Gladstone Investment posts $0.24 adjusted NII per share, increases assets to $1.1 billion amid competitive acquisitions and steady monthly distributions.

SAM - (00:00:25)

SAM Greetings and welcome to the Gladstone Investment Corporation first quarter 2026 earnings call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press Star 0 on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Mr. David Gladstone, chairman of Gladstone Investment Corporation. Thank you. You may begin.

David Gladstone - Chairman - (00:01:36)

Well, thank you, Melissa. Good morning to everybody. Thank you all for calling in. We love these earnings conference calls. The first quarter ending June 30, 2025 of the 2026 fiscal year. And this is for shareholders and analysts of the Gladstone companies and Gladstone Investment Companies. And we've got some common stock, you know it as GAIN G A I N and we do have three others. GAIN N at the end and GAIN Z and GAIN L and GAIN I. All right, you might want to read some of those. Thank you all for calling in. We're always happy to provide an update to our shareholders and the analysts who follow us and look at the current business environment as well as the other goal which is to give you a current view of our view of the future and understands what's happening. And now we'll hear from Kathryn Gerkes. Katherine is head of Investor Relations and ESG and provides a brief disclosure certain regulatory matters concerning this. Call in. Kathryn.

Kathryn Gerkes - Head of Investor Relations and ESG - (00:03:00)

Thank you, David. And good morning everyone. Today's call may include forward looking statements which are based on management's estimates, assumptions and projections. There are no guarantees of future performance and actual results may differ materially from those expressed or implied in these statements. Due to various uncertainties including the risk factors set forth in our SEC filings, which you can find on the investors page of our website gladstoneinvestment.com we assume no obligation to update any of these statements unless required by law. Please visit our website for a copy of our Form 10Q and earnings press release, both issued yesterday for more detailed information. You can also sign up for our email notification service and find information on how to contact our investor relations department. We are also on Gladstonecomps as well as LinkedIn and Facebook. Keyword for both is the Gladstone companies. Now I will turn the call over to David Dullum, President of Gladstone Investment.

David Dullum - President - (00:04:03)

Thank you Kathryn. And so good morning to everybody. Happy to be here and to report that for the first quarter of fiscal year 26 that gain produced very positive earnings results and we also very importantly had increased level of investing activity. So we ended this first quarter with adjusted NII of $0.24 per share, which is sufficient to cover our monthly distribution shareholders. And we also got our assets up to about 1.1 billion, which is slightly above from 1 billion at the end of the prior quarter. Now, this increase quarter over quarter in assets did result from really two new buyouts during the current quarter. Additionally, we closed on a new portfolio company subsequent to the quarter end, which is resulting in our current portfolio of 28 operating businesses. So, to date for fiscal 26, we've invested approximately $130 million in three new portfolio companies, and this compares to a total of $221 million which we invested in all of fiscal 25. So, recognizing this is the first quarter, we certainly look forward to hopefully exceeding what we did in fiscal 25. These two investments also are in line with our strategy where we continue growing the portfolio through acquisition of operating companies at hopefully attractive valuations. And as usual, these acquisitions are made with a combination of our equity and the debt investments from our balance sheet, where we look to generate capital gains on the equity when we exit the business, and then obviously the operating income from the debt securities, which goes towards paying our monthly dividend distributions. So from our operating income, we maintained our monthly distribution to shareholders of $0.08 per share or $0.96 per share on an annual basis. We also made a supplemental distribution of $0.54 per share in June, and this again is resulting from the successful exit in the prior quarter of one of our portfolio companies and therefore the realized capital gains on the equity portion of that investment. So we keep stressing that our model is to generate capital gains and pay the supplemental distributions as well as continuing to pay the monthly distributions of dividends. So to date we've been able to do that, and in fact, since inception in 2005, when GAIN was formed, and through this period of 6, 30, 20, 25, we've invested in 64 buyout portfolio companies for an aggregate of approximately $2.1 billion and exited 33 of these companies. And this has resulted in total investments currently valued, say about a billion, while generating over this period of time approximately 353 million in net realized gains and 45 million in other income on exit. And we hopefully will continue doing that. So then, turning to the outlook and where we are, first of all, I believe that there is liquidity in the M&A market which does create this competitive environment for us for new acquisitions at what we would consider reasonable valuations. Having said that, we're in a bit of uncertainty, obviously, with the added variable of tariffs potentially slowing economy which impact analysis certainly when evaluating new opportunities. Now not every business is affected in the same manner which both creates opportunity and adds to the uncertainty. Now we seem to be able to compete effectively for acquisitions that fit our model and as we mentioned, we've been active closed on two new investments during the quarter and the third subsequent to quarter end. We are currently continuing to be in various stages of review and diligence on a number of new opportunities and I do remain optimistic for new buyout activity during the balance of the fiscal year. As to our existing portfolio, we have a few companies that are consumer focused and while they have experienced very good results to date, we are cautious due to supply chain disruption and the tariff costs on the ultimate consumer prices that may have to be passed through and therefore may impact the demand the margin of our companies. Obviously we are working with all of our companies and evaluating supply chain alternatives and any production strategies that we so we can continue to navigate this current environment. So in summing up the quarter and looking forward to the rest of the fiscal year, our current portfolio is in good shape. We have a strong liquid balance sheet, a good level of buyout activity with a prospect of continued good earnings and distributions over the next year. So while we navigate the challenges of this uncertain economic landscape. So to go into a little more detail, I'll turn it over to our cfo Taylor Ritchie.

