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Item 1A. Risk Factors

2024-11-13 compared with 2023-11-13 · 121 added, 115 removed, 558 unchanged (30% of the section changed)

You should carefully consider these risk factors, together with all of the other information included in this Annual Report and the other reports and documents filed or furnished by us with the SEC.

You should carefully consider these risk factors, together with all of the other information included in this Annual Report and the other reports and documents filed by us with the SEC.

The risks set out below are not the only risks we face.

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If any of the following events occur, our business, financial condition, results of operations and cash flows could be materially and adversely affected.

If that happens, the trading price of our securities and our NAV could decline, and you may lose all or part of your investment.

If that happens, the trading price of our securities and the NAV of our common stock could decline, and you may lose all or part of your investment.

The risk factors described below are the principal risk factors associated with an investment in our securities as well as those factors generally associated with an investment company with investment objectives, investment policies, capital structure or trading markets similar to ours.

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These factors include, among other things:

• changes in interest rates and credit spreads;

• changes in interest rates and credit spreads and the effects of inflation on us and our portfolio companies;

• the availability of credit, including the price, terms, and conditions under which it can be obtained;

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• the ability to obtain accurate market-based valuations;

• loan values relative to the value of the underlying assets;

• investment values relative to the value of the underlying assets;

• default rates on the loans underlying our investments and the amount of related losses;

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Changes in these factors are difficult to predict, and a change in one factor could affect other factors, which could result in adverse effects to our business, results of operations, financial condition, and cash flows.

Volatility in the capital markets may make it more difficult to raise capital and may adversely affect the valuations of our investments.

Volatility in the capital markets could make it more difficult to raise capital and may adversely affect the valuations of our investments.

Given the volatility and dislocation that the capital markets have experienced from time to time, many BDCs have faced, and may in the future face, a challenging environment in which to raise capital.

We may in the future have difficulty accessing debt and equity capital, and a severe disruption in the global financial markets or deterioration in credit and financing conditions could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We may in the future have difficulty accessing debt and equity capital, and a severe disruption in U.S.

or global financial markets or deterioration in credit and financing conditions could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

In addition, significant changes in the capital markets have had, and may in the future have, a negative effect on the valuations of our investments and on the potential for liquidity events involving our investments.

Additionally, volatility in the U.S.

repo market may affect other financial markets worldwide.

An inability to raise capital, and any required sale of our investments for liquidity purposes or failure of our portfolio companies to realize liquidity events, could have a material adverse impact on our business, financial condition, results of operations, or cash flows.

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In addition, any projected future decreases in our portfolio companies’ operating results due to inflation could adversely impact the fair value of those investments.

Any decreases in the fair value of our investments could result in future unrealized losses and therefore reduce our net assets resulting from operations.

Public health threats may adversely impact the businesses in which we invest and affect our business, operating results and financial condition.

Public health threats, such as pandemics, may disrupt the operations of the businesses in which we invest.

Such threats can create economic and political uncertainties and can contribute to global economic instability.

In the event of a future public health threat, our portfolio companies may face limitations on their business activities for an unknown period of time, including shutdowns that may be requested or mandated by governmental authorities, or that they may experience disruptions in their supply chains or decreased consumer demand.

Certain of our portfolio companies have experienced increases in health and safety expenses, payroll costs and other operating expenses and future increases are possible.

These adverse economic impacts may decrease the value of the collateral securing our loans in such portfolio companies, as well as the value of our equity investments.

In addition, these adverse impacts could cause certain of our portfolio companies to have difficulty meeting their debt service requirements, which in turn could lead to an increase in defaults, and/or could diminish the ability of certain of our portfolio companies to engage in liquidity events.

These negative impacts on our portfolio companies and their performance may reduce the interest income we receive and/or increase realized and unrealized losses related to our investments, which may, in turn, adversely impact our business, financial condition or results of operations.

Any decreases in the fair value of our investments could result in future realized or unrealized losses and therefore reduce our net assets resulting from operations.

Risks Related to Interest Rates

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One of the factors that influences the price of our securities is the distribution yield on our securities (as a percentage of the price of our securities) relative to market interest rates.

An increase in market interest rates such as the current increases may lead prospective purchasers of our securities to expect a higher distribution yield.

An increase in market interest rates may lead prospective purchasers of our securities to expect a higher distribution yield.

In addition, higher interest rates have increased our borrowing costs.

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A substantial portion of our debt investments have variable interest rates that reset periodically and are generally based on SOFR.

As interest rates have increased, the operating performance of some of our portfolio companies has been affected by increasing debt service obligations and, therefore, may affect our results of operations.

As interest rates increase, the operating performance of certain of our portfolio companies has been affected by increasing debt service obligations and, therefore, may affect our results of operations.

In addition, to the extent that further increases in interest rates make it difficult or impossible to make payments on outstanding indebtedness to us or other financial sponsors or refinance debt that is maturing in the near term, some of our portfolio companies may be unable to repay such debt at maturity and may be forced to sell assets, undergo a recapitalization or seek bankruptcy protection.

Rising interest rates could also cause borrowers to shift cash from other productive uses to the payment of interest, which may have a material adverse effect on their business and operations and could, over time, lead to increased defaults.

Elevated interest rates could also cause borrowers to shift cash from other productive uses to the payment of interest, which may have a material adverse effect on their business and operations and could, over time, lead to increased defaults.

Additionally, as interest rates increase and the corresponding risk of a default by borrowers increases, the liquidity of higher interest rate loans may decrease as fewer investors may be willing to purchase such loans in the secondary market in light of the increased risk of a default by the borrower and the heightened risk of a loss of an investment in such loans.

