Q2 2022 Fidus Investment Corp Earnings Call

August 5, 2022

The that that that that that that, that.

and thank you for joining us for FIDUS Investment Corporation's second quarter 2022 earnings conference call. With me this morning are Ed Ross, FIDUS Investment Corporation's Chairman and Chief Executive Officer and Shelby Sherrod, Chief Financial Officer.

Vitus Investment Corporation issued a press release yesterday afternoon with the details of the company's quarterly financial results. The copy of the press release is available on the investor relations page of the company's website at FDUS.com. I'd also like to call your attention to the customary safe harbor disclosure regarding forward-looking information included on today's call.

Conference call today will contain forward looking statements, including statements regarding the goals, strategies, beliefs, future potential, operating results, and cash flows of fight and death's incorporation.

Although management believes these statements are reasonable based on estimates, assumptions, and projections as of today, August 5, 2022, these statements are not guarantees of future performance. Time-sensitive information may no longer be accurate at the time of any telephonic or webcast replay. Actual results may differ materially as a result of risks, uncertainties, and other factors including, but not limited to, the factors set forth in the company's filings with the Securities and Exchange Commission.

By this undertake to no obligation to update or revise any of these forward lifting statements.

With that, I would now like to turn the collar bird to Ed. Good morning Ed.

Good morning, Jody. Good morning, everyone. Welcome to our second quarter, 2022, learning conference call.

Today's call will start with a review of our second quarter performance in our portfolio at quarter end.

And then I'll for you an update of our views on market conditions in the lower middle market

CLV will cover the second quarter financial results in our liquidity position.

After we have completed our prepared remarks, we'll be happy to take your questions.

Our second quarter results demonstrates the merits of our strategy of investing in debt securities to generate recurring interest income and inequity securities for incremental profit and a margin of safety.

We generated higher interest income from our debt portfolio this quarter.

and a net realized gain of $18.2 million for 74 cents per share from monetizing a small portion of our equity portfolio.

By redeploying equity proceeds, we continue to build carefully and deliberately our debt portfolio.

Investing in high-quality companies that operate in industries that we know well Generate cash flow for search to service debt and support growth

and possess resilient business models and positive long-term outlooks.

As a result of this proven investment strategy and philosophy of managing for the long term, our portfolio overall remains healthy, notwithstanding ongoing economic uncertainties and stresses.

Adjusted net investment income, which we define as net investment income excluding any capital gain incentive fee attributable to realized and unrealized gains and losses, was $10.4 million.

or 43 cents per share, essentially unchanged versus 10.4 million or 42 cents per share last year.

NAV was $484 million or $19.80 per share.

For the second quarter, FIDUS paid a base dividend of 36 cents per share and a supplemental dividend of 7 cents per share, equal to 100% of the surplus in adjusted NII over the base dividend from the first quarter.

For the third quarter, the Board of Directors declared a base dividend of 36 cents per share and a supplemental dividend of 7 cents per share. The dividends will be payable on September 23, 2022.

to stockholders of record as of September 9th, 2022.

In addition, the Board of Directors declared a base dividend of 36 cents per share and a supplemental dividend of at least $0.7 per share with a fourth quarter. The dividends will be payable on December 16, 2022 to stockholders of record as of December 2, 2022.

As a Rick, we are required to distribute at least 90% of our investment company taxable income or ICTI.

The declaration of a minimum Q4 dividend now is intended to satisfy the distribution requirement of our 2021 ICTI.

We expect to have further information regarding incremental Q4 supplemental and or special dividends at our next earnings call in early November . Obeh King Dama

Originations for the quarter were solid, albeit not as strong as the first quarter, as we continued to redeploy equity proceeds into income-producing assets.

Investments in new portfolio companies, however, were a bit weaker than expected as getting deals across the finish line is proving a bit harder in this environment.

In total, we invested $45.7 million in debt and equity securities, including 19.5 million in two new portfolio companies that we announced as subsequent events on the first quarter call. Subscribe to AllChairpersons.com

As a reminder, we invested $8.5 million in first-lead debt and made a commitment up to a million dollars of additional first-lead debt. We have additional first-lead debt. We have additional first-lead debt.

in Choice Technology Solutions LLC, doing business as Choice Merchant Solutions LLC.

The leading army channel Global Payments platform.

We invested $11 million.

And second, lean debt of Vertex Enterprises LP, a leading vertically integrated electronic manufacturing services provider.

The remaining $26.2 million was primarily related to the new $15 million of coordinated debt investment in Penergy.

Fundings under existing commitments and other add-on investments in portfolio companies.

Almost all of the $45.7 million was invested in debt securities, read fairly evenly among first-wing, second-leaning, and subordinated debt securities. The $45.7 million was invested in debt securities.

while we have been and remain focused on first-lend debt investments.

We will continue to opportunistically make second-lien and subordinated debt investments as well.

In terms of repayments and realizations in the second quarter, we received proceeds totaling $44.8 million.

As I mentioned on the first quarter call, some of our portfolio companies had initiated strategic alternative discussions.

For this reason, monetization of equity investments accounted for about half of the total repayments in realizations this quarter, bringing the total equity proceeds for the first half of the year to $35 million.

and year-to-date net realized gains to $25.1 million.

Terms of sales and exit.

We received payment in full of $8.8 million, including a prepayment penalty on our first lien debt in Comply 365 LLC.

We receive payment in full of $11.6 million, including a prepayment penalty, on our second lean debt in Argo Turbo-Serve Corporation. On our second lean debt in Argo Turbo-Serve Corporation.

We received a distribution of $2.4 million and realized a gain of $1.9 million related to the sale of transgo LLC.

receive a distribution of $1.2 million and realize they gain a $5.8 million related to the sale of AVC Investors LLC. $5.8 million related to the sale of AVC Investors LLC.

We received proceeds of $0.8 million and realized they gained a $0.4 million related to the exit of our investment in CRS solution holdings LLC.

And we received proceeds of $18.3 million and realized again of $15.3 million related to the exit of our equity investment energy limited.

Subsequent to the end of the quarter, we invested and or made commitments totaling $45.7 million.

including in three new portfolio companies.

