GLADSTONE CAPITAL CORP 10-K

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is traded on Nasdaq under the symbol “GLAD.” The following table reflects, by quarter, the high and low intraday sales prices per share of our common stock on the Nasdaq, the intraday sales prices as a percentage of NAV per share and quarterly distributions declared per common share for each fiscal quarter during the last two completed fiscal years and the current fiscal year through November 9, 2020. Quarter Ended/ Ending Sales Prices Premium / (Discount) of High to NAV (B) Premium (Discount) of Low to NAV (B) Declared Common Stock Distributions NAV (A) High Low Fiscal Year ended September 30, 2019: 12/31/2018 $ 7.98 $ 9.65 $ 6.41 20.9 % (19.7 )% $ 0.21 3/31/2019 8.11 9.58 7.21 18.1 (11.1 ) 0.21 6/30/2019 8.23 9.57 8.89 16.3 8.0 0.21 9/30/2019 8.22 9.77 9.09 18.9 10.6 0.21 Fiscal Year ended September 30, 2020: 12/31/2019 $ 8.08 $ 10.69 $ 9.35 32.3 % 15.7 % $ 0.21 3/31/2020 6.99 10.55 4.04 50.9 (42.2 ) 0.21 6/30/2020 7.27 8.27 4.50 13.8 (38.1 ) 0.195 9/30/2020 7.40 7.84 6.78 5.9 (8.4 ) 0.195 Fiscal Year ending September 30, 2021: 10/1/2020 (through 11/9/2020) $ * $ 7.92 $ 6.97 * * $ 0.195 (A) NAV per share is determined as of the last day in the relevant quarter and therefore may not reflect the NAV per share on the date of the high and low intraday sales prices. The NAVs per share shown are based on outstanding shares at the end of each period. (B) The premiums (discounts) set forth in these columns represent the high or low, as applicable, intraday sale prices per share for the relevant quarter minus the NAV per share as of the end of such quarter, and therefore may not reflect the premium (discount) to NAV per share on the date of the high and low intraday sales prices. * Not yet available, as the NAV per share as of the end of this quarter has not yet been determined. As of November 9, 2020, there were 33 record owners of our common stock. Distributions We generally intend to distribute in the form of cash distributions a minimum of 90.0% of our Investment Company Taxable Income, if any, on a quarterly basis to our stockholders in the form of monthly distributions. We generally intend to retain some or all of our long-term capital gains, if any, but generally intend to designate the retained amount as a deemed distribution, after giving effect to any prior year realized losses that are carried forward, to supplement our equity capital and support the growth of our portfolio. However, in certain cases, our Board of Directors may choose to distribute our net realized long-term capital gains, if any, by paying a one-time special distribution. Additionally, our Credit Facility contains a covenant that limits distributions to our stockholders on an annual basis to the sum of our net investment income, net capital gains and amounts deemed to have been paid during the prior year in accordance with Section 855(a) of the Code. Recent Sales of Unregistered Securities We did not sell any unregistered shares of stock during the fiscal year ended September 30, 2020. 51 Table of Contents Purchases of Equity Securities We did not repurchase any shares of our stock during the fourth quarter ended September 30, 2020. Stock Performance Graph The following graph shows the total stockholder return on an investment of $100 in cash on September 30, 2015 for (i) our common stock, (ii) the Nasdaq’s 100 total return index (“Nasdaq 100 TR”), (iii) the Standard & Poor’s 500 total return index (the “S&P 500 TR”), and (iv) the Wells Fargo BDC Total Return index (“WF BDC TR”). The graph and other information furnished under the heading “Stock Performance Graph” shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate it by reference and shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under, or to the liabilities of Section 18 of, the Exchange Act. The returns on each investment assume reinvestment of dividends. This stock performance graph and the related textual information are not necessarily indicative of future performance. GLAD Nasdaq 100 TR S&P 500 TR WF BDC TR 9/30/2015 $ 100.00 $ 100.00 $ 100.00 $ 100.00 9/30/2016 112.62 118.13 115.43 122.61 9/30/2017 144.05 146.58 136.91 133.69 9/28/2018 157.78 188.96 161.43 138.50 9/30/2019 177.76 194.13 168.30 148.34 9/30/2020 149.59 288.76 193.80 116.45 Fees and Expenses The following table is intended to assist you in understanding the costs and expenses that an investor in the Company will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this Annual Report 52 Table of Contents contains a reference to fees or expenses paid by “us” or the “Company,” or that “we” will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in the Company. The following annualized percentages were calculated based on actual expenses incurred in the quarter ended September 30, 2020 and average net assets for the quarter ended September 30, 2020. Stockholder Transaction Expenses: Sales load (as a percentage of offering price) (1) — % Offering expenses (as a percentage of offering price) (1) — % Dividend reinvestment plan expenses (2) None Total stockholder transaction expenses (1) — % Annual expenses (as a percentage of net assets attributable to common stock) (3) : Base Management fee (4) 3.47 % Loan servicing fee (5) 2.62 % Incentive fee (20% of realized capital gains and 20% of pre-incentive fee net investment income) (6) 2.36 % Interest payments on borrowed funds (7) 4.84 % Other expenses (8) 1.46 % Total annual expenses (9) 14.75 % (1) The amounts set forth in this table do not reflect the impact of any sales load, sales commission or other offering expenses borne by the Company and its stockholders. If applicable, the prospectus or prospectus supplement relating to an offering of our common stock will disclose the offering price and the estimated offering expenses and total stockholder transaction expenses borne by the Company and its common stockholders as a percentage of the offering price. In the event that shares of our common stock are sold to or through underwriters, the applicable prospectus or prospectus supplement will also disclose the applicable sales load. (2) The expenses of the dividend reinvestment plan are included in stock record expenses, a component of “other expenses.” The participants in the dividend reinvestment plan will bear a pro rata share of brokerage commissions incurred with respect to open market purchases, if any. See “ Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Distributions and Dividends to Stockholders—Dividend Reinvestment Plan ” for information on the dividend reinvestment plan. (3) The numbers presented in this table are before credits to any fees. (4) In accordance with our Advisory Agreement, our annual base management fee is 1.75% (0.4375% quarterly) of our average gross assets, which are defined as total assets of the Company, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings. In accordance with the requirements of the SEC, the table above shows the Company’s management fee as a percentage of average net assets attributable to common shareholders. For purposes of the table, the gross base management fee has been converted to 3.47% of the average net assets as of September 30, 2020 by dividing the total dollar amount of the management fee by Gladstone Capital’s average net assets. The base management fee for the quarter ended September 30, 2020 before application of any credits was $2.0 million. Under the Advisory Agreement, the Adviser has provided and continues to provide managerial assistance to our portfolio companies. It may also provide services other than managerial assistance to our portfolio companies and receive fees therefor. Such 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; (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) primary role in interviewing, vetting and negotiating employment contracts with candidates in connection with adding and retaining key portfolio company management team members. Generally, at the end of each quarter, 100.0% of these fees are non-contractually, unconditionally 53 Table of Contents and irrevocably credited against the base management fee that we would otherwise be required to pay to the Adviser; however, a small percentage of certain of such fees, primarily for valuation of the portfolio company, is retained by the Adviser in the form of reimbursement at cost for certain tasks completed by personnel of the Adviser. For the quarter ended September 30, 2020, the base management fee credit was $0.4 million. See “ Item 1. Business — Transactions with Related Parties — Investment Advisory and Management Agreement ” for additional information. (5) The Adviser services, administers and collects on the loans held by Business Loan in return for which the Adviser receives a 1.5% annual loan servicing fee payable monthly by Business Loan based on the monthly aggregate balance of loans held by Business Loan in accordance with the Credit Facility. For the three months ended September 30, 2020, the total loan servicing fee was $1.5 million. The entire loan servicing fee paid to the Adviser by Business Loan is generally non-contractually, unconditionally and irrevocably credited against the base management fee otherwise payable to the Adviser since Business Loan is a consolidated subsidiary of the Company, and overall, the base management fee (including any loan servicing fee) cannot exceed 1.75% of total assets (including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings) during any given fiscal year pursuant to the Advisory Agreement. See “ Item 1. Business—Transactions with Related Parties—Loan Servicing Fee Pursuant to Credit Facility ” and footnote 4 above for additional information. (6) In accordance with our Advisory Agreement, the incentive fee consists of two parts: an income-based fee and a capital gains-based fee. The income-based fee is payable quarterly in arrears, and equals 20.0% of the excess, if any, of our pre-incentive fee net investment income that exceeds a 1.75% quarterly (7.0% annualized) hurdle rate of our net assets (2.0% quarterly and 8.0% annualized during the one year period from April 1, 2020 through March 31, 2021), subject to a “catch-up” provision measured as of the end of each calendar quarter. The “catch-up” provision requires us to pay 100.0% of our pre-incentive fee net investment income with respect to that portion of such income, if any, that exceeds the hurdle rate but is less than 125.0% of the quarterly hurdle rate (or 2.1875%, 2.4375% during the one year period from April 1, 2020 through March 31, 2021) in any calendar quarter (8.75% annualized, 9.75% annualized during the one year period from April 1, 2020 through March 31, 2021). The catch-up provision is meant to provide the Adviser with 20.0% of our pre-incentive fee net investment income as if a hurdle rate did not apply when our pre-incentive fee net investment income exceeds 125.0% of the quarterly hurdle rate in any calendar quarter (8.75% annualized, 9.75% annualized during the one year period from April 1, 2020 through March 31, 2021). The income-based incentive fee is computed and paid on income that may include interest that is accrued but not yet received in cash. Our pre-incentive fee net investment income used to calculate this part of the income-based incentive fee is also included in the amount of our gross assets used to calculate the 1.75% base management fee (see footnote 4 above). The capital gains-based incentive fee equals 20.0% of our net realized capital gains since our inception, if any, computed net of all realized capital losses and unrealized capital depreciation since our inception, less any prior payments, and is payable at the end of each fiscal year. We have not recorded any capital gains-based incentive fee from our inception through September 30, 2020. The income-based incentive fee for the quarter ended September 30, 2020 was $1.4 million. From time to time, the Adviser has non-contractually, unconditionally and irrevocably agreed to waive a portion of the incentive fees, to the extent net investment