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Trading prices tend to fluctuate more for fixed rate securities that have longer maturities.

There can be no guarantee the Federal Reserve Board will implement additional rate increases at a gradual pace, nor can there be any assurance that markets will not adversely react to rate increases.

Additional increases in interest rates could

have a negative effect on our investments, which could negatively impact our operating results, financial condition, and cash flows.

Conversely, reduced interest rates will result in a decrease in our total investment income unless offset by interest rate floors or an increase in the spread of our debt investments with variable interest rates.

If interest rates remain elevated or rise again in the future, it could have a negative effect on our investments, which could negatively impact our operating results, financial condition, and cash flows.

Conversely, reduced interest rates, including recent rate decreases, will result in a decrease in our total investment income unless offset by interest rate floors or an increase in the spread of our debt investments with variable interest rates.

In addition, our net investment income could decrease if there is no reduction or credit to the base management or incentive fees that we pay to the Adviser or if we are unable to refinance our fixed rate debt obligations or issue new fixed rate debt at lower rates.

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As of September 30, 2024, based on the total principal balance of debt outstanding, our portfolio consisted of approximately 93.9% of loans at variable rates with floors and approximately 6.1% at fixed rates.

As of September 30, 2023, we did not have any hedging arrangements, such as interest rate hedges.

As of September 30, 2024, we did not have any hedging arrangements, such as interest rate hedges, in place.

While hedging arrangements may insulate us against adverse fluctuations in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio.

Adverse developments resulting from changes in interest rates or any future hedging transactions could have a material adverse effect on our business, financial condition and results of operations.

Our ability to receive payments pursuant to an interest rate cap agreement is linked to the ability of the counter-party to that agreement to make the required payments.

To the extent that the counter-party to the agreement is unable to pay pursuant to the terms of the agreement, we may lose the hedging protection of the arrangement.

Our ability to receive payments pursuant to a hedging arrangement is linked to the ability of the counter-party to that hedging arrangement to make the required payments.

To the extent that the counter-party to the hedging arrangement is unable to pay pursuant to the terms of the agreement, we may lose the hedging protection of the arrangement.

Also, the fair value of certain of our debt investments is based, in part, on the current market yields or interest rates of similar securities.

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We do not seek to compete based on the interest rates we offer, and we believe that some of our competitors may make loans with interest rates that will be comparable to or lower than the rates we offer.

We may lose investment opportunities if we do not

match our competitors’ pricing, terms, and structure.

We may lose investment opportunities if we do not match our competitors’ pricing, terms, and structure.

However, if we match our competitors’ pricing, terms, and structure, we may experience decreased net interest income and increased risk of credit loss.

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• Lower middle market companies are likely to have greater exposure to economic downturns than larger businesses.

Our portfolio companies may have fewer resources than larger businesses, and thus any economic downturns or recessions are more likely to have a material adverse effect on them and the end markets in which they operate.

If one of our portfolio companies is adversely impacted by a recession, its ability to repay our loan or engage in a liquidity event, such as a sale, recapitalization or initial public offering would be diminished.

Our portfolio companies may have fewer resources than larger businesses, and thus any economic downturns or recessions are more likely to have a material adverse effect on them.

When the economy contracts, the financial results of lower middle market business, like those in which we invest, could experience deterioration or limited growth from current levels, which could ultimately lead to difficulty in meeting their debt service requirements and an increase in defaults.

Consequently, for any portfolio company that is adversely impacted by an economic downturn or recession, its ability to repay our loan or engage in a liquidity event, such as a sale, recapitalization or initial public offering would be diminished.

• Lower middle market companies may have limited financial resources and may not be able to repay the loans we make to them.

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While we believe that this provides an attractive opportunity for us to generate profits, this may make it difficult for the portfolio companies to repay their loans to us upon maturity.

A borrower’s ability to repay its loan may be adversely affected by numerous factors, including the failure to meet its business plan, a downturn in its industry, or negative economic conditions, including those created by the current market environment.

borrower’s ability to repay its loan may be adversely affected by numerous factors, including the failure to meet its business plan, a downturn in its industry, or negative economic conditions, including those created by the current market environment.

Deterioration in a borrower’s financial condition and prospects usually will be accompanied by deterioration in the value of any collateral and a reduction in the likelihood of us realizing on any guaranties we may have obtained from the borrower’s management.

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

was on non-accrual status with a cost basis of $ 6.1 million, or 0.9 % of the cost basis of all debt investments in our portfolio, and a fair value of $ 2.9 million, or 0.5 % of the fair value of all debt investments in our portfolio.

As of September 30, 2024, our loans to B+T Group Acquisition, Inc.

(“B&T Group”), Edge Adhesives Holdings, Inc.

(“Edge Adhesives”), and WB Xcel Holdings, LLC (“WB Xcel”) were on non-accrual status with a cost basis of $ 28.3 million, or 4.1 % of the cost basis of all debt investments in our portfolio, and a fair value of $ 12.8 million, or 1.9 % of the fair value of all debt investments in our portfolio.

For any loans that are placed on non-accrual status, we cannot assure you that our efforts to improve profitability and cash flows of these companies will prove successful.

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While we focus on stable companies with proven track records, we may make loans to new companies that meet our other investment criteria.

companies with limited operating histories will be exposed to all of the operating risks that new businesses face and may be particularly susceptible to, among other risks, market downturns, competitive pressures and the departure of key executive officers.

Portfolio companies with limited operating histories will be exposed to all of the operating risks that new businesses face and may be particularly susceptible to, among other risks, market downturns, competitive pressures and the departure of key executive officers.

• Debt securities of lower middle market companies typically are not rated by a credit rating agency.

