Gladstone Investment(US:GAIN)2019-07-31 20:39PART I. FINANCIAL INFORMATION This section provides the unaudited consolidated financial statements and management's discussion and analysis for Gladstone Investment Corporation Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements of Gladstone Investment Corporation, including statements of assets and liabilities, operations, changes in net assets, cash flows, and schedules of investments, along with comprehensive notes detailing accounting policies, investment specifics, related party transactions, borrowings, and other financial disclosures Consolidated Statements of Assets and Liabilities This statement provides a snapshot of the company's financial position, detailing total assets, liabilities, and net assets as of specific dates Consolidated Statements of Assets and Liabilities (in thousands) | Metric | June 30, 2019 | March 31, 2019 | | :----------------------------------- | :----------------------------- | :---------------------------- | | Total Assets | $641,946 | $635,100 | | Total Liabilities | $238,440 | $227,990 | | Total Net Assets | $403,506 | $407,110 | | Net Asset Value Per Share | $12.29 | $12.40 | Consolidated Statements of Operations This statement outlines the company's financial performance over a period, detailing investment income, expenses, and net increase in net assets from operations Consolidated Statements of Operations (in thousands) | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | | :--------------------------------------- | :------------------------------------ | :------------------------------------ | | Total Investment Income | $17,310 | $15,504 | | Total Expenses, net of credits to fees | $8,455 | $15,446 | | Net Investment Income | $8,855 | $58 | | Net Realized Gain | $533 | $14,108 | | Net Unrealized (Depreciation) Appreciation | $(3,342) | $18,161 | | Net Increase in Net Assets from Operations | $6,046 | $32,327 | | Basic and Diluted Net Investment Income per Share | $0.27 | $— | | Basic and Diluted Net Increase in Net Assets per Share | $0.18 | $0.99 | Consolidated Statements of Changes in Net Assets This statement tracks the changes in the company's net assets over a period, reflecting operational results and distributions Consolidated Statements of Changes in Net Assets (in thousands) | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | | :--------------------------------------- | :------------------------------------ | :------------------------------------ | | Net Assets, March 31 | $407,110 | $354,200 | | Net Increase in Net Assets from Operations | $6,046 | $32,327 | | Net Decrease in Net Assets from Distributions | $(9,650) | $(8,555) | | Net (Decrease) Increase in Net Assets | $(3,604) | $25,608 | | Net Assets, June 30 | $403,506 | $379,808 | Consolidated Statements of Cash Flows This statement details the cash inflows and outflows from operating, investing, and financing activities over a period Consolidated Statements of Cash Flows (in thousands) | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | | :--------------------------------------- | :------------------------------------ | :------------------------------------ | | Net cash (used in) provided by operating activities | $(10,312) | $10,683 |\n| Net cash provided by (used in) financing activities | $10,725 | $(11,336) | | Net Increase (Decrease) in Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents | $413 | $(653) | | Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents at End of Period | $4,018 | $3,314 | Consolidated Schedules of Investments This schedule provides a detailed breakdown of the company's investment portfolio by fair value, type, and security Total Investments at Fair Value (in thousands) | Date | Amount (in thousands) | | :--- | :-------------------- | | June 30, 2019 | $631,186 | | March 31, 2019 | $624,172 | Investment Breakdown by Type (June 30, 2019, at fair value, in thousands) | Investment Type | Fair Value (in thousands) | Percentage of Net Assets | | :-------------- | :------------------------ | :----------------------- | | Non-Control/Non-Affiliate | $327,365 | 81.3% | | Affiliate | $293,292 | 72.8% | | Control | $10,529 | 2.5% | Investment Breakdown by Security Type (June 30, 2019, at fair value, in thousands) | Security Type | Non-Control/Non-Affiliate (in thousands) | Affiliate (in thousands) | Control (in thousands) | | :------------ | :--------------------------------------- | :----------------------- | :--------------------- | | Secured First Lien Debt | $168,528 | $170,058 | $— | | Secured Second Lien Debt | $30,380 | $36,095 | $10,000 | | Preferred Equity | $111,041 | $77,069 | $529 | | Common Equity/Equivalents | $17,416 | $10,070 | $— | Notes to Consolidated Financial Statements These notes provide detailed explanations and additional information supporting the