Prepared remarks
Greetings, and welcome to the Gladstone Investment Corporation First Quarter 2026 Earnings Call. 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 to everyone. I appreciate you all for joining us. We enjoy these earnings conference calls. This is for the first quarter ending June 30, 2025, of the 2026 fiscal year, for shareholders and analysts of the Gladstone companies, specifically the Gladstone Investment companies. We have some common stock listed under GAIN, along with three others: GAINN, GAINZ, GAINL, and GAINI. Thank you all for joining. We are always pleased to update our shareholders and the analysts following us, discussing the current business environment and our outlook for the future. Now, I’ll hand it over to Catherine Gerkis, Head of Investor Relations and ESG, who will provide a brief disclosure regarding certain regulatory matters related to 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, 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 email 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. Keyword for both is the Gladstone Companies. Now, I will turn the call over to David Dullum, President of Gladstone Investment.
Thank you, Catherine. Good morning, everyone. I'm pleased to share that for the first quarter of fiscal year '26, GAIN achieved very positive earnings results and importantly, saw an increased level of investment activity. We ended the quarter with adjusted net investment income of $0.24 per share, which comfortably covers our monthly distribution to shareholders. Our assets grew to approximately $1.1 billion, up slightly from $1 billion at the end of the previous quarter. This increase was driven by two new buyouts during the current quarter. Additionally, we secured a new portfolio company after the quarter ended, bringing our total to 28 operating businesses. So far in fiscal '26, we've invested about $130 million in three new portfolio companies, compared to a total of $221 million for all of fiscal '25. Being the first quarter, we are optimistic about surpassing our fiscal '25 results. These investments align with our strategy of expanding our portfolio by acquiring operating companies at attractive valuations. As always, these acquisitions are funded through a mix of our equity and debt investments from our balance sheet, aiming to generate capital gains on equity at exit and operational income from debt securities, which supports our monthly dividend distributions. From our operational income, we've maintained a monthly distribution to shareholders of $0.08 per share, totaling $0.96 annually. In June, we also issued a supplemental distribution of $0.54 per share, resulting from a successful exit of one of our portfolio companies in the previous quarter, leading to realized capital gains on that investment. We consistently aim to generate capital gains, pay supplemental distributions, and continue our monthly dividend payments, and we have successfully done so to this point. Since our inception in 2005, through June 30, 2025, we have invested in 64 buyout portfolio companies totaling around $2.1 billion and have exited 33 of them, resulting in total investments valued at approximately $1 billion. Over this period, we generated about $353 million in net realized gains and $45 million in other exit income, and we aim to continue this trajectory. Looking ahead, I believe there is liquidity in the M&A market, creating a competitive landscape for us in securing acquisitions at reasonable valuations. However, there's some uncertainty due to tariffs and a potentially slowing economy, which influences our analysis when considering new opportunities. Different businesses may be impacted differently, presenting both opportunities and uncertainties. We are actively competing for acquisitions that fit our model, having closed two new investments during the quarter and a third afterward. We're currently reviewing and conducting due diligence on several new opportunities, and I remain optimistic about new buyout activity for the remainder of the fiscal year. Regarding our existing portfolio, we have a few consumer-focused companies that have performed well, but we are cautious due to supply chain disruptions and tariff costs that could affect consumer prices, demand, and margins. We are engaging with all our companies to explore supply chain alternatives and production strategies to navigate this environment. In summary, our current portfolio is strong, we have a solid balance sheet, ongoing buyout activity, and I anticipate good earnings and distributions over the next year as we navigate the challenges of this economic landscape. To provide more details, I will now 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 was down from $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 4 portfolio companies on nonaccrual status, there remain no portfolio-wide credit concerns, and we continue working closely with these 4 companies and their management teams to get back on accrual status or exit the investments when possible. With the continued improvement at 1 of the 4 portfolio companies and our planned restructuring of the investment, we anticipate that 1 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. Team has reported solid results for the quarter ending June 30, 2025, including multiple 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 and 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?
Questions and answers
Our first question comes from Mickey Schleien with Clear Street.
Dave, there's been a lot of discussion about weakness in the M&A market, but you've acquired 3 companies since May, which is a very healthy pace. And 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?
