What changed in this filing

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Item 1. Business

2020-11-10 compared with 2019-11-13 · 437 added, 377 removed, 353 unchanged (70% of the section changed)

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August 24, 2001.

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

In addition, we

have elected to be treated for tax purposes as a RIC under the Internal Revenue Code of 1986, as amended (the Code).

We were established for the purpose of investing in debt and equity securities of established private businesses

operating in the United States (U.S.).

As of September 30, 2019, our shares of common stock and 6.00% Series 2024 Term Preferred Stock

(the Series 2024 Term Preferred Stock) were traded on the Nasdaq Global Select Market (Nasdaq) under the trading symbols GLAD and GLADN, respectively, and our 6.125% Notes due 2023 (the 2023

Notes) trade on Nasdaq under the trading symbol GLADD. On October 2, 2019, we voluntarily redeemed all outstanding shares of our Series 2024 Term Preferred Stock.

On October 10, 2019, we issued $38.8 million of 5.375%

Notes due 2024 (the 2024 Notes), which trade on Nasdaq under the trading symbol GLADL.

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

In addition, we have elected to be treated for tax purposes as a RIC under the Code.

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

As of September 30, 2020, shares of our common stock, our 6.125% Notes due 2023 (the 2023 Notes) and our 5.375% Notes due 2024 (the

2024 Notes) trade on the Nasdaq Global Select Market (Nasdaq) under the trading symbols GLAD, GLADD and GLADL, respectively.

Investment Adviser and Administrator

We are externally managed by the Adviser, an affiliate of ours and an SEC registered investment adviser, pursuant to an investment advisory and

management agreement (the Advisory Agreement).

Administrative services are provided by our affiliate, Gladstone Administration, LLC (the Administrator), an affiliate of ours and the Adviser, pursuant to an administration

agreement (the Administration Agreement).

Each of the Adviser and Administrator are privately-held companies that are indirectly owned and controlled by David Gladstone, our chairman and chief executive officer.

Gladstone and

Terry Lee Brubaker, our vice chairman and chief operating officer, also serve on the board of directors of the Adviser, the board of managers of the Administrator, and serve as executive officers of the Adviser and the Administrator.

Administrator employs, among others, our chief financial officer and treasurer, chief valuation officer, chief compliance officer, general counsel and secretary (who also serves as the president of the Administrator) and their respective staffs.

Adviser and Administrator have extensive experience in our lines of business and also provide investment advisory and administrative services, respectively, to our affiliates, including, but not limited to:

externally managed by the Adviser, an investment adviser registered with the SEC and an affiliate of ours, pursuant to an investment advisory and management agreement (as amended and / or restated from time to time, the Advisory

The Adviser manages our investment activities.

We have also entered into an administration agreement with Gladstone Administration, LLC (the Administrator), an affiliate of ours and the Adviser, whereby we pay

separately for administrative services (the Administration Agreement).

Each of the Adviser and the Administrator are privately-held companies that are indirectly owned and controlled by David Gladstone, our chairman and chief executive

Gladstone and Terry Lee Brubaker, our vice chairman and chief operating officer, also serve on the board of directors of the Adviser, the board of managers of the Administrator, and serve as executive officers of the Adviser and

the Administrator.

The Administrator employs, among others, our chief financial officer and treasurer, chief valuation officer, chief compliance officer, general counsel and secretary (who also serves as the president of the Administrator) and their

respective staffs.

The Adviser and Administrator have extensive experience in our lines of business and also provide investment advisory and administrative services, respectively, to our affiliates, including:

Gladstone Commercial Corporation

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The Adviser was organized as a corporation

under the laws of the State of Delaware on July 2, 2002, and is an SEC registered investment adviser under the 1940 Act.

The Administrator was organized as a limited liability company under the laws of the State of Delaware on March 18,

under the laws of the State of Delaware on July 2, 2002, and is an SEC registered investment adviser under the Investment Advisors Act of 1940, as amended.

The Administrator was organized as a limited liability company under the laws of the

State of Delaware on March 18, 2005.

The Adviser and Administrator are headquartered in McLean, Virginia, a suburb of Washington, D.C., at 1521 Westbranch Drive, McLean, Virginia 22102.

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Investment Objectives and Strategy

Our investment objectives are to:

(1) achieve and grow current income by investing in debt securities of established lower middle market companies (which

we generally define as companies with annual earnings before interest, taxes, depreciation and amortization (EBITDA) of $3 million to $15 million) in the U.S.

that we believe will provide stable earnings and cash flow to pay expenses,

make principal and interest payments on our outstanding indebtedness, and make distributions to stockholders;

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 objectives, our primary investment strategy is to invest in several categories of debt and equity

securities, with each investment generally ranging totaling between $8 million to $30 million.

We lend to borrowers that need funds for growth capital, to finance acquisitions, or to recapitalize or refinance their existing debt facilities.

to avoid investing in high-risk, early-stage enterprises.

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

We intend for our investment portfolio to consist of approximately 90.0% debt

investments and 10.0% equity investments, at cost.

As of September 30, 2019, our investment portfolio was made up of approximately 90.7% debt investments and 9.3% equity investments, at cost.

We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity.

In July 2012, the SEC granted us

an exemptive order (the Co-Investment Order) that expanded our ability to co-invest, under certain circumstances, with certain of our affiliates, including Gladstone Investment and any future business development company or closed-end

management investment company that is advised (or sub-advised if it controls the fund) by the Adviser, or any combination of the foregoing, subject to the conditions in the Co-Investment Order.

Since 2012, we have opportunistically made several

co-investments with Gladstone Investment pursuant to the Co-Investment Order.

If we are participating in an investment with one or more co-investors, whether or not an affiliate of ours, our investment is likely to be smaller than if we were

investing alone.

In general, our investments in debt securities have a term of no more than seven years, accrue interest at variable rates (based on the

one month London Interbank Offered Rate (LIBOR)) and, to a lesser extent, at fixed rates.

We seek debt instruments that pay interest monthly or, at a minimum, quarterly, and which may include a yield enhancement, such as a success fee or

deferred interest provision and may include 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 the business.

debt securities have deferred interest whereby some portion of the interest payment is added to the principal balance so that the interest is paid, together with the principal, at maturity.

This form of deferred interest is often called paid-in-kind

(PIK) interest.

Typically, our equity investments consist of preferred or common stock, limited liability company interests, or warrants or options to purchase the foregoing.

Often, these equity investments occur in connection with our

original investment, recapitalizing a business, or refinancing existing debt.

Since our initial public offering in 2001 and through September 30,

2019, we have invested in over 240 different companies, while making 200 consecutive monthly or quarterly cash distributions to common stockholders.

We expect that our investment portfolio will primarily include the following three categories of

investments in private companies operating in the U.S.:

First Lien Secured Debt Securities:

Our investment

objectives are to:

(1) achieve and grow current income by investing in debt securities of established lower middle market companies (which we generally define as companies with annual earnings

before interest, taxes, depreciation and amortization (EBITDA) of $3 million to $15 million) in the U.S.

that we believe will provide stable earnings and cash flow to pay

expenses, make principal and interest payments on our outstanding indebtedness, and make distributions to stockholders;

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 objectives, our primary investment strategy is to invest in several categories of

debt and equity securities, with each investment generally ranging from $8 million to $30 million, although investment size may vary, depending upon our total assets or available capital at the time of investment.

We lend to borrowers that

need funds for growth capital, to finance acquisitions, or to 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 intend for our investment portfolio to consist of approximately 90.0% debt investments and 10.0% equity investments, at cost.

As of September 30, 2020, our investment portfolio was made up of

approximately 91.3% debt investments and 8.7% equity investments, at cost.

We invest by ourselves or jointly with other funds and/or management of the

portfolio company, depending on the opportunity.

In July 2012, the SEC granted us an exemptive order (the Co-Investment Order) that expanded our ability to

co-invest, under certain circumstances, with certain of our affiliates, including Gladstone Investment and any future BDC or 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.

believe the Co-Investment Order has enhanced and will continue to enhance our ability to further our investment objectives and strategies.

Since 2012, we have opportunistically made several co-investments with Gladstone Investment pursuant to the Co-Investment Order.

If we are participating in an investment with one or more

co-investors, whether or not an affiliate of ours, our investment is likely to be smaller than if we were investing alone.

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

We seek debt instruments that pay interest monthly or, at a minimum, quarterly, may have a success fee or deferred

interest provision and are primarily interest only, with all principal and any accrued but unpaid interest due at maturity.

