##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one):

|☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2016

OR



|☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

FOR THE TRANSITION PERIOD FROM
 TO

COMMISSION FILE NUMBER: 814-00237

GLADSTONE CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|MARYLAND                                                       |  | 54-2040781                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)
|                                                               | 
|1521 WESTBRANCH DRIVE, SUITE 100
MCLEAN, VIRGINIA              |  | 22102                               
|                                                              
|(Address of principal executive office)                        |  | (Zip Code)                          

(703) 287-5800

(Registrants telephone number, including area code)

Not Applicable

(Former
name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check
mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☐    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  | ☐                                                |  | Accelerated filer         |  | ☒
|                        |  |                                                  | 
|Non-accelerated filer   |  | ☐  (Do not check if a smaller reporting company) |  | Smaller reporting company |  | ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).    Yes  ☐    No  ☒

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date. The number of shares of the
issuers common stock, $0.001 par value per share, outstanding as of February 7, 2017 was 25,517,866.









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GLADSTONE CAPITAL CORPORATION

TABLE OF CONTENTS



|           |  |                                                                                                        |    |  |    | 
|---------- |  | ------------------------------------------------------------------------------------------------------ | -- |  | -- | 
|PART I.    |  | FINANCIAL INFORMATION                                                                                  |    |  |    | 
|           |  |                                                                                                       
|Item 1.    |  | Financial Statements (Unaudited)                                                                       |    |  |    | 
|           |  |                                                                                                       
|           |  | Consolidated Statements of Assets and Liabilities as of December 31, 2016 and September 30, 2016       |    |  | 3  | 
|           |  | Consolidated Statements of Operations for the three months ended December 31, 2016 and 2015            |    |  | 4  | 
|           |  | Consolidated Statements of Changes in Net Assets for the three months ended December 31, 2016 and 2015 |    |  | 5  | 
|           |  | Consolidated Statements of Cash Flows for the three months ended December 31, 2016 and 2015            |    |  | 6  | 
|           |  | Consolidated Schedules of Investments as of December 31, 2016 and September 30, 2016                   |    |  | 7  | 
|           |  | Notes to Consolidated Financial Statements                                                             |    |  | 17 | 
|           |  |                                                                                                       
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                  |    |  | 40 | 
|           |  | Overview                                                                                               |    |  | 40 | 
|           |  | Results of Operations                                                                                  |    |  | 44 | 
|           |  | Liquidity and Capital Resources                                                                        |    |  | 49 | 
|           |  |                                                                                                       
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                             |    |  | 55 | 
|           |  |                                                                                                       
|Item 4.    |  | Controls and Procedures                                                                                |    |  | 55 | 
|           |  |                                                                                                       
|PART II.   |  | OTHER INFORMATION                                                                                      |    |  |    | 
|           |  |                                                                                                       
|Item 1.    |  | Legal Proceedings                                                                                      |    |  | 56 | 
|           |  |                                                                                                       
|Item 1A.   |  | Risk Factors                                                                                           |    |  | 56 | 
|           |  |                                                                                                       
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                            |    |  | 56 | 
|           |  |                                                                                                       
|Item 3.    |  | Defaults Upon Senior Securities                                                                        |    |  | 56 | 
|           |  |                                                                                                       
|Item 4.    |  | Mine Safety Disclosures                                                                                |    |  | 56 | 
|           |  |                                                                                                       
|Item 5.    |  | Other Information                                                                                      |    |  | 56 | 
|           |  |                                                                                                       
|Item 6.    |  | Exhibits                                                                                               |    |  | 56 | 
|           | 
|SIGNATURES |  |                                                                                                        | 57 | 



2



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##### Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)



|                                                                                                                                                                                                            |  |              |         |   |               |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ------------- | - | ------- | -
|                                                                                                                                                                                                            |  | December 31, |         |   | September 30, |  
|                                                                                                                                                                                                            |  | 2016         |         |   | 2016          |  
|ASSETS                                                                                                                                                                                                      |  |              |         |   |               |   |         |  
|Investments, at fair value:                                                                                                                                                                                 |  |              |         |   |               |   |         |  
|Non-Control/Non-Affiliate
investments (Cost of $261,446and $250,991, respectively)                                                                                                                          |  | $            | 230,989 |   |               | $ | 226,401 |  
|Affiliate investments (Cost of $46,825and $85,013, respectively)                                                                                                                                            |  |              | 37,991  |   |               |   | 75,473  |  
|Control investments (Cost of $40,717 and $45,797 respectively)                                                                                                                                              |  |              | 19,266  |   |               |   | 20,240  |  
|                                                                                                                                                                                                            |  |              |         |   |               |   |         |  
|Total investments at fair value (Cost of $348,988 and $381,801 respectively)                                                                                                                                |  |              | 288,246 |   |               |   | 322,114 |  
|                                                                                                                                                                                                            |  |              |         |   |               |   |         |  
|Cash and cash equivalents                                                                                                                                                                                   |  |              | 5,780   |   |               |   | 6,152   |  
|Restricted cash and cash equivalents                                                                                                                                                                        |  |              | 51      |   |               |   | 406     |  
|Interest receivable, net                                                                                                                                                                                    |  |              | 1,953   |   |               |   | 2,333   |  
|Due from custodian                                                                                                                                                                                          |  |              | 2,943   |   |               |   | 2,164   |  
|Deferred financing fees                                                                                                                                                                                     |  |              | 1,335   |   |               |   | 1,521   |  
|Other assets, net                                                                                                                                                                                           |  |              | 4,344   |   |               |   | 848     |  
|                                                                                                                                                                                                            |  |              |         |   |               |   |         |  
|TOTAL ASSETS                                                                                                                                                                                                |  | $            | 304,652 |   |               | $ | 335,538 |  
|                                                                                                                                                                                                            |  |              |         |   |               |   |         |  
|                                                                                                                                                                                                            |  |             
|LIABILITIES                                                                                                                                                                                                 |  |              |         |   |               |   |         |  
|Borrowings, at fair value (Cost of $28,200 and $71,300, respectively)                                                                                                                                       |  | $            | 27,987  |   |               | $ | 71,300  |  
|Mandatorily redeemable preferred stock, $0.001 par value per share, $25 liquidation preference
per share; 4,000,000 shares authorized and 2,440,000 shares issued and outstanding                           |  |              | 59,448  |   |               |   | 59,360  |  
|Accounts payable and accrued expenses                                                                                                                                                                       |  |              | 614     |   |               |   | 1,019   |  
|Interest payable                                                                                                                                                                                            |  |              | 110     |   |               |   | 201     |  
|Fees due to Adviser(A)                                                                                                                                                                                      |  |              | 1,211   |   |               |   | 1,222   |  
|Fee due to Administrator(A)                                                                                                                                                                                 |  |              | 300     |   |               |   | 282     |  
|Other liabilities                                                                                                                                                                                           |  |              | 1,597   |   |               |   | 947     |  
|                                                                                                                                                                                                            |  |              |         |   |               |   |         |  
|TOTAL LIABILITIES                                                                                                                                                                                           |  | $            | 91,267  |   |               | $ | 134,331 |  
|                                                                                                                                                                                                            |  |              |         |   |               |   |         |  
|Commitments and contingencies(B)                                                                                                                                                                            |  |              |         |   |               |   |         |  
|                                                                                                                                                                                                            |  |             
|NET ASSETS                                                                                                                                                                                                  |  |              |         |   |               |   |         |  
|Common stock, $0.001 par value per share, 46,000,000 shares authorized; 25,517,866shares issued and outstandingas of December 31, 2016 and23,344,422 shares issued and outstanding as of September 30, 2016 |  | $            | 26      |   |               | $ | 23      |  
|Capital in excess of par value                                                                                                                                                                              |  |              | 343,946 |   |               |   | 327,678 |  
|Cumulative net unrealized depreciation of investments                                                                                                                                                       |  |              | (60,742 | ) |               |   | (59,687 | )
|Cumulative net unrealized depreciation of other                                                                                                                                                             |  |              | 213     |   |               |   |        |  
|(Over) Under distributed net investment income                                                                                                                                                              |  |              | (544    | ) |               |   | 4,277   |  
|Accumulated net realized losses                                                                                                                                                                             |  |              | (69,514 | ) |               |   | (71,084 | )
|                                                                                                                                                                                                            |  |              |         |   |               |   |         |  
|TOTAL NET ASSETS                                                                                                                                                                                            |  | $            | 213,385 |   |               | $ | 201,207 |  
|                                                                                                                                                                                                            |  |              |         |   |               |   |         |  
|NET ASSET VALUE PER COMMON SHARE                                                                                                                                                                            |  | $            | 8.36    |   |               | $ | 8.62    |  
|                                                                                                                                                                                                            |  |              |         |   |               |   |         |  



|(A) | Refer to Note 4Related Party Transactions for additional information.
|--- | ----------------------------------------------------------------------

|(B) | Refer to Note 10Commitments and Contingencies for additional information.
|--- | --------------------------------------------------------------------------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.



3



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##### Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)



|                                                                      |  |                                |            |   |      |   |            |  
|--------------------------------------------------------------------- |  | ------------------------------ | ---------- | - | ---- | - | ---------- | -
|                                                                      |  | Three Months EndedDecember 31, |           
|                                                                      |  | 2016                           |            |   | 2015 |  
|INVESTMENT INCOME                                                     |  |                                |            |   |      |   |            |  
|Interest income, net                                                  |  |                                |            |   |      |   |            |  
|Non-Control/Non-Affiliate
investments                                 |  | $                              | 6,806      |   |      | $ | 6,908      |  
|Affiliate investments                                                 |  |                                | 1,380      |   |      |   | 1,965      |  
|Control investments                                                   |  |                                | 445        |   |      |   | 311        |  
|Other                                                                 |  |                                | 2          |   |      |   |           |  
|                                                                      |  |                                |            |   |      |   |            |  
|Total interest income                                                 |  |                                | 8,633      |   |      |   | 9,184      |  
|Other income                                                          |  |                                |            |   |      |   |            |  
|Non-Control/Non-Affiliate
investments                                 |  |                                | 199        |   |      |   | 501        |  
|Affiliate investments                                                 |  |                                | 1,142      |   |      |   |           |  
|Control investments                                                   |  |                                |           |   |      |   | 375        |  
|                                                                      |  |                                |            |   |      |   |            |  
|Total other income                                                    |  |                                | 1,341      |   |      |   | 876        |  
|                                                                      |  |                                |            |   |      |   |            |  
|Total investment income                                               |  |                                | 9,974      |   |      |   | 10,060     |  
|                                                                      |  |                                |            |   |      |   |            |  
|EXPENSES                                                              |  |                                |            |   |      |   |            |  
|Base management fee(A)                                                |  |                                | 1,378      |   |      |   | 1,528      |  
|Loan servicing fee(A)                                                 |  |                                | 983        |   |      |   | 1,008      |  
|Incentive fee(A)                                                      |  |                                | 1,293      |   |      |   | 1,118      |  
|Administration fee(A)                                                 |  |                                | 300        |   |      |   | 336        |  
|Interest expense on borrowings                                        |  |                                | 556        |   |      |   | 785        |  
|Dividend expense on mandatorily redeemable preferred stock            |  |                                | 1,029      |   |      |   | 1,029      |  
|Amortization of deferred financing fees                               |  |                                | 273        |   |      |   | 255        |  
|Professional fees                                                     |  |                                | 236        |   |      |   | 353        |  
|Other general and administrative expenses                             |  |                                | 401        |   |      |   | 283        |  
|                                                                      |  |                                |            |   |      |   |            |  
|Expenses, before credits from Adviser                                 |  |                                | 6,449      |   |      |   | 6,695      |  
|Credit to base management fee - loan servicing
fee(A)                 |  |                                | (983       | ) |      |   | (1,008     | )
|Credits to fees from Adviser -
other(A)                               |  |                                | (699       | ) |      |   | (386       | )
|                                                                      |  |                                |            |   |      |   |            |  
|Total expenses, net of credits                                        |  |                                | 4,767      |   |      |   | 5,301      |  
|                                                                      |  |                                |            |   |      |   |            |  
|NET INVESTMENT INCOME                                                 |  |                                | 5,207      |   |      |   | 4,759      |  
|                                                                      |  |                                |            |   |      |   |            |  
|NET REALIZED AND UNREALIZED GAIN (LOSS)                               |  |                                |            |   |      |   |            |  
|Net realized gain (loss):                                             |  |                                |            |   |      |   |            |  
|Non-Control/Non-Affiliate
investments                                 |  |                                | 3,882      |   |      |   | 14,492     |  
|Affiliate investments                                                 |  |                                | (2,330     | ) |      |   | 1,207      |  
|Control investments                                                   |  |                                | (5,000     | ) |      |   | (317       | )
|Other                                                                 |  |                                |           |   |      |   | (2         | )
|                                                                      |  |                                |            |   |      |   |            |  
|Total net realized (loss) gain                                        |  |                                | (3,448     | ) |      |   | 15,380     |  
|Net unrealized appreciation (depreciation):                           |  |                                |            |   |      |   |            |  
|Non-Control/Non-Affiliate
investments                                 |  |                                | (5,867     | ) |      |   | (20,230    | )
|Affiliate investments                                                 |  |                                | 706        |   |      |   | (4,755     | )
|Control investments                                                   |  |                                | 4,106      |   |      |   | (3,858     | )
|Other                                                                 |  |                                | 212        |   |      |   |           |  
|                                                                      |  |                                |            |   |      |   |            |  
|Total net unrealized (depreciation) appreciation                      |  |                                | (843       | ) |      |   | (28,843    | )
|                                                                      |  |                                |            |   |      |   |            |  
|Net realized and unrealized loss                                      |  |                                | (4,291     | ) |      |   | (13,463    | )
|                                                                      |  |                                |            |   |      |   |            |  
|NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS       |  | $                              | 916        |   |      | $ | (8,704     | )
|                                                                      |  |                                |            |   |      |   |            |  
|BASIC AND DILUTED PER COMMON SHARE:                                   |  |                                |            |   |      |   |            |  
|Net investment income                                                 |  | $                              | 0.21       |   |      | $ | 0.21       |  
|                                                                      |  |                                |            |   |      |   |            |  
|Net increase (decrease) in net assets resulting from operations       |  | $                              | 0.04       |   |      | $ | (0.38      | )
|                                                                      |  |                                |            |   |      |   |            |  
|Distributions declared and paid                                       |  | $                              | 0.21       |   |      | $ | 0.21       |  
|                                                                      |  |                                |            |   |      |   |            |  
|WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:Basic and Diluted |  |                                | 24,778,970 |   |      |   | 22,687,057 |  



|(A) | Refer to Note 4Related Party Transactions for additional information.
|--- | ----------------------------------------------------------------------

THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.



4



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##### Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(IN THOUSANDS)

(UNAUDITED)



|                                                                |  |                                 |         |   |      |   |         |  
|--------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                |  | Three Months Ended December 31, |        
|                                                                |  | 2016                            |         |   | 2015 |  
|OPERATIONS                                                      |  |                                 |         |   |      |   |         |  
|Net investment income                                           |  | $                               | 5,207   |   |      | $ | 4,759   |  
|Net realized (loss) gain on investments                         |  |                                 | (3,448  | ) |      |   | 15,380  |  
|Net unrealized depreciation of investments                      |  |                                 | (1,055  | ) |      |   | (28,843 | )
|Net unrealized depreciation of other                            |  |                                 | 212     |   |      |   |        |  
|                                                                |  |                                 |         |   |      |   |         |  
|Net (decrease) increase in net assets resulting from operations |  |                                 | 916     |   |      |   | (8,704  | )
|                                                                |  |                                 |         |   |      |   |         |  
|                                                                |  |                                
|DISTRIBUTIONS                                                   |  |                                 |         |   |      |   |         |  
|Distributions to common stockholders from ordinary income       |  |                                 | (5,207  | ) |      |   | (4,759  | )
|                                                                |  |                                 |         |   |      |   |         |  
|Net decrease in net assets resulting from capital transactions  |  |                                 | (5,207  | ) |      |   | (4,759  | )
|                                                                |  |                                 |         |   |      |   |         |  
|                                                                |  |                                
|CAPITAL TRANSACTIONS                                            |  |                                 |         |   |      |   |         |  
|Issuance of common stock                                        |  |                                 | 17,344  |   |      |   | 19,665  |  
|Offering costs for issuance of common stock                     |  |                                 | (875    | ) |      |   | (1,176  | )
|                                                                |  |                                 |         |   |      |   |         |  
|Net increase in net assets resulting from capital transactions  |  |                                 | 16,469  |   |      |   | 18,489  |  
|                                                                |  |                                 |         |   |      |   |         |  
|                                                                |  |                                
|NET INCREASE IN NET ASSETS                                      |  |                                 | 12,178  |   |      |   | 5,026   |  
|NET ASSETS, BEGINNING OF PERIOD                                 |  |                                 | 201,207 |   |      |   | 191,444 |  
|                                                                |  |                                 |         |   |      |   |         |  
|NET ASSETS, END OF PERIOD                                       |  | $                               | 213,385 |   |      | $ | 196,470 |  
|                                                                |  |                                 |         |   |      |   |         |  

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.



5



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##### Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)



|                                                                                                                                       |  |                                 |         |   |      |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                                       |  | Three Months Ended December 31, |        
|                                                                                                                                       |  | 2016                            |         |   | 2015 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                                                                   |  |                                 |         |   |      |   |         |  
|Net increase (decrease) in net assets resulting from operations                                                                        |  | $                               | 916     |   |      | $ | (8,704  | )
|Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net
cash provided by operating activities: |  |                                 |         |   |      |   |         |  
|Purchase of investments                                                                                                                |  |                                 | (20,047 | ) |      |   | (5,087  | )
|Principal repayments on investments                                                                                                    |  |                                 | 42,234  |   |      |   | 41,331  |  
|Net proceeds from sale of investments                                                                                                  |  |                                 | 8,219   |   |      |   | 19,876  |  
|Increase in investments due to
paid-in-kind interest or other                                                                          |  |                                 | (1,095  | ) |      |   | (2,936  | )
|Net change in premiums, discounts and amortization                                                                                     |  |                                 | 54      |   |      |   | (57     | )
|Cost adjustments on non-accrual loans                                                                                                  |  |                                 |        |   |      |   | (388    | )
|Net realized loss (gain) on investments                                                                                                |  |                                 | 3,448   |   |      |   | (15,382 | )
|Net unrealized depreciation of investments                                                                                             |  |                                 | 1,055   |   |      |   | 28,844  |  
|Decrease in restricted cash and cash equivalents                                                                                       |  |                                 | 355     |   |      |   | 132     |  
|Amortization of deferred financing fees                                                                                                |  |                                 | 273     |   |      |   | 255     |  
|Decrease in interest receivable, net                                                                                                   |  |                                 | 380     |   |      |   | 3,025   |  
|Increase in due from custodian                                                                                                         |  |                                 | (779    | ) |      |   | (1,966  | )
|Decrease in other assets, net                                                                                                          |  |                                 | (3,495  | ) |      |   | (3,449  | )
|(Decrease) increase in accounts payable and accrued expenses                                                                           |  |                                 | (405    | ) |      |   | 76      |  
|Decrease in interest payable                                                                                                           |  |                                 | (91     | ) |      |   | (124    | )
|(Decrease) increase in fees due to
Adviser(A)                                                                                          |  |                                 | (11     | ) |      |   | 574     |  
|Increase in fee due to
Administrator(A)                                                                                                |  |                                 | 18      |   |      |   | 86      |  
|Increase in other liabilities                                                                                                          |  |                                 | 650     |   |      |   | 9,962   |  
|Net unrealized depreciation of other                                                                                                   |  |                                 | (213    | ) |      |   |        |  
|                                                                                                                                       |  |                                 |         |   |      |   |         |  
|Net cash provided by operating activities                                                                                              |  |                                 | 31,466  |   |      |   | 66,068  |  
|                                                                                                                                       |  |                                 |         |   |      |   |         |  
|                                                                                                                                       |  |                                
|CASH FLOWS FROM FINANCING ACTIVITIES                                                                                                   |  |                                 |         |   |      |   |         |  
|Proceeds from borrowings                                                                                                               |  |                                 | 24,200  |   |      |   | 14,500  |  
|Repayments on borrowings                                                                                                               |  |                                 | (67,300 | ) |      |   | (84,300 | )
|Proceeds from issuance of common stock                                                                                                 |  |                                 | 17,344  |   |      |   | 19,665  |  
|Offering costs for issuance of common stock                                                                                            |  |                                 | (875    | ) |      |   | (1,176  | )
|Distributions paid to common stockholders                                                                                              |  |                                 | (5,207  | ) |      |   | (4,759  | )
|                                                                                                                                       |  |                                 |         |   |      |   |         |  
|Net cash used in financing activities                                                                                                  |  |                                 | (31,838 | ) |      |   | (56,070 | )
|                                                                                                                                       |  |                                 |         |   |      |   |         |  
|                                                                                                                                       |  |                                
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                                                                   |  |                                 | (372    | ) |      |   | 9,998   |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                                                         |  |                                 | 6,152   |   |      |   | 3,808   |  
|                                                                                                                                       |  |                                 |         |   |      |   |         |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                                                                               |  | $                               | 5,780   |   |      | $ | 13,806  |  
|                                                                                                                                       |  |                                 |         |   |      |   |         |  



|(A) | Refer to Note 4Related Party Transactions for additional information.
|--- | ----------------------------------------------------------------------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.



6



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##### Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

DECEMBER 31, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)



|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     |        |           |  |     |        | 
|----------------------------------------- | ----------------- | ------------------------------------------------------- | ------------------------------------- | ------------------------------------------------------------------------------------------ |  | --------- | ------ |  | ---- | --- | ------ | --------- |  | --- | ------ | 
|Company(A)                                |                   | Industry                                                |                                       | Investment(B)                                                                              |  | Principal |        |  | Cost |     |        | FairValue | 
|NON-CONTROL/NON-AFFILIATE
INVESTMENTS(N): |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     |        |          
|Proprietary Investments:                  |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     |        |           |  |     |        | 
|AG Transportation Holdings, LLC           |                   | Cargo transport                                         |                                       | Secured Second Lien Debt (13.3%, Due 3/2018)(D)                                            |  | $         | 13,000 |  |      | $   | 13,000 |           |  | $   | 13,130 | 
|                                          |                   |                                                         |                                       | Member Profit Participation (18.0% ownership)(F)(H)                                        |  |           |        |  |      |     | 1,000  |           |  |     |       | 
|                                          |                   |                                                         |                                       | Profit Participation Warrants (7.0% ownership)(F)(H)                                       |  |           |        |  |      |     | 244    |           |  |     |       | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     |        |           |  |     |        | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     | 14,244 |           |  |     | 13,130 | 
|Alloy Die Casting Corp.(S)                |                   | Diversified/conglomerate                                |                                       | Secured First Lien Debt (13.5%, Due 10/2018)(D)                                            |  |           | 5,235  |  |      |     | 5,235  |           |  |     | 4,999  | 
|                                          |                   | manufacturing                                           |                                       | Secured First Lien Debt (13.5%, Due 10/2018)(D)                                            |  |           | 75     |  |      |     | 75     |           |  |     | 72     | 
|                                          |                   |                                                         |                                       | Secured First Lien Debt (Due 10/2018)(D) (Q)                                               |  |           | 390    |  |      |     | 390    |           |  |     | 374    | 
|                                          |                   |                                                         |                                       | Preferred Stock (1,742 shares)(F)(H)                                                       |  |           |        |  |      |     | 1,742  |           |  |     |       | 
|                                          |                   |                                                         |                                       | Common Stock (270 shares)(F)(H)                                                            |  |           |        |  |      |     | 18     |           |  |     |       | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     |        |           |  |     |        | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     | 7,460  |           |  |     | 5,445  | 
|B+T Group Acquisition Inc.(S)             |                   | Telecommunications                                      |                                       | Secured First Lien Debt (13.0%, Due 12/2019)(D)                                            |  |           | 6,000  |  |      |     | 6,000  |           |  |     | 5,865  | 
|                                          |                   |                                                         |                                       | Preferred Stock (5,503 shares)(F)(H)(K)                                                    |  |           |        |  |      |     | 1,799  |           |  |     |       | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     |        |           |  |     |        | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     | 7,799  |           |  |     | 5,865  | 
|Canopy Safety Brands, LLC                 |                   | Personal and non-durable consumer products              |                                       | Secured First Lien Line of Credit, $500 available(7.3%, Due 9/2019)(D)                     |  |           |       |  |      |     |       |           |  |     |       | 
|                                          |                   |                                                         |                                       | Secured First Lien Debt (10.5%, Due 9/2021)(D)                                             |  |           | 7,000  |  |      |     | 7,000  |           |  |     | 7,000  | 
|                                          |                   |                                                         |                                       | Participation Warrant(F)(H)                                                                |  |           |        |  |      |     | 500    |           |  |     | 369    | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     |        |           |  |     |        | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     | 7,500  |           |  |     | 7,369  | 
|Chinese Yellow Pages Company              |                   | Printing and publishing                                 |                                       | Secured First Lien Line of Credit, $0 available (7.8%, Due 2/2015)(F)                      |  |           | 108    |  |      |     | 108    |           |  |     |       | 
|Drumcree, LLC                             |                   | Broadcasting and entertainment                          |                                       | Secured First Lien Debt (13.0% PIK, Due 1/2017)(F)(G)                                      |  |           | 4,997  |  |      |     | 4,997  |           |  |     | 4,997  | 
|Flight Fit N Fun LLC                      |                   | Leisure, Amusement, Motion Pictures, Entertainment      |                                       | Secured First Lien Debt (12.0%, Due 9/2020)(D)                                             |  |           | 7,800  |  |      |     | 7,800  |           |  |     | 7,673  | 
|                                          |                   |                                                         | Preferred Stock (700,000 units)(F)(H) |                                                                                            |  |           |        |  |      | 700 |        |           |  | 858 |       
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     |        |           |  |     |        | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     | 8,500  |           |  |     | 8,531  | 
|Francis Drilling Fluids, Ltd.             |                   | Oil and gas                                             |                                       | Secured Second Lien Debt (11.9% PIK, Due 4/2020)(D)                                        |  |           | 15,303 |  |      |     | 15,303 |           |  |     | 6,121  | 
|                                          |                   |                                                         |                                       | Secured Second Lien Debt (10.8% PIK, Due 4/2020)(D)                                        |  |           | 7,128  |  |      |     | 7,128  |           |  |     | 2,851  | 
|                                          |                   |                                                         |                                       | Preferred Equity Units (1,656 units)(F)(H)                                                 |  |           |        |  |      |     | 1,215  |           |  |     |       | 
|                                          |                   |                                                         |                                       | Common Equity Units (1,656 units)(F)(H)                                                    |  |           |        |  |      |     | 1      |           |  |     |       | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     |        |           |  |     |        | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     | 23,647 |           |  |     | 8,972  | 
|Funko Acquisition Holdings,
LLC(S)        |                   | Personal and non-durable                                |                                       | Preferred Equity Units (260 units)(H)(F)                                                   |  |           |        |  |      |     | 213    |           |  |     | 365    | 
|                                          | consumer products |                                                         | Common Stock (975 units)(H)(F)        |                                                                                            |  |           |        |  |      |    |        |           |  |    |       
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     |        |           |  |     |        | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     | 213    |           |  |     | 365    | 
|GFRC Holdings, LLC                        |                   | Buildings and real estate                               |                                       | Secured First Lien Line of Credit, $295 available(9.0%, Due 9/2018)(F)                     |  |           | 905    |  |      |     | 905    |           |  |     | 905    | 
|                                          |                   |                                                         |                                       | Secured First Lien Debt (9.0%, Due 9/2018)(F)                                              |  |           | 1,000  |  |      |     | 1,000  |           |  |     | 1,000  | 
|                                          |                   |                                                         |                                       | Preferred Stock (1,000 shares)(F)(H)                                                       |  |           |        |  |      |     | 1,025  |           |  |     | 890    | 
|                                          |                   |                                                         |                                       | Common Stock Warrants (45.0% ownership)(F)(H)                                              |  |           |        |  |      |     |       |           |  |     |       | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     |        |           |  |     |        | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     | 2,930  |           |  |     | 2,795  | 
|IA Tech, LLC                              |                   | Diversified/conglomerate                                |                                       | Secured First Lien Debt (12.0%, Due 6/2021)(D)                                             |  |           | 23,000 |  |      |     | 23,000 |           |  |     | 23,345 | 
|                                          |                   | service                                                 |                                       |                                                                                            |  |           |        |  |      |     |        |           |  |     |        | 
|LCR Contractors, LLC                      |                   | Buildings and Real Estate                               |                                       | Secured First Lien Debt (10.3%, Due 1/2021)(D)                                             |  |           | 8,500  |  |      |     | 8,500  |           |  |     | 8,596  | 
|Leeds Novamark Capital I, L.P.            |                   | Private equity fundhealthcare, education and childcare |                                       | Limited Partnership Interest (3.5% ownership, $1,581 uncalled capital commitment)(H)(M)(R) |  |           |        |  |      |     | 1,414  |           |  |     | 1,254  | 



