What changed in this filing

/stocks — the workspaceLOADING

Item 1. Business

2023-11-13 compared with 2022-11-14 · 73 added, 51 removed, 476 unchanged (21% of the section changed)

3 unchanged sentences

We were established for the purpose of investing in debt and equity securities of established private businesses operating in the United States (“U.S.”).

As of September 30, 2022, shares of our common stock trade on the Nasdaq Global Select Market (“Nasdaq”) under the trading symbol “GLAD.”

As of September 30, 2023, shares of our common stock trade on the Nasdaq Global Select Market (“Nasdaq”) under the trading symbol “GLAD” and our 7.75% Notes due 2028 (the “2028 Notes”) trade on Nasdaq under the ticker symbol “GLADZ.”

Investment Adviser and Administrator

3 unchanged sentences

Each of the Adviser and the Administrator are privately-held companies that are indirectly owned and controlled by David Gladstone, our chairman and chief executive officer.

Gladstone and Terry Lee Brubaker, our vice chairman and chief operating officer, also serve on the board of directors of the Adviser, the board of managers of the Administrator, and serve as executive officers of the Adviser and the Administrator.

Gladstone and Terry Lee Brubaker, our chief operating officer, also serve on the board of directors of the Adviser, the board of managers of the Administrator, and as executive officers of the Adviser and the Administrator.

The Administrator employs, among others, our chief financial officer and treasurer, chief valuation officer, chief compliance officer, general counsel and secretary (who also serves as the president of the Administrator) and their respective staffs.

16 unchanged sentences

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 expect that our investment portfolio over time will consist of

approximately 90.0% debt investments and 10.0% equity investments, at cost.

Our targeted portfolio companies are generally

considered too small for the larger capital marketplace.

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 September 30, 2023, our investment portfolio was made up of approximately 91.4% debt investments and 8.6% equity investments, at cost.

3 unchanged sentences

If we are participating in an investment with one or more co-investors, whether or not an affiliate of ours, our investment is likely to be smaller than if we were investing alone.

In general, our investments in debt securities have a term of no more than seven years, accrue interest at variable rates (generally based on the 30-day London Interbank Offered Rate (“LIBOR”) or one-month term Secured Overnight Financing Rate (“SOFR”)) an d, to a lesser extent, at fixed rates.

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.

4 unchanged sentences

Often, these equity investments occur in connection with our original investment, recapitalizing a business, or refinancing existing debt.

Since our initial public offering in 2001 and through September 30, 2022, we have invested in approximately 268 different companies, while making 236 consecutive monthly or quarterly cash distributions to common stockholders.

Since our initial public offering in 2001 and through September 30, 2023, we have invested in approximately 273 different companies.

We expect that our investment portfolio will primarily include the following three categories of investments in private companies operating in the U.S.:

33 unchanged sentences

September 30, 2023 September 30, 2022

Cost Fair Value Cost Fair Value

Secured first lien debt $ 529,376 73.3 % $ 510,701 72.5 % $ 475,806 72.5 % $ 463,858 71.4 %

2 unchanged sentences

Total debt investments 659,826 91.4 638,579 90.6 595,048 90.7 579,841 89.2

595,048 90.7 579,841 89.2 500,552 91.6 473,360 84.9

Preferred equity 35,617 4.9 26,855 3.8 34,505 5.3 27,046 4.2

1 unchanged sentence

Total equity investments 62,443 8.6 66,236 9.4 61,005 9.3 69,774 10.8

61,005 9.3 69,774 10.8 45,960 8.4 84,252 15.1

Total Investments $ 722,269 100.0 % $ 704,815 100.0 % $ 656,053 100.0 % $ 649,615 100.0 %

$ 656,053 100.0 % $ 649,615 100.0 % $ 546,512 100.0 % $ 557,612 100.0 %

Our investments at fair value consisted of the following industry classifications as of September 30, 2023 and 2022:

