Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Gladstone Capital Corporation's third quarter ended June 30, 2015, earnings call and webcast. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's presentation, Mr. David Gladstone. Sir, please begin.

All right. Thank you, Howard. Very nice introduction, and good morning, everyone. This is David Gladstone, the Chairman, and this is the quarterly earnings conference call for stockholders and analysts that follow our stock, Gladstone Capital. Common stock's traded on the symbol GLAD and the preferred stock is traded under GLAD with an O on the end. Thank you all for calling in. We're always happy to have this time with shareholders and the analysts that cover our stock. Wish we could do it more often. We like giving updates on the company. We continue to go along at a good pace, our portfolio and our business environment seems to be okay today. As always, you have an invitation, it's open, to visit our office here in McLean, Virginia, which is outside Washington D.C. So if you're in the area, please stop by, say hello. The team is about 60-some people here and I think they are some of the finest people in the business. And now we'll hear from the General Counsel and Secretary, Michael LiCalsi. He's also President of the Administrator and he'll make a statement regarding forward-looking statements.

Good morning, everyone. This conference call may include forward-looking statements within the meaning of the Securities Act of 1933 and Securities Exchange Act of 1934 including statements with regard to the future performance of the company. These forward-looking statements inherently involve certain risks and uncertainties and other factors even though they are based on our current plans, which we believe to be reasonable. Many of these forward-looking statements can be identified by the use of 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 that are expressed or implied by these forward-looking statements including those factors listed under the caption, Risk Factors, in our Form 10-K filing and our registration statement filed with the Securities and Exchange Commission, all of which can be found on our website, www.gladstonecapital.com, or the SEC’s website, www.sec.gov. And the company undertakes no obligation to publicly update or revise any forward-looking statement, 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 future results. We ask that you visit our website and sign up for our e-mail notification service. You could also find us on Facebook, keyword, The Gladstone Companies, and follow us on Twitter at @GladstoneComps. I hope our listeners will read our press release issued yesterday and also review our Form 10-Q for our third fiscal quarter ended June 30, 2015, which was also filed yesterday with the SEC. You can access the press release and 10-Q on our website and you can access the 10-Q on the SEC's website as well, www.sec.gov. And the audio presentation of this call will also be archived on our website. And now we will begin with hearing from Gladstone Capital's President, Bob Marcotte.

Good morning, everyone. As many of you know, Gladstone [indiscernible] is the lending fund of The Gladstone Companies. We provide cash flow-based loans to privately held U.S.-based businesses in the lower middle market, which we define as having $20 million to $100 million in revenues and $3 million to $15 million in earnings before interest and taxes and depreciation. Our loans are used to fund private equity buyouts or to make acquisitions or to recapitalize or refinance a company's existing capital structure. Gladstone Capital was one of the first BDCs focused on lending to the low to middle market and today that dedication, experience and consistency are a core part of our value proposition. We approach the market with an investor perspective and strive to deliver market-oriented capital solutions to support each business's unique capital and growth profile. The majority of our loans today are to businesses backed by private equity sponsors or owner-operators with significant equity and include a combination of secured first- and second-lien loans and many include equity co-investments. We target to make investments of $8 million at the $20 million, but will opportunistically consider smaller positions in broadly syndicated loans from time to time. With that introduction, I want to take this time to update our shareholders and analysts on our operating results, our portfolio performance and commentary on the marketplace. With respect to our investment activity. After pacing well ahead of plan for the first half of our fiscal year through March 31 with originations of over $90 million, we did not make any new investments on the quarter ended June 30, 2015, as several of the proprietary deals we had anticipated closing were delayed and closed after the end of the quarter. In anticipation of funding these new investments, we sold $9 million of…

