Good day, ladies and gentlemen, and welcome to the Gladstone Capital Corporation's Second Quarter ended 03/31/2019 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 conference, Mr. David Gladstone. Sir, you may begin.

Good morning. Thank you, Jimmy, nice introduction. Hello everyone, this is David Gladstone, Chairman and this is the quarterly earnings conference call for the quarter ending March 31. We are happy to talk with our shareholders and analysts and welcome the opportunity to provide an update for our company and the investment portfolio. We're now going to do something a little bit different. We're not going to go into the history of the company and you can get that obviously from the website at gladstonecapital.com. We're going to just do the current situation of your fund and give you some idea of what – thing are going to happen in the future. But first, before we begin I'll talk to the associate of Counsel here he's going to make a statement regarding certain forward-looking statements. So Erich Hellmold, go ahead.

Thanks and good morning. Today's report may include forward-looking statements under the Securities Act of 1933 and Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable. Any factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all risk factors on our Forms 10-Q, 10-K and other documents that we file with the SEC. Those can be found on our website, www.gladstonecapital.com specifically the Investor Relations and on the SEC's website at www.sec.gov. We undertake 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. Please take the opportunity to visit our website, www.gladstonecapital.com and sign up for our e-mail notification service. We can also be found on Twitter and that's @GladstoneComps and on Facebook, keyword, The Gladstone Companies. Today's call is an overview of our results, so we ask you to review our press release and Form 10-Q, both issued yesterday for more detailed information. Again, those can be found on the Investor Relations page of our website. Now I'll turn it over to Gladstone Capital's President, Bob Marcotte.

Good morning and thank you all for dialing-in today to spend a few minutes with us this morning. Without further ado, let's get into the headline for Gladstone Capital for the quarter ended March 31, 2019. Originations on the quarter were down as it's typical for the first calendar quarter of the year and appear to be on par with the lower level of transaction activity across much of the middle market for the period. For the quarter, we closed one small syndicated investment of 3.3 million. Exits and repayments were elevated per our earlier guidance and came in at $49 million. Exits included the sale of United Flexible, which generated a $2.1 million, realized gain on our equity investment and a net pay down of $10.9 million associated with the consolidation of our investments in Impact! Chemical and WadeCo Specialties which were merged into Imperative Chemical, which also reduced our net energy exposure in the process. And while our investments declined $43.4 million as of the end of the quarter, since the end of the quarter, we have closed two additional investments totaling $40 million within the other $10 million investments expected to fund shortly. So the dip was relatively temporary and we are well on our way to continue to scale our earning asset base. Interest income declined 5% on the quarter to $11.1 million from the prior year, as a result of the decline in average yield on our interest bearing portfolio of 12%, the impact of two small investment positions being placed on nonaccrual status and the restructuring of our third investment, as the average interest bearing investment portfolio was essentially unchanged from the prior quarter. Prepayment fees, exit fees and dividend income rose on the quarter to $1.4 million which lifted total investment income to…

Good morning everyone. During the March quarter, total interest income declined by $600,000 or 5.5% from the prior quarter, due to mainly by the 30 basis point decline in the average yield on the investment portfolio and in non-earning and restructured investments discussed earlier. Other income rose by $1.2 million to $1.4 million from $200,000 last quarter, driven by exit fees and prepayment fees received associated with the payoff of Merlin and dividend income received from a number of our other portfolio company. Total investment income rose $600,000 or 5.1% to $12.5 million on the quarter. Total expenses for the quarter increased by $600,000 driven mainly by the $200,000 increase in financing expenses, associated with the 50 basis point increase in average borrowing costs, with the fourth quarter impact of our 6.25% [ph] senior notes and the 15.4 million reduction in average credit facility borrowings during the quarter and the resulting higher unused credit facility commitment fees. Net management and incentive fees rose by $500,000 for the period as base management fee credits declined with the reduced level of originations and associated fees. Other expenses declined by $100,000 in total, 78 basis points on average assets on the quarter. For the quarter ended March 31, net investment income was $6 million or $0.21 per share and covered 100% of our shareholder distribution. Moving over to the balance sheet as of March 31, total assets were $396 million consisting of $388 million in investments at fair value and $8 million in cash and other assets. Liabilities declined by $49 million to $162 million and consisted $52 million in borrowings on our credit facility, $55.5 million of 6.25% [ph] senior notes and $52 million of our Series 2024 term preferred stock. Net assets rose by 7.5 million since the prior quarter end with 3.3 million of net realized and unrealized portfolio appreciation and common stock issuance under our ATM program for net proceeds of 4.2 million. For the quarter, we issued 460,000 common shares at a weighted average price of $9.24 under our ATM program. NAV per share rose by $0.13 to $8.11 as of March 31, compared to $7.98 as of the prior quarter-end. While our leverage as of March 31, was down materially at 69% of net assets, pro forma for the deals closed since the end of the quarter and additional common issuance proceeds from our ATM program of 3.5 million. Our leverage has increased to approximately 85% post quarter-end. We currently have approximately 74 million of availability under our line of credit. And now I'll turn it back to David to conclude the presentation.

