Business Context and Reporting Period
Company: Gladstone Investment Corporation (GAIN)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three and six months ended September 30, 2015
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
| Metric | Six Months Ended Sep 30, 2015 | Six Months Ended Sep 30, 2014 |
|---|---|---|
| Total Investment Income | $26.4 million | $18.9 million |
| Net Investment Income | $11.2 million | $9.1 million |
| Net Increase in Net Assets from Operations | $8.4 million | $13.5 million |
| Net Realized Loss | $(2.5) million | $(12) thousand |
| Net Unrealized Depreciation | $(0.2) million | $4.0 million (Appreciation) |
| Total Assets | $508.2 million | $483.5 million (Mar 31, 2015) |
| Total Borrowings | $108.6 million | $123.9 million (Mar 31, 2015) |
| Mandatorily Redeemable Preferred Stock | $121.7 million | $81.4 million (Mar 31, 2015) |
| Net Assets | $274.0 million | $273.4 million (Mar 31, 2015) |
| Net Asset Value (NAV) per Share | $9.05 | $9.18 (Mar 31, 2015) |
| Cash and Cash Equivalents | $5.7 million | $4.9 million (Mar 31, 2015) |
Material Changes vs. Prior Period
- Investment Income Growth: Total investment income increased 39.9% year-over-year (YoY) for the six-month period, driven by a larger portfolio size and increased interest income ($23.3M vs. $17.0M). Other income rose 61.1% due to dividend income and success fees.
- Expense Increases: Total expenses (net of credits) increased 55.0% YoY. This was primarily due to higher interest and dividend expenses (up 107.3%) resulting from increased borrowings and the issuance of Series B and Series C Term Preferred Stock.
- Realized Losses: The company recorded a net realized loss of $2.5 million for the six months ended September 30, 2015, compared to a negligible loss in the prior year. This was primarily due to a $2.7 million loss from the restructuring of the NDLI, Inc. investment.
- Unrealized Performance: Unlike the prior year which saw $4.0 million in unrealized appreciation, the current period saw a slight net unrealized depreciation of $0.2 million. The portfolio fair value was 92.6% of cost as of September 30, 2015.
- Capital Structure: Mandatorily redeemable preferred stock increased significantly from $81.4 million to $121.7 million following the May 2015 issuance of Series C Term Preferred Stock ($40.3M gross proceeds).
Guidance, Outlook, and Risks
- Capital Raising: The company completed a $300 million shelf registration in July 2015. In March 2015, it issued common stock below NAV (authorized by stockholders in August 2015) to raise capital. The common stock traded at a 17.2% discount to NAV as of October 27, 2015.
- Portfolio Activity: During the six months ended September 30, 2015, the company invested $37.2 million in new debt and equity, obtained a $13.0 million investment via restructuring, and exited positions in Roanoke Industries and Cavert II Holding Corp.
- Liquidity: The company maintains a $185 million revolving credit facility with $81.5 million available as of September 30, 2015. It is in compliance with all covenants, including asset coverage ratios (441.9% for indebtedness; 214.3% for preferred stock).
- Risks:
- Valuation Risk: A significant portion of the portfolio consists of non-publicly traded securities valued using Level 3 inputs, involving subjective judgments.
- Interest Rate Risk: Net investment income depends on the spread between borrowing costs and investment yields. Approximately 81.5% of the debt portfolio has variable rates with a floor.
- Concentration Risk: The five largest portfolio investments (SOG, Acme, Cambridge, Counsel Press, Funko) comprised 29.4% of the total portfolio fair value.
- Non-Accrual Status: Loans to Tread Corporation ($11.1M cost basis) were on non-accrual status as of September 30, 2015.
Investor Verification Checklist
- Preferred Stock Obligations: Verify the impact of the new Series C Term Preferred Stock dividends ($2.6M annualized) on future distributable income.
- NDLI Restructuring: Review the details of the $2.7 million realized loss on NDLI and the terms of the new $13.0 million secured second lien debt in Diligent Delivery Systems.
- Tread Corporation Exposure: Assess the credit risk and potential loss severity associated with the $11.1 million non-accrual loan to Tread Corporation.
- NAV Discount: Monitor the trading price of common stock relative to NAV ($9.05) and the company's ability to raise equity capital given the 1940 Act restrictions on below-NAV issuances.
- Success Fees: Note the $29.6 million in unrecognized success fee receivables; verify the likelihood and timing of collection as these are contingent and not recognized in GAAP income until received.