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(EDGAR Online via COMTEX) — ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All statements absolute herein, added than absolute facts, may accumulated “forward-looking statements.” These statements may chronicle to, amid added things, our approaching operating results, our business affairs and the affairs of our portfolio companies, absolute and abeyant conflicts of absorption with Gladstone Administering Corporation (the “Adviser”), our adviser, and its affiliates, the use of adopted money to accounts our investments, the capability of our costs sources and alive capital, and our adeptness to co-invest, amid added factors. In some cases, you can analyze advanced statements by analogue such as “estimate,” “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “project,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the abrogating or variations of such acceding or commensurable terminology. These advanced statements absorb accepted and alien risks, uncertainties and added factors that may account our absolute results, levels of activity, achievement or achievements to be materially altered from any approaching results, levels of activity, achievement or achievements bidding or adumbrated by such advanced statements. Such factors include: (1) changes in the abridgement and the basic markets, including banal bulk volatility; (2) risks associated with acceding and cleanup of awaiting and approaching transactions; (3) the accident of one or added of our controlling officers, in accurate David Gladstone, Terry Lee Brubaker or Robert L. Marcotte; (4) changes in our advance objectives and strategy; (5) availability, acceding (including the achievability of absorption bulk volatility) and deployment of capital; (6) changes in our industry, absorption rates, barter ante or the accepted economy; (7) our business affairs and the affairs of our portfolio companies; (8) the bulk and attributes of our competition; (9) changes in authoritative regulation, tax ante and agnate matters; (10) our adeptness to avenue investments in a adapted manner; (11) our adeptness to advance our accomplishment as a adapted advance aggregation (“RIC”) beneath Subchapter M of the Centralized Revenue Code of 1986, as adapted (the “Code”), and as business development aggregation (“BDC”) beneath the Advance Aggregation Act of 1940, as adapted (the “1940 Act”); (12) those factors declared herein, including Item 1A. “Risk Factors,” and in the “Risk Factors” sections of our Anniversary Address on Anatomy 10-K (our “Annual Report”) for the budgetary year concluded September 30, 2019, filed with the U.S. Antithesis and Barter Commission (“SEC”) on November 13, 2019 and adapted on December 16, 2019 and (13) the appulse of COVID-19 on the economy, our portfolio companies and the basic markets, including the measures taken by authoritative authorities to abode it, which may accelerate or aggravate added risks and/or uncertainties. Additionally, abounding of the risks and uncertainties listed above, amid others, are currently animated by and may or will abide to be animated by the COVID-19 pandemic. We attention readers not to abode disproportionate assurance on any such advanced statements. Absolute after-effects could alter materially from those advancing in our advanced statements and approaching after-effects could alter materially from absolute performance. We accept based advanced statements on advice accessible to us on the date of this report. Except as adapted by the federal antithesis laws, we undertake no obligation to about amend or alter any advanced statements, whether as a aftereffect of new information, approaching contest or otherwise, afterwards the date of this Anniversary Address on Anatomy 10-Q.Although we undertake no obligation to alter or amend any advanced statements, whether as a aftereffect of new information, approaching contest or otherwise, you are brash to argue any added disclosures that we may accomplish anon to you or through letters that we accept filed or in the approaching may book with the SEC from time to time, including anniversary letters on Anatomy 10-K, anniversary letters on Anatomy 10-Q and accepted letters on Anatomy 8-K. The advanced statements absolute in this Anniversary Address on Anatomy 10-Q are afar from the safe anchorage aegis provided by the Clandestine Antithesis Litigation Reform Act of 1995 and Section 27A of the Antithesis Act of 1933, as amended.
The afterward assay of our cyberbanking action and after-effects of operations should be apprehend in affiliation with our accompanying Consolidated Cyberbanking Statements and the addendum thereto absolute abroad in this Anniversary Address on Anatomy 10-Q and in our Anniversary Report. Absolute cyberbanking action and after-effects of operations and allotment relationships amid any amounts in the cyberbanking statements are not necessarily apocalyptic of cyberbanking action or after-effects of operations for any approaching periods. Except per allotment amounts, dollar amounts in the tables included herein are in bags unless contrarily indicated.
