Greetings and welcome to the Gladstone Investment Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Chief Executive Officer, David Gladstone. Thank you. You may begin.

Well, thank you very much and welcome to all of you coming in to this call. This is a good call coming up. So hope you stay tuned through the whole thing. This is the third quarter report for fiscal year 2023 this quarter ended December 31. So we are a little bit for further away from that. Earnings and conference call for shareholders and analysts of Gladstone Investment listed on NASDAQ trading symbol GAIN for the common stock and then we have two registered notes, one under GAINN and GAINZ and thank you all for calling in. We are always happy to provide an update to our shareholders and the analysts who call in provide a new point of entry in terms of information about the company. Two goals for this call, first, help you understand anything that’s happened in the past through December and give you a current view for the future. Now, we will start out not with our General Counsel this time, but with his right hand man and Eric is going to do the Michael LiCalsi’s call. Go ahead, Eric.

Good morning, everyone. Today’s call may include forward-looking statements under the Securities Act of 1933 and Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties and other factors even though they are based on our current plans, which we believe to be reasonable. Many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all risk factors listed on our Forms 10-Q, 10-K and other documents we filed with the SEC from time-to-time. These can all be found on the Investors page of our website www.gladstoneinvestment.com or the SEC’s website www.sec.gov. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. Please also note that past performance or market information is not a guarantee of future results. Please take the opportunity to visit our website, www.gladstoneinvestment.com, sign-up for our e-mail notification service. You can also find us on Twitter @GladstoneComps and on Facebook, keyword, The Gladstone Companies. Today’s call is simply an overview of our results through December 31, 2022. So we ask you to review our press release and 10-Q both issued yesterday for more detailed information. And I will turn it over to Dave Dullum, President of Gladstone Investment.

Thanks, Eric and to everyone out there listening in we appreciate you being here. We are pleased to report that GAIN did indeed have another good quarter for this part of the year ‘23 quarter end 12/31, including in this very challenging period obviously of rising interest rates and inflationary costs. Our portfolio companies are meeting these challenges and we must remain vigilant and cautious not only with our portfolio management of these companies, but also with our new acquisition activity. We ended the fiscal third quarter to 12/31/22 with adjusted NII of $0.30 per share, which is slightly up from $0.29 per share in the prior quarter. And you will hear more about this detail from our CFO, Rachael Easton shortly. But this is good because we are also continuing the progress to our expectations for a strong fiscal year ending 3/31/23 and beyond that with future earnings. Total investments at fair value at 12/31/22 increased to $760 million from $738 million at the 9/30 quarter end. And this was primarily due to successful deal activity in the quarter. We did invest $15.5 million in a dividend recapitalization as we call it of one of our existing portfolio companies. And in connection with this investment we received dividend income of $4.5 million and recognized a realized gain of $13.4 million and increased our debt investment in that company at the same time up to $40.5 million. So it accomplishes a few things, increasing our investment in a really good company, but also able to harvest income and also capital gains and these opportunities may present themselves from time-to-time and we will pursue them, because they do allow us, as I mentioned, increase our investment in a company where we know the management team, we know the business and we…

Thanks, Dave. I will start with a summary of the fund’s operating performance for the quarter ended December 31, 2022. In the fiscal third quarter of FY ‘23, we generated adjusted net investment income of $10 million or $0.30 per share, up from $9.7 million or $0.29 per share in the prior quarter. We continue to believe that adjusted net investment income, which is investment income, exclusive of any capital gains based incentive fees is a useful and representative indicator of our ongoing operations. In the fiscal third quarter of FY ‘23, we generated total investment income of $21.6 million, an increase compared to $20.8 million in the prior quarter. The $0.8 million increase in total investment income during the quarter was primarily due to an increase in overall yields on our debt investments driven by an increase in LIBOR as well as interest income on additional debt investments made during the current quarter. The increase in total investment income was offset by an increase in net expenses to $13 million from $9.4 million in the prior quarter primarily due to a $3.1 million increase in accrued capital gains based incentive fees due to the net impact of realized and unrealized gains and losses as required under U.S. GAAP. As a result, net investment income for the quarter ended December 31, 2022 declined to $8.6 million or $0.26 per share from $11.4 million or $0.34 per share in the prior quarter. During the quarter, one portfolio company was moved to non-accrual status and we believe it will be back to paying interest in the next couple of quarters. We now have three portfolio companies that are on non-accrual status and we will continue working with these companies to get them back to non-accrual status when possible. We believe that maintaining…

Thank you very much. It’s very nice, Rachael and nice that Dave and Eric both provided more information to our shareholders. This call plus the 10-Q filed at the SEC yesterday, you can also find it on our website surely brings everybody up to date. The team again has reported solid results for the quarter believe the team that is in a great position to continue success through the remainder of our fiscal year, which ends in March 31, 2023. Gladstone Investment is an attractive investment for investors seeking continuous monthly distributions and supplemental distributions from capital gains. The team hopes to continue to show strong returns for the investment of the fund. Folks, you are now getting $0.96 per year, that’s a 7%, nice 7% yield and then if they can pay supplementals brought it up to 10.5% for this year. So great performance back up the truck, buy a lot of shares, because I think we’re strong. You have been paying dividends for how long Dave? About 200…

227.

