(1) All investments valued using unobservable inputs (Level 3), unless otherwise noted.
(3) All debt investments are income producing, unless otherwise noted. Equity and warrant investments are non-income producing, unless otherwise noted.
(5) The Company generally acquires its investments in private transactions exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"). These investments are generally subject to certain limitations on resale, and may be deemed to be "restricted securities" under the Securities Act.
(8) 1.0% interest rate payable in cash. 9.0% interest rate payable in cash or paid-in-kind at borrower's election. The borrower is currently paying all interest in cash.
(9) 9.0% interest rate payable in cash. 2.0% interest rate payable in cash or paid-in-kind at borrower's election. The borrower is currently paying all interest in cash.
(10) Indicates assets that the Company believes do not represent “qualifying assets” under Section 55(a) of the Investment Company Act of 1940, as amended. Qualifying assets must represent at least 70% of the Company's total assets at the time of acquisition of any additional non-qualifying assets. As of December 31, 2020, 1.1% of the Company's total assets were non-qualifying assets.
(11) The cash rate equals the approximate current yield on our last-out portion of the unitranche facility.
(14) The investment has been exited or sold. The residual value reflects estimated earnout, escrow, or other proceeds expected post-closing.
(17) Investment is valued using observable inputs (Level 1). The stock of the company is traded on the NASDAQ Capital Market under the ticker "USWS."
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(Unaudited)
Note 1. Organization
Logan Ridge Finance Corporation
(the “Company”, “we”, “us”, and “our”) is an externally managed non-diversified closed-end
management investment company incorporated in Maryland that has elected to be regulated as a business development company (“BDC”)
under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company commenced operations on May 24, 2013 and
completed its initial public offering (“IPO”) on September 30, 2013. The Company is managed by Mount Logan Management LLC
(the “Investment Advisor”), an investment adviser that is registered as an investment adviser under the Investment Advisers
Act of 1940, as amended, and BC Partners Management LLC (the “Administrator”) provides the administrative services necessary
for the Company to operate. For United States (“U.S.”) federal income tax purposes, the Company has elected to be treated,
and intends to comply with the requirements to continue to qualify annually, as a regulated investment company (“RIC”) under
subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).
The Company’s investment
objective is to generate both current income and capital appreciation through debt and equity investments. The Company offers customized
financing to business owners, management teams, and financial sponsors for change of ownership transactions, recapitalizations, strategic
acquisitions, business expansion, and other growth initiatives. The Company invests in first lien loans, and, to a lesser extent, second
lien loans and equity securities issued by lower middle-market and traditional middle-market companies.
The Company was formed
for the purpose of: (i) acquiring, through a series of transactions, an investment portfolio from the following entities:
CapitalSouth Partners Fund I Limited Partnership (“Fund I”); CapitalSouth Partners Fund II Limited Partnership
(“Fund II”); CapitalSouth Partners Fund III, L.P. (“Fund III Parent”); CapitalSouth Fund III, L.P. (f/k/a
CapitalSouth Partners SBIC Fund III, L.P.) (“Fund III”); and CapitalSouth Partners Florida Sidecar Fund I, L.P.
(“Florida Sidecar” and, collectively with Fund I, Fund II, Fund III, and Fund III Parent, the “Legacy
Funds”); (ii) raising capital in the IPO and (iii) continuing and expanding the business of the Legacy Funds by making
additional debt and equity investments in lower middle-market and traditional middle-market companies.
On September 24, 2013, the
Company acquired 100% of the limited partnership interests in Fund II, Fund III, and Florida Sidecar and each of their respective general
partners, as well as certain assets from Fund I and Fund III Parent, in exchange for an aggregate of 8,974,420 shares of the Company’s
common stock (the “Formation Transactions”). Fund II, Fund III, and Florida Sidecar became the Company’s wholly owned
subsidiaries. Fund II and Fund III retained their small business investment company ("SBIC") licenses, continued to hold their
existing investments at the time of the IPO and have continued to make new investments. The IPO consisted of the sale of 4,000,000 shares
of the Company’s common stock at a price of $20.00 per share, resulting in net proceeds to the Company of $74.25 million, after
deducting underwriting fees and commissions totaling $4.0 million and offering expenses totaling $1.75 million. The other costs of the
IPO were borne by the limited partners of the Legacy Funds. During the fourth quarter of 2017, Florida Sidecar transferred all of its
assets to the Company and was legally dissolved as a standalone partnership. On March 1, 2019, Fund II repaid its outstanding debentures
guaranteed by the SBA (the “SBA-guaranteed debentures”) and relinquished its SBIC license. On June 10, 2021, Fund III repaid
its SBA-guaranteed debentures and relinquished its SBIC license.
The Company has formed,
and expects to continue to form, certain consolidated taxable subsidiaries (the “Taxable Subsidiaries”), which are taxed as
corporations for U.S. federal income tax purposes. The Taxable Subsidiaries allow the Company to make equity investments in companies
organized as pass-through entities while continuing to satisfy the requirements of a RIC under the Code.
Capitala Business Lending,
LLC (“CBL”), a wholly-owned subsidiary of the Company, was established on October 30, 2020, for the sole purpose of holding
certain investments pledged as collateral under a senior secured revolving credit agreement with KeyBank National Association (the “KeyBank
Credit Facility”). See Note 8 for more details about the KeyBank Credit Facility. The financial statements of CBL are consolidated
with those of Logan Ridge Finance Corporation.
Reverse Stock Split
On July 30, 2020, the Company’s
board of directors (the “Board”) approved a one-for-six reverse stock split of the Company’s shares of common stock.
Accordingly, on August 3, 2020, the Company filed Articles of Amendment (the “Articles of Amendment”) to its Articles of Amendment
and Restatement with the State Department of Assessments and Taxation of the State of Maryland to effectuate a one-for-six reverse stock
split (the “Reverse Stock Split”) of the Company’s shares of common stock, par value $0.01 per share (the “Shares”).
The Reverse Stock Split became effective at 5:00 p.m. Eastern Time on August 21, 2020 (the “Effective Time”). At the Effective
Time, every six (6) issued and outstanding Shares were converted into one (1) Share. The Articles of Amendment also provided that there
was no change in the par value of $0.01 per Share as a result of the Reverse Stock Split.
No fractional shares of common
stock were issued in connection with the Reverse Stock Split and fractional shares of common stock were eliminated by paying cash for
the fair value of a fractional portion of Shares. The Reverse Stock Split applied to all of the Company’s outstanding Shares and
therefore did not affect any shareholder’s relative ownership percentage.
Definitive Agreement
On April 20, 2021,
Capitala Investment Advisors, LLC (“Capitala”), the Company’s former investment adviser, entered into a definitive
agreement (the “Definitive Agreement”) with Mount Logan Management, LLC (“Mount Logan”) and Mount Logan
Capital Inc. (“MLC”), both affiliates of BC Partners Advisors L.P. (“BC Partners”) for U.S. regulatory
purposes, whereby Mount Logan acquired certain assets related to Capitala’s business of providing investment management
services to the Company (the “Transaction”), through which Mount Logan became the Company’s investment adviser
pursuant to an investment advisory agreement (the “New Investment Advisory Agreement”) with the Company. At a special
meeting of the Company’s stockholders (the “Special Meeting”) held on May 27, 2021, the Company’s
stockholders approved the New Advisory Agreement. The transactions contemplated by the Definitive Agreement closed on July 1, 2021
(the “Closing”).
As part of the Transaction,
Mount Logan entered into a two-year contractual fee waiver (the “Fee Waiver”) with the Company to waive, to the extent necessary,
any capital gains fee under the Advisory Agreement that exceeds what would have been paid to Capitala in the aggregate over such two-year
period under the prior advisory agreement.
On the date of the Closing,
the Company changed its name from Capitala Finance Corp. to Logan Ridge Finance Corporation and on July 2, 2021, the Company’s common
stock began trading on the NASDAQ Global Select Market under the symbol “LRFC.”
On July 1, 2021, in connection
with the Closing, the Company’s interested directors, Joseph B. Alala and M. Hunt Broyhill, and the Company’s Independent
Directors, Larry W. Carroll, R. Charles Moyer, and H. Paul Chapman, resigned as members of the Board and Ted Goldthorpe, the Chairman
and Chief Executive Officer of the Company, along with Alexander Duka, George Grunebaum, and Robert Warshauer, were appointed as members
of the Board (the “Logan Ridge Directors”). The Logan Ridge Directors were appointed by the Board to fill the vacancies created
by the resignations described above and the Logan Ridge Directors were appointed to the class of directors as determined by the Board
in accordance with the Company’s organizational documents. The Company’s stockholders will have the opportunity to vote for
each of the Logan Ridge Directors when his class of directors is up for reelection.
All of the Company’s
officers resigned at the Closing and the Board appointed Ted Goldthorpe as the Company’s Chief Executive Officer and President,
Jason Roos as the Company’s Chief Financial Officer, Treasurer and Secretary, Patrick Schafer as the Company’s Chief Investment
Officer and David Held as the Company’s Chief Compliance Officer.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The Company is considered
an investment company as defined in Accounting Standards Codification (“ASC”) Topic 946 — Financial Services —
Investment Companies (“ASC 946”). The accompanying unaudited consolidated financial statements have been prepared
on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim
financial information and pursuant to the requirements for reporting on Form 10-Q and Article 6 and Article 10 of Regulation S-X. Accordingly,
certain disclosures accompanying our annual consolidated financial statements prepared in accordance with U.S. GAAP have been omitted.
The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries, including
Fund II, Fund III, CBL, and the Taxable Subsidiaries.
The Company’s financial
statements as of June 30, 2021 and December 31, 2020 and for the periods ended June 30, 2021 and 2020 are presented on a consolidated
basis. The effects of all intercompany transactions between the Company and its subsidiaries (Fund II, Fund III, CBL, and the Taxable
Subsidiaries) have been eliminated in consolidation. All financial data and information included in these consolidated financial statements
have been presented on the basis described above. In the opinion of management, the consolidated financial statements reflect all adjustments
that are necessary for the fair presentation of financial results as of and for the periods presented.
The current period’s
results of operations are not necessarily indicative of results that ultimately may be achieved for the year. Additionally, the unaudited
consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes
thereto appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the U.S. Securities
and Exchange Commission (“SEC”) on March 8, 2021.
Use of Estimates in the Preparation of Financial Statements
The preparation of the consolidated
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates under different assumptions
and conditions. The most significant estimates in the preparation of the consolidated financial statements are investment valuation, revenue
recognition, and income taxes.
Consolidation
As provided under ASC 946,
the Company will generally not consolidate its investment in a company other than a substantially wholly owned investment company subsidiary
or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated
the results of the Company’s wholly owned investment company subsidiaries (Fund II, Fund III, CBL, and the Taxable Subsidiaries)
in its consolidated financial statements. The Company did not consolidate its interest in Capitala Senior Loan Fund II, LLC (“CSLF
II”) during the periods it was in existence because the investment was not considered a substantially wholly owned investment company
subsidiary. Further, CSLF II was a joint venture for which shared power existed relating to the decisions that most significantly impacted
the economic performance of the entity. See Note 4 to the consolidated financial statements for a description of the Company’s investment
in CSLF II.
Segments
In accordance with ASC Topic
280 — Segment Reporting (“ASC 280”), the Company has determined that it has a single reporting segment and operating
unit structure. While the Company invests in several industries and geographic locations, all investments share similar business and economic
risks. As such, all investment activities have been aggregated into a single segment.
Cash and Cash Equivalents
The Company considers cash
equivalents to be highly liquid investments with original maturities of three months or less at the date of purchase. The Company deposits
its cash in financial institutions, and, at times, such balances may be in excess of the Federal Deposit Insurance Corporation insurance
limits.
Investment Classification
In accordance with the provisions
of the 1940 Act, the Company classifies its investments by level of control. As defined in the 1940 Act, “Control Investments”
are investments in those companies that the Company is deemed to “Control.” “Affiliate Investments” are investments
in those companies that are “Affiliated Companies” of the Company, as defined in the 1940 Act, other than Control Investments.
“Non-Control/Non-Affiliate Investments” are those investments that are neither Control Investments nor Affiliate Investments.
Generally, under the 1940 Act, the Company is deemed to control a company in which it has invested if the Company owns more than 25% of
the voting securities of such company and/or has greater than 50% representation on its board or has the power to exercise control over
management or policies of such portfolio company. The Company is deemed to be an affiliate of a company in which the Company has invested
if it owns 5% or more of the voting securities of such company.
Valuation of Investments
The Company applies fair value
accounting to all of its financial instruments in accordance with the 1940 Act and ASC Topic 820 — Fair Value Measurements and
Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework used to measure fair value, and requires
disclosures for fair value measurements. In accordance with ASC 820, the Company has categorized its financial instruments carried at
fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy, as discussed in Note 4.
In determining fair
value, the Board uses various valuation approaches, and engages a third-party valuation firm, which provides an independent
valuation of certain investments it reviews. In accordance with U.S. GAAP, a fair value hierarchy for inputs is used in measuring
fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most
observable inputs be used when available.
Observable inputs are those
that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Board.
Unobservable inputs reflect the Board’s assumptions about the inputs market participants would use in pricing the asset or liability
developed based upon the best information available in the circumstances.
