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

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

 

For the quarterly period ended June 30, 20182019

 

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

¨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

Telephone: (704) 376-5502 28209

State of Incorporation: Maryland

Telephone: (704) 376-5502

 90-0945675

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

Title of Each ClassTrading 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.

 

 Capitala Finance Corp.Yes  xNo  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

 

 Capitala Finance Corp.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. (Check one):

 

Capitala Finance Corp.Large accelerated filer  ¨Accelerated filerx
     
 Non-accelerated filer¨Smaller reporting company¨
     
   Emerging growth company  x¨

 

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 7(a)(2)(B)13(a) of the SecuritiesExchange Act.          ¨

 

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

 

 Capitala Finance Corp.Yes ¨No  x

  

The number of shares of Capitala Finance Corp.’s common stock, $0.01 par value, outstanding as of August 3, 2018 was 16,001,205.2, 2019 was16,130,669.

 

 

 

 

  

TABLE OF CONTENTS

 

  Page
   
PART I.FINANCIAL INFORMATION3
   
Item 1.Consolidated Financial Statements3
   
 Consolidated Statements of Assets and Liabilities as of June 30, 20182019 (unaudited) and December 31, 201720183
   
 Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018 and 2017 (unaudited)4
   
 Consolidated Statements of Changes in Net Assets for the six months ended June 30, 2019 and 2018 and 2017 (unaudited)5
   
 Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 and 2017 (unaudited)6
   
 Consolidated Schedules of Investments as of June 30, 20182019 (unaudited) and December 31, 201720187
   
 Notes to Consolidated Financial Statements as of June 30, 20182019 (unaudited)22
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations5255
   
Item 3.Quantitative and Qualitative Disclosures About Market Risk7278
   
Item 4.Controls and Procedures7379
   
PART II.OTHER INFORMATION7380
   
Item 1.Legal Proceedings7380
   
Item 1A.Risk Factors7480
   
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds7481
   
Item 3.Defaults Upon Senior Securities7481
   
Item 4.Mine Safety Disclosures7481
   
Item 5.Other Information7481
   
Item 6.Exhibits7582
  
Signatures7683

 

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 
 June 30, 2018  December 31, 2017  June 30, 2019  December 31, 2018 
 (unaudited)     (unaudited)    
ASSETS             
Investments at fair value                
Non-control/non-affiliate investments (amortized cost of $236,344 and $298,132, respectively) $253,813  $288,374 
Affiliate investments (amortized cost of $98,046 and $77,336, respectively)  118,664   103,957 
Control investments (amortized cost of $92,357 and $89,559, respectively)  110,784   107,608 
Total investments at fair value (amortized cost of $426,747 and $465,027, respectively)  483,261   499,939 
Non-control/non-affiliate investments (amortized cost of $260,927 and $280,114, respectively) $270,677  $286,843 
Affiliate investments (amortized cost of $73,803 and $72,300, respectively)  89,505   92,939 
Control investments (amortized cost of $43,272 and $67,556, respectively)  30,877   69,145 
Total investments at fair value (amortized cost of $378,002 and $419,970, respectively)  391,059   448,927 
Cash and cash equivalents  40,826   31,221   43,474   39,295 
Interest and dividend receivable  3,420   2,976   2,453   3,778 
Due from related parties  -   95 
Prepaid expenses  260   309   217   454 
Deferred tax asset, net  6   -   -   628 
Other assets  84   55   104   83 
Total assets $527,857  $534,595  $437,307  $493,165 
                
LIABILITIES                
SBA debentures (net of deferred financing costs of $1,995 and $2,300, respectively) $168,705  $168,400 
2022 Notes (net of deferred financing costs of $2,245 and $2,496, respectively)  72,755   72,504 
2022 Convertible Notes (net of deferred financing costs of $1,423 and $1,583, respectively)  50,665   50,505 
Credit Facility (net of deferred financing costs of $1,078 and $1,293, respectively)  3,922   7,707 
SBA debentures (net of deferred financing costs of $1,264 and $1,688, respectively) $148,736  $164,012 
2022 Notes (net of deferred financing costs of $1,721 and $1,987, respectively)  73,279   73,013 
2022 Convertible Notes (net of deferred financing costs of $1,090 and $1,259, respectively)  50,998   50,829 
Credit Facility (net of deferred financing costs of $828 and $983, respectively)  4,172   9,017 
Management and incentive fees payable  2,560   2,172   3,583   2,487 
Interest and financing fees payable  3,111   3,141   2,676   3,063 
Trade settlement payable  -   175 
Deferred tax liability, net  -   1,289 
Written call option at fair value (proceeds of $20 and $20, respectively)  6,815   6,815 
Accounts payable and accrued expenses  7   -   -   100 
Total liabilities $308,540  $312,708  $283,444  $302,521 
                
Commitments and contingencies (Note 2)                
                
NET ASSETS                
Common stock, par value $.01, 100,000,000 common shares authorized, 15,994,690 and 15,951,231 common shares issued and outstanding, respectively $160  $160 
Common stock, par value $0.01, 100,000,000 common shares authorized, 16,118,948 and 16,051,547 common shares issued and outstanding, respectively $161  $161 
Additional paid in capital  241,350   241,027   242,307   241,757 
Undistributed net investment income  16,541   15,854 
Accumulated net realized losses from investments  (88,459)  (61,982)
Net unrealized appreciation on investments, net of deferred taxes  56,520   33,623 
Net unrealized depreciation on written call option  (6,795)  (6,795)
Total distributable loss  (88,605)  (51,274)
Total net assets $219,317  $221,887  $153,863  $190,644 
Total liabilities and net assets $527,857  $534,595  $437,307  $493,165 
                
Net asset value per share $13.71  $13.91  $9.55  $11.88 

 

See accompanying notes to consolidated financial statements.

 

3

 

Capitala Finance Corp.

 

Consolidated Statements of Operations

(in thousands, except share and per share data)

(unaudited)

 

 For the Three Months Ended June 30  For the Six Months Ended June 30  For the Three Months Ended June 30,  For the Six Months Ended June 30, 
 2018  2017  2018  2017  2019  2018  2019  2018 
INVESTMENT INCOME                                
Interest and fee income:                                
Non-control/non-affiliate investments $6,867  $7,405  $14,223  $17,043  $7,541  $6,867  $14,826  $14,223 
Affiliate investments  2,077   1,112   4,018   2,156   2,281   2,077   4,680   4,018 
Control investments  1,838   1,583   3,687   3,571   582   1,838   1,306   3,687 
Total interest and fee income  10,782   10,100   21,928   22,770   10,404   10,782   20,812   21,928 
Payment-in-kind interest and dividend income:                                
Non-control/non-affiliate investments  427   1,530   1,132   2,708   453   427   895   1,132 
Affiliate investments  289   411   775   642   227   289   376   775 
Control investments  254   162   420   408   44   254   372   420 
Total payment-in-kind interest and dividend income  970   2,103   2,327   3,758   724   970   1,643   2,327 
Dividend income:                                
Non-control/non-affiliate investments  59   -   59   168   -   59   1,281   59 
Affiliate investments  29   29   58   58   -   29   -   58 
Control investments  25   25   50   305   425   25   450   50 
Total dividend income  113   54   167   531   425   113   1,731   167 
Other income  -   77   -   77 
Interest income from cash and cash equivalents  17   28   32   41   37   17   88   32 
Total investment income  11,882   12,362   24,454   27,177   11,590   11,882   24,274   24,454 
                                
EXPENSES                                
Interest and financing expenses  4,331   5,488   8,695   10,141   4,228   4,331   8,641   8,695 
Loss on extinguishment of debt  -   2,732   -   2,732 
Base management fee  2,314   2,505   4,617   5,019   2,020   2,314   4,138   4,617 
Incentive fees  -   -   244   1,308   463   -   1,497   244 
General and administrative expenses  1,006   934   2,229   2,041   1,145   1,006   2,129   2,229 
Expenses before incentive fee waiver  7,651   11,659   15,785   21,241   7,856   7,651   16,405   15,785 
Incentive fee waiver (See Note 6)  -   -   -   (958)  (288)  -   (288)  - 
Total expenses, net of fee waivers  7,651   11,659   15,785   20,283 
Total expenses, net of incentive fee waiver  7,568   7,651   16,117   15,785 
                                
NET INVESTMENT INCOME  4,231   703   8,669   6,894   4,022   4,231   8,157   8,669 
                                
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND WRITTEN CALL OPTION:                
Net realized gain (loss) from investments:                
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:                
Net realized gain (loss) on investments:                
Non-control/non-affiliate investments  (21,115)  214   (25,694)  5,045   365   (21,115)  (3,544)  (25,694)
Affiliate investments  139   4,473   863   4,489   2,387   139   2,276   863 
Control investments  (1,646)  -   (1,646)  -   (17,829)  (1,646)  (19,656)  (1,646)
Net realized gain (loss) from investments  (22,622)  4,687   (26,477)  9,534 
Net realized loss on investments  (15,077)  (22,622)  (20,924)  (26,477)
Net unrealized appreciation (depreciation) on investments:                                
Non-control/non-affiliate investments  25,093   (6,454)  27,227   (12,849)  (3,018)  25,093   3,021   27,227 
Affiliate investments  (5,227)  746   (6,003)  972   (4,669)  (5,227)  (4,937)  (6,003)
Control investments  2,128   (4,280)  378   (2,782)  (9,708)  2,128   (13,984)  378 
Net unrealized appreciation (depreciation) on investments  21,994   (9,988)  21,602   (14,659)  (17,395)  21,994   (15,900)  21,602 
Net unrealized depreciation on written call option  -   (927)  -   (2,412)
Net realized and unrealized loss on investments and written call option  (628)  (6,228)  (4,875)  (7,537)
Tax benefit  1,345   -   1,295   - 
Total net realized and unrealized gain (loss) on investments and written call option, net of taxes  717   (6,228)  (3,580)  (7,537)
Net realized and unrealized loss on investments  (32,472)  (628)  (36,824)  (4,875)
Tax benefit (provision)  (694)  1,345   (628)  1,295 
Total net realized and unrealized gain (loss) on investments, net of taxes  (33,166)  717   (37,452)  (3,580)
                                
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $4,948  $(5,525) $5,089  $(643) $(29,144) $4,948  $(29,295) $5,089 
                                
NET INCREASE (DECREASE) IN NET ASSETS PER SHARE RESULTING FROM OPERATIONS – BASIC (SEE NOTE 11) $0.31  $(0.35) $0.32  $(0.04) $(1.81) $0.31  $(1.82) $0.32 
                                
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING - BASIC  15,981,857   15,889,682   15,970,599   15,881,712 
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING – BASIC  16,096,678   15,981,857   16,079,885   15,970,599 
                                
NET INCREASE (DECREASE) IN NET ASSETS PER SHARE RESULTING FROM OPERATIONS – DILUTED (SEE NOTE 11) $0.26  $(0.35) $0.27  $(0.04) $(1.81) $0.26  $(1.82) $0.27 
                                
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING - DILUTED  19,297,331   15,889,682   19,286,073   15,881,712   16,096,678   19,297,331   16,079,885   19,286,073 
                                
DISTRIBUTIONS PAID PER SHARE $0.25  $0.39  $0.50  $0.78  $0.25  $0.25  $0.50  $0.50 

 

See accompanying notes to consolidated financial statements.

 

4

 

Capitala Finance Corp.

 

Consolidated Statements of Changes in Net Assets

(in thousands, except share data)

(unaudited)

 

 Common Stock  Additional  Undistributed Net  Accumulated Net Realized  Net Unrealized Appreciation (Depreciation) on Investments, net of  Net Unrealized Depreciation on     Common Stock  Additional Paid Total Distributable   
 Number of
Shares		  Par Value  Paid in
Capital		  Investment
Income		  Gains
(Losses)		  Deferred
Taxes		  Written
Call Option		  Total  Number of Shares  Par Value  in Capital  Earnings (Loss)  Total 
                 
BALANCE, December 31, 2016  15,868,045 $159 $240,184 $22,973 $(37,881) $27,863  $(2,716) $250,582 
BALANCE, March 31, 2018  15,974,218  $160  $241,191  $(23,147) $218,204 
Net investment income  -   -   -   6,894   -   -   -   6,894   -   -   -   4,231   4,231 
Net realized gain from investments  -   -   -   -   9,534   -   -   9,534 
Net change in unrealized depreciation on investments  -   -   -   -   -   (14,659)  -   (14,659)
Net change in unrealized depreciation on written call option  -   -   -   -   -   -   (2,412)  (2,412)
Distributions to Shareholders:                                
Stock issued under dividend reinvestment plan  34,450   -   449   -   -   -   -   449 
Distributions declared  -   -   -   (12,388)  -   -   -   (12,388)
BALANCE, June 30, 2017  15,902,495  $159  $240,633  $17,479  $(28,347) $13,204  $(5,128) $238,000 
                                
BALANCE, December 31, 2017  15,951,231 $160 $241,027 $15,854 $(61,982) $33,623  $(6,795) $221,887 
Net investment income  -   -   -   8,669   -   -   -   8,669 
Net realized loss from investments  -   -   -   -   (26,477)  -   -   (26,477)
Net change in unrealized appreciation on investments  -   -   -   -   -   21,602   -   21,602 
Net realized loss on investments  -   -   -   (22,622)  (22,622)
Net unrealized appreciation on investments  -   -   -   21,994   21,994 
Tax benefit  -   -   -   -   -   1,295   -   1,295   -   -   -   1,345   1,345 
Distributions to Shareholders:                                                    
Stock issued under dividend reinvestment plan  43,459   -   323   -   -   -   -   323   20,472   -   159   -   159 
Distributions declared  -   -   -   (7,982)  -   -   -   (7,982)  -   -   -   (3,994)  (3,994)
BALANCE, June 30, 2018  15,994,690  $160  $241,350  $16,541  $(88,459) $56,520  $(6,795) $219,317   15,994,690  $160  $241,350  $(22,193) $219,317 
                    
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 Paid  Total Distributable    
  Number of Shares  Par Value  in Capital  Earnings (Loss)  Total 
BALANCE, December 31, 2017  15,951,231  $160  $241,027  $(19,300) $221,887 
Net investment income  -   -   -   8,669   8,669 
Net realized loss on investments  -   -   -   (26,477)  (26,477)
Net unrealized appreciation on investments  -   -   -   21,602   21,602 
Tax benefit  -   -   -   1,295   1,295 
Distributions to Shareholders:                    
Stock issued under dividend reinvestment plan  43,459   -   323   -   323 
Distributions declared  -   -   -   (7,982)  (7,982)
BALANCE, June 30, 2018  15,994,690  $160  $241,350  $(22,193) $219,317 
                     
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 Cash Flows

(in thousands)

(unaudited)

 

 For the Six Months Ended June 30  For the Six Months Ended June 30, 
 2018  2017  2019  2018 
CASH FLOWS FROM OPERATING ACTIVITIES                
Net increase (decrease) in net assets resulting from operations $5,089  $(643) $(29,295) $5,089 
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities:        
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by operating activities:        
Purchase of investments  (38,976)  (28,249)  (34,924)  (38,976)
Repayments and sales of investments  53,656   82,336   58,131   53,656 
Net realized (gain) loss on investments  26,477   (9,534)
Net realized loss on investments  20,924   26,477 
Net unrealized (appreciation) depreciation on investments  (21,602)  14,659   15,900   (21,602)
Payment-in-kind interest and dividends  (2,327)  (3,758)  (1,643)  (2,327)
Accretion of original issue discount on investments  (550)  (790)  (520)  (550)
Net unrealized depreciation on written call option  -   2,412 
Amortization of deferred financing fees  931   1,174   1,096   931 
Loss on extinguishment of debt  -   2,732 
Tax benefit  (1,295)  - 
Tax (benefit) provision  628   (1,295)
Changes in assets and liabilities:                
Interest and dividend receivable  (444)  2,127   1,325   (444)
Due from related parties  95   53   -   95 
Prepaid expenses  49   367   237   49 
Other assets  (29)  (26)  (21)  (29)
Due to related parties  -   39 
Management and incentive fees payable  388   (4,159)  1,096   388 
Interest and financing fees payable  (30)  356   (387)  (30)
Accounts payable and accrued expenses  7   (501)  (100)  7 
Trade settlement payable  (175)  -   -   (175)
NET CASH PROVIDED BY OPERATING ACTIVITIES  21,264   58,595   32,447   21,264 
                
CASH FLOWS FROM FINANCING ACTIVITIES                
Paydowns on SBA debentures  (15,700)  - 
Proceeds from Credit Facility  21,000   -   15,000   21,000 
Payments to Credit Facility  (25,000)  (14,000)  (20,000)  (25,000)
Issuance of 2022 Notes  -   75,000 
Issuance of 2022 Convertible Notes  -   52,088 
Repayment of 2021 Notes  -   (113,438)
Distributions paid to shareholders  (7,659)  (11,939)  (7,486)  (7,659)
Deferred financing fees paid  -   (5,720)  (82)  - 
NET CASH USED IN FINANCING ACTIVITIES  (11,659)  (18,009)  (28,268)  (11,659)
                
NET INCREASE IN CASH AND CASH EQUIVALENTS  9,605   40,586   4,179   9,605 
CASH AND CASH EQUIVALENTS, beginning of period  31,221   36,281   39,295   31,221 
CASH AND CASH EQUIVALENTS, end of period $40,826  $76,867  $43,474  $40,826 
                
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                
Cash paid for interest $7,158  $8,233  $7,279  $7,158 
                
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS                
Distributions paid through dividend reinvestment plan share issuances $323  $449  $550  $323 

 

See accompanying notes to consolidated financial statements.

