Gladstone Capital (US:GLAD)2022-07-26 16:00PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents Gladstone Capital Corporation's unaudited consolidated financial statements as of June 30, 2022, including statements of assets and liabilities, operations, changes in net assets, cash flows, and a detailed schedule of investments Consolidated Statements of Assets and Liabilities Total assets increased to $597.2 million, liabilities to $284.3 million, resulting in a slight decrease in net assets to $312.9 million and NAV per share of $9.12 Consolidated Statements of Assets and Liabilities (in thousands) | Metric | June 30, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Total Investments, at fair value | $586,462 | $557,612 | | Total Assets | $597,244 | $566,500 | | Total Liabilities | $284,323 | $248,061 | | Total Net Assets | $312,921 | $318,439 | | Net Asset Value Per Common Share | $9.12 | $9.28 | Consolidated Statements of Operations Net Investment Income increased to $6.9 million for the three months and $24.8 million for nine months, but net realized and unrealized losses led to a $5.6 million net decrease in net assets for the quarter Key Operational Data (in thousands) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Nine Months Ended June 30, 2022 | Nine Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total Investment Income | $13,784 | $13,666 | $47,211 | $39,433 | | Total Expenses, net of credits | $6,837 | $7,062 | $22,409 | $20,150 | | Net Investment Income | $6,947 | $6,604 | $24,802 | $19,283 | | Net Realized and Unrealized Gain (Loss) | ($12,546) | $11,350 | ($9,995) | $32,273 | | Net Increase (Decrease) in Net Assets | ($5,599) | $17,954 | $14,807 | $51,556 | | Net Investment Income per Share | $0.20 | $0.20 | $0.72 | $0.59 | Consolidated Statements of Changes in Net Assets Net assets decreased by $5.5 million to $312.9 million for the nine months, primarily due to $20.3 million in distributions outweighing the $14.8 million net increase from operations Changes in Net Assets for the Nine Months Ended June 30, 2022 (in thousands) | Description | Amount | | :--- | :--- | | Net Assets, September 30, 2021 | $318,439 | | Net Increase in Net Assets from Operations | $14,807 | | Distributions to Common Stockholders | ($20,325) | | Net Assets, June 30, 2022 | $312,921 | Consolidated Statements of Cash Flows Net cash used in operating activities was $18.6 million for the nine months, offset by $18.7 million provided by financing activities, resulting in a $97 thousand net increase in cash Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Nine Months Ended June 30, 2022 | Nine Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | ($18,603) | $7,367 | | Net cash provided by (used in) financing activities | $18,700 | ($8,371) | | Net increase (decrease) in cash | $97 | ($1,004) | Consolidated Schedules of Investments Total investments at fair value increased to $586.5 million across 49 companies, with 73.9% in secured first lien debt and top concentrations in Diversified/Conglomerate Service, Healthcare, and Manufacturing Investment Portfolio Composition by Security Type | Security Type | Fair Value (June 30, 2022, in thousands) | % of Total | Fair Value (Sept 30, 2021, in thousands) | % of Total | | :--- | :--- | :--- | :--- | :--- | | Secured first lien debt | $433,106 | 73.9% | $337,394 | 60.5% | | Secured second lien debt | $83,846 | 14.3% | $135,956 | 24.4% | | Preferred equity | $25,315 | 4.3% | $29,246 | 5.2% | | Common equity/equivalents | $44,136 | 7.5% | $55,006 | 9.9% | | Other | $59 | 0.0% | $10 | 0.0% | | Total Investments | $586,462 | 100.0% | $557,612 | 100.0% | Top 5 Industry Concentrations by Fair Value (June 30, 2022) | Industry Classification | Fair Value (in thousands) | % of Total Investments | | :--- | :--- | :--- | | Diversified/Conglomerate Service | $147,715 | 25.2% | | Healthcare, Education, and Childcare | $98,750 | 16.8% | | Diversified/Conglomerate Manufacturing | $94,896 | 16.2% | | Aerospace and Defense | $77,382 | 13.2% | | Beverage, Food, and Tobacco | $46,267 | 7.9% | Notes to Consolidated Financial Statements This section details accounting policies, investment valuation (primarily Level 3), fee structures, credit facility terms, notes payable, and shareholder distributions - The company is an externally managed, closed-end, non-diversified management investment company that has elected to be treated as a Business Development Company (BDC) and a Regulated Investment Company (RIC)43 - The Board of Directors is ultimately responsible for determining the fair value of investments, which are primarily classified as Level 3 and valued using techniques like Total Enterprise Value (TEV) and Yield Analysis505570 - The company is externally managed by Gladstone Management Corporation (the "Adviser"), which earns a base management fee and an incentive fee; administrative services are provided