Edgar Filing: GLADSTONE CAPITAL CORP

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497

Filed Pursuant to Rule 497

Securities Act File No. 333-208637

LOGO

Supplement No. 1, dated May 3, 2018

Prospectus Supplement, dated February 8, 2018

This supplement contains information which amends, supplements or modifies certain information contained in the Prospectus of Gladstone Capital Corporation (the “Company”), dated February 1, 2018 as supplemented by the Prospectus Supplement dated February 8, 2018. Capitalized terms used but not defined herein shall have the same meaning given them in the Prospectus Supplement or Prospectus, as applicable.

Shares of closed-end investment companies, including BDCs, frequently trade at a discount to their NAV per share. If our shares trade at a discount to our NAV per share, it will likely increase the risk of loss for purchasers in this offering. Investing in shares of our common stock involves a high degree of risk. Before investing, you should read the material risks described in the “Risk Factors” section beginning on page S-11 of the Prospectus Supplement and beginning on page 12 of the Prospectus before you decide to invest.

STATUS OF THE OFFERING

We are party to an equity distribution agreement, as last amended on May 22, 2017 (the “Sales Agreement”), with Cantor Fitzgerald & Co. (“Cantor Fitzgerald”). The Sales Agreement provides that we may offer and sell shares of our common stock having an aggregate offering price of up to $50,000,000 from time to time through the Sales Agreement.

The gross proceeds raised, the related sales agent commissions, the offering expenses and the average price at which these shares were issued under the Sales Agreement from the period from February 8, 2018 through May 2, 2018 are as follows:


Fiscal Year 2018 Issuance of Common Stock	Number of Shares		Gross Proceeds		Sales Commission		Offering Expenses		Average Offering Price
First Quarter ended December 31, 2017		471,498	$	4,566,831	$	68,502	$	14,538	$	9.69
Second Quarter ended March 31, 2018		265,579		2,360,901		35,414		7,516		8.89
Third Quarter (through May 2, 2018)		—		—		—		—		—

Total		737,077	$	6,927,732	$	103,916	$	22,054	$	9.40

The aforementioned shares sold under the Sales Agreement were all sold at a premium to the then estimated NAV per share.

FILING OF OUR FORM 10-Q

On May 2, 2018, we filed our Quarterly Report on Form 10-Q (“Form 10-Q”) for the quarter ended March 31, 2018 with the Securities and Exchange Commission. We have attached the Form 10-Q to this supplement as Annex A.

LOGO

Annex A

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 MARCH 31, 2018

☐	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)

Fat-the

(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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

The number of shares of the issuer’s common stock, $0.001 par value per share, outstanding as of May 1, 2018 was 26,897,761.

GLADSTONE CAPITAL CORPORATION

TABLE OF CONTENTS


PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Statements of Assets and Liabilities as of March 31, 2018 and September 30, 2017	2
	Consolidated Statements of Operations for the three and six months ended March 31, 2018 and 2017	3
	Consolidated Statements of Changes in Net Assets for the six months ended March 31, 2018 and 2017	5
	Consolidated Statements of Cash Flows for the six months ended March 31, 2018 and 2017	6
	Consolidated Schedules of Investments as of March 31, 2018 and September 30, 2017	7
	Notes to Consolidated Financial Statements	17

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
	Overview	41
	Results of Operations	45
	Liquidity and Capital Resources	55

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	61

Item 4.	Controls and Procedures	61

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	62

Item 1A.	Risk Factors	62

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63

Item 3.	Defaults Upon Senior Securities	63

Item 4.	Mine Safety Disclosures	63

Item 5.	Other Information	63

Item 6.	Exhibits	64

SIGNATURES		65

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)


	March 31, 2018			September 30, 2017
ASSETS
Investments, at fair value:
Non-Control/Non-Affiliate investments (Cost of $360,816 and $318,952, respectively)	$	336,235		$	290,860
Affiliate investments (Cost of $54,125 and $49,868, respectively)		49,570			42,648
Control investments (Cost of $41,865 and $42,615 respectively)		16,333			18,865
Cash and cash equivalents		1,819			5,012
Restricted cash and cash equivalents		186			258
Interest receivable, net		2,207			1,699
Due from custodian		3,300			3,086
Deferred financing fees		1,699			853
Other assets, net		656			2,579

TOTAL ASSETS	$	412,005		$	365,860

LIABILITIES
Borrowings, at fair value (Cost of $127,800 and $93,000, respectively)	$	127,800		$	93,115
Mandatorily redeemable preferred stock, $0.001 par value per share, $25 liquidation preference per share; 5,440,000 and 5,440,000 shares authorized, respectively, and 2,070,000 and 2,070,000 shares issued and outstanding, respectively		49,938			49,849
Accounts payable and accrued expenses		307			522
Interest payable		386			264
Fees due to Adviser^(A)		1,007			1,292
Fee due to Administrator^(A)		312			244
Other liabilities		530			924

TOTAL LIABILITIES	$	180,280		$	146,210

Commitments and contingencies^(B)
NET ASSETS
Common stock, $0.001 par value, 44,560,000 and 44,560,000 shares authorized, respectively, and 26,897,761 and 26,160,684 shares issued and outstanding, respectively	$	27		$	26
Capital in excess of par value		354,779			348,248
Cumulative net unrealized depreciation of investments		(54,668	)		(59,062	)
Cumulative net unrealized depreciation of other		—			(115	)
Over distributed net investment income		(155	)		(139	)
Accumulated net realized losses		(68,258	)		(69,308	)

TOTAL NET ASSETS	$	231,725		$	219,650

NET ASSET VALUE PER COMMON SHARE	$	8.62		$	8.40

^(A)	Refer to Note 4—Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for additional information.

^(B)	Refer to Note 10—Commitments and Contingencies in the accompanying Notes to Consolidated Financial Statements for additional information.

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

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)


	Three Months Ended March 31,						Six Months Ended March 31,
	2018			2017			2018			2017
INVESTMENT INCOME
Interest income
Non-Control/Non-Affiliate investments	$	8,283		$	5,957		$	15,967		$	11,766
Affiliate investments		1,177			972			2,288			2,135
Control investments		376			433			1,063			878
Cash and cash equivalents		7			5			19			7

Total interest income (excluding PIK interest income)		9,843			7,367			19,337			14,786
PIK interest income
Non-Control/Non-Affiliate investments		1,088			1,064			2,194			2,061
Affiliate investments		69			157			139			374

Total PIK interest income		1,157			1,221			2,333			2,435
Total interest income		11,000			8,588			21,670			17,221
Success fee income
Non-Control/Non-Affiliate investments		—			—			—			391
Affiliate investments		—			—			—			1,142

Total success fee income		—			—			—			1,533
Other income		86			205			275			13

Total investment income		11,086			8,793			21,945			18,767

EXPENSES
Base management fee^(A)		1,784			1,359			3,460			2,737
Loan servicing fee^(A)		1,274			955			2,460			1,938
Incentive fee^(A)		1,210			1,070			2,583			2,363
Administration fee^(A)		312			286			584			586
Interest expense on borrowings		1,569			587			2,800			1,143
Dividend expense on mandatorily redeemable preferred stock		776			1,029			1,552			2,058
Amortization of deferred financing fees		292			274			540			547
Professional fees		290			206			545			442
Other general and administrative expenses		270			143			562			544

Expenses, before credits from Adviser		7,777			5,909			15,086			12,358
Credit to base management fee - loan servicing fee^(A)		(1,274	)		(955	)		(2,460	)		(1,938	)
Credits to fees from Adviser - other^(A)		(1,030	)		(1,520	)		(1,871	)		(2,219	)

Total expenses, net of credits		5,473			3,434			10,755			8,201

NET INVESTMENT INCOME		5,613			5,359			11,190			10,566

NET REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss):
Non-Control/Non-Affiliate investments		224			44			826			3,926
Affiliate investments		104			—			104			(2,330	)
Control investments		(4	)		1			(32	)		(4,999	)
Other		—			—			(133	)		—

Total net realized gain (loss)		324			45			765			(3,403	)
Net unrealized appreciation (depreciation):
Non-Control/Non-Affiliate investments		2,603			(736	)		3,511			(6,603	)
Affiliate investments		1,625			(532	)		2,665			174
Control investments		(1,194	)		621			(1,782	)		4,727
Other		333			(101	)		115			111

Total net unrealized appreciation (depreciation)		3,367			(748	)		4,509			(1,591	)

Net realized and unrealized gain (loss)		3,691			(703	)		5,274			(4,994	)

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS	$	9,304		$	4,656		$	16,464		$	5,572

^(A)	Refer to Note 4—Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for additional information.

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

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)


BASIC AND DILUTED PER COMMON SHARE:
Net investment income	$	0.21	$	0.21	$	0.42	$	0.42

Net increase in net assets resulting from operations	$	0.35	$	0.18	$	0.62	$	0.22

Distributions declared and paid	$	0.21	$	0.21	$	0.42	$	0.42

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING: Basic and Diluted		26,709,476		25,517,866		26,615,106		25,144,358

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

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(IN THOUSANDS)

(UNAUDITED)


	Six Months Ended March 31,
	2018			2017
OPERATIONS
Net investment income	$	11,190		$	10,566
Net realized gain (loss) on investments		898			(3,403	)
Realized loss on other		(133	)		—
Net unrealized appreciation (depreciation) of investments		4,394			(1,702	)
Net unrealized appreciation of other		115			111

Net increase in net assets resulting from operations		16,464			5,572

DISTRIBUTIONS
Distributions to common stockholders from net investment income		(11,190	)		(10,566	)

Total distributions to common stockholders		(11,190	)		(10,566	)

CAPITAL TRANSACTIONS
Issuance of common stock		6,928			17,344
Discounts, commissions and offering costs for issuance of common stock		(127	)		(887	)

Net increase in net assets resulting from capital transactions		6,801			16,457

NET INCREASE IN NET ASSETS		12,075			11,463
NET ASSETS, BEGINNING OF PERIOD		219,650			201,207

NET ASSETS, END OF PERIOD	$	231,725		$	212,670

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

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)


	Six Months Ended March 31,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in net assets resulting from operations	$	16,464		$	5,572
Adjustments to reconcile net increase in net assets resulting from operations to net cash (used in) provided by operating activities:
Purchase of investments		(76,377	)		(59,658	)
Principal repayments on investments		32,740			56,755
Net proceeds from sale of investments		1,301			8,311
Increase in investments due to paid-in-kind interest or other		(2,338	)		(2,289	)
Net change in premiums, discounts and amortization		(97	)		373
Net realized (gain) loss on investments		(831	)		3,403
Net unrealized (appreciation) depreciation of investments		(4,394	)		1,702
Net unrealized appreciation of other		(115	)		(111	)
Changes in assets and liabilities:
Decrease in restricted cash and cash equivalents		72			96
Amortization of deferred financing fees		540			547
(Increase) decrease in interest receivable, net		(508	)		267
(Increase) decrease in due from custodian		(214	)		16
Decrease (increase) in other assets, net		1,932			(3,509	)
Decrease in accounts payable and accrued expenses		(215	)		(564	)
Increase (decrease) in interest payable		122			(27	)
Decrease in fees due to Adviser^(A)		(285	)		(1,013	)
Increase in fee due to Administrator^(A)		68			4
(Decrease) increase in other liabilities		(163	)		371

Net cash (used in) provided by operating activities		(32,298	)		10,246

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings		87,400			70,300
Repayments on borrowings		(52,600	)		(87,500	)
Deferred financing fees		(1,329	)		(75	)
Proceeds from issuance of common stock		6,928			17,344
Discounts, commissions and offering costs for issuance of common stock		(104	)		(887	)
Distributions paid to common stockholders		(11,190	)		(10,566	)

Net cash provided by (used in) financing activities		29,105			(11,384	)

NET DECREASE IN CASH AND CASH EQUIVALENTS		(3,193	)		(1,138	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		5,012			6,152

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	1,819		$	5,014

^(A)	Refer to Note 4—Related Party Transactions in the accompanying Notes to Consolidated Financial Statements for additional information.