We invested $7.8 million in first lien debt, $2 million in subordinated debt, and $1 million in common equity of AmeriWater LLC, a leading provider of water purification systems and aftermarket parts and consumables for healthcare and industrial applications.

We made a commitment of $4.9 million and secondly, debt of magenta buyer LLC doing business as trellics. We made a commitment of $4.9 million and secondly, debt of magenta buyer LLC and secondly, debt of magenta buyer LLC

a leading global cybersecurity company.

We made a commitment of $20 million in first-leamed debt of BP Thrift Byer LLC, doing business as unique and eco-thrift and owner-in-operative retail thrift stores. And owner-in-operative retail thrift stores.

We also receive $50.3 million in repayment and realizations.

Consisting of the following. We receive a distribution on our common equity investment and realize the gain of approximately $1.9 million related to the sale of Palasi Company LLC. Related to the sale of Palasi Company LLC.

We received a distribution on our common equity investment and realized a gain of approximately $3.2 million related to the sale of Bandon Fitness Texas Inc.

We receive payment in full of $4.5 million on our first clean debt in Bedford Precision Parts LLC. We receive payment in full of $4.5 million

We received a distribution on our common equity investment in SES Investors LLC doing businesses SES foam and realized they gained of approximately $9 million. and realized they gained of approximately $9 million.

We received payment in full of $5.3 million, including a prepayment penalty on our first clean debt investment in HealthFuse LLC.

And we sold a portion of our equity investment in Fan Steel Inc. and realized a gain of approximately $24.3 million.

In conjunction with the transaction, we invested $10 million in subordinated debt.

Definitely the quarter end in total, we have received incremental proceeds from our equity investments of $40.4 million and realized net gains of approximately $38.4 million.

The fair value of the portfolio quarter end was $810.5 million, equal to 109.6% of cost.

We ended the second quarter with 73 active portfolio companies.

and 12 companies that have sold their underlying operations.

Overall, our portfolio remains healthy and well structured to produce recurring income and through our equity investments to provide us with not only incremental profits, but also a reasonable margin of safety.

From a risk perspective, our focus on investing in companies that have resilient business models and defensive characteristics, including pricing power, is serving us well in the face of ongoing macroeconomic and geopolitical uncertainties.

and inflationary cost pressures.

That doesn't mean all of our portfolio companies are immune from these dynamics.

We experienced slight depreciation in our debt portfolios. Two of our portfolio companies are facing strong headwinds in the current environment.

Reds are also the widening and we placed ebbls or ebllc. We take a sneaker and a peril retailer focused on urban areas on Nanakrool. We take a sneaker and a peril retailer focused on urban areas on Nanakrool.

Not a cruel as a June , not a cruel as a June 30th account for about 1% of our total portfolio on a fair value basis. of

as a result of the high level of equity monetization during the quarter.

The total portfolio mix on a fair value basis continued to shift in favor of debt investments.

As of June 30th, debt investments comprised 83 percent of the total portfolio compared to about 80 percent as of March 31st, 2022, and about 77 percent as of December 31st, 2021.

First, lean debt as a percentage of debt investments was in line with the first quarter at around 66%. The first quarter was in line with the first quarter at around 66%.

The yield on debt was also unchanged from the first quarter.

Equity investments as a percentage of the total portfolio on a cost basis remains under 10% in line with our target allocation.

Looking ahead to the second half of the year, from our perspective, the lower middle markets should remain relatively active, much like the first half of the year.

offering us opportunities to further redeploy equity proceeds into income-producing assets and opportunities to invest in companies that are positioned to perform well in the current environment.

Although we do expect deals to take longer to close than last year in this uncertain environment.

The same time our proven underwriting standards, disciplined investment selection, and focus on first-learn debt, and structuring investments with a high percentage of equity cushion.

Keep us on track to generate attractive risk-adjusted returns over the long term and deliver value for our shareholders.

Now I'll turn the call over to Shelby to provide some details on our financials and operating results.

to provide some details on our financials and operating results. Shelby?

Thank you, Ed, and good morning, everyone. Our review our second quarter results in more detail and close with comments on our liquidity position. Please note, I will be providing comparative commentary versus the prior quarter Q1 2022.

Total investment income was 21.2 million for the three months into June 30th. A point six million dollar increase from Q1, primarily due to a point two point one million dollar increase in interest income, including PIC, offset by a point six million dollar decrease in fee income and a point nine million dollar decrease in dividend income.

The interest?

Total investments including income tax provision were $10.1 million for the first quarter, inline with Q1.

The capital gains in Centipede accrual decreased by 0.9 million. Note the capital gain in Centipede is accrued for gap purposes, however is only payable annually in arrears to the extent cumulative realized gains exceed realized losses and unrealized depreciation.

excluding the accrued capital gains and centiphy total expenses in Q2 were approximately 0.8 million higher than Q1 due to a 0.2 million dollar increase in interest expense, a 0.4 million dollar increase in management and income and centiphy's, a 0.2 million dollar increase in other GNA expenses primarily related to proxy solicitation for the annual shareholders meeting, and a 0.1 million dollar increase in taxes offset by a 0.2 million dollar decrease in professional fees.

debt was 3.8% as of June 30, 2022.

Net investment income or NII for the three months ended June 30th was 45 cents per share versus 42 cents per share in Q1. Adjusted NII, which excludes any capital gains and centiphyacruals or reversals, attributable to realize and unrealize gains and losses on investments, was 43 cents per share in Q2, consistent with Q1. Was 43 cents per share in Q2, consistent with Q1.

For the three months into June 30th, we recognized approximately 18.2 million of net realized gains primarily from sales related to our equity investments in Penergy, Transco, Avoco, and CRS Texas.

Turning now to portfolio statistics, as of June 30, our total investment portfolio had fair value of $810.5 million. Our average portfolio company investment on a cost basis was $10.1 million, which excludes investments in 12 portfolio companies that sold their operations during the process of winding down.

We have equity investments in approximately 80% of our portfolio companies with an average fully diluted equity ownership of 3.7%.