Thanks, Bob, and good morning to everyone. I will now provide an update on some of GLAD's financial results and overall portfolio for the quarter ended June 30, 2015. Starting with our income statement. Net investment income was $4.8 million or $0.23 per share for the quarter, which increased by 31% from the prior quarter. Interest income on our debt investments increased quarter-over-quarter by $367,000 or 4.2% as the new originations added last quarter impacted this quarter's result. Other income increased by $345,000 to $828,000 on the quarter as success fees declined and dividend income increased compared to the quarter ended March 31. We expect other income to remain meaningful, but variable from quarter-to-quarter. Interest expense remained flat quarter-over-quarter as the weighted average balances outstanding on our line of credit increased by $9.5 million, but were offset by a decline in the borrowing rate effective April 30 from 4.1% in the March quarter to 3.8% in the June quarter. Nonfinancing costs, net of credit, during the quarter decreased by $391,000 or 12.3% compared to the prior quarter to $2.8 million or 3% of average total assets. Net investment income of $4.8 million for the quarter covered our common distributions declared of $4.4 million by 109.5%, which reflects the increase in total investment income and decrease in total expenses. As we have demonstrated over the last several years, our adviser remains committed to crediting its fees so that annual net investment income covers our shareholder distribution. The low net investment income on our income statement is where we reflect realized and unrealized changes in the fair value of our portfolio. During the quarter ended June 30, 2015, the net realized losses were primarily due to our exit of Sunburst Media for net proceeds of $4.7 million, resulting in a net realized…

All right. That's very nice reports from Melissa and Bob and Michael. We love to have these good reports each quarter. The quarter ended June 30, 2015, I love the idea that we've maintained our investment momentum. Obviously, they closed the 2 deals subsequent to the quarter, but we were working on those all during the quarter for another $20 million. Extending and amending the credit facility also helps knock 0.5 point or so of your borrowing level and that always falls to the bottom line. And maintaining a good, healthy pipeline of new proprietary investments, our group here has been working hard on that and we continue to see that coming on. So all in all, it was a good quarter. Our main focus now is to sell these underperforming assets and to continue to generate attractive loans. So as we take money out of the older deals and put them into new ones, you should see some good results from that. Since we do our own originations, we have a good number of experienced professionals here that do all that kind of work. BDCs like ours have an advantage of being able to execute on all facets of the business, so many borrowers are looking for us to take -- looking to us to take advantage of the capital availability by actively shopping around. But most of the smart businesses, they're not just looking for low rates or money, they are also looking for a partner and a partner that can help them succeed and I think this is where we succeed in helping out these small businesses. With all the business experience that we have and the strong relationships we have in the financial sources marketplace, we bring a powerful package to each of these businesses. These…

[Operator Instructions] Our first question or comment comes from the line of David Chiaverini.

Have a couple of questions for you. First, can you comment on the revenue and EBITDA growth in the portfolio by vintage?

I don't have any numbers on that. Do you have any, Bob or Melissa? We don't, but let us do some work on that and see if we can put something up on our website.

Got it, got it. Okay. And then second question, do you have the ability to -- are you able to disclose the magnitude of the potential sales and perhaps what percent of the legacy investments may be sold?

Well, that's a very difficult question to answer because you never know when you're going to be able to get rid of one of the legacy assets. You're constantly casting around for people that might want to buy it. In fact, in the radio station we mentioned, by the way, I probably financed 100 radio stations. This is the first time we've had losses in that sector and it just never came back. So the decision was do you want to stay in the deal and hope that they can turn the business around and fix it? Or do you want to exit at a discount, take a loss, but get your money and put it into something that has good strength and good upside. And we made that decision and lost a little bit of money, but brought in $4.7 million that was turned around and put in good, solid new business. So those kind of decisions are hard to make. I'm one that never likes to lose, but we've had some losses and we've had to take them in order to continue the momentum of growth in the company. But I don't have any. . .

Yes, I think David, the way I would respond to this, some of those businesses are, as David mentioned, in radio. There are certainly buyers of businesses that can in plug in those operations into a existing platform, or in some cases some cases, if they're too small, effectively what you end up doing is downsizing it to something that's not really supported by institutional capital. A couple of those are relatively small and they are in the works and I think we've shown the exit of Sunburst was part of that. I think you'll note that there was a paydown from the sale of a portion of the Heartland assets. So the radio portfolio is moving as part of the process. Some of the other credits, frankly, probably either need to be restructured more significantly or are going to go through a more significant exit experience. There are really probably a couple of the larger ones that are in the works. The smaller ones are still somewhat problematic because they don't have quite the marketability of larger credits and it takes a longer period of time. They're all on the table and they're all in various stages of process right now. I really can't comment specifically on any particular scale and scope.

