Good day, ladies and gentlemen, and welcome to Gladstone Investment Corporation's First Quarter Earnings ended June 30, 2017 Call and Webcast. [Operator Instructions] I would now like to turn the call over to David Gladstone. Sir, you may begin.

All right. Thank you, Chelsea. That was a nice introduction, good instructions for everybody, and hello and good morning to all of you out there. This is David Gladstone, your Chairman, and this is the quarterly earnings conference call for shareholders and for analysts on Gladstone Investment. The common stock is traded on NASDAQ symbol GAIN. We have 3 preferred stocks out there, GAINO, GAINN and GAINM. All 3 of those are very similar, minor changes in the structure. So we do have a webpage in case you want to go find out more about the preferred stocks. Thank you all for calling in. We're always happy to talk to our loyal shareholders and potential shareholders and analysts. We like to give an update on your company and its investments, and we like to give you a view of the business environment. I wish there were more meetings like this. We try to do some around the press release, but we haven't gotten around to that. Also, you have an invitation. It's open. Visit us here in McClean, Virginia. We're located just outside of Washington D.C. So please stop by and say hello if you're in the area. There's about 60 people in the company now, a lot of them on the road so you may see a few people here. Now we hear from our General Counsel and Secretary, Michael LiCalsi. Michael is also the President of Gladstone Administration, which serves as the administrator for all of the Gladstone public funds and related companies. He'll make a brief statement regarding forward-looking statements and then some other important information. Michael, take it away.

Good morning, everyone. This conference call may include statements that constitute forward-looking statements within the meaning of the Securities Act of 1933, the Securities Exchange Act of 1934, including statements with regard to the company's future performance. And 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 words such as anticipates, believes, expects, intends, will, should, may and similar expressions. There are many factors that may cause our actual results to be materially different from any future results 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 as well as in our shelf registration statement. All is filed with the SEC. These can all be found on our website, www.gladstoneinvestment.com, or on the SEC's website, which is www.sec.gov. The company undertakes no obligation to publicly update or revise any of these forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. And please also note that past performance or market information is not a guarantee of any future results. We also ask that you take the opportunity to visit our website, www.gladstoneinvestment.com. Sign up for our e-mail notification service. You can also find us on Facebook, The keyword there is The Gladstone Companies; and on Twitter, @GladstoneComps. The call today will be an overview of our results through June 30, 2017. So for more detailed information, please read our Form 10-Q and press release issued yesterday. These can be found on our website, gladstoneinvestment.com. Before I forget, we're having our annual stockholders' meeting tomorrow, August 3. You're all invited. Please be sure to…

Thank you, Mike, and good morning to everyone. So I'm pleased to report again that Gladstone Investment had a pretty strong fiscal quarter ending 6/30/17, the first quarter of the fiscal year, and with consistent quarter-over-quarter net investment income and successful exit of one of our portfolio companies with a gain. Our net asset value, NAV, which is effectively our book value, declined slightly by about $0.07 per share. And this was primarily as a result of a previously announced issuance of around 2.3 million shares of common stock, in which we raised about $20 million. Also, we paid a supplemental distribution of $0.06 per common share in June, and we raised our regular monthly distributions to common stockholders to $0.064 per share or roughly $0.77 per share annually. I might add here that, while this is obviously a quarterly call and we do look at performance quarter-to-quarter, from a management perspective we always take a longer look and view on our results for the full fiscal year, which, of course, ends in March. So we will see variations relative to each quarter. Now to put these results in perspective, it's always helpful to reiterate what our business model is, and which is where we focus on the buyouts of U.S. businesses, generally with annual earnings before interest, taxes, depreciation and amortization, otherwise known as EBITDA, and that value is generally between $3 million and $10 million of EBITDA. The financial structure which we use for funding these buyouts consists of secured first or second lien debt, and it's in a combination with direct equity investment so that we end up with a significant equity ownership position in the company when the buyout is made. We also like to really indicate how we differ from traditional credit-oriented BDCs in that…

