Gladstone Investment Corporation (GAINI) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Gladstone Investment Corporation's First Quarter and Year Ended June 30, 2020, Earnings Call and Webcast. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, David Gladstone. Please go ahead.

All right. Thank you, Sara. Nice introduction. This is David Gladstone, the Chairman and this is the first quarter ending for 2021, our year-ended March 31. In this conference call for the analysts and the shareholders of Gladstone Investment NASDAQ under the trading symbol GAIN, G-A-I-N that we are always trying to figure some capital gains and GAINM and GAINL are our preferred stocks. So we've got some stocks out there and I hope one of those fits what you're looking for. Thank you all for calling in today. We're always happy to provide some information about our company to the shareholders and analysts and provide a view of current business environment. Two goals in the call, first, is to understand what happened in the past quarter or past year even; and also best we can do not easy these days what's going on in the future for us. We'll start out with our General Counsel and Secretary, Michael LiCalsi. Michael, go ahead?

Thanks, David, and good morning, everybody. Today's call may include forward-looking statements under the Securities Act of 1933 and Securities Exchange Act of 1934 including note regarding future performance. These forward-looking statements involve certain risks and uncertainties and other factors, even though they're based on current plans, which we believe to be reasonable. The main factors make actual results to be materially different than future results expressed or implied by these forward-looking statements, including all Risk Factors listed on our Forms 10-Q, 10-K, and other documents that we file with the SEC. These can all be found on our website, which is www.gladstoneinvestment.com, or the SEC's website at sec.gov. Now 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 any past performance or market information is no guarantee of future results. Please visit our website, once again, www.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. We remind everybody today's call is simply an overview of our results through June 30, 2020. So we ask you to review our press release and Form 10-Q, both of which were issued yesterday for more detailed information. One last matter, we want to remind everybody to vote their shares whether you own preferred shares or common shares in the company, both for our upcoming Annual Shareholders Meeting which is going to take place on August 6, which is next Thursday at 11 A.M. It's very important that everyone cast their vote, so that we can at least ensure that a quorum is met at the meeting. The easiest way to vote is to contact our proxy solicitor directly as Georgeson LLC and their phone number is (800) 903-2897. Once again (800) 903-2897. If you call them you can quickly cast your vote over the phone. It takes about two minutes. Now I'll turn the presentation over to David Dullum, President of Gladstone Investment. Dave?