We were congenital beneath the Maryland Accepted Corporation Law on May 30, 2001. We accomplish as an evidently managed, closed-end, non-diversified administering advance company, and accept adopted to be brash as a BDC beneath the 1940 Act. In addition, for federal assets tax purposes we accept adopted to be brash as a RIC beneath the Code. To abide to authorize as a RIC for federal assets tax purposes and admission favorable RIC tax treatment, we charge accommodated assertive requirements, including assertive minimum administering requirements.
We were accustomed for the purpose of advance in debt and disinterestedness antithesis of accustomed clandestine businesses operating in the U.S. Our advance objectives are to: (1) accomplish and abound accepted assets by advance in debt antithesis of accustomed lower boilerplate bazaar businesses that we accept will accommodate abiding antithesis and banknote breeze to pay expenses, accomplish arch and absorption payments on our outstanding acknowledgment and accomplish distributions to stockholders that abound over time; and (2) accommodate our stockholders with abiding basic acknowledgment in the bulk of our assets by advance in disinterestedness antithesis of accustomed businesses that we accept can abound over time to admittance us to advertise our disinterestedness investments for basic gains. To accomplish our advance objectives, our advance action is to advance in several categories of debt and disinterestedness securities, with anniversary advance about alignment from $8 actor to $30 million, although advance admeasurement may vary, depending aloft our absolute assets or accessible basic at the time of investment. We apprehend that our advance portfolio over time will abide of about 90.0% debt investments and 10.0% disinterestedness investments, at cost. As of March 31, 2020, our advance portfolio was fabricated up of about 90.5% debt investments and 9.5% disinterestedness investments, at cost.
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We focus on advance in lower boilerplate bazaar companies (which we about ascertain as companies with anniversary antithesis afore interest, taxes, abrasion and acquittal of $3 actor to $15 million) in the U.S. that accommodated assertive criteria, including the following: the sustainability of the business’ chargeless banknote breeze and its adeptness to abound it over time, able assets for accommodation collateral, accomplished administering teams with a cogent buying absorption in the borrower, reasonable assets of the borrower, including an abounding disinterestedness accession or beanbag based on prevailing action appraisal multiples and, to a bottom extent, the abeyant to apprehend acknowledgment and accretion clamminess in our disinterestedness position, if any. We accommodate to borrowers that charge funds for advance basic or to accounts acquisitions or recapitalize or refinance their absolute debt facilities. We seek to abstain advance in high-risk, early-stage enterprises. Our targeted portfolio companies are about brash too baby for the beyond basic marketplace.
We advance by ourselves or accordingly with added funds and/or administering of the portfolio company, depending on the opportunity. In July 2012, the SEC accepted us an exemptive adjustment (the “Co-Investment Order”) that broadcast our adeptness to co-invest, beneath assertive circumstances, with assertive of our affiliates, including Gladstone Advance Corporation, a BDC additionally managed by the Adviser, and any approaching business development aggregation or closed-end administering advance aggregation that is brash (or sub-advised if it controls the fund) by the Adviser, or any accumulated of the foregoing, accountable to the altitude in the Co-Investment Order. Back 2012, we accept opportunistically fabricated several co-investments with Gladstone Advance Corporation pursuant to the Co-Investment Order. We accept the Co-Investment Adjustment has added and will abide to enhance our adeptness to added our advance objectives and strategies. If we are accommodating in an advance with one or added co-investors, our advance is acceptable to be abate than if we were advance alone.
We are evidently managed by the Adviser, an advance adviser registered with the SEC and an associate of ours, pursuant to an advance advising and administering agreement. The Adviser manages our advance activities. We accept additionally entered into an administering acceding with Gladstone Administration, LLC (the “Administrator”), an associate of ours and the Adviser, whereby we pay alone for authoritative services.
Additionally, Gladstone Securities, LLC (“Gladstone Securities”), a privately-held broker-dealer registered with the Cyberbanking Industry Regulatory Authority and insured by the Antithesis Investor Aegis Corporation, which is 100% alongside endemic and controlled by Mr. Gladstone, our administrator and arch controlling officer, has provided added services, such as advance cyberbanking and due action services, to assertive of our portfolio companies, for which Gladstone Antithesis receives a fee.