2 unchanged sentences

Investments Fair Value Percentage of

Diversified/Conglomerate Service $ 148,907 22.9 % $ 132,458 23.8 %

Healthcare, Education, and Childcare 136,401 21.0 92,680 16.6

Diversified/Conglomerate Manufacturing $ 158,061 22.4 % $ 114,105 17.6 %

Healthcare, Education, and Childcare 146,438 20.8 136,401 21.0

Diversified/Conglomerate Service 135,060 19.2 148,907 22.9

Aerospace and Defense 97,836 13.9 88,649 13.6

3 unchanged sentences

Personal and Non-Durable Consumer Products 14,576 2.1 18,583 2.9

Telecommunications 10,088 1.6 36,720 6.6

Machinery 6,411 0.9 9,562 1.5

Telecommunications 5,868 0.8 10,088 1.6

Textiles and Leather — — 7,978 1.2

Diversified Natural Resources, Precious Metals, and Minerals — — 47,134 8.4

Chemicals, Plastics, and Rubber — — 10,062 1.8

Home and Office Furnishings, Housewares, and Durable Consumer Products — — 10,025 1.8

Other, < 2.0% 6,376 0.9 5,542 0.8

20 unchanged sentences

Marcotte, Laura Gladstone, and Jonathan Sateri.

If this LOI is issued, then the Adviser and Gladstone Securities, LLC (“Gladstone Securities”) (collectively, the “Due Diligence Team”) will conduct a due diligence investigation and create a detailed profile summarizing the prospective portfolio company’s historical financial statements, industry, competitive position and management team, analyzing its

conformity to our general investment criteria.

The investment professionals then present this profile to the Adviser’s investment committee, which must approve each investment.

54 unchanged sentences

Gladstone, Brubaker and Sateri also serve on the Adviser’s investment committee for the other Affiliated Public Funds.

Gladstone has over 20 years of experience in investing in middle market companies and previously held the role of managing director with the Company.

Gladstone and Mr.

Sateri each have over 20 years of experience in investing in middle market companies and continue to hold the role of managing director with the Company and the Adviser.

Each of Messrs.

7 unchanged sentences

The Adviser seeks to identify potential investments through active origination and due diligence and through its dialogue with numerous private equity firms and other members of the financial community with whom the Adviser’s investment professionals have long-term relationships.

We believe that the Adviser’s investment professionals have developed a broad network of contacts within the investment, commercial banking, private equity and investment management communities,

and that their reputation, experience and focus on investing in lower middle market companies enables us to source and identify well-positioned prospective portfolio companies that provide attractive investment opportunities.

We believe that the Adviser’s investment professionals have developed a broad network of contacts within the investment, commercial banking, private equity and investment management communities, and that their reputation, experience and focus on investing in lower middle market companies enables us to source and identify well-positioned prospective portfolio companies that provide attractive investment opportunities.

Additionally, the Adviser expects to generate information from its professionals’ network of accountants, consultants, lawyers and management teams of portfolio companies and other contacts to support the Adviser’s investment activities.

49 unchanged sentences

Valuation Process

In December 2020, the SEC adopted Rule 2a-5 under the 1940 Act, which permits a BDC’s board of directors to designate its investment adviser as a valuation designee to perform fair value determinations for its investment portfolio, subject to the active oversight of such board.

The Board of Directors has approved investment valuation policies and procedures pursuant to Rule 2a-5 (the “Policy”) and, in July 2022, designated the Adviser to serve as the Board of Directors’ valuation designee.

The following is a general description of the Policy that the professionals of the Adviser and Administrator, with oversight and direction from our chief valuation officer, an employee of the Administrator who reports directly to our Board of Directors (collectively, the “Valuation Team”), use each quarter to determine the value of our investment portfolio.

In accordance with the 1940 Act and SEC Rule 2a-5, our Board of Directors has the ultimate responsibility for reviewing and determining, in good faith, the fair value of our investments for which market quotations are not readily available based on the Policy and for overseeing the valuation designee.

The Board of Directors has approved investment valuation policies and procedures pursuant to Rule 2a-5 (the “Policy”)

and, in July 2022, designated the Adviser to serve as the Board of Directors’ valuation designee (“Valuation Designee”)

under the 1940 Act.

In accordance with the 1940 Act, our Board of Directors has the ultimate responsibility for the good faith fair value determination of our investments for which market quotations are not readily available based on the Policy and overseeing the Valuation Designee.

The Adviser values our investments in accordance with the requirements of the 1940 Act and accounting principles generally accepted in the U.S.

There is no single standard for determining fair value (especially for privately-held businesses), as fair value depends upon the specific facts and circumstances of each individual investment.

Each quarter, our Board of Directors reviews the Policy to determine if

changes thereto are advisable and assesses whether the Valuation Team has applied the Policy consistently.

Each quarter, our Board of Directors reviews the Policy to determine if changes thereto are advisable and whether the Valuation Team has applied the Policy consistently.

