Good day, ladies and gentlemen. Welcome to the Gladstone Investment Corporation Fourth Quarter and Year Ended 03/31/2017 Earnings Call and Webcast. [Operator Instructions] I would now like to introduce your host for today's conference, Mr. David Gladstone. You may begin, sir.

Thank you, Kevin, very nice introduction, and good morning to all of you. This is David Gladstone, and this is the quarterly and the year-end earnings conference call for shareholders and analysts of Gladstone Investment. Common stocks on NASDAQ trading symbol GAIN, and we have three preferred stocks at trade, that's GAINO, GAINN and GAINM. So thank you all again calling for calling in. We're always happy to talk to our loyal shareholders and potential shareholders as well as our analysts. And we'd like to give an update on the company and its investments. We'd like to give you our view of our business environment as well. Wish we could do more calls and try to do this with some of the press releases, but it -- we're only doing it once now, every quarter. Also you have an invitation that if you're in the Washington, D.C. area, we're in our offices in McLean, Virginia, located just outside of Washington, D.C, so please stop by and say hello. You'll see a few other members of our 60 team or so people here, and I think we have the finest people in the business. So first, we hear from our General Counsel and Secretary, Michael LiCalsi. Michael is also the President of Gladstone Administration, which serves as the Administrator for all the Gladstone public funds and related companies. He'll make a brief statement regarding forward-looking statements and other important information. Michael, take it away.

Good morning, everyone. This conference call may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933, Securities Exchange Act of 1934, including statements with regard to our future performance. And 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. And many of these forward-looking statements can be identified by the words such as anticipates, believes, expects, intends, will, should, may and similar expressions. And 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 information listed under the caption Risk Factors in our Form 10-Q and 10-K filings as well as our shelf registration statement. All is filed with the SEC. These can all be found in our website, www.gladstoneinvestment.com or on the SEC's website, which is www.sec.gov. And the company undertakes no obligation to update or 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. And please also note that past performance or market information is not a guarantee of any future results. We also ask that you take the opportunity to visit our website, again, www.gladstoneinvestment.com. You could sign up for our e-mail notification service. You can also find us on Facebook, keyword, The Gladstone Companies; and on Twitter, @GladstoneComps. And today's call will be an overview of our results through March 31, 2017. So for a more detailed information, please read our Form 10-K and press release issued yesterday. And you can find these on our website, again, www.gladstoneinvestment.com. Now let's turn to Dave Dullum. He's the President of Gladstone Investment, and he'll give you an update on the fund and performance and outlook.

Thanks, Mike, and good morning to all. I am pleased to report today that Gladstone Investment had another strong fiscal quarter and year ended 3/31/17. In fact, we increased our net asset value, or NAV as we call it, from about $9.82 per share in the third quarter to $9.95 at this fiscal year-end and indeed for the 12 months ended 3/31/16 to 3/31/17 by $0.73 from $9.22 to $9.95. So we feel pretty good about that. Based on our results in April, we also have been able to announce an over 2% increase in our annual distribution rate to common stockholders for going from $0.75 per share to $0.77 per share annually. Now to put our results and certainly our report today in perspective, it is helpful to reiterate our business model and -- which focuses on the buyouts of U.S. businesses with what we call EBITDA, which is annual earnings before interest, taxes, depreciation and amortization, generally in a range between about $3 million and $10 million. Now our financial structure is always same, as we have said before, is for funding our buyouts, and they consist of secured first to second lien debt in combination with a direct equity investment, which really gives us significant equity ownership in these transactions. We are also differentiated from the traditional credit-oriented BDCs. In that, the target proportion of the equity-to-debt for the investments in our portfolio is about 25% equity to 75% debt at cost, which compares to most other BDC portfolios of around 10% equity and 90% debt. Now this is intentional on our part as our strategy and the stockholder value proposition is such that the debt portion of our investment provides income to pay and over time, we hope grow our monthly distributions. And as I just…

Thanks, Dave, and good morning. The fund had a strong fiscal year with the exit of 2 portfolio companies at sizable gains, as Dave laid out earlier, and the addition of 2 new deals to replace those 2 exits. We also successfully issued a new series of term preferred stocks with gross proceeds of over $57 million and amended our credit facility, which, among other things, extended the maturity date and favorably impacted pricing and net available borrowing. At the end of March, we had over $515 million in assets consisting of over $501 million in investments at fair value, $3 million in cash and cash equivalents and about $11 million in other assets. On the liability side, at year-end, we had $69.7 million in borrowings, outstanding and our line of credit, about $139 million in term preferred stock, which includes the new Series D at liquidation value and about $5 million in other liabilities with -- which results in about $301 million in net assets. And the net asset value per share was $9.95 as of March 31, which is up $0.13 from December 31. And this primarily resulted from net unrealized depreciation of $4 million in this fourth fiscal quarter. This appreciation was principally due to an increase in the operating performance such as EBITDA, as Dave laid out earlier, of certain portfolio companies and to a lesser extent, a rise in comparable multiples. Overall, our fair value to cost was over 95%. Consistent with previous years, we continue to use an external third-party valuation specialist to provide additional data points regarding market comparables and other information related to certain of our more significant equity investments. We plan to continue this practice and update the externally-provided data on an annual basis for all of our significant equity investments.…

Well, thank you, Julia. That was a great report. And David Dullum, good report especially the part about the history and things that we've gone through. And Michael, we appreciate the legal update. During the past year, we're able to report some great accomplishments. The sale, we've called it exits sometimes, but it's usually a sale or repayment of 2 investments -- an origination of 2 new investments to replace those. The issuance of our Series D preferred stock, the amendment of our credit facility to get that stronger in our favor and the continued strong performance of the portfolio companies we have in our portfolio today. And I believe we can continue the success that we've had in the past year going forward for our fiscal year ending March 31, 2018. The economy is getting stronger but there's still some people who say we may again enter into a recession, but we believe our company is well positioned to handle the potential downturn because of the diversification of many portfolio of companies in many different industries. To go through the list of things that people ask me, they say, "What are you worried about?" Well, we are still worried about the Federal Reserve, the direction regarding monetary policies and while we have variable rates on most of our loans, increasing rates will not hurt us as much as it would hurt the economy. And if the Fed does vote to increase rates, it's like only a quarter percent each time they do that. It's more of a psychological rate rise than it is a real impact. The main reason the Fed is pushing for higher rates is because they have to find buyers for all of the money that they're borrowing using treasury notes and T-bills. We get people…

[Operator Instructions] Our first question comes from Mickey Schleien with Ladenburg.

Also, I think your review of GAIN's strategy in the prepared remarks was helpful for investors. Looking at your business strategy, could you tell us what the portfolio's average leverage is at your attachment point? And do you expect any improvement in the bid ask spread in the M&A market this year?

Mickey, this is Dave. On the first question, I want to be sure I understand the question, you're asking that leverage in our portfolio, meaning our portfolio of companies?

Yes.

So I would say, roughly about 4, 4x on EBITDA. If you took it across the portfolio, we have some of that obviously a bit lower and few of that are a bit higher but in sort of that 4-ish range. That's first. Secondly bid-ask on the M&A side. I mean, what we're seeing, from understanding the question as well, deals that we think are probably priced at around 6.5 to 7, maybe stretching times EBITDA, we're seeing some of those things going at 8 to even 9, 9-plus times EBITDA. So pretty high numbers, if you will.

And Mickey, that -- Mickey, this is David Gladstone. What you're talking about also is what's the growth factor? If you have a very high technology growth factor, you're going to have to pay up for it. If you're in the middle of the range like we are, it's usually a 6 or so.

Right, and that includes a control premium, correct?

Yes.

Okay. And just a couple of portfolio questions. Looking at Tread in the third fiscal quarter going into the -- going from the second fiscal quarter to the third fiscal quarter, its debt was marked up from about 75% of par to par and now it's back down to about 63%. Could you talk about what caused the reduction in the fourth fiscal quarter? And why has the valuation been volatile?

Well, part of it, Mickey, is that investment, as you know, is related to the mining industry, and it's just purely a function of what we've seen on a slight improvement on EBITDA from time to time and then, looking down, slight decline again. Right now, it's actually headed in, believe it or not, in a good direction. They're seeing a pickup in their business. So it's just really a function of the quarter-to-quarter kind of slight movement in the results and then how that affects the relative valuation from the debt side. So nothing major going on there, right?

All right. So in other words, you're looking at trailing sort of 12-month numbers and moving up and down?

Yes. Yes, sir.

And my last question is, could you just talk about the issues confronting Alloy Die? And what they're doing to resolve that?

Okay, so Alloy Die, it's a good business. We had to make some change at the management level, which we did. And we are seeing the results of that. And fundamentally, again, the business is sound. It's a temporary thing, frankly, and I think over the next 6 to 9 months, we'll see pretty significant improvement in that business. But fundamentally, again, no issues. Again, a temporary issue.

But -- so if I understand, Dave, you put it on nonaccrual because of the change in management? Or is there something related to the actual results?