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

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

MARCH 31, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)


Company and Investment^(A)(B)(W)(Y)	Principal/ Shares/ Units^(J)(X)		Cost		Fair Value
NON-CONTROL/NON-AFFILIATE INVESTMENTS^(M) – 145.1%
Secured First Lien Debt – 73.6%
Automobile – 1.5%
Meridian Rack & Pinion, Inc.^(S) – Term Debt (L + 11.5%, 13.5% Cash, Due 4/2019)^(C)	$	4,140	$	4,140	$	3,436
Beverage, Food, and Tobacco – 2.8%
Triple H Food Processors, LLC – Line of Credit, $1,500 available (L + 6.8%, 8.6% Cash, Due 8/2018)^(C)		—		—		—
Triple H Food Processors, LLC – Term Debt (L + 8.3%, 10.1% Cash, Due 8/2020)^(C)		6,400		6,400		6,480

				6,400		6,480
Buildings and Real Estate – 0.9%
GFRC Holdings, LLC – Line of Credit, $50 available (L + 8.0%, 9.9% Cash, Due 9/2018)^(E)		1,150		1,150		1,150
GFRC Holdings, LLC – Term Debt (L + 8.0%, 9.9% Cash, Due 9/2018)^(E)		1,000		1,000		1,000

				2,150		2,150
Diversified/Conglomerate Service – 19.3%
IA Tech, LLC – Term Debt (L + 11.0%, 12.9% Cash, Due 6/2021)^(C)		23,000		23,000		23,805
Travel Sentry, Inc. – Term Debt (L + 8.0%, 10.3% Cash, Due 12/2021)^(C)(U)		8,902		8,902		9,247
Vision Government Solutions, Inc. – Line of Credit, $0 available (L + 8.8%, 10.6% Cash, Due 1/2019)^(C)		1,450		1,450		1,424
Vision Government Solutions, Inc. – Delayed Draw Term Loan, $900 available (10.0% Cash, Due 1/2019)^(C)(F)		1,600		1,600		1,519
Vision Government Solutions, Inc. – Term Debt (L + 8.8%, 10.6% Cash, Due 1/2019)^(C)		9,000		9,000		8,601

				43,952		44,596
Healthcare, education, and childcare – 7.8%
EL Academies, Inc. – Line of Credit, $2,000 available (L + 9.5%, 11.4% Cash, Due 8/2020)^(C)		—		—		—
EL Academies, Inc. – Delayed Draw Term Loan, $8,560 available (L + 9.5%, 11.4% Cash, Due 8/2022)^(C)		1,440		1,440		1,447
EL Academies, Inc. – Term Debt (L + 9.5%, 11.4% Cash, Due 8/2022)^(C)		12,000		12,000		12,060
TWS Acquisition Corporation – Term Debt (L + 8.0%, 9.9% Cash, Due 7/2020)^(C)		4,500		4,500		4,635

				17,940		18,142
Machinery – 2.9%
Arc Drilling Holdings LLC – Line of Credit, $1,000 available (L + 8.0%, 9.9% Cash, Due 11/2020)^(C)		—		—		—
Arc Drilling Holdings LLC – Term Debt (L + 9.5%, 11.4% Cash, 1.0% PIK, Due 11/2022)^(C)		5,880		5,880		5,865
Precision International, LLC – Term Debt (10.0%, Due 9/2021)^(C)(F)		836		836		832

				6,716		6,697
Oil and Gas – 17.3%
Impact! Chemical Technologies, Inc. – Line of Credit, $0 available (L + 8.8%, 10.6% Cash, Due 12/2020)^(C)		2,500		2,500		2,497
Impact! Chemical Technologies, Inc. – Term Debt (L + 8.8%, 10.8% Cash, Due 12/2020)^(C)		20,000		20,000		19,975
WadeCo Specialties, Inc. – Line of Credit, $2,425 available (L + 7.0%, 8.9% Cash, Due 4/2018)^(C)		575		575		582
WadeCo Specialties, Inc. – Term Debt (L + 7.0% 8.9% Cash, Due 3/2019)^(C)		9,941		9,941		10,078
WadeCo Specialties, Inc. – Term Debt (L + 9.0%, 12.0% Cash, Due 3/2019)^(C)		7,000		7,000		7,061

				40,016		40,193
Printing and Publishing – 0.0%
Chinese Yellow Pages Company – Line of Credit, $0 available (PRIME + 4.0%, 8.8% Cash, Due 2/2015)^(E)(V)		107		107		—
Telecommunications – 21.1%
Applied Voice & Speech Technologies, Inc. – Term Debt (L + 9.3%, 11.1% Cash, Due 10/2022)^(C)		10,725		10,725		10,712
B+T Group Acquisition, Inc.^(S) – Term Debt (L + 11.0%, 13.0% Cash, Due 12/2019)^(C)		6,000		6,000		5,970
NetFortris Corp. – Term Debt (L + 9.5%, 11.4% Cash, Due 2/2021)^(C)		23,819		23,819		24,384
XMedius Solutions Inc. – Term Debt (L + 9.3%, 11.1% Cash, Due 10/2022)^(I)		7,898		7,898		7,898

				48,442		48,964

Total Secured First Lien Debt			$	169,863	$	170,658

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

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)


Company and Investment^(A)(B)(W)(Y)	Principal/ Shares/ Units^(J)(X)		Cost		Fair Value
Secured Second Lien Debt – 65.0%
Automobile – 2.2%
Sea Link International IRB, Inc. – Term Debt (11.3% Cash, Due 3/2023)^(C)(F)	$	5,000	$	4,977	$	5,044
Beverage, Food, and Tobacco – 2.9%
The Mochi Ice Cream Company – Term Debt (L + 10.5%, 12.4% Cash, Due 1/2021)^(C)		6,750		6,750		6,784
Cargo Transportation– 5.7%
AG Transportation Holdings, LLC. – Term Debt (L + 10.0%, 13.3% Cash, Due 3/2020)^(C)		13,000		13,000		13,130
Chemicals, Plastics, and Rubber – 0.5%
Vertellus Holdings LLC – Term Debt (L + 12.0%, 13.9% Cash, Due 10/2021)^(C)		1,099		1,099		1,093
Diversified/Conglomerate Manufacturing – 8.4%
Alloy Die Casting Co.^(S) – Term Debt (L + 11.5%, 13.5% Cash, Due 4/2021)^(C)(H)		5,235		5,235		3,926
Alloy Die Casting Co.^(S) – Term Debt (L + 11.5%, 13.5% Cash, Due 4/2021)^(C)(H)		75		75		56
Alloy Die Casting Co.^(S) – Term Debt (Due 4/2021)^(C)(P)		390		390		294
United Flexible, Inc.– Term Debt (L + 9.3%, 11.1% Cash, Due 2/2022)^(C)		15,300		15,223		15,300

				20,923		19,576
Diversified/Conglomerate Service – 20.9%
DigiCert Holdings, Inc. – Term Debt (L + 8.0%, 10.3% Cash, Due 10/2025)^(D)(U)		3,000		2,976		3,038
Gray Matter Systems, LLC – Delayed Draw Term Loan, $2,000 available (12.0% Cash, Due 11/2023)^(C)(F)		—		—		—
Gray Matter Systems, LLC – Term Debt (12.0% Cash, Due 11/2023)^(C)(F)		11,100		11,100		11,072
Keystone Acquisition Corp. – Term Debt (L + 9.3%, 11.6% Cash, Due 5/2025)^(D)(U)		4,000		3,925		4,020
LDiscovery, LLC – Term Debt (L + 10.0%, 11.9% Cash, Due 12/2023)^(D)		5,000		4,825		4,100
Red Ventures, LLC – Term Debt (L + 8.0%, 9.9% Cash, Due 11/2025)^(D)		3,625		3,566		3,688
TapRoot Partners, Inc. – Term Debt (L + 10.0%, 11.9% Cash, Due 10/2022)^(C)		22,000		22,000		22,440

				48,392		48,358
Healthcare, education, and childcare – 8.2%
Medical Solutions Holdings, Inc. – Term Debt (L + 8.3%, 10.1% Cash, Due 6/2025)^(D)		3,000		2,958		2,993
Merlin International, Inc. – Term Debt (L + 10.0%, 11.9% Cash, Due 8/2022)^(C)		10,000		10,000		10,313
NetSmart Technologies, Inc. – Term Debt (L + 9.5%, 11.4% Cash, Due 10/2023)^(D)		3,660		3,612		3,660
New Trident Holdcorp, Inc. – Term Debt (L + 10.0%, 12.3% PIK, Due 7/2020)^(E)(U)		4,231		4,231		2,077

				20,801		19,043
Home and Office Furnishings, Housewares and Durable Consumer Products – 4.4%
Belnick, Inc. – Term Debt (11.0% Cash, Due 8/2023)^(C)(F)		10,000		10,000		10,188
Hotels, Motels, Inns, and Gaming – 2.9%
Vacation Rental Pros Property Management, LLC – Term Debt (L + 10.0%, 11.9% Cash, 3.0% PIK, Due 6/2023)^(C)		7,254		7,254		6,655
Oil and Gas – 7.2%
Francis Drilling Fluids, Ltd. – Term Debt (L + 10.4%, 12.2% PIK, Due 4/2020)^(C)		17,763		17,657		11,547
Francis Drilling Fluids, Ltd. – Term Debt (L + 9.3%, 11.1% PIK, Due 4/2020)^(C)		8,161		8,111		5,305

				25,768		16,852
Personal and Non-Durable Consumer Products (Manufacturing Only) – 1.7%
Canopy Safety Brands, LLC – Term Debt (L + 10.5%, 12.4% Cash, Due 7/2022)^(C)		4,000		4,000		4,010

Total Secured Second Lien Debt			$	162,964	$	150,733

Unsecured Debt – 1.5%
Healthcare, education, and childcare – 1.5%
Edmentum Ultimate Holdings, LLC – Term Debt (10.0% PIK, Due 6/2020)^(C)(F)	$	3,438	$	3,438	$	3,459
Preferred Equity – 1.7%
Automobile – 0.1%
Meridian Rack & Pinion, Inc.^(S)– Preferred Stock^(E)(G)		1,449	$	1,449	$	344
Buildings and Real Estate – 0.1%
GFRC Holdings, LLC – Preferred Stock^(E)(G)		1,000		1,025		320

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

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)


Company and Investment^(A)(B)(W)(Y)	Principal/ Shares/ Units^(J)(X)			Cost		Fair Value
Diversified/Conglomerate Manufacturing – 0.3%
Alloy Die Casting Co.^(S)– Preferred Stock^(E)(G)		2,192			2,192		—
United Flexible, Inc.– Preferred Stock^(E)(G)		538			538		674

					2,730		674
Diversified/Conglomerate Service – 0.0%
Frontier Financial Group Inc. – Preferred Stock^(E)(G)		766			500		96
Frontier Financial Group Inc. – Preferred Stock Warrant^(E)(G)		168			—		—

					500		96
Oil and Gas – 1.0%
Francis Drilling Fluids, Ltd. – Preferred Equity Units^(E)(G)		1,656			1,215		—
WadeCo Specialties, Inc. – Preferred Stock^(E)(G)		1,000			618		2,231

					1,833		2,231
Telecommunications – 0.2%
B+T Group Acquisition, Inc.^(S) – Preferred Stock^(E)(G)		5,503			1,799		—
NetFortris Corp. – Preferred Stock^(E)(G)		1,250,000			125		375

					1,924		375

Total Preferred Equity				$	9,461	$	4,040

Common Equity – 3.2%
Aerospace and Defense – 0.3%
FedCap Partners, LLC – Class A Membership Units ($0 Uncalled Commitment)^(G)(K)(R)		80		$	1,634	$	751
Automobile– 0.2%
Sea Link International IRB, Inc.– Common Equity Units^(E)(G)		494,902			495		485
Beverage, Food, and Tobacco – 0.2%
The Mochi Ice Cream Company – Common Stock^(E)(G)		450			450		—
Triple H Food Processors, LLC – Common Stock^(E)(G)		250,000			250		472

					700		472
Buildings and Real Estate – 0.0%
GFRC Holdings, LLC – Common Stock Warrants^(E)(G)		45.0	%		—		—
Cargo Transportation – 0.3%
AG Transportation Holdings, LLC – Member Profit Participation^(E)(G)		18.0	%		1,000		478
AG Transportation Holdings, LLC – Profit Participation Warrants^(E)(G)		12.0	%		244		140

					1,244		618
Chemicals, Plastics, and Rubber – 0.2%
Vertellus Holdings LLC – Common Stock Units^(E)(G)		879,121			3,017		569
Diversified/Conglomerate Manufacturing – 0.1%
Alloy Die Casting Co.^(S) – Common Stock^(E)(G)		270			18		—
United Flexible, Inc. – Common Stock^(E)(G)		1,158			148		262

					166		262
Healthcare, education, and childcare – 1.1%
Edmentum Ultimate Holdings, LLC – Common Stock^(E)(G)		21,429			2,636		—
EL Academies, Inc. – Common Stock^(E)(G)		500			520		428
Leeds Novamark Capital I, L.P. – Limited Partnership Interest ($986 uncalled capital commitment)^(G)(L)(R)		3.5	%		2,010		2,193