227, 227, that’s just fantastic. And I think all of you know the team here is presented to you our plan for going forward and paying dividends to shareholders. So now let’s have some questions from our analysts and shareholders. And operator, if you will come on and give them the signal on how to do that?

Thank you. [Operator Instructions] Our first question has come from the line of Mickey Schleien with Ladenburg. Please proceed with your questions.

Yes, good morning, everyone. Dave, I understand that you said in the prepared remarks that the market for buyouts remains frothy, but are you seeing any improvement in opportunities available to you given all the risks that and headwinds that we are seeing in the market currently?

Hey, Mickey. Good morning. So the short answer is we are seeing opportunities. There are still good companies out there I’d say that we have seen even though I say frothy, frothy being defined really as from a competitive perspective still a lot of money out there to be put to work, so as a result of that the companies that are coming to market represented by good quality investment bankers, we are still seeing fairly aggressive I would call it multiples from a valuation standpoint. I would also say though that to some degree that the volume actually overall has come down slightly. There seems to be a little bit of a holding pattern right now. So some companies that perhaps might be coming to market, they are kind of holding, just to be sure, as you just sort of reflected on seeing how the earnings are going to look for the rest of the year so to speak. So instead of getting into a conversation about a reduced valuation is maybe better to hold and just wait and see how the year evolves. So all of that said, there still are good companies, we are in the process right now with a number of what we call indications of interest on some pretty decent sized businesses for us as well as actually moving into a couple of letter of intents, which means the process starts for the intense due diligence obviously that we do. So if I hope and we expect that we will do a couple of pretty decent deals this year, I think that’s highly likely. And but again, as you well know, we are going to be very careful with our valuation metrics, because we do the debt and the equity. And we have got to be careful about that.

Yes, I agree and I appreciate that. Dave, I have a few questions about portfolio credit quality given the difficult outlook for the economy so bear with me here. When did you place Edge on non-accrual? And did you reverse any previously accrued interest income on it?

Rachael, you want to answer that?

Yes, we placed Edge on non-accrual at the beginning of the quarter so as of October 1 and we reversed 1 month.

You reversed a month, okay. And Dave, I mean, broadly speaking, what are the issues that Edge is confronting? Clearly, the previous valuation was already stressed and now it’s on non-accrual, but you mentioned that you are hoping for a positive outcome in a couple of quarters, can you – what insight can you give us into that company?

Well, interestingly enough, Mickey, some cases we have and this is one of those where actually the company is generating – has cash generating cash. We might have another lender in there and there is some constraints as a result of the fixed charge coverage metrics that say the lender would be looking at. So while the company indeed might be in a position to pay our interest. So from time to time, we may have to do that. Fundamentally, I would say that the company actually is performing quite well going into the beginning of this year. And as Rachael pointed out, I would hope and expect that we indeed somewhere in the next few quarters would be able to bring that back on accrual status.

Understand. And I see that you recapitalized Mountain, which has been on non-accrual for a while, but it’s still on non-accrual? Can you give us any insight into the outlook for that company?

Yes, I don’t think that we will come back on accrual frankly for a while. What we did was we essentially, as you well know, that has been effectively from a valuation perspective been written down for quite a while. So what we did was essentially restructure the debt at a slightly different valuation and if allowed us to therefore “write-off for all purposes, including tax purposes some of the debt.” So that’s how we manage that one, but I would not honestly anticipate that coming back on accrual for some time.

And does that – I mean their end user is consumers? Is it just weakness in the consumer at the Mountain and is that something we are seeing elsewhere in the portfolio?

On their particular products, we have seen a little bit of softness in the December timeframe interestingly enough January, which is generally a slow month by the way for them as well. So that’s not necessarily unusual. Looking forward, we are seeing a slight, we think a slight uptick in February, but certainly, the customer base that they have are generally these specialty stores, also places like the zoos, the institutions like Smithsonian and what have you. And there clearly has been some drop-off in activity at those levels. So, the company is kind of holding its own honestly. We have had – I think I have reflected on this over the years. We have had probably more issues around management with that particular company than we have had with some others. And that’s as much frankly a part of it, but we are very intensively working on it and doing the things that we need to do to get the best outcome as possible.

