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Item 7. Management’s Discussion and Analysis

2023-11-13 compared with 2022-11-14 · 163 added, 190 removed, 351 unchanged (50% of the section changed)

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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, in connection with our debt investments, that we believe can grow over time to permit us to sell our equity investments for capital gains.

and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities, in connection with our debt investments, that we believe can grow over time to permit us to sell our equity investments for capital gains.

To achieve our investment objectives, our primary 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.

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.

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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 the 30-day LIBOR or one-month Term SOFR) and, 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 SOFR), 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.

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

During the year ended September 30, 2022, we invested $215.3 million in 14 new portfolio companies and extended $59.6 million in investments to existing portfolio companies.

In addition, during the year ended September 30, 2022, we exited eight portfolio companies through early payoffs or a restructure.

We received a total of $175.8 million in combined net proceeds and principal repayments from the aforementioned portfolio company exits as well as principal repayments by existing portfolio companies during the year ended September 30, 2022.

This activity resulted in a net increase in our overall portfolio by six portfolio companies to 52 and a net increase of $109.5 million in our portfolio at cost since September 30, 2021.

From our initial public offering in August 2001 through September 30, 2023, we have made 638 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 year ended September 30, 2023, we invested $101.5 million in five new portfolio companies, received an interest in senior notes of $2.4 million, and extended $71.6 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 $125.2 million in combined net proceeds and principal repayments from portfolio company exits and principal repayments by existing portfolio companies during the year ended September 30, 2023.

During the year ended September 30, 2023, the following significant transactions occurred:

Proprietary Investments

• In October 2021, we invested $26.3 million in Engineering Manufacturing Technologies, LLC through secured first lien debt and equity.

• In November 2021, our investment in Lignetics, Inc.

was sold, which resulted in the recognition of success fee income of $1.6 million and a realized gain of $13.4 million.

In connection with the sale, we received net cash proceeds of approximately $47.2 million, including the repayment of our debt investment of $29.0 million at par.

• In November 2021, our investment in Prophet Brand Strategy paid off at par for net cash proceeds of $13.1 million.

In conjunction with the payoff, we received a prepayment fee of $0.1 million.

• In November 2021, our investment in Effective School Solutions LLC paid off at par for net cash proceeds of $19.5 million.

In conjunction with the payoff, we received a prepayment fee of $0.5 million.

• In November 2021, we invested $13.4 million in WB Xcel Holdings, LLC through secured first lien debt and equity.

• In December 2021, our investment in Phoenix Aromas & Essential Oils, LLC paid off at par for net cash proceeds of $10.0 million.

• In December 2021, we invested $10.0 million in Fix-it Group, Inc.

through secured first lien debt.

• In December 2021, we invested $10.5 million in Workforce QA LLC through secured first lien debt and equity.

• In December 2021, we invested $30.0 million in Springfield, Inc.

through secured second lien debt.

• In December 2021, we invested $16.8 million in HH-Inspire Acquisition, Inc.

(“HH-Inspire”) through secured first lien debt and preferred equity.

In June 2022, we invested an additional $11.5 million in HH-Inspire through secured first lien debt.

In August 2022, we invested an additional $0.2 million in HH-Inspire through additional preferred equity.

In September 2022, we invested an additional $8.0 million in HH-Inspire through secured first lien debt.

• In January 2022, our investment in Belnick, Inc.

paid off at par for net cash proceeds of $10.0 million.

• In March 2022, we invested $5.0 million in Pansophic Learning Ltd., an existing portfolio company, through secured first lien debt.

• In March 2022, our investment in NetFortris Corp.

was sold, which resulted in the recognition of success fee income of $3.2 million.

In connection with the sale, we received net cash proceeds of $29.0 million, including the repayment of our debt investment of $28.8 million at par.

We continue to retain an equity investment in NetFortris Holdings LLC with a cost basis of $0.8 million and fair value of $0.5 million as of September 30, 2022.

• In April 2022, we invested $12.0 million in Axios Industrial Group, LLC through secured first lien debt.

• In April 2022, we invested $14.4 million in Salvo Technologies, Inc.

through secured first lien debt and membership units.

• In May 2022, we invested $21.8 million in Viva Railings, LLC through secured first lien debt.