 

6

 

Capitala Finance Corp.

 

Consolidated Schedule of Investments

(in thousands, except for units/shares)

June 30, 20182019

(unaudited)

 

Portfolio Company, Country(1), (2), (3), (4) 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		 
                          
Non-control/non-affiliated investments - 115.7%                  
Non-control/non-affiliated investments - 175.9%                 
                                  
Non-control/non-affiliated investments - United States                                   
                                  
3 Bridge Solutions, LLC IT Consulting First Lien Debt (11.0% Cash (1 month LIBOR + 9.0%, 1.0% Floor), Due 12/4/22) $11,109  $11,109  $11,109   5.1% IT Consulting First Lien Debt (11.4% Cash (1 month LIBOR + 9.0%, 1.0% Floor), Due 12/4/22) $13,784  $13,784  $13,784   9.0%
                                   
3 Bridge Solutions, LLC IT Consulting Preferred Units (965,250 units, 8.0% PIK)(5)      1,010   1,010   0.5% IT Consulting Preferred Units (965 units, 8.0% PIK)(6)      1,090   807   0.5%
                                   
3 Bridge Solutions, LLC IT Consulting Membership Units (39,000 units)      10   36   0.0% IT Consulting Membership Units (39,000 units)      10   -   0.0%
                                     
        12,129   12,155   5.6%       14,884   14,591   9.5%
                                   
Alternative Biomedical Solutions, LLC Healthcare First Lien Debt (12.2% Cash, Due 12/18/22)(6)  13,000   13,000   13,000   5.9% Healthcare First Lien Debt (9.4% Cash (1 month LIBOR + 7.0%, 1.0% Floor), Due 12/18/22)  111   111   111   0.1%
                                   
Alternative Biomedical Solutions, LLC Healthcare Membership Units (20,092 units)      800   128   0.1% Healthcare First Lien Debt (12.4% Cash, Due 12/18/22)(7)  13,000   13,000   10,282   6.7%
                                   
Alternative Biomedical Solutions, LLC Healthcare Membership Units (20,092 units)      800   -   0.0%
                   
        13,800   13,128   6.0%       13,911   10,393   6.8%
                                   
American Clinical Solutions, LLC Healthcare First Lien Debt (10.5% Cash, 2.0% PIK, Due 6/11/20)(7)  9,114   9,091   6,731   3.1% Healthcare First Lien Debt (10.5% Cash, 2.0% PIK, Due 6/11/20)(8)  9,388   8,919   6,551   4.3%
                                     
        9,091   6,731   3.1%       8,919   6,551   4.3%
                                   
AmeriMark Direct, LLC Consumer Products First Lien Debt (12.8% Cash, Due 9/8/21)  18,800   18,470   18,800   8.6% Consumer Products First Lien Debt (12.8% Cash, Due 9/8/21)  17,800   17,585   17,518   11.4%
                  
        18,470   18,800   8.6%
                  
B&W Quality Growers, LLC Farming Membership Unit Warrants (91,739 Units)      -   5,673   2.6%
                                     
        -   5,673   2.6%       17,585   17,518   11.4%
                                   
BigMouth, Inc. Consumer Products First Lien Debt (14.0% Cash, Due 11/14/21)(6)  9,442   9,442   9,442   4.3% Consumer Products First Lien Debt (14.4% Cash, Due 11/14/21)(7)  8,746   8,746   8,746   5.7%
                                   
BigMouth, Inc. Consumer Products Series A Preferred Stock (350,000 shares, 8.0% PIK)(5)      396   681   0.3% Consumer Products Series A Preferred Stock (350,000 shares)      411   289   0.2%
                                     
        9,838   10,123   4.6%       9,157   9,035   5.9%
                                   
Bluestem Brands, Inc. Online Merchandise Retailer First Lien Debt (9.6% Cash (1 month LIBOR + 7.5%, 1.0% Floor), Due 11/7/20)  3,904   3,864   3,526   1.6% Online Merchandise Retailer First Lien Debt (9.9% Cash (1 month LIBOR + 7.5%, 1.0% Floor), Due 11/7/20)  3,654   3,654   3,494   2.4%
                                     
        3,864   3,526   1.6%       3,654   3,494   2.4%
                                   
Burke America Parts Group, LLC Home Repair Parts Manufacturer Membership Units (14 units)      5   1,759   0.8% Home Repair Parts Manufacturer Membership Units (14 units)      5   2,416   1.6%
                                     
        5   1,759   0.8%       5   2,416   1.6%
                                   
California Pizza Kitchen, Inc. Restaurant Second Lien Debt (12.1% Cash (1 month LIBOR + 10.0%, 1.0% Floor), Due 8/23/23)  5,000   4,892   4,892   2.2% Restaurant Second Lien Debt (12.5% Cash (3 month LIBOR + 10.0%, 1.0% Floor), Due 8/23/23)  5,000   4,915   4,800   3.1%
                                       
        4,892   4,892   2.2%       4,915   4,800   3.1%
                    
Cedar Ultimate Parent, LLC Consumer Electronics Series C Preferred Stock (4,759,250 units)      958   1,130   0.5%
                  
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%
                  
        958   1,130   0.5%

 

7

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

June 30, 2018

(unaudited)

Portfolio Company, Country(1), (2), (3), (4) Industry Type of Investment Principal
Amount		  Cost  Fair Value  % of
Net Assets		 
                 
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)  $10,621  $ 10,621  $ 10,621   4.8%
                     
CIS Secure Computing, Inc. Government Services Common Stock (46,163 shares)      1,000   1,596   0.7%
                     
           11,621   12,217   5.5%
                     
Corporate Visions, Inc. Sales & Marketing Services Subordinated Debt (9.0% Cash, 2.0% PIK, Due 11/29/21)  18,342   18,342   17,596   8.0%
                     
Corporate Visions, Inc. Sales & Marketing Services Common Stock (15,750 shares)      1,575   645   0.3%
                     
           19,917   18,241   8.3%
                     
Currency Capital, LLC Financial Services First Lien Debt (13.0% Cash (1 month LIBOR + 11.0%, 0.5% Floor), Due 1/20/22)(8)  17,000   17,000   17,000   7.8%
                     
Currency Capital, LLC Financial Services Class A Preferred Units (2,000,000 units)(8)      2,000   1,818   0.8%
                     
           19,000   18,818   8.6%
                     
Flavors Holdings, Inc. Food Product Manufacturer First Lien Debt (8.1% Cash (3 month LIBOR + 5.8%, 1.0% Floor), Due 4/3/20)  6,326   6,243   5,790   2.6%
                     
Flavors Holdings, Inc. Food Product Manufacturer Second Lien Debt (12.3% Cash (3 month LIBOR + 10.0%, 1.0% Floor), Due 10/3/21)  12,000   11,774   10,850   5.0%
                     
           18,017   16,640   7.6%
                     
Installs, LLC Logistics First Lien Debt (9.1% Cash (1 month LIBOR + 7.0%, 1.8% Floor), Due 6/20/23)  2,750   2,750   2,750   1.2%
                     
Installs, LLC Logistics First Lien Debt (9.1% Cash (1 month LIBOR + 7.0%, 1.8% Floor), Due 6/20/23)  3,000   3,000   3,000   1.4%
                     
           5,750   5,750   2.6%
                     
MC Sign Lessor Corp. Advertising & Marketing Services First Lien Debt (9.0% Cash (1 month LIBOR + 7.0%, 1.0% Floor), Due 12/22/22)(9)  327   327   327   0.1%

8

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

June 30, 2018

(unaudited)

Portfolio Company, Country(1), (2), (3), (4) Industry Type of Investment Principal
Amount		  Cost  Fair Value  % of
Net Assets		 
                 
MC Sign Lessor Corp. Advertising & Marketing Services First Lien Debt (9.0% Cash (1 month LIBOR + 7.0%, 1.0% Floor), Due 12/22/22)(10)  $3,925  $ 3,925  $ 3,925   1.8%
                     
           4,252   4,252   1.9%
                     
Nth Degree, Inc. Business Services First Lien Debt (13.5% Cash (1 month LIBOR + 11.5%, 1.0% Floor), 2.0% PIK, Due 12/14/20)  7,272   7,272   7,272   3.3%
                     
Nth Degree, Inc. Business Services Preferred Stock (2,400 Units, 10.0% PIK dividend)(5)      3,086   13,188   6.0%
                     
           10,358   20,460   9.3%
                     
Sequoia Healthcare Management, LLC Healthcare Management First Lien Debt (12.0% Cash, 4.0% PIK, Due 7/17/19)  8,445   8,414   8,445   3.9%
                     
           8,414   8,445   3.9%
                     
Sur La Table, Inc. Retail First Lien Debt (12.0% Cash, Due 7/28/20)  15,000   15,000   15,000   6.8%
                     
           15,000   15,000   6.8%
                     
Taylor Precision Products, Inc. Household Product Manufacturer Series C Preferred Stock (379 shares)      758   758   0.3%
                     
           758   758   0.3%
                     
Vology, Inc. Information Technology Subordinated Debt (15.0% Cash (3 month LIBOR + 14.0%, 1.0% Ceiling), 4.0% PIK Due 6/30/20)  8,544   8,544   8,544   3.9%
                     
           8,544   8,544   3.9%
                     
Western Windows Systems, LLC Building Products First Lien Debt (12.3% Cash, Due 7/31/20)(6)  10,500   10,500   10,500   4.8%
                     
Western Windows Systems, LLC Building Products Membership Units (39,860 units)      3,000   12,769   5.8%
                     
           13,500   23,269   10.6%
                     
Xirgo Technologies, LLC Information Technology Subordinated Debt (11.5% Cash, Due 3/1/22)  15,750   15,750   15,750   7.2%
                     
Xirgo Technologies, LLC Information Technology Membership Units (600,000 units)      600   838   0.4%
                     
           16,350   16,588   7.6%
                     
Sub Total Non-control/non-affiliated investments - United States          224,528   246,899   112.5%
                     
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) (11)  13,230   11,816   6,914   3.2%
                     
           11,816   6,914   3.2%
                     
Sub Total Non-control/non-affiliated investments - Brazil          11,816   6,914   3.2%
                     
Sub Total Non-control/non-affiliated investments         $236,344  $253,813   115.7%

9

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

June 30, 2018

(unaudited)

Portfolio Company, Country(1), (2), (3), (4) Industry Type of Investment Principal
Amount		  Cost  Fair Value  % of
Net Assets		 
                     
Affiliate investments - 54.1%                    
                     
Affiliate investments - United States                    
                     
AAE Acquisition, LLC Industrial Equipment Rental Second Lien Debt (8.0% Cash, 4.0% PIK, Due 8/24/19)(11) $16,165  $16,165  $16,039   7.3%
                     
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%
                     
           16,182   16,039   7.3%
                     
Burgaflex Holdings, LLC Automobile Part Manufacturer First Lien Debt (12.0% Cash, 1.0% PIK, Due 3/23/21)  14,726   14,726   14,453   6.6%
                     
Burgaflex Holdings, LLC Automobile Part Manufacturer Common Stock Class A (1,253,198 shares)      1,504   -   0.0%
                     
Burgaflex Holdings, LLC Automobile Part Manufacturer Common Stock Class B (900,000 shares)      300   -   0.0%
                     
           16,530   14,453   6.6%
                     
City Gear, LLC Footwear Retail Subordinated Debt (13.0% Cash, Due 10/20/19)(11)  8,231   8,231   8,231   3.7%
                     
City Gear, LLC Footwear Retail Preferred Membership Units (2.8% fully diluted, 9.0% Cash Dividend)(5)      1,269   1,269   0.6%
                     
City Gear, LLC Footwear Retail Membership Unit Warrants (11.4% fully diluted)      -   7,407   3.4%
                     
           9,500   16,907   7.7%
                     
GA Communications, Inc. Advertising & Marketing Services Series A-1 Preferred Stock (1,998 shares, 8.0% PIK Dividend)(5)      3,036   3,350   1.5%
                     
GA Communications, Inc. Advertising & Marketing Services Series B-1 Common Stock (200,000 shares)      2   1,442   0.7%
                     
           3,038   4,792   2.2%
                     
J&J Produce Holdings, Inc. Produce Distribution Subordinated Debt (13.0% Cash, Due 6/16/19)(11)  6,406   6,406   6,162   2.8%
                     
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   6,162   2.8%
                     
LJS Partners, LLC QSR Franchisor Common Stock (1,500,000 shares)      896   6,245   2.8%
                     
           896   6,245   2.8%

10

 

 

Capitala Finance Corp.

 

Consolidated Schedule of Investments

(in thousands, except for units/shares)

June 30, 20182019

(unaudited)

Portfolio Company, Country(1), (2), (3), (4) 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 1/31/19)(11)  $2,600  $ 2,600  $ 2,600   1.2%
                     
MMI Holdings, LLC Medical Device Distributor Subordinated Debt (6.0% Cash, Due 1/31/19)(11)  400   388   400   0.2%
                     
MMI Holdings, LLC Medical Device Distributor Preferred Units (1,000 units, 6.0% PIK Dividend)(5)      1,426   1,566   0.7%
                     
MMI Holdings, LLC Medical Device Distributor Common Membership Units (45 units)      -   191   0.1%
                     
           4,414   4,757   2.2%
                     
Sierra Hamilton Holdings Corporation Oil & Gas Engineering and Consulting Services Common Stock (15,068,000 shares)      6,958   8,909   4.1%
                     
           6,958   8,909   4.1%
                     
Source Capital Penray, LLC Automotive Chemicals & Lubricants Membership Units (11.3% ownership)(12)      -   101   0.0%
                     
           -   101   0.0%
                     
US Bath Group, LLC Building Products First Lien Debt (11.0% Cash (1 month LIBOR + 9.0%, 1.0% Floor), Due 1/2/23)  13,375   13,375   13,375   6.1%
                     
US Bath Group, LLC Building Products Membership Units (500,000 units)      500   2,047   0.9%
                     
           13,875   15,422   7.0%
                     
U.S. Well Services, LLC Oil & Gas Services First Lien Debt (8.0% Cash (1 month LIBOR + 6.0%, 1.0% floor), Due 2/2/22)(13)  2,299   2,299   2,299   1.0%
                     
U.S. Well Services, LLC Oil & Gas Services First Lien Debt (11.0% Cash (1 month LIBOR + 9.0%, 1.0% floor), Due 2/2/22)  9,616   9,616   9,616   4.4%
                     
U.S. Well Services, LLC Oil & Gas Services Class A Units (5,680,688 Units)      6,260   11,155   5.1%
                     
U.S. Well Services, LLC Oil & Gas Services Class B Units (2,076,298 Units)      441   772   0.4%
                     
           18,616   23,842   10.9%
                     
V12 Holdings, Inc. Data Processing & Digital Marketing Subordinated Debt(14)      813   1,035   0.5%
                     
           813   1,035   0.5%
                     
Sub Total Affiliate investments - United States        $98,046  $118,664   54.1%
Portfolio Company, Country(1), (2), (3), (4), (5) Industry Type of Investment Principal
Amount		  Cost  Fair Value  % of
Net Assets		 
                 
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  $ 12,941   8.4%
                     
           13,000   12,941   8.4%
                     
CIS Secure Computing, Inc. Government Services First Lien Debt (10.9% Cash (1 month LIBOR + 8.5%, 1.0% Floor), 1.0% PIK, Due 9/14/22)  9,712   9,712   9,712   6.3%
                     
CIS Secure Computing, Inc. Government Services Common Stock (46,163 shares)      1,000   1,721   1.1%
                     
           10,712   11,433   7.4%
                     
Corporate Visions, Inc. Sales & Marketing Services Subordinated Debt (9.0% Cash, 2.0% PIK, Due 11/29/21)  19,132   19,132   18,919   12.3%
                     
Corporate Visions, Inc. Sales & Marketing Services Common Stock (15,750 shares)      1,575   358   0.2%
                     
           20,707   19,277   12.5%
                     
Currency Capital, LLC Financial Services First Lien Debt (14.4% Cash (1 month LIBOR + 12.0%, 0.5% Floor), 2.0% PIK, Due 1/2/20)(9)  16,530   16,530   16,530   10.7%
                     
Currency Capital, LLC Financial Services Class A Preferred Units (2,000,000 units)(9)      2,000   1,791   1.3%
                     
           18,530   18,321   12.0%
                     
Flavors Holdings, Inc. Food Product Manufacturer First Lien Debt (8.1% Cash (3 month LIBOR + 5.8%, 1.0% Floor), Due 4/3/20)  5,789   5,755   5,643   3.7%
                     
Flavors Holdings, Inc. Food Product Manufacturer Second Lien Debt (12.3% Cash (3 month LIBOR + 10.0%, 1.0% Floor), Due 10/3/21)  12,000   11,843   11,307   7.3%
                     
           17,598   16,950   11.0%
                     
Freedom Electronics, LLC Electronic Machine Repair First Lien Debt (9.1% Cash, Due 12/20/23)(7)(10)  5,970   5,970   5,970   3.9%
                     
Freedom Electronics, LLC Electronic Machine Repair Membership Units (181,818 units)      182   167   0.1%
                     
           6,152   6,137   4.0%
                     
Installs, LLC Logistics First Lien Debt (9.4% Cash (1 month LIBOR + 7.0%, 1.8% Floor), Due 6/20/23)  2,977   2,977   2,977   1.9%
                     
           2,977   2,977   1.9%
                     
Jurassic Quest Holdings, LLC Entertainment First Lien Debt (9.9% Cash (1 month LIBOR + 7.5%, 2.0% Floor), Due 5/1/24)(10)  10,570   10,570   10,570   6.9%
                     
Jurassic Quest Holdings, LLC Entertainment Preferred Units (375,000 units, 8.0% PIK)(6)      380   380   0.2%
                     
           10,950   10,950   7.1%

 

118

 

 

Capitala Finance Corp.