					5,166		2,621
Machinery – 0.5%
Arc Drilling Holdings LLC – Common Stock^(E)(G)		16.7	%		1,500		839
Precision International, LLC – Membership Unit Warrant^(E)(G)		33.3	%		—		119

					1,500		958
Oil and Gas – 0.1%
Francis Drilling Fluids, Ltd. – Common Equity Units^(E)(G)		1,656			1		—
W3, Co. – Common Equity^(D)(G)		435			499		131

					500		131
Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.2%
Canopy Safety Brands, LLC – Participation Warrant^(E)(G)		1			500		284
Funko Acquisition Holdings, LLC^(S) – Common Units^(G)(T)		67,873			167		194

					667		478
Telecommunications – 0.0%
NetFortris Corp.– Common Stock Warrant^(E)(G)		1			1		—

Total Common Equity				$	15,090	$	7,345

Total Non-Control/Non-Affiliate Investments				$	360,816	$	336,235

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

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)


Company and Investment^(A)(B)(W)(Y)	Principal/ Shares/ Units^(J)(X)		Cost		Fair Value
AFFILIATE INVESTMENTS^(N)– 21.4%
Secured First Lien Debt – 8.4%
Diversified/Conglomerate Manufacturing – 8.4%
Edge Adhesives Holdings, Inc.^(S) – Term Debt (L + 10.5%, 12.5% Cash, Due 2/2019)^(C)	$	6,200	$	6,200	$	5,828
Edge Adhesives Holdings, Inc.^(S) – Term Debt (L + 11.8%, 13.8% Cash, Due 2/2019)^(C)		1,600		1,600		1,512
LWO Acquisitions Company LLC – Line of Credit, $0 available (L + 5.5%. 7.4% Cash, 2.0% PIK, Due 12/2019)^(C)		2,776		2,776		2,665
LWO Acquisitions Company LLC – Term Debt (L + 8.5%, 10.4% Cash, 2.0% PIK, Due 12/2019)^(C)		11,053		11,053		9,480

				21,629		19,485

Total Secured First Lien Debt			$	21,629	$	19,485

Secured Second Lien Debt – 9.2%
Diversified Natural Resources, Precious Metals and Minerals – 9.2%
Lignetics, Inc. – Term Debt (L + 9.0%, 12.0% Cash, Due 11/2022)^(C)	$	6,000	$	6,000	$	5,985
Lignetics, Inc. – Term Debt (L + 9.0%, 12.0% Cash, Due 11/2022)^(C)		8,000		8,000		7,980
Lignetics, Inc. – Term Debt (L + 9.0%, 12.0% Cash, Due 11/2022)^(C)		3,300		3,300		3,292
Lignetics, Inc. – Term Debt (L + 9.0%, 12.0% Cash, Due 11/2022)^(C)		4,000		4,000		3,990

				21,300		21,247

Total Secured Second Lien Debt			$	21,300	$	21,247

Unsecured Debt – 0.0%
Diversified/Conglomerate Manufacturing – 0.0%
LWO Acquisitions Company LLC – Term Debt (Due 6/2020)^(C)(P)	$	95	$	95	$	81
Preferred Equity – 0.9%
Diversified/Conglomerate Manufacturing – 0.5%
Edge Adhesives Holdings, Inc.^(S) – Preferred Stock^(E)(G)		2,516	$	2,516	$	1,283
Diversified Natural Resources, Precious Metals and Minerals – 0.4%
Lignetics, Inc. – Preferred Stock^(E)(G)		40,000		800		852

Total Preferred Equity			$	3,316	$	2,135

Common Equity – 2.9%
Diversified/Conglomerate Manufacturing – 0.0%
LWO Acquisitions Company LLC – Common Units^(E)(G)		921,000	$	921	$	—
Diversified Natural Resources, Precious Metals and Minerals – 0.5%
Lignetics, Inc. – Common Stock^(E)(G)		152,603		1,855		1,059
Textiles and Leather – 2.4%
Targus Cayman HoldCo, Ltd. – Common Stock^(E)(G)		3,076,414		5,009		5,563

Total Common Equity			$	7,785	$	6,622

Total Affiliate Investments			$	54,125	$	49,570

CONTROL INVESTMENTS^(O) – 7.0%
Secured First Lien Debt – 2.4%
Machinery – 1.4%
PIC 360, LLC – Term Debt (14.0%, Due 9/2019)^(E)(F)	$	3,250	$	3,250	$	3,250
Printing and Publishing – 1.0%
Sunshine Media Holdings – Line of Credit, $672 available (8.0% Cash, Due 5/2018)^(E)(F)		1,328		1,328		1,328
Sunshine Media Holdings – Term Debt (8.0% Cash, Due 5/2018)^(E)(F)(H)		5,000		3,525		316
Sunshine Media Holdings – Term Debt (L + 3.8%, 5.6% Cash, Due 5/2018)^(E)(H)		11,948		8,401		756
Sunshine Media Holdings – Term Debt (L + 4.0%, 5.9% Cash, Due 5/2018)^(E)(H)		10,700		10,700		—

				23,954		2,400

Total Secured First Lien Debt			$	27,204	$	5,650

Secured Second Lien Debt – 3.5%
Automobile– 3.5%
Defiance Integrated Technologies, Inc. – Term Debt (L + 9.5%, 11.4% Cash, Due 8/2023)^(E)	$	8,065	$	8,065	$	8,065

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

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

MARCH 31, 2018

(DOLLAR AMOUNTS IN THOUSANDS)

(UNAUDITED)


Company and Investment^(A)(B)(W)(Y)	Principal/ Shares/ Units^(J)(X)		Cost		Fair Value
Preferred Equity – 0.0%
Printing and Publishing – 0.0%
Sunshine Media Holdings – Preferred Stock^(E)(G)		15,270	$	5,275	$	—
Common Equity – 1.1%
Automobile– 0.8%
Defiance Integrated Technologies, Inc. – Common Stock^(E)(G)		33,321	$	580	$	1,739
Machinery – 0.3%
PIC 360, LLC – Common Equity Units^(E)(G)		75		1		879
Printing and Publishing – 0.0%
Sunshine Media Holdings – Common Stock^(E)(G)		1,867		740		—
Sunshine Media Holdings – Common Stock Warrants^(E)(G)		72		—		—

				740		—

Total Common Equity			$	1,321	$	2,618

Total Control Investments			$	41,865	$	16,333

TOTAL INVESTMENTS – 173.5%			$	456,806	$	402,138

^(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 $354.9 million at fair value, are pledged as collateral to our revolving line of credit, as described further in Note 5—Borrowings in the accompanying Notes to Consolidated Financial Statements. 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 March 31, 2018, our investments in FedCap Partners, LLC (“FedCap”), Leeds Novamark Capital I, L.P. (“Leeds”), Funko Acquisition Holdings, LLC (“Funko”), and XMedius Solutions Inc. (“XMedius”) are considered non-qualifying assets under Section 55 of the 1940 Act. Such non-qualifying assets represent 2.7% of total investments, at fair value, as of March 31, 2018.

^(B)

Unless indicated otherwise, all cash interest rates are indexed to 30-day London Interbank Offered Rate (“LIBOR” or “L”), which was 1.88% as of March 31, 2018. If applicable, paid-in-kind (“PIK”) interest rates are noted separately from the cash interest rate. Certain securities are subject to an interest rate floor. The cash interest rate is the greater of the floor or LIBOR plus a spread. Due dates represent the contractual maturity date.

^(C)	Fair value was based on an internal yield analysis or on estimates of value submitted by ICE Data Pricing and Reference Data, LLC (“ICE”)(formerly Standard and Poor’s Securities Evaluations, Inc.).

^(D)	Fair value was based on the indicative bid price on or near March 31, 2018, offered by the respective syndication agent’s trading desk.

^(E)	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.

^(F)	Debt security has a fixed interest rate.

^(G)	Security is non-income producing.

^(H)	Debt security is on non-accrual status.

^(I)	New investment valued at cost, as it was determined that the price paid during the quarter ended March 31, 2018 best represents fair value as of March 31, 2018.

^(J)

Where applicable, aggregates all shares of a class of stock owned without regard to specific series owned within such class (some series of which may or may not be voting shares) or aggregates all warrants to purchase shares of a class of stock owned without regard to specific series of such class of stock such warrants allow us to purchase.

^(K)	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.

^(L)	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.

^(M)	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.

^(N)	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.

^(O)	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.

^(P)	Debt security does not have a stated interest rate that is payable thereon.

^(Q)

Reserved.

^(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 granted by the U.S. Securities and Exchange Commission.

^(T)

Our investment in Funko was valued using Level 2 inputs within the FASB Accounting Standard Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) fair value hierarchy. Our common units in Funko are convertible to class A common stock in Funko, Inc. upon the expiration of a lock-up agreement and meeting other requirements. Fair value was based on the closing market price of shares of Funko, Inc. as of the reporting date, less a discount for lack of marketability. Funko, Inc. is traded on the Nasdaq Stock Market under the trading symbol “FNKO.” Refer to Note 3—Investments in the accompanying Notes to Consolidated Financial Statements for additional information.

^(U)	The cash interest rate on this investment was indexed to 90-day LIBOR, which was 2.31% as of March 31, 2018.

^(V)	The cash interest rate on this investment was indexed to the U.S. Prime Rate (“PRIME”), which was 4.75% as of March 31, 2018.

^(W)	Unless indicated otherwise, all of our investments are valued using Level 3 inputs within the ASC 820 fair value hierarchy. Refer to Note 3—Investments in the accompanying Notes to Consolidated Financial Statements for additional information.

^(X)	Represents the principal balance for debt investments and the number of shares/units held for equity investments. Warrants are represented as a percentage of ownership, as applicable.

^(Y)	Category percentages represent the fair value of each category and subcategory as a percentage of net assets as of March 31, 2018.

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

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2017

(DOLLAR AMOUNTS IN THOUSANDS)


Company and Investment^(A)(B)(W)(Z)	Principal/ Shares/ Units^(J)(X)		Cost		Fair Value
NON-CONTROL/NON-AFFILIATE INVESTMENTS^(M) – 132.4%
Secured First Lien Debt – 67.2%
Automobile – 1.7%
Meridian Rack & Pinion, Inc.^(S) – Term Debt (L + 11.5% 13.5% Cash, Due 12/2018)^(C)	$	4,140	$	4,140	$	3,643
Beverage, Food, and Tobacco – 3.2%
Triple H Food Processors, LLC – Line of Credit, $1,500 available (L + 6.8%, 8.0% Cash, Due 8/2018)^(C)		—		—		—
Triple H Food Processors, LLC – Term Debt (L + 8.3%, 9.5% Cash, Due 8/2020)^(C)		6,800		6,800		6,928

				6,800		6,928
Buildings and Real Estate – 1.0%
GFRC Holdings, LLC – Line of Credit, $20 available (L + 8.0%, 9.2% Cash, Due 9/2018)^(E)		1,180		1,180		1,180
GFRC Holdings, LLC – Term Debt (L + 8.0%, 9.2% Cash, Due 9/2018)^(E)		1,000		1,000		1,000

				2,180		2,180
Diversified/Conglomerate Service – 20.1%
IA Tech, LLC – Term Debt (L + 11.0%, 12.2% Cash, Due 6/2021)^(C)		23,000		23,000		23,633
Travel Sentry, Inc. – Term Debt (L + 9.0%, 10.3% Cash, Due 12/2021)^(C)(U)		8,902		8,902		9,170
Vision Government Solutions, Inc. – Line of Credit, $0 available (L + 8.8%, 10.0% Cash, Due 1/2019)^(C)		1,450		1,450		1,420
Vision Government Solutions, Inc. – Delayed Draw Term Loan, $900 available (10.0% Cash, Due 1/2019)^(C)(F)		1,600		1,600		1,485
Vision Government Solutions, Inc. – Term Debt (L + 8.8%, 10.0% Cash, Due 1/2019)^(C)		9,000		9,000		8,390

				43,952		44,098
Diversified/Conglomerate Manufacturing – 1.6%
Alloy Die Casting Co.^(S) – Term Debt (L + 11.5%, 13.5% Cash, Due 10/2018)^(C)(H)		5,235		5,235		3,272
Alloy Die Casting Co.^(S) – Term Debt (L + 11.5%, 13.5% Cash, Due 10/2018)^(C)(H)		75		75		47
Alloy Die Casting Co.^(S) – Term Debt (Due 10/2018)^(C)(P)		390		390		246

