Gladstone Investment (NASDAQ:GAIN) Q3 2015 Earnings Conference Call February 4, 2016 8:30 AM ET
David Gladstone - Chairman and Chief Executive Officer
Michael LiCalsi - President, General Counsel and Secretary
David Dullum - President
Julia Ryan - Chief Financial Officer and Treasurer
Kyle Joseph - Jefferies
Mickey Schleien - Ladenburg
Mitchel Penn - Janney Capital Markets
Jeremy Roane - Hilliard Lyons
Good day, ladies and gentlemen, and welcome to the Gladstone Investment Corporation's third quarter ended December 31, 2015 earnings call and webcast. [Operator Instructions] I would now like to introduce your first speaker for today, David Gladstone. You have the floor, sir.
Hello out there and good morning. This is David Gladstone and this is the quarterly earnings conference call for shareholders and analysts of Gladstone Investment. NASDAQ stock trading symbol is GAIN. We have three preferred stocks: GAINO; one that ends in P, GAINP; and one that ends in N as well, GAINN. So lot of different ways to invest in our company.
Thank you all for calling in. We're always happy to talk to our loyal shareholders and potential shareholders. We'd like to give you an update on the company and the investments that we've made, and would like to give you a view of the business environment that we found ourselves in.
We all wish we could do this more often, try to do this with some of the press releases and it's always nice to have a chance to talk with you guys. Also, an invitation is always open here to visit. Our office is in McLean, Virginia. We're just located outside of Washington D.C. So if you're in the area, stop by and say hello. You'll see some of the team here of about 60 people or so. I think we have the finest team in the business.
And now, we'll hear from the General Counsel and Secretary, Michael LiCalsi. And Michael is also the President of Gladstone Administration, which serves as the administrator to all the Gladstone funds and related companies, he'll make a statement about forward-looking statements. Michael?
Good morning, everyone. This conference call may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, including statements with regards to the future performance of this company.
And these forward-looking statements inherently involve certain risks and uncertainties and other factors even though they are based on our current plans, which we believe to be reasonable. And many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar expressions.
There are many factors that may cause our actual results to be materially different from any future results that are expressed or implied by these forward-looking statements, including information listed under the caption Risk Factors in its Form 10-Q filing or Form 10-K filing and our registration statement as well as we file with the Securities and Exchange Commission, all of which can be found on our website, www.gladstoneinvestment.com or the SEC's website, www.sec.gov.
And the company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise after the date of this conference call, except as required by law. Please also note that past performance or market information is not a guarantee of any future results.
Please take the opportunity to visit our website, gladstoneinvestment.com, and signup for our email notification service. You can also find us on Facebook, keyword, The Gladstone Companies and on Twitter at GladstoneComps.
The call today will be an overview of our results through December 31, 2015. So for more detailed information, I direct you to our press release issued yesterday and also to review our Form 10-Q for the quarter ended December 31, 2015, that we filed yesterday with the SEC. And you can access the press release and 10-Q on our website, www.gladstoneinvestment.com.
Now, let's turn the program over to David Dullum, President of Gladstone Investment. He will give you an update on the Fund's performance and outlook.
Thanks, Mike, and good morning, everyone. Usually I try to take just a few minutes and refresh our thinking and memory on what the business objectives of Gladstone Investment is, and we are a publicly traded firm, which is focused on buying U.S. businesses with annual sales between $20 million or $100 million.
The funding structure we use in these buyouts usually consists of secured first/second lien debt, in a combination with a direct and significant equity investment in the particular company that we're buying. So this combination of debt and equity does produce a mix of assets, such that the debt portion of the investments provides income, which pays and grow our multi-distributions; while we obviously look to the equity portion to increase in value, and therefore provide capital gains overtime.
And to briefly touch on how are we different from other BDCs, of course there are a number out there and we are one of a number. And I'd like to always share that we take significant equity positions in the companies that we invest in. That really differentiates us from virtually all the other public BDCs that are predominantly debt focused and generally referred to as credit-oriented BDCs. So for instance, the proportion of equity to debt for the investments in our portfolio was approximately 25% to 75%. Whereas most of the BDCs, you'll find no portfolios are closer to, say, 10% and 90% of the proportion of equity to debt.
