GAIN

Business Context and Reporting Period

Company: Gladstone Investment Corporation (GAIN)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2014
Business Model: Externally managed, closed-end, non-diversified Business Development Company (BDC) and Regulated Investment Company (RIC). The company invests in debt and equity securities of established private U.S. businesses, targeting approximately 80% debt and 20% equity allocation.

Key Financial Metrics

Material Changes vs. Prior Period

• Investment Income: Total investment income for the six months ended September 30, 2014, was $18.9 million, a slight increase of 0.8% compared to $18.8 million in the prior year period. This was driven by a 14.0% increase in interest income due to a larger loan portfolio, partially offset by a 50.0% decrease in other income (success fees and dividends) following the exit of Venyu Solutions, Inc. in the prior year.
• Net Income: Net increase in net assets resulting from operations was $13.5 million for the six months ended September 30, 2014, compared to $8.4 million in the prior year. The prior year period included a significant one-time realized gain of $24.8 million from the Venyu exit, which was absent in the current period.
• Unrealized Gains/Losses: The company recorded net unrealized appreciation of $4.0 million for the six months ended September 30, 2014, compared to net unrealized depreciation of $27.1 million in the prior year. The prior year figure included a reversal of $17.4 million in unrealized appreciation related to the Venyu sale.
• Expenses: Total expenses net of credits increased 15.9% to $9.8 million for the six-month period, primarily due to higher base management fees (reflecting a larger asset base) and increased interest expense from higher average borrowings.

Guidance, Outlook, and Risks

• Portfolio Activity: The company invested $21.9 million in new deals during the quarter and $24.4 million in October 2014 (Old World Christmas, Inc.). The portfolio consists of 30 companies across 15 industries.
• Capital Resources: The company expanded its Credit Facility commitment from $105 million to $185 million in September 2014 and reduced the interest rate margin to 3.25% over LIBOR. As of September 30, 2014, $27.1 million was available for borrowing.
• Distributions: The Board declared monthly distributions of $0.06 per common share for the quarter ended September 30, 2014. A one-time special distribution of $0.05 per share was declared in October 2014, payable in December 2014.
• Risks and Contingencies:
  • Non-Accrual Status: Loans to Tread Corp. ($12.0 million cost basis) are on non-accrual status with a fair value of $0.
  • Valuation: All investments are valued using Level 3 inputs (unobservable). The portfolio fair value is 84.2% of cost, reflecting lingering recession effects on certain portfolio companies.
  • Equity Issuance: The common stock trades at a discount to NAV ($7.27 vs. $8.49). While stockholders approved issuing shares below NAV, market conditions may constrain equity capital raising.

Key Facts for Investor Verification

• NAV vs. Market Price: Verify the current trading price relative to the $8.49 NAV per share and the implications of the discount on future capital raising capabilities.
• Tread Corp. Exposure: Confirm the status of the $12.0 million non-accrual loan to Tread Corp. and any potential for recovery or further write-downs.
• Success Fees: Note that $21.0 million in success fees are unrecognized as of September 30, 2014, due to contingent nature; verify the likelihood and timing of collection.
• Debt Covenants: Confirm continued compliance with the 200% asset coverage ratio requirement (currently 264%) and the minimum net worth requirement ($170 million).
• Preferred Stock Obligation: Verify the $40 million mandatorily redeemable preferred stock obligation due February 28, 2017, and the associated 7.125% dividend expense.