Greetings and welcome to the Gladstone Investment First Quarter Earnings Call. Please note that this conference is being recorded. I will now hand it over to your host, David Gladstone. Mr. Gladstone, you can begin.

Thank you, Alex. A nice introduction. And this is the first quarter of our fiscal year that ends on March 31, 2022, and this is the conference for shareholders and analysts at Gladstone Investment. We're on NASDAQ under the symbol G-A-I-N, and then we have a G-A-I-N-L for preferred stock, and we have some registered notes, G-A-I-N-N, for registered notes. And thank you all for calling in. We're always happy to provide updates to shareholders and analysts and provide a view of the current business environment. And remember, our two goals here are to understand what happened in the last quarter and then give you some view of the future. Of course, nobody knows the future, but we'll give you a shot at it. I'm going to start out with our General Counsel and Secretary, Michael LiCalsi.

Good morning, everyone. 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. These forward-looking statements involve certain risks and uncertainties and other factors. We know they're based on our current plans, which we believe to be reasonable, and that 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 that we file with the SEC can find all these on the Investors page of our website, that's www.gladstoneinvestment.com, or even 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 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 email notification service. You can also find us on Twitter at GladstoneComps; and on Facebook, keyword there is The Gladstone Companies. Today's call is simply an overview of our results through June 30, 2020. So we ask that you review our press release and Form 10-Q, both issued yesterday for more detailed information. Now I'll turn the presentation over to Dave Dullum, who is the President of Gladstone Investment. Dave?

Mike, thank you. I’m pleased to share that we had a strong quarter regarding our operating results for GAIN, the quality of our portfolio, and our progress in returning to pre-COVID operating conditions despite the uncertainties surrounding virus variants. We concluded the first quarter of fiscal year '22 with adjusted net investment income of $0.24 per share, continuing the positive trend that began in the last two quarters of fiscal year '21, where we reported adjusted net investment income per share of $0.20 and $0.24. We are encouraged by these results as they reflect improvements in our operations and the health of our portfolio companies, which bodes well for future earnings. Additionally, our Net Asset Value per share rose from $11.52 on March 31, 2021, to $12.66 on June 30, 2021, with assets increasing to $713 million from $644 million. This increase largely results from the ongoing recovery in the value of our equity holdings, which constitute about 25% of our total portfolio at cost. We maintained our monthly distribution of $0.07 per share, or $0.84 annually, and paid a supplemental distribution of $0.06 per share in June 2021, declaring another supplemental distribution of $0.03 per share, set for payment in September. These supplemental distributions primarily arise from our exits and capital gains, which are essential to our operations. In this first quarter of fiscal year '22, we exited two portfolio companies, leading to a net realized gain and significant other income. We also made one new buyout investment and additional investments in existing portfolio companies. Our buyout strategy continues to successfully generate income through monthly distributions to shareholders and capital gains, which we generally disburse through supplemental distributions. Our balance sheet remains robust, characterized by low leverage and strong liquidity, enabling us to support our portfolio companies with add-on acquisitions and interim financing if needed, while actively pursuing new buyout opportunities. The flow of buyout opportunities is quite strong, although we face the challenge of maintaining discipline in our acquisition process, particularly in evaluating companies and managing valuation analysis, as purchase price expectations remain high. Following June 30, 2021, we financed the addition of another operating company to our recent buyout platform investment called Nocturne Villas, and we completed a new buyout investment named Utah Pacific Bridge & Steel, which provides large steel components for bridge replacement, rehabilitation, and construction, aligning with infrastructure development trends in the country. In summary, our portfolio is in excellent shape. We have a solid and liquid balance sheet, a healthy level of buyout activities, and promising prospects for earnings and distributions during this fiscal year. Now, I will hand it over to our CFO, Julia Ryan, for more detailed financial insights. Julia?