Great. Thanks, Mike, and good morning, everyone. Just reflecting on the last report, which we gave not all that many months ago for our fiscal year-end March, and it seems like it's been quite a long time in part because obviously with everything going on with COVID, and we've all had to deal with in lots of different ways. In our case, Gladstone Investment as we go through this, I'll hopefully leave you all with a sense that one we, which, you all know, we came off of actually probably one of our best years in fiscal 2020 ending March 20. So that helped us with a good head of steam going into this fiscal year. But of course, we've all have to deal with the reality of where we've been. And so we'll touch on that and let you know what we're doing to ensure that our company keeps doing all the right things going forward and getting through this. And as a result of that, we didn't know what to expect obviously right in the beginning of going into COVID. As it turned out, we were able to end the quarter at June 30 and with reporting adjusted net investment income of $0.11 per share. And while this was against $0.19 per share for the quarter ended 3/20 -- 3/31 sorry, and we'll explain a bit more about that. We feel pretty good about that under the circumstances, and more importantly, as we move through the year, where we're headed. On a comparative basis, actually the total portfolio income which is primarily interest income on our debt investments was actually relatively stable quarter-to-quarter which is a good thing and is a testament to the foundation of the assets that we own both the debt and the equity. I really think that's important to understand and we'll hear more about that going forward. So just keep that in mind. Our primary operating focus obviously has been since we got into this and continues to be clearly closely monitoring our portfolio companies. The emphasis is on the cash flow and the working capital dynamic, if you will, of each of our portfolio companies. It really is important in this time to stress that and we keep working with our companies to get through that. Most of our companies happily I can say have performed pretty well, including some of them which have actually exceeded our expectations when we were going into this. So those where we've had some drop-off or decline really are all a function clearly of the COVID activity and what's going on in the economy in general, and frankly, not so much around the underlying operations of those companies. To-date, as a result of that, we've not necessarily needed to provide very much additional financial support, which is a good thing. But even if we needed to, and if we did, we do have sufficient liquidity for that purpose. As I mentioned, obviously in our fiscal year-end report back a number of months ago, we had exited a few of our portfolio companies last year, which generated very significant liquidity for us through the net realized capital gains and obviously the repayment of our debt securities. So we ended a really strong, again the year last year, not just the calendar 2019, but also our fiscal year, March 2020, and that's put us in good position to support our portfolio companies going forward. We also are able and will continue to grow and rebuild the portfolio. And in this regard, in July, it was just after our quarter end at 6/30, we actually did make a new buyout investment for about $47 million, which was a combination of equity and debt. And obviously, that $47 million a pretty significant part of that is the debt security, which is a good thing because that does generate obviously interest income for us. Our NAV, which is book value, for the 6/30 period was $10.87 per share and that compares to $11.17 at the 3/31/20 quarter-end, so a decrease of $0.30 per share. But again, that was a result in part obviously of some of our companies that were affected and some more than others by a decline, obviously initially in operating earnings, and as we valued them, they had to come down in value fundamentally, as a result, actually of the COVID activity and not underlying operating. We had a number of our companies that are really good businesses that were in sectors that were directly impacted by COVID and obviously their earnings were off relatively speaking and that's reflected in these valuations. This was again the NAV for 6/30 compared to what it was at 3/31/20. So in terms of the pandemic and the actions that we have taken, just follow-on the report that we gave our actions early on, we were continuing to actively monitor the potential issues in the portfolio. We're proactively engaged with their management teams to providing the support as necessary. Our Managing Directors, our team who work very closely with each portfolio company, and we're focused on things such as re-forecasting the potential for temporary capital needs that any of these companies might have. Obviously, there's a fair amount of stuff that goes into the legal resources, if you will, around HR-related in great part because people are coming back to work. And each company has to be responsible for employees and being sure that we're doing all the right things. So the good news there is we are seeing activity with companies and people coming back to work. And again, we've not had to provide at this point, much support, either through additional investments or really accommodation on interest obligations, and that's something we're going to keep striving for, and working very hard on. The aggregate portfolio values from 12/31/19 to 3/31/20 depreciated about 8%, which I mentioned before, and that was primarily again, due to the effect of the pandemic, obviously affecting not only the operations of portfolio companies, but market multiples. But to this quarter again fortunately, we've seen stabilization in these values. And we had essentially only about a 1% decline in fair values from the 3/31 quarter to the 6/30 quarter. So I'm really encouraged by that. And obviously, we're seeing some companies that are slightly more affected than others, again, based on their sector, and also the geographic location of those companies. So depending on the duration of the pandemic and the timing of an economic recovery, it is possible you might experience a bit further individual portfolio company devaluation, same time we might see as well improvement in other, so this is a balancing act, obviously. And again, I want to reemphasize that we work with our companies very carefully and that's why in times like these as we keep saying, the type of our approach being an equity and debt provider and majority owner of most of these companies that really provides us this advantage, that gives us a lot more flexibility whether we have to financially do some structuring to help with a cash flow management of the companies in the portfolio, preservation of value, and so on. And we'll talk a bit more about companies that are on non-accrual, we've only had one that has to go on non-accrual as a function of really COVID activity. And you will hear a little bit more about that. But I want to again, leave us with the thought that those that are on non-accrual are good companies, we continue working, we've made some progress with them, and we expect and hope to see some of them as we go through the yesteryears come back off of non-accrual. So that's what we're working on. In terms of our outlook in general, our focus obviously is continuing just close involvement with the portfolio companies. We also actively continue to review potential new acquisitions. The challenge obviously continues to be how you pursue quality due diligence and determine as I would say, the rationale views on what the right purchase value may be and obviously our expected returns, we're going to maintain and stick with our philosophy of the kinds of returns that we look for. And this might give us an opportunity as the markets we're seeing having a tendency to come back to some rationalization in valuations and that that's a good thing for us. Obviously, we're trying to conduct a bulk of this activity on due diligence in what is now become as would call it a Zoom type environment. That's an interesting experience. But we're doing that and actually, the new acquisition we made right in the beginning of July, we were able to get that closed by effectively using this Zoom capability. So that's where we're going. We're seeing some pickup in deal flow and we keep working on that part beyond just the one of preservation of our existing portfolio. All in all, I think it's in a really good position and we just have to be a little patient as we pull-through over the next nine months. So I'm going to stop there and turn it over to Julia Ryan, our CFO. Julia?