Alright, good report in a call, Bob, Eric[ph], I think we did a good job of informing our stockholders even though this is a little bit shorter than we normally do. Hope you all liked the way we do in our presentations now. Just to conclude, in summary, our company had a good quarter generating realized gains and the significant fee income and lifted the investment income enough to cover the dividend again in this quarter. Since the end of the quarter, the team has been very successful in reinvesting almost all of the payments that were the proceeds from the last quarter and got some good lower middle market businesses financed without money. It's well positioned, now I think to grow over the balance of the fiscal year ending September 30, 2019 and looks like it's going to be a good period for us. Gladstone Capital has remained committed to paying shareholders cash dividends. So in April the Board of Directors declared a monthly distribution of common stock $0.07 per common share for April, May and June, which is an annual rate of $0.84 per share. The Board will meet again in July to determine the monthly distributions to common shareholders for the following quarter. At the current distribution rates, the common stock with our common stock price that closed at 9.50 yesterday, distribution is a run rate of about 8.84% per share, that's a great yield for good, strong company like this. In summary, the company sees the improved position in the private business than the middle-sized businesses that we invest. Many of these are owned by middle-sized buyout funds looking for experienced partners that can put the money in and be their co-investor in those companies. This gives us a chance to make attractive interest paying loans to support our ongoing commitment to pay cash distributions to shareholders. Got a great team here and they're going to do a good job for you in this next quarter. And so Operator if you'll come on now and give the callers how they can ask questions about the conference.

[Operator Instructions] Our first question comes from Mickey Schleien with Ladenburg. Your line is now open.

Good morning everyone. I'd like to start by asking you about the decline in the portfolio's average yield. I'm curious if you use the forward curve to calculate the yield and were changes in the curve would cause the decline?

No, we don't calculate on a forward-curve basis. It's based on what's the actual LIBOR at the time and obviously LIBOR has gotten a little bit lower in the course of the last 90 days Mickey. I would say the average if you look at the footnotes, I think the average is roughly the same there was a very slight change in the aggregate. We kind of peaked at the last quarter. As you may recall, we closed a lot of deals towards year-end, some other deals paid-off as we got into this quarter. So the average was slightly different. Most of the underlying yield change was due to two factors. One is the definite mix shift in some of the older assets rolling-off and newer assets being more effective in driving the yield. And secondly as we stated, some of the non-earning assets had an effect on the average yield as well. So I would say the bigger proportion is probably the latter than the former.

That's really helpful, Bob. Thank you for that, just a couple more questions. What was the catalyst for the Impact! and WadeCo merger and how do you feel about the company's outlook, the merged companies outlook in the current environment?