• In June 2022, our investment in LWO Acquisitions Company LLC (“LWO”) was restructured upon emergence from Chapter 11 bankruptcy protection.

As part of the restructuring, our existing $16.8 million debt investment in LWO was converted to $3.3 million of first lien debt and $6.8 million of common equity in Lonestar EMS, LLC.

In conjunction with the restructuring, we recorded a net realized loss of approximately $8.5 million, including the write off of approximately $1.8 million in other receivables.

• In August 2022, we invested $28.8 million in Giving Home Health Care LLC through secured second lien debt and common equity warrants.

• In August 2022, we invested $15.0 million in Sokol & Company Holdings, LLC through secured first lien debt and common equity.

• In August 2022, we invested an additional $2.5 million in Gray Matter Systems, LLC, an existing investment, through secured second lien debt.

• In September 2022, we invested an additional $10.5 million in Antenna Research Associates, Inc., an existing investment, through secured first lien debt.

• In September 2022, we extended Salt and Straw, LLC a $2.0 million line of credit commitment and an $11.5 million delayed draw term loan commitment.

We funded $0.8 million on the line of credit at close.

• In September 2022, Unirac, Inc.

In conjunction with the sale, we received net cash proceeds of $11.8 million, including the repayment of our debt investment at par and a $0.1 million prepayment penalty.

• In September 2022, we invested $15.0 million in Unirac Holdings, Inc.

through secured first lien debt.

We also extended Unirac Holdings, Inc.

a $2.2 million line of credit commitment and a $2.8 million delayed draw term loan commitment, both of which were both unfunded at close.

• 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 September 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 the company 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 equity 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.

In September 2023, the delayed draw term loan commitment expired.

• In July 2023, we invested an additional $5.0 million in Gray Matter Systems, LLC, an existing portfolio company, through secured second lien debt.

• In September 2023, we invested an additional $4.0 million in Sea Link International IRB, Inc., an existing portfolio company, through secured second lien debt.

• In September 2023, we invested an additional $8.1 million in Antenna Research Associates, Inc., an existing portfolio company, through secured first lien debt.

• In September 2023, our debt investment in Encore Dredging Holdings, LLC (“Encore”) was paid off at par plus $0.4 million in prepayment and early termination fees.

We retain an equity investment in Encore with cost basis of $3.8 million and fair value of $4.3 million as of September 30, 2023.

Syndicated Investments

• In November 2021, our investment in Medical Solutions Holdings, Inc.

paid off at par for net cash proceeds of $6.0 million.

• In January 2022, our investment in Keystone Acquisition Corp.

• 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 Nasdaq under the trading symbol RILYO.

In June 2023, we redeemed our investment in B.

Riley Financial, Inc.

6.75% senior notes at par for proceeds of $2.4 million.

• In September 2023, our investment in CPM Holdings, Inc.

paid off at par for net cash proceeds of $0.8 million.

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We sold 8,774,101 and 430,425 common shares under our at-the-market program during the years ended September 30, 2023 and 2022, respectively.

In August 2023, we completed an offering of $57.0 million aggregate principal amount of the 2028 Notes.

In November 2021, we completed a private placement of $50.0 million aggregate principal amount of the 2027 Notes.

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When our common stock trades below 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 September 30, 2022, the closing market price of our common stock was $8.49 per share, a 6.5% discount to our September 30, 2022 NAV per share of $9.08.

On September 30, 2023, the closing market price of our common stock was $ 9.64 per share, a 2.7 % premium to our September 30, 2023 NAV per share of $ 9.39 .

Regulatory Compliance

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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.

result, the Company’s asset coverage requirements for senior securities changed from 200% to 150%, effective April 10, 2019.

As a result, the Company’s asset coverage requirements for senior securities changed from 200% to 150%, effective April 10, 2019.

As of September 30, 2023, our asset coverage on our “senior securities representing indebtedness” was 231.1 %.

Recent Developments

Credit Facility

In October 2022, we entered into Amendment No.

3 to the Credit Facility to increase the commitment amount by $20.0 million from $225.0 million to $245.0 million, as permitted under the terms of the Credit Facility.