With respect to the valuation of our investment portfolio, the Valuation Team performs the following steps each quarter:

8 unchanged sentences

• The Valuation Committee of the Board of Directors (comprised entirely of independent directors) meets to review the valuation determinations and supporting materials, discusses the information provided by our Valuation Team, determines whether the Valuation Team has followed the Policy and reviews other facts and circumstances.

Then, the Valuation Committee and chief valuation officer present the Valuation Committee’s findings to the entire Board of Directors, so that the full Board of Directors may review and approve in good faith the Valuation Designee’s determination of the fair value of such investments in accordance with the Policy.

Then, the Valuation Committee and chief valuation officer present the Valuation Committee’s findings to the entire Board of Directors, so that the full Board of Directors may review the Valuation Designee’s determination of the fair value of such investments in accordance with the Policy.

Fair value measurements of our investments may involve subjective judgment and estimates.

Due to the inherent uncertainty in valuing these securities, the determinations of fair value of our investments 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.

Due to the uncertainty inherent in valuing these securities, the determinations 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.

Our net asset value (“NAV”) could be materially affected if the determinations regarding the fair value of our investments are materially

different from the values that we ultimately realize upon our disposal of such securities.

Our valuation policies, procedures and processes are more fully described in Note 2— Summary of Significant Accounting Policies in our accompanying Notes to Consolidated Financial Statements included elsewhere in this Annual Report.

25 unchanged sentences

an income-based incentive fee and a capital gains-based incentive fee.

The income-based incentive fee rewards the Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% of our net assets (2.0% during the period from April 1, 2020 through March 31, 2023), which we define as total assets less indebtedness and before taking into account any incentive fees payable or contractually due but not payable during the period, at the end of the immediately preceding calendar quarter, adjusted appropriately for any share issuances or repurchases during the period (the “hurdle rate”).

or repurchases during the period (the “hurdle rate”).

The income-based incentive fee with respect to our pre-incentive fee net investment income is generally payable quarterly to the Adviser and is computed as follows:

2 unchanged sentences

• 20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% (2.4375% during the period from April 1, 2020 through March 31, 2022, and 2.50% from April 1, 2022 through March 31, 2023) of our net assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter.

Quarterly Incentive Fee Based on Net Investment Income for the Period Ending March 31, 2023 (A)

Quarterly Incentive Fee Based on Net Investment Income

Pre-incentive fee net investment income

2 unchanged sentences

allocated to income-related portion of incentive fee

(A) After March 31, 2023, the 2.00% quarterly hurdle rate will revert back to 1.75% and the 2.50% quarterly excess incentive fee hurdle rate will revert back to 2.1875%.

The second part of the incentive fee is a capital gains-based incentive fee that is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date) and equals 20.0% of our “net realized capital gains” (as defined below) as of the end of the fiscal year.

1 unchanged sentence

For this purpose, cumulative aggregate realized capital gains, if any, equals the sum of the differences between the net sales price of each investment, when sold, and the original cost of such investment since inception.

Cumulative aggregate realized capital losses equals the sum of the

amounts by which the net sales price of each investment, when sold, is less than the original cost of such investment since inception.

Cumulative aggregate realized capital losses equals the sum of the amounts by which the net sales price of each investment, when sold, is less than the original cost of such investment since inception.

The entire portfolio’s aggregate unrealized capital depreciation, if any, equals the sum of the difference between the valuation of each investment as of the applicable calculation date and the original cost of such investment.

6 unchanged sentences

GAAP requires that the capital gains-based incentive fee accrual consider the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized.

There can be no assurance that such unrealized capital appreciation will be realized in the future.

There can be no assurance that such unrealized capital

appreciation will be realized in the future.

No GAAP accrual for a capital gains-based incentive fee has been recorded from our inception through September 30, 2023.

Our Board of Directors accepted non-contractual, unconditional and irrevocable credits from the Adviser to reduce the income-based incentive fee to the extent net investment income did not cover 100.0% of distributions to common stockholders for the years ended September 30, 2022, 2021, and 2020, which credits totaled $0.4 million, $0.5 million, and $3.0 million, respectively.

Our Board of Directors accepted non-contractual, unconditional and irrevocable credits from the Adviser to reduce the income-based incentive fee to the extent net investment income did not cover 100.0% of distributions to common stockholders for the years ended September 30, 2022 and 2021, which credits totaled $0.4 million and $0.5 million, respectively.