And then relative to say, other private equity funds, as we think about ourselves as private equity investors, is that they generally are 10-year term private partnerships with a long-term liquidity horizon for the investors. And of course, we differ that as a publicly traded entity, our structure will allow for daily liquidity for our shareholders. So you are able to basically participate in the middle market buyout business, but having sort of daily liquidity, if you will.
So since we are equity oriented, we should discuss exits, because that's important, and realizing capital gains through our portfolio of company exits is a component of the value proposition of an investment in our fund. So I really want our shareholders to know that it is an important part of our business planning and we will, obviously, therefore be selling or exiting companies from time-to-time. These activities generally are based on market conditions and an assessment of the individual sort of risk return of each individual investment debt that we have at that point in time.
So to kind of take a look at where we are in this, we previously announced that we had exited our investment in a company called Funko during this most recent quarter. As a result of this exit, the debt investment portion was repaid at par and we realized a net gain on the equity portion of the investment of about $17 million and simultaneously generated approximately $300,000 in other income. This all resulted in net cash proceeds to us this quarter, not including the $9.5 million of debt repayment, of roughly $14.8 million. So again, the net cash proceeds roughly $14.8 million, which do not include the $9.5 million of debt repayments.
We actually also may be receiving certain additional payments, if Funko meets identified earnings targets in future years. However, such amounts clearly are contingent upon future performance, and there can be no assurance that the amounts will actually be paid to us. And further, we continue to hold a small equity investment, which could lead to further upside in Funko.
In the quarter, we also restructured investments in two of our companies, Tread and Galaxy. We've mentioned these companies in the past. And this really created a more advantageous capital structure for these companies and really are helping them and allowing them to continue in their current workout plans and improving performance. And we are very active in these companies, as we've said in the past.
So these two restructures did result though in a combined net realized loss of $19.1 million of those two companies, but netted against the $17 million roughly realized gain from Funko essentially created during the quarter a $2.1 million net realized loss. The restructures, it's important to know, they took the form of really exchanging portions of the debt investments in those individual companies into equity securities in those individual companies, so that we still have a majority economic ownership interest in the businesses and we retain the opportunity to realize on those investments overtime.
In fact, we will continue and will receive in different degrees, interest income on some of the restructured debt in these companies. And again, it's important to emphasize that these companies were not written off and they exists, they continue to exist, and we will continue working and look to have value out of those investments in the future.
Now, we carefully evaluate all of these things and certainly evaluated the nature and the timing of the restructure of these transactions in consideration with the Funko exit, potential future exits that we maybe looking at, and of course new investments in trying to create the most value for our shareholders, when it's all netted out including consideration of taxes and so on. And the point to notice well, that we do have a portfolio still of roughly 35 companies and these kinds of activities are all in context of portfolio management and continuing to generate gains from exits as we go forward.
Now, in that regard, since October 2010, we have exited six of our management supported buyout investments that includes Funko, generating about $71.7 million in net realized gains and roughly $15 million in other income. We are currently evaluating the sale of two additional portfolio companies and to the extent of course that market conditions remain favorable. And there would be more to come on these, as we move into this fiscal year 2017.
And generally, as a caution, I usually like to indicate that the buyout market, while is still somewhat seller-friendly, we must keep in mind that whenever we do sell a portfolio company with an attractive return, it may reduce our income-producing asset base temporarily, and then we will tasked obviously with incrementally, having to replace that investment.
Now, let's turn to our deal origination activity, and that's important, which have a high priority to us, to help this grow than where we are today, certainly over the last five years and adding some really good companies to the portfolio. And it results in continuing growth of new buyouts and income-producing assets. We have a broad, deep geographic footprint with offices in New York City, Los Angeles, Chicago, and of course here in MacLean, which is just outside of Washington D.C.
