GLAD

• Investment Origination and Portfolio Activity: Total funding for the quarter hit $82 million, split between $67 million in four new investments and $15 million in follow-on advances to existing portfolio companies. Exits and repayments totaled $40 million, resulting in $42 million in net originations. The firm completed an exit from its home healthcare holding, reducing healthcare and education sector concentration to redeploy capital into higher-return opportunities. It also eliminated all oil and gas sector exposure via an anticipated $12 million prepayment shortly after quarter-end. Two new non-earning controlled investments were added during the quarter: Lone Star, a Texas-based printed circuit board contractor, and EG's, an Arizona-based quick-serve sandwich chain, both undergoing operational restructuring to return to earning status. Net portfolio appreciation reached $3 million, driven by unrealized gains that outnumbered unrealized losses by a 2-to-1 margin. All new debt investments issued during the quarter were first lien, with an average leverage of under 3x EBITDA and a 7% average spread over SOFR.
• Balance Sheet and Distribution: Gross leverage rose to 100% of net assets as of quarter-end, after the firm issued a new $60 million 7% note due December 2029 to pay down revolving credit facility borrowings. Monthly common share distributions for August and September 2026 are set at $0.15 per share, representing an annual run rate of $1.80 per share and a 9.3% yield at the recent common share price of ~$19.35. The board will review the next quarter's distribution level in October 2026.

• Management expects consistent origination activity of ~$75 million per quarter, in line with prior year levels, with follow-on investments in existing portfolio companies expected to make up a meaningful share of originations going forward
• Net asset growth is expected to remain modest, held in check by the firm's current leverage profile; repayment velocity has slowed to 35-50 million per quarter, which supports moderate net growth
• New investment spreads are expected to remain in the high 6% to low 7% range, so management does not expect any meaningful degradation of the current 11.8% weighted average portfolio yield from reinvestment activity
• Management expects typical seasonal activity trends, with consistent deal flow through the second half of 2026 and a typical volume bump in the final quarter of the year
• Follow-on expansion of existing lower middle market portfolio companies is expected to be a key contributor to results for the remainder of 2026, regardless of broader economic conditions

Gladstone Capital operates as a single-segment business development company focused on middle-market debt investments. For the quarter ending June 30, 2026: Total interest income rose 4.7% to $24.3 million, driven by a $28.4 million (3.6%) increase in average earning assets, with the weighted average portfolio yield holding steady at 11.8%. Total investment income fell $1.5 million to $24.5 million year-over-year, due to the absence of the large one-time prepayment fee recorded in the prior quarter. Net investment income declined $800,000 to $11 million (49 cents per share), equal to 109% of the current cash distribution per common share. Total assets grew to $970 million as of June 30, 2026, with $953 million held in investments at fair value. Net assets rose to $485.7 million, pushing net asset value per share up from $21.36 to $21.50. The investment portfolio is 71% first lien debt and 91% total debt investments at cost, with non-accrual assets representing 3.1% of total debt investments at fair value (cost basis of $46 million).

• Softening consumer spending has created operational headwinds for the small share of the portfolio consisting of consumer-facing businesses, particularly for EG's, which has underperformed revenue growth expectations due to ongoing weakness in its target consumer market
• Higher commodity prices (including steel and copper) and tariffs are slowing the reshoring of manufacturing production to the U.S., creating pressure for industrial portfolio companies that were planning on domestic relocation
• Competitive bidding for high-quality assets in hot sectors (such as roofing, HVAC, and dental) pushes up transaction multiples and requires higher leverage, which increases credit risk and compresses investment spreads
• Low barriers to entry in sectors like landscaping and roofing create ongoing cash flow consistency risk, and labor challenges in these sectors further elevate risk
• If interest rates rise, transaction valuations will require repricing, which could slow overall investment activity until market expectations reset
• Two newly added controlled portfolio assets are currently non-earning, requiring additional time and investment to reposition for profitability

Q: How strong is the current investment pipeline compared to three months ago, and how do new investment spreads compare to the portfolio's current average yield?

A: The pipeline remains strong, with half a dozen or more add-on opportunities for existing portfolio companies, which will make up a large share of future originations. The firm can consistently source ~$75 million in originations per quarter, matching 2025 levels, and repayment velocity has slowed to 35-50 million per quarter to support modest net growth. New spreads hold in the high sixes to low sevens, matching the firm's recent experience, so no meaningful yield degradation from the current 11.8% average is expected.

Q: Have you seen economic bifurcation affecting lower-income consumers, and how are you managing this portfolio exposure?

A: Consumer-facing businesses make up a very small share of the portfolio, as the firm prioritizes businesses with higher revenue visibility. While there is clear softening in consumer spending that has impacted assets like EG's, other consumer-facing holdings (including an apparel wetsuit business and other restaurant concepts) are seeing positive momentum. Most of the portfolio is made up of industrial and aerospace/defense suppliers, which continue to report growing backlogs and strong performance.

Q: Is the lower middle market a buyer's market right now, and how does private equity activity look in this segment?

A: Transaction multiples for sub-$100 million transactions have stayed remarkably consistent at 7-7.5x EBITDA, so valuations remain attractive on average. High quality assets in hot sectors do see competitive bidding that pushes multiples up, but most competition is concentrated in larger market segments outside of Gladstone's focus. There is a wide range of opportunity from both lower middle market buyers and independent sponsors, so deal flow remains strong.

Q: Why has EG's moved to non-accrual status this quarter, and what drove this performance?

A: EG's operating environment in southern Arizona's heavily Hispanic consumer market has been difficult for over a year, with cumulative macro pressure weighing on results. Several revenue growth initiatives were less successful than management expected. The firm is currently retooling the business's strategy, cutting expenses, and anticipates that additional investment will be required to successfully reposition the chain.