Gladstone Investment Corporation

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 on your telephone 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. 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. Easy to remember because we're always triggering capital gains. You can 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 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 two goals really are to help you understand what just happened to us and what's happened to us over the last so 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 form Thanks, Catherine, 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 ended 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 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 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 and then subsequent to the quarter and 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 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 made an accretive add-on acquisition to one of our existing investments called Global Grab Technologies. So with all this activity and 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 and 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 $0.96 per share on an annual basis. So at this point, I'd like to turn it over to Erika Highland, who, as mentioned before, will take over as president on October 1st. And Erika, 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. In this regard, 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, Erika. So again, in summing up the year, the current portfolio is in solid shape. And just to touch on this, Erika said that we're working with all of our companies to and that's something that we do. 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 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 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 Erika, 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 generated net investment income of $15.9 million, or 40 cents per share, during the quarter. Thank you for joining us today. 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 portfolios. We believe our debt investment portfolio is well positioned across 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 1 to 3 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 to lower dividend income from our equity investments. As a reminder, both dividend income from our equity investments and success fee income from our debt investments are dependent upon events at our portfolio company, and are therefore inherently 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 incentives during the current quarter compared with an $18.5 million accrual in the prior quarter. These lower incentive accruals more than offset higher interest expense associated with our financing activities as well as the modest increase in other operating expenses. Portfolio valuations declined by $18.8 million during the quarter. The decline was primarily 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 we remain actively engaged with each borrower, continuing to work alongside management teams to either return these investments to a full status or pursue orderly edits where appropriate. Non-incrual investments represent 3.9% of our total portfolio at cost and only 1% at fair value at a 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 remain optimistic regarding 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 permanently reflected $0.47 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. First, using the proceeds from our February issuance of five-year notes, we repaid our 5% notes at maturity in May. Second, we successfully amended our credit facility, reducing our 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 fund new investment opportunities from the unused bond 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 and Angel Flexibility to extend the duration of our debt capital and by expanding availability and lowering loan costs on our credit facility. While we are 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 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 the debt to equity ratio of 0.88 times. We believe this provides meaningful leverage capacity to support our current investment pipeline. Finally, our distributions limit 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 million 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 these successful exits of appreciated equity investments. The timing and amount of these supplemental distributions will depend on the 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 most 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 Erika 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. 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. But now let's stop and Let's turn to some questions from our analysts as well as hopefully some of the shareholders will call in.

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, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Christopher Nolan with Ladenburg Bauman. Please proceed.

Christopher Nolan Hi. Thank you for taking my questions. I guess for Taylor, there is another income of $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 debt 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 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 notice that there appears to be no repayments in the quarter. Is that correct?

Yes, that's correct.

Okay, thank you for taking my questions.

Next question.

Our next question is from Eric Zwick 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 Diligent, so I appreciate the positive updates there. I wanted to ask just a follow-up question first on SSEG. You know, I understand that the 630 mark reflected the negotiations and the sales price, and one congrats on the sale there, another, you know, nice exit for you. But just kind of curious, regarding the negotiations. How did the buyer's view evaluation differ from the mark that you had on your statements as of 3.30? Sure.

This is Erika 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 through diligence, occasionally, not only may there be disagreements on certain assumptions, but also there may be certain findings during diligence 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 for purposes of our evaluation here, this is based on the final negotiated contract with the buyer.

That's helpful, Erica. Thank you. The basic headline number that we had agreed to with them didn't really change, so to speak. As Erika said, it was just, you know, it's a very complicated transaction, very complex company, frankly, you know, facilities, 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, Erika 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 in being sure 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 $330 to $630, you still stand to get a very nice gain. So 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 in the unrealized portion for the quarter. So just nice trends generally across the book. One, I did notice that did have some net depreciation with Detroit Defense. I'm just curious maybe if you had 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'll call it, anticipating or working on that they had Moneys didn't get released with everything going on, as you know, in Washington on the defense sector side. So some of those have now been released indeed, but that really got caught up in just the timing around some of the work that they were doing on some of those contracts. So unfortunately, we had a slight downtick in EBITDA. So that had an impact on that. But other than that, fundamentally, the business is doing well.

Okay. And so if those contracts, it sounds like maybe post-quarter did come through, that would impact the 930 valuation mark? Exactly, yeah. Gotcha. Okay. Thank you for taking my questions this morning. Great.

Thank you.

Okay. Next question.

As a reminder, there's 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? I know there are a lot of moving parts there.

Taylor, let me start with breaking them into different pieces. The realized gain loss, that was a $9 million realized loss as a result of a restructuring that we did at Home Concepts. 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 depreciation 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 EBITDA metrics, so that would further enhance the appreciation. And then we did have some that saw a little bit of a 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 the unrealized depreciation.

Well, I think, Henry, you might be also referring to Our net unrealized was roughly about $22 million negative. Of that, roughly $36.6 million was this what we call reversal of value for SFEG holdings. So I think the comment earlier was made that if you took that out of the mix, which again, it was a valuation adjustment, doesn't change the significant realized gain we're going to get there. It took that out of the mix, actually, then the unrealized is a net positive. And I think is that probably what you're trying to get to?

That's what I was trying to sort out. And I'll be honest, I haven't gone through the queue yet. The other question is, you know, you have some great insight into the real economy, you know, because you're not involved in a lot of tech. We get, you know, 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 obviously post-Iran, whatever your political views are, post-Iran, we're likely to see a big infusion in defense spending as the U.S. rebuilds, etc. Can you give us some sense of 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 Erika. You know, it's hard to overgeneralize, so, you know, 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, you know, earnings performance. So that would suggest there's no major disruptions in a broad macroeconomic way, particularly on 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 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've 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, you know, Henry, we touch, as you point out, you know, when you think about it, consumer, industrial, and manufacturing. And as Erika 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 doing fairly well and again you know we do touch on a company few companies in the in the defense sector and they're all as I mentioned earlier starting to see definitely solid opportunities and backlog building in all of those companies. Generally, you're right, we don't do much on the tech side of things and that's probably a good thing. Fundamentally, we're guardedly optimistic about where we see these companies go in the next six, nine months.

Thank you. That's very helpful. on the SFG situation. I mean, you sold 100% of the company. I've read the street account summary like four 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 three quarters? Or what is the thought process there?

That's a great question, and we're going back to business school, corporate finance, first 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 RIC 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 thing. certainly the shareholders and then from our own balance sheet. But we're looking at it carefully, taking it seriously, and we have not come to a final conclusion yet.

Well, it's a first class problem, so congratulations.

That's a good problem. Yep.

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 we 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.