UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 xQuarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended SeptemberJune 30, 20192020

 

 ¨Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission
File Number
 Exact name of registrant as specified in its charter,
address of principal executive office, telephone number, and
state or other jurisdiction of incorporation or organization
 I.R.S. Employer
Identification Number
814-01022 

Capitala Finance Corp.

4201 Congress St., Suite 360

Charlotte, North Carolina 28209

State of Incorporation: Maryland

Telephone: (704) 376-5502

 90-0945675

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class Trading symbol(s) Name of Each Exchange on Which
Registered

Common Stock, par value $0.01 per share

5.75% Convertible Notes due 2022

6.00% Notes due 2022

 

CPTA

CPTAG

CPTAL

 

NASDAQ Global Select Market

NASDAQ Capital Market

NASDAQ Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

  Yes   xNo   ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

  Yes   ¨No   ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 Large accelerated filer  ¨Accelerated filerx
     
 Non-accelerated filer¨Smaller reporting company¨
     
   Emerging growth company  ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.          ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

  Yes  ¨No  x

 

The number of shares of Capitala Finance Corp.’s common stock, $0.01 par value, outstanding as of November 1, 2019August 3, 2020 was 16,175,557.16,266,484.

 

 

 

 

TABLE OF CONTENTS

 

  Page
   
PART I.FINANCIAL INFORMATION3
   
Item 1.Consolidated Financial Statements3
   
 Consolidated Statements of Assets and Liabilities as of SeptemberJune 30, 20192020 (unaudited) and December 31, 201820193
   
 Consolidated Statements of Operations for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 (unaudited)4
   
 Consolidated Statements of Changes in Net Assets for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 (unaudited)5
   
 Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20192020 and 20182019 (unaudited)6
   
 Consolidated Schedules of Investments as of SeptemberJune 30, 20192020 (unaudited) and December 31, 201820197
   
 Notes to Consolidated Financial Statements as of Septemberand for the period ended June 30, 20192020 (unaudited)2019
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations4743
   
Item 3.Quantitative and Qualitative Disclosures About Market Risk6861
   
Item 4.Controls and Procedures6862
   
PART II.OTHER INFORMATION6962
   
Item 1.Legal Proceedings6962
   
Item 1A.Risk Factors6963
   
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds7167
   
Item 3.Defaults Upon Senior Securities7167
   
Item 4.Mine Safety Disclosures7167
   
Item 5.Other Information7167
   
Item 6.Exhibits7268
  
Signatures7369

 

2

PART I. FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

 

Capitala Finance Corp.

 

Consolidated Statements of Assets and Liabilities

(in thousands, except share and per share data)

 

 As of  As of 
 September 30, 2019  December 31, 2018  June 30, 2020  December 31, 2019 
 (unaudited)     (unaudited)   
ASSETS             
Investments at fair value        
Non-control/non-affiliate investments (amortized cost of $248,479 and $280,114, respectively) $259,747  $286,843 
Affiliate investments (amortized cost of $74,435 and $72,300, respectively)  91,355   92,939 
Control investments (amortized cost of $36,659 and $67,556, respectively)  20,249   69,145 
Total investments at fair value (amortized cost of $359,573 and $419,970, respectively)  371,351   448,927 
Investments at fair value:        
Non-control/non-affiliate investments (amortized cost of $211,569 and $250,433, respectively) $190,650  $241,046 
Affiliate investments (amortized cost of $84,403 and $80,756, respectively)  87,679   98,763 
Control investments (amortized cost of $9,044 and $22,692, respectively)  8,937   22,723 
Total investments at fair value (amortized cost of $305,016 and $353,881, respectively)  287,266   362,532 
Cash and cash equivalents  62,776   39,295   95,226   62,321 
Interest and dividend receivable  1,572   3,778   2,078   1,745 
Prepaid expenses  117   454   640   624 
Deferred tax asset, net  -   628   -   - 
Other assets  114   83   301   115 
Total assets $435,930  $493,165  $385,511  $427,337 
                
LIABILITIES                
SBA Debentures (net of deferred financing costs of $1,129 and $1,688, respectively) $148,871  $164,012 
2022 Notes (net of deferred financing costs of $1,585 and $1,987, respectively)  73,415   73,013 
2022 Convertible Notes (net of deferred financing costs of $1,003 and $1,259, respectively)  51,085   50,829 
Credit Facility (net of deferred financing costs of $727 and $983, respectively)  (727)  9,017 
SBA Debentures (net of deferred financing costs of $758 and $1,006, respectively) $149,242  $148,994 
2022 Notes (net of deferred financing costs of $1,164 and $1,447, respectively)  73,836   73,553 
2022 Convertible Notes (net of deferred financing costs of $736 and $916, respectively)  51,352   51,172 
Credit Facility (net of deferred financing costs of $0 and $1,165, respectively)  -   (1,165)
Management and incentive fees payable  3,509   2,487   3,586   3,713 
Interest and financing fees payable  1,440   3,063   2,429   2,439 
Trade settlement payable  6,442   - 
Accounts payable and accrued expenses  14   100   11   518 
Total liabilities $284,049  $302,521  $280,456  $279,224 
                
Commitments and contingencies (Note 2)                
                
NET ASSETS                
Common stock, par value $0.01, 100,000,000 common shares authorized, 16,161,075 and 16,051,547 common shares issued and outstanding, respectively $162  $161 
Common stock, par value $0.01, 100,000,000 common shares authorized, 16,266,484 and 16,203,769 common shares issued and outstanding, respectively $163  $162 
Additional paid in capital  242,639   241,757   238,220   237,886 
Total distributable loss  (90,920)  (51,274)  (133,328)  (89,935)
Total net assets $151,881  $190,644  $105,055  $148,113 
Total liabilities and net assets $435,930  $493,165  $385,511  $427,337 
                
Net asset value per share $9.40  $11.88  $6.46  $9.14 

 

See accompanying notes to consolidated financial statements.

 

3

3

 

 

Capitala Finance Corp.

 

Consolidated Statements of Operations

(in thousands, except share and per share data)

(unaudited)

 

 For the Three Months Ended September 30,  For the Nine Months Ended September 30,  For the Three Months Ended June 30,  For the Six Months Ended June 30, 
 2019  2018  2019  2018  2020  2019  2020  2019 
INVESTMENT INCOME                                
Interest and fee income:                                
Non-control/non-affiliate investments $6,270  $6,692  $21,096  $20,915  $4,693  $7,541  $9,400  $14,826 
Affiliate investments  1,898   1,852   6,578   5,870   1,632   2,281   3,311   4,680 
Control investments  115   1,898   1,421   5,585   103   582   206   1,306 
Total interest and fee income  8,283   10,442   29,095   32,370   6,428   10,404   12,917   20,812 
Payment-in-kind interest and dividend income:                                
Non-control/non-affiliate investments  388   350   1,283   1,482   378   453   714   895 
Affiliate investments  235   343   611   1,118   188   227   368   376 
Control investments  -   295   372   715   -   44   -   372 
Total payment-in-kind interest and dividend income  623   988   2,266   3,315   566   724   1,082   1,643 
Dividend income:                                
Non-control/non-affiliate investments  -   -   1,281   59   -   -   -   1,281 
Affiliate investments  25   29   25   87   -   -   25   - 
Control investments  1,134   25   1,584   75   -   425   -   450 
Total dividend income  1,159   54   2,890   221   -   425   25   1,731 
Interest income from cash and cash equivalents  61   46   149   78   5   37   49   88 
Total investment income  10,126   11,530   34,400   35,984   6,999   11,590   14,073   24,274 
                                
EXPENSES                                
Interest and financing expenses  4,110   4,320   12,751   13,015   4,885   4,228   8,711   8,641 
Base management fee  1,925   2,254   6,063   6,871   1,666   2,020   3,423   4,138 
Incentive fees  -   -   1,497   244   -   463   -   1,497 
General and administrative expenses  1,107   1,105   3,236   3,334   1,057   1,145   2,561   2,129 
Expenses before incentive fee waiver  7,142   7,679   23,547   23,464   7,608   7,856   14,695   16,405 
Incentive fee waiver (See Note 6)  -   -   (288)  -   -   (288)  -   (288)
Total expenses, net of incentive fee waiver  7,142   7,679   23,259   23,464 
Total expenses  7,608   7,568   14,695   16,117 
                                
NET INVESTMENT INCOME  2,984   3,851   11,141   12,520 
NET INVESTMENT INCOME (LOSS)  (609)  4,022   (622)  8,157 
                                
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND WRITTEN CALL OPTION:                
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS                
Net realized gain (loss) on investments:                                
Non-control/non-affiliate investments  -   9,874   (3,544)  (15,820)  (14,142)  365   (13,174)  (3,544)
Affiliate investments  12   93   2,288   956   1,341   2,387   1,341   2,276 
Control investments  -   (3,669)  (19,656)  (5,315)  (484)  (17,829)  (484)  (19,656)
Net realized gain (loss) on investments  12   6,298   (20,912)  (20,179)
Net realized loss on investments  (13,285)  (15,077)  (12,317)  (20,924)
Net unrealized appreciation (depreciation) on investments:                                
Non-control/non-affiliate investments  1,518   (8,380)  4,539   18,847   16,993   (3,018)  (11,532)  3,021 
Affiliate investments  1,218   11,730   (3,719)  5,727   (1,003)  (4,669)  (14,731)  (4,937)
Control investments  (4,015)  (32,100)  (17,999)  (31,722)  1,004   (9,708)  (138)  (13,984)
Net unrealized depreciation on investments  (1,279)  (28,750)  (17,179)  (7,148)
Net unrealized appreciation on written call option  -   6,795   -   6,795 
Net realized and unrealized loss on investments and written call option  (1,267)  (15,657)  (38,091)  (20,532)
Tax benefit (provision)  -   (110)  (628)  1,185 
Total net realized and unrealized loss on investments and written call option, net of taxes  (1,267)  (15,767)  (38,719)  (19,347)
Net unrealized appreciation (depreciation) on investments  16,994   (17,395)  (26,401)  (15,900)
Net realized and unrealized gain (loss) on investments  3,709   (32,472)  (38,718)  (36,824)
Tax provision  -   (694)  -   (628)
Total net realized and unrealized gain (loss) on investments, net of taxes  3,709   (33,166)  (38,718)  (37,452)
                                
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $1,717  $(11,916) $(27,578) $(6,827) $3,100 $(29,144) $(39,340) $(29,295)
                                
NET INCREASE (DECREASE) IN NET ASSETS PER SHARE RESULTING FROM OPERATIONS – BASIC AND DILUTED $0.11  $(0.74) $(1.71) $(0.43) $0.19  $(1.81) $(2.42) $(1.82)
                                
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING – BASIC AND DILUTED  16,133,365   16,001,919   16,097,908   15,981,154   16,266,484   16,096,678   16,243,538   16,079,885 
                                
DISTRIBUTIONS PAID PER SHARE $0.25  $0.25  $0.75  $0.75  $-  $0.25  $0.25  $0.50 

 

See accompanying notes to consolidated financial statements.

 

4

4

Capitala Finance Corp.

Consolidated Statements of Changes in Net Assets

(in thousands, except share data)

(unaudited)

  Common Stock  Additional  Total    
For the Three Months Ended June 30, 2020 and 2019 Number of Shares  Par Value  Paid in Capital  Distributable Loss  Total 
BALANCE, March 31, 2020  16,266,484  $163  $               238,220  $                (136,428) $101,955 
Net investment loss  -   -   -   (609)  (609)
Net realized loss on investments  -   -   -   (13,285)  (13,285)
Net unrealized appreciation on investments  -   -   -   16,994   16,994 
Tax provision  -   -   -   -   - 
BALANCE, June 30, 2020  16,266,484  $163  $238,220  $(133,328) $105,055 
                     
BALANCE, March 31, 2019  16,084,143  $161  $242,012  $(55,439) $186,734 
Net investment income  -   -   -   4,022   4,022 
Net realized loss on investments  -   -   -   (15,077)  (15,077)
Net unrealized depreciation on investments  -   -   -   (17,395)  (17,395)
Tax provision  -   -   -   (694)  (694)
Distributions to Shareholders:                    
Stock issued under dividend reinvestment plan  34,805   -   295   -   295 
Distributions declared  -   -   -   (4,022)  (4,022)
BALANCE, June 30, 2019  16,118,948  $161  $242,307  $(88,605) $153,863 

  Common Stock  Additional  Total    
For the Six Months Ended June 30, 2020 and 2019 Number of Shares  Par Value  Paid in Capital  Distributable  Loss  Total 
BALANCE, December 31, 2019  16,203,769  $162  $237,886  $(89,935) $148,113 
Net investment loss  -   -   -   (622)  (622)
Net realized loss on investments  -   -   -   (12,317)  (12,317)
Net unrealized depreciation on investments  -   -   -   (26,401)  (26,401)
Tax provision  -   -   -   -   - 
Distributions to Shareholders:                    
Stock issued under dividend reinvestment plan  62,715   1   334   -   335 
Distributions declared  -   -   -   (4,053)  (4,053)
BALANCE, June 30, 2020  16,266,484  $163  $238,220  $(133,328) $105,055 
                     
BALANCE, December 31, 2018  16,051,547  $161  $241,757  $(51,274) $190,644 
Net investment income  -   -   -   8,157   8,157 
Net realized loss on investments  -   -   -   (20,924)  (20,924)
Net unrealized depreciation on investments  -   -   -   (15,900)  (15,900)
Tax provision  -   -   -   (628)  (628)
Distributions to Shareholders:                    
Stock issued under dividend reinvestment plan  67,401   -   550   -   550 
Distributions declared  -   -   -   (8,036)  (8,036)
BALANCE, June 30, 2019  16,118,948  $161  $242,307  $(88,605) $153,863 

See accompanying notes to consolidated financial statements.

5

 

 

Capitala Finance Corp.

 

Consolidated Statements of Changes Cash Flows

(in Net Assetsthousands)

 (in thousands, except share data)

(unaudited)

 

  Common Stock          
For the Three Months Ended September 30, 2019 and 2018 Number of Shares  Par Value  Additional Paid
in Capital
  Total Distributable
Loss
  Total 
BALANCE, June 30, 2019  16,118,948  $161  $242,307  $(88,605) $153,863 
Net investment income  -   -   -   2,984   2,984 
Net realized gain on investments  -   -   -   12   12 
Net unrealized depreciation on investments  -   -   -   (1,279)  (1,279)
Distributions to Shareholders:                    
Stock issued under dividend reinvestment plan  42,127   1   332   -   333 
Distributions declared  -   -   -   (4,032)  (4,032)
BALANCE, September 30, 2019  16,161,075  $162  $242,639  $(90,920) $151,881 
                     
BALANCE, June 30, 2018  15,994,690  $160  $241,350  $(22,193) $219,317 
Net investment income  -   -   -   3,851   3,851 
Net realized gain on investments  -   -   -   6,298   6,298 
Net unrealized depreciation on investments  -   -   -   (28,750)  (28,750)
Net unrealized appreciation on written call option  -   -   -   6,795   6,795 
Tax provision  -   -   -   (110)  (110)
Distributions to Shareholders:                    
Stock issued under dividend reinvestment plan  23,280   -   193   -   193 
Distributions declared  -   -   -   (3,998)  (3,998)
BALANCE, September 30, 2018  16,017,970  $160  $241,543  $(38,107) $203,596 
  For the Six Months Ended June 30, 
  2020  2019 
CASH FLOWS FROM OPERATING ACTIVITIES        
Net decrease in net assets resulting from operations $(39,340) $(29,295)
Adjustments to reconcile net decrease in net assets resulting from operations to net cash provided by operating activities:        
Purchase of investments  (20,820)  (34,924)
Repayments and sales of investments  58,888   58,131 
Net realized loss on investments  12,317   20,924 
Net unrealized depreciation on investments  26,401   15,900 
Payment-in-kind interest and dividends  (1,082)  (1,643)
Accretion of original issue discount on investments  (438)  (520)
Amortization of deferred financing fees  2,090   1,096 
Tax provision  -   628 
Changes in assets and liabilities:        
Interest and dividend receivable  (333)  1,325 
Prepaid expenses  (16)  237 
Other assets  (186)  (21)
Management and incentive fees payable  (127)  1,096 
Interest and financing fees payable  (10)  (387)
Accounts payable and accrued expenses  (507)  (100)
NET CASH PROVIDED BY OPERATING ACTIVITIES  36,837   32,447 
         
CASH FLOWS FROM FINANCING ACTIVITIES        
Paydowns on SBA debentures  -   (15,700)
Proceeds from Credit Facility  -   15,000 
Repayments on Credit Facility  -   (20,000)
Distributions paid to shareholders  (3,718)  (7,486)
Deferred financing fees paid  (214)  (82)
NET CASH USED IN FINANCING ACTIVITIES  (3,932)  (28,268)
         
NET INCREASE IN CASH AND CASH EQUIVALENTS  32,905   4,179 
CASH AND CASH EQUIVALENTS, beginning of period  62,321   39,295 
CASH AND CASH EQUIVALENTS, end of period $95,226  $43,474 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION        
Cash paid for interest $6,409  $7,279 
         
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS        
Distributions paid through dividend reinvestment plan share issuances $335  $550 

 

  Common Stock          
For the Nine Months Ended September 30, 2019 and 2018 Number of Shares  Par Value  Additional Paid
in Capital
  Total Distributable
Loss
  Total 
BALANCE, December 31, 2018  16,051,547  $161  $241,757  $(51,274) $190,644 
Net investment income  -   -   -   11,141   11,141 
Net realized loss on investments  -   -   -   (20,912)  (20,912)
Net unrealized depreciation on investments  -   -   -   (17,179)  (17,179)
Tax provision  -   -   -   (628)  (628)
Distributions to Shareholders:                    
Stock issued under dividend reinvestment plan  109,528   1   882   -   883 
Distributions declared  -   -   -   (12,068)  (12,068)
BALANCE, September 30, 2019  16,161,075  $162  $242,639  $(90,920) $151,881 
                     
BALANCE, December 31, 2017  15,951,231  $160 $241,027  $(19,300) $221,887 
Net investment income  -   -   -   12,520   12,520 
Net realized loss on investments  -   -   -   (20,179)  (20,179)
Net unrealized depreciation on investments  -   -   -   (7,148)  (7,148)
Net unrealized appreciation on written call option  -   -   -   6,795   6,795 
Tax benefit  -   -   -   1,185   1,185 
Distributions to Shareholders:                    
Stock issued under dividend reinvestment plan  66,739   -   516   -   516 
Distributions declared  -   -   -   (11,980)  (11,980)
BALANCE, September 30, 2018  16,017,970  $160  $241,543  $(38,107) $203,596 

See accompanying notes to consolidated financial statements.

 

5

6

 

 

Capitala Finance Corp.

 

Consolidated Statements of Cash Flows

 (in thousands)

 (unaudited)

  For the Nine Months Ended September 30, 
  2019  2018 
CASH FLOWS FROM OPERATING ACTIVITIES        
Net decrease in net assets resulting from operations $(27,578) $(6,827)
Adjustments to reconcile net decrease in net assets resulting from operations to net cash provided by operating activities:        
Purchase of investments  (48,785)  (58,907)
Repayments and sales of investments  91,320   96,260 
Net realized loss on investments  20,912   20,179 
Net unrealized depreciation on investments  17,179   7,148 
Payment-in-kind interest and dividends  (2,266)  (3,315)
Accretion of original issue discount on investments  (784)  (847)
Payments from written call option  -   (20)
Net unrealized appreciation on written call option  -   (6,795)
Amortization of deferred financing fees  1,579   1,406 
Tax (benefit) provision  628   (1,185)
Changes in assets and liabilities:        
Interest and dividend receivable  2,206   (1,068)
Due from related parties  -   95 
Prepaid expenses  337   158 
Other assets  (31)  (73)
Management and incentive fees payable  1,022   337 
Interest and financing fees payable  (1,623)  (1,632)
Trade settlement payable  6,442   (175)
Accounts payable and accrued expenses  (86)  16 
NET CASH PROVIDED BY OPERATING ACTIVITIES  60,472   44,755 
         
CASH FLOWS FROM FINANCING ACTIVITIES        
Paydowns on SBA debentures  (15,700)  (5,000)
Proceeds from Credit Facility  15,000   21,000 
Repayments on Credit Facility  (25,000)  (30,000)
Distributions paid to shareholders  (11,185)  (11,464)
Deferred financing fees paid  (106)  (56)
NET CASH USED IN FINANCING ACTIVITIES  (36,991)  (25,520)
         
NET INCREASE IN CASH AND CASH EQUIVALENTS  23,481   19,235 
CASH AND CASH EQUIVALENTS, beginning of period  39,295   31,221 
CASH AND CASH EQUIVALENTS, end of period $62,776  $50,456 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION        
Cash paid for interest $11,906  $12,213 
         
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS        
Distributions paid through dividend reinvestment plan share issuances $883  $516 

See accompanying notes to consolidated financial statements.

6

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

SeptemberJune 30, 20192020

(unaudited)

 

Portfolio Company, Country(1), (2), (3), (4), (5) Industry Type of Investment Principal
Amount
  Cost  Fair Value  % of
Net Assets
  Industry Type of Investment Principal Amount  Cost  Fair Value  % of
Net Assets
 
Non-control/non-affiliated investments - 171.0%                    
Non-control/non-affiliated investments - 181.4%Non-control/non-affiliated investments - 181.4%                
                                    
Non-control/non-affiliated investments - United States                    Non-control/non-affiliated investments - United States                
                                    
3 Bridge Solutions, LLC IT Consulting First Lien Debt (11.1% Cash (1 month LIBOR + 9.0%, 1.0% Floor), Due 12/4/22) $13,444  $13,444  $13,444   8.8% IT Consulting First Lien Debt (13.0% Cash, Due 12/4/22) $13,036  $13,036  $13,036   12.4%
                                     
3 Bridge Solutions, LLC IT Consulting Preferred Units (965 units)      1,090   725   0.5% IT Consulting Preferred Units (965 units)      1,090   709   0.7%
                                     
3 Bridge Solutions, LLC IT Consulting Membership Units (39,000 units)      10   -   0.0% IT Consulting Membership Units (39,000 units)      10   -   0.0%
                                      
          14,544   14,169   9.3%        14,136   13,745   13.1%
                                     
Alternative Biomedical Solutions, LLC Healthcare First Lien Debt (8.0% Cash, 3.8% PIK, Due 12/18/22)  6,760   6,545   6,545   4.3% Healthcare First Lien Debt (8.0% Cash, Due 12/18/22)  7,119   7,119   7,119   6.8%
                                     
Alternative Biomedical Solutions, LLC Healthcare First Lien Debt (8.0% Cash, 3.8% PIK, Due 12/18/22)(6)  13,000   13,000   10,368   6.8% Healthcare Series A Preferred Units (12,759 units)      1,275   1,275   1.2%
                                    
Alternative Biomedical Solutions, LLC Healthcare Membership Units (20,092 units)      800   -   0.0% Healthcare Series B Preferred Units (44,367 units)      3,943   3,943   3.8%
                                    
Alternative Biomedical Solutions, LLC Healthcare Series C Preferred Units (78,900 units)      -   -   0.0%
          20,345   16,913   11.1%                
Alternative Biomedical Solutions, LLC Healthcare Membership Units (20,092 units)      800   -   0.0%
                
Alternative Biomedical Solutions, LLC Healthcare Membership Unit Warrants (49,295 warrants)      -   -   0.0%
                  
        13,137   12,337   11.8%
                 
American Clinical Solutions, LLC Healthcare First Lien Debt (7.0% Cash, Due 12/31/22)  3,500   3,500   3,430   3.3%
                
American Clinical Solutions, LLC Healthcare First Lien Debt (7.0% Cash, Due 10/13/20)  250   250   250   0.2%
                                    
American Clinical Solutions, LLC Healthcare First Lien Debt (10.5% Cash, 2.0% PIK, Due 6/11/20)(7)  9,435   8,919   6,596   4.3% Healthcare Class A Membership Units (6,030,384 units)      3,198   3,198   3.0%
                                      
          8,919   6,596   4.3%        6,948   6,878   6.5%
                                    
AmeriMark Direct, LLC Consumer Products First Lien Debt (13.8% Cash, Due 9/8/21)  16,498   16,321   16,498   10.9% Consumer Products First Lien Debt (14.3% Cash, Due 9/8/21)  15,373   15,273   15,023   14.3%
                                      
          16,321   16,498   10.9%        15,273   15,023   14.3%
                                    
BigMouth, Inc. Consumer Products First Lien Debt (14.1% Cash, Due 11/14/21)(6)  8,572   8,572   8,447   5.6% Consumer Products First Lien Debt (9.0% Cash (1 month LIBOR + 8.5%, 0.5% Floor), Due 11/14/21) (6)  5,803   5,372   2,460   2.3%
                                      
BigMouth, Inc. Consumer Products Series A Preferred Stock (350,000 shares)      411   163   0.1%
                    
          8,983   8,610   5.7%        5,372   2,460   2.3%
                                    
Bluestem Brands, Inc. Online Merchandise Retailer First Lien Debt (9.5% Cash (1 month LIBOR + 7.5%, 1.0% Floor), Due 11/7/20)  3,592   3,592   3,447   2.3% Online Merchandise Retailer First Lien Debt (7.0% Cash (1 month LIBOR + 6.0%, 1.0% Floor), Due 9/8/20) (7)  -   -   -   0.0%
                                    
Bluestem Brands, Inc. Online Merchandise Retailer First Lien Debt (7.0% Cash (1 month LIBOR + 6.0%, 1.0% Floor), Due 9/8/20)  1,803   1,803   1,803   1.7%
                
Bluestem Brands, Inc. Online Merchandise Retailer First Lien Debt (9.8% Cash (Prime + 6.5%, 2.0% Floor), Due 11/7/20) (6)  3,529   3,529   2,057   2.0%
          3,592   3,447   2.3%                  
                            5,332   3,860   3.7%
Burke America Parts Group, LLC Home Repair Parts Manufacturer Membership Units (14 units)      5   2,497   1.6%
                    
          5   2,497   1.6%
                    
California Pizza Kitchen, Inc. Restaurant Second Lien Debt (12.5% Cash (3 month LIBOR + 10.0%, 1.0% Floor), Due 8/23/23)  5,000   4,921   4,800   3.2%
                    
          4,921   4,800   3.2%

 

7

Capitala Finance Corp.

 

Consolidated Schedule of Investments

(in thousands, except for units/shares)

SeptemberJune 30, 20192020

(unaudited)

 

Portfolio Company, Country(1), (2), (3), (4), (5) Industry Type of Investment Principal
Amount
  Cost  Fair Value  % of
Net Assets
  Industry Type of Investment Principal Amount  Cost  Fair Value  % of
Net Assets
 
Burke America Parts Group, LLC Home Repair Parts Manufacturer Membership Units (14 units)     5  2,118   2.0%
                  
        5   2,118   2.0%
                
California Pizza Kitchen, Inc. Restaurant Second Lien Debt (11.0% Cash (3 month LIBOR + 10.0%, 1.0% Floor), Due 8/23/23) (6)  $5,000   4,933   944   0.9%
                  
        4,933   944   0.9%
                
Chicken Soup for the Soul, LLC Multi-platform Media and Consumer Products First Lien Debt (10.6% Cash (1 month LIBOR + 8.5%, 1.5% Floor), Due 12/13/20)  $13,000   $13,000   $12,913   8.5% Multi-platform Media and Consumer Products First Lien Debt (10.0% Cash (1 month LIBOR + 8.5%, 1.5% Floor), Due 12/13/20)  13,000   13,000   13,000   12.4%
                  
        13,000   13,000   12.4%
                
Chief Fire Intermediate, Inc. Security System Services First Lien Debt (8.6% Cash (1 month LIBOR + 7.0%, 1.6% Floor), Due 11/8/24) (6)  8,100   8,100   6,824   6.5%
                
Chief Fire Intermediate, Inc. Security System Services Class A Preferred Units (34,740 units)      913   -   0.0%
                
Chief Fire Intermediate, Inc. Security System Services Class B Common Units (3,510 units)      -   -   0.0%
          ��                           
          13,000   12,913   8.5%        9,013   6,824   6.5%
                                    
CIS Secure Computing, Inc. Government Services First Lien Debt (10.6% Cash (1 month LIBOR + 8.5%, 1.0% Floor), 1.0% PIK, Due 9/14/22)  9,489   9,489   9,489   6.3% Government Services First Lien Debt (9.5% Cash (1 month LIBOR + 8.5%, 1.0% Floor), 1.0% PIK, Due 9/14/22)  9,189   9,189   9,189   8.7%
                                    
CIS Secure Computing, Inc. Government Services Common Stock (46,163 shares)      1,000   1,534   1.0% Government Services Common Stock (46,163 shares)      1,000   2,550   2.4%
                                      
          10,489   11,023   7.3%        10,189   11,739   11.1%
                                    
Corporate Visions, Inc. Sales & Marketing Services Subordinated Debt (9.0% Cash, 2.0% PIK, Due 11/29/21)  19,229   19,229   19,120   12.6% Sales & Marketing Services Second Lien Debt (9.0% Cash, 2.0% PIK, Due 11/29/21)  19,425   19,425   19,025   18.1%
                                    
Corporate Visions, Inc. Sales & Marketing Services Common Stock (15,750 shares)      1,575   270   0.2% Sales & Marketing Services Common Stock (15,750 shares)      1,575   667   0.6%
                                      
          20,804   19,390   12.8%        21,000   19,692   18.7%
                                    
Currency Capital, LLC Financial Services First Lien Debt (14.1% Cash (1 month LIBOR + 12.0%, 0.5% Floor), 2.0% PIK, Due 1/2/20)(8)  16,400   16,400   16,400   10.8% Financial Services First Lien Debt (12.5% Cash (1 month LIBOR + 12.0%, 0.5% Floor), 4.0% PIK, Due 7/20/21) (8)(9)  16,170   16,170   15,988   15.2%
                                    
Currency Capital, LLC Financial Services Class A Preferred Units (2,000,000 units)(8)      2,000   2,364   1.6% Financial Services Class A Preferred Units (2,000,000 units) (8)      2,000   1,258   1.2%
                                      
          18,400   18,764   12.4%        18,170   17,246   16.4%
                                    
Flavors Holdings, Inc. Food Product Manufacturer First Lien Debt (7.9% Cash (3 month LIBOR + 5.8%, 1.0% Floor), Due 4/3/20)  5,789   5,766   5,683   3.7%
                    
Flavors Holdings, Inc. Food Product Manufacturer Second Lien Debt (12.1% Cash (3 month LIBOR + 10.0%, 1.0% Floor), Due 10/3/21)  12,000   11,861   11,324   7.5%
                    
          17,627   17,007   11.2%
Freedom Electronics, LLC Electronic Machine Repair First Lien Debt (7.0% Cash (1 month LIBOR + 5.0%, 2.0% Floor), Due 12/20/23)  2,704   2,704   2,704   2.6%
                                    
Freedom Electronics, LLC Electronic Machine Repair First Lien Debt (8.8% Cash, Due 12/20/23)(6)(9)  5,955   5,955   5,955   3.9% Electronic Machine Repair First Lien Debt (8.6% Cash, Due 12/20/23) (10)(11)  6,399   6,399   6,219   5.9%
                                    
Freedom Electronics, LLC Electronic Machine Repair Membership Units (181,818 units)      182   172   0.1% Electronic Machine Repair Membership Units (181,818 units)      182   139   0.1%
                                      
          6,137   6,127   4.0%        9,285   9,062   8.6%
                    
HUMC Opco, LLC Healthcare First Lien Debt (9.0% Cash, Due 8/16/20)  5,000   5,000   5,000   3.3%
                    
          5,000   5,000   3.3%
                    
Installs, LLC Logistics First Lien Debt (9.1% Cash (1 month LIBOR + 7.0%, 1.8% Floor), Due 6/20/23)  2,947   2,947   2,947   1.9%
                    
          2,947   2,947   1.9%
                    
Jurassic Quest Holdings, LLC Entertainment First Lien Debt (9.6% Cash (1 month LIBOR + 7.5%, 2.0% Floor), Due 5/1/24)(10)  10,744   10,744   10,744   7.1%
                    
Jurassic Quest Holdings, LLC Entertainment Preferred Units (375,000 units, 8.0% PIK)(11)      388   331   0.2%
                    
          11,132   11,075   7.3%

 

8

Capitala Finance Corp.

 

Consolidated Schedule of Investments

(in thousands, except for units/shares)

SeptemberJune 30, 20192020

(unaudited)

 

Portfolio Company, Country(1), (2), (3), (4), (5) Industry Type of Investment Principal
Amount
  Cost  Fair Value  % of
Net Assets
  Industry Type of Investment Principal Amount  Cost  Fair Value  % of
Net Assets
 
HUMC Opco, LLC Healthcare First Lien Debt (9.0% Cash, Due 8/16/20) 5,000  5,000   $5,000   4.8%
                  
        5,000   5,000   4.8%
                 
J5 Infrastructure Partners, LLC Wireless Deployment Services First Lien Debt (8.3% Cash (1 month LIBOR + 6.5%, 1.8% Floor), Due 12/20/24) (12)  -   -   -   0.0%
                 
J5 Infrastructure Partners, LLC Wireless Deployment Services First Lien Debt (8.3% Cash (1 month LIBOR + 6.5%, 1.8% Floor), Due 12/20/24)  6,983   6,983   6,983   6.6%
                  
        6,983   6,983   6.6%
                 
Jurassic Quest Holdings, LLC Entertainment First Lien Debt (9.5% Cash (1 month LIBOR + 7.5%, 2.0% Floor), Due 5/1/24)  9,665   9,665   8,662   8.3%
                 
Jurassic Quest Holdings, LLC Entertainment Preferred Units (467,784 units)      480   -   0.0%
                  
        10,145   8,662   8.3%
                 
MicroHoldco, LLC General Industrial Preferred Units (838,042 units)      $838   $838   0.6% General Industrial Preferred Units (838,042 units) (13)      838   670   0.7%
                                      
          838   838   0.6%        838   670   0.7%
                                     
Nth Degree, Inc. Business Services First Lien Debt (13.6% Cash (1 month LIBOR + 11.5%, 1.0% Floor), 2.0% PIK, Due 3/29/23)(12)  $7,309   7,309   7,309   4.8%
Rapid Fire Protection, Inc. Security System Services First Lien Debt (5.5% Cash (1 month LIBOR + 3.8%, 1.7% Floor), Due 11/22/24) (14)  646   646   646   0.6%
                                     
Nth Degree, Inc. Business Services Preferred Stock (2,400 Units, 10.0% PIK dividend)(11)      3,492   28,102   18.5%
Rapid Fire Protection, Inc. Security System Services First Lien Debt (9.0% Cash, Due 11/22/24) (10)(15)  7,479   7,479   7,479   7.1%
                 
Rapid Fire Protection, Inc. Security System Services Common Stock (363 shares)      500   848   0.8%
                                      
          10,801   35,411   23.3%        8,625   8,973   8.5%
                                     
Seitel, Inc. Data Services First Lien Debt (10.3% Cash (1 month LIBOR + 8.3%, 1.0% Floor), Due 3/15/23)  4,875   4,875   4,875   3.2% Data Services First Lien Debt (9.3% Cash (3 month LIBOR + 8.3%, 1.0% Floor), Due 3/15/23)  4,624   4,624   4,039   3.9%
                                      
          4,875   4,875   3.2%        4,624   4,039   3.9%
                                     
Sequoia Healthcare Management, LLC Healthcare Management First Lien Debt (12.8% Cash , Due 6/26/20)  13,069   13,069   12,968   8.5% Healthcare Management First Lien Debt (12.8% Cash, Due 8/16/20) (6)(9)  12,535   12,535   11,601   11.0%
                    
          13,069   12,968   8.5%
                    
Sur La Table, Inc. Retail First Lien Debt (11.1% Cash (3 month LIBOR + 9.0%, 1.0% Floor), Due 7/31/22)(12)(13)  10,515   10,515   10,515   6.9%
                                      
          10,515   10,515   6.9%        12,535   11,601   11.0%
                                     
Taylor Precision Products, Inc. Household Product Manufacturer Series C Preferred Stock (379 shares)      758   758   0.5% Household Product Manufacturer Series C Preferred Stock (379 shares)      758   758   0.7%
                                      
          758   758   0.5%        758   758   0.7%
                                     
U.S. BioTek Laboratories, LLC Testing laboratories First Lien Debt (9.5% Cash, Due 12/14/23)(6)(9)  6,948   6,948   6,948   4.6% Testing laboratories First Lien Debt (7.0% Cash (3 month LIBOR + 5.0%, 2.0% Floor), Due 12/14/23)  1,843   1,843   1,843   1.8%
                                     
U.S. BioTek Laboratories, LLC Testing laboratories Class A Preferred Units (500 Units, 10.0% PIK)(11)      539   266   0.2% Testing laboratories First Lien Debt (9.3% Cash, Due 12/14/23) (10)(16)  5,734   5,734   5,606   5.3%
                                     
U.S. BioTek Laboratories, LLC Testing laboratories Class C Units (500 Units)      1   -   0.0% Testing laboratories Class D Preferred Units (78 Units)      78   81   0.1%
                                     
U.S. BioTek Laboratories, LLC Testing laboratories Class A Preferred Units (500 Units)      540   118   0.1%
                 
U.S. BioTek Laboratories, LLC Testing laboratories Class C Units (578 Units)      1   -   0.0%
          7,488   7,214   4.8%                  
                            8,196   7,648   7.3%
U.S. Well Services, Inc. Oil & Gas Services Class A Common Stock (77,073 shares)(8)(14)      771   168   0.1%
                    
U.S. Well Services, Inc. Oil & Gas Services Class B Common Stock (1,125,426 shares)(8)(14)      6,701   2,465   1.6%
                    
          7,472   2,633   1.7%
                    
Vology, Inc. Information Technology Subordinated Debt (15.0% Cash (1 month LIBOR + 14.0%, 1.0% Ceiling), 4.0% PIK, Due 6/30/20)(7)  8,988   8,897   6,140   4.0%
                    
          8,897   6,140   4.0%

 

9

Capitala Finance Corp.

