What changed in this filing

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Item 1. Business

2024-11-13 compared with 2023-11-13 · 60 added, 55 removed, 494 unchanged (19% of the section changed)

Gladstone Capital Corporation was incorporated under the Maryland General Corporation Law on May 30, 2001 and completed an initial public offering on August 24, 2001.

Gladstone Capital Corporation was incorporated under the Maryland General Corporation Law on May 30, 2001.

We are an externally managed, closed-end, non-diversified management investment company that has elected to be treated as a BDC under the 1940 Act.

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

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

As of September 30, 2024, shares of our common stock trade on the Nasdaq Global Select Market (“Nasdaq”) under the trading symbol “GLAD” and our 7.75% Notes due 2028 (the “2028 Notes”) trade on Nasdaq under the ticker symbol “GLADZ.” Our 6.25% Series A Cumulative Redeemable Preferred Stock (the “Series A Preferred Stock”), our 3.75% notes due 2027 (the “2027 Notes”) and our 5.125% notes due 2026 (the “2026 Notes”) are not listed or traded on any exchange or automated quotation system.

The outstanding shares and per share amounts of the Company’s common stock in this Annual Report have been retroactively adjusted for the 1-for-2 reverse stock split (the “Reverse Stock Split”) effected on April 4, 2024 (effective April 5, 2024 for trading purposes) for all activity prior to that date, unless stated otherwise.

Investment Adviser and Administrator

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Gladstone Investment Corporation (“Gladstone Investment”), a publicly-traded BDC and RIC;

and Gladstone Land Corporation, a publicly-traded real estate investment trust (“Gladstone Land,” with “Gladstone Commercial,” and “Gladstone Investment,” collectively the “Affiliated Public Funds”).

Gladstone Land Corporation, a publicly-traded real estate investment trust (“Gladstone Land”);

and Gladstone Alternative Income Fund, a registered, non-diversified, closed-end management investment company that operates as an interval fund (“Gladstone Alternative,” with “Gladstone Land,” “Gladstone Commercial,” and “Gladstone Investment,” collectively the “Affiliated Public Funds”).

In the future, the Adviser and Administrator may provide investment advisory and administrative services, respectively, to other funds and companies, both public and private.

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(1) achieve and grow current income by investing in debt securities of established lower middle market companies (which we generally define as companies with annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $3 million to $25 million) 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 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;

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.

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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.

Our targeted portfolio companies are generally considered too small for the larger capital marketplace.

We expect that our investment portfolio over time will consist of approximately 90.0% debt investments and 10.0% equity investments, at cost.

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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 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.

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, Gladstone Alternative 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.

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

We seek debt instruments that pay interest monthly or, at a minimum, quarterly, may have a success fee or deferred interest provision and are primarily interest only, with all principal and any accrued but unpaid interest due at maturity.

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In some cases, we will own a significant portion of the equity and in other cases we may have voting control of the businesses in which we invest.

Under the 1940 Act, we may not acquire any asset other than assets of the type listed in Section 55 of the 1940 Act, which are referred to as “qualifying assets” and generally include each of the investment types listed above, unless, at the time the acquisition is made, qualifying assets (other than certain assets related to our operations) represent at least 70.0% of our total assets.

acquisition is made, qualifying assets (other than certain assets related to our operations) represent at least 70.0% of our total assets.

See “— Regulation as a BDC — Qualifying Assets.

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Investments Fair Value Percentage of

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

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

Diversified/Conglomerate Service $ 179,032 22.5 % $ 135,060 19.2 %

Diversified/Conglomerate Manufacturing 160,264 20.1 158,061 22.4

Aerospace and Defense 153,096 19.2 97,836 13.9

Healthcare, Education, and Childcare 101,707 12.8 146,438 20.8

Beverage, Food, and Tobacco 88,327 11.1 78,788 11.2

Oil and Gas 27,830 3.9 25,373 3.9

Automobile 28,286 3.6 27,571 3.9

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

Machinery 21,816 2.7 6,411 0.9

Telecommunications 5,868 0.8 10,088 1.6

Textiles and Leather — — 7,978 1.2

Oil and Gas 20,554 2.6 27,830 3.9

Cargo Transportation 20,200 2.5 — —

Personal and Non-Durable Consumer Products 13,586 1.7 14,576 2.1

Other, < 2.0% 9,392 1.2 12,244 1.7

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Overview of Investment and Approval Process

To originate investments, the Adviser’s investment professionals use an extensive referral network comprised primarily of private equity sponsors, leveraged buyout funds, investment bankers, attorneys, accountants, commercial bankers, and business brokers.

To originate investments, the Adviser’s investment professionals use an extensive referral network comprised primarily of private equity sponsors, private credit managers, venture capitalists, leveraged buyout funds, investment bankers, attorneys, accountants, commercial bankers, and business brokers.

The Adviser’s investment professionals review information received from these and other sources in search of potential financing opportunities.

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If the prospective portfolio company passes this initial screening and the IOI is accepted by the prospective company, the investment professionals will seek approval to issue a letter of intent (“LOI”) to the prospective company from the Adviser’s investment committee, which currently is comprised of David Gladstone, Terry Lee Brubaker, Robert L.

