Good day, ladies and gentlemen and welcome to the Gladstone Investment Corporation's Second Quarter Earnings Ended September 30, 2018 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] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, David Gladstone. You may begin.

All right. Thank you, [ph] Gigi. This is David Gladstone, and good morning to all of you out there. This is the quarterly earnings conference call for shareholders and analysts of Gladstone Investment, common stock on NASDAQ, trading symbol GAIN. We have a couple of preferred stocks one is GAINM and the other is GAINL. And you should look those up. They are awfully good to own as well. Thank you all for calling in. We're always happy to talk to our shareholders and potential shareholders and analysts. And we'd like to give you an update on company and its investments, provide a view of the business environment and what may happen in the future. Also you have an open invitation to stop by and see us here in McLean, Virginia. We're located just outside of Washington, D.C. Just stop by and say hello. You'll see some - a lot of people on the road, but nonetheless, come by and say hello. And now we'll hear from our Erich Hellmold, he is our Assistant General Counsel. He is sitting in for Mike today. And Mike, I mean Erich, take it away.

All right. Thank you, David. Good morning, everyone. Today's call may include forward-looking statements under the Securities Act of 1933 and 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 are 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 in our Forms 10-Q, 10-K and other documents that we filed with the SEC. These can all be found on our website www.gladstoneinvestment.com or the SEC's website www.sec.gov. We undertake no obligation to publicly update or revise any of forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. Please also note that past performance or market information is not a guarantee of future results. Please take the opportunity to visit our website www.gladstoneinvestment.com and sign up for our email notification service. You can also find us on Twitter @GladstoneComps and on Facebook, keyword The Gladstone Companies. Today's call is an overview of our results through September 30, 2018. So, we ask you to review our press release and Form 10-Q, both issued yesterday for more detailed information. Now over to David Dullum, President of Gladstone Investment.

Thank you very much, and good morning, everyone. I'm pleased to report that we did increase our net asset value, NAV from $11.57 per share at the 06/30/2018 timeframe to $12.30 per share at 09/30/2018, so an increase from $11.57 to $12.30 per share. We also were able to successfully complete several financing transactions such as our Series E preferred stock and Julia will report on that later on. Subsequent to quarter end in October, our Board of Directors approved and we announced a 1.5% increase in our annual distribution rate to common stockholders from $0.80 a share to $0.82 per share. Now this was based because of our results which were inclusive of the fiscal year ending 03/31/2018, the fiscal year 2019 to-date and as we look forward in our expectation of ability to fund and pay our dividends. We also announced a continuation of our semi-annual supplemental distributions program with a payment of $0.06 per common share which is to be made in December 2018. We expect that a significant portion of these distributions will be made from capital gains in these supplemental distributions. And as Julia will discuss in more detail, our adjusted NII for the quarter ended September 30 was lower than last quarter. Now this result was somewhat amplified by timing on certain income and expense items. And again, Julia will discuss this in more detail. So, while our quarterly results which are generally relatively stable, we mentioned numerous signs before there can be variability. And that's why when we look at and we focus on operating the business on a fiscal year end results instead of necessarily focused on the quarter-to-quarter results. Now we know that's important, but we definitely look forward and also manage the business accordingly. So, in spite of this quarter's…

Sure. Good morning, everyone. As of September 30, we had over $675 million in assets, which included $665 million in investments at fair value. Our liability is consistent primarily of roughly $116 million in borrowings outstanding in our credit facility and about a $132 million in term preferred stock at liquidation value. In August, we issued our new Series E term preferred stock at a rate of 6.375, generating net proceeds of $72.1 million. We use these proceeds and borrowings under our credit facility to redeem our Series B and Series C term preferred stock which both carried rates that were higher than the new 6.38. The new Series E term preferred stock includes the amended asset coverage requirements submitted under the Small Business Credit Availability Act, which will be a 150% effective April 10 for us. In addition, we amended our credit facility in August to include the same amended requirements while also increasing the facility size, reducing our cost of financing and extending the revolving period and maturity date. Our net assets totaled about $404 million or $12.30 per share as of September 30, which was up $0.73 from June 30, primarily as a result of net unrealized appreciation of almost $39 million. As for operating results, we ended the September quarter with a net investment loss of roughly $4 million as compared to nominal net investment income in the prior quarter. Now let's look at the factors that were driving these results. Our interest income decreased $1.4 million this quarter, which was largely due to one investment being placed on non-accrual this quarter and that compared to the prior quarter where we had some pick-up of past due interest from investments that were previously on non-accrual as well as the exit of Drew Foam towards the end…

