Good day, and welcome to the Fidus Second Quarter 2022 Earnings Call. Today's call is being recorded. I would now like to turn the conference over to Jody Burfening. Please go ahead. Thank you, Lisa, and good morning, everyone. 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 Sherard, Chief Financial Officer. Fidus Investment Corporation issued a press release yesterday afternoon with the details of the company's quarterly financial results. A 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. The conference call today will contain forward-looking statements, including statements regarding the goals, strategies, beliefs, future potential, operating results, and cash flows of Fidus Investment Corporation. 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. Fidus undertakes no obligation to update or revise any of these forward-looking statements. With that, I would now like to turn the call over to Ed. Good morning, Ed.

Good morning, Jody, and 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 and our portfolio at quarter end, and then offer you an update of our views on market conditions in the lower middle market. Shelby will cover the second quarter financial results and our liquidity position. After we have completed our prepared remarks, we'll be happy to take your questions. Our second quarter results demonstrate the merits of our strategy of investing in debt securities to generate recurring interest income and equity 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 or $0.74 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 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 $0.43 per share, essentially unchanged versus $10.4 million or $0.42 per share last year. NAV was $484 million or $19.80 per share. For the second quarter, Fidus paid a base dividend of $0.36 per share and a supplemental dividend of $0.07 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 $0.36 per share and a supplemental dividend of $0.07 per share. The dividends will be payable on September 23, 2022, to stockholders of record as of September 9, 2022. In addition, the Board of Directors declared a base dividend of $0.36 per share and a supplemental dividend of at least $0.07 per share for the fourth quarter. The dividends will be payable on December 16, 2022, to stockholders of record as of December 2, 2022. As a RIC, 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 our special dividends at our next earnings call in early November. Originations for the quarter were solid, albeit not as strong as the first quarter, as we continue 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 to be 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. As a reminder, we invested $8.5 million in first lien debt and made a commitment of up to $1 million of additional first lien debt in Choice Technology Solutions, LLC, doing business as Choice Merchant Solutions, LLC, a leading omnichannel global payments platform. We invested $11 million in second lien debt of Virtex Enterprises, LP, a leading vertically integrated electronic manufacturing services provider. The remaining $26.2 million was primarily related to the new $15 million subordinated debt investment in 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 spread fairly evenly among first lien, second lien, and subordinated debt securities. While we have been and remain focused on first lien 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 and 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. In terms of sales and exits, we received payment in full of $8.8 million, including a prepayment penalty, on our first lien debt in Comply365 LLC. We received payment in full of $11.6 million, including a prepayment penalty, on our second lien debt in Argo Turboserve Corporation. We received a distribution of $2.4 million and realized a gain of $1.9 million related to the sale of TransGo, LLC. We received a distribution of $1.2 million and realized a gain of $0.8 million related to the sale of AVC Investors, LLC. We received proceeds of $0.8 million and realized a gain of $0.4 million related to the exit of our investment in CRS Solutions Holdings, LLC. And we received proceeds of $18.3 million and realized a gain of $15.3 million related to the exit of our equity investment in Pinnergy Ltd. 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 & consumables for healthcare and industrial applications. We made a commitment of $4.9 million in second lien debt of Magenta Buyer, LLC, doing business as Trellix, a leading global cybersecurity company. We made a commitment of $20 million in first lien debt of BP Thrift Buyer LLC, doing business as Unique and Eco Thrift, an owner and operator of retail thrift stores. We also received $50.3 million in repayments and realizations consisting of the following. We received a distribution on our common equity investment and realized a gain of approximately $1.9 million related to the sale of Palisade 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 received payment in full of $4.5 million on our first lien debt in Bedford Precision Parts LLC. We received a distribution on our common equity investment in SES Investors, LLC, doing business as SES Foam, and realized a gain of approximately $9 million. We received payment in full of $5.3 million, including a prepayment penalty on our first lien debt investment in Healthfuse, LLC. And we sold a portion of our equity investment in Pfanstiehl, Inc., and realized a gain of approximately $24.3 million. In conjunction with the transaction, we invested $10 million in subordinated debt. Subsequent to 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 at 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. Spreads are also widening and we placed EbLens, EBL, LLC, a sneaker and apparel retailer focused on urban areas on nonaccrual. Nonaccruals as of June 30 accounted 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 30, debt investments comprised 83% of the total portfolio compared to about 80% as of March 31, 2022, and about 77% as of December 31, 2021. First lien debt 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 remain under 10%, in line with our target allocation. Looking ahead to the second half of the year, from our perspective, the lower middle market 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. At the same time, our proven underwriting standards, disciplined investment selection, and focus on first lien 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.