Distributions

In October 2022, our Board of Directors declared the following monthly cash distributions to common stockholders:

Record Date Payment Date Distribution

On October 10, 2023, our Board of Directors declared the following distributions to common and preferred stockholders:

Record Date Payment Date Distribution per Common Share

October 20, 2023 October 31, 2023 $ 0.0825

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Total for the Quarter $ 0.2475

Election of Director

Effective October 11, 2022, Paula Novara was elected to our Board of Directors.

Novara also serves as head of human resources, facilities and office management and IT of the Adviser and certain of its affiliates.

Record Date Payment Date Distribution per Series A Preferred Stock(A)

October 25, 2023 November 3, 2023 $ 0.130208

November 28, 2023 December 5, 2023 0.130208

December 27, 2023 January 5, 2024 0.130208

Total for the Quarter $ 0.390624

(A) 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 the one-month LIBOR or SOFR) and, to a lesser extent, at fixed rates.

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

LIBOR is currently expected to transition to a new standard rate, the SOFR, which will incorporate certain overnight repo market data collected from multiple data sets.

The majority of the new variable rate debt investments that we made during the quarter ended September 30, 2022 are based on SOFR and certain of our other existing investments have been transitioned to SOFR.

Further, the majority of our outstanding loan agreements for variable rate debt investments that are still based on one-month LIBOR have been amended to include LIBOR replacement language should LIBOR cease to exist.

Assuming that SOFR replaces LIBOR, we expect that there should be minimal impact on our operations.

In addition, our Credit Facility has been amended to update the reference rate from LIBOR to SOFR plus an 11 basis point credit spread adjustment.

In general, our investments in debt securities have a term of no more than seven years, accrue interest at variable rates (based on SOFR or historically, LIBOR) and, to a lesser extent, at fixed rates.

As of September 30, 2023, LIBOR is no longer readily available.

In the United States, LIBOR has predominantly been transitioned to a new standard rate, 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 six months ended September 30, 2022, general inflationary pressures and certain commodity price volatility have impacted our portfolio companies to varying degrees;

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

During the year ended September 30, 2023, general inflationary pressures and certain commodity price volatility have impacted our portfolio companies to varying degrees;

however, the broad based impact of these pricing changes have largely been mitigated by price adjustments without adverse sales implications, and thus, have not materially impacted our portfolio companies’ ability to service their indebtedness, including our loans.

Notwithstanding the results to date, 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 continue to monitor the current inflationary environment to anticipate any impact on our portfolio companies, including their ability 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.

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(11,016) (17,538) 6,522 (37.2)

Net unrealized appreciation (depreciation) of other

— (350) 350 (100.0)

Net gain (loss) from investments and other

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Interest income increased by 53.8% for the year ended September 30, 2023, as compared to the prior year.

The increase was due primarily to an increase in the weighted average principal balance of our interest-bearing portfolio, partially offset by a decrease in the weighted average yield on our interest-bearing portfolio.

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 year ended September 30, 2023 was $626.5 million, compared to $517.0 million for the year ended September 30, 2022, an increase of $109.5 million, or 21.2%.

The weighted average yield on our interest-bearing investments is based on the current stated interest rate on interest-bearing investments, which decreased slightly to 10.4% for the year ended September 30, 2022, compared to 10.6% for the year ended September 30, 2021, inclusive of any allowances on interest receivables made during those periods.

The decrease in the weighted average yield was driven mainly by competitive marketplace conditions.

As of September 30, 2022 and 2021, there were no loans on non-accrual status.

Other income increased by 138.9% during the year ended September 30, 2022, as compared to the prior year period primarily due to a $4.6 million increase in success fees received and a $1.2 million increase in dividend income year over year.

The weighted average yield on our interest-bearing investments is based on the current stated interest rate on interest-bearing investments, which increased to 13.3% for the year ended September 30, 2023, compared to 10.4% for the year ended September 30, 2022, inclusive of any allowances on interest receivables made during those periods.

The increase in the weighted average yield was driven mainly by increases in interest rates.

As of September 30, 2023, our loan to Edge Adhesives Holdings, Inc.

was on non-accrual status with a 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 $ 2.9 million, or 0.5 % 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 62.8% during the year ended September 30, 2023, as compared to the prior year period primarily due to a $3.9 million decrease in success fees received and a $1.9 million decrease in dividend income year over year.

