GLADSTONE CAPITAL CORP 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis of our financial condition and results of operations should be read in conjunction with our accompanying Consolidated Financial Statements and the notes thereto contained elsewhere in this Annual Report. Historical financial condition and results of operations and percentage relationships among any amounts in the financial statements are not necessarily indicative of financial condition, results of operations or percentage relationships for any future periods. Except per share amounts, dollar amounts in the tables included herein are in thousands unless otherwise indicated. OVERVIEW General We were incorporated under the Maryland General Corporation Law on May 30, 2001. We operate as an externally managed, closed-end, non-diversified management investment company, and have elected to be treated as a BDC under the 1940 Act. In addition, for federal income tax purposes we have elected to be treated as a RIC under the Code. To continue to qualify as a RIC for federal income tax purposes and obtain favorable RIC tax treatment, we must meet certain requirements, including certain minimum distribution requirements. We were established for the purpose of investing in debt and equity securities of established private businesses operating in the U.S. Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established lower middle market companies in the U.S. that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities, in connection with our debt investments, that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our investment objectives, our primary investment strategy is to invest in several categories of debt and equity securities, with each investment generally ranging from $8 million to $40 54 Table of Contents million, although investment size may vary, depending upon our total assets or available capital at the time of investment. We expect that our investment portfolio over time will consist of approximately 90.0% debt investments and 10.0% equity investments, at cost. As of September 30, 2024, our investment portfolio was made up of approximately 90.1% debt investments and 9.9% equity investments, at cost. We focus on investing in lower middle market companies (which we generally define as companies with annual earnings before interest, taxes, depreciation and amortization of $3 million to $25 million) in the U.S. that meet certain criteria, including the following: the sustainability of the business’ free cash flow and its ability to grow it over time, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the borrower, reasonable capitalization of the borrower, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples and, to a lesser extent, the potential to realize appreciation and gain liquidity in our equity position, if any. We lend to borrowers that need funds for growth capital or to finance acquisitions or recapitalize or refinance their existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises. Our targeted portfolio companies are generally considered too small for the larger capital marketplace. We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity. In July 2012, the SEC granted us the Co-Investment Order that expanded our ability to co-invest, under certain circumstances, with certain of our affiliates, including Gladstone Investment, a BDC also managed by the Adviser, Gladstone Alternative, an interval fund also managed by the Adviser, and any future BDC or registered closed-end management investment company that is advised (or sub-advised if it controls the fund) by the Adviser, or any combination of the foregoing, subject to the conditions in the Co-Investment Order. We believe the Co-Investment Order has enhanced and will continue to enhance our ability to further our investment objectives and strategies. If we are participating in an investment with one or more co-investors, whether or not an affiliate of ours, our investment is likely to be smaller than if we were investing alone. Business Portfolio and Investment Activity In general, our investments in debt securities have a term of no more than seven years, accrue interest at variable rates (generally based on one-month Term SOFR), and, to a lesser extent, at fixed rates. We seek debt instruments that pay interest monthly or, at a minimum, quarterly, may have a success fee or deferred interest provision and are primarily interest only, with all principal and any accrued but unpaid interest due at maturity. Generally, success fees accrue at a set rate and are contractually due upon a change of control of a portfolio company, typically from an exit or sale. Some debt securities have deferred interest whereby some portion of the interest payment is added to the principal balance so that the interest is paid, together with the principal, at maturity. This form of deferred interest is often called PIK interest. Typically, our equity investments consist of common stock, preferred stock, limited liability company interests, or warrants to purchase the foregoing. Often, these equity investments occur in connection with our original investment, recapitalizing a business, or refinancing existing debt. From our initial public offering in August 2001 through September 30, 2024, we have made 667 different loans to, or investments in, 277 companies for a total of approximately $2.8 billion, before giving effect to principal repayments on investments and divestitures. During the year ended September 30, 2024, we invested $53.3 million in four new portfolio companies and extended $124.4 million in investments to existing portfolio companies. In addition, we received a total of $136.3 million in combined net proceeds and principal repayments from portfolio company exits and principal repayments by existing portfolio companies during the year ended September 30, 2024. During the year ended September 30, 2024, the following significant transactions occurred: Proprietary Investments • In November 2023, we invested $ 11.0 million in Quality Environmental Midco, Inc. (“Quality”) through secured first lien debt and preferred equity. We also extended Quality a $ 2.0 million secured first lien line of credit commitment, which was unfunded at close. In February 2024, we invested an additional $ 5.0 million in Quality 55 Table of Contents through new secured first lien debt and preferred equity and increased the secured first lien line of credit commitment to $ 3.0 million. • In November 2023, we extended Cafe Zupas, an existing portfolio company, a new $ 10.5 million secured first lien delayed draw term loan commitment, which was