Prepared remarks
Greetings, and welcome to the Gladstone Investment Corporation First Quarter 2026 Earnings Call. Operator provided instructions. 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.
Thank you, Melissa, and good morning for everybody. Thanks to you all for calling in. We love these earnings conference calls. This is the first quarter ending June 30, 2025 of the 2026 fiscal year, and this is for shareholders and analysts of the Gladstone companies — Gladstone Investment companies. We have common stock GAIN (G-A-I-N), and we also have GAINN, GAINZ, GAINL, and GAINI. All right. I 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 understand what's happening. And now we'll hear from Catherine Gerkis. Catherine is Head of Investor Relations and ESG and provides a brief disclosure of certain regulatory matters concerning this call. Catherine?
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 10-Q and earnings press release, both issued yesterday for more detailed information. You can also sign up for our e-mail notification service and find information on how to contact our Investor Relations department. We are also on X @GladstoneComps as well as LinkedIn and Facebook. The keyword for both is the Gladstone Companies. Now, I will turn the call over to David Dullum, President of Gladstone Investment.
Thank you, Catherine. 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 an 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 to shareholders, and we also got our assets up to about $1.1 billion, which is slightly above $1.0 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 have 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. 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. We keep stressing that our model is to generate capital gains and pay supplemental distributions as well as continuing to pay the monthly distributions of dividends, so to date we've been able to do that. In fact, since inception in 2005 when GAIN was formed and through this period of 06/30/2025, we've invested in 64 buyout portfolio companies for an aggregate of approximately $2.1 billion and exited 33 of these companies. This has resulted in total investments currently valued, as I say, at about $1 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. 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 a 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 and a potentially slowing economy, which impacts the analysis certainly when evaluating new opportunities. Not every business is affected in the same manner, which both creates opportunity and adds to the uncertainty. 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. 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 and the margin of our companies. Obviously, we are working with all of our companies in evaluating supply chain alternatives and any production strategies so we can continue to navigate this current environment. 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 the prospect of continued good earnings and distributions over the next year while we navigate the challenges of this certain economic landscape. To go in a little more detail, I'll turn it over to our CFO, Taylor Ritchie.
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 fees and 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 nonaccrual 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 adviser 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 in a number of our other portfolio companies. Adjusted net investment income, which is net investment income exclusive of any accrued or reverse 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 past quarter. 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 $0.25 per share of net investment income and $0.01 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 ATM, including approximately $12.8 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 at 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 supplemental distribution paid in June. We will strictly continue funding future supplemental distributions as we recognize realized capital gains on the equity portion of future exits. Using the monthly distribution earning 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.
Thank you, Taylor. You did a nice job, so did Dave, Catherine, and all of that's good information for our shareholders, and this call and the 10-Q 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 multiple new investments and a 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 monthly distributions. Gladstone Investment is an attractive investment for investors seeking continuous monthly distributions and supplemental distributions from potential capital gains and other income. The 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?
Questions and answers
Operator provided instructions. Our first question comes from the line of Mickey Schleien with Clear Street.
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. I'd like to know, is that just idiosyncratic given the lead time in getting these deals done? Or are you actually seeing better deal flow?
Yes. Thanks, Mickey. And congratulations on your new spot. Glad this would deal with us. No, I would say it is really — we — obviously, as you well know, we work really hard at deal flow and certainly in the category of companies that we like to acquire in the general range of $5 million to, say, $10 million, $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. 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. Some of them are going for 9x. So theoretically, we could be even more active if the valuations came closer to where we are, but I would say fundamentally we are seeing a good quality of deals, and we're very active, and we work really hard at it. So not much more than that, I don't think.
Okay. I understand. 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?
Yes. Not generally. I would say the activity level is about where it's been. We're seeing, ironically, in a couple of companies on the consumer side that 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. Overall, we're not seeing a significant decrease in activity at this point, just more caution. I'd say the biggest impact is how the costs are affecting margins. That's where we're really seeing more impact. As a result, some of these companies had a modest decline in EBITDA, which obviously has led to a somewhat decline in valuations — nothing overly dramatic, but just a squeezing a little bit of margin mainly because of the tariffs.
