Table of Contents

As filed with the Securities and Exchange Commission on February 18, 2022

Registration No. 333-          

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

The Gladstone Companies, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   6282   90-0528770

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

1521 Westbranch Drive, Suite 100

McLean, Virginia 22102

Telephone: (703) 287-5800

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Michael LiCalsi, Esq.

General Counsel

The Gladstone Companies, Inc.

1521 Westbranch Drive, Suite 100

McLean, Virginia 22102

Telephone: (703) 287-5800

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

Copies to:

Thomas Salley

Joshua A. Kaufman

Nicolas H.R. Dumont

Cooley LLP

55 Hudson Yards

New York, NY 10001

Tel: (212) 479-6000

 

Andrew M. Tucker

Nelson Mullins Riley & Scarborough LLP

101 Constitution Avenue, NW. Suite 900

Washington, D.C. 20001

(202) 689-2800

 

 

Approximate date of commencement of the proposed sale of the securities to the public: As soon as practicable after the Registration Statement is declared effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED FEBRUARY 18, 2022

PRELIMINARY PROSPECTUS

                 Shares

 

 

LOGO

Class A Common Stock

 

 

This is the initial public offering of shares of Class A Common Stock of The Gladstone Companies, Inc. We are offering                shares of Class A Common Stock, par value $0.01 per share. This is our initial public offering of Class A Common Stock, and no public market currently exists for our Class A Common Stock. We anticipate that the initial public offering price will be between $                and $                per share of Class A Common Stock. We have applied to list our Class A Common Stock on the Nasdaq Global Select Market (“Nasdaq”), under the symbol “GC.”

Following this offering, we will have two classes of common stock: Class A Common Stock and Class B Common Stock. The rights of the holders of Class A Common Stock and Class B Common Stock will be identical, except with respect to voting, conversion, transfer rights and, in certain cases, dividends. Each share of Class A Common Stock is entitled to one vote. Each share of Class B Common Stock is entitled to ten votes and is convertible at any time into one share of Class A Common Stock. See the Section titled “Description of Capital Stock—Class A Common Stock and Class B Common Stock.” Our Chairman, President and Chief Executive Officer and his controlled entities hold    % of our outstanding Class B Common Stock and will hold approximately    % of the voting power of our outstanding capital stock immediately following this offering, assuming no exercise of the underwriters’ option to purchase additional shares of Class A Common Stock to cover over-allotments. As a result, we will be a “controlled company” within the meaning of the corporate governance rules of Nasdaq.

We are an “emerging growth company” as defined under the federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements for future filings.

Investing in our Class A Common Stock involves risks. Please read “Risk Factors” beginning on page 27 of this prospectus.

 

     Price per
Share
     Total  

Initial public offering price of Class A Common Stock

   $                    $                

Underwriting discounts and commissions(1)

   $        $    

Proceeds, before expenses, to us

   $        $    

 

(1)

See “Underwriting” for a description of compensation payable to the underwriters.

We have granted the underwriters an option for a period of 30 days from the date of this prospectus to purchase up to an additional                shares of Class A Common Stock at the public offering price, less the underwriting discounts and commissions. In addition, at our request, the underwriters have reserved                 shares for sale to the members of our Board of Directors, officers and employees of us and our affiliates at the public offering price. The underwriting discount on any shares purchased by such individuals will be $                 per share. See “Underwriting”.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of Class A Common Stock on or about                 , 2022.

Book-Running Manager

EF HUTTON

division of Benchmark Investments, LLC

Prospectus dated                , 2022.


Table of Contents

The Gladstone Companies, Inc.

 

LOGO

 

*

Our calculation of assets under management may differ from the calculations of other asset managers. As a result, this measure may not be comparable to similar measures presented by other asset managers. In addition, our definition of assets under management is not based on or related to any definition of assets under management that is set forth in the agreements governing the funds that we manage.

 


Table of Contents

TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1  

THE OFFERING

     21  

SUMMARY CONSOLIDATED FINANCIAL DATA

     24  

RISK FACTORS

     27  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     60  

MARKET AND INDUSTRY DATA AND FORECASTS

     62  

ORGANIZATIONAL STRUCTURE

     63  

USE OF PROCEEDS

     66  

CAPITALIZATION

     67  

DILUTION

     68  

CASH DIVIDEND POLICY

     70  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     71  

BUSINESS

     103  

MANAGEMENT

     115  

EXECUTIVE COMPENSATION

     122  

CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS

     130  

PRINCIPAL STOCKHOLDERS

     136  

DESCRIPTION OF CAPITAL STOCK

     137  

CLASS A COMMON STOCK ELIGIBLE FOR FUTURE SALE

     144  

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS TO NON-U.S. HOLDERS

     146  

UNDERWRITING

     150  

LEGAL MATTERS

     159  

EXPERTS

     159  

WHERE YOU CAN FIND MORE INFORMATION

     159  

FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS

     F-1  

 

 

This prospectus is solely an offer with respect to our Class A Common Stock and is not an offer, directly or indirectly, of any securities of any of the Existing Gladstone Funds (as defined herein) we advise, manage or sponsor or any funds we may advise, manage or sponsor in the future. An investment in our Class A Common Stock is not an investment in any of our funds, and the assets and revenues of our funds are not directly available to us or our stockholders. In addition, interests in certain of our funds only may be offered privately to certain sophisticated and accredited investors on the basis of exemptions from the registration requirements of the federal securities laws.

This prospectus does not constitute an offer of, or an invitation to purchase, any of our Class A Common Stock in any jurisdiction in which such offer or invitation would be unlawful. We and the underwriters are offering to sell, and seeking offers to buy, our Class A Common Stock only in jurisdictions where such offers and sales are permitted.

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered to you. Neither we nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectus we have prepared. Neither we nor the underwriters take any responsibility for, or can provide any assurance as to the reliability of, any other information that others may give you. The information in this prospectus is current only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our Class A Common Stock.

 

i


Table of Contents

Many of the terms used in this prospectus, including assets under management, which we define as (a) the total assets in the Existing Gladstone Funds (as defined herein), as included on their periodic reports filed with the Securities and Exchange Commission and (b) our total assets, as reflected on our balance sheet, including our investment in Sponsor (as defined herein) and cash and cash equivalents, may differ from the calculations of other asset managers. For example, other asset managers may calculate assets under management solely on fee paying assets rather than the total assets reflected on their balance sheet. As a result, this measure may not be comparable to similar measures presented by other asset managers. In addition, our definition of assets under management is not based on or related to any definition of assets under management that is set forth in the agreements governing the funds that we manage. For a more detailed review of assets under management, see “Management’s Discussion and Analysis of Financial Condition—Operating Metrics—Assets Under Management.

Unless indicated otherwise, the information included in this prospectus assumes no exercise by the underwriters of the overallotment option to purchase up to                additional shares of Class A Common Stock from us and that the Class A Common Stock to be sold in this offering are sold at $                per share of Class A Common Stock, which is the midpoint of the price range indicated on the front cover of this prospectus.

 

ii


Table of Contents

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all the information you should consider before investing in our Class A Common Stock. You should read this entire prospectus carefully, especially the sections entitled “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and the historical consolidated financial statements and the related notes thereto, before you decide to invest in our Class A Common Stock.

Except where the context suggests otherwise, the terms “we,” “us,” “our,” the “Company” and “The Gladstone Companies” refer to The Gladstone Companies, Inc.; “Adviser Subsidiary” refers to Gladstone Management Corporation; “Administrator Subsidiary” refers to Gladstone Administration, LLC; “GAIN” refers to Gladstone Investment Corporation; “GLAD” refers to Gladstone Capital Corporation; “GOOD” refers to Gladstone Commercial Corporation; “LAND” refers to Gladstone Land Corporation; “Broker-Dealer Subsidiary” refers to Gladstone Securities, LLC; and “Existing Gladstone Funds” refers collectively to GAIN, GLAD, GOOD and LAND.

The Gladstone Companies, Inc.

We were formed on December 7, 2009 as a Delaware corporation to continue the asset management business conducted through predecessor entities since 2001. Our sole stockholder is The Gladstone Companies, Ltd., a Cayman Islands exempted company (“TGC LTD”), which is wholly owned by David Gladstone, our Chairman, President and Chief Executive Officer.

We are an independent United States alternative asset manager with assets under management of approximately $4.0 billion as of December 31, 2021. Our alternative asset management businesses include the management, through our Adviser Subsidiary, of (1) GAIN, a business development company (“BDC”) that primarily invests in debt and equity securities of private businesses operating in the United States, generally with annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $3 million to $20 million (“lower middle market”) (including in connection with management buyouts, recapitalization or, to a lesser extent, refinancing of existing debt facilities); (2) GLAD, a BDC that primarily invests in debt securities of established private lower middle market companies in the United States; (3) GOOD, a real estate investment trust (“REIT”) under Section 856 of the Internal Revenue Code of 1986, as amended (the “Code”), which focuses on acquiring, owning and managing primarily office and industrial properties in the United States; and (4) Gladstone Land Corporation (“LAND”), a REIT and natural resources company that focuses on acquiring, owning and leasing farmland in the United States. We also provide various administrative and financial services, including investment banking, due diligence, dealer manager, mortgage placement, and other financial services through our Broker-Dealer Subsidiary.

We have grown our assets under management significantly, from approximately $132.2 million as of September 30, 2001, to approximately $4.0 billion as of December 31, 2021, representing a compound annual growth rate (“CAGR”) of approximately 18%. Our Adviser Subsidiary oversees the investments of the four Existing Gladstone Funds which have collectively invested approximately $7.1 billion in 668 businesses or properties through December 31, 2021. As of December 31, 2021, we had 29 executive officers, managing directors and directors and also employed 48 other investment and administrative professionals. Our headquarters is in McLean, Virginia (a suburb of Washington, D.C.) and we have offices in New York, New York; Seattle, Washington; Dallas, Texas; Palm Beach Gardens, Florida; Brandon, Florida; Camarillo, California; Salinas, California; and Tulsa, Oklahoma.

The Existing Gladstone Funds invest in a diverse range of alternative strategies, including private debt, private equity, real estate and natural resource real assets. We seek to deliver superior returns to investors in our

 

1


Table of Contents

funds through a disciplined, value-oriented investment approach. We believe that this investment approach, implemented through our funds across a broad and expanding range of alternative asset classes and investment strategies, helps provide stability and predictability to our business over different economic cycles and has contributed to our growth of assets under management over an extended period of time. Our investment personnel have cultivated strong relationships with clients in our financial advisory business through our Adviser Subsidiary, where we endeavor to provide objective and insightful solutions and advice that our clients can trust. We believe our scaled, diversified businesses, coupled with the long track record of investment performance we have delivered for our funds, proven investment approach and strong client relationships, position us to continue to perform well in a variety of market conditions, expand our assets under management and add complementary businesses.

The following chart sets forth our assets under management by Existing Gladstone Fund since the inception of GLAD in 2001.

 

 

LOGO

 

*

Our calculation of assets under management may differ from the calculations of other asset managers. As a result, this measure may not be comparable to similar measures presented by other asset managers. In addition, our definition of assets under management is not based on or related to any definition of assets under management that is set forth in the agreements governing the funds that we manage.

In addition to the asset management services provided by the Adviser Subsidiary, our Broker-Dealer Subsidiary earns fees by generally providing investment banking, due diligence, dealer manager, mortgage placement, and other financial services to the Existing Gladstone Funds and certain portfolio companies of the Gladstone BDCs (as defined herein).

 

2


Table of Contents

Each of the Existing Gladstone Funds is a permanent capital vehicle, which means that a significant portion of our revenue base is recurring. The long-term nature of our funds’ capital has enabled and continues to enable us to invest our funds’ assets with a long-term focus over different points in a market cycle, which we believe is an important component in generating attractive returns. For the fiscal year ended June 30, 2021, approximately 41.6% of our total revenue was comprised of investment advisory and loan servicing fees. Investment advisory fees, which are generally based on the amount of invested capital in funds we manage, are generally more predictable and less volatile than incentive fees.

We primarily generate revenue from fees earned pursuant to advisory agreements (in each case, an “Advisory Agreement”) our Adviser Subsidiary has with each of the Existing Gladstone Funds. Each Existing Gladstone Fund pays a base management fee (which is based on a measure of adjusted gross assets in the case of GAIN and GLAD (collectively, the “Gladstone BDCs”) and on a measure of gross tangible real estate in the case of GOOD and LAND (collectively, the “Gladstone REITs”)) and performance-based incentive fees. See “Certain Relationships and Related Party Transactions—Advisory Agreements.” The current base management fees paid to the Adviser Subsidiary by each of the Existing Gladstone Funds are summarized in the following table:

Investment Advisory Fees

 

GAIN

  

Annual fee of 2% of average gross assets(1)

GLAD

  

Annual fee of 1.75% of average gross assets(1)

GOOD

  

Annual fee of 0.425% of Gross Tangible Real Estate(1)(2)

LAND

  

Annual fee of 0.60% of Gross Tangible Real Estate(1)(3)

 

(1)

As defined in the applicable Advisory Agreement.

(2)

Prior to the quarter ended June 30, 2020, GOOD’s base management fee was 1.5% of total adjusted stockholders’ equity.

(3)

Prior to the quarter ended March 31, 2020, LAND’s base management fee was 2% of total adjusted common equity; from April 1, 2020 through June 30, 2021, LAND’s base management fee was 0.50% of Gross Tangible Real Estate.

Incentive fees are earned by the Adviser Subsidiary pursuant to a given Advisory Agreement when an Existing Gladstone Fund meets certain income or realized capital gains thresholds. Incentive fees are recognized as income when all contingencies, including realization of specified minimum hurdle rates, have been exceeded. By their nature incentive fees are more variable in amount and the timing of their recognition than are investment advisory fees. Through December 31, 2021, the Adviser Subsidiary has earned both income-based incentive fees as well as capital gains-based incentive fees. The following tables summarizes the basis for the incentive fee arrangements payable to the Adviser Subsidiary by each of the Existing Gladstone Funds as of the date of this prospectus:

 

    

Income-Based Incentive Fee

  

Capital Gains-Based Incentive

GAIN    All of the pre-incentive fee net investment income generated quarterly in excess of a hurdle rate of 1.75% of net assets up to threshold of 2.1875% of net assets (7% to 8.75% annualized) and 20% of the pre-incentive fee net investment income generated quarterly in excess of such    20% of certain net realized capital gains

 

3


Table of Contents
    

Income-Based Incentive Fee

  

Capital Gains-Based Incentive

   2.1875% threshold (8.75% annualized)   
GLAD    Prior to April 1, 2020, and beginning again April 1, 2022, all of the pre-incentive fee net investment income generated quarterly in excess of a hurdle rate of 1.75% of net assets up to a threshold of 2.1875% of net assets (7% to 8.75% annualized) and 20% of the pre-incentive fee net investment income in excess of such 2.1875% threshold (8.75% annualized). For the period from April 1, 2020 through March 31, 2022, all of the pre-incentive fee net investment income generated quarterly in excess of a hurdle rate of 2.00% of net assets up to a threshold of 2.4375% of net assets (8% to 9.75% annualized) and 20% of the pre-incentive fee net investment income in excess of such 2.4375 threshold (9.75% annualized)    20% of certain net realized capital gains
GOOD    15% of Core FFO (as defined in the applicable Advisory Agreement) generated quarterly in excess of a hurdle rate of 2% of adjusted stockholders’ equity (8% annualized)    15% of certain net realized capital gains
LAND    All of funds from operations (“FFO”) generated quarterly in excess of a hurdle rate of 1.75% of total adjusted common equity up to a threshold of 2.1875% of total adjusted common equity (7% to 8.75% annualized), plus 20% of FFO in excess of such 2.1875% threshold (8.75% annualized)    15% of certain net realized capital gains

In addition to fees received by our Adviser Subsidiary pursuant to the Advisory Agreements, our Adviser Subsidiary and our Broker-Dealer Subsidiary earn fees for providing investment banking, due diligence, dealer manager, mortgage placement and other financial services. All fees received by our Administrator Subsidiary are reimbursement for the allocable portion of each Existing Gladstone Fund’s corporate overhead which primarily includes rent and the salaries and benefits expenses of the Administrator Subsidiary’s employees that serve the respective Existing Gladstone Fund; therefore, ultimately, we do not generate net income from the fees generated by the Administrator Subsidiary.

 

4


Table of Contents

Our Business Model

We, through our subsidiaries, provide the following services: asset management, financial services and administrative services.

Asset Management

We are a leading alternative asset manager and provider of other administrative and financial services. We currently provide these services to the four Existing Gladstone Funds, which are publicly-traded, Nasdaq-listed companies invested in alternative asset classes.

 

   

GLAD (BDC—Debt Securities of Private Companies): We are the adviser to GLAD, a BDC that primarily invests in debt securities of established private lower middle market companies in the U.S. GLAD was established in 2001 and is an externally managed, closed-end, non-diversified management investment company that has elected to be treated as a BDC under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, it has elected to be treated as a regulated investment company (“RIC”) for federal tax purposes under the Code. Pursuant to its Advisory Agreement, since GLAD’s inception through December 31, 2021 the Adviser Subsidiary earned an aggregate of approximately $156.5 million in investment advisory and loan servicing fees, or $86.2 million net of credits to our Adviser Subsidiary, and approximately $70.6 million in incentive fees, or $43.7 million net of credits to our Adviser Subsidiary. For the fiscal year ended June 30, 2021, the Adviser Subsidiary earned an aggregate of $13.9 million of investment advisory and loan servicing fees (accounting for $5.9 million of net revenue) and $5.6 million of incentive fees (accounting for $5.0 million of net revenue). For the six months ended December 31, 2021, the Adviser Subsidiary earned an aggregate of $7.8 million of investment advisory and loan servicing fees (accounting for $2.4 million of net revenue) and $3.6 million of incentive fees (accounting for $3.6 million of net revenue). As of December 31, 2021, GLAD’s investment portfolio consisted of investments in 47 portfolio companies located in 23 states in 14 different industries, with an aggregate fair value of $577 million. The fair value of GLAD’s five largest investments as of December 31, 2021 totaled $152 million, or 26%, of its total investment portfolio.

 

   

GAIN (BDC—Debt and Equity Securities (including Buyouts) of Private Companies). We are the adviser to GAIN, a BDC that invests in debt and equity securities of lower middle market private businesses operating in the U.S. (including in connection with management buyouts, recapitalization or, to a lesser extent, refinancing of existing debt facilities). GAIN was established in 2005 and, like GLAD, is an externally managed, closed-end, non-diversified management investment company that has elected to be treated as a BDC under the 1940 Act. In addition, it has elected to be treated as a RIC for federal tax purposes under the Code. Pursuant to its Advisory Agreement, since GAIN’s inception through December 31, 2021 the Adviser Subsidiary earned an aggregate of approximately $187.7 million in investment advisory and loan servicing fees, or $84.1 million net of credits to our Adviser Subsidiary, approximately $49.7 million in income-based incentive fees, or $49.3 million net of credits to our Adviser Subsidiary, and approximately $13.4 million in capital gains-based incentive fees. For the fiscal year ended June 30, 2021, the Adviser Subsidiary earned an aggregate of $19.8 million of investment advisory and loan servicing fees (accounting for $9.1 million of net revenue) and $5.7 million of incentive fees (accounting for $5.7 million of net revenue). For the six months ended December 31, 2021, the Adviser Subsidiary earned an aggregate of $10.8 million of investment advisory and loan servicing fees (accounting for $2.6 million of net revenue) and $9.3 million of incentive fees (accounting for $9.3 million of net revenue). As of December 31, 2021, GAIN’s investment portfolio consisted of investments in 26 portfolio companies located in 19 states across 14 different industries with an aggregate fair value of $701 million. The fair value of GAIN’s five largest investments as of December 31, 2021 totaled $266 million, or 38%, of its total investment portfolio.

 

5


Table of Contents
   

GOOD (REIT—Office and Industrial Properties): We are the adviser to GOOD, a diversified, national operation, with investments in a variety of sectors and geographic locations. GOOD was established in 2003 and is an externally-managed REIT focused on acquiring, owning, and managing primarily office and industrial properties leased to single tenants. Pursuant to its Advisory Agreement, since GOOD’s inception through December 31, 2021 the Adviser Subsidiary earned an aggregate of approximately $54.3 million in investment advisory fees, or $54.0 million net of credits to our Adviser Subsidiary, and approximately $52.9 million in incentive fees, or $34.2 million net of credits to our Adviser Subsidiary. For the fiscal year ended June 30, 2021, the Adviser Subsidiary earned an aggregate of $5.7 million of investment advisory fees (accounting for $5.7 million of net revenue) and $4.4 million of incentive fees (accounting for $4.4 million of net revenue). For the six months ended December 31, 2021, the Adviser Subsidiary earned an aggregate of $3.0 million of investment advisory fees (accounting for $3.0 million of net revenue) and $2.6 million of incentive fees (accounting for $2.6 million of net revenue). As of December 31, 2021, GOOD owned 129 properties totaling 16.2 million square feet in 27 states. As of December 31, 2021, GOOD’s investments in real estate, net, totaled $959 million.

 

   

LAND (REIT—Farmland): We are the adviser to LAND, a diversified, national operation, with investments in a variety of natural resource sectors and geographic locations. LAND was established in 2013 and is an externally-managed, natural resource REIT focused on acquiring, owning and leasing farmland. Pursuant to its Advisory Agreement, since LAND’s inception through December 31, 2021 the Adviser Subsidiary earned an aggregate of approximately $23.6 million in investment advisory fees, or $21.5 million net of credits to our Adviser Subsidiary, and approximately $9.5 million in incentive fees, or $8.6 million net of credits to our Adviser Subsidiary. For the fiscal year ended June 30, 2021, the Adviser Subsidiary earned an aggregate of $5.0 million of investment advisory fees (accounting for $5.0 million of net revenue) and $2.9 million of incentive fees (accounting for $2.9 million of net revenue). For the six months ended December 31, 2021, the Adviser Subsidiary earned an aggregate of $3.6 million of investment advisory fees (accounting for $3.6 million of net revenue) and $2.7 million of incentive fees (accounting for $2.7 million of net revenue). As of December 31, 2021, LAND owned 164 farms comprised of 112,542 acres (or approximately 4.9 billion square feet) located across 15 states in the United States. LAND also owns several farm-related facilities, such as cooling facilities, packinghouses, processing facilities, and various storage facilities. As of December 31, 2021, LAND’s investments in real estate, net, totaled $1.32 billion.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Financial Measures and Indicators” for additional information regarding the investment advisory and incentive fees for each Existing Gladstone Fund. For a more detailed review of each fund’s performance, see “Business—Historical Investment Performance of Our Funds.”

Financial Services

Financial services generally include receiving transaction-based compensation or other compensation for providing advice on a variety of strategic and financial matters, such as mergers, acquisitions and divestitures, restructurings and reorganizations and capital raising and capital structure. We provide financial services through our Adviser Subsidiary and through our Broker-Dealer Subsidiary. The Broker-Dealer Subsidiary earns fees generated from providing dealer manager, investment banking, mortgage placement, and other services to us, the Existing Gladstone Funds and certain portfolio companies of GLAD and GAIN. We incur third-party securities trade costs associated with the Broker-Dealer Subsidiary that largely offset the associated securities trade commission revenue we earn.

 

6


Table of Contents

Administrative Services

Our Administrator Subsidiary provides administrative services to the Existing Gladstone Funds as well as our Adviser Subsidiary and Broker-Dealer Subsidiary. Pursuant to administration agreements with the Existing Gladstone Funds (the “Administration Agreements”), the Administrator Subsidiary allocates the costs of administrative services and overhead and receives administrative fee payments from the Existing Gladstone Funds. Additionally, the Administrator Subsidiary is responsible for producing the financial statements and asset valuations, and handling compliance, legal, and other duties for the Company, the Existing Gladstone Funds, and our subsidiaries.

Competitive Strengths

Diversified, National Alternative Asset Management. Alternative asset management is the fastest growing segment of the asset management industry, and we believe we are one of the leading small-sized independent alternative asset managers in the United States, which we define as alternative asset managers with less than $16 billion of assets under management. Our asset management business is diversified across a broad variety of alternative asset classes and investment strategies and has national reach and scale. From the time our Adviser Subsidiary entered the asset management business in 2001 through December 31, 2021, the Existing Gladstone Funds have raised approximately $3.4 billion of capital and Gladstone Acquisition has raised $107 million of capital. Our assets under management have grown from approximately $132.2 million as of December 31, 2001 to approximately $4.0 billion as of December 31, 2021, representing a CAGR of approximately 18% over the 20-year period. We believe that the strength and breadth of our franchise, supported by our people, the investment approach we have adopted for our funds and track record of success, provide a distinct advantage for our funds when raising capital, evaluating opportunities, making investments, building value and realizing returns.

Stable Earnings Model. We believe we have a stable earnings model based on:

All of the equity capital that we currently manage is long-term in nature. As of December 31, 2021, 100% of our assets under management were in permanent capital vehicles with no fund termination or maturity date. None of the Existing Gladstone Funds has a requirement to return equity capital to investors. This has enabled and continues to enable us to invest fund assets with a long-term focus over different points in a market cycle, which we believe is an important component in generating attractive returns. We believe our funds’ long-term capital also leaves us well-positioned during economic downturns, when the fundraising environment for alternative assets has historically been more challenging than during periods of economic expansion.

We manage a diverse capital base from four distinct funds. For the fiscal year ended June 30, 2021, approximately 24.7%, 33.5%, 19.4%, and 15.5% of our total revenue was generated from GLAD, GAIN, GOOD and LAND, respectively, with the balance of 6.9% arising from securities trade commissions and other income. For the six months ended December 31, 2021, approximately 21.7%, 39.7%, 14.6% and 15.9% of our total fee revenue was generated from GLAD, GAIN, GOOD and LAND, respectively, with a balance of 8.1% arising from securities trade commissions and other income. Through our funds, we manage a well-balanced and diverse capital base, which we believe is the result of our demonstrated expertise across alternative capital vehicles.

A significant portion of our revenue is generated from management fees earned pursuant to the Advisory Agreements, the continuation of which is subject to annual review and approval by the respective boards of such funds. See “Certain Relationships and Related Party TransactionsAdvisory Agreements.” Management fees, which are generally based on the amount of invested capital in funds we manage, are generally more predictable and less volatile than performance-based fees. For the fiscal year ended June 30, 2021 and the six months ended December 31, 2021, approximately 41.6% and 25.6%, respectively, of our total revenue was comprised of base management fees. For the years ended June 30, 2019, 2020 and 2021, base management fees averaged 38.3% of our total revenue.

 

7


Table of Contents

Strong Middle Market Presence. While GOOD has some exposure to large companies through tenants of certain properties, the Existing Gladstone Funds have substantial exposure to the United States middle market, which we define as United States businesses with $10 million to $1 billion in annual revenue. According to the National Center for The Middle Market, while the middle market represents just 3% of all United States companies, it accounts for a third of United States private sector gross domestic product and jobs, generates $6 trillion in annual revenue and employs 48 million people in the United States. Prior to the COVID-19 pandemic, the National Center for the Middle Market’s fourth quarter 2019 report reported that the year-over-year revenue growth rate of middle market companies was 7.5% as compared to 4.3% for companies comprising the S&P 500. In their report for the fourth quarter of 2020, during the pandemic, this revenue growth rate declined to -1.2%, but remains better than the -5.5% decline for companies in the S&P 500. As noted in the National Center for the Middle Market’s second quarter 2021 report, the year-over-year revenue growth rate of middle market companies improved to 8.0%.

Demonstrated Investment Track Record. We have a demonstrated record of generating attractive risk- adjusted returns for investors in the Existing Gladstone Funds across our asset management business, as shown in the table below. We believe that the investment returns we have generated for investors in the Existing Gladstone Funds over many years across a broad and expanding range of alternative asset classes and through a variety of economic conditions and cycles of the equity and debt capital markets are a key reason why we have been able to consistently grow our assets under management across our alternative asset management platform.

The following table provides the total percentage return on a hypothetical $100 investment in common stock of the Existing Gladstone Funds, assuming a reinvestment of all dividends, for one year, three years and five years ended December 31, 2021 are set out below, rounded to the nearest whole percent and the current yield on each of the Existing Gladstone Funds based on reported closing stock price as of December 31 of each year.

Total Percent Return

 

Funds

   1 Year     3 Year     5 Year  

GLAD

     40     107     93

GAIN

     82     135     206

GOOD

     54     82     49

LAND

     136     228     261

The following table provides the total percentage return on a hypothetical $100 investment in common stock of the Existing Gladstone Funds, assuming a reinvestment of all dividends, for one year, three years and five years ended June 30, 2021 are set out below, rounded to the nearest whole percent and the current yield on each of the Existing Gladstone Funds based on reported closing stock price as of June 30 of each year.

Total Percent Return

 

Funds

   1 Year     3 Year     5 Year  

GLAD

     71     68     151

GAIN

     53     56     207

GOOD

     31     49     97

LAND

     57     114     165

See “Business—Historical Investment Performance of Our Funds” for information regarding the calculation of investment returns, valuation methodology and factors affecting the investment performance of our funds. The historical information presented above and elsewhere in this prospectus with respect to the investment performance of our funds is provided for illustrative purposes only. The historical investment performance of the

 

8


Table of Contents

Existing Gladstone Funds is no guarantee of future performance of the Existing Gladstone Funds or any other fund we may manage in the future.

Diverse Base of Longstanding Investors. We have a long history of raising significant amounts of capital for the Existing Gladstone Funds on a national basis across a broad range of asset classes, and we believe that the strength and breadth of our relationships with individual and institutional investors will provide us with a competitive advantage in raising capital. During the nearly two decades of asset management activities of our Adviser Subsidiary, we have built long-term relationships with many individual investors through brokerage houses and smaller institutional investors in the United States, most of which invest in a number of the Existing Gladstone Funds. Furthermore, the investor base of the Existing Gladstone Funds is highly diversified, with no single unaffiliated investor in the Existing Gladstone Funds owning more than 10% of the outstanding common stock of those funds as of December 31, 2021. We believe that our strong network of investor relationships, together with our long-term track record of providing investors in our funds with superior risk-adjusted investment returns, will enable us to continue to grow the Existing Gladstone Funds and, within approximately 12 months following the completion of this offering, successfully launch (a) Gladstone Retail Corporation, a corporation formed in Maryland in 2020 that is expected to be a REIT that invests in retail properties (“Gladstone Retail”), (b) Gladstone Farming L.P., a limited partnership to be formed in Delaware that is expected to be a privately offered fund that invests in agricultural operations, farming related operations and businesses that support the farming industry in the United States (“Gladstone Farming”), and/or (c) Gladstone Partners Fund L.P., a Delaware limited partnership that is expected to be a privately offered fund that will invest alone or co-invest in new portfolio companies with the Gladstone BDCs (“Gladstone Partners”) (collectively, the “Future Gladstone Funds”), as well as assist Gladstone Acquisition Corporation (“Gladstone Acquisition”) in completing its Initial Business Combination (as defined herein). We expect that some portion of our investments in the Future Gladstone Funds will take the form of general partnership interests. A general partner generally has unlimited liability for the liabilities of the partnership, including debt of the partnership and any judgments against the partnership. There can be no assurance that we will successfully launch any of the Future Gladstone Funds in that time frame or at all and as a result we may launch some, all or none of the Future Gladstone Funds. There is no minimum number of Future Gladstone Funds we intend to launch. See “Risk FactorsRisks Related to Our Business—To the extent that our investments in the Future Gladstone Funds are in the form of general partnership interests, such investments are subject to unlimited liability.”

Strong Industry and Corporate Relationships. We believe that the strength of our relationships with investment banking firms, real estate brokers, other financial intermediaries and leading corporations and corporate executives provides us with competitive advantages in identifying transactions, securing investment opportunities for our funds and generating exceptional returns for investors in the Existing Gladstone Funds. We actively cultivate our relationships with major and minor investment banking firms and other financial intermediaries. We believe our repeated and consistent dealings with these firms over a long period of time have led to our being one of the first parties considered for potential investment ideas and have enhanced our ability to obtain financing on more favorable terms. We believe that our strong network of relationships with these firms provide us with a significant advantage in attracting deal flow and securing transactions, including a substantial number of exclusive investment opportunities and opportunities that are made available to a very limited number of other private equity firms.

Our People. We believe that our executive officers and senior management are the key drivers in the growth of our business. Our executive officers and senior management are supported by other professionals with a variety of backgrounds in investment banking, leveraged finance, private equity, real estate, farming and other disciplines. We believe that the extensive experience and financial acumen of our management and professionals provide us with a significant competitive advantage. We also believe that we benefit from substantial synergies across all of these businesses, including the ability to leverage the extensive intellectual capital that resides throughout our firm. We believe that the extensive investment review process that is conducted in all of our asset management businesses, involving active participation by David Gladstone, Terry Brubaker, David Dullum, Bob

 

9


Table of Contents

Cutlip, Bob Marcotte and Michael LiCalsi, is not only a significant reason for the successful investment performance of our funds but also helps to maximize those synergies. See the section entitled “Management” in this prospectus for additional background information for our executive officers.

