Gladstone Investment Corporation Aktie

Greetings. Welcome to Gladstone Investment Corporation First Quarter Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Mr. Gladstone, Chairman. Thank you. You may begin.

Thank you for that nice introduction. This is David Gladstone, Chairman. This is the earnings conference call for the first quarter ending June 30, 2026. This is for our shareholders and for any of the analysts that are on the line for Gladstone Investment is listed on NASDAQ trading symbol GAIN, easy to remember because we're always triggering capital gains.

So you keep up with us by listening to this and following us online. As for the common stock, we do have some registered notes, three of them, you can buy our notes as well. This is a multifaceted company. And I want to thank you all for calling in. We're happy to provide updates to our shareholders and analysts and provide our view of the current business environment. And there are 2 goals really to help you understand what just happened to us and what's happened to us over the last so many months and also give you a current view of the future. And now we'll hear from Catherine Gerkis. She's Director of Investor Relationship as well as any ESG and provides a brief disclosure regarding the certain regulatory matters that she keeps us from violating. So Catherine, jump online.

Thank you, David, and good morning, everyone. 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, gladstoneinvestment.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. We're also on X at @GladstoneComp, as well as Facebook and LinkedIn. Keyword for both is The Gladstone Companies. Now I will turn the call over to David Dullum, CEO and President of Gladstone Investment.

Thanks, Catherine, and welcome to everyone on the phone call. I am happy to report that GAIN again produced solid quarter results this time for this first quarter ended June 30, 2026.

We generated adjusted NII of $0.26 per share, which is sufficient to cover the monthly dividend distributions for the quarter, and we also ended a total portfolio fair value of $1.3 billion. So this was a pretty busy quarter, very much so with deal-related activity. And during the quarter, we actually entered into an agreement to acquire one new portfolio company called Extrude Hone. And we aim to close this in the coming weeks, and it's subject really to obtain some required regulatory approvals, which should not be an issue.

It's just a timing thing. And then subsequent to the quarter end, of course, a lot of this activity began during the quarter. We entered into an agreement to sell the operating entity in our investment of SFEG Holdings. And this sale, again, subject to various regulatory approvals. This is a multinational company, and so there are various approvals necessary in certain countries, but we hope and expect that this will close in the coming months. And when we do, we expect to receive a full repayment of our investment along with a very significant capital gain.

So in July, we also finalized the acquisition of another new portfolio company, DHE Computer Systems. And then we also made an accretive add-on acquisition to one of our existing investments called Global GRAB Technologies. So with all this activity with the pending new deals that we've mentioned here, we will have invested an aggregate of at least $116 million within the first 6 months of this fiscal year.

And that's relevant because it compares very nicely to the approximate $183 million that we have averaged over the last 3 fiscal years. So these new investments and certainly the exit activity are consistent, as I always like to say, with our buyout strategy, which is growing the portfolio through the acquisition of operating companies at attractive valuations. And this is, again, where we are generally the majority economic owner. We make these acquisitions through a combination of equity and debt investments.

And of course, main reason given our thesis for GAIN, the equity provides a potential upside of additional dividend payouts through capital gains as we would anticipate clearly in this SFEG exit. And then the debt securities generate operating income to support our monthly distributions to shareholders. And this is definitely one factor that differentiates us from most of the other traditional credit BDCs. And in this regard, from our operating income, we maintained our monthly distribution to shareholders of $0.08 per share or $0.96 per share on an annual basis. So at this point, I'd like to turn it over to Erika Highland, who, as mentioned before, will take over as President on October 1. And Erika, would you like to discuss the outlook and the current pipeline of the new investments?

Absolutely. Thank you, Dave. There continues to be ample liquidity in the M&A market, creating a competitive environment for new acquisitions at reasonable valuations. While challenging, we have been able to compete effectively for acquisitions that fit our model. Our model is where we provide both debt and equity to complete the transaction with a meaningful fixed charge coverage and an interest income yield on our total investment in excess of our cost of capital. As mentioned earlier, we have closed or have an agreement in place to acquire two new portfolio companies.

We continue to be in varying stages of diligence on additional possible new opportunities, including both accretive add-on acquisitions to existing portfolio companies, and we are in review and negotiation with a number of other new opportunities. As to our existing portfolio, most of the companies have experienced positive results to date, though we continue to be cautious due to macroeconomic factors such as elevated energy prices, potential supply chain disruption and tariff costs, and therefore the impact on demand and margins. We are working with all of our companies in evaluating cost efficiencies and growth initiatives as we continue to navigate the current environment.

In this regard, a couple companies to highlight here. Galaxy Technologies, they've experienced very positive growth in the aerospace and industrial sectors. Diligent's new management team has stabilized the business and is generating very positive EBITDA, which gives us some encouragement that we will get it back to accrual status. And finally, Pyrotek has been acquisitive and experiencing growth with existing and new artists and their entertainment schedules. And I'll turn it back to you, Dave.

Thanks, Erika. So again, in summing up the year, the current portfolio is in solid shape. And just to touch on this what Erika said that we're working with all of our companies, and that's something that we do -- we're very proactive with our operating companies. So when we say that, it's not just in passing. We actually do work at it. And so we feel very good about where we are. We have a strong liquid balance sheet, a very good level of potential portfolio activity with a prospect of continued strong earnings and the distributions over the next year. So while we continue to navigate the challenge of an uncertain economic landscape. So with that, let's turn it over to our CFO, Taylor Ritchie, and he'll give you a lot more of the detail of where we are and what to look forward to. Taylor?

Thank you, Dave and Erika, and good morning, everyone. Our results this quarter reflected solid earnings generation, continued strength within our investment portfolio and proactive capital management that supported the disciplined execution of our long-term strategy. We generated net investment income of $15.9 million or $0.40 per share during the quarter compared with a net investment loss of $10.6 million in the prior quarter.

Adjusted net investment income, which excludes the impact of capital gains-based incentive fees, increased to $10.4 million or $0.26 per share compared to $7.9 million or $0.20 per share in the prior quarter. Importantly, both net investment income and adjusted net investment income exceeded our regular monthly distributions during the quarter. The increase in net investment income was driven by higher investment income, together with lower expenses, primarily reflecting the reversal of accrued capital gains-based incentive fees resulting from the changes in portfolio valuations. The weighted average principal balance of our interest-bearing investment portfolio remained relatively stable during the quarter at approximately $706 million, providing a consistent base for recurring interest income.

The portfolio's weighted average yield was 12.9% during the quarter. This is supported by the interest rate floors including each of our debt investments. Given our recent investment activity, we expect the portfolio's weighted average yield to increase modestly as the investments originated subsequent to quarter end include interest rate floors above the weighted average of our existing portfolio.

We believe our debt investment portfolio is well positioned across a range of interest rate environments. As disclosed in our Form 10-Q, based on the current portfolio composition, a 50 to 150 basis point increase in SOFR would be expected to increase annual net investment income by approximately $0.02 to $0.09 per share, while equivalent decline in SOFR would reduce annual net investment income by approximately $0.01 to $0.03 per share.

This favorable interest rate profile continues to provide meaningful downside protection while preserving attractive upside should short-term interest rates increase. Total investment income increased to $28.4 million compared to $25.2 million in the prior quarter. Interest income increased modestly, while stronger success fee income more than offset lower dividend income from our equity investments. As a reminder, both dividend income from our equity investments and success fee income from our debt investments are dependent upon events at our portfolio companies and are therefore inherently variable.

As a result, these income streams should be evaluated over longer periods rather than any individual quarter. Net expenses declined to $12.4 million compared to $35.8 million in the prior quarter. The decrease primarily reflected the reversal of $5.6 million of accrued capital gains-based incentive fees during the current quarter compared with an $18.5 million accrual in the prior quarter.

These lower incentive fee accruals more than offset higher interest expense associated with our financing activities as well as a modest increase in other operating expenses. Portfolio valuations declined by $18.8 million during the quarter. The decline was primarily due to the adjustment in SFEG's valuation on an agreement on the final sale price. Excluding this adjustment, the remainder of the portfolio generated net unrealized appreciation, reflecting positive operating performance trends at several portfolio companies together with higher market valuation multiples.

As of June 30, three portfolio companies are on nonaccrual status, and we remain actively engaged with each borrower, continuing to work alongside management teams to either return these investments to accrual status or pursue orderly exits where appropriate. The nonaccrual investments represent 3.9% of our total portfolio cost and only 1% at fair value as of quarter end. The increase in fair value from the prior quarter was driven primarily by the continued operational improvement at Diligent Delivery Systems, which experienced a $3.8 million increase in fair value during the quarter.

Based on current operating trends, we continue to believe management is making meaningful progress and remain optimistic regarding the collection of previously unpaid interest over the coming quarters. NAV decreased to $16.24 per share compared to $16.78 per share at the end of the prior quarter. The decrease primarily reflected $0.47 per share of net unrealized appreciation, $0.23 per share of net realized losses and $0.24 per share of distributions to common shareholders.

These items were partially offset by $0.40 per share of net investment income. During the quarter, we completed 2 significant financing transactions that further strengthened our capital structure. The first, using the proceeds from our February issuance of 5-year unsecured notes, we repaid our 5% notes that maturity in May. Second, we successfully amended our credit facility, reducing our bond spread over SOFR by 40 basis points, increasing the facility commitment size from $300 million to $405 million while extending the facility's maturity to 2031. We have ample liquidity to fund new investment opportunities from the unused borrowing capacity under our credit facility with approximately $158 million outstanding as of quarter end. These actions position us to execute our investment strategy with enhanced financial flexibility through extending the duration of our debt capital and both expanding availability and lowering [ borrowing ] on our credit facility.

While we were not active under our common stock ATM program during the quarter or subsequent to quarter end, we intend to access the equity market selectively when market conditions are favorable and doing so supports attractive shareholder returns over time. Our balance sheet remains in a strong position, ending the quarter with an asset coverage ratio of 209% and a debt-to-equity ratio of 0.88x.

We believe this provides meaningful leverage capacity to support our current investment pipeline. Finally, on distributions, we ended the fiscal year with $21.3 million or $0.53 per share of spillover income. primarily due to adjusted net investment income exceeding our regular monthly distributions. Spillover increased to $22.5 million or $0.56 per share at quarter end. This balance is sufficient to support approximately 7 months of our current monthly distribution rate and enhances our flexibility in determining both the timing and amount of future monthly and supplemental distributions. We ended the quarter with total distributable income of $160.4 million or $4.03 per share. As this balance primarily represents unrealized appreciation across our investment portfolio, it reflects the potential for meaningful future shareholder distributions that we expect to monetize over time through successful portfolio company exits. Looking ahead, we anticipate continuing our practice of making supplemental distributions to shareholders as we realize capital gains from the successful exit of appreciated equity investments.