 

Consolidated Schedule of Investments

(in thousands, except for units/shares)

June 30, 20182019

(unaudited)

 

Portfolio Company, Country(1), (2), (3), (4) Industry Type of Investment Principal
Amount		  Cost  Fair Value  % of
Net Assets		 
                     
Control investments - 50.5%                    
                     
Control investments - United States                    
                     
CableOrganizer Acquisition, LLC Computer Supply Retail First Lien Debt (10.0% Cash, Due 6/30/19)(15) $1,708  $1,708  $1,708   0.8%
                     
CableOrganizer Acquisition, LLC Computer Supply Retail First Lien Debt (12.0% Cash, 4.0% PIK, Due 6/30/19)(11)  8,709   8,709   8,709   3.9%
                     
CableOrganizer Acquisition, LLC Computer Supply Retail Preferred Units (4,000,000 units)      2,354   2,354   1.1%
                     
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%
                     
           14,165   12,771   5.8%
                     
Eastport Holdings, LLC Business Services Subordinated Debt (15.3% Cash (3 month LIBOR + 13.0%, 0.5% Floor), Due 4/29/20)  16,500   15,115   16,500   7.5%
                     
Eastport Holdings, LLC Business Services Membership Units (33.3% ownership)(16)      4,733   26,449   12.1%
                     
           19,848   42,949   19.6%
                     
Kelle's Transport Service, LLC Transportation First Lien Debt (4.0% Cash, Due 2/15/20)(17)  3,300   3,300   3,300   1.5%
                     
Kelle's Transport Service, LLC Transportation First Lien Debt (2.2% Cash, Due 2/15/20)(11)  13,674   13,668   10,000   4.6%
                     
Kelle's Transport Service, LLC Transportation Membership Units (27.5% fully diluted)      -   -   0.0%
                     
           16,968   13,300   6.1%
                     
Micro Precision, LLC Conglomerate Subordinated Debt (10.0% Cash, Due 9/15/18)(11)  1,862   1,862   1,862   0.9%
                     
Micro Precision, LLC Conglomerate Subordinated Debt (14.0% Cash, 4.0% PIK, Due 9/15/18)(11)  4,238   4,238   4,238   1.9%
                     
Micro Precision, LLC Conglomerate Series A Preferred Units (47 units)      1,629   1,629   0.7%
                     
           7,729   7,729   3.5%
                     
Navis Holdings, Inc. Textile Equipment Manufacturer First Lien Debt (15.0% Cash, Due 10/30/20)(11)  7,500   7,500   7,500   3.4%
                     
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  5,309  2.4%
                     
           8,501   13,809   6.3%
Portfolio Company, Country(1), (2), (3), (4), (5) Industry Type of Investment Principal
Amount		  Cost  Fair Value  % of
Net Assets		 
                 
MC Sign Lessor Corp. Advertising & Marketing Services First Lien Debt (9.4% Cash (1 month LIBOR + 7.0%, 1.0% Floor), Due 12/22/22)  $490  $ 490  $ 490   0.3%
                     
MC Sign Lessor Corp. Advertising & Marketing Services First Lien Debt (9.4% Cash (1 month LIBOR + 7.0%, 1.0% Floor), Due 12/22/22)  4,168   4,168   4,168   2.7%
                     
           4,658   4,658   3.0%
                     
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)(11)  7,272   7,272   7,272   4.7%
                     
Nth Degree, Inc. Business Services Preferred Stock (2,400 Units, 10.0% PIK dividend)(6)      3,406   20,667   13.4%
                     
           10,678   27,939   18.1%
                     
Seitel, Inc. Data Services First Lien Debt (10.7% Cash (3 month LIBOR + 8.3%, 1.0% Floor), Due 3/15/23)  4,938   4,938   4,938   3.2%
                     
           4,938   4,938   3.2%
                     
Sequoia Healthcare Management, LLC Healthcare Management First Lien Debt (12.9% Cash (1 month LIBOR + 10.5%, 1.8% Floor), Due 8/21/23)  13,277   13,277   13,261   8.6%
                     
           13,277   13,261   8.6%
                     
Sunset Digital Holdings, LLC Telecommunications First Lien Debt (9.7% Cash (1 month LIBOR + 7.3%, 1.5% Floor), Due 8/2/19)  18,000   18,000   18,000   11.7%
                     
           18,000   18,000   11.7%
                     
Sur La Table, Inc. Retail First Lien Debt (11.4% Cash (3 month LIBOR + 9.0%, 1.0% Floor), Due 7/31/22)(11)  10,500   10,500   10,500   6.8%
                     
           10,500   10,500   6.8%
                     
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 (9.8% Cash, Due 12/14/23)(7)(10)  6,965   6,965   6,965   4.5%
                     
U.S. BioTek Laboratories, LLC Testing laboratories Class A Preferred Units (500 Units, 10.0% PIK)(6)      527   527   0.3%
                     
U.S. BioTek Laboratories, LLC Testing laboratories Class C Units (500 Units)      1   -   0.0%
                     
           7,493   7,492   4.8%

 

129

 

 

Capitala Finance Corp.

 

Consolidated Schedule of Investments

(in thousands, except for units/shares)

June 30, 20182019

(unaudited)

 

Portfolio Company, Country(1), (2), (3), (4) Industry Type of Investment Principal
Amount		  Cost  Fair Value  % of
Net Assets		 
                 
On-Site Fuel Services, Inc. Fuel Transportation Services First Lien Debt (18.0% Cash, Due 12/19/18)(7) (11) $15,525  $11,020  $12,134   5.5%
                     
On-Site Fuel Services, Inc. Fuel Transportation Services Series A Preferred Stock (32,782 shares)      3,278   -   0.0%
                     
On-Site Fuel Services, Inc. Fuel Transportation Services Series B Preferred Stock (23,648 shares)      2,365   -   0.0%
                     
On-Site Fuel Services, Inc. Fuel Transportation Services Common Stock (33,058 shares)      33   -   0.0%
                     
           16,696   12,134   5.5%
                     
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)  1,500   1,500   1,500   0.7%
                     
Portrait Studio, LLC Professional and Personal Digital Imaging First Lien Debt (9.0% Cash (1 month LIBOR + 7.0%, 1.0% floor, 5.0% ceiling), Due 12/31/22)  4,500   4,500   4,500   2.1%
                     
Portrait Studio, LLC Professional and Personal Digital Imaging Preferred Units (4,350,000 Units)      2,450   2,092   0.9%
                     
Portrait Studio, LLC Professional and Personal Digital Imaging Membership Units (150,000 Units)      -   -   0.0%
                     
           8,450   8,092   3.7%
                     
Sub Total Control investments - United States         $92,357  $110,784   50.5%
                     
TOTAL INVESTMENTS - 220.3%         $426,747  $483,261   220.3%
                     
Derivatives - (3.1)%                    
                     
Derivatives - United States                    
                     
Eastport Holdings, LLC Business Services Written Call Option(16)     $(20) $(6,815)  (3.1%)
                     
Sub Total Derivatives - United States         $(20) $(6,815)  (3.1%)
                     
TOTAL DERIVATIVES - (3.1)%         $(20) $(6,815)  (3.1%)

(1) All investments valued using unobservable inputs (Level 3).

(2) All investments valued by the Board of 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 $219,317 as of June 30, 2018.

(5) The equity investment is income producing, based on rate disclosed.

(6) The cash rate equals the approximate current yield on our last-out portion of the unitranche facility.

(7) Non-accrual investment.

(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 June 30, 2018, 4.9% of the Company's total assets were non-qualifying assets.

(9) The investment has a $0.2 million unfunded commitment.

(10) The investment has a $0.6 million unfunded commitment.

(11) The maturity date of the original investment has been extended.

(12) The investment has been exited. The residual value reflects estimated escrow to be settled post-closing.

(13) The investment has a $0.7 million unfunded commitment.

(14) The investment has been exited. The residual value reflects estimated escrow and earnout to be settled post-closing.

(15) The investment has a $0.3 million unfunded commitment.

(16) The Company has written a call option that enables CapitalSouth Partners Florida Sidecar Fund II, L.P. to purchase up to 31.25% of the Company's interest at a strike price of $1.5 million. As of June 30, 2018, the fair value of the written call option is approximately $6.8 million. See Note 4 to the consolidated financial statements for further detail on the written call option transaction.

(17) The investment has a $1.4 million unfunded commitment.

(18) The investment has a $3.8 million unfunded commitment.

See accompanying notes to consolidated financial statements.

Portfolio Company, Country(1), (2), (3), (4), (5) 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)(9)(12)      $ 771  $ 371   0.2%
                     
U.S. Well Services, Inc. Oil & Gas Services Class B Common Stock (1,125,426 shares)(9)(12)      6,701   5,425   3.5%
                     
           7,472   5,796   3.7%
                     
Vology, Inc. Information Technology Subordinated Debt (15.0% Cash (1 month LIBOR + 14.0%, 1.0% Ceiling), 4.0% PIK, Due 6/30/20) $ 8,897   8,897   8,640   5.6%
                     
           8,897   8,640   5.6%
                     
Xirgo Technologies, LLC Information Technology Membership Units (600,000 units)      600   911   0.6%
                     
           600   911   0.6%
                     
Sub Total Non-control/non-affiliated investments - United States     $260,927  $270,677   175.9%
                     
Affiliate Investments - 58.2%                
                     
Affiliate investments - United States                
                     
Burgaflex Holdings, LLC Automobile Part Manufacturer First Lien Debt (12.0% Cash, 3.0% PIK, Due 3/23/21) $14,699  $14,699  $14,571   9.5%
                     
Burgaflex Holdings, LLC Automobile Part Manufacturer Common Stock Class A (1,253,198 shares)      1,504   -   0.0%
                     
Burgaflex Holdings, LLC Automobile Part Manufacturer Common Stock Class B (1,085,070 shares)      362   -   0.0%
                     
           16,565   14,571   9.5%
                     
City Gear, LLC Footwear Retail Membership Unit Warrants (11.4% fully diluted)(13)      -   3,184   2.1%
                     
           -   3,184   2.1%
                     
Eastport Holdings, LLC Business Services Subordinated Debt (15.5% Cash (3 month LIBOR + 13.0%, 0.5% Floor), Due 4/29/20)  16,500   15,872   16,500   10.7%
                     
Eastport Holdings, LLC Business Services Membership Units (22.9% ownership)      3,263   15,533   10.1%
                     
           19,135   32,033   20.8%
                     
GA Communications, Inc. Advertising & Marketing Services Series A-1 Preferred Stock (1,998 shares, 8.0% PIK Dividend)(6)      3,323   3,618   2.4%
                     
GA Communications, Inc. Advertising & Marketing Services Series B-1 Common Stock (200,000 shares)      2   659   0.4%
                     
           3,325   4,277   2.8%

 

1310

 

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

December 31, 2017

Portfolio Company, Country(1), (2), (3), (4) Industry Type of Investment Principal
Amount		  Cost  Fair Value  % of
Net Assets		 
                 
Non-control/non-affiliated investments - 130.0%                    
                     
Non-control/non-affiliated investments - United States                    
                     
3 Bridge Solutions, LLC IT Consulting First Lien Debt (10.38% Cash (1 month LIBOR + 9.0%, 1% Floor), Due 12/4/22) $11,250  $11,250  $11,250   5.1%
                     
3 Bridge Solutions, LLC IT Consulting Preferred Units (965,250 units, 8% PIK)(5)      971   971   0.4%
                     
3 Bridge Solutions, LLC IT Consulting Membership Units (39,000 units)      10   10   0.0%
                     
           12,231   12,231   5.5%
                     
Alternative Biomedical Solutions, LLC Healthcare First Lien Debt (11.74% Cash, Due 12/18/22)(6)  13,000   13,000   13,000   5.9%
                     
Alternative Biomedical Solutions, LLC Healthcare Membership Units (20,092 units)      800   800   0.4%
                     
           13,800   13,800   6.3%
                     
American Clinical Solutions, LLC Healthcare First Lien Debt (10.5% Cash, 1% PIK, Due 6/11/20)  9,068   9,068   7,568   3.4%
                     
           9,068   7,568   3.4%
                     
American Exteriors, LLC Replacement Window Manufacturer First Lien Debt (10% PIK, Due 1/1/19)(7)(8)  8,287   5,679   1,880   0.8%
                     
American Exteriors, LLC Replacement Window Manufacturer Common Stock Warrants (10% fully diluted)      -   -   0.0%
                     
           5,679   1,880   0.8%
                     
AmeriMark Direct, LLC Consumer Products First Lien Debt (12.75% Cash, Due 9/8/21)  19,100   18,713   19,100   8.6%
                     
           18,713   19,100   8.6%
                     
B&W Quality Growers, LLC Farming Membership Unit Warrants (91,739 Units)      -   5,581   2.5%
                     
           -   5,581   2.5%
                     
BigMouth, Inc. Consumer Products First Lien Debt (13.3% Cash, Due 11/14/21)(6)  9,790   9,790   9,790   4.4%
                     
BigMouth, Inc. Consumer Products Series A Preferred Stock (350,000 shares, 8% PIK)(5)      382   722   0.3%
                     
           10,172   10,512   4.7%

14

 

Capitala Finance Corp.