Our and/or our funds’ executive officers and senior management have the following years of cumulative business experience in the business of the funds in which they operate, both before and during their tenures with us:

 

Name

  

Title

   Years of business
experience
 

David Gladstone

   President and Chief Executive Officer      49  

Terry Brubaker

   Chief Operating Officer      49  

David Dullum

   Executive Vice President of Private Equity (Buyouts)      49  

Bob Cutlip

   Executive Vice President of Commercial & Industrial Real Estate      37  

Bob Marcotte

   Executive Vice President of Private Equity (Debt)      41  

Michael LiCalsi

   Executive Vice President of Administration, General Counsel and Secretary      27  

Bill Reiman

   Executive Vice President of West Coast Operations (Gladstone Land)      27  

Michael Malesardi

   Chief Financial Officer and Treasurer      39  

Distinct Advisory Perspective. We are not engaged in activities that might conflict with our role as a trusted financial advisor. We believe that this makes us particularly well-suited to represent boards and special committees in the increasing number of situations where they are looking to retain a financial advisor who is devoid of such conflicts. In addition, we believe that our ability to view financial advisory client assignments from both the client’s and an owner’s perspective often provides unique insights into how best to maximize value while also achieving our clients’ strategic objectives.

Demonstrated History of Legal and Regulatory Compliance. We have a proven track record of launching and managing publicly traded BDC and REIT vehicles, each of which is subject to distinctive compliance and regulatory challenges. Rigorous legal and compliance analysis is important to our culture and our history of regulatory and legal compliance across all of our vehicles is a core strength of our firm.

Our Growth Strategy

As we expand our business, we intend to apply the same core principles and strategies to which we have adhered since our inception.

Organically Grow Our Existing Funds. Alternative assets are experiencing increasing demand from a range of investors, which we and many industry participants believe is part of a long-term trend to enhance portfolio diversification and to meet desired return objectives. We have demonstrated our ability to deliver strong risk-adjusted investment returns in alternative assets throughout market cycles since our inception in 2001, and we believe each of our investment strategies are well positioned to benefit from long-term positive industry momentum. By continuing to deliver strong investment and operations management performance, we expect to grow the assets under management in the Existing Gladstone Funds, which will increase our fee revenue, by deepening and broadening relationships with our current high-quality investor base as well as attracting new investors.

Expand Our Product Offerings. We intend to grow our asset management platform to include additional investment products that are complementary to the Existing Gladstone Funds. As we expand our product offerings, we expect to leverage the investor base of the Existing Gladstone Funds, and to attract new investors.

 

10


Table of Contents

Finally, we expect to leverage our direct origination platform, underwriting process and active credit management capabilities to grow our product offerings. There are a number of complementary strategies that we are currently pursuing across our platform. We intend to use the net proceeds from this offering for growth strategies, which are expected to include: (i) providing capital to the Existing Gladstone Funds and the Future Gladstone Funds, including through general partnership interests; (ii) providing additional capital to Gladstone Acquisition in connection with its Initial Business Combination; (iii) using proceeds for working capital to supplement our existing line of credit; and (iv) for other general corporate purposes. We will make investments in the Existing Gladstone Funds and the Future Gladstone Funds solely to the extent that we are not required to register as an investment company under the 1940 Act. No portion of the proceeds will be used to redeem or repurchase shares of our capital stock outstanding prior to this offering or to compensate our officers or Board of Directors. Once launched, Gladstone Retail will seek to purchase and own retail properties, which we define as locations that are open to the public and provide a product or service, and Gladstone Farming will seek to purchase agricultural operations which generate operating income across the United States that are focused on high-value crops such as organic vegetables, fruits and nuts and those of which may be converted to organic and farming related operations and businesses that support the farming industry. Gladstone Partners will seek to invest alone or co-invest in new portfolio companies with the Gladstone BDCs. In the event that Gladstone Acquisition successfully completes its initial business combination, it is likely that we will prioritize deployment of capital to Gladstone Acquisition rather than Gladstone Farming.

We intend to review other strategies in connection with establishing additional funds in the future. Other than Gladstone Acquisition and our plans for the Future Gladstone Funds, we currently have no plans for any other new funds.

Gladstone Acquisition Corporation. In January 2021, the Company formed Gladstone Sponsor, LLC, a Delaware limited partnership (“Sponsor”) and its subsidiary, Gladstone Acquisition. Gladstone Acquisition is a newly organized blank check company, referred to as a “Special Purpose Acquisition Company” (“SPAC”), that was formed for the purpose of acquiring, merging with, engaging in capital stock exchange with, purchasing all or substantially all of the assets of, engaging in contractual arrangements, or engaging in any other similar business combination with a single operating entity, or one or more related or unrelated operating entities operating in any sector (“Initial Business Combination”). While Gladstone Acquisition may pursue an Initial Business Combination target in any business, industry, sector or geographical location, it intends to focus on industries that complement its management team’s background, and to capitalize on the ability of its management team to identify and acquire a business, focusing on farming and agricultural sectors, including farming related operations and businesses that support the farming industry, where its management team has extensive experience. Gladstone Acquisition consummated its initial public offering in August 2021, raising total gross proceeds of $104,924,800, inclusive of the partial exercise of the underwriter’s over-allotment. Refer to “Recent Developments” for additional information.

Gladstone Acquisition must complete its Initial Business Combination within 15 months of its initial public offering. However, if Gladstone Acquisition anticipates that it will not be able to complete an Initial Business Combination in that time frame, Gladstone Acquisition may extend the window for another three months, for a total of 18 months, either by board resolution or at the Sponsor’s request. If Gladstone Acquisition enters into an Initial Business Combination, we may provide additional capital to Gladstone Acquisition in the form of a PIPE investment (as defined herein) or otherwise. See “Risk Factors—Risks Related to Ownership of Our Class A Common Stock and Our Organizational Structure—Gladstone Acquisition may be unable to obtain additional financing to complete its Initial Business Combination or to fund the operations and growth of a target business.” If Gladstone Acquisition does not complete an Initial Business Combination, the Sponsor’s founder shares and warrants would become worthless, causing us to lose our $4.2 million investment.

Diversify and Grow Client Base. The growing demand for alternative assets provides an opportunity for us to attract new investors across a variety of channels. We currently operate nine offices across eight states

 

11


Table of Contents

(California, Connecticut, Florida, New York, Texas, Oklahoma, Washington and Virginia). As we continue to opportunistically expand our product offering and our geographic presence within the United States, we expect to be able to attract new investors to our funds. However, we do not currently have any plans to open additional offices. In addition to retail investors, which have historically comprised a significant portion of our assets under management, in recent periods we have extended the investment strategies of our funds and marketing efforts increasingly to institutional investors.

Why We Are Going Public

We have decided to become a public company for several reasons, which include the following:

 

   

to access new sources of capital that we can use to expand into complementary new businesses through the Future Gladstone Funds and to further strengthen our development as an enduring alternative asset manager;

 

   

to provide our stockholder liquidity with a publicly-traded equity currency;

 

   

enhance our flexibility in pursuing future strategic initiatives;

 

   

to expand the range of financial and retention incentives that we can provide to our existing and future employees through the issuance of equity-based incentives representing an interest in the value and performance of our firm as a whole; and

 

   

to allow the investing community indirect access to the securities of our Adviser Subsidiary that they have followed since 2001.

We Intend to Be a Different Kind of Public Company

We believe that our success as a public company will require that we continue to focus on the areas that have contributed to our historical success: the Existing Gladstone Funds and our people.

Continued Focus on Publicly Traded Funds. Serving the Existing Gladstone Funds has been our guiding principle, and we remain fully committed to our obligations to the Existing Gladstone Funds. We do not intend to permit our status as a public company to change our focus on seeking to optimize returns to investors in the Existing Gladstone Funds. We believe that optimizing returns for the stockholders of the Existing Gladstone Funds is directly connected to creating the most value for our stockholders over time.

Management Structure. Our management structure has always reflected a strong central leadership and active involvement by our executive officers. We believe that the continued active involvement of our executive officers in the deliberations of the Existing Gladstone Funds’ investment committees will preserve a critical element of our management structure that has contributed to our historic success. As a result of our management through our subsidiaries and minority ownership of the Existing Gladstone Funds, we have extensive experience with the management and ownership of public companies. We intend to continue to employ our current management structure following the offering as we believe this structure will best enable us to continue to achieve the level of success we have historically achieved.

No Golden Parachutes/Excessive CEO Compensation. We have no severance arrangements with any of our executive officers or other employees, other than with Messrs. Gladstone and Brubaker. The departure of an executive officer or other employee would not trigger any contractual obligation on our part to make any special payments to the departing employee, except that under their current employment agreements, Messrs. Gladstone and Brubaker would be entitled to a severance payment from the Adviser Subsidiary in an amount equal to two years of base salary plus any bonus received in the prior year under certain limited circumstances related to termination without cause or a change in control of the Adviser Subsidiary. See “Management – Executive Compensation.”

 

12


Table of Contents

Equity Awards to Key Employees. We believe that the talents and dedication of all of our employees contribute to our success. As a result, we intend to adopt The Gladstone Companies 2022 Equity Incentive Plan (the “2022 Equity Incentive Plan”), and we intend to make equity awards to a number of our employees over time through the 2022 Equity Incentive Plan, subject to approval of the 2022 Equity Incentive Plan and awards thereunder by the Board of Directors (or an applicable committee thereof). See “Executive Compensation—2022 Equity Incentive Plan.” We believe this will preserve and strengthen our historical emphasis on aligning the interests of our personnel with those of our investors.

Our Risks and Challenges

Our prospects should be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by similar companies. Our ability to realize our business objectives and execute our strategies is subject to risks and uncertainties, including, among others, the following:

 

   

Unfavorable market conditions and the COVID-19 pandemic may cause a material adverse effect on our business.

 

   

Our business depends in large part on our funds’ ability to raise capital from investors, and inability to raise such capital could materially and adversely affect our results of operations and financial condition.

 

   

Extensive regulation of our businesses affects our activities and creates the potential for significant liabilities and penalties.

 

   

Valuation methodologies for certain assets in our funds can be subject to significant subjectivity.

 

   

Our failure to appropriately address conflicts of interest could damage our reputation and adversely affect our businesses.

 

   

We cannot assure you that we will be able to pay dividends.

 

   

You will not have a vote or influence on the management of our company.

 

   

The control of our Board of Directors is under the complete control of our Chairman, President and Chief Executive Officer and such control may be transferred to a third party without the consent of our stockholders.

These risks and other risks are discussed in greater detail under the section entitled “Risk Factors” in this prospectus. We encourage you to read and consider all of these risks carefully.

Impact of COVID-19 Pandemic

We are working together with the portfolio companies and tenants of the Existing Gladstone Funds to monitor and navigate the challenges created by the COVID-19 pandemic. We are focused on keeping safe our personnel, the employees of the portfolio companies and the tenants of the Existing Gladstone Funds, while continuing to manage our ongoing business activities. Through proactive measures and continued diligence, the management teams of the portfolio companies of GAIN and GLAD and the tenants of GOOD and LAND continue to demonstrate their ability to respond effectively and efficiently to the challenges posed by COVID-19 and related orders imposed by state and local governments including paused or reversed reopening orders, and including developing liquidity plans supported by internal cash reserves, shareholder support, and, as appropriate, accessing the government Paycheck Protection Program. We believe that we (and each of the Existing Gladstone Funds that we advise) have sufficient levels of liquidity to support our existing business and that our funds have adequate capital to selectively deploy capital in new investment opportunities.

The extent to which the COVID-19 pandemic may impact our business, financial condition, liquidity, results of operations, funds from operations or prospects will depend on numerous evolving factors that we are not be able to predict at this time, including the duration and long-term scope of the pandemic; the adequate production

 

13


Table of Contents

and distribution of vaccinations; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; the impact on economic activity from the pandemic and actions taken in response; and the effect on the ability of the Existing Gladstone Funds to secure debt financing, service future debt obligations or pay distributions to their stockholders, which can impact the management and incentive fees paid to us. Any of these events could materially and adversely impact our business, financial condition, liquidity, results of operations, funds from operations or prospects.

Protecting employees has been a priority since the onset of the COVID-19 pandemic. We performed stress- testing of our systems and processes. The majority of our workforce has been operating under a remote-working model since March 2020, while maintaining consistent service levels to each of the Existing Gladstone Funds. Our business continuity plans have performed effectively and our cybersecurity policies have been applied consistently in the current environment.

The full impact to our business of the COVID-19 pandemic and the resulting economic downturn remains unknown. Until such impacts are fully known, our estimates and assumptions may be subject to a high degree of volatility and there may be material variances in our quarterly operating results during this period. The management fees paid to us by GLAD and GAIN are based on the fair value of their assets at the end of each quarter, which can cause volatility in our fees, but the management fees paid to us by LAND and GOOD are based on the cost of their gross tangible real estate, which do not have the same volatility by design. In addition, the incentive fees that we are entitled to receive from each of the Existing Gladstone Funds are adversely affected to the extent that investment income (or its equivalent) is reduced, whether as a result of the COVID-19 pandemic or other economic factors. As of December 31, 2021, our assets under management were approximately $4.0 billion, an increase from $3.0 billion at June 30, 2020 and $3.6 billion at June 30, 2021. We observed a decline in the assets of GAIN between December 31, 2019 and June 30, 2020 that negatively impacted the fees for that semiannual period. However, these asset values were largely restored in the semiannual period ended June 30, 2021. GLAD experienced volatility within quarters during this period but stabilized considerably at the end of each quarter so that their fees were not materially impacted.

Recent Developments

Gladstone Acquisition Corporation

In January 2021, the Company formed Gladstone Sponsor and its subsidiary, Gladstone Acquisition. Gladstone Acquisition is a newly organized blank check company, referred to as a SPAC, that was formed for the purpose of completing an Initial Business Combination. While Gladstone Acquisition may pursue an Initial Business Combination target in any business or industry, it intends to focus its search on the farming and agricultural sectors, including farming related operations and businesses that support the farming industry, where our management team has extensive experience. Gladstone Acquisition filed a registration statement on Form S-1 with the United States Securities and Exchange Commission (the “SEC”) on February 9, 2021 to register an initial public offering of its securities. Following subsequent amendments, the S-1 was declared effective on August 4, 2021. On August 9, 2021, Gladstone Acquisition consummated its initial public offering (the “SPAC IPO”) of 10,000,000 units (the “Units”). Each Unit consists of one share of Class A Common Stock, $0.0001 par value per share of Gladstone Acquisition (the “SPAC Common Stock”), and one-half of one redeemable warrant (the “Public Warrants”), each whole Public Warrant entitling the holder thereof to purchase one share of SPAC Common Stock at an exercise price of $11.50 per share, subject to adjustment. The Units were sold at an offering price of $10.00 per Unit, generating gross proceeds of $100,000,000.

Simultaneous with the consummation of the SPAC IPO and the issuance and sale of the Units, (i) Gladstone Acquisition consummated the private placement of 4,200,000 private placement warrants (the “Private Placement Warrants”) to Sponsor, each exercisable to purchase one share of SPAC Common Stock at $11.50 per share, subject to adjustment, at a price of $1.00 per Private Placement Warrant, generating total proceeds of $4,200,000

 

14


Table of Contents

and (ii) Gladstone Acquisition consummated the private placement to EF Hutton, division of Benchmark Investments, LLC (the “Representative”), of 200,000 shares of SPAC Common Stock (the “Representative Shares”) for nominal consideration.

Of the proceeds Gladstone Acquisition received from the SPAC IPO, the sale of the Private Placement Warrants and the sale of the Representative Shares, $102.0 million, or $10.20 per Unit issued in the SPAC IPO, was deposited into a trust account with Continental Stock Transfer & Trust Company acting as trustee (the “Trust Account”).

Subsequently, on August 10, 2021, the Representative exercised the over-allotment option in part, and the closing of the issuance and sale of the additional Units (the “Over-Allotment Units”), additional Private Placement Warrants (the “Over-Allotment Private Placement Warrants”) and additional Representative Shares (the “Over-Allotment Representative Shares”) occurred on August 18, 2021. The total aggregate issuance by Gladstone Acquisition of 492,480 Over-Allotment Units, 98,496 Over-Allotment Private Placement Warrants at a purchase price of $1.00 per Private Placement Warrant and 9,850 Over-Allotment Representative Shares for nominal consideration resulted in total gross proceeds of $5,023,296 (the “Over-Allotment Proceeds”).

The Over-Allotment Proceeds were deposited to the Trust Account and added to the net proceeds from the SPAC IPO and certain of the proceeds from the sale of the Private Placement Warrants and Representative Shares at the SPAC IPO; upon closing of the over-allotment in part, there was an aggregate of approximately $107,023,296, or $10.20 per issued and outstanding Unit, in the Trust Account.

On September 18, 2021, Sponsor automatically surrendered to Gladstone Acquisition 251,880 shares of Class B Common Stock, par value $0.0001 per share, of Gladstone Acquisition for no consideration, pursuant to contractual arrangements with Gladstone Acquisition that were triggered by the expiration of the option of the Representative to purchase additional units. Following this forfeiture, Sponsor owns 2,623,120 shares of Class B Common Stock of Gladstone Acquisition, equal to approximately 19.69% of the issued and outstanding shares of Common Stock of Gladstone Acquisition.

Gladstone Acquisition will not generate any operating revenues until after the completion of its Initial Business Combination, at the earliest. Gladstone Acquisition will generate non-operating income in the form of interest income on cash and cash equivalents from the proceeds derived from the SPAC IPO.

In determining the accounting treatment of our equity interest in Gladstone Acquisition, management concluded that Gladstone Acquisition is a variable interest entity (“VIE”) as defined by Accounting Standards Codification (“ASC”) Topic 810, “Consolidation.” A VIE is an entity in which equity investors at risk lack the characteristics of a controlling financial interest. VIEs are consolidated by the primary beneficiary, the party who has both the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, as well as the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the entity. Sponsor is the primary beneficiary of Gladstone Acquisition as it has, through its equity interest, the right to receive benefits or the obligation to absorb losses from Gladstone Acquisition, as well as the power to direct a majority of the activities that significantly impact Gladstone Acquisition’s economic performance, including partnering transaction target identification.

As of December 31, 2021, we beneficially owned 19.69% of the equity of Gladstone Acquisition and the net income and net assets of Gladstone Acquisition were consolidated within our financial statements. The remaining 80.31% of the consolidated net income and net assets of Gladstone Acquisition, representing the percentage of economic interest in Gladstone Acquisition held by the public stockholders of Gladstone Acquisition through their ownership of Gladstone Acquisition equity, were allocated to redeemable noncontrolling interest (“NCI”). All transactions between Gladstone Acquisition and Sponsor, as well as related financial statement impacts, eliminate in consolidation.

 

15


Table of Contents

Gladstone Acquisition’s management has broad discretion with respect to the specific application of the net proceeds of the SPAC IPO and the Private Warrants, although substantially all of the net proceeds are intended to be applied generally toward consummating a Business Combination. There is no assurance that Gladstone Acquisition will be able to complete an Initial Business Combination successfully. Gladstone Acquisition must complete one or more Initial Business Combinations having an aggregate fair market value of at least 80% of the assets held in the Trust Account (net of amounts disbursed to management for working capital purposes, if permitted, and excluding the amount of any deferred underwriting commissions) at the time of the agreement to enter into the Initial Business Combination. However, Gladstone Acquisition would only complete a Business Combination if the post-transaction company owns or acquires 50% or more of the outstanding voting securities of the target or otherwise acquires an interest in the target sufficient for it not to be required to register as an investment company under the 1940 Act.

Assets in the Trust Account will be invested only in U.S. government securities, with a maturity of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 under the 1940 Act, which invest only in direct U.S. government treasury obligations. Except with respect to interest earned on the funds held in the Trust Account that may be released to Gladstone Acquisition to pay its tax obligations, the proceeds from the SPAC IPO will not be released from the Trust Account until the earliest to occur of: (a) the completion of Gladstone Acquisition’s Initial Business Combination, (b) the redemption of any public shares properly submitted in connection with a stockholder vote to amend Gladstone Acquisition’s amended and restated certificate of incorporation to (i) modify the substance or timing of Gladstone Acquisition’s obligation to provide for the redemption of its public stock in connection with an Initial Business Combination or to redeem 100% of its public stock if Gladstone Acquisition does not complete its Initial Business Combination within 15 months (or 18 months if extended) from the closing of the SPAC IPO or (ii) with respect to any other material provisions relating to stockholders’ rights or pre-Initial Business Combination activity, and (c) the redemption of Gladstone Acquisition’s public shares if Gladstone Acquisition is unable to complete its Initial Business Combination within 15 months (or 18 months if extended) from the closing of the SPAC IPO, subject to applicable law.

Gladstone Acquisition will provide its public stockholders with the opportunity to redeem all or a portion of their public shares upon the completion of the Initial Business Combination either (i) in connection with a stockholder meeting called to approve the Initial Business Combination or (ii) by means of a tender offer. The decision as to whether Gladstone Acquisition will seek stockholder approval of a proposed Initial Business Combination or conduct a tender offer will be made by Gladstone Acquisition solely in its discretion. The stockholders will be entitled to redeem their shares for a pro rata portion of the amount then on deposit in the Trust Account (initially approximately $10.20 per share, plus any pro rata interest earned on the funds held in the Trust Account and not previously released to Gladstone Acquisition to pay its tax obligations).

The SPAC Common Stock is subject to redemption and is recorded at redemption value and classified as temporary equity in accordance with ASC Topic 480 “Distinguishing Liabilities from Equity.” Gladstone Acquisition will proceed with a Business Combination only if it has net tangible assets of at least $5,000,001 upon such consummation of a Business Combination and, if it seeks stockholder approval, a majority of the issued and outstanding shares voted are voted in favor of the Business Combination.

Sponsor has purchased an aggregate of 4,298,496 private placement warrants at a price of $1.00 per private placement warrant for an aggregate purchase price of $4,298,496. Each private placement warrant is identical to the warrants underlying the units sold in this offering, except as described in the prospectus. The warrant investment was eliminated in consolidation.

Gladstone Acquisition’s units are listed on The Nasdaq Capital Market under the symbol “GLEEU.” Effective September 27, 2021, the SPAC Common Stock and warrants comprising the units began separate trading on The Nasdaq Capital Market under the symbols “GLEE” and “GLEEW,” respectively.

 

16


Table of Contents

Organizational Structure

We were formed as a Delaware company on December 7, 2009. We are managed by our Board of Directors who are elected by TGC LTD, which owns all of our common stock. The sole shareholder of TGC LTD is David Gladstone. As our sole voting stockholder, TGC LTD has the right to elect and remove members of our Board of Directors (the “Directors,” and each a “Director”).

We conduct substantially all of our business activities through our subsidiaries, including the Adviser Subsidiary, the Broker-Dealer Subsidiary and the Administrator Subsidiary. We expect that our fee-generating asset management business generally will be operated through the Adviser Subsidiary. The administration services will generally be provided by the Administrator Subsidiary and financial services work will be completed by our Adviser Subsidiary or Broker-Dealer Subsidiary. A portion of our business also may be conducted by us directly or indirectly through new funds or partnerships. We expect that a substantial portion of our revenues will be derived from the Existing Gladstone Funds, which are publicly-traded entities that have elected to be taxed as RICs or REITs for U.S. federal income tax purposes.

Comparison of Class A Common Stock and Class B Common Stock

The rights of the holders of Class A Common Stock and Class B Common Stock will be identical, except with respect to voting, conversion, transfer rights and, in certain cases, dividends. Each share of Class A Common Stock is entitled to one vote. Each share of Class B Common Stock is entitled to ten votes. As a result, Mr. Gladstone will have the ability to control the outcome of matters requiring stockholder approval, including the election of Directors and approval of significant corporate transactions, such as a merger or other sale of our company or our assets.

Holders of Class A Common Stock and Class B Common Stock will be entitled to share equally, substantially identically and ratably, on a per share basis, with respect to any dividend or distribution of cash or property paid or distributed by the company, unless different treatment of the shares of the affected class is approved by the affirmative vote of the holders of a majority of the outstanding shares of such affected class, voting separately as a class. In the event that a cash dividend is declared on our Class A Common Stock, holders of our Class B Common Stock will be entitled to receive a substantially equal and pro rata dividend to be paid in cash, Class A Common Stock or a mix of Class A Common Stock and cash. See “Description of Capital Stock—Common Stock.

Although TGC LTD has no business activities other than the ownership of our Class B Common Stock, conflicts of interest may arise in the future between us and holders of our Class A Common Stock, on the one hand, and TGC LTD and its affiliates, on the other. The resolution of these conflicts may not always be in our best interests or those of holders of our Class A Common Stock. In addition, we may have fiduciary and contractual obligations to our funds and we expect to regularly take actions with respect to the purchase or sale of investments or assets of our funds, the structuring of investment transactions for those funds or otherwise that are in the best interests of those funds but that might at the same time adversely affect our near-term results of operations or cash flow.

Each share of Class B Common Stock is convertible at any time at the option of the holder into one share of Class A Common Stock. After the completion of this offering, any holder’s shares of Class B Common Stock will convert automatically into Class A Common Stock, on a one-to-one basis, upon the sale or transfer of such share of Class B Common Stock (except for certain transfers described in our amended and restated certificate of incorporation that will be in effect on the completion of this offering, including transfers for tax and estate planning purposes). See “Description of Capital Stock—Common Stock—Conversion.”

 

17


Table of Contents

Registration Rights Agreement

Prior to the consummation of this offering, we intend to enter into a registration rights agreement (the “Registration Rights Agreement”) with TGC LTD and David Gladstone (each, a “Registration Party”), pursuant to which each Registration Party will be entitled to demand the registration of the sale of certain or all of our Class A common stock that it beneficially owns, including any shares of Class A Common Stock received upon exchange of shares of Class B Common Stock. Upon completion of this offering, TGC LTD and David Gladstone are expected to hold                  shares of Class B common stock and no shares of Class A common stock. Among other things, under the terms of the Registration Rights Agreement:

 

   

if we propose to file certain types of registration statements under the Securities Act with respect to an offering of equity securities, we will be required to use our reasonable best efforts to offer each Registration Party the opportunity to register the sale of all or part of its shares on the terms and conditions set forth in the Registration Rights Agreement (customarily known as “piggyback rights”); and

 

   

Each Registration Party has the right, subject to certain conditions and exceptions, to request that we file (i) registration statements with the SEC for one or more underwritten offerings of all or part of our shares of Class A common stock that it beneficially owns and/or (ii) a shelf registration statement that includes all or part of our shares of Class A common stock that it beneficially owns as soon as we become eligible to register the sale of our securities on Form S-3 under the Securities Act, and we are required to cause any such registration statements to be filed with the SEC, and to become effective, as promptly as reasonably practicable.

All expenses of registration under the Registration Rights Agreement, including the legal fees of one counsel retained by or on behalf of the Registration Parties, will be paid by us.

The registration rights granted in the Registration Rights Agreement are subject to customary restrictions such as minimums, blackout periods and, if a registration is underwritten, any limitations on the number of shares to be included in the underwritten offering as reasonably advised by the managing underwriter. The Registration Rights Agreement also contains customary indemnification and contribution provisions. The Registration Rights Agreement is governed by New York law.

Cash Dividends

We currently intend to distribute to holders of our Class A and Class B Common Stock on a monthly basis dividends equaling an amount to be determined quarterly by our Board of Directors, based on the sum of fees earned by our Adviser Subsidiary and Broker-Dealer Subsidiary, after taxes, expenses and reserves and after deducting amounts determined by our management to be necessary or appropriate to provide for the current and future conduct of our business, to make appropriate investments in our business, to comply with applicable law, to meet our debt obligations or to provide for future monthly dividends to holders of our Class A and Class B Common Stock. There can be no assurance that we will have sufficient revenues to pay dividends in any future month after deducting such amounts. As more fully described under the section titled “Description of Capital Stock—Common Stock,” in the event that a cash dividend is declared on our Class A Common Stock, holders of our Class B Common Stock will be entitled to receive a substantially equal and pro rata dividend to be paid in cash, Class A Common Stock or a mix of Class A Common Stock and cash. We expect that our first monthly dividend will be paid                .

Controlled Company Exemption

After the completion of this offering, TGC LTD, an entity wholly-owned by our Chairman, President and Chief Executive Officer, David Gladstone, will hold         % of the voting power of our Class A and Class B

 

18


Table of Contents

Common Stock on a combined basis. As a result, we expect to be a “controlled company” within the meaning of applicable Nasdaq corporate governance standards. Under these corporate governance standards, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance standards, including the requirements; (1) that a majority of our Board of Directors consist of independent Directors, (2) that our Board of Directors have a compensation committee that is comprised entirely of independent Directors with a written charter addressing the committee’s purpose and responsibilities and (3) that our Board of Directors have a nominating and corporate governance committee that is comprised entirely of independent Directors with a written charter addressing the committee’s purpose and responsibilities. We intend to take advantage of these exemptions upon completion of this offering and for as long as we continue to qualify as a “controlled company.” As a result, immediately following this offering we do not expect the majority of our Board of Directors will be independent or that any committees of the Board of Directors will be comprised entirely of independent Directors, other than our Audit Committee. Accordingly, our investors will not have the same protections afforded to stockholders of companies that are subject to all of Nasdaq’s corporate governance requirements. In the event that we cease to be a “controlled company” and shares of our Class A Common Stock continue to be listed on the Nasdaq, we will be required to comply with these provisions within the applicable transition periods.

Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As an emerging growth company, we have and may continue to take advantage of certain reduced disclosure and other requirements that are otherwise generally applicable to public companies that are not emerging growth companies. These provisions include:

 

   

Presentation of only two years of audited financial statements and only two years of related management’s discussion and analysis of financial condition and results of operations;

 

   

Reduced disclosure about our executive compensation arrangements (including Chief Executive Officer pay ratio disclosure);

 

   

No obligation to comply with any future requirements adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

 

   

No non-binding shareholder advisory votes on executive compensation or golden parachute arrangements; and

 

   

Exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting.

We may take advantage of these exemptions for so long as we qualify as an emerging growth company. We will cease to be an emerging growth company upon the earliest of: (1) the last day of the fiscal year following the fifth anniversary of this offering; (2) the last day of the fiscal year in which our annual gross revenues are $1.07 billion or more; (3) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (4) the last day of the fiscal year in which the aggregate worldwide value of our voting and non-voting common equity hold by non-affiliates exceeds $700 million as of the last business day of the most recently completed second fiscal quarter (i.e., the date on which we become a large accelerated filer). We have taken advantage of reduced disclosure regarding executive compensation arrangements, financial statements and Management’s Discussion and Analysis in this prospectus, and we may choose to take advantage of some but not all of these reduced disclosure obligations in future filings for so long as we qualify as an emerging growth company. If we do, the information that we provide stockholders may be different than you might get from other public companies in which you hold shares.

 

19


Table of Contents

Furthermore, the JOBS Act permits an emerging growth company such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to take advantage of such extended transition period to comply with new or revised accounting standards applicable to public companies.

Corporate Information

Our principal executive offices are located at 1521 Westbranch Drive, Suite 100, McLean, Virginia 22102, and our phone number is (703) 287-5800. Our website is www.gladstonecompanies.com. Information contained on or accessible through our website is not incorporated by reference into this prospectus and should not be considered a part of this prospectus.

 

20


Table of Contents

THE OFFERING

 

Class A Common Stock offered by the Company

            shares of Class A Common Stock.

 

Overallotment option to purchase additional Class A Common Stock

            shares of Class A Common Stock

 

Class A Common Stock outstanding immediately after this offering

            shares of Class A Common Stock (or                 shares of Class A Common Stock if the underwriters exercise their overallotment option in full).

 

  Class A Common Stock outstanding and the other information based thereon in this prospectus, except where otherwise disclosed, does not reflect:

 

   

                shares of Class A Common Stock issuable upon exercise of the underwriters’ overallotment option to purchase additional Class A Common Stock; or

 

   

                shares of Class A Common Stock that may be granted under our 2022 Equity Incentive Plan, see “Executive Compensation—2022 Equity Incentive Plan”.

 

Class B Common Stock outstanding immediately after this offering

                shares of Class B Common Stock.

 

Use of proceeds

We estimate that our net proceeds from this offering, at an assumed initial public offering price of $        per share of Class A Common Stock (which is the midpoint of the price range on the front cover of this prospectus) and after deducting estimated underwriting discounts, will be approximately $        million (or $        million if the underwriters exercise in full their overallotment option to purchase additional shares of Class A Common Stock).

 

  We intend to use the net proceeds from this offering for growth strategies, which are expected to include: (i) providing capital to the Existing Gladstone Funds and the Future Gladstone Funds, including through general partnership interests; (ii) providing additional capital to Gladstone Acquisition in connection with its Initial Business Combination; (iii) using proceeds for working capital to supplement our existing line of credit; and (iv) for other general corporate purposes. We will make investments in the Existing Gladstone Funds and the Future Gladstone Funds solely to the extent that we are not required to register as an investment company under the 1940 Act. No portion of the proceeds will be used to redeem or repurchase shares of our capital stock outstanding prior to this offering or to compensate our officers or Directors.

 

21


Table of Contents

Voting rights

We will have two classes of common stock: Class A Common Stock and Class B Common Stock. Each share of Class A Common Stock is entitled to one vote and each share of Class B Common Stock is entitled to ten votes and is convertible at any time into one share of Class A Common Stock. See the section titled “Description of Capital Stock—Class A Common Stock and Class B Common Stock.