Now to generate these new investment opportunities, our team primarily calls on independent sponsors, middle market investment bankers and other sources to help create what we would call proprietary investment opportunities. We do not depend on others to negotiate or structure our investments.
And generally, our investments include partnering with the management teams of these companies and other sponsors that maybe involved and tied in some fashion in the purchase of the business. So our strategy of providing a financing package, which includes both the secured debt and the majority of the equity, we believe is a competitive advantage, as it gives the seller the independent sponsor, if one is involved and the management teams involved, a high degree of comfort that the purchase will occur from a financing perspective, once we have agreed to move forward.
In addition, possibly we could have an outright purchase. We could occasionally find opportunities to partner with a business owner, who will sell a portion of their company to us and use that capital to grow the business.
Now, where do we focus our energies? Well, from an industry perspective, we like to invest in companies that are with consistent operating cash flow of at least $3 million and potential to expand their cash flow. The industry areas that we focus on are light specialty manufacturing, specialty consumer products and services, industrial products and services. And we do have a small area in aerospace area and we look at energy, although of course we are not certainly considering anything there right at this point.
Now, our secured debt investments are primarily first lien loans, typically carry a cash yield in the mid-to-high teen. And that balances the equity portion of our investments, thereby producing a blended current cash yield, which supports our shareholder distribution expectations. We generally also have, what we call, success fees, which are paid in cash on a change of control or in advanced at the portfolio company's option.
It's important to note that the target for the equity portion of investments that we make is a minimum, generally it's 2x to 3x cash on cash return, and we pretty much have been able to generate that. Currently, we are in various stages of diligence on a few new investments and we will continue to expand our marketing efforts and continue to grow our presence in the marketplace, as we move forward.
Now, fund activity for this fiscal quarter ending December 31, basically 2.1 -- in December, we acquired a new company, Nth Degree Inc., and we did that by investing approximately $19 million against for a combination of secured first lien debt and equity. And Nth Degree, which is headquartered outside of Atlanta, Georgia, is a multifaceted, face-to-face event marketing and management services organization. Additionally, we invested approximately $2 million to existing portfolio companies.
So in the outlook and in summary it's to continue strategically add accretive investments, position our existing portfolio for potential exits, thereby maximizing distributions to shareholders with a solid growth in both the equity and the income portions of our assets. And I think the portfolio is in a good shape today. We've made some decisions that I think help it going forward and continue very actively in the new sourcing area.
So that would conclude my part of the presentation. I'd like to turn it over now to Julia Ryan, who is our Chief Financial Officer. Julia?
Thanks, Dave, and good morning, everyone. As Dave just discussed, the fund had another strong quarter. Through this quarter's originations together with highly successful originations over the past 12 months or so, we generated over $12 million in total investment income.
From a balance sheet perspective, we had over $491 million in assets, consisting of $471.7 million of investments at fair value, $5.6 million in cash and cash equivalents and nearly $14 million in other assets. Our portfolio's approximate allocation was $371 million in debt securities and $149 million in equity securities or a 71% to 29% debt to equity allocation at cost.
Our liabilities and equity consisted of $89.2 million in borrowings outstanding in our line of credit, $171.7 million in term preferred stock, $18.4 million in other liabilities and over $262 million in equity. Our net asset value was $8.66 per share, down $0.39 from September 30, which is primarily a result of net unrealized depreciation of $8.8 million and a net realized loss of $2.1 million this quarter related to the restructures that Dave previously discussed.
Consistent with the previous three quarters, we continued to use an external third-party valuation specialist to provide additional data points regarding market comparables and other information related to certain of our more significant equity investments. We will continue this practice and plan to generally update this externally provided data on an annual basis for all of our significant equity investments.
Moving over to the income statement for the December quarter end. Total investment income was $12.1 million versus $13.7 million in the prior quarter. Total expenses net of credits were $7.4 million versus $7.7 million in the prior quarter, leaving net investment income of $4.6 million versus $6 million in the prior quarter. The decrease in total and net investment income quarter-over-quarter was primarily due to a decrease in other income of $1.1 million compared to the prior quarter.