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• Lower middle market companies may be highly leveraged.

Some of our portfolio companies may be highly leveraged, which may have adverse consequences to these companies and to us as an investor.

These companies m ay be subject to restrictive financial and operating covenants and the leverage may impair these companies’ ability to finance their future operations and capital needs.

Some of our portfolio companies are highly leveraged, which could have adverse consequences to these companies and to us as an investor.

These companies m ay be subject to restrictive financial and operating covenants and the leverage could impair these companies’ ability to finance their future operations and capital needs.

As a result, these companies’ flexibility to respond to changing business and economic conditions and to take advantage of business opportunities may be limited.

Further, a leveraged company’s income and net assets will tend to increase or decrease at a greater rate than if borrowed money were not used.

leveraged company’s income and net assets will tend to increase or decrease at a greater rate than if borrowed money were not used.

• Lower middle market companies may operate in regulated industries or provide services to governments.

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The valuation process for certain of our portfolio holdings creates a conflict of interest.

A substantial portion of our portfolio investments are made in the form of securities for which market quotations are not readily available.

In connection with the determination of fair value of these securities, our Valuation Team prepares portfolio company valuations based upon the most recent portfolio company financial statements available and projected financial results of each portfolio company.

A substantial portion of our portfolio investments are securities for which market quotations are not readily available.

In connection with the determination of the fair value of these securities, our Valuation Team prepares portfolio company valuations based upon the most recent portfolio company financial statements available and projected financial results of each portfolio company.

The participation of the Adviser’s investment professionals in our valuation process, and Mr.

Gladstone’s pecuniary interest in our Adviser may result in a conflict of interest, as the management fees that we pay our Adviser are based on average gross assets, less uninvested cash or cash equivalents from borrowings, and adjusted appropriately for any share issuances or repurchases during the period.

Gladstone’s pecuniary interest in the Adviser may result in a conflict of interest, as the management fees that we pay our Adviser are based on average gross assets, less uninvested cash or cash equivalents from borrowings, and adjusted appropriately for any share issuances or repurchases during the period.

The lack of liquidity of our privately held investments may adversely affect our business.

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In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may record substantial realized losses upon liquidation.

We may also face other restrictions on our ability to liquidate an investment in a portfolio company to the extent that we, the Adviser, or our respective officers, employees or affiliates have material non-public information regarding such portfolio company.

We may also face other restrictions on our ability to liquidate an investment in a portfolio company to the extent that we, the Adviser, the Administrator, or our respective officers, employees or affiliates have material non-public information regarding such portfolio company.

Due to the uncertainty inherent in valuing these securities, the Adviser’s determinations of fair value may differ materially

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After repaying such senior creditors, such portfolio company may not have any remaining assets to use to repay its obligation to us.

We may also be subject to lender liability

claims for actions taken by us with respect to a borrower’s business, in instances in which we exercised control over the borrower or as a result of actions taken in rendering significant managerial assistance.

We may also be subject to lender liability claims for actions taken by us with respect to a borrower’s business, in instances in which we exercised control over the borrower or as a result of actions taken in rendering significant managerial assistance.

Prepayments of our investments by our portfolio companies could adversely impact our results of operations and reduce our return on equity.

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These government securities will typically have substantially lower yields than the debt securities being prepaid and we could experience significant delays in reinvesting these amounts.

In addition, once the proceeds have been reinvested in new portfolio companies, the yields on such new investments may also be lower than the yields on the debt securities being repaid.

once the proceeds have been reinvested in new portfolio companies, the yields on such new investments may also be lower than the yields on the debt securities being repaid.

As a result, our results of operations could be materially adversely affected if one or more of our portfolio companies elect to prepay amounts owed to us.

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In addition, while we do not intend to invest 25.0% or more of our total assets in a particular industry or group of industries at the time of investment, it is possible that as the values of our portfolio companies change, one industry or a group of industries may comprise in excess of 25.0% of the value of our total assets.

As of September 30, 2023, our largest industry concentrations of our total investments at fair value were in diversified/conglomerate manufacturing companies, representing 22.4%;

healthcare, education, and childcare companies, representing 20.8%;

and diversified/conglomerate service companies, representing 19.2%.

As of September 30, 2024, our largest industry concentrations of our total investments at fair value were in diversified/conglomerate service companies, representing 22.5%;

diversified/conglomerate manufacturing companies, representing 20.1%;

and aerospace and defense companies, representing 19.2%.

Therefore, we are susceptible to the economic circumstances in these industries, and a downturn in one or more of these industries could have a material adverse effect on our results of operations and financial condition.

Volatility of oil and natural gas prices could impair certain of our portfolio companies’ operations and ability to satisfy obligations to their respective lenders and investors, including us, which could negatively impact our financial condition.

Our portfolio includes companies related to the oil and gas industry with the fair value of these investments representing approximately $27.8 million, or 3.9% of our total portfolio at fair value as of September 30, 2023.

These businesses provide services to oil and gas companies and are indirectly impacted by the prices of, and demand for, oil and natural gas, which have from time to time experienced volatility, including rapid and significant changes in prices, and such volatility could continue or increase in the future.

A substantial decline in oil and natural gas demand or prices may adversely affect the business, financial condition, cash flows, liquidity or results of operations of these portfolio companies and might impair their ability to meet capital expenditure obligations and financial commitments.

Any decline in oil prices, especially for a prolonged period, could therefore have a material adverse effect on our business, financial condition and results of operations.

Investments in securities of foreign portfolio companies, if any, may involve significant risks in addition to the risks inherent in U.S.

We may make investments in securities of foreign companies.

Investing in foreign companies may expose us to additional risks not typically associated with investing in U.S.