Marcotte, Laura Gladstone, and Jonathan Sateri.

Marcotte, Laura Gladstone, and John Sateri.

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

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• Experienced Management.

We typically require that the businesses in which we invest have experienced management teams.

We typically require that the businesses in which we invest have experienced management teams or a hiring plan in place to install an experienced management team.

We also require the businesses to have proper incentives in place to induce management teams to succeed and align with our interests as an investor, including having significant equity or other interests in the financial performance of their respective companies.

• Strong Competitive Position in an Industry.

We seek to invest in businesses that have developed strong market positions within their respective markets and that we believe are well-positioned to capitalize on growth opportunities.

We seek to invest in businesses that have a differentiated product or service and significant relative market share within their respective markets and that we believe have the strategy and resources to take advantage of the expected growth in their market.

We seek businesses that demonstrate significant competitive advantages versus their competitors, which we believe will help to protect their market positions and profitability.

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Extensive Due Diligence

The Due Diligence Team conducts what we believe are extensive due diligence investigations of our prospective portfolio companies and investment opportunities.

The Due Diligence Team conducts what we believe are extensive evaluation and due diligence investigations of our prospective portfolio companies and investment opportunities.

The due diligence investigation typically begins with a review of publicly available information followed by in depth business analysis, including any of the following:

• a review of the prospective portfolio company’s historical and projected financial information, including a quality of earnings analysis;

• a review of the prospective portfolio company’s historical and projected financial information, including a quality of earnings or similar analysis;

• detailed review of the track record of the private equity firm or ownership group acquiring or controlling any prospective borrower;

• visits to the prospective portfolio company’s business site(s);

• interviews with the prospective portfolio company’s management, employees, customers, and vendors;

• interviews with the prospective portfolio company’s management, employees, advisers, sponsors, customers, and vendors;

• review of loan documents and material contracts;

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The investment committee then determines whether to pursue the potential investment.

Prior to the closing of an investment, additional due diligence may be conducted on our behalf by attorneys, independent accountants, and other outside advisers, as appropriate.

We also rely on the long-term relationships that the Adviser’s investment professionals have with leveraged buyout funds, investment bankers, commercial bankers, private equity sponsors, attorneys, accountants, and business brokers.

Prior to the closing of an investment, additional due diligence may be conducted by the Adviser or on our behalf by attorneys, independent accountants, and other outside advisers, as appropriate.

We also rely on the long-term relationships that the Adviser’s investment professionals have with leveraged buyout funds, private credit managers, investment bankers, commercial bankers, private equity sponsors, attorneys, accountants, and business brokers.

In addition, the extensive direct experiences of our executive officers and managing directors in the operations of lower middle market companies and providing debt and equity capital to lower middle market companies plays a significant role in our investment evaluation and assessment of risk.

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A large number of entities compete with us and make the types of investments that we seek to make in lower middle market privately-owned businesses.

Such competitors include other BDCs, non-equity based investment funds, and other financing sources, including traditional financial services companies such as commercial banks.

Such competitors include other BDCs, registered investment companies, private investment funds, and other financing sources, including traditional financial services companies such as commercial banks.

Many of our competitors are substantially larger than we are and have considerably greater funding sources or are able to access capital more cost effectively.

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

Gladstone and Mr.

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

Gladstone has over 20 years of experience in investing in middle market companies and continues to hold the role of managing director with the Company and the Adviser.

Each of Messrs.

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

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

We believe that the Adviser’s investment professionals have developed a broad

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

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

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Longer Investment Horizon

Unlike private equity and private credit funds that are typically organized as finite-life partnerships (generally seven to ten years), we are not subject to standard periodic capital return requirements.

Unlike private equity and private credit funds that are often organized as finite-life partnerships (generally seven to ten years), we are not subject to standard periodic capital return requirements.

These structures often force private equity and private credit funds to seek returns on their investments by causing their portfolio companies to pursue mergers, public equity offerings, or other liquidity events more quickly than might otherwise be optimal or desirable, potentially resulting in a lower overall return to investors and/or an adverse impact on their portfolio companies.

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Ongoing Management of Investments and Portfolio Company Relationships

The Adviser’s investment professionals actively oversee each investment by continuously evaluating the portfolio company’s performance and typically working collaboratively with the portfolio company’s management to identify and incorporate best resources and practices that help us achieve our projected investment performance.

The Adviser’s investment professionals monitor the financial performance, trends, and changing risks of each portfolio company on an ongoing basis to determine if each company is performing within expectations and to guide the portfolio company’s management in taking the appropriate courses of action.

The Adviser’s investment professionals actively oversee each investment by continuously evaluating the portfolio company’s performance and, although generally not expected to control such companies or become involved in day-to-day operations, will work collaboratively with the portfolio company’s management, either at the portfolio company’s request or in connection with any board observer rights, to identify and incorporate best resources and practices that help us achieve our projected investment performance.

company’s management in taking the appropriate courses of action.

