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Item 1A. Risk Factors

2024-05-08 compared with 2023-05-10 · 86 added, 90 removed, 478 unchanged (27% of the section changed)

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Risks Related to the Economy

Global economic and political conditions could negatively impact our business, results of operations, financial condition, and cash flows.

Market conditions could negatively impact our business, results of operations, financial condition, and cash flows.

The market in which we operate is affected by a number of factors that are largely beyond our control but can nonetheless have a potentially significant, negative impact on us.

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• the availability of credit, including the price, terms and conditions under which it can be obtained;

• the quality, pricing, and availability of suitable investments and losses with respect to our investments;

• the quality, pricing, and availability of suitable investments and credit losses with respect to our investments;

• the ability to obtain accurate market-based valuations;

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• default rates on the loans underlying our investments and the amount of related losses;

• prepayment rates, delinquency rates and legislative / regulatory changes with respect to our investments;

• prepayment rates, delinquency rates and the timing and amount of service advances;

• competition;

• the impact of public health emergencies, generally and on the economy, the capital markets and our portfolio companies, including the measures taken by governmental authorities to address it;

• the actual and perceived state of the economy and capital markets generally;

• amendments or repeals of legislation, or changes in regulations or regulatory interpretations thereof, and transitions of government, including uncertainty regarding any of the foregoing;

• the national and global political environment, including foreign relations and trading policies;

• the national and global political environment, including war, armed conflicts, foreign relations and trading policies;

• the impact of potential changes to the Code;

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Changes in these factors are difficult to predict, and a change in one factor could affect other factors, which could result in adverse effects to our business, results of operations, financial condition, and cash flows.

Volatility in the capital markets could make it more difficult to raise capital and has, and could in the future, adversely affect the valuations of our investments.

Given the volatility and dislocation that the capital markets are experiencing and have experienced from time to time, many BDCs have faced, and may in the future face, a challenging environment in which to raise capital.

Volatility in the capital markets could make it more difficult to raise capital and may adversely affect the valuations of our investments.

Given the volatility and dislocation that the capital markets have experienced from time to time, many BDCs have faced, and may in the future face, a challenging environment in which to raise capital.

We could in the future have difficulty accessing debt and equity capital, and a severe disruption in U.S.

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In addition, significant changes in the capital markets have had, and may in the future have, a negative effect on the valuations of our investments and on the potential for liquidity events involving our investments.

Additionally, volatility in the U.S.

repo market may affect other financial markets worldwide.

An inability to raise capital, and any required sale of our investments for liquidity purposes, could have a material adverse impact on our business, financial condition, results of operations, or cash flows.

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Public health threats may adversely impact the businesses in which we invest and affect our business, operating results, and financial condition.

Public health threats, such as COVID-19 or any other pandemic, may disrupt the operations of the businesses in which we invest.

Public health threats, such as pandemics, may disrupt the operations of the businesses in which we invest.

Such threats can create economic and political uncertainties and can contribute to global economic instability.

In the event of a future public health threat, our portfolio companies may face limitations on their business activities for an unknown period of time, including shutdowns that may be requested or mandated by governmental authorities, or that they may experience disruptions in their supply chains or decreased consumer demand.

Certain of our portfolio companies have experienced increases in health and safety expenses, payroll costs and other operating expenses and future increases are possible.

These adverse economic impacts may decrease the value of our investments.

In the event of a future public health threat, our portfolio companies may face limitations on their business activities for an unknown period of time, including shutdowns that may be requested or mandated by governmental authorities, may experience disruptions in their supply chains or decreased consumer demand, or may experience increases in health and safety expenses, payroll costs and other operating expenses.

These adverse economic impacts may decrease the value of the collateral securing our loans in such portfolio companies, as well as the value of our equity investments.

In addition, these adverse impacts could cause certain of our portfolio companies to have difficulty meeting their debt service requirements, which in turn could lead to an increase in defaults, and/or could diminish the ability of certain of our portfolio companies to engage in liquidity events.

These negative impacts on our portfolio companies and their performance may increase realized and unrealized losses related to our investments, which may, in turn, adversely impact our business, financial condition or results of operations.

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As interest rates increase, generally, the cost of borrowing under our Credit Facility increases, which may affect our ability to make new investments on favorable terms or at all.

A substantial portion of our debt investments have variable interest rates that reset periodically and are generally based on LIBOR or SOFR.

A substantial portion of our debt investments have variable interest rates that reset periodically and are generally based on SOFR.

As interest rates have increased, the operating performance of certain of our portfolio companies has been affected by increasing debt service obligations and, therefore, may affect our results of operations.