These risks include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the United States, higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility.

In addition, any investments that we make that are denominated in a foreign currency will be subject to the risk that the value of a particular currency will change in relation to one or more other currencies.

Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital gains, and political developments.

We may employ hedging techniques to minimize these risks, but we cannot assure you that we will, in fact, hedge currency risk, or, that if we do, such strategies will be effective.

We invest in equity securities, which involves a substantial degree of risk.

We invest in common and other equity securities of portfolio companies.

The returns on common stock have historically been significantly more volatile than fixed income securities.

The value of such equity securities, which oftentimes are not publicly traded or liquid, will rise and fall in response to the activities of the company that issued the securities, general market conditions, and/or specific economic or political conditions.

The equity securities that we acquire may fail to appreciate or may decline in value.

Because preferred stock represents an equity ownership interest in a company and is typically subordinated to bonds and other debt instruments in a company’s capital structure, in terms of priority to corporate income, they are generally subject to greater credit risk than those debt instruments.

Accordingly, their value usually will react more strongly than bonds and other debt instruments to actual or perceived changes in a company’s financial condition or prospects or to fluctuations in the equity markets.

Preferred stockholders generally have no voting rights or their voting rights are limited to certain extraordinary transactions or events.

Unlike interest payments on debt securities, preferred stock dividends are payable only if declared by the issuer’s board of directors.

Preferred stock also may be subject to optional or mandatory redemption provisions.

The disposition of our investments may result in contingent liabilities.

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Our Credit Facility further requires us to comply with other financial and operational covenants, which obligate us to, among other things, maintain certain financial ratios, including asset and interest coverage, and a minimum number of 25 obligors in the borrowing base.

Additionally, we are required to maintain (i) a minimum net worth (defined in our Credit Facility to include any outstanding mandatorily redeemable preferred stock) of $325.0 million plus 50.0% of all equity and subordinated debt raised after May 13, 2021 less 50% of any equity and subordinated debt retired or redeemed after May 13, 2021, which equates to $ 408.9 million as of September 30, 2023, (ii) asset coverage with respect to “senior securities representing indebtedness” of at least 150% (or such percentage as may be set forth in Section 18 of the 1940 Act, as modified by Section 61 of the 1940 Act), and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code.

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 $ 418.8 million as of September 30, 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.

Continued compliance with the covenants in our Credit Facility depends on many factors, some of which are beyond our control.

Given the continued uncertainty in the capital markets, the cumulative unrealized depreciation in our portfolio may increase in future periods and threaten our ability to comply with the minimum net worth covenant and other covenants

under our Credit Facility.

Any unrealized depreciation in our portfolio may increase in future periods and threaten our ability to comply with the minimum net worth covenant and other covenants under our Credit Facility.

Our failure to satisfy these covenants could result in foreclosure by our lenders, which would accelerate our repayment obligations under the facility and thereby have a material adverse effect on our business, liquidity, financial condition, results of operations and ability to pay distributions to our stockholders.

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Our business plan is dependent upon external financing, which is constrained by the limitations of the 1940 Act.

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

Additionally, we completed an offering of $57.0 million aggregate principal amount of our 2028 Notes in August 2023, a private placement of $50.0 million aggregate principal amount of our 3.75% notes due 2027 (the “2027 Notes”) in November 2021, an offering of $100.0 million aggregate principal amount of our 5.125% notes due 2026 (the “2026 Notes”) in December 2020, and an offering of an additional $50.0 million aggregate principal amount of the 2026 Notes in March 2021.

However, there can be no assurance that we will be able to raise additional capital through issuing equity or debt in the near future.

Our business requires a substantial amount of cash to operate and grow.

There can be no assurance that we will be able to raise additional capital through issuing equity or debt in the near future.

However, our business requires a substantial amount of cash to operate and grow.

We may acquire such additional capital from the following sources:

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To satisfy the 150% asset coverage requirement in the event that we are seeking to pay a distribution, we might either have to (i) liquidate a portion of our loan portfolio to repay a portion of our indebtedness or (ii) issue common stock.

This may occur at a time when a sale of a portfolio asset may be disadvantageous, or when we have limited access to capital markets on agreeable terms.

In addition, any amounts that we use to service our indebtedness or for offering expenses will not be available for distributions to stockholders.

This may occur at a time when a sale of a portfolio asset may be

disadvantageous, or when we have limited access to capital markets on agreeable terms.

In addition, any amounts that we use to service our indebtedness, pay dividends on our preferred stock, or for offering expenses will not be available for distributions to common stockholders.

Furthermore, if we have to issue common stock at below NAV per common share, any non-participating stockholders will be subject to dilution, as described below.

Pursuant to Section 61(a)(3) of the 1940

Act, we are permitted to issue multiple classes of “senior securities representing indebtedness.” However, pursuant to Section 18(c) of the 1940 Act, we are permitted to issue only one class of “senior securities that are stock.”

Pursuant to Section 61(a)(3) of the 1940 Act, we are permitted to issue multiple classes of “senior securities representing indebtedness.” However, pursuant to Section 18(c) of the 1940 Act, we are permitted to issue only one class of “senior securities that are stock.”

• Common and Convertible Preferred Stock.

Because we are constrained in our ability to issue debt or senior securities for the reasons given above, we are dependent on the issuance of equity as a financing source.

If we raise additional funds by issuing more common stock, the percentage ownership of our stockholders at the time of the issuance would decrease and our existing common stockholder may experience dilution.

In addition, under the 1940 Act, we will generally not be able to issue additional shares of our common stock at a price below NAV per common share to purchasers, other than to our existing stockholders through a rights offering, without first obtaining the approval of our stockholders and our independent directors.