unfunded at close. We funded $ 1.4 million on the delayed draw term loan in December 2023. In addition, our existing term loan was paid down by $ 7.3 million. • In November 2023, our remaining investment in PIC 360, LLC was sold resulting in a net realized gain of $ 0.3 million. • In December 2023, we invested an additional $ 14.3 million in ALS Education, LLC, an existing portfolio company, through secured first lien debt. • In December 2023, we invested an additional $ 12.0 million in Leadpoint Business Services, LLC, an existing portfolio company, through secured first lien debt. • In December 2023, we invested an additional $ 7.0 million in Salt & Straw, LLC, an existing portfolio company, through preferred equity. We also increased our delayed draw term loan commitment to Salt & Straw, LLC by $ 2.9 million. • In February and March 2024, we invested a total of an additional $ 13.5 million in SpaceCo Holdings, LLC (“SpaceCo”), an existing portfolio company, through secured first lien debt. • In February 2024, we invested $ 15.0 million in Perimeter Solutions Group through secured second lien debt. • In March 2024, we received net cash proceeds of $ 8.4 million from the sale of Trowbridge Chicago, LLC (“Trowbridge”), an existing portfolio company. In conjunction with the sale, we received $ 0.2 million in prepayment fees and recorded a net realized gain of $ 0.2 million on our equity. In September 2024, our remaining debt investment in Trowbridge paid off at par for net cash proceeds of $ 0.3 million. • In April 2024, we invested $ 7.3 million in Total Access Elevator, LLC (“Total Access”) through secured first lien debt and common equity. We also extended Total Access a $ 3.0 million line of credit commitment and a $ 2.5 million delayed draw term loan commitment, both of which were unfunded at close. • In April 2024, our debt investment in Giving Home Healthcare, LLC (“Giving Home”) paid off at par for net cash proceeds of $ 29.7 million including a $ 0.9 million prepayment penalty. We also exercised our warrant position for common equity in Giving Home, which we continue to hold, and received a $ 2.5 million distribution associated with this investment. • In May 2024, our debt investment in Gray Matter Systems, LLC paid off at par for net cash proceeds of $ 14.0 million including a $ 0.2 million prepayment penalty. • In May 2024, our debt investment in Pansophic Learning, Ltd. (“Pansophic”) paid off at par for net cash proceeds of $ 33.0 million. • In May 2024, we invested $ 20.0 million in RPM Freight Systems, LLC (“RPM”) through secured second lien debt. We also extended RPM a $ 5.0 million delayed draw term loan commitment, which was unfunded at close. • In May 2024, our remaining shares in Funko were sold representing an exit of our investment and a return of our equity cost basis of $ 21 thousand and a realized gain of $ 2 thousand. • In June 2024, we invested an additional $ 7.4 million in Workforce QA, LLC, an existing portfolio company, through secured first lien debt. • In July 2024, we invested an additional $ 6.5 million in Turn Key Health Clinics, LLC (“Turn Key”), an existing portfolio company, through secured first lien debt. We also extended Turn Key an additional $ 2.0 million line of credit commitment which was funded in July 2024. • In September 2024, we invested an additional $ 13.5 million in Arc Drilling Holdings LLC, an existing portfolio company, through secured first lien debt and common equity. We also extended Arc Drilling an additional $ 4.0 million line of credit commitment and funded $0.9 million under the line of credit at close. 56 Table of Contents Syndicated Investments • In January 2024, our investment in CHA Holdings, Inc. paid off at par for net proceeds of $ 3.0 million. • In July 2024, our investment in Tailwind Smith Cooper Immediate Corporation paid off at par for net proceeds of $ 5.0 million. Refer to Note 14 — Subsequent Events in the accompanying Consolidated Financial Statements included elsewhere in this Annual Report for portfolio activity occurring subsequent to September 30, 2024. Capital Raising We have been able to meet our capital needs through extensions of and increases to our line of credit under the Credit Facility and by accessing the capital markets in the form of public equity offerings of common stock and public and private debt offerings. We have successfully extended the Credit Facility’s revolving period multiple times, most recently to October 2025, and currently have a total commitment amount of $ 293.7 million. We sold 476,138 and 8,774,101 common shares under our at-the-market program during the years ended September 30, 2024 and 2023, respectively. In August 2023, we completed an offering of $57.0 million aggregate principal amount of the 2028 Notes. In November 2021, we completed a private placement of $50.0 million aggregate principal amount of the 2027 Notes. Refer to “Liquidity and Capital Resources — Revolving Line of Credit,” “Liquidity and Capital Resources — Equity — Common Stock,” and “Liquidity and Capital Resources — Notes Payable” for further discussion. Although we were able to access the capital markets historically and in recent years, market conditions may affect the trading price of our capital stock and thus may inhibit our ability to finance new investments through the issuance of equity in the future. When our common stock trades below NAV per common share, our ability to issue equity is constrained by provisions of the 1940 Act, which generally prohibits the issuance and sale of our common stock below NAV per common share without first obtaining approval from our stockholders and our independent directors, other than through sales to our then-existing stockholders pursuant to a rights offering. On September 30, 2024, the closing market price of our common stock was $ 24.05 per share, a 13.6 % premium to our September 30, 2024 NAV per share of $ 21.18 . Regulatory Compliance Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage limitations of the 1940 Act, which require us to have an asset coverage (as defined in Sections 18 and 61 of the 1940 Act) of at least 150% on our “senior securities representing indebtedness” and our “senior securities that are stock.” On April 10, 2018, our Board of Directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) thereof, approved the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, the Company’s asset coverage requirements for senior securities changed from 200% to 150%, effective April 10, 2019. As of September 30, 2024, our asset coverage on our “senior securities representing indebtedness” was 243.6 % and our asset coverage