Understood. Those are good comments. And is it reasonable to expect that any sales that you do end up realizing that the proceeds will be roughly around the fair values recorded at June 30?

Yes, it depends on the situation. In the case of the radio station, I think we sold at about $1 million more than we had it valued at. So as a result, there was a step up in one rather than a step down. But I can't guarantee that we wouldn't sell something below where we have it fair valued. Fair value, as you know, in this business, is an extremely difficult thing to do. Valuing private companies that don't have any relationship to these major companies out there is very difficult. We've hired an additional group to come in and help us with this. We've got Standard & Poor's that helps us do the valuations of the debt side of the business and we now have another group that's now working with us on the equity side of it to see if we can get better results. And it's a focus of both the government and also our accounting professionals in order to make sure that we get as best as we can. But I can tell you from experience, it's a very difficult thing to do. After doing this for many, many years, sometimes I guess right and sometimes I guess wrong in terms of valuation.

I would say also, add to that, David, a number of the credits, when you look at fair values on debt and positions that are in the teens to 20s, certainly well south of 50, those are pretty extreme valuations so we tend -- I think our experience has been conservative when the markets are fairly low. What happens when these credits get into trouble? We tend to be in a situation where we either need to take it over or we put in a new management and any lift can be pretty significant movement to the underlying cash flows and valuation. So we are taking action on a significant number of these and it tends to move the numbers fairly quickly. But overall, I think we still feel pretty good about where we're marked and the likelihood proceeds would exceed where we are today.

Okay, that's helpful. And my final question is just on the nonlegacy investments. It sounds like the health of those investments is pretty good. Is that fair to say?

Yes, I mean, I would emphasize the point that Melissa went through. I mean, $150 million of senior secured assets with less than averaging 3.5x of leverage is a pretty healthy position. Most of those situations we're talking about highly diversified businesses. They tend to have some measure of growth in the current environment, in the current economic conditions. They have significant amounts of equity below them and they're all sponsored deals. So there's equity -- professional equity managers with interests below us. So I think we feel pretty good about it. Housing, they're not in cyclical industries, but we're kind of taking a bet that next year's going to be good. They are stable, growing, well secured, relatively low-leveraged assets.

Our next question or comment comes from the line of Christopher Testa from National Securities.

Just on the oil and gas exposure. I know you had mentioned that it's stabilized. David. Could you give me an idea on what the attachment point and leverage is in the oil and gas portfolio relative to -- the remainder of the portfolio?

Bob, why don't you take that?

Yes, I think I mentioned in my comments, Chris, that the overall leverage through our position on a weighted average basis is 2.8x of leverage across those 3 investments. Included in those energy investments, for example, because of the broader industry designation, there are certainly sectors within the energy complex that are subject to swings there. For example, in our list of assets is a company called SPL. I'll give you an example, that is a test and measurement company that is providing assay services and distillation measurement and accounting services for energy content of energy flows, which certainly are continuing regardless of the commodity price. That business, when we closed, the EBITDA is up probably 30% over the last year since we've gone in it and it has significantly deleveraged. So not all energy-related assets necessarily are impacted by the movement of commodity. In fact, that's one that is deleveraging in the current environment.

Okay, great. That's helpful. And is the Saunders investment -- first, when was that originated? And is that a sponsored or a nonsponsored deal?

It was originated in 2008. It was a sponsored deal and they have effectively done very well in the rest of the fund and the sponsor has no longer raising new funds so they are basically turning the keys over to us. So it'll be a situation where we will determine where that's going to go. So it's one of those situations where, over time, sponsors go out of the business and we have to work our way through it.

Okay. And just touching on the capital management given where your leverage is, I know you've bumped up the capacity to $100 million -- $170 million on the revolver. How -- are you willing to issue equity below NAV? I'm trying to figure out how you get to kind of utilizing the increased capacity on the revolver and kind of maintaining leverage. If you can give me some guidance on where...

