Greetings and welcome to the Gladstone Investment Corporation’s Fourth Quarter ended March 31, 2022 Earnings Call and Webcast. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Gladstone, Chief Executive Officer. Thank you. Please go ahead..

Thank you, Donna. Nice introduction and good morning to all of you out there. This is David Gladstone, Chairman.

This is the fourth quarter and fiscal year ending 2022 – year ending March 31, 2022 earnings and conference call for obviously shareholders as well as analysts of Gladstone Investment listed on NASDAQ under the trading symbol, GAIN, or the common stock, GAINN and GAINZ, for the registered notes that we have outstanding. Thanks again for calling in.

We are always happy to provide updates to shareholders and analysts and provide our view as best we can do it for the future. Goals are to help you to understand what has happened and give you a current view of the future. And now, we will hear from our General Counsel and Secretary, Michael LiCalsi.

Mike?.

Thanks, David. Good morning, everybody. Today’s call may include forward-looking statements under the Securities Act of 1933, the 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.

And 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. You can find them on the Investors page of our website, that’s gladstoneinvestment.com.

You can go to the SEC’s website at sec.gov. And we undertake no obligation to publicly update or revise any of these 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 any future results.

We ask you to take the opportunity to visit our website, once again, gladstoneinvestment.com, sign-up for our e-mail notification service. You can also find us on Twitter @GladstoneComps and on Facebook, keyword there is, The Gladstone Companies. Today’s call is an overview of our results through 3/31/22.

So we ask you to review our press release and Form 10-K, both issued yesterday for more detailed information. With that, I’ll turn it over to President of Gladstone Investment, Dave Dullum..

one, the continued recovery of the values of our equity holdings and also investments that we made in both new buyouts and incremental financings for add-ons to existing portfolio companies, mainly for new things that they could do; and also, we exited some portfolio companies and generated realized gains.

So, pretty active fiscal year with a lot of activity that netted into some really good results. Our dividends remain strong. We maintained our monthly distribution at $0.075 per share or $0.90 per share on an annual basis.

We paid a supplemental distribution of $0.12 per share in February of 2022, and subsequent to quarter end, we declared another supplemental distribution of $0.12 per share to be paid in June of 2022.

We certainly anticipate continued funding of these supplemental distributions as we continue to recognize realized capital gains on the equity portion of our successful exits.

During fiscal year ‘22, we invested $34.2 million in two new buyout investments and made an additional roughly $58.5 million in various existing portfolio companies and are primarily due to fund accretive add-on investments in those companies.

During the year, we exited our investments in three portfolio companies, which resulted in over $25 million in realized capital gains on equity and success fee income of $5.4 million.

As mentioned, we experienced continued improving valuations at our portfolio companies, and this is important to note because the impact of the changes in equity values has a high correlation to our overall portfolio value and given that approximately 24% of our assets that cost our equity securities.

And as we know, that is roughly the percentage that we anticipate and we look at wanting to have in our equities of companies that we do in the buyout business.

Since inception in 2005 and through 3/31/22, it’s always important to take a look backwards, we have invested in 55 buyout portfolio companies for an aggregate of approximately $1.5 billion, and we exited 27 of these companies over the years, generating approximately $263 million in net realized cap gains and over $36 million in other income on exit.

So, very good return cash on cash to the equity that we had invested in those particular 27 companies. I believe that this does reinforce the success of our buyout full strategy, which generates both income for the monthly distributions to shareholders and also capital gains on equities, which we then pay out in supplemental distributions.

Our balance sheet continues to be strong with low leverage and a very positive liquidity position with availability on our credit facility where we currently have no outstanding balance.

This allows us to continue providing support to our portfolio companies, not only for the add-on acquisitions that we would like to make and interim financing if the need arises, while actively seeking new buyout opportunities and obviously continuing to grow our assets.

In terms of where we look forward, we continue to be challenged, and I say this pretty much over the last number of calls and it does continue, with making new buyouts because the market still reflects a high purchase value with certain expectation from the sellers, and also we have very strong competition.

So as a result, we must remain and we do remain selective in diligence and our review process while aggressively seeking new buyout opportunities. Currently, we are in the letter of intent stage, LOI stage as we call it, with a few new companies that are very good-looking businesses, a little bit larger in size than we historically have done.

So we hopefully will shortly be able to report on these as new acquisitions and new assets to the portfolio. So in summing up the quarter and the year end and looking forward, we believe the state of the portfolio is very good.

We have a strong and liquid balance sheet, an active level of buyout activity and the prospect of very good earnings and distributions over the next year. So with all of that, I’ll turn it over to Rachael Easton, who can fill in some of the details.