on our “senior securities that are stock” was 237.3%. Recent Developments Distributions On October 8, 2024, our Board of Directors declared the following distributions to common and preferred stockholders: Record Date Payment Date Distribution per Common Share October 22, 2024 October 31, 2024 $ 0.1650 November 20, 2024 November 29, 2024 0.1650 December 20, 2024 December 31, 2024 0.1650 Total for the Quarter $ 0.4950 57 Table of Contents Record Date Payment Date Distribution per Series A Preferred Stock October 24, 2024 November 4, 2024 $ 0.130208 November 27, 2024 December 4, 2024 0.130208 December 23, 2024 January 3, 2025 0.130208 Total for the Quarter $ 0.390624 In November 2024, our Board of Directors declared the following supplemental distribution to common stockholders: Record Date Payment Date Distribution per Common Share December 4, 2024 December 18, 2024 $ 0.4000 58 Table of Contents RESULTS OF OPERATIONS Comparison of the Year Ended September 30, 2024 to the Year Ended September 30, 2023 For the Year Ended September 30, 2024 2023 $ Change % Change INVESTMENT INCOME Interest income $ 93,294 $ 83,030 $ 10,264 12.4 % Other income 3,327 3,404 (77) (2.3) Total investment income 96,621 86,434 10,187 11.8 EXPENSES Base management fee 13,609 11,998 1,611 13.4 Loan servicing fee 8,862 8,053 809 10.0 Incentive fee 11,410 10,255 1,155 11.3 Administration fee 1,970 1,716 254 14.8 Interest expense 21,715 20,847 868 4.2 Amortization of deferred financing costs 1,864 1,529 335 21.9 Other expenses 3,165 2,458 707 28.8 Expenses, before credits from Adviser 62,595 56,856 5,739 10.1 Credit to base management fee – loan servicing fee (8,862) (8,053) (809) 10.0 Credit to fees from Adviser – other (3,171) (3,389) 218 (6.4) Total expenses, net of credits 50,562 45,414 5,148 11.3 NET INVESTMENT INCOME 46,059 41,020 5,039 12.3 NET REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on investments 2,008 12,345 (10,337) NM Net realized gain (loss) on other 3,951 319 3,632 NM Net unrealized appreciation (depreciation) of investments 42,703 (11,016) 53,719 NM Net gain (loss) from investments and other 48,662 1,648 47,014 NM PREFERRED STOCK DIVIDENDS 215 — 215 NM NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 94,506 $ 42,668 $ 51,838 121.5 % PER BASIC AND DILUTED COMMON SHARE Net investment income (A) $ 2.11 $ 2.20 $ (0.09) (4.1) % Net increase (decrease) in net assets resulting from operations (A) $ 4.34 $ 2.29 $ 2.05 89.5 % NM N ot Meaningful (A) Per share amounts have been adjusted on a retroactive basis to reflect the Reverse Stock Split effected on April 4, 2024. Refer to Note 2— Summary of Significant Accounting Policies in the accompanying Notes to Consolidated Financial Statements for additional information. Investment Income Interest income increased by 12.4% for the year ended September 30, 2024, as compared to the prior year. Generally, the level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period multiplied by the weighted-average yield. The weighted average principal balance of our interest-bearing investment portfolio for the year ended September 30, 2024 was $665.5 million, compared to $626.5 million for the year ended September 30, 2023, an increase of $39.0 million, or 6.2%. The weighted average yield on our interest-bearing investments is based on the current stated interest rate on interest-bearing investments, which increased to 13.9% for the year ended September 30, 2024, compared to 13.3% for the year ended September 30, 2023, inclusive of any allowances on interest receivables made during those periods. The increase in the weighted average yield was driven mainly by increases in interest rates. 59 Table of Contents As of September 30, 2024, our loans to B+T Group, Edge Adhesives, and 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. As of September 30, 2023, our loan to Edge Adhesives 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. Other income decreased by 2.3% during the year ended September 30, 2024, as compared to the prior year period primarily due to a $0.6 million decrease in success fees received and a $0.1 million decrease in dividend income year over year, partially offset by a $0.7 million increase in prepayment fees received year over year. As of September 30, 2024, our investment in Antenna Research Associates, Inc. represented 11.4% of the total investment portfolio at fair value. As of September 30, 2023, no single investment represented greater than 10% of the total investment portfolio at fair value. Expenses Expenses, net of any non-contractual, unconditional and irrevocable credits to fees from the Adviser, increased $5.1 million, or 11.3%, for the year ended September 30, 2024 as compared to the prior year. This increase was primarily due to a $2.0 million increase in the net base management fee, a $1.0 million increase in the net incentive fee, and a $0.9 million increase in interest expense. Total interest expense on borrowings and notes payable increased by $0.9 million, or 4.2%, during the year ended September 30, 2024 as compared to the prior year. This increase was driven primarily by a shift in the composition of our debt outstanding. Interest expense on notes payable increased by $3.9 million period over period with the issuance of our 2028 Notes in August 2023. Interest expense on our Credit Facility decreased by $3.0 million period over period, driven primarily by a decrease in the weighted average balance outstanding on our Credit Facility, partially offset by an increase in the effective interest rate on our Credit Facility and an increase in unused commitment fees, period over period. The effective interest rate on our Credit Facility, including unused commitment fees incurred, but excluding the impact of deferred financing costs, was 11.0% during the year ended September 30, 2024, compared to 8.0% during the prior year. The increase in the effective interest rate was driven primarily by an increase in unused commitment fees. The weighted average balance outstanding on our Credit Facility was $70.6 million during the year ended September 30, 2024, as compared to $133.7 million in the prior year, a decrease of 47.2%. The net base management fee earned by the Adviser increased by $2.0 million, or 23.6%, during the year ended September 30, 2024, as compared to the prior year, resulting from an increase in average total assets subject to the base management fee and a decrease in credits to the base management fee from the Adviser for new deal origination fees, year over year. The income-based incentive fee increased by $1.2 million, or 11.3%, for the year ended September 30, 2024, as compared to