GLADSTONE CAPITAL CORP

For the period ended Mar 31, 2024. Filed May 1, 2024.

About this filing

A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.

Mar 31, 2024 · Filed May 1, 2024

GLAD$19.52+0.7%Stored close · as of Nov 9, 2026

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Contents

Item 2. Results of Operations

RESULTS OF OPERATIONS

Comparison of the Three Months Ended March 31, 2024 to the Three Months Ended March 31, 2023

	Three Months Ended March 31,
	2024	2023	$ Change	% Change
INVESTMENT INCOME
Interest income	$23,715	$19,578	$4,137	21.1%
Success fee, dividend, and other income	282	983	(701)	(71.3)
Total investment income	23,997	20,561	3,436	16.7
EXPENSES
Base management fee	3,439	2,898	541	18.7
Loan servicing fee	2,260	1,923	337	17.5
Incentive fee	2,669	2,408	261	10.8
Administration fee	469	417	52	12.5
Interest expense	5,732	4,909	823	16.8
Amortization of deferred financing costs	441	381	60	15.7
Other expenses	916	636	280	44.0
Expenses, before credits from Adviser	15,926	13,572	2,354	17.3
Credit to base management fee – loan servicing fee	(2,260)	(1,923)	(337)	17.5
Credits to fees from Adviser – other	(446)	(720)	274	(38.1)
Total expenses, net of credits	13,220	10,929	2,291	21.0
NET INVESTMENT INCOME	10,777	9,632	1,145	11.9
NET REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on investments	219	403	(184)	(45.7)
Net realized gain (loss) on other	1,949	25	1,924	NM
Net unrealized appreciation (depreciation) of investments	10,695	1,765	8,930	NM
Net unrealized depreciation of other	—	161	(161)	NM
Net gain (loss) from investments and other	12,863	2,354	10,509	446.4
PREFERRED STOCK DIVIDENDS	8	—	8	NM
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS	$23,632	$11,986	$11,646	97.2%

NM - Not Meaningful

Investment Income

Interest income increased by 21.1% for the three months ended March 31, 2024, as compared to the prior year period. Generally, the level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period multiplied by the weighted-average yield. The weighted average principal balance of our interest-bearing investment portfolio for the three months ended March 31, 2024 was $680.4 million, compared to $604.0 million for the three months ended March 31, 2023, an increase of $76.4 million, or 12.6%. The weighted average yield on our interest-bearing investments is based on the current stated interest rate on interest-bearing investments, which increased to 14.0% for the three months ended March 31, 2024, compared to 13.1% for the three months ended March 31, 2023, inclusive of any allowances on interest receivables made during those periods. The increase in the weighted average yield was driven mainly by increases in interest rates.

As of March 31, 2024, our loans to Edge Adhesives Holdings, Inc. and WB Xcel Holdings, LLC were on non-accrual status with a debt cost basis of $20.4 million, or 2.8% of the cost basis of all debt investments in our portfolio, and a fair value of $12.9 million, or 1.8% of the fair value of all debt investments in our portfolio. As of September 30, 2023, our loan to Edge Adhesives Holdings, Inc. was on non-accrual status with a debt cost basis of $6.1 million, or 0.9% of the cost basis of all debt investments in our portfolio, and a fair value of $2.9 million, or 0.5% of the fair value of all debt investments in our portfolio.

Other income decreased by 71.3% during the three months ended March 31, 2024, as compared to the prior year period, primarily due to decreases in success fees and dividend income.

As of March 31, 2024 and September 30, 2023, no single investment represented greater than 10% of the total investment portfolio at fair value.

Expenses

Expenses, net of any non-contractual, unconditional and irrevocable credits to fees from the Adviser, increased $2.3 million, or 21.0%, for the three months ended March 31, 2024, as compared to the prior year period. This increase was primarily due to a $0.9 million increase in the net base management fee earned by the Adviser and a $0.8 million increase in interest expense.

Total interest expense on borrowings and notes payable increased by $0.8 million, or 16.8%, during the three months ended March 31, 2024 driven by a shift in the composition of our debt outstanding and changes in interest rates. Interest expense on notes payable increased by $1.1 million period over period with the issuance of our 2028 Notes in August 2023. Interest expense on our Credit Facility decreased by $0.3 million due primarily to a decrease in the weighted average balance outstanding which was $90.3 million during the three months ended March 31, 2024, as compared to $125.8 million in the prior year period, a decrease of 28.2%. The effective interest rate on our Credit Facility, including unused commitment fees incurred, but excluding the impact of deferred financing costs, was 9.9% during the three months ended March 31, 2024, compared to 8.0% during the prior year period. The increase in the effective interest rate was driven primarily by a $0.1 million increase in unused commitment fees during the three months ended March 31, 2024 as compared to the prior year period as well as an increase in interest rates.