consolidated financial statements, covering accounting policies, investment details, and other financial disclosures NOTE 1. ORGANIZATION This note describes the company's legal structure, investment objectives, and target portfolio composition - Gladstone Investment Corporation is an externally advised, closed-end, non-diversified management investment company that has elected to be treated as a business development company (BDC) and a regulated investment company (RIC)61 - The company's investment objectives are to achieve and grow current income by investing in debt securities and provide long-term capital appreciation by investing in equity securities of established private businesses in the U.S61 - The company intends its investment portfolio to consist of approximately 75.0% in debt investments and 25.0% in equity investments, at cost61 NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the key accounting principles and methods used in preparing the financial statements, including fair value measurement and revenue recognition - Interim financial statements are prepared in accordance with GAAP for interim financial information and SEC Regulation S-X64 - Investments are recorded at fair value in accordance with FASB ASC Topic 820 and the 1940 Act, with the Board of Directors having ultimate responsibility for fair value determination6869 - Interest income is recognized on an accrual basis, while loans 90 days or more past due are generally placed on non-accrual status. Success fees are recorded as income when earned, often upon cash receipt7981 Non-Accrual Loans (Debt Cost Basis, in thousands) | Date | Amount (in thousands) | | :--- | :-------------------- | | June 30, 2019 | $56,400 | | March 31, 2019 | $68,300 | NOTE 3. INVESTMENTS This note provides detailed information on the company's investment portfolio, including valuation methodologies, activity, and breakdowns by industry and geography - As of June 30, 2019, all investments were valued using Level 3 inputs within the ASC 820 fair value hierarchy, except for Funko Acquisition Holdings, LLC, which was valued using Level 2 inputs93 - During the three months ended June 30, 2019, the company invested $38.8 million in one new portfolio company (Horizon Facilities Services, Inc.) and received $41.5 million from repayments and sales113202203 Investment Portfolio by Industry (Fair Value, June 30, 2019, in thousands) | Industry Classification | Fair Value (in thousands) | Percentage of Total Investments | | :---------------------- | :------------------------ | :------------------------------ | | Diversified/Conglomerate Services | $258,403 | 40.9% | | Home and Office Furnishings, Housewares, and Durable Consumer Products | $84,194 | 13.3% | | Diversified/Conglomerate Manufacturing | $51,105 | 8.1% | Investment Portfolio by Geographic Region (Fair Value, June 30, 2019, in thousands) | Location | Fair Value (in thousands) | Percentage of Total Investments | | :------- | :------------------------ | :------------------------------ | | South | $262,778 | 41.6% | | West | $165,273 | 26.2% | | Northeast | $151,827 | 24.1% | NOTE 4. RELATED PARTY TRANSACTIONS This note details transactions with related parties, including management and incentive fees paid to the Adviser - The company pays its Adviser a base management fee (2.0% annual rate on average gross assets) and an incentive fee (income-based and capital gains-based)117121125 - A loan servicing fee paid to the Adviser is 100% non-contractually, unconditionally, and irrevocably credited back against the base management fee124 Incentive Fee Summary (Three Months Ended June 30, in thousands) | Metric | 2019 (in thousands) | 2018 (in thousands) | | :------------------------ | :------------------ | :------------------ | | Incentive fee – income-based | $2,081 | $1,078 | | Incentive fee – capital gains-based | $(512) | $6,508 | | Total incentive fee | $1,569 | $7,586 | Total Related Party Fees Due (in thousands) | Date | Amount | | :--- | :----- | | June 30, 2019 | $24,908 | | March 31, 2019 | $25,068 | NOTE 5. BORROWINGS This note describes the company's credit facility, including commitment amounts, interest rates, outstanding borrowings, and covenant compliance - The Credit Facility's revolving period was extended to August 22, 2021, and the commitment amount was increased from $165.0 million to $200.0 million, with potential expansion to $300.0 million134 - Advances under the Credit Facility generally bear interest at 30-day LIBOR plus 2.85% per annum136 Credit Facility Summary (in thousands) | Metric | June 30, 2019 | March 31, 2019 | | :------------------------ | :------------ | :------------- | | Commitment amount | $200,000 | $200,000 | | Borrowings outstanding at cost | $73,500 | $53,000 | | Availability | $126,500 | $147,000 | | Adjusted Availability | $120,500 | $137,500 | - As of June 30, 2019, the company was in compliance with all covenants under the Credit Facility, maintaining a net worth of $530.6 million and asset coverage on senior securities representing indebtedness of 763.7%139 NOTE 6. MANDATORILY REDEEMABLE PREFERRED STOCK This note provides details on the company's mandatorily redeemable preferred stock, including redemption dates, interest rates, and fair values Series D Term Preferred Stock (June 30, 2019, in thousands) | Metric | Value | | :------------------------ | :-------------------- | | Mandatory Redemption Date | September 30, 2023 | | Interest Rate | 6.250% | | Shares Outstanding | 2,300,000 | | Total Liquidation Preference | $57,500 (in thousands) | Series E Term Preferred Stock (June 30, 2019, in thousands) | Metric | Value | | :------------------------ | :-------------------- | | Mandatory Redemption Date | August 31, 2025 | | Interest Rate | 6.375% | | Shares Outstanding | 2,990,000 | | Total Liquidation Preference | $74,750 (in thousands) | - As of June 30, 2019, asset coverage on senior securities that are stock was 287.5%146 Fair Value of Preferred Stock (June 30, 2019, in thousands) | Series | Fair Value | | :----- | :--------- | | Series D | $58,535 | | Series E | $78,099 | | Total | $136,634 | NOTE 7. REGISTRATION STATEMENT AND COMMON EQUITY OFFERINGS This note outlines the company's registration statement for securities offerings and remaining capacity under its 'at-the-market' program - A registration statement on Form N-2 was filed on June 14, 2019, and declared effective on July 24, 2019, allowing the company to issue up to $300.0 million in various securities154 - As of June 30, 2019, the company had remaining capacity to sell up to an additional $31.8 million of common stock under its 'at-the-market' (ATM) program155236 NOTE 8. NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS PER WEIGHTED-AVERAGE COMMON SHARE This note presents the net increase or decrease in net assets attributable to operations on a per weighted-average common share basis Net Increase in Net Assets per Weighted-Average Common Share | Period | Amount | | :------------------------ | :----- | | Three Months Ended June 30, 2019 | $0.18 | | Three Months Ended June 30, 2018 | $0.99 | NOTE 9. DISTRIBUTIONS TO COMMON STOCKHOLDERS This note details the company's distribution policy to common stockholders, including monthly and supplemental cash distributions, to maintain RIC status - To maintain RIC status, the company must distribute at least 90% of its Investment Company Taxable Income annually159 Monthly Cash Distributions to Common Stockholders (Three Months Ended June 30, 2019) | Payment Date | Distribution per Common Share | | :----------- | :---------------------------- | | April 30, 2019 | $0.068 | | May 31, 2019 | $0.068 | | June 14, 2019 | $0.090 (Supplemental) | | June 28, 2019 | $0.068 | | Total | $0.294 | - For the fiscal year ended March 31, 2019, the company elected to retain $50.0 million ($1.52 per common share) of long-term capital gains as deemed distributions, incurring $10.5 million in federal taxes165 NOTE 10. COMMITMENTS AND CONTINGENCIES This note discloses the company's legal proceedings, reserves, and unused commitments, including lines of credit and guaranties - The company is party to certain legal proceedings but does not believe they will have a material adverse effect on its financial condition or results of operations168 - Reserves and holdbacks against escrow amounts from investment exits totaled $2.4 million as of June 30, 2019169 Unused Line of Credit Commitments and Guaranties (in thousands) | Item | June 30, 2019 | March 31, 2019 | | :------------------------ | :------------ | :------------- | | Unused line of credit commitments | $4,025 | $1,259 | | Guaranties | $1,000 | $1,000 | | Total | $5,025 | $2,259 | NOTE 11. FINANCIAL HIGHLIGHTS This note provides key financial metrics and ratios per common share, including net asset value, investment income, and total investment return Per Common Share Data (Three Months Ended June 30) | Metric | 2019 | 2018 | | :--------------------------------------- | :--- | :--- | | Net asset value at beginning of period | $12.40 | $10.85 | | Net investment income | $0.27 | $— | | Net increase in net assets from operations | $0.18 | $0.99 | | Net asset value at end of period | $12.29 | $11.57 | | Total investment return | (0.72)% | 19.19% | Ratios/Supplemental Data (Annualized, Three Months Ended June 30) | Metric | 2019 | 2018 | | :--------------------------------------- | :----- | :----- | | Ratio of net expenses to average net assets | 8.29% | 16.96% | | Ratio of net investment income to average net assets | 8.68% | 0.06% | NOTE 12. UNCONSOLIDATED SIGNIFICANT SUBSIDIARIES This note identifies unconsolidated significant subsidiaries and provides their key financial