Gladstone Investment Corp (GAIN) 2019 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Gladstone Investment Corporation Second Quarter Earnings ended September 30, 2018 Earnings Call and Webcast. (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, Gigi. This is David Gladstone, and good morning to all of you out there. This is the quarter -- 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're 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 would like to give you an update on the company and its investments and 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 Erich Hellmold. He's our Assistant General Counsel. He's 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 file with the SEC. These can be 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 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 e-mail notification service. You can also find us on Twitter at @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 6/30/18 time frame to $12.30 per share at 9/30/18, 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 3/31/18, 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 the continuation of our semiannual 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 and be 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 times before there can be variability, and that's why when we look at and we focus and operate 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 lower adjusted NII, we do believe, though, that our core business, which includes new investments, the exits that we've been making, and we will talk about, and the underlying portfolio company values is very strong and robust.

So just touching on some of these timings, and subsequent to the quarter end, we announced that we successfully exited our investment in Logo Sportswear, which resulted in a significant realized gain on equity.

We sold the equity investment in CCE, which is one of our investments we've had for a while. And even though this resulted in a small realized loss, we did generate income through the payment of $1 million of success fees, and we did retain a performing debt investment in the company.

We also made an additional $15 million secured debt investment in J.R. Hobbs, and this was used by the company to fund an acquisition.

So while we have seen some decrease in our stock price quarter-over-quarter also, our total return, which is inclusive of dividends for the 12 months ended September 30, was approximately 30.8%. And this would compare very favorably to the Wells Fargo BDC Index of 3.6%.

So we continue to believe that our results are providing the investor community with support for the value proposition of the continuing growth in the distributions that we have from adjusted NII and realized capital gains and also the upside of the equity component of our buyout business model.

So this differentiated investment strategy, it's very important to really understand it, and the business model is for us to invest in the majority of equity and debt capital in buyouts, where we are the significant capital provider for that transaction. These companies, as we mentioned, generally have earnings before interest taxes, depreciation or EBITDA, generally between $3 million and $20 million. The structure we use for funding our buyouts consists of a direct equity investment for significant ownership position, and that is in combination with a secured first- or second-lien debt in that company. So this does differentiate us from traditional credit-oriented BDCs in that the proportion of debt to equity [including] investments in our portfolio should consistently be around 25% equity to 75% debt at cost when compared to most other credit-oriented BDCs. And this is a significant difference and really illustrates the nature of our NII and also that cap gains and the nature of portfolios, and you will see more of that as we go forward.

So what are some of the practical outcomes of our approach? And we summarize them as follows.

First, the interest in the success fees on the debt portion of our investments do provide a steady stream of income, which will allow us to pay and over time grow our monthly distributions as we currently are now at an $0.82 per common share run rate. And as we have mentioned on prior calls, we will experience fluctuation in this month-to-month and quarter-to-quarter adjusted NII, such as this quarter, certainly, compared to last quarter. However, we manage the business, I mentioned before, and it's important, with a view to the fiscal year end results and the goal of having our adjusted NII support and cover our annual distribution to shareholders. We do not expect distribution to get ahead of our ability to cover on an annual basis.

Second, with the significant equity positions that we own in each portfolio company, we look for increasing value, so that an increase in the equity provides capital gains and other income over the life of the investment or upon an exit. These potential capital gains and other income may then be distributed to our stockholders in part as supplemental distributions. As our portfolio matures, we should continue to realize gains from exits somewhat consistently. To this point, we have made 3 such planned supplemental distributions in the amount of $0.06 per share to common stockholders in June and December 2017 and then in June of 2018. And as mentioned, we announced the fourth such supplemental distribution, which will be made in December of 2018.

Third, the differentiated investment approach of being a provider of a significant portion of the equity and most of the debt in our transactions does give us an advantage in that we do have some influence on the companies that we buy. And so not only does that allow us to limit really the risk of our debt being refinanced, but it gives us the opportunity to be involved in the management of those companies and interaction where necessary, which will happen from time to time, such as a similar traditional private equity fund would operate.

So I'd like to look at some of our historical performance just to review this. I like to do this from time to time. And looking at it from 3/31/14 to 9/30/18, we've seen an update, and this would be an update of our annual scorecard discussion. You can also find further information and analysis, including, in graphical form, in our quarterly presentations that are posted on our website.