Rachael?.

Right. Thanks, Dave. I will start with a summary of the fund’s operating performance for the quarter and year ended – fiscal year ended March 31, 2022.

So we continue to see improvement from the ongoing impact of the pandemic on our portfolio companies through the end of the fiscal year, resulting in total investment income of $72.6 million, adjusted net investment income of $1 per share and over $25 million in realized capital gains on exits.

As for the most recent quarter, we generated adjusted NII of $8.7 million or $0.26 per share and this is consistent with adjusted NII in the prior quarter.

We continue to believe that adjusted net investment income, which is net investment income exclusive of any capital gains-based incentive fees, is a useful and representative indicator of ongoing operations.

Total investment income increased quarter-over-quarter to $19.2 million from $16.7 million, and this is primarily due to the collection of past due interest income in the current quarter, and that’s from a portfolio company that was previously on non-accrual status.

Consistent with our prior quarter at March 31, 2022, three of our portfolio companies do continue to be on non-accrual status.

Net expenses increased by $4.2 million this quarter compared to the prior quarter, which was primarily driven by an increase in capital gains-based incentive fees due to the net impact of realized and unrealized gains as required under U.S. GAAP as well as a decrease in fee credits.

We believe that maintaining liquidity and flexibility to support and grow our portfolio are key elements of our success.

With the successful issuance of our 2028 notes and related redemption of the Series E Term Preferred Stock during the fiscal year 2022 and successful exits late in the prior quarter, we have long-term capital in place and the full $180 million available under our credit facility. Our leverage is low with an asset coverage ratio at March 31 of 252.9%.

Our NAV increased to $13.43 per common share as of March 31, 2022, and this is from $13.27 per common share at the prior quarter end. The increase is primarily related to net unrealized depreciation of investments of $20 million during the quarter. Consistent with prior quarters, distributable book earnings to shareholders remain strong.

With that in mind, and as previously announced in April 2022, our Board of Directors declared another supplemental distribution to common shareholders of $0.12 to be paid in June.

Using the current monthly distribution run rate of $0.90 per share per year and $0.30 per year in supplemental distributions that we paid in the fiscal year ending 2022, our fiscal year distributions would total $1.20 per common share or yield about 8.1% using yesterday’s closing price of $14.82. This covers my part of today’s call.

Back to you, David..

Thank you, Rachael. You and your team have done a very nice job of putting together all of this accounting information for the year-end. And Dave, good report, might be good information for our shareholders. That presentation and the 10-K filed with the SEC yesterday should bring everyone on to date.

This team has reported solid results for the quarter ending fiscal year, including the buyout investment transactions and exit activity with significant net realized capital gains. The team is in great position to continue these successes through the next fiscal year, March 31, 2023.

We believe that Gladstone Investment is an attractive investment for investors seeking continuous monthly distributions and supplemental distributions that come from potential capital gains and other income.

Those aren’t nearly as important to us as these monthly dividends that we pay because that’s the basis for this company continuing to roll along and have the opportunity to trigger some capital gains. The team certainly hopes to continue to show you strong returns on your investment in this fund. Now let’s stop.

And Donna, if you will come on, we will have some questions from our shareholders and hopefully some from our analysts as well..

Thank you. The first question is coming from Mickey Schleien of Ladenburg Thalmann. Please go ahead..

Yes. Good morning, everyone. Dave, I wanted to follow-up on your comments about the overall market which, as you noted, has been challenging for buyouts given elevated valuation levels. Obviously, this year, we’ve seen a large correction in the public markets, and I sense some decrease in valuation of private companies as well.

So at the margin, are you seeing any developments in the pipeline that’s interesting or exciting to you that perhaps didn’t exist 6 months ago and what kind of quality of companies are you seeing in the pipeline?.

Thanks, Mickey. I appreciate the question, and good to talk to you. I would say that the quality is probably as good as it has been.

We are seeing a few of what we call broken processes, where guys were going to market, say, over the last, say, five months, six months with perhaps expectations of value that were not realistic, and those processes failed, right. So, some of those companies now are still kind of available. We ate looking at a few like that.

It doesn’t mean though that the valuations are taking, say, a significant decrease, right, or a step function down. Frankly, it’s kind of in the same general range, but a little bit more room to negotiate and so on. So, we are working on a number of those right now.

Overall, I would say the quality is about the same as we have seen, so it means good companies, good EBITDA. And – but I think, yes, there is some moderation of the expectations. But at the other side of that coin, as I mentioned, competition is still pretty high.