The timing and amount of these supplemental distributions will depend on the pace of portfolio realizations, taxable income consideration and our broader capital allocation priorities. Overall, we believe the portfolio remains well positioned, supported by our strong liquidity profile, conservative leverage, growing spillover income, favorable interest rate positioning and healthy acquisition pipeline. We're confident in our ability to continue generating attractive long-term returns for our shareholders. This covers my part of today's call. I'll now hand it back over to you, David, to wrap this up.

Well, thank you very much, Taylor. That was very nice. And Dave and Erika and Catherine, good information for our shareholders this call. And the Form 10-Q should be bringing everybody up-to-date in our company. The team has reported solid results for the quarter ended June 30, 2026, and has already shown positive performance for the upcoming quarter with new investment activity and some pending exits that we're pretty sure we'll get this quarter.

We believe Gladstone Investment is an attractive investment for investors seeking continuous monthly distributions and then some supplemental distributions from potential capital gains and other income that we have. The team hopes to continue to show you a strong return for the investments for this next quarter as well as the rest of the year, but now let's stop and turn to some questions from our analysts, as well as hopefully some of the shareholders will call in. Operator can come on please.

[Operator Instructions] Our first question is from Christopher Nolan with Ladenburg Thalmann.

I guess for Taylor, there is another income of $5.6 million income line. Is that related to the incentive fee reversal at all?

No, it is not. That is the collection of exit fee income, prepayment of exit fee income, success fee income, rather, that we will collect from time to time from our portfolio companies, and this one was paid by SFEG in advance of their pending exit.

Okay. And then on the topic of SFEG and the other exits indicated, should we anticipate any sort of net gain from that at all?

Apologies. Did you say debt gain or net gain?

Net, net. Realized less, you know, the true-up on the unrealized.

Yes, I would expect where our valuation is with SFEG, that's our approximate value that we would expect to collect as part of an exit. Now it is discounted for potential transaction costs and other activities, but that is what I would expect for us to be able to collect and generate in potential realized gains.

Okay, and then finally, on the cash flow statement, I noticed that there appears to be no repayments in the quarter. Is that correct?

Yes, that's correct.

Our next question is from Erik Zwick with Lucid Capital Markets.

Thanks for the detailed commentary. You covered a number of the companies I wanted to ask about Galaxy and Diligent. So I appreciate the positive updates there. I wanted to ask just a follow-up question first on SSEG. I understand that the 630 mark reflected the negotiations and the net sales price and one, congrats on the sale there, another nice exit for you. But just kind of curious regarding the negotiations, how did the buyers view of valuation differ from the mark that you had on your statements as of 3/30.

Sure. This is Erika Highland. So, as you can appreciate with these transactions, when we enter into an LOI with a prospective buyer, there are certain assumptions made around the company's financial performance, and as a buyer, with due diligence occasionally, not only may there be disagreements on certain assumptions, but also there may be certain findings in diligence where accommodations may need to be made in the value. Also, our valuation here reflects certain aspects of the purchase agreement that have funds reserved in escrow pending future activity, so there is the potential that some of those proceeds may flow back in, but you know, for purposes of our valuation here, this is based on the final negotiated contract with the buyer.

That's helpful, thank you...

Erik, the basic headline number that we had agreed to with them didn't really change, so to speak. As Erika said, it was just, you know, it's a very complicated transaction, very complex company, frankly, you know, facilities, operations, literally all over the world. And so just when things, as you well know, gets finalized and going through some of the teams up in some of the countries, Erika correctly said, some of the escrows that we have to apply to the extent that they will get utilized. We won't know for sure until the dust settles affected somewhat in being sure we took that into account so that we're fairly conservative, frankly, in that valuation. So we feel pretty good about where it's kind of settled, but it's really as a result of those impacts.

That makes sense. Thank you. And even with the change from 330 to 630, you still stand to get a very nice gain. Nicely done there. And then Taylor pointed out one thing I noticed as well, just if you remove that valuation change, there is actually net appreciation in the unrealized portion for the quarter. So just nice trends generally across the book. You know, when I did notice that, you know, did have some net depreciation was Detroit Defense and just curious, maybe if you had any commentary of what, you know, kind of transpired there during the quarter to change your valuation.

Yes, I think Detroit Defense is an interesting company. Fundamentally, by the way, it's doing very well. Part of some of their contracts that they were, I'll call it, anticipating or working on that they had, monies didn't get released with everything going on, as you know, in Washington on the defense sector side. So some of those have now been released indeed, but that really got caught up in just the timing around some of the work that they were doing on some of those contracts. So unfortunately, we had a slight downtick in EBITDA, so that had an impact on that. But other than that, fundamentally the business is doing well.

Okay. And so if those contracts, it sounds like maybe post-quarter did come through, that would impact the [ 930 ] valuation mark?

Exactly, yes.

[Operator Instructions] Our next question is from Henry Coffey with Wedbush Securities.

Most of what I'm going to ask is going to make me look stupid, but that's good. Could you go through the whole true-up of the unrealized depreciation and the realized loss and how that plays out. I know there are a lot of moving parts there.

This is Taylor. Let me start with breaking them into different pieces. So the realized gain loss, that was a $9 million realized loss as a result of a restructuring that we did at Home Concepts.

So we wrote off $9 million of their existing term loan. And that was really a proactive approach to allow the company further flexibility to execute on their operational initiatives and allow them to potentially grow and build out further. Then regarding the unrealized and the net unrealized appreciation -- depreciation rather for this quarter, we had market valuations and market multiples that increased quarter-over-quarter. For most of the portfolio, that was the case where we saw those multiple increases. And then we had many of our portfolio companies that had improving EBITDA metrics, so that would further enhance the appreciation. And then we did have some that saw a little bit of a downturn that we frankly anticipate that it will turn around in the coming quarters. We feel confident in these companies. As Dave mentioned, with Detroit Defense, that's one we do feel confident that it's a strong company, operating well. And as these contracts for Detroit come back online, we'll see that reversal of the unrealized depreciation.

Well, I think, Henry, you might be also referring to our net unrealized was roughly about $22 million negative. Of that, roughly $36.6 million was this what we call reversal of value for SFEG holdings. So I think the comment earlier was made that if you took that out of the mix, which, again, it's a valuation adjustment doesn't change the significant realized gain we're going to get there. We took that out of the mix, actually, then the unrealized is a net positive. And I think is that probably what you're trying to get to.

That's what I was trying to sort out, and I'll be honest, I haven't gone through the Q yet. The other question is, you have some great insight into the real economy because you're not involved in a lot of tech. We get a book overwhelmed with all the news about AI, et cetera. But when you look past the tech economy to the rest of the economy, what are you seeing? And in particular, my colleagues and I were talking about this, obviously, post Iran, whatever your political views are, post Iran, we're likely to see a big infusion in defense spending as the U.S. rebuilds, et cetera. Can you give us some sense of what -- when you look past the tech economy, what you're seeing going on in the "rest of the world" and particularly likely defense spending?

Yes, this is Erika. It's hard to overgeneralize, so at the risk of sharing anecdotes here, just kind of looking down the list of our portfolio companies, we're seeing that most of them are trending up quarter over quarter in terms of earnings performance.

So that would suggest there's no major disruptions in a broad macroeconomic way, particularly on defense spending. Again, we have a very small subset of those type of companies in our portfolio. And Dave spoke earlier about Detroit Defense and how it was caught up in some of the administrative and spending hurdles, but I do think there is money being flowing into more defense-oriented businesses. Certainly on the opportunity side, we are seeing more businesses in the aerospace and defense sector coming to us for potential transactions, which suggests that those owners see potential growth in that sector. So I do think, as you've pointed out, I think the trends that you're seeing are accurate. But again, while we do have a broad set here through 30-some-odd portfolio companies, it's still a relatively small sample size.

Henry, we touch, as you point out, when you think about it, consumer, industrial, and manufacturing. And as Erika said, the manufacturing groups that we have, because they're kind of spread across again, like some aerospace-oriented stuff. They're all really doing well. We got stuff in the energy sector, and we're seeing good solid results there. Consumer side, we're seeing with most of our consumer products, companies are all, some are doing hugely well, all doing fairly well. And again, we do touch on a few companies in the defense sector. And they're all, as I mentioned earlier, starting to see definitely solid opportunities and backlog building in all of those companies.

So, generally, you're right, we don't do much on the tech side of things, and that's probably a good thing. So, fundamentally, we're guardedly optimistic about where we see these companies go in the next six, nine months.

That's very helpful. And then on the SFEG situation, I mean, that you sold 100% of the company. I want to -- I've read the Street account summary like 4 times, and I still couldn't get it. You sold 100% of the company. It's going to be a substantial gain. And what is your sort of philosophy on distributing that gain? Are you going to hold some back for future periods or just pay it out as a onetime transaction sometime over the next 3 quarters? Or what is the thought process there?

That's a great question and we're going back to business school, corporate finance, first course in corporate finance, right? I want to think about that. Seriously, it's a great question, it's a real question, it's because it is a real, for us, significant number and we have to do it carefully both from the standpoint of trying to certainly reward our shareholders with clarity, some cash at least, and then how we might be able to maintain capital because given the cost of capital, it's a smart thing to maybe keep some of it.

Clearly, which you understand well with being a RIC and what have you, the timing will be important. You know, we've got excise taxes that come into play. So there are a lot of factors to determine what is the right not only mix of, say, cash and stock, what might be the timing of it. But regardless, I think it's going to be clearly a positive, certainly to shareholders and then from our own balance sheet. But we're looking at it carefully, taking it seriously, and we have not come to a final conclusion yet.

That's a good problem. Yep.

There are no further questions at this time. I would like to turn the conference back over to you for closing remarks.

Well, thank you all for asking questions. We need more questions than that, so we hope you guys will get ready next quarter and let us have a lot of questions so we can talk about our company. That's the end of this. Thank you very much for calling in.

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

Greetings, and welcome to Gladstone Investment Corporation Fourth Quarter and Year-end Earnings Conference Call.

[Operator Instructions]

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Gladstone. Thank you. Please go ahead.

All right. Thank you all for calling in. This is the earnings conference call for the fourth quarter as well as fiscal year ending March 31, 2026. For shareholders and analysts of Gladstone Investment listed on NASDAQ under the symbol GAIN for common stock and then we have several others that GAINZ, GAINI and GAING registered notes that we sold in the past.

