GLADSTONE CAPITAL CORP 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All statements contained herein, other than historical facts, may constitute “forward-looking statements.” These statements may relate to, among other things, our future operating results, our business prospects and the prospects of our portfolio companies, actual and potential conflicts of interest with Gladstone Management Corporation (the “Adviser”), our investment adviser, and its affiliates, the use of borrowed money to finance our investments, the adequacy of our financing sources and working capital, and our ability to co-invest, among other factors. In some cases, you can identify forward-looking statements by terminology such as “estimate,” “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “project,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative or variations of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include: (1) changes in the economy and the capital markets, including stock price volatility, inflation, rising interest rates and risks of recession; (2) risks associated with negotiation and consummation of pending and future transactions; (3) the loss of one or more of our executive officers, in particular David Gladstone, Terry Lee Brubaker or Robert L. Marcotte; (4) changes in our investment objectives and strategy; (5) availability, terms (including the possibility of interest rate volatility) and deployment of capital; (6) changes in our industry, interest rates, exchange rates or the general economy; (7) our business prospects and the prospects of our portfolio companies; (8) the degree and nature of our competition; (9) changes in governmental regulation, tax rates and similar matters; (10) our ability to exit investments in a timely manner; (11) our ability to maintain our qualification as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), and as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”); and (12) those factors described herein, including Item 1A. “Risk Factors,” and in the “Risk Factors” section of our Annual Report on Form 10-K (our “Annual Report”) for the fiscal year ended September 30, 2022, filed with the U.S. Securities and Exchange Commission (“SEC”) on November 14, 2022. We caution readers not to place undue reliance on any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements and future results could differ materially from historical performance. We have based forward-looking statements on information available to us on the date of this report. Except as required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC from time to time, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements contained in this Quarterly Report on Form 10-Q are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended. The following analysis of our financial condition and results of operations should be read in conjunction with our accompanying Consolidated Financial Statements and the notes thereto contained elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report. Historical financial condition and results of operations and percentage relationships among any amounts in the financial statements are not necessarily indicative of financial condition or results of operations for any future periods. Except per share amounts, dollar amounts in the tables included herein are in thousands unless otherwise indicated. OVERVIEW General We were incorporated under the Maryland General Corporation Law on May 30, 2001. We operate as an externally managed, closed-end, non-diversified management investment company, and have elected to be treated as a BDC under the 1940 Act. In addition, for federal income tax purposes we have elected to be treated as a RIC under the Code. To continue to qualify as a RIC for federal income tax purposes and obtain favorable RIC tax treatment, we must meet certain requirements, including certain minimum distribution requirements. 45 Table of Contents We were established for the purpose of investing in debt and equity securities of established private businesses operating in the U.S. Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established lower middle market businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our investment objectives, our investment strategy is to invest in several categories of debt and equity securities, with each investment generally ranging from $8 million to $30 million, although investment size may vary, depending upon our total assets or available capital at the time of investment. We expect that our investment portfolio over time will consist of approximately 90.0% debt investments and 10.0% equity investments, at cost. As of June 30, 2023, our investment portfolio was made up of approximately 91.5% debt investments and 8.5% equity investments, at cost. We focus on investing in lower middle market companies (which we generally define as companies with annual earnings before interest, taxes, depreciation and amortization of $3 million to $15 million) in the U.S. that meet certain criteria, including the following: the sustainability of the business’ free cash flow and its ability to grow it over time, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the borrower, reasonable capitalization of the borrower, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples and, to a lesser extent, the potential to realize appreciation and gain liquidity in our equity position, if any. We lend to borrowers that need funds for growth capital or to finance acquisitions or recapitalize or refinance their existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises. Our targeted portfolio companies are generally considered too small for the larger capital marketplace. We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity. In July 2012, the SEC granted us an exemptive order (the “Co-Investment Order”) that expanded our ability to co-invest, under certain circumstances, with certain of our affiliates, including Gladstone Investment Corporation, a BDC also managed by the Adviser, and any future BDC or closed-end management investment company that is advised (or sub-advised if it controls the fund) by the Adviser, or any combination of the foregoing, subject to the conditions in the Co-Investment Order. Since 2012, we have opportunistically made several co-investments with Gladstone Investment Corporation pursuant to the Co-Investment Order. We believe the Co-Investment Order has enhanced and will continue to enhance our ability to further our investment objectives and strategies. If we are participating in an investment with one or more co-investors, our investment is likely to be smaller than if we were investing alone. We are externally managed by the Adviser, an investment adviser registered with the SEC and an affiliate of ours, pursuant to an investment advisory and management agreement. The Adviser manages our investment activities. We have also entered into an administration agreement with Gladstone Administration, LLC (the “Administrator”), an affiliate of ours and the Adviser, whereby we pay separately for administrative services. Additionally, Gladstone Securities, LLC (“Gladstone Securities”), a privately-held broker-dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation, which is 100% indirectly owned and controlled by Mr. Gladstone, our chairman and chief executive officer, has provided other services, such as investment banking and due diligence services, to certain of our portfolio companies, for which Gladstone Securities receives a fee. Gladstone Securities also serves as the Company’s exclusive dealer manager in connection with the Company’s offering of up to 6,000,000 shares of 6.25% Series A Cumulative Redeemable Preferred Stock. Refer to “Liquidity and Capital Resources — Equity — Preferred Stock” for further discussion. Business Portfolio and Investment Activity In general, our investments in debt securities have a term of no more than seven years, accrue interest at variable rates (generally based on one-month Term Secured Overnight Financing Rate (“SOFR”), or, historically, the 30-day London Interbank Offered Rate (“LIBOR”) and, to a lesser extent, at fixed rates. We seek debt instruments that pay interest monthly or, at a minimum, quarterly, may have a success fee or deferred interest provision and are primarily interest only, with all principal and any accrued but unpaid interest due at maturity. Generally, success fees accrue at a set rate and are contractually due upon a change of control of a portfolio company, typically from an exit or sale. Some debt securities have deferred interest whereby some portion of the interest payment is added to the principal balance so that the interest is paid, together with the principal, at maturity. This form of deferred interest is often called paid-in-kind (“PIK”) interest. 