GLADSTONE CAPITAL CORP 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All statements contained herein, other than historical facts, may constitute “forward-looking statements.” These statements may relate to, among other things, our future operating results, our business prospects and the prospects of our portfolio companies, actual and potential conflicts of interest with Gladstone Management Corporation (the “Adviser”), our investment adviser, and its affiliates, the use of borrowed money to finance our investments, the adequacy of our financing sources and working capital, and our ability to co-invest, among other factors. In some cases, you can identify forward-looking statements by terminology such as “estimate,” “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “project,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative or variations of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include: (1) changes in the economy and the capital markets, including stock price volatility, inflation, rising interest rates and risks of recession; (2) risks associated with negotiation and consummation of pending and future transactions; (3) the loss of one or more of our executive officers, in particular David Gladstone, Terry Lee Brubaker or Robert L. Marcotte; (4) changes in our investment objectives and strategy; (5) availability, terms (including the possibility of interest rate volatility) and deployment of capital; (6) changes in our industry, interest rates, exchange rates or the general economy; (7) our business prospects and the prospects of our portfolio companies; (8) the degree and nature of our competition; (9) changes in governmental regulation, tax rates and similar matters; (10) our ability to exit investments in a timely manner; (11) our ability to maintain our qualification as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), and as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”); and (12) those factors described herein, including Item 1A. “Risk Factors,” and in the “Risk Factors” section of our Annual Report on Form 10-K (our “Annual Report”) for the fiscal year ended September 30, 2023, filed with the U.S. Securities and Exchange Commission (“SEC”) on November 13, 2023. We caution readers not to place undue reliance on any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements and future results could differ materially from historical performance. We have based forward-looking statements on information available to us on the date of this report. Except as required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC from time to time, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements contained in this Quarterly Report on Form 10-Q are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended. The following analysis of our financial condition and results of operations should be read in conjunction with our accompanying Consolidated Financial Statements and the notes thereto contained elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report. Historical financial condition and results of operations and percentage relationships among any amounts in the financial statements are not necessarily indicative of financial condition or results of operations for any future periods. Except per share amounts, dollar amounts in the tables included herein are in thousands unless otherwise indicated. OVERVIEW General We were incorporated under the Maryland General Corporation Law on May 30, 2001. We operate as an externally managed, closed-end, non-diversified management investment company, and have elected to be treated as a BDC under the 1940 Act. In addition, for federal income tax purposes we have elected to be treated as a RIC under the Code. To continue to qualify as a RIC for federal income tax purposes and obtain favorable RIC tax treatment, we must meet certain requirements, including certain minimum distribution requirements. 43 Table of Contents We were established for the purpose of investing in debt and equity securities of established private businesses operating in the U.S. Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established lower middle market 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 $40 million, although investment size may vary, depending upon our total assets or available capital at the time of investment. We expect that our investment portfolio over time will consist of approximately 90.0% debt investments and 10.0% equity investments, at cost. As of March 31, 2024, our investment portfolio was made up of approximately 90.9% debt investments and 9.1% 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 $25 million) in the U.S. that meet certain criteria, including the following: the sustainability of the business’ free cash flow and its ability to grow it over time, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the borrower, reasonable capitalization of the borrower, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples and, to a lesser extent, the potential to realize appreciation and gain liquidity in our equity position, if any. We lend to borrowers that need funds for growth capital or to finance acquisitions or recapitalize or refinance their existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises. Our targeted portfolio companies are generally considered too small for the larger capital marketplace. We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity. In July 2012, the SEC granted us an exemptive order (the “Co-Investment Order”) that expanded our ability to co-invest, under certain circumstances, with certain of our affiliates, including Gladstone Investment Corporation, a BDC also managed by the Adviser, and any future BDC or 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. Since 2012, we have opportunistically made several co-investments with Gladstone Investment Corporation pursuant to the Co-Investment Order. We believe the Co-Investment Order has enhanced and will continue to enhance our ability to further our investment objectives and strategies. If we are participating in an investment with one or more co-investors, our investment is likely to be smaller than if we were investing alone. We are externally managed by the Adviser, an investment adviser registered with the SEC and an affiliate of ours, pursuant to an investment advisory and management agreement. The Adviser manages our investment activities. We have also entered into an administration agreement with Gladstone Administration, LLC (the “Administrator”), an affiliate of ours and the Adviser, whereby we pay separately for administrative services. Additionally, Gladstone Securities, LLC (“Gladstone Securities”), a privately-held broker-dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation, which is 100% indirectly owned and controlled by Mr. Gladstone, our chairman and chief executive officer, has provided other services, such as investment banking and due diligence services, to certain of our portfolio companies, for which Gladstone Securities receives a fee. Business Portfolio and Investment Activity In general, our investments in debt securities have a term of no more than seven years, accrue interest at variable rates (generally based on one-month Term Secured Overnight Financing Rate (“SOFR”)) and, to a lesser extent, at fixed rates. We seek debt instruments that pay interest monthly or, at a minimum, quarterly, may have a success fee or deferred interest provision and are primarily interest only, with all principal and any accrued but unpaid interest due at maturity. Generally, success fees accrue at a set rate and are contractually due upon a change of control of a portfolio company, typically from an exit or sale. Some debt securities have deferred interest whereby some portion of the interest payment is added to the principal balance so that the interest is paid, together with the principal, at maturity. This form of deferred interest is often called paid-in-kind (“PIK”) interest. 