Weighted average effective yield on debt investments was 11.9% as of June 30th. The weighted average yield is computed using the effective interest rates for debt investments at cost, including the accretion of original issue discount and loan origination fees, but excluding investments on non-accurately any.

Taking into account our subsequent events, we have approximately 207.6 million of liquidity.

Now, we'll turn the call back to Ed for concluding comments.

Thanks Shelby.

As always, I'd like to thank our team and the Board of Directors at Fightists for their dedication and hard work and our shareholders for their continued support. I will now turn the call over to Lisa for Q&A. Lisa.

Thank you. If you would like to ask a question on the phone lines today, you can press star one on your telephone keypad. Once again, everyone, that is star one to ask a question. We will take our first question from Robert Dodd with Raymond James.

Please go ahead.

Good morning, Ed and Shelby, and congratulations on not just the quarter, but the post quarter as well, but the overall performance of the strategy.

which is better.

I'm sorry, but you're very good. So a couple of questions. I'm going to ask you about the dividend, but you probably knew that was coming. But the first one on, you kind of went back to a couple of times, getting deals across the finishing line.

is more difficult now. Sounds like you're quite optimistic about pipeline, but what is there a...

A gap between your ask on pricing and the borrowers ask if there is data problem on the sponsors agreeing on price, is it? Is there more divergence on pricing structure or anything like that? Is it some other?

kind of factor that's making people move a little slower right now. I'm just curious.

Sure, great question, Robert. As you can imagine, I think most folks make investments and they really want to make sure that the companies... they really want to make sure that the companies...

Performing as expected. And what we've seen in experience, quite frankly, we've had three deals that we were awarded fall apart in the last 90 days or so. And two were due to purchase price issues. And those came from, I would say, performance issues, maybe missing budget a little bit, which obviously gives rise to a purchase price discussion.

The other was a structured question for us where we had signed up a term sheet.

based on a certain structure and then the company and the borrower did not want to have that structure at the end of the day. And so we backed away. So we're obviously in this environment and always being very disciplined on how we do things. But it's a tougher environment to get things done. I think everyone is in discovery mode a little bit. And I think that's a good thing, quite frankly. Because we want to make sure we feel great about what we're investing in.

or assets your IRR has been very attractive.

Do you think the opportunities that you're seeing today and the structures you're seeing today?

a setup to meet kind of the core IRR, not just your internal targets, your hurdle rates maybe, but the core IRR that you've delivered historically. Can you still match that or is there anything that's shifted on that front?

Great question. From my perspective, so a little bit of it has to do with portfolio structures. So today we have a bow.

80% of our portfolio companies are coupled with equity investments. And so in those cases, obviously there's an opportunity for higher returns fall in. And we do feel good about the investments we're making today and do think they're very similar to what we've done in the past. So I don't see a change there. The mix of debt-only investments for us is...

maybe a little higher than usual. We may have been closer to 90% at one point in time. And so that may alter returns just a little, but I don't think it'll be enough of a move to be. We may have been closer to 90% at one point in time.

significant. So we continue to see a very attractive environment from a risk adjusted return or on a risk adjusted return basis. Continue to like the equity opportunities that we are uncovering but they're obviously, it takes hard work and discipline and being patient and that's, we're going to continue the same strategy that we've always deployed. Thank you.

Got it, got it. I appreciate that. Thank you for that, Colin. Got to ask you on the dividend indeed. Yes, I realize you said that you'll have more information on the next call, but that's three months from now. In the past...

you know, when you've had large realising, you've utilized the full spec and you've done everything on a Dean Distribution to a special dividend to supplementals. Can you give it? And obviously it's a board decision, but you are a member of the board. Can you give us any color kind of, you know, which, which, you know, a Dean Distribution allows you to retain some capital, but you've got a lot of capital equity proceeds coming in versus, you know, just paying out large specials.

you don't necessarily get full credit from the market. So can you give us any thought about which way, potentially you lean right now without not gonna set your feet in concrete on this? So you're not gonna set your feet in concrete on this?

Let me give some thoughts on just actually why we postpone things a little bit as well as just

Maybe highlight the different options that are on the table.

But as you might imagine, our ground be pretty careful with what I say. Yep. So, you know, also, as you might imagine, we spend a lot of time, you know, at the board level thinking about distributions and driven in policy questions. So, we're going to be doing a lot of things. So, we're going to be doing a lot of things. And then, we're going to be doing a lot of things. So, we're going to be doing a lot of things.

Also, as you know, our spillover position at $6.30 is very high at $2.37 per share. As you also know, the gains early here in Q3 will only further increase that spillover position. As you know, our spillover position at $6.30 will only further increase that spillover

So, you know, what we've done is, you know, given the fact that...

We're only seven months into the year. We believe it only makes sense to be patient, at least until the Q3 earnings call. We want to discuss further 2022, dividend decisions.

The Q3 and Q4 dividend declarations that we announce are expected to satisfy the Rick distribution requirements related to the 2021 investment company taxable income or ICTI. So we expect to be discussing, obviously, things a lot over the next 90 days until we have our next call. And lastly, what I'll say is our top priority is to perform well for shareholders.

You know, we may make sense to retain a healthy level of spillover still for rainy day. And then lastly, you know, a deemed distribution is definitely on the table as well, which would enable us to retain capo, the BDC level in order to continue to grow in AV as well as earning those long-term. So that's three or four things, I guess, for that we are, that are on the table from our perspective.

is probably some combination of a few of those at the end of the day. I hope that's helpful, but I gotta be, obviously, careful with what I say. That is very helpful. Thank you, and I apologize for the error.

Second.

No problem.

Thanks, Robert. Nice talking to you.

We'll take our next question from Ryan Lynch with KBW.

Hey, good morning. Good morning, Ryan.

The first question I had was, you know, kind of falling off an unrovers question, because it kind of struck me as well when you talked about deals having a harder time getting across the finished line of this environment. I think that's maybe the first time I've really heard that on the conference calls.

for the BDC sector this quarter. And so because most others have out there talked about the really the improving deal environment and what I would call maybe some more lender friendly terms that they've been able to achieve now versus six months ago or so. Obviously the economic environment is still very uncertain going forward so that does present some challenges. So.

