Good day, ladies and gentlemen, and welcome to the Gladstone Investment Corporation's first quarter earnings call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to David Gladstone. Sir, you may begin. Mr. Gladstone, you may begin.

Thank you, Shannon. Nice introduction. Hello, and good afternoon. This is David Gladstone, Chairman, and this is the quarterly earnings conference call for shareholders and analysts of Gladstone Investment. Common stock trading symbol is GAIN. And we have 3 preferred stocks: One is GAINO and GAINP and then GAINN. So 3 different versions of that. We thank you all for calling in. We're happy to talk to our shareholders and potential shareholders. We love to give updates on our company and our portfolio and our business environment. We wish we could do this more often, and you all have an invitation to stop by and say hello if you're in the Washington, D.C. area. We're in a suburb known as McLean, Virginia. And please stop by and say hello. A lot of people here. You'll meet some very fine people. And now we'll hear from our General Counsel and Secretary, Michael LiCalsi. Michael is also the President of Gladstone Administration, which serves as the administrator to all the Gladstone funds and related companies. And he'll make a statement regarding forward-looking statements. Michael?

Good afternoon, everyone. This conference call may include statements that constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, including statements with regard to the future performance of the company. And 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. And 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 this Form 10-Q filing and our Form 10-K filing and our registration statement as filed with the SEC, all of which can be found on our website, www.gladstoneinvestment.com; or the SEC's website, www.sec.gov. And the company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise after the date of this conference call, except as required by law. And please also note that past performance or market information is not a guarantee of future results. Please take the opportunity to visit our website, gladstoneinvestment.com, and sign up for our e-mail notification service. You can also find us on Facebook, keyword: The Gladstone Companies; and on Twitter, @GladstoneComps. And the presentation today will be an overview, so we ask that you read our press release issued yesterday and also to review our Form 10-Q for the quarter ended June 30, 2015, which we filed yesterday with the SEC. Those can be accessed on our website, gladstoneinvestment.com. And before…

Thank you, Mike. So our company, Gladstone Investment, is a fund focused on buying middle-market U.S. businesses with the annual sales generally between $20 million and $100 million. Our funding structure in any buyout usually consists of secured first and second lien debt in combination with a direct equity investment, giving us a significant ownership position. This combination of debt and equity produces a mix of assets, which is the basis of our strategy for Gladstone Investment. So the debt portion of our investments provide income to pay and grow our monthly distributions, while we look for the equity portion to increase in value and provide capital gains from time to time. So with our continued growth in operating income and the periodic realized gains that we have recognized, our board was able to declare a common share distribution of $0.0625 per share per month for April through September, which is a run rate of $0.75 per share per annum, which represents an over 4% increase year-over-year. Just generally, we like to indicate how we are different from other BDCs or other finance-type companies in that what we do is we take a significant equity position in the companies that we invest in, and this differs from the other public BDCs that are predominantly debt-oriented and generally referred to as credit-type BDCs. So for instance, the proportion of equity-to-debt for the investments in our portfolio, you'll see, is approximately 25:75 ratio. Most of the BDCs' portfolios are somewhere closer to about 10:90 proportion of equity-to-debt with their equity generally coming through warrants that are issued with the debt that they place or a small co-investment through and with the primary equity sponsor in any one transaction. As for more traditional private equity funds, which are generally 10-year private partnerships with…

Thanks, Dave, and good afternoon, everyone. The big news this quarter, as Dave mentioned, is that we originated 1 new deal and successfully exited 1 existing investment. We also raised almost $44 million of capital, consisting of over $40 million Series C preferred stock and over $3 million of new common stock, which was the overallotment of our $24 million March common offering. This additional capital affords us flexibility to continue to expand our balance sheet via future new deals. Through this quarter's originations, together with highly successful originations last year, we achieved another very strong quarter with over $12 million in total investment income and over $5 million in net investment income. We were also pleased to announce that our portfolio continues to perform, resulting in over $3 million of net appreciation, which was driven by improvements in operating performance as well as increases in market comparables of certain portfolio companies. The cumulative effect of these positive trends resulted in a net asset value of $9.24 per share as compared to $9.18 per share at March 31. On the balance sheet side. At the end of June, we had $502 million in assets, consisting of $481 million in investments at fair value, $6 million in cash and cash equivalents and $15 million in other assets. Our portfolio's allocation net cost is currently $377 million of debt securities and $140 million of equity securities for a 73%-27% split between debt and equity. Our liabilities and equity at June 30 consisted of approximately $90 million in borrowings outstanding on our credit facility, $122 million in term preferred stock and $10.5 million of other liabilities in addition to $280 million in equity. Listeners will remember that in March 2015, we completed the offering of 3.3 million common shares for net proceeds of…

