Gladstone Investment Corporation (GAIN) Earnings Call Transcript & Summary

Thank you. Welcome to Gladstone Investment Corporation first quarter 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 zero phone keypad. Please note this conference is being recorded. I will now turn the conference over to Mr. Gladstone, Chairman. Thank you. You may begin.

Well, thank you for that nice introduction. This is David Gladstone, Chairman. This is the earnings conference call for the first quarter ending June 30, 2026 for the This is for our shareholders and for any of the analysts that are on the line for Gladstone Investment. It's listed on NASDAQ trading symbol GAIN. It's easy to remember because we're always triggering capital gains. keep up with us by listening to this and following us online. That's for the common stock. We do have some registered notes, three of them. You can buy our notes as well. This is multifaceted company and I want to thank you all for calling in. We have to provide updates to our shareholders and analysts and provide our of the current business environment. And the two goals really are to help you understand what just happened to us and what's happened to us over the last, so many months and also give you a current view of the future. And now we'll hear from Katherine Curtis. She's director of investor relationship, as well as any ESGs, and provides a brief disclosure regarding certain regulatory matters. that she keeps us from violating. So, Catherine, jump online.

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 investor's page of our website, gladstoneinvestments.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, and earnings press release 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're also on X at Gladstone comps, as well as Facebook and LinkedIn. Keyword for both is the Gladstone companies. Now I will turn the call over to David Dellum, CEO,.

and President of Gladstone Investments. Thanks, Catherine, and welcome to everyone on the phone call. I am happy to report that GAIN again produced solid quarter results. time for this first quarter, end of June 30, 2026. We generated adjusted NII of 26 cents per share, which is sufficient to cover the monthly dividend distributions for the quarter. And we also ended with a total portfolio fair value of 1.3 billion. So this This was a pretty busy quarter, very much so with deal-related activity. And then during the quarter, we actually entered into an agreement to acquire one new portfolio company called Extrude Hone. And we aim to close this in the coming weeks, and it's subject really to obtaining some required regulatory approvals, which should not be an issue. It's just a timing thing. subsequent to the quarter end, of course a lot of this activity began during the quarter, we entered into an agreement to sell the operating entity in our investment of SFEG Holdings and this sale, again subject to various regulatory approvals, this is a most multinational company and so there are various approvals necessary in certain countries, but we hope and expect that this will close in the coming months. When we do, we expect to receive a full repayment of our investment along with a very significant capital gain. So in July, we also finalized the acquisition of another new portfolio company, DHE Computer Systems, and then we also made an accretive add-on acquisition to one of our existing investments called Global Grab Technologies. So with all this activity with the pending new deals that we've mentioned here, we will have invested an aggregate of at least $116 million within the first six months of this fiscal year. That's relevant because it compares very nicely to the approximate $183 million that we have averaged over the last three fiscal years. So these new investments and certainly the exit activity are consistent, as I always like to say, with our buyout strategy, which is growing the portfolio through the acquisition of operating companies at attractive valuations, and this again, where we are generally the majority economic owner. We make these acquisitions through a combination of equity and debt investments and of course main reason given our thesis for GAIN, the equity provides a potential upside of additional dividend payouts through capital gains as we would anticipate clearly in this SFEG exit And then the debt securities generate operating income to support our monthly distributions to shareholders. And this is definitely one factor that differentiates us from most of the other traditional credit BDCs. And in this regard, from our operating income, we maintain our monthly distribution to shareholders of $0.08 per share. or 96 cents per share on an annual basis. So at this point, I'd like to turn it over to Erica Hyland, who as mentioned before, will take over as president October 1st. And Erica, would you like to discuss the outlook and the current pipeline of new investments? Absolutely. Thank you, Dave.

There continues to be ample liquidity in the M&A market, creating a competitive environment for new acquisitions at reasonable valuations. While challenging, we have been able to compete effectively for acquisitions that fit our model. Our model is where we provide both debt and equity to complete the transaction with a meaningful fixed charge coverage and an interest income yield on our total investment in excess of our cost of capital. As mentioned earlier, we have closed or have an agreement in place to acquire two new portfolio companies. We continue to be in varying stages of diligence on additional possible new opportunities, including both accretive add-on acquisitions to existing portfolio companies, and we are in review and negotiation with a number of other new opportunities. As to our existing portfolio, most of the companies have experienced positive results to date, though we continue to be cautious due to macroeconomic factors such as elevated energy prices, potential supply chain disruption and tariff costs, and therefore the impact on demand and margins. We are working with all of our companies in evaluating cost efficiencies and growth initiatives as we continue to navigate the current environment. disregard a couple companies to highlight here. Galaxy Technologies, they've experienced very positive growth in the aerospace and industrial sectors. Diligent's new management team has stabilized the business and is generating very positive EBITDA, which gives us some encouragement that we will get it back to accrual status.

