Gladstone Capital (US:GLAD)2019-02-06 21:02PART I. FINANCIAL INFORMATION Item 1. Financial Statements (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 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 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 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 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 | $4,731 | Consolidated Schedules of Investments As of December 31, 2018, the investment portfolio's fair value was primarily composed of debt investments across 54 companies, with a significant concentration in secured first lien debt and diversified services Investment Portfolio Composition by Security Type (December 31, 2018) | Security Type | Fair Value ($ 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, 2018111 - 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 value111114 Notes to Consolidated Financial Statements 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 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 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 million177 - In November 2018, the company completed a public debt offering of $57.5 million in 6.125% Notes due 2023188 - 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 covenant191 Results of Operations 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 - 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 operations207209 Liquidity and Capital Resources 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 debt213217 - 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, 2018133135 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 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 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 period254 - No changes in internal controls occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting255 PART II. OTHER INFORMATION Item 1. Legal Proceedings 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 proceedings256 Item 1A. Risk Factors 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 quarter257 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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 This item is not applicable as there were no defaults upon senior securities during the period Item 4. Mine Safety Disclosures This item is not applicable Item 5. Other Information This item is not applicable Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, indentures, and certifications by the CEO and CFO