performance data - Galaxy Tool Holding Corporation, a designer and manufacturer of precision tools and molds, is identified as an unconsolidated significant subsidiary176 Galaxy Tool Holding Corporation Income Statement (Three Months Ended June 30, in thousands) | Metric | 2019 | 2018 | | :------- | :--- | :--- | | Net sales | $6,862 | $6,212 | | Net profit (loss) | $425 | $(1,480) | NOTE 13. SUBSEQUENT EVENTS This note discloses significant events occurring after the reporting period, including declared distributions and dividends Distributions and Dividends Declared (July-September 2019 Quarter) | Security Type | Distribution/Dividend per Share | | :------------------------ | :------------------------------ | | Common Stock | $0.234 (including $0.030 supplemental) | | Series D Term Preferred Stock | $0.39062499 | | Series E Term Preferred Stock | $0.39843750 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and operational results, including an overview of its business, investment strategy, recent portfolio activity, capital raising efforts, and regulatory compliance. It also details the comparison of financial performance for the three months ended June 30, 2019, versus 2018, and discusses liquidity and capital resources Overview This overview describes the company's business model as an externally managed BDC and RIC, its investment focus, portfolio composition, and recent activity - Gladstone Investment Corporation operates as an externally managed BDC and RIC, focusing on investing in debt and equity securities of established private U.S. businesses, primarily in the lower middle market (EBITDA of $3 million to $20 million)183187188 - As of June 30, 2019, the investment portfolio consisted of 29 companies, with 73.1% in debt securities and 26.9% in equity securities, at cost187191 - During Q2 2019, the company exited two portfolio companies, invested $38.8 million in one new company (Horizon Facilities Services, Inc.), and made $12.5 million in follow-on investments191202203 - Unrecognized contractual success fees totaled $31.7 million, or $0.97 per common share, as of June 30, 2019193252 - The company's common stock traded at an 8.6% discount to its NAV ($11.23 vs $12.29) as of June 30, 2019, which constrains its ability to issue additional equity196238 - Effective April 10, 2019, the company's asset coverage requirement for senior securities changed from 200% to 150%. As of June 30, 2019, asset coverage for indebtedness was 763.7% and for stock was 287.5%200201 Results of Operations This section analyzes the company's financial performance, comparing key income and expense metrics for the current and prior periods Key Financial Results (Three Months Ended June 30, in thousands, except per share) | Metric | 2019 | 2018 | $ Change | % Change | | :--------------------------------------- | :--- | :--- | :------- | :------- | | Total Investment Income | $17,310 | $15,504 | $1,806 | 11.6% | | Interest income | $11,875 | $13,314 | $(1,439) | (10.8)% | | Dividend, success fee, and other income | $5,435 | $2,190 | $3,245 | 148.2% | | Total expenses, net of credits to fees | $8,455 | $15,446 | $(6,991) | (45.3)% | | Net Investment Income | $8,855 | $58 | $8,797 | NM | | Net realized gain on investments | $533 | $14,108 | $(13,575) | (96.2)% | | Net unrealized (depreciation) appreciation of investments | $(3,047) | $18,068 | $(21,115) | (116.9)% | | Net increase in net assets from operations | $6,046 | $32,327 | $(26,281) | (81.3)% | | Basic and Diluted Net Investment Income per Share | $0.27 | $— | $0.27 | NM | | Basic and Diluted Net Increase in Net Assets per Share | $0.18 | $0.99 | $(0.81) | (81.8)% | - The significant increase in Net Investment Income was primarily driven by a 148.2% increase in dividend, success fee, and other income, coupled with a 45.3% decrease in total expenses (net of credits), mainly due to a reversal of the capital gains-based incentive fee208212214215 - Net unrealized depreciation of investments was $3.0 million in Q2 2019, compared to net unrealized appreciation of $18.1 million in Q2 2018, primarily due to the reversal of previously recorded unrealized appreciation upon the exit of Jackrabbit and a decline in performance of certain portfolio companies219 Liquidity and Capital Resources This section discusses the company's cash flow activities, capital structure, borrowing capacity, and compliance with financial covenants - Net cash used in operating activities was $10.3 million for the three months ended June 30, 2019, primarily due to higher purchases of investments ($51.2 million) and a decrease in other liabilities225226 - Net cash provided by financing activities was $10.7 million for the three months ended June 30, 2019, mainly from $20.5 million of net borrowings on the Credit Facility, partially offset by $9.7 million in common stockholder