Ladies and gentlemen, thank you for standing by and welcome to the Gladstone Investment Corporation's Second Quarter Earnings Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

[Operator Instructions]I would now like to hand the conference over to your speaker, David Gladstone. Please go ahead, sir..

Well, thank you, Sidney. Nice introduction, this is David Gladstone, Chairman of the Gladstone Investment and this is the quarterly earnings conference call for the quarter ending September 30, 2019 and this is for shareholders and analysts that like to ask questions at the end of this. The common stocks traded on NASDAQ, under the symbol GAIN.

Thank you all for calling in. We are always happy to provide an update to our shareholders and the analysts that follow us providing our view of the current business environment. Our goal is to help you understand what's happened and then give you a view of the future.We have changed these calls.

As many of you know, we used to do a lot of history, but we've excluded most of the history of this company and the detailed discussion of how the company is different from other VDCs and we seek to do capital gains and income, not just income.

So hope you like this streamlined reporting method that we're going through.And now hear from our General Counsel and Secretary, Michael LiCalsi..

Good morning, everyone. Today's call may include forward-looking statements under the Securities Act of 1933, the Securities Exchange Act of 1934, including those regarding our future performance.

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 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 listed on our Forms 10-Q, 10-K and other documents that we file with the SEC.

You can find all these on our website, www.gladstoneinvestment.com or even of the SEC's website, which is www.sec.gov.And 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 information or market information is not a guarantee of future results. We ask you take the opportunity to visit our website, once again, www.gladstoneinvestment.com; you could 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. As a reminder, today's call is simply an overview of our results through September 30, 2019.

So we ask you to review our press release and the Form 10-Q, both issued yesterday for more detailed information.With that, I'll turn the presentation over to Julia Ryan. She's Gladstone Investments Chief Financial Officer.

Julia?.

Good morning, everyone. Well, Dave is on vacation, I will provide an update on our business and outlook. We have please to again report solid operating results for the most recent quarter.

Adjusted net investment income of $0.23 per common share for the quarter was greater than our regular quarterly distributions of $0.20 per common share.Based on our current portfolio performance, values and income generating potential we believe the outlook for the balance of the fiscal year ending March 2020, to be positive.

We made one new buyout investment; two add-ons and successfully exited one buyout investment during the press past quarter.With this exit since inception in 2005, we have exited 19 portfolio companies and generated a 4.2 times cash-on-cash return on the equity portion of those investments while focusing on growing total assets and increase our monthly distributions to shareholders.Additionally, our net asset value remains strong at 12.39 per share at 9-30-19.

We maintained our monthly distributions at an annual run rate of $0.82 per common share, reflecting additional capital gain realization successes and made another one time additional supplemental distribution of $0.03 per common share in September.Our board also recently approved the second semi-annual supplemental distribution of $0.09 per common share to be paid in December of this year.

While the buyout environment continues to be very competitive, the good news is that we are seeing a pick up a new investment activity.

As mentioned, we made two new acquisitions in the fiscal year-to-date and are evaluating a number of other potential opportunities.We anticipate continuing to pay semi-annual supplemental distribution as the portfolio matures and grows and we're able to manage exits and realize additional capital gains.

Of course, we and our Board of Directors will evaluate the ability to make these additional supplemental distributions. The amount and timing as well as any further deemed distributions of capital gains similar to the one we declared in March of 2019.Now, let's turn to a summary of the funds financial performance.

We ended the September quarter with NII of 6.6 million as compared to NII of 8.9 million in the prior quarter.

Investment income declined slightly due to a 2.9 million decrease in other income, the timing of which can be variable, which affects the 2.3 million increase in interest income which was primarily driven by the collection of past-due amounts upon the exit of one portfolio company.Net expenses increased by 1.6 million in the current quarter, which was primarily driven by a 0.8 million increase in other expenses and a 0.8 million decrease in credits to fees from the advisor.

The 1.3 million decrease in the income based incentive fee resulting from lower pre-incentive fee net investment income was offset by $1.4 million increase in the capital gains based incentive fee given realized and unrealized gains this quarter.When we're adjusting net investment income to exclude the capital gains based incentive fee accrual, adjusted net investment income per weighted average common share was $0.23 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 realized or unrealized investment activity associated with the fee.During the quarter ended September 30, 2019.

We recognized a net realized gain on investments of 21 million which is primarily the result of one of those exits I mentioned earlier.

On the balances side and as of September 30, total assets decrease to 620 million compared to about 642 million at June 30 as repayments and the exit I mentioned exceeded new investment and add on activity and due to a roughly $4 million declining fair values quarter-over-quarter.Liquidity remained strong with over 125 million available under our credit facility and net asset coverage of 316%.

Net assets totaled about 407 million or $12.39 per share as of September 30, compared to $12.29 per share at June 30, which was primarily a result of realized gains exceeding any unrealized depreciation this period.As of September 30, and on a book basis, undistributed net investment income combined with net realized gains totaled over 27 million, or about $0.83 per common share.