I appreciate that. Dave, you mentioned in your prepared remarks that on a net basis the decline in – or the unrealized depreciation in the portfolio outside of Old World and the Mountain was driven mostly by multiples. Is that the case at Horizon Facilities which was driven down – which was marked down relatively meaningfully or there are company performance issues there as well?

So, Horizon specifically was both a decline in multiples and a decline in EBITDA.

Okay. That’s it from me this morning. I appreciate your time. Thank you.

But just one last thing on Horizon though, that company is very solid, very strong. And even though we have a slight decline in EBITDA and multiple you get us kind of a double whammy, but that company is, that’s doing very – that’s a really good company, very well managed and one that we feel very, very good about, just to be clear.

Thanks.

Thank you. Our next question has come from the line of Kyle Joseph with Jefferies. Please proceed with your question.

Hey, good morning, guys. Thanks for taking my question. Just on the credit side of things, can you give us a sense for how your companies have been able to adjust to the higher rate environment and higher debt servicing costs and kind of how that’s impacted the overall leverage of your portfolio?

Well, Kyle, I think other than the ones who we sort of specifically talked about, as Mickey was asking, we are not seeing any stress, obviously, the some of the companies, as you well know, most of our debt has a floor, not most, in fact, all of our debt has a floor. So where we have been at LIBOR plus, the way we structure our deals, LIBOR really has to start moving up pretty dramatically before you start getting above the floors of the – on the actual loans that we have to our portfolio companies. And we have seen that obviously, a bit in a few. And as Rachael mentioned, we have seen some of the increase in net investment income as a function of having slightly higher interest coming in. But overall, we have not seen stress on the leverage of the individual portfolio companies, that is necessarily putting any of them in any real concerns at this point, so.

Got it. Helpful. And then just one quick follow-up on the Old World Christmas, recap just, give us a sense for the timing, the rationale and how that impacts the overall capital structure of that company?

Okay. So, this is the second time we have recapped Old World Christmas, actually. And the timing of that, we did it right near the end of the year, in December. And that’s extremely strong company with its EBITDA, its leverage was very low. And so it was an opportunity. And it’s a great company, the management is very good. So, it was an opportunity, frankly to be able to, for us to put some more money to work, take some as I mentioned. We get some fees, obviously, from that and also it happened to lend itself to a capital gain perspective. So, the good news about that company as well, to some extent, you have a pretty good idea where the year is going to look early in the calendar year, in part because of the nature of its business. So again, I don’t know what else Kyle, I can tell you on that other than, it was a great opportunity for us to be able to do another dividend recap. It allowed some of the management who have ownership position in it as well to get a bit of a reward. And then in turn, likewise, we can make a distribution to shareholders also.

Yes. That’s very helpful. Thanks a lot for answering my questions.

Next question.

Thank you. Our next questions come from the line of Bryce Rowe with B. Riley. Please proceed with your questions.

Thanks. Good morning everyone. Maybe wanted to just start with kind of a simple question around the portfolio yield. I am just curious, when – maybe when the floating rate loans reset from a base rate perspective. Did they reset after the end of the year, in early January? And do you expect kind of continued yield expansion out of that floating rate debt portfolio?

Yes. Bryce, I will try to give an answer and then Rachael can add to that. It’s sort of automatically, I will say happens. I don’t – rate rates are starting to now it looks like maybe if not just go down, certainly stabilize. So, I am not sure we are going to see a lot more expansion in that regard above kind of where we are now with those that have gone above our floor. Rachael, do you have something you want to add to that?

Yes. So, we went over the floor late last year. So, most of our – as Dave mentioned portfolio has a floor set in place, most around generally 2%. So, really in this quarter, we did see that increase in LIBOR lift our overall yield.

And Racheel, just from a time – go ahead David, I am sorry.

No, I was just going to say, the weighted average yield, at least the way we are counting through the quarter and went up right about 1.3%. That’s obviously somewhat reflected as a result of that. But again, as I would say, I don’t know that we are going to start seeing much more necessarily increase in that just because of somewhat stabilization, I think in LIBOR. Sorry, I didn’t mean…

Got it. Maybe I didn’t – you are correct, Dave. Maybe I didn’t ask it the right way. But just kind of trying to understand whether the move that we have seen in rates, is it fully reflected in that 13.4% weighted average yield, or will you get some kind of carry-through here in the March quarter?

Yes. It is fully reflected in that 13.4%.

