Gladstone Investment Corporation (GAIN) Q3 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the Gladstone Investment Corporation Third Quarter Ended December 31, 2013 Conference Call. [Operator Instructions] Please, note that this event is being recorded. Now I would like to turn the conference over to David Gladstone. Mr. Gladstone, please, go ahead.

All right, thank you, Keith, and hello, and good morning to all of you out there. This is David Gladstone, Chairman, and this is the quarterly earnings conference call for shareholders and analysts of Gladstone Investment, common stock on NASDAQ trading symbol GAIN. We also have a preferred stock, which traded under the symbol GAINP. And thank you all again for calling in. We're always happy to talk to shareholders about the company and wish we could do it more often. We hope you take the opportunity to visit the website, www.gladstoneinvestment.com, where you can sign up for email notices so you can receive information about the company in a timely fashion. And please remember that if you're ever in the Washington, D.C. area, you have an open invitation to visit us here in McLean, Virginia, so, please, stop by and say hello to us. These are the best people in the business. And I'll read now the statement about forward-looking statements. This conference call may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933 and Securities Act of 1934, including statements with regard to the future performance of the company. These forward-looking statements inherently involve certain risks and uncertainties and other factors, even though they are based on our current plans, and we believe those plans to be reasonable. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar expressions. There are many factors that may cause our actual results to be materially different from future results that are expressed or implied in the forward-looking statements, including those factors listed under the caption Risk Factors in our 10-K and 10-Q filings and in our registration statement filed with the Securities and Exchange Commission. All of those can be found on our website at www.gladstoneinvestment.com and also on the SEC website. The company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise after the date of this conference call. Please, also note that past performance or market information is not a guarantee of future results. With that out of the way, we'll hear from David Dullum. David is the President and a board member of the company. He'll cover a lot of ground and a lot of interesting information. And Dave, take it away.