In addition, to the extent that further increases in interest rates make it difficult or impossible to make payments on outstanding indebtedness to us or other financial sponsors or refinance debt that is maturing in the near term, some of our portfolio companies may be unable to repay such debt at maturity and may be forced to sell assets, undergo a recapitalization or seek bankruptcy protection.

Rising interest rates could also cause borrowers to shift cash from other productive uses to the payment of interest, which may have a material adverse effect on their business and operations and could, over time, lead to increased defaults.

Elevated interest rates could also cause borrowers to shift cash from other productive uses to the payment of interest, which may have a material adverse effect on their business and operations and could, over time, lead to increased defaults.

Additionally, as interest rates increase and the corresponding risk of a default by borrowers increases, the liquidity of higher interest rate loans may decrease as fewer investors may be willing to purchase such loans in the secondary market in light of the increased risk of a default by the borrower and the heightened risk of a loss of an investment in such loans.

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Recent and future increases in interest rates could have a negative effect on our investments, which could negatively impact our operating results, financial condition, and cash flows.

All of our debt investments have variable interest rates that reset periodically and are generally based on LIBOR or SOFR.

Accordingly, reduced interest rates will result in a decrease in our total investment income unless offset by interest rate floors or an increase in the spread of our debt investments with variable interest rates.

Any increase in interest rates, that is not in excess of our interest rate floors, could result in an increase in the interest expense that we pay on our borrowings with no corresponding increase in interest income and thus, lower overall net investment income.

In addition, our net investment income could decrease if there is no reduction or credit to the base management or incentive fees that we pay to the Adviser.

Conversely, reduced interest rates will result in a decrease in our total investment income unless offset by interest rate floors or an increase in the spread of our debt investments with variable interest rates.

In addition, our net investment income could decrease if there is no reduction or credit to the base management or incentive fees that we pay to the Adviser or if we are unable to refinance our fixed rate debt obligations or issue new fixed rate debt at lower rates.

In addition, when interest rates decline, borrowers may refinance their loans at lower interest rates, which could shorten the average life of the loans and reduce the associated returns on the investment, as well as require the Adviser and its investment professionals to incur management time and expense to re-deploy such proceeds, including on terms that may not be as favorable as our existing loans.

Changes in interest rates may adversely affect our profitability and hedging arrangements may expose us to additional risks.

A change in interest rates may adversely affect our profitability and any hedging strategy may expose us to additional risks.

We anticipate using a combination of equity and long-term and short-term borrowings to finance our investment activities.

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Alternatively, interest rate hedging arrangements may limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio.

Ultimately, we expect approximately 90% of the loans in our portfolio to be at variable rates determined on the basis of the LIBOR or SOFR, following the upcoming transition to SOFR, and approximately up to 10% to be at fixed rates.

Ultimately, we expect approximately 90% of the loans in our portfolio to be at variable rates determined on the basis of the SOFR and approximately up to 10% to be at fixed rates.

As of March 31, 2024, based on the total principal balance of debt investments outstanding, our portfolio consisted of 100.0% of loans at variable rates with floors.

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Refer to “Quantitative and Qualitative Disclosures About Market Risk ” for additional information on interest rate fluctuations.

The interest rates of some of our term loans to our portfolio companies are priced using a spread over LIBOR, which is expected to be phased out.

LIBOR is the basic rate of interest used in lending between banks on the London interbank market and historically has been widely used as a reference for setting the interest rate on loans globally.

In general, our investments in debt securities have a term of five years, accrue interest at variable rates based on LIBOR and, to a lesser extent, at fixed rates.

As of March 31, 2023, based on the total principal balance of debt investments outstanding, our portfolio consisted of 100.0% of loans at variable rates with floors.

As a result of concerns about the accuracy of the calculation of LIBOR, a number of British Bankers’ Association (the “BBA”) member banks entered into settlements with certain regulators and law enforcement agencies with respect to the alleged manipulation of LIBOR.

On July 27, 2017, the U.K Financial Conduct Authority (“FCA”) announced that it would phase out LIBOR as a benchmark by the end of 2021.

As of December 31, 2021, all non-U.S.

dollar LIBOR publications have been phased out.

The phase out of a majority of the U.S.

dollar publications is expected to occur by June 30, 2023.

The Alternative Reference Rates Committee (“ARRC”) of the Federal Reserve Bank of New York previously confirmed that this constitutes a “benchmark transition event” and established “benchmark replacement dates” in ARRC standard LIBOR transition provisions that exist in many U.S.

law contracts using LIBOR.

There is currently no definitive information regarding the future utilization of LIBOR.