Okay. That’s helpful. Let’s see, from a – and maybe to follow-up on some of Mickey’s questions around portfolio valuation. Dave, you mentioned, an overall net decline in portfolio valuation outside of Old World Christmas. But there were some notable increases from an appreciation perspective. So, can you talk about kind of what’s going on within several of those companies, is it higher EBITDA, higher multiples, just kind of curious how you are getting to some of those higher valuations?

Yes. So, I think if you look at – if I was to go through each one of these, I won’t honestly do that. But just to give you a general sense, companies such as, I don’t recall them all out necessarily, but like a Brunswick Bowling, Mason West, Dema, which is one of our more recent investments, Nth Degree, which we still now have a interesting investment in, Schilling, which is consumer, somewhat related, PSI Molded Plastics. All of those had increases fundamentally as a result of EBITDA appreciation, while there was a slight decline on multiples, which of course, we don’t create those that’s given to us. So, net-net, in those companies, as an example, we saw an ability as a result of the EBITDA increases to offset any sort of multiple decline, so to speak. And then when you look at some of the others, Horizon, we mentioned that had a bit of a slight EBITDA decline and a multiple decline as well. Some of the others, Educators Resource, which is a very good company had a similar dynamic, B&T acquisition, similar dynamic. So, overall, I would say, the obvious question is, we have 25 companies in our portfolio, excuse me, which is down from 26 companies, because of the – we have exited one company, as I mentioned that we have had in the portfolio for some time. So, overall, I think the balance in the portfolio is very solid with the nature of the companies we have in the various industries that we are in. And as I look forward, obviously, hopefully, we will start seeing – I suspect we will see generally EBITDA for arguments sake just kind of continuing on a trailing 12 basis, which is obviously how we do our valuations. We will probably stay relatively stable. I would expect we might see a few increases, but nothing on a negative side necessarily, and then multiples, who knows what that’s going to look like as we go through the end of this quarter. I would anticipate multiples would be probably, again, relatively stable, maybe slightly down.

Okay. That’s helpful. Last one for me, around the dividend and the supplemental, it sounds like you have an intention of continuing the supplemental dividends as appropriate. Just curious kind of maybe where the estimated UTI balance is at this point? And how do you feel about that $0.48 annualized levels from a supplemental perspective, I guess how much visibility do you have into that?

Yes. Well, I think Bryce, we may have talked about this. And I certainly mentioned this I think on all – most of these calls as we know. The model that we drive here at Gladstone Investment as a “buyout fund”, right, being a little bit unique in the in the BDC space, where we have a large percentage, relatively speaking of our investments in the equities of the companies, right. So, we are not just getting – as you well know, we are not just getting a sort of equity kicker, we actually are the dominant equity source. And that’s our strategy and our plan. So, having said that, we are also at the same time though, want to be sure that we are very cognizant of the need to continue paying very stable monthly distributions to shareholders. And we have been able to, as David Gladstone mentioned, done that for a long, long time. We will continue doing that. And we will continue to increase those as we did roughly, I think 6.7% this period, because we are earning it on a monthly basis. And that’s our focus. Therefore, the supplementals if you will, a little bit about, I don’t want to say good news, bad news. The good news is our strategy. And our plan is to be able to continue as we harvest companies by exit, whether in the case of a supplemental coming from, say the Old World, which again is not going to happen all that frequently, these dividend recaps, frankly. But when we exit a business, we will probably have a couple of exits this year, that’s our plan. We want to be able to do that, so we can provide the supplementals. But having said that, we are not really in a position to tell you or tell anyone that we have a plan that we are going to be able to make a distribution from supplementals in June as an example. That’s just not the nature of the beast. It is going to be as we can manage the portfolio, manage to exits and therefore have the ability to make supplemental, that clearly is our plan. But is going to be a little bit less certain in that regard, than certainly what we expect on our monthly distributions.

Okay. Yes. That makes a lot of sense. I appreciate you taking the time this morning.

And Bryce, just so you know, sometimes you see analysts out there writing information about the number of deals we have that are on non-accrual. And that’s a comparison with all of these BDCs that are just income oriented. They don’t have any capital gains or any upside. So, when you compare us to the regular BDCs, you are getting a 7% yield plus the opportunity for these increases in capital gains that go through as an extra dividend. But it shouldn’t be compared. We shouldn’t be compared in this company with a world of BDCs, simply because they are just lending money. We are doing both. And I think that should be taken into account. Do we have any more questions?

Appreciate that.

We do not. There are no further questions. I would like to hand the call back over to you Mr. Gladstone.

Alright. Thank you very much. It was very nice to have such a wonderful quarter to report. Dave and Rachael did a great job of cleaning up the place and putting money out. It’s really nice. If there any other questions, your last chance is now, hit the button. Alright, then we will see you again next quarter. That’s the end of this call.

Thank you. That does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.