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 high and low 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 12, 2021. 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, 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 ended September 30, 2021: 12/31/2020 $ 7.61 $ 9.22 $ 6.97 21.2 % (8.4 )% $ 0.195 3/31/2021 8.11 10.39 8.60 28.1 6.0 0.195 6/30/2021 8.52 11.96 10.00 40.4 17.4 0.195 9/30/2021 9.28 12.05 11.01 29.8 18.6 0.195 Fiscal Year ending September 30, 2022: 12/31/2021 (through 11/12/2021) $ * $ 11.95 $ 11.27 * * $ 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 12, 2021, there were 37 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, 2021. See “Recent Developments” below for information regarding the unregistered sale of the 2027 Notes in November 2021. 51 Table of Contents Purchases of Equity Securities We did not repurchase any shares of our stock during the fourth quarter ended September 30, 2021. Stock Performance Graph The following graph shows the total stockholder return on an investment of $100 in cash on September 30, 2016 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 Standard and Poor’s BDC index (“S&P BDC”). For the fiscal year ended September 30, 2020, we included a comparison to the Wells Fargo BDC Total Return Index (“WF BDC TR”). For the fiscal year ended September 30, 2021, we switched to a comparison to the S&P BDC Index, due to the termination of the Wells Fargo BDC Total Return Index on July 30, 2021. 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 S&P BDC Index WF BDC TR 9/30/2016 $ 100.00 $ 100.00 $ 100.00 $ 100.00 $ 100.00 9/29/2017 129.00 124.08 118.61 108.84 109.04 9/28/2018 141.31 159.95 139.85 113.27 112.95 9/30/2019 159.19 164.33 145.80 121.96 120.98 9/30/2020 133.97 244.44 167.89 97.89 94.97 9/30/2021 220.96 316.73 218.26 151.09 N/A 52 Table of Contents 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 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. The following annualized percentages were calculated based on actual expenses incurred in the quarter ended September 30, 2021 and average net assets for the quarter ended September 30, 2021. 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) Up to a $25.00 Transaction Fee Total stockholder transaction expenses (1) — % Annual expenses (as a percentage of net assets attributable to common stock) (3) : Base Management fee (4) 3.13 % Loan servicing fee (5) 1.94 % Incentive fee (20% of realized capital gains and 20% of pre-incentive fee net investment income) (6) 2.02 % Interest payments on borrowed funds (7) 4.45 % Other expenses (8) 1.05 % Total annual expenses (9) 12.59 % (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, if any, are included in stock record expenses, a component of “other expenses.” If a participant elects by written notice to the plan agent prior to termination of his or her account to have the plan agent sell part or all of the shares held by the plan agent in the participant’s account and remit the proceeds to the participant, the plan agent is authorized to deduct a transaction fee, plus per share brokerage commissions, from the proceeds. 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 percentages presented in this table are gross of 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, and adjusted appropriately for any share issuances or repurchases. 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 3.13% of the average net assets as of September 30, 2021 by dividing the total dollar amount of the management fee by our average net assets. The base management fee for the quarter ended September 30, 2021 before application of any credits was $2.4 million. From time to time, the Adviser has non-contractually, unconditionally and irrevocably agreed to reduce the 1.75% base management fee on syndicated loan participations to 0.5%, to the extent that proceeds resulting from borrowings were used to 53 Table of Contents purchase such syndicated loan participations. For the quarter ended September 30, 2021, this credit to the base management fee was $66 thousand. 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 the fees for such services are non-contractually, unconditionally 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, 2021, 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, 2021, 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 period from April 1, 2020 through March 31, 2022), 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 period from April 1, 2020 through March 31, 2022) in any calendar quarter (8.75% annualized, 9.75% annualized during the period from April 1, 2020 through March 31, 2022). 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 period from April 1, 2020 through March 31, 2022). 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, 2021. The income-based incentive fee for the quarter ended September 30, 2021 was $1.5 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 54 Table of Contents to common stockholders during the period. There was no incentive fee credit for the quarter ended September 30, 2021. 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 during the period from April 1, 2020 through March 31, 2022) 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: = 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, 2021, we had $50.5 million in borrowings outstanding under our Credit Facility and $186.6 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, 2021 (except as set forth in footnote 9), would be $38.0 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, 2021, would be $30.1 million or 9.97% as a percentage of net assets. 