The net base management fee earned by the Adviser increased by $0.9 million, or 41.7%, for the three months ended March 31, 2024, as compared to the prior year period, resulting from a decrease in credits to the base management fee from the Adviser for new deal origination fees and an increase in average total assets subject to the base management fee.

The base management, loan servicing and incentive fees, and associated non-contractual, unconditional and irrevocable credits, are computed quarterly, as described under“Transactions with the Adviser” in Note 4—Related Party Transactions of the Notes to Consolidated Financial Statements and are summarized in the following table:

	Three Months EndedMarch 31,
	2024	2023
Average total assets subject to base management fee(A)	$786,057	$662,400
Multiplied by prorated annual base management fee of 1.75%	0.4375%	0.4375%
Base management fee(B)	$3,439	$2,898
Portfolio company fee credit	(325)	(689)
Syndicated loan fee credit	(27)	(31)
Net Base Management Fee	$3,087	$2,178
Loan servicing fee(B)	2,260	1,923
Credit to base management fee - loan servicing fee(B)	(2,260)	(1,923)
Net Loan Servicing Fee	$—	$—
Incentive fee(B)	2,669	2,408
Incentive fee credit	(94)	—
Net Incentive Fee	$2,575	$2,408
Portfolio company fee credit	(325)	(689)
Syndicated loan fee credit	(27)	(31)
Incentive fee credit	(94)	—
Credits to Fees From Adviser - other(B)	$(446)	$(720)

(A)Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods.

(B)Reflected, on a gross basis, as a line item on our Consolidated Statements of Operations.

Net Realized and Unrealized Gain (Loss)

Net Realized Gain (Loss) on Investments

For the three months ended March 31, 2024, we recorded a net realized gain on investments of $0.2 million, which resulted primarily from a $0.2 million realized gain recognized on our investment in Trowbridge. For the three months ended March 31, 2023, we recorded a net realized gain on investments of $0.4 million, which resulted primarily from a $0.5 million realized gain recognized on our investment in Imperative Holdings Corporation, partially offset by a $0.1 million realized loss recognized on the exit of our investment in Chinese Yellow Pages Company.

Net Unrealized Appreciation (Depreciation) of Investments

During the three months ended March 31, 2024, we recorded net unrealized appreciation of investments in the aggregate amount of $10.7 million. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the three months ended March 31, 2024 were as follows:

Portfolio Company	Realized Gain (Loss)	Unrealized Appreciation (Depreciation)	Reversal of Unrealized (Appreciation)Depreciation	Net Gain (Loss)
Lonestar EMS, LLC	$—	$5,729	$—	$5,729
Salt & Straw, LLC	—	2,958	—	2,958
Giving Home Health Care, LLC	—	2,009	—	2,009
MCG Energy Solutions, LLC	—	1,381	—	1,381
Antenna Research Associates, Inc.	—	1,305	—	1,305
Springfield, Inc.	—	666	—	666
Encore Dredging Holdings, LLC	—	520	—	520
Leadpoint Business Services, LLC	—	510	—	510
NeoGraf Solutions, LLC	—	495	—	495
Axios Industrial Group, LLC	—	493	—	493
8th Avenue Food & Provisions, Inc.	—	405	—	405
Trowbridge Chicago, LLC	219	43	111	373
TNCP Intermediate HoldCo, LLC	—	337	—	337
ENET Holdings, LLC	—	(530)	—	(530)
FES Resources Holdings LLC	—	(828)	—	(828)
Eegee's LLC	—	(833)	—	(833)
Edge Adhesives Holdings, Inc.	—	(892)	—	(892)
HH-Inspire Acquisition, Inc.	—	(916)	—	(916)
WB Xcel Holdings, LLC	—	(2,524)	—	(2,524)
Other, net (<$500)	—	99	157	256
Total:	$219	$10,427	$268	$10,914

The primary driver of net unrealized appreciation of $10.7 million for the three months ended March 31, 2024 was the improvement in the financial and operational performance of Lonestar EMS, LLC, partially offset by the decline in the financial and operational performance of WB Xcel Holdings, LLC.