The availability of valuation
techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including the type of
security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of
fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due
to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those
estimated values may be materially higher or lower than the values that would have been used had a market for the securities existed.
Accordingly, the degree of judgment exercised by the Board in determining fair value is greatest for securities categorized in Level 3.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for
disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined
based on the lowest level input that is significant to the fair value measurement.
Fair value is a market-based
measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions
are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing
the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including
periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities.
This condition could cause a security to be reclassified to a lower level within the fair value hierarchy.
In estimating the fair value
of portfolio investments, the Company starts with the cost basis of the investment, which includes original issue discount and payment-in-kind
(“PIK”) income, if any. The transaction price is typically the best estimate of fair value at inception. When evidence supports
a subsequent change to the carrying value from the original transaction price, adjustments are made to reflect the expected fair values.
As a practical expedient,
the Company used net asset value (“NAV”) as the fair value for its equity investment in CSLF II. CSLF II recorded its underlying
investments at fair value on a quarterly basis in accordance with the 1940 Act and ASC 820.
The valuation methodologies
summarized below are utilized by the Company in estimating fair value.
Enterprise Value Waterfall Approach
The enterprise value waterfall
approach determines an enterprise value based on earnings before interest, tax, depreciation, and amortization (“EBITDA”)
multiples of publicly traded companies that are considered similar to the subject portfolio company. The Company considers a variety of
items in determining a reasonable pricing multiple, including, but not limited to, operating results, budgeted projections, growth, size,
risk, profitability, leverage, management depth, diversification, market position, supplier or customer dependence, asset utilization,
liquidity metrics, and access to capital markets. EBITDA of the portfolio company is adjusted for non-recurring items in order to reflect
a normalized level of earnings that is representative of future earnings. In certain instances, the Company may also utilize revenue multiples
to determine enterprise value. When available, the Company may assign a pricing multiple or value its investments based on the value of
recent investment transactions in the subject portfolio company or offers to purchase the portfolio company. The enterprise value is adjusted
for financial instruments with seniority to the Company’s ownership and for the effect of any instrument which may dilute the Company’s
investment in the portfolio company. The adjusted enterprise value is then apportioned based on the seniority and privileges of the Company’s
investments within the portfolio company.
Income Approach
The income approach utilizes
a discounted cash flow methodology in which the Company estimates fair value based on the present value of expected cash flows discounted
at a market rate of interest. The determination of a discount rate, or required rate of return, takes into account the portfolio company’s
fundamentals and perceived credit risk. Because the majority of the Company’s portfolio companies do not have a public credit rating,
determining a discount rate often involves assigning an implied credit rating based on the portfolio company’s operating metrics
compared to average metrics of similar publicly rated debt. Operating metrics include, but are not limited to, EBITDA, interest coverage,
leverage ratios, return on capital, and debt to equity ratios. The implied credit rating is used to assign a base discount rate range
based on publicly available yields on similarly rated debt securities. The Company may apply a premium to the discount rate utilized in
determining fair value when performance metrics and other qualitative information indicate that there is an additional level of uncertainty
about collectability of cash flows.
Asset Approach
The asset approach values
an investment based on the value of the underlying collateral securing the investment.
Revenue Recognition
The Company’s revenue
recognition policies are as follows:
Interest income and paid-in-kind
interest income: Interest income is recorded on the accrual basis to the extent that such amounts are expected to be collected. The
Company has loans in the portfolio that contain a PIK interest provision. PIK interest, which represents contractually deferred interest
added to the loan balance that is generally due at maturity, is recorded on an accrual basis to the extent that such amounts are expected
to be collected. PIK interest is not accrued if the Company does not expect the issuer to be able to pay all principal and interest when
due.
Non-accrual investments:
Management reviews all loans that become 90 days or more past due, or when there is reasonable doubt that principal or interest will
be collected, for possible placement on non-accrual status. When the Company otherwise does not expect the borrower to be able to service
its debt and other obligations, the Company will place the loan on non-accrual status and will generally cease recognizing interest income
and PIK interest on that loan for financial reporting purposes. Interest payments received on non-accrual loans may be recognized as income
or applied to principal depending upon management’s judgment. The Company writes off any previously accrued and uncollected interest
when it is determined that interest is no longer considered collectible. Non-accrual loans are returned to accrual status when the borrower’s
financial condition improves such that management believes current interest and principal payments are expected to be collected.
Gains and losses on investment
sales: Realized gains and losses on investments are recognized using the specific identification method.
Dividend income and paid-in-kind
dividends: Dividend income is recognized on the date dividends are declared. The Company holds preferred equity investments in the
portfolio that contain a PIK dividend provision. PIK dividends, which represent contractually deferred dividends added to the equity balance,
are recorded on the accrual basis to the extent that such amounts are expected to be collected. The Company will typically cease accrual
of PIK dividends when the fair value of the equity investment is less than the cost basis of the investment or when it is otherwise determined
by management that PIK dividends are unlikely to be collected. If management determines that a decline in fair value is temporary in nature
and PIK dividends are more likely than not to be collected, management may elect to continue accruing PIK dividends.
Original issue discount:
Discounts received to par on loans purchased are capitalized and accreted into income over the life of the loan. Any remaining discount
is accreted into income upon prepayment of the loan.
Other income: Origination
fees (to the extent services are performed to earn such income), amendment fees, consent fees, and other fees associated with
investments in portfolio companies are recognized as income when the investment transaction closes. Prepayment penalties received by
the Company for debt instruments repaid prior to maturity date are recorded as income upon receipt.
Loan Sales
The Company follows the guidance
in ASC Topic 860 — Transfers and Servicing (“ASC 860”) when accounting for loan participations and partial loan
sales as it relates to concluding on sales accounting treatment for such transactions. Based on the Company’s analysis of all loan
participations and partial sales completed, the Company believes that all such transactions meet the criterion required by ASC 860 to
qualify for sales accounting treatment.
Guarantees
The Company follows the guidance
of ASC Topic 460 — Guarantees (“ASC 460”). ASC 460 elaborates on the disclosure requirements of a guarantor
in its interim and annual consolidated financial statements about its obligations under certain guarantees that it has issued. It also
requires a guarantor to recognize, at the inception of a guarantee, for those guarantees that are covered by ASC 460, the fair value of
the obligation undertaken in issuing certain guarantees.
General and Administrative Expenses
General and administrative
expenses are accrued as incurred. The Company’s administrative expenses include personnel and overhead expenses allocable to the
Company paid by and reimbursed to the Administrator under an administration agreement between the Company and the Administrator (the “Administration
Agreement”). Other operating expenses such as legal and audit fees, director fees, and director and officer insurance are generally
paid directly by the Company.
Deferred Financing Fees
Costs incurred to issue the
Company’s debt obligations are capitalized and are amortized over the term of the debt agreements under the effective interest method. Deferred
financing fees are presented as a direct deduction from the carrying amount of the corresponding debt liability in the Statement of Assets
and Liabilities.
Earnings per share
The Company’s earnings
per share (“EPS”) amounts have been computed based on the weighted-average number of shares of the Company’s common
stock outstanding for the period. Basic EPS is computed by dividing net increase (decrease) in net assets resulting from operations by
the weighted average number of shares of the Company’s common stock outstanding during the period of computation. Diluted EPS is
computed by dividing net increase (decrease) in net assets resulting from operations, adjusted for the change in net assets resulting
from the exercise of the dilutive shares, by the weighted average number of shares of the Company’s common stock assuming all potentially
dilutive shares had been issued. Diluted EPS reflects the potential dilution, using the as-if-converted method for convertible debt, which
could occur if all potentially dilutive securities were exercised.
Retroactive Adjustments for Reverse Stock Split
The share amount and per share
amount of the Company’s common stock in the consolidated financial statements and notes have been retroactively adjusted for the
Reverse Stock Split effected on August 21, 2020 for the three and six months ended June 30, 2020. See Note 1 for more information regarding
the Reverse Stock Split.
Commitments and Contingencies
As of June 30, 2021 and
December 31, 2020, the Company had outstanding unfunded commitments related to debt investments in existing portfolio companies of
$4.3 million (Rapid Fire Protection, Inc.), $3.5 million (J5 Infrastructure Partners, LLC), $1.0 million (Freedom Electronics, LLC),
and $1.0 million (U.S. BioTek Laboratories, LLC).
In the ordinary course of
business, the Company may enter into contracts or agreements that contain indemnifications or warranties. Future events could occur that
could lead to the execution of these provisions against the Company. Based on its history and experience, management believes that the
likelihood of such an event is remote.
In the ordinary course of
business, the Company may directly or indirectly be a defendant or plaintiff in legal actions with respect to bankruptcy, insolvency,
or other types of proceedings. Such lawsuits may involve claims that could adversely affect the value of certain financial instruments
owned by the Company or result in direct losses to the Company. The nature of litigation can make it difficult to predict the impact a
particular lawsuit will have on the Company. There are many reasons that the Company cannot make these assessments, including, among others,
one or more of the following: the proceeding is in its early stages; the damages sought are unspecified, unsupportable, unexplained or
uncertain; discovery has not started or is not complete; there are significant facts in dispute; and there are other parties who may share
in any ultimate liability.
In management’s opinion,
no direct losses with respect to litigation contingencies were probable as of June 30, 2021 and December 31, 2020. Management is of the
opinion that the ultimate resolution of such claims, if any, will not materially affect the Company’s business, financial position,
results of operations, or liquidity. Furthermore, in management’s opinion, it is not possible to estimate a range of reasonably
possible losses with respect to litigation contingencies.
Income Taxes
The Company has elected to
be treated for U.S. federal income tax purposes and intends to comply with the requirements to qualify annually as a RIC under subchapter
M of the Code and, among other things, intends to make the requisite distributions to its stockholders which will relieve the Company
from U.S. federal income taxes.
In order to qualify as a RIC,
among other requirements, the Company is required to timely distribute to its stockholders at least 90.0% of its investment company taxable
income, as defined by the Code, for each fiscal tax year. The Company will be subject to a nondeductible U.S. federal excise tax of 4.0%
on undistributed income if it does not distribute at least 98.0% of its ordinary income in any calendar year and 98.2% of its capital
gain net income for each one-year period ending on October 31.
Depending on the level of
taxable income earned in an excise tax year, the Company may choose to carry forward taxable income in excess of current year dividend
distributions into the next excise tax year and pay a 4.0% excise tax on such income, as required. To the extent that the Company determines
that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions for U.S. federal
excise tax purposes, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. Since the
Company’s IPO, the Company has not accrued or paid excise tax.
The tax years ended December
31, 2020, 2019, 2018, and 2017 remain subject to examination by U.S. federal, state, and local tax authorities. No interest expense or
penalties have been assessed for the three and six months ended June 30, 2021 and 2020. If the Company was required to recognize interest
and penalties, if any, related to unrecognized tax benefits this would be recognized as income tax expense in the consolidated statements
of operations.
For U.S. federal income tax
purposes, as of June 30, 2021, the aggregate net unrealized depreciation for all securities was $12.9 million. As of June 30, 2021, gross
unrealized appreciation was $21.4 million and gross unrealized depreciation was $(34.3) million. The aggregate cost of securities for
U.S. federal income tax purposes was $241.0 million as of June 30, 2021. For U.S. federal income tax purposes, as of December 31, 2020,
the aggregate net unrealized depreciation for all securities was $(23.4) million. As of December 31, 2020, gross unrealized appreciation
was $14.3 million and gross unrealized depreciation was $(37.7) million. The aggregate cost of securities for U.S. federal income tax
purposes was $298.1 million as of December 31, 2020.
The Company’s
Taxable Subsidiaries record deferred tax assets or liabilities related to temporary book versus tax differences on the income or
loss generated by the underlying equity investments held by the Taxable Subsidiaries. As of June 30, 2021 and December 31, 2020, the
Company recorded a net deferred tax asset of zero. For the three and six months ended June 30, 2021 and 2020, the Company recorded a
tax provision of zero. As of June 30, 2021 and December 31, 2020, the valuation allowance on the Company’s deferred tax asset
was $3.2 million and $4.6 million, respectively. During the three and six months ended June 30, 2021, the Company recognized a
decrease in the valuation allowance of $(0.4) million and $(1.4) million, respectively. During the three and six months ended June
30, 2020, the Company recognized an (decrease) increase in the valuation allowance of $(27) thousand and $0.8 million,
respectively.
In accordance with certain
applicable U.S. Treasury regulations and guidance issued by the Internal Revenue Service, a RIC may treat a distribution of its own stock
as fulfilling its RIC distribution requirements if each stockholder may elect to receive its entire distribution in either cash or stock
of the RIC, subject to a limitation on the aggregate amount of cash to be distributed to all stockholders, which limitation must be at
least 20.0% of the aggregate declared distribution. If too many stockholders elect to receive cash, the cash available for distribution
must be allocated among the stockholders electing to receive cash (with the balance of the distribution paid in stock). In no event will
any stockholder, electing to receive cash, receive the lesser of (a) the portion of the distribution such stockholder has elected to receive
in cash or (b) an amount equal to his or her entire distribution times the percentage limitation on cash available for distribution. If
these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in stock will be equal
to the amount of cash that could have been received instead of stock.
ASC Topic 740 — Income
Taxes (“ASC 740”), provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed
in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing
the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable
tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense
in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense
in the consolidated statements of operations. As of June 30, 2021 and December 31, 2020, there were no uncertain tax positions.
