Gladstone Investment(US:GAIN)2023-10-31 16:00markdown [PART I. FINANCIAL INFORMATION](index=4&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This section presents Gladstone Investment Corporation's unaudited consolidated financial statements, including assets, operations, cash flows, and investment schedules, for the periods ended September 30, 2023 [Consolidated Statements of Assets and Liabilities](index=4&type=section&id=Consolidated%20Statements%20of%20Assets%20and%20Liabilities) Total assets increased to $928.3 million by September 30, 2023, from $765.6 million, with net assets rising to $475.7 million and NAV per share to $14.03 Consolidated Statements of Assets and Liabilities (in thousands, except per share amounts) | Metric | September 30, 2023 | March 31, 2023 | | :--- | :--- | :--- | | **Total Investments at Fair Value** | $915,636 | $753,543 | | **Total Assets** | $928,349 | $765,644 | | **Total Borrowings** | $409,672 | $292,607 | | **Total Liabilities** | $452,683 | $325,902 | | **Net Assets** | $475,666 | $439,742 | | **Net Asset Value Per Share** | $14.03 | $13.09 | [Consolidated Statements of Operations](index=5&type=section&id=Consolidated%20Statements%20of%20Operations) For the three months ended September 30, 2023, the company reported a net investment loss of $1.7 million, while a $49.1 million gain led to a $47.4 million net increase in net assets, or $1.40 per share Key Operational Data (in thousands, except per share amounts) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Six Months Ended Sep 30, 2023 | Six Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Investment Income | $20,277 | $20,795 | $40,577 | $40,092 | | Total Expenses, net | $22,007 | $9,379 | $33,867 | $21,305 | | Net Investment (Loss) Income | $(1,730) | $11,416 | $6,710 | $18,787 | | Net Realized and Unrealized Gain (Loss) | $49,086 | $(8,341) | $49,432 | $(3,677) | | **Net Increase in Net Assets** | **$47,356** | **$3,075** | **$56,142** | **$15,110** | | **Net Increase in Net Assets per Share** | **$1.40** | **$0.09** | **$1.67** | **$0.45** | [Consolidated Statements of Changes in Net Assets](index=6&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Net%20Assets) Net assets increased from $439.7 million to $475.7 million by September 30, 2023, driven by a $56.1 million net increase from operations and $4.1 million from stock issuance, offset by distributions Changes in Net Assets for the Six Months Ended September 30, 2023 (in thousands) | Description | Amount | | :--- | :--- | | Net Assets, March 31, 2023 | $439,742 | | Net Increase from Operations | $56,142 | | Net Decrease from Distributions | $(24,277) | | Net Increase from Capital Activity | $4,059 | | **Net Assets, September 30, 2023** | **$475,666** | [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash used in operating activities was $96.6 million for the six months ended September 30, 2023, offset by $95.9 million from financing activities, resulting in a $0.7 million net decrease in cash Cash Flow Summary for the Six Months Ended September 30 (in thousands) | Cash Flow Category | 2023 | 2022 | | :--- | :--- | :--- | | Net Cash (Used in) Provided by Operating Activities | $(96,585) | $(9,445) | | Net Cash Provided by (Used in) Financing Activities | $95,919 | $(2,147) | | **Net (Decrease) Increase in Cash** | **$(666)** | **$(11,592)** | [Consolidated Schedules of Investments](index=8&type=section&id=Consolidated%20Schedules%20of%20Investments) Total investments at fair value reached $915.6 million by September 30, 2023, with the portfolio comprising 66.7% debt and 33.3% equity, diversified across 16 industries and 26 companies Investment Portfolio Composition by Security Type (at Fair Value) | Security Type | September 30, 2023 | March 31, 2023 | | :--- | :--- | :--- | | Secured first lien debt | 55.5% | 58.1% | | Secured second lien debt | 11.2% | 10.1% | | **Total debt** | **66.7%** | **68.2%** | | Preferred equity | 29.3% | 29.5% | | Common equity/equivalents | 4.0% | 2.3% | | **Total equity/equivalents** | **33.3%** | **31.8%** | | **Total investments (in millions)** | **$915.6** | **$753.5** | - The top five portfolio investments (Nocturne, Counsel Press, Inc., Old World, Brunswick Bowling Products, Inc. and Horizon Facilities Services, Inc.) represented **39.9%** of the total investment portfolio at fair value as of September 30, 2023 [Notes to Consolidated Financial Statements](index=19&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail accounting policies, investment valuation, revenue recognition, related-party transactions, credit facilities, equity offerings, and significant subsequent events - The company is a Business Development Company (BDC) and a Regulated Investment Company (RIC), investing in debt (approx. **75%** at cost) and equity (approx. **25%** at cost) of established private U.S. businesses[44](index=44&type=chunk) - As of September 30, 2023, loans to Edge Adhesives, J.R. Hobbs, and The Mountain were on non-accrual status, representing **10.3%** of the cost basis of all debt investments[63](index=63&type=chunk) - Subsequent to the quarter end, in October 2023, the company exited its investment in Counsel Press, Inc., resulting in success fee income of **$1.4 million** and a realized gain of **$43.5 million** It also amended its credit facility, extending the revolving period to October 2026 and reducing the facility size to **$135.0 million**[152](index=152&type=chunk)[153](index=153&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=46&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial condition and operational results, covering business overview, portfolio activity, capital raising, regulatory compliance, liquidity, and critical accounting estimates [Overview](index=47&type=section&id=Overview) The company operates as a BDC and RIC, targeting a 75% debt and 25% equity investment mix