Gladstone Capital (US:GLAD)2023-05-01 16:00PART I. FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements and management's discussion and analysis for Gladstone Capital Corporation Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements, including balance sheets, income statements, cash flows, and investment schedules, for the periods ended March 31, 2023 Consolidated Statements of Assets and Liabilities Total assets increased to $699.8 million as of March 31, 2023, driving total net assets to $341.8 million and NAV per share to $9.19 Consolidated Balance Sheet Summary (in thousands, except per share data) | Metric | March 31, 2023 | September 30, 2022 | | :--- | :--- | :--- | | Total Assets | $699,770 | $660,968 | | Total Investments, at fair value | $678,759 | $649,615 | | Cash and cash equivalents | $8,923 | $2,011 | | Total Liabilities | $357,959 | $345,481 | | Line of credit at fair value | $152,439 | $141,800 | | Notes payable, net | $197,814 | $197,607 | | Total Net Assets | $341,811 | $315,487 | | NAV per Common Share | $9.19 | $9.08 | Consolidated Statements of Operations Total investment income for the three months ended March 31, 2023, increased to $20.6 million, resulting in $9.6 million net investment income and $0.33 EPS Three Months Ended March 31, (in thousands, except per share data) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Total Investment Income | $20,561 | $17,260 | | Total Expenses, net of credits | $10,929 | $8,565 | | Net Investment Income | $9,632 | $8,695 | | Net Realized and Unrealized Gain (Loss) | $2,354 | $(392) | | Net Increase in Net Assets from Operations | $11,986 | $8,303 | | EPS from Operations (Basic and Diluted) | $0.33 | $0.24 | Six Months Ended March 31, (in thousands, except per share data) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Total Investment Income | $39,855 | $33,427 | | Total Expenses, net of credits | $21,498 | $15,572 | | Net Investment Income | $18,357 | $17,855 | | Net Realized and Unrealized Gain (Loss) | $(673) | $2,551 | | Net Increase in Net Assets from Operations | $17,684 | $20,406 | | EPS from Operations (Basic and Diluted) | $0.49 | $0.59 | Consolidated Statements of Changes in Net Assets Net assets increased by $26.3 million to $341.8 million for the six months ended March 31, 2023, driven by operations and common stock issuance Changes in Net Assets for the Six Months Ended March 31, 2023 (in thousands) | Description | Amount | | :--- | :--- | | Net Assets, September 30, 2022 | $315,487 | | Net Increase from Operations | $17,684 | | Distributions to Common Stockholders | $(15,655) | | Net Issuance of Common Stock | $24,316 | | Net Assets, March 31, 2023 | $341,811 | Consolidated Statements of Cash Flows Net cash used in operating activities was $12.3 million for the six months ended March 31, 2023, while financing activities provided $19.3 million Cash Flow Summary for the Six Months Ended March 31, (in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net Cash Provided by (Used in) Operating Activities | $(12,316) | $37,664 | | Net Cash Provided by (Used in) Financing Activities | $19,258 | $(36,866) | | Net Increase in Cash | $6,942 | $798 | | Cash, End of Period | $9,049 | $1,644 | Consolidated Schedules of Investments The total investment portfolio's fair value reached $678.8 million as of March 31, 2023, primarily comprising 91.1% debt investments, with 73.5% in secured first lien debt Total Investments by Type as of March 31, 2023 | Security Type | Fair Value (in thousands) | % of Total Fair Value | | :--- | :--- | :--- | | Secured first lien debt | $498,947 | 73.5% | | Secured second lien debt | $117,438 | 17.3% | | Unsecured debt | $2,372 | 0.3% | | Total debt investments | $618,757 | 91.1% | | Preferred equity | $28,298 | 4.2% | | Common equity/equivalents | $31,704 | 4.7% | | Total equity investments | $60,002 | 8.9% | | Total Investments | $678,759 | 100.0% | - The investment portfolio comprises $601.4 million in Non-Control/Non-Affiliate, $42.1 million in Affiliate, and $35.2 million in Control investments at fair value24 Notes to Consolidated Financial Statements Detailed notes explain accounting policies, investment valuation, related-party transactions, credit facilities, and unfunded commitments, clarifying the company's financial statements - The company operates as an externally managed BDC and RIC, investing in U.S. lower middle market companies with annual EBITDA between $3 million and $15 million52 - One loan to Edge Adhesives Holdings, Inc. was on non-accrual status as of March 31, 2023, with a cost basis of $6.1 million and fair value of $2.8 million71 - The company pays its Adviser a base management fee of 1.75% of average total assets and a two-part incentive fee, with total fees before credits reaching $14.1 million for the six months ended March 31, 2023106109115 - As of March 31, 2023, the company had a $245 million revolving credit facility with $152.6 million outstanding, and $200 million in aggregate principal of notes payable125138140 - Unfunded commitments to portfolio companies, including lines of credit and delayed draw term loans, totaled $58.2 million as of March 