ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
All statements contained herein, other than historical facts, may constitute forward-looking statements.
These statements may relate to, among other things, our future operating results, our business prospects and the prospects of our portfolio companies, actual and potential conflicts of interest with Gladstone Management Corporation (the
Adviser), our adviser, and its affiliates, the use of borrowed money to finance our investments, the adequacy of our financing sources and working capital, and our ability to
co-invest,
among other
factors. In some cases, you can identify forward-looking statements by terminology 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 negative or variations of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results,
levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include: (1) changes in
the economy and the capital markets, including stock price volatility; (2) risks associated with negotiation and consummation of pending and future transactions; (3) the loss of one or more of our executive officers, in particular David
Gladstone, Terry Lee Brubaker or Robert L. Marcotte; (4) changes in our investment objectives and strategy; (5) availability, terms (including the possibility of interest rate volatility) and deployment of capital; (6) changes in our
industry, interest rates, exchange rates or the general economy; (7) our business prospects and the prospects of our portfolio companies; (8) the degree and nature of our competition; (9) changes in governmental regulation, tax rates
and similar matters; (10) our ability to exit investments in a timely manner; (11) our ability to maintain our qualification as a regulated investment company (RIC) under Subchapter M of the Internal Revenue Code of 1986, as
amended (the Code) and as business development company (BDC) under the Investment Company Act of 1940, as amended (the 1940 Act); and (12) those factors described herein, including Item 1A. Risk
Factors, and in the Risk Factors sections of our Annual Report on Form
10-K
(our Annual Report) filed with the U.S. Securities and Exchange Commission (SEC) on
November 14, 2018. We caution readers not to place undue reliance on any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements and future results could differ materially
from historical performance. We have based forward-looking statements on information available to us on the date of this report. Except as required by the federal securities laws, we undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form
10-Q.
Although we undertake no obligation to revise or update any
forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file
with the SEC from time to time, including annual reports on Form
10-K,
quarterly reports on Form
10-Q
and current reports on Form
8-K.
The following analysis of our financial condition and results of operations should be read in
conjunction with our accompanying
Consolidated Financial Statements
and the notes thereto contained elsewhere in this Quarterly Report on Form
10-Q
and in our Annual Report. Historical
financial condition and results of operations and percentage relationships among any amounts in the financial statements are not necessarily indicative of financial condition or results of operations for any future periods. Except per share amounts,
dollar amounts in the tables included herein are in thousands unless otherwise indicated.
OVERVIEW
General
We were incorporated under the Maryland
General Corporation Law on May 30, 2001. We operate as an externally managed,
closed-end,
non-diversified
management investment company, and have elected to be
treated as a BDC under the 1940 Act. In addition, for federal income tax purposes we have elected to be treated as a RIC under the Code. To continue to qualify as a RIC for federal income tax purposes and obtain favorable RIC tax treatment, we must
meet certain requirements, including certain minimum distribution requirements.
We were established for the purpose of investing in debt and equity
securities of established private businesses operating in the U.S. Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established lower middle market businesses that we believe will provide
stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation
in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our investment objectives, our investment strategy is
to invest in several categories of debt and equity securities, with each investment generally ranging from $8 million to $30 million, although investment size may vary, depending upon our total assets or available capital at the time of
investment. We expect that our investment portfolio over time will consist of approximately 90.0% debt investments and 10.0% equity investments, at cost. As of December 31, 2018, our investment portfolio was made up of approximately 89.6% debt
investments and 10.4% equity investments, at cost.
We focus on investing in lower middle market companies (which we generally define as companies with
annual earnings before interest, taxes, depreciation and amortization of $3 million to $15 million) in the U.S. that meet certain criteria, including the following: the sustainability of the business free cash flow and its ability to grow
it over time, adequate assets for loan collateral, experienced
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