Financial Data and Key Metrics Changes - Total interest income declined by $600,000 or 5.5% from the prior quarter, primarily due to a 30 basis point decline in average yield on the investment portfolio and non-earning and restructured investments [19] - Total investment income rose by $600,000 or 5.1% to $12.5 million for the quarter [20] - Net investment income was $6 million or $0.21 per share, covering 100% of shareholder distribution [21] - Net assets rose by $7.5 million since the prior quarter end, with net realized and unrealized portfolio appreciation of $3.3 million [22] - Net asset value per share increased by $0.13 to $8.11 as of March 31 [23] Business Line Data and Key Metrics Changes - Originations for the quarter were down, typical for the first calendar quarter, with one small syndicated investment of $3.3 million closed [9] - Exits and repayments were elevated at $49 million, including a $2.1 million realized gain from the sale of United Flexible [10] - The asset mix shifted slightly, with senior secured assets dropping 5% to 49% of the investment portfolio at fair value, while second-lien investments rose to 38% [14] Market Data and Key Metrics Changes - The company noted a decline in average yield due to a mix shift with older assets rolling off and newer assets being less effective in driving yield [32] - The energy portfolio was consolidated, reducing net energy exposure while supporting the growth of the combined entity [36] Company Strategy and Development Direction - The company is focused on reinvesting payments from the previous quarter into lower middle market businesses, positioning itself for growth in the fiscal year ending September 30, 2019 [26] - The company remains committed to paying cash dividends, with a declared monthly distribution of $0.07 per common share for April, May, and June [27] - The company sees improved positioning in private businesses and aims to support ongoing commitments to cash distributions to shareholders [28] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the near-term outlook, expecting higher average investment balances and core net interest income due to recent investments and a current investment backlog [17] - The management team is monitoring potential spikes in prepayment activity as borrowers consider selling amid elevated market valuations [18] - Management remains positive about the outlook for LWO, despite challenges, and is working with the management team to address operational issues [40] Other Important Information - The company completed the restructuring of its senior secured position in LWO Acquisition, converting $9.7 million of exposure to a success-based fee term loan [16] - The company has approximately $74 million of availability under its line of credit, with leverage increasing to approximately 85% post quarter-end [24] Q&A Session Summary Question: Decline in portfolio's average yield - Management clarified that the yield is based on actual LIBOR rates and noted a slight change in aggregate yield due to older assets rolling off and non-earning assets affecting the average yield [31][32] Question: Catalyst for Impact! and WadeCo merger - The merger was driven by efficiency and scale, as both companies were in the chemical distribution business and owned by the same sponsor, aiming to support growth in a competitive market [33][34] Question: Outlook for LWO given valuation decline - Management believes the sector continues to grow, and they are working with the management team to address operational issues, maintaining a positive outlook despite challenges [39][40] Question: Impact of Chinese tariffs on Meridian - Management indicated that the tariffs were a temporary issue, and with adjustments made, they expect Meridian to return to accrual status soon [46][50] Question: New Trident's nonaccrual status - Management explained that New Trident was being marketed for sale, and once it became clear that a sale was unlikely, the decision was made to proceed with bankruptcy and restructuring [54][55]

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark one): ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 1521 WESTBRANCH DRIVE, SUITE 100 MCLEAN, VIRGINIA (Address of principal executive office) (I.R.S. Employer Identification No.) 22102 (Zip Code) FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD ...

Gladstone Capital (NASDAQ:GLAD) Q1 2019 Earnings Conference Call February 7, 2019 8:30 AM ET Company Participants David Gladstone - CEO Michael LiCalsi - General Counsel Bob Marcotte - President Nicole Schaltenbrand - CFO Conference Call Participants Christopher Testa - National Securities Mickey Schleien - Ladenburg Operator Good day, ladies and gentlemen, and welcome to the Gladstone Capital Corporation's first quarter ended December 31, 2018 earnings conference call. At this time, all participants are in ...