Well, yes. The results were -- it was getting tight from a cash perspective, which, of course, forced us and made us to look at -- do some things, caused us to obviously change management and to give the company some flexibility, which I mentioned from time to time, one of our capabilities to do that without any dramatic upset in the business. We can do that to give it an ability to do what it needs to do with the new team we brought in and put in place to make it work. So that's really the answer.

Our next question comes from Kyle Joseph with Jefferies.

Actually, most of them have been answered but just a quick one. I was hoping you could discuss any exposure in the portfolio to the retail sector? Obviously, we've seen a lot of headlines there. As well as any discussions you guys have on potential investment opportunities you're seeing in the space given that is one sector, where we have seen relatively lower valuations?

Right, right. So hey, Kyle, Dave. We have, obviously, as you know in our portfolio, what we call specialty consumer-type products, which are not -- by retail, we mean certainly, brick-and-mortar hardcore retailers per se. We don't have anything there, we have obviously products, companies -- Brunswick Bowling is a good example. It's not a retail business, but it's a specialty-oriented consumer product. We have others so -- which we sell, obviously, the online business market as we know and frankly, all of those companies are performing pretty well. I don't have any in our portfolio that I would say we have any concern around what's going on and as probably what you're mentioning, you see what's happening in some of the major retailers, the Nordstroms, Macy's, et cetera. So -- and we're not looking at many in that category. We don't really look at any hardcore retail-type businesses. So anything we do is going to have some sort of unique specialty, I'll call it niche and a position that we think is defensible.

So Kyle, just to tag on to that. We don't have the stores for the distribution but most of our products are being distributed through stores and so there's an impact there. But to the extent that these products are sold online, we're in sync with what's going on in the transfer of distribution from retail stores to the Internet.

Our next question comes from Andy Stapp with Hilliard Lyons.

Would you provide some more details regarding the factors that led to the stock offering? Presumably, it would be to support new investment activity. And in your prepared remarks, you talked about the improvement in the investment pipeline but you also talked about pricing remains elevated. Just trying to reconcile everything.

Hey, Andy. Thanks for the question. So as I mentioned in the prepared remarks, the best we can say is, again, I use the word very carefully but we believe we've come at our times, we have done our offerings very constructively and responsibly when we've done them and we felt again, given where we are positioned today with the results we've achieved and where we see ourselves going over the next year or so that the timing was appropriate to do an equity offering. It does a lot of things, obviously. It does generate some capital, it does support our balance sheet, sets us in good shape relative to any equity versus debt ratios going forward. So we feel really good about where we are today. As far as the pipeline question, it's a constant battle. Frankly, as we all know, that's the business we're in. And so when I say the pipeline is building, it is. We look at a lot of deals, we have our team, which is 10 folks focused on this particular company. We're always looking at new stuff, we don't win every deal we look at, so we just have to keep the battle going. So I feel generally good about our position in the marketplace and as I mentioned earlier, we're not going to stretch and do a deal with a crazy multiple because it's not going to help our returns. And so I don't know if that helps to answer it but we're just -- we're set to do -- to keep doing what we've been doing and keep trying to generate results we've generated today over time.

And Andy, think about it this way. We have an opportunity to either keep the capital gains and pay the tax on it as a way of growing or we can pay out the capital gains and that means we have to raise equity some other way in order to grow the business. So we've taken the grounds of letting the capital gains go out and letting our shareholders pay their taxes on their gains the way they do and then that means we have to turn around and do some equity offerings from time to time.

Okay. And would you talk about the outlook for more successful exits?

Well, we've, as I mentioned, we managed our exits and we've had a couple this past year and then one right at a subsequent event. And we'll keep looking and doing what we need to do to meet our goals as we go forward. The portfolio currently is 35 companies. We take a hard look as going out over the couple of years and think through how to manage them to make them successful exits and obviously, we'll see more of them as we go forward.

Okay. And GI Plastek, B-Dry and Jackrabbit had some meaningful valuation reductions during the quarter. Just if you could provide some colors on those companies, please?

Go ahead.

Andy, this is Julia. As Dave mentioned and alluded to for something like Tread, these 3 also fall on that same category where if you have temporary changes in operating performance, those generally get reflected in our fair values quarter-over-quarter. So you may see fluctuations there that don't indicate a permanent decline in the value.

[Operator Instructions] And I'm not showing any further questions at this time. I'd like to turn the call back over to David Gladstone.

All right. Thank you all for calling in. Those were good questions. Hope you have some more at next quarter and hopefully we can show you some good results, and that's the end of this conference call.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.