the prior year, primarily due to an increase in pre-incentive fee net investment income, coupled with an increase in net assets, which drives the hurdle rate. 60 Table of Contents The base management, loan servicing and incentive fees, and associated non-contractual, unconditional and irrevocable credits, are computed quarterly, as described under “Transactions with the Adviser” in Note 4— Related Party Transactions of the Notes to Consolidated Financial Statements and are summarized in the following table: Year Ended September 30, 2024 2023 Average total assets subject to base management fee (A) $ 777,657 $ 685,600 Multiplied by annual base management fee of 1.75% 1.75 % 1.75 % Base management fee (B) 13,609 11,998 Portfolio company fee credit ( 2,866 ) ( 3,263 ) Syndicated loan fee credit ( 101 ) ( 126 ) Net Base Management Fee $ 10,642 $ 8,609 Loan servicing fee (B) $ 8,862 $ 8,053 Credit to base management fee - loan servicing fee (B) ( 8,862 ) ( 8,053 ) Net Loan Servicing Fee $ — $ — Incentive fee (B) $ 11,410 $ 10,255 Incentive fee credit ( 204 ) — Net Incentive Fee $ 11,206 $ 10,255 Portfolio company fee credit $ ( 2,866 ) $ ( 3,263 ) Syndicated loan fee credit ( 101 ) ( 126 ) Incentive fee credit ( 204 ) — Credit to Fees from Adviser—Other (B) $ ( 3,171 ) $ ( 3,389 ) (A) Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the two most recently completed quarters within the respective years and adjusted appropriately for any share issuances or repurchases during the period. (B) Reflected, on a gross basis, as a line item on our accompanying Consolidated Statement of Operations located elsewhere in this Annual Report. Net Realized Gain (Loss) on Investments For the year ended September 30, 2024, we recorded a net realized gain on investments of $2.0 million, which resulted primarily from a $1.5 million realized gain recognized on our investment in Giving Home. For the year ended September 30, 2023, we recorded a net realized gain on investments of $12.3 million, which resulted primarily from a $5.9 million realized gain recognized on the sale of our investment in Targus Cayman HoldCo, Ltd. (“Targus”), a $4.1 million realized gain recognized on our investment in Leeds Novamark Capital I, L.P. (“Leeds”), and a $3.7 million realized gain recognized on our investment in PIC 360, LLC. 61 Table of Contents Net Unrealized Appreciation (Depreciation) of Investments During the year ended September 30, 2024, we recorded net unrealized appreciation of investments in the aggregate amount of $42.7 million. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the year ended September 30, 2024 were as follows: Year Ended September 30, 2024 Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized Depreciation (Appreciation) Net Gain (Loss) Antenna Research Associates, Inc. $ — $ 40,987 $ — $ 40,987 Lonestar EMS, LLC — 8,284 — 8,284 MCG Energy Solutions, LLC — 3,555 — 3,555 Salt & Straw, LLC — 3,041 — 3,041 Giving Home Health Care, LLC 1,465 1,220 — 2,685 Sokol & Company Holdings, LLC — 1,520 — 1,520 TNCP Intermediate HoldCo, LLC — 1,239 — 1,239 Café Zupas — 996 — 996 Quality Environmental Midco, Inc. — 972 — 972 Ohio Armor Holdings, LLC — 850 — 850 NeoGraf Solutions, LLC — 839 — 839 Arc Drilling Holdings LLC — 784 — 784 8th Avenue Food & Provisions, Inc. — 746 — 746 Total Access Elevator, LLC — 679 — 679 Leadpoint Business Services, LLC — 636 — 636 Canopy Safety Brands, LLC — 629 — 629 ENET Holdings, LLC — 576 — 576 Tailwind Smith Cooper Intermediate Corporation — 683 (121) 562 OCI, LLC — 549 — 549 Trowbridge Chicago, LLC 332 (23) 109 418 SpaceCo Holdings, LLC — 414 — 414 Axios Industrial Group, LLC — 367 — 367 ALS Education, LLC — 317 — 317 Viva Railings, L.L.C. — 311 — 311 Sea Link International IRB, Inc. — 252 — 252 DKI Ventures, LLC — (668) — (668) Technical Resource Management, LLC — (829) — (829) Defiance Integrated Technologies, Inc. — (1,000) — (1,000) Encore Dredging Holdings, LLC — (1,097) — (1,097) Engineering Manufacturing Technologies, LLC — (1,173) — (1,173) Edge Adhesives Holdings, Inc. — (2,515) — (2,515) HH-Inspire Acquisition, Inc. — (2,817) — (2,817) B+T Group Acquisition Inc. — (3,586) — (3,586) Eegee's LLC — (4,568) — (4,568) FES Resources Holdings LLC — (4,670) — (4,670) WB Xcel Holdings, LLC — (4,830) — (4,830) Other, net (<$500) 211 257 (212) 256 Total: $ 2,008 $ 42,927 $ (224) $ 44,711 The primary driver of net unrealized appreciation of $42.7 million for the year ended September 30, 2024 was improvement in the financial and operational performance of certain of our portfolio companies partially offset by the 62 Table of Contents decrease in comparable transaction multiples used to estimate the fair value of certain of our other portfolio companies, and the decline in the financial and operational performance of certain of our other portfolio companies. During the year ended September 30, 2023, we recorded net unrealized depreciation of investments in the aggregate amount of $11.0 million. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the year ended September 30, 2023 were as follows: Year Ended September 30, 2023 Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized Depreciation (Appreciation) Net Gain (Loss) Antenna Research Associates, Inc. $ — $ 4,702 $ — $ 4,702 FES Resources Holdings LLC — 4,508 — 4,508 Defiance Integrated Technologies, Inc. — 2,801 — 2,801 Giving Home Health Care, LLC — 2,775 — 2,775 Encore Dredging Holdings, LLC — 1,495 840 2,335 Imperative Holdings Corporation 510 1,094 — 1,604 Canopy Safety Brands, LLC — 1,316 — 1,316 HH-Inspire Acquisition, Inc. — 1,496 (200) 1,296 Triple H Food Processors, LLC — 990 — 990 TNCP Intermediate HoldCo, LLC — 736 — 736 PIC 360, LLC 3,700 1,092 (4,262) 530 Targus Cayman HoldCo, Ltd. 5,916 — (5,916) — Circuitronics EMS Holdings LLC (921) — 921 — NetFortris Holdings LLC (789) (206) 526 (469) 8th Avenue Food & Provisions, Inc. — (510) — (510) MCG Energy Solutions, LLC — (685) — (685) Leeds Novamark Capital I, L.P. 4,118 75 (5,018) (825) Technical Resource Management, LLC — (960) — (960) DKI Ventures, LLC — (1,393) — (1,393) Salvo Technologies, Inc. — (1,959) — (1,959) NeoGraf Solutions, LLC — (3,154) — (3,154) Engineering Manufacturing Technologies, LLC — (3,181) — (3,181) B+T Group Acquisition Inc. — (3,751) — (3,751) WB Xcel Holdings, LLC — (5,687) — (5,687) Other, net (<$500) (189) 108 391 310 Total: $ 12,345 $ 1,702 $ (12,718) $ 1,329 The primary driver of net unrealized depreciation of $11.0 million for the year ended September 30, 2023 was the reversal of unrealized appreciation associated with the exit of our investment in Targus, the reversal of unrealized appreciation associated