Generally, success fees accrue at a set rate and are contractually due upon a change of control of a portfolio company,

typically from an exit or sale.

Some debt securities have deferred interest whereby some portion of the interest payment is added to the principal balance so that the interest is paid, together with the principal, at maturity.

This form of deferred

interest is often called paid-in-kind (PIK) interest.

Typically, our equity investments consist of common stock, preferred stock, limited liability company interests, or warrants to purchase the foregoing.

these equity investments occur in connection with our original investment, recapitalizing a business, or refinancing existing debt.

Since our initial

public offering in 2001 and through September 30, 2020, we have invested in over 240 different companies, while making 212 consecutive monthly or quarterly cash distributions to common stockholders.

We expect that our investment portfolio will

primarily include the following three categories of investments in private companies operating in the U.S.:

Secured First Lien Debt Securities:

We seek to invest a portion of our assets in first lien secured debt

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First lien debt securities may include investments sourced from the syndicated loan market.

Second Lien Secured Debt Securities :

Secured Second Lien Debt Securities:

We seek to invest a portion of our assets in second lien secured debt

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Preferred and Common Equity/Equivalents:

In some cases we will purchase equity securities which consist of

preferred and common equity or limited liability company interests, or warrants or options to acquire such securities, and are in combination with our debt investment in a business.

Additionally, we may receive equity investments derived from

restructurings on some of our existing debt investments.

In some cases we will purchase equity securities which

consist of preferred and common equity or limited liability company interests, or warrants or options to acquire such securities, and are in combination with our debt investment in a business.

Additionally, we may receive equity investments derived

from restructurings on some of our existing debt investments.

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

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must operate for the purpose of investing in certain categories of qualifying assets.

In addition, we may not acquire any assets (other than non-investment assets necessary and appropriate to our operations as a BDC or qualifying assets) if, after

giving effect to such acquisition, the value of our qualifying assets is less than 70.0% of the value of our total assets.

We anticipate that the securities we seek to acquire will generally be qualifying assets.

In addition, we may not acquire any assets (other than non-investment assets necessary and appropriate to our operations as

a BDC or qualifying assets) if, after giving effect to such acquisition, the value of our qualifying assets is less than 70.0% of the value of our total assets.

We anticipate that the securities we seek to acquire will generally be

qualifying assets.

We will at all times endeavor to conduct our business so as to retain our status as a RIC under the Code.

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aggregate fair value of $450.4 million.

Our five largest investments at fair value as of September 30, 2019, totaled $135.5 million, or 33.6% of our total investment portfolio.

The following table outlines our investments by security type at September 30, 2019 and 2018:

The five largest investments at fair value as of September 30, 2020, totaled $130.3 million, or 28.9% of our total investment portfolio.

The following table outlines our investments by security type as of September 30, 2020 and 2019:

September 30, 2020

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Total Investments

Our investments at fair value consisted of the following industry classifications at September 30, 2019 and 2018:

Our investments at fair value consisted of the following industry classifications as of September 30, 2020 and 2019:

September 30, 2020

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Industry Classification

Percentage of

Diversified/Conglomerate Service

Telecommunications

Healthcare, Education, and Childcare

Diversified natural resources, precious metals and minerals

Diversified/Conglomerate Manufacturing

Cargo Transportation

Aerospace and Defense

Cargo Transportation

Beverage, Food, and Tobacco

Telecommunications

Diversified Natural Resources, Precious Metals, and Minerals

Chemicals, Plastics, and Rubber

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Textiles and Leather

Personal and non-durable consumer products

Buildings and Real Estate

Personal and Non-Durable Consumer Products

Other, < 2.0%

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Our investments at fair value were included in the following U.S.

geographic regions and Canada at

geographic regions and Canada as of

September 30, 2020 and 2019:

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September 30, 2019

Percentage of

Total Investments

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this initial screening and the IOI is accepted by the prospective company, the investment professionals will seek approval to issue a letter of intent (LOI) to the prospective company from the Advisers investment committee, which

is composed of Messers.

is composed of Messrs.

Gladstone, Brubaker and Marcotte.

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The criteria listed below provide general guidelines for our investment decisions, although not all of these criteria may be met by each portfolio company.

Growth-and-Income Orientation and Positive Cash Flow.

Our investment philosophy places a premium on

fundamental analysis from an investors perspective and has a distinct growth-and-income orientation.

We typically invest in companies that generate growing sales and cash flow to provide some assurance that they will be able to service their

debt and deleverage over time.

We do not expect to invest in start-up companies or companies with what we believe to be cyclical industries or speculative business plans.

Growth-and-Income Orientation

and Positive Cash Flow.

Our investment philosophy places a premium on fundamental analysis from an investors perspective and has a distinct growth-and-income

We typically invest in companies that generate growing sales and cash flow to provide some assurance that they will be able to service their debt and deleverage over time.

We do not expect to invest in

start-up companies or companies with what we believe to be cyclical industries or speculative business plans.

Experienced Management.

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The due diligence investigation may begin with a review of publicly available information followed by in depth

business analysis, including, but not limited to, any of the following:

business analysis, including any of the following:

a review of the prospective portfolio companys historical and projected financial information, including a

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competitive position therein.

After investment committee approval but prior to the closing of an investment, additional due diligence

may be conducted on our behalf by attorneys, independent accountants, and other outside advisers, as appropriate.

We also rely on the long-term

relationships that the Advisers investment professionals have with leveraged buyout funds, investment bankers, commercial bankers, private equity sponsors, attorneys, accountants, and business brokers.

In addition, the extensive direct

experiences of our executive officers and managing directors in the operations of lower middle market companies and providing debt and equity capital to lower middle market companies plays a significant role in our investment evaluation and

assessment of risk.

Upon completion of a due diligence investigation and a decision to proceed with an investment, the

Advisers investment professionals who have primary responsibility for the investment present the investment opportunity to the Advisers investment committee.

The investment committee then determines whether to pursue the potential

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

We also rely on the long-term relationships that the Advisers investment professionals have with leveraged buyout funds, investment bankers, commercial

bankers, private equity sponsors, attorneys, accountants, and business brokers.

In addition, the extensive direct experiences of our executive officers and managing directors in the operations of lower middle market companies and providing debt and

equity capital to lower middle market companies plays a significant role in our investment evaluation and assessment of risk.

Investment Structure

Once the Adviser has determined that an investment meets our standards and investment criteria, the Adviser works with the management of that company, the

private equity firm or ownership group controlling any prospective borrower, and other capital providers to structure the transaction in a way that we believe will provide us with the greatest opportunity to maximize our return on the investment,

while providing appropriate incentives to the shareholders and management of the company.

As discussed above, the capital classes through which we typically structure a deal include first lien secured debt, second lien secured debt, and preferred

and common equity or equivalents.

Once the Adviser has determined that an investment meets our standards and investment criteria, the Adviser works with the management of that

company, the private equity firm or ownership group controlling any prospective borrower, and other capital providers to structure the transaction in a way that we believe will provide us with the greatest opportunity to maximize our return on the

investment, while providing appropriate incentives to the shareholders and management of the company.

As discussed above, the capital classes through which we typically structure a deal include first lien secured debt, second lien secured debt, and

preferred and common equity or equivalents.

Through its risk management process, the Adviser seeks to limit the downside risk of our investments by:

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

Such competitors include other BDCs, non-equity based investment funds, and other financing sources, including traditional

financial services companies such as commercial banks.

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

In addition, certain of our

competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments, serve a broader customer base, and establish a greater market share.

Furthermore, many of these competitors

are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC or the regulatory requirements we must comply with as a publicly traded company.

However, we believe that we have the following competitive advantages over other

providers of financing to lower middle market companies.

Such competitors include other BDCs, non-equity based investment funds, and other

financing sources, including traditional financial services companies such as commercial banks.

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

In addition, certain of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments, serve a broader customer base, and establish a greater market

Furthermore, many of these competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC or the regulatory requirements we must comply with as a publicly traded company.

However, we believe that we have

the following competitive advantages over many other providers of financing to lower middle market companies.

Management Expertise

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We believe that the

Advisers investment professionals have developed a broad network of contacts within the investment, commercial banking, private equity and investment management communities, and that their reputation, experience and focus on investing in lower

middle market companies enables us to source and identify well-positioned prospective portfolio companies that provide attractive investment opportunities.