The Company is required to
determine whether a tax position of the Company is more-likely-than-not to be sustained upon examination by the applicable taxing authority,
including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to
be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.
De-recognition of a tax benefit previously recognized could result in the Company recording a tax liability that could negatively impact
the Company’s net assets.
The Coronavirus Aid, Relief,
and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020 and made significant prospective and retroactive
changes to the U.S. federal income tax laws (and certain corresponding state and local conformity measures) including: 1) 5-year net operating
loss (“NOL”) carrybacks with no taxable income limitation, 2) relaxation of the limitations on interest expense deductions,
3) qualified improvement property eligible for bonus depreciation, 4) acceleration of alternative minimum tax credits and related quick
tax refunds, and 5) indirect tax measures, including workplace tax credits and deferral of social security payroll tax. Management has
considered the impact of the CARES Act on the Company, its Taxable Subsidiaries, and the underlying portfolio companies, and the Company
has reflected these potential impacts in the consolidated financial statements, related tax disclosures, and the value of the investments.
Distributions
Distributions to the Company’s
common stockholders are recorded on the record date. The amount to be paid out as a dividend is determined by the Board. Net capital gains,
if any, are generally distributed at least annually, although we may decide to retain such capital gains for reinvestment.
The Company has adopted
an “opt out” dividend reinvestment plan (“DRIP”) for the Company’s common stockholders. As a result,
if the Company declares a distribution, then stockholders’ cash distributions will be automatically reinvested in additional
shares of the Company’s common stock unless a stockholder specifically “opts out” of our DRIP. If a stockholder
opts out, that stockholder will receive cash distributions. Although distributions paid in the form of additional shares of our
common stock will generally be subject to U.S. federal, state, and local taxes in the same manner as cash distributions,
stockholders participating in the Company’s DRIP will not receive any corresponding cash distributions with which to pay any
such applicable taxes.
Company Investment Risk, Concentration of Credit Risk, Liquidity
Risk, and COVID-19 Risk
The Investment Advisor has
broad discretion in making investments for the Company. Investments will generally consist of debt and equity instruments that may be
affected by business, financial market, or legal uncertainties. Prices of investments may be volatile, and a variety of factors that are
inherently difficult to predict, such as domestic or international economic and political developments, may significantly affect the results
of the Company’s activities and the value of its investments. In addition, the value of the Company’s portfolio may fluctuate
as the general level of interest rates fluctuate.
The value of the Company’s
investments may be detrimentally affected to the extent, among other things, that a borrower defaults on its obligations, there is insufficient
collateral and/or there are extensive legal and other costs incurred in collecting on a defaulted loan. The value of the Company’s
investments may also be detrimentally affected to the extent observable primary or secondary market yields for similar instruments issued
by comparable companies increase materially or risk premiums in the market between smaller companies, such as our borrowers, and those
for which market yields are observable increase materially.
The Investment Advisor may
attempt to minimize this risk by maintaining low debt-to-liquidation values with each debt investment and the collateral underlying the
debt investment.
The Company’s assets
may, at any time, include securities and other financial instruments or obligations that are illiquid or thinly traded, making purchase
or sale of such securities and financial instruments at desired prices or in desired quantities difficult. Furthermore, the sale of any
such investments may be possible only at substantial discounts, and it may be extremely difficult to value any such investments accurately.
The Company’s operating
results and portfolio companies may be negatively impacted by the COVID-19 pandemic. While several countries, as well as certain states,
counties and cities in the United States, have currently or in the past relaxed public health restrictions with the view to partially
or fully reopening their economies, many cities subsequently experienced a surge in the reported number of cases, hospitalizations and
deaths related to the COVID-19 pandemic. These surges led to the re-introduction of such restrictions and business shutdowns in certain
states in the United States and globally and could continue to lead to the re-introduction of such restrictions elsewhere, particularly
in cities impacted by variants of the COVID-19 virus or with high number of unvaccinated individuals. Health advisors warn that recurring
COVID-19 outbreaks will continue if reopening is pursued too soon or in the wrong manner, which may lead to the re-introduction or continuation
of certain public health restrictions (such as instituting quarantines, prohibitions on travel and the closure of offices, businesses,
schools, retail stores and other public venues), particularly in cities impacted by variants of the COVID-19 virus or with high numbers
of unvaccinated individuals. Additionally, travelers from the United States are restricted from visiting many countries including countries
in Europe, Asia, Africa and South America. These continued travel restrictions may prolong the global economic downturn. In addition,
although the Federal Food and Drug Administration authorized vaccines beginning in December 2020 and a significant portion of the U.S.
population have been vaccinated, and it remains unclear how quickly the vaccines will continue to be distributed nationwide and globally,
or when “herd immunity” will be achieved and the restrictions that were imposed to slow the spread of the virus will be lifted
entirely. Any delay in distributing the vaccines could lead people to continue to self-isolate and not participate in the economy at pre-pandemic
levels for a prolonged period of time. Even after the COVID-19 pandemic subsides, the U.S. economy and most other major global economies
may continue to experience a recession, and we anticipate our business and operations could be materially adversely affected by a prolonged
recession in the United States and other major markets.
This pandemic is having,
and any future outbreaks of infectious diseases could have, an adverse impact on the markets and the economy in general, which could
have a material adverse impact on, among other things, the ability of lenders to originate loans, the volume and type of loans
originated, and the volume and type of amendments and waivers granted to borrowers and remedial actions taken in the event of a
borrower default, each of which could negatively impact the amount and quality of loans available for investment by the Company and
returns to the Company, among other things. As of the date of this Quarterly Report on Form 10-Q, it is impossible to determine the
scope of this pandemic, or any future outbreaks of infectious diseases, how long any such outbreak, market disruption or
uncertainties may last, the effect any governmental actions will have or the full potential impact on the Company and our portfolio
companies. Any potential impact to our results of operations will depend to a large extent on future developments and new
information that could emerge regarding the duration and severity of COVID-19 and the actions taken by authorities and other
entities to contain COVID-19 or treat its impact, all of which are beyond our control. These potential impacts, while uncertain,
could adversely affect our and our portfolio companies’ operating results.
Note 3. Recent Accounting Pronouncements
In March 2020, the Financial
Accounting Standards Board issued Accounting Standards Update 2020-04, Reference Rate Reform (Topic 848) – Facilitation of the Effects
of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The guidance provides optional expedients and exceptions
for applying GAAP to contracts, hedging relationships, and other transactions, subject to meeting certain criteria, that reference London
Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. ASU
2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. Management continues to assess the impact that the
adoption of this guidance will have on the Company’s financial position, results of operations and cash flows.
In August 2020, the FASB issued
ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The FASB issued the amendments to reduce
the number of accounting models used for convertible debt instruments and convertible preferred stock, simplify the derivative scope exception
for contracts in an entity’s own equity, and to improve guidance related to earnings per share disclosures. The standard is effective
for fiscal years ending after December 15, 2021. Early adoption is permitted, but no earlier than fiscal years beginning after December
15, 2020. Management is currently evaluating the impact of adoption of ASU 2020-06.
Note 4. Investments and Fair Value Measurements
The Company’s investment
objective is to generate both current income and capital appreciation through debt and equity investments. The Company offers customized
financing to business owners, management teams, and financial sponsors for change of ownership transactions, recapitalizations, strategic
acquisitions, business expansion, and other growth initiatives. The Company invests in first lien loans, and, to a lesser extent, second
lien loans and equity securities issued by lower middle-market and traditional middle-market companies. As of June 30, 2021, our portfolio
consisted of investments in 32 portfolio companies with a fair value of approximately $228.0 million.
Most of the Company’s
debt investments are structured as first lien loans. First lien loans may contain some minimum amount of principal amortization, excess
cash flow sweep feature, prepayment penalties, or any combination of the foregoing. First lien loans are secured by a first priority lien
in existing and future assets of the borrower and may take the form of term loans, delayed draw facilities, or revolving credit facilities.
Unitranche debt, a form of first lien loan, typically involves issuing one debt security that blends the risk and return profiles of both
senior secured and subordinated debt, bifurcating the loan into a first-out tranche and last-out tranche. As of June 30, 2021, 16.3% of
the fair value of our first lien loans consisted of last-out loans. As of December 31, 2020, 14.5% of the fair value of our first lien
loans consisted of last-out loans. In some cases, first lien loans may be subordinated, solely with respect to the payment of cash interest,
to an asset based revolving credit facility.
The Company also invests in
debt instruments structured as second lien loans. Second lien loans are loans which have a second priority security interest in all or
substantially all of the borrower’s assets, and in some cases, may be subject to the interruption of cash interest payments upon
certain events of default, at the discretion of the first lien lender.
During the three months ended
June 30, 2021, we made approximately $10.0 million of investments and had approximately $33.5 million in repayments and sales, resulting
in net repayments and sales of approximately $23.5 million for the period. During the three months ended June 30, 2020, the Company made
approximately $12.5 million of investments and had approximately $51.1 million in repayments and sales, resulting in net repayments and
sales of approximately $38.6 million for the period.
During the six months ended
June 30, 2021, we made approximately $10.0 million of investments and had approximately $63.4 million in repayments and sales, resulting
in net repayments and sales of approximately $53.4 million for the period. During the six months ended June 30, 2020, the Company made
approximately $20.8 million of investments and had approximately $58.9 million in repayments and sales, resulting in net repayments and
sales of approximately $38.1 million for the period.
As of June 30, 2021, the Company’s
Board approved the fair value of the Company’s investment portfolio of approximately $228.0 million in good faith in accordance
with the Company’s valuation procedures. The Company’s Board approved the fair value of the Company’s investment portfolio
as of June 30, 2021 with input from a third-party valuation firm and the Investment Advisor based on information known or knowable as
of the valuation date, including trailing and forward looking data. The COVID-19 pandemic is an unprecedented circumstance that materially
impacts the fair value of the Company’s investments. As a result, the fair value of the Company’s portfolio investments may
be further negatively impacted after June 30, 2021 by circumstances and events that are not yet known.
The COVID-19 pandemic may
also impact the Company’s portfolio companies’ ability to pay their respective contractual obligations, including principal
and interest due to the Company, and some portfolio companies may require interest or principal deferrals in order to fulfill short-term
liquidity needs in response to the COVID-19 pandemic. As deemed necessary, the Company is working with each of its portfolio companies
to help them access short-term liquidity through interest deferrals, funding on unused lines of credit, and other sources of liquidity.
The composition of our investments
as of June 30, 2021, at amortized cost and fair value was as follows (dollars in thousands):
|
|
Investments
at
Amortized Cost
|
|
|
Amortized Cost
Percentage of
Total Portfolio
|
|
|
Investments
at
Fair Value
|
|
|
Fair Value
Percentage of
Total Portfolio
|
|
First Lien Debt
|
|
$
|
128,977
|
|
|
|
59.3
|
%
|
|
$
|
115,535
|
|
|
|
50.7
|
%
|
Second Lien Debt
|
|
|
38,673
|
|
|
|
17.8
|
|
|
|
38,772
|
|
|
|
17.0
|
|
Equity and Warrants
|
|
|
49,918
|
|
|
|
22.9
|
|
|
|
73,741
|
|
|
|
32.3
|
|
Total
|
|
$
|
217,568
|
|
|
|
100.0
|
%
|
|
$
|
228,048
|
|
|
|
100.0
|
%
|
The composition of our investments
as of December 31, 2020, at amortized cost and fair value was as follows (dollars in thousands):
|
|
Investments
at
Amortized Cost
|
|
|
Amortized Cost
Percentage of
Total Portfolio
|
|
|
Investments
at
Fair Value
|
|
|
Fair Value
Percentage of
Total Portfolio
|
|
First Lien Debt
|
|
$
|
185,108
|
|
|
|
66.7
|
%
|
|
$
|
167,418
|
|
|
|
60.9
|
%
|
Second Lien Debt
|
|
|
39,026
|
|
|
|
14.0
|
|
|
|
39,209
|
|
|
|
14.3
|
|
Equity and Warrants
|
|
|
53,518
|
|
|
|
19.3
|
|
|
|
68,065
|
|
|
|
24.8
|
|
Total
|
|
$
|
277,652
|
|
|
|
100.0
|
%
|
|
$
|
274,692
|
|
|
|
100.0
|
%
|
As noted above, the Company
values all investments in accordance with ASC 820. ASC 820 requires enhanced disclosures about assets and liabilities that are measured
and reported at fair value. As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date.
ASC 820 establishes a hierarchal
disclosure framework which prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair
value. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific
to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted
prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
Based on the observability
of the inputs used in the valuation techniques, the Company is required to provide disclosures on fair value measurements according to
the fair value hierarchy. The fair value hierarchy ranks the observability of the inputs used to determine fair values. Investments carried
at fair value are classified and disclosed in one of the following three categories:
|
•
|
Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
|
|
•
|
Level 2 — Valuations based on inputs other than quoted prices in active markets, which are either directly or indirectly observable.
|
|
•
|
Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
|
The Company employs the valuation
policy approved by the Board that is consistent with ASC 820 (see Note 2). Consistent with the Company’s valuation policy, the Company
evaluates the source of inputs, including any markets in which its investments are trading, in determining fair value.
