Gladstone Investment Corp (GAIN) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Gladstone Investment Corporation's First Quarter and Year Ended June 30, 2020, Earnings Call and Webcast. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, David Gladstone. Please go ahead.

All right. Thank you, Sarah. Nice introduction. This is David Gladstone, the Chairman, and this is the first quarter ending for 2021, our year-end is March 31. In this conference call for the analysts and the shareholders, Gladstone Investment is traded on NASDAQ under the trading symbol GAIN, G-A-I-N that we are to always trying to trigger some capital gains and GAINM and GAINL are our preferred stocks. So we've got some stocks out there. And I hope one of those fits what you're looking for. Thank you all for calling in today. We're always happy to provide some information about our company to the shareholders and analysts and provide a view of current business environment.

Two goals in the call, of course, is to understand what happened in the past quarter or past year even. And also, best we can do, not easy these days, what's going on in the future for us. We'll start out with our General Counsel and Secretary, Michael LiCalsi. Michael, go ahead.

Thanks, David, and good morning, everybody. 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. And these 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 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 on our forms 10-Q, 10-K and other documents that we file with the SEC.

These can all be found on our website, which is www.gladstoneinvestment.com or the SEC's website at 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 any past performance or market information is no guarantee of future results. Please visit our website, once again, www.gladstoneinvestment.com, sign up for our e-mail notification service. You can also find us on Twitter, @GladstoneComps; and on Facebook, keyword The Gladstone Companies.

We remind everybody today's call is simply an overview of our results through June 30, 2020. So we ask you to review our press release and Form 10-Q, both of which were issued yesterday for more detailed information.

One last matter we want to remind everybody to vote their shares, whether you own preferred shares or common shares in the company, both for our upcoming annual shareholders meeting, which is going to take place on August 6, which is next Thursday at 11:00 a.m. It's very important that everyone cast their vote so that we can at least ensure that a quorum is met at the meeting.

The easiest way vote is to contact our proxy solicitor directly at Georgeson LLC, and their phone number is (800) 903-2897, once again, (800) 903-2897. If you call them, you can quickly cast your vote over the phone, it takes about 2 minutes.

Now I'll turn the presentation over to David Dullum, President of Gladstone Investment. Dave?

Thanks, Mike, and good morning, everyone. Just reflecting on the last report, which we gave you not all that many months ago for our fiscal year in March, and it seems like it's been quite a long time in part because, obviously, with everything going on with COVID, and we've all had to deal with in lots of different ways.

In our case, Gladstone Investment, as we go through this, I'll hopefully leave you all with the sense that, one, we -- as you all know, we came off of actually probably one of our best years in fiscal '20, ending March '20. So that helped us with a good head of steam going into this fiscal year. But of course, we have -- we'll have to deal with the reality of where we've been.

And so we'll touch on that and let you know what we're doing to ensure that our company keeps doing all the right things going forward and getting through this.

And as a result of that, we didn't know what to expect, obviously, right in the beginning of going into COVID. As it turned out, we were able to, in the quarter, at June 30, and with reporting adjusted net investment income of $0.11 per share. And while this was against $0.19 per share for the quarter ended the 03/20 -- 03/31, sorry, and we'll explain a bit more about that.

We feel pretty good about that under the circumstances. And more importantly, as we move through the year, where we're headed. On a comparative basis, actually, the total portfolio income, which is primarily interest income on our debt investments, was actually relatively stable quarter-to-quarter, which is a good thing and is a testament to the foundation of the assets that we own, both the debt and the equity.

And I really think that's important to understand, and we'll hear more about that going forward.

So just keep that in mind. Our primary operating focus, obviously, has been since we got into this and continues to be clearly closely monitoring our portfolio companies, the emphasis is on the cash flow and the working capital dynamics, if you will, of each of our portfolio companies.

It really is important in this time to stress that, and we keep working with our companies to get through that.

Most of our companies, happily, I can say, have performed pretty well, including some of them, which have actually exceeded our expectations when we were going into this.

So those where we've had some drop off or decline really are all a function clearly of the COVID activity. And what's going on in the economy in general, and frankly, not so much around the underlying operations of those companies.

To date, as a result of that, we've not necessarily needed to provide very much additional financial support, which is a good thing. But even if we needed to and if we did, we do have sufficient liquidity for that purpose.

As I mentioned, obviously, in our fiscal year-end report, back a number of months ago, we had exited a few of our portfolio companies last year, which generated very significant liquidity for us through the net realized capital gains and obviously, the repayment of our debt securities.