There were no such credits during the year ended September 30, 2023.

Loan Servicing Fee Pursuant to Credit Agreement

10 unchanged sentences

Gladstone and 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.

Any such fees paid by portfolio companies to Gladstone Securities do not impact the fees we pay to the

Adviser or the non-contractual, unconditional, and irrevocable credits against the base management fee or incentive fee.

Any such fees paid by portfolio companies to Gladstone Securities do not impact the fees we pay to the Adviser or the non-contractual, unconditional, and irrevocable credits against the base management fee or incentive fee.

For additional information refer to Note 4 — Related Party Transactions of our accompanying Notes to Consolidated Financial Statements.

9 unchanged sentences

estate or gift tax.

Stockholders are urged to consult their tax advisors regarding their particular situations and the possible applicability of federal, state, local, non-U.S.

or other tax laws, and any proposed tax law changes.

stockholder” is a beneficial owner of stock that is for U.S.

federal income tax purposes:

• an individual who is a citizen or resident of the United States;

• a corporation, or other entity treated as a corporation for U.S.

federal income tax purposes, created or organized in or under the laws of the United States or any state thereof of the District of Columbia;

• a trust, if a court within the United States is able to exercise primary supervision over its administration and one or more U.S.

persons (as defined in the Code) have the authority to control all of its substantial decisions, or if the trust has a valid election in effect under applicable U.S.

Treasury regulations to be treated as a domestic trust for U.S.

federal income tax purposes;

• an estate, the income of which is subject to U.S.

federal income taxation regardless of its source.

To qualify for treatment as a RIC under Subchapter M of the Code, we must generally distribute to our stockholders, for each taxable year, at least 90.0% of our taxable ordinary income plus the excess of our realized net short-term capital gains over our realized net long-term capital losses (“Investment Company Taxable Income”).

10 unchanged sentences

Failure to Qualify as a RIC

If we are unable to qualify for treatment as a RIC, we would be subject to U.S.

If we were to fail to meet the income, diversification, or distribution tests described above, we could in some cases cure such failure, including by paying a fund-level tax, paying interest, making additional distributions, or disposing of certain assets.

If we were ineligible to or otherwise did not cure such failure, or were otherwise unable to qualify for treatment as a RIC, we would be subject to U.S.

federal income tax on all of our taxable income at the regular corporate income tax rate and would be subject to any applicable state and local taxes, even if we distributed all of our Investment Company Taxable Income to our stockholders.

11 unchanged sentences

federal income tax on the portion of our Investment Company Taxable Income and net capital gain (realized net long term capital gain in excess of realized net short term capital loss) that we timely distribute (or are deemed to timely distribute) to our stockholders.

any income realized, but not distributed, in the preceding period (to the extent that income tax was not imposed on such amounts), less certain reductions, as applicable (together, the “excise tax distribution requirements”), we will be subject to a 4% nondeductible federal excise tax on the portion of the undistributed amounts of such income that are less than the amounts required to be distributed based on the excise tax distribution requirements.

If we fail to distribute in a timely manner an amount at least equal to the sum of (1) 98.0% of our ordinary income for the calendar year, (2) 98.2% of our net capital gains for the one-year period ending on October 31 of the calendar year (or November 30 or December 31 of that year if we are permitted to elect and so elect) and (3) any income realized, but not

distributed, in the preceding period (to the extent that income tax was not imposed on such amounts), less certain reductions, as applicable (together, the “excise tax distribution requirements”), we will be subject to a 4% nondeductible federal excise tax on the portion of the undistributed amounts of such income that are less than the amounts required to be distributed based on the excise tax distribution requirements.

For the calendar years ended December 31, 2022, 2021, and 2020, we did not incur any excise taxes.

6 unchanged sentences

For the year ended September 30, 2023, we recorded $0.2 million of OID income and the unamortized balance of OID investments as of September 30, 2023 totaled $0.7 million.

As of September 30, 2022, we had six investments which had a PIK interest component and we recorded PIK interest income of $4.2 million during the year ended September 30, 2022.

As of September 30, 2023, we had eight investments which had a PIK interest component and we recorded PIK interest income of $3.6 million during the year ended September 30, 2023.

Taxation of Our U.S.

13 unchanged sentences

If a common stockholder participates in our “opt in” dividend reinvestment plan, then the common stockholder will have their cash dividends and distributions automatically reinvested in additional shares of our common stock, rather than receiving cash dividends and distributions.