As mentioned on previous calls, other income has been as high as 16% of our total investment income historically as compared to only 5% during the current quarter. We expect other income, which is primarily composed of success fees and dividend income, to remain meaningful, but variable from quarter-to-quarter.
Net expenses decreased in the current quarter, primarily due to a lower incentive fee as a result of the above mentioned factors. As a result, our net investment income decreased to $0.15 per share for the December quarter from $0.20 per common share in the December quarter. Our net investment income and prior years sell over amount more than covered our quarterly distribution to shareholders of $0.1875 per common share.
Let's turn to realized and unrealized changes in our assets. Realized gains and losses generally results from actual sales of our investments. Unrealized appreciation and depreciation is a non-cash event and is driven by the requirement to mark our investments to fair value on our balance sheet, with the change in fair value from one period to the next recognized in our income statement.
During the quarter ended December 31, we reported $2.7 million in net realized losses, resulting from the sale of our investment in Funko at a substantial gain and from previous retentions, strategic restructurings of two of our portfolio companies, which resulted in realized loss.
We also recorded $8.8 million of net unrealized depreciation in the quarter, which consisted of $1.6 million of current period depreciation, and then of course the $7.2 million of reversals of previously recognized net appreciation related to the exits and restructures. Such reversals are previously recorded appreciation or depreciation are recorded when realization events such as exits or restructures occur.
At December 31, our entire portfolio was valued at 90.7% of cost as compared to 92.6% of cost last quarter. All of our portfolio companies are current in payment expect one, which continues to remain a non-accrual, representing less than 1% of the fair value and the cost basis of all of our debt investments.
From a portfolio make up perspective, we are well-positioned for any interest rate increases, with approximately 86% of our loans having variable rates with the minimum or floor and the remaining 14% having fixed rates.
The weighted average yield on interest bearing debt investments remained consistent quarter-over-quarter at roughly 12.6%. This strong yield excludes success fees on our debt investments and also does not include any paid in client or pick income, as we don't currently have any debt securities with pick features.
Success fees are yield enhancements that are contractually due generally upon a change of control, although there are certain circumstances when the portfolio company can elect to pay it earlier. We generally only recognize success fees in our income statement, when are received in cash and being to be earned.
For comparison purposes, if we had accrued the success fees, as we would if it was paid in client interest like other BDCs do, our weighted average yield on interest bearing assets would approximate 15.5% during the most recent quarter. As of December 31, 2015, the success fees accruing off balance sheet totaled $25.1 million or approximately $0.83 per common share. There is no guarantee that we will be able to collect all of these success fees or have any control over their timing.
From a credit priority standpoint, all of our loans are secured, with approximately 80% having a first lien priority and the remaining 20% having a second lien priority in the capital structure of the respective portfolio company.
Overall, Gladstone Investment had another good origination quarter, which helped the company generate strong financial results. We have maintained an increased distribution rate, while still remaining committed to covering our distributions by current or prior year net investment income, as we have done consistently over the last four fiscal years.
And now, I'll return the call to David Gladstone.
Okay. And those were all great reports from Julia, Dave and Michael. And during the past quarter, we were able to report some of the great accomplishments such as good originations and successful exiting. One of the portfolio companies are in the extremely strong return.
And just to let you know, we have other portfolio companies that are on the path, and I don't know when or why or where it will happen, but sale of one or more may happen during the next 90 or 120 days, who knows. But we're also looking at one company, trying to go public, when marketplace gets better. There is just lots of activity in the portfolio, I'd say.
Just to recap the December quarter, the team closed new investment of nearly $19 million, exited one investment with a result of $17 million in realized gains in addition to about $300,000 in other income, and restructured two other companies that have gone through a lot of problems in the past, but hopefully enabled them to improve their performance. The performance is as expected and we would hope that somewhere down the road we'd get up capital gain out of that, since we've written down and off.
We believe we will continue this success going forward in the fourth quarter of fiscal year ending March 31, 2016. However, it's our opinion that we maybe entering a recession now and we need to be very, very cautious and make sure new investments can weather the storm and help out any of our existing investments. We did a good job the last time it happened and I think we can do a good job again this time.