7



---

##### Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)



|                                                             |  |                                        |                                    |                                                                                          |  |           |         |  |      |     |         |           |  |     |        | 
|------------------------------------------------------------ |  | -------------------------------------- | ---------------------------------- | ---------------------------------------------------------------------------------------- |  | --------- | ------- |  | ---- | --- | ------- | --------- |  | --- | ------ | 
|Company(A)                                                   |  | Industry                               |                                    | Investment(B)                                                                            |  | Principal |         |  | Cost |     |         | FairValue | 
|NON-CONTROL/NON-AFFILIATE INVESTMENTS(N) (Continued):        |  |                                        |                                    |                                                                                          |  |           |         |  |     
|Meridian Rack & Pinion, Inc.(S)                              |  | Automobile                             |                                    | Secured First Lien Debt (13.5%, Due 12/2018)(D)                                          |  |           | 4,140   |  |      |     | 4,140   |           |  |     | 3,793  | 
|                                                             |  |                                        |                                    | Preferred Stock (1,449 shares)(F)(H)                                                     |  |           |         |  |      |     | 1,449   |           |  |     | 834    | 
|                                                             |  |                                        |                                    |                                                                                          |  |           |         |  |      |     |         |           |  |     |        | 
|                                                             |  |                                        |                                    |                                                                                          |  |           |         |  |      |     | 5,589   |           |  |     | 4,627  | 
|Merlin International, Inc.                                   |  | Healthcare, education, and childcare   |                                    | Secured Second Lien Debt (11.0%, Due 8/2022)(D)                                          |  |           | 10,000  |  |      |     | 10,000  |           |  |     | 10,075 | 
|Mikawaya                                                     |  | Beverage, Food and Tobacco             |                                    | Secured Second Lien Debt (11.5%, Due 1/2021)(D)                                          |  |           | 6,750   |  |      |     | 6,750   |           |  |     | 6,801  | 
|                                                             |  |                                        |                                    | Common Stock (450 units)(F)(H)                                                           |  |           |         |  |      |     | 450     |           |  |     | 296    | 
|                                                             |  |                                        |                                    |                                                                                          |  |           |         |  |      |     |         |           |  |     |        | 
|                                                             |  |                                        |                                    |                                                                                          |  |           |         |  |      |     | 7,200   |           |  |     | 7,097  | 
|Precision International, LLC                                 |  | Machinery                              |                                    | Secured First Lien Debt (10.0% PIK, Due 9/2021)(D)                                       |  |           | 610     |  |      |     | 610     |           |  |     | 609    | 
|                                                             |  |                                        |                                    | Secured First Lien Mortgage Note (3.0%, Due 9/2017)(D)                                   |  |           | 1,000   |  |      |     | 1,000   |           |  |     | 999    | 
|                                                             |  |                                        |                                    | Membership Unit Warrant (33.3% ownership)(F)(H)                                          |  |           |         |  |      |     |        |           |  |     |       | 
|                                                             |  |                                        |                                    |                                                                                          |  |           |         |  |      |     |         |           |  |     |        | 
|                                                             |  |                                        |                                    |                                                                                          |  |           |         |  |      |     | 1,610   |           |  |     | 1,608  | 
|Sea Link International IRB, Inc.                             |  | Automobile                             |                                    | Secured Second Lien Debt (11.3%, Due 11/2021)(G)(J)                                      |  |           | 5,000   |  |      |     | 5,000   |           |  |     | 5,000  | 
|                                                             |  |                                        |                                    | Secured Second Lien Delayed Draw Term Loan, $2,000 available (11.3%, Due 11/2021)(G)(J)  |  |           |        |  |      |     |        |           |  |     |       | 
|                                                             |  |                                        |                                    | Common Equity Units (240,000 units)(H)(J)                                                |  |           |         |  |      |     | 240     |           |  |     | 240    | 
|                                                             |  |                                        |                                    |                                                                                          |  |           |         |  |      |     |         |           |  |     |        | 
|                                                             |  |                                        |                                    |                                                                                          |  |           |         |  |      |     | 5,240   |           |  |     | 5,240  | 
|Travel Sentry, Inc.                                          |  | Diversified/conglomerate service       |                                    | Secured First Lien Debt (9.8%, Due 12/2021)(D)                                           |  |           | 9,329   |  |      |     | 9,329   |           |  |     | 9,399  | 
|Triple H Food Processors, LLC                                |  | Beverage, Food and Tobacco             |                                    | Secured First Lien Line of Credit, $1,500 available (7.8%, Due 8/2018)(D)                |  |           |        |  |      |     |        |           |  |     |       | 
|                                                             |  |                                        |                                    | Secured First Lien Debt (9.8%, Due 8/2020)(D)                                            |  |           | 7,400   |  |      |     | 7,400   |           |  |     | 7,492  | 
|                                                             |  |                                        |                                    | Common Stock (250,000 units)(F)(H)                                                       |  |           |         |  |      |     | 250     |           |  |     | 503    | 
|                                                             |  |                                        |                                    |                                                                                          |  |           |         |  |      |     |         |           |  |     |        | 
|                                                             |  |                                        |                                    |                                                                                          |  |           |         |  |      |     | 7,650   |           |  |     | 7,995  | 
|TWS Acquisition Corporation                                  |  | Healthcare, education and childcare    |                                    | Secured First Lien Line of Credit, $1,500 available (9.0%, Due 7/2017)(D)                |  |           |        |  |      |     |        |           |  |     |       | 
|                                                             |  |                                        |                                    | Secured First Lien Debt (9.0%, Due 7/2020)(D)                                            |  |           | 9,433   |  |      |     | 9,433   |           |  |     | 9,515  | 
|                                                             |  |                                        |                                    |                                                                                          |  |           |         |  |      |     |         |           |  |     |        | 
|                                                             |  |                                        |                                    |                                                                                          |  |           |         |  |      |     | 9,433   |           |  |     | 9,515  | 
|United Flexible, Inc.                                        |  | Diversified/conglomerate manufacturing |                                    | Secured Second Lien Debt (10.5%, 2.0% PIK, Due 2/2022)(D)                                |  |           | 17,722  |  |      |     | 17,723  |           |  |     | 17,457 | 
|                                                             |  |                                        | Preferred Stock (538 shares)(F)(H) |                                                                                          |  |           |         |  |      | 538 |         |           |  | 694 |       
|                                                             |  |                                        | Common Stock (1,158 shares)(F)(H)  |                                                                                          |  |           |         |  |      | 148 |         |           |  | 45  |       
|                                                             |  |                                        |                                    |                                                                                          |  |           |         |  |      |     |         |           |  |     |        | 
|                                                             |  |                                        |                                    |                                                                                          |  |           |         |  |      |     | 18,409  |           |  |     | 18,196 | 
|Vacation Rental Pros Property Management, LLC                |  | Hotels, motels, inns, and gaming       |                                    | Secured Second Lien Debt (11.0%, 3.0% PIK, Due 6/2023)(J)                                |  |           | 7,000   |  |      |     | 7,000   |           |  |     | 7,000  | 
|Vision Government Solutions, Inc.                            |  | Diversified/conglomerate service       |                                    | Secured First Lien Line of Credit, $0 available(7.5%, Due 1/2017)(D)(T)                  |  |           | 1,450   |  |      |     | 1,450   |           |  |     | 1,347  | 
|                                                             |  |                                        |                                    | Secured First Lien Delayed Draw Term Loan, $1,200 available (10.0%, Due 1/2017)(D)(G)(T) |  |           | 1,300   |  |      |     | 1,300   |           |  |     | 1,191  | 
|                                                             |  |                                        |                                    | Secured First Lien Debt (9.8%, Due 1/2017)(D)(T)                                         |  |           | 9,000   |  |      |     | 9,000   |           |  |     | 8,243  | 
|                                                             |  |                                        |                                    |                                                                                          |  |           |         |  |      |     |         |           |  |     |        | 
|                                                             |  |                                        |                                    |                                                                                          |  |           |         |  |      |     | 11,750  |           |  |     | 10,781 | 
|WadeCo Specialties, Inc.                                     |  | Oil and gas                            |                                    | Secured First Lien Line of Credit, $1,825 available (8.0%, Due 4/2017)(D)                |  |           | 1,175   |  |      |     | 1,174   |           |  |     | 1,116  | 
|                                                             |  |                                        |                                    | Secured First Lien Debt (8.0%, Due 3/2019)(D)                                            |  |           | 11,191  |  |      |     | 11,191  |           |  |     | 10,631 | 
|                                                             |  |                                        |                                    | Secured First Lien Debt (12.0%, Due 3/2019)(D)                                           |  |           | 7,000   |  |      |     | 7,000   |           |  |     | 6,637  | 
|                                                             |  |                                        |                                    | Preferred Stock (1,000 shares)(F)(H)                                                     |  |           |         |  |      |     | 618     |           |  |     | 59     | 
|                                                             |  |                                        |                                    |                                                                                          |  |           |         |  |      |     |         |           |  |     |        | 
|                                                             |  |                                        |                                    |                                                                                          |  |           |         |  |      |     | 19,983  |           |  |     | 18,443 | 
|                                                             |  |                                        |                                    |                                                                                          |  |           |         |  |      |     |         |           |  |     |        | 
|Subtotal 
Non-Control/Non-Affiliate Proprietary Investments |  |                                        |                                    |                                                                                          |  | $         | 223,505 |  |      | $   | 200,640 |          
|                                                             |  |                                        |                                    |                                                                                          |  |           |         |  |      |     |         |           |  |    
|Syndicated Investments:                                      |  |                                        |                                    |                                                                                          |  |           |         |  |      |     |         |           |  |     |        | 
|DataPipe, Inc.                                               |  | Diversified/conglomerate service       |                                    | Secured Second Lien Debt (9.0%, Due 9/2019)(E)                                           |  |           | 2,000   |  |      |     | 1,955   |           |  |     | 1,975  | 
|LDiscovery, LLC                                              |  | Diversified/conglomerate service       |                                    | Secured Second Lien Debt (11.0%, Due 12/2023)(E)                                         |  |           | 5,000   |  |      |     | 4,800   |           |  |     | 4,800  | 
|                                                             |  |                                        |                                    |                                                                                          |  |           |         |  |      |     |         |           |  |     |       
|NetSmart Technologies, Inc.                                  |  | Healthcare, education and childcare    |                                    | Secured Second Lien Debt (10.5%, Due 10/2023)(E)                                         |  |           | 3,660   |  |      |     | 3,605   |           |  |     | 3,633  | 
|                                                             |  |                                        |                                    |                                                                                          |  |           |         |  |      |     |         |           |  |     |       



8



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##### Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)



|                                                                                                   |  |                                                             |   |                                                                                        |       |           |        |         |       |        |        |           |       |   |        | 
|-------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------- | - | -------------------------------------------------------------------------------------- | ----- | --------- | ------ | ------- | ----- | ------ | ------ | --------- | ----- | - | ------ | 
|Company(A)                                                                                         |  | Industry                                                    |   | Investment(B)                                                                          |       | Principal |        |         | Cost  |        |        | FairValue |      
|Syndicated Investments (Continued):                                                                |  |                                                             |   |                                                                                        |       |           |        |         |      
|New Trident Holdcorp, Inc.                                                                         |  | Healthcare, education and childcare                         |   | Secured Second Lien Debt (10.3%, Due 7/2020)(E)                                        |       |           | 4,000  |         |       |        | 3,991  |           |       |   | 3,000  | 
|PLATO Learning, Inc.                                                                               |  | Healthcare, education and childcare                         |   | Unsecured Debt (10.0% PIK, Due 6/2020)(D)(G)
Common Stock (21,429 shares)(F)(H)        |       | $         | 3,075  |         |       | $      | 3,038  |           |       | $ | 3,091  | 
|                                                                                                   |  |                                                             |   |                                                                                        |       |           |        |         |       |        | 2,637  |           |       |   |       | 
|                                                                                                   |  |                                                             |   |                                                                                        |       |           |        |         |       |        |        |           |       |   |        | 
|                                                                                                   |  |                                                             |   |                                                                                        |       |           |        |         |       |        | 5,675  |           |       |   | 3,091  | 
|PSC Industrial Holdings Corp.                                                                      |  | Diversified/conglomerate                                    |   | Secured Second Lien Debt (9.3%, Due 12/2021)(E)                                        |       |           | 3,500  |         |       |        | 3,445  |           |       |   | 3,272  | 
|SourceHOV LLC                                                                                      |  | Finance                                                     |   | Secured Second Lien Debt (11.5%, Due 4/2020)(E)                                        |       |           | 5,000  |         |       |        | 4,862  |           |       |   | 3,250  | 
|The Active Network, Inc.                                                                           |  | Electronics                                                 |   | Secured Second Lien Debt (9.5%, Due 11/2021)(E)                                        |       |           | 519    |         |       |        | 516    |           |       |   | 510    | 
|Vertellus Holdings LLC                                                                             |  | Chemicals, plastics and rubber                              |   | Secured Second Lien Debt (13.0%, Due 10/2021)(E)
Common Stock Units (879,121 units)(E) |       |           | 1,099  |         |       |        | 1,099  |           |       |   | 1,066  | 
|                                                                                                   |  |                                                             |   |                                                                                        |       |           |        |         |       |        | 3,017  |           |       |   | 1,187  | 
|                                                                                                   |  |                                                             |   |                                                                                        |       |           |        |         |       |        |        |           |       |   |        | 
|                                                                                                   |  |                                                             |   |                                                                                        |       |           |        | 4,116   |       |        |        | 2,253     |      
|Vitera Healthcare Solutions, LLC                                                                   |  | Healthcare, education and
childcare                         |   | Secured Second Lien Debt (9.3%, Due 11/2021)(E)                                        |       |           | 4,500  |         |       |        | 4,480  |           |       |   | 4,365  | 
|                                                                                                   |  |                                                             |   |                                                                                        |      
|W3 Co.                                                                                             |  | Oil and gas                                                 |   | Secured Second Lien Debt (9.3%, Due 9/2020)(E)                                         |       |           | 499    |         |       |        | 496    |           |       |   | 200    | 
|                                                                                                   |  |                                                             |   |                                                                                        |       |           |        |         |       |        |        |           |       |   |        | 
|Subtotal 
Non-Control/Non-Affiliate Syndicated Investments                                        |  |                                                             |   |                                                                                        |       | $         | 37,941 |         |       | $      | 30,349 |          
|                                                                                                   |  |                                                             |   |                                                                                        |       |           |        |         |       |        |        |           |       |   |        | 
|Total
Non-Control/Non-Affiliate Investments (represented 80.1% of total investments at fair value) |  |                                                             | $ | 261,446                                                                                |       |           | $      | 230,989 |      
|                                                                                                   |  |                                                             |   |                                                                                        |       |           |        |         |       |        |        |           |       |   |        | 
|AFFILIATE INVESTMENTS(O):                                                                          |  |                                                             |   |                                                                                        |       |           |        |         |       |        |        |           |       |  
|Proprietary Investments:                                                                           |  |                                                             |   |                                                                                        |       |           |        |         |       |        |        |           |       |   |        | 
|Edge Adhesives Holdings
LLC(S)                                                                     |  | Diversified/conglomerate manufacturing                      |   | Secured First Lien Debt (12.5%, Due 2/2019)(D)                                         |       | $         | 6,200  |         |       | $      | 6,200  |           |       | $ | 6,107  | 
|                                                                                                   |  | Secured First Lien Debt (13.8%, Due 2/2019)(D)              |   |                                                                                        | 1,600 |           |        |         | 1,600 |        |        |           | 1,584 |  
|                                                                                                   |  | Preferred Stock (2,516 units)(F)(H)                         |   |                                                                                        |       |           |        |         | 2,516 |        |        |           | 627   |  
|                                                                                                   |  |                                                             |   |                                                                                        |       |           |        |         |       |        |        |           |       |   |        | 
|                                                                                                   |  |                                                             |   |                                                                                        |       |           |        |         |       |        | 10,316 |           |       |   | 8,318  | 
|FedCap Partners, LLC                                                                               |  | Private equity fund  aerospace and defense                 |   | Class A Membership Units (80 units, $0 Uncalled Commitment)(H)(L)(R)                   |       |           |        |         |       |        | 1,634  |           |       |   | 1,265  | 
|Lignetics, Inc.                                                                                    |  | Diversified natural resources, precious metals and minerals |   | Secured Second Lien Debt (12.0%, Due 2/2021)(D)                                        |       |           | 6,000  |         |       |        | 6,000  |           |       |   | 5,730  | 
|                                                                                                   |  |                                                             |   | Secured Second Lien Debt (12.0%, Due 2/2021)(D)                                        |       |           | 8,000  |         |       |        | 8,000  |           |       |   | 7,640  | 
|                                                                                                   |  |                                                             |   | Common Stock (152,603 shares)(F)(H)                                                    |       |           |        |         |       |        | 1,855  |           |       |   | 439    | 
|                                                                                                   |  |                                                             |   |                                                                                        |       |           |        |         |       |        |        |           |       |   |        | 
|                                                                                                   |  |                                                             |   |                                                                                        |       |           |        |         |       |        | 15,855 |           |       |   | 13,809 | 
|LWO Acquisitions Company LLC                                                                       |  | Diversified/conglomerate manufacturing                      |   | Secured First Lien Line of Credit, $0 available (6.5%, 2.0% PIK, Due 12/2017)(D)       |       |           | 2,608  |         |       |        | 2,608  |           |       |   | 2,113  | 
|                                                                                                   |  |                                                             |   | Secured First Lien Debt (9.5%, 2.0% PIK, Due 12/2019)(D)                               |       |           | 10,777 |         |       |        | 10,777 |           |       |   | 8,729  | 
|                                                                                                   |  |                                                             |   | Common Units (921,000 units)(F)(H)                                                     |       |           |        |         |       |        | 921    |           |       |   |       | 
|                                                                                                   |  |                                                             |   |                                                                                        |       |           |        |         |       |        |        |           |       |   |        | 
|                                                                                                   |  |                                                             |   |                                                                                        |       |           |        |         |       |        | 14,306 |           |       |   | 10,842 | 
|                                                                                                   |  |                                                             |   |                                                                                        |       |           |        |         |       |        |        |           |       |   |        | 
|Subtotal  Affiliate Proprietary Investments                                                       |  |                                                             |   |                                                                                        | $     | 42,111    |        |         | $     | 34,234 |       
|                                                                                                   |  |                                                             |   |                                                                                        |       |           |        |         |       |        |        |           |       |   |        | 



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GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

DECEMBER 31, 2016

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)



|                                                                                            |  |                         |   |                                                                            |  |           |        |        |      |   |         |           |  |   |         | 
|------------------------------------------------------------------------------------------- |  | ----------------------- | - | -------------------------------------------------------------------------- |  | --------- | ------ | ------ | ---- | - | ------- | --------- |  | - | ------- | 
|Company(A)                                                                                  |  | Industry                |   | Investment(B)                                                              |  | Principal |        |        | Cost |   |         | FairValue | 
|AFFILIATE INVESTMENTS(O)(Continued):                                                        |  |                         |   |                                                                            |  |           |        |        |     
|Syndicated Investments:                                                                     |  |                         |   |                                                                            |  |           |        |        |     
|Targus Cayman HoldCo Limited                                                                |  | Textiles and leather    |   | Secured First Lien Debt (15.0% PIK, Due 12/2019)(D)(G)                     |  |           | 2,370  |        |      |   | 2,370   |           |  |   | 2,370   | 
|                                                                                            |  |                         |   | Common Stock (526,141
shares)(F)(H)                                        |  |           |        |        |      |   | 2,344   |           |  |   | 1,387   | 
|                                                                                            |  |                         |   |                                                                            |  |           |        |        |     
|                                                                                            |  |                         |   |                                                                            |  |           |        |        |      |   | 4,714   |           |  |   | 3,757   | 
|                                                                                            |  |                         |   |                                                                            |  |           |        |        |     
|Total Affiliate Investments (represented 13.2% of total investments at fair
value)          |  |                         | $ | 46,825                                                                     |  |           | $      | 37,991 |     
|                                                                                            |  |                         |   |                                                                            |  |           |        |        |     
|CONTROL
INVESTMENTS(P):                                                                     |  |                         |   |                                                                            |  |           |        |        |      |   |         |           |  |  
|Proprietary Investments:                                                                    |  |                         |   |                                                                            |  |           |        |        |      |   |         |           |  |   |         | 
|Defiance Integrated Technologies, Inc.                                                      |  | Automobile              |   | Secured Second Lien Debt (11.0%, Due 2/2019)(F)                            |  | $         | 6,145  |        |      | $ | 6,145   |           |  | $ | 6,145   | 
|                                                                                            |  |                         |   | Common Stock (33,321 shares)(F)(H)                                         |  |           |        |        |      |   | 580     |           |  |   | 3,271   | 
|                                                                                            |  |                         |   |                                                                            |  |           |        |        |      |   |         |           |  |   |         | 
|                                                                                            |  |                         |   |                                                                            |  |           |        |        |      | $ | 6,725   |           |  | $ | 9,416   | 
|PIC 360, LLC                                                                                |  | Machinery               |   | Secured First Lien Debt (14.0%, Due 12/2017)(F)(G)                         |  |           | 4,000  |        |      |   | 4,000   |           |  |   | 4,000   | 
|                                                                                            |  |                         |   | Common Equity Units (750 units)(F)                                         |  |           |        |        |      |   | 1       |           |  |   | 221     | 
|                                                                                            |  |                         |   |                                                                            |  |           |        |        |     
|                                                                                            |  |                         |   |                                                                            |  |           |        |        |      |   | 4,001   |           |  |   | 4,221   | 
|Sunshine Media Holdings                                                                     |  | Printing and publishing |   | Secured First Lien Line of Credit, $672 available (8.0%, Due 5/2018)(F)(G) |  |           | 1,328  |        |      |   | 1,328   |           |  |   | 1,328   | 
|                                                                                            |  |                         |   | Secured First Lien Debt (8.0%, Due 5/2018)(F)(G)                           |  |           | 5,000  |        |      |   | 3,525   |           |  |   | 1,269   | 
|                                                                                            |  |                         |   | Secured First Lien Debt (4.8%, Due 5/2018)(F)(I)                           |  |           | 11,948 |        |      |   | 8,423   |           |  |   | 3,032   | 
|                                                                                            |  |                         |   | Secured First Lien Debt (5.5%, Due 5/2018)(C)(F)(I)                        |  |           | 10,700 |        |      |   | 10,700  |           |  |   |        | 
|                                                                                            |  |                         |   | Preferred Stock (15,270 shares)(F)(H)(K)                                   |  |           |        |        |      |   | 5,275   |           |  |   |        | 
|                                                                                            |  |                         |   | Common Stock (1,867 shares)(F)(H)                                          |  |           |        |        |      |   | 740     |           |  |   |        | 
|                                                                                            |  |                         |   | Common Stock Warrants (72 shares)(F)(H)                                    |  |           |        |        |      |   |        |           |  |   |        | 
|                                                                                            |  |                         |   |                                                                            |  |           |        |        |     
|                                                                                            |  |                         |   |                                                                            |  |           |        |        |      |   | 29,991  |           |  |   | 5,629   | 
|                                                                                            |  |                         |   |                                                                            |  |           |        |        |     
|Total Control Proprietary Investments (represented 6.7% of total investments at fair
value) |  |                         | $ | 40,717                                                                     |  |           | $      | 19,266 |     
|                                                                                            |  |                         |   |                                                                            |  |           |        |        |     
|TOTAL INVESTMENTS                                                                           |  |                         |   |                                                                            |  |           |        |        |      | $ | 348,988 |           |  | $ | 288,246 | 
|                                                                                            |  |                         |   |                                                                            |  |           |        |        |      |   |         |           |  |   |         | 



|(A) | Certain of the securities listed in this schedule are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $250.7 million at fair value, are pledged as
collateral to our Credit Facility, as described further in Note 5Borrowings.Under the Investment Company Act of 1940, as amended, (the 1940 Act), we may not acquire any non-qualifying
assets unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. As of December 31, 2016, two of our investments (FedCap Partners, LLC and Leeds Novamark Capital I, L.P.) are considered non-qualifying assets under Section 55 of the 1940 Act. Such non-qualifying assets represent 0.9% of total investments, at fair value, as of December 31, 2016.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | Percentages represent cash interest rates (which are generally indexed off of the 30-day London Interbank Offered Rate (LIBOR)) in effect at December 31, 2016,
and due dates represent the contractual maturity date. If applicable, paid-in-kind (PIK) interest rates are noted separately from the cash interest rates and
any unused line of credit fees are excluded. Secured first lien debt securities generally take the form of first priority liens on substantially all of the assets of the underlying portfolio company businesses.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(C) | Last out tranche (LOT) of secured first lien debt, meaning if the portfolio company is liquidated, the holder of the LOT is generally paid after the other secured first lien debt holders but before all other
debt and equity holders.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(D) | Fair value was based on an internal yield analysis or on estimates of value submitted by Standard & Poors Securities Evaluations, Inc. (SPSE).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------

|(E) | Fair value was based on the indicative bid price on or near December 31, 2016, offered by the respective syndication agents trading desk.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------

|(F) | Fair value was based on the total enterprise value of the portfolio company, which was then allocated to the portfolio companys securities in order of their relative priority in the capital structure.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(G) | Debt security has a fixed interest rate.
|--- | ----------------------------------------

|(H) | Investment is non-income producing.
|--- | -----------------------------------

|(I) | Investment is on non-accrual status.
|--- | ------------------------------------

|(J) | New investment valued at cost, as it was determined that the price paid during the quarter ended December 31, 2016 best represents fair value as of
December 31, 2016.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(K) | Aggregates all shares of such class of stock owned without regard to specific series owned within such class, some series of which may or may not be voting shares.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(L) | There are certain limitations on our ability to transfer our units owned, withdraw or resign prior to dissolution of the entity, which must occur no later than
May 3, 2020.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(M) | There are certain limitations on our ability to withdraw our partnership interest prior to dissolution of the entity, which must occur no later than May 9, 2024
or two years after all outstanding leverage has matured.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(N) | Non-Control/Non-Affiliate investments, as defined by the 1940 Act, are those that are
neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(O) | Affiliate investments, as defined by the 1940 Act, are those in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and
outstanding voting securities.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(P) | Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the
portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(Q) | This investment does not have a stated interest rate that is payable thereon.
|--- | -----------------------------------------------------------------------------

|(R) | Fair value was based on net asset value provided by the fund as a practical expedient.
|--- | --------------------------------------------------------------------------------------

|(S) | One of our affiliated funds, Gladstone Investment Corporation, co-invested with us in this portfolio company pursuant to an exemptive order
(Co-Investment Order) granted by the U.S. Securities and Exchange Commission.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(T) | Subsequent to December 31, 2016, the maturity dates of our loans to Vision Government Solutions were extended to April 2017.
|--- | ----------------------------------------------------------------------------------------------------------------------------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.



11



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GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2016

(DOLLAR AMOUNTS IN THOUSANDS)



|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     |        |           |  |     |        | 
|----------------------------------------- | ----------------- | ------------------------------------------------------- | ------------------------------------- | ------------------------------------------------------------------------------------------ |  | --------- | ------ |  | ---- | --- | ------ | --------- |  | --- | ------ | 
|Company(A)                                |                   | Industry                                                |                                       | Investment(B)                                                                              |  | Principal |        |  | Cost |     |        | FairValue | 
|NON-CONTROL/NON-AFFILIATE
INVESTMENTS(N): |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     |        |          
|Proprietary Investments:                  |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     |        |           |  |     |        | 
|AG Transportation Holdings, LLC           |                   | Cargo transport                                         |                                       | Secured Second Lien Debt (13.3%, Due 3/2018)(D)                                            |  | $         | 13,000 |  |      | $   | 13,000 |           |  | $   | 13,000 | 
|                                          |                   |                                                         |                                       | Member Profit Participation (18.0% ownership)(F)(H)                                        |  |           |        |  |      |     | 1,000  |           |  |     |       | 
|                                          |                   |                                                         |                                       | Profit Participation Warrants (7.0% ownership)(F)(H)                                       |  |           |        |  |      |     | 244    |           |  |     |       | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     |        |           |  |     |        | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     | 14,244 |           |  |     | 13,000 | 
|Alloy Die Casting Corp.(T)                |                   | Diversified/conglomerate                                |                                       | Secured First Lien Debt (13.5%, Due 10/2018)(D)                                            |  |           | 5,235  |  |      |     | 5,235  |           |  |     | 4,973  | 
|                                          |                   | manufacturing                                           |                                       | Secured First Lien Debt (13.5%, Due 10/2018)(D)                                            |  |           | 75     |  |      |     | 75     |           |  |     | 71     | 
|                                          |                   |                                                         |                                       | Secured First Lien Debt (Due 10/2018)(D) (Q)                                               |  |           | 390    |  |      |     | 390    |           |  |     | 372    | 
|                                          |                   |                                                         |                                       | Preferred Stock (1,742 shares)(F)(H)                                                       |  |           |        |  |      |     | 1,742  |           |  |     |       | 
|                                          |                   |                                                         |                                       | Common Stock (270 shares)(F)(H)                                                            |  |           |        |  |      |     | 18     |           |  |     |       | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     |        |           |  |     |        | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     | 7,460  |           |  |     | 5,416  | 
|Behrens Manufacturing, LLC(T)             |                   | Diversified/conglomerate                                |                                       | Secured First Lien Debt (13.0%, Due 12/2018)(R)                                            |  |           | 4,275  |  |      |     | 4,275  |           |  |     | 4,638  | 
|                                          |                   | manufacturing                                           |                                       | Preferred Stock (1,253 shares)(H)(R)                                                       |  |           |        |  |      |     | 1,253  |           |  |     | 4,100  | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     |        |           |  |     |        | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     | 5,528  |           |  |     | 8,738  | 
|B+T Group Acquisition Inc.(T)             |                   | Telecommunications                                      |                                       | Secured First Lien Debt (13.0%, Due 12/2019)(D)                                            |  |           | 6,000  |  |      |     | 6,000  |           |  |     | 5,790  | 
|                                          |                   |                                                         |                                       | Preferred Stock (5,503 shares)(F)(H)(K)                                                    |  |           |        |  |      |     | 1,799  |           |  |     |       | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     |        |           |  |     |        | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     | 7,799  |           |  |     | 5,790  | 
|Canopy Safety Brands, LLC                 |                   | Personal and non-durable consumer products              |                                       | Secured First Lien Line of Credit, $500 available(7.0%, Due 9/2019)(J)                     |  |           |       |  |      |     |       |           |  |     |       | 
|                                          |                   |                                                         |                                       | Secured First Lien Debt (10.5%, Due 9/2021)(J)                                             |  |           | 7,000  |  |      |     | 7,000  |           |  |     | 7,000  | 
|                                          |                   |                                                         |                                       | Participation Warrant(J)                                                                   |  |           |        |  |      |     | 500    |           |  |     | 500    | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     |        |           |  |     |        | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     | 7,500  |           |  |     | 7,500  | 
|Chinese Yellow Pages Company              |                   | Printing and publishing                                 |                                       | Secured First Lien Line of Credit, $0 available (7.3%, Due 2/2015)(F)                      |  |           | 108    |  |      |     | 108    |           |  |     |       | 
|Drumcree, LLC                             |                   | Broadcasting and entertainment                          |                                       | Secured First Lien Debt (13.0% PIK, Due 1/2017)(F)(G)                                      |  |           | 4,836  |  |      |     | 4,836  |           |  |     | 4,682  | 
|Flight Fit N Fun LLC                      |                   | Leisure, Amusement, Motion Pictures, Entertainment      |                                       | Secured First Lien Debt (12.0%, Due 9/2020)(D)                                             |  |           | 7,800  |  |      |     | 7,800  |           |  |     | 7,800  | 
|                                          |                   |                                                         | Preferred Stock (700,000 units)(F)(H) |                                                                                            |  |           |        |  |      | 700 |        |           |  | 969 |       
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     |        |           |  |     |        | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     | 8,500  |           |  |     | 8,769  | 
|Francis Drilling Fluids, Ltd.             |                   | Oil and gas                                             |                                       | Secured Second Lien Debt (11.4%, Due 4/2020)(D)                                            |  |           | 15,000 |  |      |     | 15,000 |           |  |     | 8,250  | 
|                                          |                   |                                                         |                                       | Secured Second Lien Debt (10.8%, Due 4/2020)(D)                                            |  |           | 7,000  |  |      |     | 7,000  |           |  |     | 3,850  | 
|                                          |                   |                                                         |                                       | Preferred Equity Units (1,277 units)(F)(H)                                                 |  |           |        |  |      |     | 976    |           |  |     |       | 
|                                          |                   |                                                         |                                       | Common Equity Units (1,277 units)(F)(H)                                                    |  |           |        |  |      |     | 1      |           |  |     |       | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     |        |           |  |     |        | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     | 22,977 |           |  |     | 12,100 | 
|Funko Acquisition
Holdings,LLC(T)         |                   | Personal and non-durable                                |                                       | Preferred Equity Units (260 units)(H)(F)                                                   |  |           |        |  |      |     | 260    |           |  |     | 358    | 
|                                          | consumer products |                                                         | Common Stock (975 units)(H)(F)        |                                                                                            |  |           |        |  |      |    |        |           |  |    |       
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     |        |           |  |     |        | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     | 260    |           |  |     | 358    | 
|GFRC Holdings, LLC                        |                   | Buildings and real estate                               |                                       | Secured First Lien Line of Credit, $295 available(9.0%, Due 9/2018)(F)                     |  |           | 905    |  |      |     | 905    |           |  |     | 905    | 
|                                          |                   |                                                         |                                       | Secured First Lien Debt (9.0%, Due 9/2018)(F)                                              |  |           | 1,000  |  |      |     | 1,000  |           |  |     | 1,000  | 
|                                          |                   |                                                         |                                       | Preferred Stock (1,000 shares)(F)(H)                                                       |  |           |        |  |      |     | 1,025  |           |  |     | 754    | 
|                                          |                   |                                                         |                                       | Common Stock Warrants (45.0% ownership)(F)(H)                                              |  |           |        |  |      |     |       |           |  |     |       | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     |        |           |  |     |        | 
|                                          |                   |                                                         |                                       |                                                                                            |  |           |        |  |      |     | 2,930  |           |  |     | 2,659  | 
|IA Tech, LLC                              |                   | Diversified/conglomerate service                        |                                       | Secured First Lien Debt (12.0%, Due 6/2021)(D)                                             |  |           | 23,000 |  |      |     | 23,000 |           |  |     | 23,230 | 
|LCR Contractors, LLC                      |                   | Buildings and Real Estate                               |                                       | Secured First Lien Debt (10.0%, Due 1/2021)(D)                                             |  |           | 8,500  |  |      |     | 8,500  |           |  |     | 8,564  | 
|Leeds Novamark Capital I, L.P.            |                   | Private equity fundhealthcare, education and childcare |                                       | Limited Partnership Interest (3.5% ownership, $2,004 uncalled capital commitment)(H)(M)(S) |  |           |        |  |      |     | 991    |           |  |     | 779    | 



12



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##### Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2016

