GLADSTONE CAPITAL CORP

RESULTS OF OPERATIONS

Comparison of the Three Months Ended December 31, 2023 to the Three Months Ended December 31, 2022

Investment Income

Interest income increased by 25.2% for the three months ended December 31, 2023, as compared to the prior year period. Generally, the level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period multiplied by the weighted-average yield. The weighted average principal balance of our interest-bearing investment portfolio for the three months ended December 31, 2023 was $657.6 million, compared to $589.6 million for the three months ended December 31, 2022, an increase of $68.0 million, or 11.5%. The weighted average yield on our interest-bearing investments is based on the current stated interest rate on interest-bearing investments, which increased to 13.9% for the three months ended December 31, 2023, compared to 12.3% for the three months ended December 31, 2022, inclusive of any allowances on interest receivables made during those periods. The increase in the weighted average yield was driven mainly by increases in interest rates.

As of December 31, 2023, our loan to Edge Adhesives Holdings, Inc. was on non-accrual status with an aggregate debt cost basis of $6.1 million, or 0.9% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $2.8 million, or 0.4% of the fair value of all debt investments in our portfolio. As of September 30, 2023, our loan to Edge Adhesives Holdings, Inc. was on non-accrual status with an aggregate debt cost basis of $6.1 million, or 0.9% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of $2.9 million, or 0.5% of the fair value of all debt investments in our portfolio.

Other income decreased by 75.7% during the three months ended December 31, 2023, as compared to the prior year period, primarily due to a decrease in dividend income period over period.

As of December 31, 2023 and September 30, 2023, no single investment represented greater than 10% of the total investment portfolio at fair value.

Expenses

Expenses, net of any non-contractual, unconditional and irrevocable credits to fees from the Adviser, increased $0.7 million, or 6.8%, for the three months ended December 31, 2023, as compared to the prior year period. This increase was primarily due to a $0.8 million increase in the incentive fee earned by the Adviser and a $0.4 million increase in interest expense, partially offset by a $0.7 million decrease in the net base management fee earned by the Adviser.

Total interest expense on borrowings and notes payable increased by $0.4 million, or 8.7%, during the three months ended December 31, 2023 driven by a shift in the composition of our debt outstanding and changes in interest rates. Interest expense on notes payable increased by $1.1 million period over period with the issuance of our 2028 notes in August 2023. Interest expense on our Credit Facility decreased by $0.7 million due primarily to a significant decrease in the weighted average balance outstanding which was $48.6 million during the three months ended December 31, 2023, as compared to $129.1 million in the prior year period, a decrease of 62.4%. The effective interest rate on our Credit Facility, including unused commitment fees incurred, but excluding the impact of deferred financing costs, was 12.7% during the three months ended December 31, 2023, compared to 6.9% during the prior year period. The increase in the effective interest rate was driven primarily by a $0.3 million increase in unused commitment fees during the three months ended December 31, 2023 as compared to the prior year period as well as an increase in interest rates.

The net base management fee earned by the Adviser decreased by $0.7 million, or 30.5%, for the three months ended December 31, 2023, as compared to the prior year period, resulting from an increase in credits to the base management fee from the Adviser for new deal origination fees period over period, partially offset by an increase in average total assets subject to the base management fee.

The base management, loan servicing and incentive fees, and associated non-contractual, unconditional and irrevocable credits, are computed quarterly, as described under“Transactions with the Adviser” in Note 4—Related Party Transactions of the Notes to Consolidated Financial Statements and are summarized in the following table:

(A)Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods.

(B)Reflected, on a gross basis, as a line item on our Consolidated Statements of Operations.

Net Realized and Unrealized Gain (Loss)

Net Realized Gain (Loss) on Investments

For the three months ended December 31, 2023, we recorded a net realized gain on investments of $0.3 million, which resulted from a $0.3 million realized gain recognized on the sale of our investment in PIC 360, LLC in November 2023.

For the three months ended December 31, 2022, we recorded a net realized gain on investments of $9.3 million, which resulted primarily from a $5.9 million realized gain recognized on the sale of our investment in Targus Cayman HoldCo, Ltd. in October 2022 and a $4.4 million realized gain recognized on our investment in Leeds Novamark Capital I, L.P. in November 2022.

Net Unrealized Appreciation (Depreciation) of Investments

During the three months ended December 31, 2023, we recorded net unrealized appreciation of investments in the aggregate amount of $7.8 million. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the three months ended December 31, 2023 were as follows:

The primary driver of net unrealized appreciation of $7.8 million for the three months ended December 31, 2023 was the

increase in the financial and operational performance of several of our portfolio companies, partially offset by the decrease in comparable transaction multiples used to estimate the fair value of certain of our other portfolio companies, and the decline in the financial and operational performance of certain of our other portfolio companies.

During the three months ended December 31, 2022, we recorded net unrealized depreciation of investments in the aggregate amount of $12.6 million. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the three months ended December 31, 2022 were as follows:

The primary driver of net unrealized depreciation of $12.6 million for the three months ended December 31, 2022 was the reversal of unrealized appreciation associated with the exit of our investment in Targus Cayman HoldCo, Ltd. and the sale of underlying assets within Leeds Novamark Capital I, L.P as well as the decrease in comparable transaction multiples used to estimate the fair value of certain of our other portfolio companies, and the decline in the financial and operational performance of certain of our other portfolio companies.