 

Consolidated Schedule of Investments

(in thousands, except for units/shares)

December 31, 2017June 30, 2019

(unaudited)

 

Portfolio Company, Country(1), (2), (3), (4) Industry Type of Investment Principal
Amount		  Cost  Fair Value  % of
Net Assets		 
                 
Bluestem Brands, Inc. Online Merchandise Retailer First Lien Debt (9.07% Cash (1 month LIBOR + 7.5%, 1% Floor), Due 11/7/20) $4,029  $3,965  $3,755  1.7%
                     
           3,965   3,755   1.7%
                     
Brunswick Bowling Products, Inc. Bowling Products First Lien Debt (8% Cash (1 month LIBOR + 6%, 2% Floor), Due 5/22/20)  1,600   1,600   1,600   0.7%
                     
Brunswick Bowling Products, Inc. Bowling Products First Lien Debt (16.25% Cash (1 month LIBOR + 14.25%, 2% Floor), Due 5/22/20)  5,586   5,586   5,586   2.5%
                     
           7,186   7,186   3.2%
                     
Burke America Parts Group, LLC Home Repair Parts Manufacturer Membership Units (14 units)      5   2,767   1.2%
                     
           5   2,767   1.2%
                     
California Pizza Kitchen, Inc. Restaurant Second Lien Debt (11.57% Cash (1 month LIBOR + 10%, 1% Floor), Due 8/23/23)  5,000   4,880   4,880   2.2%
                     
           4,880   4,880   2.2%
                     
Caregiver Services, Inc. In-Home Healthcare Services Common Stock (293,186 shares)      258   54   0.0%
                     
Caregiver Services, Inc. In-Home Healthcare Services Common Stock Warrants (655,908 units)(9)      264   120   0.1%
                     
           522   174   0.1%
                     
Cedar Electronics Holding Corp. Consumer Electronics Subordinated Debt (12% Cash, Due 12/26/20)(7)  21,550   21,550   3,498   1.6%
                     
           21,550   3,498   1.6%
                     
CIS Secure Computing, Inc. Government Services First Lien Debt (9.88% Cash (1 month LIBOR + 8.5%, 1% Floor), 1% PIK, Due 9/14/22)(10)  9,116   9,116   9,116   4.1%
                     
CIS Secure Computing, Inc. Government Services Common Stock (46,163 shares)      1,000   1,204   0.5%
                     
           10,116   10,320   4.6%
                     
Corporate Visions, Inc. Sales & Marketing Services Subordinated Debt (9% Cash, 2% PIK, Due 11/29/21)  18,159   18,159   16,995   7.7%
                     
Corporate Visions, Inc. Sales & Marketing Services Common Stock (15,750 shares)      1,575   393   0.2%
                     
           19,734   17,388   7.9%
                     
Currency Capital, LLC Financial Services First Lien Debt (12.38% Cash (1 month LIBOR + 11%, 0.50% Floor) Due 1/20/22)(11)  17,000   17,000   17,000   7.7%
                     
Currency Capital, LLC Financial Services Class A Preferred Units (2,000,000 units)(11)     2,000  1,905  0.9%
                     
           19,000   18,905   8.6%
Portfolio Company, Country(1), (2), (3), (4), (5) Industry Type of Investment Principal
Amount		  Cost  Fair Value  % of
Net Assets		 
                     
LJS Partners, LLC QSR Franchisor Common Stock (1,852,824 shares)     $ 1,268  $ 2,039   1.3%
                     
           1,268   2,039   1.3%
                     
MMI Holdings, LLC Medical Device Distributor First Lien Debt (12.0% Cash, Due 1/31/20)(11) $2,600   2,600   2,600   1.7%
                     
MMI Holdings, LLC Medical Device Distributor Subordinated Debt (6.0% Cash, Due 1/31/20)(11)  400   388   400   0.3%
                     
MMI Holdings, LLC Medical Device Distributor Preferred Units (1,000 units, 6.0% PIK Dividend)(6)      1,522   1,660   1.1%
                     
MMI Holdings, LLC Medical Device Distributor Common Membership Units (45 units)      -   205   0.1%
                     
           4,510   4,865   3.2%
                     
Navis Holdings, Inc. Textile Equipment Manufacturer First Lien Debt (11.0% Cash, Due 6/30/23)(11)  10,100   10,100   10,100   6.6%
                     
Navis Holdings, Inc. Textile Equipment Manufacturer Class A Preferred Stock (1,000 shares, 10.0% Cash Dividend)(6)      1,000   1,000   0.6%
                     
Navis Holdings, Inc. Textile Equipment Manufacturer Common Stock (60,000 shares)      -   345   0.2%
                     
           11,100   11,445   7.4%
                     
RAM Payment, LLC Financial Services First Lien Debt (10.8% Cash, Due 1/4/24)(7)  9,375   9,375   9,375   6.1%
                     
RAM Payment, LLC Financial Services Preferred Units (86,000 units, 8.0% PIK)(6)      894   1,285   0.8%
                     
           10,269   10,660   6.9%
                     
Sierra Hamilton Holdings Corporation Oil & Gas Engineering and Consulting Services Common Stock (15,068,000 shares)      6,958   5,689   3.7%
                     
           6,958   5,689   3.7%
                     
V12 Holdings, Inc. Data Processing & Digital Marketing Subordinated Debt(14)  -   673   742   0.5%
                     
           673   742   0.5%
                     
Sub Total Affiliate investments - United States     $73,803  $89,505   58.2%

 

11

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

June 30, 2019

(unaudited)

Portfolio Company, Country(1), (2), (3), (4), (5) Industry Type of Investment Principal
Amount		  Cost  Fair Value  % of
Net Assets		 
                 
Control Investments - 20.1%                  
                     
Control investments - United States                  
                     
CableOrganizer Acquisition, LLC Computer Supply Retail First Lien Debt (8.0% Cash, Due 6/30/21)(11) $1,000  $1,000  $1,000   0.7%
                     
CableOrganizer Acquisition, LLC Computer Supply Retail First Lien Debt (8.0% Cash, Due 6/30/21)(11)  3,689   3,689   3,689   2.4%
                     
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%
                     
           13,810   4,689   3.1%
                     
Capitala Senior Loan Fund II, LLC Investment Funds Membership Units (80.0% ownership)(9)(15)      13,600   13,763   8.9%
                     
           13,600   13,763   8.9%
                     
Micro Precision, LLC Conglomerate Subordinated Debt (10.0% Cash, Due 3/31/20)(11)  1,862   1,862   1,862   1.2%
                     
Micro Precision, LLC Conglomerate Subordinated Debt (14.0% Cash, 4.0% PIK, Due 3/31/20)(11)  4,413   4,413   4,413   2.9%
                     
Micro Precision, LLC Conglomerate Series A Preferred Units (47 units)      1,629   2,898   1.9%
                     
           7,904   9,173   6.0%
                     
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)(16)  1,080   1,080   1,080   0.7%
                     
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)(8)  4,500   4,428   2,172   1.4%
                     
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%
                     
           7,958   3,252   2.1%
                     
Sub Total Control investments - United States     $43,272  $30,877   20.1%
                     
TOTAL INVESTMENTS - 254.2%     $378,002  $391,059   254.2%

15(1)All investments valued using unobservable inputs (Level 3), unless otherwise noted.
(2)All investments valued by the Board of 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 $153,863 as of June 30, 2019.
(5)Capitala Finance Corp. 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 Security Act.
(6)The equity investment is income producing, based on rate disclosed.
(7)The cash rate equals the approximate current yield on our last-out portion of the unitranche facility.

12

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

June 30, 2019

(unaudited)

(8)Non-accrual investment.
(9)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 June 30, 2019, 8.7% of the Company's total assets were non-qualifying assets.
(10)The investment has a $1.0 million unfunded commitment.
(11)The maturity date of the original investment has been extended.
(12)Investment is valued using observable inputs (Level 1). The stock of the company is traded on the NASDAQ Capital Market under the ticker "USWS."
(13)The investment has been exited. The residual value reflects estimated earnout to be settled post-closing.
(14)The investment has been exited. The residual value reflects estimated escrow and earnout to be settled post-closing.
(15)The investment has a $6.4 million unfunded commitment.
(16)The investment has a $3.9 million unfunded commitment.

See accompanying notes to consolidated financial statements.

13

 

 

Capitala Finance Corp.

 

Consolidated Schedule of Investments

(in thousands, except for units/shares)

December 31, 20172018

 

Portfolio Company, Country(1), (2), (3), (4) Industry Type of Investment Principal
Amount		  Cost  Fair Value  % of
Net Assets		 
                 
Flavors Holdings, Inc. Food Product Manufacturer First Lien Debt (7.44% Cash (3 month LIBOR + 5.75%, 1% Floor), Due 4/3/20) $6,700  $6,589  $5,911   2.7%
                     
Flavors Holdings, Inc. Food Product Manufacturer Second Lien Debt (11.69% Cash (3 month LIBOR + 10%, 1% Floor), Due 10/3/21)  12,000   11,740   10,311   4.6%
                     
           18,329   16,222   7.3%
                     
Nth Degree, Inc. Business Services First Lien Debt (8.38% Cash (1 month LIBOR + 7%, 1% Floor), 1% PIK, Due 12/14/20)  8,833   8,833   8,833   4.0%
                     
Nth Degree, Inc. Business Services First Lien Debt (12.88% Cash (1 month LIBOR + 11.5%, 1% Floor), 2% PIK, Due 12/14/20)  7,200   7,200   7,200   3.2%
                     
Nth Degree, Inc. Business Services Preferred Stock (2,400 Units, 10% PIK dividend)(5)      2,938   11,140   5.0%
                     
           18,971   27,173   12.2%
                     
Sequoia Healthcare Management, LLC Healthcare Management First Lien Debt (12% Cash, 4% PIK, Due 7/17/19)  9,014   8,964   9,014   4.1%
                     
           8,964   9,014   4.1%
                     
Spectra Services Holdings, LLC Refrigeration / HVAC services First Lien Debt (10% Cash, 4% PIK, Due 12/27/22)  7,450   7,450   7,450   3.4%
                     
Spectra Services Holdings, LLC Refrigeration / HVAC services Class A Units (1,283,824 units, 4% Cash dividend, 11% PIK dividend)(5)      1,286   1,286   0.6%
                     
Spectra Services Holdings, LLC Refrigeration / HVAC services Class B Units (257 units)      -   -   0.0%
                     
           8,736   8,736   4.0%
                     
Sur La Table, Inc. Retail First Lien Debt (12% Cash, Due 7/28/20)  15,000   15,000   15,000   6.8%
                     
           15,000   15,000   6.8%
                     
Taylor Precision Products, Inc. Household Product Manufacturer Series C Preferred Stock (379 shares)      758   1,316   0.6%
                     
           758   1,316   0.6%
                     
Vintage Stock, Inc. Specialty Retail First Lien Debt (13.86% Cash (1 month LIBOR + 12.5%, 0.5% floor), 3% PIK, Due 11/3/21)  20,713   20,713   20,713   9.3%
                     
         20,713  20,713  9.3%
Portfolio Company, 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%                 
                     
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%
                     
3 Bridge Solutions, LLC IT Consulting Preferred Units (965 units, 8.0% PIK)(5)      1,049   1,049   0.6%
                     
3 Bridge Solutions, LLC IT Consulting Membership Units (39,000 units)      10   230   0.1%
                     
           15,013   15,233   8.0%
                     
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%
                     
Alternative Biomedical Solutions, LLC Healthcare First Lien Debt (12.4% Cash, Due 12/18/22)(6)  13,000   13,000   10,370   5.4%
                     
Alternative Biomedical Solutions, LLC Healthcare Membership Units (20,092 units)      800   -   0.0%
                     
           13,918   10,488   5.5%
                     
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%
                     
           8,918   6,484   3.4%
                     
AmeriMark Direct, LLC Consumer Products First Lien Debt (12.8% Cash, Due 9/8/21)  18,300   18,029   18,300   9.6%
                     
           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%
                     
BigMouth, Inc. Consumer Products First Lien Debt (14.3% Cash, Due 11/14/21)(6)  9,094   9,094   9,094   4.8%
                     
BigMouth, Inc. Consumer Products Series A Preferred Stock (350,000 shares, 8.0% PIK)(5)      411   352   0.2%
                     
           9,505   9,446   5.0%
                     
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%
                     
           3,762   3,499   1.8%
                     
Burke America Parts Group, LLC Home Repair Parts Manufacturer Membership Units (14 units)      5   1,722   0.9%
                     
           5   1,722   0.9%

 

16

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

December 31, 2017

Portfolio Company, Country(1), (2), (3), (4) Industry Type of Investment Principal
Amount		  Cost  Fair Value  % of
Net Assets		 
                 
Vology, Inc. Information Technology Subordinated Debt (15% Cash (3 month LIBOR + 14%, 1% Ceiling), 4% PIK Due 6/30/20) $8,374  $8,374  $8,374   3.8%
                     
           8,374   8,374   3.8%
                     
Western Windows Systems, LLC Building Products First Lien Debt (11.9% Cash, Due 7/31/20)(6)  10,500   10,500   10,500   4.7%
                     
Western Windows Systems, LLC Building Products Membership Units (39,860 units)      3,000   7,379   3.3%
                     
           13,500   17,879   8.0%
                     
Xirgo Technologies, LLC Information Technology Subordinated Debt (11.5% Cash, Due 3/1/22)  15,750   15,750   15,750   7.1%
                     
Xirgo Technologies, LLC Information Technology Membership Units (600,000 units)      600   637   0.3%
                     
           16,350   16,387   7.4%
                     
Sub Total Non-control/non-affiliated investments - United States          286,316   280,359   126.4%
                     
Non-control/non-affiliated investments - Brazil                    
                     
Velum Global Credit Management, LLC Financial Services First Lien Debt (15% PIK, Due 12/31/17)(7) (8) (11) (12)  12,275   11,816   8,015   3.6%
                     
           11,816   8,015   3.6%
                     
Sub Total Non-control/non-affiliated investments - Brazil          11,816   8,015   3.6%
                     
Sub Total Non-control/non-affiliated investments         $298,132  $288,374   130.0%
                     
Affiliate investments - 46.8%                    
                     
Affiliate investments - United States                    
                     
AAE Acquisition, LLC Industrial Equipment Rental Second Lien Debt (8% Cash, 4% PIK, Due 8/24/19)(8) $15,846  $15,846  $15,603   7.0%
                     
AAE Acquisition, LLC Industrial Equipment Rental Membership Units (2.19% fully diluted)      17   -   0.0%
                     
AAE Acquisition, LLC Industrial Equipment Rental Warrants (37.78% fully diluted)      -   -   0.0%
                     
           15,863   15,603   7.0%

17

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

December 31, 2017

Portfolio Company, Country(1), (2), (3), (4) Industry Type of Investment Principal
Amount		  Cost  Fair Value  % of
Net Assets		 
                 
Burgaflex Holdings, LLC Automobile Part Manufacturer Subordinated Debt (14% Cash, Due 8/9/19)(13) $3,000  $3,000  $3,000   1.4%
                     
Burgaflex Holdings, LLC Automobile Part Manufacturer Subordinated Debt (12% Cash, Due 8/9/19)(13)  5,828   5,828   5,828   2.6%
                     
Burgaflex Holdings, LLC Automobile Part Manufacturer Common Stock (1,253,198 shares)      1,504   457   0.2%
                     
           10,332   9,285   4.2%
                     
City Gear, LLC Footwear Retail Subordinated Debt (13% Cash, Due 10/20/19)(8)  8,231   8,231   8,231   3.7%
                     
City Gear, LLC Footwear Retail Preferred Membership Units (2.78% fully diluted, 9% Cash Dividend)(5)      1,269   1,269   0.6%
                     
City Gear, LLC Footwear Retail Membership Unit Warrants (11.38% fully diluted)      -   8,248   3.7%
                     
           9,500   17,748   8.0%
                     
GA Communications, Inc. Advertising & Marketing Services Series A-1 Preferred Stock (1,998 shares, 8% PIK Dividend)(5)      2,902   3,225   1.5%
                     
GA Communications, Inc. Advertising & Marketing Services Series B-1 Common Stock (200,000 shares)      2   1,932   0.9%
                     
           2,904   5,157   2.4%
                     
J&J Produce Holdings, Inc. Produce Distribution Subordinated Debt (6% Cash, 7% PIK, Due 6/16/19)(8)  6,368   6,368   6,170   2.8%
                     
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%
                     
           7,186   6,170   2.8%
                     
LJS Partners, LLC QSR Franchisor Common Stock (1,500,000 shares)      896   7,650   3.4%
                     
           896   7,650   3.4%
                     
MMI Holdings, LLC Medical Device Distributor First Lien Debt (12% Cash, Due 1/31/19)(8)  2,600   2,600   2,600   1.2%
                     
MMI Holdings, LLC Medical Device Distributor Subordinated Debt (6% Cash, Due 1/31/19)(8)  400   388   400   0.2%
                     
MMI Holdings, LLC Medical Device Distributor Preferred Units (1,000 units, 6% PIK dividend)(5)      1,381   1,520   0.7%
                     
MMI Holdings, LLC Medical Device Distributor Common Membership Units (45 units)      -   193   0.1%
                 
         4,369  4,713  2.2%
                     
MTI Holdings, LLC Retail Display & Security Services Membership Units (2,000,000 units)(14)      -   100   0.0%
                     
           -   100   0.0%
                     
Sierra Hamilton Holdings Corporation Oil & Gas Engineering and Consulting Services Common Stock (15,068,000 shares)      6,958   8,528   3.8%
                     
           6,958   8,528   3.8%
                     
Source Capital Penray, LLC Automotive Chemicals & Lubricants Membership Units (11.3% ownership)(14)      -   101   0.0%
                     
           -   101   0.0%
                     
STX Healthcare Management Services, Inc. Dental Practice Management Common Stock (1,200,000 shares)(14)      -   93   0.0%
                     
           -   93   0.0%

18

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

December 31, 2017

Portfolio Company, Country(1), (2), (3), (4) Industry Type of Investment Principal
Amount		  Cost  Fair Value  % of
Net Assets		 
                 
U.S. Well Services, LLC Oil & Gas Services First Lien Debt (7.35% Cash (1 month LIBOR + 6%, 1% floor), Due 2/2/22)(15) $2,299  $2,299  $2,299  1.0%
                     
U.S. Well Services, LLC Oil & Gas Services First Lien Debt (12.35% PIK (1 month LIBOR + 11%, 1% floor), Due 2/2/22)  9,516   9,516   9,516   4.3%
                     
U.S. Well Services, LLC Oil & Gas Services Class A Units (5,680,688 Units)      6,259   15,004   6.8%
                     
U.S. Well Services, LLC Oil & Gas Services Class B Units (2,076,298 Units)      441   955   0.4%
                     
           18,515   27,774   12.5%
                     
V12 Holdings, Inc. Data Processing & Digital Marketing Subordinated Debt(19)      813   1,035   0.5%
                     
           813   1,035   0.5%
                     
Sub Total Affiliate investments - United States         $77,336  $103,957   46.8%
                     
Control investments - 48.5%                    
                     
Control investments - United States                    
                     
CableOrganizer Acquisition, LLC Computer Supply Retail First Lien Debt (12% Cash, 4% PIK, Due 5/24/18) $12,373   12,373   12,373   5.6%
                     
CableOrganizer Acquisition, LLC Computer Supply Retail Common Stock (21.3% fully diluted)      1,394   118   0.1%
                     
CableOrganizer Acquisition, LLC Computer Supply Retail Common Stock Warrants (10% fully diluted )    -  60  0.0%
                     
           13,767   12,551   5.7%

1914

 

 

Capitala Finance Corp.