44 Table of Contents Typically, our equity investments consist of common stock, preferred stock, limited liability company interests, or warrants to purchase the foregoing. Often, these equity investments occur in connection with our original investment, recapitalizing a business, or refinancing existing debt. During the six months ended March 31, 2024, we invested $26.0 million in two new portfolio companies and extended $76.7 million in investments to existing portfolio companies. In addition, we received a total of $37.2 million in combined net proceeds and principal repayments from portfolio company exits and principal repayments by existing portfolio companies during the six months ended March 31, 2024. Our overall portfolio consisted of 51 portfolio companies as of March 31, 2024 and increased by $68.3 million at cost since September 30, 2023. From our initial public offering in August 2001 through March 31, 2024, we have made 654 different loans to, or investments in, 275 companies for a total of approximately $2.7 billion, before giving effect to principal repayments on investments and divestitures. During the six months ended March 31, 2024, the following significant transactions occurred: Proprietary Investments • In November 2023, we invested $ 11.0 million in Quality Environmental Midco, Inc. (“Quality”) through secured first lien debt and preferred equity. We also extended Quality a $ 2.0 million secured first lien line of credit commitment, which was unfunded at close. In February 2024, we invested an additional $ 5.0 million in Quality through new secured first lien debt and preferred equity and increased the secured first lien line of credit commitment to $3.0 million. • In November 2023, we extended Cafe Zupas, an existing portfolio company, a new $ 10.5 million secured first lien delayed draw term loan commitment, which was unfunded at close. We funded $ 1.4 million on the delayed draw term loan in December 2023. In addition, our existing term loan was paid down by $ 7.3 million. • In November 2023, our remaining investment in PIC 360, LLC was sold resulting in a net realized gain of $ 0.3 million. • In December 2023, we invested an additional $ 14.3 million in ALS Education, LLC, an existing portfolio company, through secured first lien debt. • In December 2023, we invested an additional $ 12.0 million in Leadpoint Business Services, LLC, an existing portfolio company, through secured first lien debt. • In December 2023, we invested an additional $ 7.0 million in Salt & Straw, LLC, an existing portfolio company, through preferred equity. We also increased our delayed draw term loan commitment to Salt & Straw, LLC by $ 2.9 million. • In February and March 2024, we invested a total of an additional $ 13.5 million in SpaceCo Holdings, LLC (“SpaceCo”), an existing portfolio company, through secured first lien debt. • In February 2024, we invested $ 15.0 million in Perimeter Solutions Group through secured second lien debt. • In March 2024, we received net cash proceeds of $8.4 million from the sale of Trowbridge Chicago, LLC (“Trowbridge”), an existing portfolio company. In conjunction with the sale, we received $ 0.2 million in prepayment fees and recorded a net realized gain of $ 0.2 million on our equity. We retain a secured first lien debt investment of $ 0.3 million in Trowbridge. Syndicated Investments • In January 2024, our investment in CHA Holdings, Inc. paid off at par for net proceeds of $ 3.0 million. Capital Raising We have been able to meet our capital needs through extensions of and amendments to our line of credit with KeyBank National Association (“KeyBank”), as administrative agent, lead arranger and lender (as amended and/or restated from time to time, our “Credit Facility”), and by accessing the capital markets in the form of public equity offerings of common and preferred 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 $243.7 million. In August 2023, we completed an offering of $57.0 million aggregate principal amount of 7.75 % Notes due 2028 (the “2028 Notes”). In November 2021, we completed a private placement of $50.0 million aggregate principal amount of the 2027 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. 45 Table of Contents Although we have been able to access the capital markets historically and in recent years, market conditions may affect the trading price of our capital stock and thus may inhibit our ability to finance new investments through the issuance of equity in the future. When our common stock trades below net asset value (“NAV”) per common share, our ability to issue equity is constrained by provisions of the 1940 Act, which generally prohibits the issuance and sale of our common stock below NAV per common share without first obtaining approval from our stockholders and our independent directors, other than through sales to our then-existing stockholders pursuant to a rights offering. On March 31, 2024, the closing market price of our common stock was $ 10.73 per share, an 8.4 % premium to our March 31, 2024 NAV per share of $ 9.90 . 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 March 31, 2024, we had total senior securities outstanding of $379.0 million, and our asset coverage on our “senior securities representing indebtedness” was 213.4% and our asset coverage on our “senior securities that are stock” was 212.4%. Recent Developments Distributions On April 9, 2024, our Board of Directors declared the following monthly distributions to common and preferred stockholders: Record Date Payment Date Distribution per Common Share April 19, 2024 April 30, 2024 $ 0.165 May 17, 2024 May 31, 2024 0.165 June 19, 2024 June 28, 2024 0.165 Total for the Quarter: $ 0.495 Record Date Payment Date Distribution per Preferred Stock April 22, 2024 May 3, 2024 $ 0.130208 May 23, 2024 June 5, 2024 0.130208 June 25, 2024 July 5, 2024 0.130208 Total for the Quarter: $ 0.390624 Impact of Inflation We believe the effects of inflation on our historical results of operations and financial condition have not been significant. During the six months ended March 31, 2024, 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. 