Thank you, Ed, and good morning, everyone. I'll 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 ended June 30, a $0.6 million increase from Q1 primarily due to a $2.1 million increase in interest income, including PIK, offset by a $0.6 million decrease in fee income and a $0.9 million decrease in dividend income. The interest 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 backend 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. Note the capital gain incentive fee is accrued for GAAP purposes; however, it is only payable annually in arrears to the extent cumulative realized gains exceed realized losses and unrealized appreciation. Excluding the accrued capital gains incentive fee, total expenses in Q2 were approximately $0.8 million higher than Q1 due to a $0.2 million increase in interest expense, a $0.4 million increase in management and income incentive fees, a $0.2 million increase in other G&A expenses, primarily related to proxy solicitation for the annual shareholders' meeting, and a $0.1 million increase in taxes offset by a $0.2 million decrease in professional fees. We ended the quarter with $395.8 million of debt outstanding, comprised of $128.5 million of SBA debentures, $250 million of unsecured notes, and $17.3 million of secured borrowings. Our debt to equity ratio as of June 30 was 0.8x or 0.6x statutory leverage, excluding exempt SBA debentures. The weighted average interest rate on our outstanding debt was 3.8% as of June 30, 2022. Net investment income, or NII, for the three months ended June 30 was $0.45 per share versus $0.42 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 $0.43 per share in Q2 consistent with Q1. For the three months ended June 30, we recognized approximately $18.2 million of net realized gains, primarily from sales related to our equity investments in Pinnergy, TransGo, Abaco, 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 30. 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 nonaccrual, if any. Now I'd like to briefly discuss our available liquidity. As of June 30, our liquidity and capital resources included cash of $72.5 million, $41.5 million of available SBA debentures, and $100 million of availability on our line of credit, resulting in total liquidity of approximately $194 million. Taking into account our subsequent events, we have approximately $207.6 million of liquidity. Now I'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 Fidus 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. We'll take our first question from Robert Dodd with Raymond James. Please go ahead.

Good morning, Ed and Shelby, and congratulations on not only the quarter but also the post-quarter and the overall performance of the strategy, which has been very impressive. I have a couple of questions, starting with the dividend, which you likely anticipated. Firstly, Ed, you've mentioned a few times that closing deals is more challenging now. While you seem optimistic about the pipeline, is there a gap between your pricing expectations and what borrowers are requesting? Is there an issue with sponsors agreeing on prices? Are there more differences in the pricing structures, or are there other factors causing delays in decision-making? I'm just trying to understand.

Sure. Great question, Robert. As you can imagine, I think most people making investments today really want to ensure that the company's performance meets expectations. From our experience, we've had three deals that we were awarded fall apart in the last 90 days. Two of those were due to purchase price issues related to performance, possibly missing the budget, which naturally leads to discussions about price. The other concern was related to the structure; we had signed a term sheet based on a specific structure, but the company and the borrower ultimately did not want to proceed with that structure, so we decided to back away. We are definitely navigating this environment, but we have always maintained discipline in our approach. It is a tougher environment for closing deals. I believe everyone is in a discovery mode right now, which is positive because we want to feel confident in our investments as we finalize transactions. From our viewpoint, it's a good problem to have.

Yes, thank you for that. On the opportunities you're seeing, obviously, if we look back over certainly the last several years and even longer term, the IRRs, or however we want to put it, thanks to you it might be an outlier, but even 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 are 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 shifted on that front?

Great question. From my perspective, part of this relates to our portfolio structures. Currently, about 80% of our portfolio companies are tied to equity investments, which naturally allows for potentially higher overall returns. We feel confident about the investments we're making and believe they align closely with our past efforts, so I don't see any significant changes there. The proportion of debt-only investments is slightly higher than usual, and at one point, we may have been closer to 90%. While this could slightly impact returns, I don't think it will be significant. We continue to view the environment as very attractive from a risk-adjusted return perspective. We remain optimistic about the equity opportunities we are finding, although it does require hard work, discipline, and patience. We will maintain the same strategy we've always employed.

I understand. Thank you for the clarification. I have to inquire about the dividends. While I know you mentioned that more details will be available during the next call, that’s three months away. In the past, when you've experienced significant realized gains, you have used various methods, including deemed distributions, special dividends, and supplements. As a Board member, can you share any insights on which direction you might be leaning towards? Deemed distributions allow you to keep some capital, but you have significant capital and equity proceeds coming in. Paying out large specials might not receive full recognition from the market. Could you provide any thoughts on this without making any firm commitments?

