GLADSTONE CAPITAL CORP 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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, results of operations or percentage relationships 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. 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 companies in the U.S. 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. 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 52 Table of Contents 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. 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 the Co-Investment Order that expanded our ability to co-invest, under certain circumstances, with certain of our affiliates, including Gladstone Investment, a BDC also managed by the Adviser, and any future BDC or registered 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. 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, whether or not an affiliate of ours, our investment is likely to be smaller than if we were investing alone. 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 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. 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 PIK interest. 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 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 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. 53 Table of Contents • 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 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. Refer to Note 14 — Subsequent Events in the accompanying Consolidated Financial Statements included elsewhere in this Annual Report for portfolio activity occurring subsequent to September 30, 2023. 54 Table of Contents Capital Raising We have been able to meet our capital needs through extensions of and increases to our line of credit under the 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 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. In December 2020, we completed an offering of $100.0 million aggregate principal amount of the 2026 Notes. In March 2021, we completed an 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 were 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 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, 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 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 September 30, 2023, our asset coverage on our “senior securities representing indebtedness” was 231.1 %. Recent Developments Distributions 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 November 20, 2023 November 30, 2023 0.0825 December 18, 2023 December 29, 2023 0.0825 Total for the Quarter $ 0.2475 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. 55 Table of Contents LIBOR Transition 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 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 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. See “Risk Factors— We may experience fluctuations in our quarterly and annual results based on the impact of inflation in the U.S.” 56 Table of Contents RESULTS OF OPERATIONS Comparison of the Year Ended September 30, 2023 to the Year Ended September 30, 2022 For the Year Ended September 30, 2023 2022 $ Change % Change INVESTMENT INCOME Interest income $ 83,030 $ 53,988 $ 29,042 53.8 % Other income 3,404 9,162 (5,758) (62.8) Total investment income 86,434 63,150 23,284 36.9 EXPENSES Base management fee 11,998 10,247 1,751 17.1 Loan servicing fee 8,053 6,329 1,724 27.2 Incentive fee 10,255 7,511 2,744 36.5 Administration fee 1,716 1,610 106 6.6 Interest expense 20,847 12,966 7,881 60.8 Amortization of deferred financing costs 1,529 1,175 354 30.1 Other expenses 2,458 2,165 293 13.5 Expenses, before credits from Adviser 56,856 42,003 14,853 35.4 Credit to base management fee – loan servicing fee (8,053) (6,329) (1,724) 27.2 Credit to fees from Adviser – other (3,389) (4,803) 1,414 (29.4) Total expenses, net of credits 45,414 30,871 14,543 47.1 NET INVESTMENT INCOME 41,020 32,279 8,741 27.1 NET REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on investments 12,345 5,416 6,929 127.9 Net realized gain (loss) on other 319 (243) 562 (231.3) Net unrealized appreciation (depreciation) of investments (11,016) (17,538) 6,522 (37.2) Net gain (loss) from investments and other 1,648 (12,365) 14,013 (113.3) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 42,668 $ 19,914 $ 22,754 114.3 % PER BASIC AND DILUTED COMMON SHARE Net investment income $ 1.10 $ 0.94 $ 0.16 17.0 % Net increase (decrease) in net assets resulting from operations $ 1.14 $ 0.58 $ 0.56 96.6 % Investment Income Interest income increased by 53.8% for the year ended September 30, 2023, as compared to the prior year. 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 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. 57 Table of Contents 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 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 $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 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 $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. 