46 Table of Contents Typically, our equity investments consist of common stock, preferred stock, limited liability company interests, or warrants to purchase the foregoing. Often, these equity investments occur in connection with our original investment, recapitalizing a business, or refinancing existing debt. From our initial public offering in August 2001 through June 30, 2023, we have made 632 different loans to, or investments in, 273 companies for a total of approximately $2.6 billion, before giving effect to principal repayments on investments and divestitures. During the nine months ended June 30, 2023, we invested $101.5 million in five new portfolio companies, received an interest in senior notes of $2.4 million, and extended $44.2 million in investments to existing portfolio companies primarily through refinancings and draws on existing delayed draw term loan and line of credit commitments. In addition, we received a total of $84.2 million in combined net proceeds and principal repayments from portfolio company exits and principal repayments by existing portfolio companies during the nine months ended June 30, 2023. During the nine months ended June 30, 2023, the following significant transactions occurred: Proprietary Investments • In October and November 2022, we received distributions totaling $6.0 million from our investment in Leeds related primarily to the sale of underlying assets in the fund, which resulted in a realized gain of approximately $4.4 million. We retain an equity investment in Leeds with no remaining cost basis and fair value of $0.2 million as of June 30, 2023. • In December 2022, our investment in R2i Holdings, LLC paid off at par for net cash proceeds of $19.2 million. • In January 2023, we invested $29.0 million in NeoGraf Solutions LLC (“NeoGraf”) through secured first lien debt and common equity. We also extended NeoGraf a $4.5 million line of credit commitment, which was unfunded at close. • In January and March 2023, we invested a total of $6.3 million in Salt & Straw, LLC, an existing portfolio company, through funding on our existing delayed draw term loan commitment. • In March 2023, we invested $13.5 million in Leadpoint Business Services, LLC through secured first lien debt. We also extended Leadpoint Business Services, LLC a $5.5 million line of credit commitment which was fully funded as of March 31, 2023. In May 2023, the line of credit was paid off at par for net cash proceeds of $5.5 million and terminated. • In April 2023, we invested $25.0 million in Technical Resource Management, LLC (“Technical”) through secured first lien debt and equity. We also extended Technical a $3.0 million line of credit commitment and a $2.5 million delayed draw term loan commitment, each of which were unfunded at close. • In April 2023, our debt investment in HH-Inspire Acquisition, Inc. (“Inspire”) was refinanced. Our original debt investment totaling $35.5 million was redeemed at par plus a $0.2 million prepayment fee, and we invested a total of $16.8 million in Inspire through new secured first lien debt and equity, which was net funded through the redemption of our original debt investment. We also extended Inspire a $1.8 million line of credit commitment, which was unfunded at close. In June 2023, we invested an additional $3.4 million in Inspire through secured first lien debt and equity. • In May 2023, we invested $22.0 million in OCI, LLC through secured first lien debt, secured second lien debt, and common equity. • In June 2023, the majority of our investment in PIC 360, LLC was sold resulting in a net realized gain of $3.7 million. We continue to retain a small investment in PIC 360 with a fair value of approximately $0.3 million. • In June 2023, we invested $6.5 million in Trowbridge Chicago, LLC (“Trowbridge”) through secured first lien debt and preferred equity. We also extended Trowbridge a $2.0 million line of credit commitment and a $5.3 million delayed draw term loan commitment, each of which were unfunded at close. 47 Table of Contents Syndicated Investments • In October 2022, our investment in Targus Cayman HoldCo Ltd. was sold for net proceeds of approximately $8.0 million, which resulted in a realized gain of approximately $5.9 million. As part of the proceeds, we received an interest in B. Riley Financial, Inc. 6.75% senior notes in the amount of $2.4 million which are traded on the Nasdaq Global Select Market under the trading symbol RILYO. In June 2023, we redeemed our investment in B. Riley Financial, Inc. at par for proceeds of $2.4 million. Capital Raising We have been able to meet our capital needs through extensions of and amendments to our line of credit with KeyBank National Association (“KeyBank”), as administrative agent, lead arranger and lender (as amended and/or restated from time to time, our “Credit Facility”) and by accessing the capital markets in the form of public equity offerings of common stock and public and private debt offerings. We have successfully extended the Credit Facility’s revolving period multiple times, most recently to October 2025, and currently have a total commitment amount of $223.7 million. We sold 3,865,890 shares of our common stock under our at-the-market program during the nine months ended June 30, 2023. In November 2021, we completed a private placement of $50.0 million aggregate principal amount of our 3.75% Notes due 2027 (the “2027 Notes”). In December 2020, we completed a debt offering of $100.0 million aggregate principal amount of our 5.125% Notes due 2026 (the “2026 Notes”). In March 2021, we completed a debt offering of an additional $50.0 million aggregate principal amount of the 2026 Notes. Refer to “Liquidity and Capital Resources — Revolving Line of Credit,” “Liquidity and Capital Resources — Equity — Common Stock,” and “Liquidity and Capital Resources — Notes Payable” for further discussion. Although we have been able to access the capital markets historically and in recent years, market conditions may affect the trading price of our capital stock and thus may inhibit our ability to finance new investments through the issuance of equity in the future. When our common stock trades below net asset value (“NAV”) per common share, our ability to issue equity is constrained by provisions of the 1940 Act, which generally prohibits the issuance and sale of our common stock below NAV per common share without first obtaining approval from our stockholders and our independent directors, other than through sales to our then-existing stockholders pursuant to a rights offering. On June 30, 2023, the closing market price of our common stock was $ 9.76 per share, a 5.3 % premium to our June 30, 2023 NAV per share of $ 9.27 . Regulatory Compliance Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage limitations of the 1940 Act, which require us to have an asset coverage (as defined in Sections 18 and 61 of the 1940 Act) of at least 150% on our “senior securities representing indebtedness” and our “senior securities that are stock.” On April 10, 2018, our Board of Directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) thereof, approved the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, the Company’s asset coverage requirements for senior securities changed from 200% to 150%, effective April 10, 2019. As of June 30, 2023, our asset coverage on our “senior securities representing indebtedness” was 195.8%. 48 Table of Contents Recent Developments Distributions On July 11, 2023, our Board of Directors declared the following distributions to common and preferred stockholders: Record Date Payment Date Distribution per Common Share July 21, 2023 July 31, 2023 $ 0.0825 August 23, 2023 August 31, 2023 0.0825 September 7, 2023 September 15, 2023 (A) 0.0200 September 21, 2023 September 29, 2023 0.0825 Total for the Quarter: $ 0.2675 Record Date Payment Date Distribution per Series A Preferred Stock (B) July 27, 2023 August 4, 2023 $ 0.130208 August 28, 2023 September 6, 2023 0.130208 September 27, 2023 October 5, 2023 0.130208 Total for the Quarter: $ 0.390624 (A) Represents a supplemental distribution to common stockholders. (B) As of the date of this filing, there are no shares of Series A Preferred Stock outstanding. LIBOR Transition In general, our investments in debt securities have a term of five years, accrue interest at variable rates (based on SOFR or historically, LIBOR) and, to a lesser extent, at fixed rates. As of June 30, 2023, LIBOR is no longer readily available. In the United States, LIBOR has predominantly been transitioned to a new standard rate, the SOFR, which incorporates certain overnight repo market data collected from multiple data sets. The new variable rate debt investments that we are making are based on SOFR and our existing investments have been transitioned from LIBOR to SOFR with minimal impact on our operations. Impact of Inflation We believe the effects of inflation, if any, on our historical results of operations and financial condition have been immaterial. During the nine 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. Notwithstanding the results to date, the cumulative effect of these inflationary pressures may, in the future, impact the profit margins or sales of certain portfolio companies and their ability to service their debts. We continue to monitor the current inflationary environment to anticipate any impact on our portfolio companies, including their availability to pay interest on our loans. We cannot assure you that our results of operations and financial condition or that of our portfolio companies will not be materially impacted by inflation in the future. 