with our investment in PIC 360, and the sale of underlying assets within Leeds, as well as the decrease in comparable transaction multiples used to estimate the fair value of certain of our other portfolio companies, and the decline in the financial and operational performance of certain of our other portfolio companies. As of September 30, 2024, the fair value of our investment portfolio was greater than its cost basis by approximately $25.2 million and our entire investment portfolio was valued at 103.3% of cost, as compared to cumulative net unrealized depreciation of $17.5 million and a valuation of our entire portfolio at 97.6% of cost as of September 30, 2023. Comparison of the Year Ended September 30, 2023 to the Year Ended September 30, 2022 The comparison of the fiscal year ended September 30, 2023 to the fiscal year ended September 30, 2022 can be found in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023, as filed with the SEC on November 13, 2023, located within Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . 63 Table of Contents LIQUIDITY AND CAPITAL RESOURCES Operating Activities Our cash flows from operating activities are primarily generated from the interest payments on debt securities that we receive from our portfolio companies, as well as net proceeds received through repayments or sales of our investments. We utilize this cash primarily to fund new investments, make interest payments on our Credit Facility and notes payable, make distributions to our stockholders, pay management and administrative fees to the Adviser and Administrator, and for other operating expenses. Net cash provided by operating activities for the year ended September 30, 2024 was $3.2 million as compared to net cash used in operating activities of $10.9 million for the year ended September 30, 2023. The change was primarily due to an increase in repayments and net proceeds from sales year over year. Repayments and net proceeds from sales were $140.2 million during the year ended September 30, 2024 compared to $125.5 million during the year ended September 30, 2023. As of September 30, 2024, we had loans to, syndicated participations in or equity investments in 49 companies, with an aggregate cost basis of approximately $771.0 million. As of September 30, 2023, we had loans to, syndicated participations in or equity investments in 51 companies, with an aggregate cost basis of approximately $722.3 million. The following table summarizes our total portfolio investment activity during the years ended September 30, 2024 and 2023: Year Ended September 30, 2024 2023 Beginning investment portfolio, at fair value $ 704,815 $ 649,615 New investments 53,250 103,916 Disbursements to existing portfolio companies 124,399 71,561 Scheduled principal repayments (9,288) (8,311) Unscheduled principal repayments (124,183) (99,194) Net proceeds from sales of investments (2,799) (17,686) Net unrealized appreciation (depreciation) of investments 42,927 1,702 Reversal of prior period net depreciation (appreciation) of investments (224) (12,718) Net realized gain (loss) on investments (A) 2,008 12,345 Increase in investment balance due to PIK interest (B) 5,525 3,699 Net change in premiums, discounts and amortization (170) (114) Ending Investment Portfolio, at Fair Value $ 796,260 $ 704,815 (A) Excludes net realized gain (loss) on other. (B) PIK interest is a non-cash source of income and is calculated at the contractual rate stated in a loan agreement and added to the principal balance of a loan. 64 Table of Contents The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of September 30, 2024. Year Ending September 30, Amount 2025 (A) $ 16,322 2026 160,366 2027 227,287 2028 193,374 2029 78,697 Thereafter 20,000 Total contractual repayments $ 696,046 Adjustments to cost basis of debt investments (1,421) Investments in equity securities 76,386 Investments held as of September 30, 2024 at cost: $ 771,011 (A) Includes debt investments with contractual principal amounts totaling $0.2 million for which the maturity date has passed as of September 30, 2024. Financing Activities Net cash used in financing activities for the year ended September 30, 2024 was $2.3 million, which consisted primarily of $43.1 million in distributions to common shareholders, partially offset by $22.8 million in net borrowings on our Credit Facility, $11.0 million in gross proceeds from the issuance of common stock, and $7.8 million in net proceeds from the issuance of preferred stock. Net cash provided by financing activities for the year ended September 30, 2023 was $10.2 million, which consisted primarily of $87.4 million in gross proceeds from the issuance of common stock and $57.0 million in gross proceeds from the issuance of notes payable, partially offset by $94.0 million in net repayments on our Credit Facility and $35.4 million in distributions to common shareholders. Net cash provided by financing activities for the year ended September 30, 2022 was $77.7 million, which consisted primarily of $91.3 million in net borrowings on our Credit Facility and $50.0 million in gross proceeds from the issuance of notes payable, partially offset by $38.8 million used in the redemption of our 2024 Notes and $27.3 million in distributions to common shareholders. Distributions to Stockholders Common Stock Distributions To qualify to be taxed as a RIC and thus avoid corporate level federal income tax on the income we distribute to our stockholders, we are required to distribute to our stockholders on an annual basis at least 90.0% of our Investment Company Taxable Income. Additionally, our Credit Facility has a covenant that generally restricts the amount of distributions to stockholders that we can pay out to be no greater than our aggregate net investment income, net capital gains and amounts elected to have been paid during the prior year in accordance with Section 855(a) of the Code. In accordance with these requirements, during the year ended September 30, 2024, we paid monthly cash distributions of $0.165 per common share. These distributions totaled an aggregate of $43.1 million. In October 2024, our Board of Directors declared a monthly distribution of $0.165 per common share for each of October, November, and December 2024. In November 2024, our Board of Directors declared a supplemental distribution of $0.40 per common share payable in December 2024. Our Board of Directors declared these distributions to our stockholders based on our estimates of our Investment Company Taxable Income for the fiscal year ended September 30, 2025. For the fiscal years ended September 30, 2024 and September 30, 2023, our