 

  Holders of Class A Common Stock and Class B Common Stock will generally vote together as a single class, unless otherwise required by law or our amended and restated certificate of incorporation that will be in effect on the closing of this offering. Our Chairman, President and Chief Executive Officer, David Gladstone, and his controlled entities hold 100% of our outstanding Class B Common Stock and will hold approximately     % of the voting power of our outstanding shares following this offering (or     % of the voting power of our outstanding shares following this offering if the underwriters exercise their option in full to purchase additional shares of Class A Common Stock to cover over-allotments). As a result, Mr. Gladstone will have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of our Directors and the approval of any change in control transaction. See the sections titled “Principal Stockholders” and “Description of Capital Stock” for additional information.

 

Cash dividend policy

We intend to distribute to holders of our Class A and Class B Common Stock, on a monthly basis, dividends as and if declared by our Board of Directors. We expect our cash dividends will equal an amount to be determined by our Board of Directors, based on the sum of: (i) distributions from our wholly owned subsidiaries, which includes the fees earned by our Adviser Subsidiary and Broker-Dealer Subsidiary, after taxes, expenses and reserves, and (ii) our ownership in any Future Gladstone Funds; after deducting such amounts as determined by our management to be necessary or appropriate to provide for the current and future conduct of our business, to make appropriate investments in our business, to comply with applicable law, to meet our debt obligations or to provide for future monthly dividends to holders of our Class A and Class B Common Stock. As more fully described under the section titled “Description of Capital Stock—Common Stock,” in the event that a cash dividend is declared on our Class A Common Stock, holders of our Class B Common Stock will be entitled to receive a substantially equal and pro rata dividend to be paid in cash, Class A Common Stock or a mix of Class A Common Stock and cash. We expect that our first monthly dividend will be paid                .

 

 

The declaration and payment of any dividends will be at the discretion of our Board of Directors, who may change our dividend policy at any time. We will take into account the following factors, among others: general economic and business conditions; our strategic plans and prospects; our business opportunities; our financial

 

22


Table of Contents
 

condition and operating results, including cash position, net income and realizations on investments made by the funds; working capital requirements and anticipated cash needs; contractual restrictions and obligations, including restrictions under any credit facility; legal, tax and regulatory restrictions; restrictions and other implications on the payment of dividends to holders of our Class A and Class B Common Stock or by our subsidiaries to the Company; and such other factors as the Board of Directors may deem relevant.

 

No dividends prior to this offering

We have not made any cash or share dividends to existing holders of our Class A or Class B Common Stock prior to this offering.

 

Risk factors

See “Risk Factors” for a discussion of some of the risks you should carefully consider before deciding to invest in our Class A Common Stock.

 

Directed Share Program

At our request, the underwriters have reserved for sale, at the initial public offering price, up to                shares of Class A Common Stock offered in this prospectus for our Directors, officers and employees in a directed sale program. See “Underwriting—Directed Share Program.”

 

Proposed Nasdaq symbol

We have applied to list our Class A Common Stock on Nasdaq under the symbol “GC,” although there can be no assurance that our Class A Common Stock will be approved for listing.

 

23


Table of Contents

SUMMARY CONSOLIDATED FINANCIAL DATA

The following summary consolidated financial data of the Company should be read together with “Organizational Structure,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical consolidated financial statements and related notes thereto included elsewhere in this prospectus.

We derived the summary consolidated statement of operations data of the Company for each of the years ended June 30, 2021 and 2020 and the summary consolidated balance sheet data as of June 30, 2021 from the audited consolidated financial statements of the Company, which are included elsewhere in this prospectus. We derived the summary consolidated statement of operations data of the Company for each of the six months ended December 31, 2021 and 2020 and the summary consolidated balance sheet data as of December 31, 2021 from the unaudited consolidated financial statements of the Company, which are included elsewhere in this prospectus. The historical results are not necessarily indicative of the results expected for any future periods.

Summary Consolidated Statement of Operations Data

 

    Year Ended June 30,     Six Months Ended December 31,  
    2021     2020                 2021                             2020              

Consolidated Statements of Operations Data:

       

Revenues (Related Party)

       

Gross fees

  $ 81,115,792     $ 84,123,530     $ 58,810,334     $ 39,100,106  

Credits(1)

    (19,297,822     (21,846,618     (13,537,103     (9,409,719
 

 

 

   

 

 

   

 

 

   

 

 

 

Revenues

    61,817,970       62,276,912       45,273,231       29,690,387  
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating Expenses

       

Salaries and employee benefits

    43,483,583       43,449,146       28,415,092       19,612,227  

Rent

    889,634       878,137       458,010       435,174  

Depreciation

    113,998       135,455       49,492       61,107  

Securities trade costs

    4,170,086       7,082,864       3,103,377       2,191,964  

Other operating expenses

    2,986,911       2,617,886       2,444,946       1,486,388  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    51,644,212       54,163,488       34,470,917       23,786,860  
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    10,173,758       8,113,424       10,802,314       5,903,527  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common stock

  $ 6,763,517     $ 6,109,748     $ 8,485,918     $ 3,637,538  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share attributable to Common Stock—basic and diluted

  $ 67,635.17     $ 61,097.48     $ 84,859.18     $ 36,375.38  
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares of Common Stock outstanding—basic and diluted

    100       100       100       100  

 

(1)

Our Adviser Subsidiary has historically, on a non-contractual, unconditional, and irrevocable basis, voluntarily credited certain fees it earns from the Existing Gladstone Funds. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Financial Measures and Indicators” and Note 2—Summary of Significant Accounting Policies—Investment Advisory and Loan Servicing Fees in the Notes to Consolidated Financial Statements for additional information concerning such credits

 

24


Table of Contents

Summary Consolidated Balance Sheet Data:

 

     As of  
     December 31, 2021      June 30, 2021  

Balance sheet data:

     

Cash and cash equivalents

   $ 43,581,330      $ 50,666,339  

Cash held in trust account

     107,028,738        —    

Total assets

     173,472,039        67,696,006  

Total liabilities

     30,669,932        33,513,679  

Redeemable noncontrolling interest

     107,023,296        —    

Total owner’s equity

     35,778,811        34,182,327  

Financial Highlights and Non-GAAP Measures

In addition to the measures presented in our consolidated financial statements, we use the following operating metrics and non-GAAP measures for internal planning and forecasting purposes and to help us assess the health of our asset management business (including the underlying operating performance of the Existing Gladstone Funds), the effectiveness of our operational strategies and other purposes more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”

 

     Year Ended
June 30, 2020
    Year Ended
June 30, 2021
    Twelve Months
Ended
December 31, 2021
 

Assets Under Management

   $ 3,031,900,000     $ 3,586,400,000     $ 3,991,800,000  
  

 

 

   

 

 

   

 

 

 

Revenues(1)

   $ 62,276,912     $ 61,817,970     $ 77,400,814  
  

 

 

   

 

 

   

 

 

 

Credits

     (21,846,618     (19,297,822     (23,425,206
  

 

 

   

 

 

   

 

 

 

Total Gross Fees

   $ 84,123,530     $ 81,115,792     $ 100,826,020  
  

 

 

   

 

 

   

 

 

 

Gross Fees

      

Management Fees

      

Base Management Fees + Income-Based Incentive Fees

   $ 42,381,874     $ 50,110,689     $ 57,994,584  

Capital Gains-Based Incentive Fees

     8,129,214       —         5,309,223  
  

 

 

   

 

 

   

 

 

 

Total Management Fees

     50,511,088       50,110,689       63,303,807  

Loan Servicing Fees

     12,434,520       12,869,051       12,963,155  

Administration Fees

     6,162,669       6,081,937       6,222,729  

Securities Trade Commissions

     7,102,719       4,143,449       5,722,238  

Other Fees

     7,912,534       7,910,666       12,614,091  
  

 

 

   

 

 

   

 

 

 

Total Gross Fees

   $ 84,123,530     $ 81,115,792     $ 100,826,020  
  

 

 

   

 

 

   

 

 

 

Income from Operations (Fee Related Earnings)

   $ 8,113,424     $ 10,173,758     $ 15,072,545  
  

 

 

   

 

 

   

 

 

 

EBITDA

   $ 8,391,527     $ 9,525,519     $ 15,798,473  
  

 

 

   

 

 

   

 

 

 

EBITDA Margin

     13.5 %      15.4 %      20.4 % 

Net Income Attributable to Common Stock

   $ 6,109,748     $ 6,763,517     $ 11,611,897  
  

 

 

   

 

 

   

 

 

 

Distributable Earnings

   $ 6,245,203     $ 7,639,717     $ 11,714,280  
  

 

 

   

 

 

   

 

 

 

 

(1)

Fees net of non-contractual waivers of fees otherwise due; the Company is under no obligation to continue such non-contractual waivers.

 

25


Table of Contents

The following table reconciles Fee-Related Earnings, EBITDA, EBITDA Margin and Distributable Earnings, which are non-GAAP measures, for the years ended June 30, 2020 and 2021 and the twelve months ended December 31, 2021 to the most directly comparable financial measure calculated and presented in accordance with GAAP.

 

     Year Ended
June 30, 2020
    Year Ended
June 30, 2021
    Twelve Months
Ended
December 31, 2021
 

Revenues

   $ 62,276,912     $ 61,817,970     $ 77,400,814  

Operating Expenses

      

Salaries and Employee Benefits

     43,449,146       43,483,583       52,286,448  

Rent

     878,137       889,634       912,470  

Depreciation

     135,455       113,998       102,383  

Securities Trade Costs

     7,082,864       4,170,086       5,081,499  

Other Operating Expenses

     2,617,886       2,986,911       3,945,469  
  

 

 

   

 

 

   

 

 

 

Total Operating Expenses

     54,163,488       51,644,212       62,328,269  
  

 

 

   

 

 

   

 

 

 

Income from Operations (Fee Related Earnings)

   $ 8,113,424     $ 10,173,758     $ 15,072,545  
  

 

 

   

 

 

   

 

 

 

Net Income Attributable to Common Stock

   $ 6,109,748     $ 6,763,517     $ 11,611,897  

Interest

     1       (35     (35

Income Taxes

     2,146,323       2,648,039       4,084,228  

Depreciation

     135,455       113,998       102,383  
  

 

 

   

 

 

   

 

 

 

EBITDA

   $ 8,391,527     $ 9,525,519     $ 15,798,473  
  

 

 

   

 

 

   

 

 

 

EBITDA Margin

     13.5 %      15.4 %      20.4 % 

Net Income Attributable to Common Stock

   $ 6,109,748     $ 6,763,517     $ 11,611,897  

Depreciation

     135,455       113,998       102,383  

Offering cost writeoff

     —         762,202       —    
  

 

 

   

 

 

   

 

 

 

Distributable Earnings

   $ 6,245,203     $ 7,639,717     $ 11,714,280  
  

 

 

   

 

 

   

 

 

 

For further information about the limitations of the use of non-GAAP measures, see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.

 

26


Table of Contents

RISK FACTORS

Investing in our Class A Common Stock involves a high degree of risk. You should consider and read carefully all of the risks and uncertainties described below, as well as other information included in this prospectus, including our consolidated financial statements and related notes, before making an investment decision. The risks described below are not the only ones facing us. The occurrence of any of the following risks or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could materially and adversely affect our business, financial condition or results of operations. In such case, the trading price of our Class A Common Stock could decline, and you may lose all or part of your original investment.

Risks Related to Our Business

Unfavorable market conditions could adversely affect our business in many ways, including by reducing the fees revenue and distributions received from our funds, if any, or reducing the ability of our funds to raise or deploy capital on favorable terms, or at all.

Our business is materially affected by conditions in the global financial markets and economic and political conditions throughout the world that are outside our control, such as interest rates, availability and cost of credit, inflation rates, economic uncertainty, changes in laws (including laws relating to taxation and asset managers), trade barriers, commodity prices, currency exchange rates and controls, national and international political circumstances (including wars, terrorist acts or security operations), natural disasters and/or pandemics. These factors are outside our control and may affect the level and volatility of asset prices or securities prices and the liquidity and the value of investments held by our funds, and we may not be able to or may choose not to manage our or our funds’ exposure to these conditions. In the event of a market downturn, including from the impact of the COVID-19 pandemic, each of our businesses and funds will be affected in different ways.

Our Existing Gladstone Funds could be affected by the inability to find suitable investments for the funds to effectively deploy capital, which could adversely affect our ability to raise new funds and thus our assets under management, or by reduced opportunities to exit and realize value from their investments, which could adversely affect incentive fees earned by our Adviser Subsidiary. In addition, during periods of adverse economic conditions, we and our funds could have difficulty accessing financial markets, which could make it more difficult or impossible for us and them to obtain funding and harm our assets under management and operating results. Our profitability could also be adversely affected if we or the funds we manage are unable to scale back our costs within a time frame or amount sufficient to match decreases in revenue relating to changes in market and economic conditions.

During periods of difficult market conditions or slowdowns in a particular sector, companies in which our funds invest could experience decreased revenues, financial losses, difficulty in obtaining access to financing and increased funding costs. During such periods, these companies could also have difficulty in expanding their businesses and operations and be unable to meet their debt service obligations or other expenses as they become due (including obligations to our funds), increasing the risk of default with respect to debt investments held by our funds (including the Gladstone BDCs). As a result, a general market downturn, or a specific market dislocation, could result in lower investment returns for our funds, which would adversely affect our revenues and results of operations. Poor performance of our funds could result in lower base management and/or incentive fees earned by our Adviser Subsidiary and/or their ability to pay distributions on any investments we may hold in such funds, each of which could materially and adversely affect our business and results of operations.

Our business and that of the Existing Gladstone Funds has been, and in the future could be further, adversely affected by the recent coronavirus outbreak.

As of the date of this prospectus, there is an outbreak of a novel and highly contagious form of coronavirus (COVID-19), which the World Health Organization has declared to constitute a Public Health Emergency of

 

27


Table of Contents

International Concern. The outbreak of COVID-19 has resulted in numerous deaths, adversely impacted global commercial activity and contributed to significant volatility in certain equity and debt markets. The global impact of the outbreak is rapidly evolving, and many countries, including the United States, have reacted by instituting quarantines, prohibitions on travel and the closure of offices, businesses, schools, retail stores and other public venues. Businesses are also implementing similar precautionary measures. Such measures, as well as the general uncertainty surrounding the dangers and impact of COVID-19, are creating significant disruption in supply chains and economic activity and are having a particularly adverse impact on transportation, hospitality, tourism, entertainment and other industries. As COVID-19 continues to spread, the potential impacts, including a global, regional or other economic recession, are increasingly uncertain and difficult to assess.

Any public health emergency, including any outbreak of COVID-19, SARS, H1N1/09 flu, avian flu, other coronavirus, Ebola or other existing or new epidemic diseases, or the threat thereof, could have a significant adverse impact on our businesses and the Existing Gladstone Funds and their portfolio companies and could adversely affect our results of operations.

The extent of the impact of any public health emergency, including the COVID-19 pandemic, on our and our businesses’ and funds’ operational and financial performance will depend on many factors, including the duration and scope of such public health emergency, the extent of any related travel advisories and restrictions implemented, the impact of such public health emergencies on overall supply and demand, goods and services, investor liquidity, consumer confidence and levels of economic activity and the extent of its disruption to important global, regional and local supply chains and economic markets, all of which are highly uncertain and cannot be predicted. For example, the management fees paid to us by GLAD and GAIN are based on the fair value of their assets at the end of each quarter, which can cause volatility in our fees, but the management fees paid to us by LAND and GOOD are based on the cost of their gross tangible real estate, which do not have the same volatility by design. In addition, the incentive fees that we are entitled to receive from each of the Existing Gladstone Funds are adversely affected to the extent that investment income (or its equivalent) is reduced, whether as a result of the COVID-19 pandemic or other economic factors. As of December 31, 2021, our assets under management were approximately $4.0 billion, an increase from $3.0 billion at June 30, 2020 and $3.6 billion at June 30, 2021. We observed a decline in the assets of GAIN between December 31, 2019 and June 30, 2020 that negatively impacted the fees for that semiannual period. However, these asset values were largely restored in the semiannual period ended December 31, 2020.

Reductions in gross assets negatively impact the management fees that we receive from each of GLAD and GAIN and could impact our results for the fiscal year ending June 30, 2022 through the conclusion of the COVID-19 pandemic and potentially beyond. In addition, the incentive fees that we are entitled to receive from each of the Existing Gladstone Funds could be adversely affected to the extent that investment income (or its equivalent) is reduced whether as a result of the COVID-19 pandemic or otherwise. The COVID-19 pandemic has disrupted, and future public health emergencies may disrupt, the operations of the companies in which the Gladstone BDCs invest and the tenants of the Gladstone REITs. Certain of these companies and/or tenants have experienced a significant reduction of their business activities, including as a result of shutdowns requested or mandated by governmental authorities, in connection with the COVID-19 pandemic (and may experience similar outcomes in connection with future public health emergencies). We cannot estimate the impact that a public health threat could have on the companies in which the Gladstone BDCs invest or the tenants of the Gladstone REITs, but it could disrupt their businesses and their ability to make interest, lease or dividend payments and decrease the overall value of the Existing Gladstone Funds’ investments and leasehold interests, which could adversely impact their business, financial condition or results of operations, which would adversely affect our revenues and results of operations.

Further, the operations of our businesses, the Existing Gladstone Funds and their portfolio companies may be significantly impacted, or even temporarily or permanently halted, as a result of government quarantine measures, voluntary and precautionary restrictions on travel or meetings and other factors related to a public health emergency, including its potential adverse impact on the health of the Adviser Subsidiary’s and the health

 

28


Table of Contents

emergency, including its potential adverse impact on the health of the Adviser Subsidiary’s and the Administrator Subsidiary’s personnel. As a result, there is a risk that this crisis could adversely impact the ability of our businesses and funds to source, manage and divest investments in our funds and to achieve their objectives, all of which could result in lower base management and/or incentive fees earned by our Adviser Subsidiary, which could materially and adversely affect our business and results of operations.

We depend highly on our senior executives, and the loss of their services would have a material adverse effect on our business, results and financial condition.

We depend on the efforts, skill, reputations and business contacts of our senior executives, including our founders, David Gladstone and Terry Lee Brubaker, the presidents and co-presidents of the Existing Gladstone Funds, David A.R. Dullum, Robert G. Cutlip and Robert L. Marcotte, who are also our Executive Vice Presidents, the president of the Administrator Subsidiary, Michael LiCalsi, who is also our Executive Vice President of Administration, General Counsel and Secretary, and other key executive officers. Accordingly, our success will depend on the continued service of these individuals, who are not party to employment agreements (other than Messrs. Gladstone and Brubaker) and are not obligated to remain employed with us. The loss of the services of any of our senior executives could have a material adverse effect on our revenues, net income and cash flows and could harm our ability to maintain or grow assets under management in the Existing Gladstone Funds or raise additional funds in the future.

Our senior executives possess substantial experience and expertise and have strong business relationships with investors in our funds and other members of the business community. As a result, the loss of these personnel could jeopardize our relationships with investors in our funds, our clients and members of the business community and result in the reduction of assets under management or fewer investment opportunities for our funds. Further, if any of our senior executives were to join or form a competing firm, that event could have a material adverse effect on our business, results of operations and financial condition.

We derive a substantial portion of our revenues from agreements with related parties, including the Advisory Agreements, which may not be renewed or may be terminated on short notice or upon a change in control of the Adviser Subsidiary.

The majority of our revenue is currently derived from transactions with related parties, specifically between each of the Existing Gladstone Funds and the Adviser Subsidiary. Related party transactions could increase the risks of misrepresentations and fraud or increase the likelihood of a party not receiving the same level of benefit available in an arms-length transaction.

Further, the Boards of Directors of the Existing Gladstone Funds annually review and approve the Advisory Agreements with our Adviser Subsidiary. With respect to the Gladstone REITs, the Advisory Agreements may be terminated without cause upon 120 days’ prior written notice to our Adviser Subsidiary and after the affirmative vote of at least two-thirds of such fund’s independent Directors.

The Gladstone BDCs are (and any BDC or other fund regulated by the 1940 Act that we manage in the future will be) subject to certain provision of the 1940 Act. The 1940 Act requires the Advisory Agreement for each BDC must be approved annually by such funds’ board of Directors (including a majority of the independent Directors) following an initial two-year term. The board of Directors of a BDC may refuse to reapprove an Advisory Agreement or may terminate an Advisory Agreement, without penalty, at any time, upon 60 days’ notice. In addition, the Advisory Agreement with each BDC can be terminated by the majority of such BDC’s stockholders.

In addition, as required by the 1940 Act, the Advisory Agreement of each Gladstone BDC terminates automatically upon its “assignment,” as interpreted under the 1940 Act. A change in control of the Adviser Subsidiary or a change in control of us, as the Adviser Subsidiary is wholly owned by us, could be deemed to

 

29


Table of Contents

create an assignment of such Advisory Agreements. All of our voting shares are owned by TGC LTD, which is wholly owned by Mr. Gladstone. We assume that Mr. Gladstone will continue to control us through his ownership of TGC LTD so long as he is employed by us. However, if Mr. Gladstone were no longer to control us or TGC LTD, or if another person were to own more than 25% of the voting shares of the Company or TGC LTD, whether due to a third-party purchase, Mr. Gladstone’s death or otherwise, a change of control would be deemed to occur. We cannot be certain that consents required for an assignment of the Advisory Agreements with the Gladstone BDCs will be obtained in advance of such a change of control.

Termination of any of the Advisory Agreements would affect the fees we earn from the relevant funds and the underlying portfolio companies, which would have a material adverse effect on our financial condition and results of operations.

Poor performance of our funds would cause a decline in our revenue, income and cash flow and could adversely affect our ability to raise capital for future funds.

When the Existing Gladstone Funds perform poorly, our revenue, income and cash flow declines because the value of our assets under management would decrease, which would result in a reduction in management fees, and our incentive fees would decrease, resulting in a reduction in the incentive fees we earn. Moreover, we could experience losses on our investments of our own capital (as a result of any ownership from time to time of shares in our funds) as a result of poor investment performance by our funds. Poor performance of our funds could make it more difficult for us to raise new capital, as investors might decline to invest in future funds or sell the shares they already own in the Existing Gladstone Funds. Investors and potential investors in our funds continually assess our funds’ performance, and our ability to raise capital for existing and future funds will depend on our funds’ continued satisfactory performance.

Our potential use of leverage to finance our business may expose us to substantial risks, just as our funds’ use of leverage to finance investments exposes them and us to substantial risks.

In the future, we may use a significant amount of borrowings to finance our business operations. Our current line of credit contains, and we expect that any future credit agreements would contain, financial and operating covenants that may limit our ability to conduct our business. To the extent we service our debt from our cash flow, such cash will not be available for our operations or other purposes. The portion of our cash flow used to service those obligations could be substantial, which could make it difficult for us to meet our debt service requirements or force us to modify our operations. As such, if we do incur substantial indebtedness in the future, it may make it more difficult for us to withstand or respond to adverse or changing business, regulatory and economic conditions or to take advantage of new business opportunities or make necessary capital expenditures.

These risks are exacerbated by our funds’ use of leverage to finance investments. If we were to incur substantial leverage, coupled with our reliance on funds utilizing leverage to finance investments, it could also cause us to suffer a decline in the credit ratings assigned to our debt by rating agencies, to the extent our debt is rated, which might well result in an increase in our borrowing costs and could otherwise adversely affect our business in a material way, particularly if our credit ratings were to be below investment grade.

Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, or the operations of our funds or the businesses in which they invest, compromise or corrupt of confidential information and/or damage to our business relationships, all of which could negatively impact our business, financial condition and operating results.

Maintaining our network security is of critical importance because our systems store highly confidential financial models, information about our funds and information about our funds’ portfolio companies. Although we have implemented, and will continue to implement, security measures, our technology platform may be vulnerable to intrusion, computer viruses or similar disruptive problems caused by cyber-attacks. A cyber

 

30


Table of Contents

incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources or those of our funds or their portfolio companies. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation and damage to our business relationships. As our reliance on technology has increased, so have the risks posed to our information systems, both internal and those provided to us by third-party service providers. We have implemented processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, but these measures, as well as our increased awareness of the nature and extent of a risk of a cyber incident, do not guarantee that a cyber incident will not occur and/or that our financial results, operations or confidential information will not be negatively impacted by such an incident. In addition, any such incident, disruption or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties, disrupt our operations, and damage our reputations, resulting in a loss of confidence in our services, which could adversely affect our business.

We are dependent on information systems, and systems failures could significantly disrupt our business.

Our business is dependent on our and third parties’ communications and information systems. Any failure or interruption of those systems, including as a result of the termination of an agreement with any third-party service providers, could cause delays or other problems in our activities. Our financial, accounting, data processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control and adversely affect our business. There could be:

 

   

sudden electrical or telecommunications outages;

 

   

natural disasters such as earthquakes, tornadoes and hurricanes;

 

   

disease pandemics;

 

   

events arising from local or larger scale political or social matters, including terrorist acts; and

 

   

cyber-attacks.

These events, in turn, could have a material adverse effect on our operating results and negatively affect our business.

Extensive regulation of our businesses affects our activities and creates the potential for significant liabilities and penalties. The possibility of increased regulatory focus could result in additional burdens on our business.

Our asset management business is subject to extensive regulation. In particular, we are subject to regulation by the SEC under the federal securities laws (including the 1940 Act and the Investment Advisers Act of 1940, as amended (the “Advisers Act”)). In addition, many of the activities that we or our funds engage in are subject to or potentially subject to (in the absence of certain exemptions that we rely on and must comply with) the jurisdiction and regulatory oversight of various other federal regulatory agencies (including the Commodity Futures Trading Commission and the Department of Labor), various self-regulatory organizations (including the Financial Industry Regulatory Authority, Inc. (“FINRA”) and the National Futures Association) and various state regulatory authorities.

The various legal statutes and regulatory rules to which we are subject are extremely complex, and compliance with them can be a time-consuming and difficult task. For example, the Advisers Act imposes numerous obligations on investment advisers, including record keeping, advertising and operating requirements, disclosure obligations and prohibitions on misleading or fraudulent activities. The Advisers Act also imposes an

 

31


Table of Contents

overriding fiduciary duty on investment advisers. The 1940 Act imposes similar obligations on BDCs, as well as additional detailed operational requirements that must be strictly adhered to by their investment advisers and other service providers. A failure to comply with the obligations imposed by the Advisers Act, the 1940 Act or other regulatory agencies could result in investigations, sanctions and reputational damage. In addition, we may from time to time rely on exemptions from various requirements of the 1940 Act and the U.S. Employee Retirement Income Security Act of 1974, as amended, in conducting our asset management activities. These exemptions are sometimes highly complex and may in certain circumstances depend on compliance by third parties whom we do not control. If for any reason these exemptions were to become unavailable to us, we could become subject to regulatory action or third-party claims and our business could be materially and adversely affected.

Many of these regulators, including U.S. and self-regulatory organizations, as well as state securities commissions in the U.S., are empowered to conduct investigations and administrative proceedings that can result in fines, suspensions of personnel or other sanctions, including censure, the issuance of cease-and-desist orders or the suspension or expulsion of a broker-dealer or investment adviser from registration or memberships. Even if an investigation or proceeding did not result in a sanction or the sanction imposed against us or our personnel by a regulator were small in monetary amount, the adverse publicity relating to the investigation, proceeding or imposition of these sanctions could harm our reputation and cause us to lose existing clients or fail to gain new asset management or financial advisory clients. Lastly, the requirements imposed by our regulators are designed primarily to ensure the integrity of the financial markets and to protect investors in our funds and are not designed to protect holders of our Class A Common Stock. Consequently, these regulations often serve to limit our activities.

In addition, the regulatory environment in which our funds operate may affect our business. The regulatory environment in which we operate is subject to further regulation. We may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other U.S. or non-U.S. governmental regulatory authorities or self-regulatory organizations that supervise the financial markets. We also may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become law. Compliance with any new laws or regulations could make compliance more difficult and expensive and affect the manner in which we conduct business.

Valuation methodologies for certain assets in our funds can be subject to significant subjectivity and the fair value of assets established pursuant to such methodologies may never be realized, which could result in significant losses for our funds and adversely impact our results of operations.

There are no readily ascertainable market prices for a large number of the investments held by our funds. We determine the value of each such investment based on its fair value. The fair value of investments held by a BDC or a REIT is determined using a number of methodologies described in the funds’ valuation policies. While we have made valuation determinations historically with the assistance of independent valuation firms, fair value measurements involve subjective judgments and estimates. Because there is significant uncertainty in the valuation of, or in the stability of the value of, illiquid investments, the fair values of such investments as reflected in a fund’s net asset value do not necessarily reflect the prices that would actually be obtained by us on behalf of the fund when such investments are realized. Realizations at values significantly lower than the values at which investments have been reflected in previously reported SEC filings would result in losses for the applicable fund, which in turn could result in a decline in base management fees and the loss of potential incentive fees earned by the Adviser Subsidiary. Also, a situation where asset values turn out to be materially different than values previously reported by the fund could cause investors to lose confidence in us, which would result in difficulty in raising additional funds or sales of stock in certain of our funds, which would adversely affect our ability to increase assets under management.

 

32


Table of Contents

Our inability to retain and motivate our executive officers and other key personnel and to recruit, retain and motivate new executive officers and other key personnel could adversely affect our business, results and financial condition.

Our most important asset is our people, and our continued success and growth depend to a substantial degree on our ability to retain and motivate our executive officers and other key personnel and to strategically recruit, retain and motivate new talented personnel, including new executive officers. However, we may not be successful in our efforts to recruit, retain and motivate the required personnel as the market for qualified investment professionals is extremely competitive. There is no guarantee that the non-competition and non-solicitation agreements to which our executive officers are subject, together with our other arrangements with them, will prevent them from leaving us, joining our competitors or otherwise competing with us or that these agreements will be enforceable in all cases. In addition, these agreements will expire after a certain period of time, at which point each of our executive officers would be free to compete against us and solicit investors in our funds, clients and employees.

To recruit and retain existing and future executive officers and other key personnel, we may need to increase the level of compensation for certain individuals. Accordingly, as we promote or hire new executive officers and other key personnel over time, the level of compensation we pay is likely to increase, which would cause our total employee compensation and benefits expense to increase and adversely affect our profitability.

Employee misconduct could harm us by impairing our ability to attract and retain investors, portfolio companies and tenants and subjecting us to significant legal liability and reputational harm.

There is a risk that our employees could engage in misconduct that adversely affects our business and may result in litigation at the Existing Gladstone Funds. We are subject to a number of obligations and standards arising from our asset management business and our authority over the assets managed by the Existing Gladstone Funds. The violation of these obligations and standards by any of our employees would adversely affect the funds and us. Our business often requires that we deal with confidential matters of great significance to our funds and the portfolio companies or real estate properties in which our funds may invest. If our employees were improperly to use or disclose confidential information, we could suffer serious harm to our reputation, financial position and current and future business relationships. It is not always possible to detect or deter employee misconduct, and the extensive precautions we take to detect and prevent this activity may not be effective in all cases. If one of our employees were to engage in misconduct or were to be accused of such misconduct, our business and our reputation could be adversely affected. Negative impacts to our reputation could adversely affect our ability to attract investors and raise additional funds, the willingness of counterparties to do business with us or result in potential litigation against us. This could result in a loss of assets under management and related base management fees and adversely affect our business, results of operations and financial condition.

Our failure to appropriately address conflicts of interest could damage our reputation and adversely affect our businesses.

As we have expanded our business and as we continue to expand the number and scope of our businesses, we have confronted and will continue to confront potential conflicts of interest relating to such funds’ investment activities. Certain of the Existing Gladstone Funds (and Future Gladstone Funds) may have overlapping investment objectives, including funds that have different fee structures, and potential conflicts may arise with respect to our decisions regarding how to allocate investment opportunities (and related fees) among those funds. We may also cause different funds to invest in a single portfolio company. Furthermore, as the fair value of the investments held by our funds affects the calculation of the base management fees earned under the Advisory Agreements, conflicts of interest may exist in the valuation of our funds’ investments. In addition, our daily operations may create conflicts of interest. For example, a decision to receive material non-public information about a potential portfolio company while pursuing an investment opportunity for a particular fund gives rise to a potential conflict of interest when it results in our having to restrict the ability of other funds to take any action.

 

33


Table of Contents

Though we believe we have appropriate means to resolve these conflicts, our judgment on any particular allocation or resolution of any other conflict could be challenged. If we fail to appropriately address any such conflicts, it could negatively impact our reputation, which could adversely affect our ability to attract investors and raise additional funds, the willingness of counterparties to do business with us or result in potential litigation against us. This could result in a loss of assets under management and related base management fees and adversely affect our business and financial condition.

Further, our management personnel serve various management roles in the respective Existing Gladstone Funds and may make decisions in favor of the Existing Gladstone Funds that are not in our interests. We expect that agreement and conflicts between us and the Existing Gladstone Funds will be subject to the review of our Board of Directors, but this mechanism may not protect us from the effects of conflicts.

The asset management business is intensely competitive.