Portfolio and Advance Action
In general, our investments in debt antithesis accept a appellation of no added than seven years, accumulate absorption at capricious ante (generally based on the 30-day London Interbank Offered Bulk (“LIBOR”)) and, to a bottom extent, at anchored rates. We seek debt instruments that pay absorption account or, at a minimum, quarterly, may accept a success fee or deferred absorption accouterment and are primarily absorption only, with all arch and any accrued but contributed absorption due at maturity. Generally, success fees accumulate at a set bulk and are contractually due aloft a change of ascendancy of a portfolio company, about from an avenue or sale. Some debt antithesis accept deferred absorption whereby some allocation of the absorption acquittal is added to the arch antithesis so that the absorption is paid, calm with the principal, at maturity. This anatomy of deferred absorption is about alleged paid-in-kind (“PIK”) interest.
Typically, our disinterestedness investments abide of accepted stock, adopted stock, bound accountability aggregation interests, or warrants to acquirement the foregoing. Often, these disinterestedness investments action in affiliation with our aboriginal investment, recapitalizing a business, or refinancing absolute debt.
During the six months concluded March 31, 2020, we invested $57.0 actor in three new portfolio companies and continued $15.3 actor in investments to absolute portfolio companies. In addition, during the six months concluded March 31, 2020, we exited eight portfolio companies through aboriginal payoffs or a restructure. We accustomed a absolute of $39.0 actor in accumulated net accretion and arch repayments from the above portfolio aggregation exits as able-bodied as arch repayments by absolute portfolio companies during the six months concluded March 31, 2020. This action resulted in a net abatement in our all-embracing portfolio by bristles portfolio companies to 48 and a net admission of $26.7 actor in our portfolio at bulk back September 30, 2019. From our antecedent accessible alms in August 2001 through March 31, 2020, we accept fabricated 545 altered loans to, or investments in, 243 companies for a absolute of about $1.9 billion, afore giving aftereffect to arch repayments on investments and divestitures.
During the six months concluded March 31, 2020, the afterward cogent affairs occurred:
In October 2019, we invested $14.0 actor in Universal Survey Center, Inc. through anchored aboriginal affirmation debt.
In December 2019, we invested $24.0 actor in Cafe Zupas through anchored aboriginal affirmation debt.
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In January 2020, we awash our advance in The Mochi Ice Cream Aggregation (“Mochi”), which resulted in a accomplished accretion of about $2.5 million. In affiliation with the sale, we accustomed net banknote accretion of about $9.7 million, including the claim of our debt advance of $6.8 actor at par.
In January 2020, we exited our advance in Meridian Rack & Pinion, Inc. (“Meridian”), with a fair bulk of $0 as of December 31, 2019 and recorded a accomplished accident of $5.6 million.
In February 2020, we invested $19.0 actor in American Trailer Rental Group LLC through a accumulated of anchored added affirmation debt and accepted equity.
In March 2020, our investments in XMedius America, Inc. and XMedius Solutions Inc. paid off at par for accumulated net accretion of $14.9 million.
In October 2019, we invested an added $3.0 actor in Medical Solutions Holdings, Inc., an absolute portfolio company, through anchored added affirmation debt.
In October 2019, our advance in DigiCert Holdings, Inc. paid off at par for net accretion of $2.4 million.
In December 2019, our advance in LDiscovery, LLC paid off at par for net accretion of $5.0 million.
In December 2019, our advance in United PF Holdings, LLC paid off at par for net accretion of $3.1 million. In affiliation with the payoff, we accustomed a accommodation fee of $0.1 million.
In December 2019, we recorded a net accomplished accident of $4.4 actor accompanying to our advance in New Trident Holdcorp, Inc. (“New Trident”) which filed for defalcation aegis in February 2019.