(DOLLAR AMOUNTS IN THOUSANDS)



|                                                             |  |                                        |                                                                                       |                                                                           |  |           |         |  |      |       |         |           |  |       |        | 
|------------------------------------------------------------ |  | -------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- |  | --------- | ------- |  | ---- | ----- | ------- | --------- |  | ----- | ------ | 
|Company(A)                                                   |  | Industry                               |                                                                                       | Investment(B)                                                             |  | Principal |         |  | Cost |       |         | FairValue | 
|NON-CONTROL/NON-AFFILIATE INVESTMENTS(N) (Continued):        |  |                                        |                                                                                       |                                                                           |  |           |         |  |     
|Meridian Rack & Pinion, Inc.(T)                              |  | Automobile                             |                                                                                       | Secured First Lien Debt (13.5%, Due 12/2018)(D)                           |  |           | 4,140   |  |      |       | 4,140   |           |  |       | 3,767  | 
|                                                             |  |                                        |                                                                                       | Preferred Stock (1,449 shares)(F)(H)                                      |  |           |         |  |      |       | 1,449   |           |  |       | 255    | 
|                                                             |  |                                        |                                                                                       |                                                                           |  |           |         |  |      |       |         |           |  |       |        | 
|                                                             |  |                                        |                                                                                       |                                                                           |  |           |         |  |      |       | 5,589   |           |  |       | 4,022  | 
|Merlin International, Inc.                                   |  | Healthcare, education, and childcare   |                                                                                       | Secured Second Lien Debt (11.0%, Due 8/2022)(J)                           |  |           | 10,000  |  |      |       | 10,000  |           |  |       | 10,000 | 
|Mikawaya                                                     |  | Beverage, Food and Tobacco             |                                                                                       | Secured Second Lien Debt (11.5%, Due 1/2021)(D)                           |  |           | 6,750   |  |      |       | 6,750   |           |  |       | 6,649  | 
|                                                             |  |                                        | Common Stock (450 units)(F)(H)                                                        |                                                                           |  |           |         |  |      | 450   |         |           |  | 172   |       
|                                                             |  |                                        |                                                                                       |                                                                           |  |           |         |  |      |       |         |           |  |       |        | 
|                                                             |  |                                        |                                                                                       |                                                                           |  |           |         |  |      |       | 7,200   |           |  |       | 6,821  | 
|Precision International, LLC                                 |  | Machinery                              |                                                                                       | Secured First Lien Debt (10.0% PIK, Due 9/2021)(F)(G)                     |  |           | 600     |  |      |       | 600     |           |  |       | 600    | 
|                                                             |  |                                        | Secured First Lien Mortgage Note (3.0%, Due 9/2017)(F)(G)                             |                                                                           |  | 1,000     |         |  |      | 1,000 |         |           |  | 996   |       
|                                                             |  |                                        |                                                                                       | Membership Unit Warrant (33.3% ownership)(F)(H)                           |  |           |         |  |      |       |        |           |  |       |       | 
|                                                             |  |                                        |                                                                                       |                                                                           |  |           |         |  |      |       |         |           |  |       |        | 
|                                                             |  |                                        |                                                                                       |                                                                           |  |           |         |  |      |       | 1,600   |           |  |       | 1,596  | 
|Travel Sentry, Inc.                                          |  | Diversified/conglomerate service       |                                                                                       | Secured First Lien Debt (9.5%, Due 12/2021)(D)                            |  |           | 9,665   |  |      |       | 9,665   |           |  |       | 9,677  | 
|Triple H Food Processors, LLC                                |  | Beverage, Food and Tobacco             |                                                                                       | Secured First Lien Line of Credit, $1,500 available (7.8%, Due 8/2018)(D) |  |           |        |  |      |       |        |           |  |       |       | 
|                                                             |  |                                        | Secured First Lien Debt (9.8%, Due 8/2020)(D)                                         |                                                                           |  | 7,600     |         |  |      | 7,600 |         |           |  | 7,676 |       
|                                                             |  |                                        |                                                                                       | Common Stock (250,000 units)(F)(H)                                        |  |           |         |  |      |       | 250     |           |  |       | 525    | 
|                                                             |  |                                        |                                                                                       |                                                                           |  |           |         |  |      |       |         |           |  |       |        | 
|                                                             |  |                                        |                                                                                       |                                                                           |  |           |         |  |      |       | 7,850   |           |  |       | 8,201  | 
|TWS Acquisition Corporation                                  |  | Healthcare, education and childcare    |                                                                                       | Secured First Lien Line of Credit, $1,500 available (9.0%, Due 7/2017)(D) |  |           |        |  |      |       |        |           |  |       |       | 
|                                                             |  |                                        |                                                                                       | Secured First Lien Debt (9.0%, Due 7/2020)(D)                             |  |           | 10,000  |  |      |       | 10,000  |           |  |       | 10,050 | 
|                                                             |  |                                        |                                                                                       |                                                                           |  |           |         |  |      |       |         |           |  |       |        | 
|                                                             |  |                                        |                                                                                       |                                                                           |  |           |         |  |      |       | 10,000  |           |  |       | 10,050 | 
|United Flexible, Inc.                                        |  | Diversified/conglomerate manufacturing |                                                                                       | Secured Second Lien Debt (10.5%, 2.0% PIK, Due 2/2022)(D)                 |  |           | 17,632  |  |      |       | 17,632  |           |  |       | 17,280 | 
|                                                             |  |                                        | Preferred Stock (382 shares)(F)(H)                                                    |                                                                           |  |           |         |  |      | 382   |         |           |  | 428   |       
|                                                             |  |                                        |                                                                                       | Common Stock (852 shares)(F)(H)                                           |  |           |         |  |      |       | 44      |           |  |       | 36     | 
|                                                             |  |                                        |                                                                                       |                                                                           |  |           |         |  |      |       |         |           |  |       |        | 
|                                                             |  |                                        |                                                                                       |                                                                           |  |           |         |  |      |       | 18,058  |           |  |       | 17,744 | 
|Vision Government Solutions, Inc.                            |  | Diversified/conglomerate service       |                                                                                       | Secured First Lien Line of Credit, $0 available (7.5%, Due 1/2017)(D)     |  |           | 1,450   |  |      |       | 1,450   |           |  |       | 1,355  | 
|                                                             |  |                                        | Secured First Lien Delayed Draw Term Loan, $1,300 available (10.0%, Due 1/2017)(D)(G) |                                                                           |  | 1,200     |         |  |      | 1,200 |         |           |  | 1,106 |       
|                                                             |  |                                        |                                                                                       | Secured First Lien Debt (9.8%, Due 1/2017)(D)                             |  |           | 9,000   |  |      |       | 9,000   |           |  |       | 8,293  | 
|                                                             |  |                                        |                                                                                       |                                                                           |  |           |         |  |      |       |         |           |  |       |        | 
|                                                             |  |                                        |                                                                                       |                                                                           |  |           |         |  |      |       | 11,650  |           |  |       | 10,754 | 
|WadeCo Specialties, Inc.                                     |  | Oil and gas                            |                                                                                       | Secured First Lien Line of Credit, $1,125 available (8.0%, Due 4/2017)(D) |  |           | 1,175   |  |      |       | 1,174   |           |  |       | 1,127  | 
|                                                             |  |                                        |                                                                                       | Secured First Lien Debt (8.0%, Due 3/2019)(D)                             |  |           | 11,691  |  |      |       | 11,691  |           |  |       | 11,216 | 
|                                                             |  |                                        |                                                                                       | Secured First Lien Debt (12.0%, Due 3/2019)(D)                            |  |           | 7,000   |  |      |       | 7,000   |           |  |       | 6,637  | 
|                                                             |  |                                        |                                                                                       | Preferred Stock (1,000 shares)(F)(H)                                      |  |           |         |  |      |       | 618     |           |  |       |       | 
|                                                             |  |                                        |                                                                                       |                                                                           |  |           |         |  |      |       |         |           |  |       |        | 
|                                                             |  |                                        |                                                                                       |                                                                           |  |           |         |  |      |       | 20,483  |           |  |       | 18,980 | 
|                                                             |  |                                        |                                                                                       |                                                                           |  |           |         |  |      |       |         |           |  |       |        | 
|Subtotal 
Non-Control/Non-Affiliate Proprietary Investments |  |                                        |                                                                                       |                                                                           |  | $         | 216,728 |  |      | $     | 199,430 |          
|                                                             |  |                                        |                                                                                       |                                                                           |  |           |         |  |      |       |         |           |  |      
|Syndicated Investments:                                      |  |                                        |                                                                                       |                                                                           |  |           |         |  |      |       |         |           |  |       |        | 
|Autoparts Holdings Limited                                   |  | Automobile                             |                                                                                       | Secured Second Lien Debt (11.0%, Due 1/2018)(E)                           |  | $         | 700     |  |      | $     | 699     |           |  | $     | 609    | 
|DataPipe, Inc.                                               |  | Diversified/conglomerate service       |                                                                                       | Secured Second Lien Debt (9.0%, Due 9/2019)(E)                            |  |           | 2,000   |  |      |       | 1,951   |           |  |       | 1,965  | 
|NetSmart Technologies, Inc.                                  |  | Healthcare, education and childcare    |                                                                                       | Secured Second Lien Debt (10.5%, Due 10/2023)(E)                          |  |           | 2,000   |  |      |       | 1,952   |           |  |       | 1,960  | 



13



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##### Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2016

(DOLLAR AMOUNTS IN THOUSANDS)



|                                                                                                   |  |                                                             |                                                 |                                                                                    |  |           |        |         |      |       |        |           |  |       |        | 
|-------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------- | ----------------------------------------------- | ---------------------------------------------------------------------------------- |  | --------- | ------ | ------- | ---- | ----- | ------ | --------- |  | ----- | ------ | 
|Company(A)                                                                                         |  | Industry                                                    |                                                 | Investment(B)                                                                      |  | Principal |        |         | Cost |       |        | FairValue | 
|Syndicated Investments (Continued):                                                                |  |                                                             |                                                 |                                                                                    |  |           |        |         |     
|New Trident Holdcorp, Inc.                                                                         |  | Healthcare, education and childcare                         |                                                 | Secured Second Lien Debt (10.3%, Due 7/2020)(E)                                    |  |           | 4,000  |         |      |       | 3,990  |           |  |       | 3,280  | 
|PLATO Learning, Inc.                                                                               |  | Healthcare, education and childcare                         |                                                 | Unsecured Debt (10.0% PIK, Due 6/2020)(D)(G)                                       |  | $         | 3,000  |         |      | $     | 2,960  |           |  | $     | 3,012  | 
|                                                                                                   |  |                                                             | Common Stock (21,429 shares)(F)(H)              |                                                                                    |  |           |        |         |      | 2,637 |        |           |  |      |       
|                                                                                                   |  |                                                             |                                                 |                                                                                    |  |           |        |         |      |       |        |           |  |       |        | 
|                                                                                                   |  |                                                             |                                                 |                                                                                    |  |           |        |         |      |       | 5,597  |           |  |       | 3,012  | 
|PSC Industrial Holdings Corp.                                                                      |  | Diversified/conglomerate service                            |                                                 | Secured Second Lien Debt (9.3%, Due 12/2021)(E)                                    |  |           | 3,500  |         |      |       | 3,443  |           |  |       | 3,273  | 
|RP Crown Parent, LLC                                                                               |  | Electronics                                                 |                                                 | Secured Second Lien Debt (11.3%, Due 12/2019)(R)                                   |  |           | 2,000  |         |      |       | 1,976  |           |  |       | 2,000  | 
|SourceHOV LLC                                                                                      |  | Finance                                                     |                                                 | Secured Second Lien Debt (11.5%, Due 4/2020)(E)                                    |  |           | 5,000  |         |      |       | 4,854  |           |  |       | 3,000  | 
|The Active Network, Inc.                                                                           |  | Electronics                                                 |                                                 | Secured Second Lien Debt (9.5%, Due 11/2021)(E)                                    |  |           | 1,000  |         |      |       | 996    |           |  |       | 980    | 
|Vertellus Specialties Inc.                                                                         |  | Chemicals, plastics and rubber                              |                                                 | Secured First Lien Debt (10.5%, Due 10/2019)(E)(I)                                 |  |           | 3,940  |         |      |       | 3,831  |           |  |       | 2,541  | 
|Vitera Healthcare Solutions, LLC                                                                   |  | Healthcare, education and childcare                         |                                                 | Secured Second Lien Debt (9.3%, Due 11/2021)(E)                                    |  |           | 4,500  |         |      |       | 4,479  |           |  |       | 4,151  | 
|W3 Co.                                                                                             |  | Oil and gas                                                 |                                                 | Secured Second Lien Debt (9.3%, Due 9/2020)(E)                                     |  |           | 499    |         |      |       | 495    |           |  |       | 200    | 
|                                                                                                   |  |                                                             |                                                 |                                                                                    |  |           |        |         |      |       |        |           |  |       |        | 
|Subtotal 
Non-Control/Non-Affiliate Syndicated Investments                                        |  |                                                             |                                                 |                                                                                    |  | $         | 34,263 |         |      | $     | 26,971 |          
|                                                                                                   |  |                                                             |                                                 |                                                                                    |  |           |        |         |      |       |        |           |  |      
|Total
Non-Control/Non-Affiliate Investments (represented 70.3% of total investments at fair value) |  |                                                             | $                                               | 250,991                                                                            |  |           | $      | 226,401 |     
|                                                                                                   |  |                                                             |                                                 |                                                                                    |  |           |        |         |     
|AFFILIATE INVESTMENTS(O):                                                                          |  |                                                             |                                                 |                                                                                    |  |           |        |         |      |       |        |           |  |      
|Proprietary Investments:                                                                           |  |                                                             |                                                 |                                                                                    |  |           |        |         |      |       |        |           |  |       |        | 
|Edge Adhesives Holdings LLC(T)                                                                     |  | Diversified/conglomerate                                    |                                                 | Secured First Lien Debt (12.5%, Due 2/2019)(D)                                     |  | $         | 6,200  |         |      | $     | 6,200  |           |  | $     | 6,076  | 
|                                                                                                   |  | manufacturing                                               |                                                 | Secured First Lien Debt (13.8%, Due 2/2019)(D)                                     |  |           | 1,600  |         |      |       | 1,600  |           |  |       | 1,576  | 
|                                                                                                   |  |                                                             |                                                 | Preferred Stock (2,516 units)(F)(H)                                                |  |           |        |         |      |       | 2,516  |           |  |       |       | 
|                                                                                                   |  |                                                             |                                                 |                                                                                    |  |           |        |         |      |       |        |           |  |       |        | 
|                                                                                                   |  |                                                             |                                                 |                                                                                    |  |           |        |         |      |       | 10,316 |           |  |       | 7,652  | 
|FedCap Partners, LLC                                                                               |  | Private equity fund  aerospace and defense                 |                                                 | Class A Membership Units (80 units, $0 Uncalled Commitment)(H)(L)(S)               |  |           |        |         |      |       | 1,634  |           |  |       | 1,265  | 
|Lignetics, Inc.                                                                                    |  | Diversified natural resources, precious metals and minerals |                                                 | Secured Second Lien Debt (12.0%, Due 2/2021)(D)                                    |  |           | 6,000  |         |      |       | 6,000  |           |  |       | 5,850  | 
|                                                                                                   |  |                                                             | Secured Second Lien Debt (12.0%, Due 2/2021)(D) |                                                                                    |  | 8,000     |        |         |      | 8,000 |        |           |  | 7,800 |       
|                                                                                                   |  |                                                             |                                                 | Common Stock (152,603 shares)(F)(H)                                                |  |           |        |         |      |       | 1,856  |           |  |       | 1,171  | 
|                                                                                                   |  |                                                             |                                                 |                                                                                    |  |           |        |         |      |       |        |           |  |       |        | 
|                                                                                                   |  |                                                             |                                                 |                                                                                    |  |           |        |         |      |       | 15,856 |           |  |       | 14,821 | 
|LWO Acquisitions Company LLC                                                                       |  | Diversified/conglomerate manufacturing                      |                                                 | Secured First Lien Line of Credit, $125 available (6.5%, 2.0% PIK, Due 12/2017)(D) |  |           | 2,471  |         |      |       | 2,471  |           |  |       | 1,977  | 
|                                                                                                   |  |                                                             |                                                 | Secured First Lien Debt (9.5%, 2.0% PIK, Due 12/2019)(D)                           |  |           | 10,723 |         |      |       | 10,723 |           |  |       | 8,578  | 
|                                                                                                   |  |                                                             |                                                 | Common Units (921,000 units)(F)(H)                                                 |  |           |        |         |      |       | 921    |           |  |       |       | 
|                                                                                                   |  |                                                             |                                                 |                                                                                    |  |           |        |         |      |       |        |           |  |       |        | 
|                                                                                                   |  |                                                             |                                                 |                                                                                    |  |           |        |         |      |       | 14,115 |           |  |       | 10,555 | 
|RBC Acquisition Corp.                                                                              |  | Healthcare, education and childcare                         |                                                 | Secured First Lien Debt (8.0%, Due 2/2019)(G)(R)                                   |  | $         | 6,954  |         |      | $     | 6,954  |           |  | $     | 7,219  | 
|                                                                                                   |  |                                                             |                                                 | Secured First Lien Line of Credit, $0 available (6.0%, 3% PIK, Due 12/2016)(G)(R)  |  |           | 4,629  |         |      |       | 4,629  |           |  |       | 4,629  | 
|                                                                                                   |  |                                                             |                                                 | Secured First Lien Debt (8.0%, 4.0% PIK, Due 12/2016)(C)(G)(R)                     |  |           | 13,808 |         |      |       | 13,808 |           |  |       | 14,582 | 
|                                                                                                   |  |                                                             |                                                 | Secured First Lien Mortgage Note (Due 12/2017)(Q)(R)                               |  |           | 7,704  |         |      |       | 7,704  |           |  |       | 7,704  | 
|                                                                                                   |  |                                                             |                                                 | Preferred Stock (4,999,000 shares)(H)(K)(R)                                        |  |           |        |         |      |       | 4,999  |           |  |       | 3,211  | 
|                                                                                                   |  |                                                             |                                                 | Common Stock (2,000,000 shares)(H)(R)                                              |  |           |        |         |      |       | 370    |           |  |       |       | 
|                                                                                                   |  |                                                             |                                                 |                                                                                    |  |           |        |         |      |       |        |           |  |       |        | 
|                                                                                                   |  |                                                             |                                                 |                                                                                    |  |           |        |         |      |       | 38,464 |           |  |       | 37,345 | 
|                                                                                                   |  |                                                             |                                                 |                                                                                    |  |           |        |         |      |       |        |           |  |       |        | 
|Subtotal  Affiliate Proprietary Investments                                                       |  |                                                             |                                                 |                                                                                    |  | $         | 80,385 |         |      | $     | 71,638 |          
|                                                                                                   |  |                                                             |                                                 |                                                                                    |  |           |        |         |      |       |        |           |  |       |        | 



14



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##### Table of Contents

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2016

(DOLLAR AMOUNTS IN THOUSANDS)



|                                                                                            |  |                         |   |                                                                            |  |           |        |        |      |   |         |           |  |   |         | 
|------------------------------------------------------------------------------------------- |  | ----------------------- | - | -------------------------------------------------------------------------- |  | --------- | ------ | ------ | ---- | - | ------- | --------- |  | - | ------- | 
|Company(A)                                                                                  |  | Industry                |   | Investment(B)                                                              |  | Principal |        |        | Cost |   |         | FairValue | 
|AFFILIATE INVESTMENTS(O)(Continued):                                                        |  |                         |   |                                                                            |  |           |        |        |     
|Syndicated Investments:                                                                     |  |                         |   |                                                                            |  |           |        |        |      |   |         |           |  |   |         | 
|Targus Cayman HoldCo Limited                                                                |  | Textiles and leather    |   | Secured First Lien Debt (15.0% PIK, Due 12/2019)(D)(G)                     |  |           | 2,285  |        |      |   | 2,285   |           |  |   | 2,279   | 
|                                                                                            |  |                         |   | Common Stock (526,141 shares)(F)(H)                                        |  |           |        |        |      |   | 2,343   |           |  |   | 1,556   | 
|                                                                                            |  |                         |   |                                                                            |  |           |        |        |      |   |         |           |  |   |         | 
|                                                                                            |  |                         |   |                                                                            |  |           |        |        |      |   | 4,628   |           |  |   | 3,835   | 
|                                                                                            |  |                         |   |                                                                            |  |           |        |        |      |   |         |           |  |  
|Total Affiliate Investments (represented 23.4% of total investments at fair
value)          |  |                         | $ | 85,013                                                                     |  |           | $      | 75,473 |     
|                                                                                            |  |                         |   |                                                                            |  |           |        |        |     
|CONTROL
INVESTMENTS(P):                                                                     |  |                         |   |                                                                            |  |           |        |        |      |   |         |           |  |  
|Proprietary Investments:                                                                    |  |                         |   |                                                                            |  |           |        |        |      |   |         |           |  |  
|Defiance Integrated Technologies, Inc.                                                      |  | Automobile              |   | Secured Second Lien Debt (11.0%, Due 2/2019)(F)                            |  | $         | 6,225  |        |      | $ | 6,225   |           |  | $ | 6,225   | 
|                                                                                            |  |                         |   | Common Stock (33,321 shares)(F)(H)                                         |  |           |        |        |      |   | 580     |           |  |   | 3,981   | 
|                                                                                            |  |                         |   |                                                                            |  |           |        |        |      |   |         |           |  |   |         | 
|                                                                                            |  |                         |   |                                                                            |  |           |        |        |      | $ | 6,805   |           |  | $ | 10,206  | 
|PIC 360, LLC                                                                                |  | Machinery               |   | Secured First Lien Debt (14.0%, Due 12/2017)(F)                            |  |           | 4,000  |        |      |   | 4,000   |           |  |   | 4,000   | 
|                                                                                            |  |                         |   | Common Equity Units (750 units)(F)                                         |  |           |        |        |      |   | 1       |           |  |   | 1       | 
|                                                                                            |  |                         |   |                                                                            |  |           |        |        |      |   |         |           |  |   |         | 
|                                                                                            |  |                         |   |                                                                            |  |           |        |        |      |   | 4,001   |           |  |   | 4,001   | 
|Sunshine Media Holdings                                                                     |  | Printing and publishing |   | Secured First Lien Line of Credit, $672 available (8.0%, Due 5/2018)(F)(G) |  |           | 1,328  |        |      |   | 1,328   |           |  |   | 1,328   | 
|                                                                                            |  |                         |   | Secured First Lien Debt (8.0%, Due 5/2018)(F)(G)                           |  |           | 5,000  |        |      |   | 5,000   |           |  |   | 1,388   | 
|                                                                                            |  |                         |   | Secured First Lien Debt (4.8%, Due 5/2018)(F)(I)                           |  |           | 11,948 |        |      |   | 11,948  |           |  |   | 3,317   | 
|                                                                                            |  |                         |   | Secured First Lien Debt (5.5%, Due 5/2018)(C)(F)(I)                        |  |           | 10,700 |        |      |   | 10,700  |           |  |   |        | 
|                                                                                            |  |                         |   | Preferred Stock (15,270 shares)(F)(H)(K)                                   |  |           |        |        |      |   | 5,275   |           |  |   |        | 
|                                                                                            |  |                         |   | Common Stock (1,867 shares)(F)(H)                                          |  |           |        |        |      |   | 740     |           |  |   |        | 
|                                                                                            |  |                         |   | Common Stock Warrants (72 shares)(F)(H)                                    |  |           |        |        |      |   |        |           |  |   |        | 
|                                                                                            |  |                         |   |                                                                            |  |           |        |        |      |   |         |           |  |   |         | 
|                                                                                            |  |                         |   |                                                                            |  |           |        |        |      |   | 34,991  |           |  |   | 6,033   | 
|                                                                                            |  |                         |   |                                                                            |  |           |        |        |      |   |         |           |  |   |         | 
|Total Control Proprietary Investments (represented 6.3% of total investments at fair
value) |  |                         | $ | 45,797                                                                     |  |           | $      | 20,240 |     
|                                                                                            |  |                         |   |                                                                            |  |           |        |        |      |   |         |           |  |   |         | 
|TOTAL INVESTMENTS(U)                                                                        |  |                         |   |                                                                            |  |           |        |        |      | $ | 381,801 |           |  | $ | 322,114 | 
|                                                                                            |  |                         |   |                                                                            |  |           |        |        |      |   |         |           |  |   |         | 



|(A) | Certain of the securities listed in this schedule are issued by affiliate(s) of the indicated portfolio company. The majority of the securities listed, totaling $282.2 million at fair value, are pledged as
collateral to our Credit Facility, as described further in Note 5Borrowings.Under the Investment Company Act of 1940, as amended, (the 1940 Act), we may not acquire any non-qualifying
assets unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. As of September 30, 2016, two of our investments (FedCap Partners, LLC and Leeds Novamark Capital I, L.P.) are considered non-qualifying assets under Section 55 of the 1940 Act. Such non-qualifying assets represent 6.6% of total investments, at fair value, as of September 30, 2016.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | Percentages represent cash interest rates (which are generally indexed off of the 30-day London Interbank Offered Rate (LIBOR)) in effect at September 30, 2016,
and due dates represent the contractual maturity date. If applicable, paid-in-kind (PIK) interest rates are noted separately from the cash interest rates and
any unused line of credit fees are excluded. Secured first lien debt securities generally take the form of first priority liens on substantially all of the assets of the underlying portfolio company businesses.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(C) | Last out tranche (LOT) of secured first lien debt, meaning if the portfolio company is liquidated, the holder of the LOT is generally paid after the other secured first lien debt holders but before all other
debt and equity holders.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(D) | Fair value was based on an internal yield analysis or on estimates of value submitted by Standard & Poors Securities Evaluations, Inc. (SPSE).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------

|(E) | Fair value was based on the indicative bid price on or near September 30, 2016, offered by the respective syndication agents trading desk.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|(F) | Fair value was based on the total enterprise value of the portfolio company, which was then allocated to the portfolio companys securities in order of their relative priority in the capital structure.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(G) | Debt security has a fixed interest rate.
|--- | ----------------------------------------

|(H) | Investment is non-income producing.
|--- | -----------------------------------

|(I) | Investment is on non-accrual status.
|--- | ------------------------------------

|(J) | New investment valued at cost, as it was determined that the price paid during the quarter ended September 30, 2016 best represents fair value as of
September 30, 2016.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(K) | Aggregates all shares of such class of stock owned without regard to specific series owned within such class, some series of which may or may not be voting shares.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(L) | There are certain limitations on our ability to transfer our units owned, withdraw or resign prior to dissolution of the entity, which must occur no later than
May 3, 2020.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(M) | There are certain limitations on our ability to withdraw our partnership interest prior to dissolution of the entity, which must occur no later than May 9, 2024
or two years after all outstanding leverage has matured.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(N) | Non-Control/Non-Affiliate investments, as defined by the 1940 Act, are those that are
neither Control nor Affiliate investments and in which we own less than 5.0% of the issued and outstanding voting securities.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(O) | Affiliate investments, as defined by the 1940 Act, are those in which we own, with the power to vote, between and inclusive of 5.0% and 25.0% of the issued and
outstanding voting securities.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(P) | Control investments, as defined by the 1940 Act, are those where we have the power to exercise a controlling influence over the management or policies of the
portfolio company, which may include owning, with the power to vote, more than 25.0% of the issued and outstanding voting securities.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(Q) | This investment does not have a stated interest rate that is payable thereon.
|--- | -----------------------------------------------------------------------------

|(R) | Fair value was based on the expected exit or payoff amount, where such event has occurred or is expected to occur imminently.
|--- | -----------------------------------------------------------------------------------------------------------------------------

|(S) | Fair value was based on net asset value provided by the fund as a practical expedient.
|--- | --------------------------------------------------------------------------------------

|(T) | One of our affiliated funds, Gladstone Investment Corporation, co-invested with us in this portfolio company pursuant to an exemptive order granted by the U.S. Securities and
Exchange Commission.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(U) | Cumulative gross unrealized depreciation for federal income tax purposes is $75.3 million; cumulative gross unrealized appreciation for federal income tax purposes is $8.8 million. Cumulative net unrealized
depreciation is $66.5 million, based on a tax cost of $388.6 million.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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GLADSTONE CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DECEMBER 31, 2016

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND AS OTHERWISE INDICATED)

NOTE 1. ORGANIZATION

Gladstone Capital Corporation was
incorporated under the Maryland General Corporation Law on May 30, 2001 and completed an initial public offering on August 24, 2001. The terms the Company, we, our and us all refer to
Gladstone Capital Corporation and its consolidated subsidiaries. We are an externally managed, closed-end, non-diversified management investment company that has elected
to be treated as a business development company (BDC) under the Investment Company Act of 1940, as amended (the 1940 Act), and is applying the guidance of the Financial Accounting Standards Board (the FASB)
Accounting Standards Codification (ASC) Topic 946 Financial Services-Investment Companies(ASC 946). In addition, we have elected to be treated for tax purposes as a regulated investment company (RIC) under
the Internal Revenue Code of 1986, as amended (the Code). We were established for the purpose of investing in debt and equity securities of established private businesses operating in the United States (U.S). Our investment
objectives are to: (1) achieve and grow current income by investing in debt securities of established lower middle market companies (which we generally define as companies with annual earnings before interest, taxes, depreciation and
amortization of $3 million to $15 million) in the U.S. that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that
grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity
investments for capital gains.

Gladstone Business Loan, LLC (Business Loan), a wholly-owned subsidiary of ours, was established on
February 3, 2003, for the sole purpose of owning a portion of our portfolio of investments in connection with our Credit Facility (defined in Note 5  Borrowings).

Gladstone Financial Corporation (Gladstone Financial), a wholly-owned subsidiary of ours, was established on November 21, 2006, for the
purpose of holding a license to operate as a Specialized Small Business Investment Company. Gladstone Financial acquired this license in February 2007. The license enables us to make investments in accordance with the United States Small Business
Administration guidelines for specialized small business investment companies. As of December 31, 2016 and September 30, 2016, we held no investments in portfolio companies through Gladstone Financial.

The financial statements of Business Loan and Gladstone Financial are consolidated with ours. We also have significant subsidiaries whose financial statements
are not consolidated with ours. Refer to Note 12Unconsolidated Significant Subsidiaries for additional information regarding our unconsolidated significant subsidiaries.

We are externally managed by Gladstone Management Corporation (the Adviser), a Delaware corporation and a U.S. Securities and Exchange Commission
(the SEC) registered investment adviser and an affiliate of ours, pursuant to an investment advisory and management agreement (the Advisory Agreement). Administrative services are provided by our affiliate, Gladstone
Administration, LLC (the Administrator), a Delaware limited liability company, pursuant to an administration agreement (the Administration Agreement). Refer to Note 4Related Party Transactions for additional
information regarding these arrangements.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Statements and Basis of Presentation

We prepare our interim financial statements in accordance with accounting principles generally accepted in the U.S. (GAAP) for interim financial
information and pursuant to the requirements for reporting on Form 10-Q and Articles 6 and 10 of Regulation S-X. Accordingly, we have not included in this
quarterly report all of the information and notes required by GAAP for annual financial statements. The accompanying Consolidated Financial Statements include our accounts and those of our wholly-owned subsidiaries. All intercompany balances
and transactions have been eliminated in consolidation. In accordance with Article 6 of Regulation S-X, we do not consolidate portfolio company investments. Under the investment company rules and regulations
pursuant to the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide for Investment Companies, codified in ASC 946, we are precluded from consolidating any entity other than another investment company,
except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries. In our opinion, all adjustments, consisting solely of
normal recurring accruals, necessary for the fair statement of financial statements for the interim periods have been included. The results of operations for the three months ended December 31, 2016, are not necessarily indicative of results
that ultimately may be achieved for the fiscal year. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016, as filed with the SEC on November 21, 2016.

Our
accompanying fiscal year-end Consolidated Statement of Assets and Liabilities was derived from audited financial statements, but does not include all disclosures required by GAAP.



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Use of Estimates

Preparing financial statements requires management to make estimates and assumptions that affect the amounts reported in our accompanying Consolidated
Financial Statements and accompanying notes. Actual results may differ from those estimates.

Reclassifications

Certain amounts have been reclassified to conform to the current year presentation.

In April 2015, the FASB issued Accounting Standards Update 2015-03, Simplifying the Presentation of Debt
Issuance Costs (ASU 2015-03), which simplifies the presentation of debt issuance costs. ASU 2015-03 requires the presentation of debt issuance
costs as a deduction from the carrying amount of the related debt liability instead of as a deferred financing cost asset on the balance sheet. In August 2015, the FASB issued Accounting Standards Update
2015-15, Interest  Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (ASU 2015-15), which codifies an SEC staff announcement that entities are permitted
to defer and present debt issuance costs related to line of credit arrangements as assets. ASU 2015-03 was effective for annual reporting periods beginning after December 15, 2015 and interim periods
within those years, and we adopted ASU 2015-03 during the three months ended December 31, 2016. ASU 2015-15 was effective immediately and we opted to continue to
present debt issuance costs related to line of credit arrangements as assets.

As of December 31, 2016 and September 30, 2016, we had
unamortized deferred financing costs related to our mandatorily redeemable preferred stock of $1.6 million. These costs have been reclassified from Deferred financing costs, net, to Mandatorily redeemable preferred stock, net. All periods
presented have been retrospectively adjusted.