If we raise additional funds by issuing more common stock, the percentage ownership of our common stockholders at the time of the issuance would decrease and our existing common stockholder may experience dilution.

In addition, under the 1940 Act, we will generally not be able to issue additional shares of our common stock at a price below NAV per common share to purchasers, other than to our existing common stockholders through a rights offering, without first obtaining the approval of our stockholders and our independent directors.

If we were to sell shares of our common stock below our then-current NAV per common share, such sales would result in an immediate dilution to the NAV per common share.

This dilution would occur as a result of the sale of shares at a price below the then-current NAV per share of our common stock and a proportionately greater decrease in a stockholder’s interest in our earnings and assets and voting percentage than the increase in our assets resulting from such issuance.

For example, if we issue and sell an additional 10.0% of our common stock at a 5.0% discount to NAV, a stockholder who does not participate in that offering for its proportionate interest will suffer NAV dilution of up to 0.5% or $5 per $1,000 of NAV.

This dilution would occur as a result of the sale of common shares at a price below the then-current NAV per share of our common stock and a proportionately greater decrease in a common stockholder’s interest in our earnings and assets and voting percentage than the increase in our assets resulting from such issuance.

For example, if we issue and sell an additional 10.0% of our common stock at a 5.0% discount to NAV, a common stockholder who does not participate in that offering for its proportionate interest will suffer NAV dilution of up to 0.5% or $5 per $1,000 of NAV.

This imposes constraints on our ability to raise capital when our common stock is trading below NAV per common share.

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The use of leverage, including through the issuance of senior securities that are debt or stock, magnifies the potential for gain or loss on amounts invested, and, if we incur additional leverage, this potential will be further magnified.

As of September 30, 2023, we incurred leverage through the Credit Facility, the 2026 Notes, the 2027 Notes, and the 2028 Notes.

As of September 30, 2024, we incurred leverage through the Credit Facility, the Series A Preferred Stock, the 2026 Notes, the 2027 Notes, and the 2028 Notes.

From time to time, we intend to incur additional leverage to the extent permitted under the 1940 Act.

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(A) The hypothetical return to common stockholders is calculated by multiplying our total assets as of September 30, 2024 by the assumed rates of return and subtracting all interest on our debt to be paid during the 12 months following September 30, 2024, and then dividing the resulting difference by our total net assets attributable to common stock as of September 30, 2024.

Based on $719.5 million in total assets, $47.8 million drawn on our Credit Facility (at cost), $150.0 million in our 2026 Notes payable (at cost), $50.0 million in our 2027 Notes payable (at cost), $57.0 million in our 2028 Notes payable (at cost), and $408.7 million in net assets, each as of September 30, 2023.

Based on $812.5 million in total assets, $70.6 million drawn on our Credit Facility (at cost), $150.0 million in our 2026 Notes payable (at cost), $50.0 million in our 2027 Notes payable (at cost), $57.0 million in our 2028 Notes payable (at cost), $8.7 million in our Series A Preferred Stock (at cost), and $470.9 million in net assets, each as of September 30, 2024.

Based on an aggregate outstanding indebtedness of $336.3 million at cost as of September 30, 2024 and the effective annual cash interest rate of 6.0 % as of that date, our investment portfolio at fair value would have had to produce an annual return of at least 2.5 % to cover annual interest payments on the outstanding debt.

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Because we use leverage, we are subject to certain asset coverage ratio requirements under the 1940 Act and could, under certain circumstances, be restricted from making distributions necessary to qualify as a RIC.

Warrants we receive with respect to debt investments generally create OID, which we must

recognize as ordinary income over the term of the debt investment.

Warrants we receive with respect to debt investments generally create OID, which we must recognize as ordinary income over the term of the debt investment.

Similarly, PIK interest which is accrued generally over the term of the debt investment but not paid in cash, is recognized as ordinary income.

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As a registered closed-end investment company, we would be subject to substantially more regulatory restrictions under the 1940 Act, which would significantly decrease our operating flexibility.

In addition, any such failure to maintain our status as a BDC could cause an event of default under out outstanding indebtedness, which could have a material adverse effect on our business, financial condition or results of operations.

We are subject to restrictions that may discourage a change of control.

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Certain provisions of Maryland law applicable to us prohibit business combinations with:

• any person who beneficially owns 10.0% or more of the voting power of our common stock (an “interested stockholder”);

• any person who beneficially owns 10.0% or more of the voting power of our stock (an “interested stockholder”);

• an affiliate of ours who at any time within the two-year period prior to the date in question was an interested stockholder;

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These prohibitions last for five years after the most recent date on which the interested stockholder became an interested stockholder.

Thereafter, any business combination with the interested stockholder must be recommended by our Board of Directors and approved by the affirmative vote of at least 80.0% of the votes entitled to be cast by holders of our outstanding shares of common stock and two-thirds of the votes entitled to be cast by holders of our common stock other than shares held by the interested stockholder.

Thereafter, any business combination with the interested stockholder must be recommended by our Board of Directors and approved by the affirmative vote of at least 80.0% of the votes entitled to be cast by holders of our outstanding shares of common stock and preferred stock, voting together as a single class, and two-thirds of the votes entitled to be cast by holders of our common stock other than shares held by the interested stockholder.

These requirements could have the effect of inhibiting a change in control even if a change in control were in our stockholders’ interest.

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Compliance with these requirements may unfavorably limit our investment opportunities and reduce our ability in comparison to other companies to profit from favorable spreads between the rates at which we can borrow and the rates at which we can lend.

As a BDC, therefore, we intend to issue equity at a rate more frequent than our privately owned competitors, which may lead to greater stockholder dilution.

