Good day, ladies and gentlemen, and welcome to the Gladstone Investment Corporation's First Quarter Earnings Ended June 30, 2016, Earnings Call and Webcast. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference, Mr. David Gladstone. Sir, you may begin.

All right. Thank you, Chelsea, nice introduction. 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, NASDAQ traded GAIN, and then we have 3 preferred stocks, GAINO, GAINP, GAINN, so all kind of ways of investing in our company. Thank you all for calling in. We're really happy to talk to you, all these loyal shareholders who get on the line and potential shareholders. We'd like to give you an update on the company and its investments, and we'd like to give you a view of the business environment. I wish we could do this a lot more often. Also, you have an invitation that if you're in the area to stop by. We're in McLean, Virginia. It's located just outside Washington, D.C. So stop by and say hello. There's a team here of about 60-or-so people, and we have some of the finest people in the business. Now we'll here for General Counsel, Secretary, Michael LiCalsi. Michael is also the President of Gladstone Administration, which serves as the administrator for all of the funds and the related companies. He'll make a statement regarding forward-looking statements and some other information. Michael?

Good morning, everyone. This conference call may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, including statements with regard to the company's future performance. These forward-looking statements involve certain risks and uncertainties and other factors, even though they're based on our current plans, which we believe 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 words or expressions. And 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 information listed under the caption Risk Factors in our Form 10-Q and 10-K filings, and in our registration statement as filed with the SEC. All can be found on our website, www.gladstoneinvestment.com, or the SEC's website, www.sec.gov. And 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, except as required by law. And please also note that past performance or market information is not a guarantee of any future results. We ask that you take the opportunity to visit our website, gladstoneinvestment.com, and sign up for our e-mail notification service. You can also find us on Facebook, keyword: The Gladstone Companies; and on Twitter, @GladstoneComps. The call today will be an overview of our results through June 30, 2016. So for more detailed information, we ask that you read our press release issued yesterday and also review our Form 10-Q for the quarter ended June 30, 2016, and we filed that yesterday with the SEC as well. And…

Mike, thank you very much, and good morning, everyone. Generally, I'll give a very quick recap of what it is we do here at Gladstone Investment, for those of you that might be new to our stock or trying to learn. Basically, we are in the business of focusing on the buyouts of businesses that are in the United States. These are companies generally of a size range that are anywhere from above $5 million up to about $30 million in earnings. And also, the way in which we go about this is actually providing both debt and equity, when we make these investments. And the reason we do it is because this combination of the debt and equity in these individual transactions, and we'll learn more about this as we go along, produces really the assets that really give us the income that we need to distribute to our stockholders on a monthly basis, at the same time, creating the opportunity for capital gains, when we actually sell or exit these portfolio companies, which we do from time to time. So there are many other BDCs, and I'd just like to quickly highlight where we believe GAIN is different to a typical, what's called traditional credit- or debt-oriented BDC, and you might say what does that mean. Well, when we invest in operating companies, in other words, when we make an acquisition, when we make an investment in the company, we take a significant equity position in that company. This really differs from the other public BDCs that predominantly are focused on the debt investments, and those BDCs are the ones that are referred to generally as credit-oriented BDCs. So for example, if you look at the current portion of the equity to debt for the investments in our…

Very good, Dave. Good report. Michael, you gave a good report as well. And during the past quarter, we were able to give some really good accomplishments for shareholders, good originations, sold a portfolio company at a very strong return. And just to let again -- we say this, I think, often, we do have other portfolio of companies that are on the path of being positioned for sale, and one keeps saying they want to go public if the IPO market ever gets any better. So lots of activities in our portfolio. We did sell one investment, which resulted in over $18 million -- $18.6 million in realized gains, in addition to repaying the $23.7 million in debt and equity cost basis and about $2.8 million in other income that -- and that money was used to make the second investment that we talked about today, and that was the company's investment of $25.5 million in The Mountain. And if you haven't been to that website, please go, www.themountain.com. You'll look at that and you'll say, "Well, it looks -- it doesn't look too good." But those shirts in those ads are virtually indestructible. They can be washed and not torn to pieces. So go look at those. Children really love them, and some adults who may have a childish approach to life also love them as well. We believe that we can continue the success that we put in place now, going into the second quarter of our fiscal year, which is March 31, 2017. We'll keep looking at the outlook and monitoring the economy. There are some that say that we're again entering into a recession. This company is well positioned to handle a recession, should it occur. With regard to the current concerns, namely the Federal…

[Operator Instructions] And our first question comes from the line of Mickey Schleien with Ladenburg Thalmann.