So we ended a really strong, again the year last year, not just the calendar '19, but also our fiscal year March '20, and that's put us in good position to support our portfolio companies going forward.

We also are able and will continue to grow and rebuild the portfolio. And in this regard, in July, so it was just after our quarter end at 06/30, we actually did make a new buyout investment for about $47 million, which was a combination of equity and debt.

And obviously, that $47 million, a pretty significant part of that is the debt security, which is a good thing because that does generate, obviously, interest income for us.

Our NAV, it is our book value for the 06/30 period was $10.87 per share when that compares to $11.17 at the 03/31/20 quarter end. So a decrease of $0.30 per share. But again, that was a result, in part, obviously, of some of our companies that were affected and some more than others by decline, obviously, initially in operating earnings.

And as we valued them, they had to come down in value, fundamentally, as a result, actually, of the COVID activity and not underlying operating. We had a number of our companies that are really good businesses that were in sectors, that were directly impacted by COVID. And obviously, their earnings were off relatively speaking, and that's reflected in these valuations.

This was the -- again, the NAV for 06/30 compared to what it was at 03/31/20.

So in terms of the pandemic and the actions that we have taken, just follow-on the report that we gave, our actions early on, we were continuing to actively monitor the potential issues in the portfolio. We are proactively engaged with their management teams to providing the support as necessary.

Our managing directors, our team, who work very closely with each portfolio company, and we're focused on things such as reforecasting the potential for temporary capital needs that any of these companies might have, obviously, there's a fair amount of stuff that goes into the legal resources, if you will, around HR-related in great part because people are coming back to work. And each company has to be responsible for employees and being sure that we're doing all the right things.

So the good news there is we are seeing activity with companies and our people coming back to work.

And again, we have not had to provide at this point much support either through additional investments or really accommodation on interest obligations, and that's something we're going to keep striving for and working very hard on.

The aggregate portfolio values from 12/31/19 to 03/31/20 depreciated about 8%, which I mentioned before. That was primarily, again, due to the effect of the pandemic, obviously affecting not only the operations of the portfolio companies, but market multiples.

But this quarter, again, fortunately, we've seen stabilization in these values, and we had essentially only about a 1% decline in fair values from the 03/31 quarter to the 06/30 quarter.

So I'm really encouraged by that. And obviously, we're seeing some companies that are slightly more effective than others, again based on their sector and also the geographic location of those companies.

So depending on the duration of the pandemic and the timing of an economic recovery, it is possible we might experience a bit further individual portfolio company devaluation. At same time, we might see as well improvement in others.

So this is a balancing act, obviously. And again, I want to reemphasize that we work with our companies very carefully, and that's why in times like these, as we keep saying, the type of our approach being an equity and debt provider and majority owner of most of these companies that really provides us this advantage that gives us a lot more flexibility whether we have to financially do some structuring to help with the cash flow management of the companies in the portfolio, preservation of value and so on.

And we'll talk a bit more about companies that are on nonaccrual. We've only had one that's had to go on nonaccrual as a function of really COVID activity. And you'll hear a little bit more about that. But I want to, again, leave us with the thought that those that are on nonaccrual are good companies. We continue working. We've made some progress with them, and we expect and would hope to see some of them as we go through the rest of the year come back off of nonaccrual. So that's what we're working on.

In terms of our outlook, in general, our focus, obviously, is continuing this close involvement with the portfolio companies. We also actively continue to review potential acquisitions.

The challenge, obviously, continues to be how do you pursue quality due diligence and determine, as I would say, the rational views on what the right purchase value may be and obviously, our expected returns.

We're going to maintain and stick with our philosophy of the kinds of returns that we look for. And this might give us an opportunity as the market we're seeing having a tendency to come back to some rationalization in valuations, and that's a good thing for us.

Obviously, we're trying to conduct a bulk of this activity on due diligence in what has now become as they would call it a Zoom type environment. That's an interesting experience, but we're doing that. And actually, the new acquisition we made right at the beginning of July, we were able to get that closed by effectively using this Zoom capability.

So that's where we're going. We are seeing some pickup in deal flow, and we keep working on that part beyond just the one of preservation of our existing portfolio.

All in all, I think it's in a really good position, and we just have to be a little patient as we pull-through over the next 9 months.

So I'm going to stop there and turn it over to Julia Ryan, our CFO. Julia?