The asset management business is intensely competitive, with competition based on a variety of factors, including investment performance, the quality of service provided to clients, brand recognition and business reputation. Our asset management business competes with a number of private equity funds, specialized investment funds, hedge fund sponsors, traditional asset managers, commercial banks, investment banks and other financial institutions, corporate buyers and other parties, including, primarily, other BDCs and REITs. A number of factors serve to increase our competitive risks:

 

   

many of our competitors in some of our businesses have greater financial, technical, marketing and other resources and more personnel than we do;

 

   

several of our competitors have recently raised funds, or are expected to raise funds, with significant amounts of capital, and many of those funds have similar investment objectives to our funds, which may create additional competition for investment opportunities and may reduce the size and duration of pricing inefficiencies that many alternative investment strategies seek to exploit;

 

   

some of these competitors may also have a lower cost of capital and access to funding sources that are not available to us or the funds that we manage, which may create competitive disadvantages for our funds with respect to investment opportunities;

 

   

some of our competitors may have higher risk tolerances, different risk assessments or lower return thresholds, which could allow them to consider a wider variety of investments and to bid more aggressively than us for investments that we want to make on behalf of our funds or through proprietary accounts;

 

   

our competitors that are corporate buyers may be able to achieve synergistic cost savings in respect of an investment, which may provide them with a competitive advantage in bidding for an investment as compared to our funds;

 

   

there are relatively few barriers to entry impeding new investment funds, including a relatively low cost of entering these businesses, and the successful efforts of new entrants into our various lines of business, including major commercial and investment banks and other financial institutions, have resulted in increased competition; and

 

   

other industry participants will from time to time seek to recruit our investment professionals and other employees away from us.

Our funds may lose investment opportunities in the future if they do not match investment prices, structures and terms offered by competitors. Alternatively, we may experience decreased rates of return and increased risks of loss if our funds match investment prices, structures and terms offered by competitors. In addition, if interest rates were to rise or there were to be a prolonged bull market in equities, the attractiveness of our funds relative to investments in other investment products could decrease. This competitive pressure could adversely affect our

 

34


Table of Contents

funds’ ability to make successful investments and limit our ability to raise future funds, either of which would adversely impact our ability to increase our assets under management and our business, revenue, results of operations and cash flow.

In addition, certain passive products and asset classes, such as index funds and certain types of exchange- traded funds, many of which have lower fee structures, have become increasingly popular with investors. In order to continue to grow our assets under management, we must provide investment products and services that are viewed as appropriate in relation to the fees charged, which may require us to demonstrate that our strategies can outperform such passive products. If investors view our fees as high relative to the market or the returns provided on our funds, we may choose to reduce our fee levels in order to attract additional investors and grow assets under management. In addition, as part of their annual review of the Advisory Agreements, the board of Directors of each Existing Gladstone Fund will compare our fees to those of our competitors and if such board views our fees as excessive in relation to our peers or our performance, we may choose to reduce our fee levels in order to retain the applicable Advisory Agreement. Any reduction of fees charged pursuant the Advisory Agreements could negatively impact our results of operations.

Dependence on leverage by certain of our funds and by our funds’ portfolio companies subjects us to volatility and contractions in the debt financing markets and could adversely affect our business, results of operations or financial condition.

Our funds and our funds’ portfolio companies rely on the use of leverage. If our funds or their portfolio companies raise capital in the structured credit, leveraged loan and high yield bond markets, the results of their operations could suffer when such markets experience dislocations, contractions or volatility. Any such events (such as the COVID-19 pandemic) could adversely impact the availability of credit to businesses generally and could lead to an overall weakening of the U.S. and global economies. Any economic downturn could adversely affect the financial resources of our funds and their investments (in particular those investments that depend on credit from third parties or that otherwise participate in the credit markets) and their ability to make principal and interest payments on, or refinance, outstanding debt when due. Moreover, these events could affect the terms of available debt financing with, for example, higher rates, higher equity requirements and/or more restrictive covenants.

The absence of available sources of sufficient debt financing for extended periods of time or an increase in either the general levels of interest rates or in the risk spread demanded by sources of indebtedness would make it more expensive for our funds to finance investments. Certain investments may also be financed through borrowings on fund-level debt facilities, which may or may not be available for a refinancing at the end of their respective terms. Finally, the interest payments on the indebtedness used to finance our funds’ investments are generally deductible expenses for income tax purposes, subject to limitations under applicable tax law and policy. Any change in such tax law or policy to eliminate or substantially limit these income tax deductions, as has been discussed from time to time in various jurisdictions, would reduce the after-tax rates of return on the affected investments, which may have an adverse impact on our businesses and financial results.

Similarly, our funds’ portfolio companies regularly utilize the corporate debt markets to obtain additional financing for their operations. If they have credit ratings, they are typically non-investment grade and those that do not have credit ratings would likely be non-investment grade if they were rated. If the credit markets render such financing difficult to obtain or more expensive, this may negatively impact the operating performance of those portfolio companies and, therefore, the investment returns of our funds. In addition, if the markets make it difficult or impossible to refinance debt that is maturing in the near term, some of our funds’ portfolio companies may be unable to repay such debt at maturity and may be forced to sell assets, undergo a recapitalization or seek bankruptcy protection. Any of the foregoing circumstances could have a material adverse effect on our business, results of operations and financial condition.

Our funds may choose to use leverage as part of their respective investment programs. The use of leverage poses a significant degree of risk and enhances the possibility of a significant loss to investors. A fund may

 

35


Table of Contents

borrow money from time to time to make investments or may enter into derivative transactions with counterparties that have embedded leverage. The interest expense and other costs incurred in connection with such borrowing may not be recovered by returns on such investments and may be lost, and the timing and magnitude of such losses may be accelerated or exacerbated, in the event of a decline in the market value of such investments. Gains realized with borrowed funds may cause the fund’s net asset value to increase at a faster rate than would be the case without borrowings. However, if investment results fail to cover the cost of borrowings, the fund’s net asset value could also decrease faster than if there had been no borrowings. In addition, as BDCs registered under the 1940 Act, the Gladstone BDCs are each permitted to issue senior securities in amounts such that its asset coverage ratio equals at least 150% after each issuance of senior securities. Each of GLAD’s and GAIN’s ability to pay dividends will be restricted if its asset coverage ratio falls below at least 150%. An increase in interest rates could also decrease the value of fixed-rate debt investments that our funds make. Any of the foregoing circumstances could have a material adverse effect on our business, results of operations and financial condition.

An investment strategy focused primarily on privately held lower middle market companies presents certain challenges, including the lack of publicly available information about these companies.

The Gladstone BDCs have historically invested primarily in privately held lower middle market companies. Investments in these companies pose certain incremental risks as compared to investments in larger and/or public companies:

 

   

have reduced access to the capital markets, resulting in diminished capital resources and ability to withstand financial distress;

 

   

may have limited financial resources and may be unable to meet their obligations under debt that the Gladstone BDCs hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of the Gladstone BDCs realizing any guarantees they may have obtained in connection with their investment;

 

   

may have shorter operating histories, narrower product lines and smaller market shares and may be more dependent on a single or a few suppliers than larger businesses, which tend to render them more vulnerable to competitors’ actions and changing market conditions, as well as general economic downturns and the impacts of the COVID-19 pandemic;

 

   

are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on the private company and, in turn, on the applicable Gladstone BDC and us; and

 

   

generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position.

In addition, our executive officers, Directors or employees may, in the ordinary course of business, be named as defendants in litigation arising from our funds’ investments in portfolio companies. Finally, limited public information generally exists about private companies and these companies may not have third-party debt ratings or audited financial statements. We must therefore rely on the ability of the Adviser Subsidiary to obtain adequate information through due diligence to evaluate the creditworthiness and potential returns from investing in these companies. Additionally, these companies and their financial information will not generally be subject to the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”), and other rules that govern public companies. If we are unable to uncover all material information about these companies, our funds may lose money on such investments, which could adversely affect the fees that we earn pursuant to the applicable Advisory Agreement.

 

36


Table of Contents

Prepayments of debt investments by our funds’ portfolio companies could adversely impact our results of operations.

We are subject to the risk that the investments our funds make in portfolio companies may be repaid prior to maturity. When this occurs, any future investment in a new portfolio company using the proceeds of such repayment may be at lower yields than the debt securities being repaid and the applicable fund could experience significant delays in reinvesting these amounts. As a result, the results of operations of the affected fund could be materially adversely affected if one or more portfolio companies elect to prepay amounts owed to such fund, which could in turn have a material adverse effect on the incentive fees that the Adviser Subsidiary receives and our results of operations.

Our funds’ portfolio companies may incur debt that ranks equally with, or senior to, such fund’s investments in such companies.

The Gladstone BDCs pursue a strategy focused on investing primarily in the debt of privately-owned U.S. companies. The portfolio companies of the Gladstone BDCs may have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt in which such funds invest. By their terms, such debt instruments may entitle the holders to receive payment of interest or principal on or before the dates on which the applicable Gladstone BDC is entitled to receive payments with respect to the debt instruments in which it has invested. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to a Gladstone BDC’s investment in that portfolio company would typically be entitled to receive payment in full before the applicable BDC receives any distribution in respect of its investment.

In addition, even though the Gladstone BDCs have structured some of their investments as senior loans, if one of their respective portfolio companies were to go bankrupt, depending on the facts and circumstances, including the extent to which the applicable Gladstone BDC has actually provided managerial assistance (which it is required by the 1940 Act to offer) to that portfolio company, a bankruptcy court might recharacterize the BDC’s debt investment and subordinate all or a portion of its claims to that of other creditors. After repaying such senior creditors, such portfolio company may not have any remaining assets to use to repay its obligation to the applicable Gladstone BDC. The Gladstone BDCs may also be subject to lender liability claims for actions taken by them with respect to a borrower’s business, in instances in which the BDC exercised control over the borrower or as a result of actions taken in rendering significant managerial assistance. Furthermore, in the case of debt ranking equally with debt securities in which a Gladstone BDC has invested, such BDC would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization, or bankruptcy of a portfolio company. The failure of a Gladstone BDC to recoup all of the principal amount of its investments and any interest due on such investments could negatively impact such BDC’s gross assets and/or net income, which in turn could negatively impact the base management and incentive fees, respectively, that the Adviser Subsidiary earns from such BDC.

Changes in interest rates, changes in the method for determining the London Interbank Offered Rate (“LIBOR”), and the potential replacement of LIBOR may affect our and our funds’ cost of capital and net income.

General interest rate fluctuations and changes in credit spreads on floating rate loans may have a substantial negative impact on our funds and their investments and, accordingly, may have a material adverse effect on our results of operations. The majority of our funds’ debt investments have, and are expected to have, variable interest rates that reset periodically based on benchmarks such as LIBOR, the federal funds rate or prime rate. An increase in interest rates may make it more difficult for a fund’s portfolio companies to service their obligations under the debt investments that the fund holds and increase defaults even where the fund’s investment income increases. Rising interest rates could also cause borrowers to shift cash from other productive uses to the payment of interest, which may have a material adverse effect on their business and operations and could, over time, lead

 

37


Table of Contents

to increased defaults by a fund’s portfolio companies. Additionally, as interest rates increase and the corresponding risk of a default by borrowers increases, the liquidity of higher interest rate loans may decrease as fewer investors may be willing to purchase such loans in the secondary market in light of the increased risk of a default by the borrower and the heightened risk of a loss of an investment in such loans. Decreases in credit spreads on debt that pays a floating rate of return would have an impact on the income generation of our funds’ floating rate assets. Trading prices for debt that pays a fixed rate of return tend to fall as interest rates rise. Trading prices tend to fluctuate more for fixed rate securities that have longer maturities.

Conversely, if interest rates decline, borrowers may refinance their loans at lower interest rates, which could shorten the average life of the loans and reduce the associated returns on the investment, as well as require us to incur management time and expense to re-deploy such proceeds, including on terms that may not be as favorable to the fund as the existing loans.

In addition, because each of our funds borrows to fund its investments, a portion of a fund’s net investment income is dependent upon the difference between the interest rate at which it borrows funds and the interest rate at which it invests those funds. Portions of a fund’s investment portfolio and borrowings may have floating rate components. As a result, a significant change in market interest rates could have a material adverse effect on a fund’s net investment income and, as a result, the incentive fees earned by the Adviser Subsidiary. In periods of rising interest rates, our and our fund’s cost of funds could increase, which would reduce our and their net income. We and they may hedge against interest rate fluctuations by using standard hedging instruments such as interest rate swap agreements, futures, options and forward contracts, subject to applicable legal requirements, including all necessary registrations (or exemptions from registration) with the Commodity Futures Trading Commission. These activities may limit our or our funds’ ability to participate in the benefits of lower interest rates with respect to the hedged borrowings. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations.

As a result of concerns about the accuracy of the calculation of LIBOR, a number of British Bankers’ Association (the “BBA”) member banks entered into settlements with certain regulators and law enforcement agencies with respect to the alleged manipulation of LIBOR. Actions by the BBA, regulators or law enforcement agencies as a result of these or future events, may result in changes to the manner in which LIBOR is determined. Potential changes, or uncertainty related to such potential changes may adversely affect the market for LIBOR- based securities, including LIBOR-indexed, floating-rate debt securities held by our funds and our and their borrowings. In addition, changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based securities or the value of LIBOR-indexed, floating-rate debt securities and borrowings.

On July 27, 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. Following consultations in December 2020 and January 2021, the ICE Benchmark Administration Limited (the “IBA”) announced that (i) it intends to cease publication of 1-week and 2-month U.S. dollar LIBOR at the end of 2021 and (ii) subject to compliance with applicable regulations, it intends to continue publication of the remaining U.S. dollar LIBOR tenors until June 30, 2023, effectively extending the LIBOR transition period to June 30, 2023. However, the FCA has indicated it will not compel panel banks to continue to contribute to LIBOR after the end of 2021 and the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation have encouraged banks to cease entering into new contracts that use U.S. dollar LIBOR as a reference rate no later than December 31, 2021. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate.

A committee established by the Federal Reserve, the Alternative Reference Rates Committee, announced the replacement of LIBOR with a new index, based on overnight repurchase agreements collateralized by U.S. Treasury securities, called the Secured Overnight Financing Rate (“SOFR”). The Federal Reserve Bank of New

 

38


Table of Contents

York began publishing SOFR in April 2018. Other jurisdictions have also proposed their own alternative to LIBOR, including the Sterling Overnight Index Average for Sterling markets, the Euro Short Term Rate for Euros and Tokyo Overnight Average Rate for Japanese Yen. Although SOFR appears to be the preferred replacement rate for U.S. dollar LIBOR, at this time, it is not possible to predict whether SOFR will attain market traction as a LIBOR replacement tool, and the future of LIBOR is still uncertain. The effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR or other reference rates that may be enacted in the United Kingdom or elsewhere cannot be predicted at this time, and it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes in views or alternatives may have on the financial markets for financial instruments based on LIBOR.

To date, certain of the loan agreements with our funds’ portfolio companies have already been amended to include fallback language providing a mechanism for the parties to negotiate a new reference interest rate in the event that LIBOR ceases to exist. Any such renegotiations may have a material adverse effect on the business, financial condition and results of operations of our funds, which could adversely impact the fees that our Adviser Subsidiary earns and/or distributions that we receive on our investments in our funds, if any.

The Gladstone BDCs generally do not control the business operations of their portfolio companies and, due to the illiquid nature of those investments, may not be able to dispose of such investments.

Investments by the Gladstone BDCs generally consist of debt instruments and equity securities of companies that neither we nor the BDC control. Therefore, neither we nor the applicable Gladstone BDC will generally be involved in the day-to-day operations and decision-making of such portfolio companies, even though we may have board representation or board observation rights, and our debt agreements may impose certain restrictive covenants on our borrowers. As a result, the Gladstone BDCs are subject to the risk that its portfolio companies may make business decisions with which we and the Gladstone BDC disagree, and the management of such company, as representatives of the holders of their common equity, may take risks or otherwise act in ways that do not serve the interests of the Gladstone BDCs as debt investors. Due to the lack of liquidity for our funds’ investments in private companies, they may not be able to dispose of their interests in their portfolio companies as readily as we would like or at an appropriate valuation. If the portfolio company makes a decision that negatively impacts the market value of the securities held by a Gladstone BDC or the portfolio company’s ability to service its debt obligation, the total asset value of the applicable Gladstone BDC’s investment portfolio and/or its net income could be adversely affected which in turn could negatively impact the management and incentive fees, respectively, that the Adviser Subsidiary earns from such BDC.

Our funds may face risks relating to undiversified investments.

While diversification is generally an objective of our funds, there can be no assurance as to the degree of diversification, if any, that will be achieved in any fund investments. Difficult market conditions or slowdowns affecting a particular asset class, geographic region or other category of investment, such as the COVID-19 pandemic, could have a significant adverse impact on a fund if its investments are concentrated in that area, which would result in lower investment returns. This lack of diversification may expose a fund to losses disproportionate to economic conditions or market declines in general if there are disproportionately greater adverse movements in the particular investments. If a fund holds investments concentrated in a particular issuer, security, asset class or geographic region, such fund may be more susceptible than a more widely diversified investment portfolio to the negative consequences of a single corporate, economic, political, public health or regulatory event. Accordingly, a lack of diversification on the part of a fund could adversely affect a fund’s performance and, as a result, our results of operations and financial condition.

 

39


Table of Contents

If we get commitments from third-party investors in private funds, such investors may not satisfy their contractual obligation to fund capital calls when requested, which could adversely affect a fund’s operations and performance.

If we start private funds and seek investors for such funds, investors in such private funds may make capital commitments to those funds that we are entitled to call from those investors at any time during prescribed periods. In such event we will depend on investors fulfilling and honoring their commitments when we call capital from them for those funds to consummate investments and otherwise pay their obligations when due. Any investor that did not fund a capital call would be subject to several possible penalties, including having a meaningful amount of its existing investment forfeited in that fund. However, the impact of the penalty is directly correlated to the amount of capital previously invested by the investor in the fund and if an investor has invested little or no capital, for instance early in the life of the fund, then the forfeiture penalty may not be as meaningful. Investors may also negotiate for lesser or reduced penalties at the outset of the fund, thereby limiting our ability to enforce the funding of a capital call. Third-party investors in private funds often use distributions from prior investments to meet future capital calls. In cases where valuations of existing investments fall and the pace of distributions slows, investors may be unable to make new commitments to third-party managed funds such as those advised by us. A failure of investors to honor a significant amount of capital calls for any particular fund or funds could have a material adverse effect on the operation and performance of those funds and adversely affect our ability to increase assets under management. As of June 30, 2021 and December 31, 2021, we did not manage any private funds and investors in the Company and the Existing Gladstone Funds do not have any contractual obligations or capital commitments to such funds.

Our business depends in large part on our funds’ ability to raise capital from investors. If we were unable to raise such capital, we would be unable to grow assets under management, collect management fees or deploy such capital into investments, which would materially and adversely affect our business, results of operations and financial condition.

Our or our funds’ ability to raise capital from investors depends on a number of factors, including many that are outside our control. Investors may downsize their investment allocations to private funds, REITs or BDCs or to rebalance a disproportionate weighting of their overall investment portfolio among asset classes. Poor performance of our funds could also make it more difficult for us to raise new capital. Our investors and potential investors continually assess our funds’ performance independently and relative to market benchmarks and our competitors, and our ability to raise capital for existing and future funds depends on our funds’ performance. When economic and market conditions deteriorate, we could be unable to raise sufficient amounts of capital to support the investment activities of future funds. If we were unable to successfully raise capital in our funds and therefore increase our assets under management, our business, results of operations and financial condition would be adversely affected.

As more fully described in under the heading”—If we get commitments from third-party investors in private funds, such investors may not satisfy their contractual obligation to fund capital calls when requested, which could adversely affect a fund’s operations and performance” above, any investor in future private funds that did not fund a capital call would be subject to several possible penalties, including having a meaningful amount of its existing investment forfeited in that fund. To date the Existing Gladstone Funds have no such capital commitments. A future failure of investors to honor a significant amount of capital calls for any particular future private fund or funds could have a material adverse effect on the operation and performance of those future private funds and adversely affect our ability to increase assets under management.

Rapid growth of our businesses may be difficult to sustain and may place significant demands on our administrative, operational and financial resources.

Our assets under management have grown significantly in the past and we are pursuing further growth. Our rapid growth has placed, and planned growth, if successful, will continue to place, significant demands on our

 

40


Table of Contents

legal, accounting and operational infrastructure, and has increased expenses. In addition, we are required to continuously develop our systems and infrastructure in response to the increasing sophistication of the asset management market and legal, accounting, regulatory and tax developments. Our future growth will depend in part on our ability to maintain an operating platform and management system sufficient to address our growth and will require us to incur significant additional expenses and to commit additional management and operational resources. As a result, we face significant challenges:

 

   

in maintaining adequate financial, regulatory (legal, tax and compliance) and business controls;

 

   

in implementing new or updated information and financial systems and procedures; and

 

   

in training, managing and appropriately sizing our work force and other components of our businesses on a timely and cost-effective basis.

Present and future BDCs for which we serve as investment adviser are subject to regulatory complexities that limit the way in which they do business and may subject them to a higher level of regulatory scrutiny.

The Gladstone BDCs, and other BDCs for which we may serve as investment adviser in the future, operate under a complex regulatory environment. Such BDCs require the application of complex tax and securities regulations and may entail a higher level of regulatory scrutiny.

In addition, the Gladstone BDCs are subject to complex rules under the 1940 Act, including rules that restrict certain of our funds from engaging in transactions with GLAD and GAIN. Under the regulatory and business environment in which they operate, the Gladstone BDCs must periodically access the capital markets to raise cash to fund new investments in excess of their repayments to grow. This results from the Gladstone BDCs each being required to generally distribute to their respective stockholders at least 90% of its investment company taxable income to maintain its RIC status, combined with regulations under the 1940 Act that, subject to certain exceptions, generally prohibit GLAD and GAIN from issuing and selling their common stock at a price below net asset value per share and from incurring indebtedness (including for this purpose, preferred stock), if their asset coverage, as calculated pursuant to the 1940 Act, equals less than 150% after such incurrence. If our BDCs are found to be in violation of the 1940 Act, they could lose their status as BDCs

The Gladstone REITs are subject to certain risks associated with real estate ownership and lending, which could reduce the value of their investments and stockholders’ equity.

The investments of the Gladstone REITs or any Future Gladstone Fund may include industrial, office, retail and agricultural property. The performance of the Gladstone REITs, and the value of their investments, are subject to risks inherent to the ownership and operation of these types of properties, including:

 

   

changes in the general economic climate, including the credit market;

 

   

changes in local conditions, such as an oversupply of space, reduction in demand for real estate, natural disasters or disease pandemics;

 

   

changes in interest rates and the availability of financing;

 

   

competition from other available space;

 

   

changes in laws and governmental regulations, including those governing real estate usage, zoning and taxes, and the related costs of compliance with laws and regulations; and

 

   

variations in the occupancy rate of their properties.

Adverse changes in any of the above factors could negatively impact the stockholders’ equity and/or income of the Gladstone REITs, which in turn could negatively impact the fees the Adviser Subsidiary earns from such REIT.

 

41


Table of Contents

If the Gladstone REITs or Gladstone BDCs fail to qualify as REITs or RICs, respectively, their operations and distributions to their stockholders would be adversely impacted, and our revenue could therefore be materially and adversely impacted.

Each of the Gladstone REITs and Gladstone BDCs intend to continue to be organized and to operate to qualify as a REIT or a RIC, respectively, under the Code. Both REITs and RICs generally are not taxed at the corporate level on income they currently distribute to their stockholders. Qualification as a REIT or RIC involves the application of highly technical and complex rules, and for a REIT or a RIC to maintain their status as such, the entity must meet, among other things, certain source of income, asset diversification and annual distribution requirements. The determination of various factual matters and circumstances not entirely within the control of the Gladstone REITs and Gladstone BDCs may affect their ability to continue to qualify as REITs and RICs, respectively. In addition, new legislation, new regulations, administrative interpretations or court decisions could significantly change the tax laws, possibly with retroactive effect, with respect to qualification as a REIT or RIC or the federal income tax consequences of such qualification. If the Gladstone REITs or Gladstone BDCs were to fail to qualify as REITs or RICs, respectively, in any taxable year, among other adverse effects, they would become subject to corporate income tax, which would reduce their net income and their cash available for distributions to their stockholders. Further, a reduction in a Gladstone REIT or Gladstone BDC’s net income could negatively impact the fees the Adviser Subsidiary earns from such entity.

The Gladstone REITs are subject to the credit risk of their tenants, which in the event of bankruptcy, could adversely affect results of operations.

The Gladstone REITs are subject to the credit risk of their tenants. Any bankruptcy of a tenant or borrower could cause:

 

   

the loss of lease or mortgage payments;

 

   

an increase in the costs incurred to carry the property occupied by such tenant; or

 

   

a decrease in distributions to the Gladstone REITs stockholders.

Under bankruptcy law, a tenant who is the subject of bankruptcy proceedings has the option of continuing or terminating any unexpired lease. If a bankrupt tenant terminates a lease with the Gladstone REITs, any claim we might have for breach of the lease (excluding a claim against collateral securing the lease) will be treated as a general unsecured claim. The REIT’s claim would likely be capped at the amount the tenant owed for unpaid rent prior to the bankruptcy unrelated to the termination, plus the greater of one year’s lease payments or 15% of the remaining lease payments payable under the lease (but no more than three years’ lease payments). In addition, due to the long-term nature of the leases of our current REITs and terms providing for the repurchase of a property by the tenant, a bankruptcy court could re-characterize a net lease transaction as a secured lending transaction. If that were to occur, the Gladstone REITs would not be treated as the owner of the property, but might have additional rights as a secured creditor. The Gladstone REITs did not incur any losses related to tenant defaults or sale-leasebacks during the year ended June 30, 2021 or the six months ended December 31, 2021. In the event any such losses were to occur at the Gladstone REITs in the future there may be a negative impact on the incentive fees that we receive from them.

In addition, the Gladstone REITs may enter into sale-leaseback transactions, whereby they would purchase a property and then lease the same property back to the person from whom they purchased it. In the event of the bankruptcy of a tenant, a transaction structured as a sale-leaseback may be re-characterized as either a financing or a joint venture, either of which outcomes could adversely affect the REIT’s operations. Either of these outcomes could adversely affect the Gladstone REITs’ cash flow and ability to pay distributions to their stockholders.

 

42


Table of Contents

The Gladstone REITs may be unable to renew leases, lease vacant space or re-lease space as leases expire, which could adversely affect our business.

If the Gladstone REITs cannot renew leases, they may be unable to re-lease properties to other tenants at rates equal to or above the current market rate. Even if they can renew leases, tenants could be able to negotiate lower rates as a result of market conditions, including as a result of the COVID-19 pandemic. Market conditions may also hinder the ability to lease vacant space in newly developed or redeveloped properties. In addition, the Gladstone REITs may enter into or acquire leases for properties that are suited to the needs of a particular tenant. Such properties may require renovations, tenant improvements or other concessions in order to lease them to other tenants if the initial leases terminate. The REIT may be required to expend substantial funds for tenant improvements and tenant refurbishments to re-lease the vacated space and may not have sufficient sources of funding available to use in the future for such purposes and therefore may have difficulty in securing a replacement tenant. Any of these factors could adversely impact a REIT’s financial condition, results of operations or cash flow, negatively impacting fees that our Adviser Subsidiary earns from the REIT, or its ability to pay dividends to its stockholders.

Net leases may not result in fair market lease rates over time, thereby failing to maximize income and distributions to stockholders.

A large portion of the rental income from the Gladstone REITs comes from net leases, which frequently provide the tenant greater discretion in using the leased property than ordinary property leases, such as the right to sublease the property, subject to our approval, to make alterations in the leased premises and to terminate the lease prior to its expiration under specified circumstances. Further, net leases are typically for longer lease terms and, thus, there is an increased risk that contractual rental increases in future years will fail to result in fair market rental rates during those years. As a result, engaging in net leases could negatively impact the Gladstone REIT’s income (and fees that our Adviser Subsidiary earns) and distributions to its stockholders.

The value of the real estate related securities in which the Gladstone REITs may invest could be volatile.

The value of real estate related securities, including those in which the Gladstone REITs invest, fluctuates in response to issuer, political, market and economic developments (including the impact of the COVID-19 pandemic). In the short term, equity prices can fluctuate dramatically in response to these developments. Different parts of the market and different types of equity securities can react differently to these developments and they can affect a single issuer, multiple issuers within an industry or economic sector or geographic region or the market as a whole. The real estate industry is sensitive to economic downturns. The value of securities of companies engaged in real estate activities can be affected by changes in real estate values and rental income, property taxes, interest rates and tax and regulatory requirements. In times of volatility, possible future declines in rental rates and expectations of future rental concessions, including free rent to renew tenants early, to retain tenants who are up for renewal or to attract new tenants, or requests from tenants for rent abatements during periods when they are severely impacted by an economic downturn, may result in decreases in the Gladstone REITs’ cash flows from investment properties. Increases in the cost of financing due to higher interest rates may cause difficulty in refinancing the Gladstone REITs’ debt obligations prior to maturity at terms as favorable as the terms of existing indebtedness. In addition, the value of a REIT’s equity securities can depend on the structure and amount of cash flow generated by the REIT.

The Gladstone REITs are subject to the risks inherent in the ownership and operation of real estate.

Investments in the Gladstone REITs are subject to the risks inherent in the ownership and operation of real estate and real estate-related businesses and assets. These risks include those associated with the burdens of ownership of real property, general and local economic conditions, changes in supply of and demand for competing properties in an area (as a result for instance of overbuilding), the financial resources of tenants, changes in building, environmental and other laws, energy and supply shortages, various uninsured or

 

43


Table of Contents

uninsurable risks, natural disasters, changes in government regulations, changes in real property tax rates, changes in interest rates, the reduced availability of mortgage funds which may render the sale or refinancing of properties difficult or impracticable, negative developments in the economy, environmental liabilities, contingent liabilities on disposition of assets, terrorist attacks, war, public health emergencies and other factors that are beyond our control. In addition, if the Gladstone REITs acquire direct or indirect interests in undeveloped land or underdeveloped real property, which may often be non-income producing, they will be subject to the risks normally associated with such assets and development activities, including risks relating to the availability and timely receipt of zoning and other regulatory or environmental approvals, the cost and timely completion of construction (including risks beyond the control of our fund, such as weather or labor conditions or material shortages) and the availability of both permanent financing on favorable terms.

Our asset management activities may involve investments in relatively high-risk, illiquid assets, and we may fail to realize any profits from these activities for a considerable period of time or lose some or all of our principal investments.

Our funds invest in companies and equity and debt that are not publicly traded. The ability of many of our funds, particularly those that make or will make private equity investments, to dispose of investments is heavily dependent on the private and public equity markets. For example, the ability to realize any value from an investment may depend upon the ability to find a buyer for all the equity of a company or to complete an initial public offering of the portfolio company in which such investment is held. Even if the securities are publicly traded, large holdings of securities can often be disposed of only over a substantial length of time, exposing the investment returns to risks of downward movement in market prices during the intended disposition period. Accordingly, under certain conditions, our funds may be forced to either sell securities at lower prices than they had expected to realize or defer—potentially for a considerable period of time—sales that they had planned to make. In order to complement our asset management business, we may make significant principal investments alongside our investors, including through general partnership interests in our current and future funds. Contributing capital to these funds is risky, and we may lose some or all of our investments.

To the extent that our investments in the Future Gladstone Funds are in the form of general partnership interests, such investments are subject to unlimited liability.

We expect that some portion of our investments in the Future Gladstone Funds will take the form of general partnership interests. A general partner generally has unlimited liability for the liabilities of the partnership, including debt of the partnership and any judgments against the partnership. As such, the portion of investments that take the form of general partnership interests is subject to complete loss to satisfy the liabilities of the partnership and as the result of any settlement or judgment against the partnership or otherwise. In addition, our other assets could be subject to risk of loss unless we hold such general partnership interest through subsidiaries that provide for limited liability to their equity owners.

We are subject to substantial litigation risks and may face significant liabilities and damage to our professional reputation as a result of litigation allegations and negative publicity.

The investment decisions we make on behalf of our funds in our asset management business and the activities of our investment professionals on behalf of portfolio companies of our funds may subject them and us to the risk of third-party litigation arising from investor dissatisfaction with the performance of those funds, the activities of their portfolio companies and a variety of other litigation claims. In addition, to the extent investors in our funds suffer losses resulting from fraud, gross negligence, willful misconduct or other similar misconduct, investors may have remedies against us, our funds, our executive officers or our affiliates under the federal securities law and/or state law. While the executive officers are generally indemnified with respect to their conduct in connection with the management of the business and affairs of our funds, such indemnity does not extend to actions determined to have involved fraud, gross negligence, willful misconduct or other similar misconduct.

 

44


Table of Contents

Any finding of substantial legal liability could materially adversely affect our business, financial condition or results of operations or cause significant reputational harm to us, which could seriously harm our business. We depend to a large extent on our business relationships and our reputation for integrity and high-caliber professional services to pursue investment opportunities for our funds. As a result, allegations of improper conduct by private litigants or regulators, whether the ultimate outcome is favorable or unfavorable to us, as well as negative publicity and press speculation about us, our investment activities or the private equity industry in general, whether or not valid, may harm our reputation, which may be more damaging to our business than to other types of businesses.

Potential conflicts of interest may arise between holders of our Class A Common Stock and our fund investors.

