Good day, ladies and gentlemen and welcome to the Gladstone Investment Corporation's Third Quarter Earnings Ended December 31, 2018. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, David Gladstone. Sir, you may begin.

Thank you, Heather, and good morning to you all. This is David Gladstone, Chairman of Gladstone Investment and this is the quarterly earnings conference call for shareholders and analysts of Gladstone Investment, common stock traded on NASDAQ, trading symbol GAIN. And the preferred stocks are out there GAINM and GAINL. Thank you all for calling in. We're always happy to talk to our shareholders and potential shareholders and certainly our analysts. And we'd like to give you an update on the company and its investments, and provide a view of the current business environment, as well as something in the future. We wish to do this more often but this is the appointed time. Also you have an invitation to stop by and see us. We are here in McLean, Virginia, just outside of Washington, D.C. So stop by if you are in the area, and say hello. We’ll start out now with the General Counsel and Secretary, Michael LiCalsi. Michael?

Good morning everybody. 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, although they are based on our current plans, which we believe to be reasonable. And 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 all the documents that we filed with the SEC, all of which can be found on our website www.gladstoneinvestment.com, or 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 past performance or market information is not a guarantee of any future results. We also ask you to take the opportunity to visit our website, once again, gladstoneinvestment.com, 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. Today's call is simply an overview of our results December 31, 2018. So we ask you to review our press release and Form 10-Q, both of which were issued yesterday for more detailed information. With that I will turn the presentation over to Gladstone Investment's President, David Dullum. Dave?

Mike, thanks very much, and so good morning, all. I am pleased to report that we did actually have solid operating results this quarter, and that we increased our net asset value or NAV or book value to $12.53 per share, that was at 12/31/18. This compares to $12.30 per share at 9/30/18 and $10.85 per share at 3/31/18, so very nice progression in our NAV. The continuing increase in NAV really resulted in part from the improvement and the growth in the equity values of our buyout portfolio companies along with some successfully completed exits at very significant realized gains. So this quarter we also closed one new buyer investment and in line with our approach of increasing the size and the value of the existing portfolio companies, we made several add-on investments. We also continued our semiannual supplemental distributions program with the payment of $0.06 per common share in December 2018. We expect that a significant portion of distributions would be made from capital gains and to that end for calendar year 2018, our total distributions were about 18.2% from cap gains and about 81.8% from ordinary income. Now this compares to the distribution percentages of calendar 2017 where ordinary or cap gains is about 6.2% and ordinary income was 93.8%, now recognizing also that overall distribution increased as well. So as our CFO, Julia will discuss in a bit more detail our adjusted NII for the quarter ended December 31, 2018, was also higher than each of the last two quarters. Now this is important because as I've mentioned previously, while we do strive for our quarterly results to generally be relatively stable, there can be and generally is variability which is why we focus and operate the business based on the fiscal year end results which…

Thanks Dave, and good morning everyone. Looking at the balance sheet as of December 31 we had over $619 million in total assets which included $607 million in investments. And as you all heard Dave discussed earlier, we had some exciting successes this quarter which caused the apparent decline in investments quarter-over-quarter. Our liabilities consisted primarily of roughly $50 million in borrowings outstanding in our line of credit which was lower compared to prior quarter again as a result of paydowns that perceived from investment exits. We also had the pre-existing $132 million in term preferred stock. Our net assets totaled about $411 million with $12.53 per share as of the end of this quarter which is an increase of $0.23 compared to last quarter and that is primarily a result of net realized gains which were partially offset by unrealized depreciation. As for operating results, we ended the December quarter with NII of 6 million which compared to a net investment loss of 4 million in the prior quarter. And let's look at the factors driving those results. So interest income increased about $0.6 million this quarter which was largely due to additional debt investments, as well the timing of exits later in the quarter. Other income increased $1.3 million given the variable nature and timing of dividend and success fee income. Then looking at expenses they decreased by $8.1 million in the current quarter which was driven one by lower tax and bad debt expenses. As I discussed last quarter, we incurred about $1.1 million of bad debt expenses which were primarily due to placing one, investment on nonaccrual last quarter. And then two higher credits from the advisor this quarter and three, a $5 million decrease of the capital gains based incentive fees. These decreases were partially…

All right Julia, Dave, Michael lot of good information to our shareholders and that presentation that you both - all three made and the 10-Q that filed yesterday should bring everyone up-to-date at where we are in this company. The team has reported some great accomplishments this quarter including significant investment exits were realized gains and new buyout investment and a number of add-on transactions all bringing the company an increase in net investment income. The team is in a good position to continue these successes going forward in the fourth quarter which will end March 31, 2019. The economy is [indiscernible] a little bit in the quarter ending December 31, 2018 and since then I believe the economy is getting stronger, but we have no way of knowing what the future is going to bring. So the team is being careful with their investment and to counter the unforeseen we are seeking to build a strong balance sheet paying dividends is one way of our primary goals and a strong balance sheet certainly adds to being able to achieve that goal. Now that the administration, the government is delivering on changes to the tax code and continues to reduce regulations of businesses. I think the U.S. middle market business like the ones we financed is going to have a strong performance in 2019. The middle market is less impacted by the questions about tariffs, but nonetheless we hope that matters can be settled soon in that area so all businesses get stronger. We are excited about the new business environment in the U.S. and U.S. middle market is third largest economy in the world and that's the market that we love. We've been in that since founding this fund and the middle market is booming and this company will…

[Operator Instructions] And your first question comes from Kyle Joseph with Jefferies. Your line is open.

