Greetings and welcome to the Gladstone Investment Second Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Gladstone, Chief Executive Officer. Thank you, sir. You may begin.

Thank you, Latonia. That was very nice introduction and good morning to all of you that are listening in. This is David Gladstone, Chairman, Gladstone Investment. This is the second quarter ending as for the fiscal year that ends March 31, 2023. And we are ending the quarter at September 30, 2022 to talk to you about. All the shareholders and analysts that are on, hopefully you are all ready to ask us lots of good questions when we get to that part of that and we are talking about the symbol GAIN as well as two others GAIN as the common stock and GAINN and GAINZ is for the registered notes and things that we have listed as well. So, thank you all for calling in. We are always happy to provide updates to shareholders and analysts who are on the phone call. And there is two goals here to help you understand what happened in the last quarter and also to give you a current view of the future. Now, we will start out with our General Counsel, as we always do, Michael LiCalsi. Michael?

Thanks, David. Good morning, everybody. Today’s call may include forward-looking statements under the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding our future performance. So, 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. Now, 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. We find them on the Investors page of our website that’s gladstoneinvestment.com or the SEC’s website which is www.sec.gov. And 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 any past performance or market information is not a guarantee of any future results. We ask that you 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, The Gladstone Companies. Today’s call is simply an overview of our results through 9/30/22. So we ask that you review our press release and 10-Q both issued yesterday for more detailed information. With that, I will turn it over to Gladstone Investment’s President, Dave Dullum.

Hey, Mike, thank you very much and good morning, everyone. Welcome. Again, we are pleased to report that GAIN had another good quarter for fiscal year ‘23. This follows on the previous solid first quarter of the fiscal year. We clearly are in a challenging period with rising interest rates and inflationary costs. However, our portfolio companies were happy to say are meeting these challenges. And as a result, we ended the second quarter of fiscal year ‘23, which was on 9/30/22 with adjusted NII of $0.29 per share and total investments at fair value of $738 million, which is up from $690 million at 6/30/22. Our deal activity this quarter was fairly good as we made one new acquisition and investing $39 million. We also invested $30 million and recapitalized one of our existing portfolio companies. Now in connection with this investment, we received a return of our preferred equity investment of $10 million. We received dividend and success fee income of $4.8 million and recognized a realized gain of $2.2 million, thereby increasing our debt investment in that company when the dust settled to $57.7 million. So again, we were able to generate capital gains, fee income and indeed increase our actual investment in this portfolio company. I should note that we will have opportunity for recapitalizations from time to time. Now these are positive events as they generally allow us to generate capital gains and other income while increasing our investment in a company, where clearly we know the management team and the business. So, it’s a good opportunity. With the buyout market still frothy meaning relatively expensive and pretty competitive, this is a good way for us to create value within the portfolio and therefore reward shareholders. Now subsequent to the quarter end, we invested an…

Absolutely. Thanks, David. Good morning. I will start with a summary of the fund’s operating performance for the quarter ended September 30, 2022. In the second quarter of fiscal year ‘23, we generated adjusted net investment income of $9.7 million or $0.29 per share. This was up from $8.3 million or $0.25 per share 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. The increase in adjusted NII was driven by an increase in total investment income to $20.8 million compared to $19.3 million in the prior quarter as well as a decrease in net expenses to $9.4 million from $11.9 million in the prior quarter. The $1.5 million increase we saw in total investment income was primarily due to an increase in debt investments in the current quarter, as well as an increase in LIBOR impacting our interest rates. Additionally, driving the increase in interest income, we had one portfolio company that was previously on non-accrual come back on accrual status this quarter. Going forward, there are two portfolio companies that remain on non-accrual status. And we will continue working with those companies to get back on accrual status if possible. The $2.5 million decrease in net expenses we experienced was primarily driven by a decrease in accrued capital gains-based incentive fees. This was due to the net impact of realized and unrealized gains and losses as required under U.S. GAAP. We believe that maintaining liquidity and flexibility to support and grow our portfolio are key elements of our success. We have long-term capital in place and at September 30, 2022 had $163.4 million available on our $180 million credit facility. Additionally, we…

Thank you. Very nice, Rachael. It was very nice for Dave and Michael as well given good information to our shareholders. This call and the 10-Q filed with the SEC yesterday should bring everyone up-to-date in the company. The team has reported solid results for the quarter and we believe the team is in a great position to continue these successes through the remainder of our fiscal year ending March 31, 2023. I am telling you getting over 9% yield on the price of the stock these days. Very strong return, I hope all of you call your broker and get some shares. We believe that Gladstone Investment is an attractive investment and we are seeking continuous monthly distributions and supplemental distributions from potential capital gains and other income. The team hopes to continue to show you strong returns for your investment and we will take good care of your money as you know most of us, here at the company have a lot of shares in this company as well as the other funds. So, now I am going to stop and we will ask our analysts, friends and maybe some shareholders to ask us some questions and we will do our best to give you a good answer.