income did not cover 100.0% of the distributions to common stockholders during the period. For the quarter ended September 30, 2020, the incentive fee credit was $0.1 million. There can be no guarantee that the Adviser will continue to credit any portion of the fees under the Advisory Agreement in the future. Examples of how the incentive fee would be calculated are as follows: • Assuming pre-incentive fee net investment income of 0.55%, there would be no income-based incentive fee because such income would not exceed the hurdle rate of 2.00%. • Assuming pre-incentive fee net investment income of 2.10%, the income-based incentive fee would be as follows: 54 Table of Contents = 100% &times; (2.10% - 2.00%) = 0.10% • Assuming pre-incentive fee net investment income of 2.50%, the income-based incentive fee would be as follows: = (100% &times; (“catch-up”: 2.4375% - 2.00%)) + (20% &times; (2.50% - 2.4375%)) = (100% &times; 0.4375%) + (20% &times; 0.0625%) = 0.4375% + 0.0125% = 0.45% • Assuming net realized capital gains of 6% and realized capital losses and unrealized capital depreciation of 1%, the capital gains-based incentive fee would be as follows: = 20% &times; (6% - 1%) = 20% &times; 5% = 1% For a more detailed discussion of the calculation of the two-part incentive fee, see “ Item 1. Business — Transactions with Related Parties — Investment Advisory and Management Agreement . ” (7) Includes amortization of deferred financing costs. As of September 30, 2020, we had $128.0 million in borrowings outstanding on our Credit Facility and $93.9 million in notes payable, net. See “ Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Revolving Line of Credit ” for additional information regarding the Credit Facility and “ Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Notes Payable ” for additional information regarding our notes payable. (8) Includes our overhead expenses, including payments under the Administration Agreement based on our projected allocable portion of overhead and other expenses estimated to be incurred by the Administrator in performing its obligations under the Administration Agreement for the current fiscal year. See “ Item 1. Business—Transactions with Related Parties—Administration Agreement ” for additional information. (9) Total annualized gross expenses, based on actual amounts incurred for the quarter ended September 30, 2020 (except as set forth in footnote 9), would be $33.9 million. After all non-contractual, unconditional and irrevocable credits described in footnote 4, footnote 5, and footnote 6 above are applied to the base management fee, the loan servicing fee, and the incentive fee, total annualized expenses, based on actual amounts incurred for the quarter ended September 30, 2020, would be $25.9 million or 11.24% as a percentage of net assets. Examples The following examples demonstrate the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed we would have no additional leverage and that our quarterly operating expenses would remain at the levels set forth in the table above and are gross of credits to any fees. The amounts set forth below do not reflect the impact of sales load or offering expenses to be borne by the Company or its stockholders. In the prospectus supplement relating to an offering of securities pursuant to the applicable prospectus, the examples below will be restated to reflect the impact of the estimated offering expenses borne by the Company and its stockholders and, if applicable, the impact of the applicable sales load. The examples below and the expenses in the table above should not be considered a representation of our future 55 Table of Contents expenses, and actual expenses (including the cost of debt, incentive fees, if any, and other expenses) may be greater or less than those shown. While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. 1 Year 3 Years 5 Years 10 Years You would pay the following expenses on a $1,000 investment: assuming a 5% annual return consisting entirely of ordinary income (1)(2) $ 132 $ 365 $ 561 $ 926 assuming a 5% annual return consisting entirely of capital gains (2)(3) $ 141 $ 386 $ 588 $ 953 (1) While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. Additionally, we have assumed that the entire amount of such 5% annual return would constitute ordinary income as we have not historically realized positive capital gains (computed net of all realized capital losses) on our investments. Because the assumed 5% annual return is significantly below the hurdle rate of 7% (annualized, 8% annualized during the one year period from April 1, 2020 through March 31, 2021) that we must achieve under the Advisory Agreement to trigger the payment of an income-based incentive fee, we have assumed, for purposes of this example, that no income-based incentive fee would be payable if we realized a 5% annual return on our investments. (2) While the example assumes reinvestment of all dividends and distributions at NAV, participants in our dividend reinvestment plan will receive a number of shares of our common stock, determined by dividing the total dollar amount of the dividend payable to a participant by the average cost of shares of our common stock purchased in the open market in the period beginning on or before the payment date of the distribution and ending when the plan agent has expended for such purchases all of the cash that would have been otherwise payable to participants. See “ Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Distributions and Dividends to Stockholders—Dividend Reinvestment Plan ” for additional information regarding our dividend reinvestment plan. (3) For purposes of this example, we have assumed that the entire amount of such 5% annual return would constitute capital gains and that no accumulated capital losses or unrealized depreciation exist that would have to be overcome first before a capital gains based incentive fee is payable. 56 Table of Contents Senior Securities Information about our senior securities is shown in the following table for the audited periods as of our last ten fiscal years. The information has been derived from our audited financial statements for each respective period, which have been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm. PricewaterhouseCoopers LLP’s report on the senior securities table as of September 30, 2020 is attached as an exhibit to this Annual Report. Class and Year Total Amount Outstanding (1) Asset Coverage per Unit (2) Involuntary Liquidating Preference per Unit (3) Average Market Value per Unit (4) Revolving Credit Facilities September 30, 2020 $ 128,000,000 $ 2,026 $ — N/A September 30, 2019 66,900,000 3,369 — N/A September 30, 2018 110,000,000 3,590 — N/A September 30, 2017 93,000,000 3,882 — N/A September 30, 2016 71,300,000 4,623 — N/A September 30, 2015 127,300,000 2,946 — N/A September 30, 2014 36,700,000 3,054 — N/A September 30, 2013 46,900,000 3,410 — N/A September 30, 2012 58,800,000 2,296 — N/A September 30, 2011 99,400,000 3,150 — N/A Series 2016 Term Preferred Stock (5) September 30, 2013 $ 38,497,050 $ 3,410 $ 25.00 $ 25.49 September 30, 2012 38,497,050 2,963 25.00 25.55 Series 2021 Term Preferred Stock (6) September 30, 2016 $ 61,000,000 $ 2,495 $ 25.00 $ 25.55 September 30, 2015 61,000,000 1,993 25.00 25.02 September 30, 2014 61,000,000 3,054 25.00 24.45 Series 2024 Term Preferred Stock (7) September 30, 2019 $ 51,750,000 $ 2,385 $ 25.00 $ 24.99 September 30, 2018 51,750,000 2,444 25.00 25.63 September 30, 2017 51,750,000 2,496 25.00 25.09 6.125% Notes due 2023 September 30, 2020 $ 57,500,000 $ 2,026 $ — $ 25.28 September 30, 2019 57,500,000 3,369 — 26.18 5.375% Notes due 2024 September 30, 2020 $ 38,812,500 $ 2,026 $ — $ 24.49 (1) Total amount of each class of senior securities outstanding at the end of the period presented. (2) Asset coverage ratio for a class of our “senior securities representing indebtedness” means the ratio of the value of our total assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of “senior securities representing indebtedness” and asset coverage ratio for a class of our “senior securities that are stock” means the ratio of the value of our total assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of “senior securities representing indebtedness” plus the aggregate involuntary liquidation preference of a class of “senior security that is stock.” Asset coverage per unit is the asset coverage ratio expressed in terms of dollar amounts per one thousand dollars of indebtedness. (3) The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security junior to it. (4) Only applicable to our Term Preferred Stock, 2023 Notes and 2024 Notes because the other senior securities are not registered for public trading. Average market value per unit is the average of the closing prices of the 57 Table of Contents securities on the Nasdaq during the last 10 trading days of the period. Average market value per unit for our Series 2024 Term Preferred Stock for September 30, 2017 is the average of the closing prices of the shares on the Nasdaq during the last seven trading days of the period as the stock started trading on September 21, 2017. (5) In November 2011, we issued 1,539,882 shares of 7.125% Series 2016 Term Preferred Stock (the “Series 2016 Term Preferred Stock”) through a public offering and subsequent exercise of an overallotment option. In May 2014, we voluntarily redeemed all outstanding shares of our Series 2016 Term Preferred Stock and therefore had no Series 2016 Term Preferred Stock outstanding at September 30, 2015. (6) In May 2014, we issued 2,440,000 shares of 6.75% Series 2021 Term Preferred Stock (the “Series 2021 Term Preferred Stock”) through a public offering and subsequent exercise of an overallotment option. In September 2017, we voluntarily redeemed all outstanding shares of our Series 2021 Term Preferred Stock and therefore had no Series 2021 Term Preferred Stock outstanding at September 30, 2017. (7) In September 2017, we issued 2,070,000 shares of Series 2024 Term Preferred Stock through a public offering and subsequent exercise of an overallotment option. In October 2019, we voluntarily redeemed all outstanding shares of our Series 2024 Term Preferred Stock. 58 Table of Contents ITEM 6. SELECTED FINANCIAL DATA The following consolidated selected financial data for the fiscal years ended September 30, 2020, 2019, 2018, 2017 and 2016 are derived from our audited Consolidated Financial Statements . The other data included in the second table below is unaudited. The data should be read in conjunction with our accompanying Notes to Consolidated Financial Statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report. GLADSTONE CAPITAL CORPORATION CONSOLIDATED SELECTED FINANCIAL AND OTHER DATA (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE) Year Ended September 30, 2020 2019 2018 2017 2016 Statement of Operations Data: Total Investment Income $ 47,959 $ 50,035 $ 45,581 $ 39,233 $ 39,112 Total Expenses, Net of Credits from Adviser 22,796 25,455 22,493 17,800 19,625 Net Investment Income 25,163 24,580 23,088 21,433 19,487 Net Realized and Unrealized Gain (Loss) (27,036 ) (4,711 ) (4,440 ) (4,253 ) (8,120 Net Increase in Net Assets Resulting from Operations $ (1,873 ) $ 19,869 $ 18,648 $ 17,180 $ 11,367 Per Share Data: Net Investment Income per Common Share—Basic and Diluted (A) $ 0.81 $ 0.84 $ 0.85 $ 0.84 $ 0.84 Net Increase (Decrease) in Net Assets Resulting from Operations per Common Share—Basic and Diluted (A) (0.06 ) 0.68 0.69 0.67 0.49 Distributions Declared and Paid Per Common Share (B) 0.81 0.84 0.84 0.84 0.84 Statement of Assets and Liabilities Data: Total Assets $ 459,177 $ 426,069 $ 399,508 $ 365,860 $ 337,178 Net Assets 233,743 249,330 237,092 219,650 201,207 Net Asset Value Per Common Share 7.40 8.22 8.32 8.40 8.62 Common Shares Outstanding 31,566,850 30,345,923 28,501,980 26,160,684 23,344,422 Weighted Common Shares Outstanding—Basic and Diluted 31,040,852 29,269,466 27,104,077 25,495,117 23,200,642 Senior Securities Data: Total borrowings, at cost (C) $ 128,000 $ 66,900 $ 110,000 $ 93,000 $ 71,300 Mandatorily redeemable preferred stock (C)(D) — 51,750 51,750 51,750 61,000 Notes payable 96,313 57,500 — — — (A) Per share data is based on the weighted average common stock outstanding for both basic and diluted. 