58 Table of Contents 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: Year Ended September 30, 2023 2022 Average total assets subject to base management fee (A) $ 685,600 $ 585,543 Multiplied by annual base management fee of 1.75% 1.75 % 1.75 % Base management fee (B) 11,998 10,247 Portfolio company fee credit ( 3,263 ) ( 4,196 ) Syndicated loan fee credit ( 126 ) ( 170 ) Net Base Management Fee $ 8,609 $ 5,881 Loan servicing fee (B) $ 8,053 $ 6,329 Credit to base management fee - loan servicing fee (B) ( 8,053 ) ( 6,329 ) Net Loan Servicing Fee $ — $ — Incentive fee (B) $ 10,255 $ 7,511 Incentive fee credit — ( 437 ) Net Incentive Fee $ 10,255 $ 7,074 Portfolio company fee credit $ ( 3,263 ) $ ( 4,196 ) Syndicated loan fee credit ( 126 ) ( 170 ) Incentive fee credit — ( 437 ) Credit to Fees from Adviser—Other (B) $ ( 3,389 ) $ ( 4,803 ) (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 two most recently completed quarters within the respective years and adjusted appropriately for any share issuances or repurchases during the period. (B) Reflected, on a gross basis, as a line item on our accompanying Consolidated Statement of Operations located elsewhere in this Annual Report. Realized Loss and Unrealized Appreciation Net Realized Gain (Loss) on 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”). 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. (“Lignetics”), partially offset by an $8.5 million realized loss recognized on the restructuring of our investment in LWO Acquisitions Company LLC (“LWO”). 59 Table of Contents 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. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the year ended September 30, 2023 were as follows: Year Ended September 30, 2023 Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized Depreciation (Appreciation) Net Gain (Loss) 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 Total: $ 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: 60 Table of Contents Year Ended September 30, 2022 Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized Depreciation (Appreciation) Net Gain (Loss) LWO Acquisitions Company LLC $ (8,496) $ (328) $ 14,119 $ 5,295 ENET Holdings, LLC — 4,785 447 5,232 NetFortris Holdings LLC — 3,949 (284) 3,665 WB Xcel Holdings, LLC — 2,937 — 2,937 Imperative Holdings Corporation — 2,195 — 2,195 R2i Holdings, LLC — 620 — 620 TNCP Intermediate HoldCo, LLC — 609 — 609 AG Transportation Holdings, LLC 468 — — 468 HH-Inspire Acquisition, Inc. — (277) — (277) Axios Industrial Group, LLC — (345) — (345) ALS Education, LLC — (351) — (351) GFRC Holdings, LLC — (357) — (357) SpaceCo Holdings, LLC — (359) — (359) Café Zupas — (386) — (386) Tailwind Smith Cooper Intermediate Corporation — (416) — (416) Viva Railings, L.L.C. — (436) — (436) PIC 360, LLC — (529) — (529) Eegee's LLC — (536) — (536) 8th Avenue Food & Provisions, Inc. — (622) — (622) DKI Ventures, LLC — (645) — (645) Triple H Food Processors, LLC — (814) — (814) Ohio Armor Holdings, LLC — (1,136) — (1,136) Defiance Integrated Technologies, Inc. — (1,468) (28) (1,496) MCG Energy Solutions, LLC — (1,549) — (1,549) Lignetics, Inc. 13,408 — (14,958) (1,550) Engineering Manufacturing Technologies, LLC — (1,593) — (1,593) Targus Cayman HoldCo, Ltd. — (2,052) — (2,052) B+T Group Acquisition Inc. — (3,350) — (3,350) Encore Dredging Holdings, LLC — (3,353) — (3,353) Edge Adhesives Holdings, Inc. — (3,590) — (3,590) Lonestar EMS, LLC — (6,970) — (6,970) Other, net (<$500) 36 (124) (343) (431) Total: $ 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 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. 61 Table of Contents 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. Management’s Discussion and Analysis of Financial Condition and Results of Operations . 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 utilize this cash primarily to fund new investments, make interest payments on our Credit Facility and notes payable, make distributions to our stockholders, pay management and administrative fees to the Adviser and Administrator, and for other operating expenses. 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 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. 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. 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 years ended September 30, 2023 and 2022: Year Ended September 30, 2023 2022 Beginning investment portfolio, at fair value $ 649,615 $ 557,612 New investments 103,916 215,254 Disbursements to existing portfolio companies 71,561 59,644 Scheduled principal repayments (8,311) (8,838) Unscheduled principal repayments (99,194) (151,154) Net proceeds from sales of investments (17,686) (15,758) Net unrealized appreciation (depreciation) of investments 1,702 (16,491) Reversal of prior period net depreciation (appreciation) of investments (12,718) (1,047) Net realized gain (loss) on investments (A) 12,345 5,416 Increase in investment balance due to PIK interest (B) 3,699 4,532 Net change in premiums, discounts and amortization (114) 445 Ending Investment Portfolio, at Fair Value $ 704,815 $ 649,615 (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. 62 Table of Contents 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. Year Ending September 30, Amount 2024 (A) $ 24,385 2025 90,725 2026 137,108 2027 254,660 2028 146,440 Thereafter 7,762 Total contractual repayments $ 661,080 Adjustments to cost basis of debt investments (1,254) Investments in equity securities 62,443 Investments held as of September 30, 2023 at Cost: $ 722,269 (A) Includes debt investments with contractual principal amounts totaling $0.2 million for which the maturity date has passed as of September 30, 2023. 