46 Table of Contents RESULTS OF OPERATIONS Comparison of the Three Months Ended March 31, 2024 to the Three Months Ended March 31, 2023 Three Months Ended March 31, 2024 2023 $ Change % Change INVESTMENT INCOME Interest income $ 23,715 $ 19,578 $ 4,137 21.1 % Success fee, dividend, and other income 282 983 (701) (71.3) Total investment income 23,997 20,561 3,436 16.7 EXPENSES Base management fee 3,439 2,898 541 18.7 Loan servicing fee 2,260 1,923 337 17.5 Incentive fee 2,669 2,408 261 10.8 Administration fee 469 417 52 12.5 Interest expense 5,732 4,909 823 16.8 Amortization of deferred financing costs 441 381 60 15.7 Other expenses 916 636 280 44.0 Expenses, before credits from Adviser 15,926 13,572 2,354 17.3 Credit to base management fee – loan servicing fee (2,260) (1,923) (337) 17.5 Credits to fees from Adviser – other (446) (720) 274 (38.1) Total expenses, net of credits 13,220 10,929 2,291 21.0 NET INVESTMENT INCOME 10,777 9,632 1,145 11.9 NET REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on investments 219 403 (184) (45.7) Net realized gain (loss) on other 1,949 25 1,924 NM Net unrealized appreciation (depreciation) of investments 10,695 1,765 8,930 NM Net unrealized depreciation of other — 161 (161) NM Net gain (loss) from investments and other 12,863 2,354 10,509 446.4 PREFERRED STOCK DIVIDENDS 8 — 8 NM NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 23,632 $ 11,986 $ 11,646 97.2 % NM - Not Meaningful Investment Income Interest income increased by 21.1% for the three months ended March 31, 2024, as compared to the prior year period. Generally, the level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period multiplied by the weighted-average yield. The weighted average principal balance of our interest-bearing investment portfolio for the three months ended March 31, 2024 was $680.4 million, compared to $604.0 million for the three months ended March 31, 2023, an increase of $76.4 million, or 12.6%. The weighted average yield on our interest-bearing investments is based on the current stated interest rate on interest-bearing investments, which increased to 14.0% for the three months ended March 31, 2024, compared to 13.1% for the three months ended March 31, 2023, 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 March 31, 2024, our loans to Edge Adhesives Holdings, Inc. and WB Xcel Holdings, LLC were on non-accrual status with a debt cost basis of $20.4 million, or 2.8% of the cost basis of all debt investments in our portfolio, and a fair value of $12.9 million, or 1.8% of the fair value of all debt investments in our portfolio. As of September 30, 2023, our loan to Edge Adhesives Holdings, Inc. was on non-accrual status with a debt cost basis of $6.1 million, or 0.9% of the cost basis of all debt investments in our portfolio, and a fair value of $2.9 million, or 0.5% of the fair value of all debt investments in our portfolio. 47 Table of Contents Other income decreased by 71.3% during the three months ended March 31, 2024, as compared to the prior year period, primarily due to decreases in success fees and dividend income. As of March 31, 2024 and September 30, 2023, 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 $2.3 million, or 21.0%, for the three months ended March 31, 2024, as compared to the prior year period. This increase was primarily due to a $0.9 million increase in the net base management fee earned by the Adviser and a $0.8 million increase in interest expense. Total interest expense on borrowings and notes payable increased by $0.8 million, or 16.8%, during the three months ended March 31, 2024 driven by a shift in the composition of our debt outstanding and changes in interest rates. Interest expense on notes payable increased by $1.1 million period over period with the issuance of our 2028 Notes in August 2023. Interest expense on our Credit Facility decreased by $0.3 million due primarily to a decrease in the weighted average balance outstanding which was $90.3 million during the three months ended March 31, 2024, as compared to $125.8 million in the prior year period, a decrease of 28.2%. The effective interest rate on our Credit Facility, including unused commitment fees incurred, but excluding the impact of deferred financing costs, was 9.9% during the three months ended March 31, 2024, compared to 8.0% during the prior year period. The increase in the effective interest rate was driven primarily by a $0.1 million increase in unused commitment fees during the three months ended March 31, 2024 as compared to the prior year period as well as an increase in interest rates. The net base management fee earned by the Adviser increased by $0.9 million, or 41.7%, for the three months ended March 31, 2024, as compared to the prior year period, resulting from a decrease in credits to the base management fee from the Adviser for new deal origination fees and an increase in average total assets subject to the base management fee. The base management, loan servicing and incentive fees, and associated non-contractual, unconditional and irrevocable credits, are computed quarterly, as described under “Transactions with the Adviser” in Note 4— Related Party Transactions of the Notes to Consolidated Financial Statements and are summarized in the following table: Three Months Ended March 31, 2024 2023 Average total assets subject to base management fee (A) $ 786,057 $ 662,400 Multiplied by prorated annual base management fee of 1.75% 0.4375 % 0.4375 % Base management fee (B) $ 3,439 $ 2,898 Portfolio company fee credit (325) (689) Syndicated loan fee credit (27) (31) Net Base Management Fee $ 3,087 $ 2,178 Loan servicing fee (B) 2,260 1,923 Credit to base management fee - loan servicing fee (B) (2,260) (1,923) Net Loan Servicing Fee $ — $ — Incentive fee (B) 2,669 2,408 Incentive fee credit (94) — Net Incentive Fee $ 2,575 $ 2,408 Portfolio company fee credit (325) (689) Syndicated loan fee credit (27) (31) Incentive fee credit (94) — Credits to Fees From Adviser - other (B) $ (446) $ (720) (A) Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods. (B) Reflected, on a gross basis, as a line item on our Consolidated Statements of Operations . 48 Table of Contents Net Realized and Unrealized Gain (Loss) Net Realized Gain (Loss) on Investments For the three months ended March 31, 2024, we recorded a net realized gain on investments of $0.2 million, which resulted primarily from a $0.2 million realized gain recognized on our investment in Trowbridge. For the three months ended March 31, 2023, we recorded a net realized gain on investments of $0.4 million, which resulted primarily from a $0.5 million realized gain recognized on our investment in Imperative Holdings Corporation, partially offset by a $0.1 million realized loss recognized on the exit of our investment in Chinese Yellow Pages Company. Net Unrealized Appreciation (Depreciation) of Investments During the three months ended March 31, 2024, we recorded net unrealized appreciation of investments in the aggregate amount of $10.7 million. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the three months ended March 31, 2024 were as follows: Three Months Ended March 31, 2024 Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized (Appreciation) Depreciation Net Gain (Loss) Lonestar EMS, LLC $ — $ 5,729 $ — $ 5,729 Salt & Straw, LLC — 2,958 — 2,958 Giving Home Health Care, LLC — 2,009 — 2,009 MCG Energy Solutions, LLC — 1,381 — 1,381 Antenna Research Associates, Inc. — 1,305 — 1,305 Springfield, Inc. — 666 — 666 Encore Dredging Holdings, LLC — 520 — 520 Leadpoint Business Services, LLC — 510 — 510 NeoGraf Solutions, LLC — 495 — 495 Axios Industrial Group, LLC — 493 — 493 8th Avenue Food & Provisions, Inc. — 405 — 405 Trowbridge Chicago, LLC 219 43 111 373 TNCP Intermediate HoldCo, LLC — 337 — 337 ENET Holdings, LLC — (530) — (530) FES Resources Holdings LLC — (828) — (828) Eegee's LLC — (833) — (833) Edge Adhesives Holdings, Inc. — (892) — (892) HH-Inspire Acquisition, Inc. — (916) — (916) WB Xcel Holdings, LLC — (2,524) — (2,524) Other, net (<$500) — 99 157 256 Total: $ 219 $ 10,427 $ 268 $ 10,914 The primary driver of net unrealized appreciation of $10.7 million for the three months ended March 31, 2024 was the improvement in the financial and operational performance of Lonestar EMS, LLC, partially offset by the decline in the financial and operational performance of WB Xcel Holdings, LLC. 49 Table of Contents During the three months ended March 31, 2023, we recorded net unrealized appreciation of investments in the aggregate amount of $1.8 million. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the three months ended March 31, 2023 were as follows: Three Months Ended March 31, 2023 Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized (Appreciation) Depreciation Net Gain (Loss) HH-Inspire Acquisition, Inc. $ — $ 2,341 $ — $ 2,341 Antenna Research Associates, Inc. — 1,211 — 1,211 Salvo Technologies, Inc. — 1,017 — 1,017 PIC 360, LLC — 915 — 915 FES Resources Holdings LLC — 901 — 901 Giving Home Health Care, LLC — 742 — 742 Defiance Integrated Technologies, Inc. — 617 — 617 MCG Energy Solutions, LLC — 563 — 563 Imperative Holdings Corporation 510 (71) — 439 Encore Dredging Holdings, LLC — (314) — (314) Café Zupas — (318) — (318) Sokol & Company Holdings, LLC — (337) — (337) B+T Group Acquisition Inc. — (560) — (560) DKI Ventures, LLC — (561) — (561) Engineering Manufacturing Technologies, LLC — (1,969) — (1,969) WB Xcel Holdings, LLC — (2,022) — (2,022) Other, net (<$500) (107) (497) 107 (497) Total: $ 403 $ 1,658 $ 107 $ 2,168 The primary driver of net unrealized appreciation of $1.8 million for the three months ended March 31, 2023 was the improvement in the financial and operational performance of HH-Inspire Acquisition, Inc., partially offset by the decline in the financial and operational performance of certain of our other portfolio companies. Net Realized Gain on Other During the three months ended March 31, 2024 and March 31, 2023, we recorded a net realized gain on other of $1.9 million and $25 thousand, respectively. The current period gain resulted primarily from proceeds received associated with the sale of a legacy investment and the prior period gain was associated with escrows received. Net Unrealized Depreciation of Other During the three months ended March 31, 2023, we recorded $0.2 million of unrealized depreciation related to a change in the fair value of our Credit Facility. No such amounts were recorded during the three months ended March 31, 2024. 50 Table of Contents Comparison of the Six Months Ended March 31, 2024 to the Six Months Ended March 31, 2023 Six Months Ended March 31, 2024 2023 $ Change % Change INVESTMENT INCOME Interest income $ 46,711 $ 37,945 $ 8,766 23.1 % Success fee, dividend, and other income 507 1,910 (1,403) (73.5) Total investment income 47,218 39,855 7,363 18.5 EXPENSES Base management fee 6,684 5,727 957 16.7 Loan servicing fee 4,388 3,797 591 15.6 Incentive fee 5,653 4,589 1,064 23.2 Administration fee 923 820 103 12.6 Interest expense 10,764 9,538 1,226 12.9 Amortization of deferred financing costs 870 759 111 14.6 Other expenses 1,641 1,221 420 34.4 Expenses, before credits from Adviser 30,923 26,451 4,472 16.9 Credit to base management fee – loan servicing fee (4,388) (3,797) (591) 15.6 Credits to fees from Adviser – other (2,028) (1,156) (872) 75.4 Total expenses, net of credits 24,507 21,498 3,009 14.0 NET INVESTMENT INCOME 22,711 18,357 4,354 23.7 NET REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on investments 478 9,722 (9,244) (95.1) Net realized gain (loss) on other 1,952 278 1,674 NM Net unrealized appreciation (depreciation) of investments 18,500 (10,834) 29,334 NM Net unrealized depreciation of other — 161 (161) NM Net gain (loss) from investments and other 20,930 (673) 21,603 NM PREFERRED STOCK DIVIDENDS 8 — 8 NM NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 43,633 $ 17,684 $ 25,949 146.7 % NM - Not Meaningful Investment Income Interest income increased by 23.1% for the six months ended March 31, 2024, as compared to the prior year period. The weighted average principal balance of our interest-bearing investment portfolio for the six months ended March 31, 2024 was $669.0 million, compared to $596.7 million for the six months ended March 31, 2023, an increase of $72.3 million, or 12.1%. The weighted average yield on our interest-bearing investments is based on the current stated interest rate on interest-bearing investments, which increased to 13.9% for the six months ended March 31, 2024, compared to 12.7% for the six months ended March 31, 2023, 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 March 31, 2024, our loans to Edge Adhesives Holdings, Inc. and WB Xcel Holdings, LLC were on non-accrual status with a debt cost basis of $20.4 million, or 2.8% of the cost basis of all debt investments in our portfolio, and a fair value of $12.9 million, or 1.8% of the fair value of all debt investments in our portfolio. As of September 30, 2023, our loan to Edge Adhesives Holdings, Inc. was on non-accrual status with a debt cost basis of $6.1 million, or 0.9% of the cost basis of all debt investments in our portfolio, and a fair value of $2.9 million, or 0.5% of the fair value of all debt investments in our portfolio. Other income decreased by 73.5% during the six months ended March 31, 2024, as compared to the prior year period, primarily due to decreases in dividend income and success fees. 51 Table of Contents Expenses Expenses, net of any non-contractual, unconditional and irrevocable credits to fees from the Adviser, increased $3.0 million, or 14.0%, for the six months ended March 31, 2024, as compared to the prior year period. This increase was primarily due to a $1.2 million increase in interest expense and a $1.1 million increase in the incentive fee earned by the Adviser. Total interest expense on borrowings and notes payable increased by $1.2 million, or 12.9%, during the six months ended March 31, 2024 driven by a shift in the composition of our debt outstanding and changes in interest rates. Interest expense on notes payable increased by $2.2 million period over period with the issuance of our 2028 Notes in August 2023. Interest expense on our Credit Facility decreased by $1.0 million due primarily to a decrease in the weighted average balance outstanding which was $69.3 million during the six months ended March 31, 2024, as compared to $127.4 million in the prior year period, a decrease of 45.6%. The effective interest rate on our Credit Facility, including unused commitment fees incurred, but excluding the impact of deferred financing costs, was 10.9% during the six months ended March 31, 2024, compared to 7.5% during the prior year period. The increase in the effective interest rate was driven primarily by a $0.4 million increase in unused commitment fees during the six months ended March 31, 2024 as compared to the prior year period as well as an increase in interest rates. The net base management fee earned by the Adviser increased by $0.2 million, or 3.9%, for the six months ended March 31, 2024, as compared to the prior year period, resulting from an increase in average total assets subject to the base management fee, partially offset by an increase in credits to the base management fee from the Adviser period over period. 