As of September 30, 2023 and 2022, no single investment represented greater than 10% of the total investment portfolio at fair value.

Expenses, net of any non-contractual, unconditional and irrevocable credits to fees from the Adviser, increased $14.5 million, or 47.1%, for the year ended September 30, 2023 as compared to the prior year.

This increase was primarily due to a $1.8 million increase in the net incentive fee and a $1.5 million increase in interest expense on borrowings.

This increase was primarily due to a $7.9 million increase in interest expense on borrowings and a $3.2 million increase in the net incentive fee.

Total interest expense on borrowings and notes payable increased by $7.9 million, or 60.8%, during the year ended September 30, 2023 compared to the prior year.

This increase was driven by an increase in interest rates and a change in the composition of our overall debt financing.

Interest expense on our notes payable increased by $1.0 million year over year with the issuance of the 2027 Notes in November 2021 and the 2026 Notes in December 2020 and March 2021, partially offset by the redemption of the 2023 Notes in January 2021 and the 2024 Notes in November 2021.

Interest expense on our Credit Facility increased by $0.4 million period over period, driven primarily by an increase in the effective interest rate on our Credit Facility, partially offset by a decrease in the weighted average balance outstanding on our Credit Facility and a decrease in unused commitment fees, period over 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.

Interest expense on our Credit Facility increased by $7.3 million period over period, driven primarily by an increase in the effective interest rate on our Credit Facility and an increase in the weighted average balance outstanding on our Credit Facility, partially offset by a decrease in unused commitment fees, period over period.

The effective interest rate on our Credit Facility, including unused commitment fees incurred, but excluding the impact of deferred financing costs, was 8.0% during the year ended September 30, 2023, compared to 6.1% during the prior year.

The increase in the effective interest rate was driven primarily by an increase in interest rates.

The weighted average balance outstanding on our Credit Facility was $56.1 million during the year ended September 30, 2022, as compared to $59.4 million in the prior year, a decrease of 5.6%.

The gross base management fee earned by the Adviser increased by $1.6 million, or 18.1%, during the year ended September 30, 2022, as compared to the prior year, resulting from an increase in average total assets subject to the base management fee year over year.

The income-based incentive fee increased by $1.8 million, or 30.7%, for the year ended September 30, 2022, as compared to the prior year, due to higher pre-incentive fee net investment income over the respective periods.

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

The weighted average balance outstanding on our Credit Facility was $133.7 million during the year ended September 30, 2023, as compared to $56.1 million in the prior year, an increase of 138.3%.

The net base management fee earned by the Adviser increased by $2.7 million, or 46.4%, during the year ended September 30, 2023, as compared to the prior year, resulting from an increase in average total assets subject to the base management fee and a decrease in credits to the base management fee from the Adviser for new deal origination fees, year over year.

The income-based incentive fee increased by $2.7 million, or 36.5%, for the year ended September 30, 2023, as compared to the prior year, 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:

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Base management fee (B)

11,998 10,247

Portfolio company fee credit ( 3,263 ) ( 4,196 )

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Net Realized Gain (Loss) on Investments

For the year ended September 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 a $8.5 million realized loss recognized on the restructuring of our investment in LWO.

For the year ended September 30, 2021, we recorded a net realized gain on investments of $4.2 million, which resulted primarily from a $5.3 million net realized gain recognized from the exit of AG Transportation Holdings, LLC, a $0.6 million net realized gain from the exit of American Trailer Rental Group LLC and gains from previous exits of certain other investments, partially offset by a $2.4 million net realized loss on our investment in Edmentum Ultimate Holdings, LLC.

Net Unrealized Appreciation of Investments

For the year ended September 30, 2023, we recorded a net realized gain on investments of $12.3 million, which resulted primarily from a $5.9 million realized gain recognized on the sale of our investment in Targus Cayman HoldCo, Ltd.

(“Targus”), a $4.1 million realized gain recognized on our investment in Leeds Novamark Capital I, L.P.

(“Leeds”), and a $3.7 million realized gain recognized on our investment in PIC 360, LLC (“PIC 360”).