 

Consolidated Schedule of Investments

(in thousands, except for units/shares)

SeptemberJune 30, 20192020

(unaudited)

 

Portfolio Company, Country(1), (2), (3), (4), (5) Industry Type of Investment Principal
Amount
  Cost  Fair Value  % of
Net Assets
  Industry Type of Investment Principal Amount  Cost  Fair Value  % of
Net Assets
 
U.S. Well Services, Inc. Oil & Gas Services Class A Common Stock (77,073 shares) (17)     771  38   0.0%
                
U.S. Well Services, Inc. Oil & Gas Services Class B Common Stock (1,125,426 shares) (17)      6,701   551   0.5%
                  
        7,472   589   0.5%
                
Xirgo Technologies, LLC Information Technology Membership Units (600,000 units)      $600    $619   0.4% Information Technology Membership Units (600,000 units)      600   799   0.8%
                                      
          600   619   0.4%        600   799   0.8%
                                      
Sub Total Non-control/non-affiliated investments - United States         $248,479  $259,747   171.0%Sub Total Non-control/non-affiliated investments - United States     $211,569  $190,650   181.4%
                                     
Affiliate Investments - 60.2%                    
Affiliate Investments - 83.5%Affiliate Investments - 83.5%                 
                                     
Affiliate investments - United States                    Affiliate investments - United States                 
                                    
Burgaflex Holdings, LLC Automobile Part Manufacturer First Lien Debt (12.0% Cash, 3.0% PIK, Due 3/23/21) $14,561  $14,561  $14,530   9.6% Automobile Part Manufacturer First Lien Debt (12.0% Cash, 3.0% PIK, Due 3/23/21) $14,135  $14,135  $14,016   13.4%
                                    
Burgaflex Holdings, LLC Automobile Part Manufacturer Common Stock Class A (1,253,198 shares)      1,504   -   0.0% Automobile Part Manufacturer Common Stock Class B (1,085,073 shares)      362   -   0.0%
                                    
Burgaflex Holdings, LLC Automobile Part Manufacturer Common Stock Class B (1,085,073 shares)      362   41   0.0% Automobile Part Manufacturer Common Stock Class A (1,253,198 shares)      1,504   -   0.0%
                                      
          16,427   14,571   9.6%        16,001   14,016   13.4%
                                    
City Gear, LLC Footwear Retail Membership Unit Warrants (11.4% fully diluted)(15)      -   3,184   2.1% Footwear Retail Membership Unit Warrants (13)      -   1,810   1.7%
                                      
          -   3,184   2.1%        -   1,810   1.7%
                                    
Eastport Holdings, LLC Business Services Subordinated Debt (15.1% Cash (3 month LIBOR + 13.0%, 0.5% Floor), Due 4/29/20)  16,500   16,062   16,500   10.9% Business Services Second Lien Debt (13.5% Cash (3 month LIBOR + 13.0%, 0.5% Floor), Due 12/29/21) (9)  16,500   16,243   16,395   15.6%
                                    
Eastport Holdings, LLC Business Services Membership Units (22.9% ownership)      3,263   16,781   11.0% Business Services Membership Units (22.9% ownership)      3,263   15,545   14.8%
                                      
          19,325   33,281   21.9%        19,506   31,940   30.4%
                                    
GA Communications, Inc. Advertising & Marketing Services Series A-1 Preferred Stock (1,998 shares, 8.0% PIK Dividend)(11)      3,399   3,689   2.5% Advertising & Marketing Services Series A-1 Preferred Stock (1,998 shares)      3,477   3,908   3.7%
                                    
GA Communications, Inc. Advertising & Marketing Services Series B-1 Common Stock (200,000 shares)      2   644   0.4% Advertising & Marketing Services Series B-1 Common Stock (200,000 shares)      2   31   0.0%
                                      
          3,401   4,333   2.9%        3,479   3,939   3.7%
                                    
LJS Partners, LLC QSR Franchisor Common Membership Units (1,764,976 units)      975   1,686   1.1% QSR Franchisor Preferred Units (175,867 units)      437   704   0.7%
                                    
LJS Partners, LLC QSR Franchisor Preferred Units (89,612 units)      293   358   0.2% QSR Franchisor Membership Units (2,593,234 units)      1,224   2,357   2.2%
                                      
          1,268   2,044   1.3%        1,661   3,061   2.9%

 

10

Capitala Finance Corp.

  

Consolidated Schedule of Investments

(in thousands, except for units/shares)

SeptemberJune 30, 20192020

(unaudited)

 

Portfolio Company, Country(1), (2), (3), (4), (5) Industry Type of Investment Principal
Amount
  Cost  Fair Value  % of
Net Assets
  Industry Type of Investment Principal Amount  Cost  Fair Value  % of
Net Assets
 
                    
MMI Holdings, LLC Medical Device Distributor First Lien Debt (12.0% Cash, Due 1/31/20)(12)  $2,600   $2,600   $2,600   1.7% Medical Device Distributor First Lien Debt (12.0% Cash, Due 1/31/21) (9) 2,600   $2,600   $2,600   2.5%
                                    
MMI Holdings, LLC Medical Device Distributor Subordinated Debt (6.0% Cash, Due 1/31/20)(12)  400   388   400   0.3% Medical Device Distributor Second Lien Debt (6.0% Cash, Due 1/31/21) (9)  400   388   400   0.4%
                                    
MMI Holdings, LLC Medical Device Distributor Preferred Units (1,000 units, 6.0% PIK Dividend)(11)      1,548   1,685   1.1% Medical Device Distributor Preferred Units (1,000 units, 6.0% PIK Dividend) (18)      1,623   1,762   1.7%
                                    
MMI Holdings, LLC Medical Device Distributor Common Membership Units (45 units)      -   209   0.1% Medical Device Distributor Common Membership Units (45 units)      -   208   0.2%
                                      
          4,536   4,894   3.2%        4,611   4,970   4.8%
                                    
Navis Holdings, Inc. Textile Equipment Manufacturer First Lien Debt (11.0% Cash, Due 6/30/23)(12)  10,100   10,100   10,100   6.6% Textile Equipment Manufacturer First Lien Debt (9.0% Cash, 2.0% PIK, Due 6/30/23) (9)  11,428   11,428   10,963   10.4%
                                    
Navis Holdings, Inc. Textile Equipment Manufacturer Class A Preferred Stock (1,000 shares, 10.0% Cash Dividend)(11)      1,000   1,000   0.7% Textile Equipment Manufacturer Class A Preferred Stock (1,000 shares)      1,000   959   0.9%
                                    
Navis Holdings, Inc. Textile Equipment Manufacturer Common Stock (60,000 shares)      -   385   0.3% Textile Equipment Manufacturer Common Stock (60,000 shares)      -   -   0.0%
                                      
          11,100   11,485   7.6%        12,428   11,922   11.3%
                                    
Nth Degree Investment Group, LLC Business Services Membership Units (6,088,000 Units)      6,088   -   0.0%
                  
        6,088   -   0.0%
                
RAM Payment, LLC Financial Services First Lien Debt (6.5% Cash (1 month LIBOR + 5.0%, 1.5% Floor), Due 1/4/24)  3,029   3,029   3,029   2.9%
                
RAM Payment, LLC Financial Services First Lien Debt (10.4% Cash, Due 1/4/24)(6)  9,137   9,137   9,137   6.0% Financial Services First Lien Debt (9.8% Cash, Due 1/4/24) (10)  8,212   8,212   8,212   7.8%
                                    
RAM Payment, LLC Financial Services Preferred Units (86,000 units, 8.0% PIK)(11)      911   1,507   1.0% Financial Services Preferred Units (86,000 units, 8.0% PIK Dividend) (18)      962   2,331   2.2%
                                      
          10,048   10,644   7.0%        12,203   13,572   12.9%
                                    
Sierra Hamilton Holdings Corporation Oil & Gas Engineering and Consulting Services Second Lien Debt (15.0% PIK, Due 9/12/23)  754   717   717   0.5% Oil & Gas Engineering and Consulting Services Second Lien Debt (15.0% PIK, Due 9/12/23)  843   813   813   0.8%
                                    
Sierra Hamilton Holdings Corporation Oil & Gas Engineering and Consulting Services Common Stock (15,068,000 shares)      6,958   5,494   3.6% Oil & Gas Engineering and Consulting Services Common Stock (15,068,000 shares)      6,958   928   0.9%
                                      
          7,675   6,211   4.1%        7,771   1,741   1.7%
                                    
V12 Holdings, Inc. Data Processing & Digital Marketing Subordinated Debt(16)      655   708   0.5% Data Processing & Digital Marketing Second Lien Debt (13)      655   708   0.7%
                                      
          655   708   0.5%          655   708   0.7%
                                        
Sub Total Affiliate investments - United States         $74,435  $91,355   60.2%Sub Total Affiliate investments - United States      $84,403  $87,679   83.5%
                    
Control Investments - 13.3%                    
                    
Control investments - United States                    
                    
CableOrganizer Acquisition, LLC Computer Supply Retail First Lien Debt (8.0% Cash, Due 6/30/21)(12) $1,250  $1,250  $1,250   0.8%
                    
CableOrganizer Acquisition, LLC Computer Supply Retail First Lien Debt (8.0% Cash, Due 6/30/21)(7)(12)  3,689   3,638   1,685   1.1%
                    
CableOrganizer Acquisition, LLC Computer Supply Retail Preferred Units - Series A1 (7,200,000 units)      5,373   -   0.0%
                    
CableOrganizer Acquisition, LLC Computer Supply Retail Preferred Units - Series A (4,000,000 units)      2,354   -   0.0%
                    
CableOrganizer Acquisition, LLC Computer Supply Retail Common Stock (14.9% fully diluted)      1,394   -   0.0%
                    
CableOrganizer Acquisition, LLC Computer Supply Retail Common Stock Warrants (40.0% fully diluted)      -   -   0.0%
                    
          14,009   2,935   1.9%

 

11

Capitala Finance Corp.

 

Consolidated Schedule of Investments

(in thousands, except for units/shares)

SeptemberJune 30, 20192020

(unaudited)

 

Portfolio Company, Country(1), (2), (3), (4), (5) Industry Type of Investment Principal
Amount
  Cost  Fair Value  % of
Net Assets
 
Capitala Senior Loan Fund II, LLC Investment Funds Membership Units (80.0% ownership)(8)(17)      $13,600   $13,658   9.0%
                     
Capitala Senior Loan Fund II, LLC Investment Funds Subordinated Debt (7.0% Cash (1 month LIBOR + 5.0%), Due 9/3/24)(18)  -   -   -   0.0%
                     
           13,600   13,658   9.0%
                     
Portrait Studio, LLC Professional and Personal Digital Imaging First Lien Debt (9.0% Cash (1 month LIBOR + 7.0%, 1.0% Floor, 2.0% Ceiling), Due 12/31/22)(19)  $2,280   2,280   2,280   1.5%
                     
Portrait Studio, LLC Professional and Personal Digital Imaging First Lien Debt (9.1% Cash (1 month LIBOR + 7.0%, 1.0% Floor, 5.0% Ceiling), Due 12/31/22)(7)  4,500   4,320   1,376   0.9%
                     
Portrait Studio, LLC Professional and Personal Digital Imaging Preferred Units (4,350,000 Units)      2,450   -   0.0%
                     
Portrait Studio, LLC Professional and Personal Digital Imaging Membership Units (150,000 Units)      -   -   0.0%
                     
           9,050   3,656   2.4%
                     
Sub Total Control investments - United States         $36,659  $20,249   13.3%
                     
TOTAL INVESTMENTS - 244.5%         $359,573  $371,351   244.5%
Portfolio Company, Country (1), (2), (3), (4), (5)  Industry Type of Investment Principal Amount  Cost  Fair Value  % of
Net Assets
 
Control Investments - 8.5%                   
                     
Control investments - United States                 
                     
Vology, Inc. Information Technology First Lien Debt (10.5% Cash (1 month LIBOR + 8.5%, 2.0% Floor), Due 12/31/21) $3,829  $3,829  $3,829   3.6%
                     
Vology, Inc. Information Technology Class A Preferred Units (9,041,810 Units)      5,215   5,108   4.9%
                     
Vology, Inc. Information Technology Membership Units (5,363,982 Units)      -   -   0.0%
                     
           9,044   8,937   8.5%
                     
Sub Total Control investments - United States     $9,044  $8,937   8.5%
                     
TOTAL INVESTMENTS - 273.4%     $305,016  $287,266   273.4%

 

(1)All investments valued using unobservable inputs (Level 3), unless otherwise noted.
(2)All investments valued by the BoardCapitala Finance Corp.'s (the "Company") board of Directors.directors.
(3)All debt investments are income producing, unless otherwise noted. Equity and warrant investments are non-income producing, unless otherwise noted.
(4)Percentages are based on net assets of $151,881$105,055 as of SeptemberJune 30, 2019.2020.
(5)Capitala Finance Corp. 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 SecuritySecurities Act.
(6)The cash rate equals the approximate current yield on our last-out portion of the unitranche facility.
(7)Non-accrual investment.
(7) The investment has a $8.2 million unfunded commitment.
(8)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 SeptemberJune 30, 2019, 8.0%2020, 4.5% of the Company's total assets were non-qualifying assets.
(9)The investment has a $1.0 million unfunded commitment.
(10)The investment has a $0.7 million unfunded commitment.
(11)The equity investment is income producing, based on rate disclosed.
(12)The maturity date of the original investment has been extended.
(13)(10) The company may elect to have 1.5%cash rate equals the approximate current yield on our last-out portion of its cash interest capitalized as paid-in-kind interest.the unitranche facility.
(11) The investment has a $0.5 million unfunded commitment.
(12) The investment has a $3.5 million unfunded commitment.
(13) The investment has been exited or sold. The residual value reflects estimated earnout, escrow, or other proceeds expected post-closing.
(14) The investment has a $3.0 million unfunded commitment.
(15) The investment has a $3.3 million unfunded commitment.
(16) The investment has a $1.0 million unfunded commitment.
(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."
(15)(18) The equity investment has been exited. The residual value reflects estimated earnout to be settled post-closing.
(16)The investment has been exited. The residual value reflects estimated escrow and earnout to be settled post-closing.
(17)The investment has a $6.4 million unfunded commitment.
(18)The investment has a $5.0 million unfunded commitment.
(19)The investment has a $2.7 million unfunded commitment.is income producing, based on rate disclosed.

 

See accompanying notes to consolidated financial statements.

 

12

12

 

 

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

December 31, 20182019

 

PortfolioCompany, Country(1), (2), (3), (4), (19) Industry Type of Investment Principal Amount  Cost  Fair Value  % of
Net Assets
 
Non-control/non-affiliated investments - 150.4%                    
Portfolio Company, Country (1), (2), (3), (4), (5)  Industry Type of Investment Principal
Amount
  Cost  Fair Value  % of
Net Assets
 
Non-control/non-affiliated investments - 162.8%Non-control/non-affiliated investments - 162.8%                
                                      
Non-control/non-affiliated investments - United States                    Non-control/non-affiliated investments - United States                
                                      
3 Bridge Solutions, LLC IT Consulting First Lien Debt (11.3% Cash (1 month LIBOR + 9.0%, 1.0% Floor), Due 12/4/22) $13,954  $13,954  $13,954   7.3% IT Consulting First Lien Debt (10.7% Cash (1 month LIBOR + 9.0%, 1.0% Floor), Due 12/4/22) $13,274  $13,274  $13,274   9.0%
                                      
3 Bridge Solutions, LLC IT Consulting Preferred Units (965 units, 8.0% PIK)(5)      1,049   1,049   0.6% IT Consulting Preferred Units (965 units)      1,090   499   0.3%
                                      
3 Bridge Solutions, LLC IT Consulting Membership Units (39,000 units)      10   230   0.1% IT Consulting Membership Units (39,000 units)      10   -   0.0%
                                        
          15,013   15,233   8.0%          14,374   13,773   9.3%
                                       
Alternative Biomedical Solutions, LLC Healthcare First Lien Debt (9.5% Cash (1 month LIBOR + 7.0%, 1.0% Floor), Due 12/18/22)  118   118   118   0.1% Healthcare First Lien Debt (8.0% Cash, 3.8% PIK, Due 12/18/22)  5,491   5,331   5,319   3.6%
                                       
Alternative Biomedical Solutions, LLC Healthcare First Lien Debt (12.4% Cash, Due 12/18/22)(6)  13,000   13,000   10,370   5.4% Healthcare First Lien Debt (8.0% Cash, 3.8% PIK, Due 12/18/22) (6)  13,125   13,125   10,624   7.2%
                                      
Alternative Biomedical Solutions, LLC Healthcare Membership Units (20,092 units)      800   -   0.0% Healthcare Membership Units (20,092 units)      800   -   0.0%
                                        
          13,918   10,488   5.5%          19,256   15,943   10.8%
                                       
American Clinical Solutions, LLC Healthcare First Lien Debt (10.5% Cash, 2.0% PIK, Due 6/11/20)(7)  9,293   8,918   6,484   3.4% Healthcare First Lien Debt (7.0% Cash, Due 12/31/22)  3,500   3,500   3,500   2.3%
                                      
American Clinical Solutions, LLC Healthcare First Lien Debt (2.0% PIK, Due 12/31/22) (7)  6,000   3,485   3,485   2.4%
                    
          8,918   6,484   3.4%          6,985   6,985   4.7%
                                      
AmeriMark Direct, LLC Consumer Products First Lien Debt (12.8% Cash, Due 9/8/21)  18,300   18,029   18,300   9.6% Consumer Products First Lien Debt (14.3% Cash, Due 9/8/21)  16,123   15,974   15,633   10.6%
                    
          18,029   18,300   9.6%
                    
B&W Quality Growers, LLC Farming Membership Unit Warrants (91,739 Units)      -   5,880   3.1%
                                        
          -   5,880   3.1%          15,974   15,633   10.6%
                                      
BigMouth, Inc. Consumer Products First Lien Debt (14.3% Cash, Due 11/14/21)(6)  9,094   9,094   9,094   4.8% Consumer Products First Lien Debt (10.3% Cash (1 month LIBOR + 8.5%, 0.5% Floor, Due 11/14/21) (8)  857   857   857   0.6%
                                      
BigMouth, Inc. Consumer Products Series A Preferred Stock (350,000 shares, 8.0% PIK)(5)      411   352   0.2% Consumer Products First Lien Debt (10.2% Cash (1 month LIBOR + 8.5%, 0.5% Floor, Due 11/14/21)  8,784   8,784   8,628   5.8%
                                        
          9,505   9,446   5.0%          9,641   9,485   6.4%
                                      
Bluestem Brands, Inc. Online Merchandise Retailer First Lien Debt (10.0% Cash (1 month LIBOR + 7.5%, 1.0% Floor), Due 11/7/20)  3,779   3,762   3,499   1.8% Online Merchandise Retailer First Lien Debt (9.3% Cash (1 month LIBOR + 7.5%, 1.0% Floor), Due 11/7/20)  3,529   3,529   2,877   1.9%
                                        
          3,762   3,499   1.8%          3,529   2,877   1.9%
                                      
Burke America Parts Group, LLC Home Repair Parts Manufacturer Membership Units (14 units)      5   1,722   0.9% Home Repair Parts Manufacturer Membership Units (14 units)      5   2,489   1.7%
                                        
          5   1,722   0.9%          5   2,489   1.7%
                  
CableOrganizer Acquisition, LLC Computer Supply Retail First Lien Debt (9)      1,532   1,490   1.0%
                    
          1,532   1,490   1.0%

 

13

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

December 31, 20182019

 

PortfolioCompany, Country(1), (2), (3), (4), (19) Industry Type of Investment Principal Amount  Cost  Fair Value  % of
Net Assets
 
Portfolio Company, Country (1), (2), (3), (4), (5)  Industry Type of Investment Principal Amount  Cost  Fair Value  % of
Net Assets
 
California Pizza Kitchen, Inc. Restaurant Second Lien Debt (12.5% Cash (1 month LIBOR + 10.0%, 1.0% Floor), Due 8/23/23)  $5,000   $4,903   $4,903   2.6% Restaurant Second Lien Debt (11.9% Cash (3 month LIBOR + 10.0%, 1.0% Floor), Due 8/23/23) 5,000  4,927   $4,697   3.2%
                                      
          4,903   4,903   2.6%        4,927   4,697   3.2%
                                    
Cedar Ultimate Parent, LLC Consumer Electronics Series C Preferred Stock (4,759,250 units)      958   -   0.0%
                    
Cedar Ultimate Parent, LLC Consumer Electronics Series D Preferred Stock (16,562,190 units)      -   -   0.0%
                    
Cedar Ultimate Parent, LLC Consumer Electronics Series E Common Units (190,370 units)      -   -   0.0%
Chicken Soup for the Soul, LLC Multi-platform Media and Consumer Products First Lien Debt (10.2% Cash (1 month LIBOR + 8.5%, 1.5% Floor), Due 12/13/20)  13,000   13,000   13,000   8.8%
                                      
          958   -   0.0%        13,000   13,000   8.8%
                                    
Chicken Soup for the Soul, LLC Multi-platform Media and Consumer Products First Lien Debt (10.9% Cash (1 month LIBOR + 8.5%, 1.5% Floor), Due 12/13/20)  13,000   13,000   13,000   6.8%
Chief Fire Intermediate, Inc. Security System Services First Lien Debt (8.7% Cash (1 month LIBOR + 7.0%, 1.6% Floor), Due 11/8/24)  8,100   8,100   8,100   5.5%
                
Chief Fire Intermediate, Inc. Security System Services Class A Preferred Units (34,740 units, 10.0% PIK Dividend) (10)      913   913   0.6%
                
Chief Fire Intermediate, Inc. Security System Services Class B Common Units (3,510 units)      -   -   0.0%
                                      
          13,000   13,000   6.8%        9,013   9,013   6.1%
                                    
CIS Secure Computing, Inc. Government Services First Lien Debt (10.8% Cash (1 month LIBOR + 8.5%, 1.0% Floor), 1.0% PIK, Due 9/14/22)  10,428   10,428   10,428   5.5% Government Services First Lien Debt (10.2% Cash (1 month LIBOR + 8.5%, 1.0% Floor), 1.0% PIK, Due 9/14/22)  9,389   9,389   9,389   6.3%
                                    
CIS Secure Computing, Inc. Government Services Common Stock (46,163 shares)      1,000   1,681   0.9% Government Services Common Stock (46,163 shares)      1,000   1,890   1.3%
                                      
          11,428   12,109   6.4%        10,389   11,279   7.6%
                                    
Corporate Visions, Inc. Sales & Marketing Services Subordinated Debt (9.0% Cash, 2.0% PIK, Due 11/29/21)  18,940   18,940   18,679   9.8% Sales & Marketing Services Second Lien Debt (9.0% Cash, 2.0% PIK, Due 11/29/21)  19,327   19,327   18,962   12.8%
                                    
Corporate Visions, Inc. Sales & Marketing Services Common Stock (15,750 shares)      1,575   817   0.4% Sales & Marketing Services Common Stock (15,750 shares)      1,575   329   0.2%
                                      
          20,515   19,496   10.2%        20,902   19,291   13.0%
                                    
Currency Capital, LLC Financial Services First Lien Debt (13.4% Cash (1 month LIBOR + 11.0%, 0.5% Floor), Due 1/2/20)(8)  16,788   16,788   16,788   8.8% Financial Services First Lien Debt (13.7% Cash (1 month LIBOR + 12.0%, 0.5% Floor), 2.0% PIK, Due 1/2/20) (11)  16,269   16,269   16,269   11.0%
                                    
Currency Capital, LLC Financial Services Class A Preferred Units (2,000,000 units)(8)      2,000   2,000   1.0% Financial Services Class A Preferred Units (2,000,000 units) (11)      2,000   2,504   1.7%
                                      
          18,788   18,788   9.8%        18,269   18,773   12.7%
                                    
Flavors Holdings, Inc. Food Product Manufacturer First Lien Debt (8.6% Cash (3 month LIBOR + 5.8%, 1.0% Floor), Due 4/3/20)  6,300   6,241   6,070   3.2% Food Product Manufacturer First Lien Debt (7.7% Cash (3 month LIBOR + 5.8%, 1.0% Floor), Due 4/3/20)  5,789   5,778   5,767   3.9%
                                    
Flavors Holdings, Inc. Food Product Manufacturer Second Lien Debt (12.8% Cash (3 month LIBOR + 10.0%, 1.0% Floor), Due 10/3/21)  12,000   11,809   11,265   5.9% Food Product Manufacturer Second Lien Debt (11.9% Cash (3 month LIBOR + 10.0%, 1.0% Floor), Due 10/3/21)  12,000   11,878   11,842   8.0%
                                      
          18,050   17,335   9.1%        17,656   17,609   11.9%
                
Freedom Electronics, LLC Electronic Machine Repair First Lien Debt (8.7% Cash, Due 12/20/23) (6)(12)  5,940   5,940   5,940   4.0%
                
Freedom Electronics, LLC Electronic Machine Repair Membership Units (181,818 units)      182   160   0.1%
                  
        6,122   6,100   4.1%

 

14

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

December 31, 20182019

 

PortfolioCompany, Country(1), (2), (3), (4), (19) Industry Type of Investment Principal Amount  Cost  Fair Value  % of
Net Assets
 
Freedom Electronics, LLC Electronic Machine Repair First Lien Debt (8.7% Cash (1 month LIBOR + 6.3%, 2.0% Floor), Due 12/20/23)(9)  250   250   250   0.1%
                     
Freedom Electronics, LLC Electronic Machine Repair First Lien Debt (9.1% Cash, Due 12/20/23)(6)  6,000   6,000   6,000   3.1%
                     
Freedom Electronics, LLC Electronic Machine Repair Membership Units (181,818 units)      182   182   0.1%
                     
           6,432   6,432   3.3%
                     
Installs, LLC Logistics First Lien Debt (9.3% Cash (1 month LIBOR + 7.0%, 1.8% Floor), Due 6/20/23)  2,984   2,984   2,984   1.6%
                     
           2,984   2,984   1.6%
                     
MC Sign Lessor Corp. Advertising & Marketing Services First Lien Debt (9.3% Cash (1 month LIBOR + 7.0%, 1.0% Floor), Due 12/22/22)(10)  -   -   -   0.0%
                     
MC Sign Lessor Corp. Advertising & Marketing Services First Lien Debt (9.3% Cash (1 month LIBOR + 7.0%, 1.0% Floor), Due 12/22/22)(11)  3,905   3,905   3,905   2.0%
                     
           3,905   3,905   2.0%
                     
Nth Degree, Inc. Business Services First Lien Debt (13.9% Cash (1 month LIBOR + 11.5%, 1.0% Floor), 2.0% PIK, Due 3/29/23)(12)  7,346   7,346   7,346   3.9%
                     
Nth Degree, Inc. Business Services Preferred Stock (2,400 Units, 10.0% PIK dividend)(5)      3,244   16,490   8.6%
                     
           10,590   23,836   12.5%
                     
Sequoia Healthcare Management, LLC Healthcare Management First Lien Debt (10.8% Cash (1 month LIBOR + 8.5%, 1.8% Floor), Due 8/21/23)  13,792   13,792   13,792   7.2%
                     
           13,792   13,792   7.2%
                     
Sunset Digital Holdings, LLC Telecommunications First Lien Debt (9.6% Cash (1 month LIBOR + 7.3%, 1.5% Floor), Due 8/2/19)  18,000   18,000   18,000   9.4%
                     
           18,000   18,000   9.4%
                     
Sur La Table, Inc. Retail First Lien Debt (12.0% Cash, Due 7/28/20)  15,000   15,000   14,979   7.9%
                     
           15,000   14,979   7.9%
                     
Taylor Precision Products, Inc. Household Product Manufacturer Series C Preferred Stock (379 shares)      758   758   0.4%
                     
           758   758   0.4%
                     
U.S. BioTek Laboratories, LLC Testing laboratories First Lien Debt (10.1% Cash, Due 12/14/23)(6)(13)  7,000   7,000   7,000   3.7%
                     
U.S. BioTek Laboratories, LLC Testing laboratories Class A Preferred Units (500 Units, 10.0% PIK)(5)      502   502   0.3%
                     
U.S. BioTek Laboratories, LLC Testing laboratories Class C Units (500 Units)      1   1   0.0%
                     
           7,503   7,503   4.0%
Portfolio Company, Country (1), (2), (3), (4), (5)  Industry Type of Investment Principal Amount  Cost  Fair Value  % of
Net Assets
 
HUMC Opco, LLC Healthcare First Lien Debt (9.0% Cash, Due 8/16/20) 5,000  5,000   $5,000   3.4%
                     
           5,000   5,000   3.4%
                     
Installs, LLC Logistics First Lien Debt (9.3% Cash, Due 6/20/23) (6)  2,924   2,924   2,924   2.0%
                     
           2,924   2,924   2.0%
                     
J5 Infrastructure Partners, LLC Wireless Deployment Services First Lien Debt (8.3% Cash (1 month LIBOR + 6.5%, 1.8% Floor), Due 12/20/24) (13)  -   -   -   0.0%
                     
J5 Infrastructure Partners, LLC Wireless Deployment Services First Lien Debt (8.3% Cash (1 month LIBOR + 6.5%, 1.8% Floor), Due 12/20/24)  7,000   7,000   7,000   4.7%
                     
           7,000   7,000   4.7%
                     
Jurassic Quest Holdings, LLC Entertainment First Lien Debt (9.5% Cash (1 month LIBOR + 7.5%, 2.0% Floor), Due 5/1/24) (14)  10,827   10,827   10,827   7.3%
                     
Jurassic Quest Holdings, LLC Entertainment Preferred Units (375,000 units)      388   85   0.1%
                     
           11,215   10,912   7.4%
                     
MicroHoldco, LLC General Industrial Preferred Units (9)      838   838   0.6%
                     
           838   838   0.6%
                     
Portrait Studio, LLC Professional and Personal Digital Imaging First Lien Debt (9)      510   510   0.3%
                     
           510   510   0.3%
                     
Rapid Fire Protection, Inc. Security System Services First Lien Debt (9.2% Cash, Due 11/22/24) (6)(15)  6,550   6,550   6,550   4.4%
                     
Rapid Fire Protection, Inc. Security System Services Common Stock (363 shares)      500   500   0.4%
                     
           7,050   7,050   4.8%
                     
Seitel, Inc. Data Services First Lien Debt (10.0% Cash (1 month LIBOR + 8.3%, 1.0% Floor), Due 3/15/23)  4,749   4,749   4,749   3.2%
                     
           4,749   4,749   3.2%
                     
Sequoia Healthcare Management, LLC Healthcare Management First Lien Debt (12.8% Cash, Due 6/26/20)  12,744   12,744   12,607   8.5%
                     
           12,744   12,607   8.5%
                     
Sur La Table, Inc. Retail First Lien Debt (10.9% Cash (3 month LIBOR + 9.0%, 1.0% Floor), Due 7/31/22) (16)(17)  10,528   10,528   10,045   6.8%
                     
           10,528   10,045   6.8%

 

15

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

December 31, 20182019

 

PortfolioCompany, Country(1), (2), (3), (4), (19) Industry Type of Investment Principal Amount  Cost  Fair Value  % of
Net Assets
 
Portfolio Company, Country (1), (2), (3), (4), (5)  Industry Type of Investment Principal Amount  Cost  Fair Value  % of
Net Assets
 
Taylor Precision Products, Inc. Household Product Manufacturer Series C Preferred Stock (379 shares)      $758  758   0.5%
                  
        758   758   0.5%
                
U.S. BioTek Laboratories, LLC Testing laboratories First Lien Debt (9.3% Cash, Due 12/14/23) (6)(12) $6,930   6,930   6,822   4.6%
                
U.S. BioTek Laboratories, LLC Testing laboratories Class A Preferred Units (500 Units)      540   204   0.1%
                
U.S. BioTek Laboratories, LLC Testing laboratories Class C Units (500 Units)      1   -   0.0%
                  
        7,471   7,026   4.7%
                
U.S. Well Services, Inc. Oil & Gas Services Class A Common Stock (77,073 shares)(8)      $771   $632   0.3% Oil & Gas Services Class A Common Stock (77,073 shares) (11)(18)      771   146   0.1%
                                    
U.S. Well Services, Inc. Oil & Gas Services Class B Common Stock (1,125,426 shares)(8)      6,701   9,229   4.9% Oil & Gas Services Class B Common Stock (1,125,426 shares) (11)(18)      6,701   2,127   1.4%
                                      
          7,472   9,861   5.2%        7,472   2,273   1.5%
                    
Vology, Inc. Information Technology Subordinated Debt (15.0% Cash (1 month LIBOR + 14.0%, 1.0% Ceiling), 4.0% PIK Due 6/30/20)  $8,720   8,720   8,645   4.5%
                    
          8,720   8,645   4.5%
                    
Xirgo Technologies, LLC Information Technology Subordinated Debt (11.5% Cash, Due 3/1/22)  15,750   15,750   15,750   8.3%
                                    
Xirgo Technologies, LLC Information Technology Membership Units (600,000 units)      600   837   0.4% Information Technology Membership Units (600,000 units)      600   917   0.6%
                                      
          16,350   16,587   8.7%        600   917   0.6%
                                      
Sub Total Non-control/non-affiliated investments - United States          268,298   283,965   148.9%Sub Total Non-control/non-affiliated investments - United States     $250,433  $241,046   162.8%
                                     
Non-control/non-affiliated investments - Brazil                    
                    
Velum Global Credit Management, LLC Financial Services First Lien Debt (15.0% PIK, Due 12/31/17)(7) (8) (12)  14,277   11,816   2,878   1.5%
                    
          11,816   2,878   1.5%
                    
Sub Total Non-control/non-affiliated investments - Brazil          11,816   2,878   1.5%
                    
Sub Total Non-control/non-affiliated investments         $280,114  $286,843   150.4%
                    
Affiliate Investments - 48.8%                    
Affiliate Investments - 66.7%Affiliate Investments - 66.7%                 
                                     
Affiliate investments - United States                    Affiliate investments - United States           ��     
                                    
Burgaflex Holdings, LLC Automobile Part Manufacturer First Lien Debt (12.0% Cash, 1.0% PIK, Due 3/23/21) $14,801  $14,801  $14,384   7.5% Automobile Part Manufacturer First Lien Debt (12.0% Cash, 3.0% PIK, Due 3/23/21) $14,421  $14,421  $14,421   9.7%
                                    
Burgaflex Holdings, LLC Automobile Part Manufacturer Common Stock Class A (1,253,198 shares)      1,504   -   0.0% Automobile Part Manufacturer Common Stock Class B (1,085,073 shares)      362   635   0.4%
                                    
Burgaflex Holdings, LLC Automobile Part Manufacturer Common Stock Class B (900,000 shares)      300   -   0.0% Automobile Part Manufacturer Common Stock Class A (1,253,198 shares)      1,504   -   0.0%
                                      
          16,605   14,384   7.5%        16,287   15,056   10.1%
                
City Gear, LLC Footwear Retail Membership Unit Warrants (9)      -   3,326   2.2%
                  
        -   3,326   2.2%
                
Eastport Holdings, LLC Business Services Second Lien Debt (14.9% Cash (3 month LIBOR + 13.0%, 0.5% Floor), Due 12/29/21) (16)  16,500   16,155   16,500   11.2%
                
Eastport Holdings, LLC Business Services Membership Units (22.9% ownership)      3,263   17,822   12.0%
                  
        19,418   34,322   23.2%

 

16

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

December 31, 20182019

 

PortfolioCompany, Country(1), (2), (3), (4), (19) Industry Type of Investment Principal Amount  Cost  Fair Value  % of
Net Assets
 
City Gear, LLC Footwear Retail Membership Unit Warrants (11.4% fully diluted)(14)      $-   $3,184   1.7%
                    
          -   3,184   1.7%
                    
Eastport Holdings, LLC Business Services Subordinated Debt (15.8% Cash (3 month LIBOR + 13.0%, 0.5% Floor), Due 4/29/20)  $16,500   15,496   16,500   8.7%
                    
Eastport Holdings, LLC Business Services Membership Units (22.9% ownership)      3,263   17,610   9.2%
                    
