Greetings. Welcome to Gladstone Capital 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. Please note this conference is being recorded. I will now turn the conference over to Mr. David Gladstone, Chief Executive Officer. Thank you, sir. You may begin.

Thank you, Sherry. That was nice. And this is Gladstone Capital's quarter ending 12/31/2025. Call, and thank you all for calling in. We are always happy to talk to our shareholders and analysts and welcome the opportunity to provide updates on our company and answer any questions. Before we get to this quarter's results, Catherine Gerkis, our Director of Investor Relations and ESG, will provide a brief disclosure regarding certain regulatory matters that we have to adhere to. Go ahead, Catherine.

Good morning. 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 gladstonecapital.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 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. Now, I will turn the call over to Gladstone Capital's President, Bob Marcotte.

Good morning. Thank you, Catherine. I will cover the highlights for the quarter and conclude with some comments on our near-term outlook for the company. Beginning with our last quarter's results, fundings last quarter totaled $99.1 million and included two new private equity-sponsored investments totaling $37.8 million and $61.3 million of additional advances to existing portfolio companies. Exits and prepayments declined relative to the past couple of quarters to $52.8 million, so net originations were $46.3 million for the quarter. Interest income for the period rose to $23.9 million as the increase in average earning assets offset the 30 basis point decline in the average SOFR rates compared to last quarter as our weighted average debt yield came in at 12.2% for the period. Interest and financing costs increased $200,000 on higher average bank borrowings incurred to complete the fixed-rate note refinancings last quarter and higher average investment balance. In addition, net management fees rose $600,000 with the increase in average assets and lower origination fee credits. So net investment income came in at $11.3 million for the period. Net realized gains were $300,000 as the exit of our remaining equity in Sokol more than offset the $1.4 million write-off associated with the unamortized costs with the note refinancing completed last quarter. Unrealized losses rose to $5.3 million last quarter and were concentrated in three investment positions impacted by the recent government shutdown or where we have replaced senior management and are expecting significant improvements over the balance of 2026. With respect to the portfolio, the portfolio growth for the period did not have a material impact on our investment mix or spread profile as first lien debt and total debt investments came in at 73.91% of the portfolio cost respectively. As of the end of the quarter, our three…

Thanks, Bob. Good morning. During the December quarter, interest income rose $100,000 or 1% to $23.9 million as the average earning assets rose $20.3 million or 3%, while the weighted average yield on our interest-bearing portfolio declined 30 basis points to 12.2% for the period. Total investment income was $24.5 million on higher interest earnings, and fee income rose $400,000 from last quarter. Total expenses rose $800,000 or 6% versus the prior quarter as interest expenses rose $200,000 with increased bank borrowings, and net management fees rose $600,000 on higher average investments, and lower deal closing fees credits. Net investment income for the quarter declined to $11.3 million or $0.50 per share. The net increase in net assets resulting from operations was $5.5 million or $0.24 per share for the quarter ended December 31. As impacted by the realized and unrealized valuation depreciation covered by Bob earlier. Moving over to the balance sheet. As of December 31, total assets rose to $923 million consisting primarily of $903 million in investments in fair value. And $20 million in cash and other assets. Liabilities rose $20 million quarter over quarter to $445 million as of December 31, with the increase in LLC borrowings to call and repay our $150 million of 5.18% notes previously due January 2026, and our $57 million of 7.34% notes previously due in 2028. And to fund our net originations. The remaining balance of our liabilities consists primarily of $149.5 million of 5.78% convertible debt due 2030, $50 million of 3.5% notes due May 2027, and $29 million of 6.25% perpetual preferred stock. As of December 31, net assets declined $4.7 million to $477 million and NAV per share declined from $21.34 to $21.13. Our gross leverage as of December 31 rose to 93.3% of net assets. Monthly distributions for February and March will be $0.15 per common share, which is an annual run rate of $1.80 per share. The board will meet in April to determine the monthly distributions to common stockholders for the following quarter. At the current distribution rate for our common stock and with the common stock price at about $20.44 per share yesterday, the distribution run rate is now producing a yield of about 8.8%. And now, I will turn it back to David to conclude.