59 Table of Contents (B) The tax character of distributions is determined on an annual basis. For further information on the estimated character of our distributions to common stockholders, please refer to Note 9— Distributions to Common Stockholders in the accompanying Notes to Consolidated Financial Statements included elsewhere in this Annual Report. (C) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information regarding our level of indebtedness. (D) Represents the total liquidation preference of our mandatorily redeemable term preferred stock. Year Ended September 30, 2020 2019 2018 2017 2016 Other Unaudited Data: Number of Portfolio Companies 48 53 50 47 45 Average Size of Portfolio Company Investment at Cost $ 10,305 $ 8,084 $ 8,549 $ 8,754 $ 8,484 Principal Amount of New Investments 131,150 124,168 67,936 99,241 79,401 Disbursements to Existing Portfolio Companies 18,756 22,899 38,679 12,851 10,145 Proceeds from Loan Repayments, Investments Sold and Exits (A) 78,755 131,061 67,944 83,444 121,144 Weighted Average Yield on Investments, excluding loans on non-accrual status (B) 10.97 % 12.26 % 11.80 % 11.57 % 11.08 % Weighted Average Yield on Investments, including loans on non-accrual status (C) 10.77 11.82 10.72 10.61 10.27 Total Return (D) (15.75 ) 12.55 9.53 27.90 11.68 (A) Includes non-cash reductions in cost basis. (B) Weighted average yield on investments, excluding loans on non-accrual status, equals interest income on investments divided by the weighted average interest-bearing principal balance throughout the fiscal year. (C) Weighted average yield on investments, including loans on non-accrual status, equals interest income on investments divided by the weighted average total principal balance throughout the fiscal year. (D) Total return equals the change in the ending market value of our common stock from the beginning of the fiscal year, assuming reinvestment of dividends on our common stock. Total return does not take into account distributions that may be characterized as a return of capital. For further information on the estimated character of our distributions to common stockholders, refer to Note 9— Distributions to Common Stockholders elsewhere in this Annual Report. 60 Table of Contents ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis of our financial condition and results of operations should be read in conjunction with our accompanying Consolidated Financial Statements and the notes thereto contained elsewhere in this Annual Report. Historical financial condition and results of operations and percentage relationships among any amounts in the financial statements are not necessarily indicative of financial condition, results of operations or percentage relationships for any future periods. Except per share amounts, dollar amounts in the tables included herein are in thousands unless otherwise indicated. OVERVIEW General We were incorporated under the Maryland General Corporation Law on May 30, 2001. We operate as an externally managed, closed-end, non-diversified management investment company, and have elected to be treated as a BDC under the 1940 Act. In addition, for federal income tax purposes we have elected to be treated as a RIC under the Code. To continue to qualify as a RIC for federal income tax purposes and obtain favorable RIC tax treatment, we must meet certain requirements, including certain minimum distribution requirements. We were established for the purpose of investing in debt and equity securities of established private businesses operating in the U.S. Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established lower middle market companies in the U.S. that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities, in connection with our debt investments, that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our investment objectives, our primary investment strategy is to invest in several categories of debt and equity securities, with each investment generally ranging from $8 million to $30 million, although investment size may vary, depending upon our total assets or available capital at the time of investment. We expect that our investment portfolio over time will consist of approximately 90.0% debt investments and 10.0% equity investments, at cost. As of September 30, 2020, our investment portfolio was made up of approximately 91.3% debt investments and 8.7% equity investments, at cost. We focus on investing in lower middle market companies (which we generally define as companies with annual earnings before interest, taxes, depreciation and amortization of $3 million to $15 million) in the U.S. that meet certain criteria, including the following: the sustainability of the business’ free cash flow and its ability to grow it over time, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the borrower, reasonable capitalization of the borrower, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples and, to a lesser extent, the potential to realize appreciation and gain liquidity in our equity position, if any. We lend to borrowers that need funds for growth capital or to finance acquisitions or recapitalize or refinance their existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises. Our targeted portfolio companies are generally considered too small for the larger capital marketplace. We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity. In July 2012, the SEC granted us the Co-Investment Order that expanded our ability to co-invest, under certain circumstances, with certain of our affiliates, including Gladstone Investment, a BDC also managed by the Adviser, 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. Since 2012, we have opportunistically made several co-investments with Gladstone Investment Corporation pursuant to the Co-Investment Order. We believe the Co-Investment Order has enhanced 61 Table of Contents and will continue to enhance our ability to further our investment objectives and strategies. If we are participating in an investment with one or more co-investors, whether or not an affiliate of ours, our investment is likely to be smaller than if we were investing alone. Business Portfolio and Investment Activity In general, our investments in debt securities have a term of no more than seven years, accrue interest at variable rates (generally based on the 30-day 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 PIK interest. Typically, our equity investments consist of common stock, preferred stock, limited liability company interests, or warrants to purchase the foregoing. Often, these equity investments occur in connection with our original investment, recapitalizing a business, or refinancing existing debt. During the year ended September 30, 2020, we invested $131.2 million in six new portfolio companies and extended $18.8 million in investments to existing portfolio companies. In addition, during the year ended September 30, 2020, we exited eleven portfolio companies through early payoffs or a restructure. We received a total of $78.8 million in combined net proceeds and principal repayments from the aforementioned portfolio company exits as well as principal repayments by existing portfolio companies during the year ended September 30, 2020. This activity resulted in a net decrease in our overall portfolio by five portfolio companies to 48 and a net increase of $66.2 million in our portfolio at cost since September 30, 2019. From our initial public offering in August 2001 through September 30, 2020, we have made 553 different loans to, or investments in, 246 companies for a total of approximately $2.1 billion, before giving effect to principal repayments on investments and divestitures. During the year ended September 30, 2020, the following significant transactions occurred: Proprietary Investments • In October 2019, we invested $14.0 million in Universal Survey Center, Inc. through secured first lien debt. • In December 2019, we invested $24.0 million in Caf&eacute; Zupas through secured first lien debt. • In January 2020, we invested an additional $5.5 million in Lignetics, Inc., an existing portfolio company, through a combination of secured second lien debt and preferred equity. In July 2020, we sold $6.0 million of our debt investment in Lignetics, Inc. at par. • In January 2020, we sold our investment in The Mochi Ice Cream Company (“Mochi”), which resulted in a realized gain of approximately $2.5 million. In connection with the sale, we received net cash proceeds of approximately $9.7 million, including the repayment of our debt investment of $6.8 million at par. • In January 2020, we exited our investment in Meridian Rack & Pinion, Inc. (“Meridian”), with a fair value of $0 as of December 31, 2019 and recorded a realized loss of $5.6 million. • In February 2020, we invested $19.0 million in American Trailer Rental Group LLC through a combination of secured second lien debt and common equity. 62 Table of Contents • In March 2020, our investments in XMedius America, Inc. and XMedius Solutions Inc. paid off at par for combined net proceeds of $14.9 million. • In May 2020, we invested $30.0 million in Magpul Industries Corp. through secured second lien debt. • In May 2020, we invested $23.5 million in ALS Education, LLC through secured first lien debt. • In May 2020, we sold our investment in Travel Sentry, Inc. for net proceeds of $6.1 million, which resulted in a $0.1 million realized loss. • In May 2020, our debt investment in Canopy Safety Brands, LLC paid off at par for net proceeds of $3.8 million. • In July 2020, our investment in Universal Survey Center, Inc. paid off at par for net proceeds of $14.1 million. In conjunction with the payoff, we received a prepayment fee of $0.3 million. • In August 2020, we invested $20.7 million in Aerospace Engineering, LLC through secured first lien debt. Syndicated Investments • In October 2019, we invested an additional $3.0 million in Medical Solutions Holdings, Inc., an existing portfolio company, through secured second lien debt. • In October 2019, our investment in DigiCert Holdings, Inc. paid off at par for net proceeds of $2.4 million. • In December 2019, our investment in LDiscovery, LLC paid off at par for net proceeds of $5.0 million. • In December 2019, our investment in United PF Holdings, LLC paid off at par for net proceeds of $3.1 million. In conjunction with the payoff, we received a prepayment fee of $0.1 million. • In December 2019, we recorded a net realized loss of $4.4 million related to our investment in New Trident Holdcorp, Inc. (“New Trident”) which filed for bankruptcy protection in February 2019. • In June 2020, our investment in DiscoverOrg, LLC paid off at par for net proceeds of $3.3 million. In conjunction with the payoff, we received a prepayment fee of $33 thousand. Refer to Note 15— Subsequent Events in the accompanying Consolidated Financial Statements included elsewhere in this Annual Report for portfolio activity occurring subsequent to September 30, 2020. Capital Raising We have been able to meet our capital needs through extensions of and increases to our line of credit under the Credit Facility and by accessing the capital markets in the form of public equity offerings of common stock and public debt offerings. We have successfully extended the Credit Facility’s revolving period multiple times, most recently to July 2021, and currently have a total commitment amount of $180.0 million. We sold 1,220,927 and 1,843,943 common shares under our at-the-market program during the years ended September 30, 2020 and 2019, respectively. In October 2019, we completed a public debt offering of $38.8 million aggregate principal amount of the 2024 Notes, inclusive of the overallotment. Additionally, we completed a public debt offering of $57.5 million aggregate principal amount of our 2023 Notes, inclusive of