Thanks, Dave, and good morning, everyone. The fund had another quarter of consistent net investment income and the successful exit of one portfolio company at a gain. Now let's turn to the balance sheet for a summary of the financial position. At the end of June, GAIN had over $500 million in assets consisting primarily of $487 million of investments at fair value, $6 million in cash and about $7 million in other assets. On the liability side, we had about $34 million in borrowings outstanding on our credit facility, $139 million in term preferred stock at liquidation value and about $6 million in other liabilities, which leaves us with over $321 million in net assets. That translates, after the equity offering that Dave mentioned, to an NAV per share of $9.88 as of June, which is slightly down from March 31, given that we issued those common shares at a small discount to the then current NAV. Now moving over to the income statement for the June quarter, total investment income was $13.6 million versus $12.4 million in the prior quarter. Total expenses net of credits were $8.2 million compared to $7.1 million in the prior quarter, leaving net investment income of $5.4 million as compared to $5.3 million in the prior quarter. Net investment income remained relatively flat as the increase in total investment income, which was primarily due to higher other income, was offset by an increase in total expenses net of credits. Other income was 21% of total investment income this quarter as compared to only 10% in the prior quarter. As mentioned on previous calls, we expect other income, which is primarily composed of dividend income and success fees, to remain meaningful but variable between quarters. Net expenses increased by $1.1 million in the current…

Thanks, Julia. Those were good reports from you and Michael and Dave. You do a great job of informing our stockholders. During the past quarter, we were able to report some great accomplishments such as the sale, and we call it an exit of one of the investments at a good capital gain. We sold some of the stock in one of our portfolio companies to get back some capital. We increased the run rate distribution of the common stock, which is always positive for the stock. And we paid a supplemental distribution to common shareholders. This is a beginning of something we hope to continue forever and continued good performance of our companies that we invest in. And we issued some common stock to help us grow. We always need to continue to grow. We believe we can continue the success going forward into the second quarter for fiscal year 2018 which ends March 31, 2018. Just talking about the economy, it continues to get stronger. It seems to be hitting on all the cylinders. I do have some concerns that things can go wrong, but I don't really know what those could be at this point in time. To counter the unforeseen, we're building a very strong balance sheet with more equity. I don't know what may come of the future, but I think we could withstand most any kind of shock to the world economic system. On July 2017, our Board of Directors declared a monthly distribution to our common stockholders of $0.064 per common share for each of the months of July, August and September of 2017. That's an annual run rate of $0.768 per common share. We often round that up to $0.77 for reporting. As you can tell, the regular distribution is covered by…

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

Dave, I was curious to ask you what the reasoning was for raising equity capital instead of using the proceeds from Mitchell Rubber to fund the new investments that you're looking at.

Well, timing is always an issue, Mickey. And as we know, we always look forward to production that we would anticipate and plan going forward. And we always want to balance our debt-to-equity ratio, as you know, which is very important in any BDC, the ratio of 1:1. We have a lot capacity in our line of credit and we just want to always be slightly ahead of the game. We felt the timing was appropriate and where the stock was, and we felt like it was a reasonable time to do it. So we did it. So the Mitchell Rubber, it was no guarantee that, that deal was going to get closed at the time, frankly, and so we always try to manage with some thought to being a bit conservative. So that's basically the answer.

And our next question comes from the line of Henry Coffey with Wedbush.

Thanks for the shout-out. It was a real -- it was a lot of fun writing the report. Number one, you did raise equity and with the payoff and sale of investments, assets at cost are down a little bit. The value of those assets is up, which is nice. What is the outlook on originations?

Henry, it's Dave here. And again, thanks for understanding our business. Right now, as I mentioned, the challenge -- we go to work every day doing what we do, obviously. We're not going to go out and pay 7, 8, 9x EBITDA multiples as we're seeing in some of these deals. And so we just keep generating and filling the pipeline with new opportunities. We feel like we're on a pace with some of the things I mentioned. We've got one, hopefully fairly soon, that's going to close here, we've been working on for a little bit. That will add to the -- bring back up the asset base. And I'm not concerned with where it is right now. We just got to keep plugging away. It's, as I mentioned, a tough environment value-wise, but I think within the scheme of how we operate, with our current portfolio, as I look forward, I am not overly concerned at this point.