Thanks, Dave. Let me start with the summary of the fund's operating performance for the past quarters. We generated NII of $4.2 million as compared to NII of $14.8 million in the prior quarter. And that's a result of investment income declining by approximately $1.3 million, which is due to placing the one investment on nonaccrual during the current quarter.

And as you know, our investment in Horizon is travel dependent and has been significantly affected by COVID shutdowns and declines in travel. We're very hopeful that the business will return to stable levels when we learn how to manage the virus a little bit better.

Net expenses totaled $6.5 million in the current quarter compared to an expense reversal of $2.8 million in the prior quarter or a change of $9.3 million, which was primarily driven by an $8.4 million reversal of previously accrued capital gains based incentive fees due to the net impact of realized and unrealized gains and losses in the prior quarter, and that compares -- and a $1 million decrease in credits to expenses.

Absent these 2 factors, expenses were relatively consistent and only slightly increased primarily due to tax expense and stockholder expenses.

When adjusted net investment income to exclude the capital gains-based incentive fee reversal, adjusted net investment income per weighted average common share was $0.11 in the current quarter.

We continue to believe that this metric is a useful and representative indicator of operations exclusive of any capital gains-based incentive fee, as net investment income does not include the realized or unrealized investment activity associated with this fee.

And as Dave noted above, our balance sheet and liquidity remained strong as of June 30. We had availability under our line of credit of about $104 million as of 06/30/20.

We also raised about $2.3 million in net proceeds under our new Series E TPS ATM and about $1.7 million in net proceeds under our common stock ATM, and all of those were above NASH.

While NASH has declined as a result of unrealized depreciation and lower net investment income as compared to distributions paid this quarter, which is primarily a result of the $0.09 supplemental distribution, distributable income to shareholders remainED solid.

And on a book basis, undistributed net investment income combined with net realized gains that have not yet been distributed totaled almost $7 million or about $0.20 per common share.

This amount is already net of the $38 million in distribution declared as of March 31, 2020, and is also reduced by the book accrual of any potential capital gains-based incentive fee accrued under GAAP, and that number is roughly $6.6 million.

All else equal, the $0.20 per common share are available for distribution to shareholders in future periods even if the entire capital gains-based incentive fee accrual were to be paid.

And with that in mind and as previously announced, in July, our Board of Directors maintained the current monthly distribution run rate of $0.84 per year, which represents a current yield of about 8.4%, excluding any supplemental distributions.

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

Okay. Thank you, Dave, Julia, Michael, and that was good information for our shareholders, and that presentation, combined with the 10-Q filed yesterday, should really bring everybody up-to-date on where we've been and give you an indication of where we think we can go.

We believe the team here is in a good position to continue the success of the fiscal year ending March 31, 2021 and manage the portfolio through the current time of uncertainty.

I believe that Gladstone Investment is an attractive investment for distributions that is shareholders who like distributions and regular distributions and hopefully, some capital gains as time goes along.

I think this is a great company for doing that. The general economy, of course, is in recession today caused by the government's reaction to these Chinese viruses that we have floating around.

What makes it so difficult here in trying to give you an indication of where we're going is that we have no clue where the government is going to go and what they're going to do next with regard to the COVID-19 virus that's out there. There's no place to hide in the marketplace today. If you go into government securities, you're going to get nothing as a return.

So I hope some of you will use our stock as a place to park some money and pick up some good cash while you're waiting.

Anyway, at this point in time, Sarah, would you come on and we'll have some questions from our analysts and shareholders out there at this time.

(Operator Instructions) Our first question comes from the line of Mickey Schleien with Ladenburg Thalmann.

Several questions this morning. My first is with the dislocation in the market since COVID began and the obvious impact on spreads. Could you give us a sense of the terms you received on Mason West?

Sure, Mickey, it's Dave. I would -- the answer is, and as I try to generally remind ourselves, I'm not as sensitive to spreads per se. Remembering we're buying companies, we're combining our debt and our equity. So we look at total return on our total assets, both the equity and the debt. And then we, obviously, look at what we are expecting for our capital gains on our equity, which we've consistently now been able to show.

Based on our results, we've been over 3x cash-on-cash on the equity components. And our debt yields tend to be on average somewhere in the early but consistently get maintained in the 12% on the debt portion.

So without going into the specific details on that deal, you -- just you know, our -- we would normally price and put our combined equity and debt in any deal to give us a aggregate yield at any point in time, somewhere in the high 9s to up to 10% effective yield on those dollars, and that deal pretty much is consistent with that.