Thanks, Dave. As far as operating performance for the quarter, we continue to see improvement after the initial impact of the pandemic. We generated adjusted NII of $8 million or $0.24 per common share as compared to adjusted NII of $6.7 million or $0.20 per common share in the prior quarter. We continue to believe that adjusted NII is a useful and representative indicator of our operations. Investment income increased quarter-over-quarter as interest income was lifted by the collection of past due interest from those loans that were previously on nonaccrual, and other income benefited from the close of transactions and related other income in the current quarter. While we added one loan to nonaccrual this quarter, which we believe will be a relatively short-term change, over the last two quarters, we returned four portfolio companies to accrual status. As of June 30, only two of our portfolio companies were in nonaccrual status. Net expenses increased by $6.8 million this quarter, primarily driven by a $6.7 million increase in capital gains-based incentive fees, which was due to the net impact of realized gains and unrealized gains in the current quarter. All of this is required by U.S. GAAP but is not contractually due. Moving over to our liquidity position, which is obviously very important, and we still continue to believe that maintaining liquidity and flexibility to support and grow our portfolio are key elements of our success. With the successful financing transactions last quarter, if you recall, we registered some debt, we have new long-term capital in place to do just about that, and significant availability under our credit facility for the remainder of this fiscal year and going into the future. Our NAV increased to $12.66 per common share, and that was primarily related to the unrealized appreciation we had this quarter. Dave already touched upon that. Consistent with prior quarters, distributable book earnings to shareholders remain solid, especially when considering that this number has been reduced by cumulative $22.7 million of GAAP accruals of capital gains-based incentive fees, which equates to about $0.68 per common share. Again, those fees are not currently due or deductible for tax purposes. With that in mind and as previously announced in July, our Board declared an additional $0.03 supplemental distribution to common shareholders to be paid in September. If we assume that the current monthly distribution run rate is $0.84 per year per share, and then also assume $0.15 per common share in supplemental distribution, totaling two $0.06 ones plus the $0.03 one for December, our annual distributions would total $0.99 per common share, resulting in a yield of about 6.9% using yesterday's closing price. That covers my part of today's call. Back to you, David.

All right. Very nice, Julia, and nice for Dave as well and Michael. That's a lot of good information there for our shareholders. That presentation and the 10-Q filed yesterday should bring everyone up to date. The team has reported solid results for the quarter, including buyout investment transactions and exit activity, which is positive to net realized gains. We believe these teams are in a great position to continue the success that they've had in the fiscal year ending March 31, '22. So again, Gladstone Investment is an active investment for investors seeking continuous monthly distributions and, in addition to that, supplemental distributions from potential capital gains and other income. Team hopes to continue this going forward. I'm going to stop now. Alex, would you come in, and we're going to have some questions from the analysts and shareholders that want to talk to us.

Our first question comes from Kyle Joseph with Jefferies.

First one on reported yields in the quarter. They were really strong, up nearly 200 basis points quarter-on-quarter. Was there any one-time items in that? And can you give us a sense for your outlook going forward there?

Julia, do you want to take that one?

Yes, sure. Kyle, that was related to my earlier comment on the loans returning to accrual. So as you often see in periods where loans come back on accrual, they've made some catch-up payments, and that's what particularly lifted yields this quarter.

Got it. That makes sense. And then, I think on that note, nonaccruals obviously came down. Can you give us a sense for how you were able to work through those? Any sort of restructurings? Did they all return to accrual and your outlook for nonaccruals going forward?

Yes. Kyle, I'll take that one. Julia, go ahead.

I was just going to say, maybe, Dave, you can touch upon that.

Thanks for your patience. We're not quite in the same position today, so I apologize for the back and forth. Yes, Kyle, there were no restructurings that influenced this. We navigated through the COVID period by allowing companies some leeway and, in specific instances, collaborated with commercial banks that held senior positions to help them regain compliance with the required covenants. Overall, there has been significant progress in the operations of the companies. One that went on nonaccrual is currently making payments; we're in a position to receive those payments. However, due to limitations with senior banks, it had to be placed on nonaccrual, though it is likely to return to accrual soon. I feel quite positive about our situation with all of these, even though it is somewhat temporary. We are optimistic about moving forward.

I have a final question regarding the investment environment. Investment activity and repayments have increased somewhat this quarter. However, it seems you are still finding good opportunities for capital deployment after June 30. Is it correct to say that while the market is very competitive, the supply and demand are fairly balanced right now, allowing you to identify good opportunities?

Yes, I’d say we’re seeing a lot of opportunities. And the challenge for us, as I mentioned, is just sticking with our format. The two that I mentioned that we closed on, one Nocturne, the other’s Utah Bridge. Those are really good companies and evaluations that work for our model. Again, there is a whole slew of activity out there with the investment bankers in the M&A shops. We just have to stick to our strengths, and I feel very good about doing that. So we'll make a couple of new acquisitions yet over the next year or so, but we're not going to rush out and just go crazy because multiples are just really pretty bizarre, to be perfectly honest with you, on companies that we see.