As a BDC, therefore, we may issue equity at a rate more frequent than our privately owned competitors, which may lead to greater stockholder dilution.

We have incurred leverage to generate capital to make additional investments.

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If we cannot satisfy the asset coverage test, we may be required to sell a portion of our investments and, depending on the nature of our debt financing, repay a portion of our indebtedness at a time when such sales and repayments may be disadvantageous.

Such events, if they were to occur, could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Risks Related to Our External Management

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We are subject to the risk of discontinuation of the Adviser’s operations or termination of the Advisory Agreement and the risk that, upon such event, no suitable replacement will be found.

We believe that our

success depends to a significant extent upon the Adviser and that discontinuation of its operations or the loss of its key management personnel could have a material adverse effect on our ability to achieve our investment objectives.

We believe that our success depends to a significant extent upon the Adviser and that discontinuation of its operations or the loss of its key management personnel could have a material adverse effect on our ability to achieve our investment objectives.

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

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Pursuant to the Advisory Agreement, the Adviser and its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with the Adviser will not be liable to us for their acts under the Advisory Agreement, absent willful misfeasance, bad faith or gross negligence in the performance of their duties or by reason of the reckless disregard of their duties and obligations under the Advisory Agreement.

We have agreed to indemnify, defend and protect the Adviser and its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with the Adviser with respect to all damages, liabilities, costs and expenses arising out of or otherwise based upon the performance of any of the Adviser’s duties or obligations under the Advisory Agreement or otherwise as an investment adviser for us, and not arising out of willful misfeasance, bad faith or gross negligence in the performance of their duties or by reason of the reckless disregard of their duties and obligations under the Advisory Agreement.

We have agreed to indemnify, defend and protect the Adviser and its officers, managers, partners, agents, employees,

controlling persons, members and any other person or entity affiliated with the Adviser with respect to all damages, liabilities, costs and expenses arising out of or otherwise based upon the performance of any of the Adviser’s duties or obligations under the Advisory Agreement or otherwise as an investment adviser for us, and not arising out of willful misfeasance, bad faith or gross negligence in the performance of their duties or by reason of the reckless disregard of their duties and obligations under the Advisory Agreement.

These protections may lead the Adviser to act in a riskier manner when acting on our behalf than it would when acting for its own account.

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In addition to its management fee, the Adviser is entitled under the Advisory Agreement to receive incentive compensation based in part upon our achievement of specified levels of income.

In evaluating investments and other management strategies, the opportunity to earn incentive compensation based on net income may lead the Adviser to place undue emphasis on the maximization of net income at the expense of other criteria, such as preservation of capital, maintaining sufficient liquidity, or management of credit risk or market risk, in order to

achieve higher incentive compensation.

In evaluating investments and other management strategies, the opportunity to earn incentive compensation based on net investment income may lead the Adviser to place undue emphasis on the maximization of net investment income at the expense of other criteria, such as preservation of capital, maintaining sufficient liquidity, or management of credit risk or market risk, in order to achieve higher incentive compensation.

Investments with higher yield potential are generally riskier or more speculative.

This could result in increased risk to the value of our investment portfolio.

In addition, the Adviser will receive a capital gains incentive fee based, in part, upon net capital gains realized on our investments.

Unlike the portion of the incentive fee based on income, there is no hurdle rate applicable to the incentive fee based on capital gains.

As a result, the Adviser may seek to invest more capital in investments that are likely to result in capital gains as compared to income producing securities.

This practice could result in us investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns.

We may be obligated to pay the Adviser incentive compensation even if we incur a loss.

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Consequently, we may make incentive fee payments on income accruals that we may not collect in the future and with respect to which we do not have a clawback right against the Adviser.

Our OID investments totaled $52.4 million as of September 30, 2023, at cost, which are primarily syndicated loan and certain participation investments.

Our OID investments totaled $56.9 million as of September 30, 2024, at cost.

For the year ended September 30, 2024, we recognized $ 0.4 million of OID income and the unamortized balance of OID investments as of September 30, 2024 totaled $ 0.6 million.

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Marcotte is an executive vice president of the Adviser.

While portfolio managers and the officers and other employees of the Adviser devote as much time to the management of us as appropriate to enable the Adviser to perform its duties in accordance with the Advisory Agreement, the portfolio managers and other of the Adviser's officers may have conflicts in allocating their time and services among us, on the one hand, and other investment vehicles managed by the Adviser, on the other hand.

These activities could be viewed as creating a conflict of interest insofar as the time and effort of the portfolio managers and the officers and employees of the Adviser will not be devoted exclusively to our business but will instead be allocated between our business and the management of these other investment vehicles.

Moreover, the Adviser may establish or sponsor other investment vehicles which from time to time may have potentially overlapping investment objectives with ours and accordingly may invest in, whether principally or secondarily, asset classes we target.

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As a result, it is possible that we may not be given the opportunity to participate in certain investments made by other funds managed by the Adviser.

In certain circumstances, we may make investments in a portfolio company in which one of our affiliates has or will have an investment, subject to satisfaction of any regulatory restrictions and, where required, to the prior approval of our Board of

As of September 30, 2024, our Board of Directors has approved the following types of co-investment transactions:

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We expect that any such negotiations between Gladstone Commercial and our portfolio companies would result in lease terms consistent with the terms that the portfolio companies would be likely to receive were they not portfolio companies of ours.

• We may invest simultaneously with our affiliate Gladstone Investment in senior loans in the broadly syndicated market whereby neither we nor any affiliate has the ability to dictate the terms of the loans.

