Gladstone Capital Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS

INVESTMENTS

9 Months Ended

Jun. 30, 2023

Investments, Debt and Equity Securities [Abstract]

Fair Value

In accordance with ASC 820, the fair value of each investment is determined to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between willing market participants on the measurement date. This fair value definition focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. ASC 820 also establishes the following three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of a financial instrument as of the measurement date.

•Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical financial instruments in active markets;

•Level 2 — inputs to the valuation methodology include quoted prices for similar financial instruments in active or inactive markets, and inputs that are observable for the financial instrument, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are in those markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers; and

•Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are those inputs that reflect assumptions that market participants would use when pricing the financial instrument and can include the Valuation Team’s assumptions based upon the best available information.

When a determination is made to classify our investments within Level 3 of the valuation hierarchy, such determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable, or Level 3, inputs, observable inputs (or components that are actively quoted and can be validated to external sources). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. Investments in funds measured using NAV as a practical expedient are not categorized within the fair value hierarchy.

As of June 30, 2023, all of our investments were valued using Level 3 inputs within the ASC 820 fair value hierarchy, except for our investment in Funko Acquisition Holdings, LLC (“Funko”), which was valued using Level 2 inputs, and our investment in Leeds Novamark Capital I, L.P. (“Leeds”), which was valued using NAV as a practical expedient. As of September 30, 2022, all of our investments were valued using Level 3 inputs within the ASC 820 fair value hierarchy, except for our investment in Funko, which was valued using Level 2 inputs, and our investment in Leeds, which was valued using NAV as a practical expedient.

We transfer investments in and out of Level 1, 2, and 3 of the valuation hierarchy as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. During the nine months ended June 30, 2023 and 2022, there were no investments transferred into or out of Levels 1, 2 or 3 of the valuation hierarchy.

As of June 30, 2023 and September 30, 2022, our investments, by security type, at fair value were categorized as follows within the ASC 820 fair value hierarchy:


				Fair Value Measurements
	Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
As of June 30, 2023:
Secured first lien debt	$	533,237		$	—	$	—		$	533,237
Secured second lien debt	120,036			—		—			120,036
Unsecured debt	32			—		—			32
Preferred equity	27,991			—		—			27,991
Common equity/equivalents	33,835		(A)	—		31		(B)	33,804
Total Investments as of June 30, 2023	$	715,131		$	—	$	31		$	715,100


				Fair Value Measurements
	Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
As of September 30, 2022:
Secured first lien debt	$	463,858		$	—	$	—		$	463,858
Secured second lien debt	115,928			—		—			115,928
Unsecured debt	55			—		—			55
Preferred equity	27,046			—		—			27,046
Common equity/equivalents	36,331		(A)	—		58		(B)	36,273
Total Investments as of September 30, 2022	$	643,218		$	—	$	58		$	643,160

(A)Excludes our investment in Leeds with fair values of $0.2 million and $6.4 million as of June 30, 2023 and September 30, 2022, respectively. Leeds was valued using NAV as a practical expedient.

(B)Fair value was determined based on the closing market price of shares of Funko, Inc. (our units in Funko can be converted into common shares of Funko, Inc.) at the reporting date less a discount for lack of marketability as our investment was subject to certain restrictions.

The following table presents our portfolio investments, valued using Level 3 inputs within the ASC 820 fair value hierarchy and carried at fair value as of June 30, 2023 and September 30, 2022, by caption on our accompanying Consolidated Statements of Assets and Liabilities and by security type:


	Total Recurring Fair Value Measurements Reported in
	Consolidated Statements of Assets and Liabilities Using Significant Unobservable Inputs (Level 3)
	June 30, 2023			September 30, 2022
Non-Control/Non-Affiliate Investments
Secured first lien debt	$	481,679		$	413,631
Secured second lien debt	112,611			108,263
Unsecured debt	32			55
Preferred equity	21,726			17,719
Common equity/equivalents	26,575		(A)	28,688		(B)
Total Non-Control/Non-Affiliate Investments	$	642,623		$	568,356
Affiliate Investments
Secured first lien debt	$	35,493		$	34,804
Preferred equity	5,124			3,640
Common equity/equivalents	1,406			647
Total Affiliate Investments	$	42,023		$	39,091
Control Investments
Secured first lien debt	$	16,065		$	15,423
Secured second lien debt	7,425			7,665
Preferred equity	1,141			5,687
Common equity/equivalents	5,823			6,938
Total Control Investments	$	30,454		$	35,713
Total Investments at Fair Value Using Level 3 Inputs	$	715,100		$	643,160

(A)Excludes our investments in Leeds and Funko with fair values of $0.2 million and $31 thousand, respectively, as of June 30, 2023. Leeds was valued using NAV as a practical expedient, and Funko was valued using Level 2 inputs.