Henry, as you know, we always have a pipeline and the pipeline is very different for us. We're not looking for the high technology where you pay up. We're looking for the more straightforward companies that are easy to work on. And some of the pricing has gone up on those. We didn't expect it so we ran a little slow last year, but I think this year is going to be different. We're seeing people back away from those. And hopefully we can pick up 2 or 3 more before next year ending in March of 2018.

A second issue, just kind of been going through the 10-Q and one of the most helpful schedules is where you show the write-ups and the write-downs. That appeals to my analytical brain. One thing I did notice in comparing Q1 '16 -- I'm sorry, '17 to '18, a lot of the investments that were written up last year have been sort of -- had some unrealized losses this year. I'd look at it like from more -- from a portfolio perspective, in that in both years the realized gains, on balance, were positive to last year, significantly positive. Can you give me some -- I don't know whether you want to talk about specific companies or just kind of the general atmosphere for in terms of how values are changing and how that affects your sense of what the ultimate outcome should be on some of your portfolio companies.

Henry, it's Julia. As far as those changes quarter-over-quarter, they're really driven by performance of the underlying entities, for the most part, although you might have some changes due to multiple increases or decreases, respectively, as well. But all of those are generally considered temporary, meaning even if there is a dip in performance between Q1 of '17 versus Q1 of '18 we don't believe that to be a permanent decline in the valuation of those entities.

Henry, you've selected the item that's the favorite of our Chief of Valuation. She loves that chart as well. And it does give you a real good snapshot of what's going on in the portfolio. I'd hasten to add that most of the ones that have taken depreciation are still paying as agreed. They're in good shape. And so it's the variation of the marketplace that goes on both in valuation multiples for certain categories of companies as well as the underlying performance. So if they have a small downdraft because they didn't get the right contract for that quarter, it will go down a little bit. But I think the portfolio is in great shape today.

And Henry, keep in mind, and this is generally it's a true statement as well, that our -- we might see a bit more volatility in our valuations because of the higher percentage, if you will, of equity of any one portfolio company, and recognizing that our -- the debt instruments in all our portfolio companies are valued by S&P and you'll see those are relatively consistent across the board. The other thing that can be a little deceptive from time to time is when we just look at quarter-to-quarter, a company that might have been in the portfolio for maybe 3 or 4 years, I'd say, from a perspective of the initial investment might actually be up relatively speaking, but you could have a, again as Julia said, whether it's as a result of a multiple change or even and sort of as David was alluding to between quarters for some reason they have a small decline in the EBITDA, relatively speaking, times whatever the multiple is, it's going to reflect itself essentially in, say, a reduction or an increase, frankly, in the underlying equity value. So I think you're right in terms of looking at overall portfolio. That's certainly how we think of it, how we look at it. And again, to repeat what David said, I think certainly today I feel pretty decent about where our portfolio is and where it's come from.

And we have a follow-up question from the line of Mickey Schleien with Ladenburg.

I do have a couple of follow-up questions and I apologize if someone else asked these. But could you talk a little about the synergies between SBS and Mathey and how that impacted the valuation, which was marked up pretty meaningfully during the quarter?

Yes. I can't really address it relative to, call it, the valuation per se. I mean that sort of happens just because the way the numbers look. But basically, the 2 companies -- without going into a lot of detail, Mickey. I almost could do this offline if you want a little bit. Both are located in Tulsa, Oklahoma. They are both in the manufacturing business. They service some of the same general industries, which range from some energy, aerospace. And we saw an opportunity, frankly, as a result of consolidation, also, of management and leadership, which is always a very, very critical part of any of these companies. So we saw an opportunity and a cost savings, frankly, in putting effectively what Mathey's operations are, coming into the SBS facilities. So we've got a cost savings in that regard, and also we've got now a consolidated really strong management team with what's effectively a pretty broad, call it, product line between the 2. So there was a lot of thought behind this, a feeling of this is a good way to go. And as you point out, in the way the companies have come together, in part, the current valuation had a bit of an increase.