Let me give some thoughts on just actually why we postponed things a little bit as well as just maybe highlight the different options that are on the table. But as you might imagine, Robert, I've been careful with what I say. But also, as you might imagine, we spent a lot of time at the Board level thinking about distributions and dividend policy questions. And also, as you know, our spillover position at 630 is very high at $2.37 per share. And as you also know, the gains early here in Q3 will only further increase that spillover position. So what we've done is, 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 to discuss further 2022 dividend decisions. The Q3 and Q4 dividend declarations that we announce are expected to satisfy the RIC distribution requirements related to the 2021 investment company taxable income, or ICTI. So we expect to be discussing these things a lot over the next 90 days until we have our next call. Lastly, what I'll say is, look, our top priority is to perform well for shareholders over time. And for us, that means delivering stable to growing dividends to shareholders while also growing NAV over the long term as well. So as it relates to our spillover position, we're evaluating a number of options. It includes making special select cash distributions, includes increasing the base dividend and/or supplemental dividend policy. It may make sense to retain a healthy level of spillover still for a rainy day. And then lastly, a deemed distribution is definitely on the table as well, which would enable us to retain capital at the BDC level in order to continue to grow NAV as well as earnings over the long term. So there's three or four things, I guess four, 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 got to be obviously careful with what I say.

That is very helpful. Thank you. And I apologize for the background.

No problem. Thanks, Robert. Nice talking to you.

Hi. Good morning.

Good morning, Ryan.

My first question follows up on Robert's question because I found it interesting when he mentioned that deals are having a tougher time closing in this environment. I believe this might be the first instance I've heard this during the BDC sector conference calls this quarter. Most others have discussed the improving deal environment and what I would describe as more lender-friendly terms being achieved now compared to six months ago. Clearly, the economic landscape remains quite uncertain, which presents challenges. I would like to know if there's something particularly unique about the lower middle market that might be causing terms to shift more slowly than in the core middle or upper middle market, leading you to make those observations.

Sure, Ryan, that's a great question and not easy to answer. Terms are shifting to some extent, and I think spreads are stable or widening. We're experiencing similar trends, though perhaps not as pronounced as in the liquid markets. Covenants remain beneficial for the lower middle market and continue to help us, while leverage levels are not excessive and may be slightly decreasing. These observations apply primarily to high-quality situations. Looking at deal flow, Q2 was definitely slower than Q1, with a lot of price and credit discovery happening. However, in the last three to four weeks, deal flow has been quite strong, revealing many high-quality opportunities. We're optimistic about the remainder of the year. Regarding the challenge of closing hard-to-get deals, I'm a bit surprised by that comment; perhaps it wasn't fully expressed by others. Recently, we experienced three deals fall apart for reasons I mentioned, but I consider that a healthy outcome. If things don't meet expectations, I'd prefer to pause rather than proceed with the transaction. Overall, we're still seeing many quality opportunities and believe the environment is more favorable for lenders than it has been before, with less competition as some lenders have pulled back, which is beneficial for us and the lower middle market. I hope that clarifies things.

Yes, that's helpful. And I completely agree that being thoughtful and disciplined and having deals fall, backing off on deals if they're not right, 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 that are not getting 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 talk 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?

Sure. Well, this is a company that we've been invested in now for, call it, ten 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 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 do that. Hopefully, that makes sense. But we liked that. We just think a partial liquidity event was a smart thing to do for our shareholders.

Yes, it makes sense just taking a few chips off the table on a really successful investment. Just the last one I had, which is very hard to predict, but maybe for Shelby. Dividend income dropped significantly this quarter. I know it's really hard to predict on a quarter-to-quarter basis, but that can be kind of lumpy. But do you have any preliminary thoughts on what we should be expecting in the third quarter for that?

Yes. What I would just say is Q1 was probably larger than what I would expect on a run rate basis. 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 it. Good talking to you.

We'll take our next question from Mickey Schleien with Ladenburg.

Good morning, everyone. Ed, I wanted to ask you about risk management. There is a theory that the only way the Federal Reserve will control inflation is by hurting the consumer, given the consumer's significant role in the economy. I've also heard that the middle class and upper middle class are doing well, while it's the lower middle class, those living paycheck to paycheck, who are struggling under the current economic conditions. So perhaps the perceived risk isn't as high as it seems. Given the Fed's challenges with inflation, how much risk do you see in your portfolio regarding the consumer? Additionally, I think I heard you mention an investment in a thrift shop. Does this align with my comments?

Sure, it's a great question. With regard to the thrift shop, we just committed to that. The deal should close later in the quarter. It's a great business, pretty well diversified and performing very well also in this environment. So we feel like, we obviously looked at previous cycles when we looked at, and this company has performed pretty well through all those cycles. So 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 more lower income bracket, if you will, 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 share from more discretionary items, if you will. We experienced that in Evelyn's quite frankly. Evelyn's is probably focused on a consumer that's 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. And so we feel like we're well positioned as we move forward. It's really maybe a handful of names that have exposure. And I think we're feeling some pressure a little bit right now on two of the companies, one of them being Evelyn's. 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.

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. Have a great day and a great weekend.

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