at cost, maintaining a strong asset coverage ratio of 211.5% as of September 30, 2023 - The company's investment objective is to achieve current income from debt securities and long-term capital appreciation from equity securities in established U.S. private businesses[160](index=160&type=chunk) - As of September 30, 2023, the company had unrecognized, contractual success fees of **$59.8 million**, or **$1.76** per common share, which are not recorded on the balance sheet[166](index=166&type=chunk) - The company's asset coverage ratio for senior securities was **211.5%** as of September 30, 2023, exceeding the required minimum of **150%**[172](index=172&type=chunk) [Results of Operations](index=51&type=section&id=Results%20of%20Operations) For the three months ended September 30, 2023, a $1.7 million net investment loss was offset by $48.7 million in unrealized appreciation, leading to a $47.4 million net increase in net assets Comparison of Operations for the Three Months Ended September 30 | Metric (in thousands) | 2023 | 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Investment Income | $20,277 | $20,795 | $(518) | (2.5)% | | Total Expenses, net | $22,007 | $9,379 | $12,628 | 134.6% | | Net Investment (Loss) Income | $(1,730) | $11,416 | $(13,146) | (115.2)% | | Net Realized/Unrealized Gain (Loss) | $49,086 | $(8,341) | $57,427 | NM | | **Net Increase in Net Assets** | **$47,356** | **$3,075** | **$44,281** | **NM** | Comparison of Operations for the Six Months Ended September 30 | Metric (in thousands) | 2023 | 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Investment Income | $40,577 | $40,092 | $485 | 1.2% | | Total Expenses, net | $33,867 | $21,305 | $12,562 | 59.0% | | Net Investment Income | $6,710 | $18,787 | $(12,077) | (64.3)% | | Net Realized/Unrealized Gain (Loss) | $49,432 | $(3,677) | $53,109 | NM | | **Net Increase in Net Assets** | **$56,142** | **$15,110** | **$41,032** | **271.6%** | - The significant increase in expenses for the three and six-month periods was primarily driven by higher capital gains-based incentive fees, which are accrued based on net realized gains and unrealized appreciation in the portfolio[186](index=186&type=chunk)[206](index=206&type=chunk) [Liquidity and Capital Resources](index=62&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity is sourced from operations, its credit facility, and debt/equity issuance, with $100.7 million available on its credit facility and total contractual obligations of $513.3 million - Net cash used in operating activities was **$96.6 million** for the six months ended Sep 30, 2023, mainly due to **$114.8 million** in investment purchases[218](index=218&type=chunk)[219](index=219&type=chunk) - Financing activities provided **$95.9 million** in cash, primarily from a **$74.8 million** issuance of **8.00%** Notes due 2028 and net borrowings on the credit facility[222](index=222&type=chunk) Contractual Obligations as of September 30, 2023 (in thousands) | Contractual Obligations | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Credit Facility | $79,300 | $— | $79,300 | $— | $— | | Notes payable | $337,238 | $— | $127,938 | $74,750 | $134,550 | | Interest payments on obligations | $96,716 | $26,382 | $45,705 | $24,082 | $547 | | **Total** | **$513,254** | **$26,382** | **$252,943** | **$98,832** | **$135,097** | [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=69&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate risk, with 100% of its debt portfolio consisting of variable-rate loans with an interest rate floor as of September 30, 2023 - The company's primary market risk exposure is to interest rate fluctuations, which affects the spread between its borrowing costs and investment income[258](index=258&type=chunk) - As of September 30, 2023, **100%** of the company's debt investment portfolio consisted of variable-rate loans with an interest rate floor[259](index=259&type=chunk) [Item 4. Controls and Procedures](index=69&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting identified - Management concluded that disclosure controls and procedures were effective as of September 30, 2023[260](index=260&type=chunk) - There were no changes in internal controls during the three months ended September 30, 2023, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[261](index=261&type=chunk) [PART II. OTHER INFORMATION](index=70&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=70&type=section&id=Item%201.%20Legal%20Proceedings) The company may be involved in ordinary course legal proceedings but does not expect any current matters to materially affect its financial condition or results of operations - The company is not currently party to any legal proceeding that involves a claim for damages exceeding **10%** of its consolidated current assets[262](index=262&type=chunk) [Item 1A. Risk Factors](index=70&type=section&id=Item%201A.%20Risk%20Factors) The company states there have been no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the fiscal year ended March 31, 2023 - For a discussion of risks, the company refers to the "Risk Factors" section in its Annual Report on Form 10-K for the fiscal year ended March 31, 2023[263](index=263&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=70&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This item is not applicable for the reporting period - Not applicable[264](index=264&type=chunk) [Item 5. Other Information](index=70&type=section&id=Item%205.%20Other%20Information) No officers or directors adopted or terminated any Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements during the third quarter of 2023 - No officers or directors adopted or terminated any contract, instruction, or written plan for the purchase or sale of the company's securities intended to satisfy Rule 10b5-1(c) conditions during the quarter[267](index=267&type=chunk)