Good day, ladies and gentlemen, and welcome to the Gladstone Investment Corporation's Second Quarter Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. David Gladstone, Chairman. Please go ahead, sir.

All right. Thank you, Stephanie. Nice introduction. And hello, and good morning to all of you out there. This is David Gladstone, and this is the quarterly earnings conference call for shareholders and analysts of Gladstone Investment. Common stock on NASDAQ, GAIN. Again, thank you, all, for calling in. We love talking with our shareholders and some of the analysts, and we like to give an update on our company, our portfolio and all of our business environment. I wish we could do this more often. We've been thinking about doing a mid-quarter, but probably will not do that for a while. By the way, you all have an invitation to come by and see us here in McLean, Virginia. We're just outside Washington, D.C. Stop by and say hello. We have about 60 people and some of the finest people in this business. You will see some of them when you stop by. Many of them are on the road visiting with portfolio companies or seeing new companies. And now I'd like us to hear from our General Counsel and Secretary, who is also the President of the Administrator, Michael LiCalsi. He'll make a statement regarding forward-looking statements. Michael?

Good morning, everyone. This conference call may include forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, including those 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, which we believe to be reasonable. Many of these forward-looking statements can be identified by the use of such words as anticipates, believes, expects, intends, will, should, may and other similar expressions. There are many factors that may cause our actual results to be materially different from any future results that are expressed or implied by these forward-looking statements, including those factors listed under the caption Risk Factors in our Form 10-K filing and our registration statement as filed with the SEC, all of which can be found on our website, www.gladstoneinvestment.com or the SEC's website, www.sec.gov. 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, except as required by law. Please also note that these past performance or market information is not a guarantee of future results. Please take the opportunity to visit our website, www.gladstoneinvestment.com, to sign up for our e-mail notification service. You can also follow us on Facebook, keyword, the Gladstone Companies. And on Twitter, @GladstoneComps. The presentation today will be an overview, so we ask you to read our press release issued yesterday and also to review our Form 10-Q for the September 2014 quarter filed yesterday with the SEC. And you can access the press release and 10-Q on our website. And now David Dullum will come on with the President's report.

Thanks, Mike, and good morning to everyone. Generally, I like to briefly review what it is we do, in other words, what our long-term goals are, just so we keep in focus that and then as we go through these near-term results. So Gladstone Investment Corporation provides capital for the buyout of businesses. These are companies generally with annual sales between $20 million and $100 million. We provide what is called subordinated debt, and we do that in combination with equity in these companies. And in some cases, if required to get a transaction closed, we will also provide some of the senior debt. So this combination, really, of investment, produces the mix and assets that Gladstone Investment is interested in doing because it really provides the basis of our strategy. And effectively, what this means is that the debt portion of the investments provide the income which will pay and help grow our monthly distributions while we look to the equity portion of those investments to increase in value and provide a capital gains from time to time, which we have been able to actually demonstrate. We take -- why are we different from other BDCs and other finance companies, sometimes we get asked, and the answer is basically that we take large equity positions in the companies that we purchase. And this differs from most of the public BDCs that are predominantly debt-focused. So for instance, the proportion of equity and debt for the investments in our portfolio is approximately 30% on the equity and roughly 70% on the debt. Most other BDCs you'll find are closer to about 10% on equity and 90% on debt, and some are even higher in regards to the debt side. So also, we generally do not buy syndicated loans or portions…

Thanks, and good morning, everyone. Big news this quarter. Subsequent to it is that we were able to get some new deals on the books totaling over $45 million and that we were able to increase our line of credit capacity 75%, from $105 million up to $185 million, by adding 4 new banks. These actions have enabled us to expand our balance sheet, and at the end of the September quarter, we had $351 million in assets consisting of $347 million in investments at fair value, with a cost basis of $412 million. We also had $3 million in cash and $11 million in other assets. At our cost basis, 72% of our portfolio assets consists of debt investments of approximately $299 million, and 28% or $113 million consisted of equity securities, which we hope will produce capital gains in the future. As for our liabilities and equity at September 30, we had $88 million in borrowings outstanding on our new 3-year $185 million credit facility; $40 million in term preferred stock; $8 million in other liabilities and $225 million in common stock. As reported last quarter, we amended our credit facility, which allowed us to extend the maturity date of our line of credit to June 2017 or almost 3 years out. If it is not renewed or extended by that maturity date, all principal and interest will be due in payable on or before June 2019 or 5 years out. In addition, there are 2 1-year extension options to be agreed upon by all parties, which, if exercised, could, in effect, push the facility out 7 years. We were also able to reduce the interest rate from LIBOR plus 3.75% to LIBOR plus 3.25%. Our net asset value per share was $8.49, and that is down $0.08…