49 Table of Contents RESULTS OF OPERATIONS Comparison of the Three Months Ended June 30, 2023 to the Three Months Ended June 30, 2022 Three Months Ended June 30 2023 2022 $ Change % Change INVESTMENT INCOME Interest income $ 21,816 $ 12,593 $ 9,223 73.2 % Success fee, dividend, and other income 1,007 1,191 (184) (15.4) Total investment income 22,823 13,784 9,039 65.6 EXPENSES Base management fee 3,106 2,501 605 24.2 Loan servicing fee 2,069 1,614 455 28.2 Incentive fee 2,919 1,579 1,340 84.9 Administration fee 417 407 10 2.5 Interest expense 5,553 3,150 2,403 76.3 Amortization of deferred financing costs 405 286 119 41.6 Other expenses 673 485 188 38.8 Expenses, before credits from Adviser 15,142 10,022 5,120 51.1 Credit to base management fee – loan servicing fee (2,069) (1,614) (455) 28.2 Credits to fees from Adviser – other (1,926) (1,571) (355) 22.6 Total expenses, net of credits 11,147 6,837 4,310 63.0 NET INVESTMENT INCOME 11,676 6,947 4,729 68.1 NET REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on investments 2,911 (8,496) 11,407 (134.3) Net realized gain (loss) on other 44 347 (303) (87.3) Net unrealized appreciation (depreciation) of investments (2,586) (4,397) 1,811 (41.2) Net unrealized appreciation of other (161) — (161) NM Net gain (loss) from investments and other 208 (12,546) 12,754 (101.7) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 11,884 $ (5,599) $ 17,483 (312.3) % NM - Not Meaningful Investment Income Interest income increased by 73.2% 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 for the three months ended June 30, 2023 was $644.1 million, compared to $506.1 million for the three months ended June 30, 2022, an increase of $138.0 million, or 27.3%. The weighted average yield on our interest-bearing investments is based on the current stated interest rate on interest-bearing investments, which increased to 13.6% for the three months ended June 30, 2023, compared to 10.0% for the three months ended June 30, 2022, inclusive of any allowances on interest receivables made during those period s. The increase in the weighted average yield was driven mainly by increases in interest rates. As of June 30, 2023, our loan to Edge Adhesives Holdings, Inc. was on non-accrual status with a debt cost basis of $6.1 million, or 0.9% of the cost basis of all debt investments in our portfolio, and a fair value of $2.8 million, or 0.4% of the fair value of all debt investments in our portfolio. As of September 30, 2022, there were no loans on non-accrual status. Other income decreased by 15.4% during the three months ended June 30, 2023, as compared to the prior year period, primarily due to a decrease in dividend income period over period. As of June 30, 2023 and September 30, 2022, no single investment represented greater than 10% of the total investment portfolio at fair value. 50 Table of Contents Expenses Expenses, net of any non-contractual, unconditional and irrevocable credits to fees from the Adviser, increased $4.3 million, or 63.0%, for the three months ended June 30, 2023, as compared to the prior year period. This increase was primarily due to a $2.4 million increase in interest expense and a $1.3 million increase in the income-based incentive fee. Total interest expense on borrowings and notes payable increased by $2.4 million, or 76.3%, during the three months ended June 30, 2023, as compared to the prior year period. This increase was driven by increased borrowings outstanding under our Credit Facility and an increase in the effective interest rate on our Credit Facility. The weighted average balance outstanding under our Credit Facility was $154.3 million during the three months ended June 30, 2023, as compared to $49.1 million in the prior year period, an increase of 214.3%. The effective interest rate on our Credit Facility, including unused commitment fees incurred, but excluding the impact of deferred financing costs, was 8.2% during the three months ended June 30, 2023, compared to 6.2% during the prior year period. The increase in the effective interest rate was driven primarily by increases in interest rates, partially offset by a $0.2 million decrease in unused commitment fees during the three months ended June 30, 2023 as compared to the prior year period. The net base management fee earned by the Adviser decreased by $0.2 million, or 13.7%, for the three months ended June 30, 2023, as compared to the prior year period, resulting from an increase in credits to the base management fee from the Adviser for new deal origination fees partially offset by an increase in average total assets subject to the base management fee. The income-based incentive fee increased by $1.3 million, or 84.9%, during 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, loan servicing and incentive fees, and associated non-contractual, unconditional and irrevocable credits, are computed quarterly, as described under “Transactions with the Adviser” in Note 4— Related Party Transactions of the Notes to Consolidated Financial Statements and are summarized in the following table: Three Months Ended June 30, 2023 2022 Average total assets subject to base management fee (A) $ 709,943 $ 571,657 Multiplied by prorated annual base management fee of 1.75% 0.4375 % 0.4375 % Base management fee (B) $ 3,106 $ 2,501 Portfolio company fee credit (1,894) (1,099) Syndicated loan fee credit (32) (35) Net Base Management Fee $ 1,180 $ 1,367 Loan servicing fee (B) 2,069 1,614 Credit to base management fee - loan servicing fee (B) (2,069) (1,614) Net Loan Servicing Fee $ — $ — Incentive fee (B) 2,919 1,579 Incentive fee credit — (437) Net Incentive Fee $ 2,919 $ 1,142 Portfolio company fee credit (1,894) (1,099) Syndicated loan fee credit (32) (35) Incentive fee credit — (437) Credits to Fees From Adviser - other (B) $ (1,926) $ (1,571) (A) Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods. (B) Reflected, on a gross basis, as a line item on our Consolidated Statements of Operations . 51 Table of Contents Net Realized and Unrealized Gain (Loss) Net Realized Gain (Loss) on Investments For the three months ended June 30, 2023, we recorded a net realized gain on investments of $2.9 million, which resulted primarily from a $3.7 million realized gain recognized on our investment in PIC 360, LLC in June 2023, partially offset by a $0.8 million realized loss recognized on the exit of our investment in NetFortris Holdings LLC in June 2023. For the three months ended June 30, 2022, we recorded a net realized loss on investments of $8.5 million, which resulted primarily from an $8.5 million realized loss recognized on the restructuring of our investment in LWO Acquisitions Company LLC (“LWO”) in May 2022. Net Unrealized Appreciation (Depreciation) of Investments During the three months ended June 30, 2023, we recorded net unrealized depreciation of investments in the aggregate amount of $2.6 million. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the three months ended June 30, 2023 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) FES Resources Holdings LLC $ — $ 2,718 $ — $ 2,718 Defiance Integrated Technologies, Inc. — 1,951 — 1,951 Giving Home Health Care, LLC — 1,443 — 1,443 Antenna Research Associates, Inc. — 1,414 — 1,414 Triple H Food Processors, LLC — 509 — 509 NetFortris Holdings LLC (789) — 526 (263) PIC 360, LLC 3,700 — (4,262) (562) Salvo Technologies, Inc. — (669) — (669) B+T Group Acquisition Inc. — (1,225) — (1,225) NeoGraf Solutions, LLC — (1,957) — (1,957) WB Xcel Holdings, LLC — (2,672) — (2,672) Other, net (<$500) — (242) (120) (362) Total: $ 2,911 $ 1,270 $ (3,856) $ 325 The primary driver of net unrealized depreciation of $2.6 million for the three months ended June 30, 2023 was the reversal of unrealized appreciation associated with our investment in PIC 360, LLC and the decline in the financial and operational performance of WB Xcel Holdings, LLC and NeoGraf Solutions, LLC, partially offset by the improvement in the financial and operational performance of FES Resources Holdings LLC and Defiance Integrated Technologies, Inc. 52 Table of Contents During the three months ended June 30, 2022, we recorded net unrealized depreciation of investments in the aggregate amount of $4.4 million. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the three months ended June 30, 2022 were as follows: Three Months Ended June 30, 2022 Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized (Appreciation) Depreciation Net Gain (Loss) LWO Acquisitions Company LLC $ (8,496) $ — $ 14,119 $ 5,623 ENET Holdings, LLC — 876 105 981 Leeds Novamark Capital I, L.P. — 510 — 510 HH-Inspire Acquisition, Inc. — (163) — (163) DKI Ventures, LLC — (165) — (165) Eegee's LLC — (191) — (191) SpaceCo Holdings, LLC — (193) — (193) Pansophic Learning Ltd. — (256) — (256) 8th Avenue Food & Provisions, Inc. — (294) — (294) MCG Energy Solutions, LLC — (310) — (310) Sea Link International IRB, Inc. — (352) — (352) Iten Defense, LLC — (558) — (558) Engineering Manufacturing Technologies, LLC — (584) — (584) PIC 360, LLC — (721) — (721) R2i Holdings, LLC — (934) — (934) Encore Dredging Holdings, LLC — (1,164) — (1,164) Defiance Integrated Technologies, Inc. — (1,188) (28) (1,216) WB Xcel Holdings, LLC — (2,364) — (2,364) B+T Group Acquisition Inc. — (2,762) — (2,762) Lonestar EMS, LLC — (7,288) — (7,288) Other, net (<$500) — (492) — (492) Total: $ (8,496) $ (18,593) $ 14,196 $ (12,893) The primary driver of net unrealized depreciation of $4.4 million for the three months ended June 30, 2022 was the decrease in comparable transaction multiples used to estimate the fair value of certain of our portfolio companies, a pricing decrease in the broadly syndicated loan market, and an overall decline in the financial and operational performance of certain of our portfolio companies, partially offset by the reversal of unrealized depreciation associated with the restructuring of our investment in LWO. Net Realized Gain on Other During the three months ended June 30, 2023 and 2022, we recorded a net realized gain on other of $44 thousand and $0.3 million, respectively, associated with escrows received. Net Unrealized Appreciation of Other During the three months ended June 30, 2023, we recorded $0.2 million of unrealized appreciation related to a change in the fair value of our Credit Facility. No such amounts were recorded during the three months ended June 30, 2022. 53 Table of Contents Comparison of the Nine Months Ended June 30, 2023 to the Nine Months Ended June 30, 2022 Nine Months Ended June 30, 2023 2022 $ Change % Change INVESTMENT INCOME Interest income $ 59,761 $ 38,421 $ 21,340 55.5 % Success fee, dividend, and other income 2,917 8,790 (5,873) (66.8) Total investment income 62,678 47,211 15,467 32.8 EXPENSES Base management fee 8,833 7,500 1,333 17.8 Loan servicing fee 5,866 4,596 1,270 27.6 Incentive fee 7,508 5,641 1,867 33.1 Administration fee 1,237 1,187 50 4.2 Interest expense 15,091 9,177 5,914 64.4 Amortization of deferred financing costs 1,164 849 315 37.1 Other expenses 1,894 1,655 239 14.4 Expenses, before credits from Adviser 41,593 30,605 10,988 35.9 Credit to base management fee – loan servicing fee (5,866) (4,596) (1,270) 27.6 Credits to fees from Adviser – other (3,082) (3,600) 518 (14.4) Total expenses, net of credits 32,645 22,409 10,236 45.7 NET INVESTMENT INCOME 30,033 24,802 5,231 21.1 NET REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on investments 12,633 5,384 7,249 134.6 Net realized gain (loss) on other 322 (120) 442 (368.3) Net unrealized appreciation (depreciation) of investments (13,420) (15,259) 1,839 (12.1) Net unrealized depreciation of other — — — NM Net gain (loss) from investments and other (465) (9,995) 9,530 (95.3) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 29,568 $ 14,807 $ 14,761 99.7 % NM - Not Meaningful Investment Income Interest income increased by 55.5% for the nine months ended June 30, 2023, as compared to the prior year period. The weighted average principal balance of our interest-bearing investment portfolio for the nine months ended June 30, 2023 was $612.5 million, compared to $504.9 million for the nine months ended June 30, 2022, an increase of $107.6 million, or 21.3%. The weighted average yield on our interest-bearing investments is based on the current stated interest rate on interest-bearing investments, which increased to 13.0% for the nine months ended June 30, 2023, compared to 10.2% for the nine months ended June 30, 2022, inclusive of any allowances on interest receivables made during tho se periods. The increase in the weighted average yield was driven mainly by increases in interest rates. As of June 30, 2023, our loan to Edge Adhesives Holdings, Inc. was on non-accrual status with a debt cost basis of $6.1 million, or 0.9% of the cost basis of all debt investments in our portfolio, and a fair value of $2.8 million, or 0.4% of the fair value of all debt investments in our portfolio. As of September 30, 2022, there were no loans on non-accrual status. Other income decreased by 66.8% during the nine months ended June 30, 2023, as compared to the prior year period, primarily due to decreases in success fees and dividend income, period over period. Expenses Expenses, net of any non-contractual, unconditional and irrevocable credits to fees from the Adviser, increased $10.2 million, or 45.7%, for the nine months ended June 30, 2023, as compared to the prior year period. This increase was primarily due to a $5.9 million increase in interest expense and a $1.9 million increase in the income-based incentive fee. 54 Table of Contents Total interest expense on borrowings and notes payable increased by $5.9 million, or 64.4%, during the nine months ended June 30, 2023, as compared to the prior year period. This increase was driven by increased borrowings outstanding under our Credit Facility and an increase in the effective interest rate on our Credit Facility. The weighted average balance outstanding under our Credit Facility was $136.4 million during the nine months ended June 30, 2023, as compared to $41.5 million in the prior year period, an increase of 228.7%. The effective interest rate on our Credit Facility, including unused commitment fees incurred, but excluding the impact of deferred financing costs, was 7.7% during the nine months ended June 30, 2023, compared to 6.4% during the prior year period. The increase in the effective interest rate was driven primarily by increases in interest rates, partially offset by a $0.5 million decrease in unused commitment fees during the nine months ended June 30, 2023 as compared to the prior year period. The net base management fee earned by the Adviser increased by $1.4 million, or 32.6%, for the nine months ended June 30, 2023, as compared to the prior year period, resulting from an increase in average total assets subject to the base management fee. The income-based incentive fee increased by $1.9 million, or 33.1%, during the nine 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, loan servicing and incentive fees, and associated non-contractual, unconditional and irrevocable credits, are computed quarterly, as described under “Transactions with the Adviser” in Note 4— Related Party Transactions of the Notes to Consolidated Financial Statements and are summarized in the following table: Nine Months Ended June 30, 2023 2022 Average total assets subject to base management fee (A) $ 672,990 $ 571,429 Multiplied by prorated annual base management fee of 1.75% 1.3125 % 1.3125 % Base management fee (B) $ 8,833 $ 7,500 Portfolio company fee credit (2,987) (3,027) Syndicated loan fee credit (95) (136) Net Base Management Fee $ 5,751 $ 4,337 Loan servicing fee (B) 5,866 4,596 Credit to base management fee - loan servicing fee (B) (5,866) (4,596) Net Loan Servicing Fee $ — $ — Incentive fee (B) 7,508 5,641 Incentive fee credit — (437) Net Incentive Fee $ 7,508 $ 5,204 Portfolio company fee credit (2,987) (3,027) Syndicated loan fee credit (95) (136) Incentive fee credit — (437) Credits to Fees From Adviser - other (B) $ (3,082) $ (3,600) (A) Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods. (B) Reflected, on a gross basis, as a line item on our Consolidated Statements of Operations . Net Realized and Unrealized Gain (Loss) Net Realized Gain (Loss) on Investments For the nine months ended June 30, 2023, we recorded a net realized gain on investments of $12.6 million, which resulted primarily from a $5.9 million realized gain recognized on the sale of our investment in Targus Cayman HoldCo, Ltd. in October 2022, a $4.4 million realized gain recognized on our investment in Leeds Novamark Capital I, L.P. in November 2022, and a $3.7 million realized gain recognized on our investment in PIC 360, LLC in June 2023. 