(“Lignetics”), partially offset by an $8.5 million realized loss recognized on the restructuring of our investment in LWO Acquisitions Company LLC (“LWO”).

Net Unrealized Appreciation (Depreciation) of Investments

During the year ended September 30, 2023, we recorded net unrealized depreciation of investments in the aggregate amount of $11.0 million.

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(Appreciation) Net Gain

Antenna Research Associates, Inc.

$ — $ 4,702 $ — $ 4,702

FES Resources Holdings LLC — 4,508 — 4,508

Defiance Integrated Technologies, Inc.

— 2,801 — 2,801

Giving Home Health Care, LLC — 2,775 — 2,775

Encore Dredging Holdings, LLC — 1,495 840 2,335

Imperative Holdings Corporation 510 1,094 — 1,604

Canopy Safety Brands, LLC — 1,316 — 1,316

HH-Inspire Acquisition, Inc.

— 1,496 (200) 1,296

Triple H Food Processors, LLC — 990 — 990

TNCP Intermediate HoldCo, LLC — 736 — 736

PIC 360, LLC 3,700 1,092 (4,262) 530

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.

— (510) — (510)

MCG Energy Solutions, LLC — (685) — (685)

Leeds Novamark Capital I, L.P.

4,118 75 (5,018) (825)

Technical Resource Management, LLC — (960) — (960)

DKI Ventures, LLC — (1,393) — (1,393)

Salvo Technologies, Inc.

— (1,959) — (1,959)

NeoGraf Solutions, LLC — (3,154) — (3,154)

Engineering Manufacturing Technologies, LLC — (3,181) — (3,181)

B+T Group Acquisition Inc.

— (3,751) — (3,751)

WB Xcel Holdings, LLC — (5,687) — (5,687)

Other, net (<$500) (189) 108 391 310

$ 12,345 $ 1,702 $ (12,718) $ 1,329

The primary driver of net unrealized depreciation of $11.0 million for the year ended September 30, 2023 was the reversal of unrealized appreciation associated with the exit of our investment in Targus, the reversal of unrealized appreciation associated with our investment in PIC 360, and the sale of underlying assets within Leeds, 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 year ended September 30, 2022, we recorded net unrealized depreciation of investments in the aggregate amount of $17.5 million.

The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the year ended September 30, 2022 were as follows:

Year Ended September 30, 2022

Portfolio Company Realized Gain

(Depreciation) Reversal of

(Appreciation) Net Gain

LWO Acquisitions Company LLC $ (8,496) $ (328) $ 14,119 $ 5,295

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$ 5,416 $ (16,491) $ (1,047) $ (12,122)

The primary driver of net unrealized depreciation of $17.5 million for the year ended September 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 other 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.

During the year ended September 30, 2021, we recorded net unrealized appreciation of investments in the aggregate amount of $55.3 million.

The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the year ended September 30, 2021 were as follows:

Year Ended September 30, 2021

Portfolio Company Realized Gain

(Depreciation) Reversal of

(Appreciation) Net Gain

Lignetics, Inc.

$ — $ 14,420 $ — $ 14,420

Antenna Research Associates, Inc.

— 9,306 — 9,306

B+T Group Acquisition Inc.

— 6,453 — 6,453

AG Transportation Holdings, LLC 5,289 6,788 (7,934) 4,143

Targus Cayman HoldCo, Ltd.

— 4,125 — 4,125

Defiance Integrated Technologies, Inc.

— 2,535 — 2,535

Imperative Holdings Corporation — 2,281 — 2,281

Leeds Novamark Capital I, L.P — 2,219 — 2,219

MCG Energy Solutions, LLC — 1,659 — 1,659

PIC 360, LLC — 1,641 — 1,641

Triple H Food Processors, LLC — 1,523 — 1,523

Encore Dredging Holdings, LLC — 1,443 — 1,443

TNCP Intermediate HoldCo, LLC — 1,252 — 1,252

Iten Defense, LLC — 798 — 798

Tailwind Smith Cooper Intermediate Corporation

American Trailer Rental Group LLC 598 1,213 (1,042) 769

EL Academies, Inc.

DKI Ventures, LLC — 732 — 732

Sea Link International IRB, Inc.

