Gladstone Investment Corporation

Greetings and welcome to Gladstone Investment Corporation fourth quarter and year-end earnings conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone requires operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Gladstone. Thank you. Please go ahead.

All right, thank you all for calling in. This is the earnings conference call for the fourth quarter as well as fiscal year ending March 31st, 2026. For shareholders and analysts of Gladstone Investments listed on NASDAQ under the symbol GAIN for common stock. And then we have several others that Gain Z, Gain I, and Gain Z. registered notes that we sold in the past. Thank you for all calling in. Always happy to provide you updates to the shareholders and to the analysts that are following us. We're trying to tell you about the current business environment, and the two goals for this call is to have you understand what has happened and give you some current view on the future, although we're all in the same boat trying to figure out what's going to happen in the future. Now I'll hear from Catherine Gerkes, our Director of Investor Relations and ESG, to provide a brief disclosure regarding the certain regulatory matters concerning the call today. Catherine, go ahead, please.

Thank you, 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, 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-K 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 Gladstone comps, as well as Facebook and LinkedIn keyword for both is the Gladstone companies. Now I will turn the call over to David Dulles, CEO and president of Gladstone investment.

Thank you, Catherine. So good morning, everyone, and I'm very pleased to report that GAIN again produced solid results for this fourth quarter and the fiscal year ended March 31st, 2026. We also continue to see growth in our investment portfolio through new buyout investments and the improving performance at a number of our existing portfolio companies. In addition, for the fiscal year, we generated adjusted NII of 88 cents per share, and we increased the total fair value of our portfolio to $1.3 billion as of 3-31-26, which is a 34% increase from the $979 million that we reported in the prior year. This increase year-over-year in assets resulted from a couple of things. One, we had four new buyout investments along with appreciation of our existing investment portfolio. and indeed increase in our NAV per share fairly significantly. We currently have 29 operating companies and a very healthy pipeline for new acquisitions. Just quickly reviewing for 26, we invested approximately $163 million in the four new portfolio companies I mentioned, and this compares to about $221 million which we invested in the prior year. These new investments are consistent with our buyout strategy, growing the portfolio through the acquisition of operating companies at attractive valuations, where we generally are the majority economic owner. We also make acquisitions through a combination of the equity and the debt investments, with the equity providing the potential upside through capital gains upon exit, and the debt securities are generating this operating income to support our monthly distributions to shareholders. At this point, let's start to note here that we do set floors on the debt securities that we use when we make these acquisitions. So that gives us the opportunity to maintain a level of income above our cost of capital so that we are really not susceptible to as much of the spread compression as others might exhibit in this environment. So our equity investments represent a significant ownership position in our portfolio companies. And we look to the capital gains as major contributors to the additional dividend payouts to shareholders, which we have demonstrated pretty significantly in the past. So this is also one factor that does differentiate us from other traditional credit VDCs. From our operating income, we maintained our monthly distribution to shareholders of $0.08 per share, or $0.96 per share on an annual basis. We also made supplemental distributions during fiscal 26, to shareholders of 54 cents per share which came from these capital gains that I mentioned earlier and which again are a fairly important part of our overall model. And since inception in fact in 2005 and through this time of 3-31-26, we've invested in 66 buyout portfolio companies for an aggregate generating approximately $354 million in net realized gains and $45 million in other income on exit. So again, this is our plan or strategy, which we hope to continue in the future. Now, at this point, it's very important. I'd like to make an introduction to Erica Hyland, who will become our president on October 1st. I'm very honored to do this. Erica has been a managing director of GAIN for a number of years. recently was promoted to executive vice president. She has been instrumental in managing a number of our successful investments, very active in our outreach and investment generation programs. And Erica will become president in October 1st, as mentioned, and we're very much looking forward to that. I'm looking forward to working with her as we continue growing. So with that, I'm going to ask Erica to have a discussion on our outlook and a few other comments. So Erica?

Thank you, Dave, and I am proud to partner with you to help lead our fund going forward.

There continues positions that fit our model.

This is where we provide both equity and debt 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 closed on four new investments during the fiscal year. We continue to be in varying stages of diligence and possible new opportunities, including accretive add-on acquisitions to existing portfolio companies, and we are in review and negotiation with a number of other new opportunities. This activity could lead to closing on new buyout investments and accretive add-on acquisitions as we begin fiscal year 27. As to our existing portfolio, most of the companies have experienced positive results to date as reflected in our NAV increase. So we continue to be cautious due to macroeconomic landscape and therefore the impact on demand and margin. We are working with all of our portfolio companies in evaluating supply chain alternatives and cost efficiencies as we continue to navigate the current environment. That's you, Dave.