Our subsidiaries that serve as the advisors to, or the general partners of, our funds may have fiduciary duties and/or contractual obligations to those funds and their investors. As a result, we expect to take actions with respect to the purchase or sale of investments in our funds, the structuring of investment transactions for the funds or otherwise in a manner consistent with such duties and obligations. However, such actions may not be in our short-term best interest and may adversely affect our near-term results of operations or cash flows. For example, we may decline to make a particular investment for a fund because it would cause the fund to be too heavily invested in a single industry and instead make an investment with a slightly lower yield in a different industry in order to manage risk. Such an action could result in our Adviser Subsidiary earning lower incentive fees, which may in turn have an adverse effect on the price of our Class A Common Stock and/or on the interests of our holders of our Class A Common Stock. Additionally, to the extent we fail to appropriately deal with any such conflicts of interest, it could negatively impact our reputation and ability to raise additional funds.

The Existing Gladstone Funds may not be permitted to enter into certain transactions or make certain investments under their respective conflict of interest policies or applicable law.

Under the current conflict of interest policies of the Existing Gladstone Funds, without the approval of a majority of their respective independent Directors, the Existing Gladstone Funds are prohibited from, among other things, purchasing any real property owned by or, with respect to the REITs, co-investing with the Adviser Subsidiary, any of its affiliates or any business in which the Adviser Subsidiary or any of its subsidiaries have invested and other entities advised by the Adviser Subsidiary, subject to certain limited exceptions, so long as that entity does not control the portfolio company and the transaction is approved by both companies’ board of Directors. If an Existing Gladstone Fund cannot or will not enter into a transaction with us or one of our affiliates or make an investment with us or one of our affiliates, our business, results of operations and financial condition could be adversely affected.

Generally, BDCs are prohibited under the 1940 Act from knowingly participating in certain transactions with their affiliates without prior approval of their board of Directors who are not interested persons and, in some cases, prior approval by the SEC. The SEC has interpreted the prohibition on transactions with affiliates to prohibit “joint transactions” among entities that share a common investment adviser. On July 26, 2012, the SEC granted an exemptive order that permits GAIN, GLAD and any future BDC or closed-end management investment company that is advised by the Adviser Subsidiary (or sub-advised by the Adviser Subsidiary if it also controls the fund), or any combination of the foregoing, to co-invest subject to the conditions contained therein. In order for Gladstone Partners to co-invest with the Gladstone BDCs, such exemptive order may need to be amended to allow for co-investment with proprietary accounts. There is no assurance that the SEC would approve such an amendment on favorable terms or at all.

 

45


Table of Contents

Risks Related to Ownership of Our Class A Common Stock and Our Organizational Structure

The dual class structure of our common stock will have the effect of concentrating voting control with our Chairman, President and Chief Executive Officer, which will limit your ability to influence the outcome of important decisions.

Our Class B Common Stock has ten votes per share and our Class A Common Stock, which is the stock we are offering hereby, has one vote per share. Our Chairman, President and Chief Executive Officer, David Gladstone, who, collectively with his controlled entities, holds all our outstanding shares of Class B Common Stock, will beneficially own shares representing approximately        % of the voting power of our outstanding capital stock following the completion of this offering. As a result, Mr. Gladstone will have the ability to control the outcome of matters requiring stockholder approval, including the election of Directors and approval of significant corporate transactions, such as a merger or other sale of our company or our assets, even if his stock ownership represents less than 50% of the outstanding aggregate number of shares of our capital stock. This concentration of ownership will limit the ability of other stockholders to influence corporate matters and may cause us to make strategic decisions that could involve risks to you or that may not be aligned with your interests. As a board member, Mr. Gladstone owes a fiduciary duty to our stockholders and is legally obligated to act in good faith and in a manner he reasonably believes to be in the best interests of our stockholders. As a stockholder, Mr. Gladstone is entitled to vote his shares in his own interests, which may not always be in the interests of our stockholders generally. Mr. Gladstone’s control may adversely affect the market price of our Class A Common Stock.

We cannot predict the impact our dual class structure may have on the market price of our Class A Common Stock.

We cannot predict whether our dual class structure, combined with the concentrated control of our Chairman, President and Chief Executive Officer, who holds all of the outstanding shares of our Class B Common Stock, will result in a lower or more volatile market price of our Class A Common Stock or in adverse publicity or other adverse consequences. Certain index providers have announced restrictions on including companies with multiple-class share structures in certain of their indexes. For example, in July 2017, FTSE Russell and Standard & Poor’s announced that they would cease to allow most newly public companies utilizing dual or multi-class capital structures to be included in their indices. Under the announced policies, our dual class capital structure would make us ineligible for inclusion in any of these indices. Given the sustained flow of investment funds into passive strategies that seek to track certain indexes, exclusion from stock indexes would likely preclude investment by many of these funds and could make our Class A Common Stock less attractive to other investors. As a result, the market price of our Class A Common Stock could be adversely affected.

Our organizational documents do not limit our ability to enter into new lines of business, and we may, from time to time, expand into new investment strategies, geographic markets and businesses, including the Future Gladstone Funds, each of which may result in additional risks and uncertainties in our businesses.

We currently generate substantially all of our revenue from asset management and financial advisory services. We intend, to the extent that market conditions warrant, to seek to grow our businesses and expand into new investment strategies, geographic markets and businesses, including the Future Gladstone Funds. Moreover, our organizational documents do not limit us to the asset management business. To the extent that we expand to new geographic markets or businesses, undertake other related strategic initiatives or enter into a new line of business, we may face numerous risks and uncertainties, including risks associated with the following:

 

   

the required deployment of capital and other resources;

 

   

the possibility that we have insufficient expertise to engage in such activities profitably or without incurring inappropriate amounts of risk;

 

   

the combination or integration of operational and management systems and controls;

 

46


Table of Contents
   

the loss of clients due to the perception that we are no longer focusing on our core business, including the Existing Gladstone Funds;

 

   

new investment strategies and funds, including the Future Gladstone Funds, may provide for less profitable fee structures and arrangements than our existing investment strategies and funds, such as the Existing Gladstone Funds; and

 

   

the broadening of our geographic footprint, including the risks associated with conducting operations in certain foreign jurisdictions where we currently have no presence.

Further, entry into certain lines of business may subject us to new laws and regulations with which we are not familiar or from which we are currently exempt, and may lead to increased litigation and regulatory risk. If a new business generates insufficient revenue or if we are unable to efficiently manage our expanded operations, our results of operations may be adversely affected.

Our strategic initiatives may include joint ventures in which we take an active management role, which may subject us to additional risks and uncertainties in that we may be dependent upon, and subject to liability, losses or reputational damage relating to, systems, controls and personnel that are not under our control. We may elect to participate in joint venture opportunities in the future if we believe that operating in such a structure is in our best interests. There can be no assurances that we will be able to identify acceptable joint venture partners in the future or that our participation in any joint venture opportunities will be successful. In addition, we may from time to time explore opportunities to grow our business via acquisitions or other strategic transactions. There can be no assurance that we will successfully identify, negotiate or complete such transactions, or that any completed transactions will produce favorable financial results.

If we are unable to successfully enter into new lines of business or expand into new investment strategies, geographic markets and businesses, including the Future Gladstone Funds, we may not be able to implement our growth strategy successfully.

Our growth strategy is based, in part, on the selective development or acquisition of asset management businesses, advisory businesses or other businesses complementary to our existing business where we think we can add substantial value or generate substantial returns, including the Future Gladstone Funds and other new businesses discussed under the heading “Business—Our Growth Strategy” in this prospectus. The success of this strategy will depend on, among other things: (a) the availability of suitable opportunities, (b) the level of competition from other companies that may have greater financial resources, (c) our ability to value potential development or acquisition opportunities accurately and negotiate acceptable terms for those opportunities, (d) our ability to obtain requisite approvals and licenses from the relevant governmental authorities and to comply with applicable laws and regulations without incurring undue costs and delays, (e) our ability to identify and enter into mutually beneficial relationships with venture partners and (f) our ability to properly manage conflicts of interest. We do not currently have any acquisition agreements or understandings in place with any businesses and even if we are able to identify and successfully complete an acquisition in the future, we may encounter unexpected difficulties or incur unexpected costs associated with integrating and overseeing the operations of the new businesses. If we are not successful in implementing our growth strategy, our business, financial results and the market price for our Class A Common Stock may be adversely affected.

The control of our Board of Directors will be under the complete control of our Chairman, President and Chief Executive Officer and such control may be transferred to a third party without the consent of holders of our Class A Common Stock.

TGC LTD, which is wholly owned by our Chairman, President and Chief Executive Officer (Mr. Gladstone), will own all outstanding shares of Class B Common Stock after the offering is completed. Therefore, Mr. Gladstone will control        % of the voting power of our Class A Common Stock and Class B Common Stock on a combined basis. As such, he may transfer any or all of such voting shares to a third party in

 

47


Table of Contents

a sale transaction (which may trigger an assignment and termination of certain of the Advisory Agreements), including a merger or consolidation, without the consent of holders of our Class B Common Stock. See “Risk Related to our Business—We derive a substantial portion of our revenues from the Advisory Agreement that may not be renewed or may be terminated on short notice or upon a change in control of the Adviser Subsidiary.” Furthermore, at any time, Mr. Gladstone may sell or transfer all or part of his Class A Common Stock without the approval of the holders of our Class A Common Stock, subject to certain restrictions as described elsewhere in this prospectus. The prospective transfer of Class B Common Stock could lead to our Board of Directors being comprised of different members, and a new board of Directors may form funds that have investment objectives and governing terms that differ materially from those of our current funds. Similarly, a new owner could also have a different investment philosophy, employ investment professionals who are less experienced, be unsuccessful in identifying investment opportunities for our funds or have a track record that is not as successful as Mr. Gladstone’s track record. If any of the foregoing were to occur, we could experience difficulty in making new investments for our funds, and our business, our results of operations and our financial condition could materially suffer.

Upon the listing of our Class A Common Stock we will be a “controlled company” within the meaning of the Nasdaq rules and as a result, will qualify for, and intend to rely on certain of the “control company” exemptions from certain Nasdaq corporate governance requirements. Our stockholders will not have the same protection afforded to stockholders of other companies.

Under the Nasdaq rules, a company of which more than 50% of the voting power is held by another person or group of persons acting together is a “controlled company” and may elect not to comply with certain Nasdaq corporate governance requirements. Upon the consummation of this offering, Mr. Gladstone will hold        % of our voting power indirectly through TGC LTD, which will be the sole holder of our Class B Common Stock immediately following the consummation of this offering. As such, we are eligible to take advantage of the “control company” exemption. A “controlled company” may elect not to comply with certain Nasdaq Stock Market corporate governance requirements, including the requirements that (1) a majority of the Board of Directors consist of independent Directors, (2) compensation of officers be determined or recommended to the Board of Directors by a majority of its independent Directors or by a compensation committee that is composed entirely of independent Directors and (3) Directors nominees be selected or recommended by a majority of the independent Directors or by a nominating committee composed solely of independent Directors. Following this offering we intend to take advantage of the controlled company exemption relating to all three of the items enumerated above. Accordingly, our stockholders will not have the same protections afforded to stockholders of companies that are subject to all to the Nasdaq corporate governance requirements.

If we were deemed to be an “investment company” under the 1940 Act, applicable restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.

Absent an applicable exemption, an entity will generally be deemed to be an “investment company” for purposes of the 1940 Act if, among other things:

 

   

it is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities; or

 

   

it is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis.

We believe that we are engaged primarily in the business of providing asset management services and not in the business of investing, reinvesting or trading in securities. Although we are primarily engaged in a non-investment company business, some of the securities we may own and hold from time to time in our line of

 

48


Table of Contents

business may be deemed to be “investment securities,” as contemplated by Section 3(a)(1)(C) of the 1940 Act described in the second bullet point above. Such securities may include investments in the Gladstone BDCs advised by the Adviser Subsidiary or limited partnership interests in private investment funds. We intend to closely monitor any future investments to seek to ensure we remain below the 40% threshold set forth in Section 3(a)(1)(C) of the 1940 Act, as described in the second bullet point above, and/or that no more than 45% of our total assets (exclusive of U.S. government securities and cash items) consists of, and no more than 45% of our net income after taxes (for the last four fiscal quarters combined) is derived from securities as set forth in Rule 3a-1 under the 1940 Act. Accordingly, we do not believe we are, or following this offering will be, an inadvertent investment company and/or required to register as an investment company under the 1940 Act.

The 1940 Act and the rules thereunder contain detailed and substantive legal requirements that regulate the manner in which “investment companies” are permitted to conduct their business activities. Among other things, the 1940 Act and the rules thereunder limit or prohibit transactions with affiliates, impose limitations on the issuance of debt and equity securities, generally prohibit the issuance of options and impose certain burdensome governance and compliance requirements. We intend to conduct our operations so that we will not be deemed to be an investment company under the 1940 Act. If anything were to happen which would cause us to be deemed to be an investment company under the 1940 Act, requirements imposed by the 1940 Act, including limitations on our capital structure, ability to transact business with affiliates and ability to compensate key employees, could make it impractical for us to continue our business as currently conducted, impair the agreements and arrangements between and among us, our subsidiaries, funds and our executive officers, or any combination thereof, and materially adversely affect our business, financial condition and results of operations. In addition, we may be required to limit the amount of investments that we make or otherwise conduct our business in a manner that does not subject us to registration and other requirements of the 1940 Act; however, there is no guarantee that our efforts to avoid such status as an investment company will be successful.

We may be unable to deploy the proceeds of this offering.

We intend to use a portion of the proceeds from this offering to provide the initial capital to launch the Future Gladstone Funds and, possibly, invest additional amounts in Gladstone Acquisition. Our management believes it is in our best interests to avoid investments that would subject us to registration and regulation under the 1940 Act. Accordingly, management intends to conduct our business in a manner that would not subject us to registration and regulation under the 1940 Act. Therefore, our ability to deploy the proceeds from this offering will be restricted by limitations under the 1940 Act and may, for example, result in us acquiring securities in such funds that are not investment securities, such as general partnership interests.

In the event that Gladstone Acquisition successfully completes its Initial Business Combination, our management’s attention could be diverted, potentially resulting in disruption to our operations and harm to our results of operations.

Gladstone Acquisition was formed for the purpose of acquiring, merging with, engaging in capital stock exchange with, purchasing all or substantially all of the assets of, engaging in contractual arrangements, or engaging in any other similar business combination with a single operating entity, or one or more related or unrelated operating entities operating in any sector. The process of identifying suitable targets, and subsequently consummating a merger, acquisition or similar transaction with that entity, is time consuming and resource intensive. The pursuit of these potential transactions may divert the attention of our management away from existing or other future potential business opportunities, cause us to divert capital and other resources to such endeavors that may include the proceeds of this offering, and result in disruptions to our operations that may harm to our results of operations.

In the event that Gladstone Acquisition successfully completes its Initial Business Combination, it is likely that we will prioritize deployment of capital to Gladstone Acquisition rather than Gladstone Farming. Actual or perceived conflicts of interest may arise in the management and direction of Gladstone Acquisition and any of its potential targets, and other our current or future businesses. Further, should Gladstone Acquisition successfully

 

49


Table of Contents

consummate a business combination, we may not be able to successfully manage the combined business following the acquisition because of unforeseen complexity or costs.

Our business depends on the continued contributions made by David Gladstone, as our Chairman, President and Chief Executive Officer, the loss of who may result in a severe impediment to our business.

Our success is dependent upon the continued contributions made by our Chairman, President and Chief Executive Officer, David Gladstone. We rely on Mr. Gladstone’s extensive expertise in the real estate and financial industries when developing our strategy objectives. We currently do not maintain “Key Man” insurance to cover the resulting losses in the event that Mr. Gladstone should die or resign.

If Mr. Gladstone cannot serve the Company or is no longer willing to do so, we may not be able to find alternatives in a timely manner or at all. This would likely result in a severe damage to our business operations and would have an adverse material impact on our financial position and operational results. To continue as a viable operation, we may have to recruit and train replacement personnel at a higher cost.

Our investment in Gladstone Acquisition may not be successful if Gladstone Acquisition is unable to consummate an Initial Business Combination.

Gladstone Acquisition may not be able to find a suitable target business and complete its Initial Business Combination within 15 months from the closing of the SPAC IPO (or 18 months from the closing of its offering, if it extends the period of time to consummate a business combination, subject to its sponsor depositing additional funds into the applicable trust account). Gladstone Acquisition’s ability to complete its Initial Business Combination may be negatively impacted by general market conditions, volatility in the capital and debt markets and the other risks. For example, if the outbreak of COVID-19 continues to grow both in the U.S. and globally and, while the extent of the impact of the outbreak on Gladstone Acquisition will depend on future developments, it could limit Gladstone Acquisition’s ability to complete its Initial Business Combination, including as a result of increased market volatility, decreased market liquidity and third-party financing being unavailable on terms acceptable to it or at all. Additionally, the outbreak of COVID-19 may negatively impact businesses Gladstone Acquisition may seek to acquire. If Gladstone Acquisition has not completed its Initial Business Combination within such time period, it will: (i) cease all operations except for the purpose of winding up, (ii) as promptly as reasonably possible but not more than ten business days thereafter, redeem the public shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the trust account, including interest earned on the funds held in the trust account and not previously released to it to pay its taxes up to $100,000 of interest to pay dissolution expenses), divided by the number of then outstanding public shares, which redemption will completely extinguish public stockholders’ rights as stockholders (including the right to receive further liquidating distributions, if any), subject to applicable law and (iii) as promptly as reasonably possible following such redemption, subject to the approval of its remaining stockholders and board of directors, liquidate and dissolve, subject in each case, to its obligations under Delaware law to provide for claims of creditors and the requirements of other applicable law. In such case, we may lose some or all of our investment in Gladstone Acquisition.

Since Sponsor and David Gladstone will lose their entire investment in Gladstone Acquisition if Gladstone Acquisition’s Initial Business Combination is not completed (other than with respect to public shares they may acquire), a conflict of interest may arise in determining whether a particular business combination target is appropriate for Gladstone Acquisition’s Initial Business Combination.

In January 2021 Sponsor paid $25,000 in exchange for 2,875,000 founder shares. Prior to the initial investment in Gladstone Acquisition of $25,000 by the Sponsor, Gladstone Acquisition had no assets, tangible or intangible. The purchase price of the founder shares was determined by dividing the amount of cash contributed to Gladstone Acquisition by the number of founder shares issued.

 

50


Table of Contents

The number of founder shares outstanding was determined based on the expectation that the total size of Gladstone Acquisition’s offering would be a maximum of 11,500,000 units if the underwriters’ over-allotment option was exercised in full, and therefore that such founder shares would represent 20% of the outstanding shares (excluding the representative shares and the private placement warrants and underlying securities) after Gladstone Acquisition’s offering. Sponsor forfeited 251,880 of the founder shares in connection with the underwriters’ partial exercise of the over-allotment. The founder shares will be worthless if Gladstone Acquisition does not complete an Initial Business Combination. In addition, Sponsor purchased an aggregate of 4,298,496 private placement warrants, each exercisable to purchase one share of SPAC Common Stock at $11.50 per share, at a price of $1.00 per warrant, that will also be worthless if Gladstone Acquisition does not complete its Initial Business Combination. These personal and financial interests of David Gladstone and members of Sponsor may influence their motivation in identifying and selecting a target business combination, completing an Initial Business Combination and influencing the operation of the business following the Initial Business Combination. David Gladstone is also an executive officer of Gladstone Acquisition. This risk may become more acute as the 15th month anniversary of the closing of Gladstone Acquisition’s offering (or 18th month anniversary from the closing of Gladstone Acquisition’s offering, if Gladstone Acquisition extends the period of time to consummate a business combination, subject to Sponsor depositing additional funds into the trust account) nears, which is the deadline for Gladstone Acquisition’s completion of an Initial Business Combination.

Gladstone Acquisition may be unable to obtain additional financing to complete its Initial Business Combination or to fund the operations and growth of a target business.

Gladstone Acquisition has not selected any specific business combination target but intends to target businesses with enterprise values that are greater than it could acquire with the net proceeds of its initial public offering and the sale of private placement warrants. As a result, if the cash portion of the purchase price exceeds the amount available from the trust account, net of amounts needed to satisfy any redemption by public shareholders, Gladstone Acquisition may be required to seek additional financing to complete such proposed Initial Business Combination. There is no guarantee that such financing will be available on acceptable terms, if at all. To the extent that additional financing proves to be unavailable when needed to complete an Initial Business Combination, we may decide to invest further in Gladstone Acquisition including through, but not limited to, a private placement (“PIPE investment”). The potential amount of any such investments are unknown at this time. In addition, even if Gladstone Acquisition does not need additional financing to complete its Initial Business Combination, it may require such financing to fund the operations or growth of the target business.

The executive officers, directors, security holders of Gladstone Acquisition and their respective affiliates may have competitive pecuniary interests that conflict with Gladstone Acquisition’s interests.

In connection with the formation of Gladstone Acquisition, we did not adopt a policy that expressly prohibits its directors, executive officers, security holders or affiliates from having a direct or indirect pecuniary or financial interest in any investment to be acquired or disposed of by Gladstone Acquisition or in any transaction to which Gladstone Acquisition is a party or has an interest. Further, Gladstone Acquisition may enter into a business combination with a target business that is affiliated with us or our or its directors or executive officers. Neither we nor Gladstone Acquisition has a policy that expressly prohibits any such persons from engaging for their own account in business activities of the types conducted by Gladstone Acquisition. Accordingly, such persons or entities may have a conflict between their interests and Gladstone Acquisition’s.

The personal and financial interests of Gladstone Acquisition’s directors and officers may influence their motivation in timely identifying and selecting a target business and completing a business combination. Consequently, Gladstone Acquisition’s directors’ and officers’ discretion in identifying and selecting a suitable target business may result in a conflict of interest when determining whether the terms, conditions and timing of a particular business combination are appropriate and in Gladstone Acquisition’s stockholders’ best interest.

If this were the case, it would be a breach of their fiduciary duties as a matter of Delaware law and Gladstone Acquisition or its stockholders might have a claim against such individuals for infringing on our

 

51


Table of Contents

stockholders’ rights. Any such action by the directors and officers of Gladstone Acquisition, or the perception that such action may occur, might harm our reputation and have a material adverse effect on our financial condition or results of operations. In addition, we might not ultimately be successful in any claim we may make against them for such reason.

Risks Related to this Offering and Ownership of our Class A Common Stock

We will have broad discretion in the use of the net proceeds to us from this offering and may not use them effectively.

We intend to use a portion of the offering proceeds, after the payment of commissions, fees and expenses, to launch of the Future Gladstone Funds. While we have established the general investment objectives of each Future Gladstone Fund as described elsewhere in this prospectus, the final terms of each Future Gladstone Fund, including the terms of the investment advisory and incentive fees to be payable to us under an investment advisory agreement will be determined in connection with the launch of such fund. As such, you will be unable to evaluate the final transaction terms concerning such Future Gladstone Fund before we make our investment of seed capital. This increases the risk that we may not generate the returns that you seek by investing in the Class A Common Stock.

Furthermore, we will have broad discretion in the application of the net proceeds to us from this offering, including for any of the purposes described in the section titled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, our ultimate use may vary substantially from our currently intended use. Investors will need to rely upon the judgment of our management with respect to the use of proceeds. Pending use, we may invest the net proceeds from this offering in government securities, certain publicly traded securities or in medium-term liquid bonds that have a first lien. If we do not use the net proceeds that we receive in this offering effectively, our business, financial condition, results of operations, and prospects could be harmed and the market price of our Class A Common Stock could decline.

You will experience immediate and substantial dilution in the net tangible book value of the shares of Class A Common Stock you purchase in this offering.

The initial public offering price of our Class A Common Stock is substantially higher than the pro forma net tangible book value per share of our common stock immediately after this offering. If you purchase shares of our Class A Common Stock in this offering, you will suffer immediate dilution of $         per share, or $         per share if the underwriters exercise their over-allotment option in full, representing the difference between our pro forma net tangible book value per share as of                after giving effect to the sale of Class A Common Stock in this offering and the public offering price of $        per share. See the section titled “Dilution.”

We intend to pay regular dividends to our holders of our Class A and Class B Common Stock, but our ability to do so may be limited by our holding company structure, applicable provisions of law and contractual restrictions.

After consummation of this offering, we intend to pay dividends on a monthly basis. We will be a holding company and will have no material assets other than the ownership of its subsidiaries. We currently have no independent means of generating revenue. Accordingly, we will rely on revenue generated by our wholly-owned subsidiaries.

The declaration and payment of any future dividends will be at the sole discretion of our Board of Directors, which may change our dividend policy at any time. Our Board of Directors will take into account general economic and business conditions, our strategic plans and prospects, our business and investment opportunities,

 

52


Table of Contents

our financial condition and operating results, working capital requirements and anticipated cash needs, contractual restrictions and obligations, including restrictions under our revolving credit facility, legal, tax and regulatory restrictions, restrictions or other implications on the payment of dividends by us to holders of our Class A and Class B Common Stock or by our subsidiaries to us and such other factors as our Board of Directors may deem relevant.

We are an “emerging growth company,” and we cannot be certain if the reduced reporting and disclosure requirements applicable to emerging growth companies will make our Class A Common Stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including the auditor attestation requirements of Section 404, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Pursuant to Section 107 of the JOBS Act, as an emerging growth company, we have elected to use the extended transition period for complying with new or revised accounting standards until those standards would otherwise apply to private companies. As a result, our consolidated financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies, which may make our Class A Common Stock less attractive to investors. In addition, if we cease to be an emerging growth company, we will no longer be able to use the extended transition period for complying with new or revised accounting standards.

We will remain an emerging growth company until the earliest of: (1) the last day of the fiscal year following the fifth anniversary of this offering; (2) the last day of the first fiscal year in which our annual gross revenue is $1.07 billion or more; (3) the date on which we have, during the previous rolling three-year period, issued more than $1.0 billion in non-convertible debt securities; and (4) the last day of the fiscal year in which the market value of our Class A Common Stock held by non-affiliates exceeded $700 million as of the last day of the second fiscal quarter of such fiscal year.

We cannot predict if investors will find our Class A Common Stock less attractive if we choose to rely on these exemptions. For example, if we do not adopt a new or revised accounting standard, our future results of operations may not be as comparable to the results of operations of certain other companies in our industry that adopted such standards. If some investors find our Class A Common Stock less attractive as a result, there may be a less active trading market for our Class A Common Stock and our stock price may be more volatile.

If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, the Sarbanes-Oxley Act and the listing standards of Nasdaq. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. We have expended, and anticipate that we will continue to expend, significant resources in order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting.

 

53


Table of Contents

Our current controls and any new controls that we develop may become inadequate because of changes in the conditions in our business, including increased complexity resulting from our international expansion. Further, weaknesses in our disclosure controls or our internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting could also adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely adversely affect the market price of our Class A Common Stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on Nasdaq. We are not currently required to comply with the SEC rules that implement Section 404 of the Sarbanes-Oxley Act and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. As a public company, we will be required to provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second annual report on Form 10-K.

Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company.” At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed or operating. Any failure to maintain effective disclosure controls and internal control over financial reporting could have an adverse effect on our business, results of operations and financial condition and could cause a decline in the market price of our Class A Common Stock.

We have identified a material weakness in our internal control over financial reporting, and we may identify additional material weaknesses in the future or otherwise fail to maintain effective internal control over financial reporting, which may result in material misstatements of our financial statements or cause us to fail to meet our periodic reporting obligations, impact investor confidence and the price of our common stock or cause our access to the capital markets to be impaired.

During the quarter ended September 30, 2021, we identified a material weakness in our internal control over financial reporting as we did not design and maintain effective controls relating to accounting for significant non-recurring equity transactions, including proper consolidation and presentation and disclosure. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

The material weakness we identified resulted in a restatement to reclassify a portion of Gladstone Acquisition’s balance sheet from additional paid-in capital to redeemable noncontrolling interest. This reclassification was recorded prior to the issuance of standalone Gladstone Acquisition financial statements and the Company’s consolidated financial statements both as of and for the period ended September 30, 2021.

In addition, Sponsor effected an audit adjustment to consolidate and eliminate intercompany transactions with Gladstone Acquisition, impacting cash, prepaid expenses, cash held in trust account, accounts payable and accrued expenses, deferred underwriting discount, common stock of subsidiary, noncontrolling interest investment in affiliates and, investment in warrants on the balance sheet; and, other income, professional services, net loss attributable to noncontrolling interest, equity in loss on equity method investment and unrealized loss on marketable securities on the statement of operations. These adjustments were recorded prior to the issuance of the Company’s consolidated financial statements as of and for the period ended September 30, 2021.

 

54


Table of Contents

Additionally, this material weakness could result in a misstatement of the aforementioned accounts that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

Any failure to maintain effective internal control could adversely impact our ability to report our financial position and results from operations on a timely and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations. Likewise, if our financial statements are not filed on a timely and accurate basis, we could be subject to sanctions or investigations by the stock exchange on which our Class A common stock is listed, the SEC or other regulatory authorities. In either case, there could result a material adverse effect on our business. Ineffective internal control over financial reporting could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock. Restated financial statements and failures in internal control may also cause us to fail to meet reporting obligations, negatively affect investor confidence in our management and the accuracy of our financial statements and disclosures, or result in adverse publicity and concerns from investors, any of which could have a negative effect on the price of our securities, subject us to regulatory investigations and penalties or stockholder litigation, and have a material adverse impact on our financial condition.

While the adjustments to correct the accounting have been recorded, the material weakness will not be considered remediated until management completes the design and implementation of the measures necessary to remediate the deficiency and the controls operate for a sufficient period of time and management has concluded, through testing, that these controls are effective. We can give no assurance that the measures we plan to take in the future will remediate the material weakness identified or that any additional material weaknesses or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls.

Our stock price may be volatile, and the value of our Class A Common Stock may decline.

The market price of our Class A Common Stock may be highly volatile and may fluctuate or decline substantially as a result of a variety of factors, some of which are beyond our control, including:

 

   

variations in our quarterly operating results or dividends, if any, to stockholders;

 

   

additions or departures of key management personnel;

 

   

failure to meet analysts’ earnings estimates;

 

   

publication of research reports about our industry;

 

   

commentary by investors on the prospects for our business and/or our Class A Common Stock on the internet, including blogs, articles and message board, and/or social media and resulting in trading of our Class A Common Stock;

 

   

unusual trading in our Class A Common Stock or securities derivative thereof, including pursuant to naked, or uncovered, short positions or “short squeezes;”

 

   

litigation and government investigations;

 

   

changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business;

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

   

adverse market reaction to any indebtedness we may incur or securities we may issue in the future;

 

   

changes in market valuations of similar companies or speculation in the press or investment community;

 

   

announcements by our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments;

 

55


Table of Contents
   

adverse publicity about the industries we participate in or individual scandals;

 

   

significant data breaches, disruptions to or other similar incidents;

 

   

changes in the anticipated future size and growth rate of our markets; and

 

   

economic and market conditions in general, or in our industry in particular.

Broad market and industry fluctuations, as well as general economic, political, regulatory, and market conditions, may also negatively impact the market price of our Class A Common Stock. In the past, companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future, which could result in substantial expenses and divert our management’s attention.

Our issuance of additional capital stock in connection with financings, acquisitions, our equity incentive plans, or otherwise will dilute all other stockholders.

We expect to issue additional capital stock in the future that will result in dilution to all other stockholders. We expect to grant equity awards under our equity incentive plans. We may also raise capital through equity financings in the future. As part of our business strategy, we may acquire companies and issue equity securities to pay for any such acquisition. Any such issuances of additional capital stock may cause stockholders to experience significant dilution of their ownership interests and the per share value of our Class A Common Stock to decline.

We have a significant number of shares of our Class A Common Stock issuable upon exchange of our outstanding Class B Common Stock, and the issuance of such shares upon exchange may have a dilutive impact on holders of our Class A Common Stock and the value of the outstanding Class A Common Stock.

Our Class B Common Stock may be exchanged at any time for shares of our Class A Common Stock. Upon any such exchange of the Class B Common Stock, the equity interests of existing holders of our Class A Common Stock, as a percentage of the total number of the outstanding shares of our Class A Common Stock, and the net book value of such shares will be significantly diluted. As a result, existing holders of our Class A Common Stock could experience a substantial decline in the value of their investment. Although we anticipate the eventual exchange of all Class B Common Stock then outstanding, at the time of this offering, we cannot ascertain definitively the number of additional shares of Class A Common Stock that may be issued upon such exchange and therefore cannot estimate the full dilutive effect of the exchange.

No public market for our Class A Common Stock currently exists, and an active public trading market may not develop or be sustained following this offering.

No public market for our Class A Common Stock currently exists. An active public trading market for our Class A Common Stock may not develop following the completion of this offering or, if developed, it may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

Future sales of our Class A Common Stock in the public market could cause the market price of our Class A Common Stock to decline.

Sales of a substantial number of shares of our Class A Common Stock in the public market following the completion of this offering, or the perception that these sales might occur, could depress the market price of our

 

56


Table of Contents

Class A Common Stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the timing of or the effect that such sales may have on the prevailing market price of our Class A Common Stock.

All of the Class A Common Stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act, except for any shares held by our affiliates as defined in Rule 144 under the Securities Act (“Rule 144”). In addition, prior to the completion of this offering we intend to enter into a registration rights agreement pursuant to which we will grant demand and piggyback registration rights to TGC LTD and David Gladstone covering                  shares of Class B common stock at closing of this offering. See “Certain Relationships and Related-Party Transactions—Registration Rights Agreement.