All right. Thank you. Julia, that was a good report; and Dave and Michael, good reports. During the past quarter, we were able to report some great accomplishments, such as good originations, increased value in the portfolio and several successful financing activities, increasing our net investment income and declaring a dividend increase. One of our portfolio companies, as we keep mentioning, has moved closer to being sold. I think we have a couple of buyers, one now moving a little bit further ahead than the others. So I'm hopeful that before the end of the year -- end of the quarter, this quarter, that we'll have some good information for you. To recap, we closed a new investment, $16.3 million. We invested $1 million in an existing portfolio company, increased our net asset value to $9.24 and raised our run rate on monthly distributions by about 4% and believe we can continue this success going into the second quarter of fiscal 2016 and are already off to a really good start as far as doing things. And we got a lot of things under diligence and documentation phases. So I think you're going to see the quarter-ending this quarter, September 30, it looks good. We feel it's a great time to invest in smaller, middle-market companies like the ones we invest in. However, these types of companies can be significantly impacted by the economy in which they operate, although we've seen some of the positive trends in the recent economic indicators. And I think we're continuing to see the economic recovery even though it's a sluggish pace. Just a couple of things to mention to watch out for. Of course, there's still uncertainty around the Federal Reserve's monetary policies. They keep indicating maybe September. That always increases interest rates a…

[Operator Instructions] Our first question is from Kyle Joseph with Jefferies.

I was just hoping to get a little bit more of your thoughts on sort of the middle market. We've seen more volatility in the broader public markets. Are the markets that you're looking at somewhat insulated from that? And I'm just asking in the context that you said it remains a seller's market. I'm just wondering if you've seen any relief there at all.

Yes. Kyle, thanks. This is Dave Dullum. I'll try to answer it from our perspective, won't really tie in necessarily to the public markets, of course, because we deal in private businesses. And as I mentioned earlier, generally, companies we're looking at are low end $3 million, really up to $7 million or $8 million of EBITDA. In that space, what we're seeing over the last, certainly, 4 or 5, 6 months, that it stayed fairly strong if you are a decent company selling, meaning that you probably are able to get in the 7 to 8x multiple for the enterprise value for that company. That's a challenge. We tend to -- we would like to pay more like 5x. And so we work really hard at that, 5 or 6x. What I think -- this is just me thinking that I'm hoping that might moderate a bit over the next year or so, in particular, since I think the leverage availability, driven somewhat by commercial banks, et cetera, might to some degree put some pressure obviously on the amount of leverage that the equity guys can get to be able to buy a business. And that means they will have to probably put more equity in. And therefore, you might find some moderation of that. But as of right now, I would say it's holding about where it's been for a while. And in our case, we just keep working hard to find those decent companies that we can bring some of our benefit to it to be able to buy them at hopefully lower than what the general market seems to want to pay.

Kyle, do you have another question?

Yes, if that's all right. I was going to ask about the investment in trade. It looked like the fair value of the investment went up a bit quarter-on-quarter. I was wondering if you could just talk about the performance of that investment specifically.

Sure, thanks. We actually are seeing some improvement in that company. I won't go into the detail, obviously, but we're seeing a positive trend in EBITDA. They're working hard on that. And as a result of that, it's gotten a little bit of a bump, relatively speaking. And that is the one company, of course, that is on nonaccrual right now. It's the only one that we have, but they actually are generating positive EBITDA for their fiscal year. So we keep plugging away on that, and I hope it'll continue to get better.