Thanks, Erica. So in summing up the year, our current portfolio is in solid shape. We have a strong and liquid balance sheet, which you'll hear about in a few minutes, and a very good level of potential portfolio activity with the prospect of continued strong earnings and distributions over the next year while we continue to navigate the challenges, as Erica mentioned, of this macroeconomic landscape that we find ourselves in. So with that, I'll turn it over to our CFO, Taylor Ritchie, to go into some more detail. Taylor?

Thank you, Dave and Erica, and good morning, everyone. I'm happy to share that we have a fiscal year 2026 with our fifth consecutive year of our total investment income, generating $99.1 million compared to $93.7 million in the prior fiscal year. This increase is primarily driven by higher interest income resulting from conceded growth in our debt investment portfolio, partially affected by lower dividend and necessity income, the timing of which can vary from period to period. The weighted average principal balance of our interest-bearing investments was $672 million during the fiscal year, representing an increase of approximately $70 million over the prior year. For the year, our portfolio's weighted average yield declined modestly from 13.9% to 13.3%. Importantly, the interest rate floors embedded in each of our debt investments helped mitigate the impact of declining benchmark rates. As the 63 basis point decrease in portfolio yields was less than the 82 basis point decline in SOFR during the year. Excluding non-accrual investments and revolving language, the weighted average interest rate floor for our debt portfolio was 12.1% as of March 31st. We continue to underwrite our new debt investments with elevated interest rate floors in the 13.5% to 14% range to mitigate potential declines in SOFR. With more than half of our debt portfolio currently under interest rate floors, we believe In addition, these rules should help support earnings as we refinance portions of our existing lower-cost long-term debt over time. Starting to fourth quarter results, total investment income was $25.29 million, modestly higher than the $25.1 million in the prior quarter. The increase was primarily driven by higher dividend and success rate income, partially offset by lower interest income with our quarterly portfolio yield remaining stable at 12.9%. As a reminder, dividend income from our equity investments depends on the portfolio company's ability to make distributions while also maintaining sufficient earnings and profits. Additionally, success fee income is derived from an interest rate associated with our debt investments that accrues off balance sheet and is not conventionally due until a change of control event occurs. Because the realization of both dividend income and success fee income depends on multiple factors, the timing of these income streams will be variable. Net expenses for the quarter were $35.8 million compared to $31.6 million in the prior quarter. The increase was primarily driven by a $3.8 million increase in the total account book increases and penalties and a $0.4 million increase of base management fee expense, those of which were largely attributable to continued unrealized appreciation of the portfolio. As a result, net investment loss for the quarter was $10.6 million compared to $6.5 million in the prior quarter. Adjusted net investment income, which excludes the accrual of capital gains-based incentive fees, was $7.99 or $0.20 per share, compared to $8.29 or $0.21 per share in the prior quarter. Overall, portfolio valuations increased $92.5 million during the quarter. This unrealized appreciation was driven by improved operating performance at several portfolio companies, along with higher valuation multiples across the portfolio. These increases were partially offset by decreased performance in certain other portfolio companies. We continue to have three portfolio companies on non-accrual status. We remain actively engaged with each company and their respective management teams to support operational improvement initiatives, potential return to accrual status, or strategic exits where appropriate. Our non-accrual investments represent 3.8% of our total portfolio at cost and 0.7% at fair value.

Our NAV increased to $16.78 per share of net unrealized depreciation of investments.

This increase was partially offset by 27 cents per share of net investment loss and 24 cents per share of distributions to common shareholders. As we looked at our balance sheet, maintaining strong liquidity and financial flexibility remains essential to supporting and growing our portfolio. In anticipation of the May maturity of our 5% notes, we issued $100 million of 1.125% 5-year notes in February. Subsequent to quarter end, we repaid the outstanding balance of the 5% notes using proceeds from the new issuance along with borrowings on our credit rules. quarter or subsequent quarter end, we will remain opportunistic and will utilize the program when prices are accreted to NAD. We continue to believe that we are in a strong recorded position with our ability to access the debt capital market and the possible equity market to support both the refinancing of long-term debt and our pipeline of new buyout opportunities. Overall, our leverage remains conservative in this position with an asset coverage ratio of 214%, and a debt-to-equity ratio of 0.84 times as of March 31, 2016. Coming to distribution, we ended the fiscal year with $21.3 million, or 53 cents per share, in spillover income, which is sufficient to cover our current monthly distribution rate of 8 cents per share for approximately six months. We ended the year with total distributable income of $181.59, or $4.56 per share, Because total distributable income primarily reflects net unrealized appreciation within the portfolio, we expect this value to support monthly and supplemental loan distributions as appreciated investments are monetized over time, including the 54-cent supplemental loan distribution in the current fiscal year. We've paid an aggregate of $3.26 per share across 13 supplemental loan distributions over the last five fiscal years, in addition to $4.58 per share of monthly distributions during this time. We believe this track record demonstrates our ability to maintain a stable monthly distribution while also delivering incremental shareholder returns. Highlighting the strength and consistency of our final focus, equity-oriented investment strategy. Looking ahead, we expect to implement a new stream in the first quarter of our overall shareholder return strategy, with the amount and timing of future payments driven by realized capital gains on our equity investments, along with other capital allocation considerations. This concludes my remarks for today's call. I'll now hand it back over to you, David, to wrap us up.

