Good afternoon, ladies and gentlemen, and welcome to the Gladstone Capital Corporation First Quarter ended December 31, 2019, Earnings Call and Webcast. [Operator Instructions]. As a reminder, this conference call is being recorded. I would like to turn the conference over to your host, Mr. David Gladstone. You may begin.

Thank you, Sarah. This is David Gladstone, Chairman, and this is the quarterly earnings conference call for Gladstone Capital for the quarter ending December 31, 2019. Thank you all for calling in. We're also happy to talk to you and all our shareholders and analysts. We welcome the opportunity to provide an update on the company and our investment portfolio. And now we hear from our General Counsel, Michael LiCalsi, who will make a statement regarding certain forward-looking statements. Michael?

Thanks, David, and good morning, everyone. Today's report may include forward-looking statements under the Securities Act of 1933, 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. Many factors may cause our actual results to be materially different from the 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. You can find these on Investor Relations page of our website, www.gladstonecapital.com. You can also sign up for our e-mail notification service or also on the SEC's website, 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. Today's call is simply an overview of our results. So we ask that you review our press release and Form 10-Q, both issued yesterday for more detailed information. Again, you can find them on our Investor Relations page of our website. Now I'll turn the presentation over to Gladstone Capital's President, Bob Marcotte. Bob?

Good morning, all. Thank you all for dialing in this morning, and let's dive right into the summary of the results for Gladstone Capital for the quarter ended December 31, 2019. Net originations for the quarter totaled $30 million as originations of $42.5 million, including 2 new proprietary first lien investments outpaced exits and repayments of $12.6 million. Interest income declined $400,000 or 3% to $11.5 million compared to the prior quarter as higher average investment balances did not offset the $900,000 of previously deferred ADC interest collected last quarter. Prepayment fees, exit fees and dividend income also declined to $700,000 on the quarter from $900,000 last quarter, with a lighter volume of prepayments. As a result, total investment income for the quarter was down $600,000 to $12.2 million. Borrowing costs declined on the quarter with the refunding of our 6% preferred stock with the 5 3/8% GLADL issued in higher bank borrowings, the cost of which declined with lower LIBOR rates. Excluding the ADC interest collected last quarter, our net interest margin improved approximately 45 basis points in the quarter. Net management fees declined by $500,000 to $1.9 million with origination and higher incentive fee credits, resulting in net investment income of $6.4 million or $0.21 a share. The net assets from operations declined to $700,000 or $0.02 per share, which included a $1.4 million write-off of the unamortized issuance cost associated with the call of our preferred stock and a $4.3 million of net portfolio depreciation on the quarter, resulting in the NAV declining $0.14 to $8.08 per share as of December 31. Regarding the portfolio, the asset mix at the end of the quarter shifted with a predominantly first lien originations and second lien syndicated loan exits, lifting the first lien exposure by 6 points to 52%…

Thanks, Bob. Good morning, everyone. During the December quarter, total interest income declined $400,000 or 3% to $11.5 million, primarily due to the absence of the $900,000 of past due interest collected in the prior quarter. The growth in the investment portfolio offset much of the prior quarter's past due collections as the weighted average principal balance of our interest-bearing investment portfolio rose $25.6 million or 6.8% to $401.4 million for the 3 months ended December 31 compared to $375.8 million for the 3 months ended September 30. The higher investment balance also helped mitigate the approximate 40 basis point decline in LIBOR rates as 84% of the portfolio is tied to floating rates. Other income decreased by $200,000 compared to the last quarter, driven by lower prepayments and a decrease in success fees received, resulting in total investment income for the quarter declining $600,000 or 4.4% to $12.2 million. Total expenses decreased by 9.6% quarter-over-quarter, primarily due to an $800,000 decrease in dividend expense on mandatorily redeemable preferred stock and a $400,000 increase in the incentive fee credit granted by the adviser, partially offset by a $500,000 increase in interest expense on long-term debt with the new issuance during the quarter. Net investment income for the quarter ended December 31 was $6.4 million, a slight increase of 0.8% as compared to the prior quarter or $0.21 per share, covering 100% of our shareholder distribution. The net increase in net assets resulting from operations was $700,000 or $0.02 per share for the quarter ended December 31 compared to $5.4 million or $0.18 per share for the quarter ended September 30. The current quarter decrease is driven by $4.3 million of net portfolio depreciation and a $1.4 million loss on the extinguishment of debt recognized in connection with the voluntary redemption…