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: Six Months Ended March 31, 2024 2023 Average total assets subject to base management fee (A) $ 763,886 $ 654,514 Multiplied by prorated annual base management fee of 1.75% 0.8750 % 0.8750 % Base management fee (B) $ 6,684 $ 5,727 Portfolio company fee credit (1,876) (1,093) Syndicated loan fee credit (58) (63) Net Base Management Fee $ 4,750 $ 4,571 Loan servicing fee (B) 4,388 3,797 Credit to base management fee - loan servicing fee (B) (4,388) (3,797) Net Loan Servicing Fee $ — $ — Incentive fee (B) 5,653 4,589 Incentive fee credit (94) — Net Incentive Fee $ 5,559 $ 4,589 Portfolio company fee credit (1,876) (1,093) Syndicated loan fee credit (58) (63) Incentive fee credit (94) — Credits to Fees From Adviser - other (B) $ (2,028) $ (1,156) (A) Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods. (B) Reflected, on a gross basis, as a line item on our Consolidated Statements of Operations . 52 Table of Contents Net Realized and Unrealized Gain (Loss) Net Realized Gain (Loss) on Investments For the six months ended March 31, 2024, we recorded a net realized gain on investments of $0.5 million, which resulted from a $0.3 million realized gain recognized on the sale of our investment in PIC 360, LLC and a $0.2 million realized gain recognized on our investment in Trowbridge. For the six months ended March 31, 2023, we recorded a net realized gain on investments of $9.7 million, which resulted primarily from a $5.9 million realized gain recognized on the sale of our investment in Targus Cayman HoldCo, Ltd. in October 2022 and a $4.4 million realized gain recognized on our investment in Leeds Novamark Capital I, L.P. in November 2022. Net Unrealized Appreciation (Depreciation) of Investments During the six months ended March 31, 2024, we recorded net unrealized appreciation of investments in the aggregate amount of $18.5 million. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the six months ended March 31, 2024 were as follows: Six Months Ended March 31, 2024 Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized (Appreciation) Depreciation Net Gain (Loss) Antenna Research Associates, Inc. $ — $ 8,074 $ — $ 8,074 Lonestar EMS, LLC — 6,860 — 6,860 MCG Energy Solutions, LLC — 3,486 — 3,486 Salt & Straw, LLC — 2,934 — 2,934 Engineering Manufacturing Technologies, LLC — 1,993 — 1,993 Giving Home Health Care, LLC — 1,473 — 1,473 TNCP Intermediate HoldCo, LLC — 896 — 896 8th Avenue Food & Provisions, Inc. — 820 — 820 Café Zupas — 763 — 763 Viva Railings, L.L.C. — 704 — 704 Leadpoint Business Services, LLC — 611 — 611 OCI, LLC — 590 — 590 Ohio Armor Holdings, LLC — 555 — 555 SpaceCo Holdings, LLC — 554 — 554 Encore Dredging Holdings, LLC — 465 — 465 Canopy Safety Brands, LLC — 454 — 454 Axios Industrial Group, LLC — 450 — 450 Fix-It Group, LLC — 411 — 411 NeoGraf Solutions, LLC — (522) — (522) Edge Adhesives Holdings, Inc. — (958) — (958) HH-Inspire Acquisition, Inc. — (1,609) — (1,609) B+T Group Acquisition Inc. — (2,411) — (2,411) WB Xcel Holdings, LLC — (3,329) — (3,329) FES Resources Holdings LLC — (4,545) — (4,545) Other, net (<$500) 478 (204) (15) 259 Total: $ 478 $ 18,515 $ (15) $ 18,978 The primary driver of net unrealized appreciation of $18.5 million for the six months ended March 31, 2024 was the improvement in the financial and operational performance of Antenna Research Associates, Inc. and Lonestar EMS, LLC, partially offset by the decline in the financial and operational performance of FES Resources Holdings LLC and WB Xcel Holdings, LLC. 53 Table of Contents During the six months ended March 31, 2023, we recorded net unrealized depreciation of investments in the aggregate amount of $10.8 million. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the six months ended March 31, 2023 were as follows: Six Months Ended March 31, 2023 Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized (Appreciation) Depreciation Net Gain (Loss) HH-Inspire Acquisition, Inc. $ — $ 2,399 $ — $ 2,399 Encore Dredging Holdings, LLC — 1,963 — 1,963 PIC 360, LLC — 1,064 — 1,064 FES Resources Holdings LLC — 901 — 901 Giving Home Health Care, LLC — 881 — 881 Imperative Holdings Corporation 510 219 — 729 Antenna Research Associates, Inc. — 666 — 666 TNCP Intermediate HoldCo, LLC — 555 — 555 Circuitronics EMS Holdings LLC (921) — 921 — Targus Cayman HoldCo, Ltd. 5,916 — (5,916) — Salvo Technologies, Inc. — (462) — (462) Eegee's LLC — (500) — (500) Leeds Novamark Capital I, L.P. 4,406 77 (5,018) (535) Ohio Armor Holdings, LLC — (548) — (548) 8th Avenue Food & Provisions, Inc. — (666) — (666) DKI Ventures, LLC — (708) — (708) WB Xcel Holdings, LLC — (1,874) — (1,874) Engineering Manufacturing Technologies, LLC — (2,213) — (2,213) B+T Group Acquisition Inc. — (2,418) — (2,418) Other, net (<$500) (189) (462) 305 (346) Total: $ 9,722 $ (1,126) $ (9,708) $ (1,112) The primary drivers of net unrealized depreciation of $10.8 million for the six months ended March 31, 2023 were the reversal of unrealized depreciation associated with the exit of our investment in Targus Cayman HoldCo, Ltd. and the sale of underlying assets within Leeds Novamark Capital I, L.P. as well as the decrease in comparable transaction multiples used to estimate the fair value of certain of our other portfolio companies, and the decline in the financial and operational performance of certain of our other portfolio companies. Net Realized Gain (Loss) on Other During the six months ended March 31, 2024 and March 31, 2023, we recorded a net realized gain on other of $2.0 million and $0.3 million, respectively. The current period gain resulted primarily from proceeds received associated with the sale of a legacy investment and the prior period gain was associated with escrows received. Net Unrealized Depreciation of Other During the six months ended March 31, 2023, we recorded $0.2 million of unrealized depreciation related to a change in the fair value of our Credit Facility. No such amounts were recorded during the six months ended March 31, 2024. 