The following table summarizes the retrospective adjustment and the overall impact on the previously
reported consolidated financial statements:



|                                            |  |                       |        |  |                          |   |        | 
|------------------------------------------- |  | --------------------- | ------ |  | ------------------------ | - | ------ | 
|                                            |  | September 30, 2016    |       
|                                            |  | As PreviouslyReported |        |  | RetrospectiveApplication |  
|Deferred financing costs, net               |  | $                     | 3,161  |  |                          | $ | 1,521  | 
|Mandatorily redeemable preferred stock, net |  |                       | 61,000 |  |                          |   | 59,360 | 

Investment Valuation Policy

Accounting Recognition

We record our investments at fair
value in accordance with the FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (ASC 820) and the 1940 Act. Investment transactions are recorded on the trade date. Realized gains
or losses are measured by the difference between the net proceeds from the repayment or sale and amortized cost basis of the investment, without regard to unrealized depreciation or appreciation previously recognized, and include investments charged
off during the period, net of recoveries. Unrealized depreciation or appreciation primarily reflects the change in investment fair values, including the reversal of previously recorded unrealized depreciation or appreciation when gains or losses are
realized.

Board Responsibility

In accordance with
the 1940 Act, our Board of Directors has the ultimate responsibility for reviewing and approving, in good faith, the fair value of our investments based on our investment valuation policy, which has been approved by our Board of Directors (the
Policy). Such review occurs in three phases. First, prior to its quarterly meetings, our Board of Directors receives written valuation recommendations and supporting materials provided by professionals of the Adviser and
Administrator with oversight and direction from our chief valuation officer, who reports directly to our Board of Directors (the Valuation Team). Second, the Valuation Committee of our Board of Directors, comprised entirely of
independent directors, meets to review the valuation recommendations and supporting materials. Third, after the Valuation Committee concludes its meeting, it and our chief valuation officer present the Valuation Committees findings to the
entire Board of Directors and, after discussion, the Board of Directors ultimately approves the value of our portfolio of investments in accordance with the Policy.

There is no single method for determining fair value (especially for privately-held businesses), as fair value depends upon the specific facts and
circumstances of each individual investment. In determining the fair value of our investments, the Valuation Team, led by our chief valuation officer, uses the Policy and each quarter the Valuation Committee and Board of Directors reviews the
Policy to determine if changes are advisable and also reviews whether the Valuation Team has applied the Policy consistently.

Use of Third Party
Valuation Firms

The Valuation Team engages third party valuation firms to provide independent assessments of fair value of certain of our investments.



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Standard & Poors Securities Evaluation, Inc. (SPSE), a valuation specialist, generally
provides estimates of fair value on our proprietary debt investments. The Valuation Team, in accordance with the Policy, generally assigns SPSEs estimates of fair value to our debt investments where we do not have the ability to effectuate a
sale of the applicable portfolio company. The Valuation Team corroborates SPSEs estimates of fair value using one or more of the valuation techniques discussed below. The Valuation Teams estimate of value on a specific debt investment
may significantly differ from SPSEs. When this occurs, the Valuation Committee and Board of Directors review whether the Valuation Team has followed the Policy and whether the Valuation Teams recommended fair value is reasonable in light
of the Policy and other facts and circumstances and then votes to accept or reject the Valuation Teams recommended fair value.

We may engage other
independent valuation firms to provide earnings multiple ranges, as well as other information, and evaluate such information for incorporation into the total enterprise value of certain of our investments. Generally, at least once per year, we
engage an independent valuation firm to value or review our valuation of our significant equity investments, which includes providing the information noted above. The Valuation Team evaluates such information for incorporation into our total
enterprise value, including review of all inputs provided by the independent valuation firm. The Valuation Team then makes a recommendation to our Valuation Committee and Board of Directors as to the fair value. Our Board of Directors
reviews the recommended fair value, whether it is reasonable in light of the Policy, as well as other relevant facts and circumstances and then votes to accept or reject the Valuation Teams recommended fair value.

Valuation Techniques

In accordance with ASC 820, the
Valuation Team uses the following techniques when valuing our investment portfolio:



| |  |  | Total Enterprise Value  In determining the fair value using a total enterprise value (TEV), the Valuation Team first calculates the TEV of the portfolio company by incorporating some or all of
the following factors: the portfolio companys ability to make payments and other specific portfolio company attributes; the earnings of the portfolio company (the trailing or projected twelve month revenue or earnings before interest, taxes,
depreciation and amortization (EBITDA)); EBITDA or revenue multiples obtained from our indexing methodology whereby the original transaction EBITDA or revenue multiple at the time of our closing is indexed to a general subset of
comparable disclosed transactions and EBITDA or revenue multiples from recent sales to third parties of similar securities in similar industries; a comparison to publicly traded securities in similar industries, inputs provided by an independent
valuation firm, if any, and other pertinent factors. The Valuation Team generally reviews industry statistics and may use outside experts when gathering this information. Once the TEV is determined for a portfolio company, the Valuation Team then
allocates the TEV to the portfolio companys securities in order of their relative priority in the capital structure. Generally, the Valuation Team uses TEV to value our equity investments and, in the circumstances where we have the ability to
effectuate a sale of a portfolio company, our debt investments.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

TEV is primarily calculated using EBITDA or revenue
multiples; however, TEV may also be calculated using a discounted cash flow (DCF) analysis whereby future expected cash flows of the portfolio company are discounted to determine a net present value using estimated risk-adjusted discount
rates, which incorporate adjustments for nonperformance and liquidity risks. Generally, the Valuation Team uses the DCF to calculate the TEV to corroborate estimates of value for our equity investments where we do not have the ability to effectuate
a sale of a portfolio company or for debt of credit impaired portfolio companies.



| |  |  | Yield Analysis  The Valuation Team generally determines the fair value of our debt investments using the yield analysis, which includes a DCF calculation and the Valuation Teams own assumptions,
including, but not limited to, estimated remaining life, current market yield, current leverage, and interest rate spreads. This technique develops a modified discount rate that incorporates risk premiums including, among other things, increased
probability of default, increased loss upon default and increased liquidity risk. Generally, the Valuation Team uses the yield analysis to corroborate both estimates of value provided by SPSE and market quotes.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Market Quotes  For our syndicate investments for which a limited market exists, fair value is generally based on readily available and reliable market quotations which are corroborated by the Valuation Team
(generally by using the yield analysis explained above). In addition, the Valuation Team assesses trading activity for similar syndicated investments and evaluates variances in quotations and other market insights to determine if any available
quoted prices are reliable. Typically, the Valuation Team uses the lower indicative bid price (IBP) in the bid-to-ask price range obtained from the
respective originating syndication agents trading desk on or near the valuation date. The Valuation Team may take further steps to consider additional information to validate that price in accordance with the Policy.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Investments in Funds  For equity investments in other funds, where we cannot effectuate a sale, the Valuation Team generally determines the fair value of our uninvested capital at par value and of our
invested capital at the net asset value (NAV) provided by the fund. The Valuation Team may also determine fair value of our investments in other investment funds based on the capital accounts of the underlying entity.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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In addition to the above valuation techniques, the Valuation Team may also consider other factors when
determining fair values of our investments, including, but not limited to: the nature and realizable value of the collateral, including external parties guaranties; any relevant offers or letters of intent to acquire the portfolio company;
timing of expected loan repayments; and the markets in which the portfolio company operates. If applicable, new and follow-on proprietary debt and equity investments made during the current reporting quarter
(the quarter ended December 31, 2016) are generally valued at original cost basis.

Fair value measurements of our investments may involve subjective
judgments and estimates and due to the inherent uncertainty of determining these fair values, the fair value of our investments may fluctuate from period to period and may differ materially from the values that could be obtained if a ready market
for these securities existed. Our NAV could be materially affected if the determinations regarding the fair value of our investments are materially different from the values that we ultimately realize upon our exit of such securities. Additionally,
changes in the market environment and other events that may occur over the life of the investment may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. Further, such
investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize
significantly less than the value at which it is recorded.

Refer to Note 3Investments for additional information regarding fair value
measurements and our application of ASC 820.

Revenue Recognition Policy

Interest Income Recognition

Interest income, including
the amortization of premiums, acquisition costs and amendment fees, the accretion of original issue discounts (OID), and paid-in-kind (PIK)
interest, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due or if our qualitative assessment indicates that the debtor is unable to service its debt
or other obligations, we will place the loan on non-accrual status and cease recognizing interest income on that loan for financial reporting purposes until the borrower has demonstrated the ability and intent
to pay contractual amounts due. However, we remain contractually entitled to this interest. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis depending
upon managements judgment. Generally, non-accrual loans are restored to accrual status when past due principal and interest are paid and, in managements judgment, are likely to remain current, or
due to a restructuring, the interest income is deemed to be collectible. At December 31, 2016, one portfolio company, Sunshine Media Holdings, was partially on non-accrual status with an aggregate debt
cost basis of approximately $19.1 million, or 6.1% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of approximately $3.0 million, or 1.1% of the fair value of all debt investments in our portfolio.
At September 30, 2016, two portfolio companies were either fully or partially on non-accrual status with an aggregate debt cost basis of approximately $26.5 million, or 7.7% of the cost basis of all
debt investments in our portfolio, and an aggregate fair value of approximately $5.9 million, or 1.9% of the fair value of all debt investments in our portfolio.

We currently hold, and we expect to hold in the future, some loans in our portfolio that contain OID or PIK provisions. We recognize OID for loans originally
issued at discounts and recognize the income over the life of the obligation based on an effective yield calculation. PIK interest, computed at the contractual rate specified in a loan agreement, is added to the principal balance of a loan and
recorded as income over the life of the obligation. Thus, the actual collection of PIK income may be deferred until the time of debt principal repayment. To maintain our ability to be taxed as a RIC, we may need to pay out both of our OID and PIK non-cash income amounts in the form of distributions, even though we have not yet collected the cash on either.

As of
December 31, 2016 and September 30, 2016, we had 10 and 12 OID loans, respectively, primarily from the syndicated loans in our portfolio. We recorded OID income of $20 during the three months ended December 31, 2016 and
$0.1 million during the three months ended December 31, 2015. The unamortized balance of OID investments as of December 31, 2016 and September 30, 2016 totaled $0.6 million and $0.5 million, respectively. As of
December 31, 2016 and September 30, 2016, we had eight and seven investments which had a PIK interest component, respectively. We recorded PIK interest income of $1.2 million during the three months ended December 31, 2016 and
$0.1 million during the three months ended December 31, 2015. We collected $1.0 million and $0 in PIK interest in cash during the three months ended December 31, 2016 and 2015, respectively.

Other Income Recognition

We generally record success
fees upon receipt of cash. Success fees are contractually due upon a change of control in a portfolio company, typically from an exit or sale. We recorded $1.5 million and $0.8 million in success fee income during the three months ended
December 31, 2016 and 2015, respectively.

Dividend income on equity investments is accrued to the extent that such amounts are expected to be
collected and if we have the option to collect such amounts in cash. We recorded $0 and $0.1 million of dividend income during the three months ended December 31, 2016 and 2015, respectively.

During the three months ended December 31, 2016, we recharacterized $0.2 million of dividend income from our investment in Behrens Manufacturing,
LLC (Behrens) recorded during our fiscal year ended September 30, 2016 as a return of capital.



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We generally record prepayment fees upon receipt of cash. Prepayment fees are contractually due at the time of an
investments exit, based on the prepayment fee schedule. We recorded $20 and $0.1 million in prepayment fees during the three months ended December 31, 2016 and 2015, respectively.

Success fees, prepayment fees, dividend income, and any other income amounts are all recorded in other income in our accompanying Consolidated Statements
of Operations.

Recent Accounting Pronouncements

In November 2016, the FASB issued Accounting Standards Update 2016-18, Restricted Cash (a consensus of the
Emerging Issues Task Force) (ASU 2016-18), which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally
described as restricted cash or restricted cash equivalents. We are currently assessing the impact of ASU 2016-18 and do not anticipate a material impact on our financial position, results of operations
or cash flows. ASU 2016-18 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted.

In August 2016, the FASB issued Accounting Standards Update 2016-15, Classification of Certain Cash Receipts and
Cash Payments (a consensus of the Emerging Issues Task Force) (ASU 2016-15), which is intended to reduce diversity in practice in how certain transactions are classified in the statement of
cash flows. We are currently assessing the impact of ASU 2016-15 and do not anticipate a material impact on our cash flows. ASU 2016-15 is effective for annual
reporting periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted.

In January
2016, the FASB issued Accounting Standards Update 2016-01, Financial InstrumentsOverall: Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which changes how entities measure certain equity investments and how entities present changes in the fair value of financial liabilities measured under the fair value option that are attributable to
instrument-specific credit risk. We are currently assessing the impact of ASU 2016-01 and do not anticipate a material impact on our financial position, results of operations or cash flows. ASU 2016-01 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted for certain aspects of ASU 2016-01 relating to the recognition of changes in fair value of financial liabilities when the fair value option is elected.

In March 2016, the FASB issued Accounting Standards Update 2016-06, Contingent Put and Call Options in Debt Instruments
(ASU 2016-06), which clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related. We are currently assessing the impact
of ASU 2016-06 and do not anticipate a material impact on our financial position, results of operations or cash flows. ASU 2016-06 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those
fiscal years, with early adoption permitted.

In February 2015, the FASB issued Accounting Standards Update
2015-02, Amendments to the Consolidation Analysis (ASU 2015-02), which amends or supersedes the scope and consolidation guidance under
existing GAAP. The adoption of ASU 2015-02 did not have a material impact on our financial position, results of operations or cash flows. ASU 2015-02 is effective for
annual reporting periods beginning after December 15, 2015 and interim periods within those years, and we adopted ASU 2015-02 effective April 1, 2016. In October 2016, the FASB issued Accounting
Standards Update 2016-17, Interests Held through Related Parties That Are under Common Control (ASU 2016-17), which amends the
consolidation guidance in ASU 2015-02 regarding the treatment of indirect interests held through related parties that are under common control. We are currently assessing the impact of ASU 2016-17 and do not anticipate a material impact on our financial position, results of operations or cash flows. ASU 2016-17 is effective for annual reporting periods beginning
after December 15, 2016 and interim periods within those years, with early adoption permitted.

In August 2014, the FASB issued Accounting Standards
Update 201415, Presentation of Financial Statements  Going Concern (Subtopic 205  40): Disclosure of Uncertainties About an Entitys Ability to Continue as a Going Concern (ASU 2014-15). ASU 2014-15 requires management to evaluate whether there are conditions or events that raise substantial doubt about the entitys ability to continue as
a going concern, and to provide certain disclosures when it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. Since this guidance focuses on
certain disclosures to the financial statements, we anticipate no impact on our financial position, results of operations or cash flows from adopting this standard. We are currently assessing the additional disclosure requirements, if any, of ASU 2014-15. ASU 2014-15 is effective for annual periods ending after December 31, 2016 and interim periods thereafter, with early adoption permitted.



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In May 2014, the FASB issued Accounting Standards Update 2014-09,
Revenue from Contracts with Customers (ASU 2014-09), which was amended in March 2016 by FASB Accounting Standards Update 2016-08,
Principal versus Agent Considerations (ASU 2016-08), in April 2016 by FASB Accounting Standards Update 2016-10, Identifying
Performance Obligations and Licensing(ASU 2016-10), in May 2016 by FASB Accounting Standards Update 2016-12, Narrow-Scope Improvements
and Practical Expedients(ASU 2016-12), and in December 2016 by FASB Accounting Standards Update 2016-20, Technical Corrections and
Improvements to Topic 606(ASU 2016-20). ASU 2014-09, as amended, supersedes or replaces nearly all GAAP revenue recognition guidance. The new
guidance establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time and will expand disclosures about revenue. We are currently assessing the impact of ASU 2014-09, as amended, and do not anticipate a material impact on our financial position, results of operations or cash flows from adopting this standard. In July 2015, the FASB issued Accounting Standards Update 2015-14, Deferral of the Effective Date, which deferred the effective date of ASU 2014-09. ASU 2014-09, as amended
by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12, and ASU 2016-20, is now effective for annual reporting periods beginning after December 15, 2017 and interim periods within those years, with early adoption permitted for annual reporting periods beginning after
December 15, 2016 and interim periods within those years.

NOTE 3. INVESTMENTS

Fair Value

In accordance with ASC 820, the fair value of
each investment is determined to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between willing market participants on the measurement date. This fair value definition focuses on exit
price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for fair value
measurements based upon the transparency of inputs to the valuation of a financial instrument as of the measurement date.



| |  |  | Level1  inputs to the valuation methodology are quoted prices (unadjusted) for identical financial instruments in active markets;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level2 inputs to the valuation methodology include quoted prices for similar financial instruments in active or inactive markets, and inputs that are observable for the financial
instrument, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are in those markets for which there are few transactions, the prices are not current, little public information exists or
instances where prices vary substantially over time or among brokered market makers; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are those inputs that reflect assumptions that market
participants would use when pricing the financial instrument and can include the Valuation Teams assumptions based upon the best available information.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

When a determination is made to classify our investments within Level 3 of the valuation hierarchy, such determination is based upon the significance of
the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (or, components that are actively quoted and
can be validated to external sources). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. As of December 31, 2016
and September 30, 2016, all of our investments were valued using Level 3 inputs and during the three months ended December 31, 2016 and 2015, there were no investments transferred into or out of Levels 1, 2 or 3. The following table
presents our investments carried at fair value as of December 31, 2016 and September 30, 2016, by caption on our accompanying Consolidated Statements of Assets and Liabilitiesand by security type, all of which are valued using
level 3 inputs:



|                                            |  |                                                                                                 |         |  |                    |   |         | 
|------------------------------------------- |  | ----------------------------------------------------------------------------------------------- | ------- |  | ------------------ | - | ------- | 
|                                            |  | Total Recurring Fair Value Measurements Reported in                                             |        
|                                            |  | Consolidated Statements of Assets and LiabilitiesUsingSignificant Unobservable Inputs (Level
3) |        
|                                            |  | December 31, 2016                                                                               |         |  | September 30, 2016 |  
|Non-Control/Non-Affiliate
Investments       |  |                                                                                                 |         |  |                    |   |         | 
|Secured first lien debt                     |  | $                                                                                               | 125,798 |  |                    | $ | 134,067 | 
|Secured second lien debt                    |  |                                                                                                 | 94,506  |  |                    |   | 80,446  | 
|Unsecured debt                              |  |                                                                                                 | 3,091   |  |                    |   | 3,012   | 
|Preferred equity                            |  |                                                                                                 | 3,788   |  |                    |   | 7,051   | 
|Common equity/equivalents                   |  |                                                                                                 | 3,806   |  |                    |   | 1,825   | 
|                                            |  |                                                                                                 |         |  |                    |   |         | 
|Total
Non-Control/Non-Affiliate Investments |  | $                                                                                               | 230,989 |  |                    | $ | 226,401 | 
|                                            |  |                                                                                                 |         |  |                    |   |         | 
|Affiliate Investments                       |  |                                                                                                 |         |  |                    |   |         | 
|Secured first lien debt                     |  | $                                                                                               | 20,903  |  |                    | $ | 54,620  | 
|Secured second lien debt                    |  |                                                                                                 | 13,370  |  |                    |   | 13,650  | 
|Preferred equity                            |  |                                                                                                 | 627     |  |                    |   | 3,211   | 
|Common equity/equivalents                   |  |                                                                                                 | 3,091   |  |                    |   | 3,992   | 
|                                            |  |                                                                                                 |         |  |                    |   |         | 
|Total Affiliate Investments                 |  | $                                                                                               | 37,991  |  |                    | $ | 75,473  | 
|                                            |  |                                                                                                 |         |  |                    |   |         | 
|Control Investments                         |  |                                                                                                 |         |  |                    |   |         | 
|Secured first lien debt                     |  | $                                                                                               | 9,629   |  |                    | $ | 10,034  | 
|Secured second lien debt                    |  |                                                                                                 | 6,145   |  |                    |   | 6,224   | 
|Common equity/equivalents                   |  |                                                                                                 | 3,492   |  |                    |   | 3,982   | 
|                                            |  |                                                                                                 |         |  |                    |   |         | 
|Total Control Investments                   |  | $                                                                                               | 19,266  |  |                    | $ | 20,240  | 
|                                            |  |                                                                                                 |         |  |                    |   |         | 
|                                            |  |                                                                                                
|Total Investments, at Fair Value            |  | $                                                                                               | 288,246 |  |                    | $ | 322,114 | 
|                                            |  |                                                                                                 |         |  |                    |   |         | 



22



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##### Table of Contents

In accordance with ASU 2011-04, Fair Value Measurement (Topic
820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Reporting Standards (IFRS), (ASU 2011-04), the following table
provides quantitative information about our Level 3 fair value measurements of our investments as of December 31, 2016 and September 30, 2016. The table below is not intended to be
all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements. The weighted average calculations in the table below are based on the
principal balances for all debt related calculations and on the cost basis for all equity related calculations for the particular input.



|                                             |  |                                                                |          |  |                   |  |          |                                |  |  |                                |  |  |                  |                   |  |                   |  |                            |  |  |  |                            | 
|-------------------------------------------- |  | -------------------------------------------------------------- | -------- |  | ----------------- |  | -------- | ------------------------------ |  |  | ------------------------------ |  |  | ---------------- | ----------------- |  | ----------------- |  | -------------------------- |  |  |  | -------------------------- | 
|                                             |  | Quantitative Information about Level 3 Fair Value Measurements |         
|                                             |  |                                                                |          |  |                   |  |          |                                |  |  | Range / Weighted Average as of | 
|                                             |  | December 31,2016                                               |          |  | September 30,2016 |  |          | ValuationTechnique/Methodology |  |  | UnobservableInput              |  |  | December 31,2016 |                   |  | September 30,2016 | 
|Secured first lien debt(A)                   |  |                                                                | $133,163 |  |                   |  | $141,550 |                                |  |  | Yield Analysis                 |  |  |                  | Discount Rate     |  |                   |  | 8.7% -18.1% / 12.3%        |  |  |  | 8.1% -18.5% / 12.1%        | 
|                                             |  |                                                                | 23,167   |  |                   |  | 54,630   |                                |  |  | TEV                            |  |  |                  | EBITDA multiples  |  |                   |  | 3.3x  4.4x / 2.7x         |  |  |  | 3.2x - 5.5x / 2.3x         | 
|                                             |  |                                                                |          |  |                   |  |          |                                |  |  |                                |  |  |                  | EBITDA            |  |                   |  | $1,309 -$4,911 / $2,476    |  |  |  | $1,262 - $20,269 / $4,619  | 
|                                             |  |                                                                |          |  |                   |  |          |                                |  |  |                                |  |  |                  | Revenue multiples |  |                   |  | 0.4x  0.4x / 0.4x         |  |  |  | 0.2x  0.4x / 0.4x         | 
|                                             |  |                                                                |          |  |                   |  |          |                                |  |  |                                |  |  |                  | Revenue           |  |                   |  | $8,101 -$14,073 / $13,705  |  |  |  | $4,696 - $15,083 / $14,139 | 
|                                             |  |                                                                |         |  |                   |  | 2,541    |                                |  |  | Market Quotes                  |  |  |                  | IBP               |  |                   |  |                           |  |  |  | 64.5% - 64.5% /  64.5%     | 
|Secured second lien debt(B)                  |  |                                                                | 81,805   |  |                   |  | 72,678   |                                |  |  | Yield Analysis                 |  |  |                  | Discount Rate     |  |                   |  | 10.9% - 22.2% / 14.5%      |  |  |  | 12.0% - 22.0% /  15.1%     | 
|                                             |  |                                                                | 26,071   |  |                   |  | 21,417   |                                |  |  | Market Quotes                  |  |  |                  | IBP               |  |                   |  | 40.0% - 99.3% / 87.6%      |  |  |  | 40.0% - 98.3% /  83.7%     | 
|                                             |  |                                                                | 6,145    |  |                   |  | 6,225    |                                |  |  | TEV                            |  |  |                  | EBITDA multiples  |  |                   |  | 4.9x  4.9x / 4.9x         |  |  |  | 4.7x  4.7x / 4.7x         | 
|                                             |  |                                                                |          |  |                   |  |          |                                |  |  |                                |  |  |                  | EBITDA            |  |                   |  | $2,368 - $2,368 /  $2,368  |  |  |  | $2,759 -$2,759 / $2,759    | 
|Unsecured debt                               |  |                                                                | 3,091    |  |                   |  | 3,012    |                                |  |  | Yield Analysis                 |  |  |                  | Discount Rate     |  |                   |  | 9.9% - 9.9% /  9.9%        |  |  |  | 9.9% -9.9% /  9.9%         | 
|Preferred and common equity / equivalents(C) |  |                                                                | 11,098   |  |                   |  | 18,017   |                                |  |  | TEV                            |  |  |                  | EBITDA multiples  |  |                   |  | 3.3x  7.8x /  6.1x        |  |  |  | 3.2x  7.5x /  5.8x        | 
|                                             |  |                                                                |          |  |                   |  |          |                                |  |  |                                |  |  |                  | EBITDA            |  |                   |  | $791 - $92,069 / $7,296    |  |  |  | $1,132 - $86,041 /  $7,714 | 
|                                             |  |                                                                |          |  |                   |  |          |                                |  |  |                                |  |  |                  | Revenue multiple  |  |                   |  | 0.4x  0.4x /  0.4x        |  |  |  | 0.4x  0.4x /  0.4x        | 
|                                             |  |                                                                |          |  |                   |  |          |                                |  |  |                                |  |  |                  | Revenue           |  |                   |  | $8,101 - $14,073 / $13,204 |  |  |  | $7,708 - $15,083 / $14,009 | 
|                                             |  |                                                                |          |  |                   |  |          |                                |  |  |                                |  |  |                  | Discount Rate     |  |                   |  | 12.4% - 12.4% / 12.4%      |  |  |  | 11.7% - 11.7% /  11.7%     | 
|                                             |  |                                                                | 1,187    |  |                   |  |         |                                |  |  | Market Quotes                  |  |  |                  | IBP               |  |                   |  | 39.3% - 39.3% /  39.3%     |  |  |  |                           | 
|                                             |  |                                                                | 2,519    |  |                   |  | 2,044    |                                |  |  | Investments inFunds(D)         |  |  |                  |                   |  |                   |  |                            |  |  |  |                            | 
|                                             |  |                                                                |          |  |                   |  |          |                                |  |  |                                |  |  |                  |                   |  |                   |  |                            |  |  |  |                            | 
|Total Investments, at Fair Value             |  |                                                                | $288,246 |  |                   |  | $322,114 |                                |  |  |                                |  |  |                  |                   |  |                   |  |                            |  |  |  |                            | 
|                                             |  |                                                                |          |  |                   |  |          |                                |  |  |                                |  |  |                  |                   |  |                   |  |                            |  |  |  |                            | 



|(A) | Fair value as of September 30, 2016 includes one new proprietary debt investment and two restructured proprietary debt investments totaling $12.6 million,
which were valued at cost, and two proprietary debt investments totaling $38.8 million, which were valued at the expected exit amount.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | Fair value as of December 31, 2016 includes two new proprietary debt investments totaling $12.0 million, which were valued at cost. Fair value as of
September 30, 2016 includes one new proprietary debt investment for $10.0 million which was valued at cost.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(C) | Fair value as of December 31, 2016 includes one new proprietary investment totaling $0.2 million, which was valued at cost. Fair value as of
September 30, 2016 includes one new proprietary investment and one restructured proprietary investment totaling $0.5 million, which were valued at cost, and two proprietary investments for $7.3 million, which were valued at the
expected payoff amount.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(D) | Fair value as of December 31, 2016 and September 30, 2016 is based on net asset value as a practical expedient and is not subject to leveling within the
fair value hierarchy.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



23



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##### Table of Contents

Fair value measurements can be sensitive to changes in one or more of the valuation inputs. Changes in market
yields, discounts rates, leverage, EBITDA or EBITDA multiples (or revenue or revenue multiples), each in isolation, may change the fair value of certain of our investments. Generally, an increase or decrease in market yields, discount rates or
leverage or a decrease in EBITDA or EBITDA multiples (or revenue or revenue multiples) may result in a corresponding decrease or increase, respectively, in the fair value of certain of our investments.