the overallotment in November 2018. Refer to “Liquidity and Capital Resources — Revolving Credit Facility,” “Liquidity and Capital Resources — Equity — Common Stock,” and “Liquidity and Capital Resources — Notes Payable” for further discussion. Although we were able to access the capital markets historically and in recent years, market conditions, including the impact of COVID-19 and the results of the election, may continue to affect the trading price of our capital stock and thus may inhibit our ability to finance new investments through the issuance of equity. When our 63 Table of Contents common stock trades below NAV per common share, as it has done periodically since March 2020, our ability to issue equity is constrained by provisions of the 1940 Act, which generally prohibits the issuance and sale of our common stock below NAV per common share without first obtaining approval from our stockholders and our independent directors, other than through sales to our then-existing stockholders pursuant to a rights offering. On September 30, 2020, the closing market price of our common stock was $7.41 per share, a 0.1% premium to our September 30, 2020 NAV per share of $7.40. Regulatory Compliance Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage limitations of the 1940 Act, which require us to have an asset coverage (as defined in Sections 18 and 61 of the 1940 Act) of at least 150% on our “senior securities representing indebtedness” and our “senior securities that are stock.” On April 10, 2018, our Board of Directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) thereof, approved the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, the Company’s asset coverage requirements for senior securities changed from 200% to 150%, effective April 10, 2019. As of September 30, 2020, our asset coverage on our “senior securities representing indebtedness” was 202.6%. Recent Developments Distributions In October 2020, our Board of Directors declared the following monthly cash distributions to common stockholders: Record Date Payment Date Distribution per Common Share October 23, 2020 October 30, 2020 $ 0.065 November 20, 2020 November 30, 2020 0.065 December 23, 2020 December 31, 2020 0.065 Total for the Quarter $ 0.195 LIBOR Transition In general, our investments in debt securities have a term of five years, accrue interest at variable rates (based on the 30-day LIBOR) and, to a lesser extent, at fixed rates. LIBOR is currently anticipated to be phased out during late 2021. LIBOR may transition to a new standard rate, the SOFR, which will incorporate certain overnight repo market data collected from multiple data sets. To attain an equivalent 30-day rate, we currently intend to adjust the SOFR to minimize the difference between the interest that a borrower would be paying using LIBOR versus what it will be paying using SOFR. We are currently monitoring the transition and cannot assure you whether SOFR will become a standard rate for variable rate debt. However, we expect we will need to renegotiate certain loan documents with our portfolio companies that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established and may also need to renegotiate certain provisions of the Credit Facility. Assuming that SOFR replaces LIBOR and is appropriately adjusted to equate to 30-day LIBOR, we expect that there should be minimal impact on our operations. 64 Table of Contents COVID-19 We continue to monitor and work with the management teams and shareholders of our portfolio companies to navigate the significant market, operational and economic challenges created by the COVID-19 pandemic. The Company’s investment portfolio continues to be focused on a diversified mix of industries and sectors that are generally expected to be more durable than industries or sectors that are more prone to economic cycles including consumer or retail industries. We believe our portfolio companies have taken immediate actions to effectively and efficiently respond to the challenges posed by COVID-19 and related orders imposed by state and local governments including paused or reversed reopening orders, including developing liquidity plans supported by internal cash reserves, shareholder support, and as appropriate accessing the government Paycheck Protection Program. We believe we have sufficient levels of liquidity to support our existing portfolio companies, as necessary, and selectively deploy capital in new investment opportunities. 65 Table of Contents RESULTS OF OPERATIONS Comparison of the Year Ended September 30, 2020 to the Year Ended September 30, 2019 For the Year Ended September 30, 2020 2019 $ Change %Change INVESTMENT INCOME Interest income $ 46,021 $ 45,768 $ 253 0.6 % Other income 1,938 4,267 (2,329 ) (54.6 ) Total investment income 47,959 50,035 (2,076 ) (4.1 ) EXPENSES Base management fee 7,568 7,230 338 4.7 Loan servicing fee 5,819 5,072 747 14.7 Incentive fee 5,251 5,776 (525 ) (9.1 ) Administration fee 1,430 1,325 105 7.9 Interest expense on borrowings 9,991 8,037 1,954 24.3 Dividend expense on mandatorily redeemable preferred stock 9 3,105 (3,096 ) (99.7 ) Amortization of deferred financing costs 1,484 1,348 136 10.1 Other expenses 2,096 2,020 76 3.8 Expenses, before credits from Adviser 33,648 33,913 (265 ) (0.8 ) Credit to base management fee – loan servicing fee (5,819 ) (5,072 ) (747 ) 14.7 Credit to fees from Adviser – other (5,033 ) (3,386 ) (1,647 ) 48.6 Total expenses, net of credits 22,796 25,455 (2,659 ) (10.4 ) NET INVESTMENT INCOME 25,163 24,580 583 2.4 NET REALIZED AND UNREALIZED (LOSS) GAIN Net realized loss on investments (7,476 ) (16,388 ) 8,912 (54.4 ) Net realized loss on other (1,407 ) — (1,407 ) NM Net unrealized appreciation of investments (18,670 ) 11,844 (30,514 ) (257.6 ) Net unrealized appreciation (depreciation) of other 517 (167 ) 684 (409.6 ) Net loss from investments and other (27,036 ) (4,711 ) (22,325 ) 473.9 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (1,873 ) $ 19,869 $ (21,742 ) (109.4 )% PER BASIC AND DILUTED COMMON SHARE Net investment income $ 0.81 $ 0.84 $ (0.03 ) (3.6 )% Net increase (decrease) in net assets resulting from operations $ (0.06 ) $ 0.68 $ (0.74 ) (108.8 )% NM – not meaningful Investment Income Interest income increased by 0.6% for the year ended September 30, 2020, as compared to the prior year. The increase was due primarily to an increase in the weighted average principal balance of our interest-bearing portfolio, partially offset by a decrease in the weighted average yield on our interest-bearing portfolio. The weighted average yield on our interest-bearing investments is based on the current stated interest rate on interest-bearing investments, which decreased to 11.0% for the year ended September 30, 2020, compared to 12.3% for 66 Table of Contents the year ended September 30, 2019, inclusive of any allowances on interest receivables made during those periods. The decrease was driven mainly by a decrease in LIBOR over the two respective years. The weighted average principal balance of our interest-bearing investment portfolio for the year ended September 30, 2020, was $418.0 million, compared to $373.7 million for the year ended September 30, 2019, an increase of $44.3 million, or 11.9%. As of September 30, 2020, loans to one portfolio company, B+T Group Acquisition Inc. (“B+T”), were on non-accrual status, with an aggregate debt cost basis of approximately $7.2 million, or 1.6% of the cost basis of all debt investments in our portfolio. As of September 30, 2019, loans to two portfolio companies, Meridian and New Trident, were on non-accrual status with an aggregate debt cost basis of approximately $8.5 million, or 2.2% of the cost basis of all debt investments in our portfolio. Other income decreased by 54.6% during the year ended September 30, 2020, as compared to the prior year period primarily due to a $1.6 million decrease in success fees received year over year and a $0.7 million decrease in prepayment fees received year over year. As of September 30, 2020 and 2019, no single investment represented greater than 10% of the total investment portfolio at fair value. Expenses Expenses, net of any non-contractual, unconditional and irrevocable credits to fees from the Adviser, decreased $2.7 million, or 10.4%, for the year ended September 30, 2020 as compared to the prior year. This decrease was primarily due to a $3.1 million decrease in preferred dividend expense due to the redemption of our Series 2024 Term Preferred Stock in October 2019 and a $1.6 million increase in credits to fees from the Adviser, partially offset by a $2.0 million increase in interest expense on borrowings and notes payable. Interest expense increased by 24.3% during the year ended September 30, 2020, as compared to the prior year, due primarily to the issuance of $38.8 million aggregate principal amount of the 2024 Notes in October 2019. We incurred $2.0 million in interest expense related to the 2024 Notes issuance during the year ended September 30, 2020 versus no such amounts in the prior year period. The weighted average balance outstanding on our Credit Facility during the year ended September 30, 2020 was $103.5 million, as compared to $71.5 million in the prior year, an increase of 44.7%. The effective interest rate on our Credit Facility, including unused commitment fees incurred but excluding the impact of deferred financing costs, was 4.3% during the year ended September 30, 2020, compared to 6.8% during the prior year. The decrease in the effective interest rate was driven primarily by a decrease in LIBOR and a decrease in unused commitment fees as compared to the prior year period. Interest expense on our Credit Facility decreased by $0.4 million period over period as the decrease in the effective interest rate more than offset the increase in the weighted average balance outstanding on our Credit Facility. The net base management fee earned by the Adviser increased by $0.2 million, or 4.5%, during the year ended September 30, 2020, as compared to the prior year, resulting from an increase in average total assets subject to the base management fee period over period. The income-based incentive fee decreased by $0.5 million, or 9.1%, for the year ended September 30, 2020, as compared to the prior year, due to lower pre-incentive fee net investment income over the respective periods and the change to the incentive fee hurdles effective April 1, 2020 as described under “Transactions with the Adviser” in Note 4 —Related Party Transactions of the Notes to Consolidated Financial Statements . Our Board of Directors accepted non-contractual, unconditional and irrevocable credits from the Adviser of $3.0 million and $1.5 million, to reduce the income-based incentive fee to the extent net investment income did not cover 100.0% of our distributions to common stockholders during the years ended September 30, 2020 and 2019, respectively. The base management, loan servicing and incentive fees, and associated non-contractual, unconditional and irrevocable credits, are computed quarterly, as described under “Transactions with the Adviser” in Note 4— 67 Table of Contents Related Party Transactions of the Notes to Consolidated Financial Statements and are summarized in the following table: Year Ended September 30, 2020 2019 Average total assets subject to base management fee (A) $ 432,457 $ 413,143 Multiplied by annual base management fee of 1.75% 1.75 % 1.75 % Base management fee (B) 7,568 7,230 Portfolio company fee credit (1,589 ) (1,474 ) Syndicated loan fee credit (406 ) (424 ) Net Base Management Fee $ 5,573 $ 5,332 Loan servicing fee (B) $ 5,819 $ 5,072 Credit to base management fee—loan servicing fee (B) (5,819 ) (5,072 ) Net Loan Servicing Fee $ — $ — Incentive fee (B) $ 5,251 $ 5,776 Incentive fee credit (3,038 ) (1,488 ) Net Incentive Fee $ 2,213 $ 4,288 Portfolio company fee credit $ (1,589 ) $ (1,474 ) Syndicated loan fee credit (406 ) (424 ) Incentive fee credit (3,038 ) (1,488 ) Credit to Fees from Adviser—Other (B) $ (5,033 ) $ (3,386 ) (A) Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the two most recently completed quarters within the respective years and adjusted appropriately for any share issuances or repurchases during the period. (B) Reflected, on a gross basis, as a line item on our accompanying Consolidated Statement of Operations located elsewhere in this Annual Report. Realized Loss and Unrealized Appreciation Net Realized Loss on Investments For the year ended September 30, 2020, we recorded a net realized loss on investments of $7.5 million, which resulted primarily from the sale of our investment in Meridian in January 2020 for a $5.6 million realized loss and the loss recognized on our investment in New Trident of $4.4 million in December 2019, partially offset by a realized gain of $2.5 million from the sale of our investment in Mochi in January 2020. For the year ended September 30, 2019, we recorded a net realized loss on investments of $16.4 million, which resulted primarily from the restructuring of our investment in Francis Drilling Fluids, Ltd. (“FDF”) in December 2018 and the associated recognition of a $26.9 million net realized loss, partially offset by the sale of our investment in Alloy Die Casting Co (“ADC”) in August 2019 for an $8.7 million realized gain. Net Unrealized Appreciation of Investments During the year ended September 30, 2020, we recorded net unrealized depreciation of investments in the aggregate amount of $18.7 million. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the year ended September 30, 2020 were as follows: 68 Table of Contents Year Ended September 30, 2020 Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized Depreciation (Appreciation) Net Gain (Loss) Vertellus Holdings LLC $ — $ 2,194 $ — $ 2,194 Lignetics, Inc. (63 ) 1,654 — 1,591 The Mochi Ice Cream Company 2,533 1,541 (2,570 ) 1,504 Antenna Research Associates, Inc. — 1,098 — 1,098 Leeds Novamark Capital I, L.P. — 1,002 — 1,002 Vacation Rental Pros Property Management, LLC — 384 — 384 New Trident Holdcorp, Inc. (4,409 ) — 4,409 — DiscoverOrg, LLC — (348 ) 336 (12 ) Travel Sentry, Inc. (92 ) (525 ) 534 (83 ) Meridian Rack & Pinion, Inc. (5,589 ) (112 ) 5,589 (112 ) Targus Cayman HoldCo, Ltd. — (199 ) — (199 ) Precision International, LLC — (268 ) — (268 ) Canopy Safety Brands, LLC — (442 ) 122 (320 ) R2i Holdings, LLC — (333 ) — (333 ) CHA Holdings, Inc. — (336 ) — (336 ) Medical Solutions Holdings, Inc. — (343 ) — (343 ) Caf&eacute; Zupas — (519 ) — (519 ) EL Academies, Inc. — (553 ) — (553 ) Keystone Acquisition Corp. — (589 ) — (589 ) Triple H Food Processors, LLC — (642 ) — (642 ) Tailwind Smith Cooper Intermediate Corporation — (833 ) — (833 ) B+T Group Acquisition Inc. — (858 ) — (858 ) DKI Ventures, LLC — (1,221 ) — (1,221 ) LWO Acquisitions Company LLC — (1,768 ) — (1,768 ) Sea Link International IRB, Inc. — (1,928 ) — (1,928 ) NetFortris Corp. — (2,426 ) — (2,426 ) Edge Adhesives Holdings, Inc. — (2,977 ) — (2,977 ) FES Resources Holdings LLC — (3,236 ) — (3,236 ) Defiance Integrated Technologies, Inc. — (4,179 ) — (4,179 ) Imperative Holdings Corporation — (4,776 ) — (4,776 ) ENET Holdings, LLC — (5,196 ) — (5,196 ) Other, net (<$250) 144 (227 ) (129 ) (212 ) Total: $ (7,476 ) $ (26,961 ) $ 8,291 $ (26,146 ) Since March 2020, the U.S. loan market has exhibited a heightened level of volatility and wider credit spreads associated with the uncertainty and potentially adverse economic ramifications of the spread of COVID-19. The combination of the marked increase in market spreads for comparable loan investments and discounts applied to any portfolio company whose markets, or operations have been impacted by the COVID-19 pandemic, were the primary drivers of net unrealized depreciation of investments of $18.7 million for year ended September 30, 2020. The decreased performance of certain of our portfolio companies, a decrease in comparable multiples used to estimate the fair value of certain of our portfolio companies, and the reversal of previously recorded unrealized appreciation of Mochi upon exit, partially offset by the reversal of previously recorded unrealized depreciation upon the exit of Meridian and New Trident also impacted the total net unrealized depreciation. 69 Table of Contents During the year ended September 30, 2019, we recorded net unrealized appreciation of investments in the aggregate amount of $11.8 million. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the year ended September 30, 2019 were as follows: Year Ended September 30, 2019 Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized Depreciation (Appreciation) Net Gain (Loss) Alloy Die Casting Co. $ 8,734 $ 7,419 $ (5,415 ) $ 10,738 Defiance Integrated Technologies, Inc. — 3,199 — 3,199 Targus Cayman HoldCo, Ltd. — 2,495 — 2,495 Leeds Novamark Capital I, L.P. — 1,365 — 1,365 The Mochi Ice Cream Company — 1,208 — 1,208 Vision Government Solutions, Inc. — 1,162 (6 ) 1,156 GFRC Holdings, LLC — 955 — 955 PIC 360, LLC — 689 — 689 Arc Drilling Holding LLC — 668 — 668 Vacation Rental Pros Property Management, LLC — 645 — 645 LDiscovery, LLC — 516 — 516 Precision International, LLC — 488 — 488 Canopy Safety Brands, LLC — 357 — 357 Funko Acquisition Holdings, LLC 499 (131 ) (263 ) 105 Impact! Chemical Technologies, Inc — (619 ) 647 28 FedCap Partners, LLC (814 ) — 833 19 Triple H Food Processors, LLC — (40 ) (40 ) (80 ) Red Ventures, LLC — — (119 ) (119 ) WadeCo Specialties, Inc. — (236 ) 95 (141 ) Phoenix Aromas & Essential Oils, LLC — (162 ) — (162 ) United Flexible, Inc. 2,145 50 (2,387 ) (192 ) Lignetics, Inc. — (201 ) — (201 ) Sea Link International IRB, Inc. — (221 ) — (221 ) DKI Ventures, LLC — (227 ) — (227 ) Travel Sentry, Inc. — (240 ) — (240 ) TNCP Intermediate HoldCo, LLC — (266 ) — (266 ) Belnick, Inc. — (325 ) — (325 ) EL Academies, Inc. — (429 ) — (429 ) NetFortris Corp. — (544 ) — (544 ) Imperative Holdings Corporation — (585 ) — (585 ) Merlin International, Inc. — (600 ) — (600 ) R2i Holdings, LLC — (638 ) — (638 ) ENET Holdings, LLC (90 ) (580 ) — (670 ) IA Tech, LLC — (450 ) (450 ) (900 ) Antenna Research Associates, Inc. — (1,243 ) — (1,243 ) Edge Adhesives Holdings, Inc. — (2,409 ) — (2,409 ) Meridian Rack & Pinion, Inc. — (2,993 ) — (2,993 ) FES Resources Holdings LLC — (3,114 ) — (3,114 ) LWO Acquisitions Company LLC — (6,289 ) — (6,289 ) Francis Drilling Fluids, Ltd. (26,872 ) — 20,379 (6,493 ) Other, net (<$250) 10 (105 ) 1 (94 ) Total: $ (16,388 ) $ (1,431 ) $ 13,275 $ (4,544 ) The largest driver of our net unrealized appreciation of $11.8 million for the year ended September 30, 2019 was the reversal of previously recorded unrealized depreciation upon the restructure of FDF. This appreciation was 70 Table of Contents partially offset by the decline in the valuation of LWO Acquisitions Company LLC due to its financial and operational performance. As of September 30, 2020, the fair value of our investment portfolio was less than its cost basis by approximately $44.3 million and our entire investment portfolio was valued at 91.1% of cost, as compared to cumulative net unrealized depreciation of $25.6 million and a valuation of our entire portfolio at 94.0% of cost as of September 30, 2019. This year over year increase in the cumulative unrealized depreciation on investments represents net unrealized depreciation of $18.7 million for the year ended September 30, 2020. The cumulative net unrealized depreciation of our investments does not have an impact on our current ability to pay distributions to stockholders; however, it may be an indication of future realized losses, which could ultimately reduce our income available for distribution to stockholders. Net Unrealized (Appreciation) Depreciation of Other During the year ended September 30, 2020, we recorded $0.5 million of unrealized appreciation on our Credit Facility at fair value as compared to $0.2 million of unrealized depreciation during the year ended September 30, 2019. Comparison of the Year Ended September 30, 2019 to the Year Ended September 30, 2018 For the Year Ended September 30, 2019 2018 $ Change %Change INVESTMENT INCOME Interest income $ 45,768 $ 43,958 $ 1,810 4.1 % Other income 4,267 1,623 2,644 162.9 Total investment income 50,035 45,581 4,454 9.8 EXPENSES Base management fee 7,230 7,033 197 2.8 Loan servicing fee 5,072 5,042 30 0.6 Incentive fee 5,776 5,348 428 8.0 Administration fee 1,325 1,250 75 6.0 Interest expense on borrowings 8,037 5,858 2,179 37.2 Dividend expense on mandatorily redeemable preferred stock 3,105 3,105 — — Amortization of deferred financing costs 1,348 1,014 334 32.9 Other expenses 2,020 1,966 54 2.7 Expenses, before credits from Adviser 33,913 30,616 3,297 10.8 Credit to base management fee—loan servicing fee (5,072 ) (5,042 ) (30 ) 0.6 Credit to fees from Adviser—other (3,386 ) (3,081 ) (305 ) 9.9 Total expenses, net of credits 25,455 22,493 2,962 13.2 NET INVESTMENT INCOME 24,580 23,088 1,492 6.5 NET REALIZED AND UNREALIZED (LOSS) GAIN Net realized loss on investments (16,388 ) (26,063 ) 9,675 (37.1 ) Net realized loss on other — (133 ) 133 (100.0 ) Net unrealized appreciation of investments 11,844 21,641 (9,797 ) (45.3 ) Net unrealized appreciation (depreciation) of other (167 ) 115 (282 ) (245.2 ) Net loss from investments and other (4,711 ) (4,440 ) (271 ) 6.1 NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 19,869 $ 18,648 $ 1,221 6.5 % PER BASIC AND DILUTED COMMON SHARE Net investment income $ 0.84 $ 0.85 $ (0.01 ) (1.2 )% Net increase in net assets resulting from operations $ 0.68 $ 0.69 $ (0.01 ) (1.4 )% 71 Table of Contents Investment Income Interest income increased by 4.1% for the year ended September 30, 2019, as compared to the prior year. This increase was primarily due to an increase in the weighted average yield on our interest-bearing portfolio. The weighted average yield on our interest-bearing investments is based on the current stated interest rates on interest-bearing investments which increased to 12.3% for the year ended September 30, 2019 compared to 11.8% for the year ended September 30, 2018, inclusive of any allowances on interest receivables made during those periods. The increase in the weighted average yield was partially driven by the receipt and recognition of $0.9 million of past due interest upon the exit of our investment in ADC in August 2019. The weighted average principal balance of our interest-bearing investment portfolio remained relatively flat for the year ended September 30, 2019, compared to the prior year. As of September 30, 2019, two portfolio companies, Meridian and Trident, were on non-accrual status with an aggregate debt cost basis of approximately $8.5 million, or 2.2% of the cost basis of all debt investments in our portfolio. As of September 30, 2018, one portfolio company, FDF was on non-accrual status, with an aggregate debt cost basis of approximately $26.9 million, or 6.9% of the cost basis of all debt investments in our portfolio. Other income increased by 162.9% during the year ended September 30, 2019, as compared to the prior year, primarily due to an increase in success fees and prepayment penalties received. For the year ended September 30, 2019, other income consisted primarily of $1.9 million in success fees recognized, $1.2 million in prepayment fees received, and $1.1 million in dividend income. For the year ended September 30, 2018, other income consisted primarily of $0.6 million in prepayment fees received, $0.5 million in dividend income, and $0.4 million in success fees recognized. As of September 30, 2019 and 2018, no single investment represented greater than 10% of the total investment portfolio at fair value. Expenses Expenses, net of any non-contractual, unconditional and irrevocable credits to fees from the Adviser, increased $3.0 million, or 13.2%, for the year ended September 30, 2019 as compared to the prior year period. This increase was primarily due to a $2.2 million increase in interest expense on borrowings. Interest expense increased by 37.2% during the year ended September 30, 2019, as compared to the prior year, primarily due to the issuance of $57.5 million aggregate principal amount