I'd love to just, if you could just unpack, is there something that's particularly unique in kind of the lower middle market where maybe terms aren't shifting as quickly as maybe the the core middle or upper middle market that that would cause you to make those statements?

Sure, great question, Ryan. Not an easy one to answer quite frankly, but I think terms

You know, our shifting to a certain degree, I think spreads are stable to widening. So we are experiencing the same trend. Maybe it's not as much as in the liquid markets, but governance have always been a positive for the lower mental market and they continue to be.

and leverage levels are clearly not.

out of bounds and probably are coming down just a little bit as well. Again, those are for very high quality situations.

You know, from my deal flow perspective, I thought, you know, Q2 was a little slower.

Then Q1 for sure, and I think there was a lot of price discovery going on and a lot of just credit discovery going on. But what I would also say is today in the last three to four weeks, the flow has been very strong.

And so we are starting to see a fair number of high quality situations.

So we're excited about the rest of the year, quite frankly. With regard to harder to get stuff across the finish line, your comment surprises me a little bit. Maybe just people didn't...

Say it, but you know, I think a little bit that is just a product of our experience where we did have in the last 90 days three deals all apart for the reasons I just talked about. So, and I think that's healthy. You know, things aren't as expected. Then I'd rather wait and see as opposed to go ahead and close the transactions. So, but long short of it is, as we're continuing to see, you know.

a fair number of opportunities, high quality opportunities, and we do think it's a more lender friendly environment than previously. There's less competition. There's some lenders that have pulled back, quite frankly. And so that's a good thing as well for us and for the lower middle market.

Okay, that's helpful. And I completely agree that being thoughtful and disciplined and having deals fall, you know, back and often deals if they're not right, it makes complete sense. And also you could also be right that maybe other companies aren't explicitly stating that and there are deals that are sort of not getting done, maybe just the deals that are getting done are in better terms, but there could be maybe a lot of other deals. So seeing the deal's closed well revealed in Thursday, our colleague Jsideoko. from this side.

that are not getting across the finish line as well. So that's fair. The other question I had was congrats on your, your, you know, partial monetization of a fast deal in third quarter. Can you talk about what was the nature of that partial monetization and why was it only a partial monetization versus a, you know, a full monetization? What was the nature behind that?

Sure. Well, Vansdell is a company that we've been invested in now for, call it, 10 years or so, to round a little bit. Very high quality company. The monetization, from our perspective, was a negotiation with the primary owner of the business. And, you know, from our perspective, getting partial liquidity made sense. So we ended up selling less than half of our position.

And the reason for that is we feel good about the long-term prospects of our investment as well as for the company.

It's a very high quality company and so we're pleased to be able to retain that equity ownership and see how it goes in the future. But we're also very pleased with the partial realization as we thought it made sense to...

And so we're pleased to be able to retain that equity ownership and see how it goes in the future, but we're also very pleased with the partial realization as we thought it made sense to do that. so we'll see.

Hopefully that makes sense. We like that. We just think of a partial liquidity event with a smart thing to do for our shareholders. Yes. It makes sense. It's taken a few chips off the table on a really successful investment. Just the last one I had was in Switzerland. Just the last one I had was in Switzerland.

know, very hard to predict, but maybe for Shelby, you know, dividend income, you know, drop significantly this quarter. I know it's really hard to predict on a quarter basis, but that can be kind of lumpy. But do you have any preliminary thoughts on what we should be expecting, you know, in the third quarter for that.

Yeah, what I would just say is Q1 was probably larger than what I would expect on a run rate basis. Just we have a few select portfolio companies that maybe make an annual dividend. And so that's kind of what caused Q1 to be more outsized kind of going forward. I would expect things to be more in line with Q2. I would expect things to be more in line with Q2.

Okay.

That's helpful. I appreciate the time today and appreciate you taking my questions.

helpful. I appreciate the time today and appreciate you taking my questions. Thank you, Ryan. Appreciate it. Good talking to you. Thank you, Ryan. Appreciate it. Good talking to you.

oso Sir.

As a reminder everyone that is star one to ask a question. We'll take our next question from Mickey Schlein with Lattenberg

Good morning everyone. Ed, I wanted to ask you a risk management question. There's this theory out there that the only way the FEDS is going to get inflation and the control is just to kill the consumer given how much the consumer represents as part of the economy, the domestic economy. But I've also heard arguments that the middle class and the upper middle class are fine. It's the lower middle class that

And is that in line with my comments?

Sure, it's a great question. With regard to the thrift shop, I'm not sure how many people have seen this.

We just committed to that that deals you close later in the quarter. It's a great business, pretty well diversified and performing very well also in this environment.

We feel like, you know, we obviously looked at previous...

Cycles, when we looked at this company, it has performed pretty well through all those cycles. So it's a stable business from our perspective. And one, we feel very good about it in this environment as well. So it's differentiated from that perspective. So it's differentiated from that perspective.

I agree to a certain extent with your comments about maybe the

you know, maybe the more lower income bracket, if you will. You know, I do think they are being impacted more by things like higher gas prices, higher food prices, more staples, day-to-day living type of spending and taking market shows from more discretionary items, if you will. So, we...

Experience that in Evelyn's quite frankly Evelyn's is probably focused on a consumer that's more, you know, that little. You know, it's more, you know, that little.

more focused on urban areas, if you will.

So I agree with your comments.

And the last question I think you asked, or one of the questions you asked was, how exposed is our portfolio? And I would say we have some consumer exposure, but it's very limited quite frankly. But it's very limited quite frankly. But it's very limited quite frankly.

And so we feel like we're well positioned as we move forward. It's really made you a handful of names that have exposure and I think we're feeling some pressure, you know, a little bit right now on two of the companies, one of them being everyone. So overall, we feel great about our portfolio construction and feel very good about the outlook of our portfolio. Notwithstanding that it's a difficult operating environment.

I agree. That's it for me this morning. I appreciate your time. I hope you have a good weekend. Thank you. Thanks you too, Mickey.