Additionally, the Adviser expects to generate

information from its professionals network of accountants, consultants, lawyers and management teams of portfolio companies and other contacts to support the Advisers investment

Disciplined, Value and Income-Oriented Investment Philosophy with a Focus on Preservation of Capital

In making its investment decisions, the Adviser focuses on the risk and reward profile of each prospective portfolio company, seeking to minimize the risk of

capital loss without foregoing the potential for capital appreciation.

We expect the Adviser to use the same investment philosophy that its professionals use in the management of the other Gladstone Companies and to commit resources to manage

downside exposure.

Advisers investment professionals have developed a broad network of contacts within the investment, commercial banking, private

equity and investment management communities, and that their reputation, experience and focus on investing in lower middle market companies enables us to source and identify well-positioned

prospective portfolio companies that provide attractive investment opportunities.

Additionally, the Adviser expects to generate information from its professionals network of accountants, consultants, lawyers and management teams of portfolio

companies and other contacts to support the Advisers investment activities.

Disciplined, Value and Income-Oriented Investment Philosophy with a

Focus on Preservation of Capital

In making its investment decisions, the Adviser focuses on the risk and reward profile of each prospective portfolio

company, seeking to minimize the risk of capital loss without foregoing the potential for capital appreciation.

We expect the Adviser to use the same investment philosophy that its professionals use in the management of the other Affiliated Public

Funds and to commit resources to manage downside exposure.

The Advisers approach seeks to reduce our risk in investments by using some or all of the following approaches:

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standard periodic capital return requirements.

These structures often force private equity funds to seek returns on their investments by causing their portfolio companies to pursue mergers, public equity offerings, or other liquidity events more

quickly than might otherwise be optimal or desirable, potentially resulting in a lower overall return to investors and/or an adverse impact on their portfolio companies.

In contrast, we are an exchange-traded corporation of perpetual duration.

believe that our flexibility to make investments with a long-term view and without the capital return requirements of traditional private investment vehicles provides us with the opportunity to achieve greater long-term returns on invested capital.

These structures often force private equity and private credit funds to seek returns on their investments by causing their portfolio companies to pursue mergers, public equity offerings, or other

liquidity events more quickly than might otherwise be optimal or desirable, potentially resulting in a lower overall return to investors and/or an adverse impact on their portfolio companies.

In contrast, we are an exchange-traded corporation of

perpetual duration.

We believe that our flexibility to make investments with a long-term view and without the capital return requirements of traditional private investment vehicles provides us with the opportunity to achieve greater long-term

returns on invested capital.

Flexible Transaction Structuring

We believe our

management teams broad expertise and years of combined experience enable the Adviser to identify, assess, and structure investments successfully across all levels of a companys capital structure and manage potential risk and return at

all stages of the economic cycle.

We are not subject to many of the regulatory limitations that govern traditional lending institutions, such as banks.

As a result, we are flexible in selecting and structuring investments, adjusting investment

criteria and transaction structures and, in some cases, the types of securities in which we invest.

We believe that this approach enables the Adviser to craft a financing structure which best fits the investment and growth profile of the underlying

business and yields attractive investment opportunities that will continue to generate current income and capital gain potential throughout the economic cycle, including during turbulent periods in the capital markets.

We believe our management teams broad expertise and years of combined experience enable the Adviser to identify, assess, and structure investments

successfully across all levels of a companys capital structure and manage potential risk and return at all stages of the economic cycle.

We are not subject to many of the regulatory limitations that govern traditional lending institutions,

such as banks.

As a result, we are flexible in selecting and structuring investments, adjusting investment criteria and transaction structures and, in some cases, the types of securities in which we invest.

We believe that this approach enables the

Adviser to craft a financing structure which best fits the investment and growth profile of the underlying business and yields attractive investment opportunities that will continue to generate current income and capital gain potential throughout

the economic cycle, including during turbulent periods in the capital markets, such as the current COVID-19 pandemic.

Ongoing Management of Investments and Portfolio Company Relationships

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working collaboratively with the portfolio companys management to identify and incorporate best resources and practices that help us achieve our projected investment performance.

The Advisers investment

professionals monitor the financial performance, trends, and changing risks of each portfolio company on an ongoing basis to determine if each company is performing within expectations and to

guide the portfolio companys management in taking the appropriate courses of action.

The Adviser employs various methods of evaluating and monitoring the performance of our investments in

portfolio companies, which can include the following:

The Advisers investment professionals monitor the financial performance, trends, and changing risks of each portfolio company on an ongoing basis to

determine if each company is performing within expectations and to guide the portfolio companys management in taking the appropriate courses of action.

In addition, the Adviser has closely monitored our portfolio companies in connection with

the COVID-19 pandemic to help them navigate the significant challenges posed by the pandemic.

The Adviser employs various methods of evaluating and monitoring the performance of our investments in portfolio

companies, which can include the following:

monthly analysis of financial and operating performance;

assessment of the portfolio companys performance against its business plan and our investment expectations;

frequent assessment of the portfolio companys performance against its business plan and our investment

expectations;

attendance at and/or participation in the portfolio companys board of directors or management meetings;

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At times, the Adviser may also provide other services to our portfolio companies under certain agreements and may receive fees for services other than managerial assistance.

services may include, but are not limited to:

services may include:

(i) assistance obtaining, sourcing or structuring credit facilities, long term loans or additional equity from unaffiliated third parties;

(ii) negotiating important contractual financial

relationships;

(ii) negotiating important contractual financial relationships;

(iii) consulting services regarding restructuring of the portfolio company and financial modeling as it relates to raising additional debt and equity capital from unaffiliated third parties;

and (iv) taking a primary role in

interviewing, vetting and negotiating employment contracts with candidates in connection with adding and retaining key portfolio company management team members.

The Adviser non-contractually, unconditionally, and irrevocably credits 100% of these

fees against the base management fee that we would otherwise be required to pay to the Adviser as discussed below in Transactions with Related PartiesInvestment Advisory and Management AgreementBase Management

Fee. However, pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees is retained by the Adviser in the form of reimbursement, at cost, for tasks completed by personnel of the Adviser, primarily for the

valuation of portfolio companies.

Gladstone Securities also provides other services (such as investment banking and due diligence services) to certain of

our portfolio companies;

and (iv) taking a primary role in interviewing,

vetting and negotiating employment contracts with candidates in connection with adding and retaining key portfolio company management team members.

The Adviser non-contractually, unconditionally, and

irrevocably credits 100% of any fees received for such services against the base management fee that we would otherwise be required to pay to the Adviser as discussed below in Transactions with Related Parties Investment

Advisory and Management Agreement Base Management Fee. However, pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees is retained by the Adviser in the form of reimbursement, at cost, for tasks

completed by personnel of the Adviser, primarily for the valuation of portfolio companies.

Gladstone Securities also provides other services (such as

investment banking and due diligence services) to certain of our portfolio companies and receives fees for the provision of such services;

see Transactions with Related Parties Other Transactions below.

Valuation Process

The following is a general description of the investment valuation policy (the Policy) (which has been approved by our Board of

Directors) that the professionals of the Adviser and Administrator, with oversight and

direction from our chief valuation officer, an employee of the Administrator who reports directly to our Board of Directors (collectively, the Valuation Team), use each quarter to

determine the value of our investment portfolio.

In accordance with the 1940 Act, our Board of Directors has the ultimate responsibility for reviewing and approving, in good faith, the fair value of our investments based on the Policy.

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

There is no single standard for determining fair value (especially for privately-held

businesses), as fair value depends upon the specific facts and circumstances of each individual investment.

Each quarter, our Board of Directors reviews the Policy to determine if changes thereto are advisable and assesses whether the Valuation Team

has applied the Policy consistently.

The following is a general description of the investment valuation policy (the Policy) (which has been approved by our Board of Directors) that the

professionals of the Adviser and Administrator, with oversight and direction from our chief valuation officer, an employee of the Administrator who reports directly to our Board of Directors (collectively, the Valuation Team), use each

quarter to determine the value of our investment portfolio.

In accordance with the 1940 Act, our Board of Directors has the ultimate responsibility for reviewing and determining, in good faith, the fair value of our investments for which market

quotations are not readily available, based on the Policy.

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

There is no single

standard for determining fair value (especially for privately-held businesses), as fair value depends upon the specific facts and circumstances of each individual investment.

Each quarter, our Board of Directors reviews the Policy to determine if

changes thereto are advisable and assesses whether the Valuation Team has applied the Policy consistently.