Very nice, Taylor, and good report on Dave and Erica and Catherine. Lots of good information. Hopefully our shareholders are now up to date. This call, based on our 10-K, should bring everyone up to date. The team has reported solid results for the quarter ending March 31, 2026. including new investment activity and strong liquidity position to grow the portfolio through the upcoming fiscal year. I believe Gladstone investment is an attractive investment for investors seeking continuous monthly distributions and supplemental distributions from capital gains and other income. The team hopes to continue to show you strong returns going forward. Operator, would you come on now? Let's have some questions from our analysts and shareholders and people on the line.

Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Again, that's star one to register a question at this time. Our first question is coming from Eric Zwick of Lucid Capital Markets. Please go ahead.

I appreciate the last two quarters.

It's coming below the dividend level. I know I think my phone cut out a little bit. Taylor, if you could repeat just where the spillover income stands today, and just your thoughts on the dividend level and if the expectation is that, you know, some of the gains that you typically harvest will help support that going forward.

Sure. So we ended the year with $21.3 million at 53 cents per share in spillover income. So based on our 8 cents per share monthly distribution rate, that would be spillover sufficient for six months. So half of the next fiscal year would be covered by STOA already. We do look to increase our adjusted NII per share going forward. That will be dependent on deal origination, timing of new investments, where SOPA rates headed, as well as additional fee credits that we collect from time to time from our portfolio companies. So our adjusted NII per share will move around quarter to quarter, but we still feel confident in our 8% per share monthly distribution rate and don't really envision that changing.

Excellent. Thanks, Taylor. And then just looking at some changes in fair values in the SOI this quarter, notice the diligent delivery systems, the second lead position was marked down materially from about 76% of cost down to four. So just curious if you could provide any update of what transpired there during the quarter.

So, hi, Eric. It's Dave. Pretty much the business is continuing, I would say, on a fairly stable basis. We had a bit of a decline in the EBITDA, but still positive and still servicing our interests. It's a function, you probably remember, of providing service to rent-a-car companies and airports and so on, and there's been some... Oh, I'm sorry. Yeah, I was thinking about something else. Diligent, no, it's actually improving even though the valuation is down. Believe it or not, the business is actually improving and that's one that is currently on non-accrual which we anticipate might indeed be coming off of non-accrual as we move through the year. No direct expectation on timing, but I believe we might get there. So I feel better about Diligent today, even though we did have it marked down, was more a function of where the trailing EBITDA was relative to where the actual business is operating. And we're in a better shape with that today, frankly, than we were even six, nine months ago.

Great. Thanks for that, for the update there. And then a more positive note, just noticed the preferred equity position in shilling was marked up materially and having some Young kids, I'm guessing maybe that's in part due to the kind of recent surge in popularity of the Neato toy. So maybe a two-part question. One, you know, what are you seeing in terms of the business trends for that company? And then I guess I have the opportunity to be the most popular person at the dinner table tonight in the eyes of my kids if you have any insight to when those Neatos might be back in stock on their website or on local store shelves.

Yeah, I think Erica Hyland will take that one. She is involved directly with Schilling and been involved with it for a number of years. Erica.

Yeah, I'd love to be able to tell you I could offer you some product, but that's the question of the hour right now from everybody. Yeah, no, they are diligently working on expanding their production capacity with their third-party suppliers. and trying to meet all of the demand, which as you point out, that product has certainly gone viral in the last several months. They're very much aware of the demand and trying to ramp up capacity as quickly as possible. I think what you see reflected in the fair market value is directly attributable to that and their increased financial performance over the last several months due to that product.

Makes sense. Thanks, Eric. And I will say I was able to pick up one toy each for both of my kids at your investor day back in the fall. So they are very grateful for that. So thank you.

Great.

That's all for me today.

Thank you. Thanks, Eric. Next question.

Thank you. Once again, that is star one. If you would like to register a question at this time, the next question is coming from Christopher Nolan of Lattenberg Thalman. Please go ahead.

Hi, good morning. This is the second quarter where you have unusually strong unrealized gains. Should we expect that to happen in this quarter?