55 Table of Contents 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 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) $ 111 $ 313 $ 491 $ 850 assuming a 5% annual return consisting entirely of capital gains (2)(3) $ 120 $ 335 $ 521 $ 884 (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 period from April 1, 2020 through March 31, 2022) 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. The report of our independent registered public accounting firm, PricewaterhouseCoopers LLP, on the senior securities table as of September 30, 2021, is included elsewhere in 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, 2021 $ 50,500,000 $ 2,307 $ — N/A 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 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 (8) September 30, 2021 $ — $ — $ — $ — 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 (9) September 30, 2021 $ 38,812,500 $ 2,307 $ — $ 25.33 September 30, 2020 38,812,500 2,026 — 24.49 5.125% Notes due 2026 September 30, 2021 $ 150,000,000 $ 2,307 $ — N/A (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. 57 Table of Contents (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, 6.125% notes due 2023 (the “2023 Notes”) and the 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 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. (8) In November 2018, we completed a public debt offering of $57.5 million aggregate principal amount of the 2023 Notes, inclusive of the overallotment option. In January 2021, we voluntarily redeemed all of the 2023 Notes. (9) In October 2019, we completed a public debt offering of $38.8 million aggregate principal amount of the 2024 Notes, inclusive of the overallotment option. In November 2021, we voluntarily redeemed all of the 2024 Notes. 58 Table of Contents ITEM 6. RESERVED 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, 2021, our investment portfolio was made up of approximately 91.6% debt investments and 8.4% 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 registered closed-end management investment company that is advised (or sub-advised if it controls the fund) by the Adviser, or any combination of the foregoing, subject to the conditions in the Co-Investment Order. We believe the Co-Investment Order has enhanced and will continue to 59 Table of Contents 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, 2021, we invested $139.0 million in eight new portfolio companies and extended $42.8 million in investments to existing portfolio companies. In addition, during the year ended September 30, 2021, we exited ten portfolio companies through early payoffs or a restructure. We received a total of $139.3 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, 2021. This activity resulted in a net decrease in our overall portfolio by two portfolio companies to 46 and a net increase of $51.9 million in our portfolio at cost since September 30, 2020. From our initial public offering in August 2001 through September 30, 2021, we have made 574 different loans to, or investments in, 254 companies for a total of approximately $2.2 billion, before giving effect to principal repayments on investments and divestitures. During the year ended September 30, 2021, the following significant transactions occurred: Proprietary Investments • In December 2020, we invested $19.0 million in Effective School Solutions LLC through secured first lien debt. • In December 2020, we invested $10.0 million in Encore Dredging Holdings, LLC through a combination of secured first lien debt and equity. In April 2021, we invested an additional $12.5 million in Encore Dredging Holdings, LLC, through a combination of secured first lien debt and equity. In August 2021, we invested an additional $5.0 million in Encore Dredging Holdings, LLC through secured first lien debt. • In December 2020, our investment in Aerospace Engineering, LLC paid off at par for net proceeds of $20.2 million. In conjunction with the payoff, we received a prepayment fee of $0.2 million. • In February 2021, we invested $20.5 million in SpaceCo Holdings, LLC through secured first lien debt. In September 2021, we invested an additional $13.0 million in SpaceCo Holdings, LLC through secured first lien debt. • In February 2021, we invested $24.5 million in Ohio Armor Holdings, LLC through a combination of secured first lien debt and equity. 60 Table of Contents • In February 2021, our investment in Vacation Rental Pros Property Management, LLC paid off at par for net proceeds of $8.2 million. • In March 2021, we invested $27.0 million in MCG Energy Solutions, LLC through a combination of secured first lien debt and equity. • In March 2021, our investment in Magpul Industries Corp. paid off at par for net proceeds of $28.7 million. In conjunction with the payoff, we received a prepayment fee of $0.7 million. • In March 2021, our investment in Vision Government Solutions, Inc. paid off at par for net proceeds of $9.9 million. • In May 2021, AG Transportation Holdings, LLC was sold, which resulted in success fee income of $0.2 million and a net realized gain on our investment of approximately $5.3 million. In connection with the sale, we received net cash proceeds of approximately $19.5 million, including the repayment of our debt investment of $13.0 million at par. • In June 2021, we invested $17.0 million in Eegee’s LLC through secured first lien debt. • In June 2021, we invested $11.0 million in Turn Key Health Clinics, LLC through secured first lien debt. • In June 2021, we invested $10.0 million in Unirac, Inc. through secured first lien debt. In September 2021, we invested an additional $2.0 million in Unirac, Inc. through secured first lien debt. • In June 2021, American Trailer Rental Group LLC was sold, which resulted in a realized gain on our investment of approximately $0.6 million. In connection with the sale, we received net cash proceeds of approximately $19.6 million, including the repayment