Canopy Safety Brands, LLC — 657 — 657

SpaceCo Holdings, LLC — 500 — 500

Keystone Acquisition Corp.

Edmentum Ultimate Holdings, LLC (2,351) — 2,770 419

Medical Solutions Holdings, Inc.

R2i Holdings, LLC — 351 — 351

Belnick, Inc.

Vertellus Holdings LLC (41) — 313 272

Gray Matter Systems, LLC — 260 — 260

ALS Education, LLC — 237 — 237

Magpul Industries Corp.

— 210 (210) —

Drive Chassis Holdco, LLC — 260 (261) (1)

Precision International, LLC 354 (184) (332) (162)

GFRC Holdings, LLC — (548) — (548)

LWO Acquisitions Company LLC — (609) — (609)

ENET Holdings, LLC — (674) — (674)

NetFortris Corp.

— (1,371) — (1,371)

Other, net (<$500) 330 72 62 464

$ 4,179 $ 61,981 $ (6,634) $ 59,526

The primary driver of net unrealized appreciation of $55.3 million for the year ended September 30, 2021 was the improvement in the financial and operational performance across a number of our portfolio companies and an increase in comparable transaction multiples used to estimate the fair value of several of our portfolio companies, partially offset by the reversal of unrealized depreciation associated with the exit of our investment in AG Transportation Holdings, LLC and a decrease in performance of certain of our other portfolio companies.

As of September 30, 2022, the fair value of our investment portfolio was less than its cost basis by approximately $6.4 million and our entire investment portfolio was valued at 99.0% of cost, as compared to cumulative net unrealized appreciation of $11.1 million and a valuation of our entire portfolio at 102.0% of cost as of September 30, 2021.

Net Unrealized (Appreciation) Depreciation of Other

During the year ended September 30, 2021, we recorded $0.4 million of unrealized depreciation on our Credit Facility at fair value.

No such amounts were recorded during the year ended September 30, 2022.

The primary driver of net unrealized depreciation of $17.5 million for the year ended September 30, 2022 was the reversal of unrealized appreciation associated with the exit of our investment in Lignetics, the decrease in comparable transaction multiples used to estimate the fair value of certain of our other 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.

As of September 30, 2023, the fair value of our investment portfolio was less than its cost basis by approximately $17.5 million and our entire investment portfolio was valued at 97.6% of cost, as compared to cumulative net unrealized depreciation of $6.4 million and a valuation of our entire portfolio at 99.0% of cost as of September 30, 2022.

Comparison of the Year Ended September 30, 2022 to the Year Ended September 30, 2021

The comparison of the fiscal year ended September 30, 2022 to the fiscal year ended September 30, 2021 can be found in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, as filed with the SEC on November 14, 2022, located within Item 7.

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Net cash used in operating activities for the year ended September 30, 2023 was $10.9 million as compared to $76.4 million for the year ended September 30, 2022.

The change was primarily due to an increase in purchases of investments.

The change was primarily due to a decrease in purchases of investments.

Purchases of investments were $175.5 million during the year ended September 30, 2023 compared to $274.9 million during the year ended September 30, 2022.

Net cash used in operating activities for the year ended September 30, 2021 was $14.1 million as compared to $46.1 million for the year ended September 30, 2020.

The change was primarily due to an increase in principal repayments and net proceeds from sales of investments.

Repayments and net proceeds from sales were $142.7 million during the year ended September 30, 2021 compared to $78.8 million during the year ended September 30, 2020.

As of September 30, 2023, we had loans to, syndicated participations in or equity investments in 51 companies, with an aggregate cost basis of approximately $722.3 million.

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1,702 (16,491)

Reversal of prior period net appreciation (depreciation) of investments

Reversal of prior period net depreciation (appreciation) of investments

(12,718) (1,047)

Net realized gain (loss) on investments 5,416 4,179

Increase in investment balance due to PIK interest (A)

Net realized gain (loss) on investments (A)

Increase in investment balance due to PIK interest (B)

Net change in premiums, discounts and amortization (114) 445

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$ 704,815 $ 649,615

(A) 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.

(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 September 30, 2023.