With respect to the valuation of our investment portfolio, the Valuation Team performs the following steps each quarter:

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Investment Advisory and Management Agreement

2006, we entered into the Advisory Agreement, which was subsequently amended in October 2015, as approved unanimously by our Board of Directors, including the unanimous approval of our independent directors, to reduce the base management fee payable

to the Adviser effective July 1, 2015, as discussed further below.

In accordance with the Advisory Agreement, we pay the Adviser fees as compensation for its services, consisting of a base management fee and an incentive fee.

2019, our Board of Directors, including a majority of the directors who are not parties to the agreement or interested person of any such party, unanimously approved the renewal of the Advisory Agreement with the Adviser through August 31,

2006, we entered into the Advisory Agreement, which was subsequently amended in October 2015 and amended and restated in April 2020.

In accordance with the Advisory Agreement, we pay the Adviser fees as compensation for its services, consisting of a

base management fee and an incentive fee.

On July 14, 2020, our Board of Directors, including a majority of the directors who are not parties to the Advisory Agreement or interested persons of such party, unanimously approved the renewal of the

Advisory Agreement through August 31, 2021.

Gladstone, our chairman and chief executive officer, controls the Adviser.

The Board of Directors considered the following factors as the basis for its decision to renew the Advisory Agreement:

(1) the nature, extent and quality

of services provided by the Adviser to our shareholders;

Directors considered the following factors as the basis for its decision to renew the Advisory Agreement:

(1) the nature, extent and quality of services provided by the Adviser to our

shareholders;

(2) the investment performance of the Company and the Adviser;

(3) the costs of the services to be provided and profits to be realized by the Adviser and its affiliates

from the relationship with the Company;

(4) the extent to which economies of scale will be realized as the Company and the Affiliated Public Funds grow and whether the fee level under the

Advisory Agreement reflects the economies of scale for the Companys investors;

(5) the fee structure of the advisory and administrative agreements of comparable funds;

(3) the costs of the services to be provided and profits to be realized by the Adviser and its affiliates from the relationship with the Company;

extent to which economies of scale will be realized as the Company and the Affiliated Public Funds grow and whether the fee level under the Advisory Agreement reflects the economies of scale for the Companys investors;

structure of the advisory and administrative agreements of comparable funds;

(6) indirect profits to the Adviser created through the Company;

and (7) in light of the foregoing considerations, the overall fairness of the advisory fees paid under the Advisory Agreement.

information reviewed and the considerations detailed above, our Board of Directors, including all of the directors who are not interested persons as that term is defined in the 1940 Act, concluded that the investment advisory fee rates

and terms are fair and reasonable in relation to the services provided and approved the Advisory Agreement, as being in the best interests of our stockholders.

and (7) in light of the foregoing considerations, the overall fairness of the advisory fees paid

under the Advisory Agreement.

Based on the information reviewed and the considerations detailed above, our Board of Directors, including all of the

directors who are not interested persons as that term is defined in the 1940 Act, concluded that the investment advisory fee rates and terms are fair and reasonable in relation to the services provided and approved the Advisory

Agreement, as being in the best interests of our stockholders.

Base Management Fee

The base management fee is payable

quarterly to the Adviser pursuant to our Advisory Agreement and is assessed at an annual rate of 1.75%, computed on the basis of the value of our average total assets at the end of the two most recently-completed quarters (inclusive of the current

quarter), which are total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings and adjusted appropriately for any share issuances or repurchases during the period.

Board of Directors may (as it has for the years ended September 30, 2019, 2018 and 2017) accept a non-contractual, unconditional and irrevocable credit from the Adviser to reduce the annual 1.75% base management fee on syndicated loan

participations to 0.5%, to the extent that proceeds resulting from borrowings were used to purchase such syndicated loan participations.

Additionally,

pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies.

The Adviser may also provide other services to our portfolio companies under certain agreements and may receive

fees for services other than managerial assistance.

The base management fee is payable quarterly to the Adviser pursuant to our Advisory Agreement and is assessed at an annual rate of 1.75%, computed on the

basis of the value of our average total assets at the end of the two most recently-completed quarters (inclusive of the current quarter), which are total assets, including investments made with proceeds of borrowings, less any uninvested cash or

cash equivalents resulting from borrowings and adjusted appropriately for any share issuances or repurchases during the period.

Our Board of Directors may (as it has for the years ended September 30, 2020, 2019, and 2018) accept a non-contractual, unconditional and irrevocable credit from the Adviser to reduce the annual 1.75% base management fee on syndicated loan participations to 0.5%, to the extent that proceeds resulting from borrowings

were used to purchase such syndicated loan participations.

Additionally, pursuant to the requirements of the 1940 Act, the Adviser makes available

significant managerial assistance to our portfolio companies.

The Adviser may also provide other services to our portfolio companies under certain agreements and may receive fees for services other than managerial assistance.

The Adviser non-contractually, unconditionally, and irrevocably credits 100% of these fees against the base management fee that we would otherwise be required to pay to the Adviser;

pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees is retained by the Adviser in the form of reimbursement, at cost, for tasks completed by personnel of the Adviser, primarily for the valuation of portfolio

Loan servicing fees that are payable to the Adviser pursuant to our Fifth Amended and Restated Credit Agreement, with KeyBank National Association (KeyBank), as administrative agent, lead arranger and lender, as amended (our

Credit Facility), are also 100% credited against the base management fee as discussed below, Loan Servicing Fee Pursuant to Credit Agreement.

however, pursuant to the terms of the

Advisory Agreement, a small percentage of certain of such fees is retained by the Adviser in the form of reimbursement, at cost, for tasks completed by personnel of the Adviser, primarily for the valuation of portfolio companies.

Loan servicing fees

that are payable to the Adviser pursuant to our Fifth Amended and Restated Credit Agreement, with KeyBank National Association (KeyBank), as administrative agent, lead arranger and lender, as amended (our Credit Facility),

are also 100% credited against the base management fee as discussed below, Loan Servicing Fee Pursuant to Credit Agreement.

Incentive Fee

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

The income-based incentive fee rewards the Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% of our net assets, which we

define as total assets less indebtedness and before taking into account any incentive fees payable or contractually due but not payable during the period, at the end of the immediately preceding calendar quarter, adjusted appropriately for any share

issuances or repurchases during the period (the hurdle rate).

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

no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the

hurdle rate (7.0% annualized);

100.0% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net

investment income, if any, that exceeds the hurdle rate but is less than 2.1875% of our net assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter (8.75% annualized);

20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% of our net

assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter (8.75% annualized).

Quarterly Incentive Fee Based on Net Investment Income

Pre-incentive fee net investment income

The income-based incentive fee rewards the Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% of our net assets (2.0% during

the one year period from April 1, 2020 through March 31, 2021), which we define as total assets less indebtedness and before taking into account any incentive fees payable or contractually due but not payable during the period, at the end

of the immediately preceding calendar quarter, adjusted appropriately for any share issuances or repurchases during the period (the hurdle rate).

The income-based incentive fee with respect to our

pre-incentive fee net investment income is generally payable quarterly to the Adviser and is computed as follows:

no incentive fee in any calendar quarter in which our pre-incentive fee

net investment income does not exceed the hurdle rate;

100.0% of our pre-incentive fee net investment income with respect to

that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875% (2.4375% during the one year period from April 1, 2020 through March 31,

2021) of our net assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter;

20.0% of the amount of our pre-incentive fee net investment income, if

any, that exceeds 2.1875% (2.4375% during the one year period from April 1, 2020 through March 31, 2021) of our net assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter.

Quarterly Incentive Fee Based on Net Investment Income for the Year Period Ending March 31, 2021 (A)

Pre-incentive fee net investment

(expressed as a percentage of the value of net assets)

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allocated to income-related portion of incentive fee

The second part of the incentive fee is a capital gains-based incentive fee that will be determined and payable in arrears as of the end of each fiscal year

(or upon termination of the Advisory Agreement, as of the termination date) and equals 20.0% of our realized capital gains, less any realized capital losses and unrealized depreciation, as of the end of the fiscal year.

In determining the capital

gains-based incentive fee payable to the Adviser, we calculate the cumulative aggregate realized capital gains and cumulative aggregate realized capital losses since our inception, and the entire portfolios aggregate unrealized capital

depreciation, if any and excluding any unrealized capital appreciation, as of the date of the calculation.