In estimating fair value of
portfolio investments, the Company starts with the cost basis of the investment, which includes amortized original issue discount and
PIK income, if any. The transaction price is typically the best estimate of fair value at inception. When evidence supports a subsequent
change to the carrying value from the original transaction price, adjustments are made to reflect the expected fair values.
The following table presents
the fair value measurements of investments, by major class, as of June 30, 2021, according to the fair value hierarchy (dollars in thousands):
|
|
Fair Value Measurements
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
First Lien Debt
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
115,535
|
|
|
$
|
115,535
|
|
Second Lien Debt
|
|
|
—
|
|
|
|
—
|
|
|
|
38,772
|
|
|
|
38,772
|
|
Equity and Warrants
|
|
|
1,214
|
|
|
|
—
|
|
|
|
72,527
|
|
|
|
73,741
|
|
Total
|
|
$
|
1,214
|
|
|
$
|
—
|
|
|
$
|
226,834
|
|
|
$
|
228,048
|
|
The following table presents
fair value measurements of investments, by major class, as of December 31, 2020, according to the fair value hierarchy (dollars in
thousands):
|
|
Fair Value Measurements
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
First Lien Debt
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
167,418
|
|
|
$
|
167,418
|
|
Second Lien Debt
|
|
|
—
|
|
|
|
—
|
|
|
|
39,209
|
|
|
|
39,209
|
|
Equity and Warrants
|
|
|
493
|
|
|
|
—
|
|
|
|
67,572
|
|
|
|
68,065
|
|
Total
|
|
$
|
493
|
|
|
$
|
—
|
|
|
$
|
274,199
|
|
|
$
|
274,692
|
|
The following table
provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the six months ended June
30, 2021 (dollars in thousands):
|
|
First Lien
Debt
|
|
|
Second Lien
Debt
|
|
|
Equity
and Warrants
|
|
|
Total
|
|
Balance as of December 31, 2020
|
|
$
|
167,418
|
|
|
$
|
39,209
|
|
|
$
|
67,572
|
|
|
$
|
274,199
|
|
Repayments/sales
|
|
|
(54,357
|
)
|
|
|
(450
|
)
|
|
|
(8,637
|
)
|
|
|
(63,444
|
)
|
Purchases
|
|
|
10,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,000
|
|
Payment-in-kind interest and dividends accrued
|
|
|
204
|
|
|
|
—
|
|
|
|
89
|
|
|
|
293
|
|
Accretion of original issue discount
|
|
|
45
|
|
|
|
98
|
|
|
|
—
|
|
|
|
143
|
|
Net realized loss (gain) on investments
|
|
|
(12,024
|
)
|
|
|
—
|
|
|
|
4,948
|
|
|
|
(7,076
|
)
|
Net unrealized appreciation (depreciation) on investments
|
|
|
4,249
|
|
|
|
(85
|
)
|
|
|
8,555
|
|
|
|
12,719
|
|
Balance as of June 30, 2021
|
|
$
|
115,535
|
|
|
$
|
38,772
|
|
|
$
|
72,527
|
|
|
$
|
226,834
|
|
The following table provides
a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the six months ended June 30, 2020
(dollars in thousands):
|
|
First Lien
Debt
|
|
|
Second Lien
Debt
|
|
|
Equity
and Warrants
|
|
|
Total
|
|
Balance as of December 31, 2019
|
|
$
|
231,203
|
|
|
$
|
53,857
|
|
|
$
|
61,568
|
|
|
$
|
346,628
|
|
Reclassifications
|
|
|
(7,141
|
)
|
|
|
—
|
|
|
|
7,141
|
|
|
|
—
|
|
Repayments/sales
|
|
|
(31,513
|
)
|
|
|
(12,000)
|
|
|
|
(2,259
|
)
|
|
|
(45,772
|
)
|
Purchases
|
|
|
19,230
|
|
|
|
—
|
|
|
|
1,590
|
|
|
|
20,820
|
|
Payment-in-kind interest and dividends accrued
|
|
|
837
|
|
|
|
159
|
|
|
|
86
|
|
|
|
1,082
|
|
Accretion of original issue discount
|
|
|
220
|
|
|
|
218
|
|
|
|
—
|
|
|
|
438
|
|
Realized gain (loss) on investments
|
|
|
(14,092
|
)
|
|
|
—
|
|
|
|
2,259
|
|
|
|
(11,833
|
)
|
Net unrealized depreciation on investments
|
|
|
(5,134
|
)
|
|
|
(3,949
|
)
|
|
|
(15,603
|
)
|
|
|
(24,686
|
)
|
Balance as of June 30, 2020
|
|
$
|
193,610
|
|
|
$
|
38,285
|
|
|
$
|
54,782
|
|
|
$
|
286,677
|
|
The net change in unrealized
appreciation (depreciation) on investments held was $5.2 million and $(29.5) million for the six months ended June 30, 2021 and 2020,
respectively, and is included in net unrealized appreciation (depreciation) on investments on the consolidated statements of operations.
The valuation techniques and
significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of June 30, 2021 were as follows:
|
|
Fair Value
(in millions)
|
|
|
Valuation
Approach
|
|
Unobservable Input
|
|
Range (Weighted Average) (2)
|
First lien debt
|
|
$
|
105.8
|
|
|
Income
|
|
Required Rate of Return
|
|
2.7% – 13.5% (10.1%)
|
|
|
|
|
|
|
|
|
|
|
|
First lien debt
|
|
$
|
9.8
|
|
|
Enterprise Value Waterfall and Asset(1)
|
|
EBITDA Multiple
|
|
5.8x – 5.8x (5.8x)
|
|
|
|
|
|
|
|
|
|
|
|
Second lien debt
|
|
$
|
38.7
|
|
|
Income
|
|
Required Rate of Return
|
|
5.8% – 12.1% (10.7%)
|
|
|
|
|
|
|
|
|
|
|
|
Equity and warrants
|
|
$
|
72.5
|
|
|
Enterprise Value Waterfall and Asset(1)
|
|
EBITDA Multiple
|
|
1.1x – 14.0x (8.0x)
|
|
|
|
|
|
|
|
|
Revenue Multiple
|
|
0.3x – 1.8x (0.9x)
|
(1)
|
$1.0 million in
first lien debt and $1.2 million in equity and warrants were valued using the asset
approach.
|
(2)
|
The weighted averages disclosed in the table above were weighted by their relative fair value.
|
The valuation techniques and
significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of December 31, 2020 were as follows:
|
|
Fair Value
(in millions)
|
|
|
Valuation
Approach
|
|
Unobservable Input
|
|
Range (Weighted Average) (2)
|
First lien debt
|
|
$
|
139.1
|
|
|
Income
|
|
Required Rate of Return
|
|
6.9% – 15.0% (10.5%)
|
|
|
|
|
|
|
|
|
|
|
|
First lien debt
|
|
$
|
28.3
|
|
|
Enterprise Value Waterfall and Asset (1)
|
|
EBITDA Multiple
|
|
4.0x – 4.0x (4.0x)
|
|
|
|
|
|
|
|
|
Revenue Multiple
|
|
0.2x – 4.8x (2.0x)
|
|
|
|
|
|
|
|
|
|
|
|
Second lien debt
|
|
$
|
39.2
|
|
|
Income and Asset(1)
|
|
Required Rate of Return
|
|
6.0% – 13.5% (12.0%)
|
|
|
|
|
|
|
|
|
|
|
|
Equity and warrants
|
|
$
|
67.6
|
|
|
Enterprise Value Waterfall and Asset(1)
|
|
EBITDA Multiple
|
|
6.0x – 21.0x (9.5x)
|
|
|
|
|
|
|
|
|
Revenue Multiple
|
|
0.2x – 1.3x (0.8x)
|
(1)
|
$4.8 million in first lien debt, $0.9 million in second lien debt, and $4.4 million in equity and warrants were valued using the asset approach.
|
(2)
|
The weighted averages disclosed in the table above were weighted by their relative fair value.
|
The significant unobservable
inputs used in the valuation of the Company’s investments are required rate of return, EBITDA multiples, and revenue multiples.
Changes in any of these unobservable inputs could have a significant impact on the Company’s estimate of fair value. An increase
(decrease) in the required rate of return will result in a lower (higher) estimate of fair value while an increase (decrease) in EBITDA
or revenue multiples will result in a higher (lower) estimate of fair value.
Capitala Senior Loan Fund II, LLC
On December 20, 2018, the
Company and Trinity Universal Insurance Company (“Trinity”), a subsidiary of Kemper Corporation, entered into a limited liability
company agreement (the “LLC Agreement”) to co-manage CSLF II. The purpose and design of the joint venture was to invest primarily
in senior secured first-out loans. The Company and Trinity committed to provide $25.0 million of equity to CSLF II, with the Company providing
$20.0 million and Trinity providing $5.0 million. The Company and Trinity each appointed two members to CSLF II’s four-person board
of directors and investment committee. All material decisions with respect to CSLF II, including those involving its investment portfolio,
required approval of a member on the board of directors and investment committee of at least one member representing the Company and Trinity,
respectively.
In May 2020, the Company and
Trinity elected to wind-down operations of CSLF II. On June 1, 2020, CSLF II sold its existing assets with the Company and Trinity, each
purchasing approximately 50% of CSLF II’s debt investments at their par value. On June 12, 2020, CSLF II declared final distributions
and returned all remaining capital of $13.1 million and $3.3 million to the Company and Trinity, respectively. The Company’s equity
investment in CSLF II was not redeemable. On June 12, 2020, the capital commitments for the Company and Trinity were terminated.
On September 3, 2019, CSLF
II entered into a senior secured revolving credit facility (the “CSLF II Credit Facility”) with KeyBank Specialty Finance
Lending, an affiliate of KeyCorp. The CSLF II Credit Facility provided for borrowings up to $60.0 million, subject to certain borrowing
base restrictions. Borrowings under the CSLF II Credit Facility bore interest at a rate of one-month LIBOR + 2.25%. Prior to the termination
of the CSLF II Credit Facility, CSLF II incurred unused fees of 0.35% when utilization of the CSLF II Credit Facility exceeded 50% and
0.65% when utilization of the CSLF II Credit Facility was less than 50%. On June 5, 2020, CSLF II terminated the CSLF II Credit Facility
and repaid all amounts outstanding. For the three and six months ended June 30, 2020, CSLF II incurred interest and financing expenses
of $1.0 million and $1.1 million, respectively.
On September 3, 2019,
the Company and Trinity committed to provide $25.0 million of subordinated debt (the “Subordinated Notes”) to CSLF II,
with the Company providing $5.0 million and Trinity providing $20.0 million. The Subordinated Notes were scheduled to mature on
September 3, 2024, however, the Subordinated Notes were terminated on June 12, 2020. For the three and six months ended June 30,
2020, CSLF II did not incur any interest and financing expenses related to the Subordinated Notes.
Below are the unaudited statements
of operations for CSLF II (dollars in thousands):
|
|
For the Three Months Ended
|
|
|
For the Six Months ended
|
|
|
|
June 30, 2020
|
|
|
June 30, 2020
|
|
INVESTMENT INCOME
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
229
|
|
|
$
|
650
|
|
Fee income
|
|
|
2
|
|
|
|
5
|
|
Total investment income
|
|
$
|
231
|
|
|
$
|
655
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
Interest and financing expenses
|
|
$
|
975
|
|
|
$
|
1,135
|
|
General and administrative expenses
|
|
|
93
|
|
|
|
164
|
|
Total expenses
|
|
$
|
1,068
|
|
|
$
|
1,299
|
|
NET INVESTMENT LOSS
|
|
$
|
(837
|
)
|
|
$
|
(644
|
)
|
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS
|
|
$
|
(837
|
)
|
|
$
|
(644
|
)
|
Note 5. Transactions With Affiliated Companies
During the six months ended June 30, 2021, the Company had investments
in portfolio companies designated as affiliates under the 1940 Act. Transactions with affiliates were as follows (dollars in thousands):
Company (4)
|
|
Type of Investment
|
|
Principal Amount
|
|
|
Amount of Interest, Fees
or Dividends Credited to
Income (1)
|
|
|
December 31, 2020 Fair
Value
|
|
|
Gross Additions (2)
|
|
|
Gross Reductions (3)
|
|
|
Realized Gain/(Loss)
|
|
|
Unrealized
Appreciation
(Depreciation)
|
|
|
June 30, 2021 Fair Value
|
|
Affiliate investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burgaflex Holdings, LLC
|
|
First Lien Debt (12.0% Cash, 3.0% PIK, Due 3/23/21)
|
|
$
|
-
|
|
|
$
|
152
|
|
|
$
|
13,597
|
|
|
$
|
-
|
|
|
$
|
(13,597
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burgaflex Holdings, LLC
|
|
Common Stock Class B (1,085,073 shares)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,338
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
106
|
|
|
|
1,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burgaflex Holdings, LLC
|
|
Common Stock Class A (1,253,198 shares)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
945
|
|
|
|
945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152
|
|
|
|
14,935
|
|
|
|
-
|
|
|
|
(13,597
|
)
|
|
|
-
|
|
|
|
1,051
|
|
|
|
2,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
City Gear, LLC
|
|
Membership Unit Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
2,011
|
|
|
|
-
|
|
|
|
(2,215
|
)
|
|
|
2,215
|
|
|
|
(2,011
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
2,011
|
|
|
|
-
|
|
|
|
(2,215
|
)
|
|
|
2,215
|
|
|
|
(2,011
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eastport Holdings, LLC
|
|
Second Lien Debt (13.5% Cash (3 month LIBOR + 13.0%, 0.5% Floor), Due 12/29/21)
|
|
|
16,500
|
|
|
|
1,205
|
|
|
|
16,500
|
|
|
|
86
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(86
|
)
|
|
|
16,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eastport Holdings, LLC
|
|
Membership Units (22.9% ownership)
|
|
|
-
|
|
|
|
-
|
|
|
|
20,294
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,965
|
|
|
|
23,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,205
|
|
|
|
36,794
|
|
|
|
86
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,879
|
|
|
|
39,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GA Communications, Inc.