While we continue to monitor the economy, we don't see anything on the horizon that indicates a strong economy, but there are some signals out there that we are entering recession. We still look at what the federal reserve is doing and its monitory policies. I think it will take a while, before we understand what they are up to.
The U.K. finally stayed the course on their interest rates, and just don't know what the fed will do. You've got both sides, they are talking to us and it's a big unknown as far as what's going on there. The strong signals are that the economy is improving from looking at the numbers that are coming out. It's just my negative outlook sometimes on life that talks about a recession.
Volatility of oil and gas industry, pricing is just crazy out there. Lower oil prices are terrific benefit to many other consumers, but certainly to the oil industry it's an integral part of the U.S. economy and losses there will equal pain and suffering in the economy, and just don't know how far that will spread. As far as, and for us, we have no investments in the oil and gas companies. So we're not being impacted by that and some of our portfolio companies are actually benefiting by low oil and gas prices.
And the fiscal crises and the federal government is still, as to top of my mind, as I read about the deficit over $18 trillion continues to climb, as the government spending continues with no end in sight. I don't know this round of spending may push us up near $20 trillion in terms of deficit, and it's quite scary for me.
Many private companies, like those in which we invest, feel that there is just too much regulation out there, certainly in the area around healthcare, financial services and energy, all of those are hindering the performance and expansion in job growth from these small and mid-sized businesses.
From what we hear and the people in Washington, the amount of pages and the federal register just hit a new record in 2015, largest number of pages in history coming out. So the government continues to churn out regulations and doesn't help our growth prospects. In light of these concerns, our company has continued to be very, very selective in investing in new businesses. Now, these are unsettling times and we're going to continue to be very cautious.
In January 2016, our Board of Directors declared a monthly distribution of our common stockholders of $0.0625, that's up from $0.06 last year this time, so that's a 4% increase -- $0.06, yes. And so for the months ending January through March 2016, that's a run rate of about $0.75 per share per year, this nice 4% increase. Hopefully we can do something for you in 2017 as well. That's the March 31, 2017, year. Through the date of this call, we've made 127 sequential monthly cash distributions on our common stock and additionally we made special distributions along the way.
A year ago, the stock price was about the same amount as it is today, it's about $7.24. So we've not gotten any benefit there. And that's a yield of 10.3%. So it's a very, very strong yield on the stock. We do have three preferred stocks of Series A, B and C, they are all trading at about 7% yield. So there is another way to be an investor in our company buying out preferred stock.
We like to use preferred stock rather than debt. We think it's better for our shareholders to have preferred stock rather than have additional debt on the balance sheet, even though on the balance sheet we count the preferred stock as if it is debt.
In summary, the company looks very strong, its attractive investments for investors seeking continuous monthly distributions. We expect a good quarter for March 31, 2016, and that will be our yearend as well. Hopefully we'll continue to show you some strong returns on your investment in our fund.
Now, let's stop. And Andrew, if you'll come on and we'll have some questions from our analysts and some loyal shareholders out there.
[Operator Instructions] Our first question comes from the line of Kyle Joseph from Jefferies.
I wanted to get a little bit more into the portfolio, and was hoping that you guys could talk a little bit about how companies, maybe even excluding energy, just what sort of revenue growth and EBITDA growth trends you guys are seeing there? And how that compares to our recent quarters?
I'd say, across the portfolio, it's fairly stable. As you know, as I always say, quarter-to-quarter and especially in our companies if you have a run rate of say, $4 million our $6 million of EBITDA, which is generally well, the companies tend to be $200,000 or $300,000 in the quarter's result of either incremental spending for putting in a new ERP system, which we -- those are the kind of things I'm giving more detail than you might want, but we generally have to do, once we've made an acquisition along the way. And that obviously can then have an impact on, if you will, the value because multiplied by some multiples such as 5x, 6x, 7x, obviously has an impact.