Taylor Ritchie - Chief Financial Officer - (00:09:05)

Thank you Dave and good morning everyone. Looking at our operating performance for the first quarter of the fiscal year, we generated total investment income of $23.5 million, down from $27.5 million in the prior quarter. This was primarily due to the prior quarter including $4.2 million of success fee in dividend income which did not reoccur as the timing of such income is variable. The decrease in total investment income was partially offset by an increase in interest income including the collection of $1.5 million of past due interest from a portfolio company that was previously on non accrual status. Net expenses for the quarter were $14.5 million, down from 20.3 million. The decrease was primarily due to the decrease in incentive fees which included a $2.3 million decrease in income based incentive fees as well as a $2.3 million decrease in capital gains based incentive fees. Interest expense decreased in the current quarter due to the timing of the portfolio company exit in the prior quarter and the timing of our new investment activity in the current quarter. We also had an increase in credits to fees from the advisor due to the new investment activity. Previously mentioned. This resulted in net investment income for the quarter of 9.1 million compared to 7.2 million in the prior quarter. Overall portfolio company valuations in aggregate were down 1.0 million. This unrealized depreciation was driven by decreased performance at some of our portfolio companies partially offset by higher valuation multiples across the portfolio and increased performance at a number of our other portfolio companies. Adjusted net investment income, which is net investment income exclusive of any accrued or reversed capital gains based incentive fees, was 8.9 million or $0.24 per share compared to 9.4 million or $0.26 per share in the prior quarter. The decrease was due to the net impact of realized gains and unrealized depreciation on investments in the prior quarter compared to the net unrealized depreciation recorded in the current quarter which resulted in a reversal of previously accrued capital gains based incentive fees. We continue to believe that adjusted net investment income is a useful and representative indicator of our ongoing operations. Consistent with the prior quarter, we continue to have four portfolio companies on nonaccrual status. There remain no portfolio wide credit concerns and we continue working closely with these four companies and their management teams to get back on accrual status or exit the investments when possible. With the continued improvement at one of the four portfolio companies and our planned restructuring of the investment, we anticipate that one portfolio company will return to accrual status during the next quarter. Our NAV decreased to $12.99 per share compared to $13.55 per share at the end of the fiscal year. The decrease was primarily a result of $0.78 per share distribution to common shareholders including the $0.54 supplemental distribution paid in June as well as $0.04 per share of net unrealized depreciation. These decreases were partially offset by 25 cents per share of net investment income and 1 cent of net accretion from our ATM stock sales. We believe that maintaining liquidity and flexibility to support and grow our portfolio is key to our continued success. As of yesterday's Release, we had $151 million in availability on our line of credit. Additionally, we raised approximately $19.3 million in net proceeds under our common stock atmosphere including approximately $12.1 million subsequent to quarter end. We will continue to raise equity capital through our ATM program while prices remain accretive to NAV in order to support our portfolio growth as we continue to experience a healthy level of new buyout opportunities. Further, we will look to equity capital while monitoring the interest rate environment and evaluating debt financing opportunities Overall, our leverage remains in a strong position with an asset coverage ratio as of June 30, 2025 of 189%, providing cushion to the required 150% coverage ratio. Focusing on our distribution to shareholders, we ended the prior fiscal year with 55.3 million, or $1.50 per share in spillover, sufficient to cover our current monthly distribution of $0.08 per share for an annual run rate of $0.96 per share, as well as the $0.54 per share supplement distribution paid in June. We will seek to continue funding future supplemental distributions as we recognize realized capital gains on the equity portion of future exits. Using the monthly distribution run rate of $0.96 per share per year and the $0.54 per share in supplemental distribution paid in the current fiscal year, our aggregate estimated fiscal year distributions would yield about 10.6%. Using yesterday's closing price of $14.16. This covers my part of today's call. I'll now hand it back over to you, David, to wrap us up.