And finally, Pyrotech has been acquisitive and experiencing growth with existing and new artists and their entertainment schedules. And I'll turn it back to you, Dave. Thanks, Erica. So again, in summing up the year, the current portfolio is in solid shape. And just to touch on this, Erica said that we're working with all of our companies, and that's something that we We're very proactive with our operating companies. So when we say that, it's not just in passing. We actually do work at it. And so we feel very good about where we are. We have a strong liquid balance sheet, a very good level of potential portfolio activity with a prospect of continued strong earnings and the due distributions over the next year. So while we continue to navigate the challenge of an uncertain economic landscape. So with that, let's turn it over to our CFO, Taylor Ritchie, and he'll give you a lot more of the detail of where we are and what to look forward to. Taylor? Thank you, Dave and Erica, and good morning, everyone.

Our results is quote-unquote a solid-science generation, continued strength within our investment portfolio, and proactive capital management that supported the disciplined execution of our long-term strategy. generated net investment income of $15.9 million, or 40 cents per share during the quarter, compared with a net investment loss of $10.6 million in the prior quarter. net investment income, which excludes the impact of capital gains-based incentives, increased to $10.4 million, or $0.26 per share, compared to $7.9 for sharing the product order. Importantly, both the net investment income and adjusted net investment income exceeded our regular distributions during the quarter. The increase in net investment income was driven by higher investment income together with lower expenses, primarily reflecting the reversal of accrued capital gains-based incentive fees resulting from the changes in portfolio valuations. The weighted average principal balance of our interest-bearing investment portfolio remained relatively stable during the quarter at approximately 7.5 $106 million, providing a consistent base for recurring interest income. The portfolio's weighted average yield was 12.9% during the quarter. This is supported by the interest rate floors included in each of our debt investments. Given our recent investment activity, we expect the portfolio's weighted average yield to increase modestly, as the investments originated subsequent to quarter end include interest rate floors above the weighted average of our existing portfolio. We believe our debt investment portfolio is well positioned to cross a range of interest rate environments. As disclosed in our form 10-Q, based on the current portfolio composition, a 50 to 150 basis point increase in SOFR would be expected to increase annual net investment income by approximately 2 to 9 cents per share. while a equivalent decline in SOFR would reduce annual net investment income by approximately one to three cents per share. This favorable interest rate profile continues to provide meaningful downside protection while preserving attractive upside should short-term interest rates increase. Total investment income increased to $28.4 million compared to $25.2 million in the prior quarter. Interest income increased modestly, while stronger success fee income more than offered lowered dividend income from our equity investments. As a reminder, both dividend income from our equity investments and successively income from our debt investments are dependent upon events at our portfolio company. Therefore, I'm not available. As a result, these income streams should be evaluated over longer periods rather in its individual quarter. Net expenses declined to $12.4 million compared to $35.8 million in the prior quarter. The decrease primarily reflected the reversal of $5.6 million of accrued capital gains based on the fees during the current year. with an 18.5 million accrual in parkour. These lower-infinity accruals more than offset higher interest expense associated with our financing activities as well as a modest increase in other operating expenses. Portfolio valuations declined by $18.8 million during the quarter. The decline was primarily by permanent mainly due to the adjustment in SSEG's valuation following agreement on the final sale price. Excluding this adjustment, the remainder of the portfolio generated net unrealized appreciation, reflecting positive operating performance trends at several portfolio companies, together with higher market valuation multiples. As of June 30th, three portfolio companies are on non-accrual status and will remain actively engaged with each borrower, continuing to work alongside management teams to either return these investments to accrual status or proceed to accrual status. pursue orderly edits where appropriate. The non-incrual investments represent 3.9% of our total portfolio at cost and only 1% at fair value at the quarter end. The increase in fair value from the prior quarter was driven primarily by the continued operational improvement at diligent delivery systems, which experienced a 3.8 million increase in fair value during the quarter. Based on current operating trends, we continue to believe management is making meaningful progress and remains optimistic to join the team. the collection of previously unpaid interest over the coming quarters. NAV decreased to $16.24 per share compared to $16.78 per share at the end of the prior quarter. The decrease primarily reflected 47 cents per share of net unrealized appreciation, 23 cents per share of net realized losses, and 24 cents per share of distributions to common shareholders. These items were partially offset by 40 cents per share of net investment income. During the quarter, we completed two significant financing transactions that further strengthened our capital structure. The first, using the proceeds from our February issuance of five-year and year notes, we repaired paid our 5% notes at maturity during May. Second, we successfully amended reducing our bond spread over certain by 40 basis points, increasing the facility commitment size from 300 to 405 million while extending the facility's maturity to 2031. We have ample liquidity to fund new investment opportunities from the unused borrowing capacity under our credit facility, with approximately $158 million outstanding as of quarter end. These actions position us to execute our investment strategy with enhanced financial flexibility through extending the duration of our debt capital and by expanding availability and lowering loan costs on our credit facility. While we were not active under our common stock ATM program during the quarter or subsequent to quarter end. to access the equity market selectively when market conditions are favorable, and doing so supports attractive shareholder returns in time. Our balance sheet remains in a strong position, ending the quarter with an asset coverage ratio of 209% and a debt-to-equity ratio of 0.88 times. We believe this provides meaningful leverage capacity to support our current investment Finally, on distributions, we limit the fiscal year with $21.3 million or 53 cents per share of spillover income. primarily due to adjusted net investment income exceeding our regular monthly distributions, still have increased to 22.5 million, or 56 cents per share, at quarter end. balance is sufficient to support approximately seven months of our current monthly distribution rate and enhances our flexibility in determining both the timing and amount of future monthly and supplemental distributions. We ended the quarter with total distributable income of $160.4 million, or $4.03 per share. As this balance primarily represents unrealized appreciation across our investment portfolio, it reflects the potential for meaningful future shareholder distributions that we expect to monetize over time. through successful portfolio company exits. Looking ahead, we anticipate continuing our practice of making supplemental distributions to shareholders as we realize capital gains from the successful exit of appreciated equity investments. The timing and amount of these supplemental distributions will depend on the pace of portfolio realizations, taxable income considerations, and our broader capital allocation priorities. Overall, we believe the portfolio remains well positioned, supported by our strong liquidity profile. conservative leverage, growing spillover income, favorable interest rate positioning, and healthy acquisition pipeline. We're confident in our ability to continue generating attractive long-term returns for shareholders.

That covers the number of today's call. I'll now hand it back over to you, David, to wrap this up. Well, thank you very much, Taylor. That was very nice. And Dave and Erica and Catherine, good information for our shareholders this call. And the Form 10-Q should be bringing everybody up to date in our company. The team has reported solid results for the quarter ending June 30, 2026, and has already shown positive performance for the upcoming quarter with new investment activity. and some pending exits that we're pretty sure we'll get this quarter. We believe Gladstone investment is an attractive investment for investors seeking continuous monthly distributions and then some supplemental distributions from a potential capital gains and other income that we have. The team hopes to continue to show you a strong return for the investments for this next quarter as well as the rest of the year. Now let's stop and turn to some questions from our analysts, as well as hopefully some of the shareholders will.

call in right I can't come on please thank you if you would like to ask a question please press star 1 on your telephone keypad a confirmation tone will indicate your line is in the question queue you may press star 2 if you would like to remove your question from the queue and for participants using speaker equipment may be necessary to pick up your handset before pressing addressing the Star Keys. Our first question is from Christopher Nolan with Ladenburg-Bauman. Please proceed.

Hi, thank you for taking my questions. I guess for Taylor, there is another income, a $5.6 million income line. Is that related to the incentive fee reversal at all?.

No, it is not. That is the collection of exit fee income, prepayment of exit fee income, success fee income, rather, that... we will collect from time to time from our portfolio companies, and this one was paid by SFEG.

in advance of their pending exit. Okay, then on the topic of SFEG and the other exits indicated, should we anticipate any sort of net gain from that at all? Apologies. Did you say debt gain or net gain? Net, net. Realized less, you know, the true up on the unrealized.

Yes, I would expect where our valuation is with SFEG, that's our approximate value that we would expect to collect as part of an exit. Now it is discounted for potential transactions transaction costs and other activities, but that is what I would expect for us to be able to collect and generate in potential realized gains.

Okay, and then finally, on the cash flow statement, I noticed that there appears to be no repayments in the quarter. Is that correct?.

Yes, that's correct. Okay, thank you for taking my questions. Nice question. Our next question is from Eric Swick with Lucid Capital Markets. Please proceed.

Thank you. Good morning, everyone. Thanks for the detailed commentary. You covered a number of the companies I wanted to ask about Galaxy and Diligent, so I appreciate the positive updates there. I wanted to ask just a follow-up question first on SFEG. understand that the 630 mark reflected the negotiations and the sales price and one congrats on the sale there, another nice exit for you. But just kind of curious, really, regarding the negotiations, you know, how did the buyer's view of valuation differ from the mark that you had on your statements as of 3.30?.

Sure. This is Erica Hyland. So, as you can appreciate with these transactions, when we enter into an LOI with a prospective buyer, there are certain assumptions made around the company's financial performance, and as a buyer, Occasionally, not only may there be disagreements on certain assumptions, but also there may be certain findings or indulgence where accommodations may need to be made in the value. Also, our valuation here reflects certain aspects of the purchase agreement that have funds reserved in escrow pending future activity so there is the potential that some of those proceeds may flow back in but you know for purposes of our valuation here this is based on the final negotiated contract with the buyer.