|
|
Series A-1 Preferred Stock (1,998 shares)
|
|
|
-
|
|
|
|
-
|
|
|
|
4,066
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
84
|
|
|
|
4,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GA Communications, Inc.
|
|
Series B-1 Common Stock (200,000 shares)
|
|
|
-
|
|
|
|
-
|
|
|
|
146
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
214
|
|
|
|
360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
4,212
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
298
|
|
|
|
4,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LJS Partners, LLC
|
|
Preferred Units (202,336 units)
|
|
|
-
|
|
|
|
-
|
|
|
|
756
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27
|
|
|
|
783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LJS Partners, LLC
|
|
Common Membership Units (2,593,234 units)
|
|
|
-
|
|
|
|
-
|
|
|
|
3,951
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
993
|
|
|
|
4,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
4,707
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,020
|
|
|
|
5,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MMI Holdings, LLC
|
|
First Lien Debt (12.0% Cash, Due 9/30/21)
|
|
|
2,600
|
|
|
|
158
|
|
|
|
2,600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MMI Holdings, LLC
|
|
Second Lien Debt (6.0% Cash, Due 9/30/21)
|
|
|
400
|
|
|
|
12
|
|
|
|
400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MMI Holdings, LLC (5)
|
|
Preferred Units (1,000 units, 6.0% PIK Dividend)
|
|
|
-
|
|
|
|
55
|
|
|
|
1,815
|
|
|
|
55
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(20
|
)
|
|
|
1,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MMI Holdings, LLC
|
|
Common Membership Units (45 units)
|
|
|
-
|
|
|
|
-
|
|
|
|
204
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(124
|
)
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225
|
|
|
|
5,019
|
|
|
|
55
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(144
|
)
|
|
|
4,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Navis Holdings, Inc.
|
|
First Lien Debt (9.0% Cash, 2.0% PIK, Due 6/30/23)
|
|
|
10,640
|
|
|
|
601
|
|
|
|
10,882
|
|
|
|
109
|
|
|
|
(500
|
)
|
|
|
-
|
|
|
|
(114
|
)
|
|
|
10,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Navis Holdings, Inc.
|
|
Class A Preferred Stock (1,000 shares)
|
|
|
-
|
|
|
|
100
|
|
|
|
986
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Navis Holdings, Inc.
|
|
Common Stock (60,000 shares)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
463
|
|
|
|
463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
701
|
|
|
|
11,868
|
|
|
|
109
|
|
|
|
(500
|
)
|
|
|
-
|
|
|
|
363
|
|
|
|
11,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nth Degree Investment Group, LLC
|
|
Membership Units (6,088,000 Units)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RAM Payment, LLC
|
|
First Lien Debt (6.5% Cash (1 month LIBOR + 5.0%), 1.5% Floor), Due 1/4/24)
|
|
|
2,035
|
|
|
|
72
|
|
|
|
2,451
|
|
|
|
-
|
|
|
|
(418
|
)
|
|
|
-
|
|
|
|
2
|
|
|
|
2,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RAM Payment, LLC
|
|
First Lien Debt (9.8% Cash, Due 1/4/24)
|
|
|
5,516
|
|
|
|
295
|
|
|
|
6,646
|
|
|
|
-
|
|
|
|
(1,129
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
5,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RAM Payment, LLC (5)
|
|
Preferred Units (86,000 units, 8.0% PIK Dividend)
|
|
|
-
|
|
|
|
89
|
|
|
|
2,874
|
|
|
|
34
|
|
|
|
-
|
|
|
|
-
|
|
|
|
586
|
|
|
|
3,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
456
|
|
|
|
11,971
|
|
|
|
34
|
|
|
|
(1,547
|
)
|
|
|
-
|
|
|
|
587
|
|
|
|
11,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sierra Hamilton Holdings Corporation
|
|
Second Lien Debt (15.0%, Due 9/12/23)
|
|
|
3
|
|
|
|
108
|
|
|
|
441
|
|
|
|
12
|
|
|
|
(450
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sierra Hamilton Holdings Corporation
|
|
Common Stock (15,068,000 shares)
|
|
|
-
|
|
|
|
-
|
|
|
|
977
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(22
|
)
|
|
|
955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108
|
|
|
|
1,418
|
|
|
|
12
|
|
|
|
(450
|
)
|
|
|
-
|
|
|
|
(22
|
)
|
|
|
958
|
|
Company (4)
|
|
Type of Investment
|
|
Principal Amount
|
|
|
Amount of Interest, Fees
or Dividends Credited to
Income (1)
|
|
|
December 31, 2020 Fair
Value
|
|
|
Gross Additions (2)
|
|
|
Gross Reductions (3)
|
|
|
Realized Gain/(Loss)
|
|
|
Unrealized
Appreciation
(Depreciation)
|
|
|
June 30, 2021 Fair Value
|
|
V12 Holdings, Inc.
|
|
Second Lien Debt
|
|
|
-
|
|
|
|
-
|
|
|
|
490
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
490
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate investments
|
|
|
|
|
|
|
|
|
2,847
|
|
|
$
|
93,425
|
|
|
$
|
296
|
|
|
$
|
(18,309
|
)
|
|
$
|
2,215
|
|
|
$
|
4,032
|
|
|
$
|
81,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Control investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vology, Inc.
|
|
First Lien Debt (10.5% Cash (1 month LIBOR + 8.5%, 2.0% Floor), Due 12/31/21)
|
|
$
|
3,635
|
|
|
$
|
196
|
|
|
$
|
3,732
|
|
|
$
|
-
|
|
|
$
|
(97
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
3,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vology, Inc.
|
|
Class A Preferred Units (9,041,810 Units)
|
|
|
-
|
|
|
|
-
|
|
|
|
4,687
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,030
|
)
|
|
|
3,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vology, Inc.
|
|
Membership Units (5,363,982 Units)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
196
|
|
|
|
8,419
|
|
|
|
-
|
|
|
|
(97
|
)
|
|
|
-
|
|
|
|
(1,030
|
)
|
|
|
7,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Control investments
|
|
|
|
|
|
|
|
$
|
196
|
|
|
$
|
8,419
|
|
|
$
|
-
|
|
|
$
|
(97
|
)
|
|
$
|
-
|
|
|
$
|
(1,030
|
)
|
|
$
|
7,292
|
|
(1) Represents the total amount of interest, original issue discount, fees and dividends credited to income for the portion of the year an investment was included in Affiliate or Control categories, respectively.
(2) Gross additions include increases in the cost basis of investments resulting from new portfolio investments, follow-on investments, accrued PIK and accretion of original issue discount. Gross additions also include transfers into Affiliate or Control classification.
(3) Gross reductions include decreases in the cost basis of investments resulting from principal repayments and sales. Gross reductions also include transfers out of Affiliate or Control classification.
(4) All debt investments are income producing. Equity and
warrant investments are non-income producing, unless otherwise noted.
(5) The equity investment is income producing, based on rate disclosed.
During
the year ended December 31, 2020, the Company had investments in portfolio companies designated as affiliates under the 1940 Act.
Transactions with affiliates were as follows (dollars in thousands):
Company(4)
|
|
Type
of Investment
|
|
Principal
Amount
|
|
Amount
of
Interest, Fees
or Dividends
Credited to
Income (1)
|
|
|
December 31,
2019
Fair Value
|
|
|
Gross
Additions (2)
|
|
|
Gross
Reductions (3)
|
|
|
Realized
Gain/(Loss)
|
|
|
Unrealized
Appreciation
(Depreciation)
|
|
|
December 31,
2020
Fair Value
|
|
Affiliate
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burgaflex
Holdings, LLC
|
|
First
Lien Debt (12.0% Cash, 3.0% PIK, Due 3/23/21)
|
|
$
|
13,597
|
|
$
|
1,707
|
|
|
$
|
14,421
|
|
|
$
|
427
|
|
|
$
|
(1,250
|
)
|
|
$
|
-
|
|
|
$
|
(1
|
)
|
|
$
|
13,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burgaflex
Holdings, LLC
|
|
Common
Stock Class B (1,085,073 shares)
|
|
|
|
|
|
-
|
|
|
|
635
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
703
|
|
|
|
1,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burgaflex
Holdings, LLC
|
|
Common
Stock Class A (1,253,198 shares)
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,707
|
|
|
|
15,056
|
|
|
|
427
|
|
|
|
(1,250
|
)
|
|
|
-
|
|
|
|
702
|
|
|
|
14,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
City
Gear, LLC
|
|
Membership
Unit Warrants
|
|
|
|
|
|
-
|
|
|
|
3,326
|
|
|
|
-
|
|
|
|
(1,341
|
)
|
|
|
1,341
|
|
|
|
(1,315
|
)
|
|
|
2,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
3,326
|
|
|
|
-
|
|
|
|
(1,341
|
)
|
|
|
1,341
|
|
|
|
(1,315
|
)
|
|
|
2,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eastport
Holdings, LLC
|
|
Second
Lien Debt (13.5% Cash (3 month LIBOR + 13.0%, 0.5% Floor), Due 12/29/21)
|
|
|
16,500
|
|
|
2,498
|
|
|
|
16,500
|
|
|
|
173
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(173
|
)
|
|
|
16,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eastport
Holdings, LLC
|
|
Membership
Units (22.9% ownership)
|
|
|
|
|
|
-
|
|
|
|
17,822
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,472
|
|
|
|
20,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,498
|
|
|
|
34,322
|
|
|
|
173
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,299
|
|
|
|
36,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GA
Communications, Inc.
|
|
Series A-1
Preferred Stock (1,998 shares)
|
|
|
|
|
|
-
|
|
|
|
3,761
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
305
|
|
|
|
4,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GA
Communications, Inc.
|
|
Series B-1
Common Stock (200,000 shares)
|
|
|
|
|
|
-
|
|
|
|
501
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(355
|
)
|
|
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
4,262
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(50
|
)
|
|
|
4,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LJS
Partners, LLC
|
|
Preferred
Units (189,044 units)
|
|
|
|
|
|
-
|
|
|
|
372
|
|
|
|
145
|
|
|
|
-
|
|
|
|
-
|
|
|
|
239
|
|
|
|
756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LJS
Partners, LLC
|
|
Common
Membership Units (2,593,234 units)
|
|
|
|
|
|
-
|
|
|
|
1,509
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,442
|
|
|
|
3,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
1,881
|
|
|
|
145
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,681
|
|
|
|
4,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MMI
Holdings, LLC
|
|
First
Lien Debt (12.0% Cash, Due 9/30/21)
|
|
|
2,600
|
|
|
290
|
|
|
|
2,600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MMI
Holdings, LLC
|
|
Second
Lien Debt (6.0% Cash, Due 9/30/21)
|
|
|
400
|
|
|
21
|
|
|
|
400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MMI
Holdings, LLC (5)
|
|
Preferred
Units (1,000 units, 6.0% PIK Dividend)
|
|
|
|
|
|
-
|
|
|
|
1,710
|
|
|
|
104
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MMI
Holdings, LLC
|
|
Common
Membership Units (45 units)
|
|
|
|
|
|
-
|
|
|
|
194
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
311
|
|
|
|
4,904
|
|
|
|
104
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
5,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Navis
Holdings, Inc.
|
|
First
Lien Debt (9.0% Cash, 2.0% PIK, Due 6/30/23)
|
|
|
11,031
|
|
|
1,084
|
|
|
|
10,100
|
|
|
|
1,875
|
|
|
|
(944
|
)
|
|
|
-
|
|
|
|
(149
|
)
|
|
|
10,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Navis
Holdings, Inc.
|
|
Class A
Preferred Stock (1,000 shares)
|
|
|
|
|
|
25
|
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14
|
)
|
|
|
986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Navis
Holdings, Inc.