There is a lot of money out there, a lot of private equity firms obviously that have capital they want to deploy and the ability to gain leverage still there. So, we got to compete hard every day, but we are doing it, so….

Thank you for that Dave. And to follow-up on your EBITDA comment.

With the prospect of a recession developing, and who knows whether it will happen or not, I think it would be helpful if you give us a sense of the portfolio’s average EBITDA of the portfolio companies, their debt-to-EBITDA and their interest coverage ratio, just to give us a sense of how much cushion there is should we see a meaningful contraction in the economy..

Mickey, unfortunately, I am not sure I can spout off top of my head with 27 portfolio companies, frankly, what the average EBITDA is and so on. What I will tell you is this, we review, and in fact, we are going through the process currently as we speak, every one of our portfolio companies with our team.

And we look hard at, just as you are saying, what we expect for those companies over the next year or so, where we think, if any, that there might be, I will call it, areas of weakness or need for support, which is always what we have done when we went through certainly prior periods that might be akin to this.

And I will just say right now that I don’t see any dramatic issues, frankly, so far with any of our portfolio companies. In fact, we have seen improvement certainly over the last six months of portfolio companies to increase not only EBITDA, and we have seen values increase, as we mentioned earlier, equity values.

And that’s not just a function of multiple increases, but it’s actually mainly EBITDA increases in those companies. So, I guess as a general statement, I can tell you that I feel like the portfolio is in good shape.

I think most of the portfolio companies are going to be able to weather some kind of a decline and obviously depends on what industries they are in. But net-net, I feel fairly good about where we are and as we look forward.

So, but we keep – we obviously stay on top of it because we are very proactive with our portfolio companies, I think as you know, and give them assistance or help where necessary..

Dave, in terms of that EBITDA growth you just mentioned, I am glad to hear that you have some investments in portfolio companies which are manufacturers.

So, does your comment imply that generally your portfolio companies are passing increases in their costs, including wages on to their customers and defending their margins?.

Yes. Every one of our – I say, yes, meaning that we push hard with every one of our portfolio companies, not just the manufacturers, by the way, to look at price increases. And they have been doing that. We of course, started that process back many months ago, right, near the beginning of the end – near the end of last year.

So, we have been able to put those through even through and with companies that sell into some of the tough, I will call it, retailers like Walmart, etcetera, where they actually have been able to get price increases.

So, yes, every day, we work with those companies and keep pushing on not only price increases, but how might we also take costs out of the systems.

So, a number of our manufacturers, the good news over the last number of years, we started actually investing in CapEx in automation, and that’s helped certainly to keep our manufacturing costs down, and labor being a very critical part, as you mentioned. So, all-in-all, it’s been a – it’s a challenge every day for those companies.

But yes, they are working hard to improve overall EBITDA cash flow, as you say, one, by passing through – I wouldn’t say pass-through costs necessary as much as raise price increases and then also reduce costs on the manufacturing side..

Thanks for that David, that’s helpful. My last question is related to Hobbs, which as we know, is on non-accrual. I see that you restructured its debt.

Can you just remind us what issues Hobbs is confronting and what’s its outlook in this kind of environment we are in?.

Yes. I would say that one of the biggest things that they are confronting is, what I will call, delay in some jobs because the good news for them is that they have a very significant backlog. We are seeing that improving. And where it’s been the last couple of months certainly is they have the backlog, but if you will, there has been a push forward.

So, in other words, the business that they are in, in the HVAC contracting business, and in the region that they are in, there have been somewhat of a pushback from the developer, the general contractor, in part driven not because of the business is going away, but because they in turn have had issues with supply chain, right, So, getting material.

So, that slowed down some of those jobs which, in turn, obviously moves back. So, we have had some slowdown in that regard, which obviously has a direct impact on our costs, our, meaning Hobbs costs.

That’s been improving significantly, getting out in the field and managing each of the jobs is a critical part, and they got many jobs over a number of different states. So, it’s – I feel now, frankly, that we are on top of that issue with the company.

And we certainly are – feel like this year, we are seeing improvement where they had not been over the last six months or nine months. So, that’s kind of, again, a very general comment on Hobbs, but we feel good about where they are..

That’s really helpful. Dave, I appreciate it. Those are all my questions. Thank you and have a good weekend..

Thanks..

Next question please..

Mr. Gladstone, I am showing no further questions in queue at this time.

Did you have any additional or closing comments?.

Sure. Thank you very much, all of you, for calling in. We appreciate the good questions that we get, and that’s the end of this. We will see you next quarter..

Ladies and gentlemen, thank you for your participation. This concludes today’s conference. You may disconnect your lines at this time, and have a wonderful day..