighted-average principal balance of our interest-bearing investment portfolio during the nine months ended December 31, 2022 was $457.9 million, compared to $444.9 million for the prior year period.

This increase was primarily due to $118.3 million of follow-on debt investments in existing portfolio companies, the origination of $60.7 million of new debt investments, and $14.9 million of loans returned to accrual status, partially offset by $106.8 million of pay-offs, restructurings, or write-offs of debt investments and $73.4 million of loans placed on non-accrual status 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 12.5% for the nine months ended December 31, 2022, compared to 13.0% for the prior year period.

During the nine months ended December 31, 2021, we collected $3.9 million in past due interest from portfolio companies that were previously on non-accrual status, including $2.8 million from B+T Group Acquisition, Inc., $1.0 million from SOG Specialty Knives and Tools, LLC, $0.1 million from PSI Molded Plastics, Inc., and $0.1 million from Horizon.

We had no collections of past due interest during the nine months ended December 31, 2022.

As of December 31, 2022, our loans to Edge, J.R.

Hobbs and The Mountain were on non-accrual status, with an aggregate debt cost basis of $66.6 million.

As of December 31, 2021, our loans to J.R.

Hobbs, The Mountain and SFEG were on non-accrual status, with an aggregate debt cost basis of $81.3 million.

Dividend and success fee income for the nine months ended December 31, 2022 increased $9.0 million from the prior year period.

During the nine months ended December 31, 2022, dividend and success fee income consisted of $10.8 million of dividend income and $7.8 million of success fee income.

During the nine months ended December 31, 2021, dividend and success fee income consisted primarily of $8.1 million of success fee income and $1.6 million of dividend income.

As of December 31, 2022, and March 31, 2022, no single investment represented greater than 10% of the total investment portfolio at fair value.

Total expenses, net of any non-contractual, unconditional, and irrevocable credits from the Adviser, decreased 23.8% during the nine months ended December 31, 2022, as compared to the prior year period, primarily due to a decrease in the incentive fee.

In accordance with GAAP, we recorded a $0.7 million capital gains-based incentive fee during the nine months ended December 31, 2022, compared to a $16.3 million capital gains-based incentive fee recorded during the nine months ended December 31, 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 $1.1 million for the nine months ended December 31, 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.

Nine Months Ended December 31,

Average total assets subject to base management fee (A)

$ 731,000 $ 701,800

Multiplied by prorated annual base management fee of 2.0% 1.5 % 1.5 %

Base management fee (B)

$ 10,965 $ 10,527

Credits to fees from Adviser - other (B)

(3,131) (5,863)

Net base management fee $ 7,834 $ 4,664

Loan servicing fee (B)

$ 5,754 $ 5,430

Credits to base management fee - loan servicing fee (B)

(5,754) (5,430)

Net loan servicing fee $ — $ —

Incentive fee – income-based $ 7,016 $ 5,892

Incentive fee – capital gains-based (C)

Total incentive fee (B)

$ 7,722 $ 22,186

Credits to fees from Adviser - other (B)

Net total incentive fee $ 7,722 $ 22,186

(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 increased 0.9% during the nine months ended December 31, 2022, as compared to the prior year period, due to an increase in interest expense, partially offset by a decrease in dividend expense.

Interest expense increased by $2.4 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.

The weighted-average balance outstanding on the Credit Facility during the nine months ended December 31, 2022, was $12.6 million as compared to $24.0 million in the prior year period.

The effective interest rate on the Credit Facility, excluding the impact of deferred financing costs, during the nine months ended December 31, 2022 was 19.8%, as compared to 10.1% in the prior year period.

The increase in the effective interest rate on the Credit Facility was primarily a result of an increase in unused commitments fees on the undrawn portion of the Credit Facility as well as increased interest rates on the drawn portion of the Credit Facility.

Dividend expense decreased by $2.3 million as a result of the 6.375% Series E Cumulative Term Preferred Stock (“Series E Term Preferred Stock”) redemption August 2021.

Realized and Unrealized Gain (Loss)

The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the nine months ended December 31, 2022 and 2021 were as follows:

Nine Months Ended December 31, 2022

Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized (Appreciation) Depreciation Net Gain (Loss)

Brunswick Bowling Products, Inc $ — $ 13,770 $ — $ 13,770

Nth Degree Investment Group, LLC — 11,525 — 11,525

Old World Christmas, Inc.