Okay. That's helpful. And so Mason West was a significant investment subsequent to the quarter. I just want to confirm, you haven't had any material exits subsequent to the quarter. Is that correct?

Correct. We had lots of exits last year, but not so far this quarter, correct.

Right. Right. Well, there are some businesses that folks are, obviously, very interested in acquiring in the pandemic, and I was just curious.

So moving on to Horizon facilities, that was marked at par at March and then again at par at June, but it's now on nonaccruals. So can you just walk through what's going on there? Why is it on nonaccrual? And what is the outlook for the company?

Julia, do you want to tackle a part of that, and I can add some color to it.

Sure. Mickey, this Horizon is heavily focused or dependent upon the travel industry. They provide rental car services without going into too much detail. So as travel the clients, so we'll -- its business in general. And now we've seen some pickup here recently, and that's my earlier comment as to -- as far as learning how to deal with the buyers will significantly impact how people look at travel and as that resumes, our investment should return to normal status.

So did they miss an interest payment? Or what caused the nonaccrual?

Yes. So normally, we place something on nonaccrual if we either don't believe they will continue to pay or if they already have started not paying. Those are the 2 criteria, and it's generally a 3-month type concept.

Okay. So the valuation reflects your optimism that in the not-too-distant future, things will "sort of return back to normal for Horizon?"

Correct.

Yes. I would add to that, Mickey. This -- the good news for this company, their management team is superb. And they did all the right things. And so again, I referenced earlier preservation of capital in some of our companies where we have the flexibility. In this example, we would not put the pressure on them to necessarily pay interest when they've had. Obviously, a relatively significant, call it, decline in their operations, all related to COVID.

But in the meantime, they've done a heck of a good job and actually, they're starting to come back and so long we don't want to get ahead of ourselves, but it's certainly a business that longer term and even near term is going to be a good one for us.

So this helps them. It happens to be one where we actually have a third-party lender in the deal, providing working capital financing. And actually, they've stayed with them, and that's been a really good thing.

So yes, it's -- I certainly believe it's a temporary situation. And the valuation, I think, does reflect, as you say, if not optimism, certain reality about where they're going.

Okay. Dave, besides Horizon, what other investments caused the decline in your average risk rating? I know you don't break it out by quartile or anything like that, but it did decline. Was there anything else meaningfully underperforming that caused that decline?

Not anything, Mickey, I mean, that I can think off hand and Julia, I don't know, do you have anything you want to add to that?

No. Mickey, this is general, as you look at the market currently, that's how we are assessing it. It's not perfect. So we'll just be closely monitoring that.

Yes, one thing let me add this because this is a true statement. And I don't know if we touched on this last quarter, but it's important. One of our investments that we had at December, which we exited for very significant capital gains, and it's obviously in our filings Nth Degree which was an outstanding business and a great management team, we were -- we exited. As I mentioned, we reported very significant capital gains. That business tied directly to the trade show industry.

And speaking about companies and industries, and the good news for us is we exited, we did because of the transaction, as we reported before. It's worth emphasizing, maintain a very small equity position at a cost basis. But when we exited at the value, relatively speaking, was fairly high for that small piece that we kept. That business, obviously, has had a significant decline in value.

So if you look at our assets and see where we've seen decline in valuing our assets, a reasonable portion of it ironically is in that piece that we have maintained and had to maintain after December 2019.

So it's one of those aspects of its business that, again a small piece, decline in value, it's affected our valuations, but it's not certainly other than we like the folks that are there. We don't have a very significant position in that company any further. And more importantly, we were able to fortunately exit at, again, a very substantial net realized capital gains on that company.

Yes. I did see that decline, Dave, and I appreciate the clarification. How about another new deal, The Maids, my understanding is that the -- it's a franchise company that provides cleaning -- residential cleaning, which is something that from where I sit would be something that folks might try to avoid in the pandemic.

How are they performing in the current environment? And do you expect deterioration in that business as the wave of virus seems to be ongoing?

Right. So good question. Obviously, we -- that's one where out of the box when the pandemic, we did see across the board a drop-off at the franchisee level. It's a company that you mentioned, we own the franchise. We -- and within that, we have about 8 company-owned stores, if you will, but then the bulk of them over 100 are all spread around the country in different concentrations.

We did see through the franchisee an initial drop off, obviously. However, we are seeing that picking up now, not only at the franchisee level, but also the company store level. And also, again, management did a wonderful job in making adjustments in their operating expenses, et cetera.