David Gladstone - Chairman - (00:14:02)

Well, thank you, Taylor. You did a nice job. So did Dave and Kathryn. And all of that's good information for our shareholders. And this call and the 10Q we filed with the SEC yesterday should bring everyone up to date. The team has reported solid results for the quarter ending June 30, 2025, including multiples, new investments and greater liquidity position with our portfolio. So we're in a good position to grow, and we look to Dave and his team to continue to grow and pay out extra dividends as well as wonderful quarterly dividends. Gladstone Investment is an attractive investment for investors seeking continuous monthly distributions, supplemental distributions from potential capital gains and other income. Team hopes to continue to show you a strong return for your investment in our fund. Now, let's have some questions from our analysts as well as shareholders and anybody else that has a question. Operator, would you come on it?

OPERATOR - (00:15:12)

Thank you. If you'd like to ask a question, please press Star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. Our first question comes from the line of Mickey Schlung with Clear Street. Please proceed with your question.

Mickey Schlung - Analyst - (00:15:39)

Yes, Good morning, everyone. Dave, there's been a lot of discussion about weakness in the M&A market, but you've acquired three companies since May, which is a very healthy pace, and I'd like to Know, is that just idiosyncratic, you know, given the lead time in getting these deals done, or are you actually seeing better deal flow? Yeah.

David Dullum - President - (00:16:02)

Thanks, Mickey. And congratulations on your new spot. Thank you. Glad that you're still with us. No, I would say it is really. Obviously, as you well know, we work really hard at deal flow, and certainly in the category of companies that we like to acquire, you know, in the general range of 5 to, say, 10, 12 million of EBITDA, it is competitive. There is a lot of money out there, but we are seeing, I would say, a good quality of deal flow. And the valuations are still tricky. You know, we've certainly looked at a number of companies and been very interested in them and where we might be willing to pay, say, up to 7 to maybe 7.5x on an EBITDA basis. You know, some of them are going for nine times. Right. So theoretically, we could be even more active if these valuations came closer to where we are. But I would say it's just fundamentally, we are seeing good quality of deals and we're very active and we work really hard at it, so. So not much more than that, I don't think.

Mickey Schlung - Analyst - (00:17:15)

Okay, I understand. Thank you. In your prepared remarks, I think you mentioned the possibility for the economy to slow down, and that's certainly what economists are forecasting as tariffs are implemented. Are you seeing any signs yet of a weakening of performance across your portfolio companies?