Okay. Thank you, Nicole and Bob and Michael, you all did a great job in informing our stockholders and analysts that follow the company. In summary, Gladstone Capital, another good quarter, originating $42 million in investments last quarter ending December 31, 2019. Team grew the investment portfolio by $26 million to come in now at $429 million, which is a new high. They redeemed the last outstanding series of the company's preferred stock to achieve an added financial flexibility and reduce the company's financing cost to enhance the company's core interest earnings, which we used to pay the dividend. And we've maintained a strong balance sheet with significant money to -- and borrowing capacity to grow the investments in attractive lower middle market businesses. In summary, the company is continuing to demonstrate strength in finding opportunities of mid-sized private businesses. Any of these loans that we make to those businesses are in support of a midsized private equity fund that are looking for experienced partners to support the acquisition and growth of the business that they're investing in. This gives us an opportunity to make attractive interest paying loans to support our ongoing commitment to pay cash distributions to shareholders. We have a strong team in place today, and this will capitalize on this good market that's out there now. And with the economy so strong, well, quite frankly, it's the strongest economy I've seen in my lifetime. We have a strong showing when compared to other BDCs, a list I looked at from a large brokerage house showing BDCs. This BDC was #4 on their list of 37 and they measured it by the last 12 months total return, which this company had a 47% according to that list. I think I'll stop now, and we will move over to the operator. Sara, if you'll come on and tell the callers how they can ask questions about the company's.

[Operator Instructions]. Your first question comes from the line of Mickey Schleien from Ladenburg.

Just to start off with a housekeeping question. Were there any adjustments to investment income for the New Trident exit or the upcoming Meridian exit?

Mickey, no, both of those investments have written down to 0, so there were no adjustments associated with those.

Okay. And Bob, could you expand on the deterioration in the valuation of Defiance's common shares in terms of what triggered that?

Sure. I think, as I said, that is a heavy manufacturing business that serves the truck industry as well as some auto-related industries. You may note that last quarter, in the December 31st quarter, there was a strike at GM, which had some impact. You also had a number of manufacturers, managing their year end inventory in the face of uncertain growth outlook for 2020. And so there was a temporary adjustment in the production flows to manage those end inventory. And as a result, there was a dip in sales. We are now, obviously, post that period. Normal inventory flow has commenced. And in fact, that business has a significant book of new orders. It expects to ramp over the balance of the year. So we view that adjustment as largely a temporary phenomenon and feel very strong about where the business is headed at this stage. But it's a quarter-end activity, and we adjusted our equity accordingly.

I understand. That's very helpful, Bob. In your prepared remarks, I think you said something about target leverage of 1:1. Did I hear that correctly?

Yes. I think we've been guiding folks that we were headed in that direction. The question is how quickly we might get there in light of some of the prepayment activity, which we experienced a fairly heavy flow in the second and third quarters of last year. So we're working in that general direction, whether we can actually get there at the end of this fiscal year will depend a large part on certainly market activities and the level of those prepayments.

I understand. And my final question, Bob, and maybe difficult to answer, but looking at the portfolio's structure, there's certainly some exposure to things like consumer durables, and as you mentioned, transportation and cargo, aerospace. My question is, have you started to see or have your -- the management teams of your borrowers started to convey to you any information about the impact of the coronavirus on their business? I asked because, even this morning, I'm starting to read stories in the papers about folks having problems getting supplies from China.

Given the size of the investments that we typically make and the focus on domestic businesses, it tends to be domestic manufacturing. That said, we are -- there are several companies in our portfolio that do a heavier flow of imports. The most noted of which, I would say -- the business has 70 suppliers from China. So it's very diversified geographically. Secondly, it was somewhat fortuitous that most of these businesses with these long lead supply chains need to be carrying meaningful inventories given the time in transit. So they do carry inventories that are more than adequate. And the third is, this event occurring just before Chinese New Years, it's fairly common for businesses to go a little longer on inventory in light of shutdowns that occurred during that time of year in China. So the one business that I'm referencing is in pretty good shape when you factor those 3 considerations in place. Now obviously, there's a span and scope of shutdowns and disruptions that we can't necessarily fully anticipate. But unless this continues for some period, this particular business does carry an extended inventory and should be able to manage at least for the time being.

Any other questions, please.

[Operator Instructions]. I'm showing no further question at this time. I would now like to turn the conference back to Mr. David Gladstone.

Okay. Thank you very much for all of you tuning in and listening to this, and I know a number of you will listen at the call at a later time. So thank you very much, and that's the end of this call, and we'll see you again next quarter. That's the end.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and have a wonderful day. You may all disconnect.