As we've discussed our energy portfolio in the past, both of those companies were in the chemical distribution business and both were owned by the same sponsor. One was distributing chemicals to the production of wells in the Permian, which obviously continues to grow. The other was acquired and built up as distributing chemicals to the pipelines that service the South Western markets. Given the overlapping nature of the business and given the combination of vendor supply and the general consolidation that's going on in the energy complex in the southwest, the company felt efficiency and scale would be more relevant for the business. When you put those two businesses together, you're talking about a business that's approaching several hundred million dollars in revenue and certainly a far more substantial cash flow and operating profitability. On a combined basis, our feeling is it's much stronger company, in part at this point because the chemicals – the pipeline business Mickey, as you may know is going three surge in trying to add [indiscernible] capacity out of the Permian basin. And so with those new pipelines coming on the business is going to be surging on that side of the business. As a result of that, the pure working capital needs of the company on a consolidated basis were well in excess of what we continue to support. So the decision was made to support the growth of the business and the performance of the business that we allowed them to bring in a senior secured working capital line supported by the underlying assets and we downsized our position. The leverage in fact didn't really change it just provided the flexibility for the company to continue to grow. So we feel pretty good about both, the nature of the consolidation, the consistency of the overlap and the ownership, the outlook for the businesses and the leverage profile of a much larger business that we are now financing and our energy exposure dropped in the process, kind of a win all around.

And Bob, given the scale of the combined company, how likely do you believe it could be – that you'll be refinanced out of the new entities balance sheet?

Yes. Having just closed that I don't think it's likely at this point. I think they are very happy. We have been a strong supporter as you can look in our history. We've been in these businesses for a number of years. We have a very strong relationship with this company. So we were not likely to expect to see that. We were accommodating the growth of the business and I think they view us as a supportive partner, so I don't think that's likely to happen.

Okay. Lastly, could you just discuss a little bit about the outlook for LWO, given the decline in the valuation? And that's it for me this morning.

Sure. Thanks Mickey for calling-in. LWO is a business that is, as I said in the printed circuit board manufacturing side of things, we believe in all indications are that, that's a sector that continues to grow, digitization and distribution of both technology and integration of that kind of printed circuit board in all products is continuing to increase. So the opportunities are out there. It is a business that requires a very exacting level of management and oversight. And some of the operating performance gaps were became evident over time. The business did bring in some more expert operating individuals to take on that side of the business late last year, but the market is certainly challenged and so we feel that the market's there, they are beginning to add the resources that are necessary to operate it in the way that it needs to be run. It's a contract manufacturing business and if you don't run it tight, you can lose money. And lastly, having taken the moves that we have, we've also stepped in and are working with the management team with some extra more resources to address the operating issues that they have. So we still feel positive on the outlook. We have core elements that we're happy with and we're supplementing those resources. So we feel pretty positive, it is not going to be a fast turn. These are businesses that have backlogs that will take a while to work through the contract framework, but the overall momentum in the sector should allow us to turn it. It will probably be some time, or a number of quarters before we can report any significant movement there. But it's one we still feel pretty positive about and are currently spending a fair bit of time on.

Thank you for your time this morning.

Thank you, Mickey.

Jimmy, next question.

[Operator Instructions] Our next question comes from Christopher Testa with National Securities Corporation. Your line is now open.

Hi. Good morning. Thanks for taking my questions. Bob, you had mentioned Meridian nonaccrual was impacted by Chinese tariffs, would I guess the event that would bring this back on status be the lifting of those tariffs or do you think that this is something that could go back on accrual status even if the tariffs have remained?

In the business, the tariffs were kind of a temporary phenomenon on….

$600,000.

It was both of working capital on a cost. They've now moved to accommodate some of those things. I would expect it could come-off without. This is a business that had a working capital line in it and given the seasonal working capital needs, the business, over the winter months doesn't do a ton of auto repairs, demand for those parts is not much. So between the tariff, consuming some of the working capital late last year and the seasonal downswing, it was not in a position to fully service the debt. I would expect with the upswing in the seasonal, combined with the adjustments that have been made, all likelihood is that that could be returned in a shorter period, there's no doubt that auto market and parts market is a very competitive business. So we'll be evaluating all alternatives and trying to assess what's the right move on that business. But I don't think it was a permanent impairment and I think your question around the temporary aspect of the tariffs is likely one that we'll be able to overcome in the short-term.