Changes in Level 3 Fair Value Measurements of Investments

The following tables provide the changes in fair value, broken out by security type, during the three months ended December 31, 2016 and 2015 for all
investments for which the Adviser determines fair value using unobservable (Level 3) factors.



|                                                                           |  |                |         |   |                 |   |         |               |  |   |                 |  |  |                    |        |   |       |   |        |   |  |   |         |  
|-------------------------------------------------------------------------- |  | -------------- | ------- | - | --------------- | - | ------- | ------------- |  | - | --------------- |  |  | ------------------ | ------ | - | ----- | - | ------ | - |  | - | ------- | -
|Fair Value Measurements Using
Significant Unobservable Inputs (Level 3)    | 
|FISCAL YEAR TO DATE 2017:                                                  |  | Secured        |         |   | Secured         |   |         |               |  |   |                 |  |  | Common             |        |   |       |  
|Three Months Ended December 31, 2016                                       |  | First LienDebt |         |   | SecondLien Debt |   |         | UnsecuredDebt |  |   | PreferredEquity |  |  | Equity/Equivalents |        |   | Total |  
|Fair Value as of September 30, 2016                                        |  | $              | 198,721 |   |                 | $ | 100,320 |               |  | $ | 3,012           |  |  | $                  | 10,262 |   |       | $ | 9,799  |   |  | $ | 322,114 |  
|Total gains (losses):                                                      |  |                |         |   |                 |   |         |               |  |   |                 |  |  |                    |        |   |       |   |        |   |  |   |         |  
|Net realized (loss) gain(A)                                                |  |                | (4,899  | ) |                 |   | 25      |               |  |   |                |  |  |                    | 1,426  |   |       |   |       |   |  |   | (3,448  | )
|Net unrealized
(depreciation) appreciation(B)                              |  |                | 2,656   |   |                 |   | (3,220  | )             |  |   | 1               |  |  |                    | 1,116  |   |       |   | (3,195 | ) |  |   | (2,642  | )
|Reversal of prior period net depreciation (appreciation) on realization(B) |  |                | 2,210   |   |                 |   | 66      |               |  |   |                |  |  |                    | (1,059 | ) |       |   | 370    |   |  |   | 1,587   |  
|New investments, repayments and
settlements:(C)                            |  |                |         |   |                 |   |         |               |  |   |                 |  |  |                    |        |   |       |   |        |   |  |   |         |  
|Issuances/originations                                                     |  |                | 548     |   |                 |   | 19,358  |               |  |   | 75              |  |  |                    | 394    |   |       |   | 768    |   |  |   | 21,143  |  
|Settlements/repayments                                                     |  |                | (38,865 | ) |                 |   | (3,426  | )             |  |   | 3               |  |  |                    |       |   |       |   |       |   |  |   | (42,288 | )
|Net proceeds from sales                                                    |  |                | (101    | ) |                 |   | (25     | )             |  |   |                |  |  |                    | (7,724 | ) |       |   | (370   | ) |  |   | (8,220  | )
|Transfers                                                                  |  |                | (3,940  | ) |                 |   | 923     |               |  |   |                |  |  |                    |       |   |       |   | 3,017  |   |  |   |        |  
|                                                                           |  |                |         |   |                 |   |         |               |  |   |                 |  |  |                    |        |   |       |   |        |   |  |   |         |  
|Fair Value as of December 31, 2016                                         |  | $              | 156,330 |   |                 | $ | 114,021 |               |  | $ | 3,091           |  |  | $                  | 4,415  |   |       | $ | 10,389 |   |  | $ | 288,246 |  
|                                                                           |  |                |         |   |                 |   |         |               |  |   |                 |  |  |                    |        |   |       |   |        |   |  |   |         |  



|                                                                           |  |           |         |   |           |   |         |           |  |   |             |   |  |       |        |   |  |   |         |  
|-------------------------------------------------------------------------- |  | --------- | ------- | - | --------- | - | ------- | --------- |  | - | ----------- | - |  | ----- | ------ | - |  | - | ------- | -
|Fair Value Measurements Using
Significant Unobservable Inputs (Level 3)    | 
|FISCAL YEAR TO DATE 2016:                                                  |  | Secured   |         |   | Secured   |   |         |           |  |   | Common      |   |  |       |       
|                                                                           |  | First     |         |   | Second    |   |         | Preferred |  |   | Equity/     |   |  |       |       
|Three Months Ended December 31, 2015                                       |  | Lien Debt |         |   | Lien Debt |   |         | Equity    |  |   | Equivalents |   |  | Total |       
|                                                                           |  |           |         |   |          
|Fair Value as of September 30, 2015                                        |  | $         | 206,840 |   |           | $ | 120,303 |           |  | $ | 24,315      |   |  | $     | 14,433 |   |  | $ | 365,891 |  
|Total gains (losses):                                                      |  |           |         |   |           |   |         |           |  |   |             |   |  |       |        |   |  |   |         |  
|Net realized (loss) gain(A)                                                |  |           | (1,060  | ) |           |   | (174    | )         |  |   | 17,000      |   |  |       | (384   | ) |  |   | 15,382  |  
|Net unrealized depreciation(B)                                             |  |           | (8,617  | ) |           |   | (3,465  | )         |  |   | (469        | ) |  |       | (3,187 | ) |  |   | (15,738 | )
|Reversal of prior period net depreciation (appreciation) on realization(B) |  |           | 2,374   |   |           |   | 147     |           |  |   | (16,009     | ) |  |       | 383    |   |  |   | (13,105 | )



24



---

##### Table of Contents

|                                                                        |  |           |         |   |           |   |         |           |  |   |             |   |  |       |        |  |  |   |         |  
|----------------------------------------------------------------------- |  | --------- | ------- | - | --------- | - | ------- | --------- |  | - | ----------- | - |  | ----- | ------ |  |  | - | ------- | -
|Fair Value Measurements Using
Significant Unobservable Inputs (Level 3) | 
|FISCAL YEAR TO DATE 2016:                                               |  | Secured   |         |   | Secured   |   |         |           |  |   | Common      |   |  |       |       
|                                                                        |  | First     |         |   | Second    |   |         | Preferred |  |   | Equity/     |   |  |       |       
|Three Months Ended December 31, 2015                                    |  | Lien Debt |         |   | Lien Debt |   |         | Equity    |  |   | Equivalents |   |  | Total |       
|New investments, repayments and
settlements:(C)                         |  |           |         |   |           |   |         |           |  |   |             |   |  |       |        |  |  |   |         |  
|Issuances/originations                                                  |  |           | 7,725   |   |           |   | 111     |           |  |   | 187         |   |  |       |       |  |  |   | 8,023   |  
|Settlements/repayments                                                  |  |           | (29,799 | ) |           |   | (11,087 | )         |  |   |            |   |  |       |       |  |  |   | (40,886 | )
|Net proceeds from sales                                                 |  |           | (1,831  | ) |           |   |        |           |  |   | (18,045     | ) |  |       |       |  |  |   | (19,876 | )
|                                                                        |  |           |         |   |           |   |         |           |  |   |             |   |  |       |        |  |  |   |         |  
|Fair Value as of December 31, 2015                                      |  | $         | 175,632 |   |           | $ | 105,835 |           |  | $ | 6,979       |   |  | $     | 11,245 |  |  | $ | 299,691 |  
|                                                                        |  |           |         |   |           |   |         |           |  |   |             |   |  |       |        |  |  |   |         |  



|(A) | Included in net realized gain (loss) on our accompanying Consolidated Statements of Operations for the three months ended December 31, 2016 and 2015.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | Included in net unrealized appreciation (depreciation) of investments on our accompanying Consolidated Statements of Operations for the three months ended December 31, 2016 and 2015.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(C) | Includes increases in the cost basis of investments resulting from new portfolio investments, the accretion of discounts, and PIK, as well as decreases in the cost basis of investments resulting from principal
repayments or sales, the amortization of premiums and acquisition costs and other cost-basis adjustments.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Investment Activity

Proprietary Investments

As of December 31, 2016 and
September 30, 2016, we held 32 proprietary investments with an aggregate fair value of $254.1 million and $291.3 million, or 88.2% and 90.4% of the total aggregate portfolio, respectively. The following significant proprietary
investment transactions occurred during the three months ended December 31, 2016:



| |  |  | In November 2016, we completed the sale of substantially all the assets of RBC Acquisition Corp. for net proceeds of $36.3 million, which resulted in a realized loss of $2.3 million. In connection with the
sale, we received success fee income of $1.1 million and net receivables of $1.5 million, which are recorded within Other assets, net.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In November 2016, we invested $5.2 million in Sea Link International IRB, Inc. through secured second lien debt and equity.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | In December 2016, we sold our investment in Behrens Manufacturing, LLC (Behrens), which resulted in success fee income of $0.4 million and a realized gain of $2.5 million. In connection with the
sale, we received net cash proceeds of $8.2 million, including the repayment of our debt investment of $4.3 million at par.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In December 2016, we invested $7.0 million in Vacation Rental Pros Property Management, LLC through secured second lien debt.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------

Syndicated Investments

As of December 31, 2016 and
September 30, 2016, we held 12 and 13 syndicated investments with an aggregate fair value of $34.1 million and $30.8 million, or 11.8% and 9.6% of the total portfolio at fair value, respectively. The following significant syndicated
investment transactions occurred during the three months ended December 31, 2016:



| |  |  | In October 2016, RP Crown Parent, LLC paid off at par for proceeds of $2.0 million.
| | - |  | -----------------------------------------------------------------------------------



| |  |  | In October 2016, our $3.9 million secured first lien debt investment in Vertellus Specialties, Inc. was restructured. As a result of the restructure, we received a new $1.1 million secured second lien debt
investment in Vertellus Holdings LLC and common equity with a cost basis of $3.0 million.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In December 2016, Autoparts Holdings Limited paid off at par for proceeds of $0.7 million.
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | In December 2016, we invested $5.0 million in LDiscovery, LLC through secured second lien debt.
| | - |  | -----------------------------------------------------------------------------------------------

Investment Concentrations

As of December 31, 2016,
our investment portfolio consisted of investments in 44 portfolio companies located in 21 states and in 21 different industries, with an aggregate fair value of $288.2 million. The five largest investments at fair value as of December 31,
2016 totaled $86.9 million, or 30.2% of our total investment portfolio, as compared to the five largest investments at fair value as of September 30, 2016 totaling $112.1 million, or 34.8% of our total investment portfolio. As of
December 31, 2016, our average investment by obligor was $7.9 million at cost, as compared to $8.5 million at cost as of September 30, 2016.



25



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##### Table of Contents

The following table outlines our investments by security type at December 31, 2016 and September 30,
2016:



|                          |  |                   |         |  |                               |  |       |            |  |   |                               |  |  |      |       |   |                               |   |         |            |  |  |                               |   |  |   |         |  |  |  |       |  
|------------------------- |  | ----------------- | ------- |  | ----------------------------- |  | ----- | ---------- |  | - | ----------------------------- |  |  | ---- | ----- | - | ----------------------------- | - | ------- | ---------- |  |  | ----------------------------- | - |  | - | ------- |  |  |  | ----- | -
|                          |  | December 31, 2016 |         |  | September 30, 2016            | 
|                          |  | Cost              |         |  | Percentageof TotalInvestments |  |       | Fair Value |  |   | Percentageof TotalInvestments |  |  | Cost |       |   | Percentageof TotalInvestments |   |         | Fair Value |  |  | Percentageof TotalInvestments |  
|Secured first lien debt   |  | $                 | 180,182 |  |                               |  | 51.6  | %          |  | $ | 156,330                       |  |  |      | 54.2  | % |                               | $ | 227,439 |            |  |  | 59.6                          | % |  | $ | 198,721 |  |  |  | 61.7  | %
|Secured second lien debt  |  |                   | 130,650 |  |                               |  | 37.4  |            |  |   | 114,021                       |  |  |      | 39.6  |   |                               |   | 113,796 |            |  |  | 29.8                          |   |  |   | 100,320 |  |  |  | 31.2  |  
|Unsecured debt            |  |                   | 3,073   |  |                               |  | 0.9   |            |  |   | 3,091                         |  |  |      | 1.1   |   |                               |   | 2,995   |            |  |  | 0.8                           |   |  |   | 3,012   |  |  |  | 0.9   |  
|                          |  |                   |         |  |                               |  |       |            |  |   |                               |  |  |      |       |   |                               |   |         |            |  |  |                               |   |  |   |         |  |  |  |       |  
|Total Debt Investments    |  |                   | 313,905 |  |                               |  | 89.9  |            |  |   | 273,442                       |  |  |      | 94.9  |   |                               |   | 344,230 |            |  |  | 90.2                          |   |  |   | 302,053 |  |  |  | 93.8  |  
|                          |  |                   |         |  |                               |  |       |           
|Preferred equity          |  |                   | 17,085  |  |                               |  | 4.9   |            |  |   | 4,415                         |  |  |      | 1.5   |   |                               |   | 22,988  |            |  |  | 6.0                           |   |  |   | 10,262  |  |  |  | 3.2   |  
|Common equity/equivalents |  |                   | 17,998  |  |                               |  | 5.2   |            |  |   | 10,389                        |  |  |      | 3.6   |   |                               |   | 14,583  |            |  |  | 3.8                           |   |  |   | 9,799   |  |  |  | 3.0   |  
|                          |  |                   |         |  |                               |  |       |            |  |   |                               |  |  |      |       |   |                               |   |         |            |  |  |                               |   |  |   |         |  |  |  |       |  
|Total Equity Investments  |  |                   | 35,083  |  |                               |  | 10.1  |            |  |   | 14,804                        |  |  |      | 5.1   |   |                               |   | 37,571  |            |  |  | 9.8                           |   |  |   | 20,061  |  |  |  | 6.2   |  
|                          |  |                   |         |  |                               |  |       |            |  |   |                               |  |  |      |       |   |                               |   |         |            |  |  |                               |   |  |   |         |  |  |  |       |  
|Total Investments         |  | $                 | 348,988 |  |                               |  | 100.0 | %          |  | $ | 288,246                       |  |  |      | 100.0 | % |                               | $ | 381,801 |            |  |  | 100.0                         | % |  | $ | 322,114 |  |  |  | 100.0 | %
|                          |  |                   |         |  |                               |  |       |            |  |   |                               |  |  |      |       |   |                               |   |         |            |  |  |                               |   |  |   |         |  |  |  |       |  



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Our investments at fair value consisted of the following industry classifications at December 31, 2016 and
September 30, 2016:



|                                                            |  |                   |         |  |                               |  |       |            |  |   |                               |  |  |  |       |  
|----------------------------------------------------------- |  | ----------------- | ------- |  | ----------------------------- |  | ----- | ---------- |  | - | ----------------------------- |  |  |  | ----- | -
|                                                            |  | December 31, 2016 |         |  | September 30, 2016            | 
|Industry Classification                                     |  | Fair Value        |         |  | Percentageof TotalInvestments |  |       | Fair Value |  |   | Percentageof TotalInvestments | 
|Diversified/Conglomerate Service                            |  | $                 | 53,572  |  |                               |  | 18.6  | %          |  | $ | 48,898                        |  |  |  | 15.2  | %
|Diversified/Conglomerate Manufacturing                      |  |                   | 42,802  |  |                               |  | 14.8  |            |  |   | 50,106                        |  |  |  | 15.6  |  
|Healthcare, education, and childcare                        |  |                   | 34,933  |  |                               |  | 12.1  |            |  |   | 70,577                        |  |  |  | 21.9  |  
|Oil and gas                                                 |  |                   | 27,615  |  |                               |  | 9.6   |            |  |   | 31,279                        |  |  |  | 9.7   |  
|Automobile                                                  |  |                   | 19,283  |  |                               |  | 6.7   |            |  |   | 14,837                        |  |  |  | 4.6   |  
|Beverage, food and tobacco                                  |  |                   | 15,092  |  |                               |  | 5.2   |            |  |   | 15,022                        |  |  |  | 4.7   |  
|Diversified natural resources, precious metals and minerals |  |                   | 13,809  |  |                               |  | 4.8   |            |  |   | 14,821                        |  |  |  | 4.6   |  
|Cargo Transportation                                        |  |                   | 13,130  |  |                               |  | 4.6   |            |  |   | 13,000                        |  |  |  | 4.0   |  
|Buildings and real estate                                   |  |                   | 11,391  |  |                               |  | 4.0   |            |  |   | 11,223                        |  |  |  | 3.5   |  
|Leisure, Amusement, Motion Pictures, Entertainment          |  |                   | 8,532   |  |                               |  | 3.0   |            |  |   | 8,769                         |  |  |  | 2.7   |  
|Personal and non-durable consumer products                  |  |                   | 7,733   |  |                               |  | 2.7   |            |  |   | 7,858                         |  |  |  | 2.4   |  
|Hotels, motels, inns, and gaming                            |  |                   | 7,000   |  |                               |  | 2.4   |            |  |   |                              |  |  |  |      |  
|Telecommunications                                          |  |                   | 5,865   |  |                               |  | 2.0   |            |  |   | 5,790                         |  |  |  | 1.8   |  
|Machinery                                                   |  |                   | 5,828   |  |                               |  | 2.0   |            |  |   | 5,597                         |  |  |  | 1.7   |  
|Printing and publishing                                     |  |                   | 5,629   |  |                               |  | 2.0   |            |  |   | 6,033                         |  |  |  | 1.9   |  
|Broadcast and entertainment                                 |  |                   | 4,997   |  |                               |  | 1.7   |            |  |   | 4,682                         |  |  |  | 1.5   |  
|Textiles and leather                                        |  |                   | 3,757   |  |                               |  | 1.3   |            |  |   | 3,836                         |  |  |  | 1.2   |  
|Finance                                                     |  |                   | 3,250   |  |                               |  | 1.1   |            |  |   | 3,000                         |  |  |  | 0.9   |  
|Electronics                                                 |  |                   | 510     |  |                               |  | 0.2   |            |  |   | 2,980                         |  |  |  | 0.9   |  
|Other, < 2.0%                                               |  |                   | 3,518   |  |                               |  | 1.2   |            |  |   | 3,806                         |  |  |  | 1.2   |  
|                                                            |  |                   |         |  |                               |  |       |            |  |   |                               |  |  |  |       |  
|Total Investments                                           |  | $                 | 288,246 |  |                               |  | 100.0 | %          |  | $ | 322,114                       |  |  |  | 100.0 | %
|                                                            |  |                   |         |  |                               |  |       |            |  |   |                               |  |  |  |       |  

Our investments at fair value were included in the following U.S. geographic regions at December 31, 2016 and
September 30, 2016:



|                  |  |                   |         |  |                               |  |       |            |  |   |                               |  |  |  |       |  
|----------------- |  | ----------------- | ------- |  | ----------------------------- |  | ----- | ---------- |  | - | ----------------------------- |  |  |  | ----- | -
|                  |  | December 31, 2016 |         |  | September 30, 2016            | 
|Geographic Region |  | Fair Value        |         |  | Percentage ofTotalInvestments |  |       | Fair Value |  |   | Percentage ofTotalInvestments | 
|South             |  | $                 | 139,549 |  |                               |  | 48.4  | %          |  | $ | 131,181                       |  |  |  | 40.8  | %
|West              |  |                   | 56,121  |  |                               |  | 19.5  |            |  |   | 57,786                        |  |  |  | 17.9  |  
|Midwest           |  |                   | 55,547  |  |                               |  | 19.3  |            |  |   | 100,142                       |  |  |  | 31.1  |  
|Northeast         |  |                   | 37,029  |  |                               |  | 12.8  |            |  |   | 33,005                        |  |  |  | 10.2  |  
|                  |  |                   |         |  |                               |  |       |            |  |   |                               |  |  |  |       |  
|Total Investments |  | $                 | 288,246 |  |                               |  | 100.0 | %          |  | $ | 322,114                       |  |  |  | 100.0 | %
|                  |  |                   |         |  |                               |  |       |            |  |   |                               |  |  |  |       |  

The geographic region indicates the location of the headquarters of our portfolio companies. A portfolio company may also have
a number of other business locations in other geographic regions.



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Investment Principal Repayments

The following table summarizes the contractual principal repayments and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments,
as of December 31, 2016:



|                                                   |  |                                                    |  |   |         |  
|-------------------------------------------------- |  | -------------------------------------------------- |  | - | ------- | -
|                                                   |  | Amount                                             | 
|For the remaining nine months ending September 30: |  | 2017                                               |  | $ | 21,008  |  
|For the fiscal years ending September 30:          |  | 2018                                               |  |   | 53,949  |  
|                                                   |  | 2019                                               |  |   | 44,496  |  
|                                                   |  | 2020                                               |  |   | 78,593  |  
|                                                   |  | 2021                                               |  |   | 60,831  |  
|                                                   |  | Thereafter                                         |  |   | 60,593  |  
|                                                   |  |                                                    |  |   |         |  
|                                                   |  | Total contractual repayments                       |  | $ | 319,470 |  
|                                                   |  | Equity investments                                 |  |   | 35,083  |  
|                                                   |  | Adjustments to cost basis on debt investments      |  |   | (5,565  | )
|                                                   |  |                                                    |  |   |         |  
|                                                   |  | Investments Held as of December 31, 2016, at Cost: |  | $ | 348,988 |  
|                                                   |  |                                                    |  |   |         |  

Receivables from Portfolio Companies

Receivables from portfolio companies represent non-recurring costs incurred on behalf of such portfolio companies and
are included in other assets on our accompanying Consolidated Statements of Assets and Liabilities. As of December 31, 2016 and September 30, 2016, we had gross receivables from portfolio companies of $0.3 million. The
allowance for uncollectible receivables was $0 at both December 31, 2016 and September 30, 2016. In addition, as of December 31, 2016 and September 30, 2016, we had an allowance for uncollectible interest receivables of
$0.1 million and $0, respectively, which is reflected in interest receivable, net on our accompanying Consolidated Statements of Assets and Liabilities. We generally maintain an allowance for uncollectible receivables from portfolio
companies when the receivable balance becomes 90 days or more past due or if it is determined based upon managements judgment that the portfolio company is unable to pay its obligations.

NOTE 4. RELATED PARTY TRANSACTIONS

Transactions with
the Adviser

We have been externally managed by the Adviser pursuant to the Advisory Agreement since October 1, 2004 pursuant to which we pay the
Adviser a base management fee and an incentive fee for its services. The Advisory Agreement originally included administrative services; however, it was amended and restated on October 1, 2006. Simultaneously, we entered into the Administration
Agreement with the Administrator (discussed further below) to provide those services. With the unanimous approval of our Board of Directors, the Advisory Agreement was later amended in October 2015 to reduce the base management fee payable under the
agreement from 2.0% per annum to 1.75% per annum, effective July 1, 2015, with all other terms remaining unchanged. On July 12, 2016, our Board of Directors unanimously approved the annual renewal of the Advisory Agreement through
August 31, 2017.

We also pay the Adviser a loan servicing fee for its role of servicer pursuant to our Credit Facility (defined in Note 5 
Borrowings). The entire loan servicing fee paid to the Adviser by Business Loan is voluntarily, irrevocably and unconditionally credited against the base management fee otherwise payable to the Adviser, since Business Loan is a consolidated
subsidiary of ours, and overall, the base management fee (including any loan servicing fee) cannot exceed 1.75% of total assets (as reduced by cash and cash equivalents pledged to creditors) during any given fiscal year pursuant to the Advisory
Agreement.

Two of our executive officers, David Gladstone (our chairman and chief executive officer) and Terry Brubaker (our vice chairman and chief
operating officer) serve as directors and executive officers of the Adviser, which is 100% indirectly owned and controlled by Mr. Gladstone. Robert Marcotte (our president) also serves as an executive managing director of the Adviser.



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##### Table of Contents

The following table summarizes fees paid to the Adviser, including the base management fee, incentive fee, and
loan servicing fee and associated unconditional, non-contractual and irrevocable voluntary credits reflected in our accompanying Consolidated Statements of Operations:



|                                                           |  |                                |         |   |      |   |         |  
|---------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                           |  | Three Months EndedDecember 31, |        
|                                                           |  | 2016                           |         |   | 2015 |  
|Average total assets subject to base management
fee(A)     |  | $                              | 315,000 |   |      | $ | 349,300 |  
|Multiplied by prorated annual base management fee of 1.75% |  |                                | 0.4375  | % |      |   | 0.4375  | %
|                                                           |  |                                |         |   |      |   |         |  
|Base management fee(B)                                     |  | $                              | 1,378   |   |      | $ | 1,528   |  
|Portfolio company fee credit                               |  |                                | (649    | ) |      |   | (65     | )
|Senior syndicated loan fee credit                          |  |                                | (13     | ) |      |   | (33     | )
|                                                           |  |                                |         |   |      |   |         |  
|Net Base Management Fee                                    |  | $                              | 716     |   |      | $ | 1,430   |  
|                                                           |  |                                |         |   |      |   |         |  
|                                                           |  |                               
|Loan servicing fee(B)                                      |  |                                | 983     |   |      |   | 1,088   |  
|Credit to base management fee - loan servicing
fee(B)      |  |                                | (983    | ) |      |   | (1,088  | )
|                                                           |  |                                |         |   |      |   |         |  
|Net Loan Servicing Fee                                     |  | $                              |        |   |      | $ |        |  
|                                                           |  |                                |         |   |      |   |         |  
|                                                           |  |                               
|Incentive fee(B)                                           |  |                                | 1,293   |   |      |   | 1,118   |  
|Incentive fee credit                                       |  |                                | (37     | ) |      |   | (288    | )
|                                                           |  |                                |         |   |      |   |         |  
|Net Incentive Fee                                          |  | $                              | 1,256   |   |      | $ | 830     |  
|                                                           |  |                                |         |   |      |   |         |  
|Portfolio company fee credit                               |  |                                | (649    | ) |      |   | (65     | )
|Senior syndicated loan fee credit                          |  |                                | (13     | ) |      |   | (33     | )
|Incentive fee credit                                       |  |                                | (37     | ) |      |   | (288    | )
|                                                           |  |                                |         |   |      |   |         |  
|Credits to Fees From Adviser -
other(B)                    |  | $                              | (699    | ) |      | $ | (386    | )
|                                                           |  |                                |         |   |      |   |         |  



|(A) | Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued
at the end of the 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 accompanying Consolidated Statements of Operations.
|--- | ------------------------------------------------------------------------------------------------------

Base Management Fee

The base management fee is payable
quarterly to the Adviser pursuant to our Advisory Agreement and is assessed at an annual rate of 1.75%, computed on the basis of the value of our average total assets at the end of the two most recently-completed quarters (inclusive of the current
quarter), which are total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings and adjusted appropriately for any share issuances or repurchases during the period.

Additionally, pursuant to the requirements of the 1940 Act, the Adviser makes available significant managerial assistance to our portfolio companies. The
Adviser may also provide other services to our portfolio companies under certain agreements and may receive fees for services other than managerial assistance. Such services may include, but are not limited to: (i) assistance obtaining,
sourcing or structuring credit facilities, long term loans or additional equity from unaffiliated third parties; (ii) negotiating important contractual financial relationships; (iii) consulting services regarding restructuring of the
portfolio company and financial modeling as it relates to raising additional debt and equity capital from unaffiliated third parties; and (iv) primary role in interviewing, vetting and negotiating employment contracts with candidates in
connection with adding and retaining key portfolio company management team members. The Adviser voluntarily, unconditionally, and irrevocably credits 100% of these fees against the base management fee that we would otherwise be required to pay to
the Adviser; however, pursuant to the terms of the Advisory Agreement, a small percentage of certain of such fees, totaling $28 and $40 for the three months ended December 31, 2016 and 2015, respectively, was retained by the Adviser in the form
of reimbursement, at cost, for tasks completed by personnel of the Adviser primarily for the valuation of portfolio companies.

Our Board of Directors
accepted an unconditional, non-contractual and irrevocable voluntary credit from the Adviser to reduce the annual base management fee on senior syndicated loan participations to 0.5%, to the extent that
proceeds resulting from borrowings were used to purchase such senior syndicated loan participations, for each of the three months ended December 31, 2016 and 2015.

Incentive Fee

The incentive fee consists of two parts:
an income-based incentive fee and a capital gains incentive fee. The income-based incentive fee rewards the Adviser if our quarterly net investment income (before giving effect to any incentive fee) exceeds 1.75% of our net assets (the hurdle
rate). The income-based incentive fee with respect to our pre-incentive fee net investment income is generally payable quarterly to the Adviser and is computed as follows:



| |  |  | no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate (7.0% annualized);
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 100.0% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any,
that exceeds the hurdle rate but is less than 2.1875% of our net assets, adjusted appropriately for any share issuances or repurchases during the period, in any calendar quarter (8.75% annualized); and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.1875% of our net assets, adjusted appropriately for any share issuances or repurchases
during the period, in any calendar quarter (8.75% annualized).
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The second part of the incentive fee is a capital gains-based incentive fee
that will be determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date) and equals 20.0% of our realized capital gains as of the end of the fiscal year. In
determining the capital gains-based incentive fee payable to the Adviser, we calculate the cumulative aggregate realized capital gains and cumulative aggregate realized capital losses since our inception, and the entire portfolios aggregate
unrealized capital depreciation, if any and excluding any unrealized capital appreciation, as of the date of the calculation. For this purpose, cumulative aggregate realized capital gains, if any, equals the sum of the differences between the net
sales price of each investment, when sold, and the original cost of such investment since inception. Cumulative aggregate realized capital losses equals the sum of the amounts by which the net sales price of each investment, when sold, is less than
the original cost of such investment since inception. The entire portfolios aggregate unrealized capital depreciation, if any, equals the sum of the difference, between the valuation of each investment as of the applicable calculation date and
the original cost of such investment. At the end of the applicable fiscal year, the amount of capital gains that serves as the basis for our calculation of the capital gains-based incentive fee equals the cumulative aggregate realized capital gains
less cumulative aggregate realized capital losses, less the entire portfolios aggregate unrealized capital depreciation, if any. If this number is positive at the end of such fiscal year, then the capital gains-based incentive fee for such
year equals 20.0% of such amount, less the aggregate amount of any capital gains-based incentive fees paid in respect of our portfolio in all prior years. No capital gains-based incentive fee has been recorded or paid since our inception through
December 31, 2016, as cumulative unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.

Additionally, in accordance with GAAP, a capital gains-based incentive fee accrual is calculated using the aggregate cumulative realized capital gains and
losses and aggregate cumulative unrealized capital depreciation included in the calculation of the capital gains-based incentive fee. If such amount is positive at the end of a period, then GAAP requires us to record a capital gains-based incentive
fee equal to 20.0% of such amount, less the aggregate amount of actual capital gains-based incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such period. GAAP requires that the capital gains-based
incentive fee accrual consider the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains-based incentive fee would be payable if such unrealized capital appreciation were realized. There can be no assurance that
such unrealized capital appreciation will be realized in the future. No GAAP accrual for a capital gains-based incentive fee has been recorded or paid since our inception through December 31, 2016.

Our Board of Directors accepted an unconditional, non-contractual and irrevocable voluntary credit from the Adviser to
reduce the income-based incentive fee to the extent net investment income did not 100.0% cover distributions to common stockholders for the three months ended December 31, 2016, and 2015.

Loan Servicing Fee

The Adviser also services the loans
held by Business Loan (the borrower under the Credit Facility), in return for which the Adviser receives a 1.5% annual fee payable monthly based on the aggregate outstanding balance of loans pledged under our Credit Facility (defined in Note 5
 Borrowings). As discussed in the notes to the table above, we treat payment of the loan servicing fee pursuant to our line of credit as a pre-payment of the base management fee under the Advisory
Agreement. Accordingly, these loan servicing fees are 100% voluntarily, irrevocably and unconditionally credited back to us by the Adviser.

Transactions with the Administrator

We pay the
Administrator pursuant to the Administration Agreement for the portion of expenses the Administrator incurs while performing services for us. The Administrators expenses are primarily rent and the salaries, benefits and expenses of the
Administrators employees, including, but not limited to, our chief financial officer and treasurer, chief compliance officer, chief valuation officer, and general counsel and secretary (who also serves as the Administrators president,
general counsel and secretary) and their respective staffs.

Two of our executive officers, David Gladstone (our chairman and chief executive officer) and
Terry Brubaker (our vice chairman and chief operating officer) serve as members of the board of managers and executive officers of the Administrator, which is 100% indirectly owned and controlled by Mr. Gladstone.



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Our portion of the Administrators expenses are generally derived by multiplying the Administrators
total expenses by the approximate percentage of time during the current quarter the Administrators employees performed services for us in relation to their time spent performing services for all companies serviced by the Administrator. These
administrative fees are accrued at the end of the quarter when the services are performed and recorded on our accompanying Consolidated Statements of Operations and generally paid the following quarter to the Administrator. On July 12,
2016, our Board of Directors approved the annual renewal of the Administration Agreement through August 31, 2017.

Other Transactions

Gladstone Securities, LLC (Gladstone Securities), a privately-held broker-dealer registered with the Financial Industry Regulatory Authority and
insured by the Securities Investor Protection Corporation, which is 100% indirectly owned and controlled by Mr. Gladstone, our chairman and chief executive officer, has provided other services, such as investment banking and due diligence
services, to certain of our portfolio companies, for which Gladstone Securities receives a fee. Any such fees paid by portfolio companies to Gladstone Securities do not impact the fees we pay to the Adviser or the unconditional, non-contractual and irrevocable voluntary credits against the base management fee or incentive fee. Gladstone Securities received fees from portfolio companies totaling $0.1 million and $0 during the three
months ended December 31, 2016 and 2015, respectively.

Related Party Fees Due

Amounts due to related parties on our accompanying Consolidated Statements of Assets and Liabilities were as follows:



|                                          |  |                   |       |   |                    |   |       | 
|----------------------------------------- |  | ----------------- | ----- | - | ------------------ | - | ----- | 
|                                          |  | December 31, 2016 |       |   | September 30, 2016 |  
|Base management fee due (from) to Adviser |  | $                 | (267  | ) |                    | $ | 162   | 
|Loan servicing fee due to Adviser         |  |                   | 222   |   |                    |   | 236   | 
|Incentive fee due to Adviser              |  |                   | 1,256 |   |                    |   | 824   | 
|                                          |  |                   |       |   |                    |   |       | 
|Total fees due to Adviser                 |  |                   | 1,211 |   |                    |   | 1,222 | 
|                                          |  |                   |       |   |                    |   |       | 
|Fee due to Administrator                  |  |                   | 300   |   |                    |   | 282   | 
|                                          |  |                   |       |   |                    |   |       | 
|Total Related Party Fees Due              |  | $                 | 1,511 |   |                    | $ | 1,504 | 
|                                          |  |                   |       |   |                    |   |       | 

In addition to the above fees, other operating expenses due to the Adviser as of December 31, 2016 and September 30,
2016, totaled $25 and $10, respectively. In addition, other net co-investment expenses payable to Gladstone Investment (for reimbursement purposes) totaled $2 and $8 as of December 31, 2016 and
September 30, 2016, respectively. These amounts were received or paid in full in the quarter subsequent to being incurred and have been included in other assets, net and other liabilities, as appropriate, on the accompanying Consolidated
Statements of Assets and Liabilitiesas of December 31, 2016 and September 30, 2016, respectively.

NOTE 5. BORROWINGS

Revolving Credit Facility

On May 1, 2015, we,
through Business Loan, entered into a Fifth Amended and Restated Credit Agreement with KeyBank National Association (KeyBank), as administrative agent, lead arranger and a lender (our Credit Facility), which increased the
commitment amount from $137.0 million to $140.0 million, extended the revolving period end date by three years to January 19, 2019, decreased the marginal interest rate added to 30-day LIBOR
from 3.75% to 3.25% per annum, set the unused commitment fee at 0.50% on all undrawn amounts, expanded the scope of eligible collateral, and amended certain other terms and conditions. If our Credit Facility is not renewed or extended by
January 19, 2019, all principal and interest will be due and payable on or before April 19, 2020 (fifteen months after the revolving period end date). Subject to certain terms and conditions, our Credit Facility may be expanded up to a
total of $250.0 million through additional commitments of new or existing lenders. We incurred fees of approximately $1.1 million in connection with this amendment, which are being amortized through our Credit Facilitys revolving
period end date of January 19, 2019.

On June 19, 2015, we through Business Loan, entered into certain joinder and assignment agreements with
three new lenders to increase borrowing capacity under our Credit Facility by $30.0 million to $170.0 million. We incurred fees of approximately $0.6 million in connection with this expansion, which are being amortized through our
Credit Facilitys revolving period end date of January 19, 2019.

On October 9, 2015 and August 18, 2016, we entered into Amendments
No. 1 and 2 to our Credit Facility, respectively, each of which clarified various constraints on available borrowings.