So what are some of the highlights? First of all, we have grown total assets from about $331 million to over $675 million at fair value. Again, this is that period from 3/31/14 to 9/30/18. The debt portion of our assets at cost has grown from about $279 million to over $442 million, which is supporting the growth in our regular monthly distributions per common share, which have gone from $0.66 per share in 2014 to $0.82 per share at an annual run rate as of October in 2018. The equity portion of our assets at cost has grown from about $105 million to about $152 million. Our NAV per share has increased from $8.34 to $12.30 over that same period.

We had 32 companies in our portfolio at 9/30/18 from inception which was 2005. And through 9/30/18, we have exited 13 of our buyout companies, not including those that I mentioned as subsequent events earlier. And these exits have generated over $100 million in net realized gains and $22 million in other income on exit. So these exits achieved an aggregate cash on cash return on the exit of the equity portion of those investments of approximately 3.4%, again, an important aspect of our business model.

It is this equity growth and the exit activity that has allowed us to deliver on our objective of generating capital gains from the equity portion of our assets, which we look to continue in the future.

So what does that future look like as we go forward with exits? We build our investment portfolio with new buyouts. We also manage the sale or exit of the portfolio companies, and that's consistent with the strategy of providing realized capital gains from the equity portion of our portfolio. At this point, we exited Drew Foam in June 2018, generating a gain of about $13.8 million. We exit Logo Sportswear in this past week in November with a significant gain, and we sold the equity investment, as I mentioned, in CCE at a small loss, while retaining, again, in that case, a performing and income-producing debt investment.

So we will continue to be guided by market conditions. We'll be assessing the risk and the return in continuing to hold an investment versus exiting it and remain sensitive to preserving our portfolio of assets, which, in large part, produce the income for our monthly distributions.

So developing new buyout opportunities are obviously a very high priority and a significant part of our daily activities. Our team, as I mentioned before, actively calls on what we refer to as independent sponsors, middle-market investment bankers and other sources that help us create somewhat of a proprietary investment opportunity mix. Generally, our investments include -- do include partnering with the management teams in the purchase of business. We believe that our strict adherence to investment fundamentals and our thorough due diligence process has enabled us to provide shareholders' returns in both our consistent regular monthly distributions as well as the supplemental distributions. At any point in time, we are reviewing and conducting due diligence on a number of new potential investments and with an eye on achieving our new acquisition goals.

So in addition to new standalone acquisitions, we are actively pursuing accretive add-on investments for some of our portfolio companies. This is a good way and allows us to build assets, while accelerating the value creation of the existing companies. As I mentioned earlier, in October, we invested an additional $15 million of secured debt in J.R. Hobbs, which will allow them to fund an acquisition, which will be able to then expand their geographic and their service footprint.

So we're still in a buyout environment. However, where competition for new investments is elevated, purchase price is being paid up pretty high. And this makes it challenging for us to close new investments given our conservative value approach and the expected financial returns, and that could lead to an appearance of a low rate of new investment production at any one point in time. But keep in mind that we are working at this every day. And when we consider our investments, we do strive to build value with a portfolio, which is both income and equity to satisfy our distribution goals. We are not a volume-driven shop.

So we continue to target our equity investments to provide a minimum 2 to 3x cash on cash return. The debt investments, which are generally secured, and, primarily, first liens typically carry a cash yield in the low to mid-teens. These debt cash returns balance the equity portion of our investment, thereby which produces a blended current cash yield to support our stockholder distribution expectations.

The investment focus we have has not really changed. We're generally investing in companies with consistent EBITDA and operating cash flow, obviously, with an opportunity to grow and expand it. Areas of interest that we continue to like would be light specialty manufacturing, specialty consumer products and services and industrial products and services.

So we will continue executing our plan. We'll be adding accretive investments to grow both the income-generating part of our assets and the equity portion of our assets, while positioning the potential -- excuse me, positioning the portfolio for potential exits, thus trying to maximize distributions of all kinds to stockholders. We anticipate paying semiannual supplemental distributions, as the portfolio continues to mature, and we're able to manage exits and realize capital gains. These distributions are generally expected to be made from undistributed net capital gains and undistributed net investment income. So we and our Board of Directors will evaluate the ability to make additional supplemental distributions, including the amount and timing of such semiannual supplemental distributions as we continue to execute our strategy.

So with that, I'm going to turn it over to our CFO, Julia Ryan, and have her give some more detail on the actual financial performance. Julia?

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 liabilities consisted primarily of roughly $116 million in borrowings outstanding on our credit facility and about $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 used 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 committed under the Small Business Credit Availability Act, which will be 150% effective April 10 for us.

In addition, we amended our credit facility in August to include these 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 pickup of past due interest from investments that were previously on non-accrual as well as the exit of Drew Foam towards the end of June, which did not obviously recur -- incur revenue this quarter.