[PART I. FINANCIAL INFORMATION](index=2&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements (Unaudited)](index=2&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This section presents Gladstone Capital Corporation's unaudited consolidated financial statements for the quarter ended December 31, 2018, encompassing key financial statements and detailed investment schedules [Consolidated Statements of Assets and Liabilities](index=3&type=section&id=Consolidated%20Statements%20of%20Assets%20and%20Liabilities) As of December 31, 2018, total assets increased while total liabilities significantly rose, leading to a decrease in total net assets and Net Asset Value per common share Consolidated Statements of Assets and Liabilities (in thousands, except per share amounts) | | December 31, 2018 | September 30, 2018 | | :--- | :--- | :--- | | **Total Investments, at fair value** | $431,147 | $390,046 | | **Total Assets** | $438,424 | $399,508 | | **Total Liabilities** | $210,998 | $162,416 | | **Total Net Assets** | $227,426 | $237,092 | | **Net Asset Value Per Common Share** | $7.98 | $8.32 | [Consolidated Statements of Operations](index=4&type=section&id=Consolidated%20Statements%20of%20Operations) For the three months ended December 31, 2018, total investment income and net investment income increased, but a significant net realized loss led to an overall net decrease in net assets from operations Consolidated Statements of Operations (in thousands) | | Three Months Ended December 31, 2018 | Three Months Ended December 31, 2017 | | :--- | :--- | :--- | | **Total investment income** | $11,909 | $10,859 | | **Total expenses, net of credits** | $5,923 | $5,282 | | **Net Investment Income** | $5,986 | $5,577 | | **Net realized and unrealized (loss) gain** | $(9,694) | $1,583 | | **Net (Decrease) Increase in Net Assets** | $(3,708) | $7,160 | Per Common Share Data | | Three Months Ended December 31, 2018 | Three Months Ended December 31, 2017 | | :--- | :--- | :--- | | **Net investment income per share** | $0.21 | $0.21 | | **Net (decrease) increase in net assets per share** | $(0.13) | $0.27 | [Consolidated Statements of Changes in Net Assets](index=6&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Net%20Assets) For the three months ended December 31, 2018, net assets decreased due to a net decrease from operations and distributions to common stockholders, contrasting with an increase in the prior-year period Consolidated Statements of Changes in Net Assets (in thousands) | | Three Months Ended December 31, 2018 | Three Months Ended December 31, 2017 | | :--- | :--- | :--- | | **Net (decrease) increase in net assets from operations** | $(3,708) | $7,160 | | **Distributions to common stockholders** | $(5,986) | $(5,577) | | **Net increase in net assets from capital transactions** | $28 | $4,484 | | **Net (Decrease) Increase in Net Assets** | $(9,666) | $6,067 | | **Net Assets, Beginning of Period** | $237,092 | $219,650 | | **Net Assets, End of Period** | $227,426 | $225,717 | [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) For the three months ended December 31, 2018, net cash used in operating activities was largely offset by net cash provided by financing activities, resulting in a net decrease in cash and cash equivalents Consolidated Statements of Cash Flows (in thousands) | | Three Months Ended December 31, 2018 | Three Months Ended December 31, 2017 | | :--- | :--- | :--- | | **Net cash used in operating activities** | $(43,407) | $(36,919) | | **Net cash provided by financing activities** | $41,801 | $36,380 | | **Net Decrease in Cash and Equivalents** | $(1,606) | $(539) | | **Cash and Equivalents, End of Period** | $398 | $4,731 | [Consolidated Schedules of Investments](index=8&type=section&id=Consolidated%20Schedules%20of%20Investments) As of December 31, 2018, the investment portfolio's fair value was primarily composed of debt investments across 54 companies, with a significant concentration in secured first lien debt and diversified services Investment Portfolio Composition by Security Type (December 31, 2018) | Security Type | Fair Value ($ thousands) | % of Total Fair Value | | :--- | :--- | :--- | | Secured first lien debt | $232,651 | 54.0% | | Secured second lien debt | $149,783 | 34.7% | | Unsecured debt | $3,649 | 0.8% | | **Total debt investments** | **$386,083** | **89.5%** | | Preferred equity | $14,606 | 3.4% | | Common equity/equivalents | $30,458 | 7.1% | | **Total equity investments** | **$45,064** | **10.5%** | | **Total Investments** | **$431,147** | **100.0%** | - The five largest investments at fair value totaled **$123.1 million**, representing **28.6%** of the total investment portfolio as of December 31, 2018[111](index=111&type=chunk) - The investment portfolio is diversified across **19 different industries** and **24 states**, with the largest geographic concentration in the South at **46.1%** of fair value[111](index=111&type=chunk)[114](index=114&type=chunk) [Notes to Consolidated Financial Statements](index=25&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed explanations of the company's accounting policies and further breakdowns of the figures presented in the financial statements [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=46&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management provides an analysis of the company's financial condition and operational results for the quarter ended December 31, 2018, covering business overview, portfolio activity, capital, and liquidity [Overview](index=46&type=section&id=Overview) Gladstone Capital, a BDC and RIC, focuses on lower middle market investments, expanded its