Thank you for all calling in. It's always happy to provide you updates to the shareholders and to the analyst who are following us. We'll try to tell you about the current business environment. And the 2 goals for this call is to have you understand what has happened and give you some current view on the future, although we're all in the same boat trying to figure out what's going to happen in the future.

Now we'll hear from Catherine Gerkis, our Director of Investor Relations and ESG, to provide a brief disclosure regarding certain regulatory matters concerning the call today. Catherine, go ahead, please.

Thank you, and good morning, everyone. 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, gladstoneinvestment.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-K and earnings press release for more detailed information. You can also sign up for our e-mail notification service and find information on how to contact our Investor Relations department.

We are also on X@GladstoneComps as well as Facebook and LinkedIn. Keyword for both is -- the Gladstone Companies.

Now I will turn the call over to David Dullum, CEO and President of Gladstone Investment.

Thank you, Catherine. So good morning, everyone, and I'm very pleased to report that GAIN again produced solid results for this fourth quarter and the fiscal year ended March 31, 2026. We also continue to see growth in our investment portfolio through new buyout investments and the improving performance at a number of our existing portfolio companies.

In addition, for the fiscal year, we generated adjusted NII of $0.88 per share, and we increased the total fair value of our portfolio to $1.3 billion as of 3/31/26, which is a 34% increase from the $979 million that we reported in the prior year.

This increase year-over-year in assets resulted from a couple of things. One, we had 4 new buyout investments, along with appreciation of our existing investment portfolio and indeed increase in our NAV per share fairly significantly. We currently have 29 operating companies and a very healthy pipeline for new acquisitions.

Just quickly reviewing for '26, we invested approximately $163 million in the 4 new portfolio companies I mentioned, and this compares to about $221 million, which we invested in the prior year. These new investments are consistent with our buyout strategy, growing the portfolio through the acquisition of operating companies at attractive valuations where we generally are the majority economic owner.

We also make acquisitions through a combination of the equity and the debt investments with the equity providing the potential upside through capital gains upon exit and the debt securities are generating this operating income to support our monthly distributions to shareholders. At this point, I'd just like to note here that we do set floors on the debt securities that we use when we make these acquisitions. So that gives us the opportunity to maintain a level of income above our cost of capital so that we are really not susceptible to as much of the spread compression as others might exhibit in this environment.

So our equity investments represent a significant ownership position in our portfolio companies, and we look to the capital gains as major contributors to the additional dividend payouts to shareholders, which we have demonstrated pretty significantly in the past. So this is also one factor that does differentiate us from other traditional credit BDCs.

From our operating income, we maintained our monthly distribution to shareholders of $0.08 per share or $0.96 per share on an annual basis. We also made supplemental distributions during fiscal '26 to shareholders of $0.54 per share, which came from these capital gains that we -- I mentioned earlier and which, again, are a fairly important part of our overall model.

And since inception, in fact, in 2005 and through this time of 3/31/26, we've invested in 66 buyout portfolio companies for an aggregate of approximately $2.2 billion, and we exited 33 of these companies. This has resulted in total investments currently valued at $1.3 billion, while generating approximately $354 million in net realized gains and $45 million in other income on exit.

So again, this is our plan or strategy, which we hope to continue in the future. Now at this point, it's very important I'd like to make an introduction to Erika Highland, who will become our President on October 1. I'm very honored to do this. Erika has been a Managing Director of GAIN for a number of years, recently was promoted to Executive Vice President. She has been instrumental in managing a number of our successful investments, very active in our outreach and investment generation programs. And Erika will become President in October 1, as mentioned, and we're very much looking forward to that. I'm looking forward to working with her as we continue growing.

So with that, I'm going to ask Erika to have a discussion on our outlook and a few other comments. So Erika?

Thank you, Dave, and I am proud to partner with you to help lead our funds going forward. There continues to be liquidity in the M&A market, creating a competitive environment for new acquisitions at reasonable valuations. While challenging, we are able to compete effectively for acquisitions that fit our model. This is where we provide both equity and debt to complete the transaction with a meaningful fixed charge coverage and an interest income yield on our total investment in excess of our cost of capital.

As mentioned earlier, we closed on 4 new investments during the fiscal year. We continue to be in varying stages of diligence on possible new opportunities, including accretive add-on acquisitions to existing portfolio companies, and we are in review and negotiation with a number of other new opportunities. This activity could lead to closing on new buyout investments and accretive add-on acquisitions as we begin fiscal year '27. As to our existing portfolio, most of the companies have experienced positive results to date as reflected in our NAV increase. Though we continue to be cautious due to macroeconomic landscape and therefore, the impact on demand and margin. We are working with all of our portfolio companies in evaluating supply chain alternatives and cost efficiencies as we continue to navigate the current environment. Back to you, Dave.

Thanks, Erika. So in summing up the year, our current portfolio is in solid shape. We have a strong and liquid balance sheet, which you'll hear about in a few minutes, and a very good level of potential portfolio activity with the prospect of continued strong earnings and distributions over the next year, while we continue to navigate the challenges, as Erika mentioned, of this macroeconomic landscape that we find ourselves in.

So with that, I'll turn it over to our CFO, Taylor Ritchie, to go into some more detail. Taylor?

Thank you, Dave and Erika, and good morning, everyone. I'm happy to share that we ended fiscal year 2026 with our fifth consecutive year of growth in total investment income, generating $99.1 million compared to $93.7 million in the prior fiscal year. The increase was primarily driven by higher interest income resulting from continued growth in our debt investment portfolio, partially offset by lower dividend and incentive fee income, the timing of which can vary from period to period.

The weighted average principal balance of our interest-bearing investments was $672 million during the fiscal year, representing an increase of approximately $70 million over the prior year. For the year, our portfolio's weighted average yield declined modestly from 13.9% to 13.3%. Importantly, the interest rate floors embedded in each of our debt investments helped mitigate the impact of declining benchmark rates as the 63 basis point decrease in portfolio yield was less than the 82 basis point decline in SOFR during the year.

Excluding nonaccrual investments and revolving line of credit, the weighted average interest rate floor for our debt portfolio was 12.1% as of March 31. We continue to underwrite our new debt investments with elevated interest rate floors in the 13.5% to 14% range to mitigate potential declines in SOFR. With more than half of our debt portfolio currently under interest rate floors, we believe our portfolio yield is well protected against future rate declines. In addition, these floors should help support earnings as we refinance a portion of our existing lower cost long-term debt over time.

Turning to fourth quarter results. Total investment income was $25.2 million, modestly higher than the $25.1 million in the prior quarter. The increase was primarily driven by higher dividend and success fee income, partially offset by lower interest income with our quarterly portfolio yield remaining stable at 12.9%.

As a reminder, dividend income from our equity investments depends on the portfolio company's ability to make distributions while also maintaining sufficient earnings and profits. Additionally, success fee income is derived from an interest rate associated with our debt investments that accrues off balance sheet and is not to actually due until a change of control event occurs. Because the realization of both dividend income and [Technical Difficulty] income depends on multiple factors, the timing of these income streams will be variable.

Net expenses for the quarter were $35.8 million compared to $31.6 million in the prior quarter. The increase was primarily driven by a $3.8 million increase in capital increase incentive fees and a $0.4 million increase of base management fee expense, both of which were largely attributable to continued unrealized appreciation across the portfolio.

As a result, net investment loss for the quarter was $10.6 million compared to $6.5 million in the prior quarter. Adjusted net investment income, which excludes the accrual of capital gains-based incentive fees, was $7.9 million or $0.20 per share compared to $8.2 million or $0.21 per share in the prior quarter.

Overall, portfolio valuations increased $92.5 million during the quarter. This unrealized appreciation was driven by improved operating performance at several portfolio companies, along with higher valuation multiples across the portfolio. These increases were partially offset by decreased performance at certain other portfolio companies. We continue to have 3 portfolio companies on nonaccrual status. We remain actively engaged with each company and their respective management teams to support operational improvement initiatives, a potential return to accrual status or strategic exits where appropriate.

Our nonaccrual investments represent 3.8% of our total portfolio at cost and 0.7% at fair value. Our NAV increased to $16.78 per share as of March 31, 2026, compared to $14.95 per share at the end of the prior quarter. The increase was primarily a result of $2.32 per share of net unrealized appreciation of investments. This increase was partially offset by $0.27 per share of net investment loss and $0.24 per share of distributions to common shareholders.

As we look to our balance sheet, maintaining strong liquidity and financial flexibility remains essential to supporting and growing our portfolio. In anticipation of the May maturity of our 5% notes, we issued $100 million of 7.125% 5-year Notes in February. Subsequent to quarter end, we repaid the outstanding balance of the 5% notes using proceeds from the new issuance along with borrowings under our credit facility.

We will continue to monitor liquidity needs and be strategic on raising debt capital at suitable interest rates. While we are not active under the common stock ATM program during the quarter or subsequent to quarter end, we will remain opportunistic and we'll utilize the program when prices are accretive to NAV. We continue to believe that we are in a strong liquidity position with our ability to access the debt capital market and the possible equity market to support both the refinancing of long-term debt and our pipeline of new buyout opportunities. Overall, our leverage remains conservatively positioned with an asset coverage ratio of 214% and a debt-to-equity ratio of 0.84x as of March 31, 2026.

Turning to distributions. We ended the fiscal year with $21.3 million or $0.53 per share in spillover income, which is sufficient to cover our current monthly distribution rate of $0.08 per share for approximately 6 months. We ended the year with total distributable income of $181.5 million or $4.56 per share. Because total distributable income primarily reflects net unrealized appreciation within the portfolio, we expect this value to support monthly and supplement distributions as appreciated investments are monetized over time. Including the $0.54 supplement distribution in the current fiscal year, we paid an aggregate of $3.26 per share across 13 supplement distributions over the last 5 fiscal years, in addition to $4.58 per share of monthly distributions during this time.

We believe this track record demonstrates our ability to maintain a stable monthly distribution while also delivering incremental shareholder returns, highlighting the strength and consistency of our focused equity-oriented investment strategy. Looking ahead, we expect [indiscernible] to remain an important component of our overall shareholder return strategy with the amount and timing of future payments driven by realized capital gains on our equity investments, along with other capital allocation considerations. This concludes my remarks for today's call.

I'll now hand it back over to you, David, to wrap us up.

Very nice, Taylor, and good report on Dave and Erika and Catherine. Lots of good information. Hopefully, our shareholders are now up to date this call based on our 10-K should bring everyone up to date. The team has reported solid results for the quarter ending March 31, 2026, including new investment activity and strong liquidity position to grow the portfolio through the upcoming fiscal year.