The ARRC has identified SOFR as its preferred alternative rate for LIBOR.

SOFR is a measure of the cost of borrowing cash overnight, collateralized by the U.S.

Treasury securities, and is based on directly observable U.S.

Treasury-backed repurchase transactions.

Other jurisdictions have also proposed their own alternative to LIBOR, including the Sterling Overnight Index Average for Sterling markets, the Euro Short Term Rate for Euros and Tokyo Overnight Average Rate for Japanese Yens.

The effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR or other reference rates that may be enacted in the United States, United Kingdom or elsewhere cannot be predicted at this time, and it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark,

what rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes in views or alternatives may have on the financial markets for financial instruments based on LIBOR.

Factors such as the pace of the transition to replacement or reformed rates, the specific terms and parameters for and market acceptance of any alternative reference rate, prices of and the liquidity of trading markets for products based on alternative reference rates, and our ability to transition and develop appropriate systems and analytics for one or more alternative reference rates could also have a material adverse effect on our business, financial condition and results of operations.

In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have a material adverse effect on our business, financial condition, tax position and results of operations.

Risks Related to Our Investments

We operate in a highly competitive market for investment opportunities.

There is competitive pressure in the BDC and investment company marketplace for first and second lien secured debt, which can result in reduced yields on investment.

A large number of entities compete with us to make the types of investments we seek to make in Lower Middle Market companies.

We generally compete with public and private buyout funds, commercial and investment banks, commercial financing companies, and, to the extent that they provide an alternative form of financing, hedge funds, mutual funds, and private equity.

We compete with public and private buyout funds, commercial and investment banks, commercial financing companies, and, to the extent that they provide an alternative form of financing, hedge funds, mutual funds, and private equity.

Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do.

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Investments in Lower Middle Market portfolio companies are subject to a number of significant risks including the following:

• Lower Middle Market businesses are likely to be more significantly impacted in economic downturns than larger businesses .

• Lower Middle Market businesses are likely to have greater exposure to economic downturns than larger businesses .

Our portfolio companies may have fewer resources than larger businesses, and any economic downturns or recessions are more likely to have a material adverse effect on them.

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Deterioration in a borrower’s financial condition and prospects usually will be accompanied by deterioration in the value of any collateral and a reduction in the likelihood of realizing on any guaranties we may have obtained from the borrower’s management.

As of March 31, 2023, loans to three portfolio companies were on non-accrual status with an aggregate debt cost basis of $66.9 million, or 12.0% of the cost basis of all debt investments in our portfolio.

As of March 31, 2024, loans to two portfolio companies were on non-accrual status with an aggregate debt cost basis of $59.1 million, or 9.0% of the cost basis of all debt investments in our portfolio.

We cannot assure you that our efforts to improve profitability and cash flows of these companies will prove successful.

Although we will

generally seek to be a secured first lien lender to a borrower, in some of our loans we expect to be subordinated to a senior lender and our security interest in any collateral would, accordingly, likely be second lien and subordinate to another lender’s security interest.

In some of our loans we expect to be subordinated to a senior lender and our security interest in any collateral would, accordingly, likely be second lien and subordinate to another lender’s security interest.

• Lower Middle Market businesses typically have narrower product lines and smaller market shares than large businesses.

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These companies may be subject to restrictive financial and operating covenants and the leverage could impair these companies’ ability to finance their future operations and capital needs.

As a result, these companies’ flexibility to respond to changing business and economic conditions (including those currently presented by the COVID-19 pandemic) and to take advantage of business opportunities may be limited.

As a result, these companies’ flexibility to respond to changing business and economic conditions and to take advantage of business opportunities may be limited.

Further, a leveraged company’s income and net assets will tend to increase or decrease at a greater rate than if borrowed money were not used.

Because the loans we make and equity securities we invest in are not publicly traded, there is uncertainty regarding the value of our privately-held securities that could adversely affect our determination of our NAV.

• Lower Middle Market companies may operate in regulated industries or provide services to governments .

Some of our portfolio companies may operate in regulated industries and/or provide services to federal, state or local governments, or operate in industries that provide services to regulated industries or federal, state or local governments, any of which could lead to delayed payments for services or subject the company to changing payment and reimbursement rates or other terms.

Because the majority of the loans we make and equity securities we invest in are not publicly traded, there is uncertainty regarding the value of our privately-held securities.

Substantially all of our portfolio investments are, and we expect will continue to be, in the form of securities that are not publicly traded.

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In valuing our investment portfolio, several techniques are used, including, a total enterprise value approach, a yield analysis, and market quotes.