 

Consolidated Schedule of Investments

(in thousands, except for units/shares)

December 31, 20172018

 

Portfolio Company, Country(1), (2), (3), (4) Industry Type of Investment Principal
Amount		  Cost  Fair Value  % of
Net Assets		 
                 
Eastport Holdings, LLC Business Services Subordinated Debt (14.49% Cash (3 month LIBOR + 13%, 0.5% Floor), Due 4/29/20) $ 16,500  $ 14,738  $ 16,500  7.4%
                     
Eastport Holdings, LLC Business Services Membership Units (33.3% ownership)(16)      4,733   26,449   11.9%
                     
           19,471   42,949   19.3%
                     
Kelle's Transport Service, LLC Transportation First Lien Debt (4% Cash, Due 2/15/20)(17)  2,000   2,000   2,000   0.9%
                     
Kelle's Transport Service, LLC Transportation First Lien Debt (1.46% Cash, Due 2/15/20)(8)  13,674   13,669   9,560   4.3%
                     
Kelle's Transport Service, LLC Transportation Membership Units (27.5% fully diluted)      -   -   0.0%
                     
           15,669   11,560   5.2%
                     
Micro Precision, LLC Conglomerate Subordinated Debt (10% Cash, Due 9/15/18)(8)  1,862   1,862   1,862   0.8%
                     
Micro Precision, LLC Conglomerate Subordinated Debt (14% Cash, 4% PIK, Due 9/15/18)(8)  4,154   4,154   4,154   1.9%
                     
Micro Precision, LLC Conglomerate Series A Preferred Units (47 units)      1,629   1,629   0.7%
                     
           7,645   7,645   3.4%
                     
Navis Holdings, Inc. Textile Equipment Manufacturer First Lien Debt (15% Cash, Due 10/30/20)(8)  6,500   6,500   6,500   2.9%
                     
Navis Holdings, Inc. Textile Equipment Manufacturer Class A Preferred Stock (1,000 shares, 10% Cash Dividend)(5)      1,000   1,000   0.5%
                     
Navis Holdings, Inc. Textile Equipment Manufacturer Common Stock (300,000 shares)      1   5,005   2.3%
                     
           7,501   12,505   5.7%
                     
On-Site Fuel Services, Inc. Fuel Transportation Services Subordinated Debt (18% Cash, Due 12/19/18)(7) (8)  14,072   11,020   11,588   5.2%
                     
On-Site Fuel Services, Inc. Fuel Transportation Services Series A Preferred Stock (32,782 shares)      3,278   -   0.0%
                     
On-Site Fuel Services, Inc. Fuel Transportation Services Series B Preferred Stock (23,648 shares)      2,365   -   0.0%
                     
On-Site Fuel Services, Inc. Fuel Transportation Services Common Stock (33,058 shares)      33   -   0.0%
                     
          16,696  11,588  5.2%
Portfolio Company, Country(1), (2), (3), (4), (19) 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%
                     
           4,903   4,903   2.6%
                     
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%
                     
           958   -   0.0%
                     
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%
                     
           13,000   13,000   6.8%
                     
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%
                     
CIS Secure Computing, Inc. Government Services Common Stock (46,163 shares)      1,000   1,681   0.9%
                     
           11,428   12,109   6.4%
                     
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%
                     
Corporate Visions, Inc. Sales & Marketing Services Common Stock (15,750 shares)      1,575   817   0.4%
                     
           20,515   19,496   10.2%
                     
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%
                     
Currency Capital, LLC Financial Services Class A Preferred Units (2,000,000 units)(8)      2,000   2,000   1.0%
                     
           18,788   18,788   9.8%
                     
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%
                     
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%
                     
           18,050   17,335   9.1%

 

2015

 

 

Capitala Finance Corp.

 

Consolidated Schedule of Investments

(in thousands, except for units/shares)

December 31, 20172018

 

Portfolio Company, Country(1), (2), (3), (4) Industry Type of Investment Principal
Amount		  Cost  Fair Value  % of
Net Assets		 
                 
Portrait Studio, LLC Professional and Personal Digital Imaging First Lien Debt (8.56% Cash (1 month LIBOR + 7%, 1% floor, 2% ceiling), Due 12/31/22)(18) $ 1,860  $ 1,860  $ 1,860   0.9%
                     
Portrait Studio, LLC Professional and Personal Digital Imaging First Lien Debt (8.56% Cash (1 month LIBOR + 7%, 1% floor, 5% ceiling), Due 12/31/22)  4,500   4,500   4,500   2.0%
                     
Portrait Studio, LLC Professional and Personal Digital Imaging Preferred Units (4,350,000 Units)      2,450   2,450   1.1%
                     
Portrait Studio, LLC Professional and Personal Digital Imaging Membership Units (150,000 Units)      -   -   0.0%
                     
           8,810   8,810   4.0%
                     
Sub Total Control investments - United States         $89,559  $107,608   48.5%
                     
TOTAL INVESTMENTS - 225.3%         $465,027  $499,939   225.3%
                     
Derivatives - (3.1)%                    
                     
Derivatives - United States                    
                     
Eastport Holdings, LLC Business Services Written Call Option(16)     $(20) $(6,815)  (3.1)%
                     
Sub Total Derivatives - United States         $(20) $(6,815)  (3.1)%
                     
TOTAL DERIVATIVES - (3.1)%         $(20) $(6,815)  (3.1)%
Portfolio Company, 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%

16

 

(1) All investments valued using unobservable inputs (Level 3).Capitala Finance Corp.

(2) All investments valued by the Board

Consolidated Schedule of Directors.Investments

(3) All debt investments are income producing, unless otherwise noted. Equity and warrant investments are non-income producing, unless otherwise noted.(in thousands, except for units/shares)

(4) Percentages are based on net assets of $221,887 as of December 31, 2017.2018

(5) The equity investment is income producing, based on rate disclosed.

Portfolio Company, Country(1), (2), (3), (4), (19) Industry Type of Investment Principal
Amount		  Cost  Fair Value  % of
Net Assets		 
                 
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%
                     
U.S. Well Services, Inc. Oil & Gas Services Class A Common Stock (77,073 shares)(8)      771   632   0.3%
                     
U.S. Well Services, Inc. Oil & Gas Services Class B Common Stock (1,125,426 shares)(8)      6,701   9,229   4.9%
                     
           7,472   9,861   5.2%
                     
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%
                     
           16,350   16,587   8.7%
                     
Sub Total Non-control/non-affiliated investments - United States      268,298   283,965   148.9%
                     
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%

17

(6) The cash rate equals the approximate current yield on our last-out portionCapitala Finance Corp.

Consolidated Schedule of the unitranche facility.Investments

(7) Non-accrual investment.(in thousands, except for units/shares)

(8) The maturity date of the original investment has been extended.

(9) The equity investment has an excercisable put option.

(10) The investment has a $2.0 million unfunded commitment.

(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, 2017, 5.0%2018

Portfolio Company, Country(1), (2), (3), (4), (19) Industry Type of Investment Principal
Amount		  Cost  Fair Value  % of
Net Assets		 
                 
Affiliate Investments - 48.8%                
                     
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%
                     
Burgaflex Holdings, LLC Automobile Part Manufacturer Common Stock Class A (1,253,198 shares)      1,504   -   0.0%
                     
Burgaflex Holdings, LLC Automobile Part Manufacturer Common Stock Class B (900,000 shares)      300   -   0.0%
                     
           16,605   14,384   7.5%
                     
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%
                     
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%
                     
GA Communications, Inc. Advertising & Marketing Services Series B-1 Common Stock (200,000 shares)      2   1,325   0.7%
                     
           3,181   4,807   2.5%
                     
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 Common Stock (1,587,848 shares)      1,188   3,018   1.6%
                     
           1,188   3,018   1.6%
                     
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%
                     
MMI Holdings, LLC Medical Device Distributor Subordinated Debt (6.0% Cash, Due 1/31/20)(12)  400   388   400   0.2%
                     
MMI Holdings, LLC Medical Device Distributor Preferred Units (1,000 units, 6.0% PIK Dividend)(5)      1,474   1,612   0.8%
                     
MMI Holdings, LLC Medical Device Distributor Common Membership Units (45 units)      -   185   0.1%
                     
           4,462   4,797   2.5%

18

Capitala Finance Corp.

Consolidated Schedule of the Company's total assets were non-qualifying assets.Investments

(12) The company is headquartered (in Brazil.thousands, except for units/shares)

(13) In addition to the stated rate, the Company is charging 3% default interest on the investment.

(14) The investment has been exited. The residual value reflects estimated escrow to be settled post-closing.

(15) The investment has a $0.7 million unfunded commitment.

(16) The Company has written a call option that enables CapitalSouth Partners Florida Sidecar Fund II, L.P. to purchase up to 31.25% of the Company's interest at a strike price of $1.5 million. As of December 31, 2017, the fair value2018

Portfolio Company, Country(1), (2), (3), (4), (19) Industry Type of Investment Principal
Amount		  Cost  Fair Value  % of
Net Assets		 
                 
Sierra Hamilton Holdings Corporation Oil & Gas Engineering and Consulting Services Common Stock (15,068,000 shares)      $ 6,958  $ 6,854   3.6%
                     
           6,958   6,854   3.6%
                     
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%

19

Capitala Finance Corp.

Consolidated Schedule of the written call option is approximately $6.8 million. See Note 4 to the consolidated financial statementsInvestments

(in thousands, except for further detail on the written call option transaction.units/shares)

(17) The investment has a $1.0 million unfunded commitment.December 31, 2018

(18) The investment has a $3.1 million unfunded commitment.

Portfolio Company, Country(1), (2), (3), (4), (19) 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  $ 13,695   7.2%
                     
           13,600   13,695   7.2%
                     
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%

(1)All investments valued using unobservable inputs (Level 3).
(2)All investments valued by the Board of 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 as of December 31, 2018.
(5)The equity investment is income producing, based on rate disclosed.
(6)The cash rate equals the approximate current yield on our last-out portion of the unitranche facility.

20

(19) Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

December 31, 2018

(7)Non-accrual investment.
(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 December 31, 2018, 9.2% of the Company's total assets were non-qualifying assets.
(9)The investment has a $0.8 million unfunded commitment.
(10)The investment has a $0.5 million unfunded commitment.
(11)The investment has a $0.6 million unfunded commitment.
(12)The maturity date of the original investment has been extended.
(13)The investment has a $1.0 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)The investment has a $6.4 million unfunded commitment.
(18)The investment has a $5.0 million unfunded commitment.
(19)Capitala Finance Corp. generally acquires its investments in private transactions exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"). These investments are generally subject to certain limitations on resale, and may be deemed to be "restricted securities" under the Securities Act.

See accompanying notes to consolidated financial statements.

 

21

 

CAPITALA FINANCE CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

June 30, 2018

2019

(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 is an “emerging growth company” within the meaning of the Jumpstart Our Business Startups Act of 2012, and as such, is subject to reduced public company reporting requirements. 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 subsidiariessubsidiary that areis 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, 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 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.

22

  

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, Florida Sidecar, and the Taxable Subsidiaries.

22

 

The Company’s financial statements as of June 30, 20182019 and December 31, 20172018 and for the periods ended June 30, 2019 and June 30, 2018 are presented on a consolidated basis. The effects of all intercompany transactions between the Company and its subsidiaries (Fund II, Fund III, Florida Sidecar, 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, 2017,2018, filed with the U.S. Securities and Exchange Commission (“SEC”) on February 27, 2018.March 4, 2019.

 

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 Regulation S-X and 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, Florida Sidecar, and the Taxable Subsidiaries) in its consolidated financial statements. The Company does not consolidate its interest in Capitala Senior Loan Fund II, LLC (“CSLF II”) because the investment is not considered a substantially wholly owned investment company subsidiary. Further, CSLF II is a joint venture for which shared power exists relating to the decisions that most significantly impact 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.

23

 

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.

 

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.

 

23

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.

 

24

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 uses net asset value (“NAV”) as the fair value for its equity investment in CSLF II. CSLF II records 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.

24

 

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.

 

25

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 payment-in-kindPIK interest (“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 income 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 payment-in-kindPIK dividend (“PIK dividends”) 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.

26

General and Administrative Expenses

 

General and administrative expenses are paid 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.

25

 

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 June 30, 2019, the Company had outstanding unfunded commitments related to debt and equity investments in existing portfolio companies of $6.4 million (CSLF II), $3.9 million (Portrait Studio, LLC), $1.0 million (Freedom Electronics, LLC), $1.0 million (Jurassic Quest Holdings, LLC), and $1.0 million (U.S. BioTek Laboratories, LLC). As of December 31, 2018, the Company had outstanding unfunded commitments related to debt and equity investments in existing portfolio companies of $3.8$6.4 million (CSLF II), $5.0 million (Portrait Studio, LLC), $1.4 million (Kelle’s Transport Service, LLC), $0.7$1.1 million (MC Sign Lessor, Corp)Corp.), $0.7$1.0 million (U.S. Well Services,BioTek Laboratories, LLC), $0.8 million (Freedom Electronics, LLC), and $0.3 million (CableOrganizer Acquisition, LLC).  As

The Company may invest in the same unitranche facility as CSLF II, whereby CSLF II provides the first-out portion of December 31, 2017,the unitranche facility and the Company had outstanding unfunded commitments related to debt investments in existing portfolio companiesand other lenders provide the last-out portion of $3.1 million (Portrait Studio, LLC), $2.0 million (CIS Secure Computing, Inc.), $1.0 million (Kelle’s Transport Service, LLC), and $0.7 million (U.S. Well Services, LLC).

In addition to unfunded commitments related to debt investments,the unitranche facility. Under a guarantee agreement, the Company also has extended a guaranty on behalfmay be required to purchase its pro-rata portion of onefirst-out loans from CSLF II upon certain triggering events, including acceleration upon payment default of its portfolio companies, whereby the Company has guaranteed $1.9 million of obligations of Kelle’s Transport Service, LLC.underlying borrower. As of June 30, 2018, we have not been required to make payments on this or any previous guaranties, and we consider2019, the credit risks to be remote andCompany has evaluated the fair value of this guarantythe 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 be immaterial.credit risk as of June 30, 2019 and December 31, 2018, was $7.4 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.

27

 

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 complaint, as currently amended, alleges 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 plaintiffs in the Paskowitz Action seek compensatory damages and attorneys’ fees and costs, among other relief, but did not specify the amount of damages being sought. The time for the defendants in the Paskowitz ActionDefendants have moved to respond todismiss the amended complaint has not yet expired.complaint. While the Company intends to vigorously defend itself in this litigation, 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 and adversely affect the Company’s financial condition, results of operations, or cash flows in any particular reporting period.

 

26

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. In management’s opinion, no direct losses with respect to litigation contingencies were probable as of June 30, 20182019 and December 31, 2017.2018. 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 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.

 

28

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, December 31, 2017, August 31, 2017, and August 31, 2016 remain subject to examination by U.S. federal, state, and local tax authorities. No interest expense or penalties have been assessed for the three and six months ended June 30, 2019 and June 30, 2018. If the Company was required to recognize interest and penalties, if any, related to unrecognized tax benefits this would be recognized as income tax expense in the consolidated statements of operations.

For U.S. federal income tax purposes, as of June 30, 2018,2019, the aggregate net unrealized appreciationdepreciation for all securities was $56.5$(5.7) million. As of June 30, 2018,2019, gross unrealized appreciation was $85.1$22.4 million and gross unrealized depreciation was $28.6$(28.1) million. The aggregate cost of securities for U.S. federal income tax purposes was $426.7$396.7 million as of June 30, 2018.2019. For U.S. federal income tax purposes, as of December 31, 2017,2018, the aggregate net unrealized appreciation for all securities was $34.9$6.5 million. As of December 31, 2017,2018, gross unrealized appreciation was $81.4$31.9 million and gross unrealized depreciation was $46.5$(25.4) million. The aggregate cost of securities for U.S. federal income tax purposes was $465.0$442.4 million as of December 31, 2017.2018.

 

The Company’s Taxable Subsidiaries record deferred tax assets or liabilities related to temporary book versus tax differences on the income or loss generated by the underlying equity investments held by the Taxable Subsidiaries. As of June 30, 20182019 and December 31, 2017,2018, the Company recorded a net deferred tax asset of $6 thousand$0.0 million and net deferred tax liability of $1.3$0.6 million, respectively. For the three months and six months ended June 30, 2018,2019, the Company recorded a tax benefitprovision of $1.3 million.$(0.7) million and $(0.6) million, respectively. For the three and six months ended June 30, 2018, the Company recorded a tax benefit of $1.3 million and $1.3 million, respectively. As of June 30, 2019 and December 31, 2018, the valuation allowance on the Company’s deferred tax asset was $2.4 million and $0.4 million, respectively. During the three months and six months ended June 30, 2019, the Company recognized an increase in the valuation allowance of $2.0 million. ForNo change in the valuation allowance was recognized for the three and six months ended June 30, 2017, no tax provision was recorded.2018.