Thanks, Dave. Let me start with a summary of the funds operating performance for the past quarter. We generated NII of $4.2 million as compared to NII of $14.8 million in the prior quarter. And that's the result of investment income declining by approximately $1.3 million, which is due to placing the one investment on nonaccrual during the current quarter. And as you know, our investment in Horizon is travel dependent and has been significantly affected by COVID shutdowns and declines in travel. We're very hopeful that the business will return to stable levels when we learn how to manage the virus a little bit better. Net expenses totaled $6.5 million in the current quarter compared to an expense reversal of $2.8 million in the prior quarter, or a change of $9.3 million, which was primarily driven by an $8.4 million reversal of previously accrued capital gains-based incentive fees due to the net impact of realized and unrealized gains and losses in the prior quarter, and that compares -- and a $1 million decrease in credits to expenses. Absent these two factors expenses were relatively consistent and only slightly increased primarily due to tax expense and stockholder expenses. When adjusted net investment income to exclude the capital gains-based incentive fee reversal, adjusted net investment income for weighted average common share was $0.11 in the current quarter. We continue to believe that this metric is a useful and representative indicator of operations exclusive of any capital gains-based incentive fee as net investment income does not include the realized or unrealized investment activity associated with this fee. And as Dave noted above, our balance sheet and liquidity remain strong as of June 30. We had availability under our line of credit of about $104 million as of 6/30/20. We also raised about $2.3 million in net proceeds under our new series ETPS ATM, and about $1.7 million in net proceeds under our common stock ATM, and all of those were above NAV. While NAV has declined as a result of unrealized depreciation and lower net investment income as compared to distribution paid this quarter, which is primarily a result of the $0.09 supplemental distribution, distributable income to shareholders remains solid. And on a book basis, undistributed net investment income combined with net realized gains that have not yet been distributed totaled almost $7 million or about $0.20 per common share. This amount is already net of the $38 million in distribution declared as of March 31, 2020 and is also reduced by the book accrual of any potential capital gains-based incentive fee accrued under GAAP and that number is roughly $6.6 million. All else equals the $0.20 per common share are available for distribution to shareholders in future periods even if the entire capital gains-based incentive fee accrual were to be paid. And with that in mind, and as previously announced, in July, our board of directors maintained a current monthly distribution run rate of $0.84 per year, which represents a current yield of about 8.4%, excluding any supplemental distributions. And this covers my part of today's call, back to you, David.

Okay, thank you, Dave, Julia, Michael. And it's good information for our shareholders and that presentation combined with the 10-Q filed yesterday should really bring everybody up to-date on where we've been and give you an indication of where we think we can go. We believe the team here is in a good position to continue the success of the fiscal year ending March 31, 2021, and manage the portfolio through the current time of uncertainty. I believe that Gladstone Investment is an attractive investment for distributions that is shareholders who like distributions and regular distributions and hopefully some capital gains as time goes along. I think this is a great company for doing that. The general economy of course is in recession today caused by the government's reaction to these Chinese viruses that we have floating around. What makes it so difficult here in trying to give you an indication of where we're going is that we have no clue where the government is going to go and what they're going to do next with regard to the COVID-19 virus that's out there. There is no place to hide in the marketplace today, if you go into government securities, you're going to get nothing as return. So I hope some of you will use our stock as a place to park some money and pick-up some good cash while you're waiting. Anyway, at this point in time, Sara, would you come on and we'll have some questions from our analysts and shareholders at this time.

Thank you. [Operator Instructions]. Our first question comes from the line of Mickey Schleien with Ladenburg Thalmann. Your line is now open.

Yes, good morning everyone. Hope you're doing well up there. Several questions this morning. My first is with the dislocation in the market since COVID began and the obvious impact on spreads, could you give us a sense of the terms you received on Mason West?

Sure, Mickey, it's Dave. I would say, the answer is, and as I try to generally remind ourselves, I'm not as sensitive to spreads per se. Remembering, we're buying companies, we're combining our debt and our equity. So we look at total return on our total assets, both the equity and the debt. And then we obviously look at what we're expecting for our capital gains on our equity which we've consistently now been able to show -- excuse me, based on our results, we've been over 3X, cash-on-cash on the equity components. And our debt yields tend to be on average somewhere nearly but consistent again maintaining the 12% on the debt portion. So without going into the specific details on that deal, just you know, our -- we would normally price and put our combined equity and debt in any deal to give us a aggregate yield at any point in time somewhere in high 9% stuff to 10% effective yield on those dollars and that that deal pretty much was consistent with that.