				5,700		3,565
Healthcare, education, and childcare – 9.8%
EL Academies, Inc. – Line of Credit (L + 9.5%, 10.7% Cash, Due 8/2020)^(I)		—		—		—
EL Academies, Inc. – Delayed Draw Term Loan (L + 9.5%, 10.7% Cash, Due 8/2022)^(I)		—		—		—
EL Academies, Inc. – Term Debt (L + 9.5%, 10.7% Cash, Due 8/2022)^(I)		12,000		12,000		12,000
TWS Acquisition Corporation – Term Debt (L + 8.0%, 9.2% Cash, Due 7/2020)^(C)		9,432		9,432		9,609

				21,432		21,609
Leisure, Amusement, Motion Pictures, Entertainment – 3.6%
Flight Fit N Fun LLC – Term Debt (L + 14.0%, 15.2% Cash, Due 9/2020)^(Q)(Y)		7,800		7,800		7,800
Machinery – 0.4%
Precision International, LLC – Term Debt (10.0% PIK, Due 9/2021)^(C)(F)		808		808		798
Oil and Gas – 9.2%
WadeCo Specialties, Inc. – Line of Credit, $425 available (L + 7.0%, 8.2% Cash, Due 4/2018)^(E)		2,575		2,575		2,575
WadeCo Specialties, Inc. – Term Debt (L + 7.0%, 8.2% Cash, Due 3/2019)^(E)		10,441		10,427		10,440
WadeCo Specialties, Inc. – Term Debt (L + 9.0%, 12.0% Cash, Due 3/2019)^(E)		7,000		7,000		7,000

				20,002		20,015
Personal and Non-Durable Consumer Products (Manufacturing Only)– 3.0%
Canopy Safety Brands, LLC – Line of Credit, $500 available (L + 6.5%, 7.7% Cash, Due 9/2019)^(C)		—		—		—
Canopy Safety Brands, LLC – Term Debt (L + 9.5%, 10.7% Cash, Due 9/2021)^(C)		6,600		6,600		6,616

				6,600		6,616
Printing and Publishing – 0.0%
Chinese Yellow Pages Company – Line of Credit, $0 available (PRIME + 4.0%, 8.0% Cash, Due 2/2015)^(E)(V)		107		107		—
Telecommunications – 13.6%
B+T Group Acquisition, Inc.^(S) – Term Debt (L + 11.0%, 13.0% Cash, Due 12/2019)^(C)		6,000		6,000		5,955
NetFortris Corp. – Line of Credit, $2,000 available (L + 8.4%, 9.6% Cash, Due 11/2017)^(C)		—		—		—
NetFortris Corp. – Term Debt (L + 8.4%, 9.6% Cash, Due 2/2021)^(C)		24,000		24,000		24,240

				30,000		30,195

Total Secured First Lien Debt			$	149,521	$	147,447

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

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2017

(DOLLAR AMOUNTS IN THOUSANDS)


Company and Investment^(A)(B)(W)(Z)	Principal/ Shares/ Units^(J)(X)		Cost		Fair Value
Secured Second Lien Debt – 59.1%
Automobile – 2.2%
Sea Link International IRB, Inc. – Term Debt (11.3%, Due 11/2021)^(C)(F)	$	5,000	$	4,975	$	5,025
Beverage, Food, and Tobacco – 3.1%
The Mochi Ice Cream Company – Term Debt (L + 10.5%, 11.7% Cash, Due 1/2021)^(C)		6,750		6,750		6,809
Cargo Transportation– 6.0%
AG Transportation Holdings, LLC. – Term Debt (L + 10.0%, 13.3% Cash, Due 3/2020)^(C)		13,000		13,000		13,081
Chemicals, Plastics, and Rubber – 0.4%
Vertellus Holdings LLC – Term Debt (L + 12.0%, 13.2% Cash, Due 10/2021)^(D)		1,099		1,099		929
Diversified/Conglomerate Service – 16.4%
DataPipe, Inc. – Term Debt (L + 8.0%, 9.2% Cash, Due 9/2019)^(D)(Y)		2,000		1,966		2,005
HB Capital Resources, Ltd. – Term Debt (L + 10.3%, 11.5% Cash, Due 10/2022)^(C)		22,000		22,000		22,110
Keystone Acquisition Corp.– Term Debt (L + 9.3%, 10.5% Cash, Due 5/2025)^(D)		4,000		3,922		3,960
LDiscovery, LLC – Term Debt (L + 10.0%, 11.2% Cash, Due 12/2023)^(D)		5,000		4,815		4,550
PSC Industrial Holdings Corp.– Term Debt (L + 8.3%, 9.5% Cash, Due 12/2021)^(Q)(Y)		3,500		3,452		3,500

				36,155		36,125
Diversified/Conglomerate Manufacturing – 8.2%
United Flexible, Inc.– Term Debt (L + 9.5%, 10.7% Cash, 2.0% PIK, Due 2/2022)^(C)		17,993		17,909		17,903
Healthcare, education, and childcare – 8.8%
Medical Solutions Holdings, Inc. – Term Debt (L + 8.3%, 9.5% Cash, Due 12/2023)^(D)		3,000		2,956		2,970
Merlin International, Inc. – Term Debt (L + 10.0%, 11.2% Cash, Due 8/2022)^(C)		10,000		10,000		10,150
NetSmart Technologies, Inc.– Term Debt (L + 9.5%, 10.7% Cash, Due 10/2023)^(D)		3,660		3,609		3,678
New Trident Holdcorp, Inc.– Term Debt (L + 9.5%, 10.7% Cash, Due 7/2020)^(D)		4,000		4,000		2,412

				20,565		19,210
Home and Office Furnishings, Housewares and Durable Consumer Products – 4.6%
Belnick, Inc. – Term Debt (11.0%, Due 8/2023)^(C)(F)		10,000		10,000		10,100
Hotels, Motels, Inns, and Gaming – 3.2%
Vacation Rental Pros Property Management, LLC – Term Debt (L + 10.0%, 11.2% Cash, 3.0% PIK, Due 6/2023)^(C)		7,145		7,145		7,136
Oil and Gas – 5.7%
Francis Drilling Fluids, Ltd. – Term Debt (L + 10.4%, 11.9% PIK, Due 4/2020)^(C)		16,739		16,611		8,626
Francis Drilling Fluids, Ltd. – Term Debt (L + 9.3% 10.8% PIK, Due 4/2020)^(C)		7,733		7,673		3,931

				24,284		12,557
Telecommunications – 0.5%
Neustar, Inc. – Term Debt (L + 8.0%, 9.2% Cash, Due 8/2025)^(D)		1,000		1,000		1,015

Total Secured Second Lien Debt			$	142,882	$	129,890

Unsecured Debt – 1.5%
Healthcare, education, and childcare – 1.5%
Edmentum Ultimate Holdings, LLC – Term Debt (10.0% PIK, Due 6/2020)^(C)(F)	$	3,324	$	3,324	$	3,324
Preferred Equity – 2.6%
Automobile – 0.1%
Meridian Rack & Pinion, Inc.^(S)– Preferred Stock^(E)(G)		1,449	$	1,449	$	133
Buildings and Real Estate – 0.3%
GFRC Holdings, LLC – Preferred Stock^(E)(G)		1,000		1,025		824
Diversified/Conglomerate Service – 0.2%
Frontier Financial Group Inc. – Preferred Stock^(I)(G)		766		500		500
Frontier Financial Group Inc. – Preferred Stock Warrant^(I)(G)		168		—		—

				500		500
Diversified/Conglomerate Manufacturing – 0.3%
Alloy Die Casting Co.^(S)– Preferred Stock^(E)(G)		2,192		2,192		—
United Flexible, Inc.– Preferred Stock^(E)(G)		538		538		554

				2,730		554
Leisure, Amusement, Motion Pictures, Entertainment – 0.6%
Flight Fit N Fun LLC – Preferred Stock^(G)(Q)(Y)		700,000		700		1,425

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

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2017

(DOLLAR AMOUNTS IN THOUSANDS)


Company and Investment^(A)(B)(W)(Z)	Principal/ Shares/ Units^(J)(X)			Cost		Fair Value
Oil and Gas – 0.9%
Francis Drilling Fluids, Ltd. – Preferred Equity Units^(E)(G)		1,656			1,215		—
WadeCo Specialties, Inc. – Preferred Stock^(E)(G)		1,000			618		2,000

					1,833		2,000
Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.1%
Funko Acquisition Holdings, LLC^(S) – Preferred Equity Units^(E)(G)		260			167		159
Telecommunications – 0.1%
B+T Group Acquisition, Inc.^(S) – Preferred Stock^(E)(G)(J)		5,503			1,799		140

Total Preferred Equity				$	10,203	$	5,735

Common Equity – 2.0%
Aerospace and Defense – 0.3%
FedCap Partners, LLC – Class A Membership Units ($0 Uncalled Commitment)^(G)(K)(R)		80		$	1,634	$	751
Automobile– 0.2%
Sea Link International IRB, Inc.– Common Equity Units^(E)(G)		494,902			495		362
Beverage, Food, and Tobacco – 0.2%
The Mochi Ice Cream Company – Common Stock^(E)(G)		450			450		—
Triple H Food Processors, LLC – Common Stock^(E)(G)		250,000			250		366

					700		366
Buildings and Real Estate – 0.0%
GFRC Holdings, LLC – Common Stock Warrants^(E)(G)		45.0	%		—		—
Cargo Transportation – 0.0%
AG Transportation Holdings, LLC – Member Profit Participation^(E)(G)		18.0	%		1,000		—
AG Transportation Holdings, LLC – Profit Participation Warrants^(E)(G)		12.0	%		244		—

					1,244		—
Chemicals, Plastics, and Rubber – 0.2%
Vertellus Holdings LLC – Common Stock Units^(E)(G)		879,121			3,018		442
Diversified/Conglomerate Manufacturing – 0.0%
Alloy Die Casting Co.^(S) – Common Stock^(E)(G)		270			18		—
United Flexible, Inc. – Common Stock^(E)(G)		1,158			148		—

					166		—
Healthcare, education, and childcare – 0.9%
Edmentum Ultimate Holdings, LLC – Common Stock^(E)(G)		21,429			2,636		—
EL Academies, Inc. – Common Stock^(G)(I)		500			500		500
Leeds Novamark Capital I, L.P. – Limited Partnership Interest ($1,581 uncalled capital commitment)^(G)(L)(R)		3.5	%		1,628		1,645

					4,764		2,145
Machinery – 0.0%
Precision International, LLC – Membership Unit Warrant^(E)(G)		33.3	%		—		—
Oil and Gas – 0.1%
Francis Drilling Fluids, Ltd. – Common Equity Units^(E)(G)		1,656			1		—
W3, Co. – Common Equity^(D)(G)		435			499		139

					500		139
Personal and Non-Durable Consumer Products (Manufacturing Only) – 0.1%
Canopy Safety Brands, LLC – Participation Warrant^(E)(G)		1			500		259
Funko Acquisition Holdings, LLC^(S) – Common Stock^(E)(G)		975			—		—

					500		259
Telecommunications – 0.0%
NetFortris Corp.– Common Stock Warrant^(E)(G)		1			1		—

Total Common Equity				$	13,022	$	4,464

Total Non-Control/Non-Affiliate Investments				$	318,952	$	290,860

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

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2017

(DOLLAR AMOUNTS IN THOUSANDS)


Company and Investment^(A)(B)(W)(Z)	Principal/ Shares/ Units^(J)(X)		Cost		Fair Value
AFFILIATE INVESTMENTS^(N)– 19.4%
Secured First Lien Debt – 8.6%
Diversified/Conglomerate Manufacturing – 8.6%
Edge Adhesives Holdings, Inc.^(S) – Term Debt (L + 10.5%, 12.5% Cash, Due 2/2019)^(C)	$	6,200	$	6,200	$	5,704
Edge Adhesives Holdings, Inc.^(S) – Term Debt (L + 11.8%, 13.8% Cash, Due 2/2019)^(C)		1,600		1,600		1,480
LWO Acquisitions Company LLC – Line of Credit, $0 available (L + 5.5%, 6.7% Cash, 2.0% PIK, Due 3/2018)^(C)		2,748		2,746		2,336
LWO Acquisitions Company LLC – Term Debt (L + 8.5%, 9.7% Cash, 2.0% PIK, Due 12/2019)^(C)		10,942		10,921		9,301

				21,467		18,821

Total Secured First Lien Debt			$	21,467	$	18,821

Secured Second Lien Debt – 7.8%
Diversified Natural Resources, Precious Metals and Minerals – 7.8%
Lignetics, Inc. – Term Debt (L + 9.0%, 12.0% Cash, Due 2/2021)^(C)	$	6,000	$	6,000	$	5,998
Lignetics, Inc. – Term Debt (L + 9.0%, 12.0% Cash, Due 2/2021)^(C)		8,000		8,000		7,997
Lignetics, Inc. – Term Debt (L + 9.0%, 12.0% Cash, Due 2/2021)^(C)		3,300		3,300		3,299