current and accumulated earnings and profits exceeded common stock distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $6.6 million and $5.0 million, respectively, of the first common distributions paid to common stockholders in the subsequent fiscal year as having been paid in the prior year. For the fiscal year ended September 30, 2022 distributions 65 Table of Contents declared and paid exceeded taxable income available for common distributions resulting in a partial return of capital of approximately $1.4 million. Preferred Stock Dividends We paid monthly cash dividends of $0.130208 per share to holders of our Series A Preferred Sock for each month from January through September during the year ended September 30, 2024, which totaled an aggregate of $0.2 million. In October 2024, our Board of Directors declared monthly cash dividends of $0.130208 per share to holders of our Series A Preferred stock for each of October, November, and December 2024. Dividend payments to our preferred stockholders are included in preferred stock dividends on our Consolidated Statements of Operations. For federal income tax purposes, the dividends paid by us to preferred stockholders generally constitute ordinary income to the extent of our current and accumulated earnings and profits and is reported after the end of the calendar year based on tax information for the full fiscal year. Dividend Reinvestment Plan Our common stockholders who hold their shares through our transfer agent, Computershare, Inc. (“Computershare”), have the option to participate in a dividend reinvestment plan offered by Computershare, as the plan agent. This is an “opt in” dividend reinvestment plan, meaning that common stockholders may elect to have their cash distributions automatically reinvested in additional shares of our common stock. Common stockholders who do make such election will receive their distributions in cash. Common stockholders who receive distributions in the form of stock will be subject to the same federal, state and local tax consequences as stockholders who elect to receive their distributions in cash. The common stockholder will have an adjusted basis in the additional common shares purchased through the plan equal to the amount of the reinvested distribution. The additional shares will have a new holding period commencing on the day following the date on which the shares are credited to the common stockholder’s account. Computershare purchases shares in the open market in connection with the obligations under the plan. Equity Registration Statement Our shelf registration statement on Form N-2 (File No. 333-275934) (the “2024 Registration Statement”), which was declared effective on January 17, 2024, permits us to issue, through one or more transactions, up to an aggregate of $700.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock or preferred stock. As of September 30, 2024, we had the ability to issue up to $689.0 million in securities under the 2024 Registration Statement. Common Stock In August 2024, we entered into an equity distribution agreement with Jefferies LLC and Huntington Securities, Inc, (the “2024 Sales Agreement”) under which we have the ability to issue and sell, from time to time, shares of our common stock with an aggregate offering price of up to $150.0 million in an “at the market offering” (the “2024 ATM Program”). During the year ended September 30, 2024, we sold 476,138 shares of our common stock under the 2024 Sales Agreement, at a weighted-average price of $23.10 per share and raised $11.0 million of gross proceeds. Net proceeds, after deducting commissions and offering costs borne by us, were approximately $10.8 million. As of September 30, 2024, we had a remaining capacity to sell up to an additional $139.0 million of our common stock under the 2024 ATM Program. We anticipate issuing equity securities to obtain additional capital in the future. However, we cannot determine the timing or terms of any future equity issuances or whether we will be able to issue equity on terms favorable to us, or at all. To the extent that our common stock trades at a market price below our NAV per share, we will generally be precluded from raising equity capital through public offerings of our common stock, other than pursuant to stockholder and independent director approval or a rights offering to existing common stockholders. Revolving Line of Credit On May 13, 2021, we, through Business Loan, entered into a sixth amended and restated credit agreement with KeyBank as administrative agent, lead arranger, managing agent and lender, the Adviser, as servicer, and certain other lenders party thereto (the “Credit Facility”). 66 Table of Contents As of September 30, 2024, our Credit Facility had a total commitment amount of $ 293.7 million with an “accordion” feature that permits us to increase the size of the facility to $ 350.0 million. The Credit Facility has a revolving period end date of October 31, 2025 and a final maturity date of October 31, 2027 (at which time all principal and interest will be due and payable if the Credit Facility is not extended by the revolving period end date). The interest rate margin is 3.00% during the revolving period and 3.50% thereafter (in each case plus a 10 basis point SOFR credit spread adjustment). Interest is payable monthly during the term of our Credit Facility. Available borrowings are subject to various constraints imposed under our Credit Facility, based on the aggregate loan balance pledged by Business Loan, which varies as loans are added and repaid, regardless of whether such repayments are prepayments or made as contractually required. Our Credit Facility also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account with KeyBank and with The Bank of New York Mellon Trust Company, N.A. as custodian. KeyBank, which also serves as the trustee of the account, generally remits the collected funds to us once a month. Our Credit Facility contains covenants that require Business Loan to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions), and restrict material changes to our credit and collection policies without the lenders’ consents. Our Credit Facility generally limits distributions to our stockholders on a fiscal year basis to the sum of our net investment income, net capital gains and amounts elected to have been paid during the prior year in accordance with Section 855(a) of the Code. Business Loan is also subject to certain limitations on the type of loan investments it can apply as collateral towards the borrowing base to receive additional borrowing availability under our Credit