|
|
Common
Stock (60,000 shares)
|
|
|
|
|
|
-
|
|
|
|
464
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(464
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,109
|
|
|
|
11,564
|
|
|
|
1,875
|
|
|
|
(944
|
)
|
|
|
-
|
|
|
|
(627
|
)
|
|
|
11,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nth
Degree Investment Group, LLC
|
|
Membership
Units (6,088,000 Units)
|
|
|
|
|
|
-
|
|
|
|
6,088
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,088
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
6,088
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,088
|
)
|
|
|
-
|
|
Company(4)
|
|
Type
of Investment
|
|
Principal
Amount
|
|
Amount
of
Interest, Fees
or Dividends
Credited to
Income (1)
|
|
|
December 31,
2019
Fair Value
|
|
|
Gross
Additions (2)
|
|
|
Gross
Reductions (3)
|
|
|
Realized
Gain/(Loss)
|
|
|
Unrealized
Appreciation
(Depreciation)
|
|
|
December 31,
2020
Fair Value
|
|
RAM
Payment, LLC
|
|
First
Lien Debt (6.5% Cash (1 month LIBOR + 5.0%, 1.5% Floor), Due 1/4/24)
|
|
$
|
2,451
|
|
$
|
113
|
|
|
$
|
-
|
|
|
$
|
3,069
|
|
|
$
|
(618
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,451
|
|
RAM
Payment, LLC
|
|
First
Lien Debt (9.8% Cash, Due 1/4/24)
|
|
|
6,646
|
|
|
832
|
|
|
|
9,019
|
|
|
|
-
|
|
|
|
(2,372
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
6,646
|
|
RAM
Payment, LLC (5)
|
|
Preferred
Units (86,000 units, 8.0% PIK Dividend)
|
|
|
|
|
|
-
|
|
|
|
1,725
|
|
|
|
69
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,080
|
|
|
|
2,874
|
|
|
|
|
|
|
|
|
|
945
|
|
|
|
10,744
|
|
|
|
3,138
|
|
|
|
(2,990
|
)
|
|
|
-
|
|
|
|
1,079
|
|
|
|
11,971
|
|
Sierra
Hamilton Holdings Corporation
|
|
Second
Lien Debt (15.0% PIK, Due 9/12/23)
|
|
|
453
|
|
|
105
|
|
|
|
748
|
|
|
|
116
|
|
|
|
(423
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
441
|
|
Sierra
Hamilton Holdings Corporation
|
|
Common
Stock (15,068,000 shares)
|
|
|
|
|
|
-
|
|
|
|
5,160
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,183
|
)
|
|
|
977
|
|
|
|
|
|
|
|
|
|
105
|
|
|
|
5,908
|
|
|
|
116
|
|
|
|
(423
|
)
|
|
|
-
|
|
|
|
(4,183
|
)
|
|
|
1,418
|
|
V12
Holdings, Inc.
|
|
Second
Lien Debt
|
|
|
-
|
|
|
-
|
|
|
|
708
|
|
|
|
-
|
|
|
|
(276
|
)
|
|
|
110
|
|
|
|
(52
|
)
|
|
|
490
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
708
|
|
|
|
-
|
|
|
|
(276
|
)
|
|
|
110
|
|
|
|
(52
|
)
|
|
|
490
|
|
Total
Affiliate investments
|
|
|
|
|
$
|
6,675
|
|
|
$
|
98,763
|
|
|
$
|
5,978
|
|
|
$
|
(7,224
|
)
|
|
$
|
1,451
|
|
|
$
|
(5,543
|
)
|
|
$
|
93,425
|
|
Control
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitala
Senior Loan Fund II, LLC
|
|
Second
Lien Debt (7.0% Cash (1 month LIBOR + 6.0%), Due 9/3/24)
|
|
$
|
-
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Capitala
Senior Loan Fund II, LLC
|
|
Membership
Units (80.0% ownership)
|
|
|
|
|
|
-
|
|
|
|
13,631
|
|
|
|
-
|
|
|
|
(13,116
|
)
|
|
|
(484
|
)
|
|
|
(31
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
13,631
|
|
|
|
-
|
|
|
|
(13,116
|
)
|
|
|
(484
|
)
|
|
|
(31
|
)
|
|
|
-
|
|
Vology,
Inc.
|
|
First
Lien Debt (10.5% Cash (1 month LIBOR + 8.5%, 2.0% Floor), Due 12/31/21)
|
|
|
3,732
|
|
|
410
|
|
|
|
3,877
|
|
|
|
-
|
|
|
|
(145
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
3,732
|
|
Vology,
Inc.
|
|
Class A
Preferred Units (9,041,810 Units)
|
|
|
|
|
|
-
|
|
|
|
5,215
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(528
|
)
|
|
|
4,687
|
|
Vology,
Inc.
|
|
Membership
Units (5,363,982 Units)
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
410
|
|
|
|
9,092
|
|
|
|
-
|
|
|
|
(145
|
)
|
|
|
-
|
|
|
|
(528
|
)
|
|
|
8,419
|
|
Total
Control investments
|
|
|
|
|
$
|
410
|
|
|
$
|
22,723
|
|
|
$
|
-
|
|
|
$
|
(13,261
|
)
|
|
$
|
(484
|
)
|
|
$
|
(559
|
)
|
|
$
|
8,419
|
|
(1) Represents the total amount of interest, original issue discount, fees and dividends credited to income for the portion of the year an investment was included in Affiliate or Control categories, respectively.
(2)
Gross additions include increases in the cost basis of investments resulting from new portfolio investments, follow-on investments, accrued
PIK and accretion of original issue discount. Gross additions also include transfers into Affiliate or Control classification.
(3)
Gross reductions include decreases in the cost basis of investments resulting from principal repayments and sales. Gross reductions also
include transfers out of Affiliate or Control classification.
(4)
All debt investments are income producing. Equity and warrant investments are non-income producing, unless otherwise noted.
(5)
The equity investment is income producing, based on rate disclosed.
Note 6. Agreements
On September 24, 2013, the
Company entered into an investment advisory agreement (the “Investment Advisory Agreement”) with Capitala Investment Advisors,
LLC, our investment advisor prior to July 1, 2021 which was initially approved by the Board on June 10, 2013. Unless earlier terminated
in accordance with its terms, the Investment Advisory Agreement will remain in effect if approved annually by the Board or by a majority
of our outstanding voting securities, including, in either case, by a majority of our directors who are not "interested persons"
as such term is defined in Section 2(a)(19) of the 1940 Act ("Independent Directors"). The Investment Advisory Agreement was
most recently re-approved by the Board, including a majority of our Independent Directors, at a meeting on July 30, 2020. Subject to the
overall supervision of the Board, the Investment Advisor manages our day-to-day operations and provides investment advisory and management
services to us. Under the terms of the Investment Advisory Agreement, the Investment Advisor:
• determines
the composition of our portfolio, the nature and timing of the changes to our portfolio, and the manner of implementing such changes;
• identifies,
evaluates, and negotiates the structure of the investments we make (including performing due diligence on our prospective portfolio companies);
• closes
and monitors the investments we make; and
• provides
us with other investment advisory, research, and related services as we may from time to time require.
The Investment Advisor’s
services under the Investment Advisory Agreement are not exclusive, and it is free to furnish similar services to other entities so long
as its services to us are not impaired.
The Investment Advisory Agreement
provides that, absent willful misfeasance, bad faith, or negligence in the performance of its duties or by reason of the reckless disregard
of its duties and obligations, the Investment Advisor and its officers, managers, partners, agents, employees, controlling persons, members,
and any other person or entity affiliated with it are entitled to indemnification from the Company for any damages, liabilities, costs,
and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of our
Investment Advisor’s services under the Investment Advisory Agreement or otherwise as Investment Advisor for the Company.
Pursuant to the Investment
Advisory Agreement, the Company has agreed to pay the Investment Advisor a fee for investment advisory and management services consisting
of two components — a base management fee and an incentive fee.
The base management fee is
calculated at an annual rate of 1.75% of the gross assets, which are the total assets reflected on the consolidated statements of assets
and liabilities and includes any borrowings for investment purposes. Although the Company does not anticipate making significant investments
in derivative financial instruments, the fair value of any such investments, which will not necessarily equal their notional value, will
be included in the calculation of gross assets. For services rendered under the Investment Advisory Agreement, the base management fee
is payable quarterly in arrears. The base management fee is calculated based on the average value of the gross assets at the end of the
two most recently completed calendar quarters, and appropriately adjusted for any share issuances or repurchases during the current calendar
quarter.
The incentive fee consists
of the following two parts:
The first part of the
incentive fee is calculated and payable quarterly in arrears based on the pre-incentive fee net investment income for the
immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend
income, and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment,
origination, diligence, and consulting fees or other fees that we receive from portfolio companies) accrued during the calendar
quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the Administration
Agreement to our Administrator, and any interest expense and dividends paid on any issued and outstanding preferred stock, but
excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest
feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income that we
have not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, computed net of
all realized capital losses or unrealized capital appreciation or depreciation. Pre-incentive fee net investment income, expressed
as a rate of return on the value of our net assets at the end of the immediately preceding calendar quarter, is compared to a hurdle
of 2.0% per quarter (8.0% annualized). The Company pays the Investment Advisor an incentive fee with respect to the pre-incentive
fee net investment income in each calendar quarter as follows:
• no incentive
fee in any calendar quarter in which the pre-incentive fee net investment income does not exceed the hurdle of 2.0%;
• 100% of
the pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that
exceeds the hurdle but is less than 2.5% in any calendar quarter (10.0% annualized). The Company refers to this portion of the pre-incentive
fee net investment income (which exceeds the hurdle but is less than 2.5%) as the “catch-up.” The “catch-up” is
meant to provide the Investment Advisor with 20% of the pre-incentive fee net investment income as if a hurdle did not apply if this net
investment income exceeds 2.5% in any calendar quarter; and
• 20% of
the amount of the pre-incentive fee net investment income, if any, that exceeds 2.5% in any calendar quarter (10.0% annualized) is payable
to the Investment Advisor (once the hurdle is reached and the catch-up is achieved, 20% of all pre-incentive fee investment income thereafter
is allocated to the Investment Advisor).
The Investment Advisor has
voluntarily agreed to waive all, or such portion of the quarterly incentive fees earned by the Investment Advisor that would otherwise
cause the Company’s quarterly net investment income to be less than the distribution payments declared by the Board. Quarterly incentive
fees are earned by the Investment Advisor pursuant to the Investment Advisory Agreement. Incentive fees subject to the waiver cannot exceed
the amount of incentive fees earned during the period, as calculated on a quarterly basis. The Investment Advisor will not be entitled
to recoup any amount of incentive fees that it waives. The waiver was effective in the fourth quarter of 2015 and will continue unless
otherwise publicly disclosed by the Company.
The second part of the incentive
fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement,
as of the termination date), and will equal 20% of our realized capital gains, if any, on a cumulative basis from inception through the
end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less
the aggregate amount of any previously paid capital gain incentive fees with respect to each of the investments in our portfolio.
The Company will defer cash
payment of the portion of any incentive fee otherwise earned by the Investment Advisor that would, when taken together with all other
incentive fees paid to the Investment Advisor during the most recent 12 full calendar month period ending on or prior to the date such
payment is to be made, exceed 20% of the sum of (a) the pre-incentive fee net investment income during such period, (b) the net unrealized
appreciation or depreciation during such period and (c) the net realized capital gains or losses during such period. Any deferred incentive
fees will be carried over for payment in subsequent calculation periods to the extent such payment is payable under the Investment Advisory
Agreement. As of June 30, 2021 and December 31, 2020, the Company had incentive fees payable to the Investment Advisor of zero and $3.7
million related to fees earned in prior years but deferred under the incentive fee deferral mechanism.
For the three months ended
June 30, 2021 and 2020, the Company incurred $1.3 million and $1.7 million in base management fees, respectively. The Company did not
earn an incentive fee related to pre-incentive fee net investment income for the both three months ended June 30, 2021 and 2020.
For the six months ended June
30, 2021 and 2020, the Company incurred $2.7 million and $3.4 million in base management fees, respectively. The Company did not earn
an incentive fee related to pre-incentive fee net investment income for the both six months ended June 30, 2021 and 2020.
On September 24, 2013, the
Company entered into the Administration Agreement, pursuant to which the Administrator has agreed to furnish the Company with office facilities,
equipment and clerical, bookkeeping, and record keeping services at such facilities. The Administrator also performs or oversees the performance
of the required administrative services, which include, among other things, being responsible for the financial records that the Company
is required to maintain and preparing reports to our stockholders. In addition, the Administrator assists in determining and publishing
the net asset value, oversees the preparation and filing of the tax returns and the printing and dissemination of reports to the stockholders,
and generally oversees the payment of the expenses and the performance of administrative and professional services rendered to the Company
by others.
Payments under the Administration
Agreement are equal to an amount based upon the allocable portion of the Administrator’s overhead in performing its obligations
under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions, and the allocable
portion of the compensation of the chief financial officer, the chief compliance officer, and their respective administrative support
staff. Under the Administration Agreement, the Administrator will also provide, on the Company’s behalf, managerial assistance to
those portfolio companies that request such assistance. Unless terminated earlier in accordance with its terms, the Administration Agreement
will remain in effect if approved annually by the Board. The Board most recently approved the renewal of the Administration Agreement
on July 30, 2020. To the extent that the Administrator outsources any of its functions, the Company will pay the fees associated with
such functions on a direct basis without any incremental profit to our Administrator. Stockholder approval is not required to amend the
Administration Agreement.
For the three and six months
ended June 30, 2021 and 2020, the Company paid the Administrator $0.4 million and $0.7 million, respectively, for the Company’s
allocable portion of the Administrator’s overhead.
The Administration Agreement
provides that, absent willful misfeasance, bad faith, or negligence in the performance of its duties or by reason of the reckless disregard
of its duties and obligations, our Administrator and its officers, managers, partners, agents, employees, controlling persons, members,
and any other person or entity affiliated with it are entitled to indemnification from the Company for any damages, liabilities, costs,
and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of our
Administrator’s services under the Administration Agreement or otherwise as Administrator for the Company.