273 (2,169) — (1,896)

Horizon Facilities Service, Inc.

2,218 5,461 — 7,679

Nocturne Villa Rentals, Inc.

— 4,635 — 4,635

Dema/Mai Holdings, Inc.

— 3,877 — 3,877

SFEG Holdings, Inc.

B+T Group Acquisition, Inc.

— (2,187) — (2,187)

Mason West, LLC — 3,343 — 3,343

Counsel Press, Inc.

Horizon Facilities Services, Inc.

— (5,915) — (5,915)

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— (6,954) — (6,954)

Utah Pacific Bridge & Steel, Ltd.

— (1,206) — (1,206)

Educators Resources, Inc.

— (1,614) — (1,614)

The Maids International, LLC — (2,679) — (2,679)

The Mountain Corporation (10,000) (2,930) 10,000 (2,930)

Ginsey Home Solutions, Inc.

— (3,263) — (3,263)

ImageWorks Display and Marketing Group, Inc.

— (8,884) — (8,884)

Galaxy Technologies Holdings, Inc.

— (4,804) — (4,804)

Edge Adhesives Holdings, Inc — (5,395) — (5,395)

Bassett Creek Services, Inc.

5,188 — (12,250) (7,062)

B+T Group Acquisition, Inc — (13,014) — (13,014)

– Atlanta, LLC — (13,966) — (13,966)

Other, net (<$1.0 million, net) 882 (127) (93) 662

Total $ 1,155 $ (727) $ (93) $ 335

Nine Months Ended December 31, 2021

Three Months Ended June 30, 2022

Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized (Appreciation) Depreciation Net Gain (Loss)

B+T Group Acquisition, Inc.

$ — $ 15,279 $ — $ 15,279

Brunswick Bowling Products, Inc.

— 13,842 — 13,842

Old World Christmas, Inc.

— 13,559 — 13,559

Schylling, Inc.

— 13,453 — 13,453

Horizon Facilities Service, Inc.

$ — $ 15,504 $ — $ 15,504

Educators Resource, Inc.

— 8,876 — 8,876

Bassett Creek Services, Inc.

— 7,877 — 7,877

SOG Specialty Knives & Tools, LLC — 7,575 — 7,575

ImageWorks Display and Marketing Group, Inc.

Nocturne Villas Rentals, Inc.

— 6,147 — 6,147

PSI Molded Plastics, Inc.

Brunswick Bowling Products, Inc.

— 4,903 — 4,903

1 unchanged sentence

— 3,990 — 3,990

Nocturne Villa Rentals, Inc.

SFEG Holdings, Inc.

— 3,108 — 3,108

Galaxy Technologies Holdings, Inc.

Nth Degree Investment Group, LLC — 2,625 — 2,625

Old World Christmas, Inc.

— (674) — (674)

Head Country, Inc.

Educators Resources, Inc.

— (939) — (939)

Channel Technologies Group, LLC (1,841) — 1,841 —

Diligent Delivery Systems — (903) — (903)

Mason West, LLC — (2,217) — (2,217)

SBS Industries Holdings, Inc.

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.

1 unchanged sentence

- Atlanta, LLC — (5,158) — (5,158)

Pioneer Square Brands, Inc.

21,939 (1,245) (25,425) (4,731)

Galaxy Technologies Holdings, Inc.

B+T Group Acquisition, Inc — (6,234) — (6,234)

Bassett Creek Services, Inc.

4,728 — (12,250) (7,522)

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Net Realized Gain (Loss) on Investments

During the nine months ended December 31, 2022, we recorded net realized gains on investments of $10.6 million, primarily due to a $13.4 million realized gain from the recapitalization of Old World, $5.2 million of realized gains from the exit of Bassett Creek, of which $0.5 million was received in the three months ended December 31, 2022, and a $2.2 million realized gain from the recapitalization of Horizon.

These amounts were partially offset by the $10.0 million realized loss recognized in conjunction with the replacement of the existing investment in The Mountain and $0.2 million of net realized losses related to prior period exits of certain investments.

During the nine months ended December 31, 2021, we recorded net realized gains on investments of $24.4 million, primarily related to a $21.9 million realized gain from the exit of Pioneer Square Brands, Inc., a $3.6 million realized gain from the exit of Head Country, Inc.

("Head Country") and $0.7 million of realized gains related to previous exits of certain investments, partially offset by a $1.8 million realized loss from the dissolution of Channel Technologies Group, LLC ("CTG").