				17,300		17,294

Total Secured Second Lien Debt			$	17,300	$	17,294

Preferred Equity – 0.4%
Diversified/Conglomerate Manufacturing – 0.0%
Edge Adhesives Holdings, Inc.^(S) – Preferred Stock^(E)(G)		2,516	$	2,516	$	—
Diversified Natural Resources, Precious Metals and Minerals – 0.4%
Lignetics, Inc. – Preferred Stock^(E)(G)		40,000		800		826

Total Preferred Equity			$	3,316	$	826

Common Equity – 2.6%
Diversified/Conglomerate Manufacturing – 0.0%
LWO Acquisitions Company LLC – Common Units^(E)(G)		921,000	$	921	$	—
Diversified Natural Resources, Precious Metals and Minerals – 0.4%
Lignetics, Inc. – Common Stock^(E)(G)		152,603		1,855		828
Textiles and Leather – 2.2%
Targus Cayman HoldCo, Ltd. – Common Stock^(E)(G)		3,076,414		5,009		4,879

Total Common Equity			$	7,785	$	5,707

Total Affiliate Investments			$	49,868	$	42,648

CONTROL INVESTMENTS^(O) – 8.6%
Secured First Lien Debt – 3.5%
Machinery – 1.8%
PIC 360, LLC – Term Debt (14.0%, Due 12/2017)^(E)(F)	$	4,000	$	4,000	$	4,000
Printing and Publishing – 1.7%
Sunshine Media Holdings – Line of Credit, $672 available (8.0% Cash, Due 5/2018)^(E)(F)		1,328		1,328		1,328
Sunshine Media Holdings – Term Debt (8.0% Cash, Due 5/2018)^(E)(F)(H)		5,000		3,525		679
Sunshine Media Holdings – Term Debt (L + 3.8%, 5.0% Cash, Due 5/2018)^(E)(H)		11,948		8,401		1,621
Sunshine Media Holdings – Term Debt (L + 4.0%, 5.5% Cash, Due 5/2018)^(E)(H)		10,700		10,700		—

				23,954		3,628

Total Secured First Lien Debt			$	27,954	$	7,628

Secured Second Lien Debt – 3.7%
Automobile– 3.7%
Defiance Integrated Technologies, Inc. – Term Debt (L + 9.5%, 11.0% Cash, Due 2/2019)^(E)	$	8,065	$	8,065	$	8,065

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

GLADSTONE CAPITAL CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

SEPTEMBER 30, 2017

(DOLLAR AMOUNTS IN THOUSANDS)


Company and Investment^(A)(B)(W)(Z)	Principal/ Shares/ Units^(J)(X)		Cost		Fair Value
Preferred Equity – 0.0%
Printing and Publishing – 0.0%
Sunshine Media Holdings – Preferred Stock^(E)(G)(J)		15,270	$	5,275	$	—
Common Equity – 1.4%
Automobile– 1.3%
Defiance Integrated Technologies, Inc. – Common Stock^(E)(G)		33,321	$	580	$	2,856
Machinery – 0.1%
PIC 360, LLC – Common Equity Units^(E)(G)		1		1		316
Printing and Publishing – 0.0%
Sunshine Media Holdings – Common Stock^(E)(G)		1,867		740		—
Sunshine Media Holdings – Common Stock Warrants^(E)(G)		72		—		—

				740		—

Total Common Equity			$	1,321	$	3,172

Total Control Investments			$	42,615	$	18,865

TOTAL INVESTMENTS^(T) – 160.4%			$	411,435	$	352,373

^(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 $317.4 million at fair value, are pledged as collateral to our revolving line of credit, 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, 2017, our investments in FedCap and Leeds are considered non-qualifying assets under Section 55 of the 1940 Act. Such non-qualifying assets represent 0.7% of total investments, at fair value, as of September 30, 2017.

^(B)

Unless indicated otherwise, all cash interest rates are indexed to 30-day London Interbank Offered Rate (“LIBOR” or “L”), which was 1.23% as of September 30, 2017. If applicable, paid-in-kind (“PIK”) interest rates are noted separately from the cash interest rate. Certain securities are subject to an interest rate floor. The cash interest rate is the greater of the floor or LIBOR plus a spread. Due dates represent the contractual maturity date.

^(C)	Fair value was based on an internal yield analysis or on estimates of value submitted by Standard and Poor’s Securities Evaluations, Inc.

^(D)	Fair value was based on the indicative bid price on or near September 30, 2017, offered by the respective syndication agent’s trading desk.

^(E)	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.

^(F)	Debt security has a fixed interest rate.

^(G)	Security is non-income producing.

^(H)	Debt security is on non-accrual status.

^(I)	New investment valued at cost, as it was determined that the price paid during the quarter ended September 30, 2017 best represents fair value as of September 30, 2017.

^(J)

^(K)	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.

^(L)	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.

^(M)	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.

^(N)	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.

^(O)	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.

^(P)	Debt security does not have a stated interest rate that is payable thereon.

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

^(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 granted by the U.S. Securities and Exchange Commission.

^(T)	Cumulative gross unrealized depreciation for federal income tax purposes is $71.7 million; cumulative gross unrealized appreciation for federal income tax purposes is $7.5 million. Cumulative net unrealized depreciation is $64.3 million, based on a tax cost of $416.6 million.

^(U)	The cash interest rate on this investment was indexed to 90-day LIBOR, which was 1.33% as of September 30, 2017.

^(V)	The cash interest rate on this investment was indexed to the U.S. Prime Rate (“PRIME”), which was 4.25% as of September 30, 2017.

^(W)

Unless indicated otherwise, all of our investments are valued using Level 3 inputs within the FASB Accounting Standard Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) fair value hierarchy. Refer to Note 3—Investments in the accompanying Notes to Consolidated Financial Statements for additional information.

^(X)	Represents the principal balance for debt investments and the number of shares/units held for equity investments. Warrants are represented as a percentage of ownership, as applicable.

^(Y)	Investment was exited subsequent to September 30, 2017. Refer to Note 15—Subsequent Events in the accompanying Notes to Consolidated Financial Statements for additional information.

^(Z)	Category percentages represent the fair value of each category and subcategory as a percentage of net assets as of September 30, 2017.

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

GLADSTONE CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2018

(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 line of credit. The financial statements of Business Loan are consolidated with those of Gladstone Capital Corporation. We also have significant subsidiaries (as defined under Rule 1-02(w) of the U.S. Securities and Exchange Commission’s (“SEC”) Regulation S-X) 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 an 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 and six months ended March 31, 2018, are not necessarily indicative of results that ultimately may be achieved for the fiscal year or any future interim periods. 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, 2017, as filed with the SEC on November 20, 2017.

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 prior period amounts have been reclassified to conform to the current period presentation in the Consolidated Financial Statements and the accompanying notes. Reclassifications did not impact net increase in net assets resulting from operations, total assets, total liabilities or total net assets, or Statement of Changes in Net Assets and Statement of Cash Flows classifications.

Investment Valuation Policy

Accounting Recognition

We record our investments at fair value in accordance with the FASB ASC 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 generally measured by the difference between the net proceeds from the repayment or sale and the cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, and include investments charged off during the period, net of recoveries. Unrealized appreciation or depreciation primarily reflects the change in investment fair values, including the reversal of previously recorded unrealized appreciation or depreciation 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, the Board of Directors receives written valuation recommendations and supporting materials provided by professionals of the Adviser and Administrator with oversight and direction from the chief valuation officer (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 presented by the chief valuation officer. Third, after the Valuation Committee concludes its meeting, it and the chief valuation officer present the Valuation Committee’s findings to the entire Board of Directors so that the full Board of Directors may review and approve the fair value of our investments in accordance with the Policy.

There is no single standard 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 the chief valuation officer, uses the Policy and each quarter the Valuation Committee and Board of Directors review the Policy to determine if changes thereto are advisable and also review whether the Valuation Team has consistently applied the Policy.

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.

ICE, a valuation specialist (formerly Standard and Poor’s Securities Evaluations, Inc.), generally provides estimates of fair value on our proprietary debt investments. The Valuation Team generally assigns ICE’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 ICE’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 ICE’s. When this occurs, our 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 (“TEV”) of certain of our investments. Generally, at least once per year, we engage an independent valuation firm to value or review the valuation of our significant equity investments, which includes providing the information noted above. The Valuation Team evaluates such information for incorporation into our TEV, 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 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 multiples obtained from our indexing methodology whereby the original transaction EBITDA multiple at the time of our closing is indexed to a general subset of comparable disclosed transactions and EBITDA multiples from recent sales to third parties of similar securities in similar industries; a comparison to publicly traded securities in similar industries, 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 generally allocates the TEV to the portfolio company’s securities based on the facts and circumstances of the securities, which typically results in the allocation of fair value to securities based on the 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 multiples; however, TEV may also be calculated using revenue multiples or 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 a DCF analysis 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 (where we do not have the ability to effectuate a sale of a portfolio company) using the yield analysis, which includes a DCF calculation and the assumptions that the Valuation Team believes market participants would use, 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 ICE and market quotes.

•

Market Quotes — For our investments for which a limited market exists, we generally base fair value 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 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. For securities that are publicly traded, we generally base fair value on the closing market price of our shares as of the reporting date. For restricted securities that are publicly traded, we generally base fair value on the closing market price of our shares as of the reporting date less a discount for the restriction, which includes consideration of the nature and term to expiration of the restriction.

•

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.

In addition to the valuation techniques listed above, the Valuation Team may also consider other factors when determining the fair value 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 debt and equity investments made during the current reporting quarter are generally valued at our original cost basis, as near-measurement date transaction value is a reasonable indicator of fair value.

Fair value measurements of our investments may involve subjective judgments and estimates and due to the uncertainty inherent in valuing these securities, the determinations of fair value 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 disposal 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

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 such that the interest income is deemed to be collectible. At March 31, 2018, certain loans to two portfolio companies, Sunshine Media Holdings and Alloy Die Casting Co., were on non-accrual status with an aggregate debt cost basis of approximately $27.9 million, or 6.7% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of approximately $5.1 million, or 1.3% of the fair value of all debt investments in our portfolio. At September 30, 2017, certain loans to two portfolio companies, Sunshine Media Holdings and Alloy Die Casting Co., were on non-accrual status with an aggregate debt cost basis of approximately $27.9 million, or 7.5% of the cost basis of all debt investments in our portfolio, and an aggregate fair value of approximately $5.6 million, or 1.7% 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 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 each of March 31, 2018 and September 30, 2017, we had six OID loans, primarily from the syndicated loans in our portfolio. We recorded OID income of $11 and $110 for the three and six months ended March 31, 2018, respectively, and $66 and $87 during the three and six months ended March 31, 2017, respectively. The unamortized balance of OID investments as of March 31, 2018 and September 30, 2017 totaled $0.4 million. As of March 31, 2018 and September 30, 2017, we had seven and six investments which had a PIK interest component, respectively. We recorded PIK interest income of $1.2 million and $2.3 million during the three and six months ended March 31, 2018, respectively, as compared to $1.2 million and $2.4 million during the three and six months ended March 31, 2017, respectively. We collected $0.8 million in PIK interest in cash during the three and six months ended March 31, 2018, as compared to $0 and $1.0 million during the three and six months ended March 31, 2017, respectively.

Success Fee Income Recognition

We record success fees as income when earned, which often occurs upon receipt of cash. Success fees are generally contractually due upon a change of control in a portfolio company, typically resulting from an exit or sale.

Dividend Income Recognition

We accrue dividend income on preferred and common equity securities to the extent that such amounts are expected to be collected and if we have the option to collect such amounts in cash or other consideration. During the year ended September 30, 2017, we recharacterized $0.2 million of dividend income from our investment in Behrens Manufacturing, LLC recorded during our fiscal year ended September 30, 2016 as a return of capital.

Deferred Financing and Offering Costs

Deferred financing and offering costs consist of costs incurred to obtain financing, including lender fees and legal fees. Certain costs associated with our revolving line of credit are deferred and amortized using the straight-line method, which approximates the effective interest method, over the term of the revolving line of credit. Costs associated with the issuance of our mandatorily redeemable preferred stock are presented as discounts to the liquidation value of the mandatorily redeemable preferred stock and are amortized using the straight-line method, which approximates the effective interest method, over the terms of the respective financings. Refer to Note 5 — Borrowings and Note 6 — Mandatorily Redeemable Preferred Stock for further discussion.