55 Table of Contents For the nine months ended June 30, 2022, we recorded a net realized gain on investments of $5.4 million, which resulted primarily from a $13.4 million realized gain recognized on the sale of our investment in Lignetics, Inc., partially offset by an $8.5 million realized loss recognized on the restructuring of our investment in LWO in May 2022. Net Unrealized Appreciation (Depreciation) of Investments During the nine months ended June 30, 2023, we recorded net unrealized depreciation of investments in the aggregate amount of $13.4 million. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the nine months ended June 30, 2023 were as follows: Nine Months Ended June 30, 2023 Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized (Appreciation) Depreciation Net Gain (Loss) FES Resources Holdings LLC $ — $ 3,619 $ — $ 3,619 Giving Home Health Care, LLC — 2,324 — 2,324 HH-Inspire Acquisition, Inc. — 2,439 (200) 2,239 Antenna Research Associates, Inc. — 2,080 — 2,080 Encore Dredging Holdings, LLC — 1,508 — 1,508 Defiance Integrated Technologies, Inc. — 1,492 — 1,492 Imperative Holdings Corporation 510 327 — 837 Triple H Food Processors, LLC — 654 — 654 TNCP Intermediate HoldCo, LLC — 591 — 591 PIC 360, LLC 3,700 1,064 (4,262) 502 Targus Cayman HoldCo, Ltd. 5,916 — (5,916) — Circuitronics EMS Holdings LLC (921) — 921 — NetFortris Holdings LLC (789) (206) 526 (469) 8th Avenue Food & Provisions, Inc. — (574) — (574) Leeds Novamark Capital I, L.P. 4,406 37 (5,018) (575) DKI Ventures, LLC — (1,005) — (1,005) Salvo Technologies, Inc. — (1,131) — (1,131) NeoGraf Solutions, LLC — (1,957) — (1,957) Engineering Manufacturing Technologies, LLC — (2,590) — (2,590) B+T Group Acquisition Inc. — (3,643) — (3,643) WB Xcel Holdings, LLC — (4,546) — (4,546) Other, net (<$500) (189) (339) 385 (143) Total: $ 12,633 $ 144 $ (13,564) $ (787) The primary drivers of net unrealized depreciation of $13.4 million for the nine months ended June 30, 2023 were the reversal of unrealized appreciation associated with the exit of our investment in Targus Cayman HoldCo, Ltd., the reversal of unrealized appreciation associated with our investment in PIC 360, LLC, and the sale of underlying assets within Leeds Novamark Capital I, L.P as well as the decrease in comparable transaction multiples used to estimate the fair value of certain of our other portfolio companies, and the decline in the financial and operational performance of certain of our other portfolio companies. During the nine months ended June 30, 2022, we recorded net unrealized depreciation of investments in the aggregate amount of $15.3 million. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the nine months ended June 30, 2022 were as follows: 56 Table of Contents Nine Months Ended June 30, 2022 Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized (Appreciation) Depreciation Net Gain (Loss) LWO Acquisitions Company LLC $ (8,496) $ (328) $ 14,119 $ 5,295 ENET Holdings, LLC — 4,176 105 4,281 NetFortris Holdings LLC — 3,980 (284) 3,696 Targus Cayman HoldCo, Ltd. — 1,733 — 1,733 Imperative Holdings Corporation — 1,122 — 1,122 ALS Education, LLC — (304) — (304) Café Zupas — (355) — (355) DKI Ventures, LLC — (462) — (462) Iten Defense, LLC — (493) — (493) 8th Avenue Food & Provisions, Inc. — (623) — (623) PIC 360, LLC — (643) — (643) Triple H Food Processors, LLC — (671) — (671) Sea Link International IRB, Inc. — (740) — (740) Defiance Integrated Technologies, Inc. — (769) (28) (797) Leeds Novamark Capital I, L.P. — (878) — (878) Engineering Manufacturing Technologies, LLC — (946) — (946) MCG Energy Solutions, LLC — (1,232) — (1,232) Antenna Research Associates, Inc. — (1,324) — (1,324) Lignetics, Inc. 13,408 — (14,958) (1,550) R2i Holdings, LLC — (1,860) — (1,860) B+T Group Acquisition Inc. — (1,978) — (1,978) Encore Dredging Holdings, LLC — (3,940) — (3,940) Lonestar EMS, LLC — (7,288) — (7,288) Other, net (<$500) 472 (257) (133) 82 Total: $ 5,384 $ (14,080) $ (1,179) $ (9,875) The primary driver of net unrealized depreciation of $15.3 million for the nine months ended June 30, 2022 was the reversal of unrealized depreciation associated with the exit of our investment in Lignetics, Inc., the decrease in comparable transaction multiples used to estimate the fair value of certain of our portfolio companies, a pricing decrease in the broadly syndicated loan market, and the decline in the financial and operational performance of certain of our other portfolio companies, partially offset by the reversal of unrealized depreciation associated with the restructuring of our investment in LWO and unrealized appreciation recognized on ENET Holdings, LLC and NetFortris Holdings, LLC. Net Realized Gain (Loss) on Other During the nine months ended June 30, 2022, we recorded a net realized loss on other of $0.1 million primarily due to a loss on extinguishment of debt of $0.8 million, which resulted from the write-off of unamortized deferred issuance costs at the time of redemption of our $38.8 million aggregate principal amount of 5.375% Notes due 2024 (the “2024 Notes”) in November 2021, partially offset by a gain of $0.7 million associated with escrows received. During the nine months ended June 30, 2023, we recorded a net realized gain on other of $0.3 million associated with escrows received. LIQUIDITY AND CAPITAL RESOURCES Operating Activities Our cash flows from operating activities are primarily generated from the interest payments on debt securities that we receive from our portfolio companies, as well as net proceeds received through repayments or sales of our investments. We 57 Table of Contents utilize this cash primarily to fund new investments, make interest payments on our Credit Facility, make distributions to our stockholders, pay advisory and administrative fees to the Adviser and Administrator, and for other operating expenses. Net cash used in operating activities for the nine months ended June 30, 2023 was $33.7 million, as compared to net cash used in operating activities of $18.6 million for the nine months ended June 30, 2022. The change was primarily due to a decrease in principal repayments, partially offset by a decrease in purchases of investments, period over period. Purchases of investments were $148.1 million during the nine months ended June 30, 2023, compared to $188.9 million during the nine months ended June 30, 2022. Repayments and net proceeds from sales were $84.5 million during the nine months ended June 30, 2023, compared to $154.2 million during the nine months ended June 30, 2022. As of June 30, 2023, we had loans to, syndicated participations in or equity investments in 52 companies, with an aggregate cost basis of approximately $735.2 million. As of September 30, 2022, we had loans to, syndicated participations in or equity investments in 52 companies, with an aggregate cost basis of approximately $656.1 million. The following table summarizes our total portfolio investment activity during the nine months ended June 30, 2023 and 2022: Nine Months Ended June 30, 2023 2022 Beginning investment portfolio, at fair value $ 649,615 $ 557,612 New investments 103,916 155,635 Disbursements to existing portfolio companies 44,168 33,216 Scheduled principal repayments on investments (5,787) (6,038) Unscheduled principal repayments on investments (60,413) (132,193) Net proceeds from sale of investments (17,974) (15,718) Net unrealized appreciation (depreciation) of investments 144 (14,080) Reversal of prior period depreciation (appreciation) of investments on realization (13,564) (1,179) Net realized gain (loss) on investments (A) 12,633 5,384 Increase in investments due to PIK (B) 2,779 3,218 Net change in premiums, discounts and amortization (193) 605 Investment Portfolio, at Fair Value $ 715,324 $ 586,462 (A) Excludes net realized gain (loss) on other. (B) PIK interest is a non-cash source of income and is calculated at the contractual rate stated in a loan agreement and added to the principal balance of a loan. The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of June 30, 2023: Amount For the remaining three months ending September 30: 2023 (A) $ 4,806 For the fiscal years ending September 30: 2024 28,818 2025 86,790 2026 160,943 2027 241,385 Thereafter 151,330 Total contractual repayments $ 674,072 Adjustments to cost basis of debt investments ( 1,333 ) Investments in equity securities 62,443 Investments held as of June 30, 2023 at cost: $ 735,182 (A) Includes debt investments with contractual principal amounts totaling $ 0.2 million for which the maturity date has passed as of June 30, 2023. 