Net Realized Gain Loss on Other

During the nine months ended December 31, 2021, we recorded a net realized loss on other of $2.0 million related to unamortized deferred issuance costs written off upon the redemption of our Series E Term Preferred Stock in August 2021.

During the nine months ended December 31, 2022, there were no realized gains or losses on other.

During the three months ended June 30, 2023, we recorded net realized gains on investments of $1.2 million, primarily due to $0.9 million of realized gains related to a prior period exit and a $0.3 million of realized gain from the recapitalization of Old World.

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.

Net Unrealized Appreciation (Depreciation) of Investments

Net unrealized depreciation of investments of $7.1 million for the nine months ended December 31, 2022 was primarily due to the net unrealized depreciation across our portfolio as well as the reversal of unrealized appreciation of our investment in Bassett Creek upon its exit and the reversal of unrealized depreciation of our investment in The Mountain upon the replacement of our existing investment.

The net depreciation was driven primarily by 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.

These decreases were partially offset by increased performance of certain of our 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.

Net unrealized appreciation of investments of $54.9 million for the nine months ended December 31, 2021 was primarily due to increased performance of certain of our 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, increased comparable multiples used to estimate the fair value of certain of our portfolio companies and the reversal of previously recorded unrealized depreciation of our investments in CTG upon its dissolution.

These amounts were partially offset by the reversal of previously recorded unrealized appreciation of our investment in Pioneer and Head Country upon exit and the decreased performance of certain of our portfolio companies.

Across our entire investment portfolio, we recorded net unrealized depreciation of $16.1 million on our debt positions and appreciation of $9.1 million on our equity positions, for the nine months ended December 31, 2022 .

As of December 31, 2022 , the fair value of our investment portfolio was more than the cost basis by $38.1 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 depreciation of $7.1 million for the nine months ended December 31, 2022 .

Our entire portfolio had a fair value of 105.3% of cost as of December 31, 2022 .

Net unrealized depreciation of investments of $0.8 million for the three months ended June 30, 2023 was primarily due to decreased performance of certain of our portfolio companies.

These amounts were partially offset by increased performance of certain of our other portfolio companies and an increase in transaction multiples used to estimate the fair value of certain of our portfolio companies.

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, had 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 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.

Across our entire investment portfolio, we recorded net unrealized depreciation of $4.9 million on our equity positions and net unrealized appreciation of $4.1 million on our debt positions , for the three months ended June 30, 2023 .

As of June 30, 2023 , the fair value of our investment portfolio was more than the cost basis by $32.1 million, as compared to March 31, 2023, when the fair value of our investment portfolio was more than the cost basis by $32.9 million, representing net unrealized depreciation of $0.8 million for the three months ended June 30, 2023 .

Our entire portfolio had a fair value of 104.2% of cost as of June 30, 2023 .

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Net cash used in operating activities for the nine months ended December 31, 2022 was $13.4 million, compared to net cash provided by operating activities of $39.3 million for the nine months ended December 31, 2021.

This change was primarily due to an increase in purchase of investments and a decrease in the aggregate of principal repayments of investments and net proceeds from the sale of investments.

Purchases of investments were $133.5 million during the nine months ended December 31, 2022, compared to $84.6 million during the nine months ended December 31, 2021.

Principal repayments and net proceeds from the sale of investments totaled $85.8 million during the nine months ended December 31, 2022, compared to $96.9 million during the nine months ended December 31, 2021.

As of December 31, 2022, we had equity investments in and/or loans to 25 portfolio companies with an aggregate cost basis of $722.4 million.

As of December 31, 2021, we had equity investments in and/or loans to 26 portfolio companies with an aggregate cost basis of $675.6 million.

The following table summarizes our total portfolio investment activity during the nine months ended December 31, 2022 and 2021:

Nine Months Ended December 31,

Net cash used in operating activities for the three months ended June 30, 2023 was $36.4 million, compared to net cash provided by operating activities of $41.3 million for the three months ended June 30, 2022.

This change was primarily due to an increase in purchase of investments and a decrease in net proceeds from the sale of investments.

Purchases of investments were $48.0 million during the three months ended June 30, 2023, compared to $27.8 million during the three months ended June 30, 2022.