Our next question comes from Mickey Schleien with Ladenburg Thalmann.

Dave, I just wanted to follow up on your comments about the activity in the M&A market. I certainly agree with you, and I'm happy to see that you can find some transactions that meet your return requirements. But could you give us some sense of whether any of your companies are in a sale process, given how high the multiples are and your willingness to take advantage of those valuations?

Sure. The good news for us as a public entity and a long-term fund is that we don’t have pressure to exit companies. It really comes down to working with management teams and when they feel it's the right time to exit for various reasons, and we take that seriously. We have had exits in the past, and moving forward, we will encounter opportunities for exits which we will consider carefully. If we exit a strong company, we need to find a new opportunity to replace it. We are focused on the income we generate because we aim to grow our dividends and distributions to shareholders. The debt aspect is crucial. Yes, we will consider exit opportunities if they make sense, and we may see some of that in the next six to nine months. However, we will not rush into it just for the sake of doing so; we want to maintain balance, and I believe we have managed that well and will continue to do so.

That's helpful, Dave. And on Utah Pacific, that really seems to fit your business model quite well, now in an industry that is getting a lot of attention. Can you give us a sense of what sort of terms you paid on that in terms of leverage and maybe the interest rate?

Yes. Well, again, we stick with our format. As you know, when we buy a business, roughly 30% of the dollars that we put out are going to be in the equity component, and the balance is going to be in the debt component. Generally, again, as we publish, our yield on the debt component of our portfolio is generally in the sort of 12 percentage range. That's kind of how that works for our model. So any one particular deal could see the debt piece be in that sort of interest range. So we blended that with the equity components, which is pretty consistent with Utah. As far as the terms of the deal, we generally don't publish that too much, but we generally try to stay within sort of the 6 to maybe 7, 7.5x EBITDA. As long as we're kind of in that range, it works well for our model. This particular company has a very strong ownership owned by an individual that really built the business, and fortunately, we've been able to have them stay involved with us. So we got really strong management, good team going forward. It's kind of a deal that other people might have overlooked; very frankly, we work a little bit harder to find those transactions. Yes, we're very excited about this one, given their position in their market area.

Well, congrats on that deal, David, sounds good. A couple of housekeeping questions maybe for Julia. Could you give us a sense of how much interest you recognized back, past due interest, you recognized on B&T and Horizon? And did you reverse anything for SBS?

We did not, Mickey. We did not reverse anything for SBS. So that was solely within this quarter. And then the amount that was collected in past dues this period was roughly $2 million.

Okay. So a sizable amount. And Julia, can you give us your undistributed taxable income balance?

Sure. I need to look that up. I will have to get that to you after this call.

Okay. That's fine. Dave, just a couple more follow-ups, and then I'll let someone else get into the queue. Did you take out another lender at J.R. Hobbs? I noticed you refinanced that deal.

No, we did not have another lender in that deal. It's just us and management.

Okay. And lastly, obviously, we're entering another awkward cycle of the COVID pandemic, which is unfortunate. And at least to me, it seems unclear how much more support the federal government is willing to provide. Could you describe how you would expect your portfolio to perform without PPP and TALF and everything else that the government was doing to keep things moving, assuming the pandemic continues to deteriorate?

The positive or negative aspect, depending on your perspective, is that in the past year, we had only one company utilize the PPP, which was an exception. That company, The Maids, has managed well despite not really needing the assistance. As a franchisor, they were an outlier. We haven't been able to receive support for our other companies. Where assistance was necessary, which was rare, we provided additional funds to help them. The encouraging part is that we are not dependent on such support moving forward, and I don’t anticipate this having an impact on us right now. The main challenge, not just for us but for everyone, is attracting workers. The future implications of potential recurring issues are uncertain, but we are focusing on improving efficiencies across our companies. There are some cost impacts due to rising labor expenses and overtime, but we are diligently addressing those concerns with each of our portfolio companies. We need to continue our current efforts, to be frank.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I will now turn the call over to David Gladstone for closing remarks.

All right. Thank you all for tuning in and listening to this and asking good questions. We'll see you again next quarter. That's the end of this call.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.