of our debt investment of $18.0 million at par. • In July 2021, we invested an additional $6.2 million in Lignetics, Inc., an existing portfolio company, through secured second lien debt. • In September 2021, Precision International, LLC was sold, which resulted in a realized gain on our investment of approximately $0.4 million. In connection with the sale, we received net cash proceeds of approximately $1.0 million, including the repayment of our debt investment of $0.3 million at par and a consent fee of approximately $0.3 million. Syndicated Investments • In December 2020, our investment in Edmentum Ultimate Holdings, LLC was sold, which resulted in a realized loss of approximately $2.4 million on our equity investment. In connection with the sale, we received net cash proceeds of approximately $4.9 million, including the repayment of our debt investment of $4.6 million at par. • In December 2020, our investment in Vertellus Holdings LLC was sold, which resulted in a realized loss of approximately $41 thousand. In connection with the sale, we received net cash proceeds of approximately $4.1 million, including the repayment of our debt investment of $1.1 million at par. • In May 2021, our investment in Drive Chassis Holdco, LLC paid off at par for net proceeds of $5.1 million. In conjunction with the payoff, we received a prepayment fee of $50 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, 2021. 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 61 Table of Contents public and private debt offerings. We have successfully extended the Credit Facility’s revolving period multiple times, most recently to October 2023, and currently have a total commitment amount of $175.0 million. We sold 2,737,521 and 1,220,927 common shares under our at-the-market program during the years ended September 30, 2021 and 2020, respectively. In November 2021, we completed a private placement of $50.0 million aggregate principal amount of the 2027 Notes. In December 2020, we completed an offering of $100.0 million aggregate principal amount of the 2026 Notes. In March 2021, we completed an offering of an additional $50.0 million aggregate principal amount of the 2026 Notes. In October 2019, we completed an offering of $38.8 million aggregate principal amount of the 2024 Notes, inclusive of the overallotment. Additionally, we completed an 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 may affect the trading price of our capital stock and thus may inhibit our ability to finance new investments through the issuance of equity in the future. When our common stock trades below NAV per common share, our ability to issue equity is constrained by provisions of the 1940 Act, which generally prohibits the issuance and sale of our common stock below NAV per common share without first obtaining approval from our stockholders and our independent directors, other than through sales to our then-existing stockholders pursuant to a rights offering. On September 30, 2021, the closing market price of our common stock was $11.30 per share, a 21.8% premium to our September 30, 2021 NAV per share of $9.28. 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, 2021, our asset coverage on our “senior securities representing indebtedness” was 230.7%. Recent Developments Debt Offering In November 2021, we completed a private placement of $50.0 million aggregate principal amount of the 2027 Notes for net proceeds of approximately $48.5 million after adding discounts and deducting underwriting costs, commissions and offering expenses borne by us. The 2027 Notes will mature on May 1, 2027 and may be redeemed in whole or in part at any time or from time to time at the Company’s option prior to maturity at par plus a “make-whole” premium, if applicable. The 2027 Notes bear interest at a rate of 3.75% per year. Interest is payable semi-annually on May 1 and November 1 of each year (which equates to approximately $1.9 million per year). Debt Redemption On November 1, 2021, we voluntarily redeemed all of the outstanding 2024 Notes with an aggregate principal amount outstanding of $38.8 million. 62 Table of Contents Distributions In October 2021, our Board of Directors declared the following monthly cash distributions to common stockholders: Record Date Payment Date Distribution per Common Share October 22, 2021 October 29, 2021 $ 0.065 November 19, 2021 November 30, 2021 0.065 December 23, 2021 December 31, 2021 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 one-month LIBOR) and, to a lesser extent, at fixed rates. Most U.S. dollar LIBOR are currently anticipated to be phased out in June 2023. LIBOR is currently expected to 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 one-month 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. 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 include LIBOR replacement language. Assuming that SOFR replaces LIBOR and is appropriately adjusted to equate to one-month LIBOR, we expect that there should be minimal impact on our operations. 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 continuing COVID-19 pandemic. The Company’s investment portfolio continues to be focused on a diversified mix of industries and sectors that have proven 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 effectively and efficiently responded 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. 