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##### Table of Contents

The following tables summarize noteworthy information related to our Credit Facility (at cost) as of
December 31, 2016 and September 30, 2016 and during the three months ended December 31, 2016 and 2015:



|                                |  |                   |         |  |                    |   |         | 
|------------------------------- |  | ----------------- | ------- |  | ------------------ | - | ------- | 
|                                |  | December 31, 2016 |         |  | September 30, 2016 |  
|Commitment amount               |  | $                 | 170,000 |  |                    | $ | 170,000 | 
|Borrowings outstanding, at cost |  |                   | 28,200  |  |                    |   | 71,300  | 
|Availability(A)                 |  |                   | 84,227  |  |                    |   | 31,053  | 



|                                                 |  |                                        |        |   |      |   |        |  
|------------------------------------------------ |  | -------------------------------------- | ------ | - | ---- | - | ------ | -
|                                                 |  | For the Three MonthsEnded December 31, |       
|                                                 |  | 2016                                   |        |   | 2015 |  
|                                                 |  |                                       
|Weighted average borrowings outstanding, at cost |  | $                                      | 39,278 |   |      | $ | 74,132 |  
|Weighted average interest
rate(B)                |  |                                        | 5.7    | % |      |   | 4.2    | %
|Commitment (unused) fees incurred                |  | $                                      | 166    |   |      | $ | 121    |  



|(A) | Available borrowings are subject to various constraints imposed under our Credit Facility, based on the aggregate loan balance pledged by Business Loan, which varies as loans are added and repaid, regardless of whether
such repayments are prepayments or made as contractually required.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | Includes unused commitment fees and excludes the impact of deferred financing fees.
|--- | -----------------------------------------------------------------------------------

Our Credit Facility also requires that any interest or principal payments on pledged loans be remitted directly by the borrower

into a lockbox account with KeyBank. KeyBank is also the trustee of the account and generally remits the collected funds to us once a month.

Our Credit Facility contains covenants that require Business Loan to maintain its status as a separate legal entity, prohibit certain significant corporate
transactions (such as mergers, consolidations, liquidations or dissolutions), and restrict material changes to our credit and collection policies without the lenders consent. Our Credit Facility also generally limits distributions to our
stockholders on a fiscal year basis to the sum of our net investment income, net capital gains and amounts deemed to have been paid during the prior year in accordance with Section 855(a) of the Code. Business Loan is also subject to certain
limitations on the type of loan investments it can apply as collateral towards the borrowing base to receive additional borrowing availability under our Credit Facility, including restrictions on geographic concentrations, sector concentrations,
loan size, payment frequency and status, average life and lien property. Our Credit Facility further requires Business Loan to comply with other financial and operational covenants, which obligate Business Loan to, among other things, maintain
certain financial ratios, including asset and interest coverage and a minimum number of 20 obligors required in the borrowing base.

Additionally, we are
subject to a performance guaranty that requires us to maintain (i) a minimum net worth (defined in our Credit Facility to include our mandatorily redeemable preferred stock) of $205.0 million plus 50.0% of all equity and subordinated debt
raised after May 1, 2015 less 50% of any equity and subordinated debt retired or redeemed after May 1, 2015, which equates to $223.2 million as of December 31, 2016, (ii) asset coverage with respect to senior
securities representing indebtedness of at least 200%, in accordance with Section 18 of the 1940 Act, and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code.

As of December 31, 2016, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $273.0 million, asset coverage on
our senior securities representing indebtedness of 1,058.3%, calculated in compliance with the requirements of Section 18 of the 1940 Act, and an active status as a BDC and RIC. In addition, we had 32 obligors in our Credit
Facilitys borrowing base as of December 31, 2016. As of December 31, 2016, we were in compliance with all of our Credit Facility covenants.

Fair Value

We elected to apply the fair value option of
ASC 825, Financial Instruments, specifically for the Credit Facility, which was consistent with our application of ASC 820 to our investments. Generally, the fair value of our Credit Facility is determined using a yield analysis
which includes a DCF calculation and also takes into account the Valuation Teams own assumptions, including, but not limited to, the estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar
securities as of the measurement date. As of December 31, 2016, the discount rate used to determine the fair value of our Credit Facility was 30-day LIBOR, plus 3.15% per annum, plus a 0.64% unused fee.
As of September 30, 2016, the discount rate used to determine the fair value of our Credit Facility was 30-day LIBOR, plus 3.25% per annum, plus a 0.50% unused fee. Generally, an increase or decrease in
the discount rate used in the DCF calculation may result in a corresponding increase or decrease, respectively, in the fair value of our Credit Facility. As of December 31, 2016 and September 30, 2016, our Credit Facility was valued using
Level 3 inputs and any changes in its fair value are recorded in net unrealized depreciation (appreciation) of other on our accompanying Consolidated Statements of Operations.



The following tables present our Credit Facility carried at fair value as of
December 31, 2016 and September 30, 2016, on our accompanying Consolidated Statements of Assets and Liabilities for Level 3 of the hierarchy established by ASC 820 and the changes in fair value of our Credit Facility during the
three months ended December 31, 2016 and 2015:



|                |  |                                                                                                 |        |  |                    |   |        | 
|--------------- |  | ----------------------------------------------------------------------------------------------- | ------ |  | ------------------ | - | ------ | 
|                |  | Total Recurring Fair Value Measurement Reported in                                              |       
|                |  | Consolidated Statements ofAssets and LiabilitiesUsing Significant 
Unobservable Inputs(Level 3) |       
|                |  | December 31, 2016                                                                               |        |  | September 30, 2016 |  
|Credit Facility |  | $                                                                                               | 27,987 |  |                    | $ | 71,300 | 
|                |  |                                                                                                 |        |  |                    |   |        | 



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|                                                                             |  |                                 |         |   |      |   |         |  
|---------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|Fair Value Measurements Using Significant
Unobservable Data Inputs (Level 3) | 
|                                                                             |  | Three Months Ended December 31, |        
|                                                                             |  | 2016                            |         |   | 2015 |  
|Fair value as of September 30, 2016 and 2015, respectively                   |  | $                               | 71,300  |   |      | $ | 127,300 |  
|Borrowings                                                                   |  |                                 | 24,200  |   |      |   | 14,500  |  
|Repayments                                                                   |  |                                 | (67,300 | ) |      |   | (84,300 | )
|Net unrealized depreciation(A)                                               |  |                                 | (213    | ) |      |   |        |  
|                                                                             |  |                                 |         |   |      |   |         |  
|Fair Value as of December 31, 2016 and 2015, respectively                    |  | $                               | 27,987  |   |      | $ | 57,500  |  
|                                                                             |  |                                 |         |   |      |   |         |  



|(A) | Included in net unrealized appreciation (depreciation) of other on our accompanying Consolidated Statements of Operations for the three months ended December 31, 2016 and 2015.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The fair value of the collateral under our Credit Facility was $250.7 million and $282.0 million as of December 31, 2016 and September 30,
2016, respectively.

NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK

In May 2014, we completed a public offering of approximately 2.4 million shares of 6.75% Series 2021 Term Preferred Stock, par value $0.001 per share
(Series 2021 Term Preferred Stock), at a public offering price of $25.00 per share. Gross proceeds totaled $61.0 million and net proceeds, after deducting underwriting discounts, commissions and offering expenses borne by us, were
approximately $58.5 million, a portion of which was used to voluntarily redeem all 1.5 million outstanding shares of our then existing 7.125% Series 2016 Term Preferred Stock, par value $0.001 per share and the remainder was used to repay
a portion of outstanding borrowings under our Credit Facility. We incurred $2.5 million in total offering costs related to the issuance of our Series 2021 Term Preferred Stock, which are recorded as deferred financing fees on our
accompanyingConsolidated Statements of Assets and Liabilities and are being amortized over the period ending June 30, 2021, the mandatory redemption date.

The shares of our Series 2021 Term Preferred Stock are traded under the ticker symbol GLADO on the NASDAQ Global Select Market. Our Series 2021
Term Preferred Stock is not convertible into our common stock or any other security and provides for a fixed dividend equal to 6.75% per year, payable monthly (which equates in total to approximately $4.1 million per year). We are required to
redeem all of the outstanding Series 2021 Term Preferred Stock on June 30, 2021 for cash at a redemption price equal to $25.00 per share plus an amount equal to all unpaid dividends and distributions on such share accumulated to (but excluding)
the date of redemption (the Redemption Price). We may additionally be required to mandatorily redeem some or all of the shares of our Series 2021 Term Preferred Stock early, at the Redemption Price, in the event of the following:
(1) upon the occurrence of certain events that would constitute a change in control, and (2) if we fail to maintain an asset coverage ratio of at least 200% on our senior securities that are stock (which is currently only our
Series 2021 Term Preferred Stock) and the failure remains for a period of 30 days following the filing date of our next SEC quarterly or annual report. We may also voluntarily redeem all or a portion of the Series 2021 Term Preferred Stock at our
option at the Redemption Price at any time on or after June 30, 2017.

The asset coverage on our senior securities that are stock as of
December 31, 2016 was 335.5%, calculated in accordance with Section 18 of the 1940 Act. If we fail to redeem our Series 2021 Term Preferred Stock pursuant to the mandatory redemption required on June 30, 2021, or in any other
circumstance in which we are required to mandatorily redeem our Series 2021 Term Preferred Stock, then the fixed dividend rate will increase by 4.0% for so long as such failure continues. As of December 31, 2016, we have not redeemed, nor have
we been required to redeem, any shares of our outstanding Series 2021 Term Preferred Stock.

We paid the following monthly distributions on our Series
2021 Term Preferred Stock for the three months ended December 31, 2015:



|            |  |                  |  |                                       |  |                   |           |                                                 |           | 
|----------- |  | ---------------- |  | ------------------------------------- |  | ----------------- | --------- | ----------------------------------------------- | --------- | 
|Fiscal Year |  | Declaration Date |  | Record Date                           |  | Payment Date      |           | Distribution perSeries 2021 TermPreferred Share |          
|2016        |  | October 13, 2015 |  | October 26, 2015                      |  | November 4, 2015  |           | $                                               | 0.1406250 | 
|            |  | October 13, 2015 |  | November 17, 2015                     |  | November 30, 2015 |           |                                                 | 0.1406250 | 
|            |  | October 13, 2015 |  | December 18, 2015                     |  | December 31, 2015 |           |                                                 | 0.1406250 | 
|            |  |                  |  |                                       |  |                   |           |                                                 |           | 
|            |  |                  |  | Three Months Ended December 31, 2015: |  | $                 | 0.4218750 |                                                
|            |  |                  |  |                                       |  |                   |           |                                                 |           | 



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We paid the following monthly distributions on our Series 2021 Term Preferred Stock for the three months ended
December 31, 2016:



|            |  |                  |  |                                       |  |                   |           |                                                 |           | 
|----------- |  | ---------------- |  | ------------------------------------- |  | ----------------- | --------- | ----------------------------------------------- | --------- | 
|Fiscal Year |  | Declaration Date |  | Record Date                           |  | Payment Date      |           | Distribution perSeries 2021 TermPreferred Share |          
|2017        |  | October 11, 2016 |  | October 21, 2016                      |  | October 31, 2016  |           | $                                               | 0.1406250 | 
|            |  | October 11, 2016 |  | November 17, 2016                     |  | November 30, 2016 |           |                                                 | 0.1406250 | 
|            |  | October 11, 2016 |  | December 20, 2016                     |  | December 30, 2016 |           |                                                 | 0.1406250 | 
|            |  |                  |  |                                       |  |                   |           |                                                 |           | 
|            |  |                  |  | Three Months Ended December 31, 2016: |  | $                 | 0.4218750 |                                                
|            |  |                  |  |                                       |  |                   |           |                                                

In accordance with ASC 480, Distinguishing Liabilities from Equity, mandatorily redeemable financial
instruments should be classified as liabilities in the balance sheet and we have recorded our mandatorily redeemable preferred stock as a liability, at cost, as of December 31, 2016 and September 30, 2016. The related distribution payments
to our mandatorily redeemable preferred stockholders are treated as dividend expense on our statement of operations as of the ex-dividend date. For disclosure purposes, the fair value, based on the last quoted
closing price, for our Series 2021 Term Preferred Stock as of December 31, 2016 and September 30, 2016, was approximately $62.2 million and $62.4 million, respectively. We consider our mandatorily redeemable preferred stock to be
a Level 1 liability within the ASC 820 hierarchy.

Aggregate preferred stockholder dividends declared and paid on our Series 2021 Term Preferred
Stock for the three months ended December 31, 2016 and 2015, was $1.0 million. For federal income tax purposes, distributions paid by us to preferred stockholders generally constitute ordinary income to the extent of our current and
accumulated earnings and profits.

NOTE 7. REGISTRATION STATEMENT, COMMON EQUITY OFFERINGS AND SHARE REPURCHASES

Registration Statement

We filed Post-Effective Amendment
No. 2 to our current universal shelf registration statement (our Registration Statement) on Form N-2 (File No. 333-208637) with the SEC on
December 22, 2016, which was declared effective by the SEC on February 6, 2017. Our Registration Statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common
stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock, preferred stock or debt securities. After our common stock offering in October 2016, we currently have the ability to issue up to $282.7 million
in securities under the Registration Statement.

Common Stock Offerings

Pursuant to our current registration statement, in October 2016, we completed a public offering of 2.0 million shares of our common stock at a public
offering price of $7.98 per share, which was below our then current NAV per share. In November 2016, the underwriters partially exercised their overallotment option to purchase an additional 173,444 shares of our common stock. Gross proceeds totaled
$17.3 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were approximately $16.4 million.

Pursuant to our prior registration statement, on October 27, 2015, we completed a public offering of 2.0 million shares of our common stock at a
public offering price of $8.55 per share, which was below our then current NAV per share. In November 2015, the underwriters exercised their option to purchase an additional 300,000 shares. Gross proceeds totaled $19.7 million and net proceeds,
after deducting underwriting discounts and offering costs borne by us, were approximately $18.4 million.

Pursuant to our prior registration
statement, on February 27, 2015, we entered into equity distribution agreements (commonly referred to as at-the-market agreements or the Sales
Agreements) with KeyBanc Capital Markets Inc. and Cantor Fitzgerald & Co., each a Sales Agent, under which we may issue and sell, from time to time, through the Sales Agents, up to an aggregate offering price of
$50.0 million shares of our common stock. We did not sell any shares under the Sales Agreements during the year ended September 30, 2016 or the three months ended December 31, 2016.

Share Repurchases

In January 2016, our Board of
Directors authorized a share repurchase program for up to an aggregate of $7.5 million of the Companys common stock. The repurchases are intended to be implemented through open market transactions on U.S. exchanges or in privately
negotiated transactions, in accordance with applicable securities laws, and any market purchases will be made during open trading window periods or pursuant to any applicable Rule 10b5-1 trading plans. The
timing, prices, and amounts of repurchases will depend upon prevailing market prices, general economic and market conditions and other considerations. The repurchase program does not obligate us to acquire any particular number of shares of common
stock. The termination date was the earlier of repurchasing the total authorized amount of $7.5 million or January 31, 2017. During the year ended September 30, 2016, we repurchased 87,200



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shares of our common stock at an average share price of $6.53, resulting in gross purchases of $0.6 million. We did not repurchase any shares during the three months ended December 31,
2016 and there were no repurchases through the termination date of the program on January 31, 2017.



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NOTE 8. NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE

The following table sets forth the computation of basic and diluted net increase (decrease) in net assets resulting from operations per weighted average common
share for the three months ended December 31, 2016 and 2015:



|                                                                                                                 |  |                                |            |  |      |   |            |  
|---------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ---------- |  | ---- | - | ---------- | -
|                                                                                                                 |  | Three Months EndedDecember 31, |           
|                                                                                                                 |  | 2016                           |            |  | 2015 |  
|Numerator for basic and diluted net (decrease) increase in net assets resulting from operations
per common share |  | $                              | 916        |  |      | $ | (8,704     | )
|Denominator for basic and diluted weighted average common shares                                                 |  |                                | 24,778,970 |  |      |   | 22,687,057 |  
|                                                                                                                 |  |                                |            |  |      |   |            |  
|Basic and diluted net increase (decrease) in net assets resulting from operations per common
share               |  | $                              | 0.04       |  |      | $ | (0.38      | )
|                                                                                                                 |  |                                |            |  |      |   |            |  

NOTE 9. DISTRIBUTIONS TO COMMON STOCKHOLDERS

To qualify to be taxed as a RIC, we are required to distribute to our stockholders 90.0% of our investment company taxable income. The amount to be paid out as
distributions to our stockholders is determined by our Board of Directors quarterly and is based on managements estimate of the fiscal year earnings. Based on that estimate, our Board of Directors declares three monthly distributions to common
stockholders each quarter.

The federal income tax characteristics of all distributions will be reported to stockholders on the Internal Revenue Service
Form 1099 at the end of each calendar year.

We paid the following monthly distributions to common stockholders for the three months ended
December 31, 2016 and 2015:



|            |  |                  |  |                                       |  |                   |      |                              |      | 
|----------- |  | ---------------- |  | ------------------------------------- |  | ----------------- | ---- | ---------------------------- | ---- | 
|Fiscal Year |  | Declaration
Date |  | Record Date                           |  | Payment Date      |      | Distribution perCommon Share |     
|2017        |  | October 11, 2016 |  | October 21, 2016                      |  | October 31, 2016  |      | $                            | 0.07 | 
|            |  | October 11, 2016 |  | November 17, 2016                     |  | November 30, 2016 |      |                              | 0.07 | 
|            |  | October 11, 2016 |  | December 20, 2016                     |  | December 30, 2016 |      |                              | 0.07 | 
|            |  |                  |  |                                       |  |                   |      |                              |      | 
|            |  |                  |  | Three Months Ended December 31, 2016: |  | $                 | 0.21 |                             
|            |  |                  |  |                                       |  |                   |      |                             
|2016        |  | October 13, 2015 |  | October 26, 2015                      |  | November 4, 2015  |      | $                            | 0.07 | 
|            |  | October 13, 2015 |  | November 17, 2015                     |  | November 30, 2015 |      |                              | 0.07 | 
|            |  | October 13, 2015 |  | December 18, 2015                     |  | December 31, 2015 |      |                              | 0.07 | 
|            |  |                  |  |                                       |  |                   |      |                              |      | 
|            |  |                  |  | Three Months Ended December 31, 2015: |  | $                 | 0.21 |                             
|            |  |                  |  |                                       |  |                   |      |                             

Aggregate distributions declared and paid to our common stockholders for the three months ended December 31, 2016 and
2015, were each approximately $5.2 million and $4.8 million, respectively, and were declared based on estimates of investment company taxable income for the respective periods. For our federal income tax reporting purposes, we determine
the tax characterization of our common stockholder distributions at fiscal year-end based upon our investment company taxable income for the full fiscal year and distributions paid during the full fiscal year.
Therefore, a determination of tax characterization made on a quarterly basis may not be representative of the actual tax characterization of distributions for the full year. If we determined the tax characterization of our distributions as of
December 31, 2016, 100% would be from ordinary income and 0% would be a return of capital. For the fiscal year ended September 30, 2016, our current and accumulated earnings and profits (after taking into account our mandatorily redeemable
preferred stock dividends), exceeded common stock distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $5.5 million of the first common distributions paid in fiscal year 2016 as having been
paid in the respective prior year.

For the three months ended December 31, 2016 and the fiscal year ended September 30, 2016, we recorded the
following adjustments for book-tax differences to reflect tax character.



|                                               |  |                                    |        |   |                             |   |        |  
|---------------------------------------------- |  | ---------------------------------- | ------ | - | --------------------------- | - | ------ | -
|                                               |  | Three Months EndedDecember 31,2016 |        |   | Year EndedSeptember 30,2016 |  
|Under (over) distributed net investment income |  | $                                  | (4,821 | ) |                             | $ | 5,818  |  
|Accumulated net realized losses                |  |                                    | 5,020  |   |                             |   | (7,754 | )
|Capital in excess of par value                 |  |                                    | (199   | ) |                             |   | 1,936  |  



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NOTE 10. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

We are party to certain legal
proceedings incidental to the normal course of our business. We are required to establish reserves for litigation matters where those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both
probable and estimable, we do not establish reserves. Based on current knowledge, we do not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our
financial condition, results of operations or cash flows. Additionally, based on our current knowledge, we do not believe such loss contingencies are both probable and estimable and therefore, as of December 31, 2016 and September 30,
2016, we have not established reserves for such loss contingencies.

Financial Commitments and Obligations

We have lines of credit, delayed draw term loans, and an uncalled capital commitment with certain of our portfolio companies that have not been fully drawn.
Since these commitments have expiration dates and we expect many will never be fully drawn, the total commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of the combined unused lines of credit, the
unused delayed draw term loan and the uncalled capital commitment as of December 31, 2016 and September 30, 2016 to be immaterial.

The
following table summarizes the amounts of our unused lines of credit, delayed draw term loans and uncalled capital commitment, at cost, as of December 31, 2016 and September 30, 2016, which are not reflected as liabilities in the
accompanying Consolidated Statements of Assets and Liabilities:



|                                  |  |                   |        |  |                    |   |       | 
|--------------------------------- |  | ----------------- | ------ |  | ------------------ | - | ----- | 
|                                  |  | December 31, 2016 |        |  | September 30, 2016 |  
|Unused line of credit commitments |  | $                 | 6,692  |  |                    | $ | 6,397 | 
|Delayed draw term loans           |  |                   | 3,200  |  |                    |   | 1,300 | 
|Uncalled capital commitment       |  |                   | 1,581  |  |                    |   | 2,004 | 
|                                  |  |                   |        |  |                    |   |       | 
|Total                             |  | $                 | 11,473 |  |                    | $ | 9,701 | 
|                                  |  |                   |        |  |                    |   |       | 



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NOTE 11. FINANCIAL HIGHLIGHTS



|                                                                   |  |                                 |            |   |      |   |            |   
|------------------------------------------------------------------ |  | ------------------------------- | ---------- | - | ---- | - | ---------- | --
|                                                                   |  | Three Months Ended December 31, |           
|                                                                   |  | 2016                            |            |   | 2015 |  
|Per Common Share
Data(A):                                          |  |                                 |            |   |      |   |            |   
|Net asset value at beginning of
period(A)                          |  | $                               | 8.62       |   |      | $ | 9.06       |   
|                                                                   |  |                                 |            |   |      |   |            |   
|Net investment income(B)                                           |  |                                 | 0.21       |   |      |   | 0.21       |   
|Net realized and unrealized (loss)(B)                              |  |                                 | (0.17      | ) |      |   | (0.59      | ) 
|                                                                   |  |                                 |            |   |      |   |            |   
|Total from operations                                              |  |                                 | 0.04       |   |      |   | (0.38      | ) 
|                                                                   |  |                                 |            |   |      |   |            |   
|Distributions to common
stockholders(A)(C)                         |  |                                 | (0.21      | ) |      |   | (0.21      | ) 
|Offering costs for issuance of common stock                        |  |                                 | (0.04      | ) |      |   | (0.05      | ) 
|Dilutive effect of common stock
issuance(D)                        |  |                                 | (0.06      | ) |      |   | (0.05      | ) 
|Other, net(E)                                                      |  |                                 | 0.01       |   |      |   | 0.01       |   
|                                                                   |  |                                 |            |   |      |   |            |   
|Net asset value at end of
period(A)                                |  | $                               | 8.36       |   |      | $ | 8.38       |   
|                                                                   |  |                                 |            |   |      |   |            |   
|Market value at beginning of period                                |  | $                               | 8.13       |   |      | $ | 8.13       |   
|Market value at end of period                                      |  |                                 | 9.39       |   |      |   | 7.31       |   
|Total return(F)                                                    |  |                                 | 18.4       | % |      |   | (7.76      | )%
|Common shares outstanding at end of period                         |  |                                 | 25,517,866 |   |      |   | 23,431,622 |   
|Statement of Assets and Liabilities Data:                          |  |                                 |            |   |      |   |            |   
|Net assets at end of period                                        |  | $                               | 213,385    |   |      | $ | 196,470    |   
|Average net assets(G)                                              |  |                                 | 214,052    |   |      |   | 205,123    |   
|Senior Securities Data:                                            |  |                                 |            |   |      |   |            |   
|Borrowings under Credit Facility, at cost                          |  | $                               | 28,200     |   |      | $ | 57,500     |   
|Mandatorily redeemable preferred stock, at liquidation preference  |  |                                 | 61,000     |   |      |   | 61,000     |   
|Ratios/Supplemental Data:                                          |  |                                 |            |   |      |   |            |   
|Ratio of net expenses to average net assets-annualized(H)(I)       |  |                                 | 8.91       | % |      |   | 10.34      | % 
|Ratio of net investment income to average net assets-annualized(J) |  |                                 | 9.73       |   |      |   | 9.28       |   



|(A) | Based on actual common shares outstanding at the end of the corresponding period.
|--- | ---------------------------------------------------------------------------------

|(B) | Based on weighted average basic common share data for the corresponding period.
|--- | -------------------------------------------------------------------------------

|(C) | Distributions to common stockholders are determined based on taxable income calculated in accordance with income tax regulations which may differ from income amounts determined under GAAP.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(D) | During the fiscal quarters ended December 31, 2016 and 2015, the dilution was a result of issuing common shares during the respective periods at a price below
the then current NAV per share.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(E) | Represents the impact of the different share amounts (weighted average basic common shares outstanding for the corresponding period and actual common shares outstanding at the end of the corresponding period) in the Per
Common Share Data calculations and rounding impacts.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(F) | Total return equals the change in the ending market value of our common stock from the beginning of the period, taking into account common stockholder distributions reinvested in accordance with the terms of the
dividend reinvestment plan. Total return does not take into account common stockholder distributions that may be characterized as a return of capital. For further information on the estimated character of our distributions to common stockholders,
please refer to Note 9Distributions to Common Stockholders.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(G) | Average net assets are computed using the average of the balance of net assets at the end of each month of the reporting period.
|--- | --------------------------------------------------------------------------------------------------------------------------------

|(H) | Ratio of net expenses to average net assets is computed using total expenses, net of credits from the Adviser, to the base management, loan servicing and incentive fees.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(I) | Had we not received any credits to the incentive fee due to the Adviser, the ratio of net expenses to average net assets would have been 8.98% and 10.9% for the fiscal quarters ended December 31, 2016 and 2015.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(J) | Had we not received any credits to the incentive fee due to the Adviser, the ratio of net investment income to average net assets would have been 9.66% and 8.72% for the fiscal quarters ended December 31, 2016 and
2015.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTE 12. UNCONSOLIDATED SIGNIFICANT SUBSIDIARIES

In accordance with the SECs Regulation S-X, we do not consolidate portfolio company investments. Further, in
accordance with ASC 946, we are precluded from consolidating any entity other than another investment company, except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to
the investment company or its consolidated subsidiaries.

We had three unconsolidated subsidiaries, Defiance Integrated Technologies, Inc., PIC 360, LLC,
and Sunshine Media Holdings, that met at least one of the significance conditions under Rule 1-02(w) of the SECs Regulation S-X as of or during at least one of the
three month periods ended December 31, 2016 and 2015. Accordingly, summarized, comparative financial information, in aggregate, is presented below for the three months ended December 31, 2016 and 2015 for our unconsolidated significant
subsidiaries.



|                 |  |                                |       |   |      |   |        |  
|---------------- |  | ------------------------------ | ----- | - | ---- | - | ------ | -
|                 |  | Three Months EndedDecember 31, |      
|Income Statement |  | 2016                           |       |   | 2015 |  
|Net sales        |  | $                              | 8,648 |   |      | $ | 10,566 |  
|Gross profit     |  |                                | 2,172 |   |      |   | 2,696  |  
|Net loss         |  |                                | (702  | ) |      |   | (258   | )

NOTE 13. SUBSEQUENT EVENTS

Portfolio Activity

In February 2017, we invested
$10.0 million in Belnick, Inc. through secured second lien debt.

Distributions to Stockholders

In January 2017, our Board of Directors declared the following monthly cash distributions to common and preferred stockholders:



|                  |  |              |                        |  |                             |   |      |                                                |  |   |          | 
|----------------- |  | ------------ | ---------------------- |  | --------------------------- | - | ---- | ---------------------------------------------- |  | - | -------- | 
|Record Date       |  | Payment Date |                        |  | Distributionper CommonShare |   |      | Distribution perSeries 2021Term PreferredShare | 
|January 20, 2017  |  |              | January 31, 2017       |  |                             | $ | 0.07 |                                                |  | $ | 0.140625 | 
|February 16, 2017 |  |              | February 28, 2017      |  |                             |   | 0.07 |                                                |  |   | 0.140625 | 
|March 22, 2017    |  |              | March 31, 2017         |  |                             |   | 0.07 |                                                |  |   | 0.140625 | 
|                  |  |              |                        |  |                             |   |      |                                                |  |   |          | 
|                  |  |              | Total for the Quarter: |  |                             | $ | 0.21 |                                                |  | $ | 0.421875 | 
|                  |  |              |                        |  |                             |   |      |                                                |  |   |          | 



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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

All statements contained herein, other than historical facts, may constitute forward-looking statements. These statements
may relate to, among other things, our future operating results, our business prospects and the prospects of our portfolio companies, actual and potential conflicts of interest with Gladstone Management Corporation, our adviser, and its affiliates,
the use of borrowed money to finance our investments, the adequacy of our financing sources and working capital, and our ability to co-invest, among other factors. In some cases, you can identify
forward-looking statements by terminology such as estimate, may, might, believe, will, provided, anticipate, future, could,
growth, plan, intend, expect, should, would, if, seek, possible, potential, likely or the negative of such terms or
comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to: (1) the recurrence or impact of adverse events in the economy and the capital
markets, including stock price volatility; (2) risks associated with negotiation and consummation of pending and future transactions; (3) the loss of one or more of our executive officers, in particular David Gladstone, Terry Lee Brubaker
or Robert L. Marcotte; (4) changes in our investment objectives and strategy; (5) availability, terms (including the possibility of interest rate volatility) and deployment of capital; (6) changes in our industry, interest rates,
exchange rates or the general economy; (7) the degree and nature of our competition; (8) our ability to maintain our qualification as a RIC and as business development company; and (9) those factors described herein, including Item
1A. Risk Factors and in the Risk Factors sections of our Annual Report on Form 10-K (our Annual Report) filed with the U.S Securities and Exchange Commission
(SEC) on November 21, 2016. We caution readers not to place undue reliance on any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements and future results
could differ materially from historical performance. We have based forward-looking statements on information available to us on the date of this report. Except as required by the federal securities laws, we undertake no obligation to publicly update
or revise or any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q. Although we undertake no obligation to
revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in
the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form
8-K.

The following analysis of our financial condition and results of operations should be read in
conjunction with our accompanyingConsolidated Financial Statementsand the notes thereto contained elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report. Historical
financial condition and results of operations and percentage relationships among any amounts in the financial statements are not necessarily indicative of financial condition or results of operations for any future periods.

OVERVIEW

General

We were incorporated under the Maryland General Corporation Law on May 30, 2001. We operate as an externally managed, closed-end, non-diversified management investment company, and have elected to be treated as a BDC under the 1940 Act. In addition, for federal income tax purposes we have
elected to be treated as a RIC under Subchapter M of the Code. As a BDC and a RIC, we are subject to certain constraints, including limitations imposed by the 1940 Act and the Code.

We were established for the purpose of investing in debt and equity securities of established private business operating in the U.S. Our investment objectives
are to: (1) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding
indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe
can grow over time to permit us to sell our equity investments for capital gains. To achieve our investment objectives, our investment strategy is to invest in several categories of debt and equity securities, with each investment generally ranging
from $8 million to $30 million, although investment size may vary, depending upon our total assets or available capital at the time of investment. We expect that our investment portfolio over time will consist of approximately 90.0% debt
investments and 10.0% equity investments, at cost. As of December 31, 2016, our investment portfolio was made up of approximately 89.9% debt investments and 10.1% equity investments, at cost.

We focus on investing in lower middle market companies (which we generally define as companies with annual earnings before interest, taxes, depreciation and
amortization of $3 million to $15 million) in the U.S. that meet certain criteria, including, but not limited to, the following: the sustainability of the business free cash flow and its ability to grow it over time, adequate assets for
loan collateral, experienced management teams with a significant ownership interest in the borrower, reasonable capitalization of the borrower, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples and,
to a lesser extent, the potential to realize appreciation and gain liquidity in our equity position, if any. We lend to borrowers that need funds for growth



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capital or to finance acquisitions or recapitalize or refinance their existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises. Our targeted portfolio companies
are generally considered too small for the larger capital marketplace. We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity and have opportunistically made several co-investments with our affiliate Gladstone Investment, pursuant to the Co-Investment Order. We believe this ability to co-invest will
continue to enhance our ability to further our investment objectives and strategies. If we are participating in an investment with one or more co-investors, our investment is likely to be smaller than if we
were investing alone.