Hello. Thank you, David, and good morning, all. I'd like to start with a brief review of what we do. This really helps to keep the long-term goals in mind as we really update you on our short-term results. Gladstone Investment, as you know, provides capital for the buyout of businesses. These are usually companies with annual sales between $20 million to $100 million. This is where we provide a subordinated debt and equity and occasionally, some senior debt in these transactions. This combination produces a mix of assets for Gladstone Investment, which is the basis of our strategy. Our debt investments provide income to pay and grow the monthly dividends, and we expect the equity to appreciate and provide capital gains from time to time. So this is what [ph] we really believe differentiates us from other public BDCs that are predominantly debt-focused. So please keep in mind that we expect the equity portion of our assets to contribute to the overall value of our company as we grow. For example, last August, we sold Venyu Solutions Inc., a company which we purchased with its management team in late 2010. The equity portion of this investment generated cash proceeds of approximately $32 million, which resulted in a realized capital gain of approximately $25 million and [indiscernible] dividend income of approximately $1.4 million. In addition, we've also received full repayment of our debt investment of roughly $19 million and an additional approximately $2 million in success fee income. Therefore, our original investment of $6 million in equity generated approximately a 5.5x return, including the dividends that we received. The sale of Venyu is actually the fourth exit from our management-supported buyout investment since June of 2010. So the importance here is that these 4 liquidity events have generated approximately $54.5 million of realized gains since June of 2010. This has enabled us to offset our cumulative realized losses, and we're now, I'm happy to say, in a cumulative net realized gain position. So as mentioned in previous calls, the realized losses, which were primarily incurred during the recession when we were required to sell performing syndicated loans by a former lender. Therefore, with the continued growth in operating income and these realized gains, our board has also then been able to declare a monthly dividend of $0.06 per common share for January, February and March 2014. This amount actually is the same as last quarter, when we increased the monthly dividend rate by 20% from the previous quarter. So generally, as far as originations, how do we keep doing this? Well, we obtain our investment opportunities by partnering with management teams and other sponsors, as we call them, in the purchase of a business. Our strategy here is to provide a financing package which includes both the debt and the equity, which gives us, we believe, a competitive advantage as it actually helps the sellers with a high degree of comfort that the purchase will actually happen, dealing with one source such as ourselves. So the sources for deal generation that we concentrate on for these buyout opportunities are what we call independent sponsors, middle-market investment bankers and middle-market private equity funds. Occasionally, in addition to an outright purchase, we might find opportunities to partner with the business owner who will also sell a portion of his company to us and use that capital to grow the business. Looking at our activity for the quarter which ended December 31, 2013, we closed 3 new investments totaling about $42.3 million as follows: In October, we invested $16.3 million in a combination of debt and equity to purchase Alloy Die Casting. ADC is a manufacturer of high-quality finished aluminum and zinc castings for the aerospace, defense, aftermarket automotive and industrial applications. In December, we invested approximately $13 million in a combination of, again, debt and equity to purchase Behrens Manufacturing, LLC. Behrens is a manufacturer and a marketer of high-quality, plastic-looking galvanized steel utility products and containers. Also in December, we invested $13 million, again, in a combination of debt and equity to purchase Meridian Rack & Pinion. Meridian is a provider of aftermarket and OEM replacement automotive parts, which it sells through both wholesale channels and also online at www.buyautoparts.com. So a key theme here, just to refresh, is it was debt and equity that was invested in all of these deals, and so all 3 deals, we invested an aggregate of $42.3 million. And our affiliated fund, actually, Gladstone Capital Corporation invested $18.1 million in addition to our $42.3 million as a coinvestor. Further, in October, we received a full repayment of our debt investments in Channel Technologies Group, LLC, which was an amount of approximately $16.2 million. Simultaneously, though, we invested $1.3 million in additional preferred and common equity securities in Channel. So at this point, we have no debt outstanding in Channel, but we are now essentially an equity investor. Also in December 2013, we received the full repayment of our remaining debt investment in Cavert II Holding Corp., which was an aggregate amount of approximately $6.1 million. So both of these payoffs resulted in prepayment and success fee income totaling $1 million. We also sold 2, what we consider, distressed portfolio companies during the quarter, which resulted in a $12.1 million aggregate realized loss. However, these sales were accretive to our net asset value in aggregate by approximately $5.7 million and reduced our nonaccruals outstanding. Regarding our new deal pipeline, the team at GAIN is very focused and engaged on active marketing and deal-generating activity. The results of last quarter reflect that, and we continue to try to find opportunities which will fit our investment parameters, which roughly are valuations relative to the EBITDA of approximately 6.5x. Today's market, it's a bit choppy [ph], and it's frequently we do see opportunities with higher valuations in these, and we do tend to avoid them. Occasionally, though, we might pursue one of these if there is some unique characteristic to the particular transaction. So we are encouraged by our marketing efforts as reflected in our new deal activity. We are growing our presence in the marketplace, and we're providing a foundation, we believe, to continue our growth trend. So in summary, our goal for this fund is to maximize distributions to shareholders with solid growth in both the equity and the income portion of our assets. And David, this concludes my part of the presentation.

All right, David Dullum, thank you for that. That was good. And now we'll go to David Watson and hear about the financial side of the business.