63 Table of Contents RESULTS OF OPERATIONS Comparison of the Year Ended September 30, 2021 to the Year Ended September 30, 2020 For the Year Ended September 30, 2021 2020 $ Change % Change INVESTMENT INCOME Interest income $ 49,959 $ 46,021 $ 3,938 8.6 % Other income 3,835 1,938 1,897 97.9 Total investment income 53,794 47,959 5,835 12.2 EXPENSES Base management fee 8,674 7,568 1,106 14.6 Loan servicing fee 5,579 5,819 (240 ) (4.1 ) Incentive fee 5,746 5,251 495 9.4 Administration fee 1,438 1,430 8 0.6 Interest expense on borrowings 11,513 9,991 1,522 15.2 Amortization of deferred financing costs 1,347 1,484 (137 ) (9.2 ) Other expenses 1,907 2,105 (198 ) (9.4 ) Expenses, before credits from Adviser 36,204 33,648 2,556 7.6 Credit to base management fee – loan servicing fee (5,579 ) (5,819 ) 240 (4.1 ) Credit to fees from Adviser – other (2,953 ) (5,033 ) 2,080 (41.3 ) Total expenses, net of credits 27,672 22,796 4,876 21.4 NET INVESTMENT INCOME 26,122 25,163 959 3.8 NET REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on investments 4,179 (7,476 ) 11,655 (155.9 ) Net realized gain (loss) on other (999 ) (1,407 ) 408 (29.0 ) Net unrealized appreciation (depreciation) of investments 55,347 (18,670 ) 74,017 (396.4 ) Net unrealized appreciation (depreciation) of other (350 ) 517 (867 ) (167.7 ) Net gain (loss) from investments and other 58,177 (27,036 ) 85,213 (315.2 ) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 84,299 $ (1,873 ) $ 86,172 NM PER BASIC AND DILUTED COMMON SHARE Net investment income $ 0.79 $ 0.81 $ (0.02 ) (2.5 )% Net increase (decrease) in net assets resulting from operations $ 2.54 $ (0.06 ) $ 2.60 NM NM – not meaningful Investment Income Interest income increased by 8.6% for the year ended September 30, 2021, 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 64 Table of Contents weighted average principal balance of our interest-bearing investment portfolio for the year ended September 30, 2021, was $462.8 million, compared to $418.0 million for the year ended September 30, 2020, an increase of $44.8 million, or 10.7%. The weighted average yield on our interest-bearing investments is based on the current stated interest rate on interest-bearing investments, which decreased to 10.6% for the year ended September 30, 2021, compared to 11.0% for the year ended September 30, 2020, inclusive of any allowances on interest receivables made during those periods. The decrease was driven mainly by a decrease in the interest rate spread on new deals over the two respective years. As of September 30, 2021, there were no loans on non-accrual status. 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. Other income increased by 97.9% during the year ended September 30, 2021, as compared to the prior year period primarily due to a $1.5 million increase in dividend income and a $0.5 million increase in prepayment fees received year over year. As of September 30, 2021 and 2020, 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 $4.9 million, or 21.4%, for the year ended September 30, 2021 as compared to the prior year. This increase was primarily due to a $2.1 million decrease in credits to fees from the Adviser, a $1.5 million increase in interest expense on borrowings, and a $1.1 million increase in the gross base management fee. Total interest expense on borrowings and notes payable increased by $1.5 million, or 15.2%, during the year ended September 30, 2021 compared to the prior year. This increase was driven by an increase in our overall funding needs and a change in the composition of our overall debt financing. Interest expense on our notes payable increased by $3.0 million year over year with the issuance of the 2026 Notes in December 2020 and March 2021, partially offset by the redemption of the 2023 Notes in January 2021. Interest expense on our Credit Facility decreased by $1.4 million period over period, driven primarily by a decrease in the weighted average balance outstanding on our Credit Facility and a decrease in LIBOR, period over period, partially offset by an increase in unused commitment fees. The weighted average balance outstanding on our Credit Facility was $59.4 million during the year ended September 30, 2021, as compared to $103.5 million in the prior year, a decrease of 42.6%. The effective interest rate on our Credit Facility, including unused commitment fees incurred, but excluding the impact of deferred financing costs, was 5.0% during the year ended September 30, 2021, compared to 4.3% during the prior year. The increase in the effective interest rate was driven primarily by a $0.7 million increase in unused commitment fees paid during the year ended September 30, 2021 as compared to the prior year. The gross base management fee earned by the Adviser increased by $1.1 million, or 14.6%, during the year ended September 30, 2021, as compared to the prior year, resulting from an increase in average total assets subject to the base management fee year over year. The income-based incentive fee increased by $0.5 million, or 9.4%, for the year ended September 30, 2021, as compared to the prior year, due to higher pre-incentive fee net investment income over the respective periods. Our Board of Directors accepted non-contractual, unconditional and irrevocable credits from the Adviser of $0.5 million and $3.0 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, 2021 and 2020, respectively. 