Currently, ICE Data Pricing and Reference Data, LLC provides estimates of fair value on generally all of our debt investments that are not valued using total enterprise value (“TEV”) and we use another independent valuation firm to provide valuation inputs for our significant equity investments, which are generally valued using TEV, including earnings multiple ranges, as well as other information.

A third-party valuation firm provides estimates of fair value on generally all of our debt investments that are not valued using total enterprise value (“TEV”) and we use another independent valuation firm to provide valuation inputs for our significant equity investments, which are generally valued using TEV, including earnings multiple ranges, as well as other information.

In addition to these techniques, inputs and information, other factors are considered when determining fair value of our investments, including:

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and the markets in which the portfolio company operates.

Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policy — Investment Valuation” for additional information on our valuation policies, procedures, and processes.

Fair value measurements of our investments may involve subjective judgments and estimates and, due to the uncertainty inherent in valuing these securities, the determination of fair value may fluctuate from period to period and may differ materially from the values that could be obtained if a ready market for these securities existed.

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The participation of our Adviser’s investment professionals in our valuation process and Mr.

Gladstone’s pecuniary interest in our Adviser may result in a conflict of interest, as the management fees that we pay our Adviser are based on our average gross assets, less uninvested cash or cash equivalents from borrowings, and adjusted appropriately for any share issuances or repurchases during the period.

Gladstone’s pecuniary interest in our Adviser may result in a conflict of interest, as the management fees that we pay our

Adviser are based on our average gross assets, less uninvested cash or cash equivalents from borrowings, and adjusted appropriately for any share issuances or repurchases during the period.

The lack of liquidity of our privately-held investments may adversely affect our business.

We will generally make investments in private companies whose securities are not traded in any public market.

We generally make investments in private companies whose securities are not traded in any public market.

Substantially all of the investments we presently hold and the investments we expect to acquire in the future are, and will be, subject to legal and other restrictions on resale and will otherwise be less liquid than publicly-traded securities.

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As a result, if a significant investment in one or more companies fails to perform as expected, our financial results could be more negatively affected and the magnitude of the loss could be more significant than if we had made smaller investments in more companies.

Our five largest investments represented more than 35% of the fair value of our total portfolio as of March 31, 2023 and 2022.

Our five largest investments represented 42.7% and 42.8% of the fair value of our total portfolio as of March 31, 2024 and 2023, respectively.

Any disposition of a significant investment in one or more portfolio companies may negatively impact our net investment income and limit our ability to pay distributions.

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After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to us.

We may also be subject to lender liability claims for actions taken by us with respect to a borrower’s business or in instances in which we exercised control over the borrower as a result of actions taken in rendering any managerial assistance.

in rendering any managerial assistance.

Furthermore, in the case of debt ranking equally with debt securities in which we invest, we would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization, or bankruptcy of a portfolio company.

Our portfolio is concentrated in a limited number of companies and industries, which subjects us to an increased risk of significant loss if any one of these companies does not repay us or if the industries experience downturns.

As of March 31, 2023, we had investments in 25 portfolio companies, the five largest of which included, Old World, Horizon, Dema/Mai, Brunswick, and Nocturne, and comprised $322.3 million, or 42.8%, of our total investment portfolio, at fair value.

As of March 31, 2024, we had investments in 24 portfolio companies, the five largest of which included SFEG, Nocturne, Nth Degree, Old World, and Brunswick and comprised $393.5 million, or 42.7%, of our total investment portfolio, at fair value.

A consequence of a limited number of investments is that the aggregate returns we realize may be substantially adversely affected by the unfavorable performance of a small number of such investments or a substantial write-down of any one investment, including due to the current inflation and interest rate environment.

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As of March 31, 2024, our largest industry concentration was in Diversified/Conglomerate Services, representing 28.7 % of our total investments, at fair value.

Volatility of oil and natural gas prices could impair certain of our portfolio companies’ operations and ability to satisfy obligations to their respective lenders and investors, including us, which could negatively impact our financial condition.

Our portfolio includes companies related to the oil and gas industry with the fair value of these investments representing approximately $51.2 million, or 5.6% of our total portfolio at fair value as of March 31, 2024.

These businesses provide services to oil and gas companies and are indirectly impacted by the prices of, and demand for, oil and natural gas, which have from time to time experienced volatility, including rapid and significant changes in prices, and such volatility could continue or increase in the future.

A substantial decline in oil and natural gas demand or prices may adversely affect the business, financial condition, cash flows, liquidity or results of operations of these portfolio companies and might impair their ability to meet capital expenditure obligations and financial commitments.