Okay, thank you for that, David. That's helpful. And Mason West was a significant investment subsequent to the quarter. I just want to confirm you haven't had any material exits subsequent to the quarter; is that correct?

Correct. We had lots of exits last year, but not so far this quarter, correct.

Right, right. Well, there are some businesses that folks are obviously very interested in acquiring in the pandemic, and I was just curious. So moving on to Horizon facilities that was marked at par at March and then again at par at June, but it's now on non-accrual. So can you just walkthrough what's just going on there, why is it on nonaccrual and what is the outlook for the company?

Julia do you want to tackle a part of that and I can add some color to it.

Sure. Mickey, this Horizon is heavily focused or dependent upon the travel industry, they provide rental car services without going into too much detail. So as travel declines, so will it's business in general. And now we've seen some pick-ups here recently. And that's my earlier comment as to, as far as learning how to deal with the virus will significantly impact how people look at travel. And as that resumes, our investment should return to normal status.

So did they miss an interest payment or what would cause the non-accrual?

Yes. So normally, we pay something nonaccrual if we either don't believe they will continue to pay or if they already have not started or started not paying. Those are the two criteria and it's generally a three-month type concept.

Okay. So the valuation reflects your optimism that in the not too distant future things will "sort of return back to normal" for Horizon?

Correct.

Yes, I would add to that, Mickey. The good news for this company, their management team is superb, and they did all the right things until again, I referenced earlier preservation of capital in similar companies where we have the flexibility. In this example, we would not put the pressure on them to necessarily pay interest when they've had obviously a relatively significant, call it decline in their operations, all related to COVID. But in the meantime, they've done a heck of a good job in actually starting to come back and so on. We don't want to get ahead of ourselves, but it's certainly a business that longer-term and even near-term is going to be a good one for us. So this helps them, it happens to be one where we actually have a third-party lender in the deal providing working capital financing and actually they've stayed with them and that's been a really good thing. So yes, it's -- I certainly believe it's a temporary situation and the valuation I think does reflect as you say it's not optimism, so in reality about where they're going.

Okay. Dave, besides Horizon, what other investments caused the decline in your average risk rating? I know you don't break it out by quartile or anything like that. But it did decline. Was there anything else meaningfully underperforming that caused that decline?

Not anything, Mickey. I mean that I can think of offhand and Julia, I don't know do you have anything you want to add to that?

No, Mickey, this is general as you look at the market currently, that's how we are assessing it. It's not perfect. So we'll just be closely monitoring that.

Okay.

Yes, one thing let me add this because this is a true statement. I don't know if we touched on this last quarter, but it's important. One of our investments that we had at December, which we exited for very significant capital gains, and it's obviously in our filings, Nth Degree which was an outstanding business and a great management team, we were -- we exited as I mentioned, it was reported very significant capital gains that business is tied directly to the Tradeshow industry, and speaking about companies and industries. And that the good news for us is we exited, we did because of the transaction, as we reported before, it's worth emphasizing; maintain a very small equity position at a cost basis. But when we exited it, the value relatively speaking was fairly high for that small piece that we kept. That business obviously has had a significant decline in value. So if you look at our assets and see where we've seen decline in value in our assets, a reasonable portion of it ironically is in that piece that we have maintained and had to maintain after December 2019. So it's one of those aspects of its business that again, small piece decline in value. It's affected our valuations. But it's not certainly, other than we like the folks that are there. We don't have a very significant position in that company any further and more importantly, we were able to fortunately exit at again a very substantial net realized capital gains on that company.

I did see that decline Dave, and I appreciate the clarification. How about another new deal, The Maids, my understanding is that it's a franchise company that provides cleaning, residential cleaning, which is something then from my -- from where I sit would be something that folks might try to avoid in the pandemic, how are they performing in the current environment and do you expect deterioration in that business as the wave of coronavirus seems to be ongoing?