65 Table of Contents The base management, loan servicing and incentive fees, and associated non-contractual, unconditional and irrevocable credits, are computed quarterly, as described under “Transactions with the Adviser” in Note 4— Related Party Transactions of the Notes to Consolidated Financial Statements and are summarized in the following table: Year Ended September 30, 2021 2020 Average total assets subject to base management fee (A) $ 495,657 $ 432,457 Multiplied by annual base management fee of 1.75% 1.75 % 1.75 % Base management fee (B) 8,674 7,568 Portfolio company fee credit (2,195 ) (1,589 ) Syndicated loan fee credit (307 ) (406 ) Net Base Management Fee $ 6,172 $ 5,573 Loan servicing fee (B) $ 5,579 $ 5,819 Credit to base management fee – loan servicing fee (B) (5,579 ) (5,819 ) Net Loan Servicing Fee $ — $ — Incentive fee (B) $ 5,746 $ 5,251 Incentive fee credit (451 ) (3,038 ) Net Incentive Fee $ 5,295 $ 2,213 Portfolio company fee credit $ (2,195 ) $ (1,589 ) Syndicated loan fee credit (307 ) (406 ) Incentive fee credit (451 ) (3,038 ) Credit to Fees from Adviser—Other (B) $ (2,953 ) $ (5,033 ) (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 Gain (Loss) on Investments For the year ended September 30, 2021, we recorded a net realized gain on investments of $4.2 million, which was primarily a result of a $5.3 million net realized gain recognized from the exit of AG Transportation Holdings, LLC, a $0.6 million net realized gain from the exit of American Trailer Rental Group LLC and gains from previous exits of certain other investments, partially offset by a $2.4 million net realized loss on our investment in Edmentum Ultimate Holdings, LLC. For the year ended September 30, 2020, we recorded a net realized loss on investments of $7.5 million, which was primarily a result of the sale of our investment in Meridian Rack & Pinion, Inc. (“Meridian”) in January 2020 for a $5.6 million realized loss and the loss recognized on our investment in New Trident Holdcorp, Inc. (“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 The Mochi Ice Cream Company (“Mochi”) in January 2020. 66 Table of Contents Net Unrealized Appreciation of Investments During the year ended September 30, 2021, we recorded net unrealized appreciation of investments in the aggregate amount of $55.3 million. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the year ended September 30, 2021 were as follows: Year Ended September 30, 2021 Portfolio Company Realized Gain (Loss) Unrealized Appreciation (Depreciation) Reversal of Unrealized Depreciation (Appreciation) Net Gain (Loss) Lignetics, Inc. $ — $ 14,420 $ — $ 14,420 Antenna Research Associates, Inc. — 9,306 — 9,306 B+T Group Acquistion Inc. — 6,453 — 6,453 AG Transportation Holdings, LLC 5,289 6,788 (7,934 ) 4,143 Targus Cayman HoldCo, Ltd. — 4,125 — 4,125 Defiance Integrated Technologies, Inc. — 2,535 — 2,535 Imperative Holdings Corporation — 2,281 — 2,281 Leeds Novamark Capital I, L.P. — 2,219 — 2,219 MCG Energy Solutions, LLC — 1,659 — 1,659 PIC 360, LLC — 1,641 — 1,641 Triple H Food Processors, LLC — 1,523 — 1,523 Encore Dredging Holdings, LLC — 1,443 — 1,443 TNCP Intermediate HoldCo, LLC — 1,252 — 1,252 Iten Defense, LLC — 798 — 798 Tailwind Smith Cooper Intermediate Corporation — 789 — 789 American Trailer Rental Group LLC 598 1,213 (1,042 ) 769 EL Academies, Inc. — 760 — 760 Caf&eacute; Zupas — 746 — 746 DKI Ventures, LLC — 732 — 732 Sea Link International IRB, Inc. — 662 — 662 Canopy Safety Brands, LLC — 657 — 657 SpaceCo Holdings, LLC — 500 — 500 Keystone Acquisition Corp. — 481 — 481 Edmentum Ultimate Holdings, LLC (2,351 ) — 2,770 419 Medical Solutions Holdings, Inc. — 406 — 406 R2i Holdings, LLC — 351 — 351 Belnick, Inc. — 350 — 350 Vertellus Holdings LLC (41 ) — 313 272 Gray Matter Systems, LLC — 260 — 260 Unirac, Inc. — 238 — 238 ALS Education, LLC — 237 — 237 Magpul Industries Corp. — 210 (210 ) — Drive Chassis Holdco, LLC — 260 (261 ) (1 ) Precision International, LLC 354 (184 ) (332 ) (162 ) GFRC Holdings, LLC — (548 ) — (548 ) LWO Acquisitions Company LLC — (609 ) — (609 ) ENET Holdings, LLC — (674 ) — (674 ) NetFortris Corp. — (1,371 ) — (1,371 ) Other, net (<$500) 330 72 62 464 Total: $ 4,179 $ 61,981 $ (6,634 ) $ 59,526 67 Table of Contents The primary driver of net unrealized appreciation of $55.3 million for the year ended September 30, 2021 was the improvement in the financial and operational performance across a number of our portfolio companies and an increase in comparable transaction multiples used to estimate the fair value of several of our portfolio companies, partially offset by the reversal of unrealized depreciation associated with the exit of our investment in AG Transportation Holdings, LLC and a decrease in performance of certain of our other portfolio companies. 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: 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 (<$500) 144 (227 ) (129 ) (212 ) Total: $ (7,476 ) $ (26,961 ) $ 8,291 $ (26,146 ) Since March 2020, the U.S. loan market 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 68 Table of Contents 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. As of September 30, 2021, the fair value of our investment portfolio was greater than its cost basis by approximately $11.1 million and our entire investment portfolio was valued at 102.0% of cost, as compared to cumulative net unrealized depreciation of $44.2 million and a valuation of our entire portfolio at 91.1% of cost as of September 30, 2020. This year over year increase in the cumulative unrealized appreciation on investments represents net unrealized appreciation of $55.3 million for the year ended September 30, 2021. Net Unrealized (Appreciation) Depreciation of Other During the year ended September 30, 2021, we recorded $0.4 million of unrealized depreciation on our Credit Facility at fair value as compared to $0.5 million of unrealized appreciation during the year ended September 30, 2020. The comparison of the fiscal year ended September 30, 2020 to the fiscal year ended September 30, 2019 can be found in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, as filed with the SEC on November 11, 2020, located within Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations , which is incorporated by reference herein. 