For this purpose, cumulative aggregate realized capital gains, if any, equals the sum of the differences between the net sales price of each

investment, when sold, and the original cost of such investment since inception.

Cumulative aggregate realized capital losses equals the sum of the amounts by which the net sales price of each investment, when sold, is less than the original cost of

such investment since inception.

The entire portfolios aggregate unrealized capital depreciation, if any, equals the sum of the difference, between the valuation of each investment as of the applicable calculation date and the original cost of

such investment.

At the end of the applicable fiscal year, the amount of capital gains that serves as the basis for our calculation of the capital gains-based incentive fee equals the cumulative aggregate realized capital gains less cumulative

aggregate realized capital losses, less the entire portfolios aggregate unrealized capital depreciation, if any.

If this number is positive at the end of such fiscal year, then the capital gains-based incentive fee for such year equals 20.0%

of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years.

No capital gains-based incentive fee has been recorded or paid from our inception through September 30,

2019, as cumulative unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.

Additionally, in accordance with GAAP, a capital gains-based incentive fee accrual is calculated using the aggregate cumulative realized capital gains and

losses and aggregate unrealized capital depreciation included in the calculation of the capital gains-based incentive fee plus the aggregate unrealized capital appreciation.

If such amount is positive at the end of a period, then GAAP requires us to

record a capital gains-based incentive fee equal to 20.0% of such amount, less the aggregate amount of actual capital gains-based incentive fees paid in all prior years.

After March 31, 2021, the 2.00% quarterly hurdle rate will revert back to 1.75% and the 2.4375% quarterly

excess incentive fee hurdle rate will revert back to 2.1875%.

The second part of the incentive fee is a capital gains-based incentive

fee that is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date) and equals 20.0% of our net realized capital gains (as defined below) as of the

end of the fiscal year.

In determining the capital gains-based incentive fee payable to the Adviser, we calculate net realized capital gains at the end of each applicable year by subtracting the sum of our cumulative aggregate realized

capital losses and our entire portfolios aggregate unrealized capital depreciation from our cumulative aggregate realized capital gains.

For this purpose, cumulative aggregate realized capital gains, if any, equals the sum of the differences

between the net sales price of each investment, when sold, and the original cost of such investment since inception.

Cumulative aggregate realized capital losses equals the sum of the amounts by which the net sales price of each investment, when

sold, is less than the original cost of such investment since inception.

The entire portfolios aggregate unrealized capital depreciation, if any, equals the sum of the difference between the valuation of each investment as of the applicable

calculation date and the original cost of such investment.

At the end of the applicable fiscal year, the amount of capital gains that serves as the basis for our calculation of the capital gains-based incentive fee equals the cumulative aggregate

realized capital gains less cumulative aggregate realized capital losses, less the entire portfolios aggregate unrealized capital depreciation, if any.

If this number is positive at the end of such fiscal year, then the capital gains-based

incentive fee for such year equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years.

No capital gains-based incentive fee has been recorded or paid since

our inception through September 30, 2020, as cumulative unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.

In accordance with GAAP, a capital gains-based incentive fee accrual is calculated using the aggregate cumulative realized capital gains and losses and

aggregate cumulative unrealized capital appreciation and depreciation.

If such amount is positive at the end of a period, then GAAP requires us to record a capital gains-based incentive fee equal to 20.0% of such amount, less the aggregate amount of

actual capital gains-based

incentive fees paid in all prior years.

If such amount is negative, then there is no accrual for such period.

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

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

No GAAP accrual for a capital gains-based incentive fee has been recorded or paid from our inception through September 30, 2019.

Our Board of Directors accepted non-contractual, unconditional and irrevocable credits from the Adviser to reduce the income-based incentive fee to the extent

net investment income did not cover 100.0% of distributions

to common stockholders for the years ended September 30, 2019, 2018, and 2017, which credits totaled $1.5 million, $1.7 million, and $2.3 million, respectively.

GAAP requires that the capital gains-based incentive fee accrual consider the

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

There can be no assurance that such unrealized capital

appreciation will be realized in the future.

No GAAP accrual for a capital gains-based incentive fee has been recorded from our inception through September 30, 2020.

Our Board of Directors accepted non-contractual, unconditional and irrevocable credits from the Adviser to reduce the

income-based incentive fee to the extent net investment income did not cover 100.0% of distributions to common stockholders for the years ended September 30, 2020, 2019, and 2018, which credits totaled $3.0 million, $1.5 million, and

$1.7 million, respectively.

Loan Servicing Fee Pursuant to Credit Agreement

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Since Business Loan is a consolidated subsidiary of ours, and

the total base management fee paid to the Adviser pursuant to the Advisory Agreement cannot exceed 1.75% of total assets (as reduced by cash and cash equivalents pledged to creditors and adjusted appropriately for any share issuances or repurchases

during the period) during any given calendar year, we treat payment of the loan servicing fee pursuant to our line of credit as a pre-payment of the base management fee under the Advisory Agreement.

Accordingly, these loan servicing fees are 100%

non-contractually, unconditionally, and irrevocably credited back to us by the Adviser.

the total base management fee paid to the Adviser pursuant to the Advisory Agreement cannot exceed 1.75% of total assets (less any uninvested cash or cash equivalents resulting from borrowings and adjusted appropriately for any share issuances or

repurchases during the period) during any given calendar year, we treat payment of the loan servicing fee pursuant to our line of credit as a pre-payment of the base management fee under the Advisory

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

Administration Agreement

We reimburse the Administrator pursuant to the Administration Agreement for our allocable portion of the Administrators expenses incurred while

performing services to us, which are primarily rent and salaries and benefits expenses of the Administrators employees, including our chief financial officer and treasurer, chief compliance officer, chief valuation officer and general counsel

and secretary (who also serves as the Administrators president), and their respective staffs.

Our allocable portion of the Administrators

expenses are generally derived by multiplying the Administrators total expenses by the approximate percentage of time during the current quarter the Administrators employees performed services for us in relation to their time spent

performing services for all companies serviced by the Administrator.

On July 9, 2019, our Board of Directors, including a majority of the directors who are not parties to the Advisory Agreement or interested persons of such party, approved the

renewal of the Administration Agreement through August 31, 2020.

We reimburse the

Administrator pursuant to the Administration Agreement for our allocable portion of the Administrators expenses incurred while performing services to us, which are primarily rent and salaries and benefits expenses of the Administrators

employees, including our chief financial officer and treasurer, chief compliance officer, chief valuation officer and general counsel and secretary (who also serves as the Administrators president), and their respective staffs.

Our allocable portion of the Administrators expenses are generally derived by multiplying the Administrators total expenses by the approximate

percentage of time during the current quarter the Administrators employees performed services for us in relation to their time spent performing services for all companies serviced by the Administrator.

On July 14, 2020, our Board of

Directors, including a majority of the directors who are not parties to the Administration Agreement or interested persons of either party, approved the renewal of the Administration Agreement through August 31, 2021.

Other Transactions

Gladstone also serves on the board of managers of our affiliate, Gladstone Securities, a privately-held broker-dealer registered with the Financial

Industry Regulatory Authority and insured by the Securities Investor Protection Corporation.

Gladstone Securities is 100% indirectly owned and controlled by Mr.

Gladstone and has provided other services, such as investment banking and due

diligence services, to certain of our portfolio companies, for which Gladstone Securities receives a fee.

Any such fees paid by portfolio companies to Gladstone Securities do not impact the fees we pay to the Adviser or the non-contractual,

unconditional, and irrevocable credits against the base management fee or incentive fee.

For additional information refer to Note 4 Related Party Transactions of our accompanying Notes to Consolidated Financial

Gladstone also serves

on the board of managers of our affiliate, Gladstone Securities, a privately-held broker-dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation.

Gladstone Securities is 100%

indirectly owned and controlled by Mr.

Gladstone and has provided other services, such as investment banking and due diligence services, to certain of our portfolio companies, for which Gladstone Securities receives a fee.

Any such fees paid by

portfolio companies to Gladstone Securities do not impact the fees we pay to the Adviser or the non-contractual, unconditional, and irrevocable credits against the base management fee or incentive fee.

additional information refer to Note 4 Related Party Transactions of our accompanying Notes to Consolidated Financial Statements .

Material U.S.

2 unchanged sentences

federal income tax considerations applicable to us, to our qualification and taxation as a RIC for U.S.

federal income tax purposes under Subchapter M of the Code and to the ownership and disposition of our shares.

federal income tax purposes under Subchapter M of the Code and to

the ownership and disposition of our shares.