And as a result of that, we -- and another piece of it, they actually tactically went about adding a service capability on the industrial cleaning side. Now that's in thought of it, it's early days, but because as we all know, and I touch on a little bit, we see it from our companies as they come back online actually needing to go out and bring in cleaning services because they have to.

So our -- The Maids while they're focused, obviously, the bulk of it is in home cleaning, they've also been able to add to their portfolio, if you will, some industrial cleaning capability, and they're working on that. That's going to help. So actually, that's one I do see as coming back on not declining from where it is. Unfortunately, they've been able to keep doing their thing.

Actually, ironically, they did access some PPP money. And the reason they were able to do that is because there's an exemption for franchisees, franchisors. So there, we're able to get some PPP money, which really was a very positive thing for them. So that's one that I'm excited about seeing them sort of track back up, and they are not on nonaccrual. So it's -- they're doing well.

That's good news, Dave. And in terms of PPP -- and I'm almost done with my questions. During the last earnings call, you mentioned that very few of your companies qualified because of the affiliation rules. Was there any progress in the second calendar quarter? I mean as the PPP program sort of evolved, did you manage to get more PPP money into the system? Or does it remain very limited?

Yes. No, it remains. It's just strictly The Maids, the other one that did get PPP money, which was good for them ironically, is this Nth Degree. And that's mainly because one of the investors in there is an SBIC related, and that was an exemption under that. But basically, our companies for the same reason due to the attribution of ownership, we're not able to access it.

But as it's turned out to be truthful, it's not been necessarily something that, that I don't think would help much along the way and where we've needed to in very small amounts to date had to help a few companies, we've been able to do that ourselves. So...

Yes, I did notice that the follow-on investments very small this quarter. So Dave, how would you characterize the outlook for the liquidity of your borrowers in general? Assuming -- I guess the optimistic scenario is a vaccine is approved maybe by the end of the year. But realistically, that doesn't mean people get vaccinated until, let's say, the first half of next year. So we're going to be dealing with this for a while. And folks have to deal with liquidity issues for many more quarters.

How do you feel about your average borrowers' liquidity?

Yes. So again, I don't like the terminology borrowers. It's our portfolio of companies that we, obviously, have significant investments in equity and debt. I would say that they, on average, there are 1 or 2, as we look forward, and as I mentioned, we are very, very hard at work with each of our portfolio companies focus on that, doing everything, working with the management teams to get liquidity through their own working capital, which is obviously things like working hard on reduction of inventory, collection and receivables, those kinds of things.

So if you -- if I answer it on an average for the portfolio, given that we have roughly 27 companies in the portfolio, I'd say, on average, we're in good shape. They're 1 or 2 for potentially good reasons, which might help us down the road, might put some money into, again, for the right reasons. But at this point, we -- I would say, on average, we look pretty good.

And those that do have a bank -- a third-party lender, a typical bank, actually, in most cases, we found that they've been able to work with their banks, some a little more stretchable than others, but by and large, pretty good.

And okay. That's helpful. My last question, just looking at the dividend, I think Julia said that the spillover stands at $0.20. Is there still expectation for another semiannual supplemental dividend this year?

Well, when we started the semiannual dividends distributions, which are a function of realized capital gains, as we've stressed, we've been able to maintain it pretty effectively. We made the one in June. As we move forward during the year, in part as a function of liquidity ourselves, being that we are doing new deals also, we'll take a hard look at that, but that's something we'll, obviously, have to put to our Board as we go down the road.

So I can't really say that we'll have one or not have one at this point.

And in terms of the regular dividend, obviously, that was not covered by either GAAP NII or adjusted NII, given the spillover that you have is the expectation, at least at this time, to maintain the dividend at this level? I know it's been maintained through September, but it is putting pressure on the company? Or is that something the Board is thinking about revisiting?

Well, I think, as you pointed out, the -- who knows and as David Gladstone said, we don't know where the economy is going, and we have to be in for the long haul, I think at this point, based on where we are with the portfolio, the right thing to say is, we're going to do everything we can as we work with our companies, some of those that we'll see starting to improve, et cetera, will help in terms of the other income stream.

As you know, we have 2 -- basically 2 revenue streams, right, which directly affect the dividend. One is the base, as I mentioned, interest income coming off the portfolio, that's held relatively steady, and I think that's going to continue that way, might see a little pick up. And then the other one, of course, is the other income stream, which is where we've been able to get income from portfolio companies through exit fees that they pay us dividends that the companies might be in a position to pay.

We're going to, frankly, try to not put pressure on the companies to do that because, again, preservation of capital. So right now, best I will tell you is, we're going to do everything we can and work hard to maintain our current levels, but we'll look at it as we move forward during the year. And as you say, decide and put it to our Board as we go through the year. So that's, again, best I can do on that one.

I appreciate it, Dave, and thanks for all your time this morning and your patience. I hope everyone stays safe. That's it from me.

We are all looking at it the same way you are. We are all trying to figure out where tomorrow will be. And I think if we had something that everybody believed in, I'm -- personally I believe in hydroxychloroquine. A lot of people aren't. But I think those could settle out and save us all.

But Sarah, come on and see if there's a second group that wants to ask a question.

Our next question comes from the line of Ryan Carr with Jefferies.

My first, Dave is, centers around the yield. Curious to hear why the yield was contracted, it's 11.8%. Was it driven by the light repayments? So basically, what's driving that yield contraction there? And then beyond that as well, thinking longer term, especially as we go into a more uncertain environment with lower yields and lower benchmark rates, out of your debt portfolio, how does LIBOR floors impact that moving forward?

Julia?

I'll go ahead and take that one. Yes. So let's start with the latter part of the question. LIBOR floors. And I think in our 10-K, if you've had a chance to look at that, we detailed the expectations surrounding LIBOR and how it might impact our operations. And the answer in a nutshell is not very much because most of our capital is the term preferred stock, which is a fixed rate and then the line of credit, while it is LIBOR-based and what fluctuates limited.

And then on the investment side, so income-producing side, most, if not all of our floors are well in excess of where LIBOR is currently for sure. And so we do not expect to see a decline of our income as a result of LIBOR fluctuation. So that's that.

And then the yield, any 1 quarter is really difficult to look at. I think Dave has mentioned it a few times, we tend to look at our portfolio over the course of a year. So any 1 quarter might be impacted by extra payments of income or reductions in rates on a loan permanent or temporarily.

So any one thing can impact it on a quarterly basis, which is how -- what impacted this quarter's yield with the outlook being that, over time, will play in that 12% range.

Okay. And then in terms of the deployment outlook on the deal environment, you -- from a deal perspective, last quarter was light. And then you announced the subsequent quarter investment activity. Curious as to what your views are now on the current environment? Where you see things going over the next 6 months? And how you think you'll be able to take advantage of those opportunities? And then I'm curious as to what changed subsequent to the quarter end? And what catalyzed that activity?

Sure. This is Dave. I'll try to take that. That particular investment that we bought Mason West, we'd actually had been working on it prior to the -- essentially the pandemic hit. So we were able to essentially revive it as we got through the quarter, and we stayed in touch, obviously, and we're able to get the deal done.

More importantly, though, perhaps, to your question, as we look forward, we are seeing, I believe, somewhat of a pickup in activity in deal flow. And that is a function, I think, of a couple of things.

There are companies that might have been thinking about going out firms like Jefferies and others from the investment banking side that might have put things on hold. I think have said, "Hey, you know what, there's not -- we should come back in the market, keep testing it." So there's some of that going on. And certainly, good companies, some of which that had, obviously, like most companies had some effect and decline in at least in the first quarter, second quarter, even maybe starting to see some pickup and believe the time is right at least go back to the market.

So legitimately, I think that, that's happening. The other thing that's going on is that, structurally, we're seeing where a year ago, for argument sake, multiples on deals that were good companies, we've all been saying, seemed a little crazy, meaning high. We're seeing maybe a little more common sense coming into that, number one.

Number two, we're also seeing sellers being more willing to look at structures that will accommodate a transaction, which might mean taking back some seller pay for themselves, doing some other things because, frankly, the lenders, the banks, the classic third-party lenders that are driving and have driven some of these bigger valuations because leverage was so available, some of that's compressing.

So the typical, say, private equity fund is either having to more than ever putting even more equity in a transaction because you're not getting as much leverage. And as a result, that obviously are looking to moderate the valuation. So we're seeing that going on.

So the combination of those 2 things, I believe, are going to perhaps lead to opportunities that will be somewhat perhaps to our advantage. We have an advantage in that all else being equal because we do the debt and the equity that we can provide our own leverage. So we're not as dependent on third parties.

So long answer to your question, but I wouldn't say that all of a sudden things are going to burst open, but I would say that it's certainly better than it was 3 months ago.