Let me start by congratulating you on this sale of Acme. That's a very strong result and obviously a terrific thing for shareholders. I wanted to ask in relation to sales in general. The BDC sector has experienced several strong months as the risk-on trade has sort of developed, and I'm curious how that's impacting the bid-ask spread for other transactions you might be reviewing at this time?

Well, Dave, you can answer that better than I do in terms of what you're paying for deals that you're looking at these days.

Yes. Yes, so Mickey, not -- to be honest, in our world, GAIN's world, the size company, the type companies, the way in which we go about it, I really would tell you I don't think we've seen a lot of increased pressure necessarily. On that, multiples have tended to stay, for the ones we're looking at, relatively consistent, so to speak. Competition is about the same as it's been. That's really more around the quality of the opportunities that we're looking at. So maybe a slight kick-up in multiples, but not anything significant. So the real challenge is in just finding the better quality companies that suit our profile.

Dave, in the last couple of quarters, if I recall correctly, you mentioned the spread between what sellers are looking for and what buyers are willing to pay is pretty meaningful, and that's making it hard to find not only good quality deals but to find deals that can actually be closed. Is that still the case?

Yes, I think the spread is there. I think deals are getting done because, I think, as you alluded to, availability of capital is still pretty high. And starting to the extent that folks in the pure private equity world are looking to and will put more equity into a deal, they are able to raise the respective amount of leverage, so to speak, the debt side. So I'd say the spread is still pretty high. And again, I think the quality companies, the ones that have demonstrated reasonably good earnings, there's no major, say, uptick all of a sudden in earnings and believable earnings. I think those deals are getting done and they're getting done at multiples that are, in my opinion, a little bit on the higher side than we'd like to pay, but there are opportunities out there appropriate to the fact. We did The Mountain, and that's one where we believe we -- again, we stuck to our disciplines and paid a value that is reflective of what we think the upside can be for us.

Dave, with regard to The Mountain, you said that was a management buyout, correct?

Management was involved in the transaction, right.

Right. So do they own the first lien? Or who is ahead of you in the deal?

We own the first lien. We have a small working capital loan that's ahead of us, but that's, again, very typical of our transactions. The majority of the debt that's required to make the transaction is generally ours. And from time to time, we might have a commercial bank come in and take a revolver-type loan for working capital purposes.

I understand. And I see the Tread drew on its line of credit, but you marked it down given what's going on in the energy sector. Could you just give us an update? And that's not a large position, but given how important this sector is in general to BDCs, I'd certainly like any feedback you can provide us.

Yes, I can't give you a lot of feedback on the energy sector because, as you point out, we are not greatly in the energy sector. I mean, Tread happens to be related -- more related to mining, broadly defined mining industry. That company, I would say, its performance, frankly, relative to last quarter, actually, has slightly improved in terms of what it's seeing from a demand and a backlog perspective. So again, it's just sort of keeping its own. From an energy sector perspective, frankly, I'm not in a good position to give you any great insights there just based on our portfolio.

So I'm a little confused. You say Tread's performance improved but the market declined. Can you help me reconcile that? It was market [indiscernible].

Yes, well, and it's improving going forward, but it hasn't improved to the point where, given the methodology we use for our evaluation and the marks on the debt, nothing that's going to be significant. And as you point out, it's a pretty relatively small investment. It's still the one that's on nonaccrual. And so, it's like everything else, we can have companies sometimes that their earnings are starting to move in the right direction as we look out. As I mentioned, backlog does not necessarily reflect itself immediately in earnings, and therefore, immediately into the look-back that we use when we -- evaluations, again, remembering they're trailing numbers generally. So it may not quite always tie together at any one specific point in time.

Okay, I got it. And Just one sort of housekeeping question. If I'm reading the figures correctly, it looks like the dividend on Acme represented all of the fee income in this quarter. Is that correct?

So we need to be sure -- we say this. Our income, we look at obviously, when we say fee income, fee income comes from a number of different areas: one is, when we close a new transaction, we generate a fee directly in the transaction; also distributions from a portfolio company like Acme, where the structure might be a preferred with a preferred dividend. We take that income into -- or that dividend into income, and we call it other income. And we keep mentioning on our calls that the other income line for us is an important line. It's one that we manage carefully. So in this particular instance, a significant portion of the other income came from the dividend, which was paid out in cash based on the fact that the transaction occurred in this quarter.

And our next question comes from the line of Kyle Joseph with Jefferies.

I just wanted to get a little bit -- I know you guys don't provide specific earnings guidance, but for going forward, should we expect sort of results similar to the last few quarters in the sense where you have some quarters where you're a little under the dividend and then in the other quarters you have an uptick in other income, and then you cover the dividend substantially to the point where, on an annual basis, you guys do have dividend coverage? Is that fair to say?

Well, that certainly the goal is to be strong in that regard. We're getting big enough now, hopefully, if the market stand -- continues to get strength, that every a year we should be able to sell one company and make some capital gains. But that's the goal. It's not necessarily something you can put in your projections. Kyle, I wish we could help you more, but this is the business of being pretty lumpy, so it's pretty hard for us to give you more than I've just said.

Kyle, if I may add to that, though, I think in regards to the what you might be thinking about in terms of the monthly distributions out of operating NII, as you point out, the good news for this quarter is that we had $0.23 of NII per share. We paid out $0.1875. And as one looks forward, that's kind of thinking about where we're ahead. So we've got, I would say, a great start of the year. And as you pointed out, quarter-to-quarter may have slight ups and downs, depending on whether we get a deal closed exactly in a quarter, generate some fee income, et cetera. So I think the way I'd phrase that is we're off to a very good start on the operating income side of things and covering our dividend from operations, and as David Gladstone indicated, looking forward to further exits that will generate that additional opportunity for cap gains-type distributions.

And our next question comes from the line of Andy Stapp with Hilliard Lyons.

I am just wondering what you're seeing in terms of opportunities for new investments versus the quarter and a year ago?

Andy, this is Dave Dullum. I think it's about the same. I would say, we started the year pretty good with the deal that we closed. Looking out, our backlog and pipeline are starting -- I would say, improving. I think we had a little low near the end of the calendar year, and I think we're starting to see things trending upwards. So -- but I would say about the same.

[Operator Instructions] And our next session comes from the line of Mitchel Penn with Janney.

A quick question. The unrealized gains during the quarter seem to be in Galaxy, Head Country, and Jackrabbit. And the question I have is, do you have any flexibility -- I assume the gains reflect stronger EBITDA of those companies. Do you have any flexibility to get dividends from the companies that are growing their EBITDA quarter-to-quarter?

Sure. You have opportunities, but taking a dividend from them would, in essence, just pull money out of the company. So unless they are extremely strong, we don't really take the dividends out during their growth period. We are betting on the equity side of it. So we'd like to see it grow. But Dave, you want to comment on that?

No, I think that's right. Typically, Mitch, we do not generally take the dividends. The way we structure our deals, as you know, is a preferred stock, it's predominantly the equity piece unless the company has built up significant earnings and profits and it makes sense for them to pay it out. But generally, we are not going to take much in the way of a dividend.

[Operator Instructions] And I'm not showing any further questions at this time. I would now like to turn the call back over to Mr. David Gladstone for closing remarks.

Okay. Thank you, Chelsea, and thank you all for calling in. We appreciate those questions. I wish there were more questions, but I guess you'll have to hold it now until next quarter. Thanks again. That's the end of this call.

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