And that does conclude the question and answer session. I would like to turn the call back over to Ed Ross for any additional or closing remarks. And I would like to give you an indication of Recording for any additional or closing remarks. In closing highlights, the return of the return of Rice. InC toutes, the return? of Rice. In theme were the requirements of the return of each of us. in tune were more the execution and in Next of quarter? and reud by the behavior of Rice. In March 2013, the return end was sent to chair and Marnie's Thanks.

Thank you, Lisa. And thank you, everyone, for joining us this morning. We look forward to speaking with you on our third quarter call in early November 2022. On our third quarter call in early November 2022.

Have a great day and a great weekend.

And that concludes today's presentation. Thank you for your participation, and you may now disconnect.

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Good day and welcome to the FIDE 2nd quarter 2022 earnings call. Today's call is being recorded. I would now like to turn the conference over to Jody Bärfning. Please go ahead.

Thank you, Lisa. Good morning, everyone. And thank you for joining us for FITUS Investment Corporations Second Quarter 2022 earnings conference call. We've made this morning our address FITUS Investment Corporations Chairman and Chief Executive Officer and Shelby Sherrod Chief Financial Officer. And Shelby Sherrod Chief Financial Officer.

Although management believes these statements are reasonable based on estimates, assumptions, and projections as of today, August 5, 2022, these statements are not guarantees of future performance. Times sensitive information may no longer be accurate at the time of any telephonic or webcast reply. Actual results may differ materially as a result of risks, uncertainties, and other factors, including, but not limited to the factor set forth in the company's filing with the Securities and Exchange Commission.

By this undertakes no obligation to update or revise? ?? any of these forwarded statements.

With that, I would now like to turn the collar bird to Ed. Good morning Ed.

Good morning, Jody. Good morning, everyone. Welcome to our second quarter, 2022 earnings conference call. On today's call, I'll start with a review of our second quarter performance in our portfolio of quarter end. In our portfolio of quarter end.

And then I'll bring you an update of our views on market conditions in the lower middle market.

CLV will cover the second quarter financial results in our liquidity position.

After we have completed our prepared remarks, we'll be happy to take your questions. We'll be happy to take your questions.

Our second corner results demonstrates the merits of our strategy of investing in debt securities to generate recurring interest income and inequity securities for incremental profit and a margin of safety.

We generated higher interest income from our debt portfolio this quarter.

And a net realized gain of 18.2 million dollars for 74 cents per year from monetizing a small portion of our equity portfolio. From monetizing a small portion of our equity portfolio.

By redeploying equity proceeds, we continue to build carefully and deliberately our death portfolio.

Investing in high-quality companies that operate in industries that we know well Generate cashflow for search to service debt and support growth.

and possess resilient business models and positive long-term outlooks.

As a result of this proven investment strategy and philosophy of managing for the long term, our portfolio overall remains healthy, notwithstanding ongoing economic uncertainties and stresses. Notwithstanding ongoing economic uncertainties and stresses.

Adjusted net investment income, which we define as net investment income, excluding any capital gain and centipede attribute will to realize and unrealize gains and losses was $10.4 million. For $43 cents per share, the centric essentially unchanged versus $10.4 million or $42 cents per share last year. The centric is $10.4 million or $42 cents per share last year.

In AB was $484 million or $19.80 per share.

For the second quarter, by this paid a base dividend of 36 cents per share and a supplemental dividend of seven cents per share, equal to 100% of the surplus and adjusted NII over the base dividend from the first quarter.

For the third quarter, the Board of Directors declared a base dividend of 36 cents per share and a supplemental dividend of 7 cents per share. The dividends will be payable on September 23, 2022.

to stockholders of record as of September 9th, 2022.

In addition, the Board of Directors declared a base dividend of 36 cents per share and a supplemental dividend of at least $0.7 per share for the fourth quarter. The dividends will be payable on December 16, 2022 to stockholders of record as of December 2, 2022. The Board of Directors declared a base dividend of at least $0.7 per share for the fourth quarter.

As a Rick, we are required to distribute at least 90% of our investment company taxable income or ICTI.

The declaration of a minimum Q4 dividend now is intended to satisfy the distribution requirement of our 2021 ICTI.

We expect to have further information regarding incremental Q4 supplemental and or special dividends at our next earnings call in early November .

Reginations for the quarter were solid, albeit not as strong as the first quarter, as we continued to redeploy equity proceeds into income producing assets.

Investments in new portfolio companies, however, were a bit weaker than expected, as getting deals across the finish line is proving a bit harder in this environment. Investments in new portfolio companies, are getting deals across the finish line of the finish line of the finish line

In choice technology solutions LLC, we are doing business as choice merchant solutions LLC. doing business as choice merchant solutions LLC.

The leading army channel Global Payments platform.

We invested $11 million.

And second, lean debt of Vertex Enterprises LP, a leading vertically integrated electronic manufacturing services provider.

The remaining $22.26.2 million was primarily related to the new $15 million subordinated debt investment and energy.

Fundings under existing commitments and other add-on investments in portfolio companies.

Almost all of the $45.7 million was invested in debt securities, read fairly evenly among first-learned, and subordinated debt securities.

While we have been and remain focused on firstly that investment.

We will continue to opportunity, opportunistically make second-line to coordinated debt investments as well.

In terms of repayment to realizations in the second quarter, we receive proceeds totaling $44.8 million. We receive proceeds totaling $44.8 million.

As I mentioned on the first quarter call, some of our portfolio companies had initiated strategic alternative discussions.

And here today, net realized gains to $25.1 million.

Terms of sales and exit.

We receive payment in full of $8.8 million, including a prepayment penalty on our first link debt and comply 365 LLC. We receive payment in full of $11.6 million, including a prepayment penalty on our second link debt in our Go Turbo Serve Corporation. We receive a distribution of $2.4 million and realize the gain of $1.9 million related to the sale of TransGo LLC.

So 8.8 million dollars including a prepayment penalty on our first link debt and comply 365 LLC. We receive payment in full of 11.6 million dollars including a prepayment penalty on our second link debt and our go turboserve corporation. We receive a distribution of 2.4 million dollars and realize the gain of 1.9 million related to the sale of transgo LLC. 3.6 million original

a distribution of $1.2 million and realized a gain of $0.8 million related to the sale of ABC Investors LLC.