So, good question. Obviously we -- that's one where out of the box when the pandemic, we did see across the board a drop-off at the franchisee level, it's a company that you mentioned we own the franchisor. And within that, we have about eight company-owned stores, if you will, but then about the bulk of them over 100 are all spread around the country in different concentrations. We did see through the franchisee an initial drop-off obviously. However, we are seeing that picking up now not only at the franchisee level, but also the company store level and also again management did a wonderful job in making adjustments in their operating expenses et cetera. And as a result of that, we're actually -- another piece of it they actually tactically went about adding a service capability on the industrial cleaning side now that's in sort of its early days, but because as we all know, and I touched on a little bit, we see it from our companies as they come back online actually needing to go out and bring in cleaning services because they have to. So The Maids while they are focused obviously the bulk of it is in home cleaning. They've also been able to add to their portfolio, if you will, some industrial cleaning capability and they're working on that, that's been a help. So actually, that's one I do see coming back on, not declined from where it is and fortunately they've been able to keep doing their thing actually ironically. They did access some PPP money and the reason they were able to do that is because there's an exemption for franchisees, franchisors, so they were able to get some PPP money, which really was a very positive thing for them. So that's one that I'm excited about seeing them sort of track backup and they are not on nonaccrual. So they're doing well.

That's good news, Dave. And in terms of PPP and I'm almost done with my questions. And during the last earnings call, you mentioned that very few of your company is qualified because of the affiliation rules. But was there any progress in the second calendar quarter? I mean as the PPP program sort of evolved, did you manage to get more PPP money into the system or does it remain very limited?

Yes, no it remains limited, strictly The Maids, the other one that did get PPP money, which was good for them, ironically, is Nth Degree. And that's mainly because one of the investors in there is an FDIC related and that was an exemption under that, but basically our companies for the same reason due to the attribution of ownership we're not able to access it. But as this turned out to be truthful, it's not been necessarily something that that I don't think would have been much help much along the way. And where we've needed to in very small amounts today had to help a few companies, we've been able to do that ourselves, so.

Yes, I did notice that the follow-on investments were very small this quarter. So, Dave, how would you characterize the outlook for the liquidity of your borrowers in general? Assuming, I guess the optimistic scenario if a vaccine is approved, maybe by the end of the year, but realistically, that doesn't mean people get vaccinated until let's say the first half of next year. So we're going to be dealing with this for a while and folks have to deal with liquidity issues for many more quarters. How do you feel about your average borrowers' liquidity?

Yes. So again I don't like the terminology borrowers our portfolio companies that we obviously have significant investments in equity and debt. I would say that they on average, there are one or two, as we look forward to as I mentioned, we are very, very hard at work with each of our portfolio companies focused on that doing everything, working with the management teams to get liquidity through their own working capital, which is obviously things like working hard on reduction of inventory, collection of receivables, and those kinds of things. So, if I answered on an average for the portfolio, given that we have roughly 27 companies in the portfolio, I'd say on average, we're in good shape. There are one or two for potentially good reasons which might help us down the road might put some money into again for the right reasons. But at this point, I would say on average, we look pretty good. And those that do have a bank, a third-party lender or a typical bank, actually in most cases, we found that they've been able to work with their banks, some at little more stressful than others, but by and large, pretty good.

And okay, that's helpful. My last question just looking at the dividend. I think Julia said that the spillover stands at $0.20, is there still expectation for another semi-annual supplemental dividend this year?

Well we -- when we started the semiannual dividends distributions, which are a function of realized capital gains as we've stressed, we've been able to maintain it pretty effectively. We made the one in June as we move forward during the year in part as a function of liquidity ourselves being that we're doing new deals also. We'll take a hard look at that, but that's something we'll obviously have to put to our board as we go down the road. So I can't really say that we'll have one or not have one at this point.

And in terms of the regular dividend, obviously that was not covered by either GAAP NII or adjusted NII. Given the spillover that you have is the expectation, at least at this time to maintain the dividend at this level? I know it's been maintained through September, but it is putting pressure on the company or is that something the board is thinking about revisiting?

Well, I think, as you pointed out, who knows and as David Gladstone said, we don't know where the economy is going and we have to be in for the long haul. I think at this point based on where we are in the portfolio; the right thing to say is we're going to do everything we can as we work with our companies. So some of those that we'll see starting to improve et cetera will help in terms of the other income stream, as you know, we have two basically two revenue streams right which directly affects the dividend, one is the base, as I mentioned, interest income coming off the portfolio that's held relatively steady. And I think that's going to continue that way, might see a little pick up. And then the other one, of course, is the other income stream, which is where we've been able to get income from portfolio companies through exit fees that they pay us dividends that the companies might be in a position to pay. We're in a -- we're going to frankly try to not put pressure on the companies to do that because again preservation of capital. So right now, best I will tell you is we're going to do everything we can and work hard to maintain our current levels. But we'll look at it as we move forward during the year and as you say decide and put it to our board as we go through the year. So again, best I can do on that one.