          18,759   34,110   17.9%
                    
Portfolio Company, Country (1), (2), (3), (4), (5)  Industry Type of Investment Principal Amount  Cost  Fair Value  % of
Net Assets
 
GA Communications, Inc. Advertising & Marketing Services Series A-1 Preferred Stock (1,998 shares, 8.0% PIK Dividend)(5)      3,179   3,482   1.8% Advertising & Marketing Services Series A-1 Preferred Stock (1,998 shares, 8.0% PIK Dividend) (10)     3,476  3,761   2.6%
                                    
GA Communications, Inc. Advertising & Marketing Services Series B-1 Common Stock (200,000 shares)      2   1,325   0.7% Advertising & Marketing Services Series B-1 Common Stock (200,000 shares)      2   501   0.3%
                                      
          3,181   4,807   2.5%        3,478   4,262   2.9%
                                    
J&J Produce Holdings, Inc. Produce Distribution Subordinated Debt (13.0% Cash, Due 6/16/19)(12)  6,406   6,406   6,210   3.3%
                    
J&J Produce Holdings, Inc. Produce Distribution Common Stock (8,182 shares)      818   -   0.0%
                    
J&J Produce Holdings, Inc. Produce Distribution Common Stock Warrants (6,369 shares)      -   -   0.0%
                    
          7,224   6,210   3.3%
LJS Partners, LLC QSR Franchisor Preferred Units (92,924 units)      293   372   0.3%
                                    
LJS Partners, LLC QSR Franchisor Common Stock (1,587,848 shares)      1,188   3,018   1.6% QSR Franchisor Membership Units (2,593,234 units)      1,224   1,509   1.0%
                                      
          1,188   3,018   1.6%        1,517   1,881   1.3%
                                    
MMI Holdings, LLC Medical Device Distributor First Lien Debt (12.0% Cash, Due 1/31/20)(12)  2,600   2,600   2,600   1.4% Medical Device Distributor First Lien Debt (12.0% Cash, Due 1/31/21) (16) 2,600   2,600   2,600   1.8%
                                    
MMI Holdings, LLC Medical Device Distributor Subordinated Debt (6.0% Cash, Due 1/31/20)(12)  400   388   400   0.2% Medical Device Distributor Second Lien Debt (6.0% Cash, Due 1/31/21) (16)  400   388   400   0.3%
                                    
MMI Holdings, LLC Medical Device Distributor Preferred Units (1,000 units, 6.0% PIK Dividend)(5)      1,474   1,612   0.8% Medical Device Distributor Preferred Units (1,000 units, 6.0% PIK Dividend) (10)      1,572   1,710   1.1%
                                    
MMI Holdings, LLC Medical Device Distributor Common Membership Units (45 units)      -   185   0.1% Medical Device Distributor Common Membership Units (45 units)      -   194   0.1%
                                      
          4,462   4,797   2.5%        4,560   4,904   3.3%
                                    
Navis Holdings, Inc. Textile Equipment Manufacturer First Lien Debt (11.0% Cash, Due 6/30/23) (16)  10,100   10,100   10,100   6.8%
                
Navis Holdings, Inc. Textile Equipment Manufacturer Class A Preferred Stock (1,000 shares, 10.0% Cash Dividend) (10)      1,000   1,000   0.7%
                
Navis Holdings, Inc. Textile Equipment Manufacturer Common Stock (60,000 shares)      -   464   0.3%
                  
        11,100   11,564   7.8%
                
Nth Degree Investment Group, LLC Business Services Membership Units (6,088,000 Units)      6,088   6,088   4.1%
                  
        6,088   6,088   4.1%
                
RAM Payment, LLC Financial Services First Lien Debt (10.0% Cash, Due 1/4/24) (6)  9,019   9,019   9,019   6.1%
                
RAM Payment, LLC Financial Services Preferred Units (86,000 units, 8.0% PIK Dividend) (10)      928   1,725   1.2%
                  
        9,947   10,744   7.3%
                
Sierra Hamilton Holdings Corporation Oil & Gas Engineering and Consulting Services Second Lien Debt (15.0% PIK, Due 9/12/23)  782   748   748   0.5%
                
Sierra Hamilton Holdings Corporation Oil & Gas Engineering and Consulting Services Common Stock (15,068,000 shares)      6,958   6,854   3.6% Oil & Gas Engineering and Consulting Services Common Stock (15,068,000 shares)      6,958   5,160   3.5%
                                      
          6,958   6,854   3.6%        7,706   5,908   4.0%

 

17

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

December 31, 20182019

 

PortfolioCompany, Country(1), (2), (3), (4), (19) Industry Type of Investment Principal Amount  Cost  Fair Value  % of
Net Assets
 
US Bath Group, LLC Building Products First Lien Debt (11.4% Cash (1 month LIBOR + 9.0%, 1.0% Floor), Due 1/2/23)  $12,750   $12,750   $12,750   6.7%
                     
US Bath Group, LLC Building Products Membership Units (500,000 units)      500   2,083   1.1%
                     
           13,250   14,833   7.8%
                     
V12 Holdings, Inc. Data Processing & Digital Marketing Subordinated Debt(15)  -   673   742   0.4%
                     
           673   742   0.4%
                     
Sub Total Affiliate investments - United States         $72,300  $92,939   48.8%
                     
Control Investments - 36.3%                    
                     
Control investments - United States                    
                     
AAE Acquisition, LLC Industrial Equipment Rental Second Lien Debt (6.0% Cash, Due 8/24/19)(12) $16,327  $16,327  $16,327   8.6%
                     
AAE Acquisition, LLC Industrial Equipment Rental Membership Units (2.2% fully diluted)      17   -   0.0%
                     
AAE Acquisition, LLC Industrial Equipment Rental Warrants (37.8% fully diluted)      -   -   0.0%
                     
           16,344   16,327   8.6%
                     
CableOrganizer Acquisition, LLC Computer Supply Retail First Lien Debt (10.0% Cash, Due 5/24/19)(16)  1,708   1,708   1,708   0.9%
                     
CableOrganizer Acquisition, LLC Computer Supply Retail First Lien Debt (12.0% Cash, 4.0% PIK, Due 6/30/19)(12)  8,889   8,889   8,889   4.6%
                     
CableOrganizer Acquisition, LLC Computer Supply Retail Preferred Units (4,000,000 units)      2,354   -   0.0%
                     
CableOrganizer Acquisition, LLC Computer Supply Retail Common Stock (21.3% fully diluted)      1,394   -   0.0%
                     
CableOrganizer Acquisition, LLC Computer Supply Retail Common Stock Warrants (10.0% fully diluted )      -   -   0.0%
                     
           14,345   10,597   5.5%
                     
Capitala Senior Loan Fund II, LLC Investment Funds Membership Units (80.0% ownership)(8)(17)      13,600   13,695   7.2%
                     
           13,600   13,695   7.2%

18

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

December 31, 2018

PortfolioCompany, Country(1), (2), (3), (4), (19) Industry Type of Investment Principal Amount  Cost  Fair Value  % of
Net Assets
 
Micro Precision, LLC Conglomerate Subordinated Debt (10.0% Cash, Due 1/1/19)(12)  $1,862   $1,862   $1,862   1.0%
                     
Micro Precision, LLC Conglomerate Subordinated Debt (14.0% Cash, 4.0% PIK, Due 1/1/19)(12)  4,325   4,325   4,325   2.3%
                     
Micro Precision, LLC Conglomerate Series A Preferred Units (47 units)      1,629   2,817   1.5%
                     
           7,816   9,004   4.8%
                     
Navis Holdings, Inc. Textile Equipment Manufacturer First Lien Debt (15.0% Cash, Due 10/30/20)(12)  7,500   7,500   7,500   3.9%
                     
Navis Holdings, Inc. Textile Equipment Manufacturer Class A Preferred Stock (1,000 shares, 10.0% Cash Dividend)(5)      1,000   1,000   0.5%
                     
Navis Holdings, Inc. Textile Equipment Manufacturer Common Stock (300,000 shares)      1   4,348   2.3%
                     
           8,501   12,848   6.7%
                     
Portrait Studio, LLC Professional and Personal Digital Imaging First Lien Debt (9.0% Cash (1 month LIBOR + 7.0%, 1.0% Floor, 2.0% Ceiling), Due 12/31/22)(18)  -   -   -   0.0%
                     
Portrait Studio, LLC Professional and Personal Digital Imaging First Lien Debt (9.4% Cash (1 month LIBOR + 7.0%, 1.0% Floor, 5.0% Ceiling), Due 12/31/22)  4,500   4,500   4,500   2.4%
                     
Portrait Studio, LLC Professional and Personal Digital Imaging Preferred Units (4,350,000 Units)      2,450   2,174   1.1%
                     
Portrait Studio, LLC Professional and Personal Digital Imaging Membership Units (150,000 Units)      -   -   0.0%
                     
           6,950   6,674   3.5%
                     
Sub Total Control investments - United States         $67,556  $69,145   36.3%
                     
TOTAL INVESTMENTS - 235.5%         $419,970  $448,927   235.5%
Portfolio Company, Country (1), (2), (3), (4), (5)  Industry Type of Investment Principal Amount  Cost  Fair Value  % of
Net Assets
 
V12 Holdings, Inc. Data Processing & Digital Marketing Second Lien Debt (9)      $655   $708   0.5%
                     
           655   708   0.5%
                     
Sub Total Affiliate investments - United States     $80,756  $98,763   66.7%
                     
Control Investments - 15.3%                    
                     
Control investments - United States                   
                     
Capitala Senior Loan Fund II, LLC Investment Funds Second Lien Debt (6.7% Cash (1 month LIBOR + 5.0%), Due 9/3/24) (11)(19)  -   -   -   0.0%
                     
Capitala Senior Loan Fund II, LLC Investment Funds Membership Units (80.0% ownership) (11)(20)(21)     $13,600  $13,631   9.2%
                     
           13,600   13,631   9.2%
                     
Vology, Inc. Information Technology First Lien Debt (10.5% Cash (1 month LIBOR + 8.5%, 2.0% Floor), Due 12/31/21) $3,877   3,877   3,877   2.6%
                     
Vology, Inc. Information Technology Class A Preferred Units (9,041,810 Units)      5,215   5,215   3.5%
                     
Vology, Inc. Information Technology Membership Units (5,363,982 Units)      -   -   0.0%
                     
           9,092   9,092   6.1%
                     
Sub Total Control investments - United States      $22,692  $22,723   15.3%
                     
TOTAL INVESTMENTS - 244.8%      $353,881  $362,532   244.8%

 

(1)All investments valued using unobservable inputs (Level 3)., unless otherwise noted.
(2)All investments valued by the BoardCapital Finance Corp.'s (the "Company") board of Directors.directors.
(3)All debt investments are income producing, unless otherwise noted. Equity and warrant investments are non-income producing, unless otherwise noted.
(4)Percentages are based on net assets of $190,644$148,113 as of December 31, 2018.2019.
(5)The equity investment is income producing, basedCompany 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 rate disclosed.resale, and may be deemed to be "restricted securities" under the Securities Act.
(6)The cash rate equals the approximate current yield on our last-out portion of the unitranche facility.
(7)Non-accrual investment. The investment is convertible to preferred equity.
(8) The investment has a $2.6 million unfunded commitment.
(9) The investment has been exited or sold. The residual value reflects estimated earnout, escrow, or other proceeds expected post-closing.
(10) The equity investment is income producing, based on rate disclosed.
(11) 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, 2018, 9.2%2019, 8.1% of the Company's total assets were non-qualifying assets.
(9)(12) The investment has a $0.8$1.0 million unfunded commitment.
(10)(13) The investment has a $3.5 million unfunded commitment.
(14) The investment has a $0.5 million unfunded commitment.
(11)(15) The investment has a $0.6$4.5 million unfunded commitment.
(12)(16) The maturity date of the original investment has been extended.
(13)(17) The company may elect to have 1.5% of its cash interest capitalized as paid-in-kind interest.
(18) Investment is valued using observable inputs (Level 1). The stock of the company is traded on the NASDAQ Capital Market under the ticker "USWS."
(19) The investment has a $1.0$5.0 million unfunded commitment.
(14)The investment has been exited. The residual value reflects estimated earnout to be settled post-closing.
(15)The investment has been exited. The residual value reflects estimated escrow and earnout to be settled post-closing.
(16)The investment has a $0.3 million unfunded commitment.
(17)(20) The investment has a $6.4 million unfunded commitment.
(18)(21) The investment has a $5.0 million unfunded commitment.
(19)Capitala Finance Corp. generally acquires its investments in private transactions exempt from registration underis valued based on the Securities Actnet asset value 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.company.

See accompanying notes to consolidated financial statements.


CAPITALA FINANCE CORP.

 

19

CAPITALA FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

SeptemberJune 30, 20192020 

(Unaudited)

 

Note 1. Organization

 

Capitala Finance Corp. (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 Capitala Investment Advisors, LLC (the “Investment Advisor”), an investment adviser that is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, and Capitala Advisors Corp. (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. Both directly and through our subsidiary that is licensed by the U.S. Small Business Administration (“SBA”) under the Small Business Investment Company (“SBIC”) Act, 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, second lien loans, subordinated loans, and, to a lesser extent, second lien loans and equity securities issued by lower middle-market companies 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 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 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 SBA 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.

 

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, and the Taxable Subsidiaries.

 

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The Company’s financial statements as of SeptemberJune 30, 20192020 and December 31, 20182019 and for the periods ended SeptemberJune 30, 20192020 and September 30, 20182019 are presented on a consolidated basis. The effects of all intercompany transactions between the Company and its subsidiaries (Fund II, Fund III, 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, 2018,2019, filed with the U.S. Securities and Exchange Commission (“SEC”) on March 4, 2019.2, 2020.

 

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, and the Taxable Subsidiaries) in its consolidated financial statements. The Company doesdid not consolidate its interest in Capitala Senior Loan Fund II, LLC (“CSLF II”) during the periods it was in existence because the investment iswas not considered a substantially wholly owned investment company subsidiary. Further, CSLF II iswas a joint venture for which shared power existsexisted relating to the decisions that most significantly impactimpacted 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 between 5% and 25% 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.

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In determining fair value, the Company’s board of directors (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 usesused net asset value (“NAV”) as the fair value for its equity investment in CSLF II. CSLF II recordsrecorded 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.

 

The enterprise value waterfall approach is primarily utilized to value the Company’s equity securities, including warrants. However, the Company may utilize the enterprise value waterfall approach to value certain debt securities.

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.

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Asset Approach

 

The asset approach values an investment based on the value of the underlying collateral securing the investment. This approach is used when the Company has reason to believe that it will not collect all principal and interest in accordance with the contractual terms of the debt agreement.

 

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. The 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. The Company may elect to cease accruing PIK interest and continue accruing interest income in cases where a loan is currently paying its interest but, in management’s judgment, there is a reasonable likelihood of principal loss on the loan. 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 and paydowns: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 the 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.

  

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General and Administrative Expenses

 

General and administrative expenses are paidaccrued 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.

  

Earnings per share

 

The Company’s earnings per share (“EPS”) amounts have been computed based on the weighted-average number of shares of 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 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 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.

 

Commitments and Contingencies

 

As of SeptemberJune 30, 2020, the Company had outstanding unfunded commitments related to debt investments in existing portfolio companies of $8.2 million (Bluestem Brands, Inc.), $6.3 million (Rapid Fire Protection, Inc), $3.5 million (J5 Infrastructure Partners, LLC), $1.0 million (U.S. BioTek Laboratories, LLC), and $0.5 million (Freedom Electronics, LLC). As of December 31, 2019, the Company had outstanding unfunded commitments related to debt and equity investments in existing portfolio companies of  $11.4 million (CSLF II), $2.7$4.5 million (Portrait Studio,(Rapid Fire Protection, Inc), $3.5 million (J5 Infrastructure Partners, LLC), $2.6 million (BigMouth, Inc.), $1.0 million (Freedom Electronics, LLC), $1.0 million (U.S. BioTek Laboratories, LLC), and $0.7$0.5 million (Jurassic Quest Holdings, LLC).  As of December 31, 2018, the Company had outstanding unfunded commitments related to debt and equity investments in existing portfolio companies of $6.4 million (CSLF II), $5.0 million (Portrait Studio, LLC), $1.1 million (MC Sign Lessor, Corp.), $1.0 million (U.S. BioTek Laboratories, LLC), $0.8 million (Freedom Electronics, LLC), and $0.3 million (CableOrganizer Acquisition, LLC).  

The Company may invest in the same unitranche facility as CSLF II, whereby CSLF II provides the first-out portion of the unitranche facility and the Company and other lenders provide the last-out portion of the unitranche facility. Under a guarantee agreement, the Company may be required to purchase its pro-rata portion of first-out loans from CSLF II upon certain triggering events, including acceleration upon payment default of the underlying borrower. As of September 30, 2019, the Company has evaluated the fair value of the guarantee under the guidance of ASC Topic 460 —Guarantees and determined that the fair value of the guarantee is immaterial as the risk of payment default for first-out loans in CSLF II is considered remote. The maximum exposure to credit risk as of September 30, 2019 and December 31, 2018, was $7.3 million and $4.3 million, respectively, and extends to the stated maturity of the underlying loans in CSLF II.

 

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.

On December 28, 2017, an alleged stockholder filed a putative class action lawsuit complaint, Paskowitz v. Capitala Finance Corp., et al., in the United States District Court for the Central District of California (case number 2:17-cv-09251-MWF-AS) (the “Paskowitz Action”), against the Company and certain of its current officers on behalf of all persons who purchased or otherwise acquired the Company’s common stock between January 4, 2016 and August 7, 2017. On January 3, 2018, another alleged stockholder filed a putative class action complaint, Sandifer v. Capitala Finance Corp., et al., in the United States District Court for the Central District of California (case number 2:18-cv-00052-MWF-AS) (the “Sandifer Action”), asserting substantially similar claims on behalf of the same putative class and against the same defendants. On February 2, 2018, the Sandifer Action was transferred, on stipulation of the parties, to the United States District Court for the Western District of North Carolina. The Sandifer Action was voluntarily dismissed on February 28, 2018. On March 1, 2018, the Paskowitz Action was transferred, on stipulation of the parties, to the United States District Court for the Western District of North Carolina (case number 3:18-cv-00096-RJC-DSC). On June 19, 2018, the plaintiffs in the Paskowitz Action filed their amended complaint.  The amended complaint alleged certain violations of the securities laws, including, inter alia, that the defendants made certain materially false and misleading statements and omissions regarding the Company’s business, operations, and prospects between January 4, 2016 and August 7, 2017.  The amended complaint sought compensatory damages and attorneys’ fees and costs, among other relief, but did not specify the amount of damages being sought.

On August 14, 2018, Defendants in the Paskowitz Action filed a motion to dismiss the amended complaint. On August 15, 2019, the Court granted Defendants’ motion to dismiss and dismissed the amended complaint without prejudice to the plaintiffs’ ability to file a motion seeking to further amend the amended complaint.  On September 16, 2019, the plaintiffs filed a notice with the Court informing the Court that plaintiffs intend not to file a second amended complaint and requesting that the Court enter an order of final judgment and dismissal. On October 25, 2019, the Court entered a judgment in accordance with the August 15, 2019 dismissal order. While the Company intends to vigorously defend itself in this litigation should the litigation continue, the outcome of these legal proceedings cannot be predicted with certainty.

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Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult and requires an extensive degree of judgment, particularly where the matters involve indeterminate claims for monetary damages, are in the early stages of the proceedings, and are subject to appeal. In addition, because most legal proceedings are resolved over extended periods of time, potential losses are subject to change due to, among other things, new developments, changes in legal strategy, the outcome of intermediate procedural and substantive rulings and other parties’ settlement posture and their evaluation of the strength or weakness of their case against us. For these reasons, we are currently unable to predict the ultimate timing or outcome of, or reasonably estimate the possible losses or a range of possible losses resulting from, the matters described above. Based on information currently available, the Company does not believe that any reasonably possible losses arising from the currently pending legal matters described above will be material to the Company’s results of operations or financial condition. However, in light of the inherent uncertainties involved in such matters, an adverse outcome in this litigation could materially and adversely affect the Company’s financial condition, results of operations, or cash flows in any particular reporting period.

 

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 SeptemberJune 30, 20192020 and December 31, 2018.2019. 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.

 

TheIn 2017, the Company elected to amend its tax year end from August 31 to December 31 and filed a tax return for the four months ended December 31, 2017. The tax periods ended December 31, 2018,2019, December 31, 2017, August2018, December 31, 2017, and August 31, 20162017 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 ninesix months ended SeptemberJune 30, 20192020 and September 30, 2018.2019. 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 SeptemberJune 30, 2019,2020, the aggregate net unrealized depreciation for all securities was $(5.3)$(34.9) million. As of SeptemberJune 30, 2019,2020, gross unrealized appreciation was $31.4$5.0 million and gross unrealized depreciation was $(36.7)$(39.9) million. The aggregate cost of securities for U.S. federal income tax purposes was $376.6$322.2 million as of SeptemberJune 30, 2019.2020. For U.S. federal income tax purposes, as of December 31, 2018,2019, the aggregate net unrealized appreciationdepreciation for all securities was $6.5$(9.2) million. As of December 31, 2018,2019, gross unrealized appreciation was $31.9$7.7 million and gross unrealized depreciation was $(25.4)$(16.9) million. The aggregate cost of securities for U.S. federal income tax purposes was $442.4$371.7 million as of December 31, 2018.2019.

 

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 SeptemberJune 30, 20192020 and December 31, 2018,2019, the Company recorded a net deferred tax asset of $0.0 million and $0.6 million, respectively.$0.0. For the three and ninesix months ended SeptemberJune 30, 2020, the Company recorded a tax provision of $0.0. For the three and six months ended June 30, 2019, the Company recorded a tax provision of $0.0$(0.7) million and $(0.6) million, respectively. For the three months ended September 30, 2018, the Company recorded a tax provision of $(0.1) million. For the nine months ended September 30, 2018, the company recorded a tax benefit of $1.2 million. As of SeptemberJune 30, 20192020 and December 31, 2018,2019, the valuation allowance on the Company’s deferred tax asset was $3.1$4.0 million and $0.4$3.2 million, respectively. During the three and ninesix months ended SeptemberJune 30, 2020, the Company recognized an increase (decrease) in the valuation allowance of $(27) thousand and $0.8 million, respectively. During the three and six months ended June 30, 2019, the Company recognized an increase in the valuation allowance of $0.7 and $2.7 million, respectively. No change in the valuation allowance was recognized for the three and nine months ended September 30, 2018.

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$2.0 million.

 

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% (which has been temporarily reduced to 10% for distributions declared on or after April 1, 2020, and on or before December 31, 2020) 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 SeptemberJune 30, 20192020 and December 31, 2018,2019, there were no uncertain tax positions.

 

The Company is required to determine whether a tax position of the Company is more likely-than-notmore-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.

 

U.S. GAAP provides guidance on thresholds, measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition that is intended to provide better financial statement comparability among different entities.


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 6) 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 financial statements, related tax disclosures, and the value of the investments.

 

Distributions

 

Distributions to 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 LiquidityCOVID-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,loan. The value of the Company’s investments may also be detrimentally affected to the extent observable secondaryprimary or primarysecondary market yields for similar instruments issued by comparable companies increase materially or risk premiums required 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.

26

 

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 recent outbreak of COVID-19. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, a national emergency was declared in the U.S. The ongoing spread of COVID-19 has had, and will continue to have, a material adverse impact on the U.S. and global economy as commercial activity and public perception have been negatively impacted by the outbreak. The ultimate extent to which the COVID-19 crisis will impact the Company’s financial condition and results of operations will depend on future developments affecting not only the Company, but also the entire U.S. and global economy, which are inherently uncertain, including, among others, new information that may emerge concerning the severity and rate of spread of the disease.

 

Note 3. Recent Accounting Pronouncements

 

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13, Disclosure Framework — Changes to the Disclosure Requirement for Fair Value Measurement. The FASB issued the amendments as part of the disclosure framework project which is intended to improve the effectiveness of fair value disclosures in the notes to the financial statements by facilitating clear communication of the information required by U.S. GAAP that is most important to users of the financial statements. The standard is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2019. Management is currently evaluatinghas evaluated the impact of adoption of ASU 2018-13 and determined that these changes willdid not have a significant impact on the Company’s consolidated financial statements and disclosures.

 


In October 2018,March 2020, the SEC adoptedFASB issued ASU 2020-04, Reference Rate Reform. The amendments (the “Amendments”) to certain disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other SEC disclosure requirements,ASU 2020-04 provide optional expedients and exceptions for applying U.S. GAAP requirements, or changes into contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The standard is effective as of March 12, 2020 through December 31, 2022. Management is currently evaluating the information environment. In part,impact of the Amendments require an investment company to present distributable earnings in total, rather than showing the three components of distributable earnings. The compliance date for the Amendments is for all filingsoptional guidance on or after November 5, 2018. Management has adopted the Amendments and included the required disclosures in the Company’s consolidated financial statements.

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASC Topic 606) (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements under ASC Topic 605, Revenue Recognition,statements and most industry-specific guidance throughout the ASC. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The new guidance significantly enhances comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. Additionally, the guidance requires improved disclosures as to the nature, amount, timing, and uncertainty of revenue that is recognized. The new guidance became effective for the annual reporting period beginning January 1, 2018, including interim periods within that reporting period.disclosures. The Company completed its assessment in evaluating the potential impact on its consolidated financial statements and based on its assessment, determined that its financial contracts are excluded from the scope of ASU 2014-09. As a result of the scope exception for financial contracts, the Company’s management has determined that there were no material changes to the recognition, timing, and classification of revenues and expenses; additionally, the Company’s management determined that the adoption of ASU 2014-09 did not have a significant impact on its consolidated financial statement disclosures.utilize the optional expedients and exceptions provided by ASU 2020-04 during the quarter ended June 30, 2020.

 

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, second lien loans, subordinated loans, and, to a lesser extent, second lien loans and equity securities issued by lower middle-market companies and traditional middle-market companies. As of SeptemberJune 30, 2019,2020, our portfolio consisted of investments in 4037 portfolio companies with a fair value of approximately $371.4$287.3 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, or 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, in one debt security, bifurcating the loan into a first-out tranche and last-out tranche. As of SeptemberJune 30, 2019, 18.6%2020, 14.2% of the fair value of our first lien loans consisted of last-out loans. As of December 31, 2018, 13.7%2019, 18.1% 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 which are not subject to the blockage of cash interest payments to the Company at the first lien lender’s discretion.

In addition to first and second lien loans, the Company may also invest in subordinated loans. Subordinated loans typically have a second lien on all or substantially all of the borrower’s assets, but unlike second lien loans,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.

  

27

During the three months ended SeptemberJune 30, 2019,2020, the Company made approximately $13.9$12.5 million of investments and had approximately $33.2$51.1 million in repayments and sales, resulting in net repayments and sales of approximately $19.3$38.6 million for the period. During the three months ended SeptemberJune 30, 2018,2019, the Company made approximately $19.9$13.8 million of investments and had approximately $42.6$46.6 million in repayments and sales, resulting in net repayments and sales of approximately $22.7$32.8 million for the period.

 

During the ninesix months ended SeptemberJune 30, 2019,2020, the Company made approximately $48.8$20.8 million of investments and had approximately $91.3$58.9 million in repayments and sales, resulting in net repayments and sales of approximately $42.5$38.1 million for the period. During the ninesix months ended SeptemberJune 30, 2018,2019, the Company made approximately $58.9$34.9 million of investments and had approximately $96.3$58.1 million in repayments and sales, resulting in net repayments and sales of approximately $37.4$23.2 million for the period.

 

During the three and ninesix months ended SeptemberJune 30, 2019,2020, the Company funded $1.5$1.2 million and $6.4$4.5 million, respectively, of previously committed capital to existing portfolio companies. During the three and ninesix months ended SeptemberJune 30, 2019,2020, the Company funded $12.4$11.3 million and $42.4$16.3 million, respectively, of investments in portfolio companies for which it was not previously committed to fund. During the three and ninesix months ended SeptemberJune 30, 2018,2019, the Company funded $1.1$2.8 million and $6.3$4.9 million, respectively, of previously committed capital to existing portfolio companies. During the three and ninesix months ended SeptemberJune 30, 2018,2019, the Company funded $18.8$11.0 million and $52.6$30.0 million, respectively, of investments in portfolio companies for which it was not previously committed to fund. During the three and ninesix months ended SeptemberJune 30, 20192020 and September 30, 2018,2019, the Company did not lead any syndicatessyndicates.

As of June 30, 2020, the Company’s Board approved the fair value of the Company’s investment portfolio of approximately $287.3 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, 2020 with input from a third-party valuation firm and didthe 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, 2020 by circumstances and events that are not assist anyyet 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 obtaining indirect financing.

On August 31, 2016,order to fulfill short-term liquidity needs in response to the COVID-19 pandemic. The Company sold a portionis working with each of 14 securities across 10its portfolio companies to CapitalSouth Partners Florida Sidecar Fund II, L.P. (“FSC II”), including granting an option to acquire a portionhelp them access short-term liquidity through interest deferrals, funding on unused lines of the Company’s equity investment in Eastport Holdings, LLC (the “Written Call Option”), in exchange for 100%credit, and other sources of the partnership interests in FSC II. Concurrent with the sale of these assets to FSC II, the Company received cash consideration of $47.6 million from an affiliated third-party purchaser in exchange for 100% of the partnership interests of FSC II. These assets were sold to FSC II at their June 30, 2016 fair market values, resulting in a net realized gain of $0.1 million. The Company’s Board pre-approved this transaction pursuant to Section 57(f) of the 1940 Act. On August 27, 2018, FSC II exercised its option at the agreed upon strike price of $1.5 million.

The Company collected and will periodically collect principal and interest payments related to certain of the securities purchased by FSC II. Such principal and interest payments will be remitted timely to FSC II based on its proportionate share of the security. FSC II does not have any recourse to the Company related to the non-payment of principal or interest by the underlying issuers of the securities.liquidity.

 

The composition of our investments as of SeptemberJune 30, 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 $203,187   66.6% $193,610   67.4%
Second Lien Debt  42,457   13.9   38,285   13.3 
Equity and Warrants  59,372   19.5   55,371   19.3 
Total $305,016   100.0% $287,266   100.0%

The composition of our investments as of December 31, 2019, 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 $230,297   64.0% $220,049   59.3%
Second Lien Debt  17,499   4.9   16,841   4.5 
Subordinated Debt  45,232   12.6   42,868   11.5 
Equity and Warrants  52,945   14.7   77,935   21.0 
Capitala Senior Loan Fund II, LLC  13,600   3.8   13,658   3.7 
Total $359,573   100.0% $371,351   100.0%

The composition of our investments as of December 31, 2018, 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 $252,174   60.0% $237,570   52.9%
Second Lien Debt  33,040   7.9   32,495   7.2 
Subordinated Debt  72,562   17.3   73,113   16.3 
Equity and Warrants  48,594   11.6   92,054   20.5 
Capitala Senior Loan Fund II, LLC  13,600   3.2   13,695   3.1 
Total $419,970   100.0% $448,927   100.0%

28

  Investments
at
Amortized Cost
  Amortized Cost
Percentage of
Total Portfolio
  Investments
at
Fair Value
  Fair Value
Percentage of
Total Portfolio
 
First Lien Debt $235,646   66.6% $231,203   63.8%
Second Lien Debt  54,079   15.3   53,857   14.8 
Equity and Warrants  50,556   14.3   63,841   17.6 
Capitala Senior Loan Fund II, LLC  13,600   3.8   13,631   3.8 
Total $353,881   100.0% $362,532   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 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 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.
Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

 

In addition to using the above inputs in investment valuations, the Company continues to employ 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 SeptemberJune 30, 2019 (dollars in thousands),2020, according to the fair value hierarchy:hierarchy (dollars in thousands):

 

  Fair Value Measurements(1) 
  Level 1  Level 2  Level 3  Total 
First Lien Debt $  $  $220,049  $220,049 
Second Lien Debt        16,841   16,841 
Subordinated Debt        42,868   42,868 
Equity and Warrants  2,633      75,302   77,935 
Total $2,633  $  $355,060  $357,693 

(1)Excludes the Company’s $13.7 million investment in CSLF II, measured at NAV.
  Fair Value Measurements 
  Level 1  Level 2  Level 3  Total 
First Lien Debt $  $  $193,610  $193,610 
Second Lien Debt        38,285   38,285 
Equity and Warrants  589      54,782   55,371 
Total $589  $  $286,677  $287,266 

 

The following table presents fair value measurements of investments, by major class, as of December 31, 2018 (dollars in thousands),2019, according to the fair value hierarchy:hierarchy (dollars in thousands):

 

 Fair Value Measurements(1)  Fair Value Measurements(1) 
 Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3  Total 
First Lien Debt $  $  $237,570  $237,570  $  $  $231,203  $231,203 
Second Lien Debt        32,495   32,495         53,857   53,857 
Subordinated Debt        73,113   73,113 
Equity and Warrants        92,054   92,054   2,273      61,568   63,841 
Total $  $  $435,232  $435,232  $2,273  $  $346,628  $348,901 

 

(1)Excludes the Company’s $13.7$13.6 million investment in CSLF II, measured at NAV.

29

 

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the ninesix months ended SeptemberJune 30, 2020 (dollars in thousands):

  First Lien
Debt
  Second Lien
Debt
  Equity
and Warrants
  Total 
Balance as of January 1, 2020 $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 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, 2019 (dollars in thousands):

 

 First Lien
Debt
  Second Lien
Debt
  Subordinated
Debt
  Equity
and Warrants
  Total(1)  First Lien
Debt
  Second Lien
Debt
  Equity
and Warrants
  Total (1) 
Balance as of January 1, 2019 $237,570  $32,495  $73,113  $92,054  $435,232  $237,570  $105,608  $92,054  $435,232 
Reclassifications  (2,773)        2,773      (2,773)     2,773    
Repayments/sales  (52,197)     (27,843)  (11,280)  (91,320)  (26,104)  (21,538)  (10,489)  (58,131)
Purchases  42,787   4,511      1,487   48,785   29,636   3,800   1,488   34,924 
Payment in-kind interest and dividends accrued  736   290   553   687   2,266 
Payment-in-kind interest and dividends accrued  440   741   462   1,643 
Accretion of original issue discount  148   70   566      784   99   421      520 
Realized gain (loss) on investments  (10,578)  (20,412)  (606)  10,684   (20,912)  (10,578)  (21,029)  10,683   (20,924)
Net unrealized appreciation (depreciation) on investments  4,356   (113)  (2,915)  (11,242)  (9,914)  6,720   (420)  (18,203)  (11,903)
Transfers out of Level 3(2)           (9,861)  (9,861)        (9,861)  (9,861)
Balance as of September 30, 2019 $220,049  $16,841  $42,868  $75,302  $355,060 
Balance as of June 30, 2019 $235,010  $67,583  $68,907  $371,500 

 

(1)Excludes the Company’s $13.7$13.8 million investment in CSLF II, measured at NAV.

 

(2)The Company’s investment in U.S. Well Services, Inc. is traded on the NASDAQ Capital Market under the ticker “USWS”. Because the Company’s investment is now traded in an active market, the Company has reclassified its investment in U.S. Well Services, Inc. from Level 3 to Level 1 of the fair value hierarchy. Transfers between levels, if any, are recognized at the beginning of the period in which transfers occur. The unrealized depreciation on the Company’s investment in U.S. Well Services, Inc. for the ninesix months ended SeptemberJune 30, 2019 was $(7.2)$(4.1) million.

 

 The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the nine months ended September 30, 2018 (dollars in thousands):

  First Lien
Debt
  Second Lien
Debt
  Subordinated
Debt
  Equity
and Warrants
  Total 
Balance as of January 1, 2018 $243,489  $30,794  $103,385  $122,271  $499,939 
Reclassifications  17,494      (20,806)  3,312    
Repayments/sales  (79,550)     (232)  (16,478)  (96,260)
Purchases  57,814         1,093   58,907 
Payment in-kind interest and dividends accrued  1,521   481   700   613   3,315 
Accretion of original issue discount  212   69   566      847 
Realized gain (loss) on investments  (9,844)     (20,499)  10,164   (20,179)
Net unrealized appreciation (depreciation) on investments  (6,433)  804   17,225   (18,744)  (7,148)
Balance as of September 30, 2018 $224,703  $32,148  $80,339  $102,231  $439,421 

The following table provides a reconciliation of the beginning and ending balances for the Written Call Option that uses Level 3 inputs for the nine months ended September 30, 2018 (dollars in thousands):

  Written Call Option 
Balance as of January 1, 2018 $(6,815)
Payment from Written Call Option  20 
Net unrealized appreciation on Written Call Option  6,795 
Balance as of September 30, 2018 $ 


The net change in unrealized depreciation on investments held as of September 30, 2019 and September 30, 2018, was $(19.5)($29.5) million and $(28.9)($19.4) million for the six months ended June 30, 2020 and 2019, respectively, and is included in net unrealized appreciation (depreciation) on investments in the consolidated statements of operations.