Great. That's very helpful. And then in terms of the portfolio companies themselves with respect to health, how are average EBITDA trends at that level at this point? And have they changed from pre-pandemic level?

And then moving forward, as you're evaluating the risk in the portfolio, what else are you looking at besides those metrics in order to make those assumptions?

Julia?

This is a tough one. So the one thing I will say, and I believe that would be true across the market, at least based on what we're hearing and working with specialists on this front, of course, when it comes to our valuations every quarter, is that a pure wear look in the mirror is no longer possible or appropriate.

And what I mean by that is that, by and large, our valuations tend to be based on a 12-month EBITDA metric. But in this environment, given the uncertainty, given that parts of it are temporary versus others being perhaps not quite so temporary, that is no longer how a market participant would view those portfolio companies and therefore, neither we and our valuation every quarter, and that's been validated across the board in the market with specialist input.

So regular averages and ranges are not quite so meaningful at this particular point.

Great. Thank you very much for answering all my questions, and I hope all of you are well. Great to catch up.

We're all good down here. Nobody with COVID-19. We've dodged the bullet, if you want to say it that way. But Sarah, come on and see if there's anybody else with a question.

Our next question comes from the line of Henry Coffey with Wedbush.

If we look at the current quarter and compare it to anything in the last 3 or 4 quarters, so that's a little -- I think to all of us, that seems a little off. It's about a $2 million shortfall between where you are today and getting back to, say, $0.19 or $0.20 a share. What is the likely bridge that gets you there?

Where do you find over the next couple of quarters an extra $1 million or $2 million of be it net interest income or other possible drivers of those numbers?

Yes. Henry, Dave. So I think the areas we focus on, obviously, potentially 1 or 2 companies that might actually come back off of nonaccrual based on some things we're looking at. That would be one area generally, obviously. I'm not going to make any promises or specifics, but it's a total portfolio.

The other is the idea of finding those companies where we believe, from a cash flow perspective, we're able to now go back and get the other income side of things. Again, whether that's their willingness or desire to pay an agent fee accrued -- part of an accrued exit fee or what have you. Those are the primary drivers.

The third, obviously, is new deals. As we do new deals, we just did with Mason West, we got it done right at the beginning of the quarter. So that helps because that's a pretty good chunk of debt, if you will, at a good interest rate.

And then as we do new deals, we also generate incremental fee income. So those would be the, I'd say, the 3 broad categories. Obviously, the other side of the equation is expense management, to some degree, there'll be some of that, so that combination is where we would have to look to it.

Have you -- I know you don't like to make an immediate forecast. But if you were kind of coming up with a risk-weighted view, is it -- is this an event that can occur quickly? Or is this an event that might take 2 or 3 quarters for things to kind of work their way through? I mean, obviously, this year is going to be a tough year. Everyone's accepted that and you got a great capital structure that's go around and the like.

Yes. I'd say -- and again, we all keep saying, we don't know what the future holds, and David Gladstone points out very carefully, a big part of it is a function of what our government does and actions along those lines, obviously, et cetera.

But from a microcosm, our little companies as we look at each one of them and see the activities, I'd say it's over 2 to 3 quarters kind of activity. And the interesting thing for us, as I pointed out in the very beginning, the good news and bad news to some degree is, we came off of one of our best years.

So on a comparative basis, relative to, as you point out, we ended last quarter, as I mentioned, $0.19 and this quarter, $0.11. Under normal circumstances, even $0.11 may not necessarily be bad.

So the objective is to bring that back as best as we can. I think this is a tough environment, obviously, to try to replicate the great year we certainly had last year, but is still in the same token, I think it's still a very constructive positive. And more importantly, that I think you just sort of alluded to our balance sheet, our overall liquidity. We're in a good position to work through this.

And again, that's our objective with all of our portfolio companies, keep them going, and we'll hopefully get back to that level that we want to be at.

And Henry, just to chime in on that. If we sell another company as we hope to do this year, you'd make up a lot of that income because so much of it coming back in comes in from the dividend on the preferred stock. That income and any income on the debt, of course, is going to be very accretive to the dividend.

So I'm not so worried about the dividend this year. I think there's about $1.5 billion worth of money sitting out there in venture capital money, whatever, and they're trying to put it to work, and we may help them put it to work by selling them something.

So that's a goal. And again, I'm hopeful that we can do another couple of deals in terms of putting them into the portfolio during the year, and that would give us some fees and structuring fees as well as some others. So we'll see. We'll have a better view of it in October when we talk, and you can ask the question again, we'll try to answer it.