58 Table of Contents Financing Activities Net cash provided by financing activities for the nine months ended June 30, 2023 was $33.4 million, which consisted primarily of $38.3 million in gross proceeds from the issuance of common stock under our equity distribution agreement with Jefferies LLC and $22.0 million in net borrowings on our Credit Facility, partially offset by $24.7 million in distributions to our common shareholders. Net cash provided by financing activities for the nine months ended June 30, 2022 was $18.7 million, which consisted primarily of $50.0 million in gross proceeds from the issuance of our 2027 Notes and $29.5 million in net proceeds from our Credit Facility, partially offset by $38.8 million used in the redemption of our 2024 Notes and $20.3 million in distributions paid to stockholders. Distributions to Stockholders Common Stock Distributions To qualify to be taxed as a RIC and thus avoid corporate level federal income tax on the income we distribute to our stockholders, we are required to distribute to our stockholders on an annual basis at least 90.0% of our Investment Company Taxable Income. Additionally, our Credit Facility has a covenant that generally restricts the amount of distributions to stockholders that we can pay out to be no greater than our aggregate net investment income, net capital gains and amounts elected to have been paid during the prior year in accordance with Section 855(a) of the Code. In accordance with these requirements, during the nine months ended June 30, 2023 we paid monthly cash distributions of $0.07 per common share for each of October, November, and December 2022, $0.075 per common share for each of January, February, and March 2023, and $0.08 per common share for each of April, May, and June 2023. During the nine months ended June 30, 2022, we paid monthly cash distributions of $0.065 per common share from October 2021 through March 2022 and paid monthly cash distributions of $0.0675 per common share from April 2022 through June 2022. These distributions totaled an aggregate of $24.7 million and $20.3 million for the nine months ended June 30, 2023 and 2022, respectively. In July 2023, our Board of Directors declared a monthly distribution of $0.0825 per common share for each of July, August, and September 2023 and a supplemental distribution of $0.02 per common share for September 2023. Our Board of Directors declared these distributions to our stockholders based on our estimates of our Investment Company Taxable Income for the fiscal year ending September 30, 2023. From inception through June 30, 2023, we have paid 245 monthly or quarterly consecutive distributions to common stockholders totaling approximately $448.3 million or $22.51 per share. For the fiscal year ended September 30, 2022, distributions declared and paid exceeded taxable income available for common distributions resulting in a partial return of capital of approximately $1.4 million. The characterization of the common stockholder distributions declared and paid for the fiscal year ending September 30, 2023 will be determined at fiscal year end, based upon our investment company taxable income for the full fiscal year and distributions paid during the full fiscal year. Such a characterization made on a quarterly basis may not be representative of the actual full fiscal year characterization. Dividend Reinvestment Plan Our common stockholders who hold their shares through our transfer agent, Computershare, Inc. (“Computershare”), have the option to participate in a dividend reinvestment plan offered by Computershare, as the plan agent. This is an “opt in” dividend reinvestment plan, meaning that common stockholders may elect to have their cash distributions automatically reinvested in additional shares of our common stock. Common stockholders who do make such election will receive their distributions in cash. Common stockholders who receive distributions in the form of stock will be subject to the same federal, state and local tax consequences as stockholders who elect to receive their distributions in cash. The common stockholder will have an adjusted basis in the additional common shares purchased through the plan equal to the amount of the reinvested distribution. The additional shares will have a new holding period commencing on the day following the date on which the shares are credited to the common stockholder’s account. Computershare purchases shares in the open market in connection with the obligations under the plan. 59 Table of Contents Equity Registration Statement Our shelf registration statement permits us to issue, through one or more transactions, up to an aggregate of $ 300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock, preferred stock or debt securities. As of June 30, 2023, we had the ability to issue up to $ 257.2 million in securities under the registration statement. Common Stock In May 2021, we entered into an equity distribution agreement with Jefferies LLC (the “Jefferies Sales Agreement”) under which we have the ability to issue and sell, from time to time, shares of our common stock with an aggregate offering price of up to $50.0 million. During the nine months ended June 30, 2023, we sold 3,865,890 shares of our common stock under the Jefferies Sales Agreement, at a weighted-average price of $9.90 per share and raised approximately $38.3 million of gross proceeds. Net proceeds, after deducting commissions and offering costs borne by us, were approximately $37.6 million. All sales were above our then current estimated NAV per share. As of June 30, 2023, we had a remaining capacity to sell up to an additional $9.5 million of our common stock under the Jefferies Sales Agreement. We anticipate issuing equity securities to obtain additional capital in the future. However, we cannot determine the timing or terms of any future equity issuances or whether we will be able to issue equity on terms favorable to us, or at all. To the extent that our common stock trades at a market price below our NAV per share, we will generally be precluded from raising equity capital through public offerings of our common stock, other than pursuant to stockholder and independent director approval or a rights offering to existing common stockholders. On June 30, 2023, the closing market price of our common stock was $ 9.76 per share, a 5.3 % premium to our June 30, 2023 NAV per share of $ 9.27 . Revolving Credit Facility On May 13, 2021, we, through Business Loan, amended and restated the Credit Facility to, among other things, (i) decrease the commitment amount from $ 205.0 million to $ 175.0 million, (ii) extend the revolving period end date to October 31, 2023, (iii) extend the maturity date to October 31, 2025 (at which time all principal and interest will be due and payable if the Credit Facility is not extended by the revolving period end date), (iv) reduce the interest rate margin to 2.70 % during the revolving period and 3.25 % thereafter, with a LIBOR floor of 0.35 %, (v) revise the unused fee to include an additional fee tier of 0.35 % per annum on the daily undrawn amounts if the average unused amount is equal to or less than 35 % during the applicable period, (vi) provide for certain excess concentration limits, including a reduced second lien limit and a new broadly syndicated loan limit and (vii) add customary LIBOR replacement language. We incurred fees of approximately $ 1.1 million in connection with this amendment and restatement, which are being amortized through our Credit Facility’s revolving period end date of October 31, 2023. On September 12, 2022, we, through Business Loan, entered into Amendment No. 1 to the Credit Facility to update the reference rate from LIBOR to SOFR plus an 11 basis point credit spread adjustment. On September 20, 2022, we, through Business Loan, entered into Amendment No. 2 to the Credit Facility to increase the size of the Credit Facility by $50.0 million from $175.0 million to $225.0 million, as permitted under the terms of the Credit Facility. On October 31, 2022, we, through Business Loan, entered into Amendment No. 3 to the Credit Facility to increase the size of the Credit Facility by $20.0 million from $225.0 million to $245.0 million, as permitted under the terms of the Credit Facility. On June 16, 2023, we, through Business Loan, entered into Amendment No. 4 to the Credit Facility to, among other things, (i) decrease the commitment amount from $245.0 million to $223.7 million, (ii) extend the revolving period end date to October 31, 2025, (iii) extend the maturity date to October 31, 2027 (at which time all principal and