Related Party Fees

In accordance with the Advisory Agreement, we pay the Adviser fees as compensation for its services, consisting of a base management fee and an incentive fee. Additionally, we pay the Adviser a loan servicing fee as compensation for its services as servicer under the terms of our Fifth Amended and Restated Credit Agreement with KeyBank National Association (“KeyBank”), as administrative agent, lead arranger and a lender (our “Credit Facility”). These fees are accrued at the end of the quarter when the services are performed and generally paid the following quarter.

We pay separately for administrative services pursuant to the Administration Agreement. These administrative fees are accrued at the end of the quarter when the services are performed and generally paid the following quarter. Refer to Note 4—Related Party Transactions for additional information regarding these related party fees and agreements.

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 have assessed 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 have assessed 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 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. The adoption of ASU 2016-06 did not have 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, and we adopted ASU 2016-06 effective October 1, 2017.

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 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. The adoption of ASU 2016-17 did not have 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, and we adopted ASU 2015-02 effective October 1, 2017.

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. 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. We continue to assess the impact of ASU 2014-09, as amended, and expect to identify similar performance obligations as compared to existing guidance. As a result, we do not anticipate a material change in the timing of revenue recognition or a material impact on our financial position, results of operations, or cash flows from adopting this standard.

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.

•

Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical financial instruments in active markets;

•

Level 2 — 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

•

Level 3 — 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. Investments in funds measured using net asset value as a practical expedient are not categorized within the fair value hierarchy.

As of March 31, 2018, all of our investments were valued using Level 3 inputs within the ASC 820 fair value hierarchy, except for our investment in Funko, which was valued using Level 2 inputs and our investments in FedCap and Leeds, which were valued using net asset value as a practical expedient. As of September 30, 2017, all of our investments were valued using Level 3 inputs within the ASC 820 fair value hierarchy, except for our investments in FedCap and Leeds, which were valued using net asset value as a practical expedient.

We transfer investments in and out of Level 1, 2, and 3 of the valuation hierarchy as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. During the six months ended March 31, 2018, we transferred our investment in Funko from Level 3 to Level 2 as a result of the initial public offering of Funko, Inc. in November 2017 due to convertibility of our investment into shares of Funko, Inc. During the three and six months ended March 31, 2017, there were no investments transferred into or out of Levels 1, 2 or 3 of the valuation hierarchy.

As of March 31, 2018 and September 30, 2017, our investments, by security type, at fair value were categorized as follows within the ASC 820 fair value hierarchy:


				Fair Value Measurements
	Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
As of March 31, 2018:
Secured first lien debt	$	195,793		$	—	$	—		$	195,793
Secured second lien debt		180,045			—		—			180,045
Unsecured debt		3,540			—		—			3,540
Preferred equity		6,175			—		—			6,175
Common equity/equivalents		13,641	^(B)		—		194	^(A)		13,447

Total Investments at March 31, 2018	$	399,194		$	—	$	194		$	399,000


				Fair Value Measurements
	Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
As of September 30, 2017:
Secured first lien debt	$	173,896		$	—	$	—		$	173,896
Secured second lien debt		155,249			—		—			155,249
Unsecured debt		3,324			—		—			3,324
Preferred equity		6,561			—		—			6,561
Common equity/equivalents		10,947	^(B)		—		—			10,947

Total Investments at September 30, 2017	$	349,977		$	—	$	—		$	349,977

^(A)

Fair value was determined based on the closing market price of shares of Funko, Inc. (our units in Funko can be converted into shares of Funko, Inc.) at the reporting date less a discount for lack of marketability as our investment was subject to a 180-day lock-up period, which expires in May 2018, and other restrictions.

^(B)	Excludes our investments in FedCap and Leeds with fair values of $0.8 million and $2.2 million, respectively, as of March 31, 2018 and fair values of $0.8 million and $1.6 million, respectively, as of September 30, 2017. FedCap and Leeds were valued using net asset value as a practical expedient.

The following table presents our portfolio investments, valued using Level 3 inputs within the ASC 820 fair value hierarchy, and carried at fair value as of March 31, 2018 and September 30, 2017, by caption on our accompanying Consolidated Statements of Assets and Liabilities, and by security type:


	Total Recurring Fair Value Measurements Reported in
	*Consolidated Statements of Assets and Liabilities* Using Significant Unobservable Inputs (Level 3)
	March 31, 2018			September 30, 2017
Non-Control/Non-Affiliate Investments
Secured first lien debt	$	170,658		$	147,447
Secured second lien debt		150,733			129,890
Unsecured debt		3,459			3,324
Preferred equity		4,040			5,735
Common equity/equivalents		4,207	^(A)		2,068	^(B)

Total Non-Control/Non-Affiliate Investments	$	333,097		$	288,464

Affiliate Investments
Secured first lien debt	$	19,485		$	18,821
Secured second lien debt		21,247			17,294
Unsecured debt		81			—
Preferred equity		2,135			826
Common equity/equivalents		6,622			5,707

Total Affiliate Investments	$	49,570		$	42,648

Control Investments
Secured first lien debt	$	5,650		$	7,628
Secured second lien debt		8,065			8,065
Common equity/equivalents		2,618			3,172

Total Control Investments	$	16,333		$	18,865

Total Investments at Fair Value Using Level 3 Inputs	$	399,000		$	349,977

^(A)	Excludes our investments in FedCap, Leeds, and Funko with fair values of $0.8 million, $2.2 million, and $0.2 million, respectively, as of March 31, 2018. FedCap and Leeds were valued using net asset value as a practical expedient and Funko was valued using Level 2 inputs.

^(B)	Excludes our investments in FedCap and Leeds with fair values of $0.8 million and $1.6 million, respectively, as of September 30, 2017, which were valued using net asset value as a practical expedient.

In accordance with ASC 820, the following table provides quantitative information about our Level 3 fair value measurements of our investments as of March 31, 2018 and September 30, 2017. 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

Valuation

March 31,

September 30,

Techniques/

Unobservable

March 31,

September 30,

2018

2017

Methodologies

Input

2018

2017

Secured first lien debt^(A)

187,993

136,272

Yield Analysis

Discount Rate

5.0% - 21.3% /

11.9%

8.0% - 25.0% /
12.5%

7,800

37,624

TEV

EBITDA multiple

3.2x – 3.2x

/3.2x

3.2x – 10.1x /

8.2x

EBITDA

$1,391 - $1,391

/ $1,391

$1,378 - $9,420 /

$6,676

Revenue multiple

0.3x – 0.5x

/ 0.3x

0.3x – 0.4x /

0.3x

Revenue

$4,980 - $8,000

/$7,791

$6,934 - $12,094 /

$11,733

Secured second lien debt^(B)

148,404

122,165

Yield Analysis

Discount Rate

10.6% - 22.7%

/14.0%

10.8% - 23.3% /

14.0%

21,499

22,607

Market Quote

IBP

82.0% - 101.8%

/ 96.5%

84.5% - 101.5% /

97.2%

10,142

10,477

TEV

EBITDA multiple

4.5x – 6.3x

/5.1x

4.8x – 6.6x /5.4x

EBITDA

$3,004 - $75,583

/ $27,979

$3,000 - $73,650 /
$26,424

Unsecured debt

3,540

3,324

Yield Analysis

Discount Rate

9.7% - 13.7% /

9.8%

10.0% - 10.0% /

10.0%

Preferred and common equity / equivalents^(C)(D)

19,491

17,370

TEV

EBITDA multiple

3.2x – 10.0x /

6.2x

3.2x – 10.1x /

6.1x

EBITDA

$352 -$30,531

/$12,658

$890 -$84,828/

$12,835

Revenue multiple

0.3x – 1.7x /

0.5x

0.3x – 6.5 x /0.7x

Revenue

$2,973 -$522,101

/$153,397

$2,317 -$503,620/

$128,819

131

138

Market Quotes

IBP

26.2% - 26.2%

/26.2%

27.9% - 27.9% /

27.9%

Total Level 3 Investments, at Fair Value

399,000

349,977

^(A)

Fair value as of March 31, 2018 includes one new proprietary debt investment totaling $7.9 million, which was valued at cost, using the transaction price as the unobservable input. Fair value as of September 30, 2017 includes one new proprietary debt investment totaling $12.0 million, which was valued at cost, using the transaction price as the unobservable input, and one proprietary debt investment totaling $7.8 million, which was valued at the expected payoff amount as the unobservable input.

^(B)	Fair value as of September 30, 2017 includes one proprietary debt investment totaling $3.5 million which was valued at the expected payoff as the unobservable input.

^(C)

Fair value as of September 30, 2017 includes two new proprietary investments totaling $1.0 million, which were valued at cost, using transaction price as the unobservable input, and one proprietary investment totaling $1.4 million, which was valued at the expected payoff amount as the unobservable input.

^(D)

Fair value as of March 31, 2018 excludes our investments in FedCap, Leeds and Funko with fair values of $0.8 million, $2.2 million, and $0.2 million, respectively, as of March 31, 2018. FedCap and Leeds were valued using net asset value as a practical expedient and Funko was valued using Level 2 inputs as of March 31, 2018. Fair value as of September 30, 2017 excludes our investments in FedCap and Leeds with fair values of $0.8 million and $1.6 million, respectively, as of September 30, 2017, which were valued using net asset value as a practical expedient.

Fair value measurements can be sensitive to changes in one or more of the valuation inputs. Changes in discount rates, 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/(decrease) in market yields, discount rates, or an increase/(decrease) in EBITDA or EBITDA multiples (or revenue or revenue multiples) may result in a corresponding increase/(decrease), 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 and six months ended March 31, 2018 and 2017 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 2018: Three Months ended March 31, 2018	Secured First Lien Debt			Secured Second Lien Debt			Unsecured Debt		Preferred Equity			Common Equity/ Equivalents			Total
Fair Value as of December 31, 2017	$	196,195		$	171,690		$	3,444	$	5,661		$	12,434		$	389,424
Total gains (losses):
Net realized gain (loss)^(A)		(3	)		37			—		(5	)		(3	)		26
Net unrealized appreciation (depreciation)^(B)		(1,005	)		2,408			11		514			992			2,920
Reversal of prior period net (appreciation) depreciation on realization^(B)		—			(18	)		—		—			—			(18	)
New investments, repayments and settlements:^(C)
Issuances/originations		11,895			8,794			85		—			21			20,795
Settlements/repayments		(4,694	)		(9,426	)		—		—			—			(14,120	)
Net proceeds from sales		3			(38	)		—		5			3			(27	)
Transfers		(6,598	)		6,598			—		—			—			—

Fair Value as of March 31, 2018	$	195,793		$	180,045		$	3,540	$	6,175		$	13,447		$	399,000


Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
FISCAL YEAR 2018: Six Months Ended March 31, 2018	Secured First Lien Debt			Secured Second Lien Debt			Unsecured Debt		Preferred Equity			Common Equity/ Equivalents			Total
Fair Value as of September 30, 2017	$	173,896		$	155,249		$	3,324	$	6,561		$	10,947		$	349,977
Total gains (losses):
Net realized (loss) gain^(A)		(3	)		37			—		597			(31	)		600
Net unrealized (depreciation) appreciation^(B)		110			2,853			8		1,072			980			5,023
Reversal of prior period net depreciation (appreciation) on realization^(B)		—			(105	)		—		(725	)		—			(830	)
New investments, repayments and settlements:^(C)
Issuances/originations		49,321			27,159			208		125			1,521			78,334
Settlements/repayments		(17,371	)		(15,273	)		—		—			—			(32,644	)
Net proceeds from sales		3			(38	)		—		(1,296	)		30			(1,301	)
Transfers		(10,163	)		10,163			—		(159	)		—			(159	)

Fair Value as of March 31, 2018	$	195,793		$	180,045		$	3,540	$	6,175		$	13,447		$	399,000


Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
FISCAL YEAR 2017: Three Months Ended March 31, 2017	Secured First Lien Debt			Secured Second Lien Debt			Unsecured Debt		Preferred Equity			Common Equity/ Equivalents			Total
Fair Value as of December 31, 2016	$	156,330		$	114,021		$	3,091	$	4,415		$	7,870		$	285,727
Total gains (losses):
Net realized (loss) gain^(A)		—			(24	)		—		47			22			45
Net unrealized (depreciation) appreciation^(B)		(1,791	)		1,238			6		(63	)		(105	)		(715	)
Reversal of prior period net depreciation (appreciation) on realization^(B)		(96	)		115			—		—			—			19
New investments, repayments and settlements:^(C)
Issuances/originations		29,582			10,776			85		360			1			40,804
Settlements/repayments		(9,992	)		(4,851	)		3		—			—			(14,840	)
Net proceeds from sales		—			24			—		(93	)		(22	)		(91	)
Transfers		—			(202	)		—		—			202			—

Fair Value as of March 31, 2017	$	174,033		$	121,097		$	3,185	$	4,666		$	7,968		$	310,949


Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
FISCAL YEAR 2017: Six Months Ended March 31, 2017	Secured First Lien Debt			Secured Second Lien Debt			Unsecured Debt		Preferred Equity			Common Equity/ Equivalents			Total
Fair Value as of September 30, 2016	$	198,721		$	100,320		$	3,012	$	10,262		$	7,755		$	320,070
Total gains (losses):
Net realized (loss) gain^(A)		(4,899	)		1			—		1,473			22			(3,403	)
Net unrealized (depreciation) appreciation^(B)		866			(1,982	)		7		1,053			(3,351	)		(3,407	)
Reversal of prior period net depreciation (appreciation) on realization^(B)		2,114			180			—		(1,059	)		370			1,605
New investments, repayments and settlements:^(C)
Issuances/originations		30,129			30,136			161		754			344			61,524
Settlements/repayments		(48,857	)		(8,277	)		5		—			—			(57,129	)
Net proceeds from sales		(101	)		(1	)		—		(7,817	)		(392	)		(8,311	)
Transfers		(3,940	)		720			—		—			3,220			—

Fair Value as of March 31, 2017	$	174,033		$	121,097		$	3,185	$	4,666		$	7,968		$	310,949

^(A)	Included in net realized gain (loss) on investments on our accompanying Consolidated Statements of Operations for the three and six months ended March 31, 2018 and 2017.