We are externally managed by Gladstone Management Corporation (the Adviser), an investment adviser registered with the
SEC and an affiliate of ours, pursuant to an investment advisory and management agreement (the Advisory Agreement). The Adviser manages our investment activities. We have also entered into an administration agreement (the
Administration Agreement) with Gladstone Administration, LLC (the Administrator), an affiliate of ours and the Adviser, whereby we pay separately for administrative services.

Additionally, since February 2011, Gladstone Securities, LLC (Gladstone Securities), a privately-held broker-dealer registered with the Financial
Industry Regulatory Authority and insured by the Securities Investor Protection Corporation, which is 100% indirectly owned and controlled by Mr. Gladstone, our chairman and chief executive officer, has provided other services, such as
investment banking and due diligence services, to certain of our portfolio companies, for which Gladstone Securities receives a fee.

Our shares of common
stock and 6.75% Series 2021 Term Preferred Stock (our Series 2021 Term Preferred Stock) are traded on the NASDAQ Global Select Market (NASDAQ) under the trading symbols GLAD and GLADO, respectively.

Business

Portfolio and Investment
Activity

During the three months ended December 31, 2016, we invested $17.2 million in three new portfolio companies and extended
$3.9 million of investments to existing portfolio companies. In addition, during the three months ended December 31, 2016, we exited 4 portfolio companies through sales and early payoffs. We received a total of $50.5 million in
combined net proceeds and principal repayments from the aforementioned portfolio company exits as well as existing portfolio companies during the three months ended December 31, 2016. This activity resulted in a net reduction in our overall
portfolio of one portfolio company to 44 and a net decrease of 8.6% in our portfolio at cost since September 30, 2016. Continuing into fiscal year 2017, we intend to continue to show our stockholders new conservative investments in businesses
with steady cash flows. We are focused on building our pipeline and making investments that meet our objectives and strategies and that provide appropriate returns, in light of the accompanying risks. Since our initial public offering in August
2001, we have made 449 different loans to, or investments in, 209 companies for a total of approximately $1.6 billion, before giving effect to principal repayments on investments and divestitures.

During the three months ended December 31, 2016, the following significant transactions occurred:



| |  |  | In October 2016, RP Crown Parent, LLC paid off at par for proceeds of $2.0 million.
| | - |  | -----------------------------------------------------------------------------------



| |  |  | In October 2016, our $3.9 million secured first lien debt investment in Vertellus Specialties, Inc. was restructured. As a result of the restructure, we received a new $1.1 million secured second lien debt
investment in Vertellus Holdings LLC and common equity with a cost basis of $3.0 million.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In November 2016, we completed the sale of substantially all the assets of RBC Acquisition Corp. (RBC) for net proceeds of $36.3 million, which resulted in a realized loss of $2.3 million. In
connection with the sale, we received success fee income of $1.1 million and net receivables of $1.5 million, which are recorded within Other assets, net.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In November 2016, we invested $5.2 million in Sea Link International IRB, Inc. through secured second lien debt and equity.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | In December 2016, we sold our investment in Behrens Manufacturing, LLC (Behrens), which resulted in success fee income of $0.4 million and a realized gain of $2.5 million. In connection with the
sale, we received net cash proceeds of $8.2 million, including the repayment of our debt investment of $4.3 million at par.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In December 2016, we invested $7.0 million in Vacation Rental Pros Property Management, LLC through secured second lien debt.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | In December 2016, Autoparts Holdings Limited paid off at par for proceeds of $0.7 million.
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | In December 2016, we invested $5.0 million in LDiscovery, LLC through secured second lien debt.
| | - |  | -----------------------------------------------------------------------------------------------



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Refer to Note 13Subsequent Events in the accompanying Consolidated Financial Statements
included elsewhere in this Quarterly Report on Form 10-Q for portfolio activity occurring subsequent to December 31, 2016.

Capital Raising

We have been able to meet our
capital needs through extensions of and increases to the Credit Facility and by accessing the capital markets in the form of public equity offerings. We have successfully extended the Credit Facilitys revolving period multiple times, most
recently to January 2019, and currently have a total commitment amount of $170.0 million. Additionally, we issued 2.3 million shares of common stock for gross proceeds of $19.8 million in October 2015, inclusive of the November 2015
overallotment, and we issued approximately 2.2 million shares of our common stock for gross proceeds of $17.3 million in October 2016, inclusive of the November 2016 overallotment. Refer to Liquidity and Capital Resources 
Equity  Common Stock for further discussion of our common stock and Liquidity and Capital Resources  Revolving Credit Facility for further discussion of our Credit Facility.

Although we were able to access the capital markets over the last year, we believe uncertain market conditions continue to affect the trading price of our
capital stock and thus may inhibit our ability to finance new investments through the issuance of equity. The current volatility in the credit market and the uncertainty surrounding the U.S. economy have led to significant stock market fluctuations,
particularly with respect to the stock of financial services companies like ours. During times of increased price volatility, our common stock may be more likely to trade at a price below our NAV per share, which is not uncommon for BDCs like us.

When our stock trades below NAV per common share, as it has fairly consistently over the last several years, our ability to issue equity is constrained
by provisions of the 1940 Act, which generally prohibits the issuance and sale of our common stock below NAV per common share without first obtaining approval from our stockholders and our independent directors, other than through sales to our
then-existing stockholders pursuant to a rights offering. At our annual meeting of stockholders held on February 11, 2016, our stockholders approved a proposal which authorizes us to sell shares of our common stock at a price below our then
current NAV per common share subject to certain limitations (including, but not limited to, that the number of shares issued and sold pursuant to such authority does not exceed 25.0% of our then outstanding common stock immediately prior to each
such sale) for a period of one year from the date of approval, provided that our Board of Directors makes certain determinations prior to any such sale. We completed the abovementioned October 2016 common stock offering as a result of the
stockholder approval of the proposal at our 2016 Annual Meeting of Stockholders and additional Board of Directors approval. We are not requesting that our stockholders approve the Companys ability to issue shares of common stock at a price
below NAV at the Companys 2017 Annual Meeting of Stockholders to be held in February. Should we decide to issue shares of common stock at a price below NAV, we will seek the requisite approval of our stockholders.

On February 7, 2016, the closing market price of our common stock was $9.91, an 18.5% premium to our December 31, 2016 NAV per share of $8.36.

Regulatory Compliance

Our ability to seek
external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage limitations of the 1940 Act, which require us to have an asset coverage ratio (as defined in Section 18(h) of the
1940 Act) of at least 200% on our senior securities representing indebtedness and our senior securities that are stock. As of December 31, 2016, our asset coverage ratio on our senior securities representing
indebtedness was 1,058.3% and our asset coverage ratio on our senior securities that are stock was 335.5%.

Recent Developments

Common Stock Offering

In October
2016, we completed a public offering of 2.0 million shares of our common stock. In November 2016, the underwriters partially exercised their overallotment option to purchase an additional 173,444 shares of our common stock. Gross proceeds
totaled $17.3 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were approximately $16.4 million. Refer to Liquidity and Capital Resources  Equity  Common Stock
of this Item 7 for further discussion of our common stock offerings.

Registration Statement

We filed Post-Effective Amendment No. 2 to our current universal shelf registration statement (our Registration Statement) on Form N-2 (File No. 333-208637) with the SEC on December 22, 2016, which was declared effective by the SEC on February 6, 2017. Our Registration Statement permits us
to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock, preferred stock or debt
securities. We currently have the ability to issue up to $282.7 million in securities under the Registration Statement.



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Distributions

On January 10, 2017, our Board of Directors declared the following monthly cash distributions to common and preferred stockholders:



|                  |  |              |                        |  |                             |   |      |                                                |  |   |          | 
|----------------- |  | ------------ | ---------------------- |  | --------------------------- | - | ---- | ---------------------------------------------- |  | - | -------- | 
|Record Date       |  | Payment Date |                        |  | Distributionper CommonShare |   |      | Distribution perSeries 2021Term PreferredShare | 
|January 20, 2017  |  |              | January 31, 2017       |  |                             | $ | 0.07 |                                                |  | $ | 0.140625 | 
|February 16, 2017 |  |              | February 28, 2017      |  |                             |   | 0.07 |                                                |  |   | 0.140625 | 
|March 22, 2017    |  |              | March 31, 2017         |  |                             |   | 0.07 |                                                |  |   | 0.140625 | 
|                  |  |              |                        |  |                             |   |      |                                                |  |   |          | 
|                  |  |              | Total for the Quarter: |  |                             | $ | 0.21 |                                                |  | $ | 0.421875 | 
|                  |  |              |                        |  |                             |   |      |                                                |  |   |          | 



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RESULTS OF OPERATIONS

Comparison of the Three Months Ended December 31, 2016, to the Three Months Ended December 31, 2015



|                                                                |  |                                 |        |   |      |   |         |          |  |   |          |   |  |  |        |   
|--------------------------------------------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------- | -------- |  | - | -------- | - |  |  | ------ | --
|                                                                |  | Three Months Ended December 31, |       
|                                                                |  | 2016                            |        |   | 2015 |   |         | $ Change |  |   | % Change |  
|INVESTMENT INCOME                                               |  |                                 |        |   |      |   |         |          |  |   |          |   |  |  |        |   
|Interest income                                                 |  | $                               | 8,633  |   |      | $ | 9,184   |          |  | $ | (551     | ) |  |  | (6.0   | )%
|Other income                                                    |  |                                 | 1,341  |   |      |   | 876     |          |  |   | 465      |   |  |  | 53.1   |   
|                                                                |  |                                 |        |   |      |   |         |          |  |   |          |   |  |  |        |   
|Total investment income                                         |  |                                 | 9,974  |   |      |   | 10,060  |          |  |   | (86      | ) |  |  | (0.9   | ) 
|                                                                |  |                                 |        |   |      |   |         |          |  |   |          |   |  |  |        |   
|EXPENSES                                                        |  |                                 |        |   |      |   |         |          |  |   |          |   |  |  |        |   
|Base management fee                                             |  |                                 | 1,378  |   |      |   | 1,528   |          |  |   | (150     | ) |  |  | (9.8   | ) 
|Loan servicing fee                                              |  |                                 | 983    |   |      |   | 1,008   |          |  |   | (25      | ) |  |  | (2.5   | ) 
|Incentive fee                                                   |  |                                 | 1,293  |   |      |   | 1,118   |          |  |   | 175      |   |  |  | 15.7   |   
|Administration fee                                              |  |                                 | 300    |   |      |   | 336     |          |  |   | (36      | ) |  |  | (10.7  | ) 
|Interest expense on borrowings                                  |  |                                 | 556    |   |      |   | 785     |          |  |   | (229     | ) |  |  | (29.2  | ) 
|Dividend expense on mandatorily redeemable preferred stock      |  |                                 | 1,029  |   |      |   | 1,029   |          |  |   |         |   |  |  |       |   
|Amortization of deferred financing fees                         |  |                                 | 273    |   |      |   | 255     |          |  |   | 18       |   |  |  | 7.1    |   
|Other expenses                                                  |  |                                 | 637    |   |      |   | 636     |          |  |   | 1        |   |  |  | NM     |   
|                                                                |  |                                 |        |   |      |   |         |          |  |   |          |   |  |  |        |   
|Expenses, before credits from Adviser                           |  |                                 | 6,449  |   |      |   | 6,695   |          |  |   | (246     | ) |  |  | (3.7   | ) 
|Credit to base management fee  loan servicing fee              |  |                                 | (983   | ) |      |   | (1,008  | )        |  |   | 25       |   |  |  | (2.5   | ) 
|Credits to fees from Adviser - other                            |  |                                 | (699   | ) |      |   | (386    | )        |  |   | (313     | ) |  |  | 81.1   |   
|                                                                |  |                                 |        |   |      |   |         |          |  |   |          |   |  |  |        |   
|Total expenses, net of credits                                  |  |                                 | 4,767  |   |      |   | 5,301   |          |  |   | (534     | ) |  |  | (10.1  | ) 
|                                                                |  |                                 |        |   |      |   |         |          |  |   |          |   |  |  |        |   
|NET INVESTMENT INCOME                                           |  |                                 | 5,207  |   |      |   | 4,759   |          |  |   | 448      |   |  |  | 9.4    |   
|                                                                |  |                                 |        |   |      |   |         |          |  |   |          |   |  |  |        |   
|NET REALIZED AND UNREALIZED GAIN (LOSS)                         |  |                                 |        |   |      |   |         |          |  |   |          |   |  |  |        |   
|Net realized (loss) gain on investments and other               |  |                                 | (3,448 | ) |      |   | 15,380  |          |  |   | (18,828  | ) |  |  | (122.4 | ) 
|Net unrealized (depreciation) appreciation of investments       |  |                                 | (1,055 | ) |      |   | (28,843 | )        |  |   | 27,788   |   |  |  | (96.3  | ) 
|Net unrealized depreciation of other                            |  |                                 | 212    |   |      |   |        |          |  |   | 212      |   |  |  | NM     |   
|                                                                |  |                                 |        |   |      |   |         |          |  |   |          |   |  |  |        |   
|Net loss from investments and other                             |  |                                 | (4,291 | ) |      |   | (13,463 | )        |  |   | 9,172    |   |  |  | (68.1  | )%
|                                                                |  |                                 |        |   |      |   |         |          |  |   |          |   |  |  |        |   
|NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS |  | $                               | 916    |   |      | $ | (8,704  | )        |  | $ | 9,620    |   |  |  | (110.5 | )%
|                                                                |  |                                 |        |   |      |   |         |          |  |   |          |   |  |  |        |   

NM = Not Meaningful

Investment Income

Interest income decreased by
6.0% for the three months ended December 31, 2016, as compared to the prior year period. The decrease was driven by a decrease in the principal balance of our interest bearing investment portfolio outstanding during the period. The weighted
average principal balance of our interest-bearing investment portfolio during the three months ended December 31, 2016, was $298.8 million, compared to $338.3 million for the prior year period, a decrease of 11.7%. This decrease was
due primarily to exits that occurred during the first quarter of fiscal year 2017, discussed under Portfolio and Investment Activity above. The weighted average yield on our interest-bearing investment portfolio is based on the
current stated interest rate on interest-bearing investments which was 11.3% for the three months ended December 31, 2016 and 2015, inclusive of any allowances on interest receivables made during those periods.

As of December 31, 2016 and 2015, one portfolio company, Sunshine Media Holdings (Sunshine), was partially on
non-accrual status, with an aggregate debt cost basis of approximately $19.1 million and $22.6 million, or 6.1% and 6.7%, of the cost basis of all debt investments in our portfolio, respectively.

For the three months ended December 31, 2016, other income, consisting primarily of success fee income, increased by 53.1% as compared to the prior
year period. For the three months ended December 31, 2015, other income consisted primarily of $0.5 million in dividend income received and $0.3 million in success fees recognized.



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The following tables list the investment income for our five largest portfolio company investments at fair value
during the respective periods:



|                                  |  |                         |         |  |                                      |  |       |                   |  |   |                  |  |  |  |       |  
|--------------------------------- |  | ----------------------- | ------- |  | ------------------------------------ |  | ----- | ----------------- |  | - | ---------------- |  |  |  | ----- | -
|                                  |  | As of December 31, 2016 |         |  | Three Months Ended December 31, 2016 | 
|Company                           |  | Fair Value              |         |  | % of Portfolio                       |  |       | Investment Income |  |   | % of TotalIncome | 
|IA Tech, LLC                      |  | $                       | 23,345  |  |                                      |  | 8.1   | %                 |  | $ | 705              |  |  |  | 7.1   | %
|WadeCo Specialties, Inc.          |  |                         | 18,443  |  |                                      |  | 6.4   |                   |  |   | 477              |  |  |  | 4.8   |  
|United Flexible, Inc.             |  |                         | 18,196  |  |                                      |  | 6.3   |                   |  |   | 568              |  |  |  | 5.7   |  
|Lignetics, Inc.                   |  |                         | 13,809  |  |                                      |  | 4.8   |                   |  |   | 429              |  |  |  | 4.3   |  
|AG Transportation Holdings, LLC   |  |                         | 13,130  |  |                                      |  | 4.6   |                   |  |   | 440              |  |  |  | 4.4   |  
|                                  |  |                         |         |  |                                      |  |       |                   |  |   |                  |  |  |  |       |  
|Subtotalfive largest investments |  |                         | 86,923  |  |                                      |  | 30.2  |                   |  |   | 2,619            |  |  |  | 26.3  |  
|Other portfolio companies         |  |                         | 201,323 |  |                                      |  | 69.8  |                   |  |   | 7,355            |  |  |  | 73.7  |  
|                                  |  |                         |         |  |                                      |  |       |                   |  |   |                  |  |  |  |       |  
|Total Investment Portfolio        |  | $                       | 288,246 |  |                                      |  | 100.0 | %                 |  | $ | 9,974            |  |  |  | 100.0 | %
|                                  |  |                         |         |  |                                      |  |       |                   |  |   |                  |  |  |  |       |  
|                                  |  |                        
|                                  |  | As of December 31, 2015 |         |  | Three Months Ended December 31, 2015 | 
|Company                           |  | Fair Value              |         |  | % of Portfolio                       |  |       | Investment Income |  |   | % of TotalIncome | 
|WadeCo Specialties, Inc.          |  | $                       | 21,446  |  |                                      |  | 7.2   | %                 |  | $ | 524              |  |  |  | 5.2   | %
|RBC Acquisition Corp.             |  |                         | 20,754  |  |                                      |  | 6.9   |                   |  |   | 784              |  |  |  | 7.8   |  
|United Flexible, Inc.             |  |                         | 20,112  |  |                                      |  | 6.7   |                   |  |   | 475              |  |  |  | 4.7   |  
|Francis Drilling Fluids, Ltd.     |  |                         | 17,415  |  |                                      |  | 5.8   |                   |  |   | 642              |  |  |  | 6.4   |  
|Lignetics, Inc.                   |  |                         | 16,366  |  |                                      |  | 5.5   |                   |  |   | 460              |  |  |  | 4.6   |  
|                                  |  |                         |         |  |                                      |  |       |                   |  |   |                  |  |  |  |       |  
|Subtotalfive largest investments |  |                         | 96,093  |  |                                      |  | 32.1  |                   |  |   | 2,885            |  |  |  | 28.7  |  
|Other portfolio companies         |  |                         | 203,598 |  |                                      |  | 67.9  |                   |  |   | 7,175            |  |  |  | 71.3  |  
|                                  |  |                         |         |  |                                      |  |       |                   |  |   |                  |  |  |  |       |  
|Total Investment Portfolio        |  | $                       | 299,691 |  |                                      |  | 100.0 | %                 |  | $ | 10,060           |  |  |  | 100.0 | %
|                                  |  |                         |         |  |                                      |  |       |                   |  |   |                  |  |  |  |       |  

Expenses

Expenses, net of any unconditional, non-contractual and irrevocable voluntary credits to fees from the Adviser,
decreased by 10.1% for the three months ended December 31, 2016, as compared to the prior year period. This decrease was primarily due to a decrease in interest expense on borrowings and a decrease in net base management fees, partially offset
by an increase in net incentive fee.

Interest expense on borrowings decreased by $0.2 million, or 29.2%, during the three months ended
December 31, 2016, as compared to the prior year period, due primarily to a decrease in the borrowings outstanding under our Credit Facility during the period due to the sales and payoffs discussed above. The weighted average balance
outstanding under our Credit Facility during the three months ended December 31, 2016, was $39.3 million, as compared to $74.1 million in the prior year period, a decrease of 47.0%.

Net base management fee earned by the Adviser decreased by $0.7 million, or 49.9%, during the three months ended December 31, 2016, as compared to
the prior year period, resulting from a decrease in the average total assets outstanding. This decrease was offset by a $0.4 million increase in net incentive fees. Our Board of Directors accepted an unconditional, non-contractual and irrevocable voluntary credit of $37 from the Adviser to reduce the income-based incentive fee to the extent net investment income for the quarter ended December 31, 2016 did not cover 100.0%
of the distributions to common stockholders during the period. The credit granted for the quarter ended December 31, 2015, was $0.3 million.



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The base management, loan servicing and incentive fees, and associated unconditional, non-contractual, and irrevocable voluntary credits, are computed quarterly, as described under Transactions with the Adviser in Note 4Related Party Transactions of the notes to our
accompanying Consolidated Financial Statements and are summarized in the following table:



|                                                           |  |                                |         |   |      |   |         |  
|---------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                           |  | Three Months EndedDecember 31, |        
|                                                           |  | 2016                           |         |   | 2015 |  
|Average total assets subject to base management
fee(A)     |  | $                              | 315,000 |   |      | $ | 349,300 |  
|Multiplied by prorated annual base management fee of 1.75% |  |                                | 0.4375  | % |      |   | 0.4375  | %
|                                                           |  |                                |         |   |      |   |         |  
|Base management fee(B)                                     |  | $                              | 1,378   |   |      | $ | 1,528   |  
|Portfolio company fee credit                               |  |                                | (649    | ) |      |   | (65     | )
|Senior syndicated loan fee credit                          |  |                                | (13     | ) |      |   | (33     | )
|                                                           |  |                                |         |   |      |   |         |  
|Net Base Management Fee                                    |  | $                              | 716     |   |      | $ | 1,430   |  
|                                                           |  |                                |         |   |      |   |         |  
|Loan servicing fee(B)                                      |  |                                | 983     |   |      |   | 1,088   |  
|Credit to base management fee - loan servicing
fee(B)      |  |                                | (983    | ) |      |   | (1,088  | )
|                                                           |  |                                |         |   |      |   |         |  
|Net Loan Servicing Fee                                     |  | $                              |        |   |      | $ |        |  
|                                                           |  |                                |         |   |      |   |         |  
|Incentive fee(B)                                           |  |                                | 1,293   |   |      |   | 1,118   |  
|Incentive fee credit                                       |  |                                | (37     | ) |      |   | (288    | )
|                                                           |  |                                |         |   |      |   |         |  
|Net Incentive Fee                                          |  | $                              | 1,256   |   |      | $ | 830     |  
|                                                           |  |                                |         |   |      |   |         |  
|Portfolio company fee credit                               |  |                                | (649    | ) |      |   | (65     | )
|Senior syndicated loan fee credit                          |  |                                | (13     | ) |      |   | (33     | )
|Incentive fee credit                                       |  |                                | (37     | ) |      |   | (288    | )
|                                                           |  |                                |         |   |      |   |         |  
|Credits to Fees From Adviser -
other(B)                    |  | $                              | (699    | ) |      | $ | (386    | )
|                                                           |  |                                |         |   |      |   |         |  



|(A) | Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued
at the end of the 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 accompanying Consolidated Statements of Operations.
|--- | ------------------------------------------------------------------------------------------------------

Realized and Unrealized Gain (Loss)

Net
Realized Loss on Investments

For the three months ended December 31, 2016, we recorded a net realized loss on investments of $3.4 million,
which resulted primarily from the sale of substantially all the assets of RBC for a $2.3 million realized loss and the write-off of $5.0 million of our investment in Sunshine, partially offset by the
sale of Behrens for a $2.5 million realized gain and a $1.3 million realized gain related to an additional earn-out from Funko, LLC (Funko), which was exited in the prior year.

For the three months ended December 31, 2015, we recorded a net realized gain on investments of $15.4 million, which resulted primarily from the
sale of Funko for a $17.0 million realized gain, partially offset by the sale of Heartland Communications Group for a $2.4 million realized loss during the period.



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Net Unrealized Appreciation (Depreciation) of Investments

The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the three months ended December 31, 2016, were as
follows:



|                                       |  |                                      |        |   |                                      |   |        |                                                 |  |   |                |   |  |   |        |  
|-------------------------------------- |  | ------------------------------------ | ------ | - | ------------------------------------ | - | ------ | ----------------------------------------------- |  | - | -------------- | - |  | - | ------ | -
|                                       |  | Three Months Ended December 31, 2016 |       
|Portfolio Company                      |  | Realized Gain(Loss)                  |        |   | UnrealizedAppreciation(Depreciation) |   |        | Reversal ofUnrealized(Appreciation)Depreciation |  |   | NetGain (Loss) |  
|Funko, LLC                             |  | $                                    | 1,251  |   |                                      | $ | 53     |                                                 |  | $ |               |   |  | $ | 1,304  |  
|Edge Adhesives Holdings, Inc.          |  |                                      |       |   |                                      |   | 666    |                                                 |  |   |               |   |  |   | 666    |  
|Meridian Rack & Pinion, Inc.           |  |                                      |       |   |                                      |   | 605    |                                                 |  |   |               |   |  |   | 605    |  
|Mikawaya                               |  |                                      |       |   |                                      |   | 276    |                                                 |  |   |               |   |  |   | 276    |  
|New Trident Holdcorp, Inc.             |  |                                      |       |   |                                      |   | (281   | )                                               |  |   |               |   |  |   | (281   | )
|Sunshine Media Holdings                |  |                                      | (5,000 | ) |                                      |   | 983    |                                                 |  |   | 3,613          |   |  |   | (404   | )
|Vertellus Specialties Inc.             |  |                                      | 109    |   |                                      |   | (574   | )                                               |  |   |               |   |  |   | (465   | )
|Behrens Manufacturing, LLC             |  |                                      | 2,505  |   |                                      |   |       |                                                 |  |   | (3,211         | ) |  |   | (706   | )
|Defiance Integrated Technologies, Inc. |  |                                      |       |   |                                      |   | (710   | )                                               |  |   |               |   |  |   | (710   | )
|Lignetics, Inc.                        |  |                                      |       |   |                                      |   | (1,011 | )                                               |  |   |               |   |  |   | (1,011 | )
|RBC Acquisition Corp.                  |  |                                      | (2,330 | ) |                                      |   |       |                                                 |  |   | 1,119          |   |  |   | (1,211 | )
|Francis Drilling Fluids, Ltd.          |  |                                      |       |   |                                      |   | (3,797 | )                                               |  |   |               |   |  |   | (3,797 | )
|Other, net (<$250)                     |  |                                      | 17     |   |                                      |   | 1,148  |                                                 |  |   | 66             |   |  |   | 1,231  |  
|                                       |  |                                      |        |   |                                      |   |        |                                                 |  |   |                |   |  |   |        |  
|Total:                                 |  | $                                    | (3,448 | ) |                                      | $ | (2,642 | )                                               |  | $ | 1,587          |   |  | $ | (4,503 | )
|                                       |  |                                      |        |   |                                      |   |        |                                                 |  |   |                |   |  |   |        |  

The primary driver of net unrealized depreciation for the three months ended December 31, 2016, was a decline in the
financial and operational performance of certain portfolio companies, most notably Francis Drilling Fluids, Ltd. (FDF) of $3.8 million, Lignetics of $1.0 million, the reversal of previously recorded depreciation on our
investment in Sunshine upon partial write-off and the reversal of previously recorded unrealized appreciation on our investment on Behrens upon exit. This depreciation was partially offset by the reversal of
previously recorded unrealized depreciation on RBC upon exit and an additional earn-out receivable earned and included in the realized gain on the sale of Funko.

The net realized gains (losses) and unrealized appreciation (depreciation) across our investments for the three months ended December 31, 2015, were as
follows:



|                                           |  |                                      |        |   |                                      |   |         |                                                 |  |   |                 |   |  |   |         |  
|------------------------------------------ |  | ------------------------------------ | ------ | - | ------------------------------------ | - | ------- | ----------------------------------------------- |  | - | --------------- | - |  | - | ------- | -
|                                           |  | Three Months Ended December 31, 2015 |       
|Portfolio Company                          |  | Realized (Loss)Gain                  |        |   | UnrealizedAppreciation(Depreciation) |   |         | Reversal ofUnrealizedDepreciation(Appreciation) |  |   | Net Gain (Loss) |  
|Legend Communications of Wyoming, LLC      |  | $                                    |       |   |                                      | $ | 2,857   |                                                 |  | $ |                |   |  | $ | 2,857   |  
|Funko, LLC                                 |  |                                      | 17,000 |   |                                      |   |        |                                                 |  |   | (16,009         | ) |  |   | 991     |  
|J.America, Inc.                            |  |                                      |       |   |                                      |   | 482     |                                                 |  |   |                |   |  |   | 482     |  
|Behrens Manufacturing, LLC                 |  |                                      |       |   |                                      |   | 395     |                                                 |  |   |                |   |  |   | 395     |  
|Triple H Food Processors                   |  |                                      |       |   |                                      |   | 347     |                                                 |  |   |                |   |  |   | 347     |  
|Lignetics, Inc.                            |  |                                      |       |   |                                      |   | 295     |                                                 |  |   |                |   |  |   | 295     |  
|Heartland Communications Group             |  |                                      | (2,356 | ) |                                      |   |        |                                                 |  |   | 2,390           |   |  |   | 34      |  
|Autoparts Holdings Limited                 |  |                                      |       |   |                                      |   | (377    | )                                               |  |   |                |   |  |   | (377    | )
|AG Transportation Holdings, LLC            |  |                                      |       |   |                                      |   | (409    | )                                               |  |   |                |   |  |   | (409    | )
|Southern Petroleum Laboratories, Inc.      |  |                                      |       |   |                                      |   | (445    | )                                               |  |   |                |   |  |   | (445    | )
|Vision Government Solutions, Inc.          |  |                                      |       |   |                                      |   | (562    | )                                               |  |   |                |   |  |   | (562    | )
|Vertellus Specialties Inc.                 |  |                                      |       |   |                                      |   | (719    | )                                               |  |   |                |   |  |   | (719    | )
|Vision Solutions, Inc.                     |  |                                      |       |   |                                      |   | (764    | )                                               |  |   |                |   |  |   | (764    | )
|LWO Acquisitions Company LLC               |  |                                      |       |   |                                      |   | (797    | )                                               |  |   |                |   |  |   | (797    | )
|Precision Acquisition Group Holdings, Inc. |  |                                      |       |   |                                      |   | (938    | )                                               |  |   |                |   |  |   | (938    | )
|Sunshine Media Holdings                    |  |                                      |       |   |                                      |   | (1,750  | )                                               |  |   |                |   |  |   | (1,750  | )
|Targus Group International, Inc.           |  |                                      |       |   |                                      |   | (2,126  | )                                               |  |   |                |   |  |   | (2,126  | )
|Defiance Integrated Technologies, Inc.     |  |                                      |       |   |                                      |   | (2,406  | )                                               |  |   |                |   |  |   | (2,406  | )
|RBC Acquisition Corp.                      |  |                                      | 1,207  |   |                                      |   | (3,847  | )                                               |  |   |                |   |  |   | (2,640  | )
|Francis Drilling Fluids, Ltd.              |  |                                      |       |   |                                      |   | (2,700  | )                                               |  |   |                |   |  |   | (2,700  | )
|Other, net (<$250)                         |  |                                      | (471   | ) |                                      |   | (2,274  | )                                               |  |   | 514             |   |  |   | (2,231  | )
|                                           |  |                                      |        |   |                                      |   |         |                                                 |  |   |                 |   |  |   |         |  
|Total:                                     |  | $                                    | 15,380 |   |                                      | $ | (15,738 | )                                               |  | $ | (13,105         | ) |  | $ | (13,463 | )
|                                           |  |                                      |        |   |                                      |   |         |                                                 |  |   |                 |   |  |   |         |  

The largest driver of our net unrealized depreciation for the three months ended December 31, 2015 was a decline in
financial and operational performance on several portfolio companies and, to a lesser extent, decreases in comparable multiples used in valuations, most notably, RBC of $3.8 million, FDF of $2.7 million, and Defiance Integrated
Technologies, Inc. of $2.4 million. This depreciation was partially offset by the appreciation on Legend Communications of Wyoming of $2.9 million and an additional earn-out receivable earned and
included in the realized gain on the sale of Funko.

As of December 31, 2016, the fair value of our investment portfolio was less than its cost basis
by approximately $60.7 million and our entire investment portfolio was valued at 82.6% of cost, as compared to cumulative net unrealized depreciation of $73.2 million and a valuation of our entire portfolio at 80.4% of cost as of
December 31, 2015.



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The cumulative net unrealized depreciation of our investments does not have an impact on our current ability to
pay distributions to stockholders; however, it may be an indication of future realized losses, which could ultimately reduce our income available for distribution to stockholders.