David you mentioned, you talked a little bit about how broader market volatility picked up towards the end of the quarter, two questions related to that. First, in terms of your Company performance how is any impact on growth and outlooks for growth you've seen recently and then any impact in terms of competition from the increased market volatility?

David Dullum, why don't you take that question.

So Kyle, I want to be sure I understand when you say market volatility you mean stock, common stock action?

No, I'm talking about broader equity indices, high yield market.

Okay, no problem. So to be honest it has - I don't think it really and if I suggested more volatility this quarter than before I not really, this is in terms of looking at the new deals that we look at and the opportunities that we look at, I'd say it's about the same. There's looking like a potential moderation a bit in overall valuation partially as a result of I think the amount of leverage that are more traditional private equity firm can now get or put on a deal. I think we're starting to see a little bit of a change in that regard but overall it's - I'd say is competitive this past quarter, it's competitive this current quarter as it's been the last say 12 months. And what we're doing is just keeping - trying to find those companies that we can buy in 6x to maybe 7x EBITDA which works our model and still has a sort of growth that you need to get the kind of return. So all in all I'd say it's just about the same, just continuing, just slogging it out day-in and day-out. We're working on a number of opportunities. We are submitting the respective number of indications of interest that we put out ending up with one or two that frankly are the companies that we can buy. So I don't know if that helps to answer Kyle but I'd say we're positioned about where we've been and I'm not worried about where we are, we just have to keep being consistent with our approach.

And Kyle, to add on to that Kyle - it's David Gladstone. The market place has changed completely in the last 15 years. It used to be that we competed with banks and other lending institutions like banks. Now maybe the banks are making 10% of the loans in the middle market place, the government places like the SBA is maybe making 1%. So the rest of the marketplace is really being covered today by private lenders like us, private meaning not banks and not government. So the marketplace is more volatile because of that. It's a different world today and people will raise a little money and do some crazy deals and we might lose out to them but better to have lost out to them than to do something that was really risky. So I think you're going to see more volatility in the marketplace but we're going to stay steady and continue to do what we do best and that is underwriting businesses. Go ahead, Kyle.

Obviously your leverage from a debt-to-equity perspective came down given the elevated repayments. But can you guys refresh us if you have any sort of target range and if that's changed at all given some of the changes we're seeing in the BDC industry regarding leverage?

Julia, why don't you answer that? The answer is already Dave jumped on with a no, but Julia, any comment?

Kyle, nothing has really changed in our approach to leverage as it has for. If you recall our Board did approve our "Asset Coverage" to be reduced from 200% to 150%, which would go into effect this April. But as you noted, pay downs has been significant, so we're nowhere close to those metrics.

And Kyle, what I would add to that, I got to keep in mind a little bit relating to the earlier question, and answers we gave you. Keep in mind that we consider ourselves more private equity oriented than as a traditional lender. So we're driven more by opportunities in buying companies that provides a sort of enterprise value that we're looking for. So the fact that two things; one, as David Gladstone mentioned, there is certainly more volatility potentially in the debt side of markets. But where we struggle is against the private equity guys that are able to get some of that leverage and then pay up for companies that we think are overvalued, we're not going to go there. So there's that part but then from a leverage perspective again we're not looking to increase our leverage even with the changes in the regulation so to speak to then put a marginal, let's say loan on the books, that's not our business right. So the leverage we will utilize, leverage as necessary I don't think we're going to as Julia said change our policies around that and get any more highly levered, that does not lend itself to the sort of business we're in. What we have to just keep doing is finding good values, enterprise values, the companies we buy and those are the ones that we will leverage as you know within reason so that we can know those companies withstand any downturns and so on and so forth.

[Operator Instructions] Your next question comes from Mickey Schlein with Ladenburg. Your line is open.

Just wanted to start with congratulating you on the Cambridge Sound exit, obviously a very good result. Curious what caused that to be sold for so much more than its previous fair value mark? I'm just interested in how the market is behaving if you can give us some insight?