^(B)	Included in net unrealized appreciation (depreciation) on investments on our accompanying Consolidated Statements of Operations for the three and six months ended March 31, 2018 and 2017.

^(C)

Includes increases in the cost basis of investments resulting from new portfolio investments, accretion of discounts, PIK, and other non-cash disbursements to portfolio companies, 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 March 31, 2018 and September 30, 2017, we held 39 and 35 proprietary investments with an aggregate fair value of $367.7 million and $318.6 million, or 91.4% and 90.4% of the total aggregate portfolio, respectively. The following significant proprietary investment transactions occurred during the six months ended March 31, 2018:

•

In October 2017, we sold our investment in Flight Fit N Fun LLC for a realized gain of $0.6 million. In connection with the sale, we received net cash proceeds of approximately $9.4 million, including the repayment of our debt investment of $7.8 million at par.

•

In October 2017, we invested $11.0 million in Applied Voice & Speech Technologies, Inc. through secured first lien debt.

•

In November 2017, we invested $7.5 million in Arc Drilling Holdings, LLC through a combination of secured first lien debt and equity.

•

In November 2017, we invested $7.5 million in Gray Matter Systems, LLC through secured second lien debt. In March 2018, we invested an additional $3.6 million in Gray Matter Systems, LLC, through secured second lien debt.

•

In December 2017, we invested $20.0 million in Impact! Chemical Technologies, Inc. through secured first lien debt.

•

In January 2018, we invested $8.1 million in XMedius Solutions Inc. through secured first lien debt.

•

In February 2018, we invested an additional $4.0 million in an existing portfolio company, Lignetics, Inc., through secured first lien debt.

•

In March 2018, an existing portfolio company, EL Academies, Inc., drew an additional $1.4 million on the unused portion of its secured first lien delayed draw term loan.

Syndicated Investments

As of March 31, 2018 and September 30, 2017, we held 11 and 12 syndicated investments with an aggregate fair value of $34.4 million and $33.8 million, or 8.6% and 9.6% of the total portfolio at fair value, respectively. The following significant syndicated investment transactions occurred during the six months ended March 31, 2018:

•

In October 2017, PSC Industrial Holdings, LLC paid off at par for net proceeds of $3.5 million.

•

In November 2017, DataPipe, Inc. paid off at par for net proceeds of $2.0 million.

•

In November 2017, we invested $5.0 million in DigiCert Holdings, Inc. through secured second lien debt. In March 2018, we sold $2.0 million of our investment for net proceeds of $2.0 million.

•

In November 2017, we invested $4.0 million in Red Ventures, LLC through secured second lien debt.

•

In November 2017, we invested $1.0 million in ABG Intermediate Holdings 2, LLC through secured second lien debt. In January 2018, we sold our investment in ABG Intermediate Holdings 2, LLC for net proceeds of $1.0 million.

•

In March 2018, we sold our $1.0 million investment in Neustar, Inc. for net proceeds of $1.0 million.

Investment Concentrations

As of March 31, 2018, our investment portfolio consisted of investments in 50 portfolio companies located in 23 states in 18 different industries, with an aggregate fair value of $402.1 million. The five largest investments at fair value totaled $116.6 million, or 29.0% of our total investment portfolio, as compared to the five largest investments at fair value as of September 30, 2017 totaling $110.9 million, or 31.5% of our total investment portfolio. As of March 31, 2018 and September 30, 2017, our average investment by obligor was $9.1 million and $8.8 million at cost, respectively.

The following table outlines our investments by security type at March 31, 2018 and September 30, 2017:


	March 31, 2018								September 30, 2017
	Cost				Fair Value				Cost				Fair Value
Secured first lien debt	$	218,696	47.9	%	$	195,793	48.7	%	$	198,942	48.4	%	$	173,896	49.4	%
Secured second lien debt		192,329	42.1			180,045	44.8			168,247	40.9			155,249	44.1
Unsecured debt		3,533	0.8			3,540	0.9			3,324	0.8			3,324	0.9

Total debt investments		414,558	90.8			379,378	94.4			370,513	90.1			332,469	94.4
Preferred equity		18,052	3.9			6,175	1.5			18,794	4.5			6,561	1.9
Common equity/equivalents		24,196	5.3			16,585	4.1			22,128	5.4			13,343	3.7

Total equity investments		42,248	9.2			22,760	5.6			40,922	9.9			19,904	5.6

Total Investments	$	456,806	100.0	%	$	402,138	100.0	%	$	411,435	100.0	%	$	352,373	100.0	%

Our investments at fair value consisted of the following industry classifications at March 31, 2018 and September 30, 2017:


	March 31, 2018					September 30, 2017
Industry Classification	Fair Value		Percentage of Total Investments			Fair Value		Percentage of Total Investments
Diversified/Conglomerate Service	$	93,050		23.1	%	$	80,723		22.9	%
Oil and gas		59,407		14.8			34,712		9.9
Telecommunications		49,339		12.2			31,350		8.9
Healthcare, education and childcare		43,265		10.8			46,288		13.1
Diversified/Conglomerate Manufacturing		41,361		10.3			40,843		11.6
Diversified natural resources, precious metals and minerals		23,158		5.8			18,949		5.4
Automobile		19,113		4.8			20,082		5.7
Cargo Transportation		13,748		3.4			13,081		3.7
Beverage, food and tobacco		13,736		3.4			14,103		4.0
Machinery		11,784		2.9			5,114		1.4
Home and Office Furnishings, Housewares and Durable Consumer Products		10,188		2.5			10,100		2.9
Hotels, Motels, Inns, and Gaming		6,655		1.7			7,136		2.0
Textiles and leather		5,563		1.4			4,879		1.4
Personal and non-durable consumer products		4,488		1.1			7,035		2.0
Printing and publishing		2,400		0.6			3,628		1.0
Leisure, Amusement, Motion Pictures, Entertainment		—		—			9,225		2.6
Other, < 2.0%		4,883		1.2			5,125		1.5

Total Investments	$	402,138		100.0	%	$	352,373		100.0	%

Our investments at fair value were included in the following U.S. geographic regions and other countries at March 31, 2018 and September 30, 2017:


	March 31, 2018					September 30, 2017
Location	Fair Value		Percentage of Total Investments			Fair Value		Percentage of Total Investments
South	$	162,708		40.4	%	$	150,727		42.8	%
West		132,303		32.9			116,302		33.0
Midwest		63,346		15.8			58,915		16.7
Northeast		35,883		8.9			26,429		7.5
Canada		7,898		2.0			—		—

Total Investments	$	402,138		100.0	%	$	352,373		100.0	%

The geographic composition is determined by the location of the headquarters of our portfolio companies. A portfolio company may have a number of other business locations in other geographic locations.

Investment Principal Repayments

The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of March 31, 2018:


		Amount
For the remaining six months ending September 30:	2018	$	33,604
For the fiscal years ending September 30:	2019		49,470
	2020		82,400
	2021		85,214
	2022		49,707
	Thereafter		119,863

	Total contractual repayments	$	420,258
	Adjustments to cost basis of debt investments		(5,700	)
	Investments in equity securities		42,248

	Investments held as of March 31, 2018 at Cost:	$	456,806

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. 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. We write-off accounts receivable when we have exhausted collection efforts and have deemed the receivables uncollectible. As of March 31, 2018 and September 30, 2017, we had gross receivables from portfolio companies of $0.2 million and $0.5 million, respectively. The allowance for uncollectible receivables was $21 and $44 at March 31, 2018 and September 30, 2017, respectively.

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 thereunder from 2.0% per annum to 1.75% per annum, effective July 1, 2015, with all other terms remaining unchanged. On July 11, 2017, our Board of Directors, including a majority of the directors who are not parties to the Advisory Agreement or interested persons of such party, unanimously approved the annual renewal of the Advisory Agreement through August 31, 2018.

We also pay the Adviser a loan servicing fee for its role of servicer pursuant to our Credit Facility. The entire loan servicing fee paid to the Adviser by Business Loan is non-contractually, unconditionally and irrevocably 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 Lee 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.

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


	Three Months Ended March 31,						Six Months Ended March 31,
	2018			2017			2018			2017
Average total assets subject to base management fee^(A)	$	407,771		$	310,628		$	395,428		$	312,800
Multiplied by prorated annual base management fee of 1.75%		0.4375	%		0.4375	%		0.875	%		0.875	%

Base management fee^(B)	$	1,784		$	1,359		$	3,460		$	2,737
Portfolio company fee credit		(167	)		(434	)		(831	)		(1,083	)
Syndicated loan fee credit		(92	)		(9	)		(184	)		(22	)

Net Base Management Fee	$	1,525		$	916		$	2,445		$	1,632

Loan servicing fee^(B)		1,274			955			2,460			1,938
Credit to base management fee - loan servicing fee^(B)		(1,274	)		(955	)		(2,460	)		(1,938	)

Net Loan Servicing Fee	$	—		$	—		$	—		$	—

Incentive fee^(B)		1,210			1,070			2,583			2,363
Incentive fee credit		(771	)		(1,077	)		(856	)		(1,114	)

Net Incentive Fee	$	439		$	(7	)	$	1,727		$	1,249

Portfolio company fee credit		(167	)		(434	)		(831	)		(1,083	)
Syndicated loan fee credit		(92	)		(9	)		(184	)		(22	)
Incentive fee credit		(771	)		(1,077	)		(856	)		(1,114	)

Credits to Fees From Adviser - other^(B)	$	(1,030	)	$	(1,520	)	$	(1,871	)	$	(2,219	)

^(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 non-contractually, 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 $10 and $19 for the three and six months ended March 31, 2018 and $18 and $46 for the three and six months ended March 31, 2017, 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 a non-contractual, unconditional and irrevocable credit from the Adviser to reduce the annual base management fee on syndicated loan participations to 0.5%, to the extent that proceeds resulting from borrowings were used to purchase such syndicated loan participations, for each of the three and six months ended March 31, 2018 and 2017.

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);

•

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 “net realized capital gains” (as defined herein) as of the end of the fiscal year. In determining the capital gains-based incentive fee payable to the Adviser, we calculate “net realized capital gains” at the end of each applicable year by subtracting the sum of our cumulative aggregate realized capital losses and our entire portfolio’s aggregate unrealized capital depreciation from our cumulative aggregate realized capital gains. 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 March 31, 2018, as cumulative unrealized capital depreciation has exceeded cumulative realized capital gains net of cumulative realized capital losses.

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 from our inception through March 31, 2018.

Our Board of Directors accepted non-contractual, unconditional and irrevocable credits 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 and six months ended March 31, 2018 and 2017.

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. 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% non-contractually, unconditionally and irrevocably 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 Lee 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.

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 11, 2017, our Board of Directors, including a majority of the directors who are not parties to the Administration Agreement or interested persons of such party, approved the annual renewal of the Administration Agreement through August 31, 2018.

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 non-contractual, unconditional and irrevocable credits against the base management fee or incentive fee. Gladstone Securities received fees from portfolio companies totaling $0.2 million and $0.6 million during the three and six months ended March 31, 2018, respectively, and $0.3 million and $0.5 million during the three and six months ended March 31, 2017, respectively.