of the 2023 Notes in November 2018 and an increase in the effective interest rate on our Credit Facility. We incurred $3.2 million in interest expense related to the 2023 Notes during the year ended September 30, 2019 versus no such amounts in the prior year period. The weighted average balance outstanding on our Credit Facility decreased during the year ended September 30, 2019 compared to the prior year period with the issuance of the 2023 Notes. The weighted average balance outstanding during the year ended September 30, 2019, was $71.5 million, as compared to $114.7 million in the prior year, a decrease of 37.7%. The effective interest rate on our Credit Facility, including unused commitment fees incurred but excluding the impact of deferred financing costs, was 6.8% during the year ended September 30, 2019, compared to 5.1% during the prior year. The increase in the effective interest rate was driven by an increase in LIBOR as compared to the prior year period and an increase in unused commitment fees paid in the current year period, partially offset by a decrease in the marginal interest rate on our Credit Facility effective March 9, 2018. The net base management fee earned by the Adviser decreased by $0.3 million, or 5.6%, during the year ended September 30, 2019, as compared to the prior year, resulting primarily from an increase in credits from the Adviser year over year, which are driven mainly by origination fees on new deals closed during the year. 72 Table of Contents The net income-based incentive fee increased by $0.6 million, or 17.4%, for the year ended September 30, 2019, as compared to the prior year, due to higher pre-incentive fee net investment income, partially offset by an increase in net assets, which drives the hurdle rate, over the prior year. Our Board of Directors accepted a non-contractual, unconditional and irrevocable credit from the Adviser of $1.5 million to reduce the income-based incentive fee to the extent net investment income did not cover 100.0% of our distributions to common stockholders during the year ended September 30, 2019. The credit granted during the year ended September 30, 2018, totaled $1.7 million. The base management, loan servicing and incentive fees, and associated non-contractual, unconditional and irrevocable credits, are computed quarterly, as described under “Transactions with the Adviser” in Note 4— Related Party Transactions of the accompanying Notes to Consolidated Financial Statements and are summarized in the following table: Year Ended September 30, 2019 2018 Average total assets subject to base management fee (A) $ 413,143 $ 401,886 Multiplied by annual base management fee of 1.75% 1.75 % 1.75 % Base management fee (B) 7,230 7,033 Portfolio company fee credit (1,474 ) (1,020 ) Syndicated loan fee credit (424 ) (364 ) Net Base Management Fee $ 5,332 $ 5,649 Loan servicing fee (B) $ 5,072 $ 5,042 Credit to base management fee—loan servicing fee (B) (5,072 ) (5,042 ) Net Loan Servicing Fee $ — $ — Incentive fee (B) $ 5,776 $ 5,348 Incentive fee credit (1,488 ) (1,697 ) Net Incentive Fee $ 4,288 $ 3,651 Portfolio company fee credit $ (1,474 ) $ (1,020 ) Syndicated loan fee credit (424 ) (364 ) Incentive fee credit (1,488 ) (1,697 ) Credit to Fees from Adviser—Other (B) $ (3,386 ) $ (3,081 ) (A) Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the two most recently completed quarters within the respective years and adjusted appropriately for any share issuances or repurchases during the period. (B) Reflected, on a gross basis, as a line item on our accompanying Consolidated Statement of Operations located elsewhere in this Annual Report. Realized Loss and Unrealized Appreciation Net Realized Loss on Investments For the year ended September 30, 2019, we recorded a net realized loss on investments of $16.4 million, which resulted primarily from the restructuring of our investment in FDF in December 2018 and the associated recognition of a $26.9 million net realized loss, partially offset by the sale of our investment in ADC in August 2019 for an $8.7 million realized gain. For the year ended September 30, 2018, we recorded a net realized loss on investments of $26.1 million, which resulted primarily from the restructure of our investment in Sunshine Media Holdings (“Sunshine”), previously 73 Table of Contents on non-accrual status, and the associated recognition of a $28.2 million realized loss. This was partially offset by a $0.7 million realized gain from the sale of a portion of our equity investment in Funko Acquisition Holdings, LLC and a $0.6 million realized gain associated with the sale of our investment in Flight Fit N Fun LLC. Net Unrealized Appreciation of Investments During the year ended September 30, 2019, we recorded net unrealized appreciation of investments in the aggregate amount of $11.8 million. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the year ended September 30, 2019 were as follows: Year Ended September 30, 2019 Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized Depreciation (Appreciation) Net Gain (Loss) Alloy Die Casting Co. $ 8,734 $ 7,419 $ (5,415 ) $ 10,738 Defiance Integrated Technologies, Inc. — 3,199 — 3,199 Targus Cayman HoldCo, Ltd. — 2,495 — 2,495 Leeds Novamark Capital I, L.P. — 1,365 — 1,365 The Mochi Ice Cream Company — 1,208 — 1,208 Vision Government Solutions, Inc. — 1,162 (6 ) 1,156 GFRC Holdings, LLC — 955 — 955 PIC 360, LLC — 689 — 689 Arc Drilling Holding LLC — 668 — 668 Vacation Rental Pros Property Management, LLC — 645 — 645 LDiscovery, LLC — 516 — 516 Precision International, LLC — 488 — 488 Canopy Safety Brands, LLC — 357 — 357 Funko Acquisition Holdings, LLC 499 (131 ) (263 ) 105 Impact! Chemical Technologies, Inc — (619 ) 647 28 FedCap Partners, LLC (814 ) — 833 19 Triple H Food Processors, LLC — (40 ) (40 ) (80 ) Red Ventures, LLC — — (119 ) (119 ) WadeCo Specialties, Inc. — (236 ) 95 (141 ) Phoenix Aromas & Essential Oils, LLC — (162 ) — (162 ) United Flexible, Inc. 2,145 50 (2,387 ) (192 ) Lignetics, Inc. — (201 ) — (201 ) Sea Link International IRB, Inc. — (221 ) — (221 ) DKI Ventures, LLC — (227 ) — (227 ) Travel Sentry, Inc. — (240 ) — (240 ) TNCP Intermediate HoldCo, LLC — (266 ) — (266 ) Belnick, Inc. — (325 ) — (325 ) EL Academies, Inc. — (429 ) — (429 ) NetFortris Corp. — (544 ) — (544 ) Imperative Holdings Corporation — (585 ) — (585 ) Merlin International, Inc. — (600 ) — (600 ) R2i Holdings, LLC — (638 ) — (638 ) ENET Holdings, LLC (90 ) (580 ) — (670 ) IA Tech, LLC — (450 ) (450 ) (900 ) Antenna Research Associates, Inc. — (1,243 ) — (1,243 ) Edge Adhesives Holdings, Inc. — (2,409 ) — (2,409 ) Meridian Rack & Pinion, Inc. — (2,993 ) — (2,993 ) FES Resources Holdings LLC — (3,114 ) — (3,114 ) LWO Acquisitions Company LLC — (6,289 ) — (6,289 ) Francis Drilling Fluids, Ltd. (26,872 ) — 20,379 (6,493 ) Other, net (<$250) 10 (105 ) 1 (94 ) Total: $ (16,388 ) $ (1,431 ) $ 13,275 $ (4,544 ) 74 Table of Contents The largest driver of our net unrealized appreciation of $11.8 million for the year ended September 30, 2019 was the reversal of previously recorded unrealized depreciation upon the restructure of FDF. This appreciation was partially offset by the decline in the valuation of LWO Acquisitions Company LLC due to its financial and operational performance. During the year ended September 30, 2018, we recorded net unrealized appreciation of investments in the aggregate amount of $21.6 million. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the year ended September 30, 2018 were as follows: Year Ended September 30, 2018 Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized Depreciation (Appreciation) Net Gain (Loss) Edge Adhesives Holdings, Inc. $ — $ 2,830 $ — $ 2,830 United Flexible, Inc. — 2,475 — 2,475 Alloy Die Casting Co. — 2,341 — 2,341 AG Transportation Holdings, LLC — 2,083 — 2,083 Targus Cayman HoldCo, Ltd. — 1,677 — 1,677 PIC 360, LLC — 1,306 — 1,306 Funko Acquisition Holdings, LLC 745 869 (356 ) 1,258 Sea Link International IRB, Inc. — 559 — 559 Leeds Novamark Capital I, L.P. — 526 — 526 Merlin International, Inc. — 450 — 450 WadeCo Specialties, Inc. — 385 — 385 EL Academies, Inc. — 379 — 379 Precision International, LLC — 306 — 306 RBC Acquisition Corp. 284 — — 284 IA Tech, LLC — 267 — 267 Triple H Food Processors, LLC — 236 — 236 Canopy Safety Brands, LLC — 195 — 195 Funko, LLC 127 — — 127 Flight Fit N Fun LLC 630 — (725 ) (95 ) HB Capital Resources, Ltd. — 330 (440 ) (110 ) Vision Government Solutions, Inc. — (412 ) — (412 ) Frontier Financial Group, Inc. — (500 ) — (500 ) GFRC Holdings, LLC — (519 ) — (519 ) Meridian Rack & Pinion, Inc. — (671 ) — (671 ) Vacation Rental Pros Property Management, LLC — (1,020 ) — (1,020 ) Defiance Integrated Technologies, Inc. — (1,768 ) — (1,768 ) Sunshine Media Holdings (28,169 ) (1,319 ) 27,660 (1,828 ) Arc Drilling Holding LLC — (2,006 ) — (2,006 ) New Trident Holdcorp, Inc. — (2,794 ) — (2,794 ) LWO Acquisitions Company, LLC — (3,190 ) — (3,190 ) Francis Drilling Fluids, Ltd. — (7,436 ) — (7,436 ) Other, net (<$250) 320 28 (105 ) 243 Total: $ (26,063 ) $ (4,393 ) $ 26,034 $ (4,422 ) The primary drivers of our net unrealized appreciation for the year ended September 30, 2018, were the reversal of previously recorded depreciation on our investment in Sunshine upon restructure and improved performance 75 Table of Contents on certain of our portfolio companies, namely Edge Adhesives Holdings, Inc. These factors were partially offset by a decline in performance of certain of our other portfolio companies, namely FDF. As of September 30, 2019, the fair value of our investment portfolio was less than its cost basis by approximately $25.6 million and our entire investment portfolio was valued at 94.0% of cost, as compared to cumulative net unrealized depreciation of $37.4 million and a valuation of our entire portfolio at 91.2% of cost as of September 30, 2018. This year over year decrease in the cumulative unrealized depreciation on investments represents net unrealized appreciation of $11.8 million for the year ended September 30, 2019. The cumulative net unrealized depreciation of our investments does not have an impact on our current ability to pay distributions to stockholders; however, it may be an indication of future realized losses, which could ultimately reduce our income available for distribution to stockholders. Net Unrealized (Appreciation) Depreciation of Other During the year ended September 30, 2019, we recorded $0.2 million of unrealized depreciation on our Credit Facility at fair value as compared to $0.1 million of unrealized appreciation during the year ended September 30, 2018. 