Net proceeds from the sale and recapitalization of investments totaled $1.8 million during the three months ended June 30, 2023, compared to aggregate net proceeds from the sale and recapitalization of investments and principal repayments of investments of $57.4 million during the three months ended June 30, 2022.

As of June 30, 2023, we had equity investments in and/or loans to 25 portfolio companies with an aggregate cost basis of $768.0 million.

As of June 30, 2022, we had equity investments in and/or loans to 26 portfolio companies with an aggregate cost basis of $644.2 million.

The following table summarizes our total portfolio investment activity during the three months ended June 30, 2023 and 2022:

Three Months Ended June 30,

Beginning investment portfolio, at fair value $ 753,543 $ 714,396

1 unchanged sentence

Disbursements to existing portfolio companies 32,700 6,800

Unscheduled principal repayments (A)

(55,398) (46,898)

Unscheduled principal repayments — (48,000)

Net proceeds from sale and recapitalization of investments (1,775) (9,352)

4 unchanged sentences

Ending investment portfolio, at fair value $ 800,078 $ 689,513

(A) The nine months ended December 31, 2022 includes $5.1 million of non-cash principal repayments related to the August 2022 refinancing at Ginsey.

The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of December 31, 2022:

For the remaining three months ending March 31, 2023

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, 2023:

For the remaining nine months ending March 31, 2024

For the fiscal years ending March 31:

2 unchanged sentences

Investments in equity securities 172,688

Total cost basis of investments held as of December 31, 2022:

Total cost basis of investments held as of June 30, 2023:

Financing Activities

Net cash provided by financing activities for the nine months ended December 31, 2022 was $1.8 million, which consisted primarily of $29.6 million of net borrowings under the Credit Facility and $3.4 million of proceeds from issuance of common stock, net of expenses and shelf offering registration costs, partially offset by $30.9 million in distributions to common stockholders.

Net cash used in financing activities for the nine months ended December 31, 2021 was $13.0 million, which consisted primarily of the redemption of our Series E Term Preferred Stock of $94.4 million, $27.4 million in distributions to common stockholders, $22.4 million of net repayments under the Credit Facility and $3.4 million of deferred financing and offering costs, partially offset by $134.6 million in gross proceeds from the issuance of our 2028 Notes.

Net cash provided by financing activities for the three months ended June 30, 2023 was $71.0 million, which consisted primarily of $74.8 million of gross proceeds from the issuance of our 8.00% 2028 Notes, and $11.0 million of net borrowings under the Credit Facility, partially offset by $12.1 million in distributions to common stockholders and $2.7 million of deferred financing and offering costs.

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.

Distributions and Dividends to Stockholders

2 unchanged sentences

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.

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 six months from April through September 2022, monthly cash distributions of $0.08 per common share for each of the three months from October through December 2022, and supplemental distributions of $0.12 per common share in June and December 2022.

See also “ Recent Developments - Distributions and Dividends ” for a discussion of cash distributions to common stockholders declared by our Board of Directors in January 2023.

In accordance with these requirements, our Board of Directors declared, and we paid, monthly cash distributions of $0.08 per common share for each of the three months from April through June 2023, and a supplemental distribution of $0.12 per common share in June 2023.

See also “ Recent Developments - Distributions and Dividends ” for a discussion of cash distributions to common stockholders declared by our Board of Directors in July 2023.

For the fiscal year ended March 31, 2023, Investment Company Taxable Income exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $21.4 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, 2023, net capital gains exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $10.6 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 Overdistributed net investment income and increased Accumulated net realized gain in excess of distributions.

For the nine months ended December 31, 2022, we recorded $1.6 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 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 $0.1328125 per share to holders of our Series E Term Preferred Stock per month from April through July 2021 and $0.07968750 per share of our Series E Term Preferred Stock for the period from August 1, 2021 up to, but excluding, the redemption date of August 19, 2021.

In accordance with GAAP, we treat these monthly dividends as an operating expense.

For the year ended March 31, 2023, we recorded $1.6 million of net adjustments for estimated permanent book-tax differences to reflect tax character, which decreased Capital in excess of par value and increased Overdistributed net investment income and Accumulated net realized gain in excess of distributions.

For the three months ended June 30, 2023, we recorded $0.6 million of net adjustments for estimated permanent book-tax differences to reflect tax cha racter, which increased Capital in excess of par value and Overdistributed net investment income and decreased Accumulated net realized gain in excess of distributions.