During the three months ended March 31, 2023, we recorded net unrealized appreciation of investments in the aggregate amount of $1.8 million. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the three months ended March 31, 2023 were as follows:

Portfolio Company	Realized Gain (Loss)	Unrealized Appreciation (Depreciation)	Reversal of Unrealized (Appreciation)Depreciation	Net Gain (Loss)
HH-Inspire Acquisition, Inc.	$—	$2,341	$—	$2,341
Antenna Research Associates, Inc.	—	1,211	—	1,211
Salvo Technologies, Inc.	—	1,017	—	1,017
PIC 360, LLC	—	915	—	915
FES Resources Holdings LLC	—	901	—	901
Giving Home Health Care, LLC	—	742	—	742
Defiance Integrated Technologies, Inc.	—	617	—	617
MCG Energy Solutions, LLC	—	563	—	563
Imperative Holdings Corporation	510	(71)	—	439
Encore Dredging Holdings, LLC	—	(314)	—	(314)
Café Zupas	—	(318)	—	(318)
Sokol & Company Holdings, LLC	—	(337)	—	(337)
B+T Group Acquisition Inc.	—	(560)	—	(560)
DKI Ventures, LLC	—	(561)	—	(561)
Engineering Manufacturing Technologies, LLC	—	(1,969)	—	(1,969)
WB Xcel Holdings, LLC	—	(2,022)	—	(2,022)
Other, net (<$500)	(107)	(497)	107	(497)
Total:	$403	$1,658	$107	$2,168

The primary driver of net unrealized appreciation of $1.8 million for the three months ended March 31, 2023 was the improvement in the financial and operational performance of HH-Inspire Acquisition, Inc., partially offset by the decline in the financial and operational performance of certain of our other portfolio companies.

Net Realized Gain on Other

During the three months ended March 31, 2024 and March 31, 2023, we recorded a net realized gain on other of $1.9 million and $25 thousand, respectively. The current period gain resulted primarily from proceeds received associated with the sale of a legacy investment and the prior period gain was associated with escrows received.

Net Unrealized Depreciation of Other

During the three months ended March 31, 2023, we recorded $0.2 million of unrealized depreciation related to a change in the fair value of our Credit Facility. No such amounts were recorded during the three months ended March 31, 2024.

Comparison of the Six Months Ended March 31, 2024 to the Six Months Ended March 31, 2023

	Six Months Ended March 31,
	2024	2023	$ Change	% Change
INVESTMENT INCOME
Interest income	$46,711	$37,945	$8,766	23.1%
Success fee, dividend, and other income	507	1,910	(1,403)	(73.5)
Total investment income	47,218	39,855	7,363	18.5
EXPENSES
Base management fee	6,684	5,727	957	16.7
Loan servicing fee	4,388	3,797	591	15.6
Incentive fee	5,653	4,589	1,064	23.2
Administration fee	923	820	103	12.6
Interest expense	10,764	9,538	1,226	12.9
Amortization of deferred financing costs	870	759	111	14.6
Other expenses	1,641	1,221	420	34.4
Expenses, before credits from Adviser	30,923	26,451	4,472	16.9
Credit to base management fee – loan servicing fee	(4,388)	(3,797)	(591)	15.6
Credits to fees from Adviser – other	(2,028)	(1,156)	(872)	75.4
Total expenses, net of credits	24,507	21,498	3,009	14.0
NET INVESTMENT INCOME	22,711	18,357	4,354	23.7
NET REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on investments	478	9,722	(9,244)	(95.1)
Net realized gain (loss) on other	1,952	278	1,674	NM
Net unrealized appreciation (depreciation) of investments	18,500	(10,834)	29,334	NM
Net unrealized depreciation of other	—	161	(161)	NM
Net gain (loss) from investments and other	20,930	(673)	21,603	NM
PREFERRED STOCK DIVIDENDS	8	—	8	NM
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS	$43,633	$17,684	$25,949	146.7%

NM - Not Meaningful

Investment Income

Interest income increased by 23.1% for the six months ended March 31, 2024, as compared to the prior year period. The weighted average principal balance of our interest-bearing investment portfolio for the six months ended March 31, 2024 was $669.0 million, compared to $596.7 million for the six months ended March 31, 2023, an increase of $72.3 million, or 12.1%. The weighted average yield on our interest-bearing investments is based on the current stated interest rate on interest-bearing investments, which increased to 13.9% for the six months ended March 31, 2024, compared to 12.7% for the six months ended March 31, 2023, inclusive of any allowances on interest receivables made during those periods. The increase in the weighted average yield was driven mainly by increases in interest rates.