This amount is already net of the 50 million deemed distribution were declared in March of 2019.And it's also reduced by the book accrual of the capital gains based incentive fee which is roughly 23 million at this point, and this amount does not currently due.

All else equal the $0.83 per share would be available for distribution to shareholders in future periods even if the entire capital gains based incentive fee accrual were to be paid.Now with that in mind, and as previously announced in October '19, the board declared monthly distributions of $0.068 per common share for October, November and December of 2019.

And the second semi-annual supplemental distribution of $0.09 per common share could be paid in December.Assuming the current monthly distribution run rate of $0.82 per share per year, and $0.18 per share per year in supplemental distribution, meaning it does not include the additional $0.03 per share we paid in September, annual distributions totaled of roughly $1 per common share or a yield of about 7.7% based on yesterday's closing price of $12.95.And this covers my part of today's call back to you, David..

Well, that's good. Good report Julia. No, Dave Dullum is listening wherever he is and he will be out today and he'll be back soon and on the next call. Julia and Michael gave good information for our shareholders that is presented in the 10-Q filed yesterday.

This team has reported solid results, including a new buyout investment and one exit from a significant realized gain. And some add on investments.

In fact, they add-ons is the way we grow some of these companies, we have a company and then we buy a smaller company and add it to it.The team is in a really good position to continue these successes throughout our fiscal year ending March 31, 2020.

We all believe that Gladstone Investment is an attractive investment for investors seeking continuous monthly distributions with some supplemental distributions from potential capital gains and some other income that comes in from time to time.

The team hopes to continue to show you a strong return on your investment and I affirm.Now let's have some questions from our analysts. So Sidney would you come on and give instructions for asking questions..

Yes, thank you. [Operator Instructions] Our first question comes from Henry Coffey with Wedbush. Your line is now open..

Good morning, everyone. Maybe it's just winning the World Series, but great quarter and a lot of enthusiasm on the call. The challenge for us is to always figure out what's next.

When you look at your portfolio companies in aggregate, are there – not specific issues because those would be captured in fair value adjustments, but are there sort of general opportunities, constraints to growth, new doors opening, new doors closing? When you look at the world about what is your thought process in terms of the operating environment for your portfolio companies?.

I think it's good Henry. We're in the smaller end of the buyout world. As you know, we're in the middle market. Middle market's about the third largest economy in the world. And so there's opportunities coming and going in this section. And we're just sitting in there trying to pick off a couple every quarter. And I think it's a good opportunity for us.

The fact that nobody knows where we're going right now, that is, the economy's booming, but at the same time, there's a lot of doubts in the marketplace, gives us a chance to buy things and I think we're going to continue to do well. You never see anything more than about six months out.

So I think for the rest of the fiscal year ending, March 31, 2020, we're in really good shape and we should continue to grow and have a good time building up this company and hopefully have some huge capital gains someday down the road. But I think we're in good shape.

There's no real blowback at this point in time from anything that we see, so headwinds and tailwinds as they always call them. We see some going in different directions and just try to stay out of the way of the tailwinds and get good little companies and they're running these things..

With adjusted net income – NII per at $0.23, is the thought on the dividend just to sort of keep it where it is and then just continue to let it flow from a series of sort of supplemental and regular payments?.

Well, we certainly don't want to cut the dividend. That's always been a no-no for us and we'll raise the dividend when we get in a position to raise it. There's nothing other than just good feeling about where we are today. So I would hope that we can raise it sometime in the near future. But we're – we debate that every time the board gets together.

And as you know, our next board meeting is in January, so we'll keep our eyes on that and I want to raise the dividend. I'm a big proponent of raising the dividend and Dave Dullum and Julia who have to manage the balance sheet and the P&L always pushing back and making sure I don't get too excited about raising the dividend.

But we have a good discussion every quarter about raising the dividend. And I think you should look at the capital gain side of the business. It's still strong and if you looked at what we could do, if everything works, I think you'll get really, really happy with the aspect of getting some extra dividends during the next year..

Thank you..

Okay, next question..

Thank you. And our next question comes from the line of Mickey Schleien with Ladenburg. Your line is now open..

Yes. Good morning, everyone. I want to start by asking about repayments. I noticed that the last couple of quarters, the principal repayments have been pretty significant.

I'm curious what's driving that trend? And how do you feel about your deal pipeline for the second half of the fiscal year?.

Mickey, its Julia, the repayments have sorter – obviously, when we exit a deal, which we've accident quite a few already this year the debt side of things get labeled as a repayment. So that's why you see that number be a little bit higher, comparatively to the prior period and the last fiscal year.

Other than that, this is just part of our managing our exit strategy. There's nothing off hand that's happening right now. And I think I alluded to it in the earlier part of my call. We are seeing some pickup and the deal volume that we're looking at and things that make it on our radar.

So we're happy with that and we're hoping that we can close on a few DLC in the near future..

One of the things that's driving this industry we're in is that people are worried that somehow, we're going to have another recession. So they want to sell now. And we're taking advantage of that. We're not in a belief that there's going to be some kind of catastrophic event soon. And so we're playing that game today.

Maybe the wrong game, but most likely is the right game. Since everything seems so strong.