Related Party Fees Due

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


	March 31, 2018		September 30, 2017
Base management fee due to Adviser	$	251	$	45
Loan servicing fee due to Adviser		317		242
Incentive fee due to Adviser		439		1,005

Total fees due to Adviser		1,007		1,292

Fee due to Administrator		312		244

Total Related Party Fees Due	$	1,319	$	1,536

In addition to the above fees, other operating expenses due to the Adviser as of March 31, 2018 and September 30, 2017, totaled $10 and $12, respectively. In addition, net expenses payable to Gladstone Investment Corporation (for reimbursement purposes), which includes certain co-investment expenses, totaled $16 and $55 as of March 31, 2018 and September 30, 2017, respectively. These amounts are generally settled in the quarter subsequent to being incurred and have been included in other liabilities on the accompanying Consolidated Statements of Assets and Liabilities as of March 31, 2018 and September 30, 2017.

NOTE 5. BORROWINGS

Revolving Credit Facility

On March 9, 2018, we, through Business Loan, entered into Amendment No. 4 to our Credit Facility with KeyBank, which increased the commitment amount from $170.0 million to $190.0 million, extended the revolving period end date by approximately two years to January 15, 2021, decreased the marginal interest rate added to 30-day LIBOR from 3.25% to 2.85% per annum, and changed the unused commitment fee from 0.50% of the total unused commitment amount to 0.50% when the average unused commitment amount for the reporting period is less than or equal to 50%, 0.75% when the average unused commitment amount for the reporting period is greater than 50% but less than or equal to 65%, and 1.00% when the average unused commitment amount for the reporting period is greater than 65%. If our Credit Facility is not renewed or extended by January 15, 2021, all principal and interest will be due and payable on or before April 15, 2022 (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 $265.0 million through additional commitments of new or existing lenders. We incurred fees of approximately $1.2 million in connection with this amendment, which are being amortized through our Credit Facility’s revolving period end date of January 15, 2021.

The following tables summarize noteworthy information related to our Credit Facility (at cost):


	March 31, 2018		September 30, 2017
Commitment amount	$	190,000	$	170,000
Borrowings outstanding, at cost		127,800		93,000
Availability^(A)		54,375		58,576


	For the Three Months Ended March 31,						For the Six Months Ended March 31,
	2018			2017			2018			2017
Weighted average borrowings outstanding, at cost	$	128,324		$	42,394		$	113,111		$	40,819
Weighted average interest rate^(B)		4.9	%		5.5	%		5.0	%		5.6	%
Commitment (unused) fees incurred	$	59		$	160		$	151		$	326

^(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 elected to have been paid during the prior year in accordance with Section 855(a) of the Code. Business Loan is also subject to certain limitations on the type of loan investments it can apply as collateral towards the borrowing base to receive additional borrowing availability under our Credit Facility, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life and lien property. Our Credit Facility further requires Business Loan to comply with other financial and operational covenants, which obligate Business Loan to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of 25 obligors required in the borrowing base.

Additionally, we are 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 $225.2 million as of March 31, 2018, (ii) asset coverage with respect to “senior securities representing indebtedness” of at least 200%, in accordance with Sections 18 and 61 of the 1940 Act, and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code.

As of March 31, 2018, and as defined in the performance guaranty of our Credit Facility, we had a net worth of $280.0 million, asset coverage on our “senior securities representing indebtedness” of 318.4%, calculated in compliance with the requirements of Section 18 and 61 of the 1940 Act, and an active status as a BDC and RIC. In addition, we had 34 obligors in our Credit Facility’s borrowing base as of March 31, 2018. As of March 31, 2018, 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 the assumptions that the Valuation Team believes market participants would use, 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 March 31, 2018, the discount rate used to determine the fair value of our Credit Facility was 30-day LIBOR, plus 2.85% per annum, plus a 0.50% unused fee. As of September 30, 2017, the discount rate used to determine the fair value of our Credit Facility was 30-day LIBOR, plus 3.15% per annum, plus a 0.50% 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 March 31, 2018 and September 30, 2017, 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 March 31, 2018 and September 30, 2017, 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 and six months ended March 31, 2018 and 2017:


	Total Recurring Fair Value Measurement Reported in *Consolidated Statements of Assets and Liabilities* Using Significant Unobservable Inputs (Level 3)
	March 31, 2018		September 30, 2017
Credit Facility	$	127,800	$	93,115


Fair Value Measurements Using Significant Unobservable Data Inputs (Level 3) Reported in Consolidated Statements of Assets and Liabilities
	Three Months Ended March 31,
	2018			2017
Fair value as of December 31, 2017 and 2016, respectively	$	130,833		$	27,987
Borrowings		26,300			46,100
Repayments		(29,000	)		(20,200	)
Net unrealized (depreciation) appreciation^(A)		(333	)		102

Fair Value as of March 31, 2018 and 2017, respectively	$	127,800		$	53,989


	Six Months Ended March 31,
	2018			2017
Fair value as of September 30, 2017 and 2016, respectively	$	93,115		$	71,300
Borrowings		87,400			70,300
Repayments		(52,600	)		(87,500	)
Net unrealized depreciation^(A)		(115	)		(111	)

Fair Value as of March 31, 2018 and 2017, respectively	$	127,800		$	53,989

^(A)	Included in net unrealized appreciation (depreciation) of other on our accompanying Consolidated Statements of Operations for the three and six months ended March 31, 2018 and 2017.

The fair value of the collateral under our Credit Facility totaled approximately $354.9 million and $317.4 million as of March 31, 2018 and September 30, 2017, respectively.

NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK

In September 2017, we completed a public offering of approximately 2.1 million shares of 6.00% Series 2024 Term Preferred Stock, par value $0.001 per share (“Series 2024 Term Preferred Stock”), at a public offering price of $25.00 per share. Gross proceeds totaled $51.8 million and net proceeds, after deducting underwriting discounts, commissions and offering expenses borne by us, were approximately $49.8 million. We incurred approximately $1.9 million in total underwriting discounts and offering costs related to the issuance of the Series 2024 Term Preferred Stock, which have been recorded as discounts to the liquidation value on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized from issuance through September 30, 2024, the mandatory redemption date. The offering proceeds plus borrowings under our Credit Facility were used to voluntarily redeem all 2.4 million outstanding shares of our then existing 6.75% Series 2021 Term Preferred Stock, par value $0.001 per share (“Series 2021 Term Preferred Stock”). In connection with the voluntary redemption of our Series 2021 Term Preferred Stock, we incurred a loss on extinguishment of debt of $1.3 million during the three months ended September 30, 2017, which is primarily comprised of the unamortized deferred issuance costs at the time of redemption.

The shares of our Series 2024 Term Preferred Stock are traded under the ticker symbol “GLADN” on the Nasdaq Global Select Market. Our Series 2024 Term Preferred Stock is not convertible into our common stock or any other security and provides for a fixed dividend equal to 6.00% per year, payable monthly (which equates in total to approximately $3.1 million per year). We are required to redeem all of the outstanding Series 2024 Term Preferred Stock on September 30, 2024 for cash at a redemption price equal to $25.00 per share plus an amount equal to all unpaid dividends and distributions per 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 2024 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, or (2) if we fail to maintain an asset coverage of at least 200% on our “senior securities that are stock” (which is currently only our Series 2024 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. The asset coverage on our “senior securities that are stock” as of March 31, 2018 was 226.8%, calculated in accordance with Sections 18 and 61 of the 1940 Act.

We may also voluntarily redeem all or a portion of the Series 2024 Term Preferred Stock at our option at the Redemption Price at any time after September 30, 2019. If we fail to redeem our Series 2024 Term Preferred Stock pursuant to the mandatory redemption date of September 30, 2024, or in any other circumstance in which we are required to mandatorily redeem our Series 2024 Term Preferred Stock, then the fixed dividend rate will increase by 4.0% for so long as such failure continues. As of March 31, 2018, we have not redeemed, nor have we been required to redeem, any shares of our outstanding Series 2024 Term Preferred Stock.

In May 2014, we completed a public offering of approximately 2.4 million shares of 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 were recorded as discounts to the liquidation value on our accompanying Consolidated Statements of Assets and Liabilities and were amortized over the redemption period ending June 30, 2021. In September 2017, when we voluntarily redeemed all of our outstanding Series 2021 Term Preferred Stock, the remaining unamortized costs were fully written off as part of the realized loss discussed above.

We paid the following monthly distributions on our Series 2024 Term Preferred Stock for the six months ended March 31, 2018:


Fiscal Year	Declaration Date	Record Date	Payment Date	Distribution per Series 2024 Term Preferred Share^(A)
2018	October 10, 2017	October 20, 2017	October 31, 2017	$	0.141667
	October 10, 2017	November 20, 2017	November 30, 2017		0.125
	October 10, 2017	December 19, 2017	December 29, 2017		0.125
	January 9, 2018	January 22, 2018	January 31, 2018		0.125
	January 9, 2018	February 16, 2018	February 28, 2018		0.125
	January 9, 2018	March 20, 2018	March 30, 2018		0.125

		Six Months Ended March 31, 2018:		$	0.766667

(A)	The dividend paid on October 31, 2017 included the pro-rated period from and including the issuance date of September 27, 2017 to and including September 30, 2017, and the full month of October 2017.

We paid the following monthly distributions on our Series 2021 Term Preferred Stock for the six months ended March 31, 2017:


Fiscal Year	Declaration Date	Record Date	Payment Date	Distribution per Series 2021 Term Preferred 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
	January 10, 2017	January 20, 2017	January 31, 2017		0.1406250
	January 10, 2017	February 16, 2017	February 28, 2017		0.1406250
	January 10, 2017	March 22, 2017	March 31, 2017		0.1406250

		Six Months Ended March 31, 2017:		$	0.8437500

The federal income tax characteristics of dividends paid to our preferred stockholders generally constitute ordinary income to the extent of our current and accumulated earnings and profits and is reported after the end of the calendar year based on tax information for the full fiscal year. Estimates of tax characterization made on a quarterly basis may not be representative of the actual tax characterization of dividends for the full year. Estimates made on a quarterly basis are updated as of each interim reporting date. The tax characterization of dividends paid to our preferred stockholders during the calendar years ended December 31, 2017 and 2016 was 100% from ordinary income.

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 March 31, 2018 and September 30, 2017. The related dividend payments to our mandatorily redeemable preferred stockholders are treated as dividend expense on our statement of operations as of the ex-dividend date. Aggregate preferred stockholder dividends declared and paid on our Series 2024 Term Preferred Stock for the three and six months ended March 31, 2018 were $0.8 million and $1.6 million, respectively. Aggregate preferred stockholder dividends declared and paid on our Series 2021 Term Preferred Stock for the three and six months ended March 31, 2017 were $1.0 million and $2.1 million, respectively.

For disclosure purposes, the fair value, based on the last quoted closing price, for our Series 2024 Term Preferred Stock as of March 31, 2018 and September 30, 2017 was approximately $51.7 million and $52.7 million, respectively. We consider our mandatorily redeemable preferred stock to be a Level 1 liability within the ASC 820 hierarchy.

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

We filed Post-Effective Amendment No. 5 to our current universal shelf registration statement on Form N-2 (our “Registration Statement”) on Form N-2 (File No. 333-208637) with the SEC on December 19, 2017, which was declared effective by the SEC on February 1, 2018. 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. As of March 31, 2018, we have the ability to issue up to $217.7 million in securities under the Registration Statement.

Common Stock Offerings

Pursuant to our 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.

In February 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 had the ability to 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. In May 2017, we terminated the Sales Agreement with KeyBanc Capital Markets Inc. and amended the Sales Agreement with Cantor Fitzgerald & Co. to reference our current registration statement. All other material terms of the Sales Agreement with Cantor Fitzgerald & Co. remained unchanged. During the six months ended March 31, 2018, we sold 737,077 shares of our common stock under the Sales Agreement with Cantor Fitzgerald & Co., at a weighted-average price of $9.40 per share and raised $6.9 million of gross proceeds. Net proceeds, after deducting commissions and offering costs borne by us, were approximately $6.8 million. As of March 31, 2018, we had a remaining capacity to sell up to $35.6 million of common stock under the Sales Agreement with Cantor Fitzgerald & Co. We did not sell any shares under the Sales Agreements during the six months ended March 31, 2017.

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

The following table sets forth the computation of basic and diluted net increase in net assets resulting from operations per weighted average common share for the three and six months ended March 31, 2018 and 2017:

Three Months Ended
March 31,

Six Months Ended
March 31,

2018

2017

2018

2017

Large accelerated filer

Accelerated filer

Non-accelerated filer

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Smaller reporting company

Emerging growth company