We accept been able to accommodated our basic needs through extensions of and increases to our band of acclaim beneath the Fifth Adapted and Restated Acclaim Acceding with KeyBank National Association (“KeyBank”), as authoritative agent, advance arranger and lender (as amended, our “Credit Facility”) and by accessing the basic markets in the anatomy of accessible disinterestedness offerings of accepted and adopted banal and accessible debt offerings. We accept auspiciously continued the Acclaim Facility’s revolving aeon assorted times, best afresh to July 2021, and currently accept a absolute charge bulk of $180.0 million. We awash 846,716 and 463,423 accepted shares beneath our at-the-market affairs during the six months concluded March 31, 2020 and 2019, respectively. In October 2019, we completed a accessible debt alms of $38.8 actor accumulated arch bulk of our 5.375% Addendum due 2024 (the “2024 Notes”), across-the-board of the overallotment. Additionally, we completed a accessible debt alms of $57.5 actor accumulated arch bulk of our 6.125% Addendum due 2023 (the “2023 Notes”), across-the-board of the overallotment in November 2018. Refer to “Liquidity and Basic Resources – Revolving Acclaim Facility,” “Liquidity and Basic Resources – Disinterestedness – Accepted Stock,” and “Liquidity and Basic Resources – Addendum Payable” for added discussion.
Although we were able to admission the basic markets historically and in contempo years, bazaar conditions, including the appulse of COVID-19, may abide to affect the trading bulk of our basic banal and appropriately may arrest our adeptness to accounts new investments through the arising of equity. When our accepted banal trades beneath net asset bulk (“NAV”) per accepted share, as it has done back March 2020, our adeptness to affair disinterestedness is accountable by accoutrement of the 1940 Act, which about prohibits the arising and auction of our accepted banal beneath NAV per accepted allotment after aboriginal accepting approval from our stockholders and our absolute directors, added than through sales to our then-existing stockholders pursuant to a rights offering.
On March 31, 2020, the closing bazaar bulk of our accepted banal was $5.62 per share, a 19.6% abatement to our March 31, 2020 NAV per allotment of $6.99.
Our adeptness to seek alien debt financing, to the admeasurement that it is accessible beneath accepted bazaar conditions, is added accountable to the asset advantage limitations of the 1940 Act, which crave us to accept an asset advantage (as authentic in Sections 18 and 61 of the 1940 Act) of at atomic 150% on our “senior antithesis apery indebtedness” and our “senior antithesis that are stock.”
On April 10, 2018, our Board of Directors, including a “required majority” (as such appellation is authentic in Section 57(o) of the 1940 Act) thereof, accustomed the adapted asset advantage requirements set alternating in Section 61(a)(2) of the 1940 Act. As a result, the Company’s asset advantage requirements for chief antithesis afflicted from 200% to 150%, able April 10, 2019.
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As of March 31, 2020, our asset advantage on our “senior antithesis apery indebtedness” was 213.2%.
In May 2020, we invested $30.0 actor in Magpul Industries Corp. through anchored added affirmation debt.
Revolving Acclaim Facility
On April 29, 2020, we, through Business Loan, entered into Amendment No. 6 to our Acclaim Facility with KeyBank, which continued the revolving aeon end date by about six months to July 15, 2021, included LIBOR alteration considerations and decreased the charge bulk from $190 actor to $180 million. All arch and absorption will abide to be due and payable on April 15, 2022.
Transactions with the Advisor
In April 2020, we adapted and restated our absolute advising acceding with our Adviser, by entering into the Added Adapted and Restated Advance Advising and Administering Acceding amid the Aggregation and the Adviser (the “Amended Agreement”). The Company’s access into the Adapted Acceding was accustomed absolutely by our Board of Directors, including, specifically, its absolute directors. The Adapted Acceding revised the “hurdle rate” included in the adding of the Incentive Fee (as authentic in the Adapted Agreement) for the aeon alpha April 1, 2020 through March 31, 2021, accretion the hurdle bulk from 1.75% per division (7% annualized) to 2.00% per division (8% annualized) and accretion the antithesis Incentive Fee hurdle bulk from 2.1875% per division (8.75% annualized) to 2.4375% per division (9.75% annualized). The adding of the added fees in the Advising Acceding abide unchanged. The revised Incentive Fee adding will activate with the fee calculations for the division catastrophe June 30, 2020. All added acceding of the Advising Acceding remained the same.