Thank you, Mickey, and congratulations on your new position. We are indeed focused on deal flow, particularly for companies we aim to acquire in the range of $5 million to $12 million in EBITDA. The market is competitive, and there is significant capital available, but we are experiencing a solid quality of deal flow, even though valuations remain challenging. We have evaluated several companies and are willing to pay around 7 to 7.5 times EBITDA for some of them, while others are going for 9 times. If valuations align more closely with our expectations, we could be even more active in the market. Overall, we see good deal quality and remain very committed to our efforts.
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 really. The activity level is about the same as it has been. Interestingly, we've noticed an increase in activity with a couple of consumer companies, even though tariffs have raised our product costs. The retailers are somewhat willing to absorb those costs due to the nature of the products. Overall, we’re not seeing significant increases or decreases in activity at this time, just a more cautious approach. The biggest impact is coming from how costs are affecting margins. As a result, some companies are experiencing a modest decline in EBITDA, which has led to a slight decrease in valuations. It's nothing too dramatic, but margins are being squeezed primarily due to the tariffs.
That's interesting, but not enough to threaten their ability to service their debt, right?
Correct.
Yes, sir. Okay. And 1 sort of modeling question. And 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?
We are actively monitoring our current spillover level and our position regarding the end of the fiscal year, which was $1.50 per share. We reduced that by approximately one-third with the supplemental distribution in June. We do not have a specific target for monitoring this level due to the fluctuations in our capital gains accrual from quarter to quarter. However, we are comfortable with our current standing and will continue to assess it on a quarterly 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 1 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 keeping the business. We're not going to do anything dramatic with it, and we'll roll it as you say. And then over time, we'll get out of it when we get our debt paid out.
Our next question comes from 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 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 SOFR potentially?
Sure. Thanks, Erik. So the yield this order picked up, and that was primarily due to that collection of $1.5 million of past-due interest from when the company is on nonaccrual status. So we did have that 1 quarter bump from that. Excluding that collection, our yield was 13.1%. So approximately in line with where we were last quarter. And really, that declined quarter-over-quarter when you back out the collection of pass-due interest is really due to the exit of knock turn at the end of the prior quarter. So I think looking forward, to your point on potential rate cuts and compression, our 3 most recent new deals between Smart Chemical, Sun State and Global GRAB, all have 13.5% floors. And given our spread in 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 of protection when SOFR is decreasing.
That's great color, and I appreciate the clarification on the yield, excluding that onetime 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-pricing and spread perspective, but more so on structure, are you seeing any kind of changes from maybe some of your competitors, whether they're bending structure that would potentially kind of weaken the underwriting in the market from a kind of future perspective? Or is that still holding up pretty well at this point?
Thank you, Erik. In line with our strategy of acquiring businesses and providing both debt and equity, we don’t have any significant direct competitors in the BDC space. While there are others who engage in similar activities, particularly in debt provision and possibly a larger equity stake through warrants or participation, we typically operate more like sponsors. Consequently, our real competition tends to come from private equity firms, especially if they are securing leverage at potentially lower rates. However, our focus remains on the valuation and enterprise value of the businesses we are engaged with. If we can arrive at an enterprise value that suits our needs, the structure of our equity and debt is unlikely to change significantly. This stability enables us to establish a minimum baseline, as Taylor mentioned regarding our deals. If we need to adjust the equity component, it's a self-imposed decision relative to the debt element. We aim for strong fixed charge coverage, which is crucial for sustaining interest payments, and we strive to achieve a fixed yield that aligns with our average cost of capital. In summary, we are in a solid position, especially considering we typically incorporate an exit fee, which is not common practice for others. Ultimately, our main competitive challenge lies in identifying enterprise values that match our requirements, and if we continue executing our current strategy, I believe we will remain in a good position. I hope this lengthy explanation addresses your question.
And Erik, I was going to jump in and just say it 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 0 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.
And last one for me, just looking at the SOI, it 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 market?
No, just that their EBITDA was up and also the multiple was up. So it was just a combination of those 2 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.
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. And hopefully, in the 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.
This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.