OVERVIEW

Gladstone Investment Corporation is an externally managed, closed-end, non-diversified management investment company that has elected to be treated as a business development company (BDC) under the Investment Company Act of 1940. The company was incorporated in 2005 and invests primarily in debt and equity securities of established private businesses in the United States.

Gladstone Investment’s investment objectives are to: (i) achieve and grow current income by investing in debt securities that will provide stable earnings and cash flow, and (ii) provide stockholders with long-term capital appreciation by investing in equity securities that can grow over time. The company generally invests in lower middle market private businesses with annual earnings before interest, taxes, depreciation and amortization (EBITDA) of $4 million to $15 million.

As of December 31, 2024, Gladstone Investment’s investment portfolio was comprised of 76.3% debt investments and 23.7% equity investments, at cost. The company has been able to meet its capital needs through its revolving credit facility and by accessing the capital markets through public offerings of unsecured notes and common and preferred stock.

Investment Activity

During the nine months ended December 31, 2024, Gladstone Investment invested in four new portfolio companies and exited two portfolio companies. From its initial public offering in 2005 through December 31, 2024, the company has invested approximately $2.0 billion in 62 companies, excluding investments in syndicated loans.

The majority of the debt securities in Gladstone Investment’s portfolio have a success fee component, which enhances the yield on the debt investments. However, the company does not recognize success fees as income until payment has been received. As of December 31, 2024, the company had $52.8 million in unrecognized, contractual success fees.

Since inception, Gladstone Investment has exited investments in 32 portfolio companies, generating $332.5 million in net realized gains and $42.0 million in other income upon exit, for a total increase to its net assets of $374.5 million. These successful exits have enabled the company to increase its monthly distribution run rate by 100.0% from March 2011 through December 31, 2024, and to declare and pay 23 supplemental distributions to common stockholders.

Capital Raising

Gladstone Investment has been able to meet its capital needs through extensions of and increases to its revolving credit facility, as well as by accessing the capital markets. During the nine months ended December 31, 2024, the company issued $126.5 million of 7.875% Notes due 2030 and sold 148,714 shares of common stock under its “at-the-market” equity program for gross proceeds of approximately $2.0 million.

The company’s ability to issue additional equity is constrained by provisions of the 1940 Act, which generally prohibit the issuance and sale of common stock at an issuance price below the then-current net asset value (NAV) per share without stockholder approval, other than through sales to the company’s existing stockholders.

Regulatory Compliance

Gladstone Investment’s ability to seek external debt financing is subject to the asset coverage limitations of the 1940 Act, which require the company to have asset coverage of at least 150% on each of its senior securities representing indebtedness and senior securities that are stock. As of December 31, 2024, the company’s asset coverage ratio on its senior securities representing indebtedness was 185.9%.

Investment Highlights

During the nine months ended December 31, 2024, Gladstone Investment made the following significant transactions:

• Exited its remaining investment in Funko Acquisition Holdings, LLC, resulting in a realized gain of $2,000.
• Invested an additional $18.5 million in Nocturne Luxury Villas, Inc. to fund an add-on acquisition.
• Exited its investment in Nth Degree Investment Group, LLC, resulting in success fee income of $0.1 million, a realized gain of $42.3 million on its preferred equity, and the repayment of its $25.0 million debt investment.
• Invested $27.2 million in a new portfolio company, Pyrotek Special Effects, Inc., in the form of $20.1 million of secured first lien debt and $7.1 million of preferred equity.
• Invested $5.0 million in its affiliated fund, Gladstone Alternative, through common equity.
• Invested $71.3 million in a new portfolio company, Nielsen-Kellerman, Inc., in the form of $49.1 million of secured first lien debt and $22.2 million of preferred equity.
• Invested $78.7 million in a new portfolio company, Ricardo Defense, Inc., in the form of $61.3 million of secured first lien debt and $17.4 million of preferred equity.

Distributions and Dividends

In January 2025, Gladstone Investment’s Board of Directors declared monthly cash distributions to common stockholders of $0.08 per share for each of the three months from January through March 2025, as well as a supplemental distribution of $0.70 per common share.