But given that I'd say, yes, actually I'm not seeing any real negative trends necessarily. Obviously, there are some of the companies that even though peripherally for whatever reasons geographically they maybe around, I don't say, the energy sector, and then one or two that kind of say it's peripheral, you see a bit of moderation on the EBITDA there. But obviously we work with all of all those companies and the companies are all making the adjustments necessary. But otherwise I would say fairly, I don't want to say stable, but yes it's fairly stable across the portfolio.
And then going back, obviously we've seen a little more broader market volatility. I know you guys mentioned that it's a sellers market. But are you seeing any of the bottom market volatility impact lower middle market prices on companies?
Yes, I think I would say a little bit, I still think to be honest. And again, this is just based on us from the buy side and deals that we're looking at and things that we either are interested perhaps in putting a bid in on, but decide either not to, because we know we're not going to get there. We certainly had, I would say, a small handful, where we've had interest than we might go in at say 6x multiple, where we think where it make sense for the company and find that. We didn't even get a meeting with management, because there are still deals being done at 7 or 7-plus. Again that's a broad statement.
So I would say, right now, it is still a fairly strong market and we're kind of seeing that a little bit frankly from the sell-side also, where as mentioned I think both by myself and David Gladstone, a couple of things we are looking at on the potential exit side. So we're kind of in the market there and seeing really good strong interest in that same regard for companies obviously that have reasonably decent and fairly consistent EBITDA with no big blips down. So I'd say it's still a fairly good sellers market.
Kyle, as you know the syndicated loan marketplace has gone berserk and there is not a lot of money out there now. And it's crimped the style of some of the buyout companies of their inability to syndicate those debt pieces. That has come down to this marketplace as well in a sense that banks have an overarching desire to stay out of smaller areas as well as they won't lend as much as they did before.
That's been very helpful to us, because when we step in, we provided equity and the debt. So we're able to show a smaller buyout fund that they can close on a transaction by dealing with us. So I think we'll see more opportunity from that perspective. But you're right, the market volatility is kind of insane right now.
But can you talk about, which two investments do you restructured in the quarter and what specifically drove that in the quarter?
Yes, the two, one is called Tread, which has been in the portfolio for many years. It's a company that manufactures trucks and vehicles and so on, that goes to the mining industry generally for carrying explosives, et cetera, explosive materials and so on. That's one that we worked with very carefully and have for a number of years. We had new management installed a couple of years ago now.
We had to clean up some other things. And so we really brought it around to the point now where we feel good about the management team. They're starting to make some progress. Of course, the mining industry, this field is somewhat struggling both domestically and internationally, and they do sell a fair amount of their products overseas.
But there is some stability in the company right now. We've actually seen an improvement in the EBITDA and the actual cash flow from the company. So we took the opportunity to really provide a better capital structure for the company going forward. And that was one buyout, that's the one that we referred to that was on non-accruals.
So in this regard, it gave us the opportunity again to right-size the capital structure. And as I said in the call earlier, it's not a company that we have written off, et cetera. We have essentially, again, then restructured that to take place, and the way we did it, allowed for an actual realized loss, which had some obvious benefits otherwise.
The other company is Galaxy Tool, which again was one that we've had in the portfolio for a number of years. Frankly, that's had a bit of I'd call it, up and down, we're talking about volatility in part, because they are actually a really well-positioned company that is in the manufacturing of tooling, and dies that mainly go to the aerospace industry, and we again had issues around management.
We've made clean ups there over the last year-and-a-half, have an extremely talented group, and they have currently made some major cuts to some things that are important and they are all, so to speak, dressed up, ready to go to the dance.
And with quality machinery that's really critical in that industry right now, the demand side with some of the growth going on obviously on the larger commercial aircraft, et cetera. So they provide, if you will, tooling that goes to some of the suppliers for the manufactures of these aircrafts.
So again, it was an opportunity to right-size that, give the proper incentives to management by doing it the way we did it. And that is one that has been paying interest and some of the debt. And with the restructuring would anticipate continuing to at least get interest payments on a portion of debt in the restructure. So that's probably longer answer than wanted, but those are the two.