Well, thank you. That was a good summary and solid quarter for Gladstone Capital again. The team for Gladstone Capital continues to deliver attractive net originations and growth with a very healthy backlog of attractive growth-oriented lower middle market companies. The company has a strong balance sheet, ample bank lines, and capacity to grow our investment portfolio to deliver more dividends to our shareholders. And delivery of net interest margins required to sustain the shareholders' dividends. And now open the questions up. And operator, if you will come on and tell us what to do.

Our first question is from Eric Zwick with Lucid Capital Markets. Please proceed.

Thank you. Good morning. I apologize in advance for any background noise. I'm traveling today. But wanted to start with a question. During your prepared remarks, you mentioned increasing the usage of the revolver due to the floating rate function there. Curious if you could just talk a little bit on the loans to what extent you use floors and how many of those are at their floors now, just kind of given the SOFR curve would indicate that the market is expecting some more reductions in the base rates.

Yes. The majority of our variable rate loans do have floors. We are not obviously at those floors yet. So as interest rates decline, our interest income will decline. That's part of the reason why for our strategy right now, we do intend to rely on our floating rate debt somewhat more.

And Eric, one way to think about this is, I think we were very direct at we're not experiencing much in the way of spread compression last quarter, so competition is not driving it. And if you look at the big picture, based upon our average margin, our bank spread, and our marginal fees and costs, our general feeling is we can absorb most of the decrease and still be able to sustain the underlying dividend as we did this quarter. The other thing that's happening is last year we ran a very high commitment fees. We were very low in our utilization of lines. And if you compare the roughly $2.6 million of line commitment fees we paid last year, we're currently at a run rate that's closer to $1 million. So there's about $1 million, almost $1.6 million of savings that we will see from increasing utilization of our line fees. So we have a number of things that we are working to try to mitigate what might be the headwinds of lower rates if that were to evolve.

That was very helpful. Thank you. And next one for me, just looking at the investment in IMX Power Holdings, just curious if you are seeing in your origination funnel more opportunities for AI and data center-related opportunities and just how you kind of view this trend, if it's likely a longer-term trend or if you're watching it more cautiously, just curious on your take there.

We do not directly invest in data centers. That's a big boys game of what we've Google's announcement today? $180 billion or whatever the number was. We used to do that that's not really something that we see in the lower middle market. We do see some of the spend from those projects coming through in our portfolio. It might be bus bars that are going into data centers that, frankly, IMX does make. And, you know, certainly, are construction or HVAC or air handling services that might come through to some of those segments. We are very cautious about the sustainability. There's an awful lot of folks jumping into that market. And we are watching the reliance on that end of the market as we think about the play. But we are not directly investing what I would say is a significant reliance on the continuation of that investment spend. That's just not where our companies particularly play.

Got it. Thank you. And last one for me. You noted the increase in PIK. It's kind of gone up over the past couple of quarters. Could you just kind of generally talk about what's driving that? Is it certain companies that performance has slowed a little bit? Or are they just looking for some cash flow flexibility for investment opportunities? Wondering if you could talk a little bit about that.

There's a couple of credits that are in that category. One, which is undergoing a more systematic or scaling up of the underlying business and the working capital consumption that is behind that growth is stressing the free cash flows and given the underlying business performance we provided them the flexibility in the case of PIK. Obviously, we are closely monitoring the EBITDA and the enterprise value as we increase our exposure to that situation. And feel that we are more than adequately covered. In the second one, the company is in the process of liquidating a portion of their underlying business that has been underperforming. And the proceeds are more than ample to cover some of the accumulation of that PIK exposure. And we expect that company to be in a position to deleverage as it unloads a portion of its investment activity. So it's a case-by-case basis. We focus on what's the right move for the business. And what's the terminal exit for getting out from underneath that PIK exposure. That we focus on. And those two credits are by far the dominant portion of what's there. As you will note, we did exit a deal last quarter where we did have some accumulated PIK and we recouped it. So our strategy of working with our credits and getting that money back and getting them cash paying is obviously a consistent part of how we work with our credits.

Thank you for taking my questions today.

Next question.

Our next question is from Christopher Nolan with Ladenburg Thalmann. Please proceed.

Hi, thanks for taking my question. Why did the diluted share count change quarter over quarter so much?