 

In accordance with certain applicable U.S. Treasury regulations and guidance issued by the Internal Revenue Service, a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive its entire distribution in either cash or stock of the RIC, subject to a limitation on the aggregate amount of cash to be distributed to all stockholders, which limitation must be at least 20.0% of the aggregate declared distribution. If too many stockholders elect to receive cash, the cash available for distribution must be allocated among the stockholders electing to receive cash (with the balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive the lesser of (a) the portion of the distribution such stockholder has elected to receive in cash or (b) an amount equal to his or her entire distribution times the percentage limitation on cash available for distribution. If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock. For income tax purposes, the Company has paid distributions on its common stock from ordinary income in the amount of $25.2 million, $24.5 million, and $25.1 million during the tax years ended August 31, 2017, 2016 and 2015, respectively.

 

ASC Topic 740 —Income Taxes (“ASC 740”), provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the consolidated statements of operations. As of June 30, 20182019 and December 31, 2017,2018, there were no uncertain tax positions.

27

 

The Company is required to determine whether a tax position of the Company is more likely-than-not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized could result in the Company recording a tax liability that could negatively impact the Company’s net assets.

 

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 tax years ended August 31, 2017, 2016 and 2015 remain subject to examination by U.S. federal, state, and local tax authorities. No interest expense or penalties have been assessed for the three and six months ended June 30, 2018 and June 30, 2017. 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.

29

 

The Company has elected to amend its tax year end from August 31 to December 31 and will file a tax return for the four months ended December 31, 2017. The election to change the tax year end is not expected to have a material impact on the Company’s consolidated statements of operations, the Company’s tax status as a RIC, or the nature of distributions paid to our stockholders.

On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act, which significantly changes the existing U.S. tax laws, including a reduction in the corporate tax rate from 35% to 21%, a move from a worldwide tax system to a territorial system, as well as other changes. The Taxable Subsidiaries’ provisional tax is based on the new lower blended federal and state corporate tax rate of 25%. This estimate incorporates assumptions made based on the Taxable Subsidiaries’ current interpretation of the Tax Act and may change, possibly materially, as we complete our analysis and receive additional clarification and implementation guidance.

 

Distributions

 

Distributions to common stockholders are recorded as payable on the declarationrecord 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, and Liquidity 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, observable secondary or primary 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.

 

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.

28

 

Note 3. Recent Accounting Pronouncements

 

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 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 evaluating the impact these changes will have on the Company’s consolidated financial statements and disclosures.

In October 2016,2018, the SEC adopted new rules and amended existing rules (together, “final rules”amendments (the “Amendments”) intended to modernizecertain disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other SEC disclosure requirements, U.S. GAAP requirements, or changes in the reporting and disclosure of information by registered investment companies.environment. In part, the final rules amend Regulation S-X andAmendments require standardized, enhanced disclosures about derivatives inan investment company financial statements, as well as other amendments.to present distributable earnings in total, rather than showing the three components of distributable earnings. The compliance date for the amendments to Regulation S-X was August 1, 2017.Amendments is for all filings on or after November 5, 2018. Management has adopted the amendments to Regulation S-XAmendments and included the required disclosures in the Company’s consolidated financial statements and related disclosures.statements.

30

 

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, 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. 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 will bewere 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 doesdid not have a significant impact on its consolidated financial statement disclosures.

 

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. Both directly and through the Company’s subsidiaries that are licensed by the SBA under the SBIC Act, theThe 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, subordinated loans. Most of the Company’s debt investments are coupled withto a lesser extent, equity interests, whether in the form of detachable “penny” warrants or equity co-investments made pari-passu with our borrowers’ financial sponsors.securities issued by lower middle-market companies and traditional middle-market companies. As of June 30, 2018,2019, our portfolio consisted of investments in 4341 portfolio companies with a fair value of approximately $483.3$391.1 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. 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 June 30, 2018, 13.4%2019, 17.6% of the fair value of our first lien loans consisted of last-out loans. As of December 31, 2017,2018, 13.7% 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, andbut unlike second lien loans, may be subject to the interruption of cash interest payments upon certain events of default, at the discretion of the first lien lender.

 

During the three months ended June 30, 2019, the Company made approximately $13.8 million of investments and had approximately $46.6 million in repayments and sales, resulting in net repayments and sales of approximately $32.8 million for the period. During the three months ended June 30, 2018, the Company made approximately $11.2 million of investments and had approximately $32.3 million in repayments and sales, resulting in net repayments and sales of approximately $21.1 million for the period.

During the threesix months ended June 30, 2017,2019, the Company made approximately $6.5$34.9 million of investments and had approximately $49.3$58.1 million in repayments and sales, resulting in net repayments and sales of approximately $42.8$23.2 million for the period.

During the six months ended June 30, 2018, the Company made approximately $39.0 million of investments and had approximately $53.7 million in repayments and sales, resulting in net repayments and sales of approximately $14.7 million for the period. During the six months ended June 30, 2017, the Company made approximately $28.2 million of investments and had approximately $82.3 million in repayments and sales resulting in net repayments and sales of approximately $54.1 million for the period.

 

2931

 

 

During the three and six months ended June 30, 2019, the Company funded $2.8 million and $4.9 million, respectively, of previously committed capital to existing portfolio companies. During the three and six months ended June 30, 2019, the Company funded $11.0 million and $30.0 million, respectively, of investments in portfolio companies for which it was not previously committed to fund. During the three and six months ended June 30, 2018, the Company funded $4.2 million and $5.2 million, respectively, of previously committed capital to existing portfolio companies. During the three and six months ended June 30, 2018, the Company funded $7.0 million and $33.8 million, respectively, of investments in portfolio companies for which it was not previously committed to fund. During the three and six months ended June 30, 2017, the Company funded $0.3 million and $1.5 million, respectively, of previously committed capital to existing portfolio companies. During the three and six months ended June 30, 2017, the Company funded $6.2 million and $26.7 million, respectively, of investments in portfolio companies for which it was not previously committed to fund. In addition to investing directly in portfolio companies, the Company may assist portfolio companies in securing financing from other sources by introducing portfolio companies to sponsors or by leading a syndicate of investors to provide the portfolio companies with financing. During the three and six months ended June 30, 2018,2019 and June 30, 2017,2018, the Company did not lead any syndicates and did not assist any portfolio companies in obtaining indirect financing.

  

On August 31, 2016, the Company sold a portion of 14 securities across 10 portfolio companies to CapitalSouth Partners Florida Sidecar Fund II, L.P. (“FSC II”), including granting an option to acquire a portion of the Company’s equity investment in Eastport Holdings, LLC (the “Written Call Option”), 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. 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.

  

The Written Call Option granted FSC II the right to purchase up to 31.25%composition of the Company’s equity investment in Eastport Holdings, LLC. The Written Call Option has a strike price of $1.5 million and a termination date of August 31, 2018. The fair value of the Written Call Option, which has been treated as a derivative liability and is recorded in the financial statement line item Written Call Option at fair value in the Company’s consolidated statements of assets and liabilities, was approximately $6.8 million and $6.8 millionour investments as of June 30, 2018,2019, at amortized cost and December 31, 2017, respectively. For purposes of determining the fair value of the Written Call Option, the Company calculated the differencewas as follows (dollars in the fair value of the underlying equity investment in Eastport Holdings, LLC and the strike price of the Written Call Option, or intrinsic value. The time value of the Written Call Option as of June 30, 2018, was determined to be insignificant. The Written Call Option is classified as a Level 3 financial instrument.thousands):

  Investments
at
Amortized Cost		  Amortized Cost
Percentage of
Total Portfolio		  Investments
at
Fair Value		  Fair Value
Percentage of
Total Portfolio		 
First Lien Debt $242,894   64.3% $235,010   60.1%
Second Lien Debt  16,759   4.4   16,107   4.1 
Subordinated Debt  51,238   13.5   51,476   13.2 
Equity and Warrants  53,511   14.2   74,703   19.1 
Capitala Senior Loan Fund II, LLC  13,600   3.6   13,763   3.5 
Total $378,002   100.0% $391,059   100.0%

 

The composition of our investments as of June 30,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		  Investments
at
Amortized Cost		  Amortized Cost
Percentage of
Total Portfolio		  Investments
at
Fair Value		  Fair Value
Percentage of
Total Portfolio		 
First Lien Debt $256,365   60.1% $245,846   50.9% $252,174   60.0% $237,570   52.9%
Second Lien Debt  32,831   7.7   31,781   6.6   33,040   7.9   32,495   7.2 
Subordinated Debt  79,689   18.7   80,318   16.6   72,562   17.3   73,113   16.3 
Equity and Warrants  57,862   13.5   125,316   25.9   48,594   11.6   92,054   20.5 
Capitala Senior Loan Fund II, LLC  13,600   3.2   13,695   3.1 
Total $426,747   100.0% $483,261   100.0% $419,970   100.0% $448,927   100.0%

 

The composition of our investments as of December 31, 2017, at amortized cost and fair value was as follows (dollars in thousands):

32

 

  Investments
at
Amortized Cost		  Amortized Cost
Percentage of
Total Portfolio		  Investments
at
Fair Value		  Fair Value
Percentage of
Total Portfolio		 
First Lien Debt $257,147   55.3% $243,489   48.7%
Second Lien Debt  32,465   7.0   30,794   6.1 
Subordinated Debt  120,235   25.8   103,385   20.7 
Equity and Warrants  55,180   11.9   122,271   24.5 
Total $465,027   100.0% $499,939   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.

 

30

  

ASC 820 establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair value. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

 

Based on the observability of the inputs used in the valuation techniques, the Company is required to provide disclosures on fair value measurements according to the fair value hierarchy. The fair value hierarchy ranks the observability of the inputs used to determine fair values. Investments carried at fair value are classified and disclosed in one of the following three categories:

 

·Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

 

·Level 2 — Valuations based on inputs other than quoted prices in active markets, which are either directly or indirectly observable.

 

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

 

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 June 30, 20182019 (dollars in thousands), according to the fair value hierarchy:

 

 Fair Value Measurements  Fair Value Measurements(1) 
 Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3  Total 
First Lien Debt $—  $—  $245,846  $245,846  $—  $—  $235,010  $235,010 
Second Lien Debt  —   —   31,781   31,781   —   —   16,107   16,107 
Subordinated Debt  —   —   80,318   80,318   —   —   51,476   51,476 
Equity and Warrants  —   —   125,316   125,316   5,796   —   68,907   74,703 
Total $—  $—  $483,261  $483,261  $5,796  $—  $371,500  $377,296 

 

The following table presents fair value measurements of the Written Call Option as of June 30, 2018 (dollars in thousands), according to the fair value hierarchy:

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

 

  Fair Value Measurements 
  Level 1  Level 2  Level 3  Total 
Written Call Option $—  $—  $(6,815) $(6,815)
Total $—  $—  $(6,815) $(6,815)
33

 

The following table presents fair value measurements of investments, by major class, as of December 31, 20172018 (dollars in thousands), according to the fair value hierarchy:

 

 Fair Value Measurements  Fair Value Measurements(1) 
 Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3  Total 
First Lien Debt $—  $—  $243,489  $243,489  $—  $—  $237,570  $237,570 
Second Lien Debt  —   —   30,794   30,794   —   —   32,495   32,495 
Subordinated Debt  —   —   103,385   103,385   —   —   73,113   73,113 
Equity and Warrants  —   —   122,271   122,271   —   —   92,054   92,054 
Total $—  $—  $499,939  $499,939  $—  $—  $435,232  $435,232 

 

31(1)Excludes the Company’s $13.7 million investment in CSLF II, measured at NAV.

 

The following table presents fair value measurementsprovides a reconciliation of the Written Call Option as of December 31, 2017beginning and ending balances for investments that use Level 3 inputs for the six months ended June 30, 2019 (dollars in thousands), according to the fair value hierarchy::

 

  Fair Value Measurements 
  Level 1  Level 2  Level 3  Total 
Written Call Option $—  $—  $(6,815) $(6,815)
Total $—  $—  $(6,815) $(6,815)
  First Lien
Debt		  Second Lien
Debt		  Subordinated
Debt		  Equity
and Warrants		  Total(1) 
Balance as of January 1, 2019 $237,570  $32,495  $73,113  $92,054  $435,232 
Reclassifications  (2,773)  —   —   2,773   — 
Repayments/sales  (26,104)  —   (21,538)  (10,489)  (58,131)
Purchases  29,636   3,800   —   1,488   34,924 
Payment in-kind interest and dividends accrued  440   284   457   462   1,643 
Accretion of original issue discount  99   46   375   —   520 
Realized gain (loss) on investments  (10,578)  (20,411)  (618)  10,683   (20,924)
Net unrealized appreciation (depreciation) on investments  6,720   (107)  (313)  (18,203)  (11,903)
Transfers out of Level 3(2)  —   —   —   (9,861)  (9,861)
Balance as of June 30, 2019 $235,010  $16,107  $51,476  $68,907  $371,500 

(1)Excludes the Company’s $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 six months ended June 30, 2019 was $(4.1) million.

 

 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, 2018 (dollars in thousands):

 

 First Lien
Debt		  Second Lien
Debt		  Subordinated
Debt		  Equity
and Warrants		  Total  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  $243,489  $30,794  $103,385  $122,271  $499,939 
Reclassifications  17,494   —   (20,806)  3,312   —   17,494   —   (20,806)  3,312   — 
Repayments/sales  (51,472)  —   —   (2,184)  (53,656)  (51,472)  —   —   (2,184)  (53,656)
Purchases  38,176   —   —   800   38,976   38,176   —   —   800   38,976 
Payment in-kind interest and dividends accrued  1,116   320   476   415   2,327   1,116   320   476   415   2,327 
Accretion of original issue discount  129   46   375   —   550��  129   46   375   —   550 
Realized gain (loss) from investments  (6,226)  —   (20,592)  341   (26,477)
Realized gain (loss) on investments  (6,226)  —   (20,592)  341   (26,477)
Net unrealized appreciation on investments  3,140   621   17,480   361   21,602   3,140   621   17,480   361   21,602 
Balance as of June 30, 2018 $245,846  $31,781  $80,318  $125,316  $483,261  $245,846  $31,781  $80,318  $125,316  $483,261 

34

 

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

 

  Written
Call Option		 
Balance as of January 1, 2018 $(6,815)
Net unrealized depreciation on Written Call Option  — 
Balance as of June 30, 2018 $(6,815)

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, 2017 (dollars in thousands):

  First Lien
Debt		  Second Lien
Debt		  Subordinated
Debt		  Equity
and Warrants		  Total 
Balance as of January 1, 2017 $226,578  $71,483  $150,232  $93,346  $541,639 
Reclassifications  2,299   —   (9,000)  6,701   — 
Repayments/sales  (18,948)  (35,290)  (16,092)  (12,006)  (82,336)
Purchases  20,867   4,000   1,182   2,200   28,249 
Payment in-kind interest and dividends accrued  2,421   532   368   437   3,758 
Accretion of original issue discount  140   274   376   —   790 
Realized gain (loss) from investments  —   (140)  —   9,674   9,534 
Net unrealized appreciation (depreciation) on investments  (11,583)  (73)  (8,495)  5,492   (14,659)
Balance as of June 30, 2017 $221,774  $40,786  $118,571  $105,844  $486,975 

The following table provides a reconciliation of the beginning and ending balances for the Written Call Option that uses Level 3 inputs for the six months ended June 30, 2017 (dollars in thousands):

  Written Call Option 
Balance as of January 1, 2017 $(2,736)
Net unrealized depreciation on Written Call Option  (2,412)
Balance as of June 30, 2017 $(5,148)
  Written Call Option 
Balance as of January 1, 2018 $(6,815)
Net unrealized depreciation on Written Call Option  — 
Balance as of June 30, 2018 $(6,815)

 

The net change in unrealized appreciation (depreciation)depreciation on investments held as of June 30, 20182019 and June 30, 2017,2018, was $(0.4)$(19.4) million and $(5.9)$(0.4) million, 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 assets as of June 30, 2019 were as follows:

  Fair Value(2)
(in millions)		  

Valuation

Approach

 Unobservable Input Range (Weighted Average)
First lien debt $210.2  Income Required Rate of Return
Leverage Ratio
Adjusted EBITDA		 9.0% – 17.0% (12.5%)
1.6x – 7.7x (3.9x)
$1.5 million – $156.1 million ($17.2 million)
First lien debt $24.8  Enterprise Value Waterfall 

EBITDA Multiple
Adjusted EBITDA

Revenue Multiple
Revenue

 2.3x – 5.5x (4.7x)
$1.5 million – $2.3 million ($1.7 million)
 0.3x – 0.9x (0.7x)
$13.2 million – $15.1 million ($14.0 million)
Second lien debt $16.1  Income Required Rate of Return
Leverage Ratio
Adjusted EBITDA		 14.5% – 16.5% (15.9%)
4.6x – 5.1x (4.8x)
$66.8 million – $78.9 million ($75.3 million)
Subordinated debt $18.9  Income Required Rate of Return
Leverage Ratio
Adjusted EBITDA		 12.2% – 12.2% (12.2%)
7.0x – 7.0x (7.0x)
$9.6 million – $9.6 million ($9.6 million)
Subordinated debt $31.8  Enterprise Value Waterfall and Asset(1) 

EBITDA Multiple
Adjusted EBITDA

Revenue Multiple
Revenue

 6.0x – 8.0x (7.9x)
$1.8 million – $2.6 million ($2.6 million)
 0.3x – 0.4x (0.4x)
$111.2 million – $558.7 million ($404.9 million)
Equity and warrants $68.9  Enterprise Value Waterfall 

EBITDA Multiple
Adjusted EBITDA

Revenue Multiple
Revenue

 5.3x – 14.5x (7.2x)
$1.8 million – $24.9 million ($16.1 million)
0.4x – 0.4x (0.4x)
$156.1 million – $558.7 million ($450.8 million)

(1)$0.8 million in subordinated debt was valued using the asset approach.