All of our Directors and executive officers and the holders of substantially all of our Class B Common Stock and securities exercisable for, or convertible into, our Class A Common Stock outstanding immediately on the closing of this offering, are subject to lock-up agreements with the underwriters or agreements with market stand-off provisions with us pursuant to which they have agreed that they will not, and will not publicly disclose an intention to, during the period ending              (such period, the “restricted period”), offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any of our shares of common stock, any options or warrants to purchase any of our shares of common stock or any securities convertible into or exchangeable for or that represent the right to receive shares of our common stock or enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of our common stock; provided that the Representative on behalf of the underwriters may release any of the securities subject to these lock-up agreements at any time, subject to the applicable notice requirements.

In addition, the restricted period may be shortened with respect to a portion of the locked-up securities held by certain lock-up parties, and the lock-up agreements are subject to a number of exceptions. These agreements are further described in the sections titled “Shares Eligible for Future Sale” and “Underwriting.” If not earlier released, all of the shares of Class A Common Stock not sold in this offering will become eligible for sale upon expiration of the restricted period, except for any shares held by our affiliates as defined in Rule 144.

If securities or industry analysts do not publish research or publish unfavorable or inaccurate research about our business, the market price and trading volume of our Class A Common Stock could decline.

The market price and trading volume of our Class A Common Stock following the completion of this offering will be heavily influenced by the way analysts interpret our financial information and other disclosures. We do not have control over these analysts. If few securities analysts commence coverage of us, or if industry analysts cease coverage of us, our stock price would be negatively affected. If securities or industry analysts do not publish research or reports about our business, downgrade our Class A Common Stock, or publish negative reports about our business, our stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our Class A Common Stock could decrease, which might cause our stock price to decline and could decrease the trading volume of our Class A Common Stock.

The requirements of being a public company may strain our resources and divert management’s attention and affect our ability to attract and retain key talent.

As a public entity, we are subject to the reporting requirements of the Exchange Act and requirements of the Sarbanes-Oxley Act. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal controls, significant resources and management oversight are required. We are in the process of developing the procedures, processes, policies and

 

57


Table of Contents

practices for the purpose of addressing the standards and requirements applicable to public companies. Compliance with the additional requirements of being a public company may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flow

These laws and regulations to which we will be subject as a public company also could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common shares, fines, sanctions and other regulatory action and potentially litigation. As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company, which we expect to further increase after we are no longer an “emerging growth company.”

Our amended and restated certificate of incorporation will, to the extent permitted by applicable law, contain provisions renouncing our interest and expectation to participate in certain corporate opportunities identified or presented to certain of our officers, directors and subsidiaries.

We, our officers and directors and certain of our subsidiaries are in the business of providing investment advisory services and our officers and directors and certain of our subsidiaries may hold, and may, from time to time in the future, acquire interests in or provide advice to businesses that directly or indirectly compete with certain portions of our business. Our amended and restated certificate of incorporation will provide that we, on our behalf and on behalf of our subsidiaries, renounce, to the fullest extent permitted by Delaware or other applicable law, any interest or expectancy in, or in being offered an opportunity to participate in, corporate opportunities that are from time to time presented to, or acquired, created or developed by, or that otherwise come into the possession of, any of our non-employee directors, even if the opportunity is one that we might reasonably be deemed to have pursued or had the ability or desire to pursue if granted the opportunity to do so. Our officers and directors and certain of our subsidiaries may also pursue acquisitions that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. As a result, these arrangements could adversely affect our business, results of operations, financial condition or prospects if attractive business opportunities are allocated to any of our officers, directors or certain of our subsidiaries instead of to us. See “Description of Capital Stock—Corporate Opportunities.”

We may consummate future issuances of debt or preferred equity securities, which would rank senior to the Class A Common Stock, having dividend and/or liquidation rights that are senior to the rights of the holders of our Class A Common Stock. Issuances of such senior securities may adversely affect the market price of the Class A Common Stock, the value of your investment and restrict the ability of holders of our Class A Common Stock to receive dividends and/or liquidation rights.

Our certificate of incorporation permits us to issue shares of more than one series of preferred stock, which could rank senior to, and grant rights, preferences and privileges more favorable than those of, our Class A Common Stock. In the future, we may attempt to increase our capital resources by making offerings of such preferred equity securities or issuing debt securities. Upon liquidation, holders of our preferred equity securities, holders of our debt securities or creditors with respect to other borrowings, including any credit facility, would receive a distribution of our available assets in full prior to the holders of our Class A Common Stock. Additionally, our Board of Directors will likely be prohibited from declaring monthly dividend payments to the holders of our Class A Common Stock to the extent there are any accrued and unpaid dividends or interest payments owing on any outstanding preferred equity or debt securities, respectively. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, holders of our Class A Common Stock bear the risk of our future offerings reducing the per share trading price of our Class A Common Stock and diluting their interest in us.

 

58


Table of Contents

Our charter documents will designate a state or federal court located within the State of Delaware as the exclusive forum for substantially all disputes between us and our stockholders, and that the federal district courts will be the exclusive forum for claims under the Securities Act of 1933, which could limit our stockholders’ ability to choose the judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated certificate of incorporation, which will become effective immediately prior to the completion of this offering, will provide that, unless we consent in writing to the selection of an alternative forum, to the fullest extent permitted by law, the sole and exclusive forum for the following types of actions and proceedings under Delaware statutory or common law: (1) any derivative action or proceeding brought on our behalf; (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders; (3) any action arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws or (4) any other action asserting a claim that is governed by the internal affairs doctrine shall be the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware), in all cases subject to the court having jurisdiction over indispensable parties named as defendants. This exclusive forum provision will not apply to any causes of action arising under the Securities Act or the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction.

In addition, our amended and restated certificate of incorporation to be effective immediately prior to the closing of this offering will provide that, unless we consent in writing to the selection of an alternative forum, to the fullest extent permitted by law, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. This provision is intended to benefit, and may be enforced by us, our officers and directors, the underwriters to any offering giving rise to such complaint, and any other professional entity whose profession gives authority to a statement made by that person or entity and who has prepared or certified any part of the documents underlying the offering. Any person or entity purchasing or otherwise acquiring any interest in any of our securities shall be deemed to have notice of and consented to this provision. This exclusive-forum provision may limit a stockholder’s ability to bring a claim in a judicial forum of its choosing for disputes with us or our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and other employees.

If a court were to find the exclusive-forum provision in our charter documents to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could harm our results of operations.

 

59


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. Forward-looking statements are neither historical facts nor assurances of future performance. Instead they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Forward-looking statements are typically identified by words such as “believe,” “expect,” “anticipate,” “intend,” “outlook,” “target,” “estimate,” “forecast,” “project,” by future conditional verbs such as “will,” “should,” “would,” “could” or “may,” or by variations of such words or by similar expressions. These statements are not historical facts, but instead represent our current expectations, plans or forecasts and are based on the beliefs and assumptions of management and the information available to management at the time that these disclosures were prepared.

Forward-looking statements are subject to numerous assumptions, risks (both known and unknown) and uncertainties, and other factors which change over time. Such factors include:

 

   

reductions in assets under management by our Adviser Subsidiary based on investment performance, adverse changes in the economy and the capital markets and other factors, including the COVID-19 pandemic;

 

   

the loss of an Advisory Agreement with an Existing Gladstone Fund;

 

   

our ability to maintain historical returns of the Existing Gladstone Funds and sustain our historical growth;

 

   

the impact of COVID-19 generally and on the economy, the capital markets our business and the portfolio companies of the Gladstone Funds, including the measures taken by governmental authorities to address it;

 

   

our ability to retain key investment professionals or members of our senior management team;

 

   

our reliance on the technology systems supporting our operations;

 

   

availability of capital to the Existing Gladstone Funds;

 

   

our ability to successfully launch and grow the Future Gladstone Funds and develop new strategies and funds in the future;

 

   

the concentration of our funds’ investments in lower middle market businesses and real estate in the United States;

 

   

the ability of our investment teams to identify appropriate investment opportunities for our funds;

 

   

our exposure to potential litigation (including administrative or tax proceedings) or regulatory actions;

 

   

our ability to implement effective information and cyber security policies, procedures and capabilities;

 

   

our determination that we are not required to register as an “investment company” under the 1940 Act;

 

   

the fluctuation of our expenses and results of operations;

 

   

our ability to respond to recent trends in the asset management industry;

 

   

our understanding of our competition and our ability to compete effectively;

 

   

changes in governmental regulation (including regulation specific to the asset management industry), tax rates and similar matters and our ability to respond to such changes;

 

   

the degree and nature of competition in the asset management industry;

 

   

the level of control over us retained by David Gladstone;

 

   

our ability to sell shares in this offering in the amounts and on the terms contemplated, or at all;

 

60


Table of Contents
   

our ability to deploy the proceeds of this offering and any changes to our business as a result of the proposed use of proceeds;

 

   

the ability of Gladstone Acquisition to complete its Initial Business Combination within 18 months from the closing of the SPAC IPO (which will be February 9, 2023), which would otherwise require us to write-off our investment in Gladstone Acquisition; and

 

   

other risks and factors listed under “Risk Factors” and elsewhere in this prospectus.

These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this prospectus. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Therefore, you should not place undue reliance on these forward-looking statements. Forward-looking statements speak only as of the date they are made. We do not assume any duty and do not undertake to update our forward-looking statements, whether as a result of new information, future developments or otherwise, except as required by law. Because forward-looking statements are subject to assumptions, risks, uncertainties, and other factors, actual results or future events could differ, possibly materially, from those that we anticipated in our forward-looking statements and future results could differ materially from our historical performance.

 

61


Table of Contents

MARKET AND INDUSTRY DATA AND FORECASTS

This prospectus includes market and industry data and forecasts that we have derived from independent consultant reports, publicly available information, various industry publications, other published industry sources and our internal data, estimates and forecasts. Independent consultant reports, industry publications and other published industry sources generally indicate that the information contained therein was obtained from sources believed to be reliable.

Our internal data, estimates and forecasts are based upon information obtained from investors in our funds, partners, trade and business organizations and other contacts in the markets in which we operate and our management’s understanding of industry conditions. While we are not aware of any misstatements regarding any market, industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors.

 

62


Table of Contents

ORGANIZATIONAL STRUCTURE

Overview

The diagram below depicts our organizational structure immediately following the offering.

 

 

LOGO

 

Gladstone Management is a registered investment adviser and has a contract with each of the Existing

 

Gladstone Funds and is expected to have a similar contract with each of the Future Gladstone Funds.

 

Gladstone Administration has a contract to provide services to each of the Existing Gladstone Funds and is expected to have a similar contract with each of the Future Gladstone Funds.

 

 

 

LOGO

 

(1)   Following the offering the Company and its directors and executive officers are expected to own between 20% and 35% of each of the Future Gladstone Funds upon establishment.

(2)   The Company’s directors and executive officers own approximately 5.1% of the outstanding common stock of GLAD.

(3)   The Company’s directors and executive officers own approximately 2.5% of the outstanding common stock of GAIN and other affiliates own approximately 0.5% of the outstanding common stock of GAIN.

(4)   The Company’s directors and executive officers own approximately 1.5% of the outstanding common stock of GOOD and other affiliates own approximately 0.5% of the outstanding common stock of GOOD.

(5)   The Company’s directors and executive officers own approximately 7.4% and other affiliates own approximately 8.6% of the outstanding common stock of LAND.

 

63


Table of Contents

Ownership of the Company

We were formed as a Delaware corporation on December 7, 2009 to continue the asset management business we conducted through predecessor entities since 2001. We are currently managed by our Board of Directors, who are elected by TGC LTD, which owned 100% of our capital stock immediately prior to this offering. Immediately following this offering, TGC LTD will own        % of the voting power of our capital stock as the sole holder of Class B Common Stock. TGC LTD currently is, and will remain upon completion of this offering, wholly owned and controlled by our Chairman, President and Chief Executive Officer, David Gladstone.

Assuming an initial public offering price of $                 per share of Class A Common Stock, immediately following the offering:

 

   

Mr. Gladstone will not directly or indirectly own any shares of Class A Common Stock;

 

   

Mr. Gladstone, through TGC LTD, will indirectly hold                  shares, or 100%, of the Class B Common Stock, which equals         % of our shares of Class A Common Stock and Class B Common Stock on a combined basis (or         % of Class A Common Stock and Class B Common Stock on a combined basis if the underwriters exercise in full their overallotment option to purchase additional Class A Common Stock), and accounts for         % of the voting power of our shares of Class A Common Stock and Class B Common Stock on a combined basis (or         % of Class A Common Stock and Class B Common Stock on a combined basis if the underwriters exercise in full their overallotment option to purchase additional Class A Common Stock);

 

   

our Directors, officers and employees (other than Mr. Gladstone) who purchase through the directed share program will hold approximately                 shares, or         %, of Class A Common Stock, which equals         % of our shares of Class A Common Stock and Class B Common Stock on a combined basis (or         % of Class A Common Stock and Class B Common Stock on a combined basis if the underwriters exercise in full their overallotment option to purchase additional Class A Common Stock), and accounts for         % of the voting power of our shares of Class A Common Stock and Class B Common Stock on a combined basis (or         % of Class A Common Stock and Class B Common Stock on a combined basis if the underwriters exercise in full their overallotment option to purchase additional Class A Common Stock); and

 

   

investors in this offering (other than Mr. Gladstone and our other Directors, officers and employees who purchase through the directed share program and assuming all shares reserved for the program are sold) will hold an aggregate of                shares of Class A Common Stock, which equals         % of our shares of Class A Common Stock and Class B Common Stock on a combined basis (or         % of Class A Common Stock and Class B Common Stock on a combined basis if the underwriters exercise in full their overallotment option to purchase additional Class A Common Stock), and accounts for         % of the voting power of our shares of Class A Common Stock and Class B Common Stock on a combined basis (or         % of Class A Common Stock and Class B Common Stock on a combined basis if the underwriters exercise in full their overallotment option to purchase additional Class A Common Stock).

Accordingly, on the few matters that may be submitted for a vote of the Class A Common Stock, specifically those matters which constitute a variation of the rights of Class A Common Stock as set out in our amended and restated certificate of incorporation, investors in this offering (including those that purchase through the directed share program) will collectively have         % of the voting power of our shares of Class A Common Stock and Class B Common Stock on a combined basis (or         % of Class A Common Stock and Class B Common Stock on a combined basis if the underwriters exercise in full their overallotment option to purchase additional Class A Common Stock), and Mr. Gladstone, our Chairman, President and Chief Executive Officer, will indirectly retain the remaining         % of the voting power of our shares of Class A Common Stock and Class B Common Stock on a combined basis (or         % of Class A Common Stock and Class B Common

 

64


Table of Contents

Stock on a combined basis if the underwriters exercise in full their overallotment option to purchase additional Class A Common Stock)

Organization of Subsidiaries

We are, and since our formation our only activities have been as, a holding company that operates and controls the business and affairs of our subsidiaries, including the Adviser Subsidiary, the Broker-Dealer Subsidiary, and the Administrator Subsidiary.

Ownership Interest in Funds

The following table sets forth as of December 31, 2021 the current ownership of voting common stock in each Existing Gladstone Fund by our executive officers and Directors:

 

Existing Gladstone Fund

   Percentage of outstanding
common stock held
by the Company’s
executive officers
and Directors
 

GLAD

     5.1

GAIN

     2.5

GOOD

     1.5

LAND

     7.4

 

65


Table of Contents

USE OF PROCEEDS

We estimate that our net proceeds from this offering, at an assumed initial public offering price of $                per share of Class A Common Stock, the midpoint of the price range on the cover of this prospectus, and after deducting estimated underwriting discounts and expenses, will be approximately $         million (or $        million if the underwriters exercise in full their overallotment option to purchase additional Class A Common Stock).

We intend to use the net proceeds from this offering for growth strategies, which are expected to include: (i) providing capital to the Existing Gladstone Funds and the Future Gladstone Funds, including through general partnership interests; (ii) providing additional capital to Gladstone Acquisition in connection with its Initial Business Combination; (iii) using proceeds for working capital to supplement our existing line of credit; and (iv) for other general corporate purposes. We will make investments in the Existing Gladstone Funds and the Future Gladstone Funds solely to the extent that we are not required to register as an investment company under the 1940 Act. No portion of the proceeds will be used to redeem or repurchase shares of our capital stock outstanding prior to this offering or to compensate our officers or Directors.

We intend to use up to $        million of the net proceeds from this offering to provide capital to the Existing Gladstone Funds and the Future Gladstone Funds and up to $        million of the net proceeds from this offering to provide additional capital to Gladstone Acquisition with the remainder for working capital to supplement our existing line of credit; investing in other general partnership interests or other controlling interests in other new affiliated funds or other growth initiatives either directly or through our Adviser Subsidiary; providing additional capital to the Existing Gladstone Funds; and for other general corporate purposes. Once launched, Gladstone Retail will seek to purchase and own retail properties, which we define as locations that are open to the public and provide a product or service, and Gladstone Farming will seek to purchase agricultural operations across the United States that are focused on high-value crops such as organic vegetables, fruits and nuts and those of which may be converted to organic and farming related operations and businesses that support the farming industry. Gladstone Partners will seek to invest alone or co-invest in new portfolio companies with the Gladstone BDCs. In addition, we may invest additional capital in Gladstone Acquisition in connection with its Initial Business Combination. In the event that Gladstone Acquisition successfully completes its Initial Business Combination, it is likely that we will prioritize Gladstone Acquisition rather than Gladstone Farming.

There is no assurance that we will be able to utilize the net proceeds of this offering in the manner or amounts contemplated herein, or at all. In particular, as a result of the onset of the COVID-19 pandemic and the rapid pace of related developments, prospective opportunities for each of the Future Gladstone Funds are evolving and may result in a change in the priority in which we deploy proceeds from this offering as we continue to evaluate ways to maximize the prospects of ongoing success for our business. We may determine not to pursue one or more of the above uses of proceeds. Pending application of any portion of the net proceeds of this offering as described above, we intend to acquire in government securities and, provided we do not become required to register as an investment company under the 1940 Act, certain publicly traded securities or in medium-term liquid bonds that have a first lien.

 

66


Table of Contents

CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2021: (i) on a historical basis and (ii) on pro forma basis giving effect to the issuance of                 shares of Class A Common Stock in this offering at the assumed initial public offering price of $                 per share (the midpoint of the price range on the cover of this prospectus) less estimated underwriting discounts and the payment of offering expenses of approximately $                 million.

You should read this table together with the other information contained in this prospectus, including, “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical financial statements and related notes included elsewhere in this prospectus.

 

     As of December 31, 2021  
     Actual      As-Adjusted  

Cash and Cash Equivalents

   $ 43,581,330      $            
  

 

 

    

 

 

 

Loans Payable

   $ —        $    
  

 

 

    

 

 

 

Equity:

     

Common Stock, par value $0.01 per share (3,000 shares authorized, 100 shares issued and outstanding, actual; (no shares authorized, no shares issued and outstanding, pro forma)

     1     

Class A Common Stock of Gladstone Acquisition, $0.01 par value, (                 shares authorized, no shares issued and outstanding, actual;                  shares authorized,                  shares issued and outstanding, pro forma)

     21     

Class B Common Stock, par value $0.01 per share (                 shares authorized, no shares issued and outstanding, actual;                  shares authorized,                  shares issued and outstanding, pro forma)

     —       

Additional Paid-In Capital

     5,049     

Retained Earnings

     42,663,195     

Noncontrolling interest

     (6,889,455   
  

 

 

    

 

 

 

Total Stockholder’s Equity

     35,778,811     
  

 

 

    

 

 

 

Total Capitalization

   $ 35,778,811      $    
  

 

 

    

 

 

 

 

67


Table of Contents

DILUTION

If you invest in our Class A Common Stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our Class A Common Stock and the pro forma net tangible book value per share of our Class A Common Stock after this offering. Net tangible book value per share of Class A Common Stock is determined by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of Class A Common Stock deemed to be outstanding on a specified date. Dilution results from the fact that the per share offering price of our Class A Common Stock is substantially in excess of the book value per share attributable to the existing equity holders.

Our pro forma net tangible book value as of December 31, 2021 was approximately $        million, or $        per share of Class A Common Stock. Pro forma net tangible book value represents the amount of total tangible assets less total liabilities, and pro forma net tangible book value per share represents pro forma net tangible book value divided by the Class A Common Stock outstanding, after giving effect to the offering.

After giving effect to the sale of                 shares of Class A Common Stock in this offering at an assumed initial public offering price of $         per share (the midpoint of the price range on the cover of this prospectus) and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of December 31, 2021 would have been $         million, or $         per share. This represents an immediate increase in pro forma net tangible book value of $         per share to existing equity holders and an immediate dilution in net tangible book value of $         per share to investors in this offering.

The following table illustrates this dilution on a per share basis assuming the underwriters do not exercise their overallotment option to purchase additional shares:

 

Assumed initial public offering price per share of Class A Common Stock

   $            

Pro forma net tangible book value per share of Class A Common Stock as of December 31, 2021

  

Increase in pro forma net tangible book value per share of Class A Common Stock attributable to new investors

  

Pro forma net tangible book value per share of Class A Common Stock after this offering(1)

  

Dilution in pro forma net tangible book value per share of Class A Common Stock to new investors(1)

  

 

(1)

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the pro forma net tangible book value per share as of December 31, 2021 by $        , the pro forma net tangible book value per share after this offering by $         and the dilution in pro forma net tangible book value per share to new investors by $         , assuming the number of Class A Common Stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us. Similarly, each increase of 1,000,000 shares in the number of shares of Class A Common Stock offered by us would increase our pro forma net tangible book value by $         per share and decrease the immediate dilution to new investors by $        per share, and each decrease of 1,000,000 shares in the number of shares of Class A Common Stock offered by us would decrease our pro forma net tangible book value by $         per share and increase the immediate dilution to new investors by $        per share, in each case assuming the assumed initial public offering price of $         per share of Class A Common Stock remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

68


Table of Contents

The table above does not give effect to Class A Common Stock that may be issued upon exercise of the underwriters’ overallotment option to purchase additional shares or that may be granted under, or issued upon the exercise or settlement of awards that are granted under, our 2022 Equity Incentive Plan after this offering or the number of Class A Common Stock that may be issued in connection with the exchange of the Class B Common Stock. See “Executive Compensation—2022 Equity Incentive Plan” and “Description of Capital Stock—Common Stock—Conversion.”

 

69


Table of Contents

CASH DIVIDEND POLICY

Our intention is to distribute, by way of dividend, to holders of our Class A and Class B Common Stock on a monthly basis, an amount to be determined quarterly by our Board of Directors, based on the sum of: (i) distributions from our wholly-owned subsidiaries, which includes the fees earned by our Adviser Subsidiary and Broker-Dealer Subsidiary, after taxes, expenses and reserves, and (ii) and our ownership in any Future Gladstone Funds; after deducting such amounts as determined by our management to be necessary or appropriate to provide for the current and future conduct of our business, to make appropriate investments in our business, to comply with applicable law, to meet our debt obligations or to provide for future monthly dividends to holders of our Class A and Class B Common Stock. We expect that our first monthly dividend will be paid in                . We will have no material assets other than our ownership of all existing issued and outstanding shares of stock of our subsidiaries, future general partnership interests and other immaterial assets. As a result, we expect to fund dividends, if any, from cash distributions from our subsidiaries and from other interests we plan to own in our Future Gladstone Funds. The Company intends to distribute its net share of such distributions to holders of our Class A and Class B Common Stock on a pro rata and substantially identical basis by way of dividend. As more fully described under the section titled “Description of Capital Stock—Common Stock,” in the event that a cash dividend is declared on our Class A Common Stock, holders of our Class B Common Stock will be entitled to receive a substantially equal and pro rata dividend to be paid in cash, Class A Common Stock or a mix of Class A Common Stock and cash.

The declaration and payment of any dividends will be at the sole discretion of the Board of Directors of the Company, which may change its dividend policy or discontinue dividends at any time. In connection with the declaration of dividends, the Company will take into account the following factors, among others:

 

   

general economic and business conditions;

 

   

its strategic plans and prospects;

 

   

its business;

 

   

its financial condition and operating results, including cash position, net income and realizations on investments made by its funds;

 

   

working capital requirements and anticipated cash needs;

 

   

contractual restrictions and obligations, including restrictions under any credit facility;

 

   

legal, tax and regulatory restrictions;

 

   

restrictions and other implications on the payment of dividends to holders of our Class A and Class B Common Stock or by its subsidiaries to the Company; and

 

   

such other factors as the Board of Directors may deem relevant.

In addition, by paying dividends rather than investing that cash in our businesses, we might risk slowing the pace of our growth, or not having a sufficient amount of cash to fund our operations, acquisition opportunities or unanticipated capital expenditures, should the need arise.

 

70


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the historical consolidated financial statements and the related notes included elsewhere in this prospectus. The historical consolidated financial data discussed below reflect our historical results of operations and financial position.

The following discussion and analysis contains forward-looking statements that are subject to known and unknown risks and uncertainties. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those included in the section entitled “Risk Factors” contained elsewhere in this prospectus describing key risks associated with our business, operations and industry. Amounts and percentages presented throughout our discussion and analysis of financial condition and results of operations may reflect rounding adjustments and consequently totals may not appear to sum. The items discussed below have had significant effects on many items within our consolidated financial statements and affect the comparison of the current period’s activity with those of prior periods.

Overview

We are a leading alternative asset manager and provider of other administrative and financial services. We currently primarily provide these services to the four Existing Gladstone Funds, which are four publicly traded, Nasdaq-listed companies invested in alternative asset classes:

 

   

GLAD, a BDC, primarily invests in debt securities of established private lower middle market companies in the United States;

 

   

GAIN, a BDC, primarily invests in debt and equity securities of lower middle market private businesses operating in the United States (including in connection with management buyouts, recapitalizations or, to a lesser extent, refinancings of existing debt facilities);

 

   

GOOD, a REIT, focuses on acquiring, owning and managing primarily office and industrial properties; and

 

   

LAND, a REIT, focuses on acquiring, owning and leasing farmland.

We also are the sponsor and manager of Gladstone Acquisition, a SPAC that consummated its SPAC IPO on August 9, 2021 and that is pursuing an Initial Business Combination targeting farming-related operations and businesses that support the farming industry. Through our subsidiary Sponsor, we own approximately 19.69% of the equity interests of Gladstone Acquisition. In determining the accounting treatment of our equity interest in Gladstone Acquisition, management concluded that Gladstone Acquisition is a VIE as defined by ASC Topic 810, “Consolidation.” A VIE is an entity in which equity investors at risk lack the characteristics of a controlling financial interest. VIEs are consolidated by the primary beneficiary, the party who has both the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, as well as the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the entity. Sponsor is the primary beneficiary of Gladstone Acquisition as it has, through its equity interest, the right to receive benefits or the obligation to absorb losses from Gladstone Acquisition, as well as the power to direct a majority of the activities that significantly impact Gladstone Acquisition’s economic performance, including partnering transaction target identification. As such, Gladstone Acquisition is fully consolidated into our financial statements.

From August 9, 2021 through December 31, 2021, 19.69% of the net income and net assets of Gladstone Acquisition were consolidated within our financial statements as of and for the six months ended December 31, 2021. The remaining 80.31% of the consolidated net income and net assets of Gladstone Acquisition, representing the percentage of economic interest in Gladstone Acquisition held by the public stockholders of

 

71


Table of Contents

Gladstone Acquisition through their ownership of Gladstone Acquisition equity, were allocated to redeemable noncontrolling interest (“NCI”). All transactions between Gladstone Acquisition and Sponsor, as well as related financial statement impacts, eliminate in consolidation.

We generate revenue from fees earned pursuant to advisory, administrative, broker-dealer and other agreements our subsidiaries have with the Existing Gladstone Funds and to other affiliated entities. These fees are generated through:

 

   

the Adviser Subsidiary, an investment adviser registered with the SEC, which currently advises the Existing Gladstone Funds;

 

   

the Broker-Dealer Subsidiary, a broker dealer registered with FINRA and insured by the Securities Investor Protection Corporation (“SIPC”), which currently provides certain investment banking mortgage placement and dealer manager services to the Existing Gladstone Funds; and

 

   

the Administrator Subsidiary, which currently provides administrative services to the Existing Gladstone Funds, including accounting, valuation, legal, compliance, and other services.

Our assets under management have grown from approximately $132.2 million as of September 30, 2001 to approximately $4.0 billion as of December 31, 2021, representing a CAGR of 18% per year. Since the inception of GLAD in 2001 through December 31, 2021, the Existing Gladstone Funds have invested in 668 businesses or properties for an aggregate amount of approximately $7.1 billion and paid $1.4 billion in common stock dividends or distributions to their investors.

As of the date of this prospectus, we manage our operations on an aggregated, single segment basis for purposes of assessing performance and making operating decisions, and, accordingly, have only one reportable and operating segment. We provide asset management services through the Adviser Subsidiary and all of our revenues are generated within the United States.

Our Adviser Subsidiary has managed the Existing Gladstone Funds with a perspective of achieving successful growth over the long-term. In establishing and growing our various funds, and in determining the types of investments to be made by our funds, our management has consistently sought to focus on the best outcomes for our businesses and the Existing Gladstone Funds that we manage over a period of years, rather than on the short-term effect on our revenue, net income or cash flow. We intend to maintain this long-term focus after this offering. We believe that this approach will continue to significantly affect our revenue, net income and cash flow as a result of the timing of new investments and realizations of investments by the Existing Gladstone Funds, the Future Gladstone Funds and any other business or funds we may manage in the future.

Asset Management (Existing Gladstone Funds)

 

   

GLAD (BDC—Debt Securities of Private Companies): We are the adviser to GLAD, a BDC that primarily invests in debt securities of established private lower middle market companies in the U.S. GLAD was established in 2001 and is an externally managed, closed-end, non-diversified management investment company that has elected to be treated as a BDC under the 1940 Act. In addition, it has elected to be treated as a RIC for federal tax purposes under the Code.

 

   

GAIN (BDC—Debt and Equity Securities (including Buyouts) of Private Companies). We are the adviser to GAIN, a BDC that invests in debt and equity securities of lower middle market private businesses operating in the U.S. (including in connection with management buyouts, recapitalization or, to a lesser extent, refinancing of existing debt facilities). GAIN was established in 2005 and, like GLAD, is an externally managed, closed-end, non-diversified management investment company that has elected to be treated as a BDC under the 1940 Act. In addition, it has elected to be treated as a RIC for federal tax purposes under the Code.

 

72


Table of Contents
   

GOOD (REIT—Office and Industrial Properties): We are the adviser to GOOD, a diversified, national operation, with investments in a variety of sectors and geographic locations. GOOD was established in 2003 and is an externally-managed REIT focused on acquiring, owning, and managing primarily office and industrial properties in the United States.

 

   

LAND (REIT—Farmland): We are the adviser to LAND, a diversified, national operation, with investments in a variety of sectors and geographic locations. LAND was established in 2013 and is an externally-managed, natural resource REIT focused on acquiring, owning and leasing farmland in the United States.

Our asset management business is operated through our Adviser Subsidiary, a registered investment adviser with the SEC, which has advisory agreements in place to manage all of the Existing Gladstone Funds. Our investment advisory business generated income before taxes of $11.5 million and $11.2 million for the fiscal year ended June 30, 2021 and the six months ended December 31, 2021, respectively.

Financial Services

We provide financial services through our Adviser Subsidiary and through our Broker-Dealer Subsidiary. The Broker-Dealer Subsidiary earns fees generated from providing dealer manager, investment banking, mortgage placement, and other services to us, the Existing Gladstone Funds and certain portfolio companies of GLAD and GAIN. We incur internal salaries and other operating expenses and third-party securities trade costs associated with the Broker-Dealer Subsidiary that largely offset the associated securities trade commission revenue we earn

Administrative Services

Our Administrator Subsidiary is a party to administration agreements with each of the Existing Gladstone Funds, as well as being a party to substantially similar agreements with us and our subsidiaries. Our Administrator Subsidiary provides accounting, legal, compliance, treasury, valuation, regulatory and other services pursuant to such agreements.

Our Revenues and Expenses

Our revenue is primarily derived from fees (pursuant to Advisory Agreements) our Adviser Subsidiary receives for managing the Existing Gladstone Funds. Such fees include investment advisory fees (also called base management fees) which are based upon assets or stockholders’ equity under management; loan servicing fees for serving as the servicer pursuant to line of credit agreements; performance-based incentive fees for meeting certain income or realized capital gains thresholds; and investment banking fees for providing investment banking, due diligence and management or advisory services. Our Broker-Dealer Subsidiary also receives fees for other financial services it provides to certain of the Existing Gladstone Funds and portfolio companies thereof, including distribution, investment banking, due diligence, dealer manager, mortgage placement and other financial services.

Historically, our most significant expense is the payment of salaries, bonuses and benefits for our employees, each of which is directly employed by either the Adviser Subsidiary, the Administrator Subsidiary or the Broker-Dealer Subsidiary.