Got it and sticking with that theme, I know that you guys have a decent deal of manufacturing and that sort of investment on the portfolio. Just wondering how much, if any of that has also been negatively impacted by any tariffs?

Well, we've had a while to live with them based upon the overall movement in the valuations for the businesses I don't think that we're really seeing much anything in the tariff side. We do have a couple of businesses that have some Chinese operations and but we never really were a big player in virtual companies, totally reliant on imported products. So, off the top of my head and looking down the list of the various portfolio movements, we don't really have anything that is being negatively affected other than that. And frankly that wasn't a big number, I think as David referenced, it was less it was in the range of $0.5 million for a business that was doing order of magnitude somewhere between 25 and 50 in the total revenue. So it was not an overwhelming issue, it just happened to be fairly thin, a modest margin in a seasonal business that made it more impactful to that business.

Got it, that’s a great detail. Thank you, I appreciate it. And just switching gears to New Trident, I mean this had been marked at zero over the past couple quarters and then few quarters ago was marked 25 or 30 something like that. Just wondering why it took so long to place this on nonaccrual when it was apparently distressed by the marks that it had for several quarters now.

Well, the business was being marketed for sale. Certainly, the expectation was – that was a possibility, strategic buyers looking for the largest player in the sector that, that business was, would have been obviously a transformative events, when it became clear that even though there was a new management brought in, that was not likely to happen, the result was they decided to proceed with the bankruptcy and restructuring of the business. So given the market valuations and multiples in the marketplace, we felt that it was – as long as they were continuing to pay and as long as that was a viable option, that it was appropriate to accrue or at least realize what they were paying us, that obviously ended in last quarter.

Yes. Okay, I understand that, but if people are making active bids for the business or showing interest, obviously some numbers are being thrown out, but it was still, again marked at zero, so I'm just wondering why it was marked there. I appreciate the conservatism, I mean, it's a good thing that you guys had a mark where it was, but I'm just wondering why it wasn't being marked, where you are getting bids for this potentially?

I think there's a couple of things, one is, I think it was marked as zero, correct me if am wrong Nicole at December. So, obviously the financial performance was challenged, but it hadn't been marked at zero for a long time. And two, obviously it was another quarter before we took it off, put it on nonaccrual. So it was a – I think a conservative view on valuation and it was a – as we're receiving – a scenario, as we're receiving and paying interest with the view that it might be sold, we took the income in and obviously it's a very modest exposure. So we're not prejudging where the business is going to go when we recognize the income in the December quarter on that investment.

Got it, and now that you'll be taking equity in the company or are you looking to sort of rekindle the flame of selling this business? Or is this something that you guys are looking to maybe, either put in new manager and help turn it around first before you look to sell?

Chris, this is a syndicated deal. It is a large company. We are relatively small player, [indiscernible] in fact is the largest investor at a significant multiple of our exposure, I think that's a question that they might be better positioned there and still be a more significant equity owner going forward.

Got it. Okay, that's helpful. And just last one was from me and I will hop back on the queue, just coming to unrealized appreciation during the quarter what’s from technical – from the loan market bouncing back for us, just idiosyncratic positive developments in the companies.

That's a kind of a tough call. I think when we discussed earnings and results last quarter, I think we said in the neighborhood of roughly $5 million, we get attributed to market movement. This quarter as I said, ex the large one item LWO we were at 7.7. So I would guess it – if I were just using a rough guesstimate, I would probably say half to two-thirds of that was probably market oriented. There were clearly some very strong performances in the underlying portfolios that ultimately came through their year-end numbers. If I look down from the top, they were definitely few very strong performers, but I don't have, and it's very difficult when you ask our outside valuation service just to parse the difference between market multiples and earnings performance. I will say I don't believe that the middle market necessarily bounced back as much as some of the syndicated market, but it was a very significant contributor to the overall movement for the quarter.

Got it. Those were all my questions. Thanks for your time today.

Thank you, Chris.

Next question.

Thank you. And I'm showing no further questions in the queue at this time. I'd like to turn the call back to David Gladstone for any closing remarks.

Alright, thank you very much. We appreciate everybody calling in and we'll see you next quarter. That's the end of this call.

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