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Financing Activities

Net cash provided by financing activities for the year ended September 30, 2023 was $10.2 million, which consisted primarily of $87.4 million in gross proceeds from the issuance of common stock and $57.0 million in gross proceeds from the issuance of notes payable, partially offset by $94.0 million in net repayments on our Credit Facility and $35.4 million in distributions to common shareholders.

Net cash provided by financing activities for the year ended September 30, 2022 was $77.7 million, which consisted primarily of $91.3 million in net borrowings on our Credit Facility and $50.0 million in gross proceeds from the issuance of notes payable, partially offset by $38.8 million used in the redemption of our 2024 Notes and $27.3 million in distributions to common shareholders.

Net cash provided by financing activities for the year ended September 30, 2021 was $12.4 million, which consisted primarily of $150.0 million in gross proceeds from the issuance of notes payable and $26.9 million in gross proceeds from the issuance of common stock, partially offset by $77.5 million in net repayments on our Credit Facility, $57.5 million used in the redemption of our 2023 Notes, and $26.0 million in distributions to common shareholders.

Net cash provided by financing activities for the year ended September 30, 2020 was $32.8 million, which consisted primarily of $61.1 million in net borrowings on our Credit Facility and $38.8 million in gross proceeds from the issuance

of notes payable, partially offset by $51.8 million used in the redemption of our Series 2024 Term Preferred Stock and $25.2 million in distributions to common shareholders.

Distributions to Stockholders

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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 year ended September 30, 2022, we paid monthly cash distributions of $0.065 per common share for the months of October 2021 through March 2022 and paid monthly cash distributions of $0.0675 per common share for the months of April 2022 through September 2022.

In accordance with these requirements, during the year ended September 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, $0.08 per common share for each of April, May, and June 2023, $0.0825 per common share for each of July, August, and September 2023, and a supplemental distribution of $0.02 per common share in September 2023.

These distributions totaled an aggregate of $35.4 million.

During the year ended September 30, 2021, we paid monthly cash distributions of $0.065 per common share for each month, which totaled an aggregate of $26.0 million.

During the year ended September 30, 2022, we paid monthly cash distributions of $0.065 per common share for the months of October 2021 through March 2022 and paid monthly cash distributions of $0.0675 per common share for the months of April 2022 through September 2022.

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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, 2024.

From inception through September 30, 2022, we have paid 236 monthly or quarterly consecutive distributions to common stockholders totaling approximately $423.6 million or $21.83 per share.

For the fiscal years ended September 30, 2022, 2021, and 2020, distributions declared and paid exceeded taxable income available for common distributions resulting in a partial return of capital of approximately $1.4 million, $1.0 million, and $0.4 million, respectively.

Preferred Stock Dividends

On October 2, 2019, we voluntarily redeemed all 2,070,000 outstanding shares of our Series 2024 Term Preferred Stock at a redemption price of $25.00 per share which represents the liquidation preference per share, plus accrued and unpaid dividends through October 1, 2019 in the amount of $0.004166 per share, for a payment per share of $25.004166 and an aggregate redemption price of approximately $51.8 million.

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

For federal income tax purposes, the dividends paid by us to preferred stockholders generally constituted ordinary income to the extent of our current and accumulated earnings and profits and is reported after the end of the calendar year based on tax information for the full fiscal year.

Such a characterization made on an interim, quarterly basis may not be representative of the actual tax characterization for the full fiscal year.

From inception through September 30, 2023, we have paid distributions to common stockholders totaling approximately $459.0 million or $22.77 per share.

For the fiscal year ended September 30, 2023, our current and accumulated earnings and profits exceeded common stock distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $5.0 million of the first common distributions paid to common stockholders in the subsequent fiscal year as having been paid in the prior year.

For the fiscal years ended September 30, 2022 and 2021, distributions declared and paid exceeded taxable income available for common distributions resulting in a partial return of capital of approximately $1.4 million and $1.0 million, respectively.

Dividend Reinvestment Plan

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As of September 30, 2023, we had the ability to issue up to an additional $151.1 million in securities under the registration statement.

In May 2021, we entered into an equity distribution agreement with Jefferies LLC, as amended in August 2022 (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 $60.0 million.