Any decline in oil prices, especially for a prolonged period, could therefore have a material adverse effect on our business, financial condition and results of operations.

Our investments are typically long-term and will require several years to realize liquidation events.

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These arrangements may result in contingent liabilities that may ultimately yield funding obligations that must be satisfied through our return of certain distributions previously made to us.

Portfolio company-related litigation or other litigation or claims against us or our personnel could result in costs, including defense costs or damages, and the diversion of management time and resources.

Portfolio company litigation or other litigation or claims against us or our personnel could result in additional costs and the diversion of management time and resources.

In the course of investing in and often providing significant managerial assistance to certain of our portfolio companies, certain persons employed by the Adviser sometimes serve as directors on the boards of such companies.

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We may be unable to accurately estimate our exposure to litigation risk if we record balance sheet reserves for probable loss contingencies.

As a result, any reserves we establish to cover any settlements or judgments may not be sufficient to cover our actual financial exposure, which may have a material impact on our results of operations, financial condition, or cash flows.

As a result, any reserves we establish to cover any settlements or

judgments may not be sufficient to cover our actual financial exposure, which may have a material impact on our results of operations, financial condition, or cash flows.

While we believe we would have valid defenses to potential claims brought due to our investment in any portfolio company, and will defend any such claims vigorously, we may nevertheless expend significant amounts of money in defense costs and expenses.

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Further, these matters could cause us to expend significant management time and effort in connection with assessment and defense of any claims.

No range of potential expenses, costs or damages in connection with these matters can be estimated at this time.

Any unrealized depreciation we experience on our investment portfolio may be an indication of future realized losses, which could reduce any gains available for distribution.

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We will have a continuing need for capital to finance our investments.

As of March 31, 2023, we, through our wholly-owned subsidiary, Business Investment, had $35.2 million of borrowings outstanding under the Credit Facility, which provides for maximum borrowings of $180.0 million, with a revolving period end date of February 29, 2024 (the “Revolving Period End Date”).

As of March 31, 2024, we, through our wholly-owned subsidiary, Business Investment, had $67.0 million of borrowings outstanding under the Credit Facility, which provides for maximum borrowings of $200.0 million, with a revolving period end date of October 30, 2026 (the “Revolving Period End Date”).

The Credit Facility permits us to fund additional loans and investments as long as we are within the conditions and covenants set forth in the credit agreement.

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 policy without the lenders’ consent.

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 policy 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.

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Any inability to renew, extend or replace the Credit Facility on terms favorable to us, or at all, could adversely impact our liquidity and ability to fund new investments or maintain distributions to our stockholders.

If the Credit Facility is not renewed or extended by the Revolving Period End Date, all principal and interest will be due and payable on February 28, 2026 (two years after the Revolving Period End Date).

If the Credit Facility is not renewed or extended by the Revolving Period End Date, all principal and interest will be due and payable on October 30, 2028 (two years after the Revolving Period End Date).

Subject to certain terms and conditions, the Credit Facility may be expanded to a total of $300.0 million through additional commitments of existing or new lenders.

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• Senior Securities :

We may issue senior securities representing indebtedness (including borrowings under the Credit Facility, our 2026 Notes and our 2028 Notes) and senior securities that are stock, up to the maximum amount permitted by the 1940 Act.

We may issue "senior securities representing indebtedness" (including borrowings under the Credit Facility, our 5.00% 2026 Notes, our 4.875% 2028 Notes and our 8.00% 2028 Notes) and "senior securities that are stock", up to the maximum amount permitted by the 1940 Act.

The 1940 Act currently permits us, as a BDC, to issue senior securities representing indebtedness and senior securities which are stock, in amounts such that our asset coverage, as defined in Section 18(h) of the 1940 Act, is at least 150% on each such senior security immediately after each issuance of each such senior security.

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We financed certain of our investments with borrowed money and capital from the issuance of senior securities, which will magnify the potential for gain or loss on amounts invested and may increase the risk of investing in us.

The use of leverage, including through the issuance of senior securities that are debt or stock, magnifies the potential for gain or loss on amounts invested.

We have incurred leverage in the past and currently incur leverage through the Credit Facility, the 2026 Notes and the 2028 Notes and, from time to time, may incur additional leverage to the extent permitted under the 1940 Act.

The use of leverage, including through the issuance of senior securities that are debt or stock, magnifies the potential for gain or loss on amounts invested and, if we incur additional leverage, this potential will be further magnified.

We have incurred leverage in the past and currently incur leverage through the Credit Facility, the 5.00% 2026 Notes, the 4.875% 2028 Notes and the 8.00% 2028 Notes and, from time to time, may incur additional leverage to the extent permitted under the 1940 Act.