Note 7. Related Party Transactions
As of June 30, 2021 and
December 31, 2020, the Company had $0.1 million and $3.8 million of management and incentive fees payable to Capitala. These
amounts are reflected in the accompanying consolidated statements of assets and liabilities under the caption “Management and
incentive fees payable.”
On June 1, 2020, the Company
purchased approximately 50% of the outstanding loans in CSLF II at par as part of the wind-down of the joint venture. The Company paid
$8.3 million for the loans and assumed a $3.0 million unfunded commitment related to Rapid Fire Protection, Inc.’s revolving credit
facility. On June 12, 2020, the Company wound down CSLF II. See Note 4 for details.
Note 8. Borrowings
SBA-guaranteed Debentures
The Company, through its wholly
owned subsidiary Fund III, historically used debenture leverage provided through the SBA to fund a portion of its investment portfolio.
As of December 31, 2020, the Company had $91.0 million of SBA-guaranteed debentures outstanding. On June 10, 2021, Fund III repaid all
of its remaining SBA-guaranteed debentures. As of December 31, 2020, Fund III had total assets of $186.0 million collateralizing its SBA-guaranteed
debentures. On June 10, 2014, the Company received an exemptive order from the SEC exempting the Company, Fund II, and Fund III from certain
provisions of the 1940 Act (including an exemptive order granting relief from the asset coverage requirements for certain indebtedness
issued by Fund II and Fund III as SBICs) and from certain reporting requirements mandated by the Securities Exchange Act of 1934, as amended,
with respect to Fund II and Fund III.
On March 1, 2019, Fund II
repaid its outstanding SBA-guaranteed debentures and relinquished its SBIC license. On June 10, 2021, Fund III repaid its SBA-guaranteed
debentures and relinquished its SBIC license. As a result of the payoff, the Company recorded an extinguishment loss of $0.8 million during
the three and six-months ended June 30, 2021, respectively.
As of June 30, 2021, there
were no SBA-guaranteed debentures outstanding. The following table summarizes the historical interest expense and annual charges, deferred
financing costs, average outstanding balance, and average stated interest and annual charge rate on the SBA-guaranteed debentures for
the three and six months ended June 30, 2021 and 2020 (dollars in thousands):
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30, 2021
|
|
|
June 30, 2020
|
|
|
June 30, 2021
|
|
|
June 30, 2020
|
|
Interest expense and annual charges
|
|
$
|
405
|
|
|
$
|
1,331
|
|
|
$
|
1,066
|
|
|
$
|
2,662
|
|
Deferred financing costs
|
|
|
49
|
|
|
|
125
|
|
|
|
188
|
|
|
|
249
|
|
Total interest and financing expenses
|
|
$
|
454
|
|
|
$
|
1,456
|
|
|
$
|
1,254
|
|
|
$
|
2,911
|
|
Average outstanding balance
|
|
$
|
52,275
|
|
|
$
|
150,000
|
|
|
$
|
68,105
|
|
|
$
|
150,000
|
|
Average stated interest and annual charge rate
|
|
|
3.10
|
%
|
|
|
3.56
|
%
|
|
|
3.14
|
%
|
|
|
3.56
|
%
|
As of December 31, 2020, the
Company’s issued and outstanding SBA-guaranteed debentures mature (or were scheduled to mature, prior to being repaid, as applicable)
as follows (dollars in thousands):
Fixed Maturity Date
|
|
Interest Rate
|
|
|
SBA Annual
Charge
|
|
|
December 31,
2020
|
|
|
March 1, 2021
|
|
|
4.084
|
%
|
|
|
0.285
|
%
|
|
$
|
6,000
|
|
|
March 1, 2022
|
|
|
2.766
|
%
|
|
|
0.285
|
%
|
|
|
10,000
|
|
|
March 1, 2022
|
|
|
2.766
|
%
|
|
|
0.515
|
%
|
|
|
50,000
|
|
|
March 1, 2023
|
|
|
2.351
|
%
|
|
|
0.515
|
%
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
91,000
|
|
|
2022 Notes
On May 16, 2017,
the Company issued $70.0 million in aggregate principal amount of 6.0% fixed-rate notes due May 31, 2022 (the “2022 Notes”).
On May 25, 2017, the Company issued an additional $5.0 million in aggregate principal amount of the 2022 Notes pursuant to a
partial exercise of the underwriters’ overallotment option. The 2022 Notes will mature on May 31, 2022 and may be redeemed
in whole or in part at any time or from time to time at the Company’s option on or after May 31, 2019 at a redemption price
equal to 100% of the outstanding principal, plus accrued and unpaid interest. As of June 30, 2021 and December 31, 2020, the Company had
$72.8 million in 2022 Notes outstanding.
The following table summarizes
the interest expense, deferred financing costs, average outstanding balance, and average stated interest rate on the 2022 Notes for the three
and six months ended June 30, 2021 and 2020 (dollars in thousands):
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30, 2021
|
|
|
June 30, 2020
|
|
|
June 30, 2021
|
|
|
June 30, 2020
|
|
Interest expense
|
|
$
|
1,092
|
|
|
$
|
1,125
|
|
|
$
|
2,185
|
|
|
$
|
2,250
|
|
Deferred financing costs
|
|
|
146
|
|
|
|
143
|
|
|
|
290
|
|
|
|
283
|
|
Total interest and financing expenses
|
|
$
|
1,238
|
|
|
$
|
1,268
|
|
|
$
|
2,475
|
|
|
$
|
2,533
|
|
Average outstanding balance
|
|
$
|
72,833
|
|
|
$
|
75,000
|
|
|
$
|
72,833
|
|
|
$
|
75,000
|
|
Average stated interest rate
|
|
|
6.0
|
%
|
|
|
6.0
|
%
|
|
|
6.0
|
%
|
|
|
6.0
|
%
|
2022 Convertible Notes
On May 26, 2017, the Company
issued $50.0 million in aggregate principal amount of 5.75% fixed-rate convertible notes due May 31, 2022 (the “2022 Convertible
Notes”). On June 26, 2017, the Company issued an additional $2.1 million in aggregate principal amount of the 2022 Convertible Notes
pursuant to a partial exercise of the underwriters’ overallotment option.
The 2022 Convertible Notes
are convertible, at the holder’s option, into shares of the Company’s common stock at any time on or prior to the close of
business on the business day immediately preceding the maturity date. The conversion rate for the 2022 Convertible Notes was initially
1.5913 shares per $25.00 principal amount of 2022 Convertible Notes (equivalent to an initial conversion price of approximately $15.71
per share of common stock). The initial conversion premium is approximately 14.0%. As a result of the Reverse Stock Split, the conversion
rate for the 2022 Convertible Notes is 0.2652 shares per $25.00 principal amount of 2022 Convertible Notes (equivalent to a conversion
price of approximately $94.26) effective August 21, 2020. Upon conversion, the Company will deliver shares of its common stock (and cash
in lieu of fractional shares). The conversion rate is subject to adjustment if certain events occur as outlined in the supplemental indenture
relating to the 2022 Convertible Notes. The Company has determined that the embedded conversion option in the 2022 Convertible Notes is
not required to be separately accounted for as a derivative under U.S. GAAP.
In addition, pursuant to a
“fundamental change”, as defined in the supplemental indenture relating to the 2022 Convertible Notes, holders of the 2022
Convertible Notes may require the Company to repurchase for cash all or part of their 2022 Convertible Notes at a repurchase price equal
to 100.0% of the principal amount of the 2022 Convertible Notes to be repurchased, plus accrued and unpaid interest through, but excluding,
the repurchase date. The 2022 Convertible Notes are not redeemable prior to maturity and no “sinking fund” is provided for
the 2022 Convertible Notes.
As of June 30, 2021 and December
31, 2020, the Company had $52.1 million in 2022 Convertible Notes outstanding.
The following table summarizes
the interest expense, deferred financing costs, average outstanding balance, and average stated interest rate on the 2022 Convertible
Notes for the three and six months ended June 30, 2021 and 2020 (dollars in thousands):
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30, 2021
|
|
|
June 30, 2020
|
|
|
June 30, 2021
|
|
|
June 30, 2020
|
|
Interest expense
|
|
$
|
749
|
|
|
$
|
749
|
|
|
$
|
1,498
|
|
|
$
|
1,498
|
|
Deferred financing costs
|
|
|
97
|
|
|
|
90
|
|
|
|
191
|
|
|
|
179
|
|
Total interest and financing expenses
|
|
$
|
846
|
|
|
$
|
839
|
|
|
$
|
1,689
|
|
|
$
|
1,677
|
|
Average outstanding balance
|
|
$
|
52,088
|
|
|
$
|
52,088
|
|
|
$
|
52,088
|
|
|
$
|
52,088
|
|
Average stated interest rate
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
Bond Repurchase Program
On July 30, 2020, the Board
approved a bond repurchase program which authorizes the Company to repurchase up to an aggregate of $10.0 million worth of the Company's
outstanding 2022 Notes and/or 2022 Convertible Notes (the "Bond Repurchase Program"). The Bond Repurchase Program will terminate
upon the earlier of (i) July 30, 2021 or (ii) the repurchase of an aggregate of $10.0 million worth of 2022 Notes and/or 2022 Convertible
Notes. During the three and six months ended June 30, 2021 and 2020, the Company did not purchase any of the 2022 Notes or the 2022 Convertible
Notes. The Bond Repurchase Program expired on July 30, 2021 and the Company did not repurchase any additional 2022 Note or 2022 Convertible Notes
subsequent to quarter end.
ING Credit Facility
On October 17,
2014, the Company entered into a senior secured revolving credit agreement (as amended, the “ING Credit Facility”) with
ING Capital, LLC, as administrative agent, arranger, and bookrunner, and the lenders party thereto. The ING Credit Facility was set
to mature on April 30, 2022. On June 19, 2020, the Company unilaterally terminated the ING Credit Facility.
Borrowings under the ING Credit
Facility bore interest, at the Company’s election, at a rate per annum equal to (i) the one, two, three or six month LIBOR,
as applicable, plus 3.50% or (ii) 2.00% plus the highest of (A) a prime rate, (B) the Federal Funds rate plus 0.5%, and (C) three
month LIBOR plus 1.0%. The Company’s ability to elect LIBOR indices with various tenors (e.g., one, two, three or six month LIBOR)
on which the interest rates for borrowings under the ING Credit Facility were based, provided the Company with increased flexibility to
manage interest rate risks as compared to a borrowing arrangement that did not provide for such optionality. Once a particular LIBOR had
been selected, the interest rate on the applicable amount borrowed reset after the applicable tenor period and was based on the then applicable
selected LIBOR (e.g., borrowings for which the Company elected the one month LIBOR reset on the one month anniversary of the period based
on the then selected LIBOR). For any given borrowing under the ING Credit Facility, the Company elected what it believed to be an appropriate
LIBOR taking into account the Company’s needs at the time as well as the Company’s view of future interest rate movements.
The ING Credit Facility provided for the ability to step-down the pricing of the ING Credit Facility from LIBOR plus 3.50% to LIBOR plus
3.00% when certain conditions were met. The Company also paid an unused commitment fee at a rate of 0.75% per annum on the unutilized
portion of the aggregate commitments under the ING Credit Facility on each day when the utilized portion of the aggregate commitments
was less than 35% for such day and 0.50% per annum on the unutilized portion of the aggregate commitments under the ING Credit Facility
when the utilized portion was greater than 35% for such day.
The following table summarizes
the interest expense, deferred financing costs, unused commitment fees, average outstanding balance, and average stated interest rate
on the ING Credit Facility for the three and six months ended June 30, 2020 (dollars in thousands):
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30, 2020
|
|
|
June 30, 2020
|
|
Interest expense
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred financing costs
|
|
|
1,226
|
|
|
|
1,379
|
|
Unused commitment fees
|
|
|
96
|
|
|
|
211
|
|
Total interest and financing expenses
|
|
$
|
1,322
|
|
|
$
|
1,590
|
|
Average outstanding balance
|
|
$
|
—
|
|
|
$
|
—
|
|
Average stated interest rate
|
|
|
—
|
%
|
|
|
—
|
%
|
KeyBank Credit Facility
On October 30, 2020,
CBL, a direct, wholly owned, consolidated subsidiary of the Company, entered into the KeyBank Credit Facility, with the Investment Advisor,
as collateral manager, the lenders from time to time parties thereto (each a “Lender”), KeyBank National Association, as administrative
agent, and U.S. Bank National Association, as custodian. Under the KeyBank Credit Facility, the Lenders have agreed to extend credit to
CBL in an aggregate principal amount of up to $25.0 million as of October 30, 2020. CBL may, on any business day prior to October 28,
2022, request an increase in the aggregate principal amount from $25.0 million to $100.0 million in accordance with the terms
and in the manner described in the KeyBank Credit Facility. The period during which the Lenders may make loans to CBL under the KeyBank
Credit Facility commenced on October 30, 2020 and will continue through October 28, 2022, unless there is an earlier termination
or event of default. The KeyBank Credit Facility matures on October 28, 2023, unless there is an earlier termination or event of
default. Borrowings under the KeyBank Credit Facility bear interest at one-month LIBOR plus 3.5%, subject to a minimum interest rate of
4.25%. The Company will also pay an unused commitment fee at a rate of 1.75% per annum on the unutilized portion of the aggregate commitments
under the KeyBank Credit Facility. As of June 30, 2021, the KeyBank Credit Facility was fully drawn. The KeyBank Credit Facility is secured
by the investments and other assets held by CBL, the Company’s wholly owned subsidiary. The KeyBank Credit Facility includes customary
affirmative and negative covenants, including certain limitations on the incurrence of additional indebtedness and liens, as well as usual
and customary events of default for revolving credit facilities of this nature. As of June 30, 2021, assets pledged to secure the KeyBank
Credit Facility had a fair value of $84.3 million.