Mickey, thank you for the comment. And I think Julia correct me on this but I think relative to where we had a value in the prior quarter, we were relatively close in terms of the value that we got for it because we've been working on it frankly obviously for a while which we could not disclose in terms of what we saw indications of values. So having said that, this Company is pretty representative I would say of the good quality businesses that are being sold in the middle market. And as David said earlier, middle market is pretty decent shape all around pretty, you know pretty robust and the multiple that we got for this company was certainly at the higher end of a range in part because it could all of the criteria of good quality management had good growth - we had good growth since we acquired it of course we bought it at a good value ourselves few years ago about three years ago. And just represent of a good quality asset that the folks out there that want to put money to work are willing to pay sensible kind of multiple for us. So we're very pleased with it, and again we sold it because in part our work overall with the management team we all were in agreement on doing, we didn't force and exit we were happy to have kept the company frankly, but it was a good timing for all the participants.

I'm not sure investors are aware that the external manager on occasion provide some very meaningful credits to the base management fee for advisory services and those are pretty large this quarter. Can you give us a little bit of an idea or a breakdown of what went into that and sort of how that process works?

Julia why don't you take that.

So Mickey you hit the nail on the head here the advisor obviously were externally managed and as the advisor receives fees for incremental advisory services provided to our portfolio companies, those payments from the portfolio company to the advisor are generally credited back to the fund meaning a direct offset to what we would otherwise pay the advisory and management fees. So again they can be very variable it really depends on timing of those payments and what the advisor provided in terms of services. So that’s probably the best explanation I can give.

Just I could follow up Julia I understand the mechanics, what I'm curious about is was this the advisor helping for example negotiate the Cambridge sale or was it more advice on the four nonaccruals or what is the nature of the work that the external advisor is doing?

That could be part of it yes so financing transactions are part of those types of services.

Couple of more questions if I can. Dave how do you feel about the size and quality of your pipeline today?

I would say on a scale of 1 to 10, Mickey 10 is really robust and so on I’d say it’s probably about 7. The pipeline is pretty good as I said - mentioned day-in and day-out that’s we focus on obviously beyond when we have to work on exits or work on other things with existing portfolio companies. But right now I'm not I feel we’re in good shape, I think we again as I keep mentioning these things are so to speak. You can't predict them say every quarter we are going to have one new investment, but because of the build up in the pipeline, the activity levels I think we have a reasonable shot generally at our overall objectives and goals for new acquisitions on a sort of an annual basis so, again 7 out of a 10, if you want to think that way in my mind.

And on the flipside Dave are you - to what extent can you give us some insight as to whether you expect some very meaningful exits over the course of the next few quarters?

Sure. As I mentioned in my first part of my talk it is now something that we’ll continue to look at, continuing to think through with the management of some of these various companies. And again based on either timing with the company that as you sort of alluded to a little bit in a way the market from an exit perspective with multiples is pretty good if you’re on the sell-side and we do want to think about our ability going forward not just the next six, nine, 12 months but going forward as we build our portfolio, think about exits that we can start managing those. And I think we’re getting better at that and more in a position now to be able to do that so we can try to create consistent - somewhat consistent incremental either distributions or gains based on the cap gains from exits. So short answer is, we’ll keep working at it. We’re working on it and we think we’ll see some new stuff coming over the next year or so.

Wanted to ask you also about PSI, I think in the last earnings call you were somewhat optimistic about the outlook for the company, but you markdown the debt this quarter fairly meaningfully which would imply there is still problems. Can you qualitatively give us an update on the company?

Sure. It actually that started out this year pretty well. I think - I'm still optimistic about the business it’s still overall a pretty good size business with very significant EBITDA. The valuations obviously is a result of overall call it decline in EBITDA just because of some - issues internally we've had to manage with the business. So yes we decided and it made sense just given valuations where we were to do what we did, but I feel pretty good about the business fundamentally. And some of the things we have been working on over the last say quarter in terms of management issues et cetera. And so again short answer I feel pretty decent about it at this point.

And in terms of SOG you restructured it I guess last month, wasn't clear though whether that will be put back on accrual or is that still going to take some time?

Actually I would say that will take some time. Again, it's one where we got good fundamentals for variety of reasons we’ll get into here. We’ve made changes done some things that we think are right and I think we know just have to again be patient with that one looking forward, but it's not going to happen overnight.

And appreciate your time this morning. I just have one sort of housekeeping questions. I think there was a reversal for affiliated dividends in the quarter, I'm just curious how that works and what caused that?

Julia?

Mickey that sort of thing happens as estimate change as you know the recording of dividend income is driven by tax estimate so we use the best estimates we have at the time that we receive a payment as to whether that payment constitutes dividend income or should be recorded in a different manner and this is one of those reversals that is a result of a change in estimate that gets cleaned up as we get better information.

Okay Julia. Thank you for that. That's it for me this morning, and congratulations on a solid quarter.

I am showing no further questions at this time. I’d like to turn to the call back over to David Gladstone for closing remarks.

All right, thank you all for calling in and listening and we'll see you next quarter. That’s the end of this call.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you all may disconnect. Everyone have a wonderful day.