Taylor? Well, we're still working through, obviously, what the 630 valuation will look like. It's only the middle of May, so the multiples could move one way or the other, and that would obviously drive the fair value changes or be a significant component. we will have to see where EBITDA metrics are moving on a company by company basis. And we do feel confident that our portfolio companies are doing well, will continue to do well. As Dave mentioned, a couple of them that are marked down right now, we do feel optimistic that they will begin to turn around. That might not be this quarter, but it could be quarters coming forward or going forward.

And I guess as a follow-up question, is it, Are you finding it to be a strong competitive advantage in the current market where you can invest both debt and equity? Because, you know, my sense is private equity investments are not as plentiful as they might have been a couple years ago. And just trying to see how this is working in your favor or against or no real effect.

Christopher, this is Erica Highland. I'll take that one. I'd say yes. The fact that we are able to offer both debt and equity for all of our buyout transactions is indeed a competitive advantage in today's market. Even though there's a lot of liquidity out there, there is still a lot of uncertainty, and private equity firms have had challenges deploying capital and raising capital due to just some of their structural issues with fundraising. And so our ability to provide all the capital for a transaction, it provides that level of certainty to close to sellers, and that's probably been one of the driving factors for how we've been able to be competitive over the last several years, frankly.

Okay. Thank you. Oh, and congratulations on your promotion.

Thank you.

All right. I have another question from the group.

We're showing no additional questions at this time. Mr. Gladstone, do you have any additional or closing comments?

Yeah, I'm very disappointed. We wanted lots of questions, and we didn't get them this time. We've done a good job, but maybe next quarter you'll have some really solid questions for us. That's the end of the question and answer period, and we're going to sign off. You got one more? No. Okay. Who's next?

Okay, we did. We did have a late entry. Our next question is coming from Sean Paul Adams of B. Riley. Please go ahead.

Hey, guys. Good morning. Congrats on the quarter. Just really quickly, you touched a little bit earlier on the call about, you know, one possible non-accrual kind of going through a work through and, you know, without any concrete timelines could be, you know, coming off that non-accrual. The remaining two Can you provide just a little bit more color on, you know, if there's any expected workouts coming? It seems like they have some pretty severe markdowns in the portfolio. So, you know, just a little bit more color on that.

Sean, it's Dave. On the other two, one is quite small investment and probably going to take some action with that that will, frankly, probably eliminate the, you know, the issue. That's one. The other company, B&T, is actually performing fairly well. We're working through with the management and so on as to what to frankly do with the business. Nothing drastic, but we're on top of it. So I don't expect to see much change with those two companies probably within the next six months. at this point. As I mentioned on the other one, Diligent, there's a reasonable probability that that will actually come off a non-recrual. I'm not concerned about our non-recrual situation. It's relative to the overall total cost of our portfolio and the value of our portfolio, as Taylor mentioned earlier. I feel like we're in pretty decent shape there. Nothing that I could really add that would give any significance on those.

We do have a follow-up question coming from Eric Zwick of Lucid Capital. Please go ahead.

Thanks for taking the follow-up as well. So just another kind of portfolio position question. The other, you know, large write-up I noticed was that SFEG Holdings, the common there, was marked up quite material. So curious if you could provide us an update on the trends you're seeing there and what led to the valuation change.

Taylor, why don't you take it? Sure. Well, I think that's one where we continue to see the returns from the add-on acquisitions we've done, the strategic initiatives that the companies put in place that have really been able to move EBITDA in a meaningful way. And then based on market analysis and valuations that we're receiving from third parties, the multiple increased by a meaningful amount as well this quarter.

In a number of somewhat related industry categories, I would say it's international in scope, and again, the valuation, frankly, is purely a function of very solid EBITDA, certainly over the last 12 months and continuing to grow. And then, you know, multiples, we don't have a crazy multiple on it that's really causing the valuation to be where it is. So it's just that it's fundamentally, it's a really good business.

It sounds like something, you know, kind of given those trends, you've put a lot of work and capital into it. It'd be something that you'd prefer to continue holding at this point, as opposed to monetizing in the kind of the near to midterm.

Well, you know, you never know. And, you know, as you know, and you watch this and certainly over the years, we exit companies when not only we think it might make sense, but frankly, when the management teams are in favor of doing that, we've always done it that way. So we don't rush to the exits. If companies are performing well and importantly paying our interest, We like to keep them in a portfolio, but, you know, you never know sometimes when there are opportunities that you just cannot ignore, and we'll always keep evaluating those as we move forward.

Yeah, it makes sense, opportunity dependent. So, great. Thanks for taking my question again.

Any other questions?

We're showing no additional questions at this time.

Okay, we'll close it up. Sounds like... We ran out of questions. We had more people than questions this time. So lots of fun in the business these days, and the market's getting hotter. So tune in next time, and we'll tell you some more stories. That's the end of this. Thank you very much.

Ladies and gentlemen, this concludes today's event. You may disconnect your lines and log off the webcast at this time and enjoy the rest of your day.