Thank you. [Operator Instructions] Our first question comes from Mickey Schleien with Ladenburg Thalmann. Please proceed.

Good morning, everyone. Dave wanted to ask you about how business owners are behaving in terms of their wiliness to perhaps sell their businesses when we think about the headwind of rising interest rates for them and the headwinds also from a potential recession? In other words, is that driving them to have more interest in selling and providing you perhaps a bigger pipeline than you have in the past?

Hey, Mickey. Good morning. Thanks for that question. I can’t honestly tell you that, that we are seeing that. I would say that there has been probably a bit of a slowdown in the pure family-owned or controlled business somewhat to that degree. Obviously, there are other variables such as, what sort of succession there is. And what we are finding unless and we have had a few situations like this where you started getting into diligence and the values come down when you really get into it. And as a result of that actually to sellers and we are back off and not move forward. So to your point, there is a bit of that where they would love to try to sell it, but if it’s not at a value they would rather stick with it and so on. So I don’t – I wouldn’t say that’s really helping improve the deal flow in that regard. And then the other obviously seller group would be other private equity firms frankly. And they are more looking to – if they are at the point where they need to exit, they are going to exit sort of regardless. But having said all of that, as I mentioned, there is still enough demand, if you will and capital that, that is still keeping some of those valuations at a higher value than frankly we think we can support. So net-net, it’s a struggle.

Okay, I appreciate that. Dave, your portfolio sort of includes many companies that are fundamental businesses focused on the U.S. economy. So I think it would be really interesting to understand if you – or if you couldn’t just give some sense of how their revenues are developing and their margins as well given all this tightening that the Fed is doing?

So, I would say we are starting to just feel a little bit of a slowdown. As you know, we have what I think of is three sort of categories, I don’t call them, necessarily industries, the categories, manufacturing, business services and especially consumer. We are starting to see a little bit of a slowdown I would say on the demand side, on the consumer side, manufacturing that’s slowing a little bit also. And then on the business services side, that’s actually pretty robust right now. The bigger challenges continues to be in certain categories finding labor. Even though we know that there are folks that are not looking for jobs, frankly, which I think impacts the way in which we think of unemployment. But having said that the bigger challenge really is more around good quality labor, price and labor prices seem to be moderating a bit and obviously, supply chain struggles are improving. Also we have seen clearly the cost for argument sake of importing from, say, China or the Far East, where you were dealing with container costs that were $15,000 to $20,000 back not what’s six months ago, now those are back more normal kind of in the $5,000 to $7,000 per container type of cost. And that impacts clearly those companies that we have that are importing. So, we are seeing improvement there. So, across the board, I would say it’s starting to slow a little bit, but nothing dramatic in that regard.

And Dave when you think about all those comments, you have just made and look at the forward interest rate curves, what level of concern do you have regarding you company’s ability to fund their debt service in terms of cash and interest coverage ratios and their ability to absorb what it looks like going to be meaningfully higher interest rates over the next couple of quarters?

Right. So, currently as you know the way our deals are structured with a LIBOR plus and floors. We have been always pretty much in the category where we are above the floors, we are at our floors if you will. And so now with LIBOR increasing, we are starting to see a bit of an increase over and above what they have been paying. So, because our floors so to speak have been relatively high I would say, because as you know, the yield on our total portfolio is 11.9%, 12%. So, we are not seeing as big an impact right now. The other thing obviously, which as all know, because of the way in which we own these companies and the way in which we capitalize these companies, we have a little bit of flexibility if we were needing to give our company some help so to speak and in a deferral or a slight reduction if things really got tight, which we have had to do in the past from time-to-time. But right now, we are not seeing that to be a big problem with any of our portfolio companies. We obviously have two that have been on non-accrual for a while, one that actually came off of non-accrual which is a very good thing. And the two that are currently on non-accrual, we – as Rachael said, we are working hard with those companies. I think one of them very good chance, it will sometime in the next six months to nine months would come off non-accrual, the other one not so sure. But that’s not a huge, frankly driver to affect our results going forward.