David Dullum - President - (00:17:37)

Yes. Not generally. I would say the activity level is about where it's been. We've seen, ironically, in a couple of companies on the consumer side where we've actually seen an increase in activity, even though tariffs have impacted the cost of our products. And funny enough, the retailers we deal with in that regard have been willing to absorb that, in part just because of the nature of the products. But I would say, overall, it's a general, you know, we're not increasing, really, but we're not seeing significant decrease in activity at this point. Just more caution. I'd say the biggest impact, obviously, is how the costs are, in fact, affecting a bit the margins. That's where we're really, I would say, seeing more impact. So as a result of that, you know, we have some of these companies where we clearly had a, you know, modest decline in ebitda, which obviously has led to somewhat, you know, a decline in valuations. Nothing. Nothing overly dramatic, but just a squeezing a little bit of margin just because of mainly the tariffs.

Mickey Schlung - Analyst - (00:18:52)

That's interesting. But not enough to threaten their ability to service their debt, right?

David Dullum - President - (00:18:59)

Correct. Yes, sir.

Mickey Schlung - Analyst - (00:19:01)

Okay. And one sort of modeling question and I think Taylor talked about undistributed taxable income if I adjusted for the write down of Edge, which looks like it's going to happen. Looks like you're carrying about $0.50 of Undistributed Taxable Income (UTI) per share as of the end of the quarter you just reported. Is that a level the board is comfortable retaining?

David Dullum - President - (00:19:30)

I think we continue to monitor our. current spillover level and where we stand as far as using what we already have from ending the fiscal year, which was $1.50 per share, we got rid of a third of that approximately with the supplemental distribution back in June. And, and we don't necessarily have an. Exact target that we use to monitor this level considering our fluctuations from quarter to quarter with our capital gains accrual. So yes, I mean we are comfortable where we stand right now and we continue to evaluate it from a quarter to quarter basis.

Mickey Schlung - Analyst - (00:20:08)

Okay, thank you for that. Those are all my questions. I appreciate your time.

David Dullum - President - (00:20:13)

Thanks. Niki, good to hear from you again. Operator, would you come on please? And let's get the next question.

OPERATOR - (00:20:21)

Of course, our next question comes from the line of Sean Paul Adams with B. Riley Securities. Please proceed with your question.

Sean Paul Adams - Analyst - (00:20:29)

Hey guys. Good morning. On Diligent Delivery Systems. That one's coming up due pretty soon. It looks like you actually had a. Quarter over quarter markup on it as well. Is there any color you can add. To that name in particular?

David Dullum - President - (00:20:43)

Yes. Thanks, Jean Paul, nice to chat with you. We are going to keep rolling on that investment as necessary. It's one that we've a little bit of history you may not be aware of. It's actually a company that we owned many years ago called ndli, which we actually sold. And when we sold it we just took back a bit of paper, 13 million and a small amount of warrants. And it's just been really frankly just a debt investment which of course for us right now is unusual. We've been going through working with the senior bank, we and they are in concert and there's some restructuring of management that's going on with the company right now. So we'll just keep the business. We're not going to do anything dramatic with it and we'll react, roll it as you say and then over time we'll, you know, we'll get out of it when we get our debt paid out. Got it. Appreciate the color. Okay. Do we have a third question please?

OPERATOR - (00:21:50)

Yes. Before we take our third question, as a reminder, if you'd like to join the question queue, please press star1 on your telephone keypad. Our next question comes from the line of Eric Zwick with Lucid Capital Markets. Please proceed with your question.

Eric Zwick - Analyst - (00:22:05)

Thanks. Good morning everyone. Just noticed that after several quarters of a decline in the yield on the interest bearing investments, it did increase here in the most recent quarter. Just curious, have you kind of seen. A change there, do you think? We've seen a bottom kind of what drove it here and then kind of what would be your outlook going forward and I guess maybe taking into consideration the market's expectation that we may see maybe 100 basis points decline in fed funds and so forth potentially.

David Dullum - President - (00:22:34)

Sure. Thanks Eric.