Super. Erich and Dave and Julia, all of that's good information for our stockholders. This team has reported some great accomplishments this quarter and after the quarter end including significant financial achievements both on the credit facility and the $72 million in preferred stock and at the same time completed several successful investment transactions that should pan out in the future. We believe that this team can continue the success of going forward and the third quarter ending December 31, 2018 and also the year end March 31, 2019. At this point, I believe the economy is getting stronger. We don't have a way of knowing the future obviously, so we're being very careful. And to counter any possible recession, we are seeking to build a strong balance sheet and make sure that we continue paying our dividends come hail or water. Now the administration has delivered on changes on the tax code and continuous reduction in the regulations of business, I think the U.S. middle market business like the ones we financed are going to have a strong performance in the rest of 2018 and all of the 2019. The middle market is less impacted by the questions about tariffs, but nonetheless, we are hopeful the matter can be settled soon. And we're excited about the new business environment in the United States. It's a far cry from the historical U.S. middle market. The middle market is the third largest economy in the world. It's a market we love. We've been in it since founding of this fund and the middle market is booming at this point in time and this company should benefit from the strengths in the middle market. In October 2018, our Board of Directors declared a monthly distribution of our common stock of $0.068 per…

[Operator Instructions] And our first question is from Henry Coffey from Wedbush. Your line is now open.

Yes. Good morning, everyone. Excuse me. You've been running as I'm sure you know your investment income at around $13 million a quarter and now it drops. I was wondering if you could go through some of the adjustments behind that for me million again. I mean particularly if we simply compare the first quarter to the second quarter?

Henry, it's Julia. Those were sort of the large drivers of what I mentioned earlier. So, there is a decline in the top-line meaning total investment income and…

Yeah. That's where I wanted to focus. Yeah, on that.

And there were two components to it. A, being one investment that was on accrual last quarter being on non-accrual this quarter. So, you have a natural decline of your top-line as well as the incremental pick-up of some past due interest in the prior quarter from investments that were historically on non-accrual. So, you have higher income in the previous quarter. In addition, Drew Foam exited in June. So, you have almost a full quarter of interest and other income from…

What was the company that exited?

Drew Foam.

Drew Foam. Thank you.

Yeah. We were getting income, but we sold it. So, we didn't have income obviously in the quarter.

So, those were the main drivers other than just variability and timing as you may see from - yeah from us.

Can you put some numbers behind those adjustments?

You can reach out to me separately after this call that would be great.

We can put that on the Q&A, so everybody gets the numbers behind those.

Yeah Henry, I think - this is Dave. I think it's important, regardless your question is a good one. But I think way we think about the business going forward, we said before; you have the fundamentals of the interest income coming from the base companies. And as mentioned, where you have a Drew Foam exiting, you're going to lose interest obviously from that. And clearly, it's a consistent and continual as I say refilling of the bucket, so making new acquisitions. And right now we're in a really I think good position in that. We are looking forward and seeing exits, Drew Foam we mentioned, we mentioned that we also had the exit just couple of days ago of Logo Sportswear, which is a very good company. We made a really nice capital gain on that as well. So, there's a little bit of a transition. And so, it's really important to understand that quarter-to-quarter based on our assets in any point in time and based on some of these - the timings of some of these things, we will have some of these fluctuations. However, we do look at it, I'm going to stress it, on an annual basis because we know that's important and we try very hard to manage as we lose some of the income for good reasons because we've exited something that we managed additional other incomes such as exit fees, dividends from companies that are more mature et cetera. So, it's a balance and that's how we think about it. But - so you will see these variations certainly quarter-to-quarter.

Okay. When we look at the G&A line, you said there was about $1 million of bad debt expense…

Yeah.

And that's the variance on that line. And then the last item is your GAAP NII was $0.12. What was - how did you calculate your adjusted NII?

It's simply using the GAAP NII plus the capital gains based incentive fee of $7.1 million.

So, just moving that down into below the line?

Correct. If you look towards the bottom of the press release there will be a little reconciliation.

All right. Thank you.