So part of that is because, just the accounting requirement for how you do the calculation in the initial period. So the only thing that's impacting our diluted shares is the convertible debt. So we do a calculation to show on the gift converted method you know, what it would be. But that's really the only factor coming into play there.

Okay. So that's gonna be dissolved continuing, issue not an issue, but just that increased dilution share counts is gonna be sustained as long as convertible debt around?

That's correct. Yes. And the conversion price?

And the conversion price will only change if we do additional supplemental distribution. That change, we expect to be very, very inconsequential, though.

Great. Then, think that issue can be settled with cash or stock as the case may be. So there's a lot of flexibility. It's more of a disclosure requirement frankly than a practical expectation that we would ever issue that amount of shares. That's exactly right.

Okay. Just a more broad and more strategic question. Have you guys given that you're sort of co-located near Washington DC, have you heard anything in terms of updates for the regulatory structures affecting BDCs, specifically the AFFE rule? Any sort of consideration of altering that?

AFFE has been under discussion for what seven or ten years now. Obviously, there's a general relaxation in the market. But I don't think there's anything particularly concrete. And frankly, I think it's a two-stage process even if it were relieved it doesn't mean that it's going to very quickly change the way the index is our underlying calculation. So it would take probably a number of years to roll out whatever might come. So even of the view that, it will take us several years before something were to become effective. So, frankly, not counting on that as much as we would like it to improve the liquidity in our shares and expansion of our investor base. I don't think we're operating in the presumption that's a short-term issue.

Great. Thanks for the color, Bob.

Next question.

Our next question is from Robert Dodd with Raymond James. Please proceed.

Hi, everyone, and congrats on the quarter. On the discussion of the pipeline, sounds obviously quite positive for this quarter. And you said activity surprising. How much is any of that actually kind of spillover from Q4? Or are these deals that kind of came to you in with January launches, so to speak, with the expectation they'd always be a March deal? And then the kind of the second part to that question, sorry, Ronald, is what are you seeing in the very early stage? Do you expect that remain robust kind of through the middle or a whole year? Or is this just kind of a surprising bump in the March?

Good question, Robert. Yes, there's definitely a few of those deals that spilled over. I would generally say in today's marketplace, given volatility, you know, trade flows, tariffs, I think, most of the private equity that we're working with is pretty you know, pretty vigilant on diligence and diligence periods can take time. Some of the transactions we're working on, you know, have been in the works for probably three quarters now. So there's definitely probably half of that spillover are transactions that, folks are doing multiple rounds of quality of earnings and reviews of those businesses. Before they're actually pulling the trigger and executing on that. I would say that, obviously, the general downward trends in rates combined with better clarity in terms of certain industries is a positive. I mean, for example, you know, it just takes a while for, things like defense contracts or mint, you know, precision manufacturing businesses to see the pipeline activity, understand where the long-term trends are to acquire the machinery to support, some of those programs. So a number of our businesses at the moment are in that category of, you know, strong domestic growth, precision manufacturing, reshoring production capabilities, and are now getting around to the point of either acquiring businesses to achieve those objectives or investing in their own assets to expand. So I would say carryover is meaningful, but there's a consistent build of domestic manufacturing for some of these private equity-owned businesses to capitalize on the reshoring trend that started last year.

Got it. Got it. I thank you for that color. One kind of sort of related. I think one of the issues you pointed out too for the unrealized depreciation what there was of it was, with shutdown impact. And, obviously, you've historically had, you know, been, you know, done a fair amount of work with businesses that work for the federal government or do work for the federal government, at least. Has your appetite for that kind of business softened? I mean, you know, this the number of government shutdowns is obviously up versus you know, historic norms over the last couple of years. And it doesn't have necessarily great confidence that we won't continue to see sporadic shutdowns at a greater cadence than we've seen in the past. So just is that kind of segment as appealing to you as it has been in the past given those kind of risks?