We receive proceeds of $0.8 million and realize they gain a point four million dollars related to the exit of our investment in TRS solution holdings LLC.

And we received proceeds of $18.3 million and realized again of $15.3 million related to the exit of our equity investment and energy limited.

Subsequent to the end of the quarter, we invested and were made commitments totaling $45.7 million.

Subscone to the end of the quarter. We invested and or made commitments totaling $45.7 million, including in three new portfolio companies.

We invested 7.8 million in first lean debt, two million in subordinated debt, and one million in common equity of a marijuana LLC, a leading provider of water purification systems and aftermarket parts and consumables for healthcare and industrial applications. We made a commitment of $4.9 million and second lean debt of magenta buyer LLC, dealing business as trellix. We made a commitment of $4.9 million in first lean debt, and we made a commitment of $4.9 million in first lean debt,

at 7.8 million in first lean debt, 2 million in subordinated debt, and 1 million in common equity of a marijuana LLC, a leading provider of water purification systems, and aftermarket parts and consumables for healthcare and industrial applications. We made a commitment of $4.9 million in second lean debt of magenta buyer LLC doing business as trellix, a leading global cybersecurity company.

We made a commitment of $20 million and first leaned at a BP thrift buyer LLC doing business as unique and eco-thrift and owner and operator of retail thrift stores.

We also receive $50.3 million in repayment in realizations.

Consisting of the following, we receive a distribution on our common equity investment and realize the gain of approximately $1.9 million related to the sale of Palisade Company LLC.

to receive a distribution on our common equity investment and realize the gain of approximately $3.2 million related to the sale of band and fitness Texas Inc. Related to the sale of band and fitness Texas Inc.

We receive payment in full of $4.5 million on our first clean debt in Bedford Precision Parts LLC. We receive payment in full of $4.5 million

We received a distribution on our common equity investment in SES Investors LLC doing businesses SES foam and realized they gained of approximately $9 million. And realized they gained of approximately $9 million.

We receive payment in full of $5.3 million, including a prepayment penalty on our first-lead debt investment in health use LLC. We receive payment in full of $5.3 million, and we receive payment in full of $5.3 million,

And we sold a portion of our equity investment in fan steel, ink and realized the gain of approximately $24.3 million. The ink and the gain of approximately $24.3 million.

In conjunction with the transaction, we invested $10 million in subordinated debt.

After the quarter end in total, we have received incremental proceeds from our equity investments of $40.4 million and realized net gains of approximately $38.4 million. The fair value of the portfolio quarter end was $810.5 million equal to $109.6% of cost.

We ended the second quarter with 73 active portfolio companies.

and 12 companies that have sold their underlying operations.

and inflationary cost pressures.

That doesn't mean all of our portfolio companies are immune from these dynamics. We experience light depreciation in our debt portfolios to of our portfolio companies are facing strong headwinds in the current environment. Headwinds in the current environment.

Reds are also the white means and we placed ebbls or ebllc. We take a sneaker and a peril retailer focused on urban areas on Nanakrool. We take a sneaker and a peril retailer focused on urban areas on Nanakrool.

Not a cruel as a June , not a cruel as a June 30th account for about 1% of our total portfolio on a fair value basis. Not a cruel as a June 30th account for about 1% of our total portfolio on a fair value basis.

As a result of the high level of equity monetization during the quarter.

The total portfolio mix on a fair value basis continued to shift in favor of debt investments. As of June 30th, debt investments comprised 83% of the total portfolio compared to about 80% as of March 31st, 2022, and about 77% as of December 31st, 2021.

First, we get as a percentage of debt investments was in line with the first quarter at around 66%.

The yield on debt was also unchanged from the first quarter. Equity investments as a percentage of the total portfolio on a cost basis remains under 10% in line with our target allocation. The yield on debt is now under 10% in line with our target allocation.

Looking ahead to the second half of the year, from our perspective, the lower middle markets should remain relatively active, much like the first half of the year, offering us opportunities to further redeploy equity proceeds into income-producing assets and opportunities to invest in companies that are positioned to perform well in the current environment.

Although we do expect deals to take longer to close than last year in this uncertain environment.

The same time our proven underwriting standards disciplined investment selection and focus on first-leamed debt and structuring investments with a high percentage of equity cushion. With a high percentage of equity cushion.

Keep us on track to generate attractive risk adjuster returns over the long term and deliver value for our shareholders.

Now I'll turn the call over to Shelby to provide some details on our financials and operating results.

Jobby. Thank you, Ed, and good morning, everyone. Our review our second quarter results in more detail and close with comments on our liquidity position. Please note, I will be providing comparative commentary versus the prior quarter Q1 2022.

Total investment income was 21.2 million for the three months into June 30th. A point six million dollar increase from Q1, primarily due to a point 2.1 million dollar increase in interest income, including PIC, offset by a point six million dollar decrease in fee income and a point nine million dollar decrease in dividend income.

Income increase was driven by an increase in average debt investment balances outstanding. Please recall that the majority of Q1 investments closed in March and therefore were more back-end weighted in the quarter. Total investments, including income tax provision, were $10.1 million for the first quarter, in line with Q1. The capital gains incentive fee accrual decreased by $0.9 million. But the capital gains incentive fee is accrued for GAAP purposes.

However, it's only payable annually in a rears to the extent cumulative realized gains exceed realized losses and unrealized appreciation.

We ended the quarter with 395.8 million of debt outstanding, comprised of 128 million, 0.5 of SBA debentures, 250 million of unsecured notes, and 17.3 million of secured borrowings. Our debt to equity ratio as of June 30th was 0.8 times or 0.6 times statutory leverage, excluding exempt SBA debentures.

The weighted average interest rate on our outstanding debt was 3.8% as of June 30th, 2022.

Net investment income, or NII, for the three months into June 30th was 45 cents per share versus 42 cents per share in Q1. Adjusted NII, which excludes any capital gains, incentive fee accruals or reversals attributable to realized and unrealized gains and losses on investments, was 43 cents per share in Q2, consistent with Q1. For the three months into June 30th, we recognized approximately 18.2 million of net realized gains.

primarily from sales related to our equity investments in Penergy, Transco, Avoco, and CRS Texas.