 

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of investmentsassets as of SeptemberJune 30, 20192020 were as follows:

 

 Fair Value(2)
(in millions)
  

Valuation

Approach

 Unobservable Input Range (Weighted Average) Fair Value
(in millions)
  

Valuation 

Approach 

 Unobservable Input Range (Weighted Average)
First lien debt $206.9  Income Required Rate of Return
Leverage Ratio
Adjusted EBITDA
 8.7% – 18.7% (13.1%)
1.6x – 5.1x (3.6x)
$0.1 million – $147.9 million ($16.2 million)
 $158.2  Income Required Rate of Return 7.0% – 19.5% (12.5%)
       Leverage Ratio 1.2x – 6.8x (3.4x)
       Adjusted EBITDA ($0.7) million – $103.5 million ($10.3 million)
          
First lien debt $13.1  Enterprise Value Waterfall EBITDA Multiple
Adjusted EBITDA
Revenue Multiple
Revenue
 2.3x – 2.3x (2.3x)
$2.0 million – $2.0 million ($2.0 million)
 0.2x – 1.0x (0.7x)
$13.1 million – $13.2 million ($13.1 million)
 $35.4  Enterprise Value Waterfall and Asset(1) EBITDA Multiple 2.0x – 6.3x (4.4x)
       Adjusted EBITDA $0.8 million – $103.5 million ($18.8 million)
       Revenue Multiple 0.9x – 0.9x (0.9x)
       Revenue $30.5 million – $30.5 million ($30.5 million)
          
Second lien debt $16.8  Income Required Rate of Return
Leverage Ratio
Adjusted EBITDA
 14.3% – 16.5% (15.8%)
4.6x – 5.3x (4.8x)
$2.5 million – $74.1 million ($68.3 million)
 $35.4  Income Required Rate of Return 12.8% – 15.0% (13.8%)
Subordinated debt $35.6  Income Required Rate of Return
Leverage Ratio
Adjusted EBITDA
 12.0% – 15.1% (13.4%)
4.5x – 7.3x (6.0x)
$9.0 million – $20.0 million ($14.1 million)
Subordinated debt $7.3  Enterprise Value Waterfall and Asset(1) EBITDA Multiple
Adjusted EBITDA
Revenue Multiple
Revenue
 6.0x – 6.0x (6.0x)
$1.8 million – $1.8 million ($1.8 million)
 0.3x – 0.3x (0.3x)
$100.5 million – $100.5 million ($100.5 million)
       Leverage Ratio 4.3x – 5.2x (4.8x)
       Adjusted EBITDA $12.2 million – $20.3 million ($16.0 million)
          
Second lien debt $2.9  Enterprise Value Waterfall and Asset(1) EBITDA Multiple
Adjusted EBITDA
 6.0x – 6.0x (6.0x)
$1.8 million – $1.8 million ($1.8 million)
       Revenue Multiple 0.6x – 0.6x (0.6x)
       Revenue $503.4 million - $503.4 million ($503.4 million)
          
Equity and warrants $75.3  Enterprise Value Waterfall and Asset(1) EBITDA Multiple
Adjusted EBITDA
Revenue Multiple
Revenue
 4.0x – 10.0x (7.5x)
$1.8 million – $24.9 million ($18.7 million)
0.4x – 4.6x (0.8x)
$32.8 million – $568.6 million ($424.0 million)
 $54.8  Enterprise Value Waterfall and Asset(1) EBITDA Multiple 5.0x – 10.0x (6.8x)
       Adjusted EBITDA $0.8 million – $19.3 million ($8.4 million)
       Revenue Multiple 0.4x – 3.6x (0.8x)
       Revenue $12.2 million – $521.3 million ($317.2 million)

 

(1)$0.714.1 million in subordinatedfirst lien debt, $1.5 million in second lien debt, and $4.8$4.2 million in equity and warrants were valued using the asset approach.

(2)Excludes the Company’s $13.7 million investment in CSLF II, measured at NAV.

30


 

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of investmentsassets as of December 31, 20182019 were as follows:

 

 Fair Value(2)
(in millions)
  Valuation
Approach
 Unobservable Input Range (Weighted Average) Fair Value(2)
(in millions)
  Valuation
Approach
 Unobservable Input Range (Weighted Average)
First lien debt $195.1  Income Required Rate of Return
Leverage Ratio
Adjusted EBITDA
 9.2% – 16.0% (12.1%)
1.0x – 13.5x (4.3x)
$1.7 million – $118.7 million ($17.6 million)
 $211.2  Income Required Rate of Return 7.0% – 20.0% (12.0%)
      Leverage Ratio 1.5x – 7.9x (3.8x)
      Adjusted EBITDA $0.8 million – $114.0 million ($13.6 million)
      
First lien debt $42.5  Enterprise Value Waterfall and Asset(1) EBITDA Multiple
Adjusted EBITDA  
Revenue Multiple
Revenue
 4.0x – 6.0x (5.3x)
$0.6 million – $3.7 million ($2.3 million)
0.9x – 0.9x (0.9x)
$13.0 million – $13.0 million ($13.0 million)
 $20.0  Enterprise Value Waterfall and Asset (1) EBITDA Multiple 6.0x – 6.0x (6.0x)
      Adjusted EBITDA $2.9 million – $2.9 million ($2.9 million)
      Revenue Multiple 1.0x – 1.1x (1.1x)
      Revenue $13.3 million – $21.6 million ($19.5 million)
      
Second lien debt $16.2  Income Required Rate of Return
Leverage Ratio
Adjusted EBITDA
 12.5% – 15.5% (14.6%)
4.6x – 5.0x (4.8x)
$67.0 million – $79.2 million ($75.5 million)
 $53.9  Income and Asset(1) Required Rate of Return 6.0% – 15.0% (13.5%)
Second lien debt $16.3  Enterprise Value Waterfall EBITDA Multiple
Adjusted EBITDA
 5.6x – 5.6x (5.6x)
$9.2 million – $9.2 million ($9.2 million)
Subordinated debt $49.3  Income Required Rate of Return
Leverage Ratio
Adjusted EBITDA
 11.5% – 20.0% (14.1%)
3.1x – 9.1x (5.7x)
$1.7 million – $15.8 million ($10.5 million)
Subordinated debt $23.8  Enterprise Value Waterfall and Asset(1) EBITDA Multiple
Adjusted EBITDA
Revenue Multiple
Revenue
 6.0x – 8.0x (7.9x)
$1.7 million – $3.1 million ($3.0 million)
0.4x – 0.4x (0.4x)
$568.2 million – $568.2 million ($568.2 million)
      Leverage Ratio 3.0x – 7.0x (5.3x)
      Adjusted EBITDA $1.8 million – $74.5 million ($32.7 million)
      
Equity and warrants $92.1  Enterprise Value Waterfall EBITDA Multiple
Adjusted EBITDA
Revenue Multiple
Revenue
 3.3x – 14.0x (6.5x)
$1.7 million – $112.3 million ($27.8 million)
0.4x – 0.4x (0.4x)
$164.6 million – $568.2 million ($455.1 million)
 $61.6  Enterprise Value Waterfall and Asset(1) EBITDA Multiple 3.9x – 10.0x (7.3x)
      Adjusted EBITDA $1.8 million - $25.1 million ($11.7 million)
      Revenue Multiple 0.4x – 4.7x (0.8x)
      Revenue $17.1 million - $566.2 million ($406.6 million)

 

(1)$0.7 million in subordinated debt and $2.92.0 million in first lien debt, $0.7 million in second lien debt, and $4.9 million in equity and warrants were valued using the asset approach.

 

(2)Excludes the Company’s $13.7$13.6 million investment in CSLF II, measured at NAV.

 

The significant unobservable inputs used in the valuation of the Company’s investments are required rate of return, adjusted EBITDA, EBITDA multiples, revenue, revenue multiples, and leverage ratios. 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 or leverage will result in a lower (higher) estimate of fair value while an increase (decrease) in adjusted EBITDA, EBITDA multiples, revenue, or revenue multiples will result in a higher (lower) estimate of fair value. 

Capitala Senior Loan Fund II, LLC

 

On December 20, 2018, Capitalathe 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 iswas to invest primarily in senior secured first-out loans. CapitalaThe Company and Trinity have committed to provide $25.0 million of equity to CSLF II, with Capitalathe Company providing $20.0 million and Trinity providing $5.0 million. CapitalaThe 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, requirerequired approval of a member on the board of directors and investment committee of at least one member representing Capitalathe 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.

  

As of September 30, 2019 and December 31, 2018,2019, $13.6 million and $3.4 million in equity capital had been contributed by Capitalathe Company and Trinity, respectively. As of September 30, 2019, and December 31, 2018,2019, the Company and Trinity had $6.4 million and $1.6 million of unfunded equity capital commitments outstanding, respectively. The Company’s equity investment in CSLF II iswas not redeemable. On June 12, 2020, the capital commitments for the Company and Trinity were terminated.

 

For the three months ended September 30, 2019 and 2018, the Company received $0.3 million and $0.0 million, respectively, in dividend income from its equity interest in CSLF II. For the nine months ended September 30, 2019 and 2018, the Company received $0.7 million and $0.0 million, respectively, in dividend income from its equity interest in CSLF II.


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 currently providesprovided for borrowings up to $45.0$60.0 million, subject to certain borrowing base restrictions. Borrowings under the CSLF II Credit Facility bearbore interest at a rate of 1-month LIBOR + 2.25%. BeginningDuring the quarter ended March 31,June 30, 2020, CSLF II will incurincurred unused fees of .35% when utilization of the CSLF II Credit Facility exceedsexceeded 50% and .65% when utilization of the CSLF II Credit Facility iswas less than 50%. TheOn June 5, 2020, CSLF II terminated the CSLF II Credit Facility matures on September 2, 2024.

31

and repaid all amounts outstanding.

 

As of September 30, 2019 and December 31, 2018, $0.5 million and $0.02019, $12.7 million was outstanding under the CSLF II Credit Facility, respectively.Facility. For the three and ninesix months ended SeptemberJune 30, 2019,2020, CSLF II incurred interest and financing expenses of $9.0 thousand.$1.0 million and $1.1 million, respectively. For the three and ninesix months ended SeptemberJune 30, 2018,2019, CSLF II did not incur interest and financing expenses.

 

On September 3, 2019, Capitalathe Company and Trinity committed to provide $25.0 million of subordinated debt (the “Subordinated Notes”) to CSLF II, with Capitalathe Company providing $5.0 million and Trinity providing $20.0 million. The Subordinated Notes currently bear interest at a rate of 1-month LIBOR + 5.00%. Beginning the quarter ended June 30, 2020, the Subordinated Notes will bear interest at a rate of 1-month LIBOR + 6.00%. The Subordinated Noteswere scheduled to mature on September 3, 2024.2024, however, the Subordinated Notes were terminated on June 12, 2020.

 

As of September 30, 2019, and December 31, 2018,2019, $0.0 million was outstanding on the Subordinated Notes. As of September 30, 2019, and December 31, 2018,2019, the Company and Trinity had $5.0 million and $20.0 million of unfunded commitments related to the Subordinated Notes, respectively. For the three and ninesix months ended SeptemberJune 30, 2020 and 2019, and 2018, the CompanyCSLF II did not incur any interest and financing expenses related to the Subordinated Notes.

 

Below is a summary of CSLF II’s portfolio as of September 30, 2019 and December 31, 20182019 (dollars in thousands):

 

  September 30, 2019  December 31, 2018 
First lien loans(1) $16,666  $10,000 
Weighted average current interest rate on first lien loans  7.1%  7.6%
Number of portfolio companies in CSLF II  3   2 
Largest portfolio company investment(1) $6,741  $5,550 
Total of five largest portfolio company investments(1)(2) $16,666  $10,000 
  December 31, 2019 
First lien loans (1) $28,396 
Weighted average current interest rate on first lien loans  6.4%
Number of portfolio companies  5 
Largest portfolio company investment (1) $7,443 
Total of five largest portfolio company investments (1) $28,396 

 

(1)Based on principal amount outstanding at period end.

(2)Only three investments and two investments held as of September 30, 2019 and December 31, 2018, respectively.

Below is CSLF II’s unaudited schedule of investments as of September 30, 2019 (dollars in thousands):

Portfolio Company Industry Type of Investment Principal
Amount
  Cost  Fair Value 
Investments at Fair Value                
U.S. BioTek Laboratories, LLC Testing Laboratories First Lien Debt (7.1% Cash (3 month LIBOR + 5.0%, 2.0% Floor), Due 12/14/23) $4,466  $4,466  $4,466 
Freedom Electronics, LLC Electronic Machine Repair First Lien Debt (7.1% Cash (1 month LIBOR + 5.0%, 2.0% Floor), Due 12/20/23)  5,459   5,459   5,459 
RAM Payment, LLC Financial Services First Lien Debt (7.1% Cash (1 month LIBOR + 5.0%, 1.5% Floor), Due 1/4/24)  6,741   6,741   6,741 
TOTAL INVESTMENTS     $16,666  $16,666  $16,666 

 

Below is CSLF II’s schedule of investments as of December 31, 20182019 (dollars in thousands):

 

Portfolio Company Industry Type of Investment Principal
Amount
  Cost  Fair Value  Industry Type of Investment Principal
Amount
  Cost  Fair Value 
Investments at Fair Value                           
Freedom Electronics, LLC Electronic Machine Repair First Lien Debt (7.0% Cash (1 month LIBOR + 5.0%, 2.0% Floor), Due 12/20/23) $5,445  $5,445  $5,445 
Installs, LLC Logistics First Lien Debt (5.8% Cash (1 month LIBOR + 4.0%, 1.8% Floor), Due 6/20/23)  7,443   7,443   7,443 
RAM Payment, LLC Financial Services First Lien Debt (6.7% Cash (1 month LIBOR + 5.0%, 1.5% Floor), Due 1/4/24)  6,653   6,653   6,653 
Rapid Fire Protection, Inc.(1) Security System Services First Lien Debt (5.5% Cash (1 month LIBOR + 3.8%, 1.8% Floor), Due 11/22/24)  4,400   4,400   4,400 
U.S. BioTek Laboratories, LLC Testing Laboratories First Lien Debt (7.8% Cash (3 month LIBOR + 5.0%, 2.0% Floor), Due 12/14/23) $4,500  $4,500  $4,500  Testing Laboratories First Lien Debt (7.0% Cash (3 month LIBOR + 5.0%, 2.0% Floor), Due 12/14/23)  4,455   4,455   4,455 
Freedom Electronics, LLC Electronic Machine Repair First Lien Debt (7.5% Cash (1 month LIBOR + 5.0%, 2.0% Floor), Due 12/20/23)  5,500   5,500   5,500 
TOTAL INVESTMENTS   $10,000  $10,000  $10,000   $28,396  $28,396  $28,396 

(1)The investment had a $3.0 million unfunded commitment.

 

32

Below are the statements of assets and liabilities for CSLF II (dollars in thousands):

 

 As of  As of 
 September 30, 2019  December 31, 2018  June 30, 2020  December 31, 2019 
 (unaudited)     (unaudited)    
ASSETS             
Investments at fair value (amortized cost of $16,666 and $10,000, respectively) $16,666  $10,000 
Investments at fair value (amortized cost of $0 and $28,396, respectively) $  $28,396 
Cash and cash equivalents  319   7,100      704 
Interest receivable  92   31      151 
Other assets     7 
Total assets $17,077  $17,131  $  $29,258 
LIABILITIES                
Credit facility (net of deferred financing costs of $509) $(9) $ 
Credit facility (net of deferred financing costs of $0 and $621, respectively) $  $12,079 
Interest and financing fees payable  2         113 
Accounts payable  11   12      27 
Total liabilities $4  $12  $  $12,219 
NET ASSETS                
Partners’ capital $17,073  $17,119 
Members’ capital $  $17,039 
Total net assets $17,073  $17,119  $  $17,039 

 

Below are the unaudited statements of operations for CSLF II (dollars in thousands):

 

  For the Three Months Ended  For the Nine Months Ended 
  September 30, 2019  September 30, 2018  September 30, 2019  September 30, 2018 
INVESTMENT INCOME                
Interest income $313  $   —  $945  $   — 
Fee income        70    
Total investment income $313  $  $1,015  $ 
EXPENSES                
Interest and financing expenses $9  $  $9  $ 
General and administrative expenses  35      152    
Total expenses $44  $  $161  $ 
NET INVESTMENT INCOME $269  $  $854  $ 
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $269  $  $854  $ 

  For the Three Months Ended  For the Six Months Ended 
  June 30, 2020  June 30, 2019  June 30, 2020  June 30, 2019 
INVESTMENT INCOME                
Interest income $229  $320  $650  $632 
Fee income  2   2   5   70 
Total investment income $231  $322  $655  $702 
EXPENSES                
Interest and financing expenses  975      1,135    
General and administrative expenses  93   31   164   117 
Total expenses $1,068  $31  $1,299  $117 
NET INVESTMENT INCOME (LOSS) $(837) $291  $(644) $585 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $(837) $291  $(644) $585 

 

33

Note 5. Transactions With Affiliated Companies

 

During the ninesix months ended SeptemberJune 30, 2019,2020, 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, 2018
Fair Value
  Gross Additions(2)  Gross Reductions(3)  Realized
Gain/(Loss)
  Unrealized
Appreciation
(Depreciation)
  September 30, 2019
Fair Value
 
Affiliate investments                                  
                                  
Burgaflex Holdings, LLC First Lien Debt (12.0% Cash, 3.0% PIK, Due 3/23/21) $14,561  $1,397  $14,384  $260  $(500) $-  $386  $14,530 
                                   
Burgaflex Holdings, LLC Common Stock Class A (1,253,198 shares)      -   -   -   -   -   -   - 
                                   
Burgaflex Holdings, LLC Common Stock Class B (1,085,073 shares)      -   -   62   -   -   (21)  41 
                                   
         1,397   14,384   322   (500)  -   365   14,571 
                                   
City Gear, LLC Membership Unit Warrants (11.4% fully diluted)      -   3,184   111   -   (111)  -   3,184 
                                   
         -   3,184   111   -   (111)  -   3,184 
                                   
Eastport Holdings, LLC Subordinated Debt (15.1% Cash (3 month LIBOR + 13.0%, 0.5% Floor), Due 4/29/20)  16,500   2,506   16,500   567   -   -   (567)  16,500 
                                   
Eastport Holdings, LLC Membership Units (22.9% ownership)      -   17,610   -   -   -   (829)  16,781 
                                   
         2,506   34,110   567   -   -   (1,396)  33,281 
                                   
GA Communications, Inc.(5) Series A-1 Preferred Stock (1,998 shares, 8.0% PIK Dividend)      -   3,482   221   -   -   (14)  3,689 
                                   
GA Communications, Inc. Series B-1 Common Stock (200,000 shares)      -   1,325   -   -   -   (681)  644 
                                   
         -   4,807   221   -   -   (695)  4,333 
                                   
J&J Produce Holdings, Inc. Subordinated Debt (13.0% Cash, Due 6/16/19)  -   485   6,210   -   (5,788)  (618)  196   - 
                                   
J&J Produce Holdings, Inc. Common Stock (8,182 shares)      -   -   -   -   (818)  818   - 
                                   
J&J Produce Holdings, Inc. Common Stock Warrants (6,369 shares)      -   -   -   -   -   -   - 
                                   
         485   6,210   -   (5,788)  (1,436)  1,014   - 
                                   
LJS Partners, LLC Common Stock (1,764,976 units)      -   3,018   79   (293)  -   (1,118)  1,686 
                                   
LJS Partners, LLC Preferred Units (89,612 units)      -   -   293   -   -   65   358 
                                   
         -   3,018   372   (293)  -   (1,053)  2,044 
                                   
MMI Holdings, LLC First Lien Debt (12.0% Cash, Due 1/31/20)  2,600   238   2,600   -   -   -   -   2,600 
                                   
MMI Holdings, LLC Subordinated Debt (6.0% Cash, Due 1/31/20)  400   18   400   -   -   -   -   400 
                                   
MMI Holdings, LLC(5) Preferred Units (1,000 units, 6.0% PIK Dividend)      -   1,612   73   -   -   -   1,685 
                                   
MMI Holdings, LLC Common Membership Units (45 units)      -   185   -   -   -   24   209 
                                   
         256   4,797   73   -   -   24   4,894 
                                   
Navis Holdings, Inc. First Lien Debt (11.0% Cash, Due 6/30/23)  10,100   284   -   10,100   -   -   -   10,100 
                                   
Navis Holdings, Inc.(5) Class A Preferred Stock (1,000 shares, 10.0% Cash Dividend)      25   -   1,000   -   -   -   1,000 
                                   
Navis Holdings, Inc. Common Stock (60,000 shares)      -   -   -   -   -   385   385 
                                   
         309   -   11,100   -   -   385   11,485 
                                   
RAM Payment, LLC First Lien Debt (10.4% Cash, Due 1/4/24)  9,137   974   -   9,489   (351)  -   (1)  9,137 
                                   
RAM Payment, LLC(5) Preferred Equity (86,000 Units, 8.0% PIK)      -   -   910   -   -   597   1,507 
                                   
         974   -   10,399   (351)  -   596   10,644 
                                   
Sierra Hamilton Holdings Corporation Second Lien Debt (15.0% PIK, Due 9/12/23)  754   -   -   717   -   -   -   717 
                                   
Sierra Hamilton Holdings Corporation Common Stock (15,068,000 shares)      -   6,854   -   -   -   (1,360)  5,494 
                                   
         -   6,854   717   -   -   (1,360)  6,211 
                                   
US Bath Group, LLC First Lien Debt (11.5% Cash (1 month LIBOR + 9.0%, 1.0% Floor), Due 1/2/23)  -   676   12,750   -   (12,750)  -   -   - 
                                   
US Bath Group, LLC Membership Units (500,000 units)      -   2,083   -   (4,323)  3,823   (1,583)  - 
                                   
         676   14,833   -   (17,073)  3,823   (1,583)  - 
                                   
V12 Holdings, Inc. Subordinated Debt  -   -   742   -   (30)  12   (16)  708 
                                   
         -   742   -   (30)  12   (16)  708 
                                   
Total Affiliate investments       $6,603  $92,939  $23,882  $(24,035) $2,288  $(3,719) $91,355 
                                   
Control investments                                  
                                   
AAE Acquisition, LLC Second Lien Debt (6.0% PIK, Due 8/24/19) $-  $-  $16,327  $4,084  $-  $(20,411) $-  $- 
                                   
AAE Acquisition, LLC Membership Units (2.2% fully diluted)      -   -   -   -   (17)  17   - 
                                   
AAE Acquisition, LLC Warrants (58.9% fully diluted)      -   -   -   -   -   -   - 
                                   
         -   16,327   4,084   -   (20,428)  17   - 
                                   
CableOrganizer Acquisition, LLC First Lien Debt (8.0% Cash, Due 6/30/21)  1,250   80   1,708   1,542   (2,000)  -   -   1,250 
                                   
CableOrganizer Acquisition, LLC(6) First Lien Debt (8.0% Cash, Due 6/30/21)  3,689   148   8,889   -   (3,424)  (1,827)  (1,953)  1,685 
                                   
CableOrganizer Acquisition, LLC Preferred Units - Series A1 (7,200,000 units)      -   -   5,373   -   -   (5,373)  - 
                                   
CableOrganizer Acquisition, LLC Preferred Units - Series A (4,000,000 units)      -   -   -   -   -   -   - 
                                   
CableOrganizer Acquisition, LLC Common Stock (14.9% fully diluted)      -   -   -   -   -   -   - 
                                   
CableOrganizer Acquisition, LLC Common Stock Warrants (40.0% fully diluted)      -   -   -   -   -   -   - 
                                   
         228   10,597   6,915   (5,424)  (1,827)  (7,326)  2,935 
                                   
Capitala Senior Loan Fund II, LLC Membership Units (80.0% ownership)      720   13,695   -   -   -   (37)  13,658 
                                   
Capitala Senior Loan Fund II, LLC Subordinated Debt (7.0% Cash (1 month LIBOR + 5.0%), Due 9/3/24)  -   -   -   -   -   -   -   - 
                                   
         720   13,695   -   -   -   (37)  13,658 
                                   
Micro Precision, LLC Subordinated Debt (10.0% Cash, Due 3/31/20)  -   106   1,862   -   (1,862)  -   -   - 
                                   
Micro Precision, LLC Subordinated Debt (14.0% Cash, 4.0% PIK, Due 3/31/20)  -   350   4,325   88   (4,413)  -   -   - 
                                   
Micro Precision, LLC Series A Preferred Units (47 units)      814   2,817   -   (1,629)  -   (1,188)  - 
                                   
         1,270   9,004   88   (7,904)  -   (1,188)  - 
                                   
Navis Holdings, Inc. First Lien Debt (11.0% Cash, Due 6/30/23)  -   566   7,500   -   (7,500)  -   -   - 
                                   
Navis Holdings, Inc.(5) Class A Preferred Stock (1,000 shares, 10.0% Cash Dividend)      50   1,000   -   (1,000)  -   -   - 
                                   
Navis Holdings, Inc. Common Stock (60,000 shares)      -   4,348   -   (2,600)  2,599   (4,347)  - 
                                   
         616   12,848   -   (11,100)  2,599   (4,347)  - 
                                   
Portrait Studio, LLC First Lien Debt (9.0% Cash (1 month LIBOR + 7.0%, 1.0% Floor, 2.0% Ceiling), Due 12/31/22)  2,280   64   -   3,420   (1,140)  -   -   2,280 
                                   
Portrait Studio, LLC(6) First Lien Debt (9.1% Cash (1 month LIBOR + 7.0%, 1.0% Floor, 5.0% Ceiling), Due 12/31/22)  4,500   107   4,500   -   (180)  -   (2,944)  1,376 
                                   
Portrait Studio, LLC Preferred Units (4,350,000 Units)      -   2,174   -   -   -   (2,174)  - 
                                   
Portrait Studio, LLC Membership Units (150,000 Units)      -   -   -   -   -   -   - 
                                   
         171   6,674   3,420   (1,320)  -   (5,118)  3,656 
                                   
Total Control investments       $3,005  $69,145  $14,507  $(25,748) $(19,656) $(17,999) $20,249 

(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 includes 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.
(6)Non-accrual investment.

34

During the year ended December 31, 2018, 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, 2017
Fair Value
  Gross Additions(2)  Gross Reductions(3)  Realized
Gain/(Loss)
  Unrealized
Appreciation
(Depreciation)
  December 31, 2018
Fair Value
 
Affiliate investments                                  
                                   
AAE Acquisition, LLC Second Lien Debt (6.0% Cash, Due 8/24/19) $-  $479  $15,603  $320  $(16,165) $-  $242  $- 
                                   
AAE Acquisition, LLC Membership Units (2.2% fully diluted)      -   -   -   (17)  -   17   - 
                                   
AAE Acquisition, LLC Warrants (37.8% fully diluted)      -   -   -   -   -   -   - 
                                   
         479   15,603   320   (16,182)  -   259   - 
                                   
Burgaflex Holdings, LLC First Lien Debt (12.0% Cash, 1.0% PIK, Due 3/23/21)  14,801   1,390   -   14,801   -   -   (417)  14,384 
                                   
Burgaflex Holdings, LLC Subordinated Debt (14.0% Cash, Due 8/9/19)  -   116   3,000   -   (3,000)  -   -   - 
                                   
Burgaflex Holdings, LLC Subordinated Debt (12.0% Cash, Due 8/9/19)  -   199   5,828   -   (5,828)  -   -   - 
                                   
Burgaflex Holdings, LLC Common Stock Class A (1,253,198 shares)      -   457   -   -   -   (457)  - 
                                   
Burgaflex Holdings, LLC Common Stock Class B (900,000 shares)      -   -   300   -   -   (300)  - 
                                   
         1,705   9,285   15,101   (8,828)  -   (1,174)  14,384 
                                   
Chef'n Corporation Series A Preferred Stock (1,000,000 shares)      -   -   -   (644)  644   -   - 
                                   
         -   -   -   (644)  644   -   - 
                                   
City Gear, LLC Subordinated Debt (13.0% Cash, Due 10/20/19)  -   918   8,231   -   (8,231)  -   -   - 
                                   
City Gear, LLC(5) Preferred Membership Units (2.8% fully diluted, 9.0% Cash Dividend)      117   1,269   -   (1,269)  -   -   - 
                                   
City Gear, LLC Membership Unit Warrants (11.4% fully diluted)      -   8,248   -   (1,908)  1,908   (5,064)  3,184 
                                   
         1,035   17,748   -   (11,408)  1,908   (5,064)  3,184 
                                   
Eastport Holdings, LLC Subordinated Debt (15.8% Cash (3 month LIBOR + 13.0%, 0.5% Floor), Due 4/29/20)  16,500   1,168   -   15,496   -   -   1,004   16,500 
                                   
Eastport Holdings, LLC Membership Units (22.9% ownership)      -   -   4,733   (1,470)  -   14,347   17,610 
                                   
         1,168   -   20,229   (1,470)  -   15,351   34,110 
                                   
GA Communications, Inc.(5) Series A-1 Preferred Stock (1,998 shares, 8.0% PIK Dividend)      -   3,225   276   -   -   (19)  3,482 
                                   
GA Communications, Inc. Series B-1 Common Stock (200,000 shares)      -   1,932   -   -   -   (607)  1,325 
                                   
         -   5,157   276   -   -   (626)  4,807 
                                   
J&J Produce Holdings, Inc. Subordinated Debt (13.0% Cash, Due 6/16/19)  6,406   805   6,170   38   -   -   2   6,210 
                                   
J&J Produce Holdings, Inc. Common Stock (8,182 shares)      -   -   -   -   -   -   - 
                                   
J&J Produce Holdings, Inc. Common Stock Warrants (6,369 shares)      -   -   -   -   -   -   - 
                                   
         805   6,170   38   -   -   2   6,210 
                                   
LJS Partners, LLC Common Stock (1,587,848 shares)      -   7,650   293   -   -   (4,925)  3,018 
                                   
         -   7,650   293   -   -   (4,925)  3,018 
                                   
MJC Holdings, LLC Series A Preferred Units (2,000,000 units)      -   -   -   (28)  28   -   - 
                                   
         -   -   -   (28)  28   -   - 
                                   
MMI Holdings, LLC First Lien Debt (12.0% Cash, Due 1/31/20)  2,600   317   2,600   -   -   -   -   2,600 
                                   
MMI Holdings, LLC Subordinated Debt (6.0% Cash, Due 1/31/20)  400   24   400   -   -   -   -   400 
                                   
MMI Holdings, LLC(5) Preferred Units (1,000 units, 6.0% PIK Dividend)      -   1,520   92   -   -   -   1,612 
                                   
MMI Holdings, LLC Common Membership Units (45 units)      -   193   -   -   -   (8)  185 
                                   
         341   4,713   92   -   -   (8)  4,797 
                                   
MTI Holdings, LLC Membership Units (2,000,000 units)      -   100   -   (139)  139   (100)  - 
                                   
         -   100   -   (139)  139   (100)  - 
                                   
Sierra Hamilton Holdings Corporation Common Stock (15,068,000 shares)      -   8,528   -   -   -   (1,674)  6,854 
                                   
         -   8,528   -   -   -   (1,674)  6,854 
                                   
Source Capital Penray, LLC Membership Units (11.3% ownership)      121   101   -   -   -   (101)  - 
                                   
         121   101   -   -   -   (101)  - 
                                   
STX Healthcare Management Services, Inc. Common Stock (1,200,000 shares)      -   93   -   (108)  108   (93)  - 
                                   
         -   93   -   (108)  108   (93)  - 
                                   
US Bath Group, LLC First Lien Debt (11.4% Cash (1 month LIBOR + 9.0%, 1.0% Floor), Due 1/2/23)  12,750   1,806   -   15,000   (2,250)  -   -   12,750 
                                   
US Bath Group, LLC Membership Units (500,000 units)      -   -   500   -   -   1,583   2,083 
                                   
         1,806   -   15,500   (2,250)  -   1,583   14,833 
                                   
U.S. Well Services, LLC First Lien Debt (8.3% Cash (1 month LIBOR + 6.0%, 1.0% Floor), Due 2/2/22)  -   156   2,299   -   (2,299)  -   -   - 
                                   
U.S. Well Services, LLC First Lien Debt (13.3% PIK (1 month LIBOR + 11.0%, 1.0% Floor), Due 2/2/22)  -   567   9,516   409   (9,925)  -   -   - 
                                   
U.S. Well Services, LLC Class A Units (5,680,688 Units)      -   15,004   -   (6,260)  -   (8,744)  - 
                                   
U.S. Well Services, LLC Class B Units (2,076,298 Units)      -   955   -   (441)  -   (514)  - 
                                   
         723   27,774   409   (18,925)  -   (9,258)  - 
                                   
V12 Holdings, Inc. Subordinated Debt  -   -   1,035   -   (232)  93   (154)  742 
                                   
         -   1,035   -   (232)  93   (154)  742 
                                   
Total Affiliate investments       $8,183  $103,957  $52,258  $(60,214) $2,920  $(5,982) $92,939 
                                   
Control investments                                  
                                   
AAE Acquisition, LLC Second Lien Debt (6.0% Cash, Due 8/24/19) $16,327  $488  $-  $16,327  $-  $-  $-  $16,327 
                                   
AAE Acquisition, LLC Membership Units (2.2% fully diluted)      -   -   17   -   -   (17)  - 
                                   
AAE Acquisition, LLC Warrants (37.8% fully diluted)      -   -   -   -   -   -   - 
                                   
         488   -   16,344   -   -   (17)  16,327 
                                   
CableOrganizer Acquisition, LLC First Lien Debt (10.0% Cash, Due 5/24/19)  1,708   121   -   1,708   -   -   -   1,708 
                                   
CableOrganizer Acquisition, LLC First Lien Debt (12.0% Cash, 4.0% PIK, Due 6/30/19)  8,889   1,173   12,373   515   (2,354)  (1,646)  1   8,889 
                                   
CableOrganizer Acquisition, LLC Preferred Units (4,000,000 units)          -   2,354   -   -   (2,354)  - 
                                   
CableOrganizer Acquisition, LLC Common Stock (21.3% fully diluted)      -   118   -   -   -   (118)  - 
                                   
CableOrganizer Acquisition, LLC Common Stock Warrants (10.0% fully diluted )      -   60   -   -   -   (60)  - 
                                   
         1,294   12,551   4,577   (2,354)  (1,646)  (2,531)  10,597 
                                   
Capitala Senior Loan Fund II, LLC Membership Units (80.0% ownership)      -   -   13,600   -   -   95   13,695 
                                   
         -   -   13,600   -   -   95   13,695 
                                   
Eastport Holdings, LLC Subordinated Debt (15.8% Cash (3 month LIBOR + 13.0%, 0.5% Floor), Due 4/29/20)  -   2,144   16,500   493   (15,231)  -   (1,762)  - 
                                   
Eastport Holdings, LLC Membership Units (22.9% ownership)      -   26,449   -   (4,733)  -   (21,716)  - 
                                   
         2,144   42,949   493   (19,964)  -   (23,478)  - 
                                   
Kelle's Transport Service, LLC First Lien Debt (4.0% Cash, Due 2/15/20)  -   82   2,000   1,300   (3,300)  -   -   - 
                                   
Kelle's Transport Service, LLC First Lien Debt (2.2% Cash, Due 2/15/20)  -   126   9,560   -   (10,000)  (3,669)  4,109   - 
                                   
Kelle's Transport Service, LLC Membership Units (27.5% fully diluted)      -   -   -   -   -   -   - 
                                   
         208   11,560   1,300   (13,300)  (3,669)  4,109   - 
                                   
Micro Precision, LLC Subordinated Debt (10.0% Cash, Due 1/1/19)  1,862   186   1,862   -   -   -   -   1,862 
                                   
Micro Precision, LLC Subordinated Debt (14.0% Cash, 4.0% PIK, Due 1/1/19)  4,325   601   4,154   171   -   -   -   4,325 
                                   
Micro Precision, LLC Series A Preferred Units (47 units)      -   1,629   -   -   -   1,188   2,817 
                                   
         787   7,645   171   -   -   1,188   9,004 
                                   
Navis Holdings, Inc. First Lien Debt (15.0% Cash, Due 10/30/20)  7,500   1,149   6,500   1,000   -   -   -   7,500 
                                   
Navis Holdings, Inc.(5) Class A Preferred Stock (1,000 shares, 10.0% Cash Dividend)      100   1,000   -   -   -   -   1,000 
                                   
Navis Holdings, Inc. Common Stock (300,000 shares)      -   5,005   -   -   -   (657)  4,348 
                                   
         1,249   12,505   1,000   -   -   (657)  12,848 
                                   
On-Site Fuel Service, Inc. First Lien Debt (18.0% Cash, Due 12/19/18)  -   30   -   11,020   -   (11,020)  -   - 
                                   
On-Site Fuel Service, Inc. Subordinated Debt (18.0% Cash, Due 12/19/18)  -   -   11,588   -   (11,020)  -   (568)  - 
                                   
On-Site Fuel Service, Inc. Series A Preferred Stock (32,782 shares)      -   -   -   -   (3,278)  3,278   - 
                                   