Robert, the situation that I referenced that shutdown was implicated or impacted was a very unique circumstance. Generally speaking, we don't do government contracts. I mean, they're manufacturing stuff on long-term munitions or aircraft or platforms. And there's better visibility. Short-term government services is not a core focus for the business. That said, we do have a company in the portfolio that actually, believe it or not, does dredging activity that works for the army corps of engineers that is general recurring maintenance, maintaining, you know, ports and, and clearances for vessels. And the fact of the matter was there was an interruption or disruption in the army corps contracting for general maintenance services. And it caused a bit of a hole. Now that has already been corrected. Believe it or not, obviously, whatever builds up and whatever dredging activity is going to have to be caught up down the road if it wasn't done last quarter. So that business is not permanently impacted. And it will need to be maintained on a go-forward basis. It just happened in one quarter they stopped spending. That is not the usual, and that is not the norm for our business. And I don't think that that's a permanent impairment of this company in any way, shape, or form.

Got it. Thank you. One last one, if I can. I mean, you know, EG's saw, some more, stress in the equity piece of that, which is pretty small. But can you give us any color on is that still going through the transition? And you mentioned one of the businesses has additional management transitions. I don't know if that's EG's again. But, you know, how's the workout on that progressing? I mean, just because the equity went down doesn't mean it's not on track, but, you know, any color there?

I think there's a combination of factors on that one. Obviously, if you were to research it, you'll figure out that it's an Arizona-based company, so it tends to be seasonal. And selling quick service and selling frozen drinks is not a big thing in the winter. So you tend to have weak quarters. The other thing that I will note, and this may be indicative of other credit out there, things that are in border states or heavily Hispanic areas are facing significant downdraft associated with elevated ICE activities. So population, spend, you know, economic drivers are all being impacted. I would say, as much as we have confidence in the team and some of the challenges that are naturally associated with QSR type businesses, they are moving forward. They are evolving the business. There are some incremental headwinds, and I don't think we expected early last year when we went through the restructuring and took that business over. Management is continuing to perform, but some of these headwinds were unanticipated, and we are doing our best to accelerate the changes in cost structure in order to see our way through some of the incremental challenges. So it's still a work in process. The company has launched a new menu and some offerings which we think are going to drive traffic in 2026. And we will see as that evolves in the spring. But that's a little bit probably more than you wanted to hear about what's going on in that business, but we're working it.

I always love the extra detail there. Thank you.

Okay. Do we have any other questions?

Yes, we do. We have a question from Sean-Paul Aaron Adams with B. Riley Securities. Please proceed.

Tagging off Eric's question, do you currently have an estimate of remaining SOFR exposure and basis points before the majority of your embedded floors kicked in? You talked about spreads not being a material impact for the quarter, so just trying to highlight the pure base rate exposure?

I think our average what's our average floor? Probably one twenty?

Yeah. Or one twenty.

Yeah. So the right now, what was average SOFR last quarter is three ninety?

Mhmm.

Yeah. Average SOFR last quarter is roughly three ninety, so we're roughly running what is about three seventy today. Average floor is probably about one twenty five. So we've got some, you know, material move potentially on that. You know, my comment before was you know, if you eliminate you know, if you just focus on what our average spread is, what our bank line spread is, is, and what our marginal management fee and costs are, you net down to about a $250,000 plus or minus spread, ignoring the underlying base rate, And if we were to close $150,000,000 a $100,000,000, that's 2 and a half million of incremental net interest margin. If you look at our rate sensitivity, if we I think it's back at the tail end of our our queue. I think down 50 basis points. I think the sensitivity was about $2,400,000 So we could more than offset the first 50 basis points. As we get past that, we would need to dig into one, fees which are excluded from that calculation. Or the the additional commitment fee savings that I referred to. So we're working through the challenges We're down 100 basis points. That's a $5,300,000 down on potential rate exposure given our current portfolio. Frankly, that's about as far as we've been thinking and planning given the current current rate outlook. But we certainly are well positioned to absorb at least the first 50 and probably 75. Beyond that, we'd obviously take take additional actions to to to support the dividend. And as you recognize, we obviously have some additional coverage based on current economics and portfolio. So think we're monitoring that downward exposure and have a variety of levers that we're currently using to manage that. And support the dividend going forward. When we reset the dividend last quarter, we were looking out with you know, some of these sensitivities in mind and feel pretty confident that we've got the coverage that we need for the near term.

Got it. Really appreciate the color. Thank you.

Okay. Do we have one more question?

There are no further questions at this time.

Oh, shucks. We like questions. So there'll be more next time. Thank you all. That's the end of this meeting.

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