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, make distributions to 54 Table of Contents 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 six months ended March 31, 2024 was $45.3 million, as compared to net cash used in operating activities of $12.3 million for the six months ended March 31, 2023. The change was primarily due to an increase in purchases of investments and an increase in unrealized appreciation of investments. Purchases of investments were $102.7 million during the six months ended March 31, 2024, compared to $77.5 million during the six months ended March 31, 2023. Repayments and net proceeds from sales were $39.2 million during the six months ended March 31, 2024 compared to $49.2 million during the six months ended March 31, 2023. As of March 31, 2024, we had loans to, syndicated participations in or equity investments in 51 companies, with an aggregate cost basis of approximately $790.5 million. 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. The following table summarizes our total portfolio investment activity during the six months ended March 31, 2024 and 2023: Six Months Ended March 31, 2024 2023 Beginning investment portfolio, at fair value $ 704,815 $ 649,615 New investments 26,000 50,416 Disbursements to existing portfolio companies 76,733 27,053 Scheduled principal repayments on investments (4,287) (4,955) Unscheduled principal repayments on investments (31,696) (29,715) Net proceeds from sale of investments (1,229) (14,274) Net unrealized appreciation (depreciation) of investments 18,515 (1,126) Reversal of prior period depreciation (appreciation) of investments on realization (15) (9,708) Net realized gain (loss) on investments 478 9,722 Increase in investments due to PIK (A) 2,604 1,952 Net change in premiums, discounts and amortization (330) (221) Investment Portfolio, at Fair Value $ 791,588 $ 678,759 (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. The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of March 31, 2024: Amount For the remaining six months ending September 30: 2024 (A) $ 19,827 For the fiscal years ending September 30: 2025 15,947 2026 151,927 2027 266,530 2028 209,465 Thereafter 56,737 Total contractual repayments $ 720,433 Adjustments to cost basis of debt investments ( 1,583 ) Investments in equity securities 71,692 Investments held as of March 31, 2024 at cost: $ 790,542 (A) Includes debt investments with contractual principal amounts totaling $ 0.2 million for which the maturity date has passed as of March 31, 2024. 55 Table of Contents Financing Activities Net cash provided by financing activities for the six months ended March 31, 2024 was $49.3 million, which consisted primarily of $69.4 million in net borrowings on our Credit Facility, partially offset by $21.5 million in distributions to our common stockholders. Net cash provided by financing activities for the six months ended March 31, 2023 was $19.3 million, which consisted primarily of $24.7 million in gross proceeds from the issuance of common stock under our equity distribution agreement with Jefferies LLC and $10.8 million in net borrowings on our Credit Facility, partially offset by $15.7 million in distributions to our common stockholders. Distributions to Stockholders Common Stock Distributions To qualify to be taxed as a RIC and thus avoid corporate level federal income tax on the income we distribute to our stockholders, we are required to distribute to our stockholders on an annual basis at least 90.0% of our Investment Company Taxable Income. Additionally, our Credit Facility has a covenant that generally restricts the amount of distributions to stockholders that we can pay out to be no greater than our aggregate net investment income, net capital gains and amounts elected to have been paid during the prior year in accordance with Section 855(a) of the Code. In accordance with these requirements, we paid monthly cash distributions of $0.0825 per common share for each month for the six months ended March 31, 2024. During the six months ended March 31, 2023, we paid monthly cash distributions of $0.07 per common share for each of October, November, and December 2022, and $0.075 per common share for each of January, February, and March 2023. These distributions totaled an aggregate of $21.5 million and $15.7 million for the six months ended March 31, 2024 and 2023, respectively. In April 2024, our Board of Directors declared a monthly distribution of $0.165 per common share for each of April, May, and June 2024. The current dividend amount reflects the 1-for-2 reverse stock split completed on April 4, 2024. Refer to Note 12— Subsequent Events of the notes to our Consolidated Financial Statements included elsewhere in this Quarterly Report for additional information regarding the 1-for-2 reverse stock split. O ur 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 March 31, 2024, we have paid distributions to common stockholders totaling approximately $480.5 million or $23.27 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. The characterization of the common stockholder distributions declared and paid for the fiscal year ending September 30, 2024 will be determined at fiscal year end, based upon our investment company taxable income for the full fiscal year and distributions paid during the full fiscal year. Such a characterization made on a quarterly basis may not be representative of the actual full fiscal year characterization. Dividend Reinvestment Plan Our common stockholders who hold their shares through our transfer agent, Computershare, Inc. (“Computershare”), have the option to participate in a dividend reinvestment plan offered by Computershare, as the plan agent. This is an “opt in” dividend reinvestment plan, meaning that common stockholders may elect to have their cash distributions automatically reinvested in additional shares of our common stock. Common stockholders who do make such election will receive their distributions in cash. Common stockholders who receive distributions in the form of stock will be subject to the same federal, state and local tax consequences as stockholders who elect to receive their distributions in cash. The common stockholder will have an adjusted basis in the additional common shares purchased through the plan equal to the amount of the reinvested distribution. The additional shares will have a new holding period commencing on the day following the date on which the shares are credited to the common stockholder’s account. Computershare purchases shares in the open market in connection with the obligations under the plan. 56 Table of Contents Preferred Stock Dividends Our Board of Directors declared and we paid monthly cash dividends of $0.130208 per share to holders of our Series A Preferred Stock for January, February and March 2024. Aggregate preferred stockholder dividends paid on our Series A Preferred Stock for the six months ended March 31, 2024 were $ 8 thousand. There was no Series A Preferred Stock issued and outstanding prior to January 2024. Dividend payments to our preferred stockholders are included in preferred stock dividends on our Consolidated Statements of Operations . For federal income tax purposes, the dividends paid by us to preferred stockholders generally constitute ordinary income to the extent of our current and accumulated earnings and profits. Equity Registration Statement Our shelf registration statement on Form N-2 (File No. 333-275934) (the “2024 Registration Statement”), which was declared effective on January 17, 2024, permits us to issue, through one or more transactions, up to an aggregate of $ 700.