76 Table of Contents LIQUIDITY AND CAPITAL RESOURCES Operating Activities Our cash flows from operating activities are primarily generated from the interest payments on debt securities that we receive from our portfolio companies, as well as net proceeds received through repayments or sales of our investments. We utilize this cash primarily to fund new investments, make interest payments on our Credit Facility, make distributions to our stockholders, pay management and administrative fees to the Adviser and Administrator, and for other operating expenses. Net cash used in operating activities for the year ended September 30, 2020 was $46.1 million as compared to net cash provided by operating activities of $9.3 million for the year ended September 30, 2019. The change was primarily due to a decrease in principal repayments and net proceeds from sales of investments. Repayments and net proceeds from sales were $78.8 million during the year ended September 30, 2020 compared to $131.1 million during the year ended September 30, 2019. Net cash provided by operating activities for the year ended September 30, 2019 was $9.3 million as compared to net cash used in operating activities of $17.8 million for the year ended September 30, 2018. The change was primarily due to an increase in principal repayments and net proceeds from sales of investments partially offset by an increase in purchases of investments year over year. Repayments and net proceeds from sales were $131.1 million during the year ended September 30, 2019 compared to $67.9 million during the year ended September 30, 2018. Purchases of investments were $147.1 million during the year ended September 30, 2019, compared to $106.6 million during the year ended September 30, 2018. As of September 30, 2020, we had loans to, syndicated participations in or equity investments in 48 companies, with an aggregate cost basis of approximately $494.6 million. As of September 30, 2019, we had loans to, syndicated participations in or equity investments in 53 companies, with an aggregate cost basis of approximately $428.5 million. The following table summarizes our total portfolio investment activity during the years ended September 30, 2020 and 2019: Year Ended September 30, 2020 2019 Beginning investment portfolio, at fair value $ 402,875 $ 390,046 New investments 131,150 124,168 Disbursements to existing portfolio companies 18,756 22,899 Scheduled principal repayments (5,648 ) (5,543 ) Unscheduled principal repayments (70,344 ) (112,838 ) Net proceeds from sales of investments (2,763 ) (12,680 ) Net unrealized depreciation of investments (26,961 ) (1,431 ) Reversal of prior period net depreciation of investments 8,291 13,275 Net realized loss on investments (7,685 ) (16,415 ) Increase in investment balance due to PIK interest (A) 2,400 1,752 Net change in premiums, discounts and amortization 329 (358 ) Ending Investment Portfolio, at Fair Value $ 450,400 $ 402,875 (A) PIK interest is a non-cash source of income and is calculated at the contractual rate stated in a loan agreement and added to the principal balance of a loan. 77 Table of Contents The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of September 30, 2020. Year Ending September 30, Amount 2021 $ 49,431 2022 93,477 2023 48,106 2024 55,874 2025 153,150 Thereafter 52,228 Total contractual repayments $ 452,266 Adjustments to cost basis of debt investments (709 ) Investments in equity securities 43,090 Investments held as of September 30, 2020 at Cost: $ 494,647 Financing Activities Net cash provided by financing activities for the year ended September 30, 2020 was $32.8 million, which consisted primarily of $61.1 million in net borrowings on our Credit Facility and $38.8 million in gross proceeds from the issuance of notes payable, partially offset by $51.8 million used in the redemption of our Series 2024 Term Preferred Stock and $25.2 million in distributions to common shareholders. Net cash provided by financing activities for the year ended September 30, 2019 was $4.5 million, which consisted primarily of $57.5 million in gross proceeds from the issuance of the 2023 Notes and $17.2 million in gross proceeds from the issuance of common stock, partially offset by $43.1 million in net repayments on our Credit Facility and $24.6 million in distributions to common stockholders. Net cash provided by financing activities for the year ended September 30, 2018 was $14.5 million, which consisted primarily of $17.0 million in net borrowings on our Credit Facility and $22.0 million in gross proceeds from the issuance of common stock, partially offset by $22.8 million in distributions to common stockholders. Distributions to Stockholders Common Stock Distributions To qualify to be taxed as a RIC and thus avoid corporate level federal income tax on the income we distribute to our stockholders, we are required to distribute to our stockholders on an annual basis at least 90.0% of our Investment Company Taxable Income. Additionally, our Credit Facility has a covenant that generally restricts the amount of distributions to stockholders that we can pay out to be no greater than our aggregate net investment income, net capital gains and amounts elected to have been paid during the prior year in accordance with Section 855(a) of the Code. In accordance with these requirements, during the year ended September 30, 2020, we paid monthly cash distributions of $0.07 per common share for the months of October 2019 through March 2020 and paid monthly cash distributions of $0.065 per common share for the months of April 2020 through September 2020. These distributions totaled an aggregate of $25.2 million. During the years ended September 30, 2019 and 2018, we paid monthly cash distributions of $0.07 per common share for each month, which totaled an aggregate of $24.6 million and $22.8 million, respectively. In October 2020, our Board of Directors declared a monthly distribution of $0.065 per common share for each of October, November, and December 2020. Our Board of Directors declared these distributions to our stockholders based on our estimates of our Investment Company Taxable Income for the fiscal year ending September 30, 2021. From inception through September 30, 2020, we have paid 212 monthly or quarterly consecutive distributions to common stockholders totaling approximately $370.3 million or $20.26 per share. 78 Table of Contents For the fiscal years ended September 30, 2020 and 2019, distributions declared and paid exceeded taxable income available for common distributions resulting in a partial return of capital of approximately $0.4 million and $0.7 million, respectively. For the fiscal year ended September 30, 2018, our current and accumulated earnings and profits (after taking into account our mandatorily redeemable preferred stock dividends), exceeded common stock distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $0.3 million of the first common distributions paid to common stockholders in the subsequent fiscal year as having been paid in the prior year. Preferred Stock Dividends On October 2, 2019, we voluntarily redeemed all 2,070,000 outstanding shares of our Series 2024 Term Preferred Stock at a redemption price of $25.00 per share which represents the liquidation preference per share, plus accrued and unpaid dividends through October 1, 2019 in the amount of $0.004166 per share, for a payment per share of $25.004166 and an aggregate redemption price of approximately $51.8 million. In accordance with GAAP, we treated these monthly dividends as an operating expense. For federal income tax purposes, the dividends paid by us to preferred stockholders generally constituted ordinary income to the extent of our current and accumulated earnings and profits and is reported after the end of the calendar year based on tax information for the full fiscal year. Such a characterization made on an interim, quarterly basis may not be representative of the actual tax characterization for the full fiscal year. Dividend Reinvestment Plan Our common stockholders who hold their shares through our transfer agent, Computershare, Inc. (“Computershare”), have the option to participate in a dividend reinvestment plan offered by Computershare, as the plan agent. This is an “opt in” dividend reinvestment plan, meaning that common stockholders may elect to have their cash distributions automatically reinvested in additional shares of our common stock. Common stockholders who do make such election will receive their distributions in cash. Common stockholders who receive distributions in the form of stock will be subject to the same federal, state and local tax consequences as stockholders who elect to receive their distributions in cash. The common stockholder will have an adjusted basis in the additional common shares purchased through the plan equal to the amount of the reinvested distribution. The additional shares will have a new holding period commencing on the day following the date on which the shares are credited to the common stockholder’s account. Computershare purchases shares in the open market in connection with the obligations under the plan. Equity Registration Statement Our shelf registration statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock, preferred stock or debt securities. As of September 30, 2020, we had the ability to issue up to an additional $232.3 million in securities under the registration statement. Common Stock In February 2019, we entered into an equity distribution agreement with Jefferies LLC (the “Jefferies Sales Agreement”) under which we have the ability to issue and sell, from time to time, up to an aggregate offering price of $50.0 million shares of our common stock. During the year ended September 30, 2020, we sold 1,220,927 shares of our common stock under the Jefferies Sales Agreement, at a weighted-average price of $9.55 per share and raised $11.7 million of gross proceeds. Net proceeds, after deducting commissions and offering costs borne by us, were approximately $11.4 million. As of September 30, 2020, we had a remaining capacity to sell up to an additional $21.1 million of our common stock under the Jefferies Sales Agreement. 79 Table of Contents We anticipate issuing equity securities to obtain additional capital in the future. However, we cannot determine the timing or terms of any future equity issuances or whether we will be able to issue equity on terms favorable to us, or at all. To the extent that our common stock trades at a market price below our NAV per share, we will generally be precluded from raising equity capital through public offerings of our common stock, other than pursuant to stockholder and independent director approval or a rights offering to existing common stockholders. On September 30, 2020, the closing market price of our common stock was $7.41 per share, a 0.1% premium to our September 30, 2020 NAV per share of $7.40. Revolving Credit Facility On April 29, 2020, we, through Business Loan, entered into Amendment No. 6 to our Credit Facility with KeyBank, which extended the revolving period end date by approximately six months to July 15, 2021, included certain LIBOR transition considerations and decreased the commitment amount from $190 million to $180 million. All principal and interest will continue to be due and payable on April 15, 2022. On July 10, 2019, we, through Business Loan, entered into Amendment No. 5 to our Credit Facility with KeyBank, which (i) modified the covenants to reduce our minimum asset coverage with respect to senior securities representing indebtedness from 200% to 150% (or such percentage as may be set forth in Section 18 of the 1940 Act, as modified by Section 61 of the 1940 Act), (ii) amended the excess concentration limits definition to decrease the limit for non-first lien loans from 60% to 50% under certain circumstances and (iii) amended the distributions covenant to allow a distribution to be applied towards the redemption of our Series 2024 Term Preferred Stock. On March 9, 2018, we, through Business Loan, entered into Amendment No. 4 to our Credit Facility with KeyBank, which increased the commitment amount from $170.0 million to $190.0 million, extended the revolving period end date by approximately two years to January 15, 2021, decreased the marginal interest rate added to 30-day LIBOR from 3.25% to 2.85% per annum, and changed the unused commitment fee from 0.50% of the total unused commitment amount to 0.50% when the average unused commitment amount for the reporting period is less than or equal to 50%, 0.75% when the average unused commitment amount for the reporting period is greater than 50% but less than or equal to 65%, and 1.00% when the average unused commitment amount for the reporting period is greater than 65%. Subject to certain terms and conditions, our Credit Facility may be expanded up to a total of $265.0 million through additional commitments of new or existing lenders. We incurred fees of approximately $1.2 million in connection with this amendment, which are being amortized through our Credit Facility’s revolving period end date of July 15, 2021. Interest is payable monthly during the term of our Credit Facility. Available borrowings are subject to various constraints imposed under our Credit Facility, based on the aggregate loan balance pledged by Business Loan, which varies as loans are added and repaid, regardless of whether such repayments are prepayments or made as contractually required. Our Credit Facility