What's your next question Mickey?.

My next question was about what was the nature of the past-due interest on ADC?.

If you recall, two years ago, ADC had some operational struggles and we had it on nonaccrual for a while and when they came out of that they started paying back some of those contractual interest that they hadn't been paying us during the nonaccrual period and then upon exit, we negotiated that we would get all past-due amounts..

Okay, that's straightforward. A couple more questions. I noticed that last quarter, meaning the previous quarter you extended a line of credit to J.R. Hobbs. And the preferreds were written down. In this quarter, that line of credit was re-priced, and the debt was reclassified from first to second lien, and the preferreds were written down again.

So who's the lender ahead of you and what issues in general is that company confronting?.

Mickey, so you're right, we brought in a senior lender, with the idea that in the near future, we would be – our line of credit would be refinanced out. The company has had some issues on the backlog sides of managing pricing internally, but the backlog is really strong. We're out of all those projects.

They've run their term, so you should see a nice pickup in that company here in the near future..

So just to make sure I understand you brought in a bank with a facility ahead of yours and you expect them to take out your facility..

Yes, in the in the near term..

Okay.

And sort of a housekeeping question your G&A climbed quarter-to-quarter was there something specific going on there?.

Taxes, generally the quarter where we accrue excess taxes because we're nearing calendar year end?.

Okay.

And slog remains – the debt remains valued at par? Are they in a position to be making – to begin to be making interest payments and going back on accrual, was that too optimistic?.

It's too optimistic for the balance of the fiscal year, but we're working on it..

Okay, that's it for me. Appreciate your time. Thank you..

Sure..

Sidney, you got any other questions for us?.

Yes. Our next question comes from the line of Matt Sherwood with CCP. Your line is open..

Hey guys, great quarter.

Just a quick one on the interest, sorry on the B-Dry right off subsequent to quarter end, how does that impact these excess – the $0.82 you were talking about of excess income for distribution?.

Good question. So it would reduce that once that number is realized. The unrealized loss will slip into a realized loss and therefore, reduce the number that I quoted. If you look on our balance sheet, that number actually includes the unrealized piece of the portfolio as well.

So if you were to go with a liquidating as of 9-30 perspective and I would point you to the balance sheet of amounts..

Right, so the $0.82, do you take off the capital incentive fee or does that just go down by 15 million or how does it work?.

So the total accumulated gains and losses would be reduced by the amount that I just – so B-Dry losses. So you would just get a new total to divide by the total number of shares outstanding..

Okay, to be potentially lower next quarter because of the realized loss?.

Assuming no other gains, you're correct..

Okay, got you. Perfect. No, that's helpful. That's – I was just trying to clarify, thanks so much..

Okay, Sidney, any other questions?.

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

Good morning, guys and congratulations on the good quarter..

Thank you..

So my main question relates to the yield. It seems like it's been picking up quarter-to-quarter or year-over-year and that's definitely favorable.

I'm curious, is that related to the repayment of the – the late repayment of the asset or what's that? What's driving that yield enhancement, especially given the impending rate outlook?.

That is exactly right. So the slight arbitration as you might call it, for the best quarter is related to the collection of the past-due amounts, but otherwise, yield is strong in that 13% range..

Okay, and the equity portion of your portfolio continues to wind down I mean, is that – what effect does that have on your portfolio, is it rotates in terms of the yield?.

The portfolio if you look at what's going on in the portfolio, you sell something that has reached its point and you sell it and get your capital gains or trigger a loss and move on to the next one.

So you're seeing later stage deals that we hold in the portfolio being replaced to new deals and hopefully two to three years from now, those will be yielding the same as the ones in the portfolio. So the yield – you have to remember, the yield in this company is determined by us.

That is, if you own all of our most of the equity in a company or large chunk, you can set the yield as much as you want to take out. And so if you've got a very strong company, you can push your yield up.

And if it's not yielding – not strong, then your yield comes down some, but yield is a function of how much we want to take out of going along as we go through the development of the company..

Great and credit seems to be trending well, showing year-over-year improvements as well on that front. And you mentioned that your outlook in terms of the macro economy continues to be strong especially in the competitive deal environment. You have a good amount of liquidity moving forward.

Are you changing maybe your credit or underwriting strategy given this part of the cycle or is there anything different about your origination strategy moving forward?.

No, it's the same business. I've been in it for lifetime. And you go through these cycles, and when the economy is hot, you need to keep putting good deals on the books with the idea that next quarter might be the down quarter. And we get caught every now and then making a bad guess about a certain part of the economy and where it's going.

But it's rare that everything goes down, like it did in 7-89. And so my guess is that we picked the right places. If you look at where each of these new deals are I think we've picked the right place to increase our investments..

Well, thank you, David. Thank you, Julia..

All right, Sidney, any other questions?.

I'm showing no further questions at this time. I will now turn the call back over to David Gladstone for any further remarks..

All right, we thank you all for calling in. And I think this will be a good quarter when we get to December 31. And get your call going sometime in January, February or early February. That will be I think, another good time to talk. That's the end of this and I'm going to shut us down..

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