Turning now to portfolio statistics, as of June 30th, our total investment portfolio had fair value of 810.5 million. Our average portfolio company investment on a cost basis was 10.1 million, which excludes investments in 12 portfolio companies that sold their operations during the process of winding down.

We have equity investments in approximately 80% of our portfolio companies with an average fully diluted equity ownership of 3.7%.

Now I'd like to briefly discuss our available liquidity. As of June 30th, our liquidity and capital resources included cash of $72.5 million, $41.5 million of available SBA adventures, and $100 million of availability on our line of credit, resulting in total liquidity of approximately $194 million. Hobby View provides six aside from the global tariff and available to exactly 24 year winter future. We currently have 24 year projects that will be available to us at excess??products. We also present a similar example to other projects that we've introduced in the past of our unique account Sirjun??????yes. Thank you.

Taking into account our subsequent events, we have approximately 207.6 million of liquidity.

Now, we'll turn the call back to Ed for concluding comments.

Thanks Shelby. As always, I'd like to thank our team and the Board of Directors at Fightists for their dedication and hard work and our shareholders for their continued support. I will now turn the call over to Lisa for Q&A. Lisa. Thank you.

Thank you. If you would like to ask a question on the phone lines today, you can press star one on your telephone keypad. Once again, everyone that is star one to ask a question, we'll take our first question from Robert Dodd with Raymond James. Please go ahead.

Good morning, and shall be, and congratulations on not just the quarter, but the post quarter as well. How did the overall performance?

We're going to keep going of that strategy.

So a couple of questions. I'm going to ask you about the dividend, but you probably knew that was coming. But the first one on, you kind of went back to this a couple of times, getting deals across the finishing line. When it came to cuts, did we purchase the uniform before the easing, or are you going to have somebody back to his pocket with him and his other hand?

is more difficult now. Sounds like you're quite optimistic about pipeline, but what is, is there a gap between, you know, your ask on pricing and the borrower's ask, is there, is that a problem on the sponsors agreeing on price? Is it, you know, is there more divergence on pricing structure or anything like that? Or is it some other,

kind of factor this making people move a little slower right now. I'm just curious.

Sure, great question, Robert. As you can imagine, I think most folks make investments today, I really wanna make sure that the companies are forming as expected. And what we've seen in experience, quite frankly, we've had three deals that we were awarded fall apart in the last 90 days or so. And two were due to purchase price issues. And those came from, I would say performance issues may be missing but...

It's a tougher environment to get things done. I think everyone is in discovery mode a little bit. And I think that's a good thing, quite frankly, but we want to make sure we feel great about what we're investing in as we close transactions. It's a good problem to have from our perspective. It's a good problem to have from our perspective.

Thank you for that.

On the opportunities you're seeing, obviously, I mean, if we look back over and certainly the last several years and even longer term, I mean, the IRRs or however we want to put it, I mean, fans feel might be an outlier, but even though the core assets your IRRs have been very attractive, do you think the opportunities that you're seeing today and the structures you're seeing today set up to meet?

kind of the core IRR, not just your internal targets, your hurdle rates maybe, but the core IRR that you've delivered historically. Can you still match that or is there anything that's shifted on that front? Great question. From my perspective, so a little bit of it has to do with portfolio structure. So today we have about...

maybe a little higher than usual. We may have been closer to 90% at one point in time. And so that may alter returns just a little, but I don't think it'll be enough of a move to be significant.

So we continue to see a very attractive environment from a risk of just a return or on a risk of just a return basis. Continue to like the equity opportunities that we are uncovering, but obviously it takes hard work and discipline and being patient. And we are going to continue the same strategy that we have always to pull.

We continue to see a very attractive environment from a risk of just a return or on a risk of just a return basis. Continue to like the equity opportunities that we are uncovering, but obviously it takes hard work and discipline and being patient. And that's, we're gonna continue the same strategy that we've always deployed.

Got it, got it. I appreciate that. Thank you for that, Connor. Got to ask you on the dividend, yes, I realize you said that you'll have more information on the next call, but that's three months from now. In the past, well, what's been interesting from time to time is what it was just got down to was you put up the exact cards created for each TE.

you know, when you've had large real life gains, you've utilized the full spectrum. You've done everything from a deemed distribution to a special dividend to supplemental. Can you give us, and obviously it's a board decision, but you are a member of the board. Can you give us any kind of, you know, which, you know, a deemed distribution allows you to retain some capital, but you've got a lot of capital equity proceeds coming in versus, you know, just paying out large specials.

you don't necessarily get full credit from the market. So can you give us any thought about which way, potentially you lean right now without not going to set your feet in concrete on this. But...

Let me give some thoughts on just actually why we postponed things a little bit as well and just maybe highlight the different options that are on the table.

But as you might imagine, I'm gonna be pretty careful with what I with what I say, yeah But you know also as you might imagine we spent a lot of time, you know it's a board level thinking about distributions and dividend policy questions and Also, as you know our spillover position at 630 is very high at two dollars and 37 cents

You know per share and as you also know is the gains early here in Q3 will only further increase that still over position

So, you know, what we've done is, you know, given the fact that

We're only 7 months into the year. We believe it only makes sense to be patient at least until the Q3 earnings call. To discuss further 2022 dividend decisions.

The Q3 and Q4 dividend declarations that we announce are expected to satisfy the Rick distribution requirements related to the 2021 investment company taxable income or ICTI. So we expect to be discussing obviously things a lot over the next 90 days until we have our next call. And lastly, what I'll say is our top priority is to perform well for shareholders over time. For us, I mean.

makes sense to retain a healthy level of spillover still for rainy day. And then lastly, you know, a deemed distribution is definitely on the table as well, which would enable us to retain capo, the BDC level, in order to continue to grow NAV as well as our need to in the long term. So, that's three or four things, I guess, for that we are, that are on the table from our perspective. And it's probably some combination of a few of those at the end of the day. I hope that's helpful, but I'm going to be honest with you, I'm sure.

That is very helpful. Thank you, Anna. I apologize for the backman.