In general, our investments in debt antithesis accept a appellation of bristles years, accumulate absorption at capricious ante (based on the 30-day LIBOR) and, to a bottom extent, at anchored rates. LIBOR is currently advancing to be phased out during backward 2021. LIBOR is currently accepted to alteration to a new accepted rate, the Anchored Brief Costs Bulk (“SOFR”), which will absorb assertive brief repo bazaar abstracts calm from assorted abstracts sets. To attain an agnate 30-day rate, we currently intend to acclimatize the SOFR to abbreviate the aberration amid the absorption that a borrower would be advantageous application LIBOR against what it will be advantageous application SOFR. We are currently ecology the alteration and cannot assure you whether SOFR will become a accepted bulk for capricious bulk debt. However, we apprehend we will charge to renegotiate assertive accommodation abstracts with our portfolio companies that advance LIBOR as a agency in free the absorption bulk to alter LIBOR with the new accepted that is accustomed and may additionally charge to renegotiate assertive accoutrement of the Acclaim Facility. Assuming that SOFR replaces LIBOR and is appropriately adapted to agree to 30-day LIBOR, we apprehend that there should be basal appulse on our operations.
We abide to adviser and assignment with the administering teams and shareholders of our portfolio companies to cross the cogent market, operational and bread-and-butter challenges created by the COVID-19 pandemic. The Company’s advance portfolio continues to be focused on a adapted mix of industries and sectors that are about accepted to be added abiding than industries or sectors that are added decumbent to bread-and-butter cycles including customer or retail industries. We accept our portfolio companies accept taken actual accomplishments to finer and calmly acknowledge to the challenges airish by COVID-19 and accompanying orders imposed by accompaniment and bounded governments, including developing clamminess affairs accurate by centralized banknote reserves, actor supports, and as adapted accessing the afresh allowable government Paycheck Aegis Affairs (“PPP”). We accept we accept acceptable levels of clamminess to abutment our absolute portfolio companies, as necessary, and selectively arrange basic in new advance opportunities.
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NM = Not Meaningful
Interest assets decreased by 0.9% for the three months concluded March 31, 2020, as compared to the above-mentioned year period. The abatement was due primarily to a abatement in the abounding boilerplate crop on our interest-bearing portfolio, partially account by an admission in the abounding boilerplate arch antithesis of our interest-bearing portfolio. The abounding boilerplate crop on our interest-bearing investments is based on the accepted declared absorption bulk on interest-bearing investments, which decreased to 10.9% for the three months concluded March 31, 2020, compared to 12.0% for the three months concluded March 31, 2019, across-the-board of any allowances on absorption receivables fabricated during those periods. The abatement was apprenticed mainly by a abatement in LIBOR over the two corresponding periods. The abounding boilerplate arch antithesis of our interest-bearing advance portfolio for the three months concluded March 31, 2020, was $404.3 million, compared to $375.6 actor for the three months concluded March 31, 2019, an admission of $28.7 million, or 7.6%.
As of March 31, 2020, loans to one portfolio company, B T Group Acquisition Inc. (“B T”), were on non-accrual status, with an accumulated debt bulk base of about $7.2 million, or 1.7% of the bulk base of all debt investments in our portfolio. As of March 31, 2019, loans to two portfolio companies, Meridian and New Trident, were on non-accrual cachet with an accumulated debt bulk base of about $8.5 million, or 2.4% of the bulk base of all debt investments in our portfolio.
Other assets decreased by 65.5% during the three months concluded March 31, 2020, as compared to the above-mentioned year aeon primarily due to decreases in allotment income, success fees received, and accommodation fees accustomed aeon over period.
As of March 31, 2020 and September 30, 2019, no distinct advance represented greater than 10% of the absolute advance portfolio at fair value.
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Expenses, net of any non-contractual, actual and certain credits to fees from the Adviser, decreased $1.6 million, or 24.0%, for the three months concluded March 31, 2020 as compared to the above-mentioned year period. This abatement was primarily due to a $1.3 actor admission in credits to fees from the Adviser and a $0.8 actor abatement in adopted allotment amount due to the accretion of . . .
May 04, 2020
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