I noticed that Precision Southeast's second lien is on non-accrual, but it's still valued at par. Can you talk about the issues facing that company? What they're doing to address those? And do you believe there's any downside to the valuation of that investment?

Okay. I will start with the last first. I think it's in better shape today than it has been, as a result of the efforts we've been making, again primarily on the management side. PSI, Precision Southeast, is actually, as you point out -- and again recognizing that we do not value the debt, S&P values the debt so the results that we have are okay there. And also the business from an EBITDA standpoint is positive. What we've been working through, frankly, is just an interrelationship with the bank. This is a case where we do have a senior lender providing working capital and so on, and we feel very positive about the direction of the company. So I'd say there is less chance on the downside than there is now, frankly, on the upside.

So it sounds like they may have breached a covenant or something like that that triggered the non-accrual. Is that a fair statement?

Mickey, our policy, and you're likely aware of this already, but typically if somebody doesn't pay for 90-plus days we generally put them on non-accrual, other than, I guess, cases where there's a really good reason why you wouldn't. And in this case, we just went with the policy. It made sense at the time. And we're going to work with them over the next few months and hope to get them off non-accrual in the near term.

Dave, I didn't actually hear the answer to my first question, which was regarding the timing of the equity capital being raised. I apologize, but could you repeat what you were saying in terms of that?

All right. See if I can do it exactly the same way. No, I'd say it's pretty straightforward. I mean, as I was starting to mention, you asked about Mitchell Rubber, using the proceeds. One, timing is always important in these things, and Mitchell rubber, at the time when we did the offering, was obviously not done yet. We weren't sure exactly what the timing would have been on that. So as we looked at it, that was important. Secondly, as we always look out and try to project what we think our potential needs are going to be on new deals, et cetera, and always keeping in mind the importance of our debt-to-equity ratio of 1:1, being sure that we think; okay, at a certain point in time do we, should we shore up our equity so that we're in good shape because we have a lot of capacity with our line of credit, our own line of credit in terms of new deal production. So it's a balancing and we felt like the timing in the market and where the stock was and the performance in general, it was a good time to raise an amount. We did not raise as much as -- we could have raised more, but we chose to raise an amount that we felt just made sense for the company without stressing it too dramatically. And I feel good about having done what we did.

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

Just wanted to talk about -- most of my questions have been answered, but just a couple of little nits in modeling. It looked like other G&A expenses were a little bit above my forecast. Were there any sort of one-time items in there? Is that a good run rate going forward?

As I mentioned in the scripted part of the discussion here, we had a little bit of a bad debt pick-up, which was primarily related to the PSI non-accrual change. So no, I don't believe that that's necessarily a good view going forward. We shall see next quarter, but I do not believe that at least the bad debt expense part would recur.

And then I'd just like to get your sense of sort of lower middle market valuations. Obviously, I mean we follow the public equity markets, which have remained strong, but can you give us sort of a sense of valuation trends in the market you guys follow?

Yes, right now, as I sort of mentioned, we are still seeing valuations of companies that are doing, say, $4 million to $6 million, $7 million, $8 million of EBITDA where valuations are in the 8, 9 and we've even seen some in the 10x as far as transactions that these folks are moving to an LOI phase. So it's still pretty heady right now. Do I think that trend will continue? It's hard for me to tell, to be honest. We are seeing some things that are -- a couple companies that are more in the 6 to 6.5 and 7x so I'm hoping we'll see a bit more of that. But at the current time, I just think we are going to be in this sort of range of anywhere from 6 to 10x for companies that seem to be fairly good performers.

[Operator Instructions] And our next question comes from the line of Andy Stapp with Hilliard Lyons.

The rest of my questions were just answered.

[Operator Instructions] And I'm showing no further questions at this time. I would now like to turn the call back to David Gladstone for any closing remarks.

All right. Thank you all for calling in. And please, if you can just vote your shares by calling Georgeson. They're at (800) 790-6795. And we'd like to get the votes in before we crank it up tomorrow at 11:00. Thank you all. That's the end of this conversation.

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.