Okay, great. And then I'll ask last question. Just your yields have been stable overall when we're looking at x success fees and whatnot. Is that your outlook for ongoing stability in that portfolio yield? Or -- I noticed the yield on the Brunswick investment was pretty attractive, but what's your outlook for the yield on the portfolio?

Yes, I'd say pretty stable where we have been. As you know, the way we structure our deals, where we do this combination of equity and debt, we have some flexibility to the extent that we, obviously, are, I would say, commanding the presence on the right-hand side of the balance sheet. So as a result of that, we can sort of moderate it. But it's going to stay about where it is as we drive through a fairly, hopefully, consistent cash flow on the total investment, which is what's important for us, obviously, from a distribution standpoint.

Our next question comes from Mickey Schleien with Ladenburg.

I just wanted to circle back to the valuation. I did see that there were some nice movements upwards, like Funko and Cambridge and Frontier, but there was also weakness in names like Old World and B&T. Could you just give us an update on the realignment of the valuation process? And how are you using the third party in terms of the number of companies that they've looked at? And where do you see that going on the next few quarters?

Mickey, thanks for the question. And Julia is going to try to tackle that, and then we can come and see if there's anything specific else on that. Julia?

Mickey, on the specialist side or the third-party involvement, this quarter, as we had indicated last quarter, we had 5 of our significant equity deals being reviewed by the third party. We -- I think we gave guidance last quarter that we intend to present them between 4 and 6 each quarter and continue that practice for each of the next -- succeeding fiscal quarters and then cycle through the entire significant equity investment portfolio every year.

Okay, I understand, fair enough. My next question is related to operating leverage. We -- during the quarter, you posted nice portfolio growth and nice growth in investment income. But it didn't flow through to NII per share, mostly due to professional fees and other expenses. Can you give us a sense of how much operating leverage there is in the business on a go-forward basis?

I guess, Mickey, the only other thing I would answer on that is it might not show up immediately, keeping in mind that, as you point correctly, there's a slight, relatively speaking, downtick in NII per share. But we also did increase, of course, the number of shares kind of in that time frame. So I think what you're finding is that we're not yet benefiting, so to speak, from those dollars going to work to immediately flow through on the net II per share. And I think that's -- I hate to be too general in the answer, but I think that's certainly, I think, the way to think about it. And hopefully, we'll continue to increase the leverage as a result of now having the capital to deploy in the deals that we've just closed, the new deals. And as you know, we don't immediately pick up the interest income from the new deals we do. We do get a closing fee, et cetera, but not the accompanying pickup in overall portfolio income. So I would think that we'll see that starting to increase that leverage.

Appreciate that, Dave, and that's kind of a good segue to my last question. With the deal that you announced, the GI Plastek, and I understand that you may have a sale of a portfolio company this quarter, but then again, you may not. If you don't and you fund it with leverage, you're going to be back up to levels which, in the past, you've sort of maxed out at. If that happens, are you open to an equity offering even at these share prices?

Mickey, we never want to do offerings at these share prices, obviously. But we always need to keep in mind, clearly, as we have said before, we are sensitive, obviously, to the leverage ratio compared to debt-to-equity. We're at an okay range right now. We have some capacity. We just -- we will -- all I can tell you is we'll keep to manage being aware of the sensitivity of that. And obviously, the fact that we would rather not be, if we don't need to, raising equity at, say, below NAV, although the good news is we started moving much closer to NAV on our -- on the share price. So again, it's something we look at carefully, we manage carefully, and we'll do the right thing for the shareholders and the company.

And Dave, remind me, in the shareholder meeting, are you asking for authorization to issue below NAV?

Yes.

You are? Okay.

Well, we ask for that every year. It's just a routine. We don't want to have to do some other mechanism if we need money. So this is an easy way. Now we're not going to raise money just to raise money. A lot of people that are externally managed could raise a lot of money because the fees go up. But we're not in that business. We're in the business of making money for our shareholders, first of all, because mainly, I'm a big shareholder. So I like to see my stock go up and the dividend go up. But the point being here on raising money is we've got pretty good capacity to put a couple of more deals on. I think, by the time we put 2, maybe 3 more deals on, we will have to raise some form of equity. We're pretty much out of raising preferred stock. But if we do sell this one business and get a big chunk of equity -- and by the way, that company is in both companies. It's in Gladstone Capital and GAIN and GLAD. So we've got 2 ways to make money on that one. And I think if that happens, we probably would not need to raise any money for maybe 6 months or a year because it is a powerful reward for us. So anyway, I don't know the future. Nobody does. We will just keep plodding along doing a couple of more deals and see what the world looks like next time.