Taylor Ritchie - Chief Financial Officer - (00:22:35)

So the yield this quarter picked up. And that was primarily due to that collection of 1.5 million of past due interest from when the company was on non-accrual status. So we did have that 1/4 bump from that. Excluding that collection, our yield was 13.1%. So approximately in line with where we were last quarter. And really that decline quarter over quarter when you back out, the collection of past due interest is really due to the exit of Nocturne at the end of the prior quarter. So I think looking forward to your point on potential rate cuts and compression, our three most recent new deals between Smart Chemicals on State and Global grab all have 13.5% interest rate floors. And given our spread and the way those terminals are situated, they're going to stay at 13.5% despite any changes in SOFR. So I think that's our goal going forward is to continue to build in that cushion protection when SOFR is decreasing.

Eric Zwick - Analyst - (00:23:49)

That's great color and I appreciate the clarification on the yield excluding that one time collection. So maybe kind of continuing on that last point, you've been fairly effective in getting floors in on some of these new deals. As you look at your portfolio and in prepared comments you mentioned there's quite a bit of competition in the market for new deals just from a non kind of pricing and spread kind of perspective. But more so on structure, are you seeing any kind of changes from maybe some of your competitors where they're bending on structure that would potentially, you know, kind of kind of weaken the underwriting, you know, in the market from a kind of future perspective or is that still holding up pretty well at this point?

David Dullum - President - (00:24:34)

Yeah. Thanks Eric. For us again, recognizing the nature of our, you know, strategy, if you will, right where we're buying the business and we're providing the debt and the equity, I say this very carefully, we don't have any real direct competitive competitor in that regard in the BDC space. There are others that are similar to some extent that you know, do debt and might take a larger, slightly bigger piece of equity, whether it be through warrants or participation but recognizing we generally are functioning effectively as the sponsor. Right. So we really are competing more with the private equity guys and so to the extent that they are getting leverage perhaps and you know where they might be getting leveraged at a lower rate, we're competing with them in that regard. However, I say for us it's more around what valuation the enterprise value is of the business. So if we can get into an enterprise value that works for us then the ability we have in the structure of the equity and the debt I don't see changing very much. And I think that's where how we're able really to put a floor like Taylor said in the deal and if we have to moderate a bit the equity component, it's kind of doing it to ourself if you will, the equity piece relative to the debt piece. So we're driving towards fixed charge coverage on the business because that's important to be able to continue paying the interest obviously and then obviously modifying the spread to get us to a fixed sort of yield that works for us on our working on our weighted average cost of capital. So long story short, I would say we're in good shape. Plus we also obviously have usually an exit fee which we build in which is different than most people use for pic if you will. So I'd say we're in. I'd say we're in good shape. The real issue for us competitively is finding that enterprise value of the business that fits our profile and if we keep doing it the way we're doing it, I think we're in good shape there. Long answer. I hope it helps to ask the question. And Eric, if you don't mind.

Taylor Ritchie - Chief Financial Officer - (00:26:50)

I was going to jump in and just say as well a lot of the other BDCs have been seeing a rise in PIK income. We are one of the few, if not the only that has zero PIK income. Dave did mention the exit fee that is recorded off balance sheet and it's not being factored into our income stream until we actually collect that income. So I think that is something that sets us apart from other BDCs in the space.

Eric Zwick - Analyst - (00:27:20)

For me, just looking at the SOI, looks like Imageworks had a material increase in the fair value mark this quarter. Anything kind of noteworthy there, company specific or within the industry that drove that mark?

David Dullum - President - (00:27:32)

No, just that their EBITDA was up and also the multiple was up. So it was just a combination of those two things. That's a good business. They're very strong in their market space, good management team, and it's one that we look forward to seeing good results going forward.

Eric Zwick - Analyst - (00:27:55)

Thanks so much for taking my questions this morning.

David Dullum - President - (00:27:58)

Thanks, Ben. Thank you. Eric.

OPERATOR - (00:28:00)

And operator, would you come on and see if there's another question for us. Sir, Right now we have no other questions. I'll turn the floor back to you for any final comments.

David Dullum - President - (00:28:10)

All right. Well, we thank all of you for calling in and re asking questions and hopefully next quarter you'll have a lot more questions for us. We like the questions that come in. Gets anything out of the way that someone might not understand. So that's the end of this call and we thank you all for calling in. See you next quarter.

OPERATOR - (00:28:32)

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.