Gladstone Investment - Earnings Call - Q1 2026
August 13, 2025
Executive Summary
- Q1 FY2026 delivered higher net investment income per share ($0.25) despite lower total investment income ($23.5M), driven by sharply lower expenses; Adjusted NII per share was $0.24, covering the monthly dividend.
- EPS (NII/share) beat S&P Global consensus ($0.25 vs. $0.226*) while revenue (total investment income) modestly missed ($23.54M vs. $24.27M*), as success/dividend fees declined vs. Q4; management collected $1.5M past-due interest and benefited from lower incentive fees.
- NAV/share fell to $12.99 from $13.55, primarily from $0.78/share of distributions (including $0.54 supplemental) and $0.04/share net unrealized depreciation, partially offset by $0.25/share of NII and $0.01/share accretion from ATM sales.
- Pipeline and deployment accelerated: two new buyouts closed intra-quarter (Smart Chemical $49.5M; Sun State $12.8M) and one subsequent (Global GRAB $67.6M); three recent deals have 13.5% interest rate floors, mitigating SOFR cuts risk.
What Went Well and What Went Wrong
- What Went Well
- Deployment momentum and portfolio growth: “two new buyouts during the current quarter” and a third subsequent; total invested $62.8M in Q1 and $67.6M post-quarter.
- Expense relief and fee dynamics: NII rose to $9.1M as capital-gains and income-based incentive fees decreased; interest expense declined with lower credit facility borrowings.
- Structural protection: new loans carry 13.5% floors; “they’re going to stay at 13.5% despite any changes in SOFR,” supporting yield resilience.
- What Went Wrong
- Revenue mix volatility: total investment income fell QoQ due to $3.5M less success fees and $0.7M less dividend income; timing is variable and didn’t repeat this quarter.
- NAV pressure from distributions and marks: NAV/share decreased $0.56, primarily from $0.78/share distributions and $0.04/share net unrealized depreciation.
- Macro/tariff headwinds: management flagged margin squeeze at certain consumer-exposed companies and broader uncertainty from tariffs/slowdown risk.
Transcript
Speaker 5
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 zero 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.
Speaker 1
Thank you, Melissa. It's good morning for everybody. Thanks to all for calling in. We love these earnings conference calls. The first quarter ending June 30, 2025, of the 2026 fiscal year. This is for shareholders and analysts of the Gladstone companies and Gladstone Investment Corporation. We've got some common stock. You know it as GAIN, G-A-I-N. We do have three others: GAIN NN at the end, GAIN Z, GAIN L, and GAIN I. 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 understand what's happening.
Now we'll hear from Katherine Gerkes. Katherine is Head of Investor Relations and ESG and provides a brief disclosure of certain regulatory matters concerning this call in. Katherine?
Speaker 0
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 email notification service and find information on how to contact our Investor Relations department. We are also on X at gladstonecoms, 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.
Speaker 2
Thank you, Katherine. Good morning to everybody. Happy to be here and to report that for the first quarter of fiscal year 2026, that GAIN produced very positive earnings results, and we also, very importantly, had an increased level of investing activity. We ended this first quarter with an adjusted NII of $0.24 per share, which is sufficient to cover our monthly distribution to shareholders. We also got our assets up to about $1.1 billion, which is slightly above $1 billion at the end of the prior quarter. 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.
To date for fiscal 2026, 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 2025. Recognizing this is the first quarter, we certainly look forward to hopefully exceeding what we did in fiscal 2025. 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. 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 off monthly dividend distributions.
From our operating income, we maintain our monthly distribution to shareholders at $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. 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 the supplemental distributions, as well as continuing to pay the monthly distributions of dividends. To date, we've been able to do that. In fact, since inception in 2005, when GAIN was formed, and through this period of 6/30/2025, 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 at about $1 billion, while generating over this period of time approximately $253 million in net realized gains and $45 million in other income on exit. 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 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 the 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.
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've experienced very good results to date, we are cautious due to the 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 and 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 a prospect of continued good earnings and distributions over the next year while we navigate the challenges of this uncertain economic landscape. To go into a little more detail, I'll turn it over to our CFO, Taylor Ritchie.
Speaker 6
Thank you, Dave, and good morning, everyone. Looking at our operating performance for the first quarter of the fiscal year, we generate 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 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 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 increased 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 is down to $0.0 million. This unrealized depreciation is driven by decreased performance at similar portfolio companies, partially offset by higher valuation multiples across the portfolio and increased performance at a number of 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 non-accrual 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 a continued improvement at one of the four portfolio companies and a 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 period. 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 a 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 to exit 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 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.
Speaker 1
Thank you, Taylor. You did a nice job. You did a nice job, Dave and Katherine, and all of that's good information for our shareholders. 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 greater liquidity position with our portfolio. We are 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 a lot of 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. 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?
Speaker 5
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 two 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 Schleien with Clearstreet. Please proceed with your question.