The use of leverage is generally considered a speculative investment technique and increases the risks associated with investing in our securities.

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(A) The hypothetical return to common stockholders is calculated by multiplying our total assets as of March 31, 2024 by the assumed rates of return and subtracting all interest on our debt expected to be paid during the twelve months following March 31, 2024, and then dividing the resulting difference by our total net assets attributable to common stock as of March 31, 2024.

Based on $765.6 million in total assets, $35.2 million of borrowings outstanding on the Credit Facility, $127.9 million of 2026 Notes, at cost, $134.6 million of 2028 Notes, at cost, and $439.7 million in net assets as of March 31, 2023.

Based on $938.1 million in total assets, $67.0 million of borrowings outstanding on the Credit Facility, $127.9 million of 5.00% 2026 Notes, at cost, $134.6 million of 4.875% 2028 Notes, at cost, $74.8 million of 8.00% 2028 Notes, at cost, and $492.7 million in net assets as of March 31, 2024.

Based on an aggregate outstanding indebtedness of $404.2 million, at cost, as of March 31, 2024, the effective annual cash interest rate of 6.1 % as of that date, our investment portfolio at fair value would have to produce an annual return of at least 2.7 % to cover annual interest payments on the outstanding debt.

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Because we use leverage, we are subject to certain asset coverage ratio requirements under the 1940 Act and could, under certain circumstances, be restricted from making distributions necessary to qualify as a RIC.

Warrants we may receive with respect to debt investments generally create original issue discount (“OID”), which we must recognize as ordinary income over the term of the debt investment.

Warrants we may receive with respect to debt investments generally

create original issue discount (“OID”), which we must recognize as ordinary income over the term of the debt investment.

Similarly, PIK interest which is accrued generally over the term of the debt investment but not paid in cash, is recognized as ordinary income.

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Such a failure would have a material adverse effect on us and our common stock.

Refer to “Business — Material U.S.

Federal Income Tax Considerations — RIC Status” for additional information regarding asset coverage ratio and RIC requirements.

Some of our debt investments may include success fees that would generally generate payments to us upon a change of control.

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We may not be permitted to declare a dividend or make any distribution to stockholders or repurchase shares until such time as we satisfy the asset coverage tests under the provisions of the 1940 Act that apply to BDCs.

As a BDC, we have the ability to issue senior securities only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 150% after each issuance of senior securities.

If the value of our assets declines, we may be unable to satisfy this test.

If that happens, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our debt at a time when such sales and/or repayments may be disadvantageous.

Regulations governing our operation as a BDC and RIC will affect our ability to raise, and the way in which we raise, additional capital or borrow for investment purposes, which may have a negative effect on our growth.

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The Adviser has the right to resign under the Advisory Agreement at any time upon not less than 60 days’ written notice, whether we have found a replacement or not.

If the Adviser resigns, we may not be able to find a new investment adviser or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all.

If the Adviser resigns, we may not be able to find a new investment adviser or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable

terms within 60 days, or at all.

If we are unable to do so quickly, our operations are likely to experience a disruption, our financial condition, business and results of operations as well as our ability to pay distributions are likely to be adversely affected and the market price of our common stock may decline.

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Pursuant to the Advisory Agreement, the Adviser and its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with the Adviser will not be liable to us for their acts under the Advisory Agreement, absent willful misfeasance, bad faith or gross negligence in the performance of their duties or by reason of the reckless disregard of their duties and obligations under the Advisory Agreement.

liabilities, costs and expenses arising out of or otherwise based upon the performance of any of the Adviser’s duties or obligations under the Advisory Agreement or otherwise as an investment adviser for us, and not arising out of willful misfeasance, bad faith or gross negligence in the performance of their duties or by reason of the reckless disregard of their duties and obligations under the Advisory Agreement.

We have agreed to indemnify, defend and protect the Adviser and its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with the Adviser with respect to all damages, liabilities, costs and expenses arising out of or otherwise based upon the performance of any of the Adviser’s duties or obligations under the Advisory Agreement or otherwise as an investment adviser for us, and not arising out of willful misfeasance, bad faith or gross negligence in the performance of their duties or by reason of the reckless disregard of their duties and obligations under the Advisory Agreement.

These protections may lead the Adviser to act in a riskier manner when acting on our behalf than it would when acting for its own account.

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Dullum, our president, is also an executive vice president of the Adviser.