This summary does not purport to be a complete description of all of the tax considerations relating thereto.

In particular, we have not

described certain considerations that may be relevant to certain types of stockholders subject to special treatment under U.S.

In particular, we have not described

certain considerations that may be relevant to certain types of stockholders subject to special treatment under U.S.

federal income tax laws.

This summary does not discuss any aspect of state, local or foreign tax laws, or the U.S.

To qualify for

treatment as a RIC under Subchapter M of the Code, we must generally distribute to our stockholders, for each taxable year, at least 90.0% of our taxable ordinary income plus the excess of our realized

net short-term capital gains over our realized net long-term capital losses (Investment Company Taxable Income).

We refer to this as the annual distribution requirement.

We must also meet several additional requirements, including:

estate or gift

To qualify for treatment as

a RIC under Subchapter M of the Code, we must generally distribute to our stockholders, for each taxable year, at least 90.0% of our taxable ordinary income plus the excess of our realized net short-term capital gains over our realized net long-term

capital losses (Investment Company Taxable Income).

We refer to this as the annual distribution requirement. We must also meet several additional requirements, including:

Business Development Company status .

2 unchanged sentences

At least 90.0% of our gross income for each taxable year must be from

dividends, interest, payments with respect to securities, loans, gains from sales or other dispositions of securities or other income derived with respect to our business of investing in securities, and net income derived from an interest in a

qualified publicly traded partnership.

dividends, interest, payments with respect to securities, loans, gains from sales or other dispositions of securities or other income (including certain deemed inclusions) derived with respect to our business of investing in securities, and net

income derived from an interest in a qualified publicly traded partnership.

Asset diversification requirements .

11 unchanged sentences

We would not be able to deduct distributions to our stockholders, nor would we be

required to make such distributions.

Distributions would be taxable to our stockholders as ordinary dividend income to the extent of our current or accumulated earnings and profits.

Subject to certain limitations under the Code, corporate

distributees would be eligible for the dividends received deduction, if applicable.

Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholders

adjusted tax basis, and then as capital gain.

required to make such distributions for U.S.

federal income tax purposes.

Distributions would be taxable to our stockholders as ordinary dividend income and, subject to certain limitations under the Code, would be eligible for the current maximum

rate applicable to qualifying dividend income of individuals and other non-corporate U.S.

stockholders to the extent of our current or accumulated earnings and profits.

Subject to certain limitations under the

Code, corporate distributees would be eligible for the dividends received deduction, if applicable.

Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the

stockholders adjusted tax basis, and then as capital gain.

If we fail to meet the RIC requirements for more than two consecutive years and then seek to requalify as a RIC, we generally would be subject to corporate-level U.S.

federal income tax on any unrealized

appreciation with respect to our assets unless we make a special election to pay corporate-level U.S.

federal income

tax on any unrealized appreciation with respect to our assets unless we make a special election to pay corporate-level U.S.

federal income tax on any such unrealized appreciation during the succeeding five-year period.

Qualification as a RIC

qualify as a RIC and meet the annual distribution requirement, we will not be subject to U.S.

federal income tax on the portion of our Investment Company Taxable Income and net capital gain (realized net long term capital gain in excess of realized

net short term capital loss) that we timely distribute (or are deemed to distribute) to our stockholders.

We would, however, be subject to a 4.0% nondeductible federal excise tax if we do not distribute, actually or on a deemed basis, an amount at

least equal to the sum of (1) 98.0% of our ordinary income for the calendar year, (2) 98.2% of our net capital gains for the one-year period ending on October 31 of the calendar year and (3) any income realized, but not

distributed, in the preceding period (to the extent that income tax was not imposed on such amounts), less certain reductions, as applicable.

For the calendar years ended December 31, 2018, 2017, and 2016, we did not incur any excise taxes.

of September 30, 2019, our capital loss carryforward was $57.1 million.

If we acquire debt obligations that (i) were originally issued at a

discount, (ii) bear interest at rates that are not either fixed rates or certain qualified variable rates, or (iii) are not unconditionally payable at least annually over

the life of the obligation, we will be required to include in taxable income each year a portion of the original issue discount (OID) that accrues over the life of the obligation.

Additionally, PIK interest, which is computed at the contractual rate specified in a loan agreement and is added to the principal balance of a loan, is also a non-cash source of income that we are required to include in taxable income each year.

If we qualify as a RIC and

meet the annual distribution requirement, we will not be subject to U.S.

federal income tax on the portion of our Investment Company Taxable Income and net capital gain (realized net long

term capital gain in excess of realized net short term capital loss) that we timely distribute (or are deemed to timely distribute) to our stockholders.

If we fail to distribute in a timely

manner an amount at least equal to the sum of (1) 98.0% of our ordinary income for the calendar year, (2) 98.2% of our net capital gains for the one-year period ending on October 31 of the calendar year

and (3) any income realized, but not distributed, in the preceding period (to the extent that income tax was not imposed on such amounts), less certain reductions, as applicable (together, the excise tax distribution requirements),

we will be subject to a 4% nondeductible federal excise tax on the portion of the undistributed amounts of such income that are less than the amounts required to be distributed based on the excise tax distribution requirements.

For the calendar

years ended December 31, 2019, 2018, and 2017, we did not incur any excise taxes.

As of September 30, 2020, our capital loss carryforward was $72.4 million.

If we acquire debt obligations that (i) were originally issued at a discount, (ii) bear interest at rates that are not either fixed rates or certain

qualified variable rates, or (iii) are not unconditionally payable at least annually over the life of the obligation, we will be required to include in taxable income each year a portion of the original issue discount (OID) that

accrues over the life of the obligation.

Additionally, PIK interest, which is computed at the contractual rate specified in a loan agreement and is added to the principal balance of a loan, is also a non-cash

source of income that we are required to include in taxable income each year.

Both OID and PIK income will be included in our Investment Company Taxable Income even though we receive no cash corresponding to such amounts.

As a result, we may be required to make additional distributions corresponding to such OID and PIK

amounts in order to satisfy the annual distribution requirement and to continue to qualify as a RIC or to avoid the imposition of federal income and excise taxes.

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

distribution requirements.

For the year ended September 30, 2019, we recorded $0.1 million of OID income and the unamortized balance of OID investments (which are primarily all syndicated loans) as of September 30, 2019 totaled $0.8

As of September 30, 2019, we had four investments which had a PIK interest component and we recorded PIK interest income of $1.4 million during the year ended September 30, 2019.

As a result, we may be

required to make additional distributions corresponding to such OID and PIK amounts in order to satisfy the annual distribution requirement and to continue to qualify as a RIC or to avoid the imposition of federal income and excise taxes.

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

For the year ended September 30, 2020, we recorded $0.3 million of OID income and the unamortized balance of OID investments (which

are primarily all syndicated loans) as of September 30, 2020 totaled $0.6 million.

As of September 30, 2020, we had seven investments which had a PIK interest component and we recorded PIK interest income of $2.6 million during

the year ended September 30, 2020.

Taxation of Our U.S.

4 unchanged sentences

accumulated earnings and profits.

We first allocate our earnings and profits to distributions to our preferred stockholders and then to distributions to our common stockholders based on priority in our capital structure.

Any distributions in excess

of our earnings and profits will first be treated as a return of capital to the extent of the stockholders adjusted basis in his or her shares of stock and thereafter as capital gain.

Distributions of our long-term capital gains, reported by

us as such, will be taxable to our stockholders as long-term capital gains regardless of the stockholders holding period of the stock and whether the distributions are paid in cash or invested in additional stock.

We first allocate our earnings and profits to distributions to our preferred stockholders, if any, and then to distributions to our common stockholders based on priority in our capital structure.

Any distributions

in excess of our earnings and profits will first be treated as a return of capital to the extent of the stockholders adjusted basis in his or her shares of stock and thereafter as capital gain.

Distributions of our long-term capital gains,

reported by us as such, will be taxable to our stockholders as long-term capital gains regardless of the stockholders holding period of the stock and whether the distributions are paid in cash or invested in additional stock.

Corporate U.S.

generally are eligible for the 50% dividends received deduction with respect to dividends received from us, but only to the extent such amount is attributable to dividends received by us from taxable domestic corporations.

A RIC that has two or more classes of stock generally is required to allocate to each class proportionate amounts of each type of its income (such as ordinary

income, capital gains, qualified dividend income and dividends qualifying for the dividends-received deduction) based upon the percentage of total distributions paid to each class for the tax year.