I appreciate it. Dave, and thanks for all your time this morning and your patience. I hope everyone stay safe. That's it for me.

Thanks man.

We're all looking at it the same way you are. We are all trying to figure out where tomorrow will be and I think if we had something that everybody believed in, I'm personally a believer in hydroxychloroquine. A lot of people aren't, but I think those could settle out and save us all. But Sara, come on and see if there's a second group that wants to ask a question.

Thank you. Our next question comes from the line of Ryan Carr with Jefferies. Your line is now open.

Hi, good morning, everyone and thank you for taking my questions. My first here is centers around the yield. Curious to hear why the yield was contracted it's 11.8%, was it driven by the light repayments. So basically what's driving that yield contraction there? And then beyond that, as well, thinking longer-term especially as we go into a more uncertain environment with lower yields and lower benchmark rates a lot of your debt portfolio, how does LIBOR floor impact that moving forward? Thanks.

Julia?

I'll go ahead and take that one. Yes, so let's start with the latter part of the question and LIBOR floors. And I think in our 10-K, if you've had a chance to look at that we detail the expectations surrounding LIBOR and how it might impact our operations. And the answer in a nutshell is not very much because most of our capital is the term preferred stock which is a fixed rate and then the line of credit while it is LIBOR based and would fluctuate limited. And then on the investment side, so income producing side, most if not all of our floors are well in excess of where LIBOR is currently for sure. And so we do not expect to see a decline of our income as a result of LIBOR fluctuation. So that that's that. And then the yield, any one quarter is really difficult to look at as I think Dave has mentioned it a few times, we tend to look at our portfolio over the course of a year. So any one quarter might be impacted by extra payments of income or reductions in rates on a loan permanent or temporarily. So any one thing can impact it on a quarterly basis, which is how what impacted this quarter's yield with outlook being that over time will play in that 12% range.

Okay, thank you very much. And then in terms of the deployment outlook or the deal environment, from a deal perspective last quarter was light and then you announced the subsequent quarter investment activity. Curious as to what your views are now on the current environment, where you see things going over the next six months and how you think you'll be able to take advantage of those opportunities and then curious on what changed subsequent to the quarter end, what catalyzed that activity? Thank you.

Sure. This is Dave; I'll try to take that. That particular investment that we bought Mason West, we'd actually had been working on it prior to the essentially the pandemic hit, so we were able to essentially revive it as we got through the quarter and we stayed in touch obviously and we're able to get the deal done. More importantly though, perhaps to your question, as we look forward, we are seeing I believe somewhat of a pickup in activity in deal flow. And that is a function I think of a couple of things. There are companies that might have been thinking about going out, firms like Jefferies and others from the investment banking side that might have put things on hold. I think they've said hey, you know, what, there's not we should come back in the market, keep testing it. So there's some of that going on and come and certainly good companies, some of which that had obviously like most companies had some effect in decline in the least in the first quarter, second quarter even or maybe starting to see some pickup and believe the time is right to these go back to the market. So legitimately, I think that that's happening. The other thing that's going on is that structurally, we're seeing where a year-ago for argument sake multiples on deals that were good companies we've all been saying, seemed a little crazy meeting high, we're seeing maybe a little more common sense coming into that number one. Number two, we're also seeing sellers being more willing to look at structures that will accommodate a transaction, which might mean taking back some seller paper themselves, doing some other things because frankly, the lenders, the banks, the classic third-party lenders that are driving and have driven some of these biggest valuations because leverage was so available, some of that's compressing. So the typical, say private equity fund is either having to more than ever putting either more equity in a transaction because you're not getting as much leverage. And as a result of that we're looking to moderate the valuation. So we're seeing that going on. So the combination of those two things, I believe are going to perhaps lead to opportunities that will be somewhat perhaps to our advantage. We have an advantage in that all else being equal because we do the debt and the equity that we can provide our own leverage. So we're not as dependent on third-party. So long answer to your question, but I wouldn't say that all of a sudden things are going to burst open. But I would say that it's certainly better than it was three months ago.