Facility, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life, portfolio company leverage and lien property. Our Credit Facility further requires Business Loan to comply with other financial and operational covenants, which obligate Business Loan to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of 25 obligors required in the borrowing base. Additionally, we are required to maintain (i) a minimum net worth (defined in our Credit Facility to include any outstanding mandatorily redeemable preferred stock) of $325.0 million plus 50.0% of all equity and subordinated debt raised after May 13, 2021 less 50% of any equity and subordinated debt retired or redeemed after May 13, 2021, which equates to $ 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. As of September 30, 2024, and as defined in our Credit Facility, we had a net worth of $ 723.9 million, asset coverage on our “senior securities representing indebtedness” of 243.6 % and an active status as a BDC and RIC. In addition, as of September 30, 2024, we had 33 obligors in our Credit Facility’s borrowing base and we were in compliance with all of our Credit Facility covenants. Refer to Note 5— Borrowings of the notes to our Consolidated Financial Statements included elsewhere in this Annual Report for additional information regarding our Credit Facility. Notes Payable In August 2023, we completed an offering of $57.0 million aggregate principal amount of 7.75% Notes due 2028 (the “2028 Notes”) for net proceeds of approximately $55.1 million after deducting underwriting discounts, commissions and offering expenses borne by us. The 2028 Notes are traded under the ticker symbol “GLADZ” on the Nasdaq Global Select Market. The 2028 Notes will mature on September 1, 2028 and may be redeemed in whole or in part at any time or from time to time at our option on or after September 1, 2025. The 2028 Notes bear interest at a rate of 7.75% per year. Interest is payable quarterly on March 1, June 1, September 1, and December 1 of each year (which equates to approximately $4.4 million per year). In November 2021, we completed a private placement of $50.0 million aggregate principal amount of 3.75% Notes due 2027 (the “2027 Notes”) for net proceeds of approximately $48.5 million after deducting initial purchasers’ costs, commissions and offering expenses borne by us. The 2027 Notes will mature on May 1, 2027 and may be redeemed in whole or in part at any time or from time to time at the Company’s option prior to maturity at par plus a “make-whole” premium, if applicable. The 2027 Notes bear interest at a rate of 3.75% per year. Interest is payable semi-annually on May 1 and November 1 of each year (which equates to approximately $1.9 million per year). In April 2022, pursuant to the registration rights agreement we entered into in connection with the 2027 Notes, we conducted an exchange offer through which we offered to exchange all of our then outstanding 2027 Notes (the “Restricted Notes”) that were issued on November 4, 2021, for an equal aggregate principal amount of our new 3.75% Notes due 2027 (the “Exchange Notes”) that had been registered with the SEC under the Securities Act. The terms of the Exchange Notes 67 Table of Contents are identical to those of the Restricted Notes, except that the transfer restrictions and registration rights relating to the Restricted Notes do not apply to the Exchange Notes, and the Exchange Notes do not provide for the payment of additional interest in the event of a registration default. In December 2020, we completed an offering of $100.0 million aggregate principal amount of 5.125% Notes due 2026 (the “2026 Notes”) for net proceeds of approximately $97.7 million after deducting underwriting discounts, commissions and offering expenses borne by us. In March 2021, we completed an offering of an additional $50.0 million aggregate principal amount of the 2026 Notes for net proceeds of approximately $50.6 million after adding premiums and deducting underwriting costs, commissions and offering expenses borne by us. The 2026 Notes will mature on January 31, 2026 and may be redeemed in whole or in part at any time or from time to time at the Company’s option prior to maturity at par plus a “make-whole” premium, if applicable. The 2026 Notes bear interest at a rate of 5.125% per year. Interest is payable semi-annually on January 31 and July 31 of each year (which equates to approximately $7.7 million per year). In October 2019, we completed an offering of $38.8 million aggregate principal amount of 5.375% Notes due 2024 (the “2024 Notes”), inclusive of the overallotment option exercised by the underwriters, for net proceeds of approximately $37.5 million after deducting underwriting discounts, commissions and offering expenses borne by us. On November 1, 2021, we voluntarily redeemed the 2024 Notes with an aggregate principal amount outstanding of $38.8 million. The 2024 Notes would have otherwise matured on November 1, 2024. The indenture relating to the 2028 Notes, the 2027 Notes and the 2026 Notes contains certain covenants, including (i) an inability to incur additional debt or issue additional debt or preferred securities unless the Company’s asset coverage meets the threshold specified in the 1940 Act after such borrowing, (ii) an inability to declare any dividend or distribution (except a dividend payable in our stock) on a class of our capital stock or to purchase shares of our capital stock unless the Company’s asset coverage meets the threshold specified in the 1940 Act at the time of (and giving effect to) such declaration or purchase, and (iii) if, at any time, we are not subject to the reporting requirements of the Exchange Act, we will provide the holders of the 2028 Notes, the 2027 Notes and the 2026 Notes, as applicable, and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements. Off-Balance Sheet Arrangements We generally recognize success fee income when the payment has been received. As of September 30, 2024 and 2023, we had off-balance sheet success fee receivables on our accruing debt investments of $5.8 million and $4.0 million (or approximately $0.26 per common share and $0.18 per common share), respectively, that would be owed to us, generally upon a change of control of the portfolio companies. Consistent with GAAP, we generally have not recognized our success fee receivables and related income in our Consolidated Financial Statements until earned. Due to the contingent nature of our success fees, there are no guarantees that we will be able to collect all of these success fees or know the timing of such collections. Contractual Obligations We have lines of credit, delayed draw term loans, and an uncalled capital commitment with certain of our portfolio companies that have not been fully drawn. Since these commitments have expiration dates and we expect many will never be fully drawn, the total commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of the combined unused lines of credit, the unused delayed draw term loans, and the uncalled capital commitment as of September 30, 2024 and 2023 to be immaterial. 