GAIN

Business Context and Reporting Period

Company: Gladstone Investment Corporation (GAIN)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended June 30, 2016
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.

Key Financial Metrics

Material Changes vs. Prior Period

• Investment Income: Total investment income increased 13.3% to $14.4 million, driven by a 109.3% increase in other income (primarily $2.8 million in dividend income from the sale of Acme Cryogenics) and a 2.1% increase in interest income.
• Realized Gains: Net realized gains surged to $18.6 million, primarily due to an $18.8 million gain from the exit of Acme Cryogenics, Inc. in April 2016.
• Unrealized Gains/Losses: The portfolio recorded a net unrealized depreciation of $0.9 million, largely due to the reversal of $21.2 million in previously recorded unrealized appreciation upon the Acme exit.
• Liquidity: Borrowings decreased by $15.4 million to $84.7 million as the company repaid debt using proceeds from the Acme sale. Cash and cash equivalents increased to $5.2 million.
• Portfolio Composition: The portfolio consists of 36 companies. New investments of $25.5 million were made in The Mountain Corporation (debt and equity).

Guidance, Outlook, and Risks

• Capital Markets: The company's common stock traded at a 22.7% discount to NAV ($7.61 vs. $9.84) as of July 29, 2016. This discount constrains the ability to issue equity under the 1940 Act without stockholder approval, which was sought at the 2015 Annual Meeting and is scheduled for renewal at the 2016 Annual Meeting.
• Dividends and Distributions: The Board declared monthly distributions of $0.0625 per common share and dividends on Series A, B, and C preferred stock for the quarter ended June 30, 2016. The company intends to maintain RIC status by distributing at least 90% of taxable income.
• Debt Facility: The revolving credit facility has a commitment of $185.0 million with $79.6 million outstanding. The facility matures in June 2017 (revolving period) with a final maturity in 2019. The company is in compliance with all covenants, including an asset coverage ratio of 574.4%.
• Risks: Primary risks include interest rate fluctuations (90% of debt portfolio is variable rate), the ability to raise capital at favorable terms, and the performance of portfolio companies. One loan (Tread Corporation) is on non-accrual status.

Investor Verification Checklist

• Acme Cryogenics Exit: Verify the sustainability of the $18.8 million realized gain and the impact of the $21.2 million reversal of unrealized appreciation on future NAV calculations.
• Equity Issuance Constraints: Monitor the outcome of the August 2016 Annual Meeting regarding the authorization to issue shares below NAV, which is critical for future capital raising.
• Non-Accrual Status: Review the status of the Tread Corporation loan ($3.2 million cost basis) and potential impact on future interest income.
• Preferred Stock Obligations: Confirm the ability to meet mandatory redemption dates for Series A preferred stock (February 2017) and associated dividend payments.
• Success Fees: Note the $29.9 million in unrecognized success fees; verify the likelihood and timing of collection given their contingent nature.