• Pursuant to the Co-Investment Order, under certain circumstances, we may co-invest with Gladstone Investment and any future BDC or closed-end management investment company that is advised by the Adviser (or sub-advised by the Adviser if it controls the fund), or any combination of the foregoing, subject to the conditions included therein.

• We may invest simultaneously with our affiliates Gladstone Investment and/or Gladstone Alternative in senior loans in the broadly syndicated market whereby neither we nor any affiliate has the ability to dictate the terms of the loans.

• Pursuant to the Co-Investment Order, under certain circumstances, we may co-invest with Gladstone Investment, Gladstone Alternative and any future BDC or closed-end management investment company that is advised by the Adviser (or sub-advised by the Adviser if it controls the fund), or any combination of the foregoing, subject to the conditions included therein.

Certain of our officers, who are also officers of the Adviser, may from time to time serve as directors of certain of our portfolio companies.

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Moreover, to the extent that we distribute amounts that exceed our current and accumulated earnings and profits, these distributions constitute a return of capital to the extent of the common stockholder’s adjusted tax basis in its shares of our common stock.

A return of capital represents a return of a stockholder’s original investment in shares of our common stock and should not be confused with a distribution from earnings and profits.

A return of capital represents a return of a stockholder’s original investment in

shares of our common stock and should not be confused with a distribution from earnings and profits.

Although return of capital distributions may not be taxable, such distributions may increase an investor’s tax liability for capital gains upon the sale of shares of our common stock by reducing the investor’s tax basis in its shares of our common stock.

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Under the 1940 Act, we are generally not able to issue additional shares of our common stock at a price below NAV per share to purchasers other than our existing stockholders through a rights offering without first obtaining the approval of our common stockholders and our independent directors.

Additionally, when our common stock is trading below its NAV per share, our dividend yield may exceed the weighted average returns that we would expect to realize on new investments that would be made with the proceeds from the sale of such stock, making it unlikely that we would determine to issue

additional shares in such circumstances.

Thus, for as long as our common stock may trade below NAV, we will be subject to significant constraints on our ability to raise capital through the issuance of common stock.

Additionally, an extended period of time in which we are unable to raise capital may restrict our ability to grow and adversely impact our ability to increase or maintain our distributions.

Common stockholders may incur dilution if we sell shares of our common stock in one or more offerings at prices below the then-current NAV per share of our common stock.

Absent stockholder approval, we are not able to access the capital markets in an offering at prices below the then-current NAV per share due to restrictions applicable to BDCs under the 1940 Act.

Should we decide to issue shares of common stock at a price below NAV per share in the future, we will seek the requisite approval of our stockholders at such time.

If we were to sell shares of our common stock below NAV per share, such sales would result in an immediate dilution to the NAV per share.

This dilution would occur as a result of the sale of shares at a price below the then-current NAV per share of our common stock and a proportionately greater decrease in a stockholder’s interest in our earnings and assets and voting interest in us than the increase in our assets resulting from such issuance.

The greater the difference between the sale price and the NAV per share at the time of the offering, the more significant the dilutive impact would be.

Because the number of shares of common stock that could be issued and the timing of any issuance is not currently known, the actual dilutive effect, if any, cannot be currently predicted.

However, if, for example, we sold an additional 10.0% of our common stock at a 5.0% discount to NAV, a stockholder who did not participate in that offering for its proportionate interest would suffer NAV dilution of up to 0.5% or $5 per $1,000 of NAV.

Risks Related to the 2026 Notes, 2027 Notes, and 2028 Notes (collectively, the “Notes”)

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The indentures under which the Notes were issued offer limited protection to holders of the Notes.

The terms of the indentures do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a variety of

corporate transactions, circumstances or events that could have an adverse impact on your investment in the Notes.

The terms of the indentures do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have an adverse impact on your investment in the Notes.

In particular, the terms of the indenture and the Notes do not place any restrictions on our or our subsidiaries’ ability to:

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We have not listed, and do not intend to list in the future, the 2026 Notes and 2027 Notes on any securities exchange or for quotation of the Notes on any automated dealer quotation system.

Although the 2028 Notes are listed on Nasdaq, they may trade at a discount to their purchase price depending on prevailing interest rates, the market for similar securities, our credit

ratings, our financial condition, performance and prospects, general economic conditions or other relevant factors.

Although the 2028 Notes are listed on Nasdaq, they may trade at a discount to their purchase price depending on prevailing interest rates, the market for similar securities, our credit ratings, our financial condition, performance and prospects, general economic conditions or other relevant factors.

Accordingly, we cannot assure you that a liquid trading market will develop and/or be maintained for any of the Notes, that a holder will be able to sell its Notes at a particular time or that the price received when a holder sells its Notes will be favorable.

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Our failure to purchase such tendered Notes upon the occurrence of such Change of Control Repurchase Event would cause an event of default under the indenture governing the Notes and a cross-default under the agreements governing the Credit Facility, which may result in the acceleration of such indebtedness requiring us to repay that indebtedness immediately.

If the holders of the 2026 Notes or 2027 Notes exercise their right to require us to repurchase such Notes upon a Change of Control Repurchase Event, the financial effect of this repurchase could cause a default under our current and future debt instruments, and we may not have sufficient funds to repay any such accelerated indebtedness.

If the holders of the 2026 Notes or 2027 Notes exercise their right to require us to

repurchase such Notes upon a Change of Control Repurchase Event, the financial effect of this repurchase could cause a default under our current and future debt instruments, and we may not have sufficient funds to repay any such accelerated indebtedness.

A downgrade, suspension or withdrawal of the credit rating assigned by a rating agency to us or the Notes or change in the debt markets could cause the liquidity or market value of the Notes to decline significantly.