Business Environment

As an asset management firm, our businesses are materially affected by conditions in the financial markets and economic conditions generally in the United States and, to a lesser extent, globally. Our diverse mix of businesses has allowed us to generate attractive returns across different business climates. Generally, business

 

73


Table of Contents

conditions characterized by low inflation, low or declining interest rates and strong equity markets provide a positive climate for us to generate attractive returns on existing investments of our funds. Since the Existing Gladstone Funds are closed-end funds with no requirement to return invested equity capital, we have generally been able to produce stable revenues. However, during periods of market volatility the fair value of the assets owned by the Existing Gladstone Funds will increase or decrease accordingly, which impacts the base management fees. In addition, during market downturns, certain portfolio companies and tenants of the Existing Gladstone Funds may no longer be able to make the payments due under the applicable agreement with an Existing Gladstone Fund, which may impact the income of the applicable Existing Gladstone Fund and incentive fees.

Market Conditions

Our ability to grow revenues in our asset management business largely depends upon the growth in assets under management and income in the Existing Gladstone Funds, Future Gladstone Funds, and in other businesses or funds we may manage in the future. Such growth will depend upon our ability to attract new capital and investors to our funds and our ability to successfully invest our funds’ capital. Our ability to grow our revenues in our financial services business (through our Broker-Dealer Subsidiary) depends largely on the ability of GLAD and GAIN (and in the future, Gladstone Farming or Gladstone Partners) to invest in new portfolio companies and the Broker-Dealer Subsidiary’s ability to source mortgages for GOOD and LAND (and in the future, Gladstone Retail), and the Broker-Dealer Subsidiary’s ability to provide effective dealer manager services to certain of the Existing Gladstone Funds’ and Future Gladstone Funds’ registered, non-listed issuances of stock or bonds, if any.

The global economy has experienced economic uncertainty in recent years. Economic uncertainty impacts our business in many ways, including through changing spreads, structures and purchase multiples, as well as the overall supply of investment capital. See “Risk Factors—Risks Related to Our Business” in this prospectus. As interest rates remain relatively low and public equities are not able to meet expected returns, we see increasing investor demand for alternative investments to achieve higher yields. As a result, some investors have increased their allocation to private markets relative to other asset classes. In addition, the opportunities in private markets have expanded as firms have created new vehicles and products in which to access private markets across different geographies and opportunity sets.

Our fees and revenues are directly impacted by the performance of the Existing Gladstone Funds. This includes any impacts they or their portfolio companies and assets experience from COVID-19. Not all such impacts attributable to COVID-19 are quantifiable. Changes in the assets or income of the Existing Gladstone Funds, including their ability to deploy capital in new investment opportunities, can impact any of our fee types, particularly investment advisory, incentive and investment banking fees. Reductions in incentive fees that the Company earns result in a corresponding decrease in the amount of incentive compensation that is due under our carried interest incentive compensation plans, partially offsetting the fee impact. Protecting the Company’s employees has been a priority since the onset of the COVID-19 pandemic in early 2020, which continued through our fiscal year ended June 30, 2021, and through the date of this prospectus, and included having employees transition to a remote working environment. The Company continues to monitor and work with the management teams of the companies to which we provide services to mitigate impacts of the pandemic, and with managing its own workforce as we return to a more normal operating environment. It is difficult to predict the extent to which COVID-19 will continue to impact the Company’s financial condition or results of operations, but the Company believes it has taken appropriate measures to continue managing this risk.

As of December 31, 2021, our assets under management were approximately $4.0 billion, an increase from $3.0 billion at June 30, 2020 and $3.6 billion at June 30, 2021. From June 30, 2021 to December 31, 2021, the most significant components of the increase in assets under management related to the Gladstone Acquisition IPO, which created consolidated assets of $108 million as of December 31, 2021, and to $321 million of net investments, offset by $23 million of negative changes in fund value. We observed a decline in the assets of GAIN between December 31, 2019 and June 30, 2020 that negatively impacted the fees for that semiannual period; however, these asset values were largely restored in the semiannual period ended December 31, 2020.

 

74


Table of Contents

GLAD experienced volatility within quarters during this period but stabilized considerably at the end of each quarter so that their fees were not materially impacted. The management fees paid to us by LAND and GOOD are based on the cost of their gross tangible real estate, which did not fluctuate as a result of COVID-19, so were not impacted.

As discussed under “Certain Financial Measures and Indicators—Revenues,” reductions in incentive fees that we earn results in a corresponding decrease in the amount of incentive compensation that would be due under our carried interest incentive compensation plans, thereby dampening the net impact on our earnings.

Both GLAD’s and GAIN’s investment portfolio companies are diverse from an industry and geographic perspective, which should help mitigate any disproportionate effects of COVID-19 on specific industries and regions. In addition, while both GLAD and GAIN continue to monitor and work with their respective portfolio companies to navigate the significant challenges created by the COVID-19 pandemic, we believe that the portfolio companies of both GLAD and GAIN have taken actions to effectively and efficiently respond to such challenges. We believe both GLAD and GAIN have sufficient levels of liquidity to support their existing portfolio companies, as necessary, and selectively deploy capital in new investment opportunities.

We believe GOOD has a diverse tenant base from both a geography and industry perspective, without significant exposure to tenants in industries that have been significantly impacted by COVID-19, and GOOD has collected all cash rent obligations through December 31, 2021 that were not subject to rent deferral agreements. GOOD entered into rent deferral agreements with three tenants in April 2020 which in the aggregate represented approximately 2% of GOOD’s total portfolio rents, of which two were repaid in full as of December 31, 2020, and the third tenant was granted an extended deferral in exchange for one year of additional lease term.

We do not believe that COVID has materially affected LAND’s operations or those of its tenants at this point in time. Most of LAND’s farmers initially experienced increased sales volumes and higher-than-average prices because the pandemic led the public to stockpile food and other necessities. However, such volumes and prices have recently returned to more normalized levels. LAND granted two rent deferrals for semi-annual rental payments due in July 2020 which in the aggregate represented approximately 0.7% of LAND’s total portfolio rents. These rental payments were collected in full during the year ended December 31, 2020, and they did not receive any further requests from tenants seeking relief as a result of COVID-19.

Trends Affecting our Business

In addition to general market conditions, we believe the following trends will impact our future performance:

 

   

Increasing Importance of Alternative Assets. Over the past several years, investor groups of all types have meaningfully increased their capital allocations to alternative investment strategies. We expect this current trend will continue as the combination of volatile returns in public equities and low-yields on traditional fixed income investments shifts investor focus to the lower correlated and absolute levels of returns offered by alternative assets. In particular, real assets, private equity and private debt strategies are expected to achieve significant growth as investors diversify to reduce volatility and achieve higher yields.

 

   

Increasing Demand for Alternative Assets from Retail Investors. Defined contribution pension plans and retail investors are demanding more exposure to alternative investment products to seek differentiated returns as well as to satisfy a desire for current yield due to changing demographics. We have benefited from this growing demand, given our diverse alternative offerings through publicly traded vehicles. With an established market presence, we believe we are well positioned to take advantage of the growing opportunity in the retail channel.

 

   

Shifting Asset Allocation Policies of Institutional Investors. We believe that the growing pension liability gap is driving investors to seek higher return strategies and that institutional investors, such as

 

75


Table of Contents
 

insurance companies, are increasingly rotating away from core fixed income products towards more liquid alternative credit and absolute return-oriented products to achieve their return hurdles. According to Ernst & Young, institutional investors allocated an estimated 25% of the global portfolio towards alternative strategies in 2019, up from approximately 12% in 2009. The increase in allocation has also been accompanied by a change in allocation strategy to a more balanced approach between private equity and non-private equity alternative investments. Our combination of credit expertise, total return and multi-strategy product offerings are particularly well suited to benefit from these asset allocation trends.

 

   

The strength and liquidity of the United States and relevant global equity and debt markets. These markets affect the value of the underlying investments of the Existing Gladstone Funds and Future Gladstone Funds, which in turn affect the assets under management and income of those funds and the base management fees and the incentive fees we earn. Furthermore, changes in supply and demand for real estate assets could affect our ability to increase the value of GOOD and LAND. In addition, certain of our funds may use leverage in order to increase investment returns, which ultimately affects our current income and ability to attract additional capital. Prior to the onset of the COVID-19 pandemic, United States and relevant global debt markets have been particularly robust in recent years, contributing to our ability to finance acquisitions by the Existing Gladstone Funds at attractive rates, leverage ratios and terms. A reduction in leverage ratios or a tightening of covenants and other credit terms could also negatively impact the assets under management or income of our Existing Gladstone Funds and our Future Gladstone Funds and the fees the Adviser Subsidiary earns under the Advisory Agreements.

 

   

Interest Rate Risk. Fluctuations in interest rates may affect the performance of the Existing Gladstone Funds and Future Gladstone Funds. Historical trends in these markets are not necessarily indicative of future performance in these funds. Current interest rates are near long-term historical lows; however, credit spreads have increased with the recent decline in interest rates, mitigating a portion of the decline in investment yields. Increases in rates and decreases in credit spreads would have a mixed impact on our performance as asset yields would tend to rise but so would the cost of servicing floating-rate debt used to leverage the Existing and Future Gladstone Funds, which could impact the performance-based incentive fees that the Adviser Subsidiary earns. However, we believe that we and the Existing Gladstone Funds are well-positioned for a rising interest rate environment, as the floating rate investments in these funds are substantially greater than their floating rate debts.

 

   

Competition among alternative asset managers. Our ability to grow our revenue is dependent on our continued ability to source attractive investments for the funds we manage and to deploy the capital that we have raised. Our transaction volume is largely based on relationships that we cultivate in the debt, equity, real estate and natural resource markets. Deviations from these relationships can occur in any given year for a number of reasons. We compete against a number of other public and private asset managers that are larger than us or have more diversified sources of revenue or stronger relationships in the sectors in which we operate. A significant decrease in the quality or quantity of investment opportunities for our funds or an increase in competition from new alternative asset management entrants could adversely affect our ability to source investments with returns that meet the investment objectives of the funds we manage.

 

   

Unpredictable global macroeconomic conditions. Global economic conditions, including political environments, the impact of pandemics such as COVID-19, financial market performance, interest rates, credit spreads or other conditions beyond our control, all of which affect the performance of our funds’ underlying investments, are unpredictable and could negatively affect our performance and that of the funds that we manage and their and our ability to raise funds in the future.

 

   

Increasing regulatory requirements. The complex regulatory and tax environment for asset managers could restrict our operations and subject us to increased compliance costs and administrative burdens, as well as restrictions on our business activities.

 

76


Table of Contents

We believe recent market conditions have created both favorable and unfavorable environments for our asset management and financial advisory businesses during the periods presented. Changes in these market conditions could have positive or negative effects on our asset management and financial advisory businesses in future periods, and those effects could be material. For a more detailed description of how economic and global financial market conditions can materially affect our financial performance and condition, see “Prospectus Summary—Recent Developments” and “Risk Factors—Risks Related to Our Business” in this prospectus. Our historical results of operations are not indicative of the expected future operating results following this offering.

Certain Financial Measures and Indicators

Consolidation

We consolidate the financial results of the Adviser Subsidiary, the Administrator Subsidiary and the Broker-Dealer Subsidiary. In addition, we consolidate the financial results of Gladstone Acquisition for reasons further described in Notes 2 and 3 to our consolidated financial statements for the six months ended December 31, 2021, contained herein. We do not consolidate the Existing Gladstone Funds, and the base management fees and incentive fee compensation received from the advisory agreements between our Adviser Subsidiary and the Existing Gladstone Funds are the only aspects of the Existing Gladstone Funds that are recorded in our financial statements.

Revenues

Investment Advisory Fees (Base Management Fees). Investment advisory fees are earned from services provided by the Adviser Subsidiary to the Existing Gladstone Funds pursuant to the terms of the Advisory Agreements. Investment advisory fee revenue is recognized as the advisory services are provided, and any unpaid amounts are classified as accounts receivable, related party. Additionally, pursuant to the requirements of the 1940 Act, our Adviser Subsidiary makes available significant managerial assistance to portfolio companies of GLAD and GAIN. The Adviser Subsidiary may also provide other services to such portfolio companies under certain agreements and may receive fees for services other than managerial assistance. Our Adviser Subsidiary non-contractually, unconditionally, and irrevocably credits 100% of these fees against the investment advisory fee that GLAD and GAIN would otherwise be required to pay to our Adviser Subsidiary; however, pursuant to the terms of the Advisory Agreements with each of GLAD and GAIN, a small percentage of certain of such fees is retained by our Adviser Subsidiary in the form of reimbursement, at cost, for tasks completed by personnel of the Adviser Subsidiary, primarily for the valuation of portfolio companies of GLAD and GAIN.

Loan Servicing Fees. Certain of GLAD’s and GAIN’s loan investments are held in their respective wholly- owned subsidiaries. Loan servicing fees represent amounts earned by the Adviser Subsidiary for acting as the servicer pursuant to the terms of the line of credit agreements between the relevant subsidiary and its creditor banks. Since GLAD and GAIN own these loans indirectly (through their 100% ownership of the relevant subsidiary), all loan-servicing fees earned by the Adviser Subsidiary are credited directly against the investment advisory fees otherwise due and payable to the Adviser Subsidiary by GLAD and GAIN. Loan servicing fee revenue is recognized when it is earned and is 1.50% and 2.0% of the aggregate loan balances pledged under GLAD and GAIN’s credit facilities, respectively.

Performance-Based Incentive Fees. Incentive fees are earned by the Adviser Subsidiary pursuant to a given Advisory Agreement when an Existing Gladstone Fund meets certain income or realized capital gains thresholds. Income-based incentive fees are recognized as income when all contingencies, including realization of specified minimum hurdle rates, have been exceeded. Capital gains-based incentive fee income is calculated cumulatively based on realized capital gains of the Existing Gladstone Fund in a given fiscal year, net of realized capital losses and unrealized capital depreciation. Any calculated amount above the required minimum hurdle rates, as specified in the respective Advisory Agreement, is allocated by the Existing Gladstone Fund to the Adviser Subsidiary.

 

77


Table of Contents

Income-based incentive fees are calculated and payable to the Adviser Subsidiary quarterly in cash. Capital gains-based incentive fees are calculated and payable to the Adviser Subsidiary annually in cash. The incentive fees are considered fixed compensation and are not subject to reversal or clawback under the terms of the Advisory Agreements. To date the Adviser Subsidiary has not received any such capital gains-based incentive fees other than from GAIN.

In the fiscal year ended June 30, 2020, we recognized and were paid $8.1 million of capital gains-based incentive fees. In the fiscal year ended June 30, 2021 we did not recognize any capital gains-based incentive fees, but we did recognize $5.3 million in the six months ended December 31, 2021. To the extent we receive capital gains-based incentive fees, they give rise to an obligation under our capital gains-based carried interest plans that exist between the Adviser Subsidiary and certain of its current or former employees and officers that operate the respective funds, for which we accrued $7.0 million of compensation expense as of June 30, 2020 that was considered probable of payment and which was subsequently paid in September 2020. As of December 31, 2021, we have accrued $4.0 million of compensation expense related to the capital gains-based incentive fees that is considered probable of payment in September 2022.

The Adviser Subsidiary maintains several income-based and capital gains-based carried interest plans (collectively, “the Carried Interest Plans”) for the benefit of its current and former employees and officers which provides incentive compensation that is linked to the performance-based incentive fees that it earns. Under the terms of the Carried Interest Plans, a significant portion of the incentive fees earned, net of credits against those fees, are paid out as compensation. The Adviser Subsidiary may retain certain unallocated portions of the incentive fees under the agreements from time to time at its discretion. Our ability to continue to generate incentive fees and other fees is an important element of our business, and these items have historically accounted for a significant portion of our revenue and related expenses.

Administration Fees. The Administrator Subsidiary has entered into an Administration Agreement with each of the Existing Gladstone Funds and its other affiliates, pursuant to which it furnishes such funds and other companies with accounting, valuation, legal, compliance, and other services. Pursuant to the Administration Agreements, the Existing Gladstone Funds and the Administrator Subsidiary’s other affiliates collectively pay the costs and expenses of the Administrator Subsidiary to perform the administrative services, which are primarily rent and the salaries, benefits and expenses of the Administrator Subsidiary’s employees, including the chief financial officer and treasurer, chief compliance officer, chief valuation officer, and general counsel and secretary (and the staffs of all of the foregoing) of each of the Existing Gladstone Funds and the Administrator Subsidiary’s other affiliates. Administration fee revenue is recognized when it is earned.

Investment Banking Fees (Other Financial Services Fees): Investment banking fees include fees (1) received by the Broker-Dealer Subsidiary for providing investment banking and due diligence services to certain portfolio companies of GLAD and GAIN, (2) received by the Adviser Subsidiary for providing management or advisory services to certain portfolio companies of GLAD and GAIN and (3) received by the Broker-Dealer Subsidiary for providing mortgage placement services to GOOD and LAND. Due to uncertainty surrounding the closing of related deals, these fees are recognized when the transaction occurs and the fees are collected. Such fees may be received in advance and, if so, are recorded as deferred revenue in our consolidated balance sheets and are refundable until earned. To the extent that the Adviser Subsidiary receives any fees directly from a portfolio company of either GLAD or GAIN for any such services, 100% of such fees are credited (on a non-contractual, unconditional, and irrevocable basis) against the investment advisory fees otherwise due to the Adviser Subsidiary pursuant to the applicable Advisory Agreement.

Securities Trade Commissions. Securities trade commission income includes dealer manager and broker dealer commissions received by the Broker-Dealer Subsidiary pursuant to its role in distributing certain shares of Series B and Series C preferred stock of LAND and Series F preferred stock of GOOD through the independent broker dealer network. The Broker-Dealer Subsidiary provides certain sales, promotional and marketing services in connection with such offerings and in return is paid (1) selling commissions of up to 7.0% of the gross proceeds from sales of the Land Series B and up to 6.0% of the gross proceeds from sales of the LAND Series C

 

78


Table of Contents

and the GOOD Series F, and (2) a dealer manager fee of up to 3.0% of the gross proceeds from sales of each of the offerings. Fees are generated and earned on a trade-date basis, when the Broker-Dealer Subsidiary’s obligation is satisfied.

Fee Credits and Waivers. Fee credits or waivers have historically reduced the investment advisory fees or incentive fees due to the Adviser Subsidiary from the Existing Gladstone Funds under the Advisory Agreements. Any such fee credits or waivers are non-contractual, unconditional, and irrevocable. Fee credits generally consist of: (1) certain investment banking fees received by the Adviser Subsidiary from portfolio companies of GLAD and GAIN, (2) loan servicing fees received by the Adviser Subsidiary from certain subsidiaries of GLAD and GAIN, (3) a portion of the annual review fees received by the Adviser Subsidiary from portfolio companies of GLAD and GAIN, and (4) business advisory or management services fees received by the Adviser Subsidiary from portfolio companies of GLAD and GAIN. Fee waivers are typically granted to maintain the desired level of distributions to the Existing Gladstone Funds’ stockholders or as a reduction in the investment advisory fees charged in connection with syndicated loan investments held by GLAD and GAIN. In addition, while there are no caps to the aggregate amount of fees that the Adviser Subsidiary may receive, the Adviser Subsidiary non-contractually, unconditionally and irrevocably credits the full amount of the loan servicing fees it receives against any earned investment advisory fees such that net investment advisory fees (specifically, the base management fee) received as a percentage of GLAD’s and GAIN’s assets do not exceed the 1.75% or 2% set forth under the Advisory Agreements, respectively, as the average gross assets on which the advisory fees are calculated already reflects the value of the loans serviced under each of GLAD’s and GAIN’s credit facilities.

Operating Expenses

Salaries and Employee Benefits Expense. Our employee compensation and benefits expense reflects compensation (primarily salaries and bonuses) of our employees through our Adviser Subsidiary, our Administrator Subsidiary and our Broker-Dealer Subsidiary. Our compensation arrangements with our employees contain a significant performance-based bonus component. Therefore, as our revenues increase, our compensation costs also rise, and vice versa as revenues decrease. In addition, our compensation costs reflect increased headcount as we expand geographically and create new products and businesses. Historically, all payments for services rendered by our management and selected other individuals engaged in our businesses have been accounted for as employee compensation and benefits expense. As a result, our employee compensation and benefits expense has reflected payments for services rendered by these individuals

Operating Expenses Other Than Salaries and Employee Benefits Expense. The operating expenses other than salaries and employee benefits expenses consist primarily of rent, depreciation, telecommunications, office expenses, professional services and other third-party expenses incurred in connection with operating our business lines. We also incur third-party securities trade costs associated with the Broker-Dealer Subsidiary.

Other Income

Net Gains from Investment Activities. We expect to generate realized and unrealized gains and losses from underlying investments in the Future Gladstone Funds and Gladstone Acquisition. Net gains or losses from the interests we hold in Future Gladstone Funds, including general partnership interests, would reflect a combination of internal and external factors. The external factors affecting the net gains associated with our investing activities might vary by asset class but would be expected to be broadly driven by the market considerations discussed above. The key external measures that we expect to monitor for purposes of deriving net gains from our investing activities include price/earnings ratios and EBITDA multiples for benchmark public companies and comparable transactions and capitalization rates for real estate property investments. These measures generally represent the relative value at which comparable entities have either been sold or at which they trade in the public marketplace. Other than the information from our managing directors, we refer to these measures generally as exit multiples. Internal factors that would be expected to be managed and monitored include a variety of cash flow and operating performance measures, most commonly EBITDA and net operating income.

 

79


Table of Contents

Operating Metrics

The alternative asset management business is a complex business that is unusual due to its ability to support rapid growth without requiring substantial capital investment. However, there also can be volatility associated with its earnings and cash flow. Since our inception, we have developed and used various supplemental operating metrics to assess and monitor the operating performance of our various alternative asset management businesses in order to monitor the effectiveness of our value creating strategies.

Assets Under Management

We currently monitor assets under management, an operating metric that is common to the alternative asset management industry. Our calculation of assets under management may differ from the calculations of other asset managers. For example, other asset managers may calculate assets under management solely on fee paying assets rather than the total assets reflected on their balance sheet. As a result, this measure may not be comparable to similar measures presented by other asset managers. In addition, our definition of assets under management is not based on or related to a definition of assets under management that is set forth in the agreements governing the funds that we manage.

We calculate assets under management as (a) the total assets in the Existing Gladstone Funds, as included on their periodic reports filed with the SEC and (b) our total assets, as reflected on our balance sheet, including our investment in Sponsor and cash and cash equivalents.

Assets under management were $4.0 billion as of December 31, an increase of approximately $405 million, or 11%, compared to $3.6 billion at June 30, 2021. The following table sets forth assets under management (by Existing Gladstone Fund) as of December 31, 2021 and June 30, 2021.

 

(in millions)    December 31,
2021
     June 30,
2021
 

GLAD

   $ 587.37      $ 514.66  

GAIN

     736.10        713.19  

GOOD

     1,143.35        1,089.22  

LAND

     1,351.55        1,201.60  

Other Investments

     173.47        67.70  
  

 

 

    

 

 

 

Total

   $ 3,991.84      $ 3,586.37  
  

 

 

    

 

 

 

Assets under management have increased since June 30, 2020, primarily as a result of the ability of the Existing Gladstone Funds to raise additional capital and effectively deploy such capital into new investments, and due to the effect of the Gladstone Acquisition IPO, which increased our assets under management in the six months ended December 31, 2021 by $108 million. As reflected in the table below, for the fiscal year ended June 30, 2021, the changes include $688 million of new investments and increases in fund value of $140 million that were partially offset by investment repayments and sales of $273 million. For the six months ended December 31, 2021, the changes include $500 million of new investments, increases in fund value of $85 million (including the Gladstone Acquisition assets) that were offset by investment repayments and sales of $178 million.

 

80


Table of Contents

The following tables provide a roll-forward of assets under management (by Existing Gladstone Fund) for the fiscal years ended June 30, 2021 and 2020 and the six months ended December 31, 2021 and 2020:

 

     Fiscal Year Ended June 30, 2021  
(in millions)    GLAD     GAIN     GOOD     LAND      Other      Total  

Beginning Balance, June 30, 2020

   $ 457.72     $ 570.67     $ 1,086.05     $ 856.69      $ 60.79      $ 3,031.92  

Investment Purchases and Additions

     182.17       112.14       73.79       319.70        —          687.80  

Investment Repayments and Sales

     (159.76     (73.77     (39.50     —          —          (273.03

Change in Fund Value

     34.53       104.15       (31.12     25.21        6.91        139.68  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Ending Balance, June 30, 2021

   $ 514.66     $ 713.19     $ 1,089.22     $ 1,201.60      $ 67.70      $ 3,586.37  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

     Fiscal Year Ended June 30, 2020  
(in millions)    GLAD     GAIN     GOOD     LAND     Other      Total  

Beginning Balance, June 30, 2019

   $ 415.34     $ 641.95     $ 969.79     $ 628.72     $ 55.12      $ 2,710.92  

Investment Purchases and Additions

     154.66       94.54       165.76       246.31       —          661.27  

Investment Repayments and Sales

     (84.63     (128.67     (9.31     —         —          (222.61

Change in Fund Value

     (27.65     (37.15     (40.19     (18.34     5.67        (117.66
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance, June 30, 2020

   $ 457.72     $ 570.67     $ 1,086.05     $ 856.69     $ 60.79      $ 3,031.92  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

     Six Months Ended December 31, 2021  
(in millions)    GLAD     GAIN     GOOD     LAND     Other      Total  

Beginning Balance, June 30, 2021

   $ 514.66     $ 713.19     $ 1,089.22     $ 1,201.60     $ 67.70      $ 3,586.37  

Investment Purchases and Additions

     140.27       67.41       81.11       210.80       —          499.59  

Investment Repayments and Sales

     (99.51     (74.72     (4.27     —         —          (178.49

Change in Fund Value

     31.95       30.21       (22.72     (60.85     105.77        84.36  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance, December 31, 2021

   $ 587.37     $ 736.10     $ 1,143.35     $ 1,351.55     $ 173.47      $ 3,991.84  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

     Six Months Ended December 31, 2020  
(in millions)    GLAD     GAIN     GOOD     LAND     Other     Total  

Beginning Balance, June 30, 2020

   $ 457.72     $ 570.67     $ 1,086.05     $ 856.69     $ 60.79     $ 3,031.92  

Investment Purchases and Additions

     52.48       89.28       65.96       230.60       —         438.32  

Investment Repayments and Sales

     (56.93     (50.25     (23.92     —         —         (131.10

Change in Fund Value

     6.14       12.00       (30.18     (38.27     (20.64     (70.95
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance, December 31, 2020

   $ 459.41     $ 621.70     $ 1,097.91     $ 1,049.02     $ 40.15     $ 3,268.19  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP Financial Measures

The Company prepares and presents its consolidated financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). However, management believes that Gross Fees, EBITDA, EBITDA Margin, Fee-Related Earnings and Distributable Earnings, non-GAAP financial measures, provide investors with additional useful information in evaluating the Company’s performance. Gross Fees, EBITDA, EBITDA Margin, Fee-Related Earnings and Distributable Earnings are financial measures that are not required by, or presented in accordance with GAAP. The Company believes that Gross Fees, EBITDA, EBITDA Margin, Fee-Related Earnings and Distributable Earnings, when taken together with the Company’s financial results presented in accordance with GAAP, provide meaningful supplemental information regarding the Company’s operating performance and facilitates internal comparisons of the Company’s historical operating performance on a more consistent basis by excluding certain items that may not be indicative of the Company’s business, results of operations or outlook. In particular, the Company believes that the use of Gross Fees, EBITDA, EBITDA Margin, Fee-Related Earnings and Distributable Earnings are helpful to the Company’s

 

81


Table of Contents

investors as they are measures used by management in assessing the health of its asset management business (including the underlying operating performance of the Existing Gladstone Funds); the effectiveness of operational strategies; the Company’s ability to generate profits from revenues that are measured and received on a recurring basis; the performance and amounts available for dividends to the Company’s shareholders; determining incentive compensation, as well as for internal planning and forecasting purposes. In addition, the Company believes these non-GAAP measures provide another tool for investors to use in comparing its results with other companies in its industry, some of whom use similar non-GAAP measures. Gross Fees, EBITDA, EBITDA Margin, Fee-Related Earnings and Distributable Earnings are presented for supplemental informational purposes only, have limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, the Company’s use of Gross Fees, EBITDA, EBITDA Margin, Fee-Related Earnings and Distributable Earnings may not be comparable to similarly titled measures of other companies because they may not calculate Gross Fees, EBITDA, EBITDA Margin, Fee-Related Earnings and Distributable Earnings in the same manner, limiting their usefulness as a comparative measure. For example, we calculate Fee-Related Earnings as Net Revenues less Total Operating Expenses and Distributable Earnings as Net Income adjusted for Depreciation, Offering Cost Write-off, and Net Loss Attributable to Noncontrolling Interests and such adjustments may not be applicable to other companies. Because of these limitations, when evaluating the Company’s performance, you should consider Gross Fees, EBITDA, EBITDA Margin, Fee-Related Earnings and Distributable Earnings alongside other financial measures, including the Company’s net income and other results stated in accordance with GAAP. We urge you to review the reconciliation of Gross Fees to revenue and net income to EBITDA, EBITDA Margin, Fee-Related Earnings and Distributable Earnings as set forth below.

Gross Fees

Gross Fees is a supplemental performance measure and is used to evaluate the health of our asset management business (including the underlying operating performance of the Existing Gladstone Funds) and our ability to generate profits from revenues that are measured and received on a recurring basis while removing fluctuations due to credits, which can be a non-recurring item. In addition, we provide supplemental disclosure of gross fees and credits that on a net basis comprise revenues because we believe that gross fees and credits are important in understanding the components of our revenue. Gross Fees is a component of and reconciled to, but not equivalent to, its most directly comparable GAAP measure of revenue. We describe the basis for our fees and any related credits in Note 2 (Summary of Significant Accounting Policies - Revenue Recognition) and Note 6, (Related Party Transactions), to our consolidated financial statements for the fiscal years ended June 30, 2021 and 2020 included herein.

EBTIDA and EBITDA Margin

EBITDA and EBITDA Margin are used to assess the health of our asset management business (including the underlying operating performance of the Existing Gladstone Funds); the effectiveness of operational strategies and our ability to generate profits from revenues that are measured and received on a recurring basis while removing certain fluctuations from non-recurring items. EBITDA and EBITDA Margin are derived from and reconciled to, but not equivalent to, its most directly comparable GAAP measure of net income attributable to common stock. EBITDA differs from GAAP net income attributable to common stock in that it excludes: (i) interest expense; (ii) income tax provision; and (iii) depreciation. We calculate EBITDA Margin as EBITDA divided by net revenues. The use of EBITDA and EBITDA Margin without consideration of the related GAAP measures is not adequate due to the adjustments described herein. These measures supplement GAAP net income attributable to common stock and should be considered in addition to and not in lieu of the results of operations presented accordance with GAAP.

 

82


Table of Contents

Fee-Related Earnings

Fee-Related Earnings is a supplemental performance measure and is used to evaluate our business (including the underlying operating performance of the Existing Gladstone Funds), our ability to generate profits from revenues that are measured and received on a recurring basis and make resource deployment and other operational decisions. Fee-Related Earnings is equivalent to our Income from Operations and differs from net income computed in accordance with GAAP in that it adjusts to exclude (i) income tax provisions and (ii) net income (loss) attributable to noncontrolling interests. We use Fee-Related Earnings to measure the ability of our business to cover compensation and operating expenses from fee revenues other than other forms of income. The use of Fee-Related Earnings without consideration of the related GAAP measures is not adequate due to the adjustments described herein. This measure supplements GAAP net revenues and should be considered in addition to and not in lieu of the results of operations presented accordance with GAAP.

Distributable Earnings

Distributable Earnings is used to assess performance and amounts potentially available for distributions. Distributable Earnings is derived from and reconciled to, but not equivalent to, its most directly comparable GAAP measure of net income. Distributable Earnings differs from GAAP net income computed in accordance with GAAP in that it does not include (i) depreciation and amortization expense, (ii) potential offering cost write-offs, and (iii) net income (loss) attributable to noncontrolling interests. While we believe that the inclusion or exclusion of the aforementioned GAAP income statement items provides investors with a meaningful indication of our core operating performance, the use of Distributable Earnings without consideration of the related GAAP measures is not adequate due to the adjustments described herein. This measure supplements GAAP net income and should be considered in addition to and not in lieu of the results of operations presented accordance with GAAP.

 

83


Table of Contents

The following table reconciles Gross Fees, Fee-Related Earnings, EBITDA, EBITDA Margin and Distributable Earnings, which are non-GAAP measures, for the years ended June 30, 2020 and 2021, the six months ended December 31, 2020 and 2021 and the twelve months ended December 31, 2021 to the most directly comparable financial measure calculated and presented in accordance with GAAP.