Well, what's going on right now -- yes, Chris, what's going on right now is we're changing out some of the deals that we have. For example, we still have some syndicated. So we'll sell those and put them into different deals. As you heard, we are also selling some of our -- some that aren't working as well in order to get them. And so we're changing out stuff right now and we've got room on our line to do some more. Don't anticipate doing anything more than our current work with our rights -- not rights offering, but our ATM program. And we don't want to take on a lot right now. We are still expecting one of our investments to sell and we've got a pretty good capital gain out of it, but that's always a wish rather than something you can plan on. So working the portfolio first before we start talking about selling stock yet well below net asset value.

Yes, I will probably add the fact that, Chris, there's a number of credits that aren't inside into our credit facilities and we don't get any borrowing ability, so it's very dilutive to our availability. So those are high on our list to potentially move out. Order of magnitude, there's a significant, and you'll see probably from some of the other BDCs out there, some significant number of refinancings and recapitalizations going on, a number of them in our syndicated positions, a number of them in our proprietary positions and a number of them that we are proactively managing whether they're syndicated or proprietary. So there's a fair bit of fluidity. I think we demonstrated it last quarter and I think we have the ability to continue to demonstrate that to supplement where we are today. I think the idea of turning through some of the assets that don't fit our long-term position is our priority and the primary course of action in managing any future proprietary investments.

Okay, that's helpful. And my last question would be just with your input investment roll forward, you have the first-lien debt, you have in this Q, $194.6 million as of 3/31. But last Q, the other filing, it was at $181.5 million and the second-lien debt was also a different number. Can you just give me some color on why those numbers have changed or why those are off?

Well, first of all, you would take some of the deals that we had a first lien on that we sold and those that went away. So that ran and we're replacing them. You'll see these 2 deals that we've put on the books, we'll show you something in the next quarter. So we're swapping on some things out obviously.

Yes, and Chris, I think, the other thing that happened and you picked up and so there was a very small reclassification. Occasionally, when we do a unitranche facility, we will structure it as an A loan and a B loan, and in theory, both of them are senior secured. But in prior quarters, there was a time where the B loan was classified as a second lien even though we control the entire thing and it's just a script in the underlying credit. Today, because essentially it is all first lien and it's all controlled by us, it is appropriately being recharacterized as a senior secured loan, much like any other BDC and as it's treated on our new credit facility.

That's correct.

If we hold and A and a B tranche, which total 3x of leverage, our lenders treat it as a senior secured asset and we've now linked up our senior secured asset in our credit facility with our financial statement. So you see a slight revision of one or two credits that were in that category from the prior quarters.

Chris, just to elaborate. Our financial statement, we reflect the legal definition of lien. And as Bob said, in some cases, we were subordinated to ourselves, so we had previously been subordinated. But now -- or second lien and now we're showing the true legal definition.

Our next question or comment comes from the line of Mitchel Penn from Janney.

In the Q, you guys, in investment income, talked about an allowance. It says interest income from these new investments was partially offset by allowances on uncertain interest receivables for about $200,000. Can you just tell me what is that?

Mitch, yes, there are times when we establish reserves from some of our interest receivables and the company is not on nonaccrual at that time. There are times when we end up receiving this interest or the portfolio company ends up moving to nonaccrual status. Ultimately, we just have to see how the financial results of the portfolio company plays out. Obviously, there's different facts and circumstances around each portfolio company.

Which companies are those?

Which reserves have moved?

Yes.

Currently, there is a reserve from Saunders from previous quarters, Reliable and that's it. Yes, just Saunders and Reliable at this point.

Okay, great. Can you just update us on Legend and Precision?

Legend is a small radio operator in the Mountain States, continues to perform. It's current on all of its underlying interests. It's probably in the category of slightly larger than some of our other radio assets. So the marketability and the exit alternatives, as I alluded to earlier, are probably a little bit stronger. We're assessing where that might ultimately go. Certainly, we expressed an intent to exit a number of our small-market radio and in the past have been successful in bringing local banks and attracting SBA-guaranteed financing to refinance those. So that has worked and might be an alternative in the not-too-distant future for Legend. Who's your other -- the other question was?

Precision.

Precision, yes. Precision is a supplier into the aluminum manufacturing marketplace. Precision has been improving substantially over the course of the last year. We are seeing significant EBITDA growth. There was a point in time where that was pretty challenged. The company is current, paying interest and deleveraging relatively quickly. We extended the maturity date to early 2016, as you'll see in our schedule of investment, and we have every expectation that given the performance and the diversity that, that business is something that is marketable. I expect ultimately to see a liquidity event on that in the not-too-distant future.