On-Site Fuel Service, Inc. Series B Preferred Stock (23,648 shares)      -   -   -   -   (2,364)  2,364   - 
                                   
On-Site Fuel Service, Inc. Common Stock (33,058 shares)      -   -   -   -   (33)  33   - 
                                   
         30   11,588   11,020   (11,020)  (16,695)  5,107   - 
                                   
Portrait Studio, LLC First Lien Debt (9.0% Cash (1 month LIBOR + 7.0%, 1.0% Floor, 2.0% Ceiling), Due 12/31/22)  -   167   1,860   2,400   (4,260)  -   -   - 
                                   
Portrait Studio, LLC First Lien Debt (9.4% Cash (1 month LIBOR + 7.0%, 1.0% Floor, 5.0% Ceiling), Due 12/31/22)  4,500   435   4,500   -   -   -   -   4,500 
                                   
Portrait Studio, LLC Preferred Units (4,350,000 Units)      -   2,450   -   -   -   (276)  2,174 
                                   
Portrait Studio, LLC Membership Units (150,000 Units)      -   -   -   -   -   -   - 
                                   
         602   8,810   2,400   (4,260)  -   (276)  6,674 
                                   
Total Control investments       $6,802  $107,608  $50,905  $(50,898) $(22,010) $(16,460) $69,145 
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)
  June 30, 2020
Fair Value
 
Affiliate investments                                  
                                   
Burgaflex Holdings, LLC First Lien Debt (12.0% Cash, 3.0% PIK, Due 3/23/21) $14,135  $858  $14,421  $214  $(500) $-  $(119) $14,016 
                                   
Burgaflex Holdings, LLC Common Stock Class B (1,085,073 shares)      -   635   -   -   -   (635)  - 
                                   
Burgaflex Holdings, LLC Common Stock Class A (1,253,198 shares)      -   -   -   -   -   -   - 
                                   
         858   15,056   214   (500)  -   (754)  14,016 
                                   
City Gear, LLC Membership Unit Warrants      -   3,326   -   (1,341)  1,341   (1,516)  1,810 
                                   
         -   3,326   -   (1,341)  1,341   (1,516)  1,810 
                                   
Eastport Holdings, LLC Second Lien Debt (13.5% Cash (3 month LIBOR + 13.0%, 0.5% Floor), Due 12/29/21)  16,500   1,273   16,500   86   -   -   (191)  16,395 
                                   
Eastport Holdings, LLC Membership Units (22.9% ownership)      -   17,822   -   -   -   (2,277)  15,545 
                                   
         1,273   34,322   86   -   -   (2,468)  31,940 
                                   
GA Communications, Inc. Series A-1 Preferred Stock (1,998 shares)      -   3,761   -   -   -   147   3,908 
                                   
GA Communications, Inc. Series B-1 Common Stock (200,000 shares)      -   501   -   -   -   (470)  31 
                                   
         -   4,262   -   -   -   (323)  3,939 
                                   
LJS Partners, LLC Preferred Units (175,867 units)      -   372   145   -   -   187   704 
                                   
LJS Partners, LLC Common Membership Units (2,593,234 units)      -   1,509   -   -   -   848   2,357 
                                   
         -   1,881   145   -   -   1,035   3,061 
                                   
MMI Holdings, LLC First Lien Debt (12.0% Cash, Due 1/31/21)  2,600   158   2,600   -   -   -   -   2,600 
                                   
MMI Holdings, LLC Second Lien Debt (6.0% Cash, Due 1/31/21)  400   12   400   -   -   -   -   400 
                                   
MMI Holdings, LLC (5) Preferred Units (1,000 units, 6.0% PIK Dividend)      -   1,710   52   -   -   -   1,762 
                                   
MMI Holdings, LLC Common Membership Units (45 units)      -   194   -   -   -   14   208 
                                   
         170   4,904   52   -   -   14   4,970 
                                   
Navis Holdings, Inc. First Lien Debt (9.0% Cash, 2.0% PIK, Due 6/30/23)  11,428   553   10,100   1,507   (179)  -   (465)  10,963 
                                   
Navis Holdings, Inc. Class A Preferred Stock (1,000 shares)      25   1,000   -   -   -   (41)  959 
                                   
Navis Holdings, Inc. Common Stock (60,000 shares)      -   464   -   -   -   (464)  - 
                                   
       �� 578   11,564   1,507   (179)  -   (970)  11,922 
                                   
Nth Degree Investment Group, LLC Membership Units (6,088,000 Units)      -   6,088   -   -   -   (6,088)  - 
                                   
         -   6,088   -   -   -   (6,088)  - 
                                   
RAM Payment, LLC First Lien Debt (6.5% Cash (1 month LIBOR + 5.0%, 1.5% Floor), Due 1/4/24)  3,029   16   -   3,070   (41)  -   -   3,029 
                                   
RAM Payment, LLC First Lien Debt (9.8% Cash, Due 1/4/24)  8,212   436   9,019   -   (807)  -   -   8,212 
                                   
RAM Payment, LLC (5) Preferred Units (86,000 units, 8.0% PIK Dividend)      -   1,725   34   -   -   572   2,331 
                                   
         452   10,744   3,104   (848)  -   572   13,572 
                                   
Sierra Hamilton Holdings Corporation Second Lien Debt (15.0% PIK, Due 9/12/23)  843   5   748   66   -   -   (1)  813 
                                   
Sierra Hamilton Holdings Corporation Common Stock (15,068,000 shares)      -   5,160   -   -   -   (4,232)  928 
                                   
         5   5,908   66   -   -   (4,233)  1,741 
                                   
V12 Holdings, Inc. Second Lien Debt  -   -   708   -   -   -   -   708 
                                   
         -   708   -   -   -   -   708 
                                   
Total Affiliate investments       $3,336  $98,763  $5,174  $(2,868) $1,341  $(14,731) $87,679 
                                   
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)  3,829   206   3,877   -   (48)  -   -   3,829 
                                   
Vology, Inc. Class A Preferred Units (9,041,810 Units)      -   5,215   -   -   -   (107)  5,108 
                                   
Vology, Inc. Membership Units (5,363,982 Units)      -   -   -   -   -   -   - 
                                   
         206   9,092   -   (48)  -   (107)  8,937 
                                   
Total Control investments       $206  $22,723  $-  $(13,164) $(484) $(138) $8,937 

 

(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 includes 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.

 

35

See accompanying notes to consolidated financial statements.

 


During the year ended December 31, 2019, 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, 2018
Fair Value
  Gross
Additions (2)
  Gross
Reductions (3)
  Realized
Gain/(Loss)
  Unrealized
Appreciation
(Depreciation)
  December 31,
2019
Fair Value
 
Affiliate investments                                  
                                   
Burgaflex Holdings, LLC First Lien Debt (12.0% Cash, 3.0% PIK, Due 3/23/21) $14,421  $1,837  $14,384  $370  $(750) $-  $417  $14,421 
                                   
Burgaflex Holdings, LLC Common Stock Class B (1,085,073 shares)      -   -   62   -   -   573   635 
                                   
Burgaflex Holdings, LLC Common Stock Class A (1,253,198 shares)      -   -   -   -   -   -   - 
                                   
         1,837   14,384   432   (750)  -   990   15,056 
                                   
City Gear, LLC Membership Unit Warrants      -   3,184   111   -   (111)  142   3,326 
                                   
         -   3,184   111   -   (111)  142   3,326 
                                   
Eastport Holdings, LLC Second Lien Debt (14.9% Cash (3 month LIBOR + 13.0%, 0.5% Floor), Due 12/29/21)  16,500   3,230   16,500   659   -   -   (659)  16,500 
                                   
Eastport Holdings, LLC Membership Units (22.9% ownership)      -   17,610   -   -   -   212   17,822 
                                   
         3,230   34,110   659   -   -   (447)  34,322 
                                   
GA Communications, Inc. (5) Series A-1 Preferred Stock (1,998 shares, 8.0% PIK Dividend)      -   3,482   299   -   -   (20)  3,761 
                                   
GA Communications, Inc. Series B-1 Common Stock (200,000 shares)      -   1,325   -   -   -   (824)  501 
                                   
         -   4,807   299   -   -   (844)  4,262 
                                   
J&J Produce Holdings, Inc. Second Lien Debt (13.0% Cash, Due 6/16/19)  -   485   6,210   -   (5,788)  (618)  196   - 
                                   
J&J Produce Holdings, Inc. Common Stock (8,182 shares)      -   -   -   -   (818)  818   - 
                                   
J&J Produce Holdings, Inc. Common Stock Warrants (6,369 shares)      -   -   -   -   -   -   - 
                                   
         485   6,210   -   (5,788)  (1,436)  1,014   - 
                                   
LJS Partners, LLC Preferred Units (92,924 units)      -   -   293   -   -   79   372 
                                   
LJS Partners, LLC Common Membership Units (2,593,234 units)      -   3,018   327   (293)  -   (1,543)  1,509 
                                   
         -   3,018   620   (293)  -   (1,464)  1,881 
                                   
MMI Holdings, LLC First Lien Debt (12.0% Cash, Due 1/31/21)  2,600   316   2,600   -   -   -   -   2,600 
                                   
MMI Holdings, LLC Second Lien Debt (6.0% Cash, Due 1/31/21)  400   24   400   -   -   -   -   400 
                                   
MMI Holdings, LLC (5) Preferred Units (1,000 units, 6.0% PIK Dividend)      -   1,612   98   -   -   -   1,710 
                                   
MMI Holdings, LLC Common Membership Units (45 units)      -   185   -   -   -   9   194 
                                   
         340   4,797   98   -   -   9   4,904 
                                   
Navis Holdings, Inc. First Lien Debt (11.0% Cash, Due 6/30/23)  10,100   568   -   10,100   -   -   -   10,100 
                                   
Navis Holdings, Inc. (5) Class A Preferred Stock (1,000 shares, 10.0% Cash Dividend)      50   -   1,000   -   -   -   1,000 
                                   
Navis Holdings, Inc. Common Stock (60,000 shares)      -   -   -   -   -   464   464 
                                   
         618   -   11,100   -   -   464   11,564 
                                   
Nth Degree Investment Group, LLC Membership Units (6,088,000 Units)      -   -   6,088   -   -   -   6,088 
                                   
         -   -   6,088   -   -   -   6,088 
                                   
RAM Payment, LLC First Lien Debt (10.0% Cash, Due 1/4/24)  9,019   1,212   -   9,489   (470)  -   -   9,019 
                                   
RAM Payment, LLC (5) Preferred Units (86,000 Units, 8.0% PIK Dividend)      -   -   928   -   -   797   1,725 
                                   
         1,212   -   10,417   (470)  -   797   10,744 
                                   
Sierra Hamilton Holdings Corporation Second Lien Debt (15.0% PIK, Due 9/12/23)  782   3   -   748   -   -   -   748 
                                   
Sierra Hamilton Holdings Corporation Common Stock (15,068,000 shares)      -   6,854   -   -   -   (1,694)  5,160 
                                   
         3   6,854   748   -   -   (1,694)  5,908 
                                   
US Bath Group, LLC First Lien Debt (11.5% Cash (1 month LIBOR + 9.0%, 1.0% Floor), Due 1/2/23)  -   676   12,750   -   (12,750)  -   -   - 
                                   
US Bath Group, LLC Membership Units (500,000 units)      -   2,083   -   (4,323)  3,823   (1,583)  - 
                                   
         676   14,833   -   (17,073)  3,823   (1,583)  - 
                                   
V12 Holdings, Inc. Second Lien Debt      -   742   -   (30)  12   (16)  708 
                                   
         -   742   -   (30)  12   (16)  708 
                                   
Total Affiliate investments       $8,401  $92,939  $30,572  $(24,404) $2,288  $(2,632) $98,763 
                                   
Control investments                                  
                                   
AAE Acquisition, LLC Second Lien Debt (6.0% PIK, Due 8/24/19) $-  $-  $16,327  $4,084  $-  $(20,411) $-  $- 
                                   
AAE Acquisition, LLC Membership Units (2.2% fully diluted)      -   -   -   -   (17)  17   - 
                                   
AAE Acquisition, LLC Warrants (58.9% fully diluted)      -   -   -   -   -   -   - 
                                   
         -   16,327   4,084   -   (20,428)  17   - 
                                   
CableOrganizer Acquisition, LLC First Lien Debt (8.0% Cash, Due 6/30/21)  -   72   1,708   1,842   (3,550)  -   -   - 
                                   
CableOrganizer Acquisition, LLC First Lien Debt (8.0% Cash, Due 6/30/21)  -   148   8,889   -   (3,424)  (5,465)  -   - 
                                   
CableOrganizer Acquisition, LLC Preferred Units - Series A1 (7,200,000 units)      -   -   5,373   -   (5,373)  -   - 
                                   
CableOrganizer Acquisition, LLC Preferred Units - Series A (4,000,000 units)      -   -   -   -   (2,354)  2,354   - 
                                   
CableOrganizer Acquisition, LLC Common Stock (14.9% fully diluted)      -   -   -   -   (1,394)  1,394   - 
                                   
CableOrganizer Acquisition, LLC Common Stock Warrants (40.0% fully diluted)      -   -   -   -   -   -   - 
                                   
         220   10,597   7,215   (6,974)  (14,586)  3,748   - 
                                   
Capitala Senior Loan Fund II, LLC Second Lien Debt (6.7% Cash (1 month LIBOR + 5.0%), Due 9/3/24)  -   -   -   -   -   -   -   - 
                                   
Capitala Senior Loan Fund II, LLC Membership Units (80.0% ownership)      1,040   13,695   -   -   -   (64)  13,631 
                                   
         1,040   13,695   -   -   -   (64)  13,631 
                                   
Micro Precision, LLC Second Lien Debt (10.0% Cash, Due 3/31/20)  -   106   1,862   -   (1,862)  -   -   - 
                                   
Micro Precision, LLC Second Lien Debt (14.0% Cash, 4.0% PIK, Due 3/31/20)  -   350   4,325   88   (4,413)  -   -   - 
                                   
Micro Precision, LLC Series A Preferred Units (47 units)      814   2,817   -   (1,629)  -   (1,188)  - 
                                   
         1,270   9,004   88   (7,904)  -   (1,188)  - 
                                   
Navis Holdings, Inc. First Lien Debt (11.0% Cash, Due 6/30/23)  -   566   7,500   -   (7,500)  -   -   - 
                                   
Navis Holdings, Inc. (5) Class A Preferred Stock (1,000 shares, 10.0% Cash Dividend)      50   1,000   -   (1,000)  -   -   - 
                                   
Navis Holdings, Inc. Common Stock (60,000 shares)      -   4,348   -   (2,600)  2,599   (4,347)  - 
                                   
         616   12,848   -   (11,100)  2,599   (4,347)  - 
                                   
Portrait Studio, LLC First Lien Debt (9.0% Cash (1 month LIBOR + 7.0%, 1.0% Floor, 2.0% Ceiling), Due 12/31/22)  -   98   -   3,540   (3,540)  -   -   - 
                                   
Portrait Studio, LLC First Lien Debt (9.1% Cash (1 month LIBOR + 7.0%, 1.0% Floor, 5.0% Ceiling), Due 12/31/22)  -   107   4,500   -   (792)  (3,708)  -   - 
                                   
Portrait Studio, LLC Preferred Units (4,350,000 Units)      -   2,174   -   -   (2,450)  276   - 
                                   
Portrait Studio, LLC Membership Units (150,000 Units)      -   -   -   -   -   -   - 
                                   
         205   6,674   3,540   (4,332)  (6,158)  276   - 
                                   
Vology, Inc. First Lien Debt (10.5% Cash (1 month LIBOR + 8.5%, 2.0% Floor), Due 12/31/21)  3,877   119   -   3,877   -   -   -   3,877 
                                   
Vology, Inc. Class A Preferred Units (9,041,810 Units)      -   -   5,215   -   -   -   5,215 
                                   
Vology, Inc. Membership Units (5,363,982 Units)      -   -   -   -   -   -   - 
                                   
         119   -   9,092   -   -   -   9,092 
                                   
Total Control investments       $3,470  $69,145  $24,019  $(30,310) $(38,573) $(1,558) $22,723 

(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 includes 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 our Investment Advisor, 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 non-interested directors. The Investment Advisory Agreement was most recently re-approved by the Board, including a majority of our non-interested directors, at an in-persona meeting on August 1, 2019.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, structuring, 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 net investment income used to calculate this part of the incentive fee is also included in the amount of the gross assets used to calculate the 1.75% base management fee. 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).

 

36

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 SeptemberJune 30, 20192020 and December 31, 2018,2019, the Company had incentive fees payable to the Investment Advisor of $3.7 million and $2.5 million, respectively.related to fees earned in prior years but deferred under the incentive fee deferral mechanism.

 

For the three months ended SeptemberJune 30, 20192020 and 2018,2019, the Company incurred $1.9$1.7 million and $2.3$2.0 million in base management fees, respectively. The Company incurred $0.0 million and $0.0$0.5 million in incentive fees related to pre-incentive fee net investment income for the three months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. For the three months ended SeptemberJune 30, 2020 and 2019, our Investment Advisor waived $0.0 and 2018, $0.0 million and $0.0$0.3 million, respectively, in incentive fees were waived by our Investment Advisor.fees.

 

For the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, the Company incurred $6.1$3.4 million and $6.9$4.1 million in base management fees, respectively. The Company incurred $1.5 million$0.0 and $0.2$1.5 million in incentive fees related to pre-incentive fee net investment income for the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. For the ninesix months ended SeptemberJune 30, 2020 and 2019, our Investment Advisor waived $0.0 and 2018, $0.3 million and $0.0 million, respectively, in incentive fees were waived by our Investment Advisor.fees.

 

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 August 1, 2019.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 ninesix months ended SeptemberJune 30, 2019,2020, the Company paid the Administrator $0.4 million and $1.1$0.7 million, respectively, for the Company’s allocable portion of the Administrator’s overhead. For the three and ninesix months ended SeptemberJune 30, 2018,2019, the Company paid the Administrator $0.4 million and $1.1$0.7 million, respectively, for the Company’s allocable portion of the Administrator’s overhead.

37

 

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

 

At SeptemberJune 30, 20192020 and December 31, 2018,2019, the Company had $3.5$3.6 million and $2.5$3.7 million, respectively, of management and incentive fees payable to the Investment Advisor. These amounts are reflected in the accompanying consolidated statements of assets and liabilities under the caption “Management and incentive fees payable.”

 

On August 31, 2016,June 1, 2020, the Company sold assets to FSC II in exchange for 100%purchased 50% of the partnership interestsoutstanding loans in FSC II. Concurrent withCSLF II at par as part of the salewind-down of these assetsthe joint venture. The Company paid $8.3 million for the loans and assumed a $3.0 million unfunded commitment related to FSC II,Rapid Fire Protection, Inc.’s revolving credit facility. On June 12, 2020, the Company received cash consideration of $47.6 million from an affiliated third-party purchaser in exchange for 100% of the partnership interests of FSC II. The Company’s Board pre-approved this transaction pursuant to Section 57(f) of the 1940 Act. The Administrator also serves as the administrator to FSCwound down CSLF II. See Note 4 for a further description of this transaction.

The Company may invest in the same unitranche facility as CSLF II, whereby CSLF II provides the first-out portion of the unitranche facility and the Company and other lenders provide the last-out portion of the unitranche facility. Under a guarantee agreement, the Company may be required to purchase its pro-rata portion of first-out loans from CSLF II upon certain triggering events, including acceleration upon payment default of the underlying borrower. As of September 30, 2019, the Company has evaluated the fair value of the guarantee under the guidance of ASC Topic 460 —Guarantees and determined that the fair value of the guarantee is immaterial as the risk of payment default for first-out loans in CSLF II is considered remote. The maximum exposure to credit risk as of September 30, 2019 and December 31, 2018 was $7.3 million and $4.3 million, respectively, and extends to the stated maturity of the underlying loans in CSLF II.details.

 

Note 8. Borrowings

 

SBA Debentures

 

The Company, through its wholly owned subsidiary Fund III, uses debenture leverage provided through the SBA to fund a portion of its investment portfolio. As of SeptemberJune 30, 20192020 and December 31, 2018,2019, the Company had $150.0 million and $165.7 million, respectively, of SBA-guaranteed debentures outstanding. The Company has issued all SBA-guaranteed debentures that were permitted under each of the Legacy Funds’ respective SBIC licenses (as applicable), and there are no unused SBA debenture commitments remaining. On March 1, 2019, Fund II repaid its outstanding SBA debentures and relinquished its SBIC license. SBA-guaranteed debentures are secured by a lien on all assets of Fund III and were secured by a lien on all assets of Fund II prior to March 1, 2019. As of SeptemberJune 30, 2020, Fund III had total assets of $238.5 million. As of December 31, 2019, Fund III had total assets of $269.8 million. As of December 31, 2018, Fund II and Fund III had total assets of $332.7$266.3 million. 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. The Company intends to comply with the conditions of the order.

 

The following table summarizes the 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 ninesix months ended SeptemberJune 30, 20192020 and 20182019 (dollars in thousands):

 

 For the Three Months Ended  For the Nine Months Ended  For the Three Months Ended  For the Six Months Ended 
 September 30, 2019  September 30, 2018  September 30, 2019  September 30, 2018  June 30, 2020  June 30, 2019  June 30, 2020  June 30, 2019 
Interest expense and annual charges $1,345  $1,574  $4,109  $4,716  $1,331  $1,331  $2,662  $2,764 
Deferred financing costs  135   153   559   458   125   139   249   424 
Total interest and financing expenses $1,480  $1,727  $4,668  $5,174  $1,456  $1,470  $2,911  $3,188 
Average outstanding balance $150,000  $169,069  $153,393  $170,151  $150,000  $150,000  $150,000  $155,118 
Average stated interest and annual charge rate  3.56%  3.69%  3.58%  3.71%  3.56%  3.56%  3.56%  3.59%

 

38

As of SeptemberJune 30, 20192020 and December 31, 2018,2019, the Company’s issued and outstanding SBA-guaranteed debentures mature as follows (dollars in thousands):

 

Fixed Maturity Date Interest Rate  SBA Annual
Charge
  September 30,
2019
  December 31,
2018
  Interest Rate  SBA Annual
Charge
  June 30,
2020
  December 31,
2019
 
September 1, 2020  3.215%  0.285% $19,000  $19,000   3.215%  0.285% $19,000  $19,000 
March 1, 2021  4.084%  0.515%     15,700 
March 1, 2021  4.084%  0.285%  46,000   46,000   4.084%  0.285%  46,000   46,000 
March 1, 2022  2.766%  0.285%  10,000   10,000   2.766%  0.285%  10,000   10,000 
March 1, 2022  2.766%  0.515%  50,000   50,000   2.766%  0.515%  50,000   50,000 
March 1, 2023  2.351%  0.515%  25,000   25,000   2.351%  0.515%  25,000   25,000 
         $150,000  $165,700          $150,000  $150,000 

 

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.

 

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 ninesix months ended SeptemberJune 30, 20192020 and 20182019 (dollars in thousands):

 

 For the Three Months Ended  For the Nine Months Ended  For the Three Months Ended  For the Six Months Ended 
 September 30, 2019  September 30, 2018  September 30, 2019  September 30, 2018  June 30, 2020  June 30, 2019  June 30, 2020  June 30, 2019 
Interest expense $1,125  $1,125  $3,375  $3,375  $1,125  $1,125  $2,250  $2,250 
Deferred financing costs  136   128   402   379   143   134   283   266 
Total interest and financing expenses $1,261  $1,253  $3,777  $3,754  $1,268  $1,259  $2,533  $2,516 
Average outstanding balance $75,000  $75,000  $75,000  $75,000  $75,000  $75,000  $75,000  $75,000 
Average stated interest rate  6.0%  6.0%  6.0%  6.0%  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 is 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%. 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.

 

39

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 ninesix months ended SeptemberJune 30, 20192020 and 20182019 (dollars in thousands):

 

 For the Three Months Ended  For the Nine Months Ended  For the Three Months Ended  For the Six Months Ended 
 September 30, 2019  September 30, 2018  September 30, 2019  September 30, 2018  June 30, 2020  June 30, 2019  June 30, 2020  June 30, 2019 
Interest expense $749  $749  $2,247  $2,247  $749  $749  $1,498  $1,498 
Deferred financing costs  86   82   255   241   90   85   179   169 
Total interest and financing expenses $835  $831  $2,502  $2,488  $839  $834  $1,677  $1,667 
Average outstanding balance $52,088  $52,088  $52,088  $52,088  $52,088  $52,088  $52,088  $52,088 
Average stated interest rate  5.75%  5.75%  5.75%  5.75%  5.75%  5.75%  5.75%  5.75%

 


Credit Facility

 

On October 17, 2014, the Company entered into a senior secured revolving credit agreement (as amended, the “Credit Facility”) with ING Capital, LLC, as administrative agent, arranger, and bookrunner, and the lenders party thereto. The Credit Facility was amendedset to mature on May 22, 2015,April 30, 2022. On June 16, 2017, July 19, 2018, and February 22, 2019 (the “Amendments”). The Amendments were affected, among other things, in order to increase2020, the total borrowings allowed underCompany unilaterally terminated the Credit Facility, allow for stock repurchases, extend the maturity date, reduce the minimum required interest coverage ratio, reduce the minimum required net asset value, and reduce the minimum required asset coverage ratio. The Credit Facility currently provides for borrowings up to $114.5 million and may be increased up to $200.0 million pursuant to its “accordion” feature. The Credit Facility matures on June 16, 2021.Facility.

 

Borrowings under the Credit Facility bearbore 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 3.00%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 Credit Facility arewere based, providesprovided the companyCompany with increased flexibility to manage interest rate risks as compared to a borrowing arrangement that doesdid not provide for such optionality. Once a particular LIBOR hashad been selected, the interest rate on the applicable amount borrowed will reset after the applicable tenor period and bewas based on the then applicable selected LIBOR (e.g., borrowings for which the Company has elected the one month LIBOR will reset on the one month anniversary of the period based on the then selected LIBOR). For any given borrowing under the Credit Facility, the Company intends to electelected what it believesbelieved 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 Credit Facility providesprovided for the ability to step-down the pricing of the Credit Facility from LIBOR plus 3.00%3.50% to LIBOR plus 2.75%3.00% when certain conditions arewere met. The Company will also paypaid an unused commitment fee at a rate of 2.50%0.75% per annum on the amount (if positive) by which 40%unutilized portion of the aggregate commitments under the Credit Facility exceedson each day when the outstanding amountutilized portion of loans under the Credit Facilityaggregate commitments was less than 35% for such day and 0.50% per annum on any remaining unusedthe unutilized portion of the aggregate commitments under the Credit Facility.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 Credit Facility for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 (dollars in thousands):

 

 For the Three Months Ended  For the Nine Months Ended  For the Three Months Ended  For the Six Months Ended 
 September 30, 2019  September 30, 2018  September 30, 2019  September 30, 2018  June 30, 2020  June 30, 2019  June 30, 2020  June 30, 2019 
Interest expense $52  $31  $575  $291  $  $307  $  $523 
Deferred financing costs  126   113   363   328   1,226   122   1,379   237 
Unused commitment fees  356   365   866   980   96   236   211   510 
Total interest and financing expenses $534  $509  $1,804  $1,599  $1,322  $665  $1,590  $1,270 
Average outstanding balance $3,804  $2,391  $13,864  $8,098  $  $22,252  $  $18,977 
Average stated interest rate  5.35%  5.13%  5.46%  4.85%  %  5.47%  %  5.50%

 

As of September 30, 2019 and December 31, 2018,2019, the Company had $0.0 million and $10.0 million, respectively, outstanding under the Credit Facility. The Credit Facility iswas secured by investments and cash held by the Company, exclusive of assets pledged as collateral for the Company’s SBA debentures. Assets pledged to secure the Credit Facility had a carrying value of $165.4$159.8 million and $158.9 million, respectively, at September 30, 2019 and December 31, 2018. As part of the terms of the Credit Facility, the Company may not make cash distributions with respect to any taxable year that exceed 110% (125% if the Company is not in default and our covered debt does not exceed 85% of the borrowing base) of the amounts required to be distributed to maintain eligibility as a RIC and to reduce our tax liability to zero for taxes imposed on our investment company taxable income and net capital gains.

40

2019.

 

Financial Instruments Disclosed, But Not Carried, At Fair Value

 

The following table presents the carrying value and fair value of the Company’s financial liabilities disclosed, but not carried, at fair value as of SeptemberJune 30, 2019,2020, and the level of each financial liability within the fair value hierarchy (dollars in thousands):

 

 Carrying
Value(1)
  Fair Value  Level 1  Level 2  Level 3  Carrying
Value (1)
  Fair Value  Level 1  Level 2  Level 3 
SBA debentures $150,000  $151,353  $  $  $151,353  $150,000  $151,013  $  $  $151,013 
2022 Notes  75,000   74,640   74,640         75,000   60,300   60,300       
2022 Convertible Notes  52,088   50,858   50,858         52,088   40,107   40,107       
Credit Facility               
Total $277,088  $276,851  $125,498  $  $151,353  $277,088  $251,420  $100,407  $  $151,013 

 

(1)Carrying value equals the gross principal outstanding at period end.

 

The following table presents the carrying value and fair value of the Company’s financial liabilities disclosed, but not carried, at fair value as of December 31, 2018,2019, and the level of each financial liability within the fair value hierarchy (dollars in thousands):

 

 Carrying
Value(1)
  Fair Value  Level 1  Level 2  Level 3  Carrying
Value (1)
  Fair Value  Level 1  Level 2  Level 3 
SBA debentures $165,700  $165,436  $  $  $165,436  $150,000  $151,167  $  $  $151,167 
2022 Notes  75,000   74,700   74,700         75,000   74,970   74,970       
2022 Convertible Notes  52,088   49,546   49,546         52,088   51,498   51,498       
Credit Facility  10,000   10,030         10,030                
Total $302,788  $299,712  $124,246  $  $175,466  $277,088  $277,635  $126,468  $  $151,167 

 

(1)Carrying value equals the gross principal outstanding at period end.


 

The estimated fair value of the Company’s SBA 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 Credit Facility was based on future contractual cash payments discounted at estimated market interest rates for similar debt.

 

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 ninesix months ended SeptemberJune 30, 2020, the Company recognized directors’ fees expense of $0.1 million and $0.2 million, respectively. For the three and six months ended June 30, 2019, the Company recognized directors’ fees expense of $0.1 million and $0.3 million, respectively. For the three and nine months ended September 30, 2018, the Company recognized directors’ fees expense of $0.1 million and $0.3$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. Summarized Financial Information of Our Unconsolidated Subsidiaries

The Company holds a control interest, as defined by the 1940 Act, in two portfolio companies that are considered significant subsidiaries under the guidance in Regulation S-X but are not consolidated in Effective April 1, 2020, the Company’s consolidated financial statements. Below is a brief descriptionindependent directors have agreed to waive 20% of each such portfolio company, along with summarized financial information.

During the nine months ended September 30, 2019, the Company wrote off its investment in AAE Acquisition, LLC and realized a loss of $20.4 million. During the nine months ended September 30, 2019, the Company exited its investment in Micro Precision, LLC, receiving $6.3 million for its debt investment, and receiving $2.4 million in total consideration for its equity investment.

41

CableOrganizer Acquisition, LLC

CableOrganizer Acquisition, LLC, a Delaware limited liability company that began operations on April 23, 2013, is a leading online provider of cable and wire management products. The loss the Company generated from CableOrganizer Acquisition, LLC, which includes all interest, dividends, PIK interest and PIK dividends, fees realized loss, and unrealized appreciation (depreciation), was $(8.9) million and $(0.2) milliondue to them for the nine months ended September 30, 2019 and September 30, 2018, respectively.

Micro Precision, LLC

Micro Precision, LLC, formed on August 5, 2011 as a Delaware limited liability company, is a prime contractor supplying critical parts and mechanical assembliesremainder of the fiscal year ending December 31, 2020 due to the U.S. Departmentimpact of Defense as well as designer and manufacturer of locomotive air horns. The income the Company generated from Micro Precision, LLC, which includes all interest, dividends, PIK interest and PIK dividends, fees, and unrealized appreciation (depreciation), was $0.2 million and $1.9 million for the nine months ended September 30, 2019 and September 30, 2018, respectively. COVID-19 pandemic.

The summarized unaudited financial information of our unconsolidated subsidiaries was as follows (dollars in thousands):

  As of 
  September 30,  December 31, 
Balance Sheets – CableOrganizer Acquisition, LLC 2019  2018 
Current assets $2,813  $2,987 
Noncurrent assets  7,190   8,459 
Total assets $10,003  $11,446 
         
Current liabilities $2,219  $13,094 
Noncurrent liabilities  4,939    
Total liabilities $7,158  $13,094 
         
Total equity (deficit) $2,845  $(1,648)

  For the Nine Months Ended 
  September 30,  September 30, 
Statements of Operations – CableOrganizer Acquisition, LLC 2019  2018 
Net sales $9,440  $14,348 
Cost of goods sold  6,810   9,601 
Gross profit $2,630  $4,747 
         
Other expenses $4,619  $6,022 
Loss before income taxes  (1,989)  (1,275)
Income tax provision      
Net loss $(1,989) $(1,275)

  As of 
  June 30,  December 31, 
Balance Sheets – Micro Precision, LLC(1) 2019  2018 
Current assets $7,430  $6,127 
Noncurrent assets  19,346   19,469 
Total assets $26,776  $25,596 
         
Current liabilities $7,934  $6,223 
Noncurrent liabilities  13,977   16,208 
Total liabilities $21,911  $22,431 
         
Total equity $4,865  $3,165 

  For the Nine Months Ended 
  June 30,  June 30, 
Statements of Operations - Micro Precision, LLC(1) 2019  2018 
Net sales $10,413  $9,115 
Cost of goods sold  6,024   5,111 
Gross profit $4,389  $4,004 
         
Other expenses $3,828  $3,602 
Income before income taxes  561   402 
Income tax provision  (286)   
Net income $275  $402 

(1)September 30, 2019 financial statements are not available. As such, the most recent comparable period is presented.

42

 

Note 11.10. 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 outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating diluted earnings per share. For the three and ninesix months ended SeptemberJune 30, 20192020 and September 30, 2018,2019, 3.3 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 ninesix months ended SeptemberJune 30, 20192020 and 20182019 (dollars in thousands, except share and per share data): 

 

 For the Three Months Ended  For the Nine Months Ended  For the Three Months Ended  For the Six Months Ended 
 September 30, 2019  September 30, 2018  September 30, 2019  September 30, 2018  June 30, 2020  June 30, 2019  June 30, 2020  June 30, 2019 
Net increase (decrease) in net assets resulting from operations $1,717  $(11,916) $(27,578) $(6,827) $3,100  $(29,144) $(39,340) $(29,295)
Weighted average common stock outstanding – basic and diluted  16,133,365   16,001,919   16,097,908   15,981,154   16,266,484   16,096,678   16,243,538   16,079,885 
Net increase (decrease) in net assets per share resulting from operations – basic and diluted $0.11  $(0.74) $(1.71) $(0.43) $0.19  $(1.81) $(2.42) $(1.82)

  

Note 12.11. 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 common stock, or a combination of cash and common stock.

