Gladstone Capital (GLAD) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This part presents the company's unaudited financial statements, management's discussion and analysis, market risk disclosures, and internal controls Item 1. Financial Statements (Unaudited) The unaudited financial statements show a significant increase in total net assets to $270.9 million, driven by operational performance and unrealized appreciation on investments Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2021 (in thousands) | September 30, 2020 (in thousands) | | :--- | :--- | :--- | | Total Investments, at fair value | $492,767 | $450,400 | | Total Assets | $504,219 | $459,177 | | Total Liabilities | $233,331 | $225,434 | | Total Net Assets | $270,888 | $233,743 | | Net Asset Value Per Share | $8.11 | $7.40 | Consolidated Operations Highlights (in thousands) | Metric | Three Months Ended Mar 31, 2021 (in thousands) | Three Months Ended Mar 31, 2020 (in thousands) | Six Months Ended Mar 31, 2021 (in thousands) | Six Months Ended Mar 31, 2020 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Total Investment Income | $12,885 | $11,492 | $25,767 | $23,651 | | Net Investment Income | $6,399 | $6,547 | $12,679 | $12,964 | | Net Realized and Unrealized Gain (Loss) | $14,900 | $(34,322) | $20,923 | $(40,041) | | Net Increase (Decrease) in Net Assets | $21,299 | $(27,775) | $33,602 | $(27,077) | - For the six months ended March 31, 2021, net cash used in operating activities was $4.8 million, while net cash provided by financing activities was $7.4 million. This was primarily driven by proceeds from the issuance of long-term debt and common stock, offset by repayments on the line of credit and redemption of other long-term debt[26] Financial Highlights Per Common Share | Metric | Six Months Ended Mar 31, 2021 | Six Months Ended Mar 31, 2020 | | :--- | :--- | :--- | | Net Asset Value at beginning of period | $7.40 | $8.22 | | Net Investment Income per share | $0.39 | $0.42 | | Total from operations per share | $1.03 | $(0.87) | | Total distributions per share | $(0.39) | $(0.42) | | Net Asset Value at end of period | $8.11 | $6.99 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, investment portfolio growth, liquidity, and regulatory compliance, highlighting a turnaround in net assets Overview Gladstone Capital, a BDC, focuses on debt and equity investments in U.S. lower middle market companies, achieving a net portfolio increase and maintaining strong asset coverage - The company's investment objective is to achieve current income through debt securities and long-term capital appreciation from equity securities in lower middle market companies, generally defined as those with annual EBITDA of $3 million to $15 million[174][176] - During the six months ended March 31, 2021, the company invested $101.0 million in five new portfolio companies and received $82.1 million in net proceeds and principal repayments, resulting in a net increase of $17.9 million in the portfolio at cost[182] - As of March 31, 2021, the company's asset coverage on its senior securities representing indebtedness was 215.5%, well above the required minimum of 150%[190] Results of Operations The company experienced increased investment income and a significant turnaround in net assets, driven by unrealized appreciation on investments, contrasting with prior-year losses Comparison of Operations (Three Months Ended March 31) | Metric (in thousands) | 2021 (in thousands) | 2020 (in thousands) | $ Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Total investment income | $12,885 | $11,492 | $1,393 | 12.1% | | Total expenses, net of credits | $6,486 | $4,945 | $1,541 | 31.2% | | Net Investment Income | $6,399 | $6,547 | $(148) | (2.3)% | | Net Realized/Unrealized Gain (Loss) | $14,900 | $(34,322) | $49,222 | (143.4)% | | Net Increase (Decrease) in Net Assets | $21,299 | $(27,775) | $49,074 | (176.7)% | Comparison of Operations (Six Months Ended March 31) | Metric (in thousands) | 2021 (in thousands) | 2020 (in thousands) | $ Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Total investment income | $25,767 | $23,651 | $2,116 | 8.9% | | Total expenses, net of credits | $13,088 | $10,687 | $2,401 | 22.5% | | Net Investment Income | $12,679 | $12,964 | $(285) | (2.2)% | | Net Realized/Unrealized Gain (Loss) | $20,923 | $(40,041) | $60,964 | (152.3)% | | Net Increase (Decrease) in Net Assets | $33,602 | $(27,077) | $60,679 | (224.1)% | - The primary driver of the $16.0 million net unrealized appreciation for the three months ended March 31, 2021, was the improved financial and operational performance and increased comparable multiples for several portfolio companies[207] - In contrast, the net unrealized depreciation of $31.4 million for the three months ended March 31, 2020, was primarily driven by heightened market volatility and wider credit spreads due to the COVID-19 pandemic[209] Liquidity and Capital Resources The company's liquidity is supported by financing activities, including new debt issuance and an increased credit facility, alongside capital raised from common stock offerings - Net cash provided by financing activities for the six months ended March 31, 2021 was $7.4 million, primarily from $150.0 million in proceeds from new long-term debt, offset by $86.8 million in net repayments on the Credit Facility and a $57.5 million redemption of the 2023 Notes[236] - The company increased its revolving credit facility commitment to $205 million in December 2020. As of March 31, 2021, borrowings outstanding were $41.2 million, with availability of $140.5 million[128][131] - During the six months ended March 31, 2021, the company sold 1,829,576 shares of common stock under its at-the-market program, raising approximately $16.2 million in net proceeds[243] - As of March 31, 2021, the company had off-balance sheet success fee receivables of $12.2 million, which are contingent upon events like a change of control in portfolio companies and are not recognized in the financial statements until earned[262] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with a significant portion of its debt investment portfolio consisting of variable-rate instruments - The company's primary market risk exposure is interest rate risk, stemming from the difference between the rate at which it borrows funds and the rate at which it invests[275] - As of March 31, 2021, 86.8% of the company's debt investment portfolio consisted of variable-rate instruments, primarily tied to LIBOR or the prime rate[276] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective, with no material changes to internal control over financial reporting - Based on an evaluation as of March 31, 2021, management concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level[278] - No changes in internal controls occurred during the three months ended March 31, 2021, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[279] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, mine safety, other information, 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 and its subsidiaries are not currently subject to any material legal proceedings[280] 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 - The report refers to the Risk Factors section of the Annual Report on Form 10-K for the fiscal year ended September 30, 2020, indicating no material changes from the previously disclosed risks[281] 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 during the period - No unregistered sales of equity securities or issuer purchases of equity securities were reported for the period[282] Item 3. Defaults Upon Senior Securities This item is not applicable as there were no defaults upon senior securities during the period - No defaults upon senior securities were reported for the period[283] Item 4. Mine Safety Disclosures This item is not applicable - No mine safety disclosures were required[284] Item 5. Other Information This item is not applicable - No other information was reported under this item[285] Item 6. Exhibits This section lists all exhibits filed with the quarterly report, including corporate governance documents and certifications - The report includes several exhibits, such as the Third Amended and Restated Investment Advisory and Management Agreement and Sarbanes-Oxley Act certifications[286]