Other income decreased by 73.5% during the six months ended March 31, 2024, as compared to the prior year period, primarily due to decreases in dividend income and success fees.

Expenses

Expenses, net of any non-contractual, unconditional and irrevocable credits to fees from the Adviser, increased $3.0 million, or 14.0%, for the six months ended March 31, 2024, as compared to the prior year period. This increase was primarily due to a $1.2 million increase in interest expense and a $1.1 million increase in the incentive fee earned by the Adviser.

Total interest expense on borrowings and notes payable increased by $1.2 million, or 12.9%, during the six months ended March 31, 2024 driven by a shift in the composition of our debt outstanding and changes in interest rates. Interest expense on notes payable increased by $2.2 million period over period with the issuance of our 2028 Notes in August 2023. Interest expense on our Credit Facility decreased by $1.0 million due primarily to a decrease in the weighted average balance outstanding which was $69.3 million during the six months ended March 31, 2024, as compared to $127.4 million in the prior year period, a decrease of 45.6%. The effective interest rate on our Credit Facility, including unused commitment fees incurred, but excluding the impact of deferred financing costs, was 10.9% during the six months ended March 31, 2024, compared to 7.5% during the prior year period. The increase in the effective interest rate was driven primarily by a $0.4 million increase in unused commitment fees during the six months ended March 31, 2024 as compared to the prior year period as well as an increase in interest rates.

The net base management fee earned by the Adviser increased by $0.2 million, or 3.9%, for the six months ended March 31, 2024, as compared to the prior year period, resulting from an increase in average total assets subject to the base management fee, partially offset by an increase in credits to the base management fee from the Adviser period over period.

	Six Months EndedMarch 31,
	2024	2023
Average total assets subject to base management fee(A)	$763,886	$654,514
Multiplied by prorated annual base management fee of 1.75%	0.8750%	0.8750%
Base management fee(B)	$6,684	$5,727
Portfolio company fee credit	(1,876)	(1,093)
Syndicated loan fee credit	(58)	(63)
Net Base Management Fee	$4,750	$4,571
Loan servicing fee(B)	4,388	3,797
Credit to base management fee - loan servicing fee(B)	(4,388)	(3,797)
Net Loan Servicing Fee	$—	$—
Incentive fee(B)	5,653	4,589
Incentive fee credit	(94)	—
Net Incentive Fee	$5,559	$4,589
Portfolio company fee credit	(1,876)	(1,093)
Syndicated loan fee credit	(58)	(63)
Incentive fee credit	(94)	—
Credits to Fees From Adviser - other(B)	$(2,028)	$(1,156)

(B)Reflected, on a gross basis, as a line item on our Consolidated Statements of Operations.

Net Realized and Unrealized Gain (Loss)

Net Realized Gain (Loss) on Investments

For the six months ended March 31, 2024, we recorded a net realized gain on investments of $0.5 million, which resulted from a $0.3 million realized gain recognized on the sale of our investment in PIC 360, LLC and a $0.2 million realized gain recognized on our investment in Trowbridge.

For the six months ended March 31, 2023, we recorded a net realized gain on investments of $9.7 million, which resulted primarily from a $5.9 million realized gain recognized on the sale of our investment in Targus Cayman HoldCo, Ltd. in October 2022 and a $4.4 million realized gain recognized on our investment in Leeds Novamark Capital I, L.P. in November 2022.

Net Unrealized Appreciation (Depreciation) of Investments

During the six months ended March 31, 2024, we recorded net unrealized appreciation of investments in the aggregate amount of $18.5 million. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the six months ended March 31, 2024 were as follows:

Portfolio Company	Realized Gain (Loss)	Unrealized Appreciation (Depreciation)	Reversal of Unrealized (Appreciation)Depreciation	Net Gain (Loss)
Antenna Research Associates, Inc.	$—	$8,074	$—	$8,074
Lonestar EMS, LLC	—	6,860	—	6,860
MCG Energy Solutions, LLC	—	3,486	—	3,486
Salt & Straw, LLC	—	2,934	—	2,934
Engineering Manufacturing Technologies, LLC	—	1,993	—	1,993
Giving Home Health Care, LLC	—	1,473	—	1,473
TNCP Intermediate HoldCo, LLC	—	896	—	896
8th Avenue Food & Provisions, Inc.	—	820	—	820
Café Zupas	—	763	—	763
Viva Railings, L.L.C.	—	704	—	704
Leadpoint Business Services, LLC	—	611	—	611
OCI, LLC	—	590	—	590
Ohio Armor Holdings, LLC	—	555	—	555
SpaceCo Holdings, LLC	—	554	—	554
Encore Dredging Holdings, LLC	—	465	—	465
Canopy Safety Brands, LLC	—	454	—	454
Axios Industrial Group, LLC	—	450	—	450
Fix-It Group, LLC	—	411	—	411
NeoGraf Solutions, LLC	—	(522)	—	(522)
Edge Adhesives Holdings, Inc.	—	(958)	—	(958)
HH-Inspire Acquisition, Inc.	—	(1,609)	—	(1,609)
B+T Group Acquisition Inc.	—	(2,411)	—	(2,411)
WB Xcel Holdings, LLC	—	(3,329)	—	(3,329)
FES Resources Holdings LLC	—	(4,545)	—	(4,545)
Other, net (<$500)	478	(204)	(15)	259
Total:	$478	$18,515	$(15)	$18,978

The primary driver of net unrealized appreciation of $18.5 million for the six months ended March 31, 2024 was the improvement in the financial and operational performance of Antenna Research Associates, Inc. and Lonestar EMS, LLC, partially offset by the decline in the financial and operational performance of FES Resources Holdings LLC and WB Xcel Holdings, LLC.

During the six months ended March 31, 2023, we recorded net unrealized depreciation of investments in the aggregate amount of $10.8 million. The net realized gain (loss) and unrealized appreciation (depreciation) across our investments for the six months ended March 31, 2023 were as follows:

Portfolio Company	Realized Gain (Loss)	Unrealized Appreciation (Depreciation)	Reversal of Unrealized (Appreciation)Depreciation	Net Gain (Loss)
HH-Inspire Acquisition, Inc.	$—	$2,399	$—	$2,399
Encore Dredging Holdings, LLC	—	1,963	—	1,963
PIC 360, LLC	—	1,064	—	1,064
FES Resources Holdings LLC	—	901	—	901
Giving Home Health Care, LLC	—	881	—	881
Imperative Holdings Corporation	510	219	—	729
Antenna Research Associates, Inc.	—	666	—	666
TNCP Intermediate HoldCo, LLC	—	555	—	555
Circuitronics EMS Holdings LLC	(921)	—	921	—
Targus Cayman HoldCo, Ltd.	5,916	—	(5,916)	—
Salvo Technologies, Inc.	—	(462)	—	(462)
Eegee's LLC	—	(500)	—	(500)
Leeds Novamark Capital I, L.P.	4,406	77	(5,018)	(535)
Ohio Armor Holdings, LLC	—	(548)	—	(548)
8th Avenue Food & Provisions, Inc.	—	(666)	—	(666)
DKI Ventures, LLC	—	(708)	—	(708)
WB Xcel Holdings, LLC	—	(1,874)	—	(1,874)
Engineering Manufacturing Technologies, LLC	—	(2,213)	—	(2,213)
B+T Group Acquisition Inc.	—	(2,418)	—	(2,418)
Other, net (<$500)	(189)	(462)	305	(346)
Total:	$9,722	$(1,126)	$(9,708)	$(1,112)

The primary drivers of net unrealized depreciation of $10.8 million for the six months ended March 31, 2023 were the reversal of unrealized depreciation associated with the exit of our investment in Targus Cayman HoldCo, Ltd. and the sale of underlying assets within Leeds Novamark Capital I, L.P. as well as the decrease in comparable transaction multiples used to estimate the fair value of certain of our other portfolio companies, and the decline in the financial and operational performance of certain of our other portfolio companies.

Net Realized Gain (Loss) on Other

During the six months ended March 31, 2024 and March 31, 2023, we recorded a net realized gain on other of $2.0 million and $0.3 million, respectively. The current period gain resulted primarily from proceeds received associated with the sale of a legacy investment and the prior period gain was associated with escrows received.

Net Unrealized Depreciation of Other

During the six months ended March 31, 2023, we recorded $0.2 million of unrealized depreciation related to a change in the fair value of our Credit Facility. No such amounts were recorded during the six months ended March 31, 2024.

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