Andrew, come on and get the second question.
Our next question comes from the line of Mickey Schleien from Ladenburg.
Most of my questions were answered. But just curious in relation to Funko, you recorded a pretty large payable for a tax liability. Just curious, when that actually will have to be paid in cash?
It will be paid within the next three months.
And my other question is related to Tread. I understand restructuring, but it still on non-accrual, if I am not mistaken. So can you just help me reconcile that?
Yes, I mentioned, Mickey, in the call, it is the only company that, yes, is currently on non-accrual. The restructuring, what we did was, as I mentioned briefly and I get too into detail, but we were able to take some of what was our debt, senior debt we had with the company down into a preferred layer and what have you more in the equity column.
So we currently have a little show on our SOI going forward, a revolving line of credit through the company, which I don't want to say right now is going to come off of non-accrual, but as we move forward and continuing with the company where it looks headed, there is a possibility that we might actually have that off of non-accruals guidance in receiving interest on that one.
So Dave, I'm just a little confused. If you went through the effort of restructuring it, but it's still on non-accrual that implies that you don't believe at least as of December 31 that you could collect the interest. So what's happening in January and February that changes that scenario?
Well, first of all, as I say, I don't want to go into a lot of detail here on this call. But it's possible, the way we restructure that that they could indeed pay. But one of the things we have to look at also is some other GAAP-related issues in a way which we might treat, call it, income coming from that, whether it runs to actually a repayment, if you will, of the principal versus actually income.
So the other thing we want to be sensitive to is the fact that the cash flow from the business, we want to be sure, having restructured, gotten among the right path, so the things they are doing currently that we also allow the company to have the access to the capital and the cash it needs to go forward.
So I don't think it's at odd. Really, again restructuring simply meaning that we were able to take what was a portion of the debt, so to speak, that clearly was on non-accruals, to be able to bring it down into a preferred category of investment, have also helped enhance the ability for the right types of incentive comp for the management team, which is important, and to retain remaining level of debt that we have, as I say, the revolver. And overtime, certainly would anticipate and hope that that will actually as they pay interest on that would then come off of non-accrual.
While we have it on non-accrual, this is a revolving line and we have money going back and forth from us. At this point in time, due to the accounting rules, it's really hard to structure something and turn it back on to accrual until you've demonstrated the ability to pay for some period of time.
So we are just waiting for that time to pass and for the company to continue to make payments back and forth with us putting enough money when they needed, and then getting payback from time-to-time. And I don't know how long that time period is, because there is no mechanism that says under the accounting rule, if you are good for six months or three months that you can turn it back on. But my guess is it will turned on within the next six to nine months.
Our next question comes from the line of Mitchel Penn from Janney Capital Markets.
Can you guys give us some comments around Diligent? Given that they're in Houston sort of around the EBITDA trends and any comments around the economy in Houston?
Actually, the Diligent is a logistics business and based in Houston, as you say. And that investment, of course, as you recall, came about as a result of it acquiring our company called NDLI, originally Noble Logistics. So what we're actually finding in ND and Diligent, which we now mainly only have an investment in debt in the company, we do have warrants for equity that is very much consistently paying on its interest. And actually the EBITDA, since the acquisition of our company and the combination, is quite strong and growing.
So don't know what it says about the economy in Houston, it's clearly not directly related, I would say, not related to necessarily oil and gas, as an example, because they do things with the automotive industry, supplying dealers, et cetera, with parts. And also there is a portion that is still, as a result of all the acquisition from us, that's in the pharmaceutical area. So it's a fairly broad-based of same day delivery type activity and services.
And Mitch, they are not just in Houston. They are in a number of cities outside of Houston. So I think we are not dependent on the Houston marketplace for this company to be successful.
And one last question on Galaxy and Tread. It sounded like you guys, the actions you took were sort of in concert with the gain on Funko. You were trying to sort of optimize taxes for shareholders. Is that fair?
We are always working for our shareholders, Mitch. And the idea of having a big gain and being able to offset the gains with some loses that probably were little overdue in taking anyway, was a very nice opportunity to keep all of that capital gain inside the company, tax free, and turn that money into interest-bearing funds for our shareholders.