interest will be due and payable if the Credit Facility is not extended by the revolving period end date), (iv) increase the interest rate margin to 3.00% during the revolving period and 3.50% thereafter, with a 10 basis point credit spread adjustment, and (v) provide for certain excess concentration limits. We incurred fees of approximately $1.2 million in connection with this amendment, which are being amortized through our Credit Facility’s revolving period end date of October 31, 2025. Interest is payable monthly during the term of our Credit Facility. Available borrowings are subject to various constraints imposed under our Credit Facility, based on the aggregate loan balance pledged by Business Loan, which varies as loans are added and repaid, regardless of whether such repayments are prepayments or made as contractually required. Our 60 Table of Contents Credit Facility also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account with KeyBank and with The Bank of New York Mellon Trust Company, N.A. as custodian. KeyBank, which also serves as the trustee of the account, generally remits the collected funds to us once a month. Our Credit Facility also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account with KeyBank. KeyBank is also the trustee of the account and generally remits the collected funds to us once each month. Amounts collected in the lockbox account with KeyBank are presented as Due from administrative agent on the accompanying Consolidated Statement of Assets and Liabilities as of June 30, 2023 and September 30, 2022. Our Credit Facility contains covenants that require Business Loan to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions), and restrict material changes to our credit and collection policies without the lenders’ consent. Our Credit Facility also generally limits distributions to our stockholders on a fiscal year basis to the sum of our net investment income, net capital gains and amounts elected to have been paid during the prior year in accordance with Section 855(a) of the Code. Business Loan is also subject to certain limitations on the type of loan investments it can apply as collateral towards the borrowing base to receive additional borrowing availability under our Credit Facility, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life and lien property. Our Credit Facility further requires Business Loan to comply with other financial and operational covenants, which obligate Business Loan to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of 25 obligors required in the borrowing base. Additionally, we are required to maintain (i) a minimum net worth (defined in our Credit Facility to include any outstanding mandatorily redeemable preferred stock) of $ 325.0 million plus 50.0 % of all equity and subordinated debt raised after May 13, 2021 less 50 % of any equity and subordinated debt retired or redeemed after May 13, 2021, which equates to $ 355.8 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 our Credit Facility, we had a net worth of $ 554.3 million, asset coverage on our “senior securities representing indebtedness” of 195.8 %, calculated in accordance with the requirements of Section 18 and 61 of the 1940 Act, and an active status as a BDC and RIC. In addition, we had 37 obligors in our Credit Facility’s borrowing base as of June 30, 2023. As of June 30, 2023, we were in compliance with all of our Credit Facility covenants. Refer to Note 5— Borrowings of the notes to our Consolidated Financial Statements included elsewhere in this Quarterly Report for additional information regarding our Credit Facility. Notes Payable In November 2021, we completed a private placement of $50.0 million aggregate principal amount of the 2027 Notes for net proceeds of approximately $48.5 million after deducting initial purchasers’ costs, commissions and offering expenses borne by us. The 2027 Notes will mature on May 1, 2027 and may be redeemed in whole or in part at any time or from time to time at the Company’s option prior to maturity at par plus a “make-whole” premium, if applicable. The 2027 Notes bear interest at a rate of 3.75% per year. Interest is payable semi-annually on May 1 and November 1 of each year (which equates to approximately $1.9 million per year). In April 2022, pursuant to the registration rights agreement we entered into in connection with the 2027 Notes, we conducted an exchange offer through which we offered to exchange all of our then outstanding 2027 Notes (the “Restricted Notes”) that were issued on November 4, 2021, for an equal aggregate principal amount of our new 3.75% Notes due 2027 (the “Exchange Notes”) that had been registered with the SEC under the Securities Act of 1933, as amended. The terms of the Exchange Notes are identical to those of the outstanding Restricted Notes, except that the transfer restrictions and registration rights relating to the Restricted Notes do not apply to the Exchange Notes, and the Exchange Notes do not provide for the payment of additional interest in the event of a registration default. In December 2020, we completed an offering of $100.0 million aggregate principal amount of the 2026 Notes for net proceeds of approximately $97.7 million after deducting underwriting discounts, commissions and offering expenses borne by us. In March 2021, we completed an offering of an additional $50.0 million aggregate principal amount of the 2026 Notes for net proceeds of approximately $50.6 million after adding premiums and deducting underwriting costs, commissions and offering expenses borne by us. The 2026 Notes will mature on January 31, 2026 and may be redeemed in whole or in part at any time or from time to time at the Company’s option prior to maturity at par plus a “make-whole” 61 Table of Contents premium, if applicable. The 2026 Notes bear interest at a rate of 5.125% per year. Interest is payable semiannually on January 31 and July 31 of each year (which equates to approximately $7.7 million per year). In October 2019, we completed an offering of $38.8 million aggregate principal amount of the 2024 Notes, inclusive of the overallotment option exercised by the underwriters, for net proceeds of approximately $37.5 million after deducting underwriting discounts, commissions and offering expenses borne by us. On November 1, 2021, we voluntarily redeemed the 2024 Notes with an aggregate principal amount outstanding of $38.8 million. The 2024 Notes would have otherwise matured on November 1, 2024. The indenture relating to the 2027 Notes and the 2026 Notes contains certain covenants, including (i) an inability to incur additional debt or issue additional debt or preferred securities unless the Company’s asset coverage meets the threshold specified in the 1940 Act after such borrowing, (ii) an inability to declare any dividend or distribution (except a dividend payable in our stock) on a class of our capital stock or to purchase shares of our capital stock unless the Company’s asset coverage meets the threshold specified in the 1940 Act at the time of (and giving effect to) such declaration or purchase, and (iii) if, at any time, we are not subject to the reporting requirements of the Exchange Act, we will provide the holders of the 2027 Notes and the 2026 Notes, as applicable, and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements. The 2027 Notes and 2026 Notes are recorded at the principal amount, plus applicable premiums, less discounts and offering costs, on our Consolidated Statements of Assets and Liabilities. Preferred Stock In May 2023, we entered into a Dealer Manager Agreement pursuant to which we may sell a maximum of 6,000,000 shares of 6.25% Series A Cumulative Redeemable Preferred Stock (the “Series A Preferred Stock”), par value $0.001 per share, on a “reasonable best efforts” basis through our affiliated dealer manager, Gladstone Securities, LLC, at a public offering price of $25.00 per share. As of June 30, 2023, no shares of Series A Preferred Stock have been sold. Under the Dealer Manager Agreement, Gladstone Securities will provide certain sales, promotional and marketing services to us in connection with the Series A Offering, and we will pay Gladstone Securities (i) selling commissions of 7.0% of the gross proceeds from sales of Series A Preferred Stock in the Series A Offering, and (ii) a dealer manager fee of 3.0% of the gross proceeds from sales of Series A Preferred Stock in the Series A Offering. Gladstone Securities may, in its sole discretion, reallow a portion of the dealer manager fee to participating broker-dealers in support of the Series A Offering. Pursuant to the Dealer Manager Agreement, the offering of the Series A Preferred Stock will terminate on the date that is the earlier