We believe Gladstone Investment is an attractive investment for investors seeking continuous monthly distributions and supplemental distributions from capital gains and other income. The team hopes to continue to show you strong returns going forward.

So operator, would you come on now? Let's have some questions from our analysts and shareholders and people who are on the line.

[Operator Instructions]

Our first question is coming from Erik Zwick of Lucid Capital Markets.

I wanted to start with a question just on the kind of relative adjusted NII per share the last 2 quarters, it's come in below the dividend level. And I know I think my phone cut out a little bit, Taylor, if you could repeat just where the spillover income stands today? And just your thoughts on the dividend level and if the expectation is that some of the gains that you typically harvest will help support that going forward.

Sure. So we ended the year with $21.3 million or $0.53 per share in spillover income. So based on our $0.08 per share monthly distribution rate, that would be spillover sufficient for 6 months. So half of the next fiscal year would be covered by spillover already. We do look to increase our adjusted NII per share going forward. That will be dependent on deal origination, timing of new investments, where SOFR rates headed as well as additional fee credits that we collect from time to time from our portfolio companies.

So our adjusted NII per share will move around quarter-to-quarter, but we still feel confident in our $0.08 per share monthly distribution rate and don't really envision that changing.

Excellent. And then just looking at some changes in fair values in the SOI this quarter, I noticed the diligent delivery systems, the second lien position was marked down materially from about 76% of cost down to 4%. So just curious if you could provide any update of what transpired there during the quarter.

So Erik, it's Dave. Pretty much the business is continuing, I would say, on a fairly stable basis. We had a bit of a decline in the EBITDA, but still positive and still servicing our interest. It's a function, you probably remember of providing service to rent-a-car companies at airports and so on, and there's been some...

Diligent, he asking about...

I'm sorry, yes, I was thinking about something else. Diligent, no, it's actually improving even though the valuation is down, believe it or not, the business is actually improving, and that's one that is currently on nonaccrual, which we anticipate might indeed be coming off of nonaccrual as we move through the year. No direct expectation on timing, but I believe we might get there. So I feel better about diligent today, even though we did have it marked down was more a function of where the trailing EBITDA was relative to where the actual business is operating, and we're in a better shape with that today, frankly, than we were even 6, 9 months ago.

Great. And then on a more positive note, just noticed the preferred equity position in Schylling was marked up materially and having some young kids. I'm guessing maybe that's in part due to the kind of recent surge in popularity of the [indiscernible]. So maybe a 2-part question. One, what are you seeing in terms of the business trends for that company? And then I guess I have the opportunity to be the most popular person at the dinner table tonight in the eyes of my kids, if you have any insight to when those NeeDohs might be back in stock on the website or on local store shelves.

Yes. I think Erika Highland will take that one. She is involved directly with Schylling and been involved with for a number of years. Erika?

Yes, I can -- I'd love to be able to tell you I could offer you some product, but that's the question of the hour right now from everybody. Yes. No, they are diligently working on expanding their production capacity with their third-party suppliers and trying to meet all of the demand, which, as you point out, that product has certainly gone viral in the last several months. And they're very much aware of the demand and trying to ramp up capacity as quickly as possible. So I think what you see reflected in the fair market value is directly attributable to that and their increased financial performance over the last several months due to that product.

Makes sense. And I will say I was able to pick up one toy each for both of my kids at your Investor Day back in the fall. So they are very grateful to you.

Next question?

[Operator Instructions]

The next question is coming from Christopher Nolan of Ladenburg Thalmann.

This is the second quarter where you have unusually strong unrealized gains. Should we expect that to happen in this quarter?

Taylor?

Well, we're still working through, obviously, what the 6/30 valuation will look like. It's only the middle of May. So the multiples could move one way or the other, and that would obviously drive the fair value changes or would be a significant component. We will have to see where EBITDA metrics are moving on a company-by-company basis. And we do feel confident that our portfolio companies are doing well, will continue to do well. As Dave mentioned, a couple of them that are marked down. Right now, we do feel optimistic that they will begin to turn around. That might not be this quarter, but it could be quarters coming forward.

And I guess as a follow-up question, are you finding it to be a strong competitive advantage in the current market where you can invest both debt and equity? Because my sense is private equity investments are not as plentiful as it might have been a couple of years ago. And just trying to see how this is working in your favor or against no real effect.

Christopher, this is Erika Highland. I'll take that one. I'd say, yes, the fact that we are able to offer both debt and equity for all of our buyout transactions is indeed a competitive advantage in today's market. Even though there's a lot of liquidity out there, there is still a lot of uncertainty and private equity firms have had challenges deploying capital and raising capital due to just some of their structural issues with fundraising.

And so our ability to provide all the capital for a transaction, it provides that level of certainty to close to sellers, and that's probably been one of the driving factors for how we've been able to be competitive over the last several years, frankly.

Congratulations on your promotion.

Thank you.

All right. Do we have another question from the group?

We're showing no additional questions at this time. Mr. Gladstone, do you have any additional or closing comments?

Yes, I'm very disappointed. We want lots of questions, and we didn't get them this time. We've done a good job. But maybe next quarter, you will have some really solid questions for us. That's the end of the question-and-answer period, and we're going to sign off. We got one more.

We did have a late entry. Our next question is coming from Sean-Paul Adams of B. Riley.

Congrats on the quarter. Just really quickly, you touched a little bit earlier on the call about one possible nonaccrual kind of going through a work through and without any concrete time lines could be coming off that nonaccrual. The remaining 2, can you provide just a little bit more color on if there's any expected workouts coming? It seems like they have some pretty severe markdowns in the portfolio. So just a little bit more color on that.

Sean, it's Dave. On the other two, one is quite small investment and probably going to take some action with that, that will, frankly, probably eliminate the issue. That's one. The other company, B&T is actually performing fairly well. We're working through with the management and so on as to what to frankly do with the business. Nothing drastic, but we're on top of it.

So I don't expect to see much change with those 2 companies probably within the next 6 months at this point. And as I mentioned, on the other one, diligent, there is a reasonable probability that, that will actually come off of nonaccrual. So I'm not concerned about our nonaccrual situation. It's relative to the overall total cost of our portfolio and the value of our portfolio, as Taylor mentioned earlier, I feel like we're in pretty decent shape there. So nothing that I could really add that would be of any significance on those. Erika, did you agree with that?

Nothing else to add.

Okay. Any further questions?

We do have a follow-up question coming from Erik Zwick of Lucid Capital.

So just another kind of portfolio position question. The other large write-off I noticed was the SFEG holdings that the common there was marked up quite material. So curious if you could provide us an update on the trends you're seeing there and what led to the valuation change.

Taylor, why don't you take it?

Well, I think that's one where we continue to see the returns from the add-on acquisitions we've done, the strategic initiatives that the company has put in place that have really been able to move EBITDA in a meaningful way. And then based on market analysis and valuations that we're receiving from third parties, the multiple increased by a meaningful amount as well this quarter.

Yes, that's just -- Erik, fundamentally is a really, really well-managed, very good business. It's got a broad swath of products in a number of somewhat related industry categories, I would say. It's international in scope. And again, the valuation, frankly, is purely a function of very solid EBITDA certainly over the last 12 months and continuing to grow and then multiples, we don't have a crazy multiple on it that's really causing the valuation to be where it is. So it's just that it's fundamentally it's a really good business.

It sounds like something kind of given those trends, you put a lot of working capital into it, it would be something that you'd prefer to continue holding at this point as opposed to monetizing in the kind of the near to midterm?

Well, you know, you never know. And as you know, and you watch this and certainly over the years, we exit companies when not only we think it might make sense, but frankly, when the management teams are in favor of doing that, we've always done it that way. So we don't rush to the exits. The companies are performing well and importantly, paying our interest, we like to keep them in the portfolio, but you never know sometimes when there are opportunities that you just cannot ignore, and we'll always keep evaluating those as we move forward.

Any other questions?

We're showing no additional questions at this time.

Okay. We'll close it up. It sounds like we ran out of questions. We had more people than questions this time. So lots of fun in the business these days and market is getting hotter. So tune in next time, and we'll tell you some more stories. That's the end of this. Thank you very much.

Ladies and gentlemen, this concludes today's event. You may disconnect your lines and log off the webcast at this time, and enjoy the rest of your day.

Greetings, and welcome to the Gladstone Investment Corporation's Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. David Gladstone, Chief Executive Officer. Thank you, sir. You may begin.

Well, thank you, Latonya, and good morning to everybody. This is David Gladstone, Chairman of Gladstone Investment. And this is the earnings conference call for the third quarter ending December 31, 2025, for the 2026 fiscal year, that is the March 31st year. And we hope we get all of our shareholders on board and analysts in order to tell you about the future of the company. We're listed on NASDAQ under the trading symbol GAIN for the common stock, and then we have 3 preferred stocks, GAINN and GAINZ and GAINI for 3 different registered notes.

Thank you all for calling in. We're always happy to provide updates to our shareholders and analysts and provide a view of the current business and the environment that we're in. Two goals of this call are to help you understand what happened to us during the last quarter and give you our current view of the future. And now we'll hear from Catherine Gerkis, our Director of Investor Relations and ESG, to provide a brief disclosure regarding certain regulatory matters concerning this call.

Catherine, go ahead.

Good morning, everyone. 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, gladstoneinvestment.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 e-mail notification service and find information on how to contact our Investor Relations department. We are also on X, @GladstoneComps as well as Facebook and LinkedIn, keyword for both is The Gladstone Company.

Now I will turn the call over to David Dullum, President of Gladstone Investment.

Thanks, Catherine, and good morning to everybody. So I'm pleased to report again that the third quarter of fiscal year '26, which, as David Gladstone mentioned, ends on March 31, that we, GAIN, continue to build on the prior quarters of very strong performance in this fiscal year, driven by our continued growth in the portfolio and the results of our existing portfolio of companies.

So we ended the third quarter with an adjusted NII of $0.21 per share, total assets of about $1.2 billion, which is up about $92 million from the end of the prior quarter. Now this increase quarter-over-quarter in assets resulted from one new buyout investment during the current quarter, along with fairly significant appreciation of our investment portfolio. So with the new buyout investment, we currently have 29 operating companies and a very healthy pipeline for new acquisitions.

In this regard, to date, for fiscal '26, we've invested approximately $163 million, which is in 4 new portfolio companies, which compares to about $221 million that we invested for all of fiscal year '25. These new investments are consistent of course, with the buyout strategy where we grow the portfolio through the acquisition of operating companies at attractive valuations and where we generally are the majority economic owner.