 

     Year
Ended June 30,
2020
    Six Months
Ended
December 31,
2020
    Year
Ended June 30,
2021
    Six Months
Ended
December 31,
2021
    Twelve Months
Ended
December 31,
2021
 

Revenues

   $ 62,276,912     $ 29,690,387     $ 61,817,970     $ 45,273,231     $ 77,400,814  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Credits

     (21,846,618     (9,409,719     (19,297,822     (13,537,103     (23,425,206
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Gross Fees

   $ 84,123,530     $ 39,100,106     $ 81,115,792     $ 58,810,334     $ 100,826,020  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Fees

          

Management Fees

          

Base Management Fees + Income-Based Incentive Fees

   $ 42,381,874     $ 23,631,209     $ 50,110,689     $ 31,515,104     $ 57,994,584  

Capital Gains-Based Incentive Fees

     8,129,214       —         —         5,309,223       5,309,223  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Management Fees

     50,511,088       23,631,209       50,110,689       36,824,327       63,303,807  

Loan Servicing Fees

     12,434,520       6,390,147       12,869,051       6,484,251       12,963,155  

Administration Fees

     6,162,669       3,002,486       6,081,937       3,143,278       6,222,729  

Securities Trade Commissions

     7,102,719       2,089,090       4,143,449       3,667,879       5,722,238  

Other Fees

     7,912,534       3,987,174       7,910,666       8,690,599       12,614,091  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Gross Fees

     84,123,530       39,100,106       81,115,792       58,810,334     $ 100,826,020  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Credits

     (21,846,618     (9,409,719     (19,297,822     (13,537,103     (23,425,206

Operating Expenses

          

Salaries and Employee Benefits

     43,449,146       19,612,227       43,483,583       28,415,092       52,286,448  

Rent

     878,137       435,174       889,634       458,010       912,470  

Depreciation

     135,455       61,107       113,998       49,492       102,383  

Securities Trade Costs

     7,082,864       2,191,964       4,170,086       3,103,377       5,081,499  

Other Operating Expenses

     2,617,886       1,486,388       2,986,911       2,444,946       3,945,469  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Expenses

     54,163,488       23,786,860       51,644,212       34,470,917       62,328,269  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from Operations (Fee Related Earnings)

   $ 8,113,424     $ 5,903,527     $ 10,173,758     $ 10,802,314     $ 15,072,545  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Attributable to Common Stock

   $ 6,109,748     $ 3,637,538     $ 6,763,517     $ 8,485,918     $ 11,611,897  

Interest

     1       —         (35     —         (35

Income Taxes

     2,146,323       1,503,787       2,648,039       2,939,976       4,084,228  

Depreciation

     135,455       61,107       113,998       49,492       102,383  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 8,391,527     $ 5,202,432     $ 9,525,519     $ 11,475,386     $ 15,798,473  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA Margin

     13.5 %      17.5 %      15.4 %      25.3 %      20.4 % 

Net Income Attributable to Common Stock

   $ 6,109,748     $ 3,637,538     $ 6,763,517     $ 8,485,918     $ 11,611,897  

Depreciation

     135,455       61,107       113,998       49,492       102,383  

Offering cost writeoff

     —         762,202       762,202       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Distributable Earnings

   $ 6,245,203     $ 4,460,847     $ 7,639,717     $ 8,535,410     $ 11,714,280  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

84


Table of Contents

Results of Operations for the Three and Six Months Ended December 31, 2021 and 2020

Following is a discussion of our consolidated results of operations for the three and six months ended December 31, 2021 and 2020. The following tables set forth information regarding our results of operations and certain key operating metrics for the three and six months ended December 31, 2021 and 2020:

 

     Three Months Ended
December 31,
    Six Months Ended
December 31,
 
     2021     2020     2021     2020  

Revenues (Related Party)

        

Investment advisory and loan servicing fees, net

     $3,890,170       $6,450,903     $ 11,603,135     $ 12,469,056  

Incentive fees, net

     12,672,568       4,957,320       18,168,340       8,142,581  

Administration fees

     1,667,984       1,510,678       3,143,278       3,002,486  

Investment banking fees

     6,388,375       1,870,250       8,167,292       3,578,111  

Annual review fees

     191,875       96,875       325,417       206,821  

Property management fees

     92,110       92,668       187,322       187,486  

Securities trade commissions

     2,071,001       1,391,668       3,667,879       2,089,090  

Other income

     6,753       3,009       10,568       14,756  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     26,980,836       16,373,371       45,273,231       29,690,387  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Salaries and employee benefits

     17,206,781       10,649,333       28,415,092       19,612,227  

Rent

     226,675       217,262       458,010       435,174  

Depreciation

     24,292       30,430       49,492       61,107  

Telecommunications

     149,087       143,038       289,825       290,390  

Office expenses

     79,622       43,150       146,274       88,785  

Professional services

     718,393       275,375       1,293,856       573,653  

Securities trade costs

     1,763,609       1,401,508       3,103,377       2,191,964  

Other operating expenses

     439,512       323,940       714,991       533,560  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     20,607,971       13,084,036       34,470,917       23,786,860  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     6,372,865       3,289,335       10,802,314       5,903,527  
  

 

 

   

 

 

   

 

 

   

 

 

 

Write-off of offering costs

     —         (762,202     —         (762,202

Other non-operating income

     90,677       —         90,677       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income before income taxes

     6,463,542       2,527,133       10,892,991       5,141,325  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax provision

     (1,812,063     (626,796     (2,939,976     (1,503,787
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income including noncontrolling interests

     4,651,479       1,900,337       7,953,015       3,637,538  

Net loss attributable to noncontrolling interest

     (247,769)       —         (532,903     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     $4,899,248       $1,900,337     $ 8,485,918     $ 3,637,538  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share attributable to common
stock-basic and diluted

     $48,992,48       $19,003.37     $ 84,859.18     $ 36,375.38  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares of common stock
outstanding-basic and diluted

     100       100       100       100  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

85


Table of Contents

Three Months Ended December 31, 2021 Compared to Three Months Ended December 31, 2020

Revenues—Investment Advisory and Loan Servicing Fees

The following tables reflect the components (by Existing Gladstone Fund) of investment advisory and loan servicing fees for the three months ended December 31, 2021 and 2020:

 

Three Months Ended December 31, 2021

   Capital     Investment     Commercial      Land      Total  

Base management fees

   $ 2,520,158     $ 3,629,730     $ 1,513,325      $ 1,835,903      $ 9,499,116  

Loan servicing fees

     1,461,729       1,767,276       —          —          3,229,005  

Loan servicing fee credit

     (1,461,729     (1,767,276     —          —          (3,229,005

Credit for fees received from portfolio companies and other fee waivers

     (1,868,750     (3,682,075     —          —          (5,550,825

Fee reduction on senior syndicated loans

     (58,121     —         —          —          (58,121
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Investment advisory and loan servicing fee, net

   $ 593,287     $ (52,345)     $ 1,513,325      $ 1,835,903      $ 3,890,170  
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

Three Months Ended December 31, 2020

   Capital     Investment     Commercial(1)      Land      Total  

Base management fees

   $ 2,003,274     $ 3,116,268     $ 1,429,165      $ 1,129,764      $ 7,678,471  

Loan servicing fees

     1,347,627       1,786,003       —          —          3,133,630  

Loan servicing fee credit

     (1,347,627     (1,786,003     —          —          (3,133,630

Credit for fees received from portfolio companies and other fee waivers

    
(352,000

   
(788,500

 

 

—  

 

  

 

—  

 

    
(1,140,500

Fee reduction on senior syndicated loans

    
(87,068

 

 

—  

 

 

 

—  

 

  

 

—  

 

    
(87,068

  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Investment advisory and loan servicing fee, net

   $
1,564,206
 
  $
2,327,768
 
  $
1,429,165
 
   $
1,129,764
 
   $
6,450,903
 
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

(1)

On July 14, 2020, GOOD amended and restated its existing Advisory Agreement with the Adviser Subsidiary to change the calculation of the base management fee from an annual rate of 1.5% of Total Equity (as defined in the Advisory Agreement in effect at such time) to an annual rate of 0.425% of Gross Tangible Real Estate (as defined in the current Advisory Agreement) commencing with the quarter ended December 31, 2020.

Incentive Fees

The following tables reflect the components (by Existing Gladstone Fund) of incentive fees for the three months ended December 31, 2021 and 2020:

 

Three Months Ended December 31, 2021

  Capital     Investment     Commercial     Land     Total  

Income-based incentive fees

  $ 2,090,873     $ 2,197,222     $ 1,319,264     $ 1,755,986     $ 7,363,345  

Capital gains-based incentive fees

    —         5,309,223       —         —         5,309,223  

Incentive fee waiver

    —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Incentive fee, net

  $ 2,090,873     $ 7,506,445     $ 1,319,264     $ 1,755,986     $ 12,672,568  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

86


Table of Contents

Three Months Ended December 31, 2020

  Capital     Investment     Commercial     Land     Total  

Income-based incentive fees

  $ 1,366,450     $ 2,001,924     $ 1,000,358     $ 799,984     $ 5,168,716  

Capital gains-based incentive fees

    —         —         —         —         —    

Incentive fee waiver

    (211,396     —         —         —         (211,396
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Incentive fee, net

  $ 1,155,054     $ 2,001,924     $ 1,000,358     $ 799,984     $ 4,957,320  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Credits to Investment Advisory and Loan Servicing Fees and Incentive Fees

The following tables reflect the components (by Existing Gladstone Fund) of credits granted by us against investment advisory and loan servicing fees and incentive fees for the three months ended December 31, 2021 and 2020:

 

Three Months Ended December 31, 2021

   Capital     Investment     Commercial      Land      Total  

Credit for fees received from portfolio companies and other fee waivers

   $ (1,868,750  

$

(3,682,075

 

$

—  

 

  

$

—  

 

  

$

(5,550,825

Loan servicing fee credit

     (1,461,729     (1,767,276     —          —          (3,229,005

Fee reduction on senior syndicated loans

     (58,121     —         —          —          (58,121

Incentive fee waiver

     —         —         —          —          —    
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total credits

   $ (3,388,600   $ (5,449,351   $ —        $ —        $ (8,837,951
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

Three Months Ended December 31, 2020

   Capital     Investment     Commercial      Land      Total  

Credit for fees received from portfolio companies and other fee waivers

   $ (352,000   $ (788,500   $ —        $ —        $ (1,140,500

Loan servicing fee credit

     (1,347,627     (1,786,003     —          —          (3,133,630

Fee reduction on senior syndicated loans

     (87,068     —         —          —          (87,068

Incentive fee waiver

     (211,396     —         —          —          (211,396
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total credits

   $ (1,998,091   $ (2,574,503   $ —        $ —        $ (4,572,594
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Revenues (which is net of credits) were $27.0 million for the three months ended December 31, 2021, an increase of $10.6 million, or 65%, compared with the three months ended December 31, 2020. The overall increase was the result of $5.3 million of increases in capital gains-based incentive fees, $2.4 million of increases in income-based incentive fees, $4.5 million of increases in investment banking fees, and $0.7 million of increases in securities trade commissions, offset by $2.6 million of decreases in net investment advisory and loan servicing fees resulting from credits that were granted related to other fees.

Gross base management fees and loan servicing fees for the three months ended December 31, 2021 were $12.7 million, an increase of $1.9 million, or 18%, compared with the prior year, primarily due to increased assets under management of GAIN and GLAD, and increases in total gross real estate assets of GOOD and LAND year-over-year, on which fees were based. The portion of fees related to base management fees increased to $9.5 million for the three months ended December 31, 2021 from $7.7 million for the three months ended December 31, 2020, primarily as a result of growth in assets under management of the GAIN and GLAD, and growth in total gross real estate assets of GOOD and LAND. Assets under management increased by $724 million from December 31, 2020 to December 31, 2021 due to $749 million of investment purchases and additions and $295 million of increases in fund values, including the $107 million raised by Gladstone Acquisition, offset by $320 million of investment repayments and sales.

Investment advisory and loan servicing fee revenue (which is net of credits) was $3.9 million for the three months ended December 31, 2021, a decrease of $2.6 million, or 40%, compared with the prior year. The decrease in revenue was due to an increase in non-contractual, unconditional and irrevocable fee waivers that we granted due to a $4.5 million increase in investment banking fees we earned.

 

87


Table of Contents

Gross incentive fees for the three months ended December 31, 2021 were $12.7 million, including $7.4 million of income-based incentive fees and $5.3 million of capital gains-based incentive fees. This represents an increase of $7.5 million, or 144%, compared with the three months ended December 31, 2020, due to $2.2 million of increases in income-based incentive fees earned across all funds and the $5.3 million of capital gains-based fees from GAIN. Incentive fee credits relate to irrevocable, non-contractual voluntary waivers of incentive fee income credited against incentive fees earned to support such funds maintaining distributions to their respective stockholders. Incentive fee revenue (which is net of credits) increased $7.7 million, or 156%, to $12.7 million, due primarily to an increase in the GAIN fees and a reduction of $0.2 million in fee credits.

Administration fees represent reimbursement of the expense of our Administrator Subsidiary for providing administrative services to the Existing Gladstone Funds. Administrative fees for the three months ended December 31, 2021 were $1.7 million, an increase of $0.2 million, or 10%, from the prior year, due to normal cost increases and a shift in the amount allocated to the Existing Gladstone Funds. The administration fees earned by the Administrator Subsidiary are charged based on and entirely offset by the expenses of the Administrator Subsidiary. As a result, the administration fee revenue earned by the Administrator Subsidiary does not directly affect our operating or net income.

Investment banking fees typically include revenues earned for services offered to the portfolio companies of the Existing Gladstone Funds for transaction structuring and loan financing. For the three months ended December 31, 2021, investment banking fees were $6.4 million, an increase of $4.5 million, or 242%, from the prior year. The increase resulted from successful exits from investments by GAIN and GLAD during the quarter.

Securities trade commissions include dealer manager and broker-dealer commissions received by the Broker-Dealer Subsidiary pursuant to its role in distributing certain shares of preferred stock and notes of its affiliates through an independent broker-dealer network. Fees are generated and earned on a trade-date basis. For the three months ended December 31, 2021, securities trade commission fee revenue was $2.1 million, an increase of $0.7 million, or 49%, compared with the prior year, as a result of an increase in the number of shares of non-traded preferred stock sold by LAND and GOOD year-over-year. Due to commissions and costs incurred with brokers and registered investment advisors related to the sale of such securities, securities trade costs almost entirely offset the related securities trade commission revenue.

Investment Advisory and Fee Credits

Our Adviser Subsidiary has historically credited back some of its base management fees and incentive fees to the Existing Gladstone Funds that did not have sufficient earnings to pay their dividends. Our goal is to have all of the Existing Gladstone Funds and any Future Gladstone Funds generate sufficient income so that we will not need to forego or credit any management or incentive fees to permit the fund in question to cover its dividends or distributions. However, there can be no assurance as to when and if such credits will be discontinued in the future.

Operating Expenses

Operating expenses were $20.6 million for the three months ended December 31, 2021, an increase of $7.5 million, or 58%, compared with the prior year. The change was primarily due to an increase of $6.6 million, or 62%, in salaries and employee benefits related to variable bonus and incentive compensation, and an increase of $0.4 million, or 161%, in professional fees for legal and audit services related to various initiatives.

Income Tax Provision

We recorded an income tax provision of $1.8 million for the three months ended December 31, 2021, which represents a combined federal and state effective tax rate of 28.0% of net income before income taxes. This

 

88


Table of Contents

compares to an income tax provision of $0.6 million for the three months ended December 31, 2020, which represents a combined federal and state effective tax rate of 24.8% of net income before income taxes. The current and prior period effective tax rates differ from the federal statutory tax rate of 21% due primarily to the effect of state taxes and, for the three months ended December 31, 2021, by the effect of the net loss attributable to the non-controlling interest, which is not deductible for tax purposes.

Net Loss Attributable to Noncontrolling Interest

The net loss attributable to noncontrolling interest represents an add-back of the portion of the net loss of Gladstone Acquisition attributable to the 80.31% economic interest held by the public stockholders of Gladstone Acquisition.

Net Income Attributable to Common Stock

Our net income attributable to common stock of $4.9 million for the three months ended December 31, 2021 was an increase of $3.0 million, or 158%, compared to the prior year, resulting from the $10.7 million of increases in revenues offset by $7.5 million of increases in operating expenses, $1.2 million of increases in income tax expense, and $0.7 million of decreases in non-operating expenses.

Six Months Ended December 31, 2021 Compared to Six Months Ended December 31, 2020

Revenues—Investment Advisory and Loan Servicing Fees

The following tables reflect the components (by Existing Gladstone Fund) of investment advisory and loan servicing fees for the six months ended December 31, 2021 and 2020:

 

Six Months Ended December 31, 2021

   Capital     Investment     Commercial      Land      Total  

Base management fees

   $ 4,881,143     $ 7,205,089     $ 2,985,804      $ 3,583,951      $ 18,655,987  

Loan servicing fees

     2,922,638       3,561,613       —          —          6,484,251  

Loan servicing fee credit

     (2,922,638     (3,561,613     —          —          (6,484,251

Credit for fees received from portfolio companies and other fee waivers

     (2,316,625     (4,611,634     —          —          (6,928,259

Fee reduction on senior syndicated loans

     (124,593     —         —          —          (124,593
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Investment advisory and loan servicing fee, net

   $ 2,439,925     $ 2,593,455     $ 2,985,804      $ 3,583,951      $ 11,603,135  
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

Six Months Ended December 31, 2020

   Capital     Investment     Commercial      Land      Total  

Base management fees

   $ 3,998,424     $ 6,105,016     $ 2,847,294      $ 2,207,674      $ 15,158,408  

Loan servicing fees

     2,857,141       3,533,006       —          —          6,390,147  

Loan servicing fee credit

     (2,857,141     (3,533,006     —          —          (6,390,147

Credit for fees received from portfolio companies and other fee waivers

     (650,773     (1,859,092     —          —          (2,509,865

Fee reduction on senior syndicated loans

     (179,487     —         —          —          (179,487
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Investment advisory and loan servicing fee, net

   $ 3,168,164     $ 4,245,924     $ 2,847,294      $ 2,207,674      $ 12,469,056  
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

89


Table of Contents

Incentive Fees

The following tables reflect the components (by Existing Gladstone Fund) of incentive fees for the six months ended December 31, 2021 and 2020:

 

Six Months Ended December 31, 2021

   Capital      Investment      Commercial      Land      Total  

Income-based incentive fees

   $ 3,617,799      $ 3,955,119      $ 2,584,929      $ 2,701,270      $ 12,859,117  

Capital gains-based incentive fees

     —          5,309,223        —          —          5,309,223  

Incentive fee waiver

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Incentive fee, net

   $ 3,617,799      $ 9,264,342      $ 2,584,929      $ 2,701,270      $ 18,168,340  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Six Months Ended December 31, 2020

   Capital     Investment      Commercial      Land      Total  

Income-based incentive fees

   $ 2,721,693     $ 2,001,924      $ 2,127,904      $ 1,621,280      $ 8,472,801  

Capital gains-based incentive fees

     —         —          —          —          —    

Incentive fee waiver

     (330,220     —          —          —          (330,220
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Incentive fee, net

   $ 2,391,473     $ 2,001,924      $ 2,127,904      $ 1,621,280      $ 8,142,581  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Credits to Investment Advisory and Loan Servicing Fees and Incentive Fees

The following tables reflect the components (by Existing Gladstone Fund) of credits granted by us against investment advisory and loan servicing fees and incentive fees for the six months ended December 31, 2021 and 2020:

 

Six Months Ended December 31, 2021

   Capital     Investment     Commercial      Land      Total  

Credit for fees received from portfolio companies and other fee waivers

   $ (2,316,625   $ (4,611,634   $ —        $ —        $ (6,928,259

Loan servicing fee credit

     (2,922,638     (3,561,613     —          —          (6,484,251

Fee reduction on senior syndicated loans

     (124,593     —         —          —          (124,593

Incentive fee waiver

     —         —         —          —          —    
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total credits

   $ (5,363,856   $ (8,173,247   $ —        $ —        $ (13,537,103
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

Six Months Ended December 31, 2020

   Capital     Investment     Commercial      Land      Total  

Credit for fees received from portfolio companies and other fee waivers

   $ (650,773   $ (1,859,092   $ —        $ —        $ (2,509,865

Loan servicing fee credit

     (2,857,141     (3,533,006     —          —          (6,390,147

Fee reduction on senior syndicated loans

     (179,487     —         —          —          (179,487

Incentive fee waiver

     (330,220     —         —          —          (330,220
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total credits

   $ (4,017,621   $ (5,392,098   $ —        $ —        $ (9,409,719
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Revenues (which is net of credits) were $45.3 million for the six months ended December 31, 2021, an increase of $15.6 million, or 52%, compared with the six months ended December 31, 2020. The overall increase was the result of $16.5 million of increases in net fees offset by a decrease of $0.9 million in investment advisory and loan servicing fees.

Gross base management fees and loan servicing fees for the six months ended December 31, 2021 were $25.1 million, an increase of $3.6 million, or 17%, compared with the prior period, primarily due to increased assets under management of GAIN and GLAD, and increases in total gross real estate assets of GOOD and LAND year-over-year, on which fees were based. The portion of fees related to base management fees increased to $18.7 million for the six months ended December 31, 2021 from $15.2 million for the six months ended

 

90


Table of Contents

December 31, 2020, primarily as a result of growth in assets under management of the GAIN and GLAD, and growth in total gross real estate assets of GOOD and LAND. Assets under management increased by $724 million from December 31, 2020 to December 31, 2021 due to $749 million of investment purchases and additions and $295 million of increases in fund values, including the $107 million raised by Gladstone Acquisition, offset by $320 million of investment repayments and sales. Loan servicing fees for the six months ended December 31, 2021 and 2020 were constant at $3.3 million. Since GLAD and GAIN own indirectly the loans subject to the loan servicing fees, all loan-servicing fees earned by the Adviser Subsidiary are credited directly against the investment advisory fees otherwise due and payable to the Adviser Subsidiary by GLAD and GAIN.

Investment advisory and loan servicing fee revenue (which is net of credits) was $11.6 million for the six months ended December 31, 2021, a decrease of $0.9 million, or 7%, compared with the prior year. The decrease in revenue was due to a increase in non-contractual, unconditional and irrevocable fee waivers that we granted.

Gross incentive fees for the six months ended December 31, 2021 were $18.2 million, an increase of $9.7 million, or 52%, compared with the six months ended December 31, 2020, primarily due to $5.3 million of capital gain-based incentive fee earned from GAIN and $4.4 million of increases in income-based incentive fees. Incentive fee credits relate to irrevocable, non-contractual voluntary waivers of incentive fee income credited against incentive fees earned to support such funds maintaining distributions to their respective stockholders. Incentive fee revenue (which is net of credits) increased $10.0 million, or 123%, to $18.2 million, due primarily to the $5.3 million of capital gain-based incentive fee earned from GAIN and the $4.4 million of total increase in income-based incentive fees.

Administration fees represent reimbursement of the expense of our Administrator Subsidiary for providing administrative services to the Existing Gladstone Funds. Administrative fees for the six months ended December 31, 2021 were $3.1 million, consistent with the prior year, due to normal cost increases and a shift in the amount allocated to the Existing Gladstone Funds. The administration fees earned by the Administrator Subsidiary are charged based on and entirely offset by the expenses of the Administrator Subsidiary. As a result, the administration fee revenue earned by the Administrator Subsidiary does not directly affect our operating or net income.

Investment banking fees typically include revenues earned for services offered to the portfolio companies of the Existing Gladstone Funds for transaction structuring and loan financing. For the six months ended December 31, 2021, investment banking fees were $8.2 million, an increase of $4.6 million, or 128%, from the prior year. The increase resulted from successful exits from investments by GAIN and GLAD during the six month period ended December 31, 2021.

Securities trade commissions include dealer manager and broker-dealer commissions received by the Broker-Dealer Subsidiary pursuant to its role in distributing certain shares of preferred stock and notes of its affiliates through an independent broker-dealer network. Fees are generated and earned on a trade-date basis. For the six months ended December 31, 2021, securities trade commission fee revenue was $3.7 million, an increase of $1.6 million, or 76%, compared with the prior year, as a result of an increase in the number of shares of non-traded preferred stock sold by LAND and GOOD year-over-year. Due to commissions and costs incurred with brokers and registered investment advisors related to the sale of such securities, securities trade costs almost entirely offset the related securities trade commission revenue.

Investment Advisory and Fee Credits

Our Adviser Subsidiary has historically credited back some of its base management fees and incentive fees to the Existing Gladstone Funds that did not have sufficient earnings to pay their dividends. Our goal is to have all of the Existing Gladstone Funds and any Future Gladstone Funds generate sufficient income so that we will not need to forego or credit any management or incentive fees to permit the fund in question to cover its dividends or distributions. However, there can be no assurance as to when and if such credits will be discontinued in the future.

 

91


Table of Contents

Operating Expenses

Operating expenses were $34.5 million for the six months ended December 31, 2021, an increase of $10.7 million, or 45%, compared with the prior year. The change was primarily due to an increase of $8.8 million, or 45%, in salaries and employee benefits related to variable bonus and incentive compensation, an increase in professional services of $0.7 million and an increase of $0.9 million, or 42%, in securities trade costs of the Broker-Dealer Subsidiary due to the corresponding increase in securities trade commission revenue.

Income Tax Provision

We recorded an income tax provision of $3.0 million for the six months ended December 31, 2021, which represents a combined federal and state effective tax rate of 25.4% of net income before income taxes. This compares to an income tax provision of $1.5 million for the six months ended December 31, 2020, which represents a combined federal and state effective tax rate of 29.2% of net income before income taxes. The current and prior period effective tax rates differ from the federal statutory tax rate of 21% due primarily to the effect of state taxes, and for the six months ended December 31, 2021, by the effect of the net loss attributable to the non-controlling interest, which is not deductible for tax purposes. Additionally, during the three months ended September 30, 2020, the IRS (as defined herein) completed an examination of the Company’s income tax return for the fiscal year ended June 30, 2018. The settlement of the examination resulted in an adjustment to the timing of certain bonus expense deductions, deferring them from the fiscal year accrued to the fiscal year paid. While the adjustment was temporary in nature, because of a differential in the federal income tax rate between the fiscal year ended June 30, 2018 and the fiscal year ended June 30, 2019, the Company recorded additional federal and state income tax expense of $193,606 in the three months ended September 30, 2020 when the audit was settled, which increased the effective tax rate for the six month period ended December 31, 2020 by 3.7%, and also recorded $84,699 of related interest expense in other operating expenses.

Net Loss Attributable to Noncontrolling Interest

The net loss attributable to noncontrolling interest represents an add-back of the portion of the net loss of Gladstone Acquisition attributable to the 80.31% economic interest held by the public stockholders of Gladstone Acquisition.

Net Income Attributable to Common Stock

Our net income of $8.0 million for the six months ended December 31, 2021 was an increase of $4.3 million, or 119%, compared to the prior year, resulting from the $15.6 million of increases in revenues offset by $10.7 million of increases in operating expenses and $1.4 million of increases in income tax expense, and $0.7 million of decreases in non-operating expenses.

 

92


Table of Contents

Results of Operations for the Fiscal Years Ended June 30, 2021 and 2020

Following is a discussion of our consolidated results of operations for the fiscal years ended June 30, 2021 and 2020. The following tables set forth information regarding our results of operations and certain key operating metrics for the fiscal years ended June 30, 2021 and 2020:

 

     Fiscal Year Ended June 30,  
     2021      2020  

Revenues (Related Party)

     

Investment advisory and loan servicing fees, net

   $ 25,741,711      $ 22,363,616  

Incentive fees, net

     17,940,207        18,735,374  

Administration fees

     6,081,937        6,162,669  

Investment banking fees

     6,993,659        6,722,052  

Annual review fees

     548,675        434,864  

Property management fees

     348,369        359,317  

Securities trade commissions

     4,143,449        7,102,719  

Other income

     19,963        396,301  
  

 

 

    

 

 

 

Total revenues

     61,817,970        62,276,912  
  

 

 

    

 

 

 

Operating expenses

     

Salaries and employee benefits

     43,483,583        43,449,146  

Rent

     889,634        878,137  

Depreciation

     113,998        135,455  

Telecommunications

     581,402        514,044  

Office expenses

     192,789        275,378  

Professional services

     961,925        738,921  

Securities trade costs

     4,170,086        7,082,864  

Other operating expenses

     1,250,830        1,089,542  
  

 

 

    

 

 

 

Total expenses

     51,644,212        54,163,488  
  

 

 

    

 

 

 

Income from operations

     10,173,758        8,113,424  

Dividends from marketable securities

     —          93,774  

Realized gain on marketable securities

     —          48,873  

Write-off of offering costs

     (762,202      —    
  

 

 

    

 

 

 

Net income before income taxes

     9,411,556        8,256,071  
  

 

 

    

 

 

 

Income tax provision

     (2,648,039      (2,146,323  
  

 

 

    

 

 

 

Net income

   $ 6,763,517      $ 6,109,748  
  

 

 

    

 

 

 

Net income per share attributable to common stock-basic and diluted

   $ 67,635.17      $ 61,097.48  
  

 

 

    

 

 

 

Weighted average shares of common stock outstanding-basic and diluted

     100        100  
  

 

 

    

 

 

 

 

93


Table of Contents

Revenues—Investment Advisory and Loan Servicing Fees

The following tables reflect the components (by Existing Gladstone Fund) of investment advisory and loan servicing fees for the fiscal years ended June 30, 2021 and 2020:

 

2021

   Capital     Investment     Commercial(1)      Land      Total  

Base management fees

   $ 8,308,708     $ 12,579,125     $ 5,743,469      $ 4,953,312      $ 31,584,614  

Loan servicing fees

     5,627,535       7,241,516       —          —          12,869,051  

Loan servicing fee credit

     (5,627,535     (7,241,516     —          —          (12,869,051

Credit for fees received from portfolio companies and other fee waivers

     (2,045,148     (3,464,015     —          —          (5,509,163

Fee reduction on senior syndicated loans

     (333,740     —         —          —          (333,740
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Investment advisory and loan servicing fee, net

   $ 5,929,820     $ 9,115,110     $ 5,743,469      $ 4,953,312      $ 25,741,711  
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

2020

   Capital     Investment     Commercial      Land(2)      Total  

Base management fees

   $ 7,381,423     $ 11,830,794     $ 5,415,101      $ 3,824,734      $ 28,452,052  

Loan servicing fees

     5,618,789       6,815,731       —          —          12,434,520  

Loan servicing fee credit

     (5,618,789     (6,815,731     —          —          (12,434,520

Credit for fees received from portfolio companies and other fee waivers

     (1,693,938     (3,948,383     —          —          (5,642,321

Fee reduction on senior syndicated loans

     (446,115     —         —          —          (446,115
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Investment advisory and loan servicing fee, net

   $ 5,241,370     $ 7,882,411     $ 5,415,101      $ 3,824,734      $ 22,363,616  
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

(1)

On July 14, 2020, GOOD amended and restated its existing Advisory Agreement with the Adviser Subsidiary to change the calculation of the base management fee from an annual rate of 1.5% of Total Equity (as defined in the Advisory Agreement in effect at such time) to an annual rate of 0.425% of Gross Tangible Real Estate (as defined in the current Advisory Agreement) commencing with the quarter ended September 30, 2020.

(2)

On January 14, 2020, LAND amended and restated its existing Advisory Agreement with the Adviser Subsidiary to change the calculation of the base management fee from an annual rate of 2.0% of total adjusted common equity (as defined in the Advisory Agreement in effect at such time) to an annual rate of 0.5% of Gross Tangible Real Estate (as defined in the current Advisory Agreement) commencing with the quarter ended March 31, 2020.

 

94


Table of Contents

Incentive Fees

The following tables reflect the components (by Existing Gladstone Fund) of incentive fees for the fiscal years ended June 30, 2021 and 2020:

 

2021

   Capital     Investment      Commercial     Land      Total  

Income-based incentive fees

   $ 5,573,677     $ 5,683,916      $ 4,402,313     $ 2,866,169      $ 18,526,075  

Capital gains-based incentive fees

     —         —          —         —          —    

Incentive fee waiver

     (570,202     —          (15,666     —          (585,868
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Incentive fee, net

   $ 5,003,475     $ 5,683,916      $ 4,386,647     $ 2,866,169      $ 17,940,207  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

2020

   Capital     Investment      Commercial(1)      Land      Total  

Income-based incentive fees

   $ 5,385,470     $ 2,257,421      $ 4,106,361      $ 2,180,570      $ 13,929,822  

Capital gains-based incentive fees

     —         8,129,214        —          —          8,129,214  

Incentive fee waiver

     (3,323,662     —          —          —          (3,323,662
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Incentive fee, net

   $ 2,061,808     $ 10,386,635      $ 4,106,361      $ 2,180,570      $ 18,735,374  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

On April 14, 2020, GLAD amended and restated its existing Advisory Agreement with the Adviser Subsidiary to change the calculation of the incentive fee. The Amended Agreement revised the “hurdle rate” included in the calculation of the Incentive Fee for the period beginning April 1, 2020 through March 31, 2022, increasing the hurdle rate from 1.75% per quarter (7% annualized) to 2.00% per quarter (8% annualized) and increasing the excess Incentive Fee hurdle rate from 2.1875% per quarter (8.75% annualized) to 2.4375% per quarter (9.75% annualized). The calculation of the other fees in the Advisory Agreement remains unchanged. The revised Incentive Fee calculation began with the fee calculations for the quarter ended June 30, 2020.

Credits to Investment Advisory and Loan Servicing Fees and Incentive Fees

The following tables reflect the components (by Existing Gladstone Fund) of credits granted by us against investment advisory and loan servicing fees and incentive fees for the fiscal years ended June 30, 2021 and 2020: