Gladstone Investment Corp (GAIN) 2027 Q1 法說會逐字稿

Greeting.

Welcome to Gladstone Investment Corporation first quarter earnings call.

(Operator Instructions) Please note this conference is being recorded.

I will now turn the conference over to Mr. Gladstone, Chairman.

Thank 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, 26 for.

This is for our shareholders and for any of the analysts that are on the line for Gladstone Investments listed on NASDAQ trading symbol gain.

Easy to remember because we're always triggering capital gains,

You keep up with us by listening to this and following us online.

As for the common stock, we do have some registered notes, 3 of them you can buy our notes as well, this is, a multifaceted company, and

I want to thank you all for calling in.

We're happy to provide updates to our shareholders and analysts and provide.

Our view of the current business environment, and the 2 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 Catherine Gerkis, she's a director of investor relationship.

As well as any GSG ESGs.

And provides a brief disclosure regarding the certain regulatory models 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 investors 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 For PEQ 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 are also on X at Gladstonecoms as well as Facebook and LinkedIn, keyword for both is the Gladstone Company.

Now I will turn the call over to David Dullam, CEO and President of Gladstone Investments.

Thanks, Katherine, and welcome to everyone on the phone call, I am happy to report that gain again produced solid quarter results, this time for this first quarter, end of June 30th, 2026.

We generated adjusted NII of $0.26 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 was a pretty busy quarter, very much, so with deal-related activity, and during the quarter we actually entered into an agreement to acquire one new portfolio company called Extrude H1, 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, and then subsequent to the quarter and, of course, a lot of this activity began during the quarter, we entered into an

To sell the operating entity in our investment of SFEG Holdings, and this sale again subject to various regulatory approvals.

This is a, 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, and 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 need 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 1st 6 months of this fiscal year, and that's relevant because it compares very nicely to the.

Approximate 183 million we have averaged over the last 3 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 that attract evaluations, 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 the 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 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 of shareholders of $0.08 per share or $0.96 per share on an annual basis, so at this point I'd like to turn it over to Erica Highland, who, as mentioned before, will take over as President on October 1st, and Erica, would you like to discuss the outlook in the current pipeline and the 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 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 a creative add-on acquisitions to portfolio companies, and we are in review and negotiation with another, 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.

In this regard, a couple companies highlight here, Galaxy Technologies, they've experienced very positive growth in the aerospace and industrial sectors.

Diligence new management team has stabilized the business and it's just 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.

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 do, 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 and about where we are, we have a strong liquid balance sheet, a very good level of potential portfolio activity with the prospect of continued strong earnings and the distributions over the next year, and

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 Richie, 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 this quarter reflected solid earnings generation, continued strength within our investment portfolio and proactive capital management that supported the disciplined execution of our long-term strategy.

We generate a net investment income of 15.9 million or $0.40 per share during the quarter compared with a net investment loss of 10.6 million in the prior quarter.

Adjusted net investment income, which excludes the impact of capital gains based incentive fees, increased to 10.4 million, or $0.26 per share, compared to 7.9.

$0.20 per share on the prior order.

Importantly, both the net investment income and adjusted net investment income exceeded our regular monthly 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 706 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.

Believe our debt investment portfolio is well positioned for a change of interest rate environment as disclosed in our form you based on the current portfolio composition, a 50 to 150 basis point increase in sour would be expected to increase annual net investment income by approximately 2 to $0.09 per share.

Or equivalent decline and so forth would reduce annual net investment income by approximately 1 to $0.03 per share.

This favorable interest rate profile continues to provide meaningful downside protection while preserving the 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 successes income more than dividend income from equity investments.

As a reminder, both dividend income from our equity investments and successfully income from our debt investments is dependent upon events at our portfolios and therefore be variable.

As a result, these income streams should be evaluated over longer periods rather than any 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 in fees during this quarter.Compared with an 18.5 million accrual in our quarter.

These lower incentive accruals more than offset higher interest expenses 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, primarily due to the adjustment in SFEG's valuation for an 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, 3 portfolio companies are on nonaccrual status, and we remain actively engaged for continuing to work alongside management teams to either return these investments to full status or pursue orderly ends where appropriate.

Non-accrual investments represent 3.9% of our total portfolio at cost and only 1% at fair value at the end.

Increase in fair value from the prior quarter is 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 regarding the collection of previously unpaid interest over the coming quarters.

NAV decreased to $16.

$24 per share compared to $16.78 dollars per share at the end of the part.

The decrease primarily reflected $0.47 per share of net unrealized appreciation.

$0.23 per share of net realized losses and $0.24 per share of distributions to common shareholders.

These items were partially offset by $0.40 per share of net investment income.

During the quarter, we completed 2 significant financing transactions that first strengthen our capital structure.

The first, using the proceeds from our February issuance of 5-year on your notes, we were paid a 5% notes at maturity in May.

Second, we successfully amended bond spread over social 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 find 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 to extending the duration of our debt capital in both expanding availability and lowering war costs on the credit facility.

While we were not active under our common stock ATM program during the quarter or subsequent to quarter end, we intend to access the equity market selectively when market conditions are favorable and doing to support the attractive shareholder over time.

Our balance sheet remains in a strong position, ending the quarter with an asset coverage ratio of 209% and the debt-to-equity ratio of 0.88 times.

We believe this provides meaningful leverage capacity to support our current investment pipeline.

Finally, on distributions, limited the fiscal year with 21.3 million, or $0.53 per share of spillover income.

Primarily due to adjusted net investment income exceeding our regular monthly distributions, spillover increased to 22.5 million, or $0.56 per share at quarter end.

This balance is sufficient to support approximately 7 months or monthly distribution rate and enhance 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.

$0.03 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, hold on to the 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 consideration and a broader capital allocation.

Overall, we believe the portfolio remains well positioned, supported by our strong laity, 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.

Covers my part of today's call, and I 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 Katherine, good information for our shareholders this call and the Form 10Q should be bringing everybody up to date in our company.

The team has reported solid results for the quarter ending June 30th, 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, he hopes to continue to show you a strong return for the investments for this next quarter as well as the rest of the year.

But now let's stop and turn to some questions from our analysts as well as hopefully some of the shareholders will call in.

Right, can come on please?

(Operator Instructions) Our first question is from Christopher Nolan with Ladenberg Thalmann, please proceed.

Hi, thank you for taking my questions, I guess for Taylor, there is another income of $5.6 million income line, is it 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 SEG and the other, exits indicated, should we anticipate any sort of debt?

Gain from that at all?

Apologies, did you say debt gain or net gain?

Net, realized that less, the true up than the unrealized.

Yes, I would expect, where our evaluation is with SFEG, that's our approximate value that we would expect to collect, as part of the exit now it is discounted for potential, transaction costs and other activities, but that is what I would expect for us to be able to collect and generate in potential 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, and thanks for the detailed commentary, you covered a number of the companies I wanted to ask about Galaxy and Diligence, so I appreciate the, positive updates there.

I wanted to ask, just a follow-up question first on SFEG, understand that the 6:30 mark reflected the negotiations and that sales price and one congrats on the sale there, another, nice exit for you, but just kind of curious, regarding.

And the negotiations, how did the buyers view evaluation differ from the the market that you had on, your statements as of, 3:30.

Sure, this is Erica Highland, 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 diligence 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.

And the value, also our evaluation 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, for purposes of our evaluation here, this is based on the final negotiated contract with the buyer.

That's helpful, thank you, the basic headline number, excuse me, the basic headline number that we had agreed to with them, didn't really change, so to speak, as Erica said, it was just, it's a very complicated transaction, very complex company, frankly, facilities and operations literally all over the world, and so just when things, as you well know, gets finalized and going through some of the, teeing up in.

Some of the countries, Erica correctly said some of the escrows that we have to apply, to the extent that they will get utilized, we won't know for sure until the dust settles affected somewhat, and Binger we took that into account so that we're fairly conservative, frankly, in that valuation, so we feel pretty good about where it's kind of settled, but, it's really as a result of those impacts.

That makes sense, thank you, and even with the change from 3:30 to 6:30, you still stand to get a very nice gain, so, yeah, nicely done there, and then, Taylor pointed out one thing I noticed as well, just if you, remove that valuation change, there is actually, net appreciation and unrealized portion, for the quarters, they're just nice trends generally across the book, when I did notice that, did have some net depreciation with Detroit, defense and just curious maybe if you had any

Any commentary of what, kind of transpired there during the quarter to change your valuation.

Yeah, I think Detroit Defense is an interesting company, fundamentally, by the way, it's doing very well, part of some of their contracts that they were, I, I'll call it anticipating or working on that they had didn't, money didn't get released, with everything going on, as in Washington, on the defense sector side, so some of those have now been released indeed, but that really got caught up in just a tiny

Timing around, some of the,

Work that that they're doing on some of those contracts, so unfortunately we had a slight downtick, in EBITD, so that had an impact on that, but other than that, the fundamentally the business is doing well, so.

Okay, so, and so if those contracts sounds like maybe post quarter did come through that would impact the 9, the 930 evaluation mark.

Got you, thank you for taking my questions this morning.

Great, thank you.

Okay, next question.

As a reminder to star one on your telephone keypad if you would like to ask a question, our next question is from Henry Coffey with Wedbush Securities, please proceed.

Yes, good morning, everyone, and thank you for taking my question,

Most of what I'm going to ask is going to make me look stupid, but that's good.

Could you go through the whole true up of the unrealized.

Depreciation and the real loss and how that

Plays out, I know there are a lot of moving parts there.

Well, let me, this is Taylor, let me start with

Breaking them into different pieces, so to realize gain and loss, that was a $9 million realized loss as a result of a restructuring that we did at Home Concepts, so we wrote off $9 million of their existing term loan, and that was really a proactive approach to allow the company further flexibility to execute on their operational initiatives.

And allow them to potentially grow and build out further, then regarding the unrealized and the net unrealized appreciation, depreciation rather for this quarter we had market valuations and market multiples that increased quarter over quarter, for most of the portfolio, that was the case where we saw those multiple increases, and then we had many of our portfolio companies that had improving.

The diometrics, so that would further enhance the appreciation, and then we did have some that saw a little bit of a downturn that downturn that we frankly anticipate that it will turn around in coming quarters.

We feel confident in these companies, as Dave mentioned with Detroit defense, that's one we do feel confident that it's a strong company operating well and as these contracts for Detroit.

Come back online, we'll see that reversal of being unrealized.

Depreciation.

Well, I think Henry, you might be also re re referring to our net unrealized was roughly about 22 million negative, of that, roughly 36.6 billion was this what we call reversal of value, for SFEG Holdings, so I think the comment earlier was that if you took that out of the mix, which again, it was a valuation adjustment doesn't change the significant realized game we're going to get.

There, it took that out of the mix, actually, then the unrealis is a net positive, and I think is that probably what you're trying to get to that, that's what I was trying to sort out, and I'll be H1st, I haven't gone through the queue yet, yeah.

The other question is, you have some great insight into the, to the real economy, because you're not involved in a lot of tech.

We, we

Get, overwhelmed with all the news about AI, etc.

But when you look past the tech economy to the rest of the economy.

What are you seeing, and in particular, my colleagues and I were talking about this, but that obviously post Iran, whatever your political views are, post Iran, we're likely to see a big infusion in this defense spending as the US rebuilds, etc.

Can you give us some sense of what, when you look past the tech economy, what you're seeing going on.

Quote, in the rest of the world.

And particularly likely defense spending.

Yeah, this is Erica, it's hard to overgeneralize, so, at the risk of sharing anecdotes here, just kind of looking down the list of our portfolio companies, we're seeing that most of them are trending up quarter over quarter in terms of, earnings performance, so, that would suggest there's no, major disruptions, in a broad macroeconomic way.

Particularly on, defense spending, again, we have a very small subset of those type of companies in our portfolio, and Dave spoke earlier about Detroit defense and how it was caught up in some of the, administrative and spending, hurdles, but, I do think there is money being flowing into more defense oriented businesses, certainly on the,

Opportunity side, we are seeing more businesses in the aerospace and defense sector.

Coming to us for, potential transactions, which suggests that, those owners see, potential growth in that sector, so I do think, as you pointed out, I think the trends that you're seeing are accurate, but again, while we do have a broad set here through 30 some odd portfolio companies, it's still a relatively small sample size.

Yeah, and, Henry, we touched, you point out, when you think about it, consumer, industrial, and manufacturing, and as Erik has said, the manufacturing groups that we have, because they're kind of spread across again like some aerospace oriented stuff, they're all really doing well, we got stuff in the, energy sector, and we're seeing good solid results there, consumer side.

We're seeing with most of our consumer products companies are all some are doing hugely well, all doing fairly well, and again, we do touch on a few companies in the defense sector, and they're all, as I mentioned earlier, starting to see definitely, solid, opportunities and and backlog building in in all of those companies, so generally, yeah, you're right, we don't do much on the tech side of things, and that's probably a good.

Thing, so fundamentally what we see, we're guardedly optimistic about the, where we see these companies going in the next, 69 months.

Thank you, that's very helpful, and then on the SFG situation, I mean that you sold 100% of the company if I wanted, I, I've read the street account summary like 4 times and I still couldn't get it, you sold 100% of the company, it's going to be a substantial gain, and what is your sort of philosophy on distributing that gain, are you going to hold some back for future periods or just pay it out as a one-time transaction sometime over the next 3 quarters, or what is the thought process there?

That's a great question, and we're going back to business school, corporate finance, 1st course in corporate finance, right?

How to think about that, seriously, it's a great question.

It's a real question, it's because it is a real for us significant number, and we have to do it carefully both from the standpoint of trying to certainly reward our shareholders, with clarity, some cash at least, and then how we might be able to maintain, capital.

Because given the cost of capital, it's a smart thing to maybe keep some of it, clearly, which you understand well with being a Rick and what have you, the timing will be important, we've got excise taxes that come into play, so there are a lot of factors to determine what is the right, not only mix of, say, cash and stock, what might be the timing of it, but regardless, I think it's going to be clearly a positive, and then our own balance sheet, but we're.

Looking at it carefully, taking it seriously, we have not come to a final conclusion yet.

Well, it's a first-class problem, so congratulations, that's a good problem, yes.

Next question.

There are no further questions at this time, I would like to turn the conference back over to you for closing remarks.

Well, thank you all for asking questions.

We need more questions than that, so I hope you guys will get ready next quarter and let us have a lot of questions so we can talk about our company, that's the end of this, thank you very much for calling in.

Thank you, this will conclude today's conference, you may disconnect at this time, and thank you for your participation.

Yeah.