We also make our acquisitions through a combination of equity and debt and with the equity providing the potential upside through capital gains upon exit and the debt securities, of course, generating the operating income, which supports our monthly distributions to shareholders. And that is a very important aspect of our portfolio. Now this is one of the factors that, in fact, differentiates us from other traditional credit BDCs, the aspect that we provide both the debt and the equity when we make an acquisition.

So from our operating income, we maintained our monthly distribution to shareholders of $0.08 per share or $0.96 per share on an annual basis. Put this in perspective, since inception in 2005 and through 12/31/25, we've invested in 66 buyout portfolio companies for an aggregate of approximately $2.2 billion and exited 33 of these companies. This resulted in the total investments currently being valued at $1.2 billion, while generating approximately $353 million in net realized gains and $45 million in other income on exit.

So as we look forward, what we are finding is there is very good liquidity in the M&A market. This creates a very competitive environment for new acquisitions, certainly at what we would consider reasonable valuations. Now while this is challenging, we do seem to be able to compete effectively, as I mentioned, the investments we've made in this fiscal year. So we're out there working hard effectively competing for these acquisitions that do indeed fit our model. And again, this is where we're providing both the equity and the debt to complete the acquisition.

And one of the things that we do in looking at the debt securities that we do, we need a meaningful, what we call, fixed charge coverage and income yield on our total investment. So that is indeed in excess of our cost of capital. As I mentioned earlier, we closed on 4 new investments during the first 9 months of the fiscal year. We are continuing to be in varying stages of diligence on some possible new opportunities, including accretive add-on acquisitions to existing portfolio companies, and we're in review and negotiation with a number of other new opportunities.

I would just like to elaborate on the add-on acquisitions that I mentioned, given the way in which we manage our portfolio, it's not unusual for us to be constantly looking for acquisitions to add to existing portfolio companies and indeed are able to grow the value of our overall investments and portfolio by this add-on activity. So this activity all could lead to closing on new buyout investments during the balance of the fiscal year. And as it relates to the income that's generated for the portfolio, there is one word and question that seems to keep coming up, we hear about what we call spread compression and given that interest rates generally given SOFR coming down and so on, that these interest rates may be declining.

I want to again emphasize that one differentiator for GAIN from other credit-oriented BDCs is that we put floors on our debt securities while we have a stated rate, which indeed is a spread over SOFR. Now so while we may have seen a decline in yield because SOFR has come down, granted that's coming down from a higher level, we still have the protection of the floors. And I think it's a very important point that we need to stress, and you'll hear more about this from Taylor Ritchie, our CFO, in a little bit. So again, this floor is usually set high enough, which establishes an effective yield on our total investment, which does help to mitigate this spread compression or the decline in SOFR over time.

As to our existing portfolio, most of the companies have experienced very good results to date, and this is reflected in a very significant increase in our net asset value. And though we continue to be cautious due to supply chain disruption, tariff costs and the other issues going on in the economy, we feel very good about where we are with our portfolio companies. We are working with all of our companies in evaluating things such as supply chain alternatives, other cost efficiencies that we need to help navigate the current environment.

So in summing up the quarter and looking forward to the rest of the fiscal year, our current portfolio is in good shape. We have a strong and liquid balance sheet, a good level of buyout activity with the prospect of continued good earnings and distributions over the next year. So with all of that, while we hopefully navigate the challenges of this uncertain economic landscape.

So I'll turn it over to our CFO, Taylor Ritchie, and he can tell us a bit more detail. Taylor?

Thank you, Dave, and good morning, everyone. Looking at our operating performance for the third quarter, we generated total investment income of $25.1 million, down slightly from $25.3 million in the prior quarter. The decrease was primarily driven by a decrease in dividend and success fee income, partially offset by additional interest income resulting from the continued growth of our debt investment portfolio.

The weighted average principal balance of our interest-bearing investments was $699 million in the current quarter, representing an increase of $30 million compared to prior quarter. After adjusting for the prior year's collection of past due interest income from investments that were previously on nonaccrual status, our portfolio's weighted average yield decreased modestly from 13.2% to 12.9%. This 24 basis point decrease is in line with the 32 basis point decrease in SOFR during the quarter and was mitigated by the interest rate floors included in each of our debt investments.

Excluding nonaccrual investments in revolving lines of credit, the weighted average interest rate floor for our debt portfolio was 12.1% as of December 31. We continue to underwrite our new debt investments with elevated interest rate floors in the 13% to 13.5% range to mitigate potential declines in SOFR.

With over half of our debt portfolio currently at their interest rate floors, we believe our yield is well protected against future rate declines. Further, the overall interest rate floors will offset higher interest expense that will result from the future refinancing of our low-cost long-term debt that will be maturing in the coming quarters and years.

Additionally, dividend and success fee income declined by $0.4 million quarter-over-quarter. Dividend income from our equity investments is dependent on the portfolio company's ability to pay the distribution while also having sufficient earnings and profits to support the characterization of the distribution as dividend income.

Success fee income is derived from an interest rate associated with our debt investment that accrues off balance sheet for both GAIN and the portfolio company and is not contractually due until a change of control event. However, similar to dividend income, a portfolio company may elect to prepay a portion of this accrual from time to time. Given that collection of both dividend income and success fee income is dependent on multiple factors, the timing of this income will be variable.

Net expenses for the quarter were $31.6 million, up from $21 million in the prior quarter. The increase was primarily due to a $9.9 million increase in the accrual of capital gains-based incentive fees. Base management fee expense increased by $0.5 million compared to the prior quarter as a result of new buyout investment activity and the significant increase in unrealized appreciation of our investments.

Fee credits from Adviser, the level of which is correlated to the timing and volume of new originations, declined $0.4 million quarter-over-quarter. Interest expense decreased $0.2 million in the current quarter due to the timing of the issuance of our 6.875% notes, [ with redemption ] of our 8% notes and new investment activity. This resulted in a net investment loss of $6.5 million compared to net investment income of $4.3 million in the prior quarter.

Overall, portfolio company valuations in the aggregate increased to $70.2 million. This unrealized appreciation was driven by both increased performance at some of our portfolio companies, along with higher valuation multiples across the portfolio. The increase was partially offset by decreased performance at other portfolio companies.

Adjusted net investment income, which represents net investment income or loss, excluding any accrued or reversed capital gains-based incentive fees, was $8.2 million or $0.21 per share compared to $9.2 million or $0.24 per share in the prior quarter. We believe that adjusted net investment income remains an indicative metric of our ongoing and core performance as it removes the impact of capital gains-based incentive fees, which is an expense recorded under U.S. GAAP each quarter but is not yet contractually due.

For the current quarter, we continue to have 3 portfolio companies on nonaccrual status. We have been working closely with each of these 3 companies working alongside their management teams to support efforts to return to accrual status or pursuing exits where appropriate. Our nonaccrual investments represent 3.8% of our total portfolio at cost and 1.5% at fair value.

Our NAV increased to $14.95 per share compared to $13.53 per share at the end of the prior quarter. The increase was primarily a result of $1.77 per share of net unrealized depreciation and $0.09 per share of net realized gains. These increases were partially offset by $0.24 per share of distributions to common shareholders, $0.16 per share of net investment loss and $0.03 per share of realized losses associated with the redemption of our 8% notes.

Moving on to our balance sheet. Our ability to maintain sufficient liquidity, financial flexibility and managing a fluctuating interest rate environment is essential to supporting and growing our portfolio. As part of our proactive balance sheet management, we redeemed the full $74.8 million outstanding balance of our 8% notes using proceeds from the recently issued $60 million, 6.875% notes and borrowings under our line of credit. This redemption and new debt issuance reduced our interest burden for $75 million of debt capital by approximately 110 basis points.

Further, we expanded our credit facility to include City National Bank with $30 million commitment level. As a result of this expansion, we now have a total commitment level of $300 million under our facility. And as of yesterday's release, we had approximately [ $171 million ] in the remaining availability.

During the quarter, we raised approximately $3.2 million in net proceeds through common stock ATM program issuances. While the price level of our common stock limited the number of days we were active on the ATM, we will look to sell under our ATM program in the future when prices are accretive to NAV. We believe that we are in a sufficiently strong liquidity position with our ability to access the debt capital markets and when possible, the equity markets to support both the refinancing of upcoming debt maturities and our pipeline of new buyout opportunities.

Overall, our leverage remains in a strong position, with an asset coverage ratio as of December 31, 2025, of 201%, providing what we believe to be ample cushion to the required 150% coverage ratio.

Focusing on our distributions to shareholders, we ended the prior fiscal year with $55.3 million or $1.50 per share in spillover, sufficient to cover our current monthly distribution of $0.08 per share for an annual run rate of $0.96 per share as well as the $0.54 per share supplemental distribution we paid in June. As of December 31, our estimated spillover was approximately $22.9 million or $0.58 per share. We ended the quarter with total distributable income of $108.7 million or $2.73 per share.

Total distributable income primarily consists of the net unrealized depreciation of our investments as well as the GAAP adjusted balance of our spillover presented on our balance sheet. Including the $0.54 supplemental distribution in the current fiscal year, we paid an aggregate of $3.26 per share across 13 supplemental distributions over the last 5 fiscal years, in addition to the $4.68 per share of monthly distributions during this time. This track record reflects our ability to maintain a stable monthly dividend while also delivering incremental returns to shareholders, underscoring the strength and consistency [ of our focused ] equity-oriented investment strategy.

Looking ahead, we expect supplemental distributions to remain an important component of our overall shareholder return strategy, with the amount and timing of future payments driven by realized capital gains on our equity investments, along with other capital allocation considerations.

This covers my part of today's call. I'll now hand it back over to you, David, to wrap us up.

Well, thank you. Very nice, Taylor, and nice by Dave Dullum and Catherine Gerkis as well. And this will tidy over our shareholders until the next call, which will be at the end of March, which will be our annual as well as the fourth quarter. The call and Form 10-Q should bring everyone up to date.

The team has reported solid results for the quarter ending December 31, 2025, including new investment activity and strong liquidity position to grow the portfolio throughout the fiscal year. We believe Gladstone Investment is a very attractive investment for investors seeking continued monthly distribution and some supplemental distributions from potential capital gains and other income. The team hopes to continue to show you a strong return on investment in our funds.

Now let's stop for some questions from the analysts and other shareholders. Please come on, Latonya.

[Operator Instructions] The first question comes from Mickey Schleien with Clear Street.

Dave, a good portion of the appreciation in NAV this quarter came from 3 investments, Schylling, Old World, SFEG. Can you discuss the operational or valuation changes that drove that appreciation for each of those companies?