69 Table of Contents LIQUIDITY AND CAPITAL RESOURCES Operating Activities Our cash flows from operating activities are primarily generated from the interest payments on debt securities that we receive from our portfolio companies, as well as net proceeds received through repayments or sales of our investments. We utilize this cash primarily to fund new investments, make interest payments on our Credit Facility and notes payable, make distributions to our stockholders, pay management and administrative fees to the Adviser and Administrator, and for other operating expenses. Net cash used in operating activities for the year ended September 30, 2021 was $14.1 million as compared to $46.1 million for the year ended September 30, 2020. The change was primarily due to an increase in principal repayments and net proceeds from sales of investments. Repayments and net proceeds from sales were $142.7 million during the year ended September 30, 2021 compared to $78.8 million during the year ended September 30, 2020. 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. As of September 30, 2021, we had loans to, syndicated participations in or equity investments in 46 companies, with an aggregate cost basis of approximately $546.5 million. 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. The following table summarizes our total portfolio investment activity during the years ended September 30, 2021 and 2020: Year Ended September 30, 2021 2020 Beginning investment portfolio, at fair value $ 450,400 $ 402,875 New investments 138,992 131,150 Disbursements to existing portfolio companies 42,849 18,756 Scheduled principal repayments (4,854 ) (5,648 ) Unscheduled principal repayments (121,962 ) (70,344 ) Net proceeds from sales of investments (12,457 ) (2,763 ) Net unrealized appreciation (depreciation) of investments 61,981 (26,961 ) Reversal of prior period net appreciation (depreciation) of investments (6,634 ) 8,291 Net realized gain (loss) on investments 4,179 (7,685 ) Increase in investment balance due to PIK interest (A) 5,994 2,400 Net change in premiums, discounts and amortization (876 ) 329 Ending Investment Portfolio, at Fair Value $ 557,612 $ 450,400 (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. 70 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, 2021. Year Ending September 30, Amount 2022 (A) $ 118,499 2023 32,544 2024 46,231 2025 96,825 2026 190,456 Thereafter 17,581 Total contractual repayments $ 502,136 Adjustments to cost basis of debt investments (1,584 ) Investments in equity securities 45,960 Investments held as of September 30, 2021 at Cost: $ 546,512 (A) Includes debt investments with contractual principal amounts totaling $44.1 million for which the maturity date has passed as of September 30, 2021. Financing Activities Net cash provided by financing activities for the year ended September 30, 2021 was $12.4 million, which consisted primarily of $150.0 million in gross proceeds from the issuance of notes payable and $26.9 million in gross proceeds from the issuance of common stock, partially offset by $77.5 million in net repayments on our Credit Facility, $57.5 million used in the redemption of our 2023 Notes, and $26.0 million in distributions to common shareholders. 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. 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, 2021, we paid monthly cash distributions of $0.065 per common share for each month, which totaled an aggregate of $26.0 million. 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 year ended September 30, 2019, we paid monthly cash distributions of 71 Table of Contents $0.07 per common share for each month, which totaled an aggregate of $24.6 million. In October 2021, our Board of Directors declared a monthly distribution of $0.065 per common share for each of October, November, and December 2021. 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, 2022. From inception through September 30, 2021, we have paid 224 monthly or quarterly consecutive distributions to common stockholders totaling approximately $396.3 million or $21.04 per share. For the fiscal years ended September 30, 2021, 2020, and 2019, distributions declared and paid exceeded taxable income available for common distributions resulting in a partial return of capital of approximately $1.0 million, $0.4 million, and $0.7 million, respectively. 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, 2021, we had the ability to issue up to an additional $55.5 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 had the ability to issue and sell, from time to time, shares of our common stock with an aggregate offering price of up to $50.0 million. During the year ended September 30, 2021, we sold 2,082,269 shares of our common stock under the Jefferies Sales Agreement, at a weighted-average price of $9.21 72 Table of Contents per share and raised $19.2 million of gross proceeds. Net proceeds, after deducting commissions and offering costs borne by us, were approximately $18.8 million. In May 2021, we entered into a new equity distribution agreement with Jefferies LLC (the “New Jefferies Sales Agreement”) under which we have the ability to issue and sell, from time to time, shares of our common stock with an aggregate offering price of up to $60.0 million. During the year ended September 30, 2021, we sold 655,252 shares of our common stock under the New Jefferies Sales Agreement, at a weighted-average price of $11.71 per share and raised $7.7 million of gross proceeds. Net proceeds, after deducting commissions and offering costs borne by us, were approximately $7.5 million. As of September 30, 2021, we had a remaining capacity to sell up to an additional $52.3 million of our common stock under the New Jefferies Sales Agreement. 