Gladstone Capital (GLAD) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements for Gladstone Capital Corporation, covering assets, operations, cash flows, and investments for the periods ended June 30, 2023 Consolidated Statements of Assets and Liabilities Total assets and liabilities increased as of June 30, 2023, leading to a rise in total net assets and Net Asset Value per common share Consolidated Statements of Assets and Liabilities (in thousands, except per share data) | | June 30, 2023 | September 30, 2022 | | :--- | :--- | :--- | | Total Investments, at fair value | $715,324 | $649,615 | | Total Assets | $730,062 | $660,968 | | Total Liabilities | $372,116 | $345,481 | | Total Net Assets | $357,946 | $315,487 | | Net Asset Value Per Common Share | $9.27 | $9.08 | Consolidated Statements of Operations For the nine months ended June 30, 2023, the company reported increased total investment income and net investment income, leading to a significant rise in net assets from operations Key Operational Results (in thousands) | | Nine Months Ended June 30, 2023 | Nine Months Ended June 30, 2022 | | :--- | :--- | :--- | | Total Investment Income | $62,678 | $47,211 | | Total Expenses, net of credits | $32,645 | $22,409 | | Net Investment Income | $30,033 | $24,802 | | Net Realized and Unrealized Gain (Loss) | $(465) | $(9,995) | | Net Increase in Net Assets | $29,568 | $14,807 | Per Share Results | | Nine Months Ended June 30, 2023 | Nine Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net Investment Income Per Share | $0.82 | $0.72 | | Net Increase in Net Assets Per Share | $0.81 | $0.43 | Consolidated Statements of Changes in Net Assets Net assets increased for the nine months ended June 30, 2023, driven by operational gains and common stock issuance, partially offset by stockholder distributions Changes in Net Assets for the Nine Months Ended June 30, 2023 (in thousands) | Description | Amount | | :--- | :--- | | Net Assets, September 30, 2022 | $315,487 | | Net Increase from Operations | $29,568 | | Distributions to Common Stockholders | $(24,737) | | Issuance of Common Stock, net | $37,728 | | Net Assets, June 30, 2023 | $357,946 | Consolidated Statements of Cash Flows Net cash used in operating activities was largely offset by cash provided by financing activities for the nine months ended June 30, 2023 Cash Flow Summary for the Nine Months Ended June 30 (in thousands) | | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $(33,730) | $(18,603) | | Net cash provided by (used in) financing activities | $33,409 | $18,700 | | Net Increase (Decrease) in Cash | $(321) | $97 | | Cash, End of Period | $1,786 | $943 | Consolidated Schedules of Investments As of June 30, 2023, the investment portfolio comprised 52 companies, primarily in secured first lien debt, with significant concentrations in diversified service and manufacturing sectors Investment Portfolio Composition by Type (June 30, 2023) | Investment Type | Fair Value (in thousands) | % of Total Investments | | :--- | :--- | :--- | | Secured first lien debt | $533,237 | 74.5% | | Secured second lien debt | $120,036 | 16.8% | | Unsecured debt | $32 | 0.0% | | Preferred equity | $27,991 | 3.9% | | Common equity/equivalents | $34,028 | 4.8% | | Total Investments | $715,324 | 100.0% | - The investment portfolio consisted of 52 companies across 12 industries, with the five largest investments comprising 24.0% of the total portfolio fair value[97] - The majority of investments (98.5% of fair value) are proprietary, with the remaining 1.5% being syndicated investments[95][96] Notes to Consolidated Financial Statements This section details the company's accounting policies, investment valuation, related party transactions, borrowings, distributions, and unfunded commitments - The company is an externally managed BDC and has elected to be treated as a RIC for tax purposes, aiming for current income and long-term capital appreciation by investing in debt and equity of U.S. lower middle market companies[50] - As of June 30, 2023, all investments were valued using Level 3 inputs, except for one investment valued using Level 2 inputs (Funko) and one using NAV as a practical expedient (Leeds)[79] - The company has a revolving credit facility with a commitment of $223.7 million, maturing in October 2027, and has outstanding notes payable totaling $200.0 million (2026 Notes and 2027 Notes)[124][135][137] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and operating results, highlighting investment income, expenses, portfolio activity, and liquidity Overview The company operates as a BDC and RIC, targeting debt and equity investments in lower middle market companies, maintaining strong asset coverage - The company's investment objectives are to generate current income and long-term capital appreciation by investing