[Operator Instructions] Our next question comes from Jeremy Roane with Hilliard Lyons.

I just wanted to speak a little bit about the origination activity and if you could comment on really what you're targeting this year in terms of originations. And also if you could comment on asset sales and possibly the level of those that you might expect this year and perhaps the timing of those as well, please.

Jeremy, great, thanks. This is Dave Dullum. As you know, we have to be a little cautious obviously in specifics, both as to origination and also, certainly, exits. But I'll just say that certainly our -- as we look forward, we certainly think we are in the position of similar sort of origination activities as this past year. And I think the way the quarter has started -- the year has started off, certainly, with the first quarter and this recent acquisition we just made beginning of the second quarter, I think we're on the kind of the sort of run rate that we've been on. And looking at backlog and the work we're doing, I feel reasonably good about that. In terms of the exit sale or the asset sales, again, we are -- David Gladstone has made a couple of comments around that. We are actively pursuing some things, and we'll keep working through those and sensitive to, again, as I've said in my commentary, the idea that we really -- in selling, we reduce assets. So we don't want to do that just to do it, but indeed, to take advantage, opportunity of, say, the right time to sell is what always we've tried to do in combination with the management teams of the portfolio companies. So again, I think we look ahead, we look forward, and I think we think our plans are pretty good to similar to what we were looking at last year, certainly, from a production perspective.

I know what you're going through, Jeremy. It's really tough to build a model around what we're trying to do. We spend a lot of time forecasting. Each time we come up with a few more deals, we want to put them on a forecast and see what they're doing to the balance sheet and the P&L. And it's a very lumpy business. And unfortunately, it's very hard to forecast what the top line in terms of revenue is going to be because you don't know how many deals you're going to close. And sometimes, you close a deal that has a lot of fees, and that will make a very nice income go up. And then sometimes, you're selling something. And as Dave mentioned, when you sell something, you got to turn around and replace it. One of the things we do is we look at each deal every year, and we do it on a quarterly basis sometimes. And we try to say this is our asset plan for that transaction. And if it just happens to be some leftover debt that we've already sold at equity or we've done some kind of clearing, like writing off a piece of equity and we've just got debt left, many times, it's better to go ahead and get that debt paid off with a bank coming in and turning around and putting that money to work in something that has a significant upside. So we're constantly looking at the portfolio with that color in our eyes, looking for those kind of transactions. So you're constantly working your portfolio. We've got people that spend every day thinking about what to do with 1 or 2 or even a dozen portfolio companies over the next year. And that's just the way this business works, unfortunately. So we don't have a good way of telling you what we're going to buy and what we're going to sell. But I think Dave is right on target, it -- probably from a buying standpoint, it will be much like it was last year, unless we find 2 or 3 really excellent deals, then it will be bigger.

That's helpful. And then just one more question. Should you do an asset sale perhaps the next quarter or 2, where would you guys look to cut your expenses to help manage that bottom line?

We probably wouldn't have to cut any expenses because we would pay off the debt with anything that comes in, and Dave's got a pretty good backlog of transactions. So I think anything we sell we'd probably replace. Remember, a lot of the appreciation is in the equity, and that equity has no income on it. And so we're talking about getting paid off on the debt. Many of the portfolio companies as they go forward gets stronger, and they find cheaper debt, and we encourage them to pay it off because we do only equity. So as a result, usually, a transaction in which a lot of money comes in is out of the equity section. And so therefore, it doesn't harm the ability to pay dividends. It just adds money to the company to turn around and invest and increase the dividend. I hope that answers the question.

I'm showing no further questions at this time. I'd like to turn the call back over to Mr. Gladstone for closing remarks.

All right. Thank you all for calling in, and we'll see you again next quarter. Hopefully, we'll have even more news, good news. Thanks a lot. Bye.

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