While portfolio managers and the officers and other employees of the Adviser devote as

much time to the management of us as appropriate to enable the Adviser to perform its duties in accordance with the Advisory Agreement, the portfolio managers and other of the Adviser's officers may have conflicts in allocating their time and services among us, on the one hand, and other investment vehicles managed by the Adviser, on the other hand.

While portfolio managers and the officers and other employees of the Adviser devote as much time to the management of us as appropriate to enable the Adviser to perform its duties in accordance with the Advisory Agreement, the portfolio managers and other of the Adviser's officers may have conflicts in allocating their time and services among us, on the one hand, and other investment vehicles managed by the Adviser, on the other hand.

These activities could be viewed as creating a conflict of interest insofar as the time and effort of the portfolio managers and the officers and employees of the Adviser will not be devoted exclusively to our business but will instead be allocated between our business and the management of these other investment vehicles.

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In addition, as a BDC, we make available significant managerial assistance to our portfolio companies and provide other services to such portfolio companies.

While neither we nor the Adviser currently receive fees in connection with managerial assistance, the Adviser and Gladstone Securities have, at various times, provided other services to certain of our portfolio companies and received fees for services other than managerial assistance as discussed in “ Business – Ongoing Management of Investment Portfolio Company Relationships – Managerial Assistance and Services.”

The Adviser is not obligated to provide credits of the base management fee or incentive fees, which could negatively impact our earnings and our ability to maintain our current level of distributions to our stockholders.

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However, if, for example, we sold an additional 10% of our common stock at a 5% discount from NAV, an existing common stockholder who did not participate in that offering for its proportionate interest would suffer NAV dilution of up to 0.5% or $5 per $1,000 of NAV.

Risks Related to the 2026 Notes and 2028 Notes (collectively, the "Notes")

Risks Related to the 5.00% 2026 Notes, 4.875% 2028 Notes and 8.00% 2028 Notes (collectively, the "Notes")

The Notes are unsecured and therefore are effectively subordinated to any secured indebtedness we may incur in the future and will rank pari passu with, or equal to, all outstanding and future unsecured indebtedness issued by us and our general liabilities (total liabilities, less debt).

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Even if we are recognized as a creditor of one or more of our subsidiaries, our claims would still be effectively subordinated to any security interests in the assets of any such subsidiary and to any indebtedness or other liabilities of any such subsidiary senior to our claims.

Consequently, the Notes are structurally subordinated to all indebtedness and other liabilities of any of our subsidiaries and any subsidiaries that we may in the future acquire or establish.

Our wholly-owned subsidiary, Gladstone Business Investment, is the obligor under our Credit Facility, which is structurally senior to the Notes.

Consequently, the Notes are structurally subordinated to all indebtedness and other liabilities of any of our subsidiaries and any

subsidiaries that we may in the future acquire or establish.

Our wholly-owned subsidiary, Business Investment, is the obligor under our Credit Facility, which is structurally senior to the Notes.

In addition, our subsidiaries may incur substantial additional indebtedness in the future, all of which would be structurally senior to the Notes.

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In particular, the terms of the indenture and the Notes do not place any restrictions on our or our subsidiaries’ ability to:

• issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the Notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore is structurally senior to the Notes and (4) securities, indebtedness or obligations issued or incurred by our subsidiaries that would be senior to our equity interests in our subsidiaries and therefore rank structurally senior to the Notes with respect to the assets of our subsidiaries, in each case other than an incurrence of indebtedness or other obligation that would cause a violation of Section 18(a)(1)(A) as modified by Section 61(a)(2) of the 1940 Act or any successor provisions, whether or not we continue to be subject to such provisions of the 1940 Act, which generally prohibit us incurring additional debt or issuing additional debt or

preferred securities, unless our asset coverage, as defined in the 1940 Act, equals at least 150% after such incurrence or issuance;

• pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities ranking junior in right of payment to the Notes, including preferred stock and any subordinated indebtedness, in each case other than dividends, purchases, redemptions or payments that would cause our asset coverage to fall below the threshold specified in Section 18(a)(1)(B) as modified by Section 61(a)(2) of the 1940 Act or any successor provisions thereto, whether or not we are subject to such provisions of the 1940 Act, giving effect to any no-action relief granted by the SEC to another BDC and upon which we may reasonably rely (or to us if we determine to seek such similar SEC no-action or other relief) permitting the BDC to declare any cash dividend or distribution notwithstanding the prohibition contained in Section 18(a)(1)(B) as modified by Section 61(a)(2) of the 1940 Act to maintain the BDC’s status as a RIC under Subchapter M of the Code;

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Any default under the agreements governing our indebtedness, including a default under the Credit Facility or other indebtedness to which we may be a party, that is not waived by the required lenders or holders, and the remedies sought by the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the Notes and substantially decrease the market value of the Notes.