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, 2021, the closing market price of our common stock was $11.30 per share, a 21.8% premium to our September 30, 2021 NAV per share of $9.28. Revolving Credit Facility On May 13, 2021, we, through Business Loan, amended and restated the Credit Facility to, among other things, (i) decrease the commitment amount from $205.0 million to $175.0 million, (ii) extend the revolving period end date to October 31, 2023, (iii) extend the maturity date to October 31, 2025 (at which time all principal and interest will be due and payable if the Credit Facility is not extended by the revolving period end date), (iv) reduce the interest rate margin to 2.70% during the revolving period and 3.25% thereafter, with a LIBOR floor of 0.35%, (v) revise the unused fee to include an additional fee tier of 0.35% per annum on the daily undrawn amounts if the average unused amount is equal to or less than 35% during the applicable period, (vi) provide for certain excess concentration limits, including a reduced second lien limit and a new broadly syndicated loan limit and (vii) add customary LIBOR replacement language. We incurred fees of approximately $1.1 million in connection with this amendment and restatement, which are being amortized through our Credit Facility’s revolving period end date of October 31, 2023. Interest is payable monthly during the term of our Credit Facility. Available borrowings are subject to various constraints imposed under our Credit Facility, based on the aggregate loan balance pledged by Business Loan, which varies as loans are added and repaid, regardless of whether such repayments are prepayments or made as contractually required. Our Credit Facility also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account with KeyBank and with The Bank of New York Mellon Trust Company, N.A. as custodian. KeyBank, which also serves as the trustee of the account, generally remits the collected funds to us once a month. Our Credit Facility contains covenants that require Business Loan to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions), and restrict material changes to our credit and collection policies without the lenders’ consents. Our Credit Facility generally limits distributions to our stockholders on a fiscal year basis to the sum of our net investment income, net capital gains and amounts elected to have been paid during the prior year in accordance with Section 855(a) of the Code. Business Loan is also subject to certain limitations on the type of loan investments it can apply as collateral towards the borrowing base to receive additional borrowing availability under our Credit Facility, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life, portfolio company leverage and lien property. Our Credit Facility further requires Business Loan to comply with other financial and operational covenants, which obligate Business Loan to, 73 Table of Contents among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of 25 obligors required in the borrowing base. Additionally, we are required to maintain (i) a minimum net worth (defined in our Credit Facility to include any outstanding mandatorily redeemable preferred stock) of $325.0 million plus 50.0% of all equity and subordinated debt raised after May 13, 2021 less 50% of any equity and subordinated debt retired or redeemed after May 13, 2021, which equates to $328.8 million as of September 30, 2021, (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, 2021, and as defined in our Credit Facility, we had a net worth of $504.0 million, asset coverage on our “senior securities representing indebtedness” of 230.7% and an active status as a BDC and RIC. In addition, as of September 30, 2021, we had 31 obligors in our Credit Facility’s borrowing base and we were in compliance with all of our Credit Facility covenants. Refer to Note 5— Borrowings of the notes to our Consolidated Financial Statements included elsewhere in this Annual Report for additional information regarding our Credit Facility. Notes Payable In December 2020, we completed an offering of $100.0 million aggregate principal amount of the 2026 Notes for net proceeds of approximately $97.7 million after deducting underwriting discounts, commissions and offering expenses borne by us. In March 2021, we completed an offering of an additional $50.0 million aggregate principal amount of the 2026 Notes for net proceeds of approximately $50.6 million after adding premiums and deducting underwriting costs, commissions and offering expenses borne by us. The 2026 Notes will mature on January 31, 2026 and may be redeemed in whole or in part at any time or from time to time at the Company’s option prior to maturity at par plus a “make-whole” premium, if applicable. The 2026 Notes bear interest at a rate of 5.125% per year. Interest is payable semi-annually on January 31 and July 31 of each year (which equates to approximately $7.7 million per year). In October 2019, we completed a debt offering of $38.8 million aggregate principal amount of the 2024 Notes, inclusive of the overallotment option exercised by the underwriters, for net proceeds of approximately $37.5 million after deducting underwriting discounts, commissions and offering expenses borne by us. As of September 30, 2021, the 2024 Notes were traded under the ticker symbol “GLADL” on the Nasdaq Global Select Market. On November 1, 2021, we voluntarily redeemed the 2024 Notes with an aggregate principal amount outstanding of $38.8 million. In November 2018, we completed a public debt offering of $57.5 million aggregate principal amount of the 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. On January 7, 2021, we voluntarily redeemed the 2023 Notes with an aggregate principal amount outstanding of $57.5 million. The redemption amount was $58.1 million inclusive of accrued interest through the date of redemption. In connection with the voluntary redemption of the 2023 Notes, we incurred a loss on extinguishment of debt of $1.2 million, which is primarily comprised of the unamortized deferred issuance costs at the time