portfolio, completed a significant debt offering, and is preparing for a reduced asset coverage requirement - The company's investment strategy targets debt and equity securities in lower middle market companies, with investment sizes generally ranging from **$8 million to $30 million**[177](index=177&type=chunk) - In November 2018, the company completed a public debt offering of **$57.5 million** in **6.125% Notes due 2023**[188](index=188&type=chunk) - Effective April 10, 2019, the company's required asset coverage for senior securities will decrease from **200% to 150%**, allowing for increased leverage; however, the Credit Facility and preferred stock maintain a **200%** coverage covenant[191](index=191&type=chunk) [Results of Operations](index=50&type=section&id=Results%20of%20Operations) For the quarter ended December 31, 2018, Net Investment Income increased, but a substantial net realized loss, primarily from an investment restructuring, led to an overall net decrease in net assets from operations Comparison of Operating Results (in thousands) | | Three Months Ended Dec 31, 2018 | Three Months Ended Dec 31, 2017 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | **Total investment income** | $11,909 | $10,859 | $1,050 | 9.7% | | **Total expenses, net of credits** | $5,923 | $5,282 | $641 | 12.1% | | **Net Investment Income** | $5,986 | $5,577 | $409 | 7.3% | | **Net realized (loss) gain** | $(26,863) | $441 | $(27,304) | NM | | **Net unrealized appreciation** | $17,169 | $1,142 | $16,027 | NM | | **Net (Decrease) Increase in Net Assets** | $(3,708) | $7,160 | $(10,868) | NM | - Interest income increased by **9.5%** year-over-year due to a **6.3%** increase in the weighted average principal balance of the investment portfolio and a rise in the weighted average yield to **12.3%** from **12.0%**[196](index=196&type=chunk) - A net realized loss of **$26.9 million** was recorded, primarily from the restructuring of the investment in Francis Drilling Fluids, Ltd (FDF), which was the main driver for the overall net decrease in net assets from operations[207](index=207&type=chunk)[209](index=209&type=chunk) [Liquidity and Capital Resources](index=54&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity is primarily derived from operating and financing activities, supported by a significant credit facility and ongoing common stock distributions - Net cash used in operating activities was **$43.4 million**, driven by new investments, while net cash provided by financing activities was **$41.8 million**, mainly from the issuance of long-term debt[213](index=213&type=chunk)[217](index=217&type=chunk) - The company's revolving credit facility has a total commitment of **$190.0 million**, with a revolving period ending January 15, 2021, and **$102.2 million** outstanding as of December 31, 2018[133](index=133&type=chunk)[135](index=135&type=chunk) Contractual Obligations as of December 31, 2018 (in thousands) | Contractual Obligations | Total | | :--- | :--- | | Credit Facility | $102,200 | | Mandatorily Redeemable Preferred Stock | $51,750 | | Notes Payable | $57,500 | | Interest expense on debt obligations | $54,681 | | **Total** | **$266,131** | [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=60&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company identifies interest rate risk as its primary market risk exposure, as its net investment income depends on the spread between its borrowing costs and investment yields Debt Investment Portfolio by Interest Rate Type (as of Dec 31, 2018) | Rate Type | Percentage of Principal | | :--- | :--- | | Variable rates | 91.0% | | Fixed rates | 9.0% | | **Total** | **100.0%** | [Item 4. Controls and Procedures](index=60&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures as of December 31, 2018, and concluded they were effective at a reasonable assurance level - Based on their evaluation, the CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period[254](index=254&type=chunk) - No changes in internal controls occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[255](index=255&type=chunk) [PART II. OTHER INFORMATION](index=61&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=61&type=section&id=Item%201.%20Legal%20Proceedings) The company reports that it is not currently subject to any material legal proceedings, nor is it aware of any pending or threatened material legal proceedings against it or its subsidiaries - As of the filing date, the company is not a party to any material legal proceedings[256](index=256&type=chunk) [Item 1A. Risk Factors](index=61&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended September 30, 2018 - The company refers to the Risk Factors section of its Annual Report on Form 10-K filed on November 14, 2018, for a discussion of risks, indicating no material changes during the quarter[257](index=257&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=62&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This item is not applicable as there were no unregistered sales of equity securities or issuer purchases of equity securities during the period [Item 3. Defaults Upon Senior Securities](index=62&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This item is not applicable as there were no defaults upon senior securities during the period [Item 4. Mine Safety Disclosures](index=62&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable [Item 5. Other Information](index=62&type=section&id=Item%205.%20Other%20Information) This item is not applicable [Item 6. Exhibits](index=63&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, indentures, and certifications by the CEO and CFO