 

On April 30, 2020, the Company’s Board determined not to declare a distribution for the second quarter of 2020 due to the impact of the COVID-19 pandemic on the Company’s expected net investment income. On July 30, 2020, the Company’s Board determined not to declare a distribution for the third quarter of 2020 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, we estimate that total distributions of $0.0 and $4.1 million, respectively, were classified as a return of capital. 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 ninesix months ended SeptemberJune 30, 2020 (dollars in thousands, except share and per share data):

Date Declared Record Date Payment Date Amount
Per Share
  Cash
Distribution
  DRIP
Shares
Issued
  DRIP
Share
Value
 
January 2, 2020 January 24, 2020 January 30, 2020 $0.0833  $1,231   14,593  $119 
January 2, 2020 February 20, 2020 February 27, 2020  0.0833   1,228   16,556   122 
January 2, 2020 March 23, 2020 March 30, 2020  0.0833   1,259   31,566   94 
Total Distributions Declared and Distributed $0.25  $3,718   62,715  $335 

The following table summarizes the Company’s distribution declarations for the six months ended June 30, 2019 (dollars in thousands, except share and per share data):

 

Date Declared Record Date Payment Date Amount
Per Share
  Cash
Distribution
  DRIP
Shares
Issued
  DRIP
Share
Value
 
January 2, 2019 January 24, 2019 January 30, 2019 $0.0833  $1,256   10,270  $81 
January 2, 2019 February 20, 2019 February 27, 2019  0.0833   1,253   10,570   85 
January 2, 2019 March 21, 2019 March 28, 2019  0.0833   1,250   11,756   89 
April 1, 2019 April 22, 2019 April 29, 2019  0.0833   1,246   11,479   94 
April 1, 2019 May 23, 2019 May 30, 2019  0.0833   1,243   11,579   97 
April 1, 2019 June 20, 2019 June 27, 2019  0.0833   1,238   11,747   104 
July 1, 2019 July 23, 2019 July 30, 2019  0.0833   1,237   11,721   106 
July 1, 2019 August 22, 2019 August 29, 2019  0.0833   1,231   16,079   113 
July 1, 2019 September 20, 2019 September 27, 2019  0.0833   1,231   14,327   114 
Total Distributions Declared and Distributed $0.75  $11,185   109,528  $883 

43

The following table summarizes the Company’s distribution declarations for the nine months ended September 30, 2018 (dollars in thousands, except share and per share data):

Date Declared Record Date Payment Date Amount
Per Share
  Cash
Distribution
  DRIP
Shares
Issued
  DRIP
Share
Value
 
January 2, 2018 January 22, 2018 January 30, 2018 $0.0833  $1,275   7,280  $54 
January 2, 2018 February 20, 2018 February 27, 2018  0.0833   1,275   8,076   54 
January 2, 2018 March 23, 2018 March 29, 2018  0.0833   1,274   7,631   56 
April 2, 2018 April 19, 2018 April 27, 2018  0.0833   1,278   7,006   53 
April 2, 2018 May 22, 2018 May 30, 2018  0.0833   1,277   6,875   54 
April 2, 2018 June 20, 2018 June 28, 2018  0.0833   1,280   6,591   52 
July 2, 2018 July 23, 2018 July 30, 2018  0.0833   1,279   6,515   53 
July 2, 2018 August 23, 2018 August 30, 2018  0.0833   1,277   6,699   56 
July 2, 2018 September 20, 2018 September 27, 2018  0.0833   1,249   10,066   84 
Total Distributions Declared and Distributed  $0.75  $11,464   66,739  $516 

44

Date Declared Record Date Payment Date Amount
Per Share
  Cash
Distribution
  DRIP
Shares
Issued
  DRIP
Share
Value
 
January 2, 2019 January 24, 2019 January 30, 2019 $0.0833  $1,256   10,270  $81 
January 2, 2019 February 20, 2019 February 27, 2019  0.0833   1,253   10,570   85 
January 2, 2019 March 21, 2019 March 28, 2019  0.0833   1,250   11,756   89 
April 1, 2019 April 22, 2019 April 29, 2019  0.0833   1,246   11,479   94 
April 1, 2019 May 23, 2019 May 30, 2019  0.0833   1,243   11,579   97 
April 1, 2019 June 20, 2019 June 27, 2019  0.0833   1,238   11,747   104 
Total Distributions Declared and Distributed $0.50  $7,486   67,401  $550 

 

Note 13.12. Financial Highlights

 

The following is a schedule of financial highlights for the ninesix months ended SeptemberJune 30, 20192020 and 20182019 (dollars in thousands, except share and per share data): 

 

 For the Nine Months Ended  For the Six Months Ended 
 September 30, 2019  September 30, 2018  June 30, 2020  June 30, 2019 
Per share data:             
Net asset value at beginning of period $11.88  $13.91  $9.14  $11.88 
Net investment income(1)  0.69   0.78 
Net investment income (loss)(1)  (0.04)  0.51 
Net realized loss on investments(1)  (1.30)  (1.26)  (0.76)  (1.30)
Net unrealized depreciation on investments(1)  (1.07)  (0.45)  (1.63)  (0.99)
Net unrealized appreciation on Written Call Option(1)     0.43 
Tax benefit (provision)(1)  (0.03)  0.07 
Distributions declared from net investment income  (0.75)  (0.75)
Tax provision(1)     (0.04)
Distributions – return of capital(2)  (0.25)   
Distributions – net investment income(2)     (0.50)
Other(7)(3)  (0.02)  (0.02)     (0.01)
Net asset value at end of period $9.40  $12.71  $6.46  $9.55 
Net assets at end of period $151,881  $203,596  $105,055  $153,863 
Shares outstanding at end of period  16,161,075   16,017,970   16,266,484   16,118,948 
Per share market value at end of period $8.29  $8.71  $2.63  $9.45 
Total return based on market value(2)(4)  26.83%  31.81%  (68.36)%  40.11%
Ratio/Supplemental data:                
Ratio of net investment income to average net assets(9)  8.96%  7.80%
Ratio of incentive fees, net of incentive fee waiver, to average net assets(6)(10)  0.71%  0.11%
Ratio of net investment income (loss) to average net assets(5)  (1.06)%  9.98%
Ratio of incentive fees, net of incentive fee waiver, to average net assets(6)(7)  %  0.68%
Ratio of interest and financing expenses to average net assets(8)  9.98%  8.06%  14.80%  9.84%
Ratio of tax (benefit) provision to average net assets(8)  0.49%  (0.73)%
Ratio of tax provision to average net assets(8)  %  0.72%
Ratio of other operating expenses to average net assets(8)  7.28%  6.32%  10.16%  7.13%
Ratio of total expenses including tax (benefit) provision, net of incentive fee waiver, to average net assets(6)(9)  18.46%  13.76%
Ratio of total expenses including tax benefit, to average net assets(5)(6)  24.96%  18.37%
Portfolio turnover rate(3)(9)  11.71%  12.23%  6.43%  8.09%
Average debt outstanding(4) $294,345  $305,337 
Average debt outstanding(10) $277,088  $301,183 
Average debt outstanding per common share $18.21  $19.06  $17.03  $18.69 
Asset coverage ratio per unit(5) $2,195  $2,602 
Asset coverage ratio per unit(11) $1,827  $2,165 

 


(1)Based on daily weighted average balance of shares outstanding during the period.

(2)Distributions may be subject to reclassification based on future dividends and operating results and will not be determined until the end of the year.

(3)Includes the impact of different share amounts used in calculating per share data based on weighted average shares outstanding during the period and certain per share data based on shares outstanding as of a period end or transaction date.

(4)Total investment return is calculated assuming a purchase of common shares 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.

(3)(5)Ratios are annualized. Incentive fees, included within the ratio are not annualized.

(6)The ratio of waived incentive fees to average net assets was 0.00% and 0.16%, respectively, for the six months ended June 30, 2020 and 2019.

(7)Ratio is not annualized.

(8)Ratios are annualized.

(9)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.

(4)(10)Based on the daily weighted average balance of debt outstanding during the period.

(5)(11)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 SeptemberJune 30, 20192020 and September 30, 20182019 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 200%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.

(6)The ratio of waived incentive fees to average net assets was 0.17% and 0.00%, respectively, for the nine months ended September 30, 2019 and September 30, 2018.

(7)Includes the impact of different share amounts used in calculating per share data as a result of calculating certain per share data based on weighted average shares outstanding during the period and certain per share data based on shares outstanding as of a period end or transaction date.

(8)Ratios are annualized.

(9)Ratios are annualized. Incentive fees, net of incentive fee waiver included within the ratio are not annualized.

(10)Ratio is not annualized.

45

 

Note 14. Subsequent Events

 

Management has evaluated subsequent events through the date of issuance of the consolidated financial statements included herein. There have been no subsequent events that occurred during such period that would be required to be recognized in the consolidated financial statements as of SeptemberJune 30, 2019.2020.

 

DistributionsPortfolio Activity 

On October 1, 2019,During July 2020, the Company’s Board declared normal monthly distributions for October, November, and December of 2019 as set forth below:Company received $2.4 million in principal repayments on its first lien debt investment in BigMouth, Inc.

Date Declared Record Date Payment Date Distributions per Share 
October 1, 2019 October 22, 2019 October 29, 2019 $0.0833 
October 1, 2019 November 22, 2019 November 29, 2019 $0.0833 
October 1, 2019 December 23, 2019 December 30, 2019 $0.0833 

 

Other

 

On October 8, 2019,July 30, 2020, the Board of Directors appointed Kevin A. Koonts to replace Richard G. Wheelahan III as the Chief Compliance Officer and Secretaryapproved a one-for-six reverse stock split of the Company. Kevin A. KoontsCompany’s common stock which is expected to be effective at 5:00 p.m. Eastern Standard Time on August 21, 2020 (the "Effective Time"). The Company's common stock is expected to begin trading on a split-adjusted basis at the market open on August 24, 2020. At the Effective Time, every six (6) issued and outstanding shares of the Company's common stock will continuebe converted into one (1) share of the Company's common stock.

On July 30, 2020, the Board approved a bond repurchase program which authorizes the Company to serve asrepurchase up to an aggregate of $10.0 million worth of the Company’s Chief Accounting Officer and Treasurer.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.

 

46

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q.

 

Except as otherwise specified, references to “we,” “us,” “our”, or the “Company”, refer to Capitala Finance Corp.

 

This Quarterly Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about the Company, our current and prospective portfolio investments, our industry, our beliefs, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” “continue,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “targets,” “projects,” and variations of these words and similar expressions are intended to identify forward-looking statements.

 

Some of the statements in the Quarterly Report on Form 10-Q constitute forward-looking statements, which relate to future events or our performance or financial condition. The forward-looking statements contained in this Quarterly Report on Form 10-Q involve risks and uncertainties, including statements as to:

 

our future operating results;
our future operating results and the impact of the COVID-19 pandemic thereon;

 

our business prospects and the prospects of our portfolio companies;
our business prospects and the prospects of our portfolio companies, including our and their ability to achieve our respective objectives as a result of the current COVID-19 pandemic;

 

the impact of investments that we expect to make;
the impact of investments that we expect to make;

 

our contractual arrangements and relationships with third parties;
our contractual arrangements and relationships with third parties;

 

the dependence of our future success on the general economy and its impact on the industries in which we invest;
the dependence of our future success on the general economy and its impact on the industries in which we invest and the impact of the COVID-19 pandemic thereon;

 

the ability of our portfolio companies to achieve their objectives;
our expected financings and investments;

 

our expected financings and investments;
the adequacy of our cash resources and working capital; and

 

the adequacy of our cash resources and working capital; and

the timing of cash flows, if any, from the operations of our portfolio companies.
the timing of cash flows, if any, from the operations of our portfolio companies and the impact of the COVID-19 pandemic thereon.

 

These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:

 

an economic downturn could impair our portfolio companies’ ability to continue to operate or repay their borrowings, which could lead to the loss of some or all of our investments in such portfolio companies;
an economic downturn, due to the COVID-19 pandemic or otherwise, could impair our portfolio companies’ ability to continue to operate or repay their borrowings, which could lead to the loss of some or all of our investments in such portfolio companies;

a contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities and the impact of the COVID-19 pandemic thereon;

interest rate volatility could adversely affect our results, particularly if we use leverage as part of our investment strategy; and

the risks, uncertainties, and other factors we identify in “Risk Factors” and elsewhere in our Annual Report on Form 10-K and in this quarterly report on Form 10-Q.

 

a contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities;

interest rate volatility could adversely affect our results, particularly if we use leverage as part of our investment strategy; and

the risks, uncertainties, and other factors we identify in “Risk Factors” and elsewhere in our Annual Report on Form 10-K and in this quarterly report on Form 10-Q.

Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. Important assumptions include our ability to originate new loans and investments, certain margins and levels of profitability, and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 31, 20182019 and in this quarterly reportQuarterly Report on Form 10-Q. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events, or otherwise, unless required by law or U.S. Securities and Exchange Commission (“SEC”) rule or regulation.

 

47

Overview

 

We are a Maryland corporation that has elected to be regulated as a business development company (‘‘BDC’’) under the Investment Company Act of 1940, as amended (the ‘‘1940 Act’’). Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We are managed by Capitala Investment Advisors, LLC (the ‘‘Investment Advisor’’), and Capitala Advisors Corp. (the ‘‘Administrator’’) provides the administrative services necessary for us to operate.

 

We provide capital to lower and traditional middle-market companies in the United States (‘‘U.S.’’), with a non-exclusive emphasis on the Southeast, Southwest, and Mid-Atlantic regions. We invest primarily in companies with a history of earnings growth and positive cash flow, proven management teams, products or services with competitive advantages, and industry-appropriate margins. We primarily invest in companies with between $4.5 million and $30.0 million in trailing twelve-month earnings before interest, tax, depreciation, and amortization (‘‘EBITDA’’).

 

We invest in first lien loans second lien loans, and subordinated loans, and, to a lesser extent, second lien loans and equity securities issued by lower middle-market companies and traditional middle-market companies.

 

As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally must invest at least 70% of our total assets in “qualifying assets,” including securities of private or thinly traded public U.S. companies, cash, cash equivalents, U.S. government securities, and high-quality debt investments that mature in one year or less. In addition, we are only allowed to borrow money such that our asset coverage, as defined in the 1940 Act, equals at least 200% (or 150%, if certain requirements are met, after November 1, 2019) after such borrowing, with certain limited exceptions. On March 23, 2018, theThe Small Business Credit Availability Act (the “SBCA”"SBCA") was signed into law, which included various changes to regulations under the federal securities laws that impact BDCs. The SBCA included changes to the 1940 Act to allowallows BDCs to decrease their asset coverage requirement from 200% to 150% (i.e. the amount of debt may not exceed 66.7% of the value of our total assets), if certain requirements are met. On November 1, 2018, the Board,our board of directors (the “Board”), including a ‘‘required majority’’“required majority” (as such term is defined in Section 57(o) of the 1940 Act) approved the application of the modified asset coverage. Ascoverage and as a result, our asset coverage requirements for senior securities will bewas changed from 200% to 150%, effective November 1, 2019. As of SeptemberJune 30, 2019,2020, our asset coverage ratio was 219.5%182.7%. To maintain our regulated investment company (“RIC”) status, we must meet specified source-of-income and asset diversification requirements. To maintain our RIC tax treatment under subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”) for U.S. federal income tax purposes, we must distribute at least 90% of our net ordinary income and realized net short- termshort-term capital gains in excess of realized net long-term capital losses, if any, for the taxable year.

 

Corporate History

 

We commenced operations on May 24, 2013 and completed our initial public offering (“IPO”) on September 30, 2013. 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 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 SBIC licenses and continued to hold their existing investments at the time of IPO and have continued to make new investments after the IPO. 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 SBA debentures and relinquished its SBIC license.

 

At the time of the Formation Transactions, our portfolio consisted of: (1) approximately $326.3 million in investments; (2) an aggregate of approximately $67.1 million in cash, interest receivable and other assets; and (3) liabilities of approximately $202.2 million of U.S. Small Business Administration (“SBA”) guaranteed debt payable. Fund III, our subsidiary, is licensed under the Small Business Investment Company (“SBIC”) Act and has elected to be regulated as a BDC under the 1940 Act. Fund II, our subsidiary, was licensed under the SBIC Act until March 1, 2019 and has elected to be regulated as a BDC under the 1940 Act.

48

 

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.

 

Basis of Presentation

 

The Company is considered an investment company as defined in Accounting Standards Codification (“ASC”) Topic 946 —Financial ServicesInvestment 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.

 

The Company’s financial statements as of SeptemberJune 30, 20192020 and December 31, 20182019 and for the periods ended SeptemberJune 30, 20192020 and September 30, 20182019 are presented on a consolidated basis. The effects of all intercompany transactions between the Company and its subsidiaries (Fund II, Fund III, 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.

 

Consolidation

 

As provided under ASC 946, the Company will generally not consolidate its investment in a company other than an 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, and the Taxable Subsidiaries) in its consolidated financial statements. The Company doesdid not consolidate its interest in Capitala Senior Loan Fund II, LLC (‘‘CSLF II’’) during the periods it was in existence because the investment iswas not considered a substantially wholly owned investment company subsidiary. Further, CSLF II iswas a joint venture for which shared power existsexisted relating to the decisions that most significantly impactimpacted 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.

 

Revenues

 

We generate revenue primarily from the periodic cash interest we collect on our debt investments. In addition, most of our debt investments offer the opportunity to participate in a borrower’s equity performance through warrant participation, direct equity ownership, or otherwise, which we expect to result in revenue in the form of dividends and/or capital gains. Further, we may generate revenue in the form of commitment fees, origination fees, amendment structuring orfees, diligence fees, monitoring fees, fees for providing managerial assistance and possibly consulting fees and performance-based fees. These fees will be recognized as they are earned.

 


Expenses

 

Our primary operating expenses include the payment of investment advisory fees to our Investment Advisor, our allocable portion of overhead and other expenses incurred by our Administrator in performing its obligations under an administration agreement between us and the Administrator (the “Administration Agreement”) and other operating expenses as detailed below. Our investment advisory fee will compensate our Investment Advisor for its work in identifying, evaluating, negotiating, closing, monitoring, and servicing our investments. We will bear all other expenses of our operations and transactions, including (without limitation):

 

the cost of our organization;
the cost of our organization;

 

the cost of calculating our net asset value, including the cost of any third-party valuation services;
the cost of calculating our net asset value, including the cost of any third-party valuation services;

 

the cost of effecting sales and repurchases of our shares and other securities;
the cost of effecting sales and repurchases of our shares and other securities;

 

interest payable on debt, if any, to finance our investments;
interest payable on debt, if any, to finance our investments;

 

fees payable to third parties relating to, or associated with, making investments (such as legal, accounting, and travel expenses incurred in connection with making investments), including fees and expenses associated with performing due diligence reviews of prospective investments and advisory fees;
fees payable to third parties relating to, or associated with, making investments (such as legal, accounting, and travel expenses incurred in connection with making investments), including fees and expenses associated with performing due diligence reviews of prospective investments and advisory fees;

 

transfer agent and custodial fees;
transfer agent and custodial fees;

 

49fees and expenses associated with marketing efforts;

 

costs associated with our reporting and compliance obligations under the 1940 Act, the Securities Exchange Act of 1934, as amended (the “Exchange Act”), other applicable federal and state securities laws, and ongoing stock exchange listing fees;

 

fees and expenses associated with marketing efforts;
federal, state, and local taxes;

 

costs associated with our reporting and compliance obligations under the 1940 Act, the Securities Exchange Act of 1934, as amended (the “1934 Act”), other applicable federal and state securities laws, and ongoing stock exchange listing fees;
independent directors’ fees and expenses;

 

federal, state, and local taxes;
brokerage commissions;

 

independent directors’ fees and expenses;
costs of proxy statements, stockholders’ reports, and other communications with stockholders;

  

brokerage commissions;
fidelity bond, directors’ and officers’ liability insurance, errors and omissions liability insurance, and other insurance premiums;

 

costs of proxy statements, stockholders’ reports, and other communications with stockholders;
direct costs and expenses of administration, including printing, mailing, telephone, and staff;

 

fidelity bond, directors’ and officers’ liability insurance, errors and omissions liability insurance, and other insurance premiums;
fees and expenses associated with independent audits and outside legal costs; and

 

direct costs and expenses of administration, including printing, mailing, telephone, and staff;

fees and expenses associated with independent audits and outside legal costs; and

all other expenses incurred by either our Administrator or us in connection with administering our business, including payments under the Administration Agreement that will be based upon our allocable portion of overhead and other expenses incurred by our Administrator in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions, and our allocable portion of any costs of compensation and related expenses of our chief compliance officer, our chief financial officer, and their respective administrative support staff.
all other expenses incurred by either our Administrator or us in connection with administering our business, including payments under the Administration Agreement that will be based upon our allocable portion of overhead and other expenses incurred by our Administrator in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions, and our allocable portion of any costs of compensation and related expenses of our chief compliance officer, our chief financial officer, and their respective administrative support staff.

 

Critical Accounting Policies and Use of Estimates

 

In the preparation of our consolidated financial statements and related disclosures, we have adopted various accounting policies that govern the application of U.S. GAAP. Our significant accounting policies are described in Note 2 to the consolidated financial statements. While all of these policies are important to understanding our consolidated financial statements, certain accounting policies and estimates are considered critical due to their impact on the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the periods covered by such consolidated financial statements. We have identified investment valuation, revenue recognition, and income taxes as our most critical accounting estimates. We continuously evaluate our estimates, including those related to the matters described below. Because of the nature of the judgments and assumptions we make, actual results could materially differ from those estimates under different assumptions or conditions. A discussion of our critical accounting policies follows.

 


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 to our consolidated financial statements.

 

In determining fair value, our board of directors (the “Board”)the Board uses various valuation approaches, and engages a third-party independent valuation firm, which provides positive assurance on the 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 fair value hierarchy is categorized into three levels based on the inputs as follows:

 

Level 1— Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 securities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.

 

Level 2— Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

 

Level 3— Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

50

 

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 Company 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. We use 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.value.

 

As a practical expedient, the Company usesused net asset value (“NAV”) as the fair value for its equity investment in CSLF II. CSLF II recordsrecorded its underlying investments at fair value on a quarterly basis in accordance with the 1940 Act and ASC 820.

 


Valuation Techniques

Enterprise Value Waterfall Approach

 

The enterprise value waterfall approach determines an enterprise value based on 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.

The enterprise value waterfall approach is primarily utilized to value the Company’s equity securities, including warrants. However, the Company may utilize the enterprise value waterfall approach to value certain debt securities.

51

 

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 ratio, 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. This approach is used when the Company has reason to believe that it will not collect all principal and interest in accordance with the contractual terms of the debt agreement.

 

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. The PIK interest, which represents contractually deferred interest added to the loan balance that is generally due at maturity, is recorded on the 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 cash interest when it is determined that interest is no longer considered collectible. The Company may elect to cease accruing PIK interest and continue accruing interest income in cases where a loan is currently paying its interest but, in management’s judgment, there is a reasonable likelihood of principal loss on the loan. 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 and paydowns: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 dividendsdividend 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 the 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 the maturity date are recorded as income upon receipt.

 

Income Taxes

 

Prior to the Formation Transactions, the Legacy Funds were treated as partnerships for U.S. federal, state, and local income tax purposes and, therefore, no provision has been made in the accompanying consolidated financial statements for federal, state, or local income taxes. In accordance with the partnership tax law requirements, each partner would include their respective components of the Legacy Funds’ taxable profits or losses, as shown on their Schedule K-1 in their respective tax or information returns. The Legacy Funds are disregarded entities for tax purposes prior to and post the Formation Transactions.

52

 

The Company has elected to be treated for U.S. federal income tax purposes and intends to comply with the requirement 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.

 

TheIn 2017, the Company elected to amend its tax year end from August 31 to December 31 and filed a tax return for the four months ended December 31, 2017.

The tax periods ended December 31, 2018,2019, December 31, 2017, August2018, December 31, 2017, and August 31, 20162017 remain subject to examination by U.S. federal, state, and local tax authorities. No interest expense or penalties have been assessed for the periods ended SeptemberJune 30, 20192020 and 2018.2019. 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.

 

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 SeptemberJune 30, 20192020 and December 31, 2018,2019, the Company recorded a net deferred tax asset of $0.0 million and $0.6 million, respectively.$0.0. For the three and ninesix months ended SeptemberJune 30, 2020, the Company recorded a tax provision of $0.0. For the three and six months ended June 30, 2019, the Company recorded a tax provision of $0.0$(0.7) million and $(0.6) million, respectively. For the three and nine months ended September 30, 2018, the Company recorded a tax benefit (provision) of $(0.1) million and $1.2 million, respectively. As of SeptemberJune 30, 20192020 and December 31, 2018,2019, the valuation allowance on the Company’s deferred tax asset was $3.1$4.0 million and $0.4$3.2 million, respectively. During the three and ninesix months ended SeptemberJune 30, 2020, the Company recognized an increase (decrease) in the valuation allowance of $(27) thousand and $0.8 million, respectively. During the three and six months ended June 30, 2019, the Company recognized an increase in the valuation allowance of $0.7 million and $2.7 million, respectively. No change in the valuation allowance was recognized for the three and nine months ended September 30, 2018.$2.0 million.

 

In accordance with certain applicable U.S. treasury regulations and private letter rulings 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% (which has been temporarily reduced to 10% for distributions declared on or after April 1, 2020, and on or before December 31, 2020) of the aggregate declared distribution. If too many stockholders elect to receive cash, each stockholder electing to receive cash will receive a pro rata amount of cash (with the balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive less than 20.0% (which has been temporarily reduced to 10% for distributions declared on or after April 1, 2020, and on or before December 31, 2020) of its entire distribution in cash. 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 consolidated 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” of being 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 SeptemberJune 30, 20192020 and December 31, 2018,2019, there were no uncertain tax positions.


 

The Company is required to determine whether a tax position of the Company is more likely-than-notmore-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.

 

U.S. GAAP provides guidance on thresholds, measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition that is intended to provide better financial statement comparability among different entities.

 

53

The Company has concluded that it was not necessary to record a liability for any such tax positions as of SeptemberJune 30, 20192020 and December 31, 2018.2019. However, the Company’s conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, ongoing analyses of, and changes to, tax laws, regulations, and interpretations thereof.

  

Portfolio and Investment Activity

 

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 primarily in first lien loans, second lien loans, and subordinated loans, and, to a lesser extent, second lien loans and equity securities issued by lower middle-market companies and traditional middle-market companies. As of SeptemberJune 30, 2019,2020, our portfolio consisted of investments in 4037 portfolio companies with a fair value of approximately $371.4$287.3 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, or 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, in one debt security, bifurcating the loan into a first-out tranche and last-out tranche. As of SeptemberJune 30, 2019, 18.6%2020, 14.2% of the fair value of our first lien loans consisted of last-out loans. As of December 31, 2018, 13.7%2019, 18.1% 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 which are not subject to the blockage of cash interest payments to the Company at the first lien lender’s discretion.

In addition to first and second lien loans, the Company may also invest in subordinated loans. Subordinated loans typically have a second lien on all or substantially all of the borrower’s assets, but unlike second lien loans,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 SeptemberJune 30, 2019,2020, we made approximately $13.9$12.5 million of investments and had approximately $33.2 million in repayments and sales of investments, resulting in net repayments and sales of approximately $19.3 million for the period. During the three months ended September 30, 2018, we made approximately $19.9 million of investments and had approximately $42.6$51.1 million in repayments and sales, resulting in net repayments and sales of approximately $22.7$38.6 million for the period.

During the ninethree months ended SeptemberJune 30, 2019, we made approximately $48.8$13.8 million of investments and had approximately $91.3 million in repayments and sales of investments, resulting in net repayments and sales of approximately $42.5 million for the period. During the nine months ended September 30, 2018, we made approximately $58.9 million of investments and had approximately $96.3$46.6 million in repayments and sales, resulting in net repayments and sales of approximately $37.4$32.8 million for the period.

During the six months ended June 30, 2020, we 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. During the six months ended June 30, 2019, we made approximately $34.9 million of investments and had approximately $58.1 million in repayments and sales, resulting in net repayments and sales of approximately $23.2 million for the period.

 

As of SeptemberJune 30, 2020, our debt investment portfolio, which represented 80.7% of the fair value of our total portfolio, had a weighted average annualized yield of approximately 10.3%. As of June 30, 2020, 44.8% of the fair value of our debt investment portfolio was bearing a fixed rate of interest. As of December 31, 2019, our debt investment portfolio, which represented 75.3%78.6% of the fair value of our total portfolio, had a weighted average annualized yield of approximately 11.5%. As of September 30, 2019, 39.0% of the fair value of our debt investment portfolio was bearing a fixed rate of interest. As of December 31, 2018, our debt investment portfolio, which represented 76.4% of the fair value of our total portfolio, had a weighted average annualized yield of approximately 11.9%. As of December 31, 2018, 41.4%2019, 37.2% of the fair value of our debt investment portfolio was bearing a fixed rate of interest.

 

The weighted average annualized yield is calculated based on the effective interest rate as of period end, divided by the fair value of our debt investments. The weighted average annualized yield of our debt investments is not the same as a return on investment for our stockholders but, rather, relates to a portion of our investment portfolio and is calculated before the payment of all of our fees and expenses. There can be no assurance that the weighted average annualized yield will remain at its current level.

 


As of June 30, 2020, the Board approved the fair value of our investment portfolio of approximately $287.3 million in good faith in accordance with our valuation procedures. The Board approved the fair value of our investment portfolio as of June 30, 2020 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 our investments. As a result, the fair value of our portfolio investments may be further negatively impacted after June 30, 2020 by circumstances and events that are not yet known.

The COVID-19 pandemic may also impact our portfolio companies’ ability to pay their respective contractual obligations, including principal and interest due to us, and some portfolio companies may require interest or amortization deferrals in order to fulfill short-term liquidity needs in response to COVID-19. We are working with each of our portfolio companies to help them access short-term liquidity through interest deferrals, funding on unused lines of credit, and other sources of liquidity.

As of June 30, 2020, we had debt investments in five portfolio companies on non-accrual status with an aggregate amortized cost of $34.5 million and an aggregate fair value of $23.9 million, which represented 11.3% and 8.3% of the investment portfolio, respectively. As of December 31, 2019, we had no investments on non-accrual status. The increase in non-accrual investments from December 31, 2019 to June 30, 2020 was largely driven by the economic impact of COVID-19.

The following table summarizes the amortized cost and the fair value of investments as of SeptemberJune 30, 20192020 (dollars in thousands): 

 

 Investments
at
Amortized Cost
  Percentage of
Total
  Investments
at
Fair Value
  Percentage of
Total
  Investments
at
Amortized Cost
  Percentage of
Total
  Investments
at
Fair Value
  Percentage of
Total
 
First Lien Debt $230,297   64.0% $220,049   59.3% $203,187   66.6% $193,610   67.4%
Second Lien Debt  17,499   4.9   16,841   4.5   42,457   13.9   38,285   13.3 
Subordinated Debt  45,232   12.6   42,868   11.5 
Equity and Warrants  52,945   14.7   77,935   21.0   59,372   19.5   55,371   19.3 
Capitala Senior Loan Fund II, LLC  13,600   3.8   13,658   3.7 
Total $359,573   100.0% $371,351   100.0% $305,016   100.0% $287,266   100.0%

 

54

The following table summarizes the amortized cost and the fair value of investments as of December 31, 20182019 (dollars in thousands):

 

 Investments
at
Amortized Cost
  Percentage of
Total
  Investments
at
Fair Value
  Percentage of
Total
  Investments
at
Amortized Cost
  Percentage of
Total
  Investments
at
Fair Value
  Percentage of
Total
 
First Lien Debt $252,174   60.0% $237,570   52.9% $235,646   66.6% $231,203   63.8%
Second Lien Debt  33,040   7.9   32,495   7.2   54,079   15.3   53,857   14.8 
Subordinated Debt  72,562   17.3   73,113   16.3 
Equity and Warrants  48,594   11.6   92,054   20.5   50,556   14.3   63,841   17.6 
Capitala Senior Loan Fund II, LLC  13,600   3.2   13,695   3.1   13,600   3.8   13,631   3.8 
Total $419,970   100.0% $448,927   100.0% $353,881   100.0% $362,532   100.0%

  

The following table shows the portfolio composition by industry grouping at fair value as of SeptemberJune 30, 20192020 and December 31, 20182019 (dollars in thousands):

 

  September 30, 2019  December 31, 2018 
  Investments at
Fair Value
  Percentage of
Total Portfolio
  Investments at
Fair Value
  Percentage of
Total Portfolio
 
Business Services $68,692   18.5% $57,946   12.9%
Financial Services  29,408   7.9   21,666   4.8 
Healthcare  28,509   7.7   16,972   3.8 
Consumer Products  25,108   6.8   27,746   6.2 
Sales & Marketing Services  19,390   5.2   19,496   4.3 
Food Product Manufacturer  17,007   4.6   17,335   3.9 
Automobile Part Manufacturer  14,571   3.9   14,384   3.2 
IT Consulting  14,169   3.8   15,233   3.4 
Investment Funds  13,658   3.7   13,695   3.0 
Healthcare Management  12,968   3.5   13,792   3.1 
Multi-platform media and consumer products  12,913   3.5   13,000   2.9 
Textile Equipment Manufacturer  11,485   3.1   12,848   2.8 
Entertainment  11,075   3.0       
Government Services  11,023   3.0   12,109   2.7 
Retail  10,515   2.8   14,979   3.3 
Testing laboratories  7,214   1.9   7,503   1.7 
Information Technology  6,759   1.8   25,232   5.6 
Oil & Gas Engineering and Consulting Services  6,211   1.7   6,854   1.5 
Electronic Machine Repair  6,127   1.6   6,432   1.4 
Medical Device Distributor  4,894   1.3   4,797   1.1 
Data Services  4,875   1.3       
Restaurant  4,800   1.3   4,903   1.1 
Advertising & Marketing Services  4,333   1.2   8,712   1.9 
Professional and Personal Digital Imaging  3,656   1.0   6,674   1.5 
Online Merchandise Retailer  3,447   0.9   3,499   0.8 
Footwear Retail  3,184   0.8   3,184   0.7 
Logistics  2,947   0.8   2,984   0.7 
Computer Supply Retail  2,935   0.8   10,597   2.4 
Oil & Gas Services  2,633   0.7   9,861   2.2 
Home Repair Parts Manufacturer  2,497   0.7   1,722   0.4 
QSR Franchisor  2,044   0.6   3,018   0.7 
General Industrial  838   0.2       
Household Product Manufacturer  758   0.2   758   0.2 
Data Processing & Digital Marketing  708   0.2   742   0.2 
Telecommunications        18,000   4.0 
Industrial Equipment Rental        16,327   3.6 
Building Products        14,833   3.3 
Conglomerate        9,004   2.0 
Produce Distribution        6,210   1.4 
Farming        5,880   1.3 
Total $371,351   100.0% $448,927   100.0%

55


  June 30, 2020  December 31, 2019 
  Investments at
Fair Value
  Percentage
of
Total
Portfolio
  Investments at
Fair Value
  Percentage
of
Total
Portfolio
 
Business Services $31,940   11.1% $40,410   11.2%
Financial Services  30,818   10.7   29,517   8.1 
Healthcare  24,215   8.4   27,928   7.7 
Sales & Marketing Services  19,692   6.9   19,291   5.3 
Consumer Products  17,483   6.1   25,118   6.9 
Security System Services  15,797   5.5   16,063   4.4 
Automobile Part Manufacturer  14,016   4.9   15,056   4.2 
IT Consulting  13,745   4.8   13,773   3.8 
Multi-Platform Media and Consumer Products  13,000   4.5   13,000   3.6 
Textile Equipment Manufacturer  11,922   4.2   11,564   3.2 
Government Services  11,739   4.1   11,279   3.1 
Healthcare Management  11,601   4.0   12,607   3.5 
Information Technology  9,736   3.4   10,009   2.8 
Electronic Machine Repair  9,062   3.2   6,100   1.7 
Entertainment  8,662   3.0   10,912   3.0 
Testing Laboratories  7,648   2.7   7,026   1.9 
Wireless Deployment Services  6,983   2.4   7,000   1.9 
Medical Device Distributor  4,970   1.7   4,904   1.4 
Data Services  4,039   1.4   4,749   1.3 
Advertising & Marketing Services  3,939   1.4   4,262   1.2 
Online Merchandise Retailer  3,860   1.4   2,877   0.8 
QSR Franchisor  3,061   1.1   1,881   0.5 
Home Repair Parts Manufacturer  2,118   0.7   2,489   0.7 
Footwear Retail  1,810   0.6   3,326   0.9 
Oil & Gas Engineering and Consulting Services  1,741   0.6   5,908   1.6 
Restaurant  944   0.3   4,697   1.3 
Household Product Manufacturer  758   0.3   758   0.2 
Data Processing & Digital Marketing  708   0.2   708   0.2 
General Industrial  670   0.2   838   0.2 
Oil & Gas Services  589   0.2   2,273   0.6 
Food Product Manufacturer        17,609   4.9 
Investment Funds        13,631   3.8 
Retail        10,045   2.8 
Logistics        2,924   0.8 
Computer Supply Retail        1,490   0.4 
Professional and Personal Digital Imaging        510   0.1 
Total $287,266   100.0% $362,532   100.0%

 

With the exception of the international investment holdings noted below, allAll investments made by the Company as of SeptemberJune 30, 20192020 and December 31, 20182019 were made in portfolio companies located in the U.S. The geographic composition is determined by the location of the corporate headquarters of the portfolio company, which may not be indicative of the primary source of the portfolio company’s business. The following table shows the portfolio composition by geographic region at fair value as of SeptemberJune 30, 20192020 and December 31, 20182019 (dollars in thousands):

 

 September 30, 2019  December 31, 2018  June 30, 2020  December 31, 2019 
 Investments at
Fair Value
  Percentage of
Total Portfolio
  Investments at
Fair Value
  Percentage of
Total Portfolio
  Investments at
Fair Value
  Percentage of
Total Portfolio
  Investments at
Fair Value
  Percentage of
Total Portfolio
 
South $197,118   53.1% $224,856   50.1% $135,198   47.1% $165,963   45.8%
West  61,341   21.3   70,102   19.3 
Midwest  50,464   17.6   55,283   15.3 
Northeast  60,991   16.4   66,303   14.8   40,263   14.0   71,184   19.6 
Midwest  56,740   15.3   77,537   17.3 
West  56,502   15.2   77,353   17.2 
International        2,878   0.6 
Total $371,351   100.0% $448,927   100.0% $287,266   100.0% $362,532   100.0%

 

In addition to various risk management tools, our Investment Advisor uses an investment rating system to characterize and monitor our expected level of return on each investment in our portfolio.

 

As part of our valuation procedures, we risk rate all of our investments. In general, our investment rating system uses a scale of 1 to 5, with 1 being the lowest probability of default and principal loss. Our internal rating is not an exact system, but it is used internally to estimate the probability of: (i) default on our debt securities and (ii) loss of our debt principal, in the event of a default. In general, our internal rating system may also assist our valuation team in its determination of the estimated fair value of equity securities or equity-like securities. Our internal risk rating system generally encompasses both qualitative and quantitative aspects of our portfolio companies.