Accordingly, we intend to allocate capital gain

distributions, distributions of qualified dividend income, and distributions qualifying for the dividends-received deduction, if any, between our common shares and preferred shares in proportion to the total distributions paid to each class with

respect to such tax year.

Any distribution declared by us in October, November or December of any calendar year, payable to our stockholders of record on

a specified date in such a month and actually paid during January of the following year, will be treated as if it were paid by us and received by our stockholders on December 31 of the previous year.

In addition, we may elect (in accordance

with Section 855(a) of the Code) to relate a distribution back to the prior taxable year if we (1) declare such distribution prior to the later of the extended due date for filing our return for that taxable year or the 15 th day of the ninth month following the close of the taxable year, (2) make the election in that return, and (3) distribute the amount in the 12-month period following the

close of the taxable year but not later than the first regular distribution payment of the same type following the declaration.

Any such election will not alter the general rule that a stockholder will be treated as receiving a distribution in the

taxable year in which the distribution is made, subject to the October, November, December rule described above.

If a common stockholder participates in

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

distributions.

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

stockholder had received the distribution in cash.

The common stockholder will have an adjusted basis in the additional common shares purchased through the plan equal to the dollar amount that

would have been received if the U.S.

stockholder had received the dividend or distribution in cash.

The additional common shares will have a new holding period commencing on the day following the day on which the shares are credited to the common

stockholders account.

The plan agent purchases shares in the open market in connection with the obligations under the plan.

We do not have a dividend reinvestment plan for our preferred stockholders.

stockholders generally are eligible for the 50% dividends received deduction with respect to ordinary income dividends received from us, but only to the extent such amount is attributable to dividends received by us from taxable domestic

corporations.

A RIC that has two or more classes of stock generally is required to allocate to each class proportionate amounts of each type of its

income (such as ordinary income, capital gains, qualified dividend income and dividends qualifying for the dividends-received deduction) based upon the percentage of total distributions paid to each class for the tax year.

Accordingly, for any tax

year in which we have common shares and preferred shares, we intend to allocate capital gain distributions, distributions of qualified dividend income, and distributions qualifying for the dividends-received deduction, if any, between our common

shares and preferred shares in proportion to the total distributions paid to each class with respect to such tax year.

Any distribution declared by us in October, November or December of any calendar year, payable to our

stockholders of record on a specified date in such a month and actually paid during January of the following year, will be treated as if it were paid by us and received by our stockholders on December 31 of the previous year.

In addition, we

may elect (in accordance with Section 855(a) of the Code) to relate a distribution back to the prior taxable year if we (1) declare such distribution prior to the later of the extended due date for filing our return for that taxable year

or the 15 th day of the ninth month following the close of the taxable year, (2) make the election in that return, and (3) distribute the amount in

the 12-month period following the close of the taxable year but not later than the first regular distribution payment of the same type following the declaration.

Any such election will not alter the

general rule that a stockholder will be treated as receiving a distribution in the taxable year in which the distribution is made, subject to the October, November, December rule described above.

If a common stockholder participates in our opt in dividend reinvestment plan, then the common stockholder will have their cash dividends and

distributions automatically reinvested in additional shares of our common stock, rather than receiving cash dividends and distributions.

Any distributions reinvested under the plan will be taxable to the common stockholder to the same extent, and

with the same character, as if the common stockholder had received the distribution in cash.

The common stockholder will have an adjusted basis in the additional common shares purchased through the plan equal to the dollar amount that would have

been received if the U.S.

stockholder had received the dividend or distribution in cash, unless we were to issue new shares that are trading at or above net asset value, in which case, the U.S.

stockholders basis in the new shares would

generally be equal to their fair market value.

The additional common shares will have a new holding period commencing on the day following the day on which the shares are credited to the common stockholders account.

The plan agent purchases

shares in the open market in connection with the obligations under the plan.

Sale of Our Shares

stockholder generally

will recognize taxable gain or loss if the U.S.

stockholder sells or otherwise disposes of the shares of our common or preferred stock.

Any gain arising from such sale or disposition generally will be treated as long-term capital gain or loss if the

stockholder generally will recognize taxable gain or loss if the U.S.

stockholder sells or otherwise disposes of the shares of our common stock.

gain arising from such sale or disposition generally will be treated as long-term capital gain or loss if the U.S.

stockholder has held the shares for more than one year.

Otherwise, it will be classified as short-term capital gain or loss.

However, any capital loss arising from the sale or disposition of shares of our stock held for six months or less will

be treated as long-term capital loss to the extent of the amount of capital gain dividends received, or undistributed capital gain deemed received, with respect to such shares.

Under the tax laws in effect as of the date of this filing, individual

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

received, with respect to such shares.

Under the tax laws in effect as of the date of this filing, individual U.S.

stockholders are subject to a maximum federal income tax rate of 20% on their net capital gain (i.e.

the excess of realized net long-term capital gain over realized net short-term capital loss for a taxable year) including any long-term capital

gain derived from an investment in our shares.

Such rate is lower than the maximum rate on ordinary income currently payable by individuals.

the excess of realized net

long-term capital gain over realized net short-term capital loss for a taxable year) including any long-term capital gain derived from an investment in our shares.

Such rate is lower than the maximum rate on ordinary income currently payable by

Corporate U.S.

stockholders currently are subject to federal income tax on net capital gain at the same

rates applied to their ordinary income.

Capital losses are subject to limitations on use for both corporate and non-corporate stockholders.

stockholders who are individuals, estates or trusts generally are also subject to a

3.8% Medicare tax on, among other things, dividends on and capital gain from the sale or other disposition of shares of our stock.

Withholding and Other Required Withholding

stockholders currently are subject to federal income tax on net capital gain at the same rates applied to their ordinary income.

Capital losses are subject to limitations on use for both corporate

and non-corporate stockholders.

stockholders who are individuals, estates or trusts generally are also subject to a 3.8% Medicare tax on, among other things, dividends on and capital gain from the sale or other disposition of

shares of our stock.

Backup Withholding and Other Required Withholding

We may be required to withhold U.S.

federal income tax, or backup withholding, from all taxable

distributions to any non-corporate U.S.

stockholder (i) who fails to furnish us with a correct taxpayer identification number or a certificate that such stockholder is exempt from backup withholding, or (ii) with respect to whom

the Internal Revenue Service (IRS) notifies us that such stockholder has failed to properly report certain interest and dividend income to the IRS and to respond to notices to that effect.

An individuals taxpayer identification

number is generally his or her social security number.

federal income tax (i.e.

backup withholding) from all taxable distributions to

any non-corporate U.S.

stockholder (i) who fails to furnish us with a correct taxpayer identification number or a certificate that such stockholder is exempt from backup withholding, or

(ii) with respect to whom the Internal Revenue Service (IRS) notifies us that such stockholder has failed to properly report certain interest and dividend income to the IRS and to respond to notices to that effect.

individuals taxpayer identification number is generally his or her social security number.

Any amount withheld under backup withholding is allowed as a credit against the U.S.

stockholders federal income tax liability, provided that proper information is provided to the IRS.

stockholders federal income tax liability, provided that

proper information is timely provided to the IRS.

The Foreign Account Tax Compliance Act imposes a U.S.

federal withholding tax on certain types of payments made to foreign financial

institutions and certain other non-U.S.

federal withholding tax on certain types of payments made

to foreign financial institutions and certain other non-U.S.

entities unless certain due diligence, reporting, withholding, and certification obligation requirements are satisfied.

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Regulation as a BDC

We are a closed-end,

non-diversified management investment company that has elected to be regulated as a BDC under Section 54 of the 1940 Act.

As such, we are subject to regulation under the 1940 Act.

contains prohibitions and restrictions relating to transactions between BDCs and their affiliates, principal underwriters and affiliates of those affiliates or underwriters and requires that a

majority of the directors be persons other than interested persons, as defined in the 1940 Act.

In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a

BDC unless approved by a majority of our outstanding voting securities, as defined in the 1940 Act.

We intend to conduct our business so as

to retain our status as a BDC.

We are a closed-end, non-diversified management investment company that has elected to be regulated as a BDC under Section 54 of the 1940 Act.

As such, we are subject to

regulation under the 1940 Act.

The 1940 Act contains prohibitions and restrictions relating to transactions between BDCs and their affiliates, principal underwriters and affiliates of those affiliates or underwriters and requires that a majority of

the directors be persons other than interested persons, as defined in the 1940 Act.