distributions228 - Common stockholders received monthly cash distributions of $0.068 per share and a supplemental distribution of $0.09 per share in June 2019230 - The Credit Facility has a $200.0 million commitment, with $120.5 million adjusted availability as of June 30, 2019, and the company was in compliance with all covenants246251 Contractual Obligations as of June 30, 2019 (at cost, in thousands) | Contractual Obligations | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | | :---------------------- | :---- | :--------------- | :-------- | :-------- | :---------------- | | Credit Facility | $73,500 | $— | $— | $73,500 | $— | | Mandatorily redeemable preferred stock | $132,250 | $— | $— | $57,500 | $74,750 | | Secured borrowing | $5,096 | $— | $5,096 | $— | $— | | Interest payments on obligations | $66,749 | $13,929 | $27,290 | $19,970 | $5,560 | | Total | $277,595 | $13,929 | $32,386 | $150,970 | $80,310 | Item 3. Quantitative and Qualitative Disclosures About Market Risk This section addresses the company's exposure to market risks, primarily interest rate risk, and its approach to managing it. The company targets a specific mix of fixed and variable-rate loans in its portfolio and is monitoring the transition from LIBOR to SOFR - The primary market risk exposure is interest rate risk, which affects net investment income based on the difference between borrowing and investment rates266 - The company targets approximately 90% of its loans at variable rates (with a floor mechanism) and 10% at fixed rates267 Debt Investment Portfolio Breakdown (June 30, 2019, by principal balance) | Rate Type | Percentage | | :------------------------ | :--------- | | Variable rates with a floor | 97.4% | | Fixed rates | 2.6% | | Total | 100.0% | - The company is monitoring the anticipated phase-out of LIBOR by late 2021 and its expected transition to SOFR, anticipating minimal impact with appropriate adjustments to loan documents205 Item 4. Controls and Procedures This section confirms that management, including the chief executive officer and acting principal financial officer, evaluated the effectiveness of the company's disclosure controls and procedures and concluded they were effective as of June 30, 2019. No material changes in internal control over financial reporting were reported - As of June 30, 2019, management concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level268 - There were no changes in internal control over financial reporting during the three months ended June 30, 2019, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting269 PART II. OTHER INFORMATION This section includes legal proceedings, risk factors, and other miscellaneous disclosures not covered in the financial information Item 1. Legal Proceedings This section states that the company is involved in routine legal proceedings but does not anticipate any material adverse effects on its financial condition or operations from these matters - The company is party to certain legal proceedings incidental to the normal course of business, but does not expect them to have a material adverse effect on its financial condition, results of operation, or cash flows270 - No proceeding involves a claim for damages that exceeds 10% of the company's consolidated current assets270 Item 1A. Risk Factors This section directs readers to the company's Annual Report on Form 10-K for a comprehensive discussion of risk factors - For a discussion of risk factors, refer to the section captioned 'Item 1A. Risk Factors' in Part I of the Annual Report on Form 10-K for the fiscal year ended March 31, 2019271 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable for the reporting period - Not applicable272 Item 3. Defaults Upon Senior Securities This item is not applicable for the reporting period - Not applicable273 Item 4. Mine Safety Disclosures This item is not applicable for the reporting period - Not applicable274 Item 5. Other Information This item is not applicable for the reporting period - Not applicable275 Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including corporate governance documents, stock certificates, and required certifications - The exhibits include the Amended and Restated Certificate of Incorporation, Certificates of Designation for Series D and E Preferred Stock, Amended and Restated Bylaws, Specimen Stock Certificates, and Certifications of the Chief Executive Officer and Acting Principal Financial Officer277 SIGNATURES This section contains the formal signature block, confirming the report's authorization and signing SIGNATURE This section contains the formal signature block, confirming that the report has been duly authorized and signed on behalf of Gladstone Investment Corporation - The report was signed by Nicole Schaltenbrand, Acting Principal Financial Officer, on July 31, 2019281