 


Our internal investment rating system incorporates the following five categories:

 

Investment
Rating
 Definition
   
1 In general, the investment may be performing above our internal expectations. Full return of principal and interest is expected. Capital gain is expected.
   
2 In general, the investment may be performing within our internal expectations, and potential risks to the applicable investment are considered to be neutral or favorable compared to any potential risks at the time of the original investment. All new investments are initially given this rating.
   
3 In general, the investment may be performing below our internal expectations and therefore, investments in this category may require closer internal monitoring; however, the valuation team believes that no loss of investment return (interest and/or dividends) or principal is expected. The investment also may be out of compliance with certain financial covenants.
   
4 In general, the investment may be performing below internal expectations and quantitative or qualitative risks may have increased substantially since the original investment. Loss of some or all principal is expected.
   
5 In general, the investment may be performing substantially below our internal expectations and a number of quantitative or qualitative risks may have increased substantially since the original investment. Loss of some or all principal is expected.

 

Our Investment Advisor will monitor and, when appropriate, change the investment ratings assigned to each investment in our portfolio. In connection with our valuation process, our Investment Advisor will review these investment ratings on a quarterly basis. The investment rating of a particular investment should not, however, be deemed to be a guarantee of the investment’s future performance.

 

56

The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of SeptemberJune 30, 20192020 and December 31, 20182019 (dollars in thousands):

 

  As of September 30, 2019  As of December 31, 2018 
Investment Rating Investments at
Fair Value
  Percentage of
Total
Investments
  Investments at
Fair Value
  Percentage of
Total
Investments
 
1 $119,415   32.1% $171,829   38.3%
2  207,086   55.8   194,411   43.3 
3  25,523   6.9   73,325   16.3 
4  19,327   5.2   9,362   2.1 
5            
Total $371,351   100.0% $448,927   100.0%

As of September 30, 2019, we had four debt investments on non-accrual status with an aggregate amortized cost of $25.8 million and an aggregate fair value of $15.8 million, which represented 7.2% and 4.3% of the investment portfolio, respectively. As of December 31, 2018, we had two debt investments on non-accrual status with an aggregate amortized cost of $20.7 million and an aggregate fair value of $9.4 million, which represented 4.9% and 2.1% of the investment portfolio, respectively.

  As of June 30, 2020  As of December 31, 2019 
Investment Rating Investments at
Fair Value
  Percentage of
Total
Investments
  Investments at
Fair Value
  Percentage of
Total
Investments
 
1 $78,982   27.5% $85,688   23.6%
2  154,344   53.7   219,855   60.7 
3  30,054   10.5   56,989   15.7 
4  23,886   8.3       
Total $287,266   100.0% $362,532   100.0%

 

Capitala Senior Loan Fund II, LLC

 

On December 20, 2018, Capitalathe 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 iswas to invest primarily in senior secured first-out loans. CapitalaThe Company and Trinity have committed to provide $25.0 million of equity to CSLF II, with Capitalathe Company providing $20.0 million and Trinity providing $5.0 million. CapitalaThe 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, requirerequired approval of a member on the board of directors and investment committee of at least one member representing Capitalathe 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.

  

As of September 30, 2019 and December 31, 2018,2019, $13.6 million and $3.4 million in equity capital had been contributed by Capitalathe Company and Trinity, respectively. As of September 30, 2019 and December 31, 2018,2019, the Company and Trinity had $6.4 million and $1.6 million of unfunded equity capital commitments outstanding, respectively. The Company’s equity investment in CSLF II iswas not redeemable.

For On June 12, 2020, the three months ended September 30, 2019 and 2018,capital commitments for the Company received $0.3 million and $0.0 million, respectively, in dividend income from its equity interest in CSLF II. For the nine months ended September 30, 2019 and 2018, the Company received $0.7 million and $0.0 million, respectively, in dividend income from its equity interest in CSLF II.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 currently providesprovided for borrowings up to $45.0$60.0 million, subject to certain borrowing base restrictions. Borrowings under the CSLF II Credit Facility bearbore interest at a rate of 1-month LIBOR + 2.25%. BeginningDuring the quarter ended March 31,June 30, 2020, CSLF II will incurincurred unused fees of .35% when utilization of the CSLF II Credit Facility exceedsexceeded 50% and .65% when utilization of the CSLF II Credit Facility iswas less than 50%. TheOn June 5, 2020, CSLF II terminated the CSLF II Credit Facility matures on September 2, 2024.and repaid all amounts outstanding.

 


As of September 30, 2019 and December 31, 2018, $0.5 million and $0.02019, $12.7 million was outstanding under the CSLF II Credit Facility, respectively.Facility. For the three and ninesix months ended SeptemberJune 30, 2019,2020, CSLF II incurred interest and financing expenses of $9.0 thousand.$1.0 million and $1.1 million, respectively. For the three and ninesix months ended SeptemberJune 30, 2018,2019, CSLF II did not incur interest and financing expenses.

 

On September 3, 2019, Capitalathe Company and Trinity committed to provide $25.0 million of subordinated debt (the “Subordinated Notes”) to CSLF II, with Capitalathe Company providing $5.0 million and Trinity providing $20.0 million. The Subordinated Notes currently bear interest at a rate of 1-month LIBOR + 5.00%. Beginning the quarter ended June 30, 2020, the Subordinated Notes will bear interest at a rate of 1-month LIBOR + 6.00%. The Subordinated Noteswere scheduled to mature on September 3, 2024.2024, however, the Subordinated Notes were terminated on June 12, 2020.

 

As of September 30, 2019, and December 31, 2018,2019, $0.0 million was outstanding on the Subordinated Notes. As of September 30, 2019, and December 31, 2018,2019, the Company and Trinity had $5.0 million and $20.0 million of unfunded commitments related to the Subordinated Notes, respectively. For the three and ninesix months ended SeptemberJune 30, 2020 and 2019, and 2018, the CompanyCSLF II did not incur any interest and financing expenses related to the Subordinated Notes.

 

Below is a summary of CSLF II’s portfolio as of September 30, 2019 and December 31, 20182019 (dollars in thousands):

 

  September 30, 2019  December 31, 2018 
First lien loans(1) $16,666  $10,000 
Weighted average current interest rate on first lien loans  7.1%  7.6%
Number of portfolio companies in CSLF II  3   2 
Largest portfolio company investment(1) $6,741  $5,550 
Total of five largest portfolio company investments(1)(2) $16,666  $10,000 
  December 31, 2019 
First lien loans (1) $28,396 
Weighted average current interest rate on first lien loans  6.4%
Number of portfolio companies  5 
Largest portfolio company investment (1) $7,443 
Total of five largest portfolio company investments (1) $28,396 

 

(1)Based on principal amount outstanding at period end.

(2)Only three investments and two investments held as of September 30, 2019 and December 31, 2018, respectively.

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Below is CSLF II’s unaudited schedule of investments as of September 30, 2019 (dollars in thousands):

Portfolio Company Industry Type of Investment Principal
Amount
  Cost  Fair Value 
Investments at Fair Value                
U.S. BioTek Laboratories, LLC Testing Laboratories First Lien Debt (7.1% Cash (3 month LIBOR + 5.0%, 2.0% Floor), Due 12/14/23) $4,466  $4,466  $4,466 
Freedom Electronics, LLC Electronic Machine Repair First Lien Debt (7.1% Cash (1 month LIBOR + 5.0%, 2.0% Floor), Due 12/20/23)  5,459   5,459   5,459 
RAM Payment, LLC Financial Services First Lien Debt (7.1% Cash (1 month LIBOR + 5.0%, 1.5% Floor), Due 1/4/24)  6,741   6,741   6,741 
TOTAL INVESTMENTS     $16,666  $16,666  $16,666 

 

Below is CSLF II’s schedule of investments as of December 31, 20182019 (dollars in thousands):

 

Portfolio Company Industry Type of Investment Principal
Amount
  Cost  Fair Value  Industry Type of Investment Principal
Amount
 Cost Fair Value 
Investments at Fair Value                     
Freedom Electronics, LLC Electronic Machine Repair First Lien Debt (7.0% Cash (1 month LIBOR + 5.0%, 2.0% Floor), Due 12/20/23) $5,445 $5,445 $5,445 
Installs, LLC Logistics First Lien Debt (5.8% Cash (1 month LIBOR + 4.0%, 1.8% Floor), Due 6/20/23) 7,443 7,443 7,443 
RAM Payment, LLC Financial Services First Lien Debt (6.7% Cash (1 month LIBOR + 5.0%, 1.5% Floor), Due 1/4/24) 6,653 6,653 6,653 
Rapid Fire Protection, Inc.(1) Security System Services First Lien Debt (5.5% Cash (1 month LIBOR + 3.8%, 1.8% Floor), Due 11/22/24) 4,400 4,400 4,400 
U.S. BioTek Laboratories, LLC Testing Laboratories First Lien Debt (7.8% Cash (3 month LIBOR + 5.0%, 2.0% Floor), Due 12/14/23) $4,500  $4,500  $4,500  Testing Laboratories First Lien Debt (7.0% Cash (3 month LIBOR + 5.0%, 2.0% Floor), Due 12/14/23)  4,455  4,455  4,455 
Freedom Electronics, LLC Electronic Machine Repair First Lien Debt (7.5% Cash (1 month LIBOR + 5.0%, 2.0% Floor), Due 12/20/23)  5,500   5,500   5,500 
TOTAL INVESTMENTS $10,000  $10,000  $10,000    $28,396 $28,396 $28,396 

(1)The investment had a $3.0 million unfunded commitment.


 

Below are the statements of assets and liabilities for CSLF II (dollars in thousands):

 

  As of 
  September 30, 2019  December 31, 2018 
  (unaudited)    
ASSETS        
Investments at fair value (amortized cost of $16,666 and $10,000, respectively) $16,666  $10,000 
Cash and cash equivalents  319   7,100 
Interest receivable  92   31 
Total assets $17,077  $17,131 
LIABILITIES        
Credit facility (net of deferred financing costs of $509) $(9) $ 
Interest and financing fees payable  2    
Accounts payable  11   12 
Total liabilities $4  $12 
NET ASSETS        
Partners’ capital $17,073  $17,119 
Total net assets $17,073  $17,119 

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  As of 
  June 30, 2020  December 31, 2019 
  (unaudited)    
ASSETS      
Investments at fair value (amortized cost of $0 and $28,396, respectively) $  $28,396 
Cash and cash equivalents     704 
Interest receivable     151 
Other assets     7 
Total assets $  $29,258 
LIABILITIES       
Credit facility (net of deferred financing costs of $0 and $621, respectively) $  $12,079 
Interest and financing fees payable     113 
Accounts payable     27 
Total liabilities $  $12,219 
NET ASSETS       
Members’ capital $  $17,039 
Total net assets $  $17,039 

 

Below are the unaudited statements of operations for CSLF II (dollars in thousands):

 

  For the Three Months Ended  For the Nine Months Ended 
  September 30, 2019  September 30, 2018  September 30, 2019  September 30, 2018 
INVESTMENT INCOME                
Interest income $313  $  $945  $ 
Fee income        70    
Total investment income $313  $  $1,015  $ 
EXPENSES                
Interest and financing expenses $9  $  $9  $ 
General and administrative expenses  35      152    
Total expenses $44  $  $161  $ 
NET INVESTMENT INCOME $269  $  $854  $ 
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $269  $  $854  $ 

  For the Three Months Ended  For the Six Months Ended 
  June 30, 2020  June 30, 2019  June 30, 2020  June 30, 2019 
INVESTMENT INCOME                
Interest income $229  $320  $650  $632 
Fee income  2   2   5   70 
Total investment income $231  $322  $655  $702 
EXPENSES                
Interest and financing expenses  975      1,135    
General and administrative expenses  93   31   164   117 
Total expenses $1,068  $31  $1,299  $117 
NET INVESTMENT INCOME (LOSS) $(837) $291  $(644) $585 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $(837) $291  $(644) $585 

 

Results of Operations

 

Operating results for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 were as follows (dollars in thousands):

 

  For the Three Months Ended  For the Nine Months Ended 
  September 30, 2019  September 30, 2018  September 30, 2019  September 30, 2018 
Total investment income $10,126  $11,530  $34,400  $35,984 
Total expenses, net of incentive fee waiver  7,142   7,679   23,259   23,464 
Net investment income  2,984   3,851   11,141   12,520 
Net realized gain (loss) on investments  12   6,298   (20,912)  (20,179)
Net unrealized depreciation on investments  (1,279)  (28,750)  (17,179)  (7,148)
Net unrealized appreciation on Written Call Option     6,795      6,795 
Tax benefit (provision)     (110)  (628)  1,185 
Net increase (decrease) in net assets resulting from operations $1,717  $(11,916) $(27,578) $(6,827)
  For the Three Months Ended  For the Six Months Ended 
  June 30, 2020  June 30, 2019  June 30, 2020  June 30, 2019 
Total investment income $6,999  $11,590  $14,073  $24,274 
Total expenses, net of incentive fee waiver  7,608   7,568   14,695   16,117 
Net investment income (loss)  (609)  4,022   (622)  8,157 
Net realized loss on investments  (13,285)  (15,077)  (12,317)  (20,924)
Net unrealized appreciation (depreciation) on investments  16,994   (17,395)  (26,401)  (15,900)
Tax provision     (694)     (628)
Net increase (decrease) in net assets resulting from operations $3,100  $(29,144) $(39,340) $(29,295)

 

Investment income

 

The composition of our investment income for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 was as follows (dollars in thousands):

 

 For the Three Months Ended  For the Nine Months Ended  For the Three Months Ended  For the Six Months Ended 
 September 30, 2019  September 30, 2018  September 30, 2019  September 30, 2018  June 30, 2020  June 30, 2019  June 30, 2020  June 30, 2019 
Interest income $8,120  $9,885  $28,237  $31,149  $6,337  $10,096  $12,507  $20,117 
Fee income  163   557   858   1,221   91   308   410   695 
Payment-in-kind interest and dividend income  623   988   2,266   3,315   566   724   1,082   1,643 
Dividend income  1,159   54   2,890   221      425   25   1,731 
Interest from cash and cash equivalents  61   46   149   78   5   37   49   88 
Total investment income $10,126  $11,530  $34,400  $35,984  $6,999  $11,590  $14,073  $24,274 


 

The income reported as interest income, and PIK interest, and PIK dividend income is generally based on the stated rates as disclosed in our consolidated schedules of investments. Accretion of discounts received for purchased loans are included in interest income as an adjustment to yield. As a general rule, our interest income, and PIK interest, and PIK dividend income are recurring in nature.

 

We also generate fee income primarily through origination fees charged for new investments, and secondarily via amendment fees, consent fees, prepayment penalties, and other fees. While fee income is typically non-recurring for each investment, most of our new investments include an origination fee; as such, fee income is dependent upon our volume of directly originated investments and the fee structure associated with those investments.

 

59

We earn dividends on certain equity investments within our investment portfolio. As noted in our consolidated schedules of investments, some investments are scheduled to pay a periodic dividend, though these recurring dividends do not make up a significant portion of our total investment income. We may receive, and have received, more substantial one-time dividends from our equity investments.

 

For the three months ended SeptemberJune 30, 2019,2020, total investment income decreased by $1.4$4.6 million, or 12.2%39.6%, compared to the three months ended SeptemberJune 30, 2018.2019. Interest income decreased from $9.9$10.1 million for the three months ended SeptemberJune 30, 20182019 to $8.1$6.3 million for the three months ended SeptemberJune 30, 2019.2020. The decrease from the prior period is primarily relateddue to lower average outstanding debt investments duringand the impact of an increase in non-accrual loans for the three months ended SeptemberJune 30, 20192020 compared to the three months ended SeptemberJune 30, 2018.2019. The increase in non-accrual investments was largely driven by the economic impact of the COVID-19 pandemic. PIK income declined from $1.0$0.7 million for the three months ended SeptemberJune 30, 20182019 to $0.6 million for the three months ended SeptemberJune 30, 2019, primarily2020, due to a decrease in investments with a contractual PIK rate. Fee income decreased from $0.6$0.3 million for the three months ended SeptemberJune 30, 20182019 to $0.2 million$91 thousand for the three months ended SeptemberJune 30, 2019.2020. For the three months ended SeptemberJune 30, 2019,2020, we generated $0.0 million$24 thousand in origination fees from new deployments and $0.2 million$67 thousand in non-originationother fees. Comparatively, for the three months ended SeptemberJune 30, 2018,2019, we generated $0.5$0.2 million in origination fees from new deployments and $0.1 million in non-originationother fees. Dividend income increaseddecreased from $0.1$0.4 million for the three months ended SeptemberJune 30, 20182019 to $1.2 million$0.0 for the three months ended SeptemberJune 30, 2019,2020, primarily due to a $0.3$0.4 million dividend received from CSLF II and a $0.8 million non-recurring dividend from a portfolio company.during the three months ended June 30, 2019.

 

For the ninesix months ended SeptemberJune 30, 2019,2020, total investment income decreased by $1.6$10.2 million, or 4.4%42.0%, compared to the ninesix months ended SeptemberJune 30, 2018.2019. Interest income decreased from $31.1$20.1 million for the ninesix months ended SeptemberJune 30, 20182019 to $28.2$12.5 million for the ninesix months ended SeptemberJune 30, 2019.2020. The decrease from the prior period is primarily relateddue to lower average outstanding debt investments duringand the nineimpact of an increase in non-accrual loans for the six months ended SeptemberJune 30, 20192020 compared to the ninesix months ended SeptemberJune 30, 2018.2019. The increase in non-accrual investments was largely driven by the economic impact of the COVID-19 pandemic. PIK income declined from $3.3$1.6 million for the ninesix months ended SeptemberJune 30, 20182019 to $2.3$1.1 million for the ninesix months ended SeptemberJune 30, 2019, primarily2020, due to a decrease in investments with a contractual PIK rate. Fee income decreased from $1.2$0.7 million for the ninesix months ended SeptemberJune 30, 20182019 to $0.9$0.4 million for the ninesix months ended SeptemberJune 30, 2018.2020. For the ninesix months ended SeptemberJune 30, 2020, we generated $0.2 million in origination fees from new deployments and $0.2 million in other fees. Comparatively, for the six months ended June 30, 2019, we generated $0.6 million in origination fees from new deployments and $0.3$0.1 million in non-origination fees. Comparatively, for the nine months ended September 30, 2018, we generated $0.9 million in origination fees from new deployments and $0.3 million in non-originationother fees. Dividend income increaseddecreased from $0.2$1.7 million for the ninesix months ended SeptemberJune 30, 20182019 to $2.9 million$25 thousand for the ninesix months ended SeptemberJune 30, 2019,2020, primarily due to twoa $1.3 million non-recurring dividends of $2.2dividend from a portfolio company and a $0.4 million received from portfolio companies and $0.7 million in dividend income received from CSLF II.II received during the six months ended June 30, 2019.

 

Operating expenses

 

The composition of our expenses for the three and ninesix months ended SeptemberJune 30, 20192020 and September 30, 20182019 was as follows (dollars in thousands):

 

 For the Three Months Ended  For the Nine Months Ended  For the Three Months Ended  For the Six Months Ended 
 September 30, 2019  September 30, 2018  September 30, 2019  September 30, 2018  June 30, 2020  June 30, 2019  June 30, 2020  June 30, 2019 
Interest and financing expenses $4,110  $4,320  $12,751  $13,015  $4,885  $4,228  $8,711  $8,641 
Base management fee  1,925   2,254   6,063   6,871   1,666   2,020   3,423   4,138 
Incentive fees, net of incentive fee waiver        1,209   244      175      1,209 
General and administrative expenses  1,107   1,105   3,236   3,334   1,057   1,145   2,561   2,129 
Total expenses, net of incentive fee waiver $7,142  $7,679  $23,259  $23,464  $7,608  $7,568  $14,695  $16,117 

 


For the three months ended SeptemberJune 30, 2019,2020, operating expenses decreased $0.5 million,increased by $40 thousand, or 7.0%0.5%, compared to the three months ended SeptemberJune 30, 2018.2019. Interest and financing expense decreasedincreased from $4.3$4.2 million for the three months ended SeptemberJune 30, 20182019 to $4.1$4.9 million for the three months ended SeptemberJune 30, 2019.2020. The decreaseincrease in interest and financing expenses was primarily driven by $1.1 million in accelerated deferred financing expense from termination of the prior period is primarily related to lower average outstanding SBA debenturesCredit Facility during the three months ended SeptemberJune 30, 20192020, offset in part by lower recurring interest and financing expenses due to lower average debt outstanding during the three months ended June 30, 2020 compared to the three months ended SeptemberJune 30, 2018.2019. Base management fees declined from $2.3$2.0 million for the three months ended SeptemberJune 30, 20182019 to $1.9$1.7 million for the three months ended SeptemberJune 30, 2019, due to lower average assets under management. General and administrative expenses remained relatively flat at $1.1 million for the three months ended September 30, 2019 and September 30, 2018.

For the nine months ended September 30, 2019, operating expenses decreased $0.2 million, or 0.9%, compared to the nine months ended September 30, 2018. Interest and financing expense decreased from $13.0 million for the nine months ended September 30, 2018 to $12.8 million for the nine months ended September 30, 2019. The decrease from the prior period is primarily related to lower average outstanding SBA debentures during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. Base management fees declined from $6.9 million for the nine months ended September 30, 2018 to $6.1 million for the nine months ended September 30, 2019,2020, due to lower average assets under management. Incentive fees, net of incentive fee waiver, increaseddeclined from $0.2 million for the ninethree months ended SeptemberJune 30, 20182019 to $1.2 million$0.0 for the ninethree months ended SeptemberJune 30, 2019, primarily2020 due to better net investment income returns in relation to our net asset value.NAV during the three months ended June 30, 2019. General and administrative expenses remainedwere relatively flat decliningconsistent for the three months ended June 30, 2020 and June 30, 2019.

For the six months ended June 30, 2020, operating expenses decreased by $1.4 million, or 8.8%, compared to the six months ended June 30, 2019. Interest and financing expense increased from $3.3$8.6 million for the ninesix months ended SeptemberJune 30, 20182019 to $3.2$8.7 million for the ninesix months ended SeptemberJune 30, 2020. The increase in interest and financing expenses was primarily driven by $1.1 million in accelerated deferred financing expense from termination of the Credit Facility during the six months ended June 30, 2020, offset in part by lower recurring interest and financing expenses due to lower average debt outstanding during the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

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Base management fees declined from $4.1 million for the six months ended June 30, 2019 to $3.4 million for the six months ended June 30, 2020, due to lower average assets under management. Incentive fees, net of incentive fee waiver, declined from $1.2 million for the six months ended June 30, 2019 to $0.0 for the six months ended June 30, 2020 due to better net investment income returns in relation to our NAV during the six months ended June 30, 2019. General and administrative expenses increased from $2.1 million for the six months ended June 30, 2019 to $2.6 million for the six months ended June 30, 2020, primarily due to an increase in legal and professional fees.

 

Net realized gain (loss)loss on investments

 

During the three and ninesix months ended SeptemberJune 30, 20192020 we recognized $12.0 thousand$(13.3) million and $(20.9)$(12.3) million, respectively, of net realized gain (loss)losses on our portfolio investments. During the three and ninesix months ended SeptemberJune 30, 20182019 we recognized $6.3$(15.1) million and $(20.2)$(20.9) million, respectively, of net realized gain (loss)losses on our portfolio investments.

 

Net unrealized appreciation (depreciation) on investments

 

Net change in unrealized appreciation (depreciation) on investments reflects the net change in the fair value of our investment portfolio. For the three and ninesix months ended SeptemberJune 30, 2020 we had net unrealized appreciation (depreciation) of $17.0 million and $(26.4) million, respectively. For the three and six months ended June 30, 2019 we had net unrealized depreciation of $(1.3)$(17.4) million and $(17.2)$(15.9) million, respectively. For the three and nine months ended September 30, 2018 we hadThe increase in net unrealized depreciation of $(28.8) millionfor the six months ended June 30, 2020 was due primarily to the negative economic impact and $(7.1) million, respectively.the increased uncertainty caused by the COVID-19 pandemic.

 

Net unrealized appreciation on Written Call OptionTax provision

 

For the three and ninesix months ended SeptemberJune 30, 20192020 we had net unrealized appreciation on the Written Call Optionrecorded a tax provision of $0.0 million.$0.0. For the three and ninesix months ended September 30, 2018 we had net unrealized appreciation on the Written Call Option of $6.8 million.

Tax benefit (provision)

For the three and nine months ended SeptemberJune 30, 2019 we recorded a tax provision of $0.0$(0.7) million and $(0.6) million, respectively. For the three and nine months ended September 30, 2018, we recorded a tax provision of $(0.1) million and a tax benefit of $1.2 million, respectively.

Changes in net assets resulting from operations

 

For the three and ninesix months ended SeptemberJune 30, 2019,2020, we recorded a net increase (decrease) in net assets resulting from operations of $1.7$3.1 million and $(27.6)$(39.3) million, respectively. Based on the weighted average shares of common stock outstanding for the three and ninesix months ended SeptemberJune 30, 2019,2020, our per share net increase (decrease) in net assets resulting from operations was $0.11$0.19 and $(1.71)$(2.42), respectively.

 

For the three and ninesix months ended SeptemberJune 30, 2018,2019, we recorded a net decrease in net assets resulting from operations of $(11.9)$(29.1) million and $(6.8)$(29.3) million, respectively. Based on the weighted average shares of common stock outstanding for the three and ninesix months ended SeptemberJune 30, 2018,2019, our per share net decrease in net assets resulting from operations was $(0.74)$(1.81) and $(0.43)$(1.82), respectively.

Summarized Financial Information of Our Unconsolidated Subsidiaries

The Company holds a control interest, as defined by the 1940 Act, in two portfolio companies that are considered significant subsidiaries under the guidance in Regulation S-X but are not consolidated in the Company’s consolidated financial statements. Below is a brief description of each such portfolio company, along with summarized financial information.

During the nine months ended September 30, 2019, the Company wrote off its investment in AAE Acquisition, LLC and realized a loss of $20.4 million. During the nine months ended September 30, 2019, the Company exited its investment in Micro Precision, LLC, receiving $6.3 million for its debt investment, and receiving $2.4 million in total consideration for its equity investment.

CableOrganizer Acquisition, LLC

CableOrganizer Acquisition, LLC, a Delaware limited liability company that began operations on April 23, 2013, is a leading online provider of cable and wire management products. The loss the Company generated from CableOrganizer Acquisition, LLC, which includes all interest, dividends, PIK interest and PIK dividends, fees, realized loss, and unrealized appreciation (depreciation), was $(8.9) million and $(0.2) million for the nine months ended September 30, 2019 and September 30, 2018, respectively.

Micro Precision, LLC

Micro Precision, LLC, formed on August 5, 2011 as a Delaware limited liability company, is a prime contractor supplying critical parts and mechanical assemblies to the U.S. Department of Defense as well as designer and manufacturer of locomotive air horns. The income the Company generated from Micro Precision, LLC, which includes all interest, dividends, PIK interest and PIK dividends, fees, and unrealized appreciation (depreciation), was $0.2 million and $1.9 million for the nine months ended September 30, 2019 and September 30, 2018, respectively.   

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The summarized unaudited financial information of our unconsolidated subsidiaries was as follows (dollars in thousands):   

  As of 
  September 30,  December 31, 
Balance Sheets – CableOrganizer Acquisition, LLC 2019  2018 
Current assets $2,813  $2,987 
Noncurrent assets  7,190   8,459 
Total assets $10,003  $11,446 
         
Current liabilities $2,219  $13,094 
Noncurrent liabilities  4,939    
Total liabilities $7,158  $13,094 
         
Total equity (deficit) $2,845  $(1,648)

  For the Nine Months Ended 
  September 30,  September 30, 
Statements of Operations – CableOrganizer Acquisition, LLC 2019  2018 
Net sales $9,440  $14,348 
Cost of goods sold  6,810   9,601 
Gross profit $2,630  $4,747 
         
Other expenses $4,619  $6,022 
Loss before income taxes  (1,989)  (1,275)
Income tax provision      
Net loss $(1,989) $(1,275)

  As of 
  June 30,  December 31, 
Balance Sheets – Micro Precision, LLC(1) 2019  2018 
Current assets $7,430  $6,127 
Noncurrent assets  19,346   19,469 
Total assets $26,776  $25,596 
         
Current liabilities $7,934  $6,223 
Noncurrent liabilities  13,977   16,208 
Total liabilities $21,911  $22,431 
         
Total equity $4,865  $3,165 

  For the Nine Months Ended 
  June 30,  June 30, 
Statements of Operations - Micro Precision, LLC(1) 2019  2018 
Net sales $10,413  $9,115 
Cost of goods sold  6,024   5,111 
Gross profit $4,389  $4,004 
         
Other expenses $3,828  $3,602 
Income before income taxes  561   402 
Income tax provision  (286)   
Net income $275  $402 

(1)September 30, 2019 financial statements are not available. As such, the most recent comparable period is presented.

62

 

Financial Condition, Liquidity and Capital Resources

 

We use and intend to use existing cash primarily to originate investments in new and existing portfolio companies, pay distributions to our stockholders and repay indebtedness.

 

Since our IPO, we have raised approximately $136.0 million in net proceeds from equity offerings through SeptemberJune 30, 2019.2020.

 

On October 17, 2014, the Company entered into a senior secured revolving credit agreement (as amended, the “Credit Facility”) with ING Capital, LLC, as administrative agent, arranger, and bookrunner, and the lenders party thereto. The Credit Facility was amendedset to mature on May 22, 2015,April 30, 2022. On June 16, 2017, July 19, 2018, and February 22, 2019 (the “Amendments”). The Amendments were affected, among other things, in order to increase2020, the total borrowings allowed under the Credit Facility, allow for stock repurchases, extend the maturity date, reduce the minimum required interest coverage ratio, reduce the minimum required net asset value, and reduce the minimum required asset coverage ratio. The Credit Facility currently provides for borrowings up to $114.5 million and may be increased up to $200.0 million pursuant to its “accordion” feature. The Credit Facility matures on June 16, 2021. As of September 30, 2019, we had $0.0 million outstanding and $114.5 million available underCompany unilaterally terminated the Credit Facility.

 


On May 16, 2017, we 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, we 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 our option on or after May 31, 2019 at a redemption price equal to 100% of the outstanding principal, plus accrued and unpaid interest. Interest on the 2022 Notes is payable quarterly. The 2022 Notes are listed on the NASDAQ Global Select Market under the trading symbol “CPTAL” with a par value of $25.00 per share.

 

On May 26, 2017, we 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, we 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. Interest on the 2022 Convertible Notes is payable quarterly. The 2022 Convertible Notes are listed on the NASDAQ Capital Market under the trading symbol “CPTAG” with a par value of $25.00 per share.

 

As of SeptemberJune 30, 2019,2020, Fund III had $75.0 million in regulatory capital and $150.0 million in SBA-guaranteed debentures outstanding. In addition to our existing SBA-guaranteed debentures, we may, if permitted by regulation, seek to issue additional SBA-guaranteed debentures as well as other forms of leverage and borrow funds to make investments. On June 10, 2014, we received an exemptive order from the SEC exempting us, 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 1934Exchange Act, with respect to Fund II and Fund III. We intend to comply with the conditions of the order. 

On December 31, 2019, we entered into an open market sale agreementSM with Jefferies LLC pursuant to which we may issue and sell up to $50.0 million in aggregate amount of shares of our common stock in amounts, and at times, to be determined by us (the “ATM Program”). Actual sales in this ATM Program will depend on a variety of factors to be determined by us including market conditions, the trading price of our common stock and determinations by us of the appropriate sources of funding. We may issue shares of our common stock at a price below the then current NAV per share pursuant to the ATM Program. There were no sales of our common stock under the ATM Program during the three and six months ended June 30, 2020.

 

We are only allowed to borrow money such that our asset coverage, as defined in the 1940 Act, equals at least 200% (or 150% if certain requirements are met, after November 1, 2019) after such borrowing, with certain limited exceptions. On March 23, 2018, the SBCA was signed into law, which included various changes to regulations under the federal securities laws that impact BDCs. The SBCA included changes to the 1940 Act to allowallows BDCs to decrease their asset coverage requirement from 200% to 150% (i.e. the amount of debt may not exceed 66.7% of the value of our total assets), if certain requirements are met. On November 1, 2018, the Board, including a ‘‘required majority’’“required majority” (as such term is defined in Section 57(o) of the 1940 Act) approved the application of the modified asset coverage. Ascoverage and as a result, our asset coverage requirements for senior securities will bewas changed from 200% to 150%, effective November 1, 2019. As of SeptemberJune 30, 2019,2020, our asset coverage ratio was 219.5%182.7%. If our asset coverage ratio falls below 150% due a decline in the fair market of our portfolio, including as the result of the economic impact caused by the COVID-19 pandemic, we may be limited in our ability to raise additional debt.

 

As of SeptemberJune 30, 2019,2020, we had $62.8$95.2 million in cash and cash equivalents, and our net assets totaled $151.9$105.1 million.

 

Contractual Obligations

 

We have entered into two contracts under which we have material future commitments: the Investment Advisory Agreement, pursuant to which the Investment Advisor serves as our investment adviser, and the Administration Agreement, pursuant to which our Administrator agrees to furnish us with certain administrative services necessary to conduct our day-to-day operations. Payments under the Investment Advisory Agreement in future periods will be equal to: (1) a percentage of the value of our gross assets; and (2) an incentive fee based on our performance. Payments under the Administration Agreement will occur on an ongoing basis as expenses are incurred on our behalf by our Administrator.

 

The Investment Advisory Agreement and the Administration Agreement are each terminable by either party without penalty upon 60 days’ written notice to the other. If either of these agreements is terminated, the costs we incur under new agreements may increase. In addition, we will likely incur significant time and expense in locating alternative parties to provide the services we expect to receive under both our Investment Advisory Agreement and our Administration Agreement. Any new investment advisory agreement would also be subject to approval by our stockholders.

 

63

 

A summary of our significant contractual payment obligations as of SeptemberJune 30, 20192020 are as follows (dollars in thousands):

 

 Contractual Obligations Payments Due by Period  Contractual Obligations Payments Due by Period 
 Less Than
1 Year
 1 – 3
Years
 3 – 5
Years
 More Than
5 Years
 Total  Less Than
1 Year
  1 – 3
Years
  3 – 5
Years
  More Than
5 Years
  Total 
SBA Debentures $19,000 $106,000 $25,000 $ $150,000  $65,000  $85,000  $  $  $150,000 
2022 Notes  75,000   75,000      75,000         75,000 
2022 Convertible Notes  52,088   52,088      52,088         52,088 
Credit Facility           
Total Contractual Obligations $19,000 $233,088 $25,000 $ $277,088  $65,000  $212,088  $  $  $277,088 

 

64

Distributions

 

In order to qualify as a RIC and to avoid corporate-level U.S. federal income tax on the income we distribute to our stockholders, we are required to distribute at least 90% of our net ordinary income and our net short-term capital gains in excess of net long-term capital losses, if any, to our stockholders on an annual basis. Additionally, we must distribute an amount at least equal to the sum of 98% of our net ordinary income (during the calendar year) plus 98.2% of our net capital gain income (during each 12-month period ending on October 31) plus any net ordinary income and capital gain net income for preceding years that were not distributed during such years and on which we paid no U.S. federal income tax to avoid a U.S. federal excise tax. We made quarterly distributions to our stockholders for the first four full quarters subsequent to our IPO. To the extent we havehad income available, we have made and intend to make monthly distributions thereafter.to our stockholders from October 30, 2014 until March 30, 2020. As announced on April 1, 2020, distributions, if any, will be made on a quarterly basis effective for the second quarter of 2020. Our monthly stockholder distributions, if any, will be determined by our Board on a quarterly basis. Any distributiondistributions to our stockholders will be declared out of assets legally available for distribution. On April 30, 2020, the Company’s Board determined not to declare a distribution for the second quarter of 2020 due to the impact of the COVID-19 pandemic on the Company’s expected net investment income. On July 30, 2020, the Company’s Board determined not to declare a distribution for the third quarter of 2020 due to the impact of the COVID-19 pandemic on the Company’s expected net investment income.

 

We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of our distributions from time to time, and from time to time we may decrease the amount of our distributions. In addition, we may be limited in our ability to make distributions due to the asset coverage requirements applicable to us as a BDC under the 1940 Act. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including the possible loss of our qualification as a RIC. We cannot assure stockholders that they will receive any distributions.

 

To the extent our taxable earnings fall below the total amount of our distributions for that fiscal year, a portion of those distributions may be deemed a return of capital to our stockholders for U.S. federal income tax purposes. Thus, the source of a distribution to our stockholders may be the original capital invested by the stockholder rather than our income or gains. Stockholders should read any written disclosure accompanying any stockholder distribution carefully and should not assume that the source of any distribution is our ordinary income or capital gains.