Sure thing. Good morning, everyone. As David said, we had a lot of activity this quarter, including 3 new deals, 2 substantial repayments and 2 sales. We saw the prior quarter where we a had big win with the sale of Venyu. Exits such as Venyu generates substantial other income for us and results in a lot of earnings volatility. And in fact, since early 2010, we have generated almost $23 million in other income from our portfolio, which has accounted for about 21% of our total income over the same period. However, you know we are consistently generating this type of income over the long term. It is very lumpy, and we could go long periods without generating any of this type of income. So in order to better understand our straightline performance over the last 2 quarters, if one were to exclude the impacts of the Venyu sale, other income events and [indiscernible] factors from our financials, our net investment income quarter-to-quarter would be consistent. So with those overriding thoughts in mind, I will get into the details of our financials. Regarding our balance sheet, at the end of the December quarter, we had $318 million in assets consisting of $291 million in investments at fair value, $15 million in cash and cash equivalents, and $12 million in other assets. On a cost basis, 73%, or $252 million, of our portfolio assets consisted of debt investments, and 27%, or $98 million, consisted of equity securities, which we will hope will produce capital gains over time. Included in the cash and cash equivalents is $10 million of U.S. Treasury securities purchased through the use of borrowed funds at quarter end to satisfy our asset diversification requirements. The amount of the T-bills that we've had to purchase has generally been coming down consistently over the past year. I am happy to report that we have passed, as we would have to, the diversification requirement over the past 2 quarters without purchasing any T-bills. However, we will continue to utilize the purchase of T-bills, so we are 100% confident with our margins of error on the test. As for our liabilities, we had $93 million, consisting of $40 million in term preferred stock, $36 million in borrowings outstanding on our $105 million 3-year credit facility, $5 million of secured borrowings, $9 borrowed with a short-term loan and $3 million in other liabilities. In all, as of December 31, we had $225 million in net assets or $8.49 per share. Today, we have investments at fair value of $291 million, cash of $3 million, $34 million in borrowings on our $105 million credit facility and $5 million in secured borrowings. So in other words, we have over $70 million in available capital to deploy in new investments before any potential increases in our borrowing capacity. Moving over to the income statement for the December quarter end. Total investment income was $8.7 million versus $11.4 million in the prior quarter. Total expenses, including credits, were $4.3 million versus $5.1 million in the prior quarter, leaving net investment income of $4.4 million versus $6.2 million for the prior quarter, a decrease of 29%. This was primarily due to the $1.9 million of success fees and $1.4 million in dividend income, partially offset by an increase in incentive fees related to the sale of Venyu in the prior quarter. As mentioned earlier, since early 2010, other income has accounted for over 21% of our total income on average. Last quarter, it was 32%. This quarter, it was 13%. And over the 2 quarters, it averaged 24%, which is slightly above our recent historical average. While our base fund earnings, which include the impact of other income and related incentive fees, grew last quarter and remained stable this quarter. We continue to expect volatility in our net investment income for the foreseeable future. So in total, our net investment income, which was $0.17 per common share, decreased 29% over the prior quarter of $0.24 per common share. We think it's important to take a moment to touch on significant, steady growth that we've had in our portfolio and the income since we restarted our origination efforts in May 2010. The year-over-year net growth rate since the time -- since that time in the size of our weighted average interest-bearing assets has been 22.5%. The year-over-year net growth rate over the same period in the amount of cash interest income recorded has been 27%. In addition, our weighted average yield on interest-bearing debt investment has increased to 12.7% in the current quarter, up from 11.3% in late 2010. Keep in mind, we often have success fees as a component of our debt instrument, but they are excluded from our reported yields. Success fees are contractually due upon the sale of a portfolio company, although the portfolio company may pay it earlier. So as of December 31, approximately 79% of our interest-bearing debt has associated success fees with a weighted average contractual rate of 3.1% per annum. The success fees owed to us are approximately $16.2 million, which is about $0.61 per share. We generally do not accrue these success fees on our balance sheet. So for comparison purposes, if we had accrued these success fees as we would pick, our weighted average yield on interest-bearing assets was approximately 15.8% during the December quarter. Again, there is no guarantee that we'll be able to collect all the success fees or have any control over their timing. So overall, we believe that the positive portfolio in yield growth and our debt investments on loan has positioned this company well for the future and, in part, has enabled us to increase our dividend rate on our common stock by 50% since late 2010. Let's turn to