Sure. Mickey, nice to chat with you. Yes, and actually, we had a pretty significant -- those 3 you mentioned were large numbers, but we have a number of other companies indeed also that had, relatively speaking, pretty significant increase as well. But fundamentally, all the ones that were -- these large increases were fundamentally no multiple change, but pretty much all because of EBITDA increase, so -- which is obviously the best situation. So yes, that was true of all 3 of those that you specifically mentioned. EBITDA -- yes, sorry, go ahead.

It's interesting. I don't know if it's pronounced Schylling or Schylling, but Schylling and Old World are obviously consumer-oriented companies, and we're reading so much about the K-shaped economy. So what's sort of different about those 2 companies that's allowing them to grow their EBITDA even with the headwinds in the consumer sector?

Yes. I think the only answer I can give is the products that they make and sell, obviously. Schylling is a very interesting business, and they have a very unique product, which makes up a reasonable portion of their overall revenue, something called NeeDoh. It's one of these things where you squeeze for a variety of reasons, and they have different types of that. And that product has had huge demand even with, as you point out, forget consumer demand generally, but the whole tariff increases that we've seen in their products, of course, a significant portion comes from the Far East. So even with that, they have literally been able to maintain a level of demand that just frankly, has allowed the company to perform at an exceptionally high level.

Overall Christmas, obviously, Christmas tree ornaments, you're familiar with those, I think, you've seen them. And again, they're a well-run business. All these companies are very well run. We've got great management teams on pretty much, frankly, all of our portfolio companies right now. And they've just been able to outperform, I guess, really the consumer demand side of things, as you say. I don't have any further specific real insight to that other than, again, good management, quality products and been able to manage through the tariff impacts.

That's really good to hear. Dave, you also recently invested in Rowan Energy. Can you walk us through how you underwrote that deal particularly how you assess the cyclicality in the energy equipment fracking sand filtration sector? And what assumptions you made about where Rowan stands in its business cycle?

Best answer I can give you, Mickey. We can certainly chat about this offline if you need and bring some of the other folks involved that were more directly involved in those companies. But as you know, we have a couple of investments now that are in the energy-related sector. One company, in particular, E3, which also had a very interesting and nice increase in valuation. And what we have there is a quality and experienced team running that particularly E3, and that, frankly, helps us to move off into and be able to evaluate companies such as what you mentioned, Smart Chemical is another one. And so we have knowledge and experience within our portfolio to help properly evaluate that.

So right now and through those lenses, we feel like where these guys are in their cycle that we still have upside and we've been able to manage it through valuations, frankly, that also are at a level that aren't really -- I'll use the words carefully, but overpaying, so to speak. But anyway, it's one that we can talk about in more detail if you really want to later on.

I appreciate that. Dave or maybe Taylor, if I look at the table in the press release regarding floor rates, I want to make sure I understand it. Is it correct to say that about half the portfolio has about 80 basis points of downside in average yields?

Yes, but the way for us to get there, we would need significant decreases in SOFR. So it wouldn't just be 80 basis points would get to that level of 12.1% floor. We would need closer to 210 basis points to be able to bring SOFR down to a level where the other portfolio companies would then hit their floors. So there's some wiggle room. And as you could see with the fact that the basis point decrease right below that table there, the 25%, 50%, 75%, 100% -- or 100 basis point decreases in SOFR you could see as that decrease occurs, the decrease to the overall rate is not one for one. And that's because we start hitting the interest rate floors of more of the portfolio companies.

Okay. Yes, I understand. And lastly, given sort of the typical portfolio companies that you are attracted to, is it reasonable to say that there's sort of limited risk from AI in the portfolio? And how are you looking at that in terms of the pipeline?

Yes. That terminology, of course, is pretty broad, right, AI. I guess what I would say is that most of our companies are -- to the extent that AI is important, they're actually using it to some degree. And I think, in fact, if you recall coming out to our conference last year, we had a fair amount of stuff on that, and I think you heard some of that as well. So a number of our portfolio companies are utilizing various aspects of AI, which is enhancing their -- either their efficiency and whether it be designing some of the product you mentioned Schylling, again, they -- actually for a couple of years now, they've been using some aspect of AI in helping them to really design efficiently some of their products and so on. So I would say, yes, we're more beneficiary to some extent than necessarily, as you point out, where we have a tech company that might be directly in that space and there may be real competition for that. I would say we don't have that in our portfolio. So you're correct.

The next question comes from Christopher Nolan with Ladenburg Thalmann.

As a follow-up to the unrealized gains, were those mostly related to equity gains in the portfolio?

Yes. They were predominantly equity. We did have a handful of portfolio companies that experienced debt fair value increases as the overall TEV for that portfolio company was increasing as a result of both multiple increases and EBITDA increases. But the bulk of it, yes, it is equity driven.

And then in the comments section, you guys said there's good liquidity in the M&A market. I've heard from other managements where credit is widely available to all these middle market companies, but equity is less so. Do you have a different take on that? And if equity is less prevalent, do that give you a competitive advantage?

Yes. So I guess, Chris, my response to that might be, from my experience, our experience, I think maybe our -- the folks, let's say, we compete with the traditional private equity guys, to the extent that they're able to access leverage at more attractive rates, I think that's where why if they can put less equity in and slightly higher leverage or lower rates, they're doing some of that. I think this gives us an advantage, though as well because we're bringing, again, the equity and the debt, and we can moderate that. So we get the leverage on our own equity.

But I would say that it's competitive, frankly, with the M&A -- direct M&A shops because valuations, while we're seeing some elevation, frankly, on elevations, the fact that they can get leverage at lower rates, relatively speaking, makes them pretty competitive as well. So to your point, they might put in less equity, put in a bit more leverage and be competitive with us even though we're doing the debt and the equity. So it gives us a slight advantage in that when we deal with the management team and we're trying to buy the business, we at least are speaking for the whole capital stack, and we have a bit more certainty there versus, say, a traditional firm that might have to go out and try to raise the debt, whereas we at least can speak for all of it. So it gives us a slight edge. But yes, it's -- there's a fair amount of capital out there in both, I'd say that certainly the debt market and clearly on the equity side from our experience.

Great. And final question. Given the decline in base rates over the last year or so, will that have any positive effect in the discount rate used in your fair value calculations for your portfolio companies going forward?

Clarify that question again for me, Chris. Say it again.

Sure, sure. Yes, the risk-free rate has gone down and the Fed cuts rates. And does that affect the discount rate used in your discounted cash flow valuations when you're fair valuing an investment?

Well, most of our investments are being fair valued using a TEV valuation. So we're really looking at what EBITDA is times the multiple that we're setting for that portfolio company. So using a DCF model isn't as prevalent for our overall valuation approach. But yes, you are correct, in theory, that would improve it, but that's not how we're really valuing the bulk of our investments.

Great quarter or unusual in terms of the dynamics. You guys had a super GAAP EPS profit and the NII EPS loss and super jump in NAV per share but good show.

Thanks, Chris.

The next question comes from Erik Zwick with Lucid Capital.

This is Justin on for Erik today. Just wondering if you could speak on the current state of underwriting conditions and specifically, if you're seeing any pressure on terms or structure given the tighter spread environment?

Yes. For us, I would say, Justin, probably not. As I mentioned earlier, because of availability of leverage, lower leverage, so when we're competing for a deal for us, we still try to stick with our formula. Typically, it's about 70% of our assets or the investment that we make is in debt security, 30% roughly is in the equity security. So when we combine those, we're driving for an effective yield on the total dollars relative to our essential cost of capital being very cognizant of the income aspect of it for dividend distribution. But likewise, we look for -- on the upside, we always try to see our way to, say, 2x cash on cash on the equity side of things.

So our model really hasn't changed. What we have found -- yes, indeed, there have been a couple of deals that we've been working on that we liked and we're bidding on, if you will, and we were a couple of turns off on the multiple. But we stay pretty disciplined. And given what we're seeing out there, I don't see us having to change too dramatically our model. I mean if we saw something we really liked and we could say, put a bit more debt on it and generate more income so long as we weren't sacrificing too significantly the equity side of things, we will do that. But that's not necessarily because of the market, it's just because of the way we might look at the deal itself, if that helps.

Yes. And Dave, in your prepared remarks, you described the pipeline is very healthy. Can you talk about how it's looking compared to maybe a year ago? And are there any specific sectors where you're seeing better deals than others?

I'm really across all sectors. We have seen recently a few areas. The consumer side of things, actually Mickey was asking earlier, even though our experience of our portfolio and our consumer companies are doing really well. Consumer side of things are a little bit obviously slower, a great part because, again, we talk about tariffs. And so when we look at a new deal, let's say, consumer-driven, you have to really be very sensitive to the cost of product because of tariffs and so on, and that has some effect there certainly.

Business services, we're seeing reasonably good things in the business service area, interestingly enough on the manufacturing side, seeing things kind of reflected in our portfolio kind of in the aerospace and defense area. There are certainly aspects of with what government is doing, et cetera. So we've seen somewhat of a pickup in that area. So generally speaking, I'd say pretty much across the board, everything is looking -- we're seeing about the same certainly as about a year ago. And if there's any one area that might be a little weaker in terms of looking forward, might be somewhat in the consumer area.

Thank you, Justin, it was good to see...

Sorry, I just got one more.

Go ahead.

It was good to see that your nonaccrual was stable quarter-over-quarter. Just wondering if you could talk about your current outlook for asset quality and if there's any near-term opportunities to resolve any of the remaining names that are on nonaccrual.

Yes. I would say this, the ones that are currently on nonaccrual in differing degrees, I feel better about them, honestly, today than if you'd asked me that question perhaps a year ago, in part because we're taking some actions. Again, they're all generating actually positive EBITDA. There are some structural reasons why we don't have them back yet on accrual. But between some of the things that we're doing with them, we might even see a potential exit and certainly improvement to the point where we actually will be able to get them back on accrual. So I see it as a positive looking forward versus it being a negative.

No, I agree. And where we stand with these 3 companies, there's no -- it doesn't feel like we are in a next quarter, it will change, but the outlook is much more positive and every quarter, it looks more positive. So we are encouraged by where each of the 3 are trending.

There are no further questions at this time. I would like to turn it back to you, Mr. Gladstone for closing comments.

Okay. Well, thank you. We appreciate all those questions. We hope there are at least double questions next time. We always like to answer your questions because that shows the light on all the things we're doing. And you have to remember that these are not just portfolio companies, these are platforms, and we're getting people that are coming in and getting [indiscernible] us because they're getting some of their money that they've made over the years back now, but they have equity in going forward. So it's a bite now and a bite later of income for people who are joining us. And we're all oriented toward these platform companies, and thank you all for appreciating that. It's a different way of running our business, but one that works for us.

So thank you all for calling. And next time, we'll see you in April. Thanks, again.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.

Greetings, and welcome to Gladstone Investment Corporation's Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Erich Hellmold, General Counsel. Please go ahead.

Thank you, Donna, and good morning. This is Erich Hellmold, General Counsel Gladstone Investment. This is the earnings conference call for the second quarter ended September 30, 2025 of the 2026 fiscal year for shareholders and analysts of Gladstone Investment. Listed on NASDAQ under trading symbols GAIN for the common stock, GAINN, GAINJ, GAINL and GAINI for our 4 different registered notes.

Thank you for all calling in. We're happy to provide updates to our shareholders and analysts and provide our view of the current business environment. Two goals for our call today are to help you understand what has happened and give you our current view of the future.

Now we'll hear from Catherine Gerkis, our Director of Investor Relations [indiscernible] to provide a brief disclosure regarding certain regulatory matters concerning this call and report.

Good morning, everyone. 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 supported in our SEC filings, which you can find on the Investors page of our website, gladstoneinvestment.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 e-mail notification service and find information on how to contact our Investor Relations department. We are also on X @GladstoneComps as well as Facebook and LinkedIn keyword for both is the Gladstone Companies.

Now I will turn the call over to David Dullum, President of Gladstone Investment.

Thanks, Catherine, and good morning to everybody, and also thank you for being on the call. I am again pleased to report that our second quarter of fiscal 2026, we experienced strong performance. This was driven by the continued growth in the portfolio and the results also of our existing portfolio companies.

We ended the second quarter with adjusted NII of $0.24 per share, which is sufficient to cover our monthly distributions to shareholders and our total assets of $1.1 billion are up $90 million from the end of the prior quarter. Now this increase quarter-over-quarter in assets resulted from one new buyout investment during the current quarter along with appreciation of our investment portfolio, I should say, net appreciation. With the new buyout investment, we currently have 28 operating companies and a very healthy pipeline for new acquisitions, which we'll discuss a little further.

To date and through the first 6 months of fiscal year '26, we have invested approximately $130 million in three new portfolio companies, and this compares to a total of $251 million which we invested in all of fiscal year '25. So we're at a pretty good run rate relative to where we were in fiscal '25.

Now these new investments, they are in line with our strategy to continue growing our portfolio through the acquisition of operating companies at what we deem to be attractive valuations. Now as usual, these acquisitions are made with a combination of our equity and debt where we look to generate capital gains on the equity when we exit the business, and the operating income from the debt securities that we hold for the monthly distributions to shareholders.

From our operating income, we were able to maintain our monthly distribution to shareholders of $0.08 per share, or $0.96 per share on an annual basis. So we have earned our ability to distribute from our income that we generated.

Now for perspective, since inception in 2005, and through this period in 9/30, 2025, we have invested in 65 bio portfolio companies for an aggregate of approximately $2.2 billion. We exited 33 of these companies. So this leaves total investments currently valued at approximately $1.1 billion, while we generated approximately $335 million in net realized gains and $45 million in other income and exit over that period of time.

Now let's turn to the outlook, which is probably the most important part, where are we today and what do we see going forward. First of all, there is very good liquidity in the M&A market which is where we compete, which does create this very competitive environment and trying to make new acquisitions at these reasonable valuations that I referenced. In addition, we are in a bit of uncertainty, obviously, with the added variable tariffs, potentially slowing of the economy, which obviously will impact the analysis when we evaluate new opportunities. So it's not that easy, but we believe we have a pretty good handle on these variables and take them very carefully, again, coming back to our desire to have reasonable valuations on these companies [indiscernible].

Now not every business is affected in the same manner, which then both creates opportunity and obviously, again, adds to the uncertainty. We seem to be able to compete effectively for acquisitions that fit our model. As we mentioned earlier, we've been active, we closed on three new investments during the first 6 months of the fiscal year. We are in the final stages of diligence on some new opportunities and in review and negotiation of a number of other new opportunities. So our activity level is strong. We're very active in the marketplace. And this -- as a result of this, this activity keeps me somewhat optimistic for closing on some new buyouts during the balance of our fiscal year.

As to our existing portfolio, we have a few companies that are consumer focused. And while they have experienced very good results to date, we are cautious due to supply chain disruption, tariff costs on the ultimate consumer prices, which may have an effect on the actual demand and the margin impact on that -- those particular companies. We continue to work with all of our companies in evaluating supply chain alternatives and the production strategies as we continue to navigate the current environment. And as I mentioned in the -- over the past years, as a group, we're very proactive in working with our businesses from an operating perspective as well. So we feel pretty good about where we are in this.

So in summing up the quarter and looking forward to the rest of the fiscal year, our current portfolio is in good shape. We have a strong and liquid balance sheet, a good level of buyout activity with the prospect of continued good earnings and distributions over the next year while we navigate the challenges of an uncertain economic landscape.

So with that, I'm going to turn it over to Taylor Ritchie, our CFO, to provide us with some more direct information. Taylor?

Thank you, Dave, and good morning. Looking at our operating performance for the second quarter, we generated total investment income of $25.3 million, up from $23.5 million in the prior quarter. The increase was primarily driven by an additional $1 million of interest income resulting from the continued growth of our debt investment portfolio. The weighted average yield on our debt investments decreased from 14.1% to 13.4% during the quarter. However, after adjusting for the collection of past due interest income from investments that had previously been on nonaccrual status, our portfolio's weighted average yield increased modestly from 13.1% to 13.2%.

This improvement [indiscernible] to our recent buyout debt investments which generally include interest rate floors in the 13% to 13.5% range. Excluding nonaccrual investments, the weighted average interest rate floor of our current debt portfolio was 12% as of September 30. We believe these elevated interest rate floors [indiscernible] as well to mitigate potential compression in net interest income in the event of future declines in [ SOFR ]. Additionally, we experienced a $0.7 million increase in dividend and success fee income, the timing of which can be variable.

Net expenses for the quarter were $21 million, up from $14.5 million, the increase was primarily due to the increase in incentive fees, which included a $5.1 million increase in capital gains-based incentive fees as well as a $0.3 million increase in income-based incentive fees. Interest expense increased in the current quarter due to the timing of borrowings for new investment activity from both the current and prior quarter, partially offset by our ATM sales in the current quarter. This resulted in net investment income of $4.3 million compared to $9.1 million in the prior quarter.

Overall, portfolio company valuations in the aggregate were up $54.5 million, the increase was a result of both the net unrealized appreciation of $35.3 million and $19.1 million of reversal and unrealized depreciation from our restructuring of our investment in J.R. Hobbs. The unrealized appreciation was driven by increased performance at some of our portfolio companies, partially offset by lower valuation multiples across the portfolio and decreased performance at some of our other portfolio companies.

Adjusted net investment income, which represents net investment income, excluding any accrued or reverse capital gains based incentive fees was $9.2 million or $0.24 per share, compared to $8.9 million or $0.24 per share in the prior quarter. We believe that adjusted net investment income remains a meaningful measure of our ongoing performance as it removes the impact of the capital gains-based incentive which is an expense recorded under U.S. GAAP each quarter, but is not yet contractually due.

During the quarter, we reduced the number of portfolio companies on nonaccrual status from 4 to 3. This reduction reflects the restructuring of our debt investments in J.R. Hobbs, which resulted in a $29.9 million realized loss, while establishing a new $20 million term loan that is now paying interest. We are confident in the management team in place at J.R. Hobbs and believe that the restructuring will position the company for long-term success.

Despite continued macroeconomic uncertainty, we do not see any broad-based credit concerns across the portfolio. We continue to stay closely engaged with the three companies currently on nonaccrual, working alongside their management teams to support efforts to return to accrual status or pursuing exits where appropriate. Following J.R. Hobbs returned to accrual status, our nonaccrual investments represent 3.9% of our total portfolio at cost and 1.7% at fair value. Our NAV increased to $13.53 per share compared to $12.99 per share at the end of the prior quarter. The increase was primarily a result of $1.42 per share of net unrealized depreciation, $0.11 per share of net investment income and $0.06 of accretion from our issuing shares on our ATM at prices in excess of NAV. These increases were partially offset by [ $0.17 ] per share of realized losses and $0.24 per share of distributions to common shareholders.

Looking at our balance sheet. We believe that maintaining strong liquidity and financial flexibility is essential to supporting and growing our portfolio. As of yesterday's release, we had $174 million in availability under our credit facility. In addition, we raised approximately [indiscernible] in net proceeds through our common stock ATM program during the quarter, and we intend to continue utilizing [indiscernible] while pricing remains accretive to NAV. Looking ahead, we expect to access both the equity and debt markets to support what continues to be a healthy pipeline of new buyout opportunities and to refinance upcoming debt maturities.

Overall, our leverage remains in a strong position with an asset coverage ratio as of September 30 of 193%, providing what we believe to be ample [indiscernible] 150% coverage ratio.

Focusing on our distributions to shareholders, we ended the prior fiscal year with $55.3 million or $1.50 per share in spillover, sufficient to cover our current monthly distribution of $0.08 per share for an annual run rate of $0.96 per share as well as the $0.54 per share supplemental distribution paid in June. We will seek to continue paying future supplemental distributions as we recognize realized capital gains on the equity portion of future exits. Using the monthly distribution run rate of $0.96 per share per year, and the $0.54 per share in supplemental distributions paid in the current fiscal year, our aggregate estimated fiscal year distributions would yield about [ 10.5% ], using yesterday's closing price of $13.79.

This covers my part of today's call. I'll now hand it back over to David Gladstone to wrap this up.

Well, thank you very much, Taylor. It's nice for you and Dave and Catherine, good information for our shareholders on this call in the Form 10-Q we filed -- it should bring us up to date for everyone that follows us.

The team has reported solid results for the quarter ending September 30, 2025, including new investment activity, improvements in nonaccrual balances, that's a good one to get out of the way and a strong liquidity position to grow the portfolio through the rest of this fiscal year, which will end on in the next quarter.

We believe that Gladstone Investment is an attractive investment for investors seeking continuous monthly distributions and supplemental distributions from potential capital gains and other income that we have, team hopes to continue to show you a strong return on your investment in our fund. Why don't we slow down now and have some questions from our analysts and other [indiscernible].

So operator, if you'll please come on and ask some [indiscernible] some questions.

[Operator Instructions] Our first question is coming from [indiscernible] of Clear Street.

Taylor, in your remarks, you mentioned that the net unrealized depreciation excluding the Hobbs hubs reversals due to some companies performing well. Could you give us a sense of which sectors are the strongest in the portfolio? And what sectors you're seeing the most challenges.

Mike, it's Dave. Taylor sort of pointed at me and said, "Hey, maybe you should take that question." So I'll try and he can jump in.

Frankly, it's really truthfully across the board. It's not like our -- couple of our consumer-oriented companies, we're seeing not only a slight change downwards in multiples in general and one or two that are slightly down in EBITDA, which, of course, combines for -- again, these are not huge, frankly, unrealized valuation decreases are all in line, relatively speaking. But I'd say in that, we've got a couple that are somewhat related to the government sector stuff where there's been some slowdown, if you will, or pushing backwards on some of the activity, clearly because of the shutdown, et cetera, but not anything dramatic. The business performing really well.

So truly, I can't give you one sector that I would say is not performing worse, let's say, or any others. The oil and gas or energy sector, we've got a couple of pretty good holdings there. They're doing quite well. And there, we've seen multiples pretty much across the board are actually down. And so it's really more a function of where EBITDA on any one of the individual companies is actually up, which is combined to give the sort of unrealized appreciation aspect of it. But the short answer is, relatively speaking, it's pretty broad spread.

Dave, yes. I'm sorry, go ahead, Taylor.

Sorry, I was just going to add in, if you look at the top three portfolio companies that moving up from the quarter, they spread all 3 of our kind of traditional sectors, between SFEG, E3 and [indiscernible]. So we are seeing it kind of across the board.

That's helpful. And Dave, you mentioned the government shutdown, which is obviously a new development since the last earnings call and since your Investor Day in Utah. Could you give us a little more color on how that's impacting the portfolio and which companies are most exposed to that?

Well, the ones that would be most exposed are those that are -- where we have direct involvement with services products related, obviously, to military and so on. And again, fundamentally, they're all doing well. I would say it's less of an issue now. We went through a period where we were concerned. Let's use that word carefully on maybe pushing back of demand because of the uncertainty from the government, not that the fundamentals of what we needed to do our supply were in question, it was really more whether something might get funded or not.

But what we learned actually and what's occurred is it really has not been an issue for our specific portfolio companies. So it's just something we keep an eye on. Again, it had an impact earlier in the year, but it frankly now seems to be smoothing out. So no, I wouldn't want to highlight any one particular or companies that has got an issue with that because that would be misleading.

And my last question, Hobbs had been an issue for a long time. So it's good to see the restructuring. But I noticed you cut your investment in Hobbs by about half. So did another investor get involved, whether another sponsor or another lender? And how would you describe that company's outlook now?

Yes. No. So we are the only continuing investor. As we mentioned, we did a restructuring, if you will, and that allowed us to really so to set the table with the dollars we have invested to generate income, as Taylor mentioned, which is a good thing. We've seen a really nice turn in the business there, a business that or function of the construction-related projects generally in multifamily and, to some extent, commercial down in the Southeast generally, which frankly has continued well.

So what they've done very well in the last, I'd say, 9 months to 12 months, is to really realize which are the contracts that they need to take on and we reduce the revenue as a result of that. The revenue run rate order of magnitude, $100 million, which is still pretty significant. But it's caused us to really be critical and not take contracts that while it might be nice to have the revenue run the risk of not being able to provide any margin, if you will, just because of the nature of the beat.

So all in all, I'd say to the management team has done an exceptional job in bringing it to where it is. And now we're looking at positive EBITDA, positive cash flow. And yes, we're happy that we've continued to remain in that investment and now got it at least on an income-producing basis.

The next question is coming from Christopher Nolan of Ladenburg Thalmann.

Taylor, in case I missed it, what was the spillover income per share in the quarter, please?

We don't disclose that quarter-by-quarter just given the fluctuations, and we're really don't manage the spillover on a quarterly basis. We're really looking on an annual basis. But to put it in perspective, again, we started the year with $1.50, which covers the supplemental of $0.54 in June, and each month of $0.08. So we really have only been eating into the spillover that we started the year with. So we still feel comfortable and are confident in where we're going to end the year.

Okay. And then following up on the J.R. Hobbs comments from Mickey. Should we look for other restructurings and for the other companies on nonaccrual?

Chris, this is Dave. No, I would say not. I think the other companies that are on nonaccrual for slightly different reasons, they're actually producing income, et cetera. We just have to work through with some of the other folks that are in the investment senior lender and what have you in terms of some certain restrictions function of covenants. But no, I would not anticipate any restructuring on those other couple of companies.

Okay. Final question is, I noticed there was a slowdown in the ATM issuances quarter-to-date. Does that really reflect just smaller windows where you can accretively issue the shares or just lower seasonal balance sheet growth?

Chris, it's Taylor. Now to confirm, when you say quarter-to-date, are you talking about subsequent to 9/30? Or are you talking about the 9/30 quarter itself?

Subsequent to 9/30, please. The 515,000 share common shares issued.

Yes. So subsequent to 9/30, again, with us having the ability to be active on the ATM, but only when we are trading at a price sufficiently above NAV between covering our costs and commissions and then providing a little bit of cushion for any kind of downturn. The trading window for while we were in a position based on our 9/30 NAV, which again increased meaningfully from $12.99, up to $13.53. When factoring in the commission and the cushion, there were only so many days that we were trading above that. And as I mentioned in my prepared remarks, we will continue to utilize the ATM as price remains above NAV and the cushion discount that we factor in.

The next question is coming from Dylan is of B. Riley Securities.

I was just wondering if you could provide some more detail or color on the diligence and the conversations you're having for upcoming commitments and general scale and histories.

Yes. So obviously, I have to be a little sensitive to, with our legal team sitting here with me about what we're saying about those. But seriously, we are as I say, active in a number of companies right now kind of in the final phases of diligence, which means that with any success will sometime in the next month or so, hopefully, see some new acquisitions for us.

And then there are others where we're very active constantly in evaluating new businesses with indications of interest, and those turn into letters of intent, if we generally earn a couple of those right now as well. No guarantee that those LOIs, as we call them, that will get accepted because these are competitive processes, as you know.

So I'd say right now, all in all, we've given the level of activity, given -- when we look at those that are in IOI indication of interest, those that are in LOI, those that are actually in what we call initial review, the level is probably as high as it's been for a while. So subject to just getting through those processes, I think we're in really good shape for adding to the portfolio.

Okay. And then I was just wondering if you could provide more color on the variability of tariff uncertainties, there's specific holdings or industries that are worse than others in your view?

Yes. Well, certainly, some of those, we're fortunate, frankly, in a lot of our companies that would import products, say, from China, which is obviously the big area, have been able to find other sources, there are a couple of companies and part of it, to be honest, because of the demand for the product even though we had fairly significant tariff increase, primarily in a consumer-related company, it didn't affect the demand at all. In fact, demand continued and the profitability of the business pretty significant.

So it's really more around those companies, the ones that we have where they use a lot of steel, let's say, or what have [indiscernible] not particularly impacted. It's really those that are where we have a very significant supply, say, from China specifically. But so far to date, most of our companies that are doing that, we've been able to mitigate it to some degree. But we're cautious just because you never know. I mean, we seem to think that it looks like we might be seeing some pushback now on tariffs, some reductions. And if so, that will be a good thing.

Our next question is coming from Erik Zwick of Lucid Capital Markets.

This is Justin on for Erik today. I had a question on the J.R. Hobbs position. We noticed it was previously marked at 0, and now it's marked well above the cost basis. Was that a result of the restructuring? Or is that more a function of improving business performance?

The primary driver is obviously the restructuring, which eliminated essentially $29.9 million of debt that was ahead of the preferred when you come to the valuation process. So as we look at kind of a waterfall method of coming up with a TEV for the company each quarter, you go through the debt stack, allocate value there and then what is left over will fall into equity fair value. So as we got rid of the debt investments that left over a fair value for the preferred equity piece.

Okay. Yes, that makes sense. And then you guys had another really solid quarter of net new investments. I was hoping you can expand on how the pipeline is looking compared with last quarter and where you're seeing the most compelling opportunities.

Yes. I think as I was indicating a little bit earlier, we are, as I mentioned, seeing a volume that's probably as good as it's been in the last quarter or so -- last couple of quarters actually. Part of it is a function of, obviously, I think, and our team doing a really good job getting out there and seeing opportunities that meet what we want to do. The other thing we've been doing frankly, gradually increasing the size of investments that we're making. So per investment, we're actually putting more money to work because we think that the businesses that are a little bit larger, generating more consistent EBITDA will be better value creation over time.

So all in all, again, nothing spectacular other than we're active. We're out there. We're putting out a lot of indications of interest on some good quality businesses. It is a competitive environment. But again, I feel like we're in really good shape for net new deals as we look forward. And it's similar to like we've done in the last couple of quarters.

Okay. And last one for me. I'm just kind of curious about market dynamics and the competitive landscape. We've heard some larger BDCs are moving down market to smaller deals. Are you seeing any evidence of this in the borrowers that you're looking at?

Yes. No. And we have to keep in mind that our approach is less than being a credit-oriented fund, if you will, right? We fall in that category of the businesses we're looking at, we're buying them. So when we, of course, we bring our debt and our own leverage from our own balance sheet to the transactions. So I would say we don't fall in that broad category of competing necessarily with those folks who might be coming down market on the debt pieces. I think where we are is looking more at the middle market on the companies that we can buy. And as I mentioned, we're increasing looking at slightly larger businesses for us, relatively speaking, because we think that's where we can, over time, create higher value and consistently put more money to work in both the debt and the equity investments in those particular companies.

So I wouldn't say that we're seeing necessarily greater competition because people are coming down market, I'd just say that generally, there is enough capital out there, certainly in the M&A world and where we sought to compete that it is a struggle to some degree, to find these businesses at values that we think makes some sense. But we obviously have been doing it reasonably successfully and I think we can continue doing that.

And I think the only thing I would add to that to what Dave just mentioned is really that when we are going after portfolio companies of potential acquisitions, our competitors are typically going to be private equity funds that are focusing on the middle market space. So while other BDCs in the industry may be moving down market, they're often looking at companies that we may not be looking at. So we're -- our competitors are a different subset of the industry.

At this time, I would like to turn the floor back over to Mr. Gladstone for closing comments.

Thank you all for calling in. It's nice to know that this place will keep rocking and rolling, even if I'm stuck in traffic as I was this morning, I got to see the new way into Tyson's Corner, which is a disaster. Nonetheless, I'm here, still working.

I want to thank you all for calling in. And if you have other questions, we'll catch you next quarter. That's the end of this message.

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