Other income declined $1 million quarter-over-quarter given the variable nature and timing of dividend and success fee income.

Net expenses increased by $1.6 million in the current quarter, which was driven by $1.1 million of bad debt expense, primarily due to placing one investment on non-accrual and $0.7 million of tax expense and $7.1 million of capital gains-based incentive fees, which were required to be accrued under U.S. GAAP, as per prior quarters, but which are not currently due under our investment advisory agreement.

All of these increases were partially offset by a $1.1 million decrease in the income-based incentive fee, which was a result of the decline in net investment income overall and the increase in net assets, which drives the hurdle rate.

The current quarter accrual of the capital gains-based incentive fee was $7.1 million, an increase because of net unrealized appreciation this quarter. Last quarter, we accrued $6.5 million. As a reminder, the investment advisory agreement provides that a capital gains-based incentive fee is determined and paid annually with respect to realized capital gains, but not including unrealized appreciation, if such realized capital gains exceed net realized losses and unrealized depreciation. However, under GAAP, a capital gains-based incentive fee is accrued if realized capital gains plus unrealized appreciation exceed the sum of realized capital losses and unrealized depreciation. So this is really an as-if-liquidated-today point of view.

As a result of these factors, our net investment income decreased in the current quarter. When adjusting NII or that investment loss to exclude the capital gains-based incentive fee accrual, adjusted net investment income per weighted average common share would have been $0.10 in the current quarter, which compared to $0.20 in the prior quarter, again, as a result of the factors driving expenses and income I mentioned earlier.

We believe that adjusted net investment income continues to be a useful and representative indicator of operations and should be viewed exclusive of any capital gains-based incentive fees.

Current and prior period adjusted net investment income covered current quarter and annual distributions from net investment income by a significant margin. While our balance sheet at 9/30 may show over distributed net investment income of $12.3 million, this is a direct result of the roughly $18 million of capital gains-based incentive fee accrued to date that is not yet due to be paid. If and when this accrued fee, or a portion thereof will be paid, such payment would follow the realization of gains, i.e. actual proceeds to us to cover distributions to shareholders.

As of September 30, undistributed income and net realized gains totaled $2.9 million or $0.09 per common share. And if you were to exclude that capital gains-based incentive accrual, that number would be $20.9 million or $0.64 per common share.

During the quarter, we recognized a net realized loss on investments of $2.9 million, which was primarily a result of the exit of NDLI. We also incurred a realized loss of $1.7 million on the redemption of our Series B and Series C Term Preferred Stock, which was largely comprised of unamortized financing costs.

We -- as I mentioned, we also recorded net unrealized appreciation of investments of 30 -- $38.5 million in the current quarter, which was predominantly due to improved operating performance and an increase in comparable multiples of certain portfolio companies.

Our fair value to cost was 112% this quarter. 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.

Certain of our loans to 4 of our portfolio companies are non-accrual at this time, representing about 11.2% of the fair value of our total debt investment as of September 30. We are actively working with these companies in an effort to improve operating performance and liquidity.

Our portfolio's approximate allocation between debt and equity securities was 74% to 26% at cost. The portfolio is well positioned for any interest rate increases, with about 97% of our loans having variable rates with a minimum of floor and the remaining 3% having fixed rates.

The weighted average cash yield on interest-bearing debt investments was 12.9% this quarter. This yield does not include success fees in our debt investments. For comparison purposes, if we had accrued success fees, the weighted average yield on our total debt investments would approximate 13.4% during the current quarter.

And in summary, as of the end of this quarter, we had unrecognized contractual success fees totaling $32 million or $0.99 per common share. There's no guarantee that we will be able to collect any or all of the success fees or have any control over timing of collection.

From a credit priority perspective, 100% of our loans are secured with 75% having first-lien positions and 25% having second-lien priority in the capital structure of the respective portfolio companies.

And this covers my part of today's call. Back to you, David.

Super. Erich and Dave and Julia, all of that is 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 in 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 can continue paying our dividend, come hell or high 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 finance, are going to have a strong performance in the rest of 2018 and all of 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 at $0.068 per share for each of the months of October, November and December in 2018. That's an annual run rate now of about $0.82 per share and a supplemental distribution to be paid in December of $0.06 per share. Through the date of this call, we've made 160 sequential monthly cash distributions to our common stockholders. In addition, we've made a number of supplemental distributions now that is part of our regular approach to the marketplace.

As of September 30, 2018, we've distributed a total of $235 million or about $9.65 per share to common stockholders and based on the number of shares outstanding at the time of the payment of each of these distributions. The company continues to be a solid dividend payer, and I'm believing that we'll be able to do it in the future as well.