Dividend Reinvestment Plan

8 unchanged sentences

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

2 unchanged sentences

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 $296.5 million of the securities registered under the registration statement.

In December 2019, we entered into equity distribution agreements with Wedbush Securities, Inc., Cantor Fitzgerald & Co., and Ladenburg Thalmann & Co., Inc., under which we had the ability to issue and sell shares of our common stock, from time to time, through such sales agents, up to an aggregate offering price of $35.0 million.

On August 11, 2021, we terminated the equity distribution agreements with each of such sales agents.

We did not sell any shares of our common stock under this ATM program during the year ended March 31, 2022.

As of the date of this report, we have the ability to issue up to $219.8 million of the $300.0 million of securities registered under the registration statement.

In August 2022, we entered into equity distribution agreements with Oppenheimer & Co.

and Virtu Americas LLC (each a “Sales Agent”), under which we have the ability to issue and sell shares of our common stock, from time to time, through the Sales Agents, up to an aggregate offering price of $50.0 million in what is commonly referred to as an “at-the-market” program (“Common Stock ATM Program”).

As of December 31, 2022, we had remaining capacity to sell up to an additional $46.5 million of common stock under the Common Stock ATM program.

During the three months ended December 31, 2022, we sold 212,338 shares of our common stock under the Common Stock ATM Program at a weighted-average gross price of $14.11 per share, raising approximately $3.0 million of gross proceeds.

The weighted-average net price per share, after deducting commissions and offering costs borne by us, was $13.91 and resulted in total net proceeds of approximately $3.0 million.

These sales were above our then current estimated NAV per share.

During the nine months ended December 31, 2022, we sold 241,978 shares of our common stock under the Common Stock ATM Program at a weighted-average gross price of $14.31 per share, raising approximately $3.5 million of gross proceeds.

The weighted-average net price per share, after deducting commissions and offering costs borne by us, was $14.11 and resulted in total net proceeds of approximately $3.4 million.

These sales were above our then current estimated NAV per share.

Subsequent to December 31, 2022 and through February 1, 2023, we sold 8,484 shares of our common stock under our Common Stock ATM Program at a weighted-average gross price of $14.01 per share and raised approximately $0.1 million in net proceeds.

These sales were above our then-current estimated NAV per share.

and Virtu Americas LLC (each a “Sales Agent”), under which we have the ability to issue and sell shares of our common stock, from time to time, through the Sales Agents, having an aggregate offering price of up to $50.0 million in what is commonly referred to as an “at-the-market” program (“Common Stock ATM Program”).

There were no shares sold during three months ended June 30, 2023.

As of June 30, 2023, we had remaining capacity to sell up to an additional $44.5 million of common stock under the Common Stock ATM program.

In July 2023, we sold 304,170 shares of our common stock under our Common Stock ATM program at a weighted-average gross price of $13.55 per share and raised approximately $4.1 million in net proceeds.

We anticipate issuing equity securities to obtain additional capital in the future.

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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 December 31, 2022, the closing market price of our common stock was $12.91 per share, representing a 3.9% discount to our NAV per share of $13.43 as of December 31, 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.

On June 30, 2023, the closing market price of our common stock was $ 13.04 per share, representing a 0.4 % premium to our NAV per share of $ 12.99 as of June 30, 2023.

Revolving Line of Credit

On March 8, 2021, we, through our wholly-owned subsidiary, Gladstone Business Investment, LLC (“Business Investment”), entered into Amendment No.

On April 10, 2023, we, through our wholly-owned subsidiary, Gladstone Business Investment, LLC ("Business Investment"), entered into Amendment No.

7 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 reference rate was updated from LIBOR to Term SOFR plus an 11 basis point credit spread adjustment.

On March 8, 2021, we, through our wholly-owned subsidiary, Gladstone Business Investment, LLC, entered into Amendment No.

6 to the Credit Facility with 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 December 31, 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.

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.

Advances under the Credit Facility generally bear interest at 30-day SOFR, subject to a floor of 0.35 %, 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 with a SOFR credit spread adjustment of 11 basis points.

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 December 31, 2022, we had $29.6 million borrowings outstanding on the Credit Facility and as of the date of this report, we had $31.3 million outstanding under the Credit Facility.

At June 30, 2023, we had $ 46.2 million borrowings outstanding on the Credit Facility and as of the date of this report, we had $38.2 million outstanding under the Credit Facility.