That's interesting, but not enough to threaten their ability to service their debt, right?
Correct.
And one modeling question. I think Taylor talked about undistributed taxable income. If I adjust it for the write-down of Edge, which looks like it's going to happen, it looks like you're carrying about $0.50 of UTI per share as of the end of the quarter you just reported. Is that a level the Board is comfortable retaining?
I think we're — 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 used approximately one-third of that with the supplemental distribution back in June. 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 on a quarter-to-quarter basis.
Our next question comes from the line of Sean-Paul Adams with B. Riley Securities.
On Diligent Delivery Systems, that one is 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?
Yes. Thanks, Sean-Paul. We are going to keep that rolling on that investment as necessary. It's one that we've had a little bit of history with; you may not be aware of it. It's actually a company that we owned many years ago called NDLI, which we sold and when we sold it we took back a bit of paper — $13 million — and a small amount of warrants, and it's just been, frankly, a debt investment, which for us right now is unusual. We've been working with the senior bank and they are in concert and there's some restructuring of management 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 roll it as you say. Then over time, we'll get out of it when we get our debt paid out.
Our next question comes from the line of Erik Zwick with Lucid Capital Markets.
I 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, 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 SOFR potentially?
Sure. Thanks, Erik. 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 nonaccrual status. So we did have that one-quarter bump from that. Excluding that collection, our yield was 13.1%, approximately in line with where we were last quarter. That decline quarter-over-quarter when you back out the collection of past-due interest is really due to the exit of Knock Turn at the end of the prior quarter. Looking forward, to your point on potential rate cuts and compression, our three most recent new deals — Smart Chemical, Sun State and Global GRAB — all have 13.5% floors. Given our spread in the way those terms 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 of protection when SOFR is decreasing.
That's great color, and I appreciate the clarification on the yield excluding that one-time collection. Maybe 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 your prepared comments you mentioned there's quite a bit of competition in the market for new deals. Just from a structure perspective, are you seeing any kind of changes from maybe some of your competitors where they might be bending structure that would potentially weaken the underwriting in the market from a future perspective? Or is that still holding up pretty well at this point?
Yes. Thanks, Erik. For us, recognizing the nature of our strategy where we're buying the business and we're providing the debt and the equity, I say this carefully: we don't have any direct competitor in that regard in the BDC space. There are others that are similar to some extent that do debt and might take a slightly bigger piece of equity, whether it be through warrants or participation. But generally we function effectively as the sponsor, so we really are competing more with private equity. To the extent they are getting leverage perhaps at a lower rate, we are competing with them in that regard. However, for us it's more around the valuation, the enterprise value of the business. If we can get into an enterprise value that works for us, then the structure of the equity and the debt tends not to change very much. If we have to moderate the equity component, it's more something we do to ourselves — adjusting the equity piece relative to the debt piece. We're driving toward fixed charge coverage on the business because that's important to be able to continue paying interest, and then modifying the spread to get us to a fixed sort of yield that works for our weighted average cost of capital. We also usually have an exit fee that we build in, which is different than most people use. So 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. If we keep doing it the way we're doing it, I think we're in good shape there.
And Erik, I'll add that a lot of the other BDCs have been seeing a rise in PIK income. We are one of the few, if not the only, with 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. I think that is something that sets us apart from other BDCs in the space.
Last one for me: looking at the Schedules of Investments, it looks like ImageWorks had a material increase in the fair value mark this quarter. Anything noteworthy there company-specific or within the industry that drove that mark?
No, just that their EBITDA was up and also the multiple was up. So it was 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 from going forward.
So right now, we have no other questions. I'll turn the floor back to you for any final comments.
All right. Well, we thank all of you for calling in and asking questions. Hopefully in the next quarter you'll have a lot more questions for us. We like the questions that come in; they get 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.
This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.