Gladstone Capital (GLAD) - 2022 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) For the quarter ended December 31, 2021, Gladstone Capital reported total assets of $587.4 million and total net assets of $323.9 million, an increase from the previous quarter, with net investment income significantly increasing to $9.2 million, or $0.27 per share, from $6.3 million, or $0.20 per share, in the prior year's quarter, resulting in a net increase in net assets from operations of $12.1 million driven by strong net investment income and net realized gains on investments Consolidated Statements of Assets and Liabilities | (In thousands, except per share data) | December 31, 2021 | September 30, 2021 | | :--- | :--- | :--- | | Total Investments, at fair value | $576,595 | $557,612 | | Total Assets | $587,368 | $566,500 | | Total Liabilities | $263,515 | $248,061 | | Total Net Assets | $323,853 | $318,439 | | Net Asset Value Per Common Share | $9.44 | $9.28 | Consolidated Statements of Operations (Three Months Ended) | (In thousands, except per share data) | December 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total investment income | $16,167 | $12,882 | | Total expenses, net of credits | $7,007 | $6,602 | | Net Investment Income | $9,160 | $6,280 | | Net realized and unrealized gain (loss) | $2,943 | $6,023 | | Net Increase in Net Assets from Operations | $12,103 | $12,303 | | Net investment income per share | $0.27 | $0.20 | | Net increase in net assets per share | $0.35 | $0.38 | Consolidated Statements of Cash Flows (Three Months Ended) | (In thousands) | December 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(5,790) | $12,199 | | Net cash provided by (used in) financing activities | $6,391 | $(13,114) | | Net increase (decrease) in cash | $601 | $(915) | - The investment portfolio is primarily composed of secured debt, with secured first lien debt representing 68.7% of the portfolio's fair value as of December 31, 2021[79] - The company's investment portfolio is diversified across 14 industries, with the largest concentration in Diversified/Conglomerate Service at 24.6% of fair value as of December 31, 2021[80] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 25.5% increase in total investment income for the quarter to higher interest income and a significant rise in success fee and dividend income, leading to a 45.9% year-over-year growth in net investment income, while the company maintained a strong liquidity position by issuing $50.0 million in 3.75% Notes due 2027 and redeeming $38.8 million of higher-cost 5.375% Notes due 2024, resulting in a net portfolio increase of $29.2 million at cost with a focus on lower middle-market companies, and confirming compliance with all debt covenants, including a 224.3% asset coverage ratio on senior securities Overview - Gladstone Capital operates as a BDC and a RIC, focusing on debt and equity investments in U.S. lower middle-market companies, generally defined as those with annual EBITDA of $3 million to $15 million[139][142] - The company's investment strategy targets a portfolio composition of approximately 90.0% debt and 10.0% equity investments at cost, with the portfolio consisting of 91.4% debt and 8.6% equity at cost as of December 31, 2021[141] - During the quarter ended December 31, 2021, the company invested $106.9 million in six new portfolio companies and exited five, resulting in a net portfolio increase of $29.2 million at cost[148] - As of December 31, 2021, the company's asset coverage ratio on senior securities was 224.3%, well above the required minimum of 150%[156] Results of Operations Comparison of Quarterly Results of Operations | (In thousands) | Three Months Ended Dec 31, 2021 | Three Months Ended Dec 31, 2020 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total investment income | $16,167 | $12,882 | $3,285 | 25.5% | | Total expenses, net of credits | $7,007 | $6,602 | $405 | 6.1% | | Net Investment Income | $9,160 | $6,280 | $2,880 | 45.9% | | Net gain (loss) from investments | $2,943 | $6,023 | $(3,080) | (51.1)% | | Net Increase in Net Assets | $12,103 | $12,303 | $(200) | (1.6)% | - Interest income increased by 6.5% year-over-year, driven by an 11.5% increase in the weighted average principal balance of the investment portfolio, partially offset by a decrease in the weighted average yield from 10.8% to 10.3%[162][163] - Other income surged by 312.6% compared to the prior year period, primarily due to increased success fees and dividend income[164] - Net realized gain on investments was $13.9 million, primarily from a $13.4 million gain on the sale of the investment in Lignetics, Inc[171] - Net unrealized depreciation of investments was $10.2 million, mainly due to the reversal of previously recorded unrealized appreciation upon the exit of the Lignetics, Inc. investment, which offset appreciation in other portfolio companies[174] Liquidity and Capital Resources - Net cash used in operating activities was $5.8 million, a shift from $12.2 million provided by operating activities in the prior year, primarily due to a significant increase in investment purchases ($110.8 million vs. $29.1 million)[180] - Financing activities provided $6.4 million in cash, driven by the issuance of $50.0 million of 3.75% Notes due 2027, which was partially used to redeem $38.8 million of 5.375% Notes due 2024[185][200][202] - The company's Credit Facility was amended in May 2021, extending the revolving period to October 2023 and the maturity to October 2025, with $53.9 million outstanding and $100.9 million available as of December 31, 2021[101][102][194] - The company paid monthly distributions of $0.065 per common share, totaling $6.7 million for the quarter, and has paid 227 consecutive distributions from inception through December 31, 2021[187] Contractual Obligations as of December 31, 2021 | (In thousands) | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Credit Facility | $0 | $0 | $53,900 | $0 | $53,900 | | Notes Payable | $0 | $0 | $150,000 | $50,000 | $200,000 | | Interest expense on debt | $12,465 | $24,930 | $14,497 | $625 | $52,517 | | Total | $12,465 | $24,930 | $218,397 | $50,625 | $306,417 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, as its net investment income depends on the spread between its borrowing rates and investment yields, with a significant portion of the investment portfolio exposed to interest rate fluctuations - The company's primary market risk exposure is to interest rate fluctuations, which affects the spread between the income generated from its investments and the cost of its borrowings[219] - As of December 31, 2021, 88.5% of the company's debt investment portfolio consisted of variable-rate loans, while 11.5% were fixed-rate[220] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures as of December 31, 2021, and concluded they were effective at a reasonable assurance level, with no material changes to internal control over financial reporting identified during the quarter - Management concluded that as of December 31, 2021, the company's disclosure controls and procedures were effective at a reasonable assurance level[221] - There were no changes in internal controls during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[222] PART II. OTHER INFORMATION Legal Proceedings The company is not currently subject to any material legal proceedings, nor is it aware of any pending or threatened material legal proceedings - As of the report date, the company is not a party to any material legal proceedings[224] 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, 2021 - The company refers to the Risk Factors section of its Annual Report on Form 10-K for the fiscal year ended September 30, 2021, indicating no material changes[225] 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 - The company reports no unregistered sales of equity securities or use of proceeds for the period[226] Defaults Upon Senior Securities This item is not applicable as there were no defaults upon senior securities during the period - The company reports no defaults upon senior securities[228] Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO as required by the Sarbanes-Oxley Act - The report includes a list of exhibits filed, such as corporate governance documents, indentures, and certifications from the CEO and CFO[231][233]