Great, thank you. It's very helpful. And then in terms of the portfolio companies itself with respect to how average EBITDA trends at that level at this point and how they change from pre-pandemic levels. And then moving forward as you're evaluating the rest of this portfolio, what else are you looking at besides those metrics to make those assumptions? Thank you.

Julia?

This is a tough one. So the one thing I will say and I believe that would be true across the market at least based on what we're hearing and working with specialists on this front of course, when it comes to evaluations every quarter is that a pure, no, rear look in the mirror is no longer possible or appropriate. And what I mean by that is that by and large, our evaluations tend to be based on a 12-months EBITDA metric, but in this environment given the uncertainty given that parts of it are temporary versus other staying perhaps not quite so temporary, that is no longer how a market participant would view those portfolio companies. And therefore, neither are we in our evaluation every quarter. And that's been validated across the board in the market with specialists in place. So regular averages and ranges are not quite so meaningful at this particular point.

Great, thank you very much for answering all my questions and hope all of you are well, great to catch up.

We're all good down here. Nobody with COVID-19, we dodged the bullet if you want to say it that way. But Sara, come on and see if there's anybody else with a question.

Thank you. Our next question comes from the line of Henry Coffey with Wedbush. Your line is now open.

Good morning, everyone, and thanks for taking my question. If we look at the current quarter and compare it to anything in the last three or four quarters so that's a little -- I think to all of us that seems a little off. It's about a $2 million shortfall between where you are today and getting back to say $0.19 or $0.20 a share. What is the likely bridge that gets you there? Where do you find over the next couple of quarters an extra $1 million or $2 million be in net interest income or other possible drivers of those numbers?

Yes hey Henry, Dave. So I think the areas we focus on obviously, potentially one or two companies that might actually come back off of nonaccrual based on some things we're looking at. That would be one area generally obviously, I'm not going to make any promises or specifics but that is a total portfolio. The other is the idea of finding those companies where we believe from a cash flow perspective we're able to now go back and get the other income side of things, again, whether that's their willingness or our desire to pay an agency accrued part of an accrued agency or what have you, those are the primary drivers. The third obviously is new deals. As we do a new deal, as we just did with Mason West. And we got it done right at the beginning of the quarter. So that helps because that's a pretty good chunk of debt, if you will, at a good interest rate. And then as we do new deals, we also generate incremental fee income. So those would be the, I'd say the three broad categories. Obviously, the other side of the equation is expense management. To some degree, they'll be some of that. So that that combination is where we would have to look to it.

I know you don't like to make an immediate forecast, but if you are kind of coming up with a risk weighted view, is it -- is this an event that can occur quickly? Or is this an event that might take two or three quarters for things to kind of work their way through? I mean, obviously this year's going to be a tough year everyone's accepted that and you got a great capital structure to just go around and like?

Yes, I'd say -- I'd say and again we all keep saying we don't know what the future holds and David Gladstone pointed out very carefully is a big part of it is a function of what our government does and actions along those lines, obviously, et cetera. But from a microcosm, our little companies as we look at each one of them and see the activities, I'd say it's over two to three quarters kind of activity. And the interesting thing for us at that point on the very beginning, the good news and bad news to some degree is we came off of one of our best year. So on a comparative basis; relative to as you point out, we ended last quarter as I mentioned $0.19 and this quarter $0.11. Under normal circumstances, even $0.11 may not necessarily be bad. So the objective is to bring that back as best as we can. I think this is a tough environment, obviously to try to replicate the great year we certainly had last year, but it's still the same token. I think still a very constructive positive and more importantly that I think you just sort of alluded to, our balance sheet, our overall liquidity; we were in a good position to work through this. And again, that's our objective with all of our portfolio companies, keep them, keep them going. And we'll hopefully get back to that level that we want to be at.

And Henry just to chime in on that. If we sell another company, as we hope to do this year. You'd make up a lot of that income because so much of it coming back in comes in from the dividend on the preferred stock. That income and any income on the debt of course is going to be very accretive to the dividend. So I'm not so worried about the dividend this year. I think there's about $1.5 billion worth of money sitting out there in venture capital money, whatever. And they're trying to put it to work. And we may help them put it to work by selling them something. So that's a goal. And again I'm hopeful that we can do another couple of details in terms of putting them into the portfolio during the year and that would get us some fees and structuring fees as well as some other, so we'll see. We'll have a better view of it in October when we talk, and you can ask the question again, we'll try to answer it.

I know how important that dividends are to you, David, and I always have appreciated that. The people we work with who own the stock made a lot of money over the last few years because of your efforts and not paying the supplement or reducing the dividend for a couple of quarters maybe that doesn't build up a lot of capital. But this is more of a partnership than just a trade. And clearly, as you think about at least the supplement, maybe this is time to back off a little bit and build up some capital and but when we know you'll make the right decision.

Sure. We are not going to cut the dividend if I can help it. That's the last thing we look at. But go ahead. I'm sorry, Henry.

I appreciate the clarity on that, sir. Thank you very much.

But Henry, we will as you said it is a partnership and then we're here for the long haul and we'll do the things, we have to do so to make a long-term investment.

Sara, you want to come on and is anyone else asking a question?

Thank you. Our next question comes from the line of Bryce Rowe with National Securities. Your line is now open.

Thanks, Sara. Good morning, everyone. Just maybe a couple of follow-ups. David on the -- you mentioned the Mason West investment, obviously a good size in the mid-$40 million range. I'm just curious with -- I guess repayment activities as slow it is right now, should we expect you to draw on the credit facility to fund that deal?

Well yes, that of course that was a subsequent event. So subsequent to June, so the short answer is yes, we have.

Okay.

Already drawn [indiscernible].

Okay, that's helpful. And then just wanted to ask about the ATM program with the preferred stock and then the notes, the notes, I guess offering that that's out there through Gladstone Securities. Just curious what your kind of your appetite is to takedown either the unsecured notes and issue those to help fund subsequent activity or should we expect more activity on the -- on the preferred ATM to generate some capital for future use?

Yes, so Bryce the ATM as you point out the preferred subject obviously to blackout periods when we have to be out of the markets. As you well know with ATMs, there's sort of the good news is it's a good way if markets accommodated to raise capital in general, what we're doing is taking a long-term look at how we keep funding ourselves over time. And the idea of the notes that we're sort of starting to put out there and work through is not a program that's an overnight program. So as time goes along, we will raise capital, hopefully from that source. And as we do that, we will manage our overall capital structure as a result of that, obviously. So think of it as we're focused on. Our strategy here is, let's lay in the best types of securities for the long-term for this business. We're a long-term business and as we would say, raise capital from the notes. We obviously will -- we're not looking to just increase leverage and certainly not having cash sit on our balance sheet, but we will adjust our other funding sources accordingly so that we maintain a conservative level of leverage, relatively speaking at the same time providing a capital to doing new deals and so on and so forth. So kind of all of the above it's a management of our capital structure is the best way to answer the question.

Okay, that's helpful, David. And then wanted to ask about the portfolio and some of the valuations Mickey obviously discussed some of the depreciation for the quarter. I wanted to ask about the -- some of the appreciation in the quarter. There were several at least equity investments that saw some appreciation. And maybe you could speak to what's driving that, is there something within that business, whether it'd be related to COVID or not, that has helped propel the valuations of those businesses higher here over the quarter?

Julia, do you want to tackle that?

Sure. So Bryce, it always helps to look at what industry are these companies in. So the largest appreciation for the quarter was Pioneer Square brands. And you may or may not know, but they're in the K through 12 Electronics support industry, I have a hard time describing this accurately. But they make cases and other supporting accessories for iPads, laptops, all those things. So with schools being closed down, you can imagine that the demand for those items has skyrocketed and hence they're doing really well. Dave alluded to it in his part of the call earlier that we have seen our performance in our portfolio and this falls in that category.

Okay, that's helpful, Julia. And I appreciate that.

Let me just add to that, though, that company obviously, as Julia alluded to, had some impact and a positive vein on COVID and buying habits, right. And you see that across the board, some of our e-commerce oriented types of companies, some improvement there. But I'd also add that the fundamentals of those companies that also we saw upticks in valuation, some little higher than others are also very, very strong, too. So it's a combination of things. Obviously, a little bit of an uptick and who knows with COVID made some of that slowdown a little bit it’s hard to tell, but generally the fundamentals still are sound and that's really a very important aspect of valuation.

Excellent, thank you for the time this morning. Have a good rest of the summer. Thanks.

Thanks, man.

Sara, you got anybody else?

There are no further questions in the queue at this time.

All right. Well we'll end up by just saying thank you all for calling in and asking good questions, and we'll see you again in October. That's the end of this call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.