All right. Thank you. I've got good reports from Michael and Dave Dullum and now David Watson. And I think this second quarter was a bit mixed from my perspective. We have some great accomplishments such as adding some new investments to our portfolio and increasing the line of credit so that we can leverage up a little bit more. We've always been very low on the leverage side. However, it was a little disappointing to have our earnings at $0.16 rather than the $0.18 that we had projected, but I believe that will change as we move forward, simply because we closed 2 deals since then that should be in the earnings for the quarter ending December 31. Although the recent economic indicators have been really positive in many regards, the recovery still is sluggish, continue to monitor the economic outlook, which affects the investment climate in which we operate, and feel we have a few concerns still today. We just don't know what the Federal Reserve is going to do with regard to monetary policies and the impact on future interest rates. That's always a wildcard. And the fiscal crisis in the federal government is still top of mind as the federal deficit is now over $17 trillion and continues to climb as the government continues to spend. It just seems to be unsustainable and out of control. We don't know where that's going to lead us. And many of the private companies that we talk to, which we invest in, feel that too much regulations around health care, financial services, the energy sector, the emissions, all of these things are hindering the performance and expansion of the job growth marketplace that these companies could do if they were out from under so many regulations. Our company is…

[Operator Instructions] And our first question comes from Vernon Plack of BB&T Capital Markets.

Congratulations on your last 2 deals, Cambridge and Old World Christmas. A question regarding those. Can you tell me what the ownership split is on Cambridge between you, Boston Harbor and perhaps management or anyone else?

Sure. Vernon, it's Dave Dullum. Basically, we have roughly, on a fully diluted basis, about 85% of the company. And the balance is between Boston Harbor and management with one caveat and recognizing, when we do a deal with someone like Boston Harbor, who is an independent sponsor, they generally are not going to get their ownership until some hurdle rate is achieved. So I'm sort of giving you numbers that would look down the road assuming that occurred, and that's where they would end up.

So it's listed as an affiliate investment, though. If -- do you have 85% ownership of Cambridge? And if that were the case, wouldn't that be a control investment?

David Watson, do you want to tackle that?

Sure, Vernon. So the classification of our investments on the SOI for the 40 Act is based off of voting security. And so we actually do not have greater than 50% of the voting securities in this investment -- or in either of these investments. Economically, we tend to have more, as Mr. Dullum just alluded to, but it's really a GAAP 40 Act voting security type of requirement.

Okay. And can you...

Vernon, I just want to be clear, too. We -- obviously, as you know, we are quite active in the way which we manage our portfolio companies from a governance perspective, bringing independent directors on that can really add value to the companies. So while we, as David Watson said, do not have voting -- certainly do not have voting control, we have quality activity around the -- again, the management of the company and so on. We're not just sitting on the sidelines and receiving reports. That's an important thing for you to know as well.

Sure. And what was the multiple that the company was valued at?

I don't want to disclose that directly, but order of magnitude, a little bit over 6x.

Okay. Yes, that's great. And for Old World, in terms of ownership, would that also be listed as an affiliate investment due to voting -- I don't know how much you effectively own versus the management team and if there's anybody else involved.

Vernon, that's correct.

Yes. And in this case, we actually had a new CEO came onboard, and he actually put some capital himself into the deal. So he bought some shares, but roughly saying, general order of magnitude as the other one.

Okay. And was the company valued sort of in that same range, somewhere in the -- perhaps the mid- to high single digits?

Yes.

Our next question comes from Mickey Schleien of Ladenburg.

I just wanted to touch on the overall performance of the portfolio. There was a scare in the markets a couple of weeks ago that the economy would be slowing down. And notwithstanding the comments at the beginning of the call, I was curious how your companies overall are performing in terms of their revenue growth and margins.

David Dullum, can you answer that?

Yes, I'll answer that. I think -- Mickey, pretty much across the board, we're seeing stability. There are a couple for a variety of reasons and in some cases, some of the newer investments that we have made. One of the things, as you know, we always look to is perhaps having to increase some expense for the right reasons. So that will impact sort of quarter-to-quarter the EBITDA. We've had a couple that are more attuned to certain industries. As an example, in the, call it, aerospace industry, where we have seen a bit of slowing down, some of that's timing as far as certain kinds of programs that are going on. So I would have to say net-net, pretty neutral. I'm not seeing any big concern in any decline or from a slowdown in the economy as it impacts any of the portfolio companies at this point.

And there's a couple of portfolio companies that are literally blowing the roof off in terms of growth. I just can't believe, we never expected that much growth. So those are doing well today.

Good to hear. Perhaps for Dave Watson. I noticed that you changed the footnotes to the SOI regarding valuation. Has there been any material change in your valuation methodology?

Mickey, there hasn't been any material change in our valuation methodology. We still continue to utilize the third-party services of S&P to put a valuation on each and every debt security. We still continue to run the models running the TEV, total enterprise valuations, of each and every portfolio company. And so in short, no, there hasn't been any material changes or, frankly, immaterial changes to our valuation process.

Okay. It's certainly nice to see the portfolio climb above 30 companies. It's great to see more diversification. And with valuation multiples as strong as they've been, I was hoping we'd see some NAV growth, but you fully wrote off your Galaxy Tool's preferred shares. And I was curious what's going on there. That was a fairly meaningful hit.

It was. Dave Dullum, did you want to talk a little bit more about Galaxy?

I don't think so. I think when you say wrote off all preferred shares, the value that -- we didn't write off the preferred shares of -- the value came down, we had a decline there. That was one I was sort of referring that's related to the aerospace industry. Actually, they are growing, if you will, they're in some major programs, some major extensions on their tooling capability side. So that timing thing, Mickey, and of course, because of the -- I'll call it the trailing, both decline in EBITDA still very positive. At a multiple, it obviously had an effect on the valuation, but we did not write off our preferred shares there.

Well, what I mean by writing off is they're valued at 0 relative to a cost of $11.5 million. But I understand what you're saying. And again, talking about valuation multiples as strong as they are, you have some equity positions like the Cavert prefers, and the Quench common shares and the Channel Tech shares. I was just curious whether we can expect you to rotate some of that into some yield assets to help grow NII.

Well, Cavert, the answer is no. We already did what you suggested on Cavert a few years ago. Actually, I think we've talked about this a little bit before. We sold our equity, common equity, back to the management at a very nice capital gain, which we realized. And then we actually helped to fund the purchase with debt, which did indeed add to the NII. The company's performed very well. It actually paid down on the debt. What we're basically left with is a relatively small preferred share -- so which is accruing a dividend. So that's one that's just going to run its natural course, very frankly. And ultimately, we will -- we'll be taken out of that on the preferred stock. And let's see, what was the other one you asked about?

Quench and Channel Tech.

Quench, we are -- that one we sold out our debt a few years ago. There's some very, very good equity guys that are running that, and the company's actually -- perhaps something -- some sort of liquidity event could happen there over the next year, a significant equity appreciation for us. So there's nothing we can really do in that particular case. It's sort of a wait and see investment, if you will. So that's, that one. And what was the last one, I'm sorry?

Channel Tech.

Yes, again, Channel, we -- that's one we did with another private equity firm who really, it's their deal. We did that a few years ago. We did get taken out of our debt there. We are left with just some pretty much preferred equity. And we're not -- at this point, we have no reason to add to that or do anything, so again, we're going to just let that one run its course.

Okay. And not to beat a dead horse, but I'm still trying to understand how Danco debt can be marked at 8%, but still be on accrual. It would just seem that either it's severely undervalued or should be on nonaccrual. Maybe Dave Watson can reiterate how that can be.

Sure. Danco is a company that is -- continues to pay current. The interest rates have -- in a restructure last year, early this year, had been reduced to a more manageable cash flow type of situation. Danco has been -- seen an increase. Even though the valuation has come down, the Danco team has been refocused and has been restructured. New management has been put in place, and the company has seen an increase in their backlog. So ultimately, we do believe that there will be a meaningful recovery in Danco. But given the valuation methodology, the utilization of S&P, it does have a severe mark. But again, they are paying current, and we -- at this point, there are no guarantees that it will remain on accrual. There is always a possibility if it doesn't continue to turn in the right direction, that we might have to do that. But at this point, we felt that Danco should remain on accrual.

Okay. Do we have any other questions?

I'm not showing any questions at this time.

Last chance until next quarter. I know other...

[Operator Instructions]

Well, Stephanie, it sounds like we don't have any other questions. So we'll end this. Thank you, all, for tuning in, and we'll see you again next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a good day.