I appreciate that Dave. Couple of last questions, more housekeeping sort of questions. The portfolio’s weighted average yield climbed only 20 basis points, but during that period LIBOR increased 150 basis points. You just talked about LIBOR floors, were your LIBOR floors so high that that accounts for that change or is there something else that I should understand?

So, you are right there. Our floors are generally around 2% to 3% across the portfolio. So, now as LIBOR continues to increase this quarter, we should see that yield lift as well.

Okay. You see that if floors are higher than what’s typical in the middle market. And my last question is just your view on balance sheet leverage, or what sort of level of debt-to-equity are you comfortable with in the current market environment?

Right now we are at about 250% and I think that’s a level that we are comfortable with. We have – we are at current about $20 million out on our line of credit. So, I think we have a lot of room there. But we look at it holistically at our business and our capital structure. And we were conservative in our leverage metrics. And I don’t think we are looking to change that.

Yes. And obviously, as we look forward and start, hopefully, we will be making some new acquisitions this year, we have the capacity. That’s the good news, as Rachael is pointing out. In terms of where we would start to be a little nervous, call it around the leverage ratio, I would say, if we start to get in the kind of 180% sort of range is probably where we start to look at it. As you know, we put in an ATM program earlier this year in common stock and we were raising not aggressively, but we were raising until of course, prices started moving down for everybody. So, we are clearly we are slowly back to about now. We are a little bit below now. So, we are certainly not going to raise any common, certainly at this level as we go forward and as prices, hopefully will start – stock prices move back up, we will gradually add some equity to the balance sheet as we look forward and sort of match it with new acquisitions that we are making. But right now, as Rachael said, to reinforce that we are in really good shape right now and we think as we look forward, even with some pretty good new acquisitions, we will be in decent shape, both from a leverage perspective, and from a capital perspective, probably up through halfway of next year thereabouts. That would be my thinking.

Okay. That’s it for me this morning. I appreciate your time, as always. Thank you.

Thanks Mickey.

Thank you.

So, our next question.

[Operator Instructions] Our next question comes from Kyle Joseph with Jefferies. Please proceed.

Hey. Good morning guys and thanks for taking my questions. Just curious on your commentary regarding things remaining competitive in the middle market in terms of buyouts, what would be the outlook for you if rates continue to rise, you ultimately see some competitive disruptions there. And then in terms of capital allocation priorities, our add-on acquisitions kind of the near-term focus for you guys.

Yes. Hey, Kyle, good to talk to you. So, add-ons, yes, we have been making some of those. As we mentioned this past quarter, we added on to one of our portfolio companies and we are continuing to grow that business. We are aggressively looking for add-ons. That’s the good way for us to do as I mentioned, recapitalizations with some of the companies that are sensible, that’s another good way for us to do it. In terms of the competitiveness, so what we are starting to see is as rates rise, where the impact there clearly is around for the traditional private equity funds, meaning our competition, the leverage that they are being made available for them is certainly declining a little bit, we think. In other words, it’s getting tougher for them to get leverage, for getting the rate even. So, that should thereby mean that we are more competitive because we – right, we bring our own leverage with us and it’s the total package. We are seeing some of that, but having said that, what we are also seeing is private equity firms, frankly, just being more aggressive on the equity. So, in other words, they are less leverage, putting more equity in the deal. And presumably that thinking that’s down the road, they will lay that off in some regard. So, the short answer would be, it’s still a struggle, it’s still competitive. And we are not going to pay some of the multiples that we are seeing, because it really doesn’t work for our model, and it’s not the right way to go. So, we will keep being patient. And I think we will do a good job this year, but it’s going to take us a while to make the kind of acquisitions we would like to make.

Got it. Very helpful. Thanks for answering my question.

Next question, please.

There are no further questions in queue at this time. Mr. Gladstone, so if you have any closing comments for the group? End of Q&A:

Well, that’s said, we like good questions, so we are missing out on this one. We will have to wait till next quarter in order to hear some really strong questions, hopefully next time. That’s the end of this. Thank you all for tuning in.

Thank you. This does conclude today’s teleconference webcast. You may disconnect your lines at this time and have a great day.