Business Context and Reporting Period
Company: Gladstone Investment Corporation (GAIN)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2017
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. As of September 30, 2017, the portfolio consisted of 34 companies across 18 industries.
Key Financial Metrics
| Metric | Six Months Ended Sep 30, 2017 | Three Months Ended Sep 30, 2017 |
|---|---|---|
| Total Investment Income | $26.8 million | $13.1 million |
| Net Investment Income | $11.2 million | $5.8 million |
| Net Increase in Net Assets from Operations | $21.7 million | $13.6 million |
| Net Asset Value (NAV) per Share | $10.10 (End of Period) | $10.10 (End of Period) |
| Total Assets | $529.7 million | $529.7 million |
| Total Borrowings | $61.8 million | $61.8 million |
| Cash and Cash Equivalents | $2.4 million | $2.4 million |
| Portfolio Fair Value | $520.2 million | $520.2 million |
Portfolio Composition (at Cost): 72.3% Debt, 27.7% Equity.
Asset Coverage: 819.6% on senior securities representing indebtedness; 258.2% on senior securities that are stock.
Material Changes vs. Prior Period
- Investment Income: Total investment income increased 2.4% for the six months ended September 30, 2017, compared to the prior year period. This was driven by a 72.5% increase in dividend, success fee, and other income, partially offset by a 6.0% decrease in interest income due to a smaller interest-bearing portfolio.
- Net Investment Income: Decreased 6.2% year-over-year for the six-month period, primarily due to higher expenses (specifically incentive fees and other expenses) and lower interest income.
- Realized Gains: Net realized gains on investments dropped significantly to $1.1 million for the six months ended September 30, 2017, compared to $18.6 million in the prior year period. The prior year included a large gain from the exit of Acme Cryogenics, Inc.
- Unrealized Appreciation: The portfolio recorded net unrealized appreciation of $9.4 million for the six months ended September 30, 2017, a reversal from the $5.9 million depreciation recorded in the same period in 2016. This improvement was driven by increased fair values in several portfolio companies, including Drew Foam Companies, Inc. and Nth Degree, Inc.
- Capital Activity: The company issued approximately 2.3 million shares of common stock in May and June 2017, raising net proceeds of approximately $20.1 million, which were used to repay borrowings and for general corporate purposes.
Guidance, Outlook, and Risks
Management Commentary: Management continues to see investment opportunities consistent with its strategy of providing debt and equity to lower middle-market companies. The company successfully exited one portfolio company (Mitchell Rubber Products) and invested $28.3 million in a new company (Pioneer Square Brands) during the period. A merger between two existing portfolio companies (Mathey Investments and SBS Industries) was also completed.
Distributions: The Board declared monthly distributions of $0.064 per common share for April through September 2017, plus a supplemental distribution of $0.06 per share in June. For the quarter ended September 30, 2017, the Board declared monthly distributions of $0.065 per share and a supplemental distribution of $0.06 per share for December 2017.
Risks and Contingencies:
- Non-Accrual Status: Loans to three portfolio companies (Alloy Die Casting Co., Precision Southeast, Inc., and Tread Corporation) were on non-accrual status as of September 30, 2017, with an aggregate cost basis of $25.2 million.
- Market Risk: The company is exposed to interest rate risk as it borrows at variable rates (LIBOR-based) to invest in fixed and variable rate assets. A significant change in market rates could adversely affect net investment income.
- Success Fees: As of September 30, 2017, the company had $26.0 million in unrecognized, contractual success fees. These are contingent and not recognized until earned.
- Equity Issuance Constraints: The company's ability to issue common stock is constrained when the market price trades below NAV, though stockholders approved an exemption for one year in August 2017.
Investor Verification Checklist
- Non-Accrual Exposure: Verify the status and potential recovery value of the $25.2 million in loans currently on non-accrual status.
- Success Fee Realization: Assess the likelihood and timing of collecting the $26.0 million in unrecognized success fees, which are contingent on future exits or events.
- Equity Valuation: Review the fair value assumptions for the significant unrealized appreciation recorded in equity positions, particularly for Drew Foam Companies, Inc. and Nth Degree, Inc.
- Debt Covenants: Confirm continued compliance with the Credit Facility covenants, specifically the asset coverage ratio (currently 819.6%) and minimum net worth requirements.
- Common Stock Discount: Monitor the trading price of common stock relative to NAV ($10.10) to evaluate future capital raising capabilities under the 1940 Act.