Investment Advisory Agreement

On January 24, 2025, the company entered into a new investment advisory and management agreement with its investment adviser, Gladstone Management Corporation, as a result of a change of control of the adviser.

Revolving Line of Credit

On February 10, 2025, Gladstone Investment, through its wholly-owned subsidiary Gladstone Business Investment, LLC, entered into an amendment to its revolving credit facility to increase the size from $200.0 million to $250.0 million and update certain existing terms.

Results of Operations

Comparison of the Three Months Ended December 31, 2024 to the Three Months Ended December 31, 2023:

• Total investment income decreased $1.7 million, or 7.4%, primarily due to a decrease in interest income and dividend and success fee income.
• Total expenses, net of credits from the adviser, increased $6.9 million, or 51.5%, primarily due to an increase in incentive fees and base management fees, partially offset by an increase in fee credits from the adviser.
• Net investment income decreased $8.6 million, or 88.1%.
• Net realized and unrealized gain increased $40.5 million, primarily due to $37.3 million in net unrealized appreciation.
• Net increase in net assets resulting from operations increased $31.9 million, or 485.0%.

Comparison of the Nine Months Ended December 31, 2024 to the Nine Months Ended December 31, 2023:

• Total investment income increased $2.5 million, or 3.9%, primarily due to an increase in interest income and dividend and success fee income.
• Total expenses, net of credits from the adviser, decreased $2.0 million, or 4.1%, primarily due to a decrease in incentive fees, partially offset by an increase in interest expense, other expenses, and base management fees, as well as a decrease in fee credits from the adviser.
• Net investment income increased $4.4 million, or 26.8%.
• Net realized and unrealized gain decreased $19.7 million, or 42.6%, primarily due to $15.7 million in net unrealized depreciation.
• Net increase in net assets resulting from operations decreased $15.3 million, or 24.4%.

Liquidity and Capital Resources

Gladstone Investment’s net cash used in operating activities for the nine months ended December 31, 2024 was $96.4 million, compared to $75.7 million for the prior year period, primarily due to an increase in purchases of investments.

Net cash provided by financing activities for the nine months ended December 31, 2024 was $96.3 million, which consisted primarily of $126.5 million in gross proceeds from the issuance of 7.875% Notes due 2030, $24.5 million of net borrowings under the credit facility, and $2.0 million in proceeds from the issuance of common stock, partially offset by $52.1 million in distributions to common stockholders and $4.6 million of deferred financing and offering costs.

As of December 31, 2024, the company had $91.5 million in borrowings outstanding on its $250.0 million revolving credit facility and total debt outstanding of $463.7 million. The company’s asset coverage ratio on its senior securities representing indebtedness was 185.9% as of December 31, 2024.

Analysis

Gladstone Investment has demonstrated a consistent track record of generating investment income and capital gains through its strategy of providing debt and equity financing to lower middle market private companies in the United States. The company’s diversified portfolio, focus on stable cash flow-generating businesses, and successful exits have enabled it to steadily grow its net asset value and distributions to shareholders over time.

The company’s ability to access the capital markets through its credit facility and public debt and equity offerings has been a key strength, allowing it to fund new investments and manage its leverage. However, Gladstone Investment’s equity issuance capacity is constrained by the 1940 Act when its stock trades below net asset value, which could limit its flexibility to raise additional capital.

The company’s investment portfolio continues to perform well, with the majority of its debt investments generating attractive yields through success fees. While the company has experienced some credit issues, with several loans on non-accrual status, its overall portfolio quality and diversification have helped mitigate risks.

Looking ahead, Gladstone Investment’s focus on the lower middle market, conservative leverage, and disciplined investment approach position it well to continue generating stable investment income and capital appreciation for shareholders. The company’s recent investments in new portfolio companies and its affiliated Gladstone Alternative fund suggest it is actively deploying capital and seeking to diversify its sources of returns.

Overall, Gladstone Investment appears to be a well-managed BDC that is effectively executing on its strategy of providing financing solutions to private companies while delivering consistent returns to its investors.