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There will be no public market for the Series A Preferred Stock as we do not intend to apply for listing on a national securities exchange unless the Share Repurchase Program is terminated.

There is currently no public market for our 6.25% Series A Cumulative Redeemable Preferred Stock (the “Series A Preferred Stock”), and we do not intend to apply to list the Series A Preferred Stock on a national securities exchange or to include the Series A Preferred Stock for listing on any national securities market.

There is currently no public market for our Series A Preferred Stock and we do not intend to apply to list the Series A Preferred Stock on a national securities exchange or to include the Series A Preferred Stock for listing on any national securities market.

Unless shares of the Series A Preferred Stock are listed on a national securities exchange, holders of shares of Series A Preferred Stock may be unable to sell them at all or, if they are able to, only at substantial discounts from the liquidation preference of such shares.

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As a result, depending on the amount of repurchase requests, a stockholder’s repurchase request may not be fulfilled in the amount requested.

In addition, our Board of Directors may terminate or suspend the share repurchase program at any time for any reason in its sole and absolute

In addition, our Board of Directors may terminate or suspend the share repurchase program at any time for any reason in its sole and absolute discretion.

Therefore, our obligation to repurchase shares at the request of a holder of Series A Preferred Stock is limited to the extent our Board of Directors suspends or terminates the optional repurchase right for any reason, including after delivery of a stockholder repurchase request but prior to the corresponding stockholder repurchase date.

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The cash payment that stockholders who request to have their shares of Series A Preferred Stock repurchased will receive will be at a substantial discount if such request is made within three years of the purchase date.

outstanding for at least one year but less than two years will be subject to an early repurchase discount of 6% (or at a price of $23.50 per share), and shares that have been outstanding for at least two years but less than three years will be subject to an early repurchase discount of 3% (or at a price of $24.25 per share).

Repurchases under the share repurchase program for the Series A Preferred Stock will be at a price per share equal to the liquidation preference of the Series A Preferred Stock plus accrued and unpaid dividends, except that shares that have been outstanding for less than one year will be subject to an early repurchase discount of 10% (or at a price of $22.50 per share), shares that have been outstanding for at least one year but less than two years will be subject to an early repurchase discount of 6% (or at a price of $23.50 per share), and shares that have been outstanding for at least two years but less than three years will be subject to an early repurchase discount of 3% (or at a price of $24.25 per share).

If you request to have your shares repurchased such request could cause you to lose a substantial portion of your investment.

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Any failure or interruption of those systems, including as a result of the termination of an agreement with any third-party service providers, could cause delays or other problems in our activities.

Our financial, accounting, data processing, backup or other operating

systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control and adversely affect our business.

Our financial, accounting, data processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control and adversely affect our business.

There could be:

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Federal Income Tax Considerations” and “Business—Regulation as a BDC.”

We are subject to risks related to corporate social responsibility.

Our business (including that of our portfolio companies) may face public scrutiny related to environmental, social and governance (“ESG”) activities.

A variety of organizations measure the performance of companies on ESG topics, and the results of these assessments are widely publicized.

Adverse incidents with respect to ESG activities could impact the value of our brand, our relationship with future portfolio companies, the cost of our operations and relationships with investors, all of which could adversely affect our business and results of operations.

Additionally, new regulatory initiatives related to ESG that are applicable to us and our portfolio companies could adversely affect our business.

The SEC has adopted rules that, among other matters, establish a framework for reporting of climate-related risks and other ESG-related rules have been proposed and these or similar rules may be adopted in the

Compliance with these rules may be onerous and expensive.

Further, compliance with any new laws, regulations or disclosure obligations increases our regulatory burden and could make compliance more difficult and expensive, affect the manner in which we or our portfolio companies conduct our businesses and adversely affect our profitability.

We and/or our portfolio companies may be subject to risks related to global climate change.

Climate change is widely considered to be a significant threat to the global economy.

Our business operations and our portfolio companies may face risks associated with climate change, including risks related to the impact of climate-related legislation and regulation (both domestically and internationally), risks related to climate-related business trends (such as the process of transitioning to a lower-carbon economy), and risks stemming from the physical impacts of climate change, such as the increasing frequency or severity of extreme weather events and rising sea levels and temperatures.

We may experience fluctuations in our quarterly and annual operating results.

We may experience fluctuations in our quarterly and annual operating results due to a number of factors, including, among others, variations in our investment income, the interest rates payable on the debt securities we acquire, the default rates on such securities, variations in and the timing of the recognition of realized and unrealized gains or losses, the level of our expenses, the degree to which we encounter competition in our markets, and general economic conditions, including the impacts of public health emergencies.

The majority of our portfolio companies are in industries that are directly impacted by inflation, such as manufacturing and consumer goods and services.

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As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.

UNRESOLVED STAFF COMMENTS

We do not own any real estate or other physical properties material to our operations.

The Adviser is the current leaseholder of all properties in which we operate.

We occupy these premises pursuant to the Advisory and Administration Agreements with the Adviser and Administrator, respectively.

LEGAL PROCEEDINGS

We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us.

MINE SAFETY DISCLOSURES

Not applicable.

Public health threats may adversely impact the businesses in which we invest and affect our business, operating results and financial condition.

Public health threats, such as pandemics, may disrupt the operations of the businesses in which we invest.

Such threats can create economic and political uncertainties and can contribute to global economic instability.

Certain of our portfolio companies have experienced increases in health and safety expenses, payroll costs and other operating expenses and future increases are possible.

These adverse economic impacts may decrease the value of the collateral securing our loans in such portfolio companies, as well as the value of our equity investments.

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 1A. Risk Factors