Business Context and Reporting Period
Company: Gladstone Investment Corporation (GAIN)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 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 primarily in debt and equity securities of established private U.S. businesses, focusing on the lower middle market.
Key Financial Metrics
| Metric | Three Months Ended Dec 31, 2017 | Nine Months Ended Dec 31, 2017 | Dec 31, 2017 Balance Sheet |
|---|---|---|---|
| Total Investment Income | $16.2 million | $42.9 million | - |
| Net Investment Income | $7.5 million | $18.7 million | - |
| Net Increase in Net Assets from Operations | $17.1 million | $38.8 million | - |
| Net Asset Value (NAV) per Share | - | - | $10.37 |
| Total Assets | - | - | $580.6 million |
| Total Borrowings | - | - | $102.0 million |
| Cash and Cash Equivalents | - | - | $2.7 million |
| Portfolio Fair Value | - | - | $566.4 million |
Portfolio Composition (at Cost): 73.1% Debt, 26.9% Equity.
Asset Coverage: 551.9% on senior securities representing indebtedness; 236.0% on senior securities that are stock.
Material Changes vs. Prior Period
- Investment Income: Increased 21.0% for the three months ended Dec 31, 2017, compared to the prior year period, driven by higher interest income (up 16.1%) and success fee income (up 100%+). For the nine months, total investment income rose 8.7%.
- Net Investment Income: Rose 44.7% for the quarter and 9.3% for the nine months compared to the prior year periods.
- Realized Gains: Net realized gains on investments were minimal ($25k) for the quarter, a significant improvement from the $3.1 million net realized loss in the prior year quarter (which included a $10.2 million loss on a Danco restructure). For the nine months, net realized gains were $1.1 million, down from $15.5 million in the prior year.
- Unrealized Appreciation: Net unrealized appreciation of investments was $9.8 million for the quarter and $19.2 million for the nine months, compared to $8.9 million and $3.0 million in the respective prior year periods.
- Expenses: Total expenses, net of credits, increased 5.9% for the quarter and 8.2% for the nine months, primarily due to higher incentive fees and base management fees.
Guidance, Outlook, and Risks
Management Commentary:
- Portfolio Activity: During the nine months ended Dec 31, 2017, the company invested $59.4 million in two new portfolio companies (Pioneer Square Brands and ImageWorks) and completed two portfolio company mergers (Mathey/SBS and GI Plastek/Precision). It also exited one portfolio company (Mitchell Rubber Products).
- Capital Raising: In May 2017, the company completed a public offering of 2.1 million common shares at $9.38 per share (below NAV), raising net proceeds of $18.7 million. Stockholders approved the ability to issue shares below NAV for one year.
- Distributions: The Board declared monthly distributions of $0.065 per common share for January, February, and March 2018. Supplemental distributions of $0.06 per share were paid in June and December 2017.
Risks and Contingencies:
- Tax Legislation: The Tax Cuts and Jobs Act (signed Dec 22, 2017) may impact the company and stockholders, though the full impact is uncertain.
- Non-Accrual Loans: As of Dec 31, 2017, loans to Alloy Die Casting Co. and Tread Corporation were on non-accrual status with an aggregate cost basis of $15.6 million.
- Success Fees: The company has $25.9 million in unrecognized contractual success fees, which are contingent on future events and not recognized until earned.
- Market Risk: The company is exposed to interest rate risk as it borrows at variable rates (LIBOR-based) to invest in variable and fixed-rate assets.
Investor Verification Checklist
- NAV vs. Market Price: Verify the current trading price of GAIN relative to the reported NAV of $10.37 per share (reported as a 10.8% discount as of Feb 5, 2018).
- Non-Accrual Status: Monitor the status and potential recovery of the $15.6 million in non-accrual loans (Alloy Die Casting and Tread).
- Success Fee Realization: Track the realization of the $25.9 million in unrecognized success fees, which are critical to future income but contingent on exits or refinancings.
- Debt Covenants: Confirm continued compliance with the Credit Facility covenants, specifically the 200% asset coverage requirement (currently at 551.9%).
- Preferred Stock Obligations: Review the dividend obligations and mandatory redemption dates for Series B (2021), Series C (2022), and Series D (2023) preferred stock.