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. 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 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, 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. These distributions totaled an aggregate of $27.3 million. In October 2023, our Board of Directors declared a monthly distribution of $0.0825 per common share for each of October, November, and December 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, 2024. From inception through September 30, 2023, we have paid distributions to common stockholders totaling approximately $459.0 million or $22.77 per share. 63 Table of Contents 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 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. 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 or preferred stock. As of September 30, 2023, we had the ability to issue up to an additional $151.1 million in securities under the registration statement. Common Stock 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, 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. 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 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% 64 Table of Contents 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 Term 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, (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. 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 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 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’ consents. 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. 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 $ 408.9 million as of September 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 September 30, 2023, and as defined in our Credit Facility, we had a net worth of $ 660.5 million, asset coverage on our “senior securities representing indebtedness” of 231.1 % and an active status as a BDC and RIC. In addition, as of September 30, 2023, we had 37 obligors in our Credit Facility’s borrowing base and 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 Annual Report for additional information regarding our Credit Facility. 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 65 Table of Contents 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. 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. 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. 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” premium, if applicable. The 2026 Notes bear interest at a rate of 5.125% per year. Interest is payable semi-annually 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 5.375% Notes due 2024 (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 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 We generally recognize success fee income when the payment has been received. As of September 30, 2023 and 2022, we had off-balance sheet success fee receivables on our accruing debt investments of $4.0 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 66 Table of Contents 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: Contractual Obligations (A) Payments Due by Period Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Total Credit Facility (B) $ — $ 47,800 $ — $ — $ 47,800 Notes Payable — 150,000 107,000 — 257,000 Interest expense on debt obligations (C) 19,867 29,213 12,061 — 61,141 Total $ 19,867 $ 227,013 $ 119,061 $ — $ 365,941 (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 $45.2 million, at cost, as of September 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, 2028 Notes, 2027 Notes, and 2026 Notes. The amount of interest expense calculated for purposes of this table was based upon rates and balances as of September 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 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 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 67 Table of Contents 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. The following table reflects risk ratings for all proprietary loans in our portfolio as of September 30, 2023 and 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: As of September 30, Rating 2023 2022 Highest 10.0 10.0 Average 7.1 7.1 Weighted Average 7.5 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 September 30, 2023 and 2022, representing approximately 1.3% and 1.6%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period: As of September 30, Rating 2023 2022 Highest 5.0 4.0 Average 3.5 3.4 Weighted Average 4.2 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 September 30, 2023 and 2022, representing approximately 0.5% and 0.5%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period: As of September 30, Rating 2023 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 and also to limit certain federal excise taxes imposed on RICs. Refer to Note 10— Federal and State Income Taxes in our accompanying Notes to Consolidated Financial Statements included elsewhere in this Annual Report for additional information regarding our tax status. 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 Annual Report for a description of recent accounting pronouncements.