Business Context and Reporting Period
Company: Gladstone Investment Corporation (GAIN)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2018
Business Overview: Gladstone is an externally advised, closed-end, non-diversified management investment company operating as a Business Development Company (BDC) and a Regulated Investment Company (RIC). It invests in debt and equity securities of established private U.S. businesses, primarily in the lower middle market.
Key Financial Metrics
| Metric | Q2 2018 | Q2 2017 |
|---|---|---|
| Total Investment Income | $15.5 million | $13.6 million |
| Net Investment Income | $0.06 million | $5.4 million |
| Net Realized Gain | $14.1 million | $1.2 million |
| Net Unrealized Appreciation | $18.1 million | $1.5 million |
| Net Increase in Net Assets from Operations | $32.3 million | $8.1 million |
| Net Asset Value (NAV) per Share | $11.57 | $9.88 |
| Total Assets | $639.0 million | $610.9 million (Q1 2018) |
| Total Borrowings | $108.0 million | $112.6 million (Q1 2018) |
| Cash and Cash Equivalents | $3.3 million | $6.7 million (Q2 2017) |
Material Changes vs. Prior Period
- Net Investment Income Decline: Net investment income dropped 98.9% to $0.06 million from $5.4 million in the prior year. This was primarily driven by a $6.5 million non-cash accrual for a capital gains-based incentive fee, which is not yet contractually due, and increased interest expense.
- Significant Realized Gains: Net realized gains surged to $14.1 million, largely due to a $13.8 million gain from the sale of the company's investment in Drew Foam Companies, Inc.
- Unrealized Appreciation: Net unrealized appreciation increased to $18.1 million, driven by improved performance of portfolio companies and higher valuation multiples, partially offset by reversals of previously recorded appreciation upon the Drew Foam exit.
- Expense Increase: Total expenses (net of credits) rose 88.7% to $15.4 million, primarily due to the aforementioned incentive fee accrual and higher interest costs on borrowings.
Guidance, Outlook, and Risks
- Investment Activity: The company invested $29.2 million in a new portfolio company (Bassett Creek Restoration, Inc.) and exited one company (Drew Foam). The portfolio consists of 33 companies.
- Capital Resources: The company maintains a $165.0 million revolving credit facility with $59.5 million in adjusted availability as of June 30, 2018. It also has an "at-the-market" (ATM) equity program with $31.8 million remaining capacity.
- Regulatory Changes: The Board approved modified asset coverage requirements under the Small Business Credit Availability Act, allowing the asset coverage ratio to decrease from 200% to 150% effective April 10, 2019. This permits increased leverage but introduces higher risk.
- Risks: Key risks include interest rate fluctuations (97.2% of the debt portfolio is variable rate), the contingent nature of success fees ($29.3 million unrecognized), and the potential for unrealized gains to differ from realized values upon exit.
- Distributions: The company declared monthly distributions of $0.067 per common share for April, May, and June 2018, plus a supplemental distribution of $0.06 per share in June.
Investor Verification Checklist
- Incentive Fee Accrual: Verify the impact of the $6.5 million non-cash capital gains-based incentive fee on Net Investment Income and its non-contractual status.
- Non-Accrual Loans: Review the status of loans to B-Dry, LLC, The Mountain Corporation, and PSI Molded Plastics, Inc., which are on non-accrual status with an aggregate cost basis of $55.1 million.
- Asset Coverage Ratios: Confirm compliance with the 200% asset coverage requirement for the Credit Facility and preferred stock, noting the upcoming regulatory change to 150% in 2019.
- Success Fees: Assess the collectability of the $29.3 million in unrecognized contractual success fees.
- Equity Issuance: Monitor the company's ability to issue equity below NAV, which requires stockholder approval currently set to expire in August 2018.