Speaker 4
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. 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?
Speaker 2
Yeah, thanks, Mickey, and congratulations on your new spot.
Speaker 4
Thank you.
Speaker 2
Glad that you're still with us. 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, you know, 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. 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 seven to maybe 7.5 times on an EBITDA basis. You know, some of them are going for nine times, right? Theoretically, we could be even more active if these valuations came closer to where we are.
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. Not much more than that, I don't think.
Speaker 4
Okay, I understand. Thank you. In your prepared remarks, I think you mentioned the possibility for the economy to slow down. That is certainly what economists are forecasting as, you know, tariffs are implemented. Are you seeing any signs yet of a weakening of performance across your portfolio companies?
Speaker 2
Yeah, 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 where we've actually seen an increase in activity, even though tariffs have impacted the cost of, you know, our products. 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. I would say overall, it's a general, you know, we're not increasing really, but we're not seeing a 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.
As a result of that, 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 overly dramatic, but just a squeezing a little bit of margin just because of mainly the tariffs.
Speaker 4
That's interesting, but not enough to threaten their ability to service their debt, right?
Speaker 2
Correct. Yes, sir.
Speaker 4
Okay. One sort of 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?
Speaker 6
I think we continue to monitor our current turnover 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. 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. Yes, I mean, we are comfortable where we stand right now and we continue to evaluate it from a quarter to quarter basis.
Speaker 4
Okay, thank you for that. Those are all my questions. I appreciate your time.
Speaker 2
Thanks, Mickey.
Speaker 1
Good to hear from you again. Operator, would you come on, please, and let's get the next question.
Speaker 5
Of course. Our next question comes from the line of Sean Paul Adams with B. Riley Securities. Please proceed with your question.
Speaker 3
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?
Speaker 2
Yeah. Thanks, Sean Paul. Nice to chat with you. We are going to keep that rolling on that investment as necessary. It's one that we've, you know, 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. When we sold it, we just took back a bit of paper, $13 million, and a small amount of warrants. 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. We'll just keep keeping the business. We're not going to do anything dramatic with it.
We'll, you know, re-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.
Speaker 3
Got it. Appreciate the color.
Speaker 1
Okay, do we have a third question, please?
Speaker 5
Yes. Before we take our third question, as a reminder, if you'd like to join the question queue, please press star one on your telephone keypad. Our next question comes from the line of Eric Zwick with Lucid Capital Markets. Please proceed with your question.
Speaker 3
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? What drove it here? What would be your outlook going forward? 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.
Speaker 6
Sure. Thanks, Eric. 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. 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 Nocturne at the end of the prior quarter. I think looking forward to your point on potential rate cuts and compression, our three most recent new deals between Smart Chemical, Sun State, and Global Grab all have 13.5% floors. Given our spread and the way those terminals are situated, they're going to stay at 13.5% despite any changes in SOFR.
I think that's our goal going forward is to continue to build in that cushion protection when SOFR is decreasing.
Speaker 3
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 prepared comments, you mentioned there's quite a bit of competition in the market for new deals. Just from a non-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 weaken the underwriting in the market from a future perspective, or is that still holding up pretty well at this point?
Speaker 2
Yeah, thanks, Eric. For us, again, recognizing the nature of our 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 competitor in that regard in the BDC space. There are others that are similar to some extent that do debt and might take a larger, slightly bigger piece of equity, whether it be through warrants or a participation. Recognizing we generally are functioning effectively as the sponsor, right? We really are competing more with the private equity guys. To the extent that they are getting leverage, perhaps, and where they might be getting leverage at a lower rate, we're competing with them in that regard. However, I'd say for us, it's more around what valuation the enterprise value is of the business.
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. I think that's how we're able really to put a floor, like Taylor said, in the deal. If we have to moderate a bit the equity component, it's kind of doing it to ourselves, if you will, the equity piece relative to the debt piece. 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 weighted average cost of capital. 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 PIK, if you will. 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. Long answer. I hope it helps to answer the question. Eric, if you don't mind.
Speaker 3
Yeah, that's great.
Speaker 6
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. I think that is something that sets us apart from other BDCs in the space.
Speaker 3
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 mark?
Speaker 2
No, just that their EBITDA was up, and also the multiple was up. It was just a combination of those two things. That's a good business. They're very, very strong in their market space, good management team, and it's one that we look forward to seeing good results going forward.
Speaker 3
Thanks so much for taking my questions this morning.
Speaker 2
Thanks, man.
Speaker 1
Thank you, Eric. Operator, would you come on and see if there's another question for us?
Speaker 5
Sir, right now we have no other questions. I'll turn the floor back to you for any final comments.
Speaker 1
All right. We thank all of you for calling in and asking questions. Hopefully, next quarter you have a lot more questions for us. We like the questions that come in. It gets anything out of the way that someone might not understand. That's the end of this call, and we thank you all for calling in. See you next quarter.
Speaker 5
Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.