If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness,

or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness, including the Notes.

If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness, including the Notes.

In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under the Credit Facility or other debt we may incur in the future could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation.

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Because the Credit Facility has, and any future credit facilities will likely have, customary cross-default provisions, if the indebtedness under the Notes or the Credit Facility or under any future credit facility is accelerated, we may be unable to repay or finance the amounts due.

We may choose to redeem the Notes when prevailing interest rates are relatively low.

At any time with respect to the 5.00% 2026 Notes and the 4.875% 2028 Notes and on or after August 1, 2025, with respect to the 8.00% 2028 Notes, we may choose to redeem the Notes from time to time, especially if prevailing interest rates are lower than the rate borne by the Notes.

If prevailing rates are lower at the time of redemption, and we redeem the Notes, you likely would not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as the interest rate on the Notes being redeemed.

Our redemption right also may adversely impact your ability to sell the Notes as the optional redemption date or period approaches.

A downgrade, suspension or withdrawal of any credit rating assigned by a rating agency to us or the Notes could cause the liquidity or market value of the Notes to decline significantly.

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Maintaining our network security is of critical importance because our systems store highly confidential financial models and portfolio company information.

Although we have implemented, and will continue to implement, security measures, our technology platform may be vulnerable to intrusion, computer viruses or similar disruptive problems caused by cyber-attacks.

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources or those of our portfolio companies.

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In addition, any such incident, disruption or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties, disrupt our operations, and damage our and our Adviser’s reputations, resulting in a loss of confidence in our services and our Adviser’s services, which could adversely affect our business.

We are subject to risks associated with artificial intelligence and machine learning technology.

Recent technological advances in artificial intelligence and machine learning technology pose risks to our Company and our portfolio companies.

Our Company and our portfolio companies could be exposed to the risks of artificial intelligence and machine learning technology if third-party service providers or any counterparties, whether or not known to our Company, also use artificial intelligence and machine learning technology in their business activities.

We and our portfolio companies may not be in a position to control the use of artificial intelligence and machine learning technology in third-party products or services.

Use of artificial intelligence and machine learning technology could include the input of confidential information in contravention of applicable policies, contractual or other obligations or restrictions, resulting in such confidential information becoming partly accessible by other third-party artificial intelligence and machine learning technology applications and users.

Independent of its context of use, artificial intelligence and machine learning technology is generally highly reliant on the collection and analysis of large amounts of data, and it is not possible or practicable to incorporate all relevant data into the model that artificial intelligence and machine learning technology utilizes to operate.

Certain data in such models will inevitably contain a degree of inaccuracy and error—potentially materially so—and could otherwise be inadequate or flawed, which would be likely to degrade the effectiveness of artificial intelligence and machine learning technology.

To the extent that we or our portfolio companies are exposed to the risks of artificial intelligence and machine learning technology use, any such inaccuracies or errors could have adverse impacts on our Company or our investments.

Artificial intelligence and machine learning technology and its applications, including in the private investment and financial sectors, continue to develop rapidly, and it is impossible to predict the future risks that may arise from such developments.

We are subject to risks related to corporate social responsibility.

Our business (including that of our portfolio companies) faces increasing public scrutiny related to environmental, social and governance (“ESG”) activities, which are increasingly considered to contribute to the long-term sustainability of a company’s performance.

A variety of organizations measure the performance of companies on ESG topics, and the results of these assessments are widely publicized.

Adverse incidents with respect to ESG activities could impact the value of our brand, our relationship with future portfolio companies, the cost of our operations and relationships with investors, all of which could adversely affect our business and results of operations.

Additionally, new regulatory initiatives related to ESG that are applicable to us and our portfolio companies could adversely affect our business.

The SEC has adopted rules that require additional disclosures about ESG investment practices by investment advisers and certain funds, including BDCs.

The SEC has also adopted rules that, among other matters, establish a framework for reporting of climate-related risks.

Compliance with these rules may be onerous and expensive.

Further, compliance with any new laws, regulations or disclosure obligations increases our regulatory burden and could make compliance more difficult and expensive, affect the manner in which we or our portfolio companies conduct our businesses and adversely affect our profitability.

We are dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to pay dividends.

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As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.

UNRESOLVED STAFF COMMENTS

We do not own any real estate or other physical properties material to our operations.

The Adviser is the current leaseholder of all properties in which we operate.

We occupy these premises pursuant to our Advisory and Administration Agreements with the Adviser and Administrator, respectively.

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-K

Item 1A. Risk Factors