31, 2023157 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, operating results, investment strategy, liquidity, and capital resources, highlighting portfolio activity and the impact of rising interest rates Overview The company's strategy focuses on U.S. lower middle-market investments, maintaining a 195.5% asset coverage ratio and transitioning variable-rate investments to SOFR - Investment strategy targets U.S. lower middle market companies with annual EBITDA of $3 million to $15 million, with typical investments between $8 million and $30 million167168 - For the six months ended March 31, 2023, the company invested $75.1 million (including $48.0 million in new companies and $27.1 million in existing ones) and received $48.9 million in net proceeds and repayments175 - The company's asset coverage ratio on senior securities was 195.5% as of March 31, 2023, exceeding the 150% regulatory requirement182 Results of Operations Net investment income increased 10.8% to $9.6 million for the three months ended March 31, 2023, driven by higher interest income, while the six-month net increase in net assets from operations decreased to $17.7 million Comparison of Three Months Ended March 31, (in thousands) | Metric | 2023 | 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total investment income | $20,561 | $17,260 | $3,301 | 19.1% | | Total expenses, net of credits | $10,929 | $8,565 | $2,364 | 27.6% | | Net Investment Income | $9,632 | $8,695 | $937 | 10.8% | | Net gain (loss) from investments | $2,354 | $(392) | $2,746 | (700.5)% | Comparison of Six Months Ended March 31, (in thousands) | Metric | 2023 | 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total investment income | $39,855 | $33,427 | $6,428 | 19.2% | | Total expenses, net of credits | $21,498 | $15,572 | $5,926 | 38.1% | | Net Investment Income | $18,357 | $17,855 | $502 | 2.8% | | Net gain (loss) from investments | $(673) | $2,551 | $(3,224) | (126.4)% | - Interest income increased due to a larger average portfolio balance of $604.0 million (vs $514.4 million) and a higher weighted average yield of 13.1% (vs 10.2%) for the quarter189 - A net realized gain of $9.7 million for the six months ended March 31, 2023, primarily resulted from the sale of Targus Cayman HoldCo, Ltd. ($5.9 million gain) and distributions from Leeds Novamark Capital I, L.P. ($4.4 million gain)212 Liquidity and Capital Resources Liquidity is sourced from operations, a $245 million credit facility, and equity/debt offerings, with $12.3 million net cash used in operations and $19.3 million provided by financing activities for the six months ended March 31, 2023 - Net cash used in operating activities was $12.3 million for the six months ended March 31, 2023, a shift from $37.7 million provided in the prior year, primarily due to lower investment repayments220 - Financing activities provided $19.3 million in cash, driven by $24.7 million from common stock issuance and $10.8 million in net borrowings, partially offset by $15.7 million in distributions223 Contractual Obligations as of March 31, 2023 (in thousands) | Contractual Obligations | Less than 1 Year | 1-3 Years | 3-5 Years | Total | | :--- | :--- | :--- | :--- | :--- | | Credit Facility | $0 | $152,600 | $0 | $152,600 | | Notes Payable | $0 | $0 | $200,000 | $200,000 | | Interest expense on debt | $22,131 | $37,745 | $2,031 | $61,907 | | Total | $22,131 | $190,345 | $202,031 | $414,507 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with 91.5% of its debt investment portfolio in variable-rate loans, making income sensitive to benchmark rate changes - The primary market risk exposure is interest rate risk, impacting the spread between borrowing costs and investment yields259 - As of March 31, 2023, 91.5% of the debt investment portfolio at principal comprised variable-rate instruments, with 8.5% being fixed-rate260 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting - Management concluded that disclosure controls and procedures were effective as of March 31, 2023261 - No material changes in internal control over financial reporting occurred during the three months ended March 31, 2023263 PART II. OTHER INFORMATION This section provides additional information including legal proceedings, risk factors, equity sales, and a list of exhibits Item 1. Legal Proceedings The company is not currently subject to any material legal proceedings, nor is it aware of any pending or threatened actions - The company reports no material legal proceedings as of the filing date265 Item 1A. Risk Factors 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, 2022, have occurred - The company refers to its Form 10-K for the fiscal year ended September 30, 2022, for a discussion of risk factors, indicating no material changes266 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable as no unregistered sales or issuer purchases of equity securities occurred during the period - No unregistered sales of equity securities or issuer purchases of equity securities were reported for the period267268 Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including credit agreement amendments and CEO/CFO certifications