That is very helpful. Thank you and I apologize for the fact that. No problem.

Thanks, Robert. Nice talking to you.

We'll take our next question from Ryan Lynch with KBW.

Hey, good morning. Good morning, Ryan. The first question I had was, you know, kind of falling off an unroberaged question because it kind of struck me as well when you talked about deals having a harder time getting across the finished line in this environment. I think that's maybe the first time I've really heard that on the conference calls.

for the BBC sector this quarter. And so because most others out there talked about the really the improving deal environment and what I would call maybe some more lender friendly terms that they're being able to achieve now versus six months ago or so. Obviously, the economic environment is still very uncertain going forward. So that does present some challenges. So I'd love to just just if you could just unpack is there something that's

particularly unique in kind of the lower middle market where maybe terms aren't shifting as quickly as maybe the Core middle or upper middle market that That would cause you to make those statements Sure, great question, Ryan. Not an easy one to answer quite frankly, but I think terms

are shifting to a certain degree. I think spreads are stable to widening. So we are experiencing the same trend. Maybe it's not as much as in the liquid markets, but covenants have always been a positive for the lower middle market and they continue to be.

and help us in leverage levels are clearly not.

out of bounds and probably are coming down just a little bit as well. Again, those are for very high quality situations.

You know, from my deal flow perspective, I thought, you know, Q2 was a little slower.

Then Q1 for sure, and I think there was a lot of price discovery going on and a lot of just credit discovery going on. So, but what I would also say is today in the last three to four weeks, the EAL flow has been very strong. And so we are starting to see a fair number of high quality situations.

So we're excited about the rest of the year, quite frankly. With regard to harder to get stuff across the finish line, your comment surprises me a little bit, maybe just people didn't.

Say it, but I think a little bit that is just a product of our experience where we did have in the last 90 days three deals all apart for the reasons I just talked about. So, and I think that's healthy. Things aren't as expected. And I'd rather wait and see as opposed to go ahead and close the transaction.

But long and short of it is, is we're continuing to see a fair number of opportunities, high quality opportunities. And we do think it's a more linder-friendly environment than previously. There's less competition. There's some lenders that have pulled back quite frankly. And so that's a good thing as well for us and for the lower metal marks. And for the lower metal marks.

Yeah, that's helpful and I completely agree that being thoughtful and disciplined and having deals fall, you know, backing off and deals if they're not right, it makes complete sense. And also, you could also be right that maybe other companies aren't explicitly stating that. And there are deals that are not getting done, maybe just the deals that are getting done are in better terms, but there could be maybe a lot of other deal effects.

that are knocking across the finish line as well. So that's fair. The other question I had was, congrats on your partial monetization of a fast deal in third quarter. Can you tell us about what was the nature of that partial monetization and why was it only a partial monetization versus a full monetization? What was the nature behind that? What was the nature behind that?

Sure. Well, Vansdell is a company that we've been invested in now for, call it, 10 years or so, around a little bit. Very high quality company. The monetization, from our perspective, was a negotiation with the primary owner of the business. And, you know, from our perspective, getting partial liquidity made sense. So we ended up selling less than half of our position.

And the reason for that is we feel good about the long-term prospects of our investment as well as, you know, as for the company. It's a very high quality company. And, you know, so we're pleased to be able to retain that equity ownership and, you know, see how it goes in the future. But we're also very pleased with the partial realization as we thought it made sense to...

To do that, hopefully that makes sense. We like that we just think it partial liquidity event was a. Smart thing to do for our shareholders. It makes sense just taking a few chips off the table on a really successful investment. Just the last 1 I had, which is.

very hard to predict, but maybe for Shelby, you know, dividend income, you know, drops significantly at latest quarter. I know it's really hard to predict on or a quarter basis, but that can be kind of a lumpy, but do you have any preliminary thoughts on what we should be expecting, you know, in the third quarter for that?

Yeah, what I would just say is Q1 was probably larger than what I would expect on a run rate basis. Just we have a few select portfolio companies that maybe make an annual dividend. And so that's kind of what caused Q1 to be more outsized. Kind of going forward, I would expect things to be more in line with Q2.

I would say Q1 was probably larger than what I would expect on a run rate basis. Just we have a few select portfolio companies that maybe make an annual dividend. And so that's kind of what caused Q1 to be more outsized kind of going forward. I would expect things to be more in line with Q2. Okay.

That's helpful. I appreciate the time today and appreciate you taking my questions. Thank you, Ryan. I appreciate you talking to you. I appreciate you talking to you.

You too.

As a reminder, everyone, that is Star One to ask a question. We'll take our next question from Mickey Schlein with Leidenberg.

Good morning, everyone. Ed, I wanted to ask you a risk management question. There's this theory out there that the only way the FEDS going to get inflation and the control is just to kill the consumer given how much the consumer represents as part of the economy, the domestic economy. But I've also heard arguments that the middle class and the upper middle class are fine. It's the lower middle class.

on a thrift shop and is that in line with my comments?

Sure, it's a great question. With regard to the thrift shop.

We just committed to that, that deals should close later in the quarter. It's a great business, pretty well diversified, and performing very well also in this environment. We feel like, we obviously looked at previous cycles when we looked at this company has performed pretty well through all those cycles. It's a stable business from our perspective and one

we feel very good about in this environment as well. So it's differentiated from that perspective. I agree to a certain extent with your comments about maybe the

you know, maybe the more lower income bracket, if you will. You know, I do think they are being impacted more by things like higher gas prices, higher food prices, more staples day-to-day living type of spending and taking market of from more discretionary items, if you will.

Experience that in Evelyn's, quite frankly, Evelyn's is probably focused on a consumer that's more, you know, that little...

more focused on urban areas, if you will.

So, I agree with your comments.

And so we feel like we're well positioned as we move forward. It's really made you a handful of names that have exposure. And I think we're, you know, feeling some pressure, you know, a little bit right now on two of the companies, one of them being Evelyn. So overall, we feel great about our portfolio construction. And feel very good about the outlook of our portfolio. Notwithstanding that it's a, you know, it's a difficult operating environment. I agree. And that's it for me this morning.

And thank you for your participation and you may now disconnect.

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