68 Table of Contents The following table shows our contractual obligations as of September 30, 2024, at cost: Contractual Obligations (A) Payments Due by Period Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Total Credit Facility (B) $ — $ — $ 70,600 $ — $ 70,600 Notes Payable — 200,000 57,000 — 257,000 Interest expense on debt obligations (C) 20,457 28,102 6,308 — 54,867 Total $ 20,457 $ 228,102 $ 133,908 $ — $ 382,467 (A) Excludes our unused line of credit commitments, unused delayed draw term loans, and uncalled capital commitments to our portfolio companies in an aggregate amount of $57.6 million, at cost, as of September 30, 2024. (B) Principal balance of borrowings outstanding under our Credit Facility, based on the maturity date following the current contractual revolver period end date. (C) Includes estimated interest payments on our Credit Facility, 2028 Notes, 2027 Notes, and 2026 Notes. The amount of interest expense calculated for purposes of this table was based upon rates and balances as of September 30, 2024. Critical Accounting Estimates The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported consolidated amounts of assets and liabilities, including disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ materially from those estimates under different assumptions or conditions. We have identified our investment valuation policy (which has been approved by our Board of Directors) as our most critical accounting policy, which is described in Note 2— Summary of Significant Accounting Policies in the accompanying notes to our Consolidated Financial Statements included elsewhere in this Annual Report. Additionally, refer to Note 3— Investments in our accompanying Notes to Consolidated Financial Statements included elsewhere in this Annual Report for additional information regarding fair value measurements and our application of Financial Accounting Standards Board Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures.” We have also identified our revenue recognition policy as a critical accounting policy, which is described in Note 2— Summary of Significant Accounting Policies in our accompanying Notes to Consolidated Financial Statements included elsewhere in this Annual Report. Investment Valuation Credit Monitoring and Risk Rating The Adviser monitors a wide variety of key credit statistics that provide information regarding our portfolio companies to help us assess credit quality and portfolio performance and, in some instances, used as inputs in our valuation techniques. Generally, we, through the Adviser, participate in periodic board meetings of our portfolio companies in which we hold board seats and also require them to provide annual audited and monthly unaudited financial statements. Using these statements or comparable information and board discussions, the Adviser calculates and evaluates certain credit statistics. The Adviser risk rates all of our investments in debt securities. The Adviser does not risk rate our equity securities. For syndicated loans that have been rated by an SEC registered Nationally Recognized Statistical Rating Organization (“NRSRO"), the Adviser generally uses the average of two corporate level NRSRO’s risk ratings for such security. For all other debt securities, the Adviser uses a proprietary risk rating system. While the Adviser seeks to mirror the NRSRO systems, we cannot provide any assurance that the Adviser’s risk rating system will provide the same risk rating as an NRSRO would for these securities. The Adviser’s risk rating system is used to estimate the probability of default on debt securities and the expected loss if there is a default. The Adviser’s risk rating system uses a scale of 0 to >10, with >10 being the lowest probability of default. It is the Adviser’s understanding that most debt securities of medium-sized companies do not exceed the grade of BBB on an NRSRO scale, so there would be no debt securities in the middle market that would meet the definition of AAA, AA or A. Therefore, the Adviser’s scale begins with the designation >10 as the best risk rating which may be equivalent to a BBB from an NRSRO; however, no assurance can be given that a >10 on the Adviser’s scale is equal to a BBB or Baa2 on an NRSRO scale. The Adviser’s risk rating system covers both qualitative and quantitative aspects of the business and the securities we hold. 69 Table of Contents The following table reflects risk ratings for all proprietary loans in our portfolio as of September 30, 2024 and 2023, representing approximately 99.5% and 98.2%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period: As of September 30, Rating 2024 2023 Highest 10.0 10.0 Average 7.8 7.1 Weighted Average 8.1 7.5 Lowest 3.0 3.0 The following table reflects the risk ratings for all syndicated loans in our portfolio that were rated by an NRSRO as of September 30, 2024 and 2023, representing approximately 0.5% and 1.3%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period: As of September 30, Rating 2024 2023 Highest 3.0 5.0 Average 3.0 3.5 Weighted Average 3.0 4.2 Lowest 3.0 3.0 The following table reflects the risk ratings for all syndicated loans in our portfolio that were not rated by an NRSRO as of September 30, 2023 representing approximately 0.5% of the principal balance of all debt investments in our portfolio at the end of the period: Rating As of September 30, 2023 Highest 5.0 Average 5.0 Weighted Average 5.0 Lowest 5.0 There were no syndicated loans in our portfolio that were not rated by an NRSRO as of September 30, 2024. Tax Status We intend to continue to maintain our qualification as a RIC under Subchapter M of the Code for federal income tax purposes and also to limit certain federal excise taxes imposed on RICs. Refer to Note 10— Federal and State Income Taxes in our accompanying Notes to Consolidated Financial Statements included elsewhere in this Annual Report for additional information regarding our tax status. Recent Accounting Pronouncements Refer to Note 2— Summary of Significant Accounting Policies in the notes to our accompanying Consolidated Financial Statements included elsewhere in this Annual Report for a description of recent accounting pronouncements.