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

3235

 

  

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets and (liabilities) as of June 30,December 31, 2018 were as follows:

 

  Fair Value
(in millions)		  

Valuation

Approach

 Unobservable Input Range (Weighted Average)
First lien debt $182.9  Income Required Rate of Return
Leverage Ratio
Adjusted EBITDA		 9.1% – 16.0% (12.6%)
1.2x – 7.2x (3.5x)
$1.8 million – $112.7 million
($25.1 million)
First lien debt $62.9  

Enterprise Value Waterfall and Asset(1)

 

EBITDA Multiple
Adjusted EBITDA

 

Revenue Multiple
Revenue

 5.5x – 6.5x (6.0x)
$0.7 million – $2.9 million ($1.7 million)
0.2x – 1.1x (0.4x)
$12.2 million – $161.3 million ($84.7 million)
Second lien debt $31.8  Income Required Rate of Return
Leverage Ratio
Adjusted EBITDA		 12.5% – 18.1% (15.0%)
4.9x – 6.8x (5.9x)
$7.5 million – $77.0 million ($40.5 million)
Subordinated debt $56.3  Income Required Rate of Return
Leverage Ratio
Adjusted EBITDA		 11.5% – 19.0% (14.2%)
3.3x – 8.4x (5.7x)
$1.8 million – $15.4 million ($10.6 million)
Subordinated debt $24.0  Enterprise Value Waterfall and Asset(1) 

EBITDA Multiple
Adjusted EBITDA

Revenue Multiple
Revenue

 

 6.0x – 6.0x (6.0x)
$1.8 million – $2.8 million ($2.7 million)
0.5x – 0.5x (0.5x)
$545.9 million – $545.9 million ($545.9 million)
Equity and warrants $125.3  Enterprise Value Waterfall 

EBITDA Multiple
Adjusted EBITDA

Revenue Multiple
Revenue

 

 3.3x – 15.5x (8.1x)
$0.7 million – $110.7 million ($26.5 million)
0.5x – 0.5x (0.5x)
$156.1 million – $545.9 million ($447.7 million)
Written Call Option $(6.8) Enterprise Value Waterfall Revenue Multiple
Revenue		 0.5x – 0.5x (0.5x)
$545.9 million – $545.9 million ($545.9 million)

 Fair Value(2)
(in millions)		Valuation
Approach		Unobservable InputRange (Weighted Average)
First lien debt$195.1IncomeRequired 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)
First lien debt$42.5Enterprise 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)
Second lien debt$16.2IncomeRequired 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)
Second lien debt$16.3Enterprise Value WaterfallEBITDA Multiple
Adjusted EBITDA		5.6x – 5.6x (5.6x)
$9.2 million – $9.2 million ($9.2 million)
Subordinated debt$49.3IncomeRequired 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$23.8Enterprise 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)
Equity and warrants$92.1Enterprise 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)

(1)$1.00.7 million in subordinated debt and $6.9$2.9 million in first lien debt were valued using the asset approach.

 

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets and (liabilities) as of December 31, 2017 were as follows:

  Fair Value
(in millions)		  

Valuation

Approach

 Unobservable Input Range (Weighted Average)
First lien debt $211.2  Income Required Rate of Return
Leverage Ratio
Adjusted EBITDA		 8.6% – 21.2% (13.5%)
1.7x – 7.0x (3.6x)
$1.8 million – $131.2 million
($21.1 million)
First lien debt $32.3  Enterprise Value Waterfall and Asset(1) EBITDA Multiple
Adjusted EBITDA		 4.0x – 7.0x (5.5x)
$2.1 million – $3.1 million
($2.6 million)
Second lien debt $30.8  Income Required Rate of Return
Leverage Ratio
Adjusted EBITDA		 11.6% – 17.6% (14.4%)
4.9x – 7.0x (6.0x)
$7.3 million – $78.5 million
($41.1 million)
Subordinated debt $64.4  Income Required Rate of Return
Leverage Ratio
Adjusted EBITDA		 11.5% – 19.0% (14.2%)
3.2x – 8.1x (5.6x)
3.2 million – $15.1 million ($9.7 million)
Subordinated debt $39.0  Enterprise Value Waterfall and Asset(1) EBITDA Multiple
Adjusted EBITDA

Revenue Multiple
Revenue
 		 6.0x – 7.5x (7.2x)
$1.8 million – $30.1 million ($21.2 million)
0.2x – 0.2x (0.2x)
$150.7 million – $150.7 million ($150.7 million)
Equity and warrants $122.3  Enterprise Value Waterfall EBITDA Multiple
Adjusted EBITDA		 3.5x – 14.5x (7.9x)
$1.8 million – $77.6 million ($24.3 million)
Written Call Option $(6.8) Enterprise Value Waterfall EBITDA Multiple
Adjusted EBITDA		 7.25x – 7.25x (7.25x)
$30.1 million – $30.1 million ($30.1 million)

(1)(2)$1.0Excludes the Company’s $13.7 million investment in subordinated debt and $1.9 million in first lien debt were valued using the asset approach.CSLF II, measured at NAV.

 

33

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, Capitala 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 is to invest primarily in senior secured first-out loans. Capitala and Trinity have committed to provide $25.0 million of equity to CSLF II, with Capitala providing $20.0 million and Trinity providing $5.0 million. Capitala 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, require approval of a member on the board of directors and investment committee of at least one member representing Capitala and Trinity, respectively.

As of June 30, 2019 and December 31, 2018, $13.6 million and $3.4 million in equity capital had been contributed by Capitala and Trinity, respectively. As of June 30, 2019, and December 31, 2018, 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 is not redeemable.

 

3436

 

For the three months ended June 30, 2019 and 2018, the Company received $0.4 million and $0.0 million, respectively, in dividend income from its equity interest in CSLF II. For the six months ended June 30, 2019 and 2018, the Company received $0.4 million and $0.0 million, respectively, in dividend income from its equity interest in CSLF II.

Below is a summary of CSLF II’s portfolio as of June 30, 2019 and December 31, 2018 (dollars in thousands):

  June 30, 2019  December 31, 2018 
First lien loans(1) $16,866  $10,000 
Weighted average current interest rate on first lien loans  7.5%  7.6%
Number of portfolio companies in CSLF II  3   2 
Largest portfolio company investment(1) $6,915  $5,550 
Total of five largest portfolio company investments(1)(2) $16,866  $10,000 

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

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

Below is CSLF II’s unaudited schedule of investments as of June 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 (7.5% Cash (3 month LIBOR + 5.0%, 2.0% Floor), Due 12/14/23) $4,478  $4,478  $4,478 
Freedom Electronics, LLC Electronic Machine Repair First Lien Debt (7.4% Cash (1 month LIBOR + 5.0%, 2.0% Floor), Due 12/20/23)  5,473   5,473   5,473 
RAM Payment, LLC Financial Services First Lien Debt (7.4% Cash (1 month LIBOR + 5.0%, 1.5% Floor), Due 1/4/24)  6,915   6,915   6,915 
TOTAL INVESTMENTS     $16,866  $16,866  $16,866 

Below is CSLF II’s schedule of investments as of December 31, 2018 (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 (7.8% Cash (3 month LIBOR + 5.0%, 2.0% Floor), Due 12/14/23) $4,500  $4,500  $4,500 
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 

37

Below are the Statements of Assets and Liabilities for CSLF II (dollars in thousands):

  As of 
  June 30, 2019  December 31, 2018 
  (unaudited)    
ASSETS        
Investments at fair value (amortized cost of $16,866 and $10,000, respectively) $16,866  $10,000 
Cash and cash equivalents  251   7,100 
Interest receivable  97   31 
Total assets $17,214  $17,131 
LIABILITIES        
Accounts payable $11  $12 
Total liabilities $11  $12 
NET ASSETS        
Partners’ capital $17,203  $17,119 
Total net assets $17,203  $17,119 

Below are the unaudited Statements of Operations for CSLF II (dollars in thousands):

  For the Three Months Ended  For the Six Months Ended 
  June 30, 2019  June 30, 2018  June 30, 2019  June 30, 2018 
INVESTMENT INCOME                
Interest income $320  $—  $632  $— 
Fee income  2   —   70   — 
Total investment income $322  $—  $702  $— 
EXPENSES                
General and administrative expenses $31  $—  $117  $— 
Total expenses $31  $—  $117  $— 
NET INVESTMENT INCOME $291  $—  $585  $— 
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $291  $—  $585  $— 

38

 

Note 5. Transactions With Affiliated Companies

 

During the six months ended June 30, 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)		  June 30, 2019
Fair Value		 
Affiliate investments                                
                                   
Burgaflex Holdings, LLC First Lien Debt (12.0% Cash, 3.0% PIK, Due 3/23/21) $14,699  $953  $14,384  $149  $(250) $-  $288  $14,571 
                                   
Burgaflex Holdings, LLC Common Stock Class A (1,253,198 shares)      -   -   -   -   -   -   - 
                                   
Burgaflex Holdings, LLC Common Stock Class B (1,085,070 shares)      -   -   62   -   -   (62)  - 
                                   
         953   14,384   211   (250)  -   226   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 (15.5% Cash (3 month LIBOR + 13.0%, 0.5% Floor), Due 4/29/20)  16,500   1,672   16,500   376   -   -   (376)  16,500 
                                   
Eastport Holdings, LLC Membership Units (22.9% ownership)      -   17,610   -   -   -   (2,077)  15,533 
                                   
         1,672   34,110   376   -   -   (2,453)  32,033 
                                   
GA Communications, Inc.(5) Series A-1 Preferred Stock (1,998 shares, 8.0% PIK Dividend)      -   3,482   145   -   -   (9)  3,618 
                                   
GA Communications, Inc. Series B-1 Common Stock (200,000 shares)      -   1,325   -   -   -   (666)  659 
                                   
         -   4,807   145   -   -   (675)  4,277 
                                   
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 (1,852,824 shares)      -   3,018   79   -   -   (1,058)  2,039 
                                   
         -   3,018   79   -   -   (1,058)  2,039 
                                   
MMI Holdings, LLC First Lien Debt (12.0% Cash, Due 1/31/20)  2,600   158   2,600   -   -   -   -   2,600 
                                   
MMI Holdings, LLC Subordinated Debt (6.0% Cash, Due 1/31/20)  400   12   400   -   -   -   -   400 
                                   
MMI Holdings, LLC(5) Preferred Units (1,000 units, 6.0% PIK Dividend)      -   1,612   48   -   -   -   1,660 
                                   
MMI Holdings, LLC Common Membership Units (45 units)      -   185   -   -   -   20   205 
                                   
         170   4,797   48   -   -   20   4,865 
                                   
Navis Holdings, Inc. First Lien Debt (11.0% Cash, Due 6/30/23)  10,100   -   -   10,100   -   -   -   10,100 
                                   
Navis Holdings, Inc.(5) Class A Preferred Stock (1,000 shares, 10.0% Cash Dividend)      -   -   1,000   -   -   -   1,000 
                                   
Navis Holdings, Inc. Common Stock (60,000 shares)      -   -   -   -   -   345   345 
                                   
         -   -   11,100   -   -   345   11,445 
                                   
RAM Payment, LLC First Lien Debt (10.8% Cash, Due 1/4/24)  9,375   724   -   9,489   (114)  -   -   9,375 
                                   
RAM Payment, LLC(5) Preferred Units (86,000 Units, 8.0% PIK)      -   -   893   -   -   392   1,285 
                                   
         724   -   10,382   (114)  -   392   10,660 
                                   
Sierra Hamilton Holdings Corporation Common Stock (15,068,000 shares)      -   6,854   -   -   -   (1,165)  5,689 
                                   
         -   6,854   -   -   -   (1,165)  5,689 
                                   
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   -   -   -   -   742 
                                   
         -   742   -   -   -   -   742 
                                   
Total Affiliate investments     $4,680  $92,939  $22,452  $(23,225) $2,276  $(4,937) $89,505 

39

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)		  June 30, 2019
Fair Value		 
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)  1,000   56   1,708   1,292   (2,000)  -   -   1,000 
                                   
CableOrganizer Acquisition, LLC First Lien Debt (8.0% Cash, Due 6/30/21)  3,689   148   8,889   -   (3,373)  (1,827)  -   3,689 
                                   
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)      -   -   -   -   -   -   - 
                                   
         204   10,597   6,665   (5,373)  (1,827)  (5,373)  4,689 
                                   
Capitala Senior Loan Fund II, LLC Membership Units (80.0% ownership)      400   13,695   -   -   -   68   13,763 
                                   
         400   13,695   -   -   -   68   13,763 
                                   
Micro Precision, LLC Subordinated Debt (10.0% Cash, Due 3/31/20)  1,862   93   1,862   -   -   -   -   1,862 
                                   
Micro Precision, LLC Subordinated Debt (14.0% Cash, 4.0% PIK, Due 3/31/20)  4,413   307   4,325   88   -   -   -   4,413 
                                   
Micro Precision, LLC Series A Preferred Units (47 units)      -   2,817   -   -   -   81   2,898 
                                   
         400   9,004   88   -   -   81   9,173 
                                   
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)  1,080   29   -   2,220   (1,140)  -   -   1,080 
                                   
Portrait Studio, LLC(6) First Lien Debt (9.4% Cash (1 month LIBOR + 7.0%, 1.0% Floor, 5.0% Ceiling), Due 12/31/22)  4,500   107   4,500   -   (72)  -   (2,256)  2,172 
                                   
Portrait Studio, LLC Preferred Units (4,350,000 Units)      -   2,174   -   -   -   (2,174)  - 
                                   
Portrait Studio, LLC Membership Units (150,000 Units)      -   -   -   -   -   -   - 
                                   
         136   6,674   2,220   (1,212)  -   (4,430)  3,252 
                                   
Total Control investments     $1,756  $69,145  $13,057  $(17,685) $(19,656) $(13,984) $30,877 

(1)Represents the total amount of interest, original issue discount, fees, and dividends credited to income for the portion of the year an investment was included in Affiliate or Control categories, respectively.
(2)Gross additions include increases in the cost basis of investments resulting from new portfolio investments, follow-on investments, accrued PIK, and accretion of original issue discount. Gross additions also include transfers into Affiliate or Control classification.
(3)Gross reductions include decreases in the cost basis of investments resulting from principal repayments and sales. Gross reductions also include transfers out of Affiliate or Control classification.
(4)All debt investments are income producing. Equity and warrant investments are non-income producing, unless otherwise noted.
(5)The equity investment is income producing, based on rate disclosed.
(6)Non-accrual investment.