Just to follow up on Henry, Warren Buffet was once asked, would you like to have a 6% consistent return or a 9% up and down, up and down, but at the end of the day you get 9%. He said, he'd rather have variable one. So, I think this company is one that's going to bounce around a little bit, but it won't be as bad as we were just talking about. I think that's an anomaly that came just this quarter. So, next question please.

Thank you. [Operator Instructions] And our next question is from Mickey Schlein from Ladenburg. Your line is now open.

Yes. Good morning, everyone. I have a couple of questions about the non-accruals. You've placed, I don't know if you've put out some SOG or S-O-G specialty [ph] knives on non-accrual, but its valuation didn't change much quarter-to-quarter. So, I guess that implies you don't feel the debts impaired. Can you give us an update on what happened there and the outlook?

Sure Mickey. It's Dave. Good to talk to you. So, as we have with a number - whenever we do have a company that might have to go on non-accrual, we lot of times obviously, you know I have talked about this before because we have clearly the majority of usually the debt, in some cases obviously we have a senior lender involved et cetera. And so, we will work with them, we may have to put it temporarily on non-accrual so that we can from a cash flow perspective. So, with SOG specifically, we are - the company continues to perform reasonably well. We've got the leverages a bit higher than we'd like it to be. So, we're frankly just putting it down where it is. That same thing is true with couple of the other companies that are on non-accrual there. PSI which is still producing really good cap gains amount. And so, we've got as we said, we have to work with these companies, do the right thing. And so, our expectation is that we'll find a way to get back to accrual as we work through them, as we historically have done. So, I would say in the cases of those that are on non-accrual came on this quarter, it's a function of working with the management teams, temporary decline in the business from a cash flow perspective and working with our senior lenders so that we can gracefully move the company forward, do the right things to get us where we need to be. So, again, I look at this as it might take six months, but it's not something that we are panicked about or particularly technology concerned about.

Dave, you mentioned PSI I think. I did want to follow up on that because the predecessor Precision Southeast was on non-accrual and you merged it a year ago with G.I. Plastic and they were performing. But now the new company, the merged company PSI has been on non-accrual for a couple of quarters, but again, like SOG it's valued at par. So, has something changed dramatically in that business the last few months that you didn't anticipate when you merged the companies?

Well, when we merged them, a couple of things did happen. We did have some incremental expenses after merger, for instance some things we had to do getting more detail and we need we can talk about this offline if you want. But ERP systems, we had some incremental CapEx we had to put in et cetera, do some things. The company is performing actually from an EBITDA perspective. We are - it's actually producing enough operating cash flow frankly to essentially cover its interest both to the bank, we have a senior lender there and also our debt. But we again felt like it was important to give it an opportunity over the next few months to get back to a point where it could. So, as we look at it also having the significant debt and the equity, we don't see an impairment in that regard because we would believe given an enterprise value, we would exit if we were going to exit which we're not obviously right now, where we'd come out pretty much whole in that regard. So, again it's a temporary we believe situation as we look forward to actually the end of its fiscal year. We think we're going to - or end of this which is this calendar year. We think we'll be certainly at a positive cash flow over and above the interest cost and the other costs that we have associated with it. So, again it's managing the business to a point where some time hopefully in the next calendar year we're going to be back on accrual. So, the combination made sense, it still makes sense operationally. We just have to work through some things that we needed to fix with it.

Okay. One last question if I may, sort of more of a housekeeping question. I just wanted to dive a little bit deeper into the $1 million bad debt expense. I just want to understand the accounting there because usually that's got something to do with an account for an allowance for doubtful accounts. Is that the nature of the expense or is it something else?

That's two-fold there. The small component of it that relates to an allowance for doubtful accounts which is relatively immaterial to us and then the biggest driver this quarter was SOG going on non-accrual and its previously recorded income having to be written down.

Okay. So, this is a reversal of previously accrued investment income more than anything else?

Yes.

Okay. And I just had one more question. Dave, I don't know if you can give us any sense of whether there was a success or prepayment fee on the Logo exit?

Yeah, there was a small one.

Okay. That's it for me. I appreciate your time. Thank you.

Thanks Mickey. Next question.

Thank you. At this time, I am showing no further questions. I would like to turn the call back over to David Gladstone for closing remarks.

Well, we thank you all for calling in. And I think you're going be very happy when you get into the January, February timeframe, we're continuing to look at capital gains and opportunities and we'll see you next time. That's the end of this call.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.