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock or preferred stock. As of March 31, 2024, we had the ability to issue up to $ 700.0 million in securities under the 2024 Registration Statement. Our shelf registration statement on Form N-2 (File No. 333-261398) (the “2021 Registration Statement”) permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock, preferred stock or debt securities. As of March 31, 2024, we had the ability to issue up to an additional $ 149.3 million in securities under the 2021 Registration Statement. Refer to Note 6— Cumulative Redeemable Preferred Stock Offering of the notes to our Consolidated Financial Statements included elsewhere in this Quarterly Report for additional information regarding our 2021 Registration Statement. Common Stock 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 March 31, 2024, the closing market price of our common stock was $ 10.73 per share, an 8.4 % premium to our March 31, 2024 NAV per share of $ 9.90 . Revolving Credit Facility On May 13, 2021, we, through Business Loan, entered into a sixth amended and restated credit agreement with KeyBank as administrative agent, lead arranger, managing agent and lender, the Adviser, as servicer, and certain other lenders party thereto (the “Credit Facility”). As of March 31, 2024, our Credit Facility had a total commitment amount of $ 243.7 million with an “accordion” feature that permits us to increase the size of the facility to $ 350.0 million. The Credit Facility has a revolving period end date of October 31, 2025, and a final maturity date of 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). The interest rate margin is 3.00 % during the revolving period and 3.50 % thereafter (in each case plus a 0.001 basis point SOFR credit spread adjustment). On December 12, 2023, we, through Business Loan, entered into Amendment No. 5 to the Credit Facility to increase the commitment amount from $ 223.7 million to $ 233.7 million. On March 28, 2024, we, through Business Loan, entered into Amendment No. 6 to the Credit Facility to increase the commitment amount from $ 233.7 million to $ 243.7 million. 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 57 Table of Contents 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 also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account with KeyBank. KeyBank is also the trustee of the account and generally remits the collected funds to us once each month. Amounts collected in the lockbox account with KeyBank are presented as Due from administrative agent on the accompanying Consolidated Statement of Assets and Liabilities as of March 31, 2024 and September 30, 2023. Our Credit Facility contains covenants that require Business Loan to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions), and restrict material changes to our credit and collection policies without the lenders’ consent. Our Credit Facility also generally limits distributions to our stockholders on a fiscal year basis to the sum of our net investment income, net capital gains and amounts elected to have been paid during the prior year in accordance with Section 855(a) of the Code. Business Loan is also subject to certain limitations on the type of loan investments it can apply as collateral towards the borrowing base to receive additional borrowing availability under our Credit Facility, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life and lien property. Our Credit Facility further requires Business Loan to comply with other financial and operational covenants, which obligate Business Loan to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of 25 obligors required in the borrowing base. Additionally, we are required to maintain (i) a minimum net worth (defined in our Credit Facility to include any outstanding mandatorily redeemable preferred stock) of $ 325.0 million plus 50.0 % of all equity and subordinated debt raised after May 13, 2021 less 50 % of any equity and subordinated debt retired or redeemed after May 13, 2021, which equates to $ 409.8 million as of March 31, 2024, (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 March 31, 2024, and as defined in our Credit Facility, we had a net worth of $ 683.3 million, asset coverage on our “senior securities representing indebtedness” of 213.4 %, calculated in accordance with the requirements of Section 18 and 61 of the 1940 Act, and an active status as a BDC and RIC. In addition, we had 36 obligors in our Credit Facility’s borrowing base as of March 31, 2024. As of March 31, 2024, we were in compliance with all of our Credit Facility covenants. Refer to Note 5— Borrowings of the notes to our Consolidated Financial Statements included elsewhere in this Quarterly Report for additional information regarding our Credit Facility. Notes Payable In August 2023, we completed an offering of $ 57.0 million aggregate principal amount of 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. The 2027 Notes will mature on May 1, 2027 and may be redeemed in whole or in part at any time or from time to time at the Company’s option prior to maturity at par plus a “make-whole” premium, if applicable. The 2027 Notes bear interest at a rate of 3.75 % per year. Interest is payable semi-annually on May 1 and November 1 of each year (which equates to approximately $ 1.9 million per year). In April 2022, pursuant to the registration rights agreement we entered into in connection with the 2027 Notes, we conducted an exchange offer through which we offered to exchange all of our then outstanding 2027 Notes (the “Restricted Notes”) that were issued on November 4, 2021, for an equal aggregate principal amount of our new 3.75 % Notes due 2027 (the “Exchange Notes”) that had been registered with the SEC under the Securities Act of 1933, as amended. The terms of 58 Table of Contents 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). 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. The 2028 Notes, 2027 Notes, and 2026 Notes are recorded at the principal amount, plus applicable premiums, less discounts and offering costs, on our Consolidated Statements of Assets and Liabilities. Off-Balance Sheet Arrangements We generally recognize success fee income when the payment has been received. As of March 31, 2024 and September 30, 2023, we had off-balance sheet success fee receivables on our accruing debt investments of $5.2 million and $4.0 million (or approximately $0.12 per common share and $0.09 per common share), respectively, that would be owed to us, generally upon a change of control of the portfolio companies. Consistent with GAAP, we generally have not recognized our success fee receivables and related income in our Consolidated Financial Statements until earned. Due to the contingent nature of our success fees, there are no guarantees that we will be able to collect all of these success fees or know the timing of such collections. Contractual Obligations We have lines of credit, delayed draw term loans, and an uncalled capital commitment with certain of our portfolio companies that have not been fully drawn. Since these commitments have expiration dates and we expect many will never be fully drawn, the total commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of the combined unused lines of credit, the unused delayed draw term loans, and the uncalled capital commitment as of March 31, 2024 and September 30, 2023 to be immaterial. The following table shows our contractual obligations as of March 31, 2024, at cost: Payments Due by Period Contractual Obligations (A) Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Total Credit Facility (B) $ — $ — $ 117,200 $ — $ 117,200 Notes Payable — 150,000 107,000 — 257,000 Interest expense on debt obligations (C) 24,975 40,981 15,328 — 81,284 Total $ 24,975 $ 190,981 $ 239,528 $ — $ 455,484 (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 $54.1 million, at cost, as of March 31, 2024. (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 March 31, 2024. 