Any distributions reinvested under the plan will be taxable to the common

stockholder to the same extent, and with the same character, as if the common stockholder had received the distribution in cash.

Any distributions reinvested under the plan will be taxable to the common stockholder to the same extent, and with the same character, as if the common stockholder had received the distribution in

The common stockholder will have an adjusted basis in the additional common shares purchased through the plan equal to the dollar amount that would have been received if the U.S.

10 unchanged sentences

However, any capital loss arising from the sale or disposition of shares of our stock held for six months or less will be treated as long-term capital loss to the extent of the amount of capital gain dividends received, or undistributed capital gain deemed received, with respect to such shares.

Under the tax laws in effect as of the date of this filing, individual U.S.

All or a portion of any loss realized upon a taxable disposition of shares will be disallowed under the Code’s “wash sale” rule if other substantially identical shares are purchased within 30 days before or after the disposition.

In such a case, the basis of the newly purchased shares will be adjusted to reflect the disallowed loss.Under the tax laws in effect as of the date of this filing, individual U.S.

stockholders are subject to a maximum federal income tax rate of 20% on their net capital gain (i.e.

13 unchanged sentences

stockholder’s federal income tax liability, provided that proper information is timely provided to the IRS.

The Foreign Account Tax Compliance Act imposes a U.S.

federal withholding tax on certain types of payments made to “foreign financial institutions” and certain other non-U.S.

entities unless certain due diligence, reporting, withholding, and certification obligation requirements are satisfied.

Sections 1471-1474 of the Code and the U.S.

Treasury and IRS guidance issued thereunder (collectively, “FATCA”) generally require that we obtain information sufficient to identify the status of each shareholder under FATCA or under an applicable intergovernmental agreement (an “IGA”) between the United States and a foreign government.

If a shareholder fails to provide the requested information or otherwise fails to comply with FATCA or an IGA, we may be required to withhold under FATCA at a rate of 30% with respect to that shareholder on ordinary dividends it pays.

The IRS and the Department of Treasury have issued proposed regulations providing that these withholding rules will not apply to the gross proceeds of share redemptions or capital gain dividends we pay.

If a payment is subject to FATCA withholding, we are required to withhold even if such payment would otherwise be exempt from withholding under the rules applicable to foreign shareholders described above (e.g., interest-related dividends).

In addition, subject to certain exceptions, this legislation also imposes a 30% withholding on payments to foreign entities that are not financial institutions unless the foreign entity certifies that it does not have a greater than 10% U.S.

owner or provides the withholding agent with identifying information on each greater than 10% U.S.

Depending on the status of a non-U.S.

stockholder and the status of the intermediaries through which they hold their shares, non-U.S.

stockholders could be subject to this 30% withholding tax with respect to distributions on their shares and proceeds from the sale of their shares.

Under certain circumstances, a non-U.S.

stockholder might be eligible for refunds or credits of such taxes.

Information Reporting

3 unchanged sentences

In addition, the U.S.

federal tax status of each year’s distributions will generally be reported to the IRS (including the amount of dividends, if any, eligible for the preferential rates applicable to long-term capital gains).

federal tax status of each year’s distributions will generally be

reported to the IRS (including the amount of dividends, if any, eligible for the preferential rates applicable to long-term capital gains).

Regulation as a BDC

57 unchanged sentences

• Investing in our securities may involve an above average degree of risk.

• Common shares of closed-end investment companies frequently trade at a discount to the net asset value (“NAV”) per share.

• The indentures under which the notes were issued contain limited protection for holders of the Notes.

• Common shares of closed-end investment companies frequently trade at a discount to the NAV per share.

• The indentures under which our unsecured notes were issued contain limited protection for holders of such notes.

• Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, or the operations of businesses in which we invest, a compromise or corruption of our confidential information and/or damage to our business relationships, all of which could negatively impact our business, financial condition and operating results.

3 unchanged sentences

This code of ethics and business conduct is publicly available on the Investors section of our website under “Governance – Governance Documents” at www.GladstoneCapital.com.

Appendix A to the code of ethics and business conduct is our insider trading policy.

We intend to provide any required disclosure of any amendments to or waivers of the provisions of this code by posting information regarding any such amendment or waiver to our website or in a Current Report on Form 8-K.

17 unchanged sentences

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 1. Business