The Adviser employs various methods of evaluating and monitoring the performance of our investments in portfolio companies, which can include the following:

• monthly analysis of financial and operating performance;

• monthly or quarterly analysis of financial and operating performance;

• frequent assessment of the portfolio company’s performance against its business plan and our investment expectations;

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Valuation Process

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

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

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

under the 1940 Act.

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

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

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

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

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

The Adviser values our investments in accordance with the requirements of the 1940

Act and accounting principles generally accepted in the U.S.

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

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• Each investment is initially assessed by the Valuation Team using the Policy, which may include:

• obtaining fair value quotes or utilizing input from third party valuation firms;

• obtaining fair value quotes or utilizing valuation inputs from third party valuation firms;

• using techniques, such as total enterprise value, yield analysis, market quotes and other factors, including but not limited to:

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Fair value determinations and supporting material are sent to the Board of Directors in advance of its quarterly meetings.

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

• The Valuation Committee of the Board of Directors (comprised entirely of independent directors) meets to review the valuation determinations and supporting materials, discusses the information provided by the Valuation Team, determines whether the Valuation Team has followed the Policy and reviews other facts and circumstances, including current valuation risks, conflicts of interest, material valuation matters, appropriateness of valuation methodologies, back-testing results, price challenges/overides, and ongoing monitoring and oversight of pricing services.

After the Valuation Committee concludes its meeting, it and the chief valuation officer, representing the Valuation Designee, present the Valuation Committee’s findings on the Valuations Designee's determinations to the entire Board of Directors so that the full Board of Directors may review the Valuation Designee's determined fair values of such investments in accordance with the Policy.

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

Due to the uncertainty inherent in valuing these securities, the determinations of fair value may fluctuate from period to period and may differ

materially from the values that could be obtained if a ready market for these securities existed.

Due to the uncertainty inherent in valuing these securities, the determinations of fair value may fluctuate from period to period and may differ materially from the values that could be obtained if a ready market for these securities existed.

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

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

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

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

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

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

There can be no assurance that such unrealized capital

appreciation will be realized in the future.

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

No GAAP accrual for a capital gains-based incentive fee has been recorded from our inception through September 30, 2024.

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The Adviser also services the loans held by our wholly-owned subsidiary, Gladstone Business Loan, LLC (“Business Loan”) (the borrower under our Credit Facility), in return for which the Adviser receives a 1.5% annual fee payable monthly based on the monthly aggregate outstanding balance of loans pledged under our Credit Facility.

Since Business Loan is a consolidated subsidiary of ours, and the total base management fee paid to the Adviser pursuant to the Advisory Agreement cannot exceed 1.75% of total assets (less any uninvested cash or cash equivalents resulting from borrowings and adjusted appropriately for any share issuances or repurchases during the period) during any given calendar year, we treat payment of the loan servicing fee pursuant to our Credit Facility as a pre-payment of the base management fee under the Advisory Agreement.

treat payment of the loan servicing fee pursuant to our Credit Facility as a pre-payment of the base management fee under the Advisory Agreement.

Accordingly, these loan servicing fees are 100% non-contractually, unconditionally, and irrevocably credited back to us by the Adviser.

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

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

If we fail to distribute in a timely manner an amount at least equal to the sum of (1) 98.0% of our ordinary income for the calendar year, (2) 98.2% of our net capital gains for the one-year period ending on October 31 of the calendar year (or November 30 or December 31 of that year if we are permitted to elect and so elect) and (3) any income realized, but not distributed, in the preceding period (to the extent that income tax was not imposed on such amounts), less certain reductions, as applicable (together, the “excise tax distribution requirements”), we will be subject to a 4% nondeductible federal excise tax on the portion of the undistributed amounts of such income that are less than the amounts required to be distributed based on the excise tax distribution requirements.

For the calendar years ended December 31, 2023, 2022, and 2021, we did not incur any excise taxes.

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In this event, we may be required to sell investments or other assets to meet the RIC distribution requirements.

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

For the year ended September 30, 2024, we recorded $ 0.4 million of OID income and the unamortized balance of OID investments as of September 30, 2024

totaled $ 0.6 million.

As of September 30, 2024, we had eight investments which had a PIK interest component and we recorded PIK interest income of $ 5.7 million during the year ended September 30, 2024.

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

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

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

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

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

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

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

purchased within 30 days before or after the disposition.

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

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In addition, the U.S.

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

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

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

Regulation as a BDC

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A BDC generally must make available significant managerial assistance to issuers of certain of its portfolio securities that the BDC counts as a qualifying asset for the 70.0% test described above.

Making available significant managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company.

Making available significant managerial

assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company.

Significant managerial assistance also includes the exercise of a controlling influence over the management and policies of the portfolio company.

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Certain provisions contained in our articles of incorporation and Maryland law may prohibit or restrict a change of control and adversely impact the price of our common stock.

• There are significant potential conflicts of interest, including with the Adviser, which could impact our investment returns.

• Our success depends on the Adviser’s ability to attract and retain qualified personnel in a competitive environment.

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

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

information and/or damage to our business relationships, all of which could negatively impact our business, financial condition and operating results.

Code of Ethics

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

What changed 10-K

Item 1. Business