by Gladstone Administration, LLC45 - As of June 30, 2022, the company had a $175.0 million revolving credit facility with $80.0 million outstanding, and $200.0 million in aggregate principal of notes payable (3.75% Notes due 2027 and 5.125% Notes due 2026)115126128 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, investment activities, and operational results, highlighting investment strategy, regulatory compliance, and liquidity Overview Gladstone Capital invests in U.S. lower middle market companies, growing its portfolio by $44.1 million at cost, while maintaining a 209.1% asset coverage ratio above regulatory minimums - The company's investment strategy targets lower middle market companies with annual EBITDA between $3 million and $15 million154 - For the nine months ended June 30, 2022, the company invested $155.6 million in 10 new portfolio companies and $33.2 million in existing ones, resulting in a net portfolio increase of $44.1 million at cost160 - The asset coverage ratio for senior securities was 209.1% as of June 30, 2022, exceeding the required 150% minimum169 Results of Operations Net Investment Income increased for both three and nine-month periods, but significant net realized and unrealized losses led to a net decrease in net assets for the quarter Comparison of Results of Operations (Three Months Ended June 30) | Metric (in thousands) | 2022 | 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Investment Income | $13,784 | $13,666 | $118 | 0.9% | | Total Expenses, net | $6,837 | $7,062 | ($225) | (3.2)% | | Net Investment Income | $6,947 | $6,604 | $343 | 5.2% | | Net Realized/Unrealized Gain (Loss) | ($12,546) | $11,350 | ($23,896) | (210.5)% | | Net Increase (Decrease) in Net Assets | ($5,599) | $17,954 | ($23,553) | (131.2)% | Comparison of Results of Operations (Nine Months Ended June 30) | Metric (in thousands) | 2022 | 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Investment Income | $47,211 | $39,433 | $7,778 | 19.7% | | Total Expenses, net | $22,409 | $20,150 | $2,259 | 11.2% | | Net Investment Income | $24,802 | $19,283 | $5,519 | 28.6% | | Net Realized/Unrealized Gain (Loss) | ($9,995) | $32,273 | ($42,268) | (131.0)% | | Net Increase in Net Assets | $14,807 | $51,556 | ($36,749) | (71.3)% | - The net realized loss of $8.5 million for the three months ended June 30, 2022, was primarily due to the restructuring of the investment in LWO Acquisitions Company LLC182 Liquidity and Capital Resources Liquidity is primarily from operations and financing, with $18.6 million net cash used in operations and $18.7 million provided by financing, including new debt issuance and redemptions - Net cash used in operating activities was $18.6 million for the nine months ended June 30, 2022, a reversal from $7.4 million provided in the prior year, mainly due to higher investment purchases203 - In November 2021, the company issued $50.0 million of 3.75% Notes due 2027 and redeemed all $38.8 million of its 5.375% Notes due 2024207222225 Contractual Obligations as of June 30, 2022 (in thousands) | Contractual Obligations | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Credit Facility | $0 | $0 | $80,000 | $0 | $80,000 | | Notes Payable | $0 | $0 | $200,000 | $0 | $200,000 | | Interest expense on debt | $14,006 | $28,011 | $9,403 | $0 | $51,420 | | Total | $14,006 | $28,011 | $289,403 | $0 | $331,420 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations, with 93.1% of debt investments at variable rates, impacting net income by $4.0 million for a 100 basis point increase - The company's primary market risk exposure is to interest rate fluctuations, with 93.1% of its debt investments being variable-rate as of June 30, 2022243244 Interest Rate Sensitivity Analysis (Annualized) | Basis Point Change | Net Increase (Decrease) in Net Assets (in thousands) | | :--- | :--- | | Up 200 basis points | $8,202 | | Up 100 basis points | $4,048 | | Down 100 basis points | ($2,323) | Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - Management concluded that disclosure controls and procedures were effective as of the end of the period covered by the report247 - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls248 PART II. OTHER INFORMATION Item 1. 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 filing date, the company is not a party to any material legal proceedings249 Item 1A. Risk Factors For a comprehensive discussion of risk factors, refer to the company's Annual Report on Form 10-K for the fiscal year ended September 30, 2021 - For a discussion of risk factors, the company refers to its Annual Report on Form 10-K for the fiscal year ended September 30, 2021250 Other Items (Items 2, 3, 4, 5, 6) Items 2, 3, 4, and 5 of Part II are reported as not applicable, while Item 6 lists exhibits filed with the Form 10-Q - Items 2, 3, 4, and 5 of Part II are not applicable for this reporting period251253254255