Our next question or comment comes from the line of Casey Alexander from Gilford Securities.

On Funko, was that a directly placed investment? Or was it a private equity-sponsored investment? And if so, can -- would you share with us who the private equity sponsor is on that one?

Well, I'm not sure we can do that at this point in time. It was -- it had an equity sponsor, not as well known as you would expect in that area and it one that we originated. We took the lead on it in both of our companies. It happens to be in Gladstone Capital as well as Gladstone Investment, so we split the deal between the two and it has done exceedingly well.

It's a small West Coast operator that, I think, it was more of a pledged fund as opposed to an established private equity platform.

Our next question or comment comes from the line of Bill Brown [ph].

A couple of questions. First of all, I think, David, you alluded to a potential portfolio company that's hopefully looking at potentially large capital gain. I assume -- is this the one that you referred to in the last conference call that you had hoped, at that time, would exit in July, August? And if so, any more color on the time frame?

They're still working it down to 2 proposals. They haven't selected one, so we'll see. But all of that's up in the air. Please don't put that down as something that absolutely will happen. The group that's involved in it is working it very hard, but that's still something up in the air, but we're very hopeful that, that will happen in August.

And as follow-up to that, just on this issue, I'm just curious of the company policy. I know generally when you make a new proprietary investment, you send out a press release. When you exit a company, I know generally, you don't. Is it -- does it depend on the magnitude of the sale? Or is it just you figure the sales are not something that merits a press release?

Well, neither of them are required press releases. We've tried to give people an idea. There was a time when we did no press releases either way. And the people, the analysts, for example, I think one of them actually assumed that we did nothing during the quarter. Then at the end of the quarter, when we announced the 3 or 4 deals that we're in, he was embarrassed. So as a result, we've gone with the rest of the community and we announce these deals that we put together when we do them so that people can see the progress. Unfortunately, this is an exceedingly lumpy business in which you, one quarter you might have any number and then the next quarter you don't have any. So it doesn't make much sense to have the press release other than the fact that most analysts want to know when you've done a next deal.

Got it. So it's likelihood that if there's a sale, you probably would not have a press release?

Well, if it was big enough and was material, then you have to. For example, if we sold something and got $5 million worth of capital gains. We'd have to be able to press release that. I think that would reach materiality and we'd have to put something out.

Got it. And a second question relates to the adviser credits that were put in this quarter. I'm just curious, I know in the prior couple of calls, you had talked about how the adviser had committed to making sure the company could cover the dividend over an annual basis and then I thought the intent was to do the credits, if necessary, at the end of the year. I'm curious why -- what happened in terms of you doing them this quarter?

Well, the bottom -- go ahead, Melissa.

Sure. So the end of our fiscal year is September 30 and so when assessing and looking at our projections of NII and also our projections of cash distributions, we wanted to make sure that we would, indeed, be covered by that fourth quarter. So in some cases, although we switched to an annual basis instead of a quarterly basis of calculating those credits or determining those credits, we thought in the third quarter it was more prudent to add in an additional credit.

Unless there's a large capital gain, we know there will be a credit this year and we're just being mindful that we need to make sure that everyone knows we're going to try to do everything we can to cover it. A lot of people in the analytical world don't like the idea of these and they give us negative ratings because we haven't done it. I actually like it because it tells the people who are entitled to the credits that we are going to think of our shareholders first. So they know it's coming right out of their bonus if they don't make the numbers work and I think that's very healthy for a company like ours to tell those people that are sitting at the top that you either make it for the shareholders or you don't get it. There are a lot of situations, and I don't know how many they are, but I asked a couple of the analysts years ago, I said, how many people are crediting part on their incentive fee back to make sure they cover the dividend? And the answer was two and one was Gladstone Capital and the other was Gladstone Investments. So we seem to be the only ones that are dedicated and put our money where our mouth is to make sure that we cover the dividend each year.

[Operator Instructions] I'm showing no additional audio questions at this time, sir. I'll turn it back over to you for any closing remarks.

Well, we don't have any closing remarks except thank you all for listening, and we'll see you again next quarter. That's the end of this call.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.