of redemption. The indenture relating to the 2026 Notes and the 2024 Notes contains certain covenants, including (i) an inability to incur additional debt or issue additional debt or preferred securities unless the Company’s asset coverage meets the threshold specified in the 1940 Act after such borrowing, (ii) an inability to declare any dividend or distribution (except a dividend payable in our stock) on a class of our capital stock or to purchase shares of our capital stock unless the Company’s asset coverage meets the threshold specified in the 1940 Act at the time of (and giving effect to) such declaration or purchase, and (iii) if, at any time, we are not subject to the reporting requirements of the Exchange Act, we will provide the holders of the 2026 Notes and the 2024 Notes, as 74 Table of Contents applicable, and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements. The 2026 Notes and 2024 Notes are recorded at the principal amount, plus applicable premiums, less discounts and offering costs, on our Consolidated Statements of Assets and Liabilities . Off-Balance Sheet Arrangements We generally recognize success fee income when the payment has been received. As of September 30, 2021 and 2020, we had off-balance sheet success fee receivables on our accruing debt investments of $11.7 million and $9.9 million (or approximately $0.34 per common share and $0.31 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, 2021 and 2020 to be immaterial. The following table shows our contractual obligations as of September 30, 2021, 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) $ — $ — $ 50,500 $ — $ 50,500 Notes Payable — — 188,813 — 188,813 Interest expense on debt obligations (C) 12,910 25,821 13,822 — 52,553 Total $ 12,910 $ 25,821 $ 253,135 $ — $ 291,866 (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 $54.4 million, at cost, as of September 30, 2021. (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, 2026 Notes, and 2024 Notes. The amount of interest expense calculated for purposes of this table was based upon rates and balances as of September 30, 2021. 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 75 Table of Contents Financial Statements included elsewhere in this Annual Report for additional information regarding fair value measurements and our application of Financial Accounting Standards Board Accounting Standards Codification Topic 820, “ Fair Value Measurements and Disclosures.” We have also identified our revenue recognition policy as a critical accounting policy, which is described in Note 2— Summary of Significant Accounting Policies in our accompanying Notes to Consolidated Financial Statements included elsewhere in this Annual Report. Investment Valuation Credit Monitoring and Risk Rating The Adviser monitors a wide variety of key credit statistics that provide information regarding our portfolio companies to help us assess credit quality and portfolio performance and, in some instances, used as inputs in our valuation techniques. Generally, we, through the Adviser, participate in periodic board meetings of our portfolio companies in which we hold board seats and also require them to provide annual audited and monthly unaudited financial statements. Using these statements or comparable information and board discussions, the Adviser calculates and evaluates certain credit statistics. The Adviser risk rates all of our investments in debt securities. The Adviser does not risk rate our equity securities. For syndicated loans that have been rated by an SEC registered Nationally Recognized Statistical Rating Organization (“NRSRO”), the Adviser generally uses the average of two corporate level NRSRO’s risk ratings for such security. For all other debt securities, the Adviser uses a proprietary risk rating system. While the Adviser seeks to mirror the NRSRO systems, we cannot provide any assurance that the Adviser’s risk rating system will provide the same risk rating as an NRSRO would for these securities. The Adviser’s risk rating system is used to estimate the probability of default on debt securities and the expected loss if there is a default. The Adviser’s risk rating system uses a scale of 0 to >10, with >10 being the lowest probability of default. It is the Adviser’s understanding that most debt securities of medium-sized companies do not exceed the grade of BBB on an NRSRO scale, so there would be no debt securities in the middle market that would meet the definition of AAA, AA or A. Therefore, the Adviser’s scale begins with the designation >10 as the best risk rating which may be equivalent to a BBB from an NRSRO; however, no assurance can be given that a >10 on the Adviser’s scale is equal to a BBB or Baa2 on an NRSRO scale. The Adviser’s risk rating system covers both qualitative and quantitative aspects of the business and the securities we hold. The following table reflects risk ratings for all proprietary loans in our portfolio as of September 30, 2021 and 2020, representing approximately 95.5% and 92.7%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period: As of September 30, Rating 2021 2020 Highest 10.0 10.0 Average 6.6 6.3 Weighted Average 7.0 6.5 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, 2021 and 2020, representing approximately 3.9% and 5.4%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period: As of September 30, Rating 2021 2020 Highest 5.0 5.0 Average 4.6 4.7 Weighted Average 4.5 4.7 Lowest 4.0 3.0 76 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, 2021 and 2020, representing approximately 0.6% and 1.9%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period: As of September 30, Rating 2021 2020 Highest 5.0 6.0 Average 5.0 5.0 Weighted Average 5.0 4.6 Lowest 5.0 4.0 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.