I know how important the dividends are to you, David, and I always have appreciated that. The people we work with, who own the stock, have made a lot of money over the last few years because of your efforts and not paying the supplement or reducing the dividend for a couple of quarters, maybe that doesn't build up a lot of capital, but this is more of a partnership than just a trade.

And clearly, as you think about at least the supplement, maybe this is time to back off a little bit and build up some capital. And -- but we know you'll make the right decision.

Yes, hush your mouth, I'm not going to cut the dividend. If I can help it, that's the last thing we look at. But go ahead, I'm sorry, Henry.

I appreciate the clarity on that, sir. Thank you very much.

But Henry, we will, as you said, it is a partnership, and we're here for the long haul, and we'll do the things we have to do. So -- to make it a long-term investment.

Sarah, you want to come on and see if there's anyone else asking a question.

Our next question comes from the line of Bryce Rowe with National Securities.

Just maybe a couple of follow-ups. David, on the -- you mentioned the Mason West investment. Obviously, a good size in the mid-$40 million range. I'm just curious with, I guess, repayment activity as slow as it is right now. Should we expect you to draw on the credit facility to fund that deal?

Well, yes, that, of course, that was a subsequent event, so subsequent to June. So the short answer is yes, we have.

Already drawn that.

Okay. That's helpful. And then just wanted to ask about the ATM program with the preferred stock and then the notes. The notes, I guess, offering that's out there through Gladstone Securities. Just curious what your -- kind of your appetite is to take down either the unsecured notes and issue those to help fund subsequent activity? Or should we expect more activity on the preferred ATM to generate some capital for future use?

Yes. So right, the ATM, as you pointed on the preferred, subject to, obviously, to blackout periods when we have to be out of the market. As you well know, with ATMs, there's sort of -- the good news is, it's a good way if markets accommodate it to raise capital in general.

What we're doing is taking a long-term look at how we keep funding ourselves over time. And the idea of the notes that we're sort of starting to put out there and work through is not a program that's an overnight program.

So as time goes along, we will raise capital, hopefully, from that source. And as we do that, we will manage our overall capital structure as a result of that, obviously. So think of it as we're focused on our strategy here is let's lay in the best types of securities for the long term for this business. We are a long-term business.

And as we would say, raise capital from the notes, we obviously will -- we're not looking to just increase leverage and certainly not having cash sit on our balance sheet, but we will adjust our other funding sources accordingly so that we maintain a conservative level of leverage, relatively speaking, at the same time, providing the capital to doing new deals and so on and so forth.

So kind of all of the above. It's a management of our capital structure is the best way to answer the question.

Okay. That's helpful, David. And then I wanted to ask about the portfolio and some of the valuations. Nicky, obviously, discussed some of the depreciation for the quarter. I wanted to ask about the -- some of the appreciation in the quarter. There were several at least equity investments that saw some appreciation. And maybe you could speak to what's driving that? Is there something within that business, whether it be related to COVID or not that has helped propel the valuations of those businesses higher here over the quarter?

Julia, you want to tackle that?

Sure. So Bryce, it always helps to look at what industry are these companies in. So the largest appreciation for the quarter was Pioneer Square Brands. And you may or may not know but they are in the K-through-12 electronics support industry. I have a hard time describing this accurately, but they make cases and other supporting accessories for iPads, laptops, all those things.

So with schools being closed down, you can imagine that the demand for those items has skyrocketed. And hence, they're doing really well. Dave alluded to it in his part of the call earlier that we have seen some outperformance in our portfolio and this falls in that category.

Okay. That's helpful, Julia.

Yes, Bryce let me just add to that, though. That company, obviously, as Julia alluded to, has some impact and a positive vein on COVID and buying habits, right? And we're seeing -- you see that across the board, some of our e-commerce oriented types of companies, some improvement there.

But I'd also add that the fundamentals of those companies that also we saw upticks in valuation, some a little higher than others, are also very, very strong, too. So it's a combination of things.

Obviously, a little bit of an uptick and who knows with COVID may some of that slow down a little bit. It's hard to tell, but generally, the fundamentals still are sound, and that's really a very important aspect of valuation.

Sarah, you got anybody else?

There are no further questions in the queue at this time.

All right. Well, we'll end up by just saying thank you all for calling in and asking good questions, and we'll see you again in October. That's the end of this call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.