(B)Excludes our investments in Leeds and Funko with fair values of $6.4 million and $58 thousand, respectively, as of September 30, 2022. Leeds was valued using NAV as a practical expedient, and Funko was valued using Level 2 inputs.

In accordance with ASC 820, the following table provides quantitative information about our Level 3 fair value measurements of our investments as of June 30, 2023 and September 30, 2022. The table below is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements.

The weighted average calculations in the table below are based on the principal balances for all debt related calculations and on the cost basis for all equity related calculations for the particular input.

Quantitative Information about Level 3 Fair Value Measurements

Range / Weighted Average as of

June 30,
2023

September 30,
2022

Valuation

Techniques/

Methodologies

Unobservable

Input

June 30,
2023

September 30,
2022

Secured first lien debt

492,379

423,912

Yield Analysis

Discount Rate

11.7% - 37.0%

/ 14.3%

8.0% - 29.5%

/ 11.8%

40,858

39,946

TEV

EBITDA multiple

4.7x – 5.9x

/ 5.8x

4.8x – 6.7x

/ 6.2x

EBITDA

$960 - $14,121

/ $13,605

$800 - $10,257

/ $7,605

Revenue multiple

0.3x – 0.8x

/ 0.6x

0.3x – 0.6x

/ 0.5x

Revenue

$15,375 - $16,322

/ $15,922

$11,514 - $16,320

/ $14,656

Secured second lien debt

102,328

97,472

Yield Analysis

Discount Rate

11.7% - 15.5%

/ 14.2%

11.5% - 15.4%

/ 13.8%

10,283

10,791

Market Quote

IBP

66.0% - 99.3%

/ 82.4%

82.0% - 95.0%

/ 86.5%

7,425

7,665

TEV

EBITDA multiple

5.5x – 5.5x

/ 5.5x

5.6x – 5.6x

/ 5.6x

EBITDA

$3,441 - $3,441

/ $3,441

$3,299 - $3,299

/ $3,299

Unsecured debt

TEV

Revenue multiple

1.3x – 1.3x

/ 1.3x

0.3x – 1.3x

/ 1.0x

Revenue

$5,270 - $5,270

/ $5,270

$764 - $11,514

/ $4,249

Preferred and common equity / equivalents(A)

61,795

63,319

TEV

EBITDA multiple

4.3x – 12.9x

/ 6.7x

4.1x – 11.0x

/ 6.5x

EBITDA

$960 -$108,146

/ $10,410

$800 -$74,512

/ $11,742

Revenue multiple

0.3x – 3.0x

/ 1.2x

0.3x– 4.4x

/ 1.4x

Revenue

$3,447 -$16,322

/ $14,798

$764 -$42,926

/ $19,963

Total Level 3 Investments, at Fair Value

715,100

643,160

(A)Fair value as of June 30, 2023 excludes our investments in Leeds and Funko with fair values of $0.2 million and $31 thousand, respectively. Fair value as of September 30, 2022 excludes our investments in Leeds and Funko with fair values of $6.4 million and $58 thousand, respectively. Leeds was valued using NAV as a practical expedient and Funko was valued using Level 2 inputs as of both June 30, 2023 and September 30, 2022.

Fair value measurements can be sensitive to changes in one or more of the valuation inputs. Changes in discount rates, EBITDA or EBITDA multiples (or revenue or revenue multiples), each in isolation, may change the fair value of certain of our investments. Generally, an increase/(decrease) in market yields or, discount rates, or a (decrease)/increase in EBITDA or EBITDA multiples (or revenue or revenue multiples) may result in a (decrease)/increase, respectively, in the fair value of certain of our investments.

Changes in Level 3 Fair Value Measurements of Investments

The following tables provide the changes in fair value, broken out by security type, during the three and nine months ended June 30, 2023 and 2022 for all investments for which we determine fair value using unobservable (Level 3) inputs.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)


Three months ended June 30, 2023	Secured First Lien Debt		Secured Second Lien Debt		Unsecured Debt		Preferred Equity		Common Equity/ Equivalents		Total
Fair Value as of March 31, 2023	$	498,947	$	117,438	$	36	$	28,298	$	31,444	$	676,163
Total gains (losses):
Net realized gain (loss)(A)	—		—		—		(789)		3,700		2,911
Net unrealized appreciation (depreciation)(B)	(2,195)		601		(4)		(1,718)		4,622		1,306
Reversal of prior period net depreciation (appreciation) on realization(B)	(200)		—		—		526		(4,262)		(3,936)
New investments, repayments and settlements: (C)
Issuances/originations	65,707		2,061		—		1,674		2,000		71,442
Settlements/repayments	(29,022)		(64)		—		—		—		(29,086)
Net proceeds from sales	—		—		—		—		(3,700)		(3,700)
Transfers	—		—		—		—		—		—
Fair Value as of June 30, 2023	$	533,237	$	120,036	$	32	$	27,991	$	33,804	$	715,100

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)


Nine months ended June 30, 2023	Secured First Lien Debt		Secured Second Lien Debt		Unsecured Debt		Preferred Equity		Common Equity/ Equivalents		Total
Fair Value as of September 30, 2022	$	463,858	$	115,928	$	55	$	27,046	$	36,273	$	643,160
Total gains (losses):
Net realized gain (loss)(A)	(107)		—		(95)		(279)		8,695		8,214
Net unrealized appreciation (depreciation)(B)	(4,685)		376		(23)		(693)		5,239		214
Reversal of prior period net depreciation (appreciation) on realization(B)	10		—		95		526		(9,257)		(8,626)
New investments, repayments and settlements: (C)
Issuances/originations	135,567		6,303		—		2,045		4,532		148,447
Settlements/repayments	(61,406)		(2,571)		—		—		—		(63,977)
Net proceeds from sales	—		—		—		(654)		(11,678)		(12,332)
Transfers	—		—		—		—		—		—
Fair Value as of June 30, 2023	$	533,237	$	120,036	$	32	$	27,991	$	33,804	$	715,100

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)


Three months ended June 30, 2022	Secured First Lien Debt		Secured Second Lien Debt		Unsecured Debt		Preferred Equity		Common Equity/ Equivalents		Total
Fair Value as of March 31, 2022	$	377,902	$	85,498	$	64	$	27,935	$	41,264	$	532,663
Total gains (losses):
Net realized gain (loss)(A)	(8,471)		—		(25)		—		—		(8,496)
Net unrealized appreciation (depreciation)(B)	(3,182)		(1,006)		(5)		(5,482)		(9,440)		(19,115)
Reversal of prior period net depreciation (appreciation) on realization(B)	14,199		—		25		(28)		—		14,196
New investments, repayments and settlements: (C)
Issuances/originations	64,578		167		—		3,140		—		67,885
Settlements/repayments	(6,509)		(813)		—		(250)		—		(7,572)
Net proceeds from sales	1,339		—		—		—		—		1,339
Transfers	(6,750)		—		—		—		6,750		—
Fair Value as of June 30, 2022	$	433,106	$	83,846	$	59	$	25,315	$	38,574	$	580,900

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)


Nine months ended June 30, 2022	Secured First Lien Debt		Secured Second Lien Debt		Unsecured Debt		Preferred Equity		Common Equity/ Equivalents		Total
Fair Value as of September 30, 2021	$	337,394	$	135,956	$	10	$	29,246	$	48,441	$	551,047
Total gains (losses):
Net realized gain (loss)(A)	(8,471)		—		(25)		—		13,876		5,380
Net unrealized appreciation (depreciation)(B)	1,230		(627)		24		(4,691)		(9,148)		(13,212)
Reversal of prior period net depreciation (appreciation) on realization(B)	13,819		(1,601)		25		(4,309)		(9,113)		(1,179)
New investments, repayments and settlements: (C)
Issuances/originations	151,401		30,503		25		6,640		3,500		192,069
Settlements/repayments	(56,856)		(80,385)		—		(250)		—		(137,491)
Net proceeds from sales	1,339		—		—		(1,321)		(15,732)		(15,714)
Transfers	(6,750)		—		—		—		6,750		—
Fair Value as of June 30, 2022	$	433,106	$	83,846	$	59	$	25,315	$	38,574	$	580,900

(A)Included in net realized gain (loss) on investments on our accompanying Consolidated Statements of Operations for the corresponding period.

(B)Included in net unrealized appreciation (depreciation) on investments on our accompanying Consolidated Statements of Operations for the corresponding period.

(C)Includes increases in the cost basis of investments resulting from new portfolio investments, accretion of discounts, PIK, and other non-cash disbursements to portfolio companies, as well as decreases in the cost basis of investments resulting from principal repayments or sales, the amortization of premiums and acquisition costs and other cost-basis adjustments.

Investment Activity

Proprietary Investments

As of June 30, 2023 and September 30, 2022, we held 47 and 46 proprietary investments, respectively, with an aggregate fair value of $704.9 million and $630.8 million, or 98.5% and 97.1% of the total investment portfolio at fair value,

respectively. The following significant proprietary investment transactions occurred during the nine months ended June 30, 2023:

•In October and November 2022, we received distributions totaling $6.0 million from our investment in Leeds related primarily to the sale of underlying assets in the fund, which resulted in a realized gain of approximately $4.4 million. We retain an equity investment in Leeds with no remaining cost basis and fair value of $0.2 million as of June 30, 2023.

•In December 2022, our investment in R2i Holdings, LLC paid off at par for net cash proceeds of $19.2 million.

•In January 2023, we invested $29.0 million in NeoGraf Solutions LLC (“NeoGraf”) through secured first lien debt and common equity. We also extended NeoGraf a $4.5 million line of credit commitment, which was unfunded at close.

•In January and March 2023, we invested a total of $6.3 million in Salt & Straw, LLC, an existing portfolio company, through funding on our existing delayed draw term loan commitment.

•In March 2023, we invested $13.5 million in Leadpoint Business Services, LLC through secured first lien debt. We also extended Leadpoint Business Services, LLC a $5.5 million line of credit commitment which was fully funded as of March 31, 2023. In May 2023, the line of credit was paid off at par for net cash proceeds of $5.5 million and terminated.

•In April 2023, we invested $25.0 million in Technical Resource Management, LLC (“Technical”) through secured first lien debt and equity. We also extended Technical a $3.0 million line of credit commitment and a $2.5 million delayed draw term loan commitment, each of which were unfunded at close.

•In April 2023, our debt investment in HH-Inspire Acquisition, Inc. (“Inspire”) was refinanced. Our original debt investment totaling $35.5 million was redeemed at par plus a $0.2 million prepayment fee, and we invested a total of $16.8 million in Inspire through new secured first lien debt and equity, which was net funded through the redemption of our original debt investment. We also extended Inspire a $1.8 million line of credit commitment, which was unfunded at close. In June 2023, we invested an additional $3.4 million in Inspire through secured first lien debt and equity.

•In May 2023, we invested $22.0 million in OCI, LLC through secured first lien debt, secured second lien debt, and common equity.

•In June 2023, the majority of our investment in PIC 360, LLC was sold resulting in a net realized gain of $3.7 million. We continue to retain a small investment in PIC 360 with a fair value of approximately $0.3 million.

•In June 2023, we invested $6.5 million in Trowbridge Chicago, LLC (“Trowbridge”) through secured first lien debt and preferred equity. We also extended Trowbridge a $2.0 million line of credit commitment and a $5.3 million delayed draw term loan commitment, each of which were unfunded at close.

Syndicated Investments

As of June 30, 2023 and September 30, 2022, we held five and six syndicated investments with an aggregate fair value of $10.4 million and $18.8 million, or 1.5% and 2.9% of the total investment portfolio at fair value, respectively. The following significant syndicated investment transaction occurred during the nine months ended June 30, 2023:

•In October 2022, our investment in Targus Cayman HoldCo Ltd. was sold for net proceeds of approximately $8.0 million, which resulted in a realized gain of approximately $5.9 million. As part of the proceeds, we received an interest in B. Riley Financial, Inc. 6.75% senior notes in the amount of $2.4 million which are traded on the Nasdaq Global Select Market under the trading symbol RILYO. In June 2023, we redeemed our investment in B. Riley Financial, Inc. 6.75% senior notes at par for proceeds of $2.4 million.

Investment Concentrations

As of June 30, 2023, our investment portfolio consisted of investments in 52 portfolio companies located in 24 states in 12 different industries, with an aggregate fair value of $715.3 million. The five largest investments at fair value as of June 30, 2023 totaled $172.0 million, or 24.0% of our total investment portfolio, as compared to the five largest investments at fair value as of September 30, 2022 totaling $174.5 million, or 26.9% of our total investment portfolio. As of June 30, 2023 and September 30, 2022, our average investment by obligor was $14.1 million and $12.6 million at cost, respectively.

The following table outlines our investments by security type as of June 30, 2023 and September 30, 2022:


	June 30, 2023								September 30, 2022
	Cost				Fair Value				Cost				Fair Value
Secured first lien debt	$	549,860	74.8	%	$	533,237	74.5	%	$	475,806	72.5	%	$	463,858	71.4	%
Secured second lien debt	122,681		16.7		120,036		16.8		118,949		18.2		115,928		17.8
Unsecured debt	198		0.0		32		0.0		293		0.0		55		0.0
Total debt investments	672,739		91.5		653,305		91.3		595,048		90.7		579,841		89.2
Preferred equity	35,617		4.8		27,991		3.9		34,505		5.3		27,046		4.2
Common equity/equivalents	26,826		3.7		34,028		4.8		26,500		4.0		42,728		6.6
Total equity investments	62,443		8.5		62,019		8.7		61,005		9.3		69,774		10.8
Total Investments	$	735,182	100.0	%	$	715,324	100.0	%	$	656,053	100.0	%	$	649,615	100.0	%

Our investments at fair value consisted of the following industry classifications as of June 30, 2023 and September 30, 2022:


	June 30, 2023				September 30, 2022
Industry Classification	Fair Value		Percentage of Total Investments		Fair Value		Percentage of Total Investments
Diversified/Conglomerate Service	$	164,261	23.0	%	$	148,907	22.9	%
Diversified/Conglomerate Manufacturing	160,904		22.5		114,105		17.6
Healthcare, Education, and Childcare	145,011		20.3		136,401		21.0
Aerospace and Defense	87,932		12.3		88,649		13.6
Beverage, Food, and Tobacco	74,641		10.4		64,283		9.9
Oil and Gas	26,887		3.8		25,373		3.9
Automobile	22,191		3.1		20,144		3.1
Personal and Non-Durable Consumer Products	14,742		2.1		18,583		2.9
Machinery	6,676		0.9		9,562		1.5
Telecommunications	5,976		0.8		10,088		1.6
Textiles and Leather	—		—		7,978		1.2
Other, < 2.0%	6,103		0.8		5,542		0.8
Total Investments	$	715,324	100.0	%	$	649,615	100.0	%

Our investments at fair value were included in the following U.S. geographic regions as of June 30, 2023 and September 30, 2022:


	June 30, 2023				September 30, 2022
Location	Fair Value		Percentage of Total Investments		Fair Value		Percentage of Total Investments
South	$	290,432	40.6	%	$	326,524	50.3	%
West	220,602		30.8		169,415		26.1
Midwest	146,324		20.5		118,191		18.2
Northeast	57,966		8.1		35,485		5.4
Total Investments	$	715,324	100.0	%	$	649,615	100.0	%

The geographic composition indicates the location of the headquarters for our portfolio companies. A portfolio company may have additional locations in other geographic regions.

Investment Principal Repayments

The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as of June 30, 2023:


		Amount
For the remaining three months ending September 30:	2023(A)	$	4,806
For the fiscal years ending September 30:	2024	28,818
	2025	86,790
	2026	160,943
	2027	241,385
	Thereafter	151,330
	Total contractual repayments	$	674,072
	Adjustments to cost basis of debt investments	(1,333)
	Investments in equity securities	62,443
	Investments held as of June 30, 2023 at cost:	$	735,182

(A)Includes debt investments with contractual principal amounts totaling $0.2 million for which the maturity date has passed as of June 30, 2023.

Receivables from Portfolio Companies

Receivables from portfolio companies represent non-recurring costs incurred on behalf of such portfolio companies and are included in other assets on our accompanying Consolidated Statements of Assets and Liabilities. We generally maintain an allowance for uncollectible receivables from portfolio companies when the receivable balance becomes 90 days or more past due or if it is determined, based upon management’s judgment, that the portfolio company is unable to pay its obligations. We write off accounts receivable when we have exhausted collection efforts and have deemed the receivables uncollectible. As of June 30, 2023 and September 30, 2022, we had gross receivables from portfolio companies of $0.9 million and $0.5 million, respectively. The allowance for uncollectible receivables was $0 as of each of June 30, 2023 and September 30, 2022.