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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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 December 31st, 2025 call. And thank you all for calling in. We're always happy to talk to our shareholders and analysts and welcome the opportunity to provide updates on our company and answer any questions. And before we get to this quarter's results, Catherine Gerkus, our Director of Investor Relations and ESG, We 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 investor's 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 Markoff.

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, funding 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 SOPA rates compared to last quarter as our weighted average debt yield came in at 12.2% for the period. Interest in financing costs increased $200,000 on higher average bank borrowings incurred to complete the fixed-rate note refinancings last quarter and higher average investment balances. In addition, net management fees rose $600,000 with the increase in average assets and low 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 of 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% and 91% of the portfolio cost, respectively. As of the end of the quarter, our three non-earning asset debt investments were unchanged with a cost basis of $28.8 million, or $13.2 million at fair value, or 1.6%. In addition, PIC income for the quarter rose to $2.3 million, or 9.6% of interest income. However, we also collected $2.8 million of PIC for the period, so our accrued PIC balance declined accordingly. Since the end of the quarter, we've experienced one significant prepayment of Vets Choice in the amount of $42.8 million, which also generated a large prepayment fee of $855,000 on the period. And to date, we've funded an additional $6 million senior debt investment in a precision machining business. Although earning assets have declined since the end of last quarter, our current pipeline of late-stage deals, which have been vetted, awarded, or in the diligence or documentation, is quite robust at over $100 million and should more than offset the recent repayments. The level of near-term investment opportunities we are working through in what is traditionally a slow Q1 is, frankly, a bit surprising. I would attribute this investment activity to the resilience of the lower middle market deal flows and the growth prospects within our existing portfolio. We ended the quarter with a conservative leverage position and net debt at a modest 93% of NAV and have increased our floating rate bank borrowings to better match our asset rate sensitivity while bringing down our net funding costs as short-term interest rates ease and we reduce our unused facility fees accordingly. Our current line of credit facility totals $365 million, and net of the recent repayments, our borrowing availability is more than $150 million, which is more than ample to support our near-term investment activities. And now I'll turn the call over to Nicole Schultenbrand, our CFO, to provide some details on the fund's financial results for the quarter.

Thanks, Bob. Good morning. During the December quarter, total 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 31st. as impacted by the realized and unrealized valuation depreciation covered by Bob earlier. Moving over to the balance sheet. As of December 31st, total assets rose to $923 million, consisting primarily of $903 million in investments in fair value and $20 million in cash and other assets. Viabilities rose $20 million quarter over quarter to $445 million as of December 31st, with the increase in LSE borrowings to call and repay our $150 million of 5 1⁄8 notes previously due January 2026 and our $57 million of 7 3⁄4 notes previously due in 2028, and to fund our net origination. The remaining balance of our liabilities consists primarily of $149.5 million of 5 7⁄8 convertible debt due 2030, $50 million of 3.75 notes due May 2027, and $29 million of 6.25 perpetual preferred stock. As of December 31st, 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 31st 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 good. Summary and a solid quarter for Gladstone Capital again. The team for GLAD continues to deliver attractive net originations and growth with very healthy backlog of attractive growth-oriented lower-middle-market companies. The company has 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. Now we'll open the questions up, and operator, if you'll come on and tell us what to do.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Eric Zwick with Lucid Capital Markets. Please proceed.

Thank you. I apologize in advance for any background noise. I'm traveling today. But I wanted to start with a question. During the prepared remarks, you mentioned, you know, increasing the usage of the revolver due to the floating rate, you know, kind of 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 after floors now, just kind of given the, you know, the SOFR curve would indicate that the market's expecting some more reductions in the base rates.

Yeah, the majority of our variable rate loans do have floors. We're 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 that 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, you know, 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 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 a million dollars. So there's about a million and a half dollars, almost a million six 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 to evolve no it's very helpful thank you and next one for me just looking at the investment and 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, you know, if it's likely a longer-term trend or if you're watching it more cautiously.

Just curious on your take there.

We don't directly invest in data centers. That's a big boys game. What was Google's announcement today, $180 billion or whatever the number was. We used to do that, but 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, you know, bus bars that are going into data centers that, frankly, IMX does make. And, you know, certainly there 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 in 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. And last one for me, you noted the increase in PIC. It's kind of gone up over the past couple 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? I'm wondering if you could just 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 PIC. 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 a 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 PIC exposure, and we expect that company to be in a position to deleverage as it unloads a portion of its investment activities. 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 PIC 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 PIC 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 question, sir. Next question.

Our next question is from Christopher Dolan with Lattinburg-Ballman. Please proceed.

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

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 if converted method, you know, what is received. Like, that's really the only factor coming into play there.

Okay, so that's going to be a continuing issue, not an issue, but just that increased solution share counts is going to sustain as long as a convertible debt stream, correct?

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.

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

That's exactly right.

Just a more broad and more strategic question. Have you guys, given that you're sort of co-located near Washington, D.C., 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. You know, 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 indexes are underlying calculations. So it would take probably a number of years to roll out whatever might come. So even in 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 on the presumption that's a short-term issue.

Great. Thanks for the call, Bob.

Next question.

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

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

Good question, Robert. Yeah, there's definitely a few of those deals that spilled over. I would generally say in today's marketplace, given, you know, 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. You know, some of the transactions we're working on, you know, 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, you know, obviously the general downward trend in rates combined with, you know, 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 contractor, you know, precision manufacturing businesses to see the see the pipeline activity understand where the long-term trends are to acquire you know 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, you know, private equity-owned businesses to capitalize on the reshoring trend that started last year. Got it. Thank you for that, fella.

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 shutdown impact. Obviously, you've historically had, you know, been, you know, done a fair amount of work with, you know, 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, the number of government shutdowns is obviously up versus, you know, historic norms over the last couple of years, and we don'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 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 contractors. I mean, you know, 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 clearances for, you know, vessels. And the fact of the matter was there was a 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, and 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 week quarters. The other thing that I will note, and this may be indicative of other credits 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 As we have confidence in the team and some of the, you know, challenges that are naturally associated with QSR-type businesses, they are moving forward. They are evolving the business. There are some incremental headwinds that 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 additional offerings, which we think are going to drive traffic in 26.

And we will see as that evolves in the spring but you know 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 but thank you okay we have any other questions yes we do we have a question from Sean Paul Adams with the Riley Securities please proceed hey guys 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 kick 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 120?

Yeah.

Yeah, so right now, what was the average SOFR last quarter? 390? Average SOFR last quarter is roughly 390, so we're roughly running what is about 370 today average floor is probably about 125 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 and what our marginal management fee and costs are You know, you net down to about a 250 plus or minus spread, ignoring the underlying base rate. And if we were to close $150 million – $100 million, that's $2.5 million of incremental net interest margin, which if you look at our rate sensitivity, if we – I think it's back at the tail end of our queue. I think down 50 basis points, I think the sensitivity was about 2.4 million, 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 additional commitment fee savings that I referred to. So, we're working through the challenges. We're down 100 basis points. That's a $5.3 million 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 rate outlook. But we certainly are well positioned to absorb at least the first 50 and probably 75. Beyond that, we'd obviously take additional actions to support the dividend. And as you recognize, we obviously have some additional coverage based on the current economics of the portfolio. So I 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.

Okay. Do we have one more question?

There are no further questions at this time.

Aw, shucks. We like questions, so there'll be more next time. Thank you all. We're at 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.