Net Unrealized Depreciation of Other

During the three
months ended December 31, 2016, we recorded $0.2 million of net unrealized depreciation on our credit facility recorded at fair value whereas no such amounts were incurred in the prior year period.



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LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Our cash flows from operating
activities are primarily generated from the interest payments on debt securities that we receive from our portfolio companies, as well as net proceeds received through repayments or sales of our investments. We utilize this cash primarily to fund
new investments, make interest payments on our Credit Facility, make distributions to our stockholders, pay management fees to the Adviser, and for other operating expenses. Net cash provided by operating activities for the three months ended
December 31, 2016 was $31.5 million as compared to $66.1 million for the three months ended December 31, 2015. The change was primarily due to the increase in purchases of investments and the decrease in net unrealized
depreciation period over period. Purchases of investments were $20.0 million during the three months ended December 31, 2016 compared to $5.1 million during the three months ended December 31, 2015. Net unrealized depreciation
totaled $1.1 million during the three months ended December 31, 2016 compared to $28.8 million during the three months ended December 31, 2015.

As of December 31, 2016, we had loans to, syndicated participations in or equity investments in 44 private companies, with an aggregate cost basis of
approximately $349.0 million. As of December 31, 2015, we had loans to, syndicated participations in or equity investments in 44 private companies, with an aggregate cost basis of approximately $372.9 million.

The following table summarizes our total portfolio investment activity during the three months ended December 31, 2016 and 2015:



|                                                                                   |  |                                |         |   |      |   |         |  
|---------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                   |  | Three Months EndedDecember 31, |        
|                                                                                   |  | 2016                           |         |   | 2015 |  
|Beginning investment portfolio, at fair value                                      |  | $                              | 322,114 |   |      | $ | 365,891 |  
|New investments                                                                    |  |                                | 17,240  |   |      |   | 3,800   |  
|Disbursements to existing portfolio companies                                      |  |                                | 2,807   |   |      |   | 1,287   |  
|Scheduled principal repayments on investments                                      |  |                                | (1,683  | ) |      |   | (369    | )
|Unscheduled principal repayments on investments                                    |  |                                | (40,551 | ) |      |   | (40,962 | )
|Net proceeds from sale of investments                                              |  |                                | (8,219  | ) |      |   | (19,876 | )
|Net unrealized depreciation of investments                                         |  |                                | (2,642  | ) |      |   | (15,738 | )
|Reversal of prior period (appreciation) depreciation of investments on realization |  |                                | 1,587   |   |      |   | (13,105 | )
|Net realized gain (loss) on investments                                            |  |                                | (3,448  | ) |      |   | 15,382  |  
|Increase in investments due to PIK(A) or
other                                     |  |                                | 1,095   |   |      |   | 2,936   |  
|Cost adjustments on non-accrual loans                                              |  |                                |        |   |      |   | 388     |  
|Net change in premiums, discounts and amortization                                 |  |                                | (54     | ) |      |   | 57      |  
|                                                                                   |  |                                |         |   |      |   |         |  
|Investment Portfolio, at Fair Value                                                |  | $                              | 288,246 |   |      | $ | 299,691 |  
|                                                                                   |  |                                |         |   |      |   |         |  



|(A) | Paid-in-kind (PIK) interest is a
non-cash source of income and is calculated at the contractual rate stated in a loan agreement and added to the principal balance of a loan.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments,
as of December 31, 2016:



|                                                   |  |                                                    |  |   |         |  
|-------------------------------------------------- |  | -------------------------------------------------- |  | - | ------- | -
|                                                   |  | Amount                                             | 
|For the remaining nine months ending September 30: |  | 2017                                               |  | $ | 21,008  |  
|For the fiscal years ending September 30:          |  | 2018                                               |  |   | 53,949  |  
|                                                   |  | 2019                                               |  |   | 44,496  |  
|                                                   |  | 2020                                               |  |   | 78,593  |  
|                                                   |  | 2021                                               |  |   | 60,831  |  
|                                                   |  | Thereafter                                         |  |   | 60,593  |  
|                                                   |  |                                                    |  |   |         |  
|                                                   |  | Total contractual repayments                       |  | $ | 319,470 |  
|                                                   |  | Equity investments                                 |  |   | 35,083  |  
|                                                   |  | Adjustments to cost basis on debt investments      |  |   | (5,565  | )
|                                                   |  |                                                    |  |   |         |  
|                                                   |  | Investments Held as of December 31, 2016,
at Cost: |  | $ | 348,988 |  
|                                                   |  |                                                    |  |   |         |  



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Financing Activities

Net cash used in financing activities for the three months ended December 31, 2016 was $31.8 million, which consisted primarily of $43.1 million
in net repayments on our Credit Facility and $5.2 million in distributions to common stockholders, partially offset by $16.4 million in proceeds from the issuance of common stock, net of underwriting costs. Net cash used in financing
activities totaled $56.1 million for the three months ended December 31, 2015 and consisted primarily of net repayments on our Credit Facility of $69.8 million and $4.8 million of distributions to common stockholders, partially
offset by $18.4 million in proceeds from the issuance of common stock, net of underwriting costs during the quarter.

Distributions to
Stockholders

Common Stock Distributions

To qualify to be taxed as a RIC and thus avoid corporate level federal income tax on the income we distribute to our stockholders, we are required to
distribute to our stockholders on an annual basis at least 90.0% of our investment company taxable income. Additionally, our Credit Facility has a covenant that generally restricts the amount of distributions to stockholders that we can pay out to
be no greater than our aggregate net investment income, net capital gains and amounts deemed to have been paid during the prior year in accordance with Section 855(a) of the Code. In accordance with these requirements, we paid monthly cash
distributions of $0.07 per common share for each month during the three months ended December 31, 2016 and 2015, which totaled an aggregate of $5.2 million and $4.8 million, respectively. In January 2017, our Board of Directors
declared a monthly distribution of $0.07 per common share for each of January, February and March 2017. Our Board of Directors declared these distributions based on our estimates of our investment company taxable income for the fiscal year ending
September 30, 2017.

For the year ended September 30, 2016, our current and accumulated earnings and profits (after taking into account
mandatorily redeemable preferred stock dividends) exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $5.5 million of the first common distributions paid in fiscal year 2017 as
having been paid in the respective prior year. For the year ended September 30, 2015, our current and accumulated earnings and profits (after taking into account mandatorily redeemable preferred stock dividends) exceeded distributions declared
and paid, and, in accordance with Section 855(a) of the Code, we elected to treat $1.7 million of the first common distributions paid in fiscal year 2016 as having been paid in the respective prior year.

The characterization of the common stockholder distributions declared and paid for the fiscal year ending September 30, 2017 will be determined at fiscal
year-end based upon our investment company taxable income for the full fiscal year and distributions paid during the full fiscal year. Such a characterization made on a quarterly basis may not be
representative of the actual full fiscal year characterization.

Preferred Stock Dividends

We paid monthly cash dividends of $0.140625 per share of our Series 2021 Term Preferred Stock for each month during the three months ended December 31,
2016 and 2015, which totaled an aggregate of $1.0 million during each of the three months ended December 31, 2016 and 2015. In January 2017, our Board of Directors declared a monthly distribution of $0.140625 per share of Series 2021 Term
Preferred stock for each of January, February and March 2017. For federal income tax purposes, distributions paid by us to preferred stockholders generally constitute ordinary income to the extent our current and accumulated earnings and profits
have been characterized as ordinary income to our preferred stockholders.

Equity

Registration Statement

We filed Post-Effective
Amendment No. 2 to our current Registration Statement on Form N-2 (File No. 333-208637) with the SEC on December 22, 2016, which was declared effective by
the SEC on February 6, 2017. Our Registration Statement permits us to issue, through one or more transactions, up to an aggregate of $300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt
securities and warrants to purchase common stock, preferred stock or debt securities. We currently have the ability to issue up to $282.7 million in securities under the Registration Statement.

Common Stock

Pursuant to our current Registration
Statement, in October 2016, we completed a public offering of 2.0 million shares of our common stock at a public offering price of $7.98 per share, which was below our then current NAV per share. In November 2016, the underwriters partially
exercised their overallotment option to purchase an additional 173,444 shares of our common stock. Gross proceeds totaled $17.3 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were approximately
$16.4 million. The net proceeds of this offering were used to repay borrowings under our Credit Facility.

In January 2016, our Board of Directors
authorized a share repurchase program for up to an aggregate of $7.5 million of the



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Companys common stock. During the twelve months ended September 30, 2016, we repurchased 87,200 shares of our common stock at an average share price of $6.53, resulting in gross
purchases of $0.6 million. We did not repurchase any shares of our common stock during the three months ended December 31, 2016 and there were no repurchases through the termination date of the program on January 31, 2017.

Pursuant to our prior registration statement, on October 27, 2015, we completed a public offering of 2.0 million shares of our common stock at a
public offering price of $8.55 per share, which was below our then current NAV per share. In November 2015, the underwriters exercised their option to purchase an additional 300,000 shares. Gross proceeds totaled $19.7 million and net proceeds,
after deducting underwriting discounts and offering costs borne by us, were approximately $18.4 million. The net proceeds of this offering were used to repay borrowings under our Credit Facility.

Pursuant to our prior registration statement, on February 27, 2015, we entered into equity distribution agreements (commonly referred to as at-the-market agreements or the Sales Agreements) with KeyBanc Capital Markets Inc. and Cantor Fitzgerald & Co., each a Sales
Agent, under which we may issue and sell, from time to time, through the Sales Agents, up to an aggregate offering price of $50.0 million shares of our common stock. We did not sell any shares under the Sales Agreements during the year
ended September 30, 2016 or the three months ended December 31, 2016.

We anticipate issuing equity securities to obtain additional capital in
the future. However, we cannot determine the terms of any future equity issuances or whether we will be able to issue equity on terms favorable to us, or at all. To the extent that our common stock trades at a market price below our NAV per share,
we will generally be precluded from raising equity capital through public offerings of our common stock, other than pursuant to stockholder and independent director approval or a rights offering to existing common stockholders. We completed the
abovementioned October 2016 common stock offering as a result of the stockholder approval of the proposal at our 2016 Annual Meeting of Stockholders and additional Board of Directors approval. We are not requesting that our stockholders approve the
Companys ability to issue shares of common stock at a price below NAV at the Companys 2017 Annual Meeting of Stockholders to be held in February. Should we decide to issue shares of common stock at a price below NAV, we will seek the
requisite approval of our stockholders.

On February 7, 2016, the closing market price of our common stock was $9.91, an 18.5% premium to our
December 31, 2016 NAV per share of $8.36.

Term Preferred Stock

Pursuant to our prior registration statement on Form N-2, in May 2014, we completed a public offering of approximately
2.4 million shares of our Series 2021 Term Preferred Stock, par value $0.001 per share, at a public offering price of $25.00 per share and a 6.75% rate. Gross proceeds totaled $61.0 million and net proceeds, after deducting underwriting
discounts, commissions and offering expenses borne by us, were $58.5 million, a portion of which was used to voluntarily redeem all 1.5 million outstanding shares of our then existing 7.125% Series 2016 Term Preferred Stock, par value
$0.001 per share, and the remainder was used to repay a portion of outstanding borrowings under our Credit Facility.

Our Series 2021 Term Preferred Stock
is not convertible into our common stock or any other security and provides for a fixed dividend rate equal to 6.75% per year, payable monthly (which equates in total to approximately $4.1 million per year). We are required to redeem all
of the outstanding Series 2021 Term Preferred Stock on June 30, 2021 for cash at a redemption price equal to $25.00 per share plus an amount equal to all unpaid dividends and distributions on such share accumulated to (but excluding) the date
of redemption (the Redemption Price). We may additionally be required to mandatorily redeem some or all of the shares of our Series 2021 Term Preferred Stock early, at the Redemption Price, in the event of the following: (1) upon
the occurrence of certain events that would constitute a change in control, and (2) if we fail to maintain an asset coverage ratio of at least 200% on our senior securities that are stock (which, currently is only the Series 2021
Term Preferred Stock) and the failure remains for a period of 30 days following the filing date of our next SEC quarterly or annual report. We may also voluntarily redeem all or a portion of the Series 2021 Term Preferred Stock at our option at the
Redemption Price at any time on or after June 30, 2017. The asset coverage on our senior securities that are stock (thus, our Series 2021 Term Preferred Stock) as of December 31, 2016 was 335.5%.

If we fail to redeem our Series 2021 Term Preferred Stock pursuant to the mandatory redemption required on June 30, 2021, or in any other circumstance in
which we are required to mandatorily redeem our Series 2021 Term Preferred Stock, then the fixed dividend rate will increase by 4.0% for so long as such failure continues. As of December 31, 2016, we have not redeemed, nor have we been required
to redeem, any shares of our outstanding Series 2021 Term Preferred Stock.

Revolving Credit Facility

On May 1, 2015, we, through Business Loan, entered into a Fifth Amended and Restated Credit Agreement with KeyBank, as administrative agent, lead arranger
and a lender, which increased the commitment amount of our Credit Facility from $137.0 million to $140.0 million, extended the revolving period end date by three years to January 19, 2019, decreased the marginal interest rate added to
30-day LIBOR from 3.75% to 3.25% per annum, set the unused commitment fee at 0.50% on all undrawn amounts, expanded the scope of eligible collateral, and amended other terms and conditions to among other
items. If our Credit Facility is not renewed or extended by January 19, 2019, all principal and interest will be due and payable on or before April 19, 2020. Subject to



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certain terms and conditions, our Credit Facility may be expanded up to a total of $250.0 million through additional commitments of new or existing lenders. We incurred fees of approximately
$1.1 million in connection with this amendment, which are being amortized through our Credit Facilitys revolving period end date of January 19, 2019. On June 19, 2015, we, through Business Loan, entered into certain joinder and
assignment agreements with three new lenders to increase borrowing capacity on our Credit Facility by $30.0 million to $170.0 million. We incurred fees of approximately $0.6 million in connection with this expansion, which are being
amortized through our Credit Facilitys revolving period end date of January 19, 2019.

On October 9, 2015 and August 18, 2016, we
entered into Amendments No. 1 and 2 to our Credit Facility, respectively, each of which clarified various constraints on available borrowings.

Interest is payable monthly during the term of our Credit Facility. Available borrowings are subject to various constraints imposed under our Credit Facility,
based on the aggregate loan balance pledged by Business Loan, which varies as loans are added and repaid, regardless of whether such repayments are prepayments or made as contractually required. Our Credit Facility also requires that any interest or
principal payments on pledged loans be remitted directly by the borrower into a lockbox account with KeyBank and with The Bank of New York Mellon Trust Company, N.A. as custodian. KeyBank, which also serves as the trustee of the account, generally
remits the collected funds to us once a month.

Our Credit Facility contains covenants that require Business Loan to maintain its status as a separate
legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions), and restrict material changes to our credit and collection policies without the lenders consents. Our Credit
Facility generally limits distributions to our stockholders on a fiscal year basis to the sum of our net investment income, net capital gains and amounts deemed to have been paid during the prior year in accordance with Section 855(a) of the Code.
Business Loan is also subject to certain limitations on the type of loan investments it can apply as collateral towards the borrowing base to receive additional borrowing availability under our Credit Facility, including restrictions on geographic
concentrations, sector concentrations, loan size, payment frequency and status, average life, portfolio company leverage and lien property. Our Credit Facility further requires Business Loan to comply with other financial and operational covenants,
which obligate Business Loan to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of 20 obligors required in the borrowing base. Additionally, we are subject to a performance guaranty
that requires us to maintain (i) a minimum net worth (defined in our Credit Facility to include our mandatorily redeemable preferred stock) of $205.0 million plus 50% of all equity and subordinated debt raised after May 1, 2015 less
50% of any equity and subordinated debt retired or redeemed after May 1, 2015, which equates to $223.2 million as of December 31, 2016, (ii) asset coverage with respect to senior securities representing indebtedness
of at least 200%, in accordance with Section 18 of the 1940 Act and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code.

As of December 31, 2016, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $273.0 million, asset coverage on
our senior securities representing indebtedness of 1,058.3% and an active status as a BDC and RIC. In addition, we had 32 obligors in our Credit Facilitys borrowing base as of December 31, 2016. As of December 31, 2016,
we were in compliance with all of our Credit Facility covenants. Refer to Note 5Borrowings of the notes to our accompanying Consolidated Financial Statementsincluded elsewhere in this quarterly report for additional information
regarding our Credit Facility.

Off-Balance Sheet Arrangements

We generally recognize success fee income only when the payment has been received. As of December 31, 2016 and September 30, 2016, we had off-balance sheet success fee receivables on our accruing debt investments of $2.4 million and $3.4 million (or approximately $0.09 per common share and $0.14 per common share), respectively, that would be
owed to us based on our current portfolio if fully paid off. Consistent with GAAP, we have not recognized our success fee receivable on our balance sheet or income statement. Due to our success fees contingent nature, there are no guarantees
that we will be able to collect all of these success fees or know the timing of such collections.

Contractual Obligations

We have lines of credit, delayed draw term loans, and an uncalled capital commitment with certain of our portfolio companies that have not been fully drawn.
Since these commitments have expiration dates and we expect many will never be fully drawn, the total commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of the combined unused lines of credit, the
unused delayed draw term loan and the uncalled capital commitment as of December 31, 2016 and September 30, 2016 to be immaterial. The following table shows our contractual obligations as of December 31, 2016, at cost:



|                                        |  |                              |       |  |           |   |        |           |  |   |               |  |  |       |   |  |  |   |         | 
|--------------------------------------- |  | ---------------------------- | ----- |  | --------- | - | ------ | --------- |  | - | ------------- |  |  | ----- | - |  |  | - | ------- | 
|                                        |  | Payments Due by Fiscal Years |      
|Contractual
Obligations(A)              |  | Less than1 Year              |       |  | 1-3 Years |   |        | 4-5 Years |  |   | After 5 Years |  |  | Total |  
|Credit Facility(B)                      |  | $                            |      |  |           | $ | 28,200 |           |  | $ |              |  |  | $     |  |  |  | $ | 28,200  | 
|Series 2021 Term Preferred Stock        |  |                              |      |  |           |   |       |           |  |   | 61,000        |  |  |       |  |  |  |   | 61,000  | 
|Interest expense on debt
obligations(C) |  |                              | 4,492 |  |           |   | 14,849 |           |  |   | 3,088         |  |  |       |  |  |  |   | 22,429  | 
|                                        |  |                              |       |  |           |   |        |           |  |   |               |  |  |       |   |  |  |   |         | 
|Total                                   |  | $                            | 4,492 |  |           | $ | 43,049 |           |  | $ | 64,088        |  |  | $     |  |  |  | $ | 111,629 | 
|                                        |  |                              |       |  |           |   |        |           |  |   |               |  |  |       |   |  |  |   |         | 



|(A) | Excludes our unused lines of credit commitments, unused delayed draw term loans, and an uncalled capital commitment in an aggregate amount of $11.5 million as of December 31, 2016.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | Principal balance of borrowings under our Credit Facility as of December 31, 2016, based on the current revolving period end date of January 19, 2019.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------

|(C) | Includes estimated interest payments on our Credit Facility and distribution obligations on our Series 2021 Term Preferred Stock. The amount of interest expense calculated for purposes of this table was based upon rates
and outstanding balances as of December 31, 2016. Distribution payments on our Series 2021 Term Preferred Stock assume quarterly distribution declarations and monthly distributions to stockholders through the date of mandatory redemption.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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CRITICAL ACCOUNTING POLICIES

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the
reported consolidated amounts of assets and liabilities, including disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported. Actual results could differ materially
from those estimates under different assumptions or conditions. We have identified our investment valuation policy (which has been approved by our Board of Directors) (the Policy) as our most critical accounting policy.

Investment Valuation

Fair value measurements of
our investments may involve subjective judgments and estimates and due to the inherent uncertainty of determining these fair values, the fair value of our investments may fluctuate from period to period. Additionally, changes in the market
environment and other events that may occur over the life of the investment may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. Refer to Note 2Summary of Significant
Accounting Policiesand Note 3  Investments in the notes to our accompanying Consolidated Financial Statements included elsewhere in this report for additional information regarding fair value measurements.

Credit Monitoring and Risk Rating

The Adviser monitors a
wide variety of key credit statistics that provide information regarding our portfolio companies to help us assess credit quality and portfolio performance and, in some instances, used as inputs in our valuation techniques. Generally, we, through
the Adviser, participate in periodic board meetings of our portfolio companies in which we hold board seats and also require them to provide annual audited and monthly unaudited financial statements. Using these statements or comparable information
and board discussions, the Adviser calculates and evaluates certain credit statistics.

The Adviser risk rates all of our investments in debt securities.
The Adviser does not risk rate our equity securities. For syndicated loans that have been rated by a Nationally Recognized Statistical Rating Organization (NRSRO) (as defined in Rule 2a-7 under the
1940 Act), the Adviser generally uses the average of two corporate level NRSROs risk ratings for such security. For all other debt securities, the Adviser uses a proprietary risk rating system. While the Adviser seeks to mirror the NRSRO
systems, we cannot provide any assurance that the Advisers risk rating system will provide the same risk rating as an NRSRO for these securities. The Advisers risk rating system is used to estimate the probability of default on debt
securities and the expected loss if there is a default. The Advisers risk rating system uses a scale of 0 to >10, with >10 being the lowest probability of default. It is the Advisers understanding that most debt securities of medium-sized companies do not exceed the grade of BBB on an NRSRO scale, so there would be no debt securities in the middle market that would meet the definition of AAA, AA or A. Therefore, the Advisers scale
begins with the designation >10 as the best risk rating which may be equivalent to a BBB from an NRSRO; however, no assurance can be given that a >10 on the Advisers scale is equal to a BBB or Baa2 on an NRSRO scale. The Advisers
risk rating system covers both qualitative and quantitative aspects of the business and the securities we hold.

The following table reflects risk ratings
for all proprietary loans in our portfolio at December 31, 2016 and September 30, 2016, representing approximately 89.0% and 90.0%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period:



|                 |  |                       |     |  |                        |  |     | 
|---------------- |  | --------------------- | --- |  | ---------------------- |  | --- | 
|Rating           |  | As ofDecember 31,2016 |     |  | As ofSeptember 30,2016 | 
|Highest          |  |                       | 9.0 |  |                        |  | 8.0 | 
|Average          |  |                       | 5.4 |  |                        |  | 5.3 | 
|Weighted Average |  |                       | 5.5 |  |                        |  | 5.3 | 
|Lowest           |  |                       | 1.0 |  |                        |  | 1.0 | 



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The following table reflects the risk ratings for all syndicated loans in our portfolio that were rated by an
NRSRO at December 31, 2016 and September 30, 2016, representing approximately 9.0% and 7.3%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period:



|                 |  |                       |     |  |                        |  |     | 
|---------------- |  | --------------------- | --- |  | ---------------------- |  | --- | 
|Rating           |  | As ofDecember 31,2016 |     |  | As ofSeptember 30,2016 | 
|Highest          |  |                       | 5.0 |  |                        |  | 5.0 | 
|Average          |  |                       | 3.9 |  |                        |  | 3.9 | 
|Weighted Average |  |                       | 3.8 |  |                        |  | 4.0 | 
|Lowest           |  |                       | 2.0 |  |                        |  | 2.0 | 

The following table reflects the risk ratings for all syndicated loans in our portfolio that were not rated by an NRSRO at
December 31, 2016 and September 30, 2016, representing approximately 2.0% and 2.7%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period:



|                 |  |                       |     |  |                        |  |     | 
|---------------- |  | --------------------- | --- |  | ---------------------- |  | --- | 
|Rating           |  | As ofDecember 31,2016 |     |  | As ofSeptember 30,2016 | 
|Highest          |  |                       | 5.0 |  |                        |  | 5.0 | 
|Average          |  |                       | 4.0 |  |                        |  | 4.0 | 
|Weighted Average |  |                       | 3.7 |  |                        |  | 3.5 | 
|Lowest           |  |                       | 3.0 |  |                        |  | 3.0 | 

Tax Status

We
intend to continue to maintain our qualification as a RIC under Subchapter M of the Code for federal income tax purposes and also to limit certain federal excise taxes imposed on RICs. Refer to Note 9Distributions to Common Stockholders
in the notes to our accompanying Consolidated Financial Statements included elsewhere in this report for additional information regarding our tax status.

Revenue Recognition

Interest Income
Recognition

Interest income, including the amortization of premiums, acquisition costs and amendment fees, the accretion of OID, and PIK interest, is
recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes 90 days or more past due or if our qualitative assessment indicates that the debtor is unable to service its debt or other
obligations, we will place the loan on non-accrual status and cease recognizing interest income on that loan for financial reporting purposes until the borrower has demonstrated the ability and intent to pay
contractual amounts due. However, we remain contractually entitled to this interest.

Other Income Recognition

We generally record success fees upon receipt of cash. Success fees are contractually due upon a change of control in a portfolio company, typically from an
exit or sale. Dividend income on equity investments is accrued to the extent that such amounts are expected to be collected and if we have the option to collect such amounts in cash. We generally record prepayment fees upon receipt of cash.
Prepayment fees are contractually due at the time of an investments exit, based on the prepayment fee schedule. Success fees, prepayment fees and dividend income are all recorded in other income in our accompanying Consolidated Statements
of Operations.

Refer to Note 2Summary of Significant Accounting Policies in the notes to our accompanying Consolidated Financial
Statements included elsewhere in this report for additional information regarding revenue recognition.

Recent Accounting Pronouncements

Refer to Note 2Summary of Significant Accounting Policies in the notes to our accompanying Consolidated Financial Statements
included elsewhere in this report for a description and our application of recent accounting pronouncements.



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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes
that affect market sensitive instruments. The prices of securities held by us may decline in response to certain events, including those directly involving the companies whose securities are owned by us; conditions affecting the general economy;
overall market changes; local, regional or global political, social or economic instability; and interest rate fluctuations.

The primary risk we believe
we are exposed to is interest rate risk. Because we borrow money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. As a result,
there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. We use a combination of debt and equity capital to finance our investing activities. We may use
interest rate risk management techniques from time to time to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act.

All of our variable-rate debt investments have rates generally associated with either the current LIBOR or prime rate. As of December 31, 2016, our
portfolio of debt investments on a principal basis consisted of the following:



|               |  |  |       |  
|-------------- |  |  | ----- | -
|Variable rates |  |  | 90.9  | %
|Fixed rates    |  |  | 9.1   |  
|               |  |  |       |  
|Total:         |  |  | 100.0 | %
|               |  |  |       |  

There have been no material changes in the quantitative and qualitative market risk disclosures for the three months ended
December 31, 2016 from that disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016, as filed with the SEC on November 21, 2016.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

a) Evaluation of Disclosure Controls and Procedures

As of December 31, 2016 (the end of the period covered by this report), our management, including our chief executive officer and chief financial officer,
evaluated the effectiveness and design and operation of our disclosure controls and procedures. Based on that evaluation, our management, including the chief executive officer and chief financial officer, concluded that our disclosure controls and
procedures were effective at a reasonable assurance level in timely alerting management, including the chief executive officer and chief financial officer, of material information about us required to be included in periodic SEC filings. However, in
evaluation of the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

b) Changes in Internal
Control over Financial Reporting

There were no changes in internal controls for the three months ended December 31, 2016 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART IIOTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time, we may become involved in various investigation, claims and legal proceedings that arise in the ordinary course of our business.
Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies. While we do not expect that the resolution of these matters, if they arise, would materially affect our business,
financial condition, results of operations or cash flows, resolution of these matters will be subject to various uncertainties and could result in the expenditure of significant financial and managerial resources. Neither we, nor any of our
subsidiaries are currently subject to any material legal proceeding, nor, to our knowledge, is any material legal proceeding pending or threatened against us or any of our subsidiaries.



|ITEM 1A. | RISK FACTORS.
|-------- | -------------

Our business is subject to certain risks and events that, if they occur, could adversely
affect our financial condition and results of operations and the trading price of our securities. For a discussion of these risks, please refer to this section, the section captioned Item 1A. Risk Factors in Part I of our Annual
Report on Form 10-K for the fiscal year ended September 30, 2016, as filed with the SEC on November 21, 2016. The risks described in our Annual Report are not the only risks we face. Additional
risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
|------- | ------------------------------------------------------------

Sales of Unregistered Securities

Not applicable.

Issuer Purchases of Equity
Securities

Not applicable.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES.
|------- | --------------------------------

Not applicable.



|ITEM 4. | MINE SAFETY DISCLOSURES.
|------- | ------------------------

Not applicable.



|ITEM 5. | OTHER INFORMATION.
|------- | ------------------

Not applicable.



|ITEM 6. | EXHIBITS.
|------- | ---------

See the exhibit index.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.



GLADSTONE CAPITAL CORPORATIONBy:

/s/Nicole SchaltenbrandNicole SchaltenbrandChief Financial Officer and Treasurer


Date: February 8, 2017



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EXHIBIT INDEX



|        |  |                                                                                                                                                                                                                                                                                                                                                                  
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                                                                                                                                                      
|        | 
|3.1     |  | Articles of Amendment and Restatement to the Articles of Incorporation, incorporated by reference to Exhibit 99.a.2 to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-63700), filed July 27, 2001.                                                                                                                        
|        | 
|3.2     |  | Articles Supplementary Establishing and Fixing the Rights and Preferences of Term Preferred Shares, including Appendix A thereto relating to the Term Preferred Shares, 7.125% Series 2016, incorporated by reference to
Exhibit 2.a.2 to Post-Effective Amendment No. 5 to the Registration Statement on Form N-2 (File No. 333-162592), filed October 31,
2011.
|        | 
|3.3     |  | Articles Supplementary Establishing and Fixing the Rights and Preferences of Term Preferred Shares, 6.75% Series 2021, including Exhibit A thereto, incorporated by reference to Exhibit 3.3 to Form 8-A (File No. 001-35332), filed May 15, 2014.                                                                                                               
|        | 
|3.4     |  | Certificate of Correction to Articles Supplementary Establishing and Fixing the Rights and Preferences of Term Preferred Shares, 6.75% Series 2021, incorporated by reference to Exhibit 3.4 to the Quarterly Report on Form 10-Q (File No.811-000000), filed July 30, 2014.                                                                                     
|        | 
|3.5     |  | Certificate of Correction to Articles Supplementary Establishing and Fixing the Rights and Preferences of Term Preferred Shares, incorporated by reference to Exhibit 3.1 to the Current Report on Form
8-K (File No. 814-00237), filed October 29, 2015.                                                                                                        
|        | 
|3.6     |  | By-laws, incorporated by reference to Exhibit 99.b to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-63700), filed July 27, 2001.                                                                                                                                                                                         
|        | 
|3.7     |  | Amendment to By-laws, incorporated by reference to Exhibit 3.3 to the Quarterly Report on Form 10-Q (File
No. 814-00237), filed February 17, 2004.                                                                                                                                                                                                               
|        | 
|3.8     |  | Second Amendment to By-laws, incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K (File
No. 814-00237), filed July 10, 2007.                                                                                                                                                                                                              
|        | 
|3.9     |  | Third Amendment to By-laws, incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K (File
No. 814-00237), filed June 10, 2011.                                                                                                                                                                                                               
|        | 
|3.10    |  | Fourth Amendment to Bylaws, incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 814-00237), filed
November 29, 2016.                                                                                                                                                                                                            
|        | 
|4.1     |  | Form of Certificate for Common Stock, incorporated by reference to Exhibit 99.d.2 to Pre-Effective Amendment No. 3 to the Registration Statement on Form
N-2 (File No. 333-63700), filed August 23, 2001.                                                                                                                                                        
|        | 
|4.2     |  | Form of Certificate for 6.75% Series 2021 Term Preferred Stock, incorporated by reference to Exhibit 4.3 to Form 8-A (File No. 001-35332), filed
May 15, 2014.                                                                                                                                                                                                   
|        | 
|11      |  | Computation of Per Share Earnings (included in the notes to the unaudited consolidated financial statements contained in this report).*                                                                                                                                                                                                                          
|        | 
|31.1    |  | Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.*                                                                                                                                                                                                                                                             
|        | 
|31.2    |  | Certification of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.*                                                                                                                                                                                                                                                             
|        | 
|32.1    |  | Certification of Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002.+                                                                                                                                                                                                                                                             
|        | 
|32.2    |  | Certification of Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002.+                                                                                                                                                                                                                                                             



|* | Filed herewith
|- | --------------

|+ | Furnished herewith
|- | ------------------

All other exhibits for which provision is made in the applicable regulations of the
Securities and Exchange Commission are not required under the related instruction or are inapplicable and therefore have been omitted.



58