of (1) December 31, 2026 (unless earlier terminated or extended by our Board of Directors) and (2) the date on which all 6,000,000 shares of Series A Preferred Stock offered are sold. Off-Balance Sheet Arrangements We generally recognize success fee income when the payment has been received. As of June 30, 2023 and September 30, 2022, we had off-balance sheet success fee receivables on our accruing debt investments of $3.6 million and $4.7 million (or approximately $0.09 per common share and $0.13 per common share), respectively, that would be owed to us, generally upon a change of control of the portfolio companies. Consistent with GAAP, we generally have not recognized our success fee receivables and related income in our Consolidated Financial Statements until earned. Due to the contingent nature of our success fees, there are no guarantees that we will be able to collect all of these success fees or know the timing of such collections. Contractual Obligations We have lines of credit, delayed draw term loans, and an uncalled capital commitment with certain of our portfolio companies that have not been fully drawn. Since these commitments have expiration dates and we expect many will never be fully drawn, the total commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of the combined unused lines of credit, the unused delayed draw term loans, and the uncalled capital commitment as of June 30, 2023 and September 30, 2022 to be immaterial. 62 Table of Contents The following table shows our contractual obligations as of June 30, 2023, at cost: Payments Due by Period Contractual Obligations (A) Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Total Credit Facility (B) $ — $ 163,800 $ — $ — $ 163,800 Notes Payable — 150,000 50,000 — 200,000 Interest expense on debt obligations (C) 23,539 34,557 1,563 — 59,659 Total $ 23,539 $ 348,357 $ 51,563 $ — $ 423,459 (A) Excludes our unused line of credit commitments, unused delayed draw term loans, and uncalled capital commitments to our portfolio companies in an aggregate amount of $63.9 million, at cost, as of June 30, 2023. (B) Principal balance of borrowings outstanding under our Credit Facility, based on the maturity date following the current contractual revolver period end date. (C) Includes estimated interest payments on our Credit Facility, 2027 Notes, and 2026 Notes. The amount of interest expense calculated for purposes of this table was based upon rates and balances as of June 30, 2023. Critical Accounting Estimates The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported consolidated amounts of assets and liabilities, including disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ materially from those estimates under different assumptions or conditions. We have identified our investment valuation policy (which has been approved by our Board of Directors) as our most critical accounting policy, which is described in Note 2— Summary of Significant Accounting Policies in the accompanying notes to our Consolidated Financial Statements included elsewhere in this Quarterly Report. Additionally, refer to Note 3— Investments in our accompanying Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report for additional information regarding fair value measurements and our application of Financial Accounting Standards Board Accounting Standards Codification Topic 820, “ Fair Value Measurements and Disclosures.” We have also identified our revenue recognition policy as a critical accounting policy, which is described in Note 2— Summary of Significant Accounting Policies in our accompanying Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report. Investment Valuation Credit Monitoring and Risk Rating The Adviser monitors a wide variety of key credit statistics that provide information regarding our portfolio companies to help us assess credit quality and portfolio performance and, in some instances, used as inputs in our valuation techniques. Generally, we, through the Adviser, participate in periodic board meetings of our portfolio companies in which we hold board seats and also require them to provide annual audited and monthly unaudited financial statements. Using these statements or comparable information and board discussions, the Adviser calculates and evaluates certain credit statistics. The Adviser risk rates all of our investments in debt securities. The Adviser does not risk rate our equity securities. For syndicated loans that have been rated by an SEC registered Nationally Recognized Statistical Rating Organization (“NRSRO”), the Adviser generally uses the average of two corporate level NRSRO’s risk ratings for such security. For all other debt securities, the Adviser uses a proprietary risk rating system. While the Adviser seeks to mirror the NRSRO systems, we cannot provide any assurance that the Adviser’s risk rating system will provide the same risk rating as an NRSRO would for these securities. The Adviser’s risk rating system is used to estimate the probability of default on debt securities and the expected loss if there is a default. The Adviser’s risk rating system uses a scale of 0 to >10, with >10 being the lowest probability of default. It is the Adviser’s understanding that most debt securities of medium-sized companies do not exceed the grade of BBB on an NRSRO scale, so there would be no debt securities in the middle market that would meet the definition of AAA, AA or A. Therefore, the Adviser’s scale begins with the designation >10 as the best risk rating which may be equivalent to a BBB from an NRSRO; however, no assurance can be given that a >10 on the Adviser’s scale is equal to a BBB or Baa2 on an NRSRO scale. The Adviser’s risk rating system covers both qualitative and quantitative aspects of the business and the securities we hold. 63 Table of Contents The following table reflects risk ratings for all proprietary loans in our portfolio as of June 30, 2023 and September 30, 2022, representing approximately 98.2% and 97.9%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period: Rating As of June 30, 2023 As of September 30, 2022 Highest 10.0 10.0 Average 7.1 7.1 Weighted Average 7.6 7.6 Lowest 3.0 1.0 The following table reflects the risk ratings for all syndicated loans in our portfolio that were rated by an NRSRO as of June 30, 2023 and September 30, 2022, representing approximately 1.4% and 1.6%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period: Rating As of June 30, 2023 As of September 30, 2022 Highest 5.0 4.0 Average 3.6 3.4 Weighted Average 4.1 3.6 Lowest 3.0 3.0 The following table reflects the risk ratings for all syndicated loans in our portfolio that were not rated by an NRSRO as of June 30, 2023 and September 30, 2022, representing approximately 0.4% and 0.5%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period: Rating As of June 30, 2023 As of September 30, 2022 Highest 5.0 5.0 Average 5.0 5.0 Weighted Average 5.0 5.0 Lowest 5.0 5.0 Tax Status We intend to continue to maintain our qualification as a RIC under Subchapter M of the Code for federal income tax purposes. As a RIC, we generally are not subject to federal income tax on the portion of our taxable income and gains distributed to our stockholders. To maintain our qualification as a RIC, we must maintain our status as a BDC and meet certain source-of-income and asset diversification requirements. In addition, in order to qualify to be taxed as a RIC, we must distribute to stockholders at least 90% of our Investment Company Taxable Income, determined without regard to the dividends paid deduction. Our policy generally is to make distributions to our stockholders in an amount up to 100% of our Investment Company Taxable Income. We may retain some or all of our net long-term capital gains, if any, and designate them as deemed distributions, or distribute such gains to stockholders in cash. To avoid a 4% federal excise tax on undistributed amounts of income, we must distribute to stockholders, during each calendar year, an amount at least equal to the sum of: (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our capital gain net income (both long-term and short-term) for the one-year period ending on October 31 of the calendar year, and (3) any income realized, but not distributed, in the preceding year (to the extent that income tax was not imposed on such amounts) less certain over-distributions in prior years. 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. 64 Table of Contents Recent Accounting Pronouncements Refer to Note 2 — Summary of Significant Accounting Policies in the notes to our accompanying Consolidated Financial Statements included elsewhere in this Quarterly Report for a description of recent accounting pronouncements, if any.