Interest is payable monthly during the term of the Credit Facility.

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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 $288.0 million as of December 31, 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 December 31, 2022, and as defined in the performance guaranty of the Credit Facility, we had a net worth of $705.7 million, asset coverage on our senior securities representing indebtedness of 250.5%, 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 December 31, 2022, we had availability, after adjustments for

various constraints based on collateral quality, of $150.4 million under the Credit Facility and were in compliance with all covenants under the Credit Facility.

Additionally, the Credit Facility contains a performance guaranty that requires the Company to maintain (i) a minimum net worth 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 $ 326.4 million as of June 30, 2023, (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, 2023, and as defined in the performance guaranty of the Credit Facility, we had a net worth of $ 766.1 million, asset coverage on our senior securities representing indebtedness of 211.0 %, 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, 2023, we had availability, after adjustments for various constraints based on collateral quality, of $ 133.8 million under the Credit Facility and were in compliance with all covenants under the Credit Facility.

Notes Payable

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In March 2021, we completed a public offering of the 5.00% 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 5.00% 2026 Notes are traded under the ticker symbol “GAINN” on

The 5.00% 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.

The 5.00% 2026 Notes bear interest at a rate of 5.00% per year (which equates to $6.4 million per year), payable quarterly in arrears.

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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.

8.00% Notes due 2028

In May 2023, we completed a public offering of the 8.00% 2028 Notes with an aggregate principal amount of $74.8 million, which resulted in net proceeds of approximately $72.3 million after deducting underwriting discounts, commissions and offering costs borne by us.

The 8.00% 2028 Notes are traded under the ticker symbol “GAINL” on Nasdaq.

The 8.00% 2028 Notes will mature on August 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 August 1, 2025.

The 8.00% 2028 Notes bear interest at a rate of 8.00% per year (which equates to $6.0 million per year), payable quarterly in arrears.

The indenture relating to the 8.00% 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 8.00% 2028

Notes and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements.

The 8.00% 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 $ 2.5 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 August 1, 2028, the maturity date.

OFF-BALANCE SHEET ARRANGEMENTS

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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 December 31, 2022 and March 31, 2022, we had unrecognized, contractual off-balance sheet success fee receivables of $53.1 million and $50.5 million (or approximately $1.59 and $1.52 per common share), respectively, on our debt investments.

As a result, as of June 30, 2023 and March 31, 2023, we had unrecognized, contractual off-balance sheet success fee receivables of $56.5 million and $53.6 million (or approximately $1.68 and $1.60 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 December 31, 2022 to be immaterial.

In conjunction with the term loan repayment by CCE in November 2022, our previously outstanding $1.0 million guaranty was released and terminated.

We were not required to make any payments on this guaranty, or any guaranties that existed in previous periods.

The following table shows our contractual obligations as of December 31, 2022, at cost:

We have line of credit commitments to certain of our portfolio companies that have not been fully drawn.

Since these line of credit commitments have expiration dates and we expect many will never be fully drawn, the total line of credit commitment amounts do not necessarily represent future cash requirements.

We estimate the fair value of the combined unused line of credit commitments as of June 30, 2023 to be insignificant.

The following table shows our contractual obligations as of June 30, 2023, at cost:

Payments Due by Period

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Total $ 480,696 $ 24,104 $ 219,528 $ 25,079 $ 211,985

(A) Excludes unused line of credit and delayed draw term debt commitments to our portfolio companies.

As of December 31, we had no amounts unused or outstanding.

(A) Excludes unused line of credit commitments to our portfolio companies in the aggregate principal 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.

The amount of interest payments calculated for purposes of this table was based upon rates and outstanding balances as of December 31, 2022.

(C) Includes interest payments due on the Credit Facility, 5.00% 2026 Notes, 4.875% 2028 Notes and 8.00% 2028 Notes, as applicable.

The amount of interest payments calculated for purposes of this table was based upon rates and outstanding balances as of June 30, 2023.

Critical Accounting Estimates

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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 December 31, 2022 and March 31, 2022:

Rating December 31, 2022 March 31, 2022

The following table reflects risk ratings for all loans in our portfolio as of June 30, 2023 and March 31, 2023:

Rating June 30, 2023 March 31, 2023

Weighted-average

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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 December 31, 2022 and March 31, 2022.

Our capital loss carryforward balance was $0 as of both June 30, 2023 and March 31, 2023.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis