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, 2024

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, 2024, all of our investments were valued using Level 3 inputs within the ASC 820 fair value hierarchy, except for our investment in Leeds Novamark Capital I, L.P. (“Leeds”), which was valued using NAV as a practical expedient. As of September 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, 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, 2024 and 2023, there were no investments transferred into or out of Levels 1, 2 or 3 of the valuation hierarchy.

As of June 30, 2024 and September 30, 2023, 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, 2024:
Secured first lien debt	$	542,283		$	—	$	—	$	542,283
Secured second lien debt	117,875			—		—		117,875
Unsecured debt	33			—		—		33
Preferred equity	32,965			—		—		32,965
Common equity/equivalents	64,379		(A)	—		—		64,379
Total Investments as of June 30, 2024	$	757,535		$	—	$	—	$	757,535


				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, 2023:
Secured first lien debt	$	510,701		$	—	$	—		$	510,701
Secured second lien debt	127,854			—		—			127,854
Unsecured debt	24			—		—			24
Preferred equity	26,855			—		—			26,855
Common equity/equivalents	39,150		(A)	—		22		(B)	39,128
Total Investments as of September 30, 2023	$	704,584		$	—	$	22		$	704,562

(A)Excludes our investment in Leeds with a fair value of $0.2 million and $0.2 million as of June 30, 2024 and September 30, 2023, 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, 2024 and September 30, 2023, 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, 2024			September 30, 2023
Non-Control/Non-Affiliate Investments
Secured first lien debt	$	527,215		$	491,686
Secured second lien debt	110,610			120,429
Unsecured debt	33			24
Preferred equity	26,931			21,733
Common equity/equivalents	45,262		(A)	29,419		(B)
Total Non-Control/Non-Affiliate Investments	$	710,051		$	663,291
Affiliate Investments
Secured first lien debt	$	975		$	2,895
Preferred equity	6,034			5,122
Common equity/equivalents	2,883			2,404
Total Affiliate Investments	$	9,892		$	10,421
Control Investments
Secured first lien debt	$	14,093		$	16,120
Secured second lien debt	7,265			7,425
Common equity/equivalents	16,234			7,305
Total Control Investments	$	37,592		$	30,850
Total Investments at Fair Value Using Level 3 Inputs	$	757,535		$	704,562

(A)Excludes our investment in Leeds with fair value of $0.2 million as of June 30, 2024. Leeds was valued using NAV as a practical expedient.

(B)Excludes our investments in Leeds and Funko with fair values of $0.2 million and $22 thousand, respectively, as of September 30, 2023. 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, 2024 and September 30, 2023. 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,
2024

September 30,
2023

Valuation

Techniques/

Methodologies

Unobservable

Input

June 30,
2024

September 30,
2023

Secured first lien debt

450,678

461,638

Yield Analysis

Discount Rate

11.1% - 18.2%

/ 13.2%

11.8% - 29.9%

/ 14.8%

91,605

49,063

TEV

EBITDA multiple

4.0x – 9.5x

/ 7.4x

4.7x – 6.8x

/ 6.7x

EBITDA

$215 - $16,609

/ $9,505

$995 - $14,002

/ $13,624

Revenue multiple

0.4x – 4.5x

/ 2.2x

0.3x – 0.8x

/ 0.6x

Revenue

$6,741 - $30,240

/ $16,292

$14,934 - $16,283

/ $15,361

Secured second lien debt

102,315

110,820

Yield Analysis

Discount Rate

13.0% - 15.4%

/ 14.3%

12.5% - 15.6%

/ 14.5%

8,295

9,609

Market Quote

IBP

89.5% - 100.0%

/ 95.5%

67.8% - 94.0%

/ 82.2%

7,265

7,425

TEV

EBITDA multiple

5.2x – 5.2x

/ 5.2x

5.6x – 5.6x

/ 5.6x

EBITDA

$3,811 - $3,811

/ $3,811

$3,690 - $3,690

/ $3,690

Unsecured debt

TEV

Revenue multiple

1.0x – 1.0x

/ 1.0x

1.0x – 1.0x

/ 1.0x

Revenue

$7,551 - $7,551

/ $7,551

$5,044 - $5,044

/ $5,044

Preferred and common equity / equivalents(A)

97,344

65,983

TEV

EBITDA multiple

4.0x – 13.0x

/ 7.2x

4.7x – 13.0x

/ 6.9x

EBITDA

$215 -$144,874

/ $10,157

$995 -$112,841

/ $10,570

Revenue multiple

0.6x – 4.5x

/ 2.7x

0.3x– 3.0x

/ 1.2x

Revenue

$5,394 -$30,240

/ $16,489

$4,213 -$16,283

/ $14,959

Total Level 3 Investments, at Fair Value

757,535

704,562

(A)Fair value as of June 30, 2024 excludes our investment in Leeds with fair value of $0.2 million. Fair value as of September 30, 2023 excludes our investments in Leeds and Funko with fair values of $0.2 million and $22 thousand, respectively. Leeds was valued using NAV as a practical expedient as of both June 30, 2024 and September 30, 2023. Funko was valued using Level 2 inputs as of September 30, 2023.

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, 2024 and 2023 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, 2024	Secured First Lien Debt		Secured Second Lien Debt		Unsecured Debt		Preferred Equity		Common Equity/ Equivalents		Total
Fair Value as of March 31, 2024	$	563,849	$	140,409	$	33	$	32,598	$	54,435	$	791,324
Total gains (losses):
Net realized gain (loss)(A)	(50)		—		—		—		1,465		1,415
Net unrealized appreciation (depreciation)(B)	(6,748)		727		—		367		9,213		3,559
Reversal of prior period net depreciation (appreciation) on realization(B)	(33)		(58)		—		—		—		(91)
New investments, repayments and settlements: (C)
Issuances/originations	26,964		20,132		—		—		750		47,846
Settlements/repayments	(41,749)		(43,335)		—		—		—		(85,084)
Net proceeds from sales	50		—		—		—		(1,484)		(1,434)
Transfers	—		—		—		—		—		—
Fair Value as of June 30, 2024	$	542,283	$	117,875	$	33	$	32,965	$	64,379	$	757,535

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)


Nine months ended June 30, 2024	Secured First Lien Debt		Secured Second Lien Debt		Unsecured Debt		Preferred Equity		Common Equity/ Equivalents		Total
Fair Value as of September 30, 2023	$	510,701	$	127,854	$	24	$	26,855	$	39,128	$	704,562
Total gains (losses):
Net realized gain (loss)(A)	(50)		—		—		219		1,724		1,893
Net unrealized appreciation (depreciation)(B)	(1,750)		2,270		9		(3,270)		24,804		22,063
Reversal of prior period net depreciation (appreciation) on realization(B)	(52)		99		—		130		(283)		(106)
New investments, repayments and settlements: (C)
Issuances/originations	106,939		35,494		—		10,000		750		153,183
Settlements/repayments	(73,555)		(47,842)		—		—		—		(121,397)
Net proceeds from sales	50		—		—		(969)		(1,744)		(2,663)
Transfers	—		—		—		—		—		—
Fair Value as of June 30, 2024	$	542,283	$	117,875	$	33	$	32,965	$	64,379	$	757,535

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

(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, 2024 and September 30, 2023, we held 48 and 47 proprietary investments, respectively, with an aggregate fair value of $749.3 million and $695.1 million, or 98.9% and 98.6% of the total investment portfolio at fair value,

respectively. The following significant proprietary investment transactions occurred during the nine months ended June 30, 2024:

•In November 2023, we invested $11.0 million in Quality Environmental Midco, Inc. (“Quality”) through secured first lien debt and preferred equity. We also extended Quality a $2.0 million secured first lien line of credit commitment, which was unfunded at close. In February 2024, we invested an additional $5.0 million in Quality through new secured first lien debt and preferred equity and increased the secured first lien line of credit commitment to $3.0 million.

•In November 2023, we extended Cafe Zupas, an existing portfolio company, a new $10.5 million secured first lien delayed draw term loan commitment, which was unfunded at close. We funded $1.4 million on the delayed draw term loan in December 2023. In addition, our existing term loan was paid down by $7.3 million.

•In November 2023, our remaining investment in PIC 360, LLC was sold resulting in a net realized gain of $0.3 million.

•In December 2023, we invested an additional $14.3 million in ALS Education, LLC, an existing portfolio company, through secured first lien debt.

•In December 2023, we invested an additional $12.0 million in Leadpoint Business Services, LLC, an existing portfolio company, through secured first lien debt.

•In December 2023, we invested an additional $7.0 million in Salt & Straw, LLC, an existing portfolio company, through preferred equity. We also increased our delayed draw term loan commitment to Salt & Straw, LLC by $2.9 million.

•In February and March 2024, we invested a total of an additional $13.5 million in SpaceCo Holdings, LLC (“SpaceCo”), an existing portfolio company, through secured first lien debt.

•In February 2024, we invested $15.0 million in Perimeter Solutions Group through secured second lien debt.

•In March 2024, we received net cash proceeds of $8.4 million from the sale of Trowbridge Chicago, LLC (“Trowbridge”), an existing portfolio company. In conjunction with the sale, we received $0.2 million in prepayment fees and recorded a net realized gain of $0.2 million on our equity. We retain a secured first lien debt investment of $0.3 million in Trowbridge.

•In April 2024, we invested $7.3 million in Total Access Elevator, LLC (“Total Access”) through secured first lien debt and common equity. We also extended Total Access a $3.0 million line of credit commitment and a $2.5 million delayed draw term loan commitment, both of which were unfunded at close.

•In April 2024, our debt investment in Giving Home Healthcare, LLC (“Giving Home”) paid off at par for net cash proceeds of $29.7 million including a $0.9 million prepayment penalty. We also exercised our warrant position for common equity in Giving Home, which we continue to hold, and received a $2.5 million distribution associated with this investment.

•In May 2024, our debt investment in Gray Matter Systems, LLC paid off at par for net cash proceeds of $14.0 million including a $0.2 million prepayment penalty.

•In May 2024, our debt investment in Pansophic Learning, Ltd. (“Pansophic”) paid off at par for net cash proceeds of $33.0 million.

•In May 2024, we invested $20.0 million in RPM Freight Systems, LLC (“RPM”) through secured second lien debt. We also extended RPM a $5.0 million delayed draw term loan commitment, which was unfunded at close.

•In May 2024, our remaining shares in Funko were sold representing an exit of our investment and a return of our equity cost basis of $21 thousand and a realized gain of $2 thousand.

•In June 2024, we invested an additional $7.4 million in Workforce QA, LLC, an existing portfolio company, through secured first lien debt.

Syndicated Investments

As of June 30, 2024 and September 30, 2023, we held three and four syndicated investments, respectively, with an aggregate fair value of $8.4 million and $9.7 million, or 1.1% and 1.4% of the total investment portfolio at fair value, respectively. The following significant syndicated investment transaction occurred during the nine months ended June 30, 2024:

•In January 2024, our investment in CHA Holdings, Inc. paid off at par for net proceeds of $3.0 million.

Investment Concentrations

As of June 30, 2024, our investment portfolio consisted of investments in 51 portfolio companies located in 23 states in 13 different industries, with an aggregate fair value of $757.7 million. The five largest investments at fair value as of June 30, 2024 totaled $207.1 million, or 27.3% of our total investment portfolio, as compared to the five largest investments at fair value as of September 30, 2023 totaling $176.9 million, or 25.1% of our total investment portfolio. As of June 30, 2024 and September 30, 2023, our average investment by obligor was $14.8 million and $14.2 million at cost, respectively.

The following table outlines our investments by security type as of June 30, 2024 and September 30, 2023:


	June 30, 2024								September 30, 2023
	Cost				Fair Value				Cost				Fair Value
Secured first lien debt	$	562,760	74.7	%	$	542,283	71.6	%	$	529,376	73.3	%	$	510,701	72.5	%
Secured second lien debt	117,904		15.7		117,875		15.5		130,252		18.1		127,854		18.1
Unsecured debt	198		0.0		33		0.0		198		0.0		24		0.0
Total debt investments	680,862		90.4		660,191		87.1		659,826		91.4		638,579		90.6
Preferred equity	44,867		6.0		32,965		4.4		35,617		4.9		26,855		3.8
Common equity/equivalents	27,534		3.6		64,589		8.5		26,826		3.7		39,381		5.6
Total equity investments	72,401		9.6		97,554		12.9		62,443		8.6		66,236		9.4
Total Investments	$	753,263	100.0	%	$	757,745	100.0	%	$	722,269	100.0	%	$	704,815	100.0	%

Our investments at fair value consisted of the following industry classifications as of June 30, 2024 and September 30, 2023:


	June 30, 2024				September 30, 2023
Industry Classification	Fair Value		Percentage of Total Investments		Fair Value		Percentage of Total Investments
Diversified/Conglomerate Service	$	180,136	23.8	%	$	135,060	19.2	%
Diversified/Conglomerate Manufacturing	164,251		21.7		158,061		22.4
Aerospace and Defense	128,782		17.0		97,836		13.9
Healthcare, Education, and Childcare	93,853		12.4		146,438		20.8
Beverage, Food, and Tobacco	90,843		12.0		78,788		11.2
Automobile	28,040		3.7		27,571		3.9
Oil and Gas	21,600		2.9		27,830		3.9
Cargo Transportation	20,000		2.6		—		0.0
Personal and Non-Durable Consumer Products	13,617		1.8		14,576		2.1
Machinery	6,389		0.8		6,411		0.9
Other, < 2.0%	10,234		1.3		12,244		1.7
Total Investments	$	757,745	100.0	%	$	704,815	100.0	%

Our investments at fair value were included in the following U.S. geographic regions as of June 30, 2024 and September 30, 2023:


	June 30, 2024				September 30, 2023
Location	Fair Value		Percentage of Total Investments		Fair Value		Percentage of Total Investments
South	$	289,191	38.2	%	$	273,181	38.8	%
West	248,443		32.8		224,235		31.8
Midwest	175,923		23.2		145,122		20.6
Northeast	44,188		5.8		62,277		8.8
Total Investments	$	757,745	100.0	%	$	704,815	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, 2024:


		Amount
For the remaining three months ending September 30:	2024(A)	$	16,950
For the fiscal years ending September 30:	2025	16,478
	2026	146,728
	2027	227,661
	2028	191,635
	Thereafter	83,114
	Total contractual repayments	$	682,566
	Adjustments to cost basis of debt investments	(1,704)
	Investments in equity securities	72,401
	Investments held as of June 30, 2024 at cost:	$	753,263

(A)Includes debt investments with contractual principal amounts totaling $0.2 million for which the maturity date has passed as of June 30, 2024.

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, 2024 and September 30, 2023, we had gross receivables from portfolio companies of $1.5 million and $0.8 million, respectively. The allowance for uncollectible receivables was $58 thousand and $9 thousand as of June 30, 2024 and September 30, 2023, respectively.