Our next question comes from the line of [ph] Mark Farone, he's a private investor.
I just wanted to comment that I think the overall leadership that's going on at the Gladstone Group has been very impressive. And I just wanted to ask, how secure going forward the dividend that's been paid to the investors is in light of all the other dividends in many of the stocks have been cut?
As you know, this company only had a problem during the recession in '09, and that was because our bank and Deutsche Bank refused to renew our line of credit, even though we've been given signals that they were going to do it. And we had to sell some assets, and of course when you sell assets that are income producing, it lowers your ability to pay your dividend. So that was when we cut the dividend.
Now, we have a great portfolio and it's well-diversified and we're getting good income off of the portfolio, so no problem from that side. We do now have a very widespread group of banks that have been very supportive. And in fact, Keybanc, who is the lead, was not our lead when Deutsche Bank decided to exit, and they stepped up and did what they could. At the time, they weren't big enough or strong enough to take on the entire Deutsche Bank transaction. But now, we have a group of banks. We think they are well satisfied with us and we feel comfortable with that. We're not going to have a banking problem.
So I would say from a perspective that we are strong and ready to go into a recession and handle it with -- well, it's always difficult in a recession, but I don't think we are going to have a problem in a recession. I just want to warn you, there is no guarantees in life. And right now we feel very comfortable in meeting the dividend.
Our next question comes from the line of Jeremy Roane from Hilliard Lyons.
I was wondering, if you could give -- you mentioned that there could be some asset sales over the next couple of quarters. Can you give us a little bit of color on the magnitude of the size of those deals and also the timing?
Jeremy, we really can't. We have two other companies that actually have been in construction of a deal, and I just don't know. Sometimes we get going in these things and all of a sudden we can't get to the price we want, so we back off. And if you remember, last year at this time, I started talking about Funko, not name, but mentioning it and like it was going to happen.
And six months later it finally happened, and I felt an embarrassment of continuing to mention that when these things really take their own path to success. I think both of them will be successful, but it's going to be a while before we can give any kind of indication and we never give out their names. So I'm sorry, I can't really give you much about either the amount or the names.
Maybe kind of as it relates to that. Can you talk about how you guys are expecting to do your financing over the next few quarters or perhaps the next year?
A number of opportunities, obviously in terms of trying to raise additional capital, we can raise a little bit of preferred, we will look at any way of doing it, but right now trying to raise money at the stock price that we have. It is very difficult. So raising common stock looks like it's not a good way to do it.
We've got plenty of room under our line of credit, even though we do transactions that have lots of leverage, have been very averse to having a lot of leverage especially in volatile times like there is today, so we'll just have to see. I can't give you a good answer to that. If all the stock analyst on the call would just put out a buy order on our stock and get it up to around $10 a share, we'd feel a lot better about raising equity.
And just one last question please. Could you give us an indication of whether net investment income will be covered this coming quarter -- or I'm sorry, whether the dividend will be covered by net investment income? And kind of how you expect to do that, I guess by waiving certain fees or by not?
Well, we've always waived fees in terms of making sure that there is money available for the payment of the dividend. The dividend was impacted this time by the write-offs that we did as mentioned before when we were talking with Mitch. The idea was that at the end of the day we were using some accounting conventions in order to offset capital gains. And I think we are in a strong position to cover it before the next quarter. There are no guarantees, we could have some kind of loss in there, but I feel pretty strong about it right now.
And it looks like that's all the questionnaires that we have for today. So I'd like to turn the call back over to David Gladstone for closing remarks.
End of Q&A
All right. Thank you all of for calling in. We'll see you again in a quarter and it will be our yearend next time, so we'll be a little bit later than we normally are with these quarterly calls, mainly because the audit takes a little extra time for yearend. Thank you all and that's the end of the call.
Ladies and gentlemen, thank you, again, for your participation in today's conference. This now concludes the program and you may all disconnect the telephone lines at this time. Everyone have a great day.
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