At the current distribution rate, the common stock or the common stock price of about $10.61 as it was yesterday at the close. The yield on the current regular distribution rate of $0.82 a share is just at about 7.7%, a little over maybe 7.7%. And if we look to the future and make an assumption that the company will pay 2 supplemental distributions of $0.06 per share, as it did last year, then the annual payout is about $0.94 for about an 8.8% yield to stockholders.

Please know, as we say all the time, there's no guarantee that the regular supplemental distributions will be paid out, that's one of our central goals here at the company of paying dividends. As most of you know, a regulated investment company, like ours, in simple terms, has to pay out 90% of its earnings.

For the current calendar year, September 30, 2018 -- and as of September 30, 2018, the estimated capital gain portion of our distribution is about 11%. That may change by the time we end the year in March 2019, so don't put that one down on your tax return until we can get something out to you.

Our 2 series preferred stocks are traded above their $25 per share par value yield around 6.2%, maybe 6.3% depending on which one of the series.

Just in summary, before we get started with some questions and summary, Gladstone Investment is an attractive investment for all investors seeking continuous monthly distributions and also supplemental distributions and some potential capital gains. We've had good luck in the past, and I'm estimating we're going to have some good ones in the future as well. Hope to continue to show you some strong returns on your investments.

And now if we'll have the operator come on, we'll get some questions from our shareholders and maybe a few from the analysts.

(Operator Instructions) And our first question is from Henry Coffey from Wedbush.

Yes. 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, again, you know, I mean, and particularly if we can simply compare the first quarter to the second quarter.

Henry, it's Julia. Those were sort of the large drivers are what I mentioned earlier, so there's a decline in the top line, meaning, total investment...

Yes, that's where I wanted to focus on that -- that, yes, on that...

And there were 2 components to it: a, being one investment that was on accrual last quarter being on nonaccrual this quarter, so you have a natural decline of your top line as well as the incremental pickup of some past due interest in the prior quarter from investments that were historically on nonaccrual, 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.

Yes. 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 here from us.

And that -- 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 out on the Q&A, so everybody gets the numbers behind those.

Yes, Henry. I think -- this is Dave. I think it's important, regardless. I think your question's a good one. But I think -- way we think about the business going forward, as 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 then clearly, with a consistent and continual, as I say, refilling of the bucket, right, 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 about a 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 that little bit of a transition.

And so it's really important to understand that quarter to quarter, based on our assets at any point in time and based on some of these timings or 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. We try very hard to manage as we lose some of the income for good reasons because we've exited something, that we manage additional other income, such as exit fees, dividends from companies that are more mature, except for -- so it's a balance, and that's how we think about it. But -- and so you will see these variations certainly quarter to quarter.

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

Correct. If you look towards the bottom of the press release, you'll see a little reconciliation.

Just to follow up on Henry. Warren Buffett was one -- once asked, "Would you like to have a 6% consistent return or 9% up and down, up and down, but at the end of the day, you get 9%?" He said he'd rather have the 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.

(Operator Instructions) And our next question is from Mickey Schleien from Ladenburg.

I have a couple questions about the nonaccruals. You placed, I don't know if you pronounce it SOG, or S-O-G, Specialty Knives on nonaccrual, but its valuation didn't change much quarter to quarter. So I guess, that implies you don't feel the debt is 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 nonaccrual, we -- a lot of times, obviously, you and I talked about this before, because we have clearly the majority of usually of the debt -- 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 nonaccrual, 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 leverage is 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 nonaccrual there, PSI, which is still producing really good cap gains amount. And so we've got -- as we've 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 nonaccrual and 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 6 months, but it's not something that we're panicked about or particularly concerned about.

Dave, you mentioned PSI. I think -- I did want to follow up on that because the predecessor, Precision Southeast, was on nonaccrual. And you merged it 1 year ago with GI Plastek, and they were performing. But now, the new company, the merged company, PSI has been on nonaccrual 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 things did happen. We did have some incremental expenses after merger, for instance, some things we had to do. I can get you more detail if you 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 the enterprise value, we would exit if we were going to exit, which we're not obviously right now, where we'd come up 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 a housekeeping question. I just wanted to delve a little bit deeper into the million dollar 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?

It's twofold. So there is a 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 nonaccrual, and its previously recorded income having to be written down.

Okay. So this was a reversal of previously accrued investment income more than anything else.

Yes.

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

Yes, there was -- that was a small one.

At this time, I'm 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 to be very happy when you get into the January, February time frame. 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.