 

We have adopted an “opt out” dividend reinvestment plan (“DRIP”) for our common stockholders. As a result, if we declare a distribution, then stockholders’ cash distributions will be automatically reinvested in additional shares of our 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 our DRIP will not receive any corresponding cash distributions with which to pay any such applicable taxes.

 

The following tables summarize our distributions declared from January 1, 20172018 through SeptemberJune 30, 2019:2020:

 

Date Declared Record Date Payment Date Amount
Per Share
 
January 2, 2019 January 24, 2019 January 30, 2019 $0.0833 
January 2, 2019 February 20, 2019 February 27, 2019  0.0833 
January 2, 2019 March 21, 2019 March 28, 2019  0.0833 
April 1, 2019 April 22, 2019 April 29, 2019  0.0833 
April 1, 2019 May 23, 2019 May 30, 2019  0.0833 
April 1, 2019 June 20, 2019 June 27, 2019  0.0833 
July 1, 2019 July 23, 2019 July 30, 2019  0.0833 
July 1, 2019 August 22, 2019 August 29, 2019  0.0833 
July 1, 2019 September 20, 2019 September 27, 2019  0.0833 
Total Distributions Declared and Distributed for 2019     $0.75 
Date Declared Record Date Payment Date Amount
Per Share
 
January 2, 2020 January 24, 2020 January 30, 2020 $0.0833 
January 2, 2020 February 20, 2020 February 27, 2020  0.0833 
January 2, 2020 March 23, 2020 March 30, 2020  0.0833 
Total Distributions Declared and Distributed for 2020     $0.25 

Date Declared Record Date Payment Date Amount
Per Share
 
January 2, 2019 January 24, 2019 January 30, 2019 $0.0833 
January 2, 2019 February 20, 2019 February 27, 2019  0.0833 
January 2, 2019 March 21, 2019 March 28, 2019  0.0833 
April 1, 2019 April 22, 2019 April 29, 2019  0.0833 
April 1, 2019 May 23, 2019 May 30, 2019  0.0833 
April 1, 2019 June 20, 2019 June 27, 2019  0.0833 
July 1, 2019 July 23, 2019 July 30, 2019  0.0833 
July 1, 2019 August 22, 2019 August 29, 2019  0.0833 
July 1, 2019 September 20, 2019 September 27, 2019  0.0833 
October 1, 2019 October 22, 2019 October 29, 2019  0.0833 
October 1, 2019 November 22, 2019 November 29, 2019  0.0833 
October 1, 2019 December 23, 2019 December 30, 2019  0.0833 
Total Distributions Declared and Distributed for 2019     $1.00 


 

Date Declared Record Date Payment Date Amount
Per Share
 
January 2, 2018 January 22, 2018 January 30, 2018 $0.0833 
January 2, 2018 February 20, 2018 February 27, 2018  0.0833 
January 2, 2018 March 23, 2018 March 29, 2018  0.0833 
April 2, 2018 April 19, 2018 April 27, 2018  0.0833 
April 2, 2018 May 22, 2018 May 30, 2018  0.0833 
April 2, 2018 June 20, 2018 June 28, 2018  0.0833 
July 2, 2018 July 23, 2018 July 30, 2018  0.0833 
July 2, 2018 August 23, 2018 August 30, 2018  0.0833 
July 2, 2018 September 20, 2018 September 27, 2018  0.0833 
October 1, 2018 October 23, 2018 October 30, 2018  0.0833 
October 1, 2018 November 21, 2018 November 29, 2018  0.0833 
October 1, 2018 December 20, 2018 December 28, 2018  0.0833 
Total Distributions Declared and Distributed for 2018     $1.00 

 

65

Date Declared Record Date Payment Date Amount
Per Share
 
January 3, 2017 January 20, 2017 January 30, 2017 $0.1300 
January 3, 2017 February 20, 2017 February 27, 2017  0.1300 
January 3, 2017 March 23, 2017 March 30, 2017  0.1300 
April 3, 2017 April 19, 2017 April 27, 2017  0.1300 
April 3, 2017 May 23, 2017 May 29, 2017  0.1300 
April 3, 2017 June 24, 2017 June 29, 2017  0.1300 
July 3, 2017 July 21, 2017 July 28, 2017  0.1300 
July 3, 2017 August 23, 2017 August 30, 2017  0.1300 
July 3, 2017��September 20, 2017 September 28, 2017  0.1300 
October 2, 2017 October 23, 2017 October 30, 2017  0.0833 
October 2, 2017 November 21, 2017 November 29, 2017  0.0833 
October 2, 2017 December 20, 2017 December 28, 2017  0.0833 
Total Distributions Declared and Distributed for 2017     $1.42 

Tax characteristics of all distributions paid are reported to stockholders on Form 1099 after the end of the calendar year. For the year ended December 31, 2018, total distributions of $16.0 million were comprised 100% of ordinary income. For the year ended December 31, 2019, total distributions of $16.1 million were comprised of approximately $13.4 million from ordinary income and $2.7 million from return of capital. For the six months ended June 30, 2020, we estimate that total distributions of $4.1 million were classified as a return of capital. Distributions may be subject to reclassification based on future dividends and operating results and will not be determined until the end of the year.

 

Related Parties

 

We have entered into the Investment Advisory Agreement with the Investment Advisor. Joseph B. Alala, our chief executive officer and chairman of our Board, is the managing partner and chief investment officer of the Investment Advisor, and M. Hunt Broyhill, a member of our Board, has an indirect controlling interest in the Investment Advisor.

 

In addition, an affiliate of the Investment Advisor also manages CapitalSouth Partners SBIC Fund IV, L.P. (‘‘Fund IV’’), a private investment limited partnership which provides financing solutions to smaller and lower middle-market companies that had its first closing in March 2013 and obtained SBA approval for its SBIC license in April 2013. In addition to Fund IV, affiliates of the Investment Advisor may manage several affiliated funds whereby institutional limited partners in Fund IV have the opportunity to co-invest with Fund IV in portfolio investments. An affiliate of the Investment Advisor also manages Capitala Private Credit Fund V, L.P. (‘‘Fund V’’), a private investment limited partnership, and a private investment vehicle (referred to herein as “Capitala Specialty Lending Corp” or “CSLC”), both of which provide financing solutions to lower middle-market and traditional middle-market companies. The Investment Advisor and its affiliates may also manage other funds in the future that may have investment mandates that are similar, in whole and in part, with ours. To the extent permitted by the 1940 Act and interpretation of the SEC staff, the Investment Advisor and its affiliates may determine that an investment is appropriate for us and for one or more of those other funds. In such event, depending on the availability of such investment and other appropriate factors, the Investment Advisor or its affiliates may determine that we should invest side-by-side with one or more other funds. Any such investments will be made only to the extent permitted by applicable law and interpretive positions of the SEC and its staff, and consistent with the Investment Advisor’s allocation procedures. We expect to make, and have made, co-investments with Fund IV, Fund V, and/or CSLC to the extent their respective investment strategies align with ours.

 

On September 10, 2015, we, Fund II, Fund III, Fund V, and the Investment Advisor filed an application for exemptive relief with the SEC to permit an investment fund and one or more other affiliated investment funds, including future affiliated investment funds, to participate in the same investment opportunities through a proposed co-investment program where such participation would otherwise be prohibited under the 1940 Act. On June 1, 2016, the SEC issued an order (the ‘‘Order’’) permitting this relief. Pursuant to the Order, we are permitted to co-invest in such investment opportunities with our affiliates if a ‘‘required majority’’ (as defined in Section 57(o) of the 1940 Act) of our independent directors make certain conclusions in connection with a co-investment transaction, including, but not limited to, that (1) the terms of the potential co-investment transaction, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching in respect of us or our stockholders on the part of any person concerned, and (2) the potential co-investment transaction is consistent with the interests of our stockholders and is consistent with our then-current investment objective and strategies.

 

On August 31, 2016, the Company sold assets to FSC II in exchange for 100% of the partnership interests in FSC II. Concurrent with the sale of these assets to FSC II, the Company received cash consideration of $47.6 million from an affiliated third-party purchaser in exchange for 100% of the partnership interests of FSC II. The Company’s Board pre-approved this transaction pursuant to Section 57(f) of the 1940 Act. Capitala Advisors Corp., the Company’s Administrator, also serves as the administrator to FSC II.

66

The Company may invest in the same unitranche facility as CSLF II, whereby CSLF II provides the first-out portion of the unitranche facility and the Company and other lenders provide the last-out portion of the unitranche facility. Under a guarantee agreement, the Company may be required to purchase its pro-rata portion of first-out loans from CSLF II upon certain triggering events, including acceleration upon payment default of the underlying borrower. As of September 30, 2019, the Company has evaluated the fair value of the guarantee under the guidance of ASC Topic 460 —Guarantees and determined that the fair value of the guarantee is immaterial as the risk of payment default for first-out loans in CSLF II is considered remote. The maximum exposure to credit risk as of September 30, 2019 and December 31, 2018, was $7.3 million and $4.3 million, respectively, and extends to the stated maturity of the underlying loans in CSLF II.

We have entered into a license agreement with the Investment Advisor, pursuant to which the Investment Advisor has agreed to grant us a non-exclusive, royalty-free license to use the name ‘‘Capitala.’’

 

We have entered into the Administration Agreement with our Administrator. Pursuant to the terms of the Administration Agreement, our Administrator provides us with the office facilities and administrative services necessary to conduct our day-to-day operations. Mr. Alala, our chief executive officer, and chairman of our Board, is the chief executive officer, president, and a director of our Administrator.

 

Off-Balance Sheet Arrangements

 

As of SeptemberJune 30, 2020, the Company had outstanding unfunded commitments related to debt investments in existing portfolio companies of $8.2 million (Bluestem Brands, Inc.), $6.3 million (Rapid Fire Protection, Inc), $3.5 million (J5 Infrastructure Partners, LLC), $1.0 million (U.S. BioTek Laboratories, LLC), and $0.5 million (Freedom Electronics, LLC). As of December 31, 2019, the Company had outstanding unfunded commitments related to debt and equity investments in existing portfolio companies of  $11.4 million (CSLF II), $2.7$4.5 million (Portrait Studio,(Rapid Fire Protection, Inc), $3.5 million (J5 Infrastructure Partners, LLC), $2.6 million (BigMouth, Inc.), $1.0 million (Freedom Electronics, LLC), $1.0 million (U.S. BioTek Laboratories, LLC), and $0.7$0.5 million (Jurassic Quest Holdings, LLC). As of December 31, 2018, the Company had outstanding unfunded commitments related to debt and equity investments in existing portfolio companies of $6.4 million (CSLF II), $5.0 million (Portrait Studio, LLC), $1.1 million (MC Sign Lessor, Corp.), $1.0 million (U.S. BioTek Laboratories, LLC), $0.8 million (Freedom Electronics, LLC), and $0.3 million (CableOrganizer Acquisition, LLC).  

 

We have no other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

 

Recent Developments

 

DistributionsPortfolio Activity 

On October 1, 2019,During July 2020, the Company’s Board declared normal monthly distributions for October, November, and December of 2019 as set forth below:Company received $2.4 million in principal repayments on its first lien debt investment in BigMouth, Inc.

Date Declared Record Date Payment Date Distributions per Share 
October 1, 2019 October 22, 2019 October 29, 2019 $0.0833 
October 1, 2019 November 22, 2019 November 29, 2019 $0.0833 
October 1, 2019 December 23, 2019 December 30, 2019 $0.0833 

 

Other

On October 8, 2019,July 30, 2020, the Board of Directors appointed Kevin A. Koonts to replace Richard G. Wheelahan III as the Chief Compliance Officer and Secretaryapproved a one-for-six reverse stock split of the Company. Kevin A. KoontsCompany’s common stock which is expected to be effective at 5:00 p.m. Eastern Standard Time on August 21, 2020 (the "Effective Time"). The Company's common stock is expected to begin trading on a split-adjusted basis at the market open on August 24, 2020. At the Effective Time, every six (6) issued and outstanding shares of the Company's common stock will continue to serve asbe converted into one (1) share of the Company’s Chief Accounting Officer and Treasurer.Company's common stock.

 

67

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.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

We are subject to financial market risks, including changes in interest rates. Changes in interest rates may affect both our cost of funding and our interest income from portfolio investments and cash and cash equivalents. We may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options, and forward contracts subject to the requirements of the 1940 Act. For the ninesix months ended SeptemberJune 30, 2019,2020, we did not engage in hedging activities.

 

As of SeptemberJune 30, 2019,2020, we held 2123 securities bearing a variable rate of interest. Our variable rate investments represent approximately 61.0%55.2% of the fair value of total debt investments. On a fair value basis, 4.9%As of June 30, 2020, 98.4% of variable rate securities were yielding interest at a rate equal to the established interest rate floor, or interest rate ceiling and 95.1%1.6% of variable rate securities were yielding interest at a rate above its interest rate floor or were not subject to an interest rate floor as of September 30, 2019.floor. As of SeptemberJune 30, 2019, we had $0.0 million outstanding on our Credit Facility, which has a variable rate of interest at one-month LIBOR + 3.0%. As of September 30, 2019,2020, all of our other interest paying liabilities, consisting of $150.0 million in SBA-guaranteed debentures, $75.0 million in 2022 Notes, and $52.1 million in 2022 Convertible Notes, were bearing interest at a fixed rate.

 


Interest rate sensitivity refers to the change in earnings that may result from changes in the level of interest rates. In addition, U.S. and global capital markets and credit markets have experienced a higher level of stress due to the global COVID-19 pandemic, which has resulted in an increase in the level of volatility across such markets and a general decline in value of the securities that we hold. Because we fund a portion of our investments with borrowings, our net investment income is affected by the difference between the rate at which we invest and the rate at which we borrow. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In connection with the COVID-19 pandemic, the U.S. Federal Reserve and other central banks have reduced certain interest rates and LIBOR has decreased. In addition, in a prolonged low interest rate environment, including a reduction of LIBOR to zero, the difference between the total interest income earned on interest earning assets and the total interest expense incurred on interest bearing liabilities may be compressed, reducing our net interest income and potentially adversely affecting our operating results.

 

Based on our SeptemberJune 30, 20192020 consolidated statement of assets and liabilities, the following table shows the annual impact on net income (excluding the potential related incentive fee impact) of base rate changes in interest rates (considering interest rate floors for variable rate securities) assuming no changes in our investment and borrowing structure (dollars in thousands):

  

Basis Point Change Increase
(decrease)
in interest
income
  (Increase)
decrease in
interest
expense
  Increase
(decrease)
in net income
  Increase
(decrease)
in interest
income
  (Increase)
decrease in
interest
expense
  Increase
(decrease)
in net
income
 
Up 300 basis points $4,931  $  $4,931  $2,245  $  $2,245 
Up 200 basis points $3,287  $  $3,287  $1,051  $  $1,051 
Up 100 basis points $1,644  $  $1,644  $275  $  $275 
Down 100 basis points $(1,305) $  $(1,305) $  $  $ 
Down 200 basis points $(1,568) $  $(1,568) $  $  $ 
Down 300 basis points $(1,568) $  $(1,568) $  $  $ 

  

Item 4. Controls and Procedures

 

 (a)Evaluation of Disclosure Controls and Procedures

 

As of SeptemberJune 30, 20192020 (the end of the period covered by this report), we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.

  

 (b)Changes in Internal Controls Over Financial Reporting

 

Management has not identified any change in the Company’s internal control over financial reporting that occurred during the thirdsecond quarter of 20192020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Other than as described below, weWe and our subsidiaries are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us or our subsidiaries. From time to time, we, or our subsidiaries may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings, if any, cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.

 

On December 28, 2017, an alleged stockholder filed a putative class action lawsuit complaint, Paskowitz v. Capitala Finance Corp., et al., in the United States District Court for the Central District of California (case number 2:17-cv-09251-MWF-AS) (the “Paskowitz Action”), against the Company and certain of its current officers on behalf of all persons who purchased or otherwise acquired the Company’s common stock between January 4, 2016 and August 7, 2017. On January 3, 2018, another alleged stockholder filed a putative class action complaint, Sandifer v. Capitala Finance Corp., et al., in the United States District Court for the Central District of California (case number 2:18-cv-00052-MWF-AS) (the “Sandifer Action”), asserting substantially similar claims on behalf of the same putative class and against the same defendants. On February 2, 2018, the Sandifer Action was transferred, on stipulation of the parties, to the United States District Court for the Western District of North Carolina. The Sandifer Action was voluntarily dismissed on February 28, 2018. On March 1, 2018, the Paskowitz Action was transferred, on stipulation of the parties, to the United States District Court for the Western District of North Carolina (case number 3:18-cv-00096-RJC-DSC). On June 19, 2018, the plaintiffs in the Paskowitz Action filed their amended complaint. The amended complaint alleged certain violations of the securities laws, including, inter alia, that the defendants made certain materially false and misleading statements and omissions regarding the Company’s business, operations, and prospects between January 4, 2016 and August 7, 2017. The amended complaint sought compensatory damages and attorneys’ fees and costs, among other relief, but did not specify the amount of damages being sought.

On August 14, 2018, Defendants in the Paskowitz Action filed a motion to dismiss the amended complaint. On August 15, 2019, the Court granted Defendants’ motion to dismiss and dismissed the amended complaint without prejudice to the plaintiffs’ ability to file a motion seeking to further amend the amended complaint.  On September 16, 2019, the plaintiffs filed a notice with the Court informing the Court that plaintiffs intend not to file a second amended complaint and requesting that the Court enter an order of final judgment and dismissal. On October 25, 2019, the Court entered a judgment in accordance with the August 15, 2019 dismissal order. While the Company intends to vigorously defend itself in this litigation should the litigation continue, the outcome of these legal proceedings cannot be predicted with certainty.

Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult and requires an extensive degree of judgment, particularly where the matters involve indeterminate claims for monetary damages, are in the early stages of the proceedings, and are subject to appeal. In addition, because most legal proceedings are resolved over extended periods of time, potential losses are subject to change due to, among other things, new developments, changes in legal strategy, the outcome of intermediate procedural and substantive rulings, and other parties’ settlement posture and their evaluation of the strength or weakness of their case against us. For these reasons, we are currently unable to predict the ultimate timing or outcome of, or reasonably estimate the possible losses or a range of possible losses resulting from, the matters described above. Based on information currently available, the Company does not believe that any reasonably possible losses arising from the currently pending legal matters described above will be material to the Company’s results of operations or financial condition. However, in light of the inherent uncertainties involved in such matters, an adverse outcome in this litigation could materially adversely affect the Company’s financial condition, results of operations or cash flows in any particular reporting period.


Item 1A. Risk Factors

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018,2019 (the “Annual Report on Form 10-K”), which could materially affect our business, financial condition and/or operating results, including the Risk Factor titled “Recent legislation may allow us to incur additional leverage”. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties that are not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. Other than the risk factors below, during the ninesix months ended SeptemberJune 30, 2019,2020, there have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2018.10-K.

 

UncertaintyEvents outside of our control, including public health crises, could negatively affect our portfolio companies and our results of our operations.

Periods of market volatility have occurred and could continue to occur in response to pandemics or other events outside of our control. These types of events have adversely affected and could continue to adversely affect operating results for us and for our portfolio companies. For example, in December 2019, a novel strain of coronavirus (also known as “COVID-19”) surfaced in China and has since spread and continues to spread to other countries, including the United States. This outbreak has led and for an unknown period of time will continue to lead to disruptions in local, regional, national and global markets and economies affected thereby. With respect to the U.S. credit markets (in particular for middle market loans), this outbreak has resulted in, and until fully resolved is likely to continue to result in, the following among other things: (i) government imposition of various forms of shelter-in-place orders and the closing of “non-essential” businesses, resulting in significant disruption to the businesses of many middle-market loan borrowers including supply chains, demand and practical aspects of their operations, as well as in lay-offs of employees, and, while these effects are hoped to be temporary, some effects could be persistent or even permanent; (ii) increased draws by borrowers on revolving lines of credit; (iii) increased requests by borrowers for amendments and waivers of their credit agreements to avoid default, increased defaults by such borrowers and/or increased difficulty in obtaining refinancing at the maturity dates of their loans; (iv) volatility and disruption of these markets including greater volatility in pricing and spreads and difficulty in valuing loans during periods of increased volatility, and liquidity issues; and (v) rapidly evolving proposals and/or actions by state and federal governments to address problems being experienced by the markets and by businesses and the economy in general which will not necessarily adequately address the problems facing the loan market and middle market businesses. This outbreak is having, and any future outbreaks 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 us and returns to us, among other things. As of the date of this 10-Q, it is impossible to determine the scope of this outbreak, or any future outbreaks, how long any such outbreak, market disruption or uncertainties may last, the effect any governmental actions will have or the full potential impact on us 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.

If the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, loan non-accruals, problem assets, and bankruptcies may increase. In addition, collateral for our loans may decline in value, which could cause loan losses to increase and the net worth and liquidity of loan guarantors could decline, impairing their ability to honor commitments to us. An increase in loan delinquencies and non-accruals or a decrease in loan collateral and guarantor net worth could result in increased costs and reduced income which would have a material adverse effect on our business, financial condition or results of operations.

We will also be negatively affected if our operations and effectiveness or the operations and effectiveness of a portfolio company (or any of the key personnel or service providers of the foregoing) is compromised or if necessary or beneficial systems and processes are disrupted.

Any public health emergency, including the COVID-19 pandemic or any outbreak of other existing or new epidemic diseases, or the threat thereof, and the resulting financial and economic market uncertainty could have a significant adverse impact on us and the fair value of our investments. These potential impacts, while uncertain, could adversely affect our and our portfolio companies’ operating results.

We are currently operating in a period of capital markets disruption and economic uncertainty.

The U.S. capital markets have experienced extreme volatility and disruption following the global outbreak of COVID-19 that began in December 2019. The global impact of the outbreak is rapidly evolving, and many countries have reacted by instituting quarantines, prohibitions on travel and the closure of offices, businesses, schools, retail stores and other public venues. Businesses are also implementing similar precautionary measures. Such measures, as well as the general uncertainty surrounding the dangers and impact of COVID-19, have created significant disruption in supply chains and economic activity. The impact of COVID-19 has led to significant volatility and declines in the global public equity markets and it is uncertain how long this volatility will continue. As COVID-19 continues to spread, the potential impacts, including a global, regional or other economic recession, are increasingly uncertain and difficult to assess. Some economists and major investment banks have expressed concern that the continued spread of the virus globally could lead to a world-wide economic downturn.


Disruptions in the capital markets caused by the COVID-19 pandemic have increased the spread between the yields realized on risk-free and higher risk securities, resulting in illiquidity in parts of the capital markets. These and future market disruptions and/or illiquidity would be expected to have an adverse effect on our business, financial condition, results of operations and cash flows. Unfavorable economic conditions also would be expected to increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events have limited and could continue to limit our investment originations, limit our ability to grow and have a material negative impact on our operating results and the fair values of our debt and equity investments.

Additionally, the recent disruption in economic activity caused by the COVID-19 pandemic has had, and may continue to have, a negative effect on the potential for liquidity events involving our investments. The illiquidity of our investments may make it difficult for us to sell such investments to access capital if required, and as a result, we could realize significantly less than the value at which we have recorded our investments if we were required to sell them for liquidity purposes. An inability to raise or access capital, and any required sale of all or a portion of our investments as a result, could have a material adverse effect on our business, financial condition or results of operations.

Adverse developments in the credit markets may impair our ability to secure debt financing.

In past economic downturns, such as the financial crisis in the United States that began in mid-2007 and during other times of extreme market volatility, many commercial banks and other financial institutions stopped lending or significantly curtailed their lending activity. In addition, in an effort to stem losses and reduce their exposure to segments of the economy deemed to be high risk, some financial institutions limited routine refinancing and loan modification transactions and even reviewed the terms of existing facilities to identify bases for accelerating the maturity of existing lending facilities. If these conditions recur, for example as a result of the COVID-19 pandemic, it may be difficult for us to obtain desired financing to finance the growth of our investments on acceptable economic terms, or at all.

So far, the COVID-19 pandemic has resulted in, and until fully resolved is likely to continue to result in, among other things, increased draws by borrowers on revolving lines of credit and increased requests by borrowers for amendments, modifications and waivers of their credit agreements to avoid default or change payment terms, increased defaults by such borrowers and/or increased difficulty in obtaining refinancing at the maturity dates of their loans. In addition, the duration and effectiveness of responsive measures implemented by governments and central banks cannot be predicted. The commencement, continuation, or cessation of government and central bank policies and economic stimulus programs, including changes in monetary policy involving interest rate adjustments or governmental policies, may contribute to the development of or result in an increase in market volatility, illiquidity and other adverse effects that could negatively impact the credit markets and the Company.

If we are unable to consummate credit facilities on commercially reasonable terms, our liquidity may be reduced significantly. If we are unable to repay amounts outstanding under any facility we may enter into and are declared in default or are unable to renew or refinance any such facility, it would limit our ability to initiate significant originations or to operate our business in the normal course. These situations may arise due to circumstances that we may be unable to control, such as inaccessibility of the credit markets, a severe decline in the value of the U.S. dollar, a further economic downturn or an operational problem that affects third parties or us, and could materially damage our business. Moreover, we are unable to predict when economic and market conditions may become more favorable. Even if such conditions improve broadly and significantly over the long term, adverse conditions in particular sectors of the financial markets could adversely impact our business.

Changes relating to the LIBOR calculation process may adversely affect the value of our portfolio of the LIBOR-indexed, floating-rate debt securities.

LIBOR, the London Interbank Offered Rate, is the basic rate of interest used in lending transactions between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. We typically use LIBOR as a reference rate in floating-rate loans we extend to portfolio companies such that the interest due to us pursuant to a term loan extended to a portfolio company is calculated using LIBOR. The terms of our debt investments generally include minimum interest rate floors which are calculated based on LIBOR. In the recent past, concerns have been publicized that some of the member banks surveyed by the British Bankers’ Association (“BBA”) in connection with the calculation of LIBOR across a range of maturities and currencies may have been under-reporting or otherwise manipulating the inter-bank lending rate applicable to them in order to profit on their derivativesderivative positions or to avoid an appearance of capital insufficiency or adverse reputational or other consequences that may have resulted from reporting inter-bank lending rates higher than those they actually submitted. A number of BBA member banks have entered into settlements with their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and investigations by regulators and governmental authorities in various jurisdictions are ongoing.

 

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Actions by the BBA,ICE Benchmark Administration, regulators or law enforcement agencies as a result of these or future events, may result in changes to the manner in which LIBOR is determined. Uncertainty asPotential changes, or uncertainty related to the nature of such potential changes may adversely affect the market for LIBOR-based securities, including our portfolio of LIBOR-indexed, floating-rate debt securities. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based securities or the value of our portfolio of LIBOR-indexed, floating-rate debt securities. For example, onsecurities, loans, and other financial obligations or extensions of credit held by or due to us.

On July 27, 2017, the U.K.’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that it intends to phase outstop persuading or compelling banks to submit LIBOR byrates after 2021. In addition, on March 25, 2020, the FCA stated that although the central assumption that firms cannot rely on LIBOR being published after the end of 2021.2021 has not changed, the outbreak of COVID-19 has impacted the timing of many firms’ transition planning, and the FCA will continue to assess the impact of the COVID-19 pandemic on transition timelines and update the marketplace as soon as possible. It is unclear if at that time whether or notafter 2021 LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. We have exposure to LIBOR, including in financial instruments that mature after 2021. Our exposure arises from the value of our portfolio of LIBOR-indexed, floating-rate debt securities.

 

The U.S.In the United States, the Federal Reserve Board and the Federal Reserve Bank of New York, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index calculated by short termshort-term repurchase agreements, backed by Treasury securities called the Secured Overnight Financing Rate (“SOFR”). The first publicationFederal Reserve Bank of New York began publishing SOFR was released in April 2018. Whether or not SOFR attains market traction as a LIBOR replacement remains a question and the future of LIBOR at this time is uncertain.uncertain, including whether the COVID-19 pandemic will have further effect on LIBOR transition plans.

 

The elimination of LIBOR or any other changes or reforms to the determination or supervision of LIBOR could have an adverse impact on the market for or value of any LIBOR-indexed, floating-rate debt securities, loans, and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations. If LIBOR ceases to exist, we may need to renegotiate the credit agreements extending beyond 2021 with our portfolio companies that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established. However, becauseIn the event that the LIBOR Rate is no longer available or published on a current basis or no longer made available or used for determining the interest rate of loans, our administrative agent that manages our loans will generally select a comparable successor rate; provided that (i) to the extent a comparable or successor rate is approved by the administrative agent, the approved rate shall be applied in a manner consistent with market practice; and (ii) to the extent such market practice is not administratively feasible for the administrative agent, such approved rate shall be applied as otherwise reasonably determined by the administrative agent.

If the current period of capital market disruption and instability continues for an extended period of time, there is a risk that investors in our equity securities may not receive distributions consistent with historical levels or at all or that our distributions may not grow over time and a portion of our distributions may be a return of capital.

We intend to make distributions on a quarterly basis to our stockholders out of assets legally available for distribution. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions. Our ability to pay distributions might be adversely affected by the impact of one or more of the risk factors described in our Annual Report on Form 10-K including the COVID-19 pandemic described above. For example, if the temporary closure of many corporate offices, retail stores, and manufacturing facilities and factories in the jurisdictions, including the United States, affected by the COVID-19 pandemic were to continue for an extended period of time it could result in reduced cash flows to us from our existing portfolio companies, which could reduce cash available for distribution to our stockholders. If we violate certain covenants under our existing or future credit facilities or other leverage, we may be limited in our ability to make distributions. If we declare a distribution and if more stockholders opt to receive cash distributions rather than participate in our dividend reinvestment plan, we may be forced to sell some of our investments in order to make cash distribution payments. To the extent we make distributions to stockholders that include a return of capital, such portion of the distribution essentially constitutes a return of the stockholder’s investment. Although such return of capital may not be taxable, such distributions would generally decrease a stockholder’s basis in our common stock and may therefore increase such stockholder’s tax liability for capital gains upon the future sale of LIBORsuch stock. A return of capital distribution may cause a stockholder to recognize a capital gain from the sale of our common stock even if the stockholder sells its shares for less than the original purchase price.


Due to the COVID-19 pandemic or other disruptions in the economy, we may not be able to increase our dividends and may reduce or defer our dividends and choose to incur US federal excise tax in order preserve cash and maintain flexibility.

As a BDC, we are not required to make any distributions to shareholders other than in connection with our election to be taxed as a RIC under subchapter M of the Code. In order to maintain our tax treatment as a RIC, we must distribute to shareholders for each taxable year at this time is uncertain, the specific effectsleast 90.0% of our investment company taxable income (i.e., net ordinary income plus realized net short-term capital gains in excess of realized net long-term capital losses). If we qualify for taxation as a RIC, we generally will not be subject to corporate-level U.S. federal income tax on our investment company taxable income and net capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) that we timely distribute to shareholders. We will be subject to a 4.0% US federal excise tax on undistributed earnings of a transition away from LIBOR, including any effectRIC unless we distribute each calendar year at least the sum of (i) 98.0% of our ordinary income for the calendar year, (ii) 98.2% of our capital gains in excess of capital losses for the one-year period ending on our net investment income, cannot be determined asOctober 31 of the datecalendar year, and (iii) any ordinary income and net capital gains for preceding years that were not distributed during such years and on which we paid no federal income tax. 

Under the Code, we may satisfy certain of our RIC distributions with dividends paid after the end of the current year. In particular, if we pay a distribution in January of the following year that was declared in October, November, or December of the current year and is payable to shareholders of record in the current year, the dividend will be treated for all U.S. federal income tax purposes as if it were paid on December 31 of the current year. In addition, under the Code, we may pay dividends, referred to as “spillover dividends,” that are paid during the following taxable year that will allow us to maintain our qualification for taxation as a RIC and eliminate our liability for corporate-level U.S. federal income tax. Under these spillover dividend procedures, we may defer distribution of income earned during the current year until December of the following year. For example, we may defer distributions of income earned during 2020 until as late as December 31, 2021. If we choose to pay a spillover dividend, we will incur the 4.0% U.S. federal excise tax on some or all of the distribution.

Due to the COVID-19 pandemic or other disruptions in the economy, we anticipate that we may take certain actions with respect to the timing and amounts of our distributions in order to preserve cash and maintain flexibility. For example, we anticipate that we will not be able to increase our dividends. In addition, we may reduce our dividends and/or defer our dividends to the following taxable year. If we defer our dividends, we may choose to utilize the spillover dividend rules discussed above and incur the 4.0% U.S. federal excise tax on such amounts. To further preserve cash, we may combine these reductions or deferrals of dividends with one or more distributions that are payable partially in our common stock as discussed below under “We may in the future choose to pay dividends in our own stock, in which case you may be required to pay tax in excess of the cash you receive.”

We may in the future choose to pay dividends in our own common stock, in which case you may be required to pay tax in excess of the cash you receive.

We may distribute taxable dividends that are payable in part in our common stock. In accordance with certain applicable U.S. Treasury regulations and published guidance issued by the Internal Revenue Service, a publicly offered RIC may treat a distribution of its own stock as fulfilling the RIC distribution requirements if each shareholder may elect to receive his or her entire distribution in either cash or stock of the RIC, subject to a limitation that the aggregate amount of cash to be distributed to all shareholders must be at least 20.0% (which has been temporarily reduced to 10% for distributions declared on or after April 1, 2020, and on or before December 31, 2020) of the aggregate declared distribution. If too many shareholders elect to receive cash, the cash available for distribution must be allocated among the shareholders electing to receive cash (with the balance of the distribution paid in stock). In no event will any shareholder, electing to receive cash, receive less than the lesser of (a) the portion of the distribution such shareholder 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. Taxable shareholders receiving such dividends will be required to include the amount of the dividends as ordinary income (or as long-term capital gain to the extent such distribution is properly reported as a capital gain dividend) to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, a U.S. shareholder may be required to pay tax with respect to such dividends in excess of any cash received. If a U.S. shareholder sells the stock it receives as a dividend in order to pay this report.tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to non-U.S. shareholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common stock. In addition, if a significant number of our shareholders determine to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock.

Due to the recent COVID-19 pandemic, shares of BDCs have traded below their respective NAVs. If our shares of common stock trade at a discount from NAV, it could limit our ability to raise equity capital.

As a result of the COVID-19 pandemic, the stocks of BDCs as an industry, including shares of our common stock, have traded below NAV, at or near historic lows as a result of concerns over liquidity, leverage restrictions and distribution requirements. If our common stock trades below its NAV, we will generally not be able to issue additional shares of our common stock at its market price without first obtaining the approval for such issuance from our stockholders and our independent directors. If additional funds are not available to us, we could be forced to curtail or cease our new lending and investment activities, and our NAV could decrease and our level of distributions could be impacted.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

During the quarter ended September 30, 2019, pursuant to our DRIP, we issued 42,127 shares of common stock to stockholders of record that did not opt out of our DRIP. The issuances were not subject to the registration requirements under the Securities Act of 1933, as amended. The cash paid for shares of common stock issued under our DRIP during the quarter ended September 30, 2019 was approximately $0.3 million. Other than the shares issued under our DRIP during the quarter ended September 30, 2019, we did not sell any unregistered equity securities.None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

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Item 6. Exhibits

 

The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:

 

Exhibit  
Number Description of Document
3.1 Articles of Amendment and Restatement(1)
   
3.2 Certificate of Limited Partnership of CapitalSouth Partners Fund II Limited Partnership(2)
   
3.3 Certificate of Limited Partnership of CapitalSouth Partners SBIC Fund III, L.P.(2)
   
3.4 Bylaws(1)
   
3.5 Form of Amended and Restated Limited Partnership Agreement of CapitalSouth Partners Fund II Limited Partnership(3)
   
3.6 Form of Amended and Restated Agreement of Limited Partnership of CapitalSouth Partners SBIC Fund III, L.P.(3)
   
4.1 Form of Common Stock Certificate(1)
   
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
   
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
   
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
   
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
   
(1) Previously filed in connection with the Pre-Effective Amendment No. 1 to Capitala Finance Corp.’s registration statement on Form N-2 (File No. 333-188956) filed on September 9, 2013.
   
(2) Previously filed in connection with Pre-Effective Amendment No. 2 to Capitala Finance Corp.’s registration statement on Form N-2 (File No. 333-188956) filed on September 16,17, 2013.
   
(3) Previously filed in connection with Pre-Effective Amendment No. 5 to Capitala Finance Corp.’s registration statement on Form N-2 (File No. 333-188956) filed on September 24, 2013.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: NovemberAugust 4, 20192020By/s/ Joseph B. Alala III
  Joseph B. Alala III
  Chief Executive Officer
  (Principal Executive Officer)
  Capitala Finance Corp.
   
Date: NovemberAugust 4, 20192020By/s/ Stephen A. Arnall
  Stephen A. Arnall
  Chief Financial Officer
  (Principal Financial Officer)
  Capitala Finance Corp.
   
Date: NovemberAugust 4, 20192020By/s/ Kevin A. Koonts
  Kevin A. Koonts
  Chief Accounting Officer
  (Principal Accounting Officer)
  Capitala Finance Corp.

 

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