In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a BDC unless

approved by a majority of our outstanding voting securities, as defined in the 1940 Act.

We intend to conduct our business so as to retain

our status as a BDC.

A BDC may use capital provided by public stockholders and from other sources to make long-term investments in private companies.

A BDC provides stockholders the ability to retain the liquidity of a publicly traded

stock while sharing in the possible benefits, if any, of investing in primarily privately owned companies.

A BDC provides stockholders the ability to retain the liquidity of a publicly traded stock while

sharing in the possible benefits, if any, of investing in primarily privately owned companies.

In general, a BDC must have been organized and have its principal place of business in the U.S.

and must be operated for the purpose of making

investments in qualifying assets, as described in Sections 55(a)(1) through (a)(3) of the 1940 Act.

and must be operated for the purpose of making investments

in qualifying assets, as described in Sections 55(a)(1) through (a)(3) of the 1940 Act.

Qualifying Assets

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The types of qualifying assets in which we may invest under the 1940 Act include the following:

Securities purchased in transactions not involving any public offering from the issuer of such securities,

which issuer is an eligible portfolio company.

Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer is an eligible portfolio company.

An eligible portfolio company is generally defined in the 1940 Act as any issuer which:

2 unchanged sentences

otherwise excluded from the definition of investment company);

satisfies one of the following:

it does not have any class of securities with respect to which a broker or dealer may extend margin credit;

it is controlled by the BDC and for which an affiliate of the BDC serves as a director;

it has total assets of not more than $4.0 million and capital and surplus of not less than $2 million;

it has total assets of not more than $4.0 million and capital and surplus of not less than

it does not have any class of securities listed on a national securities exchange;

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Pursuant to Section 61(a)(3)

of the 1940 Act, we are permitted, under specified conditions, 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 is stock. In either case, we may only issue such senior securities if such class of senior securities, after such

issuance, has an asset coverage, as defined in Section 18(h) of the 1940 Act and as amended by the Small Business Credit Availability Act (the SBCAA), of at least 150%.

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

is stock. In either case, we may only issue such senior securities if such class of senior securities, after such issuance, has an asset coverage, as defined in Section 18(h) of the 1940 Act of at least 150%.

In addition, our ability to pay dividends or distributions (other than dividends payable in our common stock) to holders of any class of our capital stock

22 unchanged sentences

make available such managerial assistance, or the BDC may exercise such control jointly.

Summary Risk Factors

Below is a summary of the principal risk factors associated with an investment in our securities.

In addition to the below, you should carefully consider the

information included in Risk Factors beginning on page 24 of this

Annual Report 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 for a more detailed discussion of

the principal risks as well as certain other risks that you should carefully consider before deciding to invest in our securities.

Market conditions could negatively impact our business, results of operations, cash flows and financial

Volatility in the capital markets may make it more difficult to raise capital and may adversely affect the

valuations of our investments.

Our business may be adversely affected by the current coronavirus pandemic and related government actions.

Changes in interest rates may negatively impact our investments and have an adverse effect on our business,

financial condition, results of operations, and cash flows.

We typically invest in transactions involving acquisitions, buyouts and recapitalizations of companies, which

will subject us to the risks associated with change in control transactions.

Our investments in lower middle market companies are extremely risky and could cause you to lose all or a part

of your investment.

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

Our portfolio is concentrated in a limited number of companies and industries, which subjects us to an

increased risk of significant loss if any one of these companies does not repay us or if the industries experience downturns.

Any inability to renew, extend or replace our Credit Facility on terms favorable to us, or at all, could

adversely impact our liquidity and ability to fund new investments or maintain distributions to our stockholders.

Changes in laws or regulations governing our operations, or changes in the interpretation thereof, and any

failure by us to comply with laws or regulations governing our operations may adversely affect our business.

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

Certain provisions contained in our

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

Our success depends on the Advisers ability to attract and retain qualified personnel in a competitive

Our incentive fee may induce the Adviser to make certain investments, including speculative investments.

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

The Adviser is not obligated to provide a credit of the base management fee or incentive fee, which could

negatively impact our earnings and our ability to maintain our current level of distributions to our stockholders.

There is a risk that you may not receive distributions or that distributions may not grow over time

Investing in our securities may involve an above average degree of risk.

Common shares of closed-end investment companies frequently trade at a

discount to the net asset value of our common stock (NAV).

We may choose to redeem the 2023 Notes or 2024 Notes when prevailing interest rates are relatively low.

Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our

operations, or the operations of businesses in which we invest, a compromise or corruption of our confidential information and/or damage to our business relationships, all of which could negatively impact our business, financial

condition and operating results.

Code of Ethics

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companies that complies with the guidelines set forth in Item 406 of Regulation S-K of the Securities Act and Rule 17j-1 of the 1940 Act.

As required by the 1940 Act, this code establishes procedures for personal investments, restricts certain

transactions by such personnel and requires the reporting of certain transactions and holdings by such personnel.

This code of ethics and business conduct is publicly available on our website under Corporate Governance at

www.GladstoneCapital.com .

As required by the 1940 Act,

this code establishes procedures for personal investments, restricts certain transactions by such personnel and requires the reporting of certain transactions and holdings by such personnel.

This code of ethics and business conduct is publicly

available on the Investors section of our website under Governance Governance Documents at www.GladstoneCapital.com .

We intend to provide any required disclosure of any amendments to or waivers of the provisions of this

code by posting information regarding any such amendment or waiver to our website or in a Current Report on Form 8-K.

Compliance Policies and Procedures

We and the Adviser have adopted and implemented written policies and procedures reasonably designed to prevent violation of the federal securities laws, and

our Board of Directors is required to review these compliance policies and procedures annually to assess their adequacy and the effectiveness of their implementation.

We have designated a chief compliance officer, John Dellafiora, Jr., who also

serves as chief compliance officer for all of the Gladstone Companies.

We do not currently have any employees and do not expect to have any employees in the foreseeable future.

Currently, services necessary for our business are

provided by individuals who are employees of the Adviser and

the Administrator pursuant to the terms of the Advisory Agreement and the Administration Agreement, respectively.

We expect that 25 to 30 full time employees of the Adviser and the Administrator

will spend substantial time on our matters during the remainder of calendar year 2019 and all of calendar year 2020.

As of October 31, 2019, the Adviser and the Administrator collectively had 70 full-time employees.

A breakdown of these

employees is summarized by functional area in the table below:

Adviser have adopted and implemented written policies and procedures reasonably designed to prevent violation of the federal securities laws, and our Board of Directors is required to review these compliance policies and procedures annually to

assess their adequacy and the effectiveness of their implementation.

We have designated a chief compliance officer, John Dellafiora, Jr., who also serves as chief compliance officer for all of the Gladstone Companies.

We do not currently have any employees

and do not expect to have any employees in the foreseeable future.

Currently, services necessary for our business are provided by individuals who are employees of the Adviser and the Administrator pursuant to the terms of the Advisory Agreement and

the Administration Agreement, respectively.

We expect that 25 to 30 full time employees of the Adviser and the Administrator will spend substantial time on our matters during the remainder of calendar year 2020 and all of calendar year 2021.

September 30, 2020, the Adviser and the Administrator collectively had 68 full-time employees.

A breakdown of these employees is summarized by functional area in the table below:

Number of Individuals

Functional Area

2 unchanged sentences

Investment management, portfolio management and due diligence

Available Information

We file with or furnish to the SEC copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy

statements and other information meeting the information requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), and make such reports and any amendments thereto

available free of charge through the investor relations section of our website at www.GladstoneCapital.com as soon as reasonably practicable after such materials are electronically filed with or furnished to the SEC.

The SEC also maintains a

website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov .

The Adviser and the Administrator aim to attract and retain capable advisory and administrative personnel, respectively, by

offering competitive base salaries and bonus structure and by providing employees with appropriate opportunities for professional growth.

We file with or furnish to the SEC copies of our annual report on Form 10-K, quarterly

reports on Form 10-Q, current reports on Form 8-K, proxy statements and other information meeting the information requirements of Section 13(a) or

15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), and make such reports and any amendments thereto available free of charge through the Investors section of our website at www.GladstoneCapital.com

as soon as reasonably practicable after such materials are electronically filed with or

furnished to the SEC.

Information contained on our website is not incorporated by reference into this Annual Report.

The SEC also maintains a website that contains reports, proxy and information

statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov .

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

What changed 10-K

Item 1. Business