also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account with KeyBank and with The Bank of New York Mellon Trust Company, N.A. as custodian. KeyBank, which also serves as the trustee of the account, generally remits the collected funds to us once a month. Our Credit Facility contains covenants that require Business Loan to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions), and restrict material changes to our credit and collection policies without the lenders’ consents. Our Credit Facility generally limits distributions to our stockholders on a fiscal year basis to the sum of our net investment income, net capital gains and amounts elected to have been paid during the prior year in accordance with Section 855(a) of the Code. Business Loan is also subject to certain limitations on the type of loan investments it can apply as collateral towards the borrowing base to receive additional borrowing availability under our Credit Facility, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency 80 Table of Contents and status, average life, portfolio company leverage and lien property. Our Credit Facility further requires Business Loan to comply with other financial and operational covenants, which obligate Business Loan to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of 25 obligors required in the borrowing base. Additionally, we are required to maintain (i) a minimum net worth of $205.0 million plus 50% of all equity and subordinated debt raised after May 1, 2015 less 50% of any equity and subordinated debt retired or redeemed after May 1, 2015, which equates to $269.5 million as of September 30, 2020, (ii) asset coverage with respect to “senior securities representing indebtedness” of at least 150% (or such percentage as may be set forth in Section 18 of the 1940 Act, as modified by Section 61 of the 1940 Act), and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code. As of September 30, 2020, and as defined in our Credit Facility, we had a net worth of $327.3 million, asset coverage on our “senior securities representing indebtedness” of 202.6% and an active status as a BDC and RIC. In addition, we had 31 obligors in our Credit Facility’s borrowing base as of September 30, 2020. As of September 30, 2020, we were in compliance with all of our Credit Facility covenants. Refer to Note 5— Borrowings of the notes to our Consolidated Financial Statements included elsewhere in this Annual Report for additional information regarding our Credit Facility. Notes Payable In October 2019, we completed a public debt offering of $38.8 million aggregate principal amount of 2024 Notes, inclusive of the overallotment option exercised by the underwriters, for net proceeds of approximately $37.5 million after deducting underwriting discounts, commissions and offering expenses borne by us. In November 2018, we completed a public debt offering of $57.5 million aggregate principal amount of 2023 Notes, inclusive of the overallotment option exercised by the underwriters, for net proceeds of $55.4 million after deducting underwriting discounts, commissions and offering expenses borne by us. The 2024 Notes and 2023 Notes are traded under the ticker symbols “GLADL” and “GLADD” on the Nasdaq Global Select Market, respectively. The 2024 Notes and 2023 Notes will mature on November 1, 2024 and November 1, 2023, respectively, and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after November 1, 2021 and November 1, 2020, respectively. The 2024 Notes and 2023 Notes bear interest at a rate of 5.375% and 6.125% per year, respectively, payable quarterly on February 1, May 1, August 1, and November 1 of each year (which equates to approximately $5.6 million per year). The 2024 Notes and 2023 Notes are recorded at the principal amount, less discounts and offering costs, on our Consolidated Statements of Assets and Liabilities . The indenture relating to the 2024 Notes and 2023 Notes contains certain covenants, including (i) an inability to incur additional debt or issue additional debt or preferred securities unless the Company’s asset coverage meets the threshold specified in the 1940 Act after such borrowing, (ii) an inability to declare any dividend or distribution (except a dividend or distribution payable in our stock) on a class of our capital stock or to purchase shares of our capital stock unless the Company’s asset coverage meets the threshold specified in the 1940 Act at the time of (and giving effect to) such declaration or purchase, and (iii) if, at any time, we are not subject to the reporting requirements of the Exchange Act, we will provide the holders of the 2024 Notes and 2023 Notes and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements. Off-Balance Sheet Arrangements We generally recognize success fee income when the payment has been received. As of September 30, 2020 and 2019, we had off-balance sheet success fee receivables on our accruing debt investments of $9.9 million and 81 Table of Contents $6.2 million (or approximately $0.31 per common share and $0.21 per common share), respectively, that would be owed to us, generally upon a change of control of the portfolio companies. Consistent with GAAP, we generally have not recognized our success fee receivables and related income in our Consolidated Financial Statements until earned. Due to the contingent nature of our success fees, there are no guarantees that we will be able to collect all of these success fees or know the timing of such collections. Contractual Obligations We have lines of credit, delayed draw term loans, and an uncalled capital commitment with certain of our portfolio companies that have not been fully drawn. Since these commitments have expiration dates and we expect many will never be fully drawn, the total commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of the combined unused lines of credit, the unused delayed draw term loans, and the uncalled capital commitment as of September 30, 2020 and 2019 to be immaterial. The following table shows our contractual obligations as of September 30, 2020, at cost: Payments Due by Period Contractual Obligations (A) Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Total Credit Facility (B) $ — $ 128,000 $ — $ — $ 128,000 Notes Payable — — 96,313 — 96,313 Interest expense on debt obligations (C) 9,823 15,783 2,553 — 28,159 Total $ 9,823 $ 143,783 $ 98,866 $ — $ 252,472 (A) Excludes our unused line of credit commitments, unused delayed draw term loans, and uncalled capital commitments to our portfolio companies in an aggregate amount of $27.8 million, at cost, as of September 30, 2020. (B) Principal balance of borrowings outstanding under our Credit Facility, based on the maturity date following the current contractual revolver period end date. (C) Includes estimated interest payments on our Credit Facility, 2024 Notes, and 2023 Notes. The amount of interest expense calculated for purposes of this table was based upon rates and balances as of September 30, 2020. Critical Accounting Policies The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported consolidated amounts of assets and liabilities, including disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ materially from those estimates under different assumptions or conditions. We have identified our investment valuation policy (which has been approved by our Board of Directors) as our most critical accounting policy, which is described in Note 2— Summary of Significant Accounting Policies in the accompanying notes to our Consolidated Financial Statements included elsewhere in this Annual Report. Additionally, refer to Note 3— Investments in our accompanying Notes to Consolidated Financial Statements included elsewhere in this Annual Report for additional information regarding fair value measurements and our application of Financial Accounting Standards Board Accounting Standards Codification Topic 820, “ Fair Value Measurements and Disclosures.” We have also identified our revenue recognition policy as a critical accounting policy, which is described in Note 2— Summary of Significant Accounting Policies in our accompanying Notes to Consolidated Financial Statements included elsewhere in this Annual Report. 82 Table of Contents Investment Valuation Credit Monitoring and Risk Rating The Adviser monitors a wide variety of key credit statistics that provide information regarding our portfolio companies to help us assess credit quality and portfolio performance and, in some instances, used as inputs in our valuation techniques. Generally, we, through the Adviser, participate in periodic board meetings of our portfolio companies in which we hold board seats and also require them to provide annual audited and monthly unaudited financial statements. Using these statements or comparable information and board discussions, the Adviser calculates and evaluates certain credit statistics. The Adviser risk rates all of our investments in debt securities. The Adviser does not risk rate our equity securities. For syndicated loans that have been rated by an SEC registered Nationally Recognized Statistical Rating Organization (“NRSRO”), the Adviser generally uses the average of two corporate level NRSRO’s risk ratings for such security. For all other debt securities, the Adviser uses a proprietary risk rating system. While the Adviser seeks to mirror the NRSRO systems, we cannot provide any assurance that the Adviser’s risk rating system will provide the same risk rating as an NRSRO would for these securities. The Adviser’s risk rating system is used to estimate the probability of default on debt securities and the expected loss if there is a default. The Adviser’s risk rating system uses a scale of 0 to >10, with >10 being the lowest probability of default. It is the Adviser’s understanding that most debt securities of medium-sized companies do not exceed the grade of BBB on an NRSRO scale, so there would be no debt securities in the middle market that would meet the definition of AAA, AA or A. Therefore, the Adviser’s scale begins with the designation >10 as the best risk rating which may be equivalent to a BBB from an NRSRO; however, no assurance can be given that a >10 on the Adviser’s scale is equal to a BBB or Baa2 on an NRSRO scale. The Adviser’s risk rating system covers both qualitative and quantitative aspects of the business and the securities we hold. The following table reflects risk ratings for all proprietary loans in our portfolio as of September 30, 2020 and 2019, representing approximately 92.7% and 87.7%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period: As of September 30, Rating 2020 2019 Highest 10.0 10.0 Average 6.3 6.2 Weighted Average 6.5 6.4 Lowest 1.0 1.0 The following table reflects the risk ratings for all syndicated loans in our portfolio that were rated by an NRSRO as of September 30, 2020 and 2019, representing approximately 5.4% and 9.1%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period: As of September 30, Rating 2020 2019 Highest 5.0 6.0 Average 4.7 4.5 Weighted Average 4.7 4.5 Lowest 3.0 3.0 83 Table of Contents The following table reflects the risk ratings for all syndicated loans in our portfolio that were not rated by an NRSRO as of September 30, 2020 and 2019, representing approximately 1.9% and 3.2%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period: As of September 30, Rating 2020 2019 Highest 6.0 5.0 Average 5.0 2.8 Weighted Average 4.6 3.1 Lowest 4.0 1.0 Tax Status We intend to continue to maintain our qualification as a RIC under Subchapter M of the Code for federal income tax purposes and also to limit certain federal excise taxes imposed on RICs. Refer to Note 10— Federal and State Income Taxes in our accompanying Notes to Consolidated Financial Statements included elsewhere in this Annual Report for additional information regarding our tax status. Recent Accounting Pronouncements Refer to Note 2— Summary of Significant Accounting Policies in the notes to our accompanying Consolidated Financial Statements included elsewhere in this Annual Report for a description of recent accounting pronouncements.