realized and unrealized changes in our assets. Realized gains and losses come from actual sales or disposals of investments. Unrealized appreciations and depreciations come from our requirement to mark our investments to the fair value on our balance sheet, with the change in fair value from one period to the next recognized in our income statement. Unrealized appreciation and depreciation is a noncash event. So as we mentioned earlier, we generated approximately $25 million in realized gains last quarter with the sale of Venyu, and Venyu, together with 3 other earlier liquidity events, has generated $55 million in realized gains since early 2010. And so we've overcome our cumulative realized losses since inception that were primarily incurred during the recession and in connection with the sale of performing syndicated loans at a realized loss to pay off the former lender. We are happy to say we're in a realized gain position today. We took this opportunity during the 3 months ended December 31 to strategically sell 2 of our distressed portfolio companies, ASH and Packerland, to existing members of their management teams and other existing owners. This resulted in realized losses of $11.4 million and $1.7 million, respectively. These sales, while at a realized loss, were accretive to our net asset value in aggregate by about $5.7 million and reduced our nonaccruals outstanding. As for our unrealized activity, the net unrealized depreciation over our portfolio for the quarter ended December 31 was approximately $2.3 million. This included the reversal of $13.2 million in aggregate unrealized depreciation, primarily related to the ASH and Packerland sales. Excluding reversals, we had $15.5 million in net unrealized depreciation for the 3 months ended December 31. This unrealized depreciation was primarily due to decreased equity valuation in several of our portfolio companies. This results on the combination of a quarter-over-quarter decrease in these portfolio companies' earnings and decreases in certain comparable multiples used in our methodology to estimate the fair value of the equity of our investments. We are always mindful of the amount of unrealized depreciation on our portfolio quarter-over-quarter. But as with our other income, we experienced a lot of volatility in our valuations as market comparable multiples are difficult to obtain for lower middle-market private companies, which is what we invest in. So to underscore that point, over the last 5 quarters, excluding reversals, we have seen our unrealized appreciation and depreciation fluctuate to the midpoint, going from zero to $10.4 million in appreciation to $11.4 million of depreciation to $1.7 million of appreciation, and finally, to $15.5 million of depreciation in the past quarter. But given our long-term view related to our investments, we have been pleased with the realized value [indiscernible] on investments and are generally less concerned about the inherent quarter-to-quarter fluctuations in our valuations. But for the December quarter end, our entire remaining portfolio was fair valued at 80.7% of cost, down from 81.1% of cost last quarter. Now lets turn to net decrease/increase in net assets from operations. The term is a combination of net investment income, unrealized net appreciation or depreciation, and unrealized gains and losses. For the December 2013 quarter end, this number was a decrease of $10.7 million or $0.40 per share versus an increase of $14.9 million or $0.57 per share in the September quarter. The quarter-over-quarter change is primarily due to the aforementioned realized activity and unrealized amounts over the past 2 quarters. All of our portfolio companies are current in payments except for one, which continues to remain on nonaccrual and now represents [ph] 0% of the fair value and 4.6% of the cost basis of our total debt investment portfolio as of December 31. Regarding our interest rate risk, approximately 81% of our loans have variable rates, but they all have a minimum or floor in the rate they [ph] charge. So with the low interest rates that we have experienced over the last several years, these floors have minimized the negative impact on our ability to make distributions. As of December 31, the weighted average floor on our variable rate loans is 2.7%, with a margin of 10%, resulting in an all-in rate of 12.7%. The remaining 19% of our loans are fixed, with a weighted average rate of 11.3%. So over the last 3 fiscal years and the current year to date, our net investment income per share of $2.59 has outpaced the distributions we had made to our common shareholders by $0.37 per share or 14%. This has largely been driven by income generated from our equity investments. Our board continues to maintain a conservative distribution policy to ensure we earn our dividend. As a reminder, RICs generally have to distribute at least 90% of their taxable ordinary income and capital gains. And as in the past, we will continue to utilize Section 855A of the IRS Code, which allows us to carry forward a reasonable portion of our income and gains. The balance as of March 31, 2013, was $3.1 million, and it has since increased with our performance and the Venyu sale during the first 9 months of this fiscal year ending March 31, 2014. Given our desire to be tax efficient, last quarter, the board increased our monthly sustainable distribution rate by 20% to $0.06 per common share a month and also declared a onetime special distribution of $0.05 per share that was paid in November. We look forward to maintaining all this momentum and increasing shareholder value. And now I will turn the call back over to Mr. Gladstone.

All right, thanks. That was a great report, David Watson, and a good report from Dave Dullum, too. I hope all the listeners out there read our press releases and also obtain a copy of our quarterly report called the 10-Q, which has been filed with the SEC and can be accessed on our website at www.gladstoneinvestment.com and on the SEC website as well. For the quarter ending December 31, the major news of the quarter was increasing the dividend, of course, and continued investments in new portfolio companies. Most of those happened at the end of the quarter, so we didn't get much bang out of their income. We think the rest of the fiscal year will continue to be good, and we'll keep investing. And given the liquidity generated from Venyu's sale and the expansion of our line of credit from $70 million to $105 million this year, we have plenty of room to borrow under the line and make new investments. So we're out there looking, and Dave Dullum is doing a great job of finding new investments. We still have other concerns, and we have some external things to our operations here that we worry about. Of course, it's a difficult time to invest because so many external things are in the mix. We ask questions about these external items each time we look at an investment. Unfortunately, we won't have any answers for many of these questions. Of course, oil prices could spike, and that would certainly slow or stop the recovery that we're in. Oil prices, I think, are still too high. We have massive oil and gas reserves in the United States, but the U.S. government has just not let businesses develop them. High gas prices for cars and trucks would hurt every business in the United States because transportation is so important. We are all worried about inflation. The decision by Congress and the President of the U.S. to extend the money supply will ultimately cause serious -- will result in what they call serious inflation, we believe. It's a bad idea to say that we can borrow and spend our way into prosperity, and that socialistic theory has been disproven here in the U.S. as well as in hundreds of other countries over time. Spending by the federal government, of course, is still out of control, and we cannot continue to borrow. The government can't continue to borrow and spend as much money as they're doing today. It's just unsustainable. The amount of money being spent on the war in Afghanistan still hurts, but we've been told it's going to end this year, 2014, and I certainly hope that's true. So terrible news out there that part of the government still wants to raise taxes of all kinds, and of course, the middle class pays the bulk of taxes, and they'll be hit if taxes are raised. I just hope Congress and the President don't try to raise taxes again. The trade deficit with China and certain other nations is just terrible. China continues to subsidize all their industries to the disadvantage of our business this year in the United States. And this means many of our companies can't compete with them. We must have a government that will stop China from cheating on this, but I don't think it is happening in today's marketplace. Stagnation of the housing industry may be coming to an end. I just read today that mortgage applications are up again this month, and they seemed to be up one month and down another. It just is unpredictable at this point in time. Nonetheless, the lenders are, again, making loans to those who cannot make mortgage payments as they did before, and I think they're on pretty solid ground or going [ph] to recover. Unemployment in the U.S. is still far too high. The numbers used by the government and reported by the popular press don't include those working part time but are seeking full-time jobs nor does the government figures include those that have stopped looking for work altogether. I think a more realistic number for unemployment rate in the U.S. today if you used some of the old statistics is about 15%. In spite of all those negatives, the small business base in the U.S. today is not a disaster. Many of them have hunkered down and continued to be strong. However, I do warn that the number of new businesses that are starting up each year is the lowest in 20 years. That will have an impact in future years in terms of small businesses available to lend to. Like most companies in the U.S., some of our portfolio companies have seen a great deal of progress in terms of revenue or backlog. However, others are seeing good increases and strength there, and a few others are seeing great increases. It's a very uneven economy that we're in today with some industries taking off and others falling behind. Our monthly distribution declared by the Board of Directors in January was $0.06 per month for each January, February and March of 2014. This is a run rate of $0.72 a year, and it's a, as mentioned before, 20% increase over the September 2013 quarter. As mentioned in our last call, the board declared and paid a special bonus dividend of $0.05 per common share in November, and [indiscernible] special dividend. And when you have capital gains the way that we have them, it's also included in the payout of extra dividends. We don't get much credit in the marketplace, but it's good to pay it out. The board next meets in April to consider and vote upon a dividend for April, May and June of 2014. The current distribution rate for common stock with the common stock price at about $7.98 yesterday, is yield on a distribution. It's now very high, in my opinion, at just a little over 9%. One of the reasons we think the yield is high is that it should trade at much lower yield because the growth in the dividend and the buildup of possible capital gain seems to be a fairly good indicator of the future. Please, go to our website and sign up for email notifications. We don't send out junk mail, just news about your company. We're at www.gladstoneinvestment.com. That's the site. You can also follow us on Twitter using GladstoneComps and find us on Facebook under the keywords "The Gladstone Companies." As far as we can see today, I think we can look out about 6 months, we think everything is going to be okay, even though the stock market seems to not think so. But the economy is not strong, and we're looking for new investments now and hope to have more good news for you when we have this call next quarter. Now I'm going to stop the commentary [ph] and, Keith, if you'll come along, we'll take some questions from analysts and some of our shareholders.

[Operator Instructions] And the first question comes from Dan Furtado from Jefferies.

I just had 1 or 2 quick questions. Nice quarter. On the capital deployment side, we've seen this accelerate nicely in the quarter. Could you help investors understand how much of this is due to internal focus, so to speak, since 2010? And how much do you think is due to the business environment you're operating in today?

Okay. It's Dave Dullum. I'll take a crack at that. I think it's obviously a combination of both. I do feel that the business environment's pretty decent. But frankly, our efforts, and we may have touched on this before, we've got good focus around all of the Gladstone entities. And so we have our GAIN team, which is, right now, approximately 11 folks. I think I'd mentioned on a previous call, adding a managing director in Chicago middle of last year, comes from the private equity world. So we really stepped up our marketing effort, our focus, our direction and frankly, our skill set around the type of transactions we're looking for, again, being this combination of equity with, obviously, significant debt in these buyouts. So I would say, again, a bit of both but more around the effort. And I think our team's done a great job in ferreting out and getting through the areas where we find the types of companies that we are looking to invest in, again, in the sort of $3 million to up to $8 million or $9 million EBITDA and at valuations that we believe makes some sense to us. So I'm optimistic about the trend.

Great. And then is there any noticeable difference on the competitive front, or would you consider that to be more or less status quo from the previous couple quarters?

I'd say it's probably status quo. Again, we look at competition. We're not really looking at competition regarding just pure debt-oriented BDCs, recognizing, again, we bring the debt with the equity when we do a transaction. So for us, again, it's more just slogging it out there and generating opportunities.

And Dan, what you see in the marketplace is -- we're not competing so much with the other BDCs and EICs [ph] that are out there. And this fund competes with some of the smaller buyout funds and with some of the people that bring deals to the marketplace. So this is really a buyout fund in a sense that it is looking for capital -- long-term capital gains. And it's a little bit different than most of the BDCs.

The next question comes from Mickey Schleien with Ladenburg.

I have several questions. I wanted to start with the marks on B-Dry, Noble and Danco, which are now down to the neighborhood of 20% to 25%. I just can't understand how those can still be on accrual status with marks that low, which usually imply a company that's severely distressed. Can you explain that?

It's Dave Dullum. Well, first of all, all 3 are paying their interest, so that's one of the key drivers. And clearly, the concern might be, hey, where they'll be 6, 9 months from now. I think, as you well know and we've said many times before, we work very hard with our underlying portfolio companies. And so even though, as you point out, the marks may be down, the values may be down, we keep being concerned more around the ability to service their debt and what's going on with fixing those companies. So at this point, I have to say that all 3 of those businesses are generating positive cash flow. We see them staying, by and large -- you can have changes from time to time, obviously, in the portfolio for the longer term. And at this point, frankly, I don't see a rationale for putting them on nonaccrual when, indeed, they are paying their interest. Now if something changes, obviously, we'll do that. But I don't know if that helps with the question.

Well, I still don't understand how you get down to a 20% to 25% mark if the borrower is servicing the debt. Can you help me understand that?

Well, keep in mind, remember, our valuation, which we've discussed before is a little tricky, right, meaning that we're valuing both the equity and the debt in all of those companies, with the exception, actually, of Noble. [indiscernible] early deals we did. We have significant ownership position, relatively speaking. So keeping in mind that the debt might be marked down somewhat, s&P does that for us. The equity portions, however, on the waterfall [ph] can take a relatively significant decline just because of the methodologies, as you know, that we use. For instance, I know we have -- not one of those companies, but another one of our companies that, frankly, we had it valued at the quarter end at roughly a 4x multiple. The industry, by the way, for that particular company, is at over 6x, which is a pretty significant change, right, delta. So frankly, again, it's a combination of both the valuation on the equity portions of those companies, obviously, being down driving the overall decline, versus the fact that they are paying a current paying position on the debt portion of those securities.

Mickey, the one that you're asking, how can you get to a 25% value if you're strong enough to keep making your payment. And all I can tell you is that we use a very strict approach to valuations, and we think we've done a good job, but no one knows until a buyer shows up what true value is. So we've been, perhaps, a little too conservative, but at the same time, we feel comfortable with those valuations.

Okay. I might circle back with you on that one. And a related question, looking at the unrealized depreciation in the quarter, excluding the reversal, by my count, most of that was driven by 10 companies, which is a large part of the portfolio where the loan investments remain marked at par, but the board marked down the preferred and the equity investments. So I'm getting mixed signals because at the beginning of your prepared remarks, you said that in general, the market is choppy and that valuations are trending above your target, which is around 6.5x EBITDA. But when I look at your Q, the board used EBITDA multiples for the preferred and equity -- for the preferred and common equity, which were 0.2 turns lower in the current quarter than the previous quarter. And you also mentioned that earnings, in some cases, decreased quarter-to-quarter, but generally speaking, the economy was pretty good in the fourth calendar quarter. So how do you reconcile all of that? I mean, I was really surprised that you took that much of a hit on NAV from this side here.

[indiscernible] David Watson. [indiscernible] I'll give you an example without getting too specific, but for instance, I've mentioned one of the companies that's in that tenet you mentioned, roughly has an EBITDA [indiscernible] fairly close example approximately just under 7x, right? And the multiple, because of our methodology, I think we've talked about it before, and what we publish takes not only a look back on EBITDA, which is not as relevant in this case, but also the way which we come up with the multiples. The multiple used for that particular company was 4x. The multiple for the industry and the points you made, we would never, obviously, value this company in a normal course or certainly sell it at 4x. But the industry average for that particular kind of company is about 6, so 2x delta multiples on $7 million is $14 million. So there's an example of where we have a significantly undervalued situation in a really good company just because of the methodologies that we use -- have been using for our valuations in our waterfall to come to the underlying equity value. So your point's very valid, and it's a great question. Again, adding points to the issue around what I would consider very, very conservative valuation methodologies today relative to the underlying equity values of our companies. And so it's a methodology we use, so that's what we use. So again, specifically, there will be an example of one company out of all of those, and there are others like that, by the way, that the market multiple you generally probably apply is at least 1 turn, maybe in some cases 2 turns higher than what we use. And that would have, obviously, significant impact on the value.

Dave, how concerned are you that -- you saw -- I think David Watson mentioned that the bulk of these companies saw a decline in their earnings in the fourth calendar quarter versus, I guess, the previous quarter. How concerned are you with that trend given that, like I said, the economy was fairly decent in that quarter?

Okay. Remember, also, we use trailing 12 when we do our valuations, so you're always obviously looking -- you have to think about where the trailing 12 started. And you can have -- again, using a simple example, with these companies that are maybe, say, doing $5 million, $7 million, $8 million EBITDA, right, and if you had a trailing 12 decline, which is [indiscernible] a couple hundred thousand dollars times a multiple of, say, 4x or 5x, that's $1 million of decline in value. The right question, and you're asking the right question, are we concerned if I see a $200,000, say, decline on a trailing 12 quarter-to-quarter in terms of the fundamentals of the business? The basic answer is certainly not based on our current portfolio. So you have those kind of movements, and we're taking companies that, say, looking back over a year ago, they might have been coming slowly out of a decline, right? And so if you lop that off, you'd find that we don't look at -- we don't use that looking forward kind of an EBITDA. So that's where you get these anomalies.

Okay. I guess the point is that it's not really quarter-to-quarter. It's trailing 12 versus the previous trailing 12. So now we're more than a month into the last fiscal quarter of the year, I guess you're starting to see the numbers for January. What trends are you seeing so far in your portfolio companies?

We don't get financials until, probably, the end of February for most of the portfolio companies. So there's not much we can say about January at this point other than we've not had any major bad news come through our platform.

Okay. My last question relates to ASH and Packerland, which were relatively recent investments, one in fiscal '11 and one in fiscal '12, which were made when the economy was on an upswing. So I'd like to understand what caused those businesses to deteriorate to the point that you decided to take an exit?

Okay. I think we've actually chatted briefly about it. ASH was the first investment that Gladstone Investment made back in -- like it was roughly '05. And obviously, over the years, it had added investments. So I don't know the data on that, just to be clear. So that's an older quote investment, right?

Okay. I'm mistaken, and than that's an old...

No problem. And so that one, we, frankly, had reached the point where that business, I think we've sort of talked about this before, and, frankly, got a management team in place. We felt the opportunity where we thought it was headed, we were better off. And at this point, we had the opportunity to essentially take this -- I'll call it write-down -- and let the management have the ability, really, to take that business forward, which they're doing very nicely. I think the other side of that coin, even though we've had that writeoff, certainly, we do have currently, in the way we did the transaction, have left with a $5 million roughly piece of debt, which is actually paying currently. It's actually cash. And that company is generating positive EBITDA. So it was a proper and a decent thing to have done, and we now have a modest investment in that business that, in fact, is paying currently in cash on our interest. Packerland was one that was a relatively small investment that we made in -- let's see. That was in early '11, I believe, and it was one that had an issue right out of the box, unfortunately, that all the investors missed. We did not leave that as a direct investment. The good news was that a significant portion of our investment's in debt and a relatively small investment in equity, mainly preferred equity. And shortly after the transaction, we were actually able to get back all of our debt investments on that and had a lingering preferred piece. So we also took the opportunity to negotiate with, actually, the lead investor on that to sell, if you will, our preferred position back to them and actually got cash out of the deal and then took a writeup of approximately $1.5 million. So net-net, the total investment, actually, given that we got all our debt back, had a modest, relatively speaking, actual decline in writeoff. But that were some unusual circumstances around that company, which really is what caused that transaction.

And Mickey, both of these were valued at zero last quarter.

[Operator Instructions] And we do have a question from J.T. Rogers of Janney Capital Markets.

Most of my questions have been answered, but looking at the other expense line, it looks like administration fees, professional fees and other have been trending up over most recent quarters. I'm just wondering what's driving that, and if you expect that to ease at all over the coming year.

Sure, J.T. This is David. The other expense line, kind of positive a little bit in the December quarter, and that's really reflective of the excise tax that we had to accrue and pay this quarter. And that was approximately $260,000, which is something that you're not going to see in any of the other 3 quarters. And that number was less than prior calendar years. And then for -- there's also some -- as we are planning [ph] on more deals and then have a lot more activity in the fund, there is a possibility of having more of that deal expenses to expense certain [indiscernible] to be consummated, and that can result in a little uptick in your other expense line item as well.

There are no more questions at the present time, so I'd like to turn it back over to management for any closing comments.

All right. Well, thank you all for tuning in. And we look forward to seeing some of you at the next meeting. That's the end of this call.

Thank you. Our conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a nice day.