59 Table of Contents Critical Accounting Estimates The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported consolidated amounts of assets and liabilities, including disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ materially from those estimates under different assumptions or conditions. We have identified our investment valuation policy (which has been approved by our Board of Directors) as our most critical accounting policy, which is described in Note 2— Summary of Significant Accounting Policies in the accompanying notes to our Consolidated Financial Statements included elsewhere in this Quarterly Report. Additionally, refer to Note 3— Investments in our accompanying Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report for additional information regarding fair value measurements and our application of Financial Accounting Standards Board Accounting Standards Codification Topic 820, “ Fair Value Measurements and Disclosures.” We have also identified our revenue recognition policy as a critical accounting policy, which is described in Note 2— Summary of Significant Accounting Policies in our accompanying Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report. Investment Valuation Credit Monitoring and Risk Rating The Adviser monitors a wide variety of key credit statistics that provide information regarding our portfolio companies to help us assess credit quality and portfolio performance and, in some instances, used as inputs in our valuation techniques. Generally, we, through the Adviser, participate in periodic board meetings of our portfolio companies in which we hold board seats and also require them to provide annual audited and monthly unaudited financial statements. Using these statements or comparable information and board discussions, the Adviser calculates and evaluates certain credit statistics. The Adviser risk rates all of our investments in debt securities. The Adviser does not risk rate our equity securities. For syndicated loans that have been rated by an SEC registered Nationally Recognized Statistical Rating Organization (“NRSRO”), the Adviser generally uses the average of two corporate level NRSRO’s risk ratings for such security. For all other debt securities, the Adviser uses a proprietary risk rating system. While the Adviser seeks to mirror the NRSRO systems, we cannot provide any assurance that the Adviser’s risk rating system will provide the same risk rating as an NRSRO would for these securities. The Adviser’s risk rating system is used to estimate the probability of default on debt securities and the expected loss if there is a default. The Adviser’s risk rating system uses a scale of 0 to >10, with >10 being the lowest probability of default. It is the Adviser’s understanding that most debt securities of medium-sized companies do not exceed the grade of BBB on an NRSRO scale, so there would be no debt securities in the middle market that would meet the definition of AAA, AA or A. Therefore, the Adviser’s scale begins with the designation >10 as the best risk rating which may be equivalent to a BBB from an NRSRO; however, no assurance can be given that a >10 on the Adviser’s scale is equal to a BBB or Baa2 on an NRSRO scale. The Adviser’s risk rating system covers both qualitative and quantitative aspects of the business and the securities we hold. The following table reflects risk ratings for all proprietary loans in our portfolio as of March 31, 2024 and September 30, 2023, representing approximately 98.8% and 98.2%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period: Rating As of March 31, 2024 As of September 30, 2023 Highest 10.0 10.0 Average 7.4 7.1 Weighted Average 7.7 7.5 Lowest 3.0 3.0 60 Table of Contents The following table reflects the risk ratings for all syndicated loans in our portfolio that were rated by an NRSRO as of March 31, 2024 and September 30, 2023, representing approximately 1.2% and 1.3%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period: Rating As of March 31, 2024 As of September 30, 2023 Highest 5.0 5.0 Average 3.5 3.5 Weighted Average 4.2 4.2 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, representing approximately 0.5% of the principal balance of all debt investments in our portfolio at the end of the period: Rating As of September 30, 2023 Highest 5.0 Average 5.0 Weighted Average 5.0 Lowest 5.0 There were no syndicated loans in our portfolio that were not rated by an NRSRO as of March 31, 2024. Tax Status We intend to continue to maintain our qualification as a RIC under Subchapter M of the Code for federal income tax purposes. As a RIC, we generally are not subject to federal income tax on the portion of our taxable income and gains distributed to our stockholders. To maintain our qualification as a RIC, we must maintain our status as a BDC and meet certain source-of-income and asset diversification requirements. In addition, in order to qualify to be taxed as a RIC, we must distribute to stockholders at least 90% of our Investment Company Taxable Income, determined without regard to the dividends paid deduction. Our policy generally is to make distributions to our stockholders in an amount up to 100% of our Investment Company Taxable Income. We may retain some or all of our net long-term capital gains, if any, and designate them as deemed distributions, or distribute such gains to stockholders in cash. To avoid a 4% federal excise tax on undistributed amounts of income, we must distribute to stockholders, during each calendar year, an amount at least equal to the sum of: (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our capital gain net income (both long-term and short-term) for the one-year period ending on October 31 of the calendar year, and (3) any income realized, but not distributed, in the preceding year (to the extent that income tax was not imposed on such amounts) less certain over-distributions in prior years. Under the RIC Modernization Act, we are permitted to carryforward any capital losses that we may incur for an unlimited period, and such capital loss carryforwards will retain their character as either short-term or long-term capital losses. Recent Accounting Pronouncements Refer to Note 2 — Summary of Significant Accounting Policies in the notes to our accompanying Consolidated Financial Statements included elsewhere in this Quarterly Report for a description of recent accounting pronouncements, if any.