During the year ended September 30, 2022, we sold 430,425 shares of our common stock under the Jefferies Sales Agreement, at a weighted-average price of $10.53 per share and raised $4.5 million of gross proceeds.

In May 2021, we entered into an equity distribution agreement with Jefferies LLC, as amended in August 2022 (the “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 $100.0 million in an “at the market offering” (the “ATM Program”).

In July 2023, we amended and restated the Sales Agreement to add Huntington Securities, Inc.

as a sales agent under the ATM Program in addition to Jefferies LLC.

During the year ended September 30, 2023, we sold 8,774,101 shares of our common stock under the Sales Agreement, at a weighted-average price of $9.96 per share and raised $87.4 million of gross proceeds.

Net proceeds, after deducting commissions and offering costs borne by us, were approximately $85.9 million.

As of September 30, 2022, we had a remaining capacity to sell up to an additional $47.8 million of our common stock under the Jefferies Sales Agreement.

As of September 30, 2023, we had a remaining capacity to sell up to an additional $0.4 million of our common stock under the Sales Agreement.

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

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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 September 30, 2022, the closing market price of our common stock was $ 8.49 per share, a 6.5 % discount to our September 30, 2022 NAV per share of $ 9.08 .

On September 30, 2023, the closing market price of our common stock was $ 9.64 per share, a 2.7 % premium to our September 30, 2023 NAV per share of $ 9.39 .

Revolving Line of Credit

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.

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.

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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, (v) update the SOFR credit spread adjustment to 10 basis points, and (vi) 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.

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Our Credit Facility 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, portfolio company leverage and lien property.

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, portfolio company leverage 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.

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Notes Payable

In August 2023, we completed an offering of $57.0 million aggregate principal amount of 7.75% Notes due 2028 (the “2028 Notes”) for net proceeds of approximately $55.1 million after deducting underwriting discounts, commissions and offering expenses borne by us.

The 2028 Notes are traded under the ticker symbol “GLADZ” on the Nasdaq Global Select Market.

The 2028 Notes will mature on September 1, 2028 and may be redeemed in whole or in part at any time or from

time to time at our option on or after September 1, 2025.

The 2028 Notes bear interest at a rate of 7.75% per year.

Interest is payable quarterly on March 1, June 1, September 1, and December 1 of each year beginning December 1, 2023 (which equates to approximately $4.4 million per year).

In November 2021, we completed a private placement of $50.0 million aggregate principal amount of 3.75% Notes due 2027 (the “2027 Notes”) for net proceeds of approximately $48.5 million after deducting initial purchasers’ costs, commissions and offering expenses borne by us.

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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.

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.

The terms of the Exchange Notes are identical to those of the 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 5.125% Notes due 2026 (the “2026 Notes”) for net proceeds of approximately $97.7 million after deducting underwriting discounts, commissions and offering expenses borne by us.

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The 2024 Notes would have otherwise matured on November 1, 2024.

In November 2018, we completed an offering of $57.5 million aggregate principal amount of 6.125% Notes due 2023 (the “2023 Notes”), inclusive of the overallotment option exercised by the underwriters, for net proceeds of $55.4 million after deducting underwriting discounts, commissions and offering expenses borne by us.

On January 7, 2021, we voluntarily redeemed the 2023 Notes with an aggregate principal amount outstanding of $57.5 million.

The redemption amount was $58.1 million inclusive of accrued interest through the date of redemption.

In connection with the voluntary redemption of the 2023 Notes, we incurred a loss on extinguishment of debt of $1.2 million, which is primarily comprised of the unamortized deferred issuance costs at the time of redemption.

The 2023 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 indenture relating to the 2028 Notes, 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 2028 Notes, the 2027 Notes and the 2026 Notes, as applicable, and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements.

Off-Balance Sheet Arrangements

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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 September 30, 2022 and 2021 to be immaterial.

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 September 30, 2023 and 2022 to be immaterial.

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

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(B) Principal balance of borrowings outstanding under our Credit Facility, based on the maturity date following the current contractual revolver period end date.

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

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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 Annual Report.

Additionally, refer to Note 3— Investments in our accompanying Notes to Consolidated Financial Statements included elsewhere in this Annual 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 Annual Report.

Investment Valuation

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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.

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.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis