Gladstone Investment Corporation (GAINI) Q3 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Gladstone Investment Corporation's Third Quarter Earnings Ended December 31, 2018. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, David Gladstone. Sir, you may begin.

Thank you, Heather, and good morning to you all. This is David Gladstone, Chairman of Gladstone Investment and this is the quarterly earnings conference call for shareholders and analysts of Gladstone Investment, common stock traded on NASDAQ, trading symbol GAIN. And the preferred stocks are out there GAINM and GAINL. Thank you all for calling in. We're always happy to talk to our shareholders and potential shareholders and certainly our analysts. And we'd like to give you an update on the company and its investments, and provide a view of the current business environment, as well as something in the future. We wish to do this more often but this is the appointed time. Also you have an invitation to stop by and see us. We are here in McLean, Virginia, just outside of Washington, D.C. So stop by if you are in the area, and say hello. We’ll start out now with the General Counsel and Secretary, Michael LiCalsi. Michael?

Good morning everybody. Today's call may include forward-looking statements under the Securities Act of 1933, the Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties, although they are based on our current plans, which we believe to be reasonable. And many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all risk factors listed in our Forms 10-Q, 10-K and all the documents that we filed with the SEC, all of which can be found on our website www.gladstoneinvestment.com, or the SEC's website, which is www.sec.gov. And we undertake 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 past performance or market information is not a guarantee of any future results. We also ask you to take the opportunity to visit our website, once again, gladstoneinvestment.com, sign up for our e-mail notification service. You can also find us on Twitter, @GladstoneComps and on Facebook, keyword there is The Gladstone Companies. Today's call is simply an overview of our results December 31, 2018. So we ask you to review our press release and Form 10-Q, both of which were issued yesterday for more detailed information. With that I will turn the presentation over to Gladstone Investment's President, David Dullum. Dave?

Mike, thanks very much, and so good morning, all. I am pleased to report that we did actually have solid operating results this quarter, and that we increased our net asset value or NAV or book value to $12.53 per share, that was at 12/31/18. This compares to $12.30 per share at 9/30/18 and $10.85 per share at 3/31/18, so very nice progression in our NAV. The continuing increase in NAV really resulted in part from the improvement and the growth in the equity values of our buyout portfolio companies along with some successfully completed exits at very significant realized gains. So this quarter we also closed one new buyer investment and in line with our approach of increasing the size and the value of the existing portfolio companies, we made several add-on investments. We also continued our semiannual supplemental distributions program with the payment of $0.06 per common share in December 2018. We expect that a significant portion of distributions would be made from capital gains and to that end for calendar year 2018, our total distributions were about 18.2% from cap gains and about 81.8% from ordinary income. Now this compares to the distribution percentages of calendar 2017 where ordinary or cap gains is about 6.2% and ordinary income was 93.8%, now recognizing also that overall distribution increased as well. So as our CFO, Julia will discuss in a bit more detail our adjusted NII for the quarter ended December 31, 2018, was also higher than each of the last two quarters. Now this is important because as I've mentioned previously, while we do strive for our quarterly results to generally be relatively stable, there can be and generally is variability which is why we focus and operate the business based on the fiscal year end results which is March 31, in order to meet our distribution goals and to maximize our shareholder value. We reiterate that we believe our core business including new investments, exits, and underlying portfolio company values is indeed very strong. Now we have seen some continuing decline in BDC stock prices, including our own which was down to $9.32 at 12/31, and quarter-over-quarter which does affect of course the total return inclusive of dividends for the 12 months ended December 31. However, good news is we seem to share price bounce back after quarter-end and indeed yesterday closed about $11 a share and continue to believe that these results that we're providing the investor community with the support for the value proposition of the continued growth in distributions from the adjusted NII and realized capital gains, and also the upside of the equity component of our buyout business model is helping provide this again increased back in share price. The difference here on investment strategy and the business model I always try to stress that, is first invest in a sizeable portion of equity and a debt capital and buyouts where we are significant capital providers to the transaction. These companies have annual earnings before interest taxes depreciation, amortization or EBITDA, generally between $3 million and $20 million, and the structure we use for funding our buyouts again consist of a direct equity investment for significant ownership position in combination with a secured first or second lien debt. Again, this differentiates us from the traditional credit oriented BDCs and that the proportion of equity to debt in all portfolio could be around 25% equity, 75% debt at cost. However, any one new investment of course could be up to 30% of equity, 70% debt as compared to most other credit oriented BDC portfolios which typically are around 10% equity and 90% debt. So again we might vary deal-to-deal but generally it's going to work out around 25% equity, 75% debt. So what are the some of the practical and let's call it expected outcomes of our approach? We'd like to summarize somewhat as follows. First, the interest and success fees on the debt portion of our investments is what provides steady stream of income to pay and of course over time grow our monthly distributions and currently we're $0.82 per common share annually. As we've mentioned on prior calls, we will experience fluctuation in the month-the-month and quarter-to-quarter adjusted NII such as this quarter compared to last quarter. However, we manage the business again with a view to fiscal year end results and the goal of having our adjusted NII support and cover our annual distribution to shareholders other than any of these supplemental distributions that we have been making and hope to continue making. Secondly, with the significant equity positions that we own in each portfolio company, we do look for increasing value so that an increase in the equity provides cap gains and other income over the life of the investment or upon the exit. With these potential capital gains and other income made and we distributed to our stockholders in part as supplemental distributions. So as our portfolio matures, we should continue to realize gains from exits somewhat consistently. We've made four such planned supplemental distributions in the amount of $0.06 per share to common stockholders in June and December 2017, and again in June and December 2018. Third aspect of our plan or approach is that the differentiated investment approach of being a provider of a significant portion of the equity and most of the debt in our transactions gives us an advantage in that we do have some influence over the companies that we buy. Thus we not only limit the risk of our debt being refinanced but our involvement with management provide the interaction with the company similar to what you would find in a traditional private equity fund. This interaction gives us the ability to proactively work with our portfolio companies that do need assistance for some times turnaround action, management changes or other means of value creation. Again, with a large portfolio you will have issues with from time to time with individual portfolio companies and we are in a position to take the action and indeed we do that. So let's just take a quick look at our historical performances. We try to just keep us inline with where we've been and where we're going. So from March of 2014 through 12/31 of 2018, I will just give you a very quick update and then of course you can find more information in graphical form in our recorded presentations which are posted on the website. We have grown total assets from about $331 million to over $619 million in this period of time, this is at fair value. And as noted early, we had some significant exit successes this period so this caused a little decrease in the total assets quarter-over-quarter. The debt portion of our portfolio at cost is grown from about $279 million to about $457 million, which is supporting the growth in our regular monthly distributions per common share from roughly $0.66 in fiscal year 2014 to a run rate of $0.82 per share annually in October 2018 and at this point. This equity portion at cost over assets has grown from about $105 million to about $145 million, of course this includes exits that have come out of this. So the gross amount are actually higher. The NAV per share increased from $8.34 to $12.53 over the same period. We had 30 companies in our portfolio at 12/31/18. From inception in '05 through 12/31/18 we've exited 16 buyout companies. And these exits have generated over $185 million in net realized capital gains and at about $22.8 million at other income on the exits. So these exits achieved an aggregate cash and cash return on the equity portion of the investments of approximately 4.6x. Again, this is in line with our overall goal and objective of creating equity value while we continue to make new buyer investments. And again it is this equity growth and the exit activity that has allowed us to deliver on our objective of generating capital gains from the equity portion of our assets which we do look to continue into the future. So let's think about going forward and some of our exits we talk a lot about exits. So as we build our investment portfolio with new buyouts, we also will be managing the sale or the exit as we call it of the portfolio companies and this is consistent with the strategy of providing realized capital gains from the equity portion of our portfolio. So quick review year-to-date, this year we sold Drew Foam in June of 2018 with a gain of about $40 million, Logo Sportswear in November 2018 with a gain of about $13 million, Cambridge Sound in December 2018 with a gain of about $66 million and Star Seed in December 2018 with a gain of about $5 million, and again this is gains just on the equity portion of these investments that we've made. So the total gain from these exits was about $98 million, but we also partially offset them against a couple of things. One, we exited our investment in NDLI at a loss of about $4 million and we sold the equity investment in CCE for a loss of about $8 million. However, we did retain - are retaining and performing at an income producing debt investment. So that portfolio company still is existing and we're simply a [dead] holder at this point. Subsequent to 12/31/18, we did restructure two of our [announced] SOG and we did realize a loss of about $10 million. Now, this was a conscientious action on our part allowing us to take advantage of some tax planning frankly and to preserve shareholder value in SOG, and we really do anticipate a recovery. And again it's one of those where we had to take action, we are taking action and the Company fundamentally is in a good position, we have to be a little patient with where we're going with this one. So, in all we will be guided by market conditions when you assess whether we want to sell the business, look at the risk-return of continuing or hold the investment versus exiting and also remaining sensitive to our portfolio of assets which is necessary to continue producing the income from monthly distributions. Now how we're doing on new buyout, let see. So developing new buyout activities continues is already heights in significant part of our daily activities what we do every day. They're actively calling on the various sources, independent sponsors, middle-market investment bankers and so on to try to help create these new buyer opportunities. And generally of course our investments are partnering with the management teams when we do buy a business. We do believe that our strict adherence investment fundamentals and our thorough due diligence process has enabled us to provide shareholder returns in both our consistent and regular monthly distributions, as well as the supplemental distributions that we have been making. Now at any point in time we are reviewing and conducting due diligence on a number of new potential investments with an eye on achieving our new acquisition goals. In addition though to new standalone acquisitions, we're actively pursuing accretive add-on investments for some of our existing portfolio companies. Of course if we do this, it allows for building of assets while accelerating the value creation of the existing companies. At this point and year-to-date we invested about $29 million in Bassett Creek which is a new buyout deal that was in April, $29 million in Educators Resources which is also new buyout investment in November. And we made a $15 million incremental investment in J. R. Hobbs, and it could make an add-on acquisition that was in October. I will also mention that certainly Bassett Creek is one of those platforms where we would look to be able to continue making incremental investment as it continues to grow and we feel valued at there. And then we also had another roughly $11 million in various add-ons to some of our existing portfolio companies. So all in all we still really though are in a buyout environment where the competition for new investments is high versus prices that are being paid is still pretty high and this does make it challenging for us to close new investments because we are really conservative in our value approach and also what our expected financial return certain on the equity needs to be. So while this might lead to an appearance of a low rate of new investment production at any point in time, it's important to know that this is what we do again every day, and we look at it on an annual basis and we continue trying to strive and build value in our portfolio in both income and equity to satisfy your distribution goals. So result of that we're not going to be a volume driven investment firm but we will try to achieve our goals with good solid new acquisitions. We will continue to target equity investments providing 2x to 3x cash-on-cash equity return. As I mentioned earlier, we've had over 4x cash-on-cash equity return, and the dead investments which do make generally are secured and primarily first lien loans typically are carrying a cash yield in the low teens and these debt cash returns due balance the equity portfolio for our investment which produces this blended current cash yield that we need to support our stockholder distribution expectations. Our investment focus hasn't really changed, it continues to basically be in companies as I mentioned earlier, lower middle market some areas are such as light specialty manufacturing, especially consumer products and services and so on. So all in all going forward, we will continue executing our plan. We’re going to be adding accretive investments which will both grow the income generating assets of our portfolio and the equity portion of our assets while we position the portfolio for potential exits hopefully and thereby maximizing distributions to shareholders. We do anticipating paying semiannual supplemental distributions as a portfolio continues to mature and we are able to manage exits and realize additional capital gains. These distributions are generally expected to be made from undistributed net capital gains and undistributed net investment income. We and our Board of Directors will evaluate the ability to make additional supplemental distributions including the amount and the timing of such semiannual, as well as now potentially redeem distributions of capital gains to shareholders and we will be doing this as we continue with our fundamental strategy. So all in all a good quarter, we feel good about where we are headed and what we’re looking at in the future. And I'm now going to turn it over to Julia Ryan, our CFO and she can give some more detail on the actual financial performance. Julia?

Thanks Dave, and good morning everyone. Looking at the balance sheet as of December 31 we had over $619 million in total assets which included $607 million in investments. And as you all heard Dave discussed earlier, we had some exciting successes this quarter which caused the apparent decline in investments quarter-over-quarter. Our liabilities consisted primarily of roughly $50 million in borrowings outstanding in our line of credit which was lower compared to prior quarter again as a result of paydowns that perceived from investment exits. We also had the pre-existing $132 million in term preferred stock. Our net assets totaled about $411 million with $12.53 per share as of the end of this quarter which is an increase of $0.23 compared to last quarter and that is primarily a result of net realized gains which were partially offset by unrealized depreciation. As for operating results, we ended the December quarter with NII of 6 million which compared to a net investment loss of 4 million in the prior quarter. And let's look at the factors driving those results. So interest income increased about $0.6 million this quarter which was largely due to additional debt investments, as well the timing of exits later in the quarter. Other income increased $1.3 million given the variable nature and timing of dividend and success fee income. Then looking at expenses they decreased by $8.1 million in the current quarter which was driven one by lower tax and bad debt expenses. As I discussed last quarter, we incurred about $1.1 million of bad debt expenses which were primarily due to placing one, investment on nonaccrual last quarter. And then two higher credits from the advisor this quarter and three, a $5 million decrease of the capital gains based incentive fees. These decreases were partially offset by a $2 million increase in the income-based incentive fee which was a result of the higher debt investment income and partially offset by an increase in net assets which drives the hurdle to determine the income base incentive fee. Now looking at the details beyond the capital gains-based incentive fee, which was $2.1 million this quarter and was the result of the realized gains which were partially offset by unrealized depreciation. Last quarter's accrual was $7.1 million and I know I have said this a million times but the capital gains-based incentive fee is required to be accrued under U.S. GAAP but is not currently due under our investment advisory agreement which provides that a capital gains-based incentive fee is determined and paid annually with respect to realized capital gains, but not unrealized appreciation. If such realized capital gains exceed realized losses and unrealized depreciation. Under GAAP however, a capital gains-based incentive fee is accrued if realized capital gains plus unrealized appreciation so that’s the differentiator here exceed the sum of realized capital losses and unrealized depreciation. So it’s as if you were liquidating our balance sheet today. And when adjust our GAAP net investment income to exclude the capital gains-based incentive fee accrual. Our adjusted NII per weighted-average common share was roughly $0.25 this quarter compared to $0.10 in the prior quarter. And we believe that adjusted net investment income and continues to be a useful and representative indicator of operations exclusive of the capital gains-based incentive fee as the NII does not include the realized and unrealized investment activity that get raised to the capital gains-based incentive fee. So coming full-circle current and prior period adjusted net investment income again covered our current quarter and annual distributions and not doing so by a significant margin. While our balance sheet at 12/31 may show a line item that called over-distributed net investment income to the tune of almost $10 million that is a direct result of the capital gains-based incentive fee accrual of roughly $20 million. So as of this quarter end for our balance sheet undistributed or over-distributed income and net realized gains totaled almost $77 million or $2.34 per common share. When removing the $20 million of cap gains-based incentive fee accrual the amounts would be roughly $97 million or almost $3 per common share. This is the amount that would be available for distribution to shareholders in future periods in either cash or as redeem distribution. So looking at the realized and gains and unrealized gains for this period which again you’ve looked at and thought that they were quite significant given all the exits we recognized almost $77 million of realized gains and the largest portion of that was Cambridge which included about $66 million of such gains. But again there were others like exits of Logo and Star Seed that were very successful and were partially offset by those losses that Dave mentioned. We also recorded net unrealized depreciation of investments of about $66 million and that consisted significantly by that I mean $59 million of previously recorded net unrealized appreciation related to those exits. The remainder or about $7 million of unrealized depreciation relates to the existing portfolio and the depreciation of those assets was predominantly due to a decline in operating performance such as EBITDA of certain of those portfolio companies. And all in all the fair value to cost was still over 100% this quarter and we continue to use an external third-party valuation specialist to provide additional data points regarding market comparables and other information related to certain of our more significant equity investments. We continue to have four loans that are on nonaccrual and they represent about 7.5% of the fair value of our total debt investments and we continue to work with those companies to improve operating performance, liquidity and value. Our portfolio's approximate allocation between debt and equity securities were 76% to 24% equity at cost as of the December 31st. The debt portfolio is well positioned for any interest rate increases was about 97% of our loans having variable rates with a minimum of float and the remaining 3% having fixed rates. The weighted average cash yield on interest-bearing debt this quarter was 13% and of course yield continues to exclude success fees. At the end of December, we had unrecognized contractual success fees totaling over $32 million or roughly $0.99 per common share. There is no guarantee that we’ll be able to collect these success fees or have any control over timing and collection. From a credit priority standpoint we have 100% of our loans being secured 78% of which having have a first lien priority and 22% having a second lien priority all measured at cost. And that covers my part today, and I'll turn it back over to David Gladstone.

All right Julia, Dave, Michael lot of good information to our shareholders and that presentation that you both - all three made and the 10-Q that filed yesterday should bring everyone up-to-date at where we are in this company. The team has reported some great accomplishments this quarter including significant investment exits were realized gains and new buyout investment and a number of add-on transactions all bringing the company an increase in net investment income. The team is in a good position to continue these successes going forward in the fourth quarter which will end March 31, 2019. The economy is [indiscernible] a little bit in the quarter ending December 31, 2018 and since then I believe the economy is getting stronger, but we have no way of knowing what the future is going to bring. So the team is being careful with their investment and to counter the unforeseen we are seeking to build a strong balance sheet paying dividends is one way of our primary goals and a strong balance sheet certainly adds to being able to achieve that goal. Now that the administration, the government is delivering on changes to the tax code and continues to reduce regulations of businesses. I think the U.S. middle market business like the ones we financed is going to have a strong performance in 2019. The middle market is less impacted by the questions about tariffs, but nonetheless we hope that matters can be settled soon in that area so all businesses get stronger. We are excited about the new business environment in the U.S. and U.S. middle market is third largest economy in the world and that's the market that we love. We've been in that since founding this fund and the middle market is booming and this company will benefit from the strengths of the middle market. On the distribution front, our Board of Directors declared monthly distributions to our common stockholders of $0.068 per share for each of the months of January, February and March in 2019, at an annual run rate of $0.82 per share per year. Through the date of this call we've made 163 sequential monthly cash distributions to our common stockholders and addition have made these four of these supplemental distributions as well. As of December 31, 2018, the Company has distributed total of $244 million or about $9.91 per share for common stockholders based on the number of shares outstanding at the time the payments of these distributions were made. The Company continues to be a solid dividend pay and I don't see anything in the future that's going to stop us from continuing to do that. At the current distribution rate and the common stock with the common stock price at $11 yesterday's close, the yield is currently on the regular distributions about 7.45%. And if we look at the future and make the assumption that the Company will pay the two supplemental distributions of $0.06 per share and as it did last year, then the annual payout is $0.94 and that's about 8.5% yield. Our Board will look at the payments of supplemental distributions for the calendar 2019 at the regular Board meeting in April. The team is trying hard to increase the payouts. Please note there's no guarantee that the regular or even the supplementals will be paid, but that is the central role of this Company. And the most of you know that a regulated investment company that is our Company, in simple terms has to distribute 90% of its earnings. For the current calendar year the estimated capital gains portion of the distribution is 19%. The two series of preferred stocks for those of you who like steady dividend payers or about 6.3% in yield each of the $25 preferreds are trading at somewhere between $0.23 and $0.30, above their $0.25, so good place to park some money if that's what you need to do. In summary, I believe Gladstone Investment is attractive investment for investors seeking continuous monthly distributions and also supplemental distribution from potential capital gains and other income. Team hopes to continue to show you a strong return on investment on this front, but now let's stop and have Heather come back on and we'll have some questions from analysts and friends of the Company.

[Operator Instructions] And your first question comes from Kyle Joseph with Jefferies. Your line is open.

David you mentioned, you talked a little bit about how broader market volatility picked up towards the end of the quarter, two questions related to that. First, in terms of your Company performance how is any impact on growth and outlooks for growth you've seen recently and then any impact in terms of competition from the increased market volatility?

David Dullum, why don't you take that question.

So Kyle, I want to be sure I understand when you say market volatility you mean stock, common stock action?

No, I'm talking about broader equity indices, high yield market.

Okay, no problem. So to be honest it has - I don't think it really and if I suggested more volatility this quarter than before I not really, this is in terms of looking at the new deals that we look at and the opportunities that we look at, I'd say it's about the same. There's looking like a potential moderation a bit in overall valuation partially as a result of I think the amount of leverage that are more traditional private equity firm can now get or put on a deal. I think we're starting to see a little bit of a change in that regard but overall it's - I'd say is competitive this past quarter, it's competitive this current quarter as it's been the last say 12 months. And what we're doing is just keeping - trying to find those companies that we can buy in 6x to maybe 7x EBITDA which works our model and still has a sort of growth that you need to get the kind of return. So all in all I'd say it's just about the same, just continuing, just slogging it out day-in and day-out. We're working on a number of opportunities. We are submitting the respective number of indications of interest that we put out ending up with one or two that frankly are the companies that we can buy. So I don't know if that helps to answer Kyle but I'd say we're positioned about where we've been and I'm not worried about where we are, we just have to keep being consistent with our approach.

And Kyle, to add on to that Kyle - it's David Gladstone. The market place has changed completely in the last 15 years. It used to be that we competed with banks and other lending institutions like banks. Now maybe the banks are making 10% of the loans in the middle market place, the government places like the SBA is maybe making 1%. So the rest of the marketplace is really being covered today by private lenders like us, private meaning not banks and not government. So the marketplace is more volatile because of that. It's a different world today and people will raise a little money and do some crazy deals and we might lose out to them but better to have lost out to them than to do something that was really risky. So I think you're going to see more volatility in the marketplace but we're going to stay steady and continue to do what we do best and that is underwriting businesses. Go ahead, Kyle.

Obviously your leverage from a debt-to-equity perspective came down given the elevated repayments. But can you guys refresh us if you have any sort of target range and if that's changed at all given some of the changes we're seeing in the BDC industry regarding leverage?

Julia, why don't you answer that? The answer is already Dave jumped on with a no, but Julia, any comment?

Kyle, nothing has really changed in our approach to leverage as it has for. If you recall our Board did approve our "Asset Coverage" to be reduced from 200% to 150%, which would go into effect this April. But as you noted, pay downs has been significant, so we're nowhere close to those metrics.

And Kyle, what I would add to that, I got to keep in mind a little bit relating to the earlier question, and answers we gave you. Keep in mind that we consider ourselves more private equity oriented than as a traditional lender. So we're driven more by opportunities in buying companies that provides a sort of enterprise value that we're looking for. So the fact that two things; one, as David Gladstone mentioned, there is certainly more volatility potentially in the debt side of markets. But where we struggle is against the private equity guys that are able to get some of that leverage and then pay up for companies that we think are overvalued, we're not going to go there. So there's that part but then from a leverage perspective again we're not looking to increase our leverage even with the changes in the regulation so to speak to then put a marginal, let's say loan on the books, that's not our business right. So the leverage we will utilize, leverage as necessary I don't think we're going to as Julia said change our policies around that and get any more highly levered, that does not lend itself to the sort of business we're in. What we have to just keep doing is finding good values, enterprise values, the companies we buy and those are the ones that we will leverage as you know within reason so that we can know those companies withstand any downturns and so on and so forth.

[Operator Instructions] Your next question comes from Mickey Schlein with Ladenburg. Your line is open.

Just wanted to start with congratulating you on the Cambridge Sound exit, obviously a very good result. Curious what caused that to be sold for so much more than its previous fair value mark? I'm just interested in how the market is behaving if you can give us some insight?

Mickey, thank you for the comment. And I think Julia correct me on this but I think relative to where we had a value in the prior quarter, we were relatively close in terms of the value that we got for it because we've been working on it frankly obviously for a while which we could not disclose in terms of what we saw indications of values. So having said that, this Company is pretty representative I would say of the good quality businesses that are being sold in the middle market. And as David said earlier, middle market is pretty decent shape all around pretty, you know pretty robust and the multiple that we got for this company was certainly at the higher end of a range in part because it could all of the criteria of good quality management had good growth - we had good growth since we acquired it of course we bought it at a good value ourselves few years ago about three years ago. And just represent of a good quality asset that the folks out there that want to put money to work are willing to pay sensible kind of multiple for us. So we're very pleased with it, and again we sold it because in part our work overall with the management team we all were in agreement on doing, we didn't force and exit we were happy to have kept the company frankly, but it was a good timing for all the participants.

I'm not sure investors are aware that the external manager on occasion provide some very meaningful credits to the base management fee for advisory services and those are pretty large this quarter. Can you give us a little bit of an idea or a breakdown of what went into that and sort of how that process works?

Julia why don't you take that.

So Mickey you hit the nail on the head here the advisor obviously were externally managed and as the advisor receives fees for incremental advisory services provided to our portfolio companies, those payments from the portfolio company to the advisor are generally credited back to the fund meaning a direct offset to what we would otherwise pay the advisory and management fees. So again they can be very variable it really depends on timing of those payments and what the advisor provided in terms of services. So that’s probably the best explanation I can give.

Just I could follow up Julia I understand the mechanics, what I'm curious about is was this the advisor helping for example negotiate the Cambridge sale or was it more advice on the four nonaccruals or what is the nature of the work that the external advisor is doing?

That could be part of it yes so financing transactions are part of those types of services.

Couple of more questions if I can. Dave how do you feel about the size and quality of your pipeline today?

I would say on a scale of 1 to 10, Mickey 10 is really robust and so on I’d say it’s probably about 7. The pipeline is pretty good as I said - mentioned day-in and day-out that’s we focus on obviously beyond when we have to work on exits or work on other things with existing portfolio companies. But right now I'm not I feel we’re in good shape, I think we again as I keep mentioning these things are so to speak. You can't predict them say every quarter we are going to have one new investment, but because of the build up in the pipeline, the activity levels I think we have a reasonable shot generally at our overall objectives and goals for new acquisitions on a sort of an annual basis so, again 7 out of a 10, if you want to think that way in my mind.

And on the flipside Dave are you - to what extent can you give us some insight as to whether you expect some very meaningful exits over the course of the next few quarters?

Sure. As I mentioned in my first part of my talk it is now something that we’ll continue to look at, continuing to think through with the management of some of these various companies. And again based on either timing with the company that as you sort of alluded to a little bit in a way the market from an exit perspective with multiples is pretty good if you’re on the sell-side and we do want to think about our ability going forward not just the next six, nine, 12 months but going forward as we build our portfolio, think about exits that we can start managing those. And I think we’re getting better at that and more in a position now to be able to do that so we can try to create consistent - somewhat consistent incremental either distributions or gains based on the cap gains from exits. So short answer is, we’ll keep working at it. We’re working on it and we think we’ll see some new stuff coming over the next year or so.

Wanted to ask you also about PSI, I think in the last earnings call you were somewhat optimistic about the outlook for the company, but you markdown the debt this quarter fairly meaningfully which would imply there is still problems. Can you qualitatively give us an update on the company?

Sure. It actually that started out this year pretty well. I think - I'm still optimistic about the business it’s still overall a pretty good size business with very significant EBITDA. The valuations obviously is a result of overall call it decline in EBITDA just because of some - issues internally we've had to manage with the business. So yes we decided and it made sense just given valuations where we were to do what we did, but I feel pretty good about the business fundamentally. And some of the things we have been working on over the last say quarter in terms of management issues et cetera. And so again short answer I feel pretty decent about it at this point.

And in terms of SOG you restructured it I guess last month, wasn't clear though whether that will be put back on accrual or is that still going to take some time?

Actually I would say that will take some time. Again, it's one where we got good fundamentals for variety of reasons we’ll get into here. We’ve made changes done some things that we think are right and I think we know just have to again be patient with that one looking forward, but it's not going to happen overnight.

And appreciate your time this morning. I just have one sort of housekeeping questions. I think there was a reversal for affiliated dividends in the quarter, I'm just curious how that works and what caused that?

Julia?

Mickey that sort of thing happens as estimate change as you know the recording of dividend income is driven by tax estimate so we use the best estimates we have at the time that we receive a payment as to whether that payment constitutes dividend income or should be recorded in a different manner and this is one of those reversals that is a result of a change in estimate that gets cleaned up as we get better information.

Okay Julia. Thank you for that. That's it for me this morning, and congratulations on a solid quarter.

I am showing no further questions at this time. I’d like to turn to the call back over to David Gladstone for closing remarks.

All right, thank you all for calling in and listening and we'll see you next quarter. 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 all may disconnect. Everyone have a wonderful day.