The following table summarizes
the interest expense, deferred financing costs, unused commitment fees, average outstanding balance, and average stated interest rate
on the KeyBank Credit Facility for the three and six months ended June 30, 2021 (dollars in thousands):
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30, 2021
|
|
|
June 30, 2021
|
|
Interest expense
|
|
$
|
54
|
|
|
$
|
54
|
|
Deferred financing costs
|
|
|
48
|
|
|
|
96
|
|
Unused commitment fees
|
|
|
88
|
|
|
|
197
|
|
Total interest and financing expenses
|
|
$
|
190
|
|
|
$
|
347
|
|
Average outstanding balance
|
|
$
|
5,209
|
|
|
$
|
2,619
|
|
Average stated interest rate
|
|
|
4.25
|
%
|
|
|
4.25
|
%
|
Financial Instruments Disclosed, But Not Carried,
At Fair Value
The following table presents
the outstanding principal and fair value of the Company’s financial liabilities disclosed, but not carried, at fair value as of
June 30, 2021, and the level of each financial liability within the fair value hierarchy (dollars in thousands):
|
|
Outstanding
Principal
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
2022 Notes
|
|
$
|
72,833
|
|
|
$
|
73,125
|
|
|
$
|
73,125
|
|
|
$
|
—
|
|
|
$
|
—
|
|
2022 Convertible Notes
|
|
|
52,088
|
|
|
|
53,921
|
|
|
|
53,921
|
|
|
|
—
|
|
|
|
—
|
|
KeyBank Credit Facility
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,000
|
|
Total
|
|
$
|
149,921
|
|
|
$
|
152,046
|
|
|
$
|
127,046
|
|
|
$
|
—
|
|
|
$
|
25,000
|
|
The following table presents the outstanding
principal and fair value of the Company’s financial liabilities disclosed, but not carried, at fair value as of December 31, 2020,
and the level of each financial liability within the fair value hierarchy (dollars in thousands):
|
|
Outstanding
Principal
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
SBA-guaranteed debentures
|
|
$
|
91,000
|
|
|
$
|
92,189
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
92,189
|
|
2022 Notes
|
|
|
72,833
|
|
|
|
70,503
|
|
|
|
70,503
|
|
|
|
—
|
|
|
|
—
|
|
2022 Convertible Notes
|
|
|
52,088
|
|
|
|
51,233
|
|
|
|
51,233
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
215,921
|
|
|
$
|
213,925
|
|
|
$
|
121,736
|
|
|
$
|
—
|
|
|
$
|
92,189
|
|
The estimated fair value
of the Company’s SBA-guaranteed debentures was based on future contractual cash payments discounted at market interest rates to
borrow from the SBA as of the measurement date.
The estimated fair value of
the 2022 Notes and 2022 Convertible Notes was based on their respective closing prices as of the measurement date as they are traded on
the NASDAQ Global Select Market under the ticker “CPTAL” (2022 Notes) and on the NASDAQ Capital Market under the ticker “CPTAG”
(2022 Convertible Notes).
The estimated fair value of
the KeyBank Credit Facility was based on future contractual cash payments discounted at estimated market interest rates for similar debt. The
outstanding principal balance on KeyBank Credit Facility approximates fair value.
Note 9. Directors’ Fees
Our Independent
Directors receive an annual fee of $50,000. They also receive $5,000 plus reimbursement of reasonable out-of-pocket expenses
incurred in connection with attending each board meeting and $5,000 plus reimbursement of reasonable out-of-pocket expenses incurred
in connection with attending each committee meeting. In addition, the chairman of the audit committee receives an annual fee of
$10,000 and each chairman of any other committee receives an annual fee of $5,000 for their additional services, if any, in these
capacities. For the three and six months ended June 30, 2021, the Company recognized directors’ fees expense of $0.1 million
and $0.2 million, respectively. For the three and six months ended June 30, 2020, the Company recognized directors’ fees
expense of $0.1 million and $0.2 million, respectively. No compensation is expected to be paid to directors who are
“interested persons” of the Company, as such term is defined in Section 2(a)(19) of the 1940 Act.
Note 10. Earnings Per Share
In accordance with the provisions
of ASC Topic 260 - Earnings per Share (“ASC 260”), basic earnings per share is computed by dividing earnings available
to common stockholders by the weighted average number of shares of the Company’s common stock outstanding during the period. Other
potentially dilutive shares of the Company’s common stock, and the related impact to earnings, are considered when calculating diluted
earnings per share. For the three and six months ended June 30, 2021 and 2020, 0.6 million in convertible shares related to the 2022 Convertible
Notes were considered anti-dilutive.
The following information
sets forth the computation of the weighted average basic and diluted net increase (decrease) in net assets per share resulting from operations
for the three and six months ended June 30, 2021 and 2020 (dollars in thousands, except share and per share data):
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30, 2021
|
|
|
June 30, 2020 (1)
|
|
|
June 30, 2021
|
|
|
June 30, 2020 (1)
|
|
Net (decrease) increase in net assets resulting from operations
|
|
$
|
(7,554
|
)
|
|
$
|
3,100
|
|
|
$
|
4,800
|
|
|
$
|
(39,340
|
)
|
Weighted average common stock outstanding – basic and diluted(1)
|
|
|
2,711,068
|
|
|
|
2,711,068
|
|
|
|
2,711,068
|
|
|
|
2,707,256
|
|
Net (decrease) increase in net assets per share resulting from operations – basic and diluted(1)
|
|
$
|
(2.79)
|
|
|
$
|
1.14
|
|
|
$
|
1.77
|
|
|
$
|
(14.53
|
)
|
|
(1)
|
Basic and diluted shares of the Company’s common stock and basic and diluted earnings per share have been adjusted for the three and months ended June 30, 2020 to reflect the one-for-six reverse stock split effected on August 21, 2020 on a retroactive basis, as described in Note 1.
|
Note 11. Distributions
The Company’s distributions
are recorded on the record date. Stockholders have the option to receive payment of the distribution in cash, shares of the Company’s
common stock, or a combination of cash and common stock.
The Company’s Board
determined not to declare a distribution for the first or second quarter of 2021 due to the impact of the COVID-19 pandemic on the Company’s
expected net investment income.
Tax characteristics of all
distributions paid are reported to stockholders on Form 1099 after the end of the calendar year. For the three and six months ended June
30, 2020, total distributions of zero and $4.1 million, respectively, were classified as a return of capital. There were no distributions
for the three and six months ended June 30, 2021. Distributions may be subject to reclassification based on future dividends and operating
results and will not be determined until the end of the year.
The following table summarizes
the Company’s distribution declarations for the six months ended June 30, 2020 (dollars in thousands, except share and per share
data):
Date
Declared
|
|
Record
Date
|
|
Payment
Date
|
|
|
Amount
Per Share(1)
|
|
|
Cash
Distribution
|
|
|
DRIP
Shares
Issued(1)
|
|
|
DRIP
Share
Value
|
|
January 2, 2020
|
|
January 24, 2020
|
|
January 30, 2020
|
|
$
|
0.50
|
|
$
|
1,231
|
|
|
2,432
|
|
$
|
119
|
|
January 2, 2020
|
|
February 20, 2020
|
|
February 27, 2020
|
|
|
0.50
|
|
|
1,228
|
|
|
2,760
|
|
|
122
|
|
January
2, 2020
|
|
March 23,
2020
|
|
March 30,
2020
|
|
|
0.50
|
|
|
1,259
|
|
|
5,261
|
|
|
94
|
|
Total
Distributions Declared and Distributed
|
|
$
|
1.50
|
|
$
|
3,718
|
|
|
10,453
|
|
$
|
335
|
|
|
(1)
|
Shares and amount per share
have been adjusted for the three and six months ended June 30, 2020 to reflect the one-for-six reverse stock split effected on August
21, 2020 on a retroactive basis, as described in Note 1.
|
Note 12. Financial Highlights
The following is a schedule
of financial highlights for the six months ended June 30, 2021 and 2020 (dollars in thousands, except share and per share data):
|
|
For the Six Months Ended
|
|
|
|
June 30, 2021
|
|
|
June 30, 2020
|
|
Per share data(1):
|
|
|
|
|
|
|
Net asset value at beginning of period
|
|
$
|
40.19
|
|
|
$
|
54.84
|
|
Net investment loss(2)
|
|
|
(0.28
|
)
|
|
|
(0.23
|
)
|
Net realized loss on investments(2)
|
|
|
(2.61
|
)
|
|
|
(4.55
|
)
|
Net unrealized appreciation (depreciation) on investments(2)
|
|
|
4.96
|
|
|
|
(9.75
|
)
|
Net realized loss on extinguishment of debt(2)
|
|
|
(0.30
|
)
|
|
|
—
|
|
Distributions – return of capital(3)
|
|
|
—
|
|
|
|
(1.50
|
)
|
Other(4)
|
|
|
—
|
|
|
|
(0.06
|
)
|
Net asset value at end of period
|
|
$
|
41.96
|
|
|
$
|
38.75
|
|
Net assets at end of period
|
|
$
|
113,747
|
|
|
$
|
105,055
|
|
Shares outstanding at end of period
|
|
|
2,711,068
|
|
|
|
2,711,068
|
|
Per share market value at end of period
|
|
$
|
24.55
|
|
|
$
|
15.78
|
|
Total return based on market value(5)
|
|
|
70.37
|
%
|
|
|
(68.36
|
)%
|
Ratio/Supplemental data:
|
|
|
|
|
|
|
|
|
Ratio of net investment loss to average net assets(6)
|
|
|
(1.32
|
)%
|
|
|
(1.06
|
)%
|
Ratio of interest and financing expenses to average net assets(6)
|
|
|
10.14
|
%
|
|
|
14.80
|
%
|
Ratio of other operating expenses to average net assets(6)
|
|
|
8.71
|
%
|
|
|
10.16
|
%
|
Ratio of total expenses to average net assets(6)
|
|
|
18.85
|
%
|
|
|
24.96
|
%
|
Portfolio turnover rate(7)
|
|
|
3.94
|
%
|
|
|
6.43
|
%
|
Average debt outstanding(8)
|
|
$
|
195,644
|
|
|
$
|
277,088
|
|
Average debt outstanding per common share
|
|
$
|
72.17
|
|
|
$
|
102.21
|
|
Asset coverage ratio per unit(9)
|
|
$
|
1,759
|
|
|
$
|
1,827
|
|
(1)
|
Shares and per share data has been adjusted for the six months ended June 30, 2020 to reflect the one-for-six reverse stock split effected on August 21, 2020 on a retroactive basis, as described in Note 1.
|
|
|
(2)
|
Based on daily weighted average balance of shares of the Company’s common stock outstanding during the period.
|
(3)
|
Distributions may be subject to reclassification based on future dividends and operating results and will not be determined until the end of the year.
|
(4)
|
Includes the impact of different share amounts used in calculating per share data based on weighted average shares of the Company’s common stock outstanding during the period and certain per share data based on shares of the Company’s common stock outstanding as of a period end or transaction date. Also includes the impact of shares of the Company’s common stock issued under the Company’s DRIP.
|
(5)
|
Total investment return is calculated assuming a purchase of shares of the Company’s common stock at the current market value on the first day and a sale at the current market value on the last day of the period reported. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Company’s DRIP. Total investment return does not reflect brokerage commissions. Total investment returns covering less than a full period are not annualized.
|
(7)
|
Portfolio turnover rate is calculated using the lesser of year-to-date sales or year-to-date purchases over the average of the invested assets at fair value. Portfolio turnover rates that cover less than a full period are not annualized.
|
(8)
|
Based on the daily weighted average balance of debt outstanding during the period.
|
(9)
|
Asset coverage per unit is the ratio of the carrying value of our total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. We have excluded our SBA-guaranteed debentures from the asset coverage calculation as of June 30, 2020 pursuant to the exemptive relief granted by the SEC in June 2014 that permits us to exclude such debentures from the definition of senior securities in the 150% asset coverage ratio we are required to maintain under the 1940 Act. Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness.
|
Note 13. Subsequent Events
On April 20, 2021, Capitala entered into a definitive
agreement with Mount Logan and MLC, both affiliates of BC Partners for U.S. regulatory purposes, whereby Mount Logan acquired certain
assets related to Capitala's business of providing investment management services to the Company, through which Mount Logan became the
Company's investment adviser pursuant to the New Advisory Agreement with the Company. At the Special Meeting held on May 27, 2021, the
Company's stockholders approved the New Advisory Agreement. The transactions contemplated by the Definitive Agreement closed on July 1,
2021.
Management has evaluated subsequent
events through the date of issuance of the consolidated financial statements included herein. There have been no other subsequent events
that occurred during such period that would be required to be recognized in the consolidated financial statements as of June 30, 2021.