in debt and equity of lower middle market companies[167] - The target portfolio composition is approximately 90.0% debt and 10.0% equity, at cost, with the actual portfolio at June 30, 2023, being 91.5% debt and 8.5% equity, at cost[167] - The company's asset coverage on senior securities was 195.8% as of June 30, 2023, exceeding the required 150% minimum[183] Results of Operations Net investment income increased significantly for the nine months ended June 30, 2023, driven by higher interest income and realized gains on investments Comparison of Results of Operations (Nine Months Ended June 30) | | 2023 (in thousands) | 2022 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Total Investment Income | $62,678 | $47,211 | 32.8% | | Total Expenses, net of credits | $32,645 | $22,409 | 45.7% | | Net Investment Income | $30,033 | $24,802 | 21.1% | | Net Realized Gain on Investments | $12,633 | $5,384 | 134.6% | | Net Unrealized Depreciation | $(13,420) | $(15,259) | (12.1)% | - The increase in interest income was driven by a 21.3% increase in the average principal balance of the investment portfolio and a rise in the weighted average yield to 13.0% from 10.2% due to higher market interest rates[208] - Net realized gains for the nine months ended June 30, 2023, were primarily driven by gains on the exits of Targus Cayman HoldCo, Ltd. ($5.9 million), Leeds Novamark Capital I, L.P. ($4.4 million), and PIC 360, LLC ($3.7 million)[216] Liquidity and Capital Resources The company's liquidity is supported by operating cash flows, credit facility borrowings, and capital market activities, with significant unfunded commitments - During the nine months ended June 30, 2023, the company sold 3,865,890 shares of common stock under its at-the-market program, raising net proceeds of approximately $37.6 million[234] - The revolving credit facility was amended in June 2023, extending the revolving period to October 2025 and the maturity date to October 2027, with a total commitment of $223.7 million[239] Contractual Obligations as of June 30, 2023 (in thousands) | Contractual Obligations | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Credit Facility | $0 | $163,800 | $0 | $0 | $163,800 | | Notes Payable | $0 | $150,000 | $50,000 | $0 | $200,000 | | Interest expense on debt | $23,539 | $34,557 | $1,563 | $0 | $59,659 | | Total | $23,539 | $348,357 | $51,563 | $0 | $423,459 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, given its reliance on variable-rate debt investments and borrowing costs - The primary market risk exposure is interest rate risk, as the company's net investment income is dependent on the difference between its borrowing rates and investment yields[266] Debt Investment Portfolio by Interest Rate Type (as of June 30, 2023) | Rate Type | Percentage of Principal | | :--- | :--- | | Variable rates | 91.6% | | Fixed rates | 8.4% | | Total | 100.0% | Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting - Management concluded that as of June 30, 2023, the company's disclosure controls and procedures were effective at a reasonable assurance level[268] - No changes in internal controls occurred during the three months ended June 30, 2023, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[269] PART II. OTHER INFORMATION Legal Proceedings The company is not currently subject to any material legal proceedings and does not anticipate future material impacts - As of the report date, the company is not subject to any material legal proceedings, nor is it aware of any pending or threatened material legal proceedings[270] Risk Factors The company's business is subject to various risks, with no new material changes reported since the last annual filing - 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, 2022[271] Unregistered Sales of Equity Securities and Use of Proceeds This section is reported as not applicable, indicating no unregistered equity sales or related use of proceeds - The company reported no unregistered sales of equity securities during the period[272] Defaults Upon Senior Securities This section is reported as not applicable, indicating no defaults on senior securities during the period - The company reported no defaults upon its senior securities[274] Other Information No officers or directors adopted or terminated Rule 10b5-1 trading plans during the third quarter of fiscal year 2023 - No officers or directors adopted or terminated a Rule 10b5-1 trading arrangement during the three months ended June 30, 2023[276] Exhibits This section lists exhibits filed with the Form 10-Q, including credit agreement amendments and SOX certifications - Key exhibits filed include Amendment No. 4 to the Credit Agreement, Articles Supplementary for the Series A Preferred Stock, and CEO/CFO certifications under Sarbanes-Oxley Sections 302 and 906[278][282]