40

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
Gain/(Loss)		  June 30, 2018
Fair Value		  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                                Affiliate investments                                
                                                                
AAE Acquisition, LLC Second Lien Debt (8.0% Cash, 4.0% PIK, Due 8/24/19) $16,165  $639  $15,603  $320  $-  $-  $116  $16,039  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)  -   -   -   -   -   -   -   -  Membership Units (2.2% fully diluted)      -   -   -   (17)  -   17   - 
                                                                
AAE Acquisition, LLC Warrants (37.8% fully diluted)  -   -   -   -   -   -   -   -  Warrants (37.8% fully diluted)      -   -   -   -   -   -   - 
                                                                  
      639   15,603   320   -   -   116   16,039       479   15,603   320   (16,182)  -   259   - 
                                                                
Burgaflex Holdings, LLC First Lien Debt (12.0% Cash, 1.0% PIK, Due 3/23/21)  14,726   485   -   14,725   -   -   (272)  14,453  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% Cash, Due 8/9/19)  -   116   3,000   -   (3,000)  -   -   -  Subordinated Debt (14.0% Cash, Due 8/9/19)  -   116   3,000   -   (3,000)  -   -   - 
                                                                
Burgaflex Holdings, LLC Subordinated Debt (12% Cash, Due 8/9/19)  -   199   5,828   -   (5,828)  -   -   -  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)  -  Common Stock Class A (1,253,198 shares)      -   457   -   -   -   (457)  - 
                                                                
Burgaflex Holdings, LLC Common Stock Class B (900,000 shares)  -   -   -   300   -   -   (300)  -  Common Stock Class B (900,000 shares)      -   -   300   -   -   (300)  - 
                                                                  
      800   9,285   15,025   (8,828)  -   (1,029)  14,453       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   -   -  Series A Preferred Stock (1,000,000 shares)      -   -   -   (644)  644   -   - 
                                                                  
      -   -   -   (644)  644   -   -       -   -   -   (644)  644   -   - 
                                                                
City Gear, LLC Subordinated Debt (13.0% Cash, Due 10/20/19)  8,231   538   8,231   -   -   -   -   8,231  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)  -   58   1,269   -   -   -   -   1,269  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   -   -   -   (841)  7,407  Membership Unit Warrants (11.4% fully diluted)      -   8,248   -   (1,908)  1,908   (5,064)  3,184 
                                                                  
      596   17,748   -   -   -   (841)  16,907       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   134   -   -   (9)  3,350  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   -   -   -   (490)  1,442  Series B-1 Common Stock (200,000 shares)      -   1,932   -   -   -   (607)  1,325 
                                                                  
      -   5,157   134   -   -   (499)  4,792       -   5,157   276   -   -   (626)  4,807 
                                                                
J&J Produce Holdings, Inc. Subordinated Debt (13.0% Cash, Due 6/16/19)  6,406   380   6,170   38   -   -   (46)  6,162  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)  -   -   -   -   -   -   -   -  Common Stock (8,182 shares)      -   -   -   -   -   -   - 
                                                                
J&J Produce Holdings, Inc. Common Stock Warrants (6,369 shares)  -   -   -   -   -   -   -   -  Common Stock Warrants (6,369 shares)      -   -   -   -   -   -   - 
                                                                  
      380   6,170   38   -   -   (46)  6,162       805   6,170   38   -   -   2   6,210 
                                                                
LJS Partners, LLC Common Stock (1,500,000 shares)  -   -   7,650   -   -   -   (1,405)  6,245  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   -   - 
                                                                  
      -   7,650   -   -   -   (1,405)  6,245       -   -   -   (28)  28   -   - 
                                                                
MMI Holdings, LLC First Lien Debt (12.0% Cash, Due 1/31/19)  2,600   158   2,600   -   -   -   -   2,600  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 1/31/19)  400   12   400   -   -   -   -   400  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   46   -   -   -   1,566  Preferred Units (1,000 units, 6.0% PIK Dividend)      -   1,520   92   -   -   -   1,612 
                                                                
MMI Holdings, LLC Common Membership Units (45 units)  -   -   193   -   -   -   (2)  191  Common Membership Units (45 units)      -   193   -   -   -   (8)  185 
                                                                  
      170   4,713   46   -   -   (2)  4,757       341   4,713   92   -   -   (8)  4,797 
                                                                
MTI Holdings, LLC Membership Units (2,000,000 units)  -   -   100   -   (139)  139   (100)  -  Membership Units (2,000,000 units)      -   100   -   (139)  139   (100)  - 
                                                                
      -   100   -   (139)  139   (100)  -       -   100   -   (139)  139   (100)  - 
                                                                
Sierra Hamilton Holdings Corporation Common Stock (15,068,000 shares)  -   -   8,528   -   -   -   381   8,909  Common Stock (15,068,000 shares)      -   8,528   -   -   -   (1,674)  6,854 
                                                                
      -   8,528   -   -   -   381   8,909       -   8,528   -   -   -   (1,674)  6,854 
                                                                
Source Capital Penray, LLC Membership Units (11.3% ownership)  -   -   101   -   -   -   -   101  Membership Units (11.3% ownership)      121   101   -   -   -   (101)  - 
                                                                  
      -   101   -   -   -   -   101       121   101   -   -   -   (101)  - 
                                                                
STX Healthcare Management Services, Inc. Common Stock (1,200,000 shares)  -   -   93   -   (80)  80   (93)  -  Common Stock (1,200,000 shares)      -   93   -   (108)  108   (93)  - 
                                                                
      -   93   -   (80)  80   (93)  -       -   93   -   (108)  108   (93)  - 
                                                                
US Bath Group, LLC First Lien Debt (11.0% Cash (1 month LIBOR + 9.0%, 1.0% Floor), Due 1/2/23)  13,375   1,049   -   15,000   (1,625)  -   -   13,375  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   -   -   1,547   2,047  Membership Units (500,000 units)      -   -   500   -   -   1,583   2,083 
                                                                  
      1,049   -   15,500   (1,625)  -   1,547   15,422       1,806   -   15,500   (2,250)  -   1,583   14,833 
                                                                
U.S. Well Services, LLC First Lien Debt (8.0% Cash (1 month LIBOR + 6.0%, 1.0% floor), Due 2/2/22)  2,299   90   2,299   -   -   -   -   2,299  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 (11.0% Cash (1 month LIBOR + 9.0%, 1.0% floor), Due 2/2/22)  9,616   352   9,516   197   (97)  -   -   9,616  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   -   -   -   (3,849)  11,155  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   -   -   -   (183)  772  Class B Units (2,076,298 Units)      -   955   -   (441)  -   (514)  - 
                                                                  
      442   27,774   197   (97)  -   (4,032)  23,842       723   27,774   409   (18,925)  -   (9,258)  - 
                                                                
V12 Holdings, Inc. Subordinated Debt  -   -   1,035   -   -   -   -   1,035  Subordinated Debt  -   -   1,035   -   (232)  93   (154)  742 
                                                                  
      -   1,035   -   -   -   -   1,035       -   1,035   -   (232)  93   (154)  742 
                                                                
Total Affiliate investments     $4,076  $103,957  $31,260  $(11,413) $863  $(6,003) $118,664 Total Affiliate investments     $8,183  $103,957  $52,258  $(60,214) $2,920  $(5,982) $92,939 
                                
Control investments                                
                                
CableOrganizer Acquisition, LLC First Lien Debt (10.0% Cash, Due 6/30/19) $1,708  $33  $-  $1,708  $-  $-  $-  $1,708 
                                
CableOrganizer Acquisition, LLC First Lien Debt (12.0% Cash, 4.0% PIK, Due 6/30/19)  8,709   633   12,373   336   (2,354)  (1,646)  -   8,709 
                                

 

3541

 

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		 
                                   
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,

2017
Fair Value

  Gross Additions(2)  Gross Reductions(3)  Realized
Gain/(Loss)		  Unrealized
Gain/(Loss)		  June 30, 2018
Fair Value		 
                           
CableOrganizer Acquisition, LLC Common Stock (21.3% fully diluted) $-  $-  $118  $-  $-  $-  $(118) $- 
                                   
CableOrganizer Acquisition, LLC Common Stock Warrants (10.0% fully diluted )  -   -   60   -   -   -   (60)  - 
                                   
CableOrganizer Acquisition, LLC Preferred Units (4,000,000 units)  -   -   -   2,354   -   -   -   2,354 
                                   
         666   12,551   4,398   (2,354)  (1,646)  (178)  12,771 
                                   
Eastport Holdings, LLC Subordinated Debt (15.3% Cash (3 month LIBOR + 13.0%, 0.5% Floor), Due 4/29/20)  16,500   1,627   16,500   376   -   -   (376)  16,500 
                                   
Eastport Holdings, LLC Membership Units (33.3% ownership)  -   -   26,449   -   -   -   -   26,449 
                                   
         1,627   42,949   376   -   -   (376)  42,949 
                                   
Kelle's Transport Service, LLC First Lien Debt (4.0% Cash, Due 2/15/20)  3,300   51   2,000   1,300   -   -   -   3,300 
                                   
Kelle's Transport Service, LLC First Lien Debt (2.2% Cash, Due 2/15/20)  13,674   126   9,560   -   -   -   440   10,000 
                                   
Kelle's Transport Service, LLC Membership Units (27.5% fully diluted)  -   -   -   -   -   -   -   - 
                                   
         177   11,560   1,300   -   -   440   13,300 
                                   
Micro Precision, LLC Subordinated Debt (10.0% Cash, Due 9/15/18)  1,862   93   1,862   -   -   -   -   1,862 
                                   
Micro Precision, LLC Subordinated Debt (14.0% Cash, 4.0% PIK, Due 9/15/18)  4,238   295   4,154   84   -   -   -   4,238 
                                   
Micro Precision, LLC Series A Preferred Units (47 units)  -   -   1,629   -   -   -   -   1,629 
                                   
         388   7,645   84   -   -   -   7,729 
                                   
Navis Holdings, Inc. First Lien Debt (15.0% Cash, Due 10/30/20)  7,500   549   6,500   1,000   -   -   -   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 (300,000 shares)  -   -   5,005   -   -   -   304   5,309 
                                   
         599   12,505   1,000   -   -   304   13,809 
                                   
On-Site Fuel Services, Inc.(6) First Lien Debt (18.0% Cash, Due 12/19/18)  15,525   -   -   11,020   -   -   1,114   12,134 
                                   
On-Site Fuel Services, Inc. Subordinated Debt (18% Cash, Due 12/19/18)  -   -   11,588   -   (11,020)  -   (568)  - 
                                   
On-Site Fuel Services, Inc. Series A Preferred Stock (32,782 shares)  -   -   -   -   -   -   -   - 
                                   
On-Site Fuel Services, Inc. Series B Preferred Stock (23,648 shares)  -   -   -   -   -   -   -   - 
                                   
On-Site Fuel Services, Inc. Common Stock (33,058 shares)  -   -   -   -   -   -   -   - 
                                   
         -   11,588   11,020   (11,020)  -   546   12,134 
                                   
Portrait Studio, LLC First Lien Debt (9.0% Cash (1 month LIBOR + 7.0%, 1.0% floor, 2.0% ceiling), Due 12/31/22)  1,500   82   1,860   1,080   (1,440)  -   -   1,500 
                                   
Portrait Studio, LLC First Lien Debt (9.0% Cash (1 month LIBOR + 7.0%, 1.0% floor, 5.0% ceiling), Due 12/31/22)  4,500   198   4,500   -   -   -   -   4,500 
                                   
Portrait Studio, LLC Preferred Units (4,350,000 Units)  -   -   2,450   -   -   -   (358)  2,092 
                                   
Portrait Studio, LLC Membership Units (150,000 Units)  -   -   -   -   -   -   -   - 
                                   
         280   8,810   1,080   (1,440)  -   (358)  8,092 
                                   
Total Control investments       $3,737  $107,608  $19,258  $(14,814) $(1,646) $378  $110,784 

(1) Represents the total amount of interest, original issue discount, fees or dividends credited to income for the portion of the year an investment was included in Control or Affiliate 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 OID. Gross additions also include transfers into an affiliate or control classification.

(3) Gross reductions include decreases in the total cost basis of investments resulting from principal or PIK repayments and sales.

(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.

(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.

 

36

During the year ended December 31, 2017, 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,

2016
Fair Value

  Gross Additions(2)  Gross Reductions(3)  Realized
Gain/(Loss)		  Unrealized
Gain/(Loss)		  

December 31,

2017
Fair Value

 
                           
Affiliate investments                                  
                                   
AAE Acquisition, LLC Second Lien Debt (8% Cash, 4% PIK, Due 8/24/19) $15,846  $757  $ -  $15,846  $ -  $ -  $(243) $15,603 
                                   
AAE Acquisition, LLC Membership Units (2.19% fully diluted)  -   -   -   16   -   -   (16)  - 
                                   
AAE Acquisition, LLC Warrants (37.78% fully diluted)  -   -   -   -   -   -   -   - 
                                   
         757   -   15,862   -   -   (259)  15,603 
                                   
Burgaflex Holdings, LLC Subordinated Debt (14% Cash, Due 8/9/19)  3,000   515   3,000   -   -   -   -   3,000 
                                   
Burgaflex Holdings, LLC Subordinated Debt (12% Cash, Due 8/9/19)  5,828   886   5,828   -   -   -   -   5,828 
                                   
Burgaflex Holdings, LLC Common Stock (1,253,198 shares)  -   -   1,248   -   -   -   (791)  457 
                                   
         1,401   10,076   -   -   -   (791)  9,285 
                                   
City Gear, LLC Subordinated Debt (13% Cash, Due 10/20/19)  8,231   1,085   8,231   -   -   -   -   8,231 
                                   
City Gear, LLC(5) Preferred Membership Units (2.78% fully diluted, 9% Cash Dividend)  -   115   1,269   -   -   -   -   1,269 
                                   
City Gear, LLC Membership Unit Warrants (11.38% fully diluted)  -   -   9,736   -   -   -   (1,488)  8,248 
                                   
         1,200   19,236   -   -   -   (1,488)  17,748 
                                   
GA Communications, Inc.(5) Series A-1 Preferred Stock (1,998 shares, 8% PIK Dividend)  -   -   2,864   255   -   -   106   3,225 
                                   
GA Communications, Inc. Series B-1 Common Stock (200,000 shares)  -   -   1,046   -   -   -   886   1,932 
                                   
         -   3,910   255   -   -   992   5,157 
                                   
J&J Produce Holdings, Inc. Subordinated Debt (6% Cash, 7% PIK, Due 6/16/19)  6,368   632   6,182   186   -   -   (198)  6,170 
                                   
J&J Produce Holdings, Inc. Common Stock (8,182 shares)  -   -   -   -   -   -   -   - 
                                   
J&J Produce Holdings, Inc. Common Stock Warrants (6,369 shares)  -   -   -   -   -   -   -   - 
                                   
         632   6,182   186   -   -   (198)  6,170 
                                   
LJS Partners, LLC Common Stock (1,500,000 shares)  -   -   8,497   -   (630)  -   (217)  7,650 
                                   
         -   8,497   -   (630)  -   (217)  7,650 
                                   
MJC Holdings, LLC Series A Preferred Units (2,000,000 units)  -   -   5,011   -   (5,473)  4,473   (4,011)  - 
                                   
         -   5,011   -   (5,473)  4,473   (4,011)  - 
                                   
MMI Holdings, LLC First Lien Debt (12% Cash, Due 1/31/19)  2,600   317   2,600   -   -   -   -   2,600 
                                   
MMI Holdings, LLC Subordinated Debt (6% Cash, Due 1/31/19)  400   24   400   -   -   -   -   400 
                                   
MMI Holdings, LLC(5) Preferred Units (1,000 units, 6% PIK Dividend)  -   -   1,433   85   -   -   2   1,520 
                                   
MMI Holdings, LLC Common Membership Units (45 units)  -   -   228   -   -   -   (35)  193 
                                   
         341   4,661   85   -   -   (33)  4,713 
                                   
MTI Holdings, LLC Membership Units (2,000,000 units)  -   -   537   -   (437)  437   (437)  100 
                                   
         -   537   -   (437)  437   (437)  100 
                                   
Sierra Hamilton Holdings Corporation Common Stock (15,068,000 shares)  -   -   -   6,958   -   -   1,570   8,528 
                                   
         -   -   6,958   -   -   1,570   8,528 
                                   
Source Capital Penray, LLC Subordinated Debt (13% Cash, Due 4/8/19)  -   78   1,425   -   (1,425)  -   -   - 
                                   
Source Capital Penray, LLC Membership Units (11.3% ownership)  -   526   805   -   (750)  -   46   101 
                                   
         604   2,230   -   (2,175)  -   46   101 
                                   
STX Healthcare Management Services, Inc. Common Stock (1,200,000 shares)  -   -   109   -   (16)  16   (16)  93 
                                   
         -   109   -   (16)  16   (16)  93 
                                   
U.S. Well Services, LLC First Lien Debt (7.35% Cash (1 month LIBOR + 6%, 1% floor), Due 2/2/22)  2,299   132   -   2,299   -   -   -   2,299 
                                   
U.S. Well Services, LLC First Lien Debt (12.35% PIK (1 month LIBOR + 11%, 1% floor), Due 2/2/22)  9,516   83   -   9,516   -   -   -   9,516 
                                   
U.S. Well Services, LLC Class A Units (5,680,688 Units)  -   -   -   6,260   -   -   8,744   15,004 
                                   
U.S. Well Services, LLC Class B Units (2,076,298 Units)  -   -   -   441   -   -   514   955 
                                   
         215   -   18,516   -   -   9,258   27,774 
                                   
V12 Holdings, Inc. Subordinated Debt  -   -   1,015   -   -   -   20   1,035 
                                   
       -  1,015  -  -  -  20  1,035 
                                   
Total Affiliate investments       $5,150  $61,464  $41,862  $(8,731) $4,926  $4,436  $103,957 
                                   

37

Company(4) Type of Investment Principal Amount  Amount of Interest,
Fees or Dividends
Credited to Income(1)		  

December 31,

2016
Fair Value

  Gross Additions(2)  Gross Reductions(3)  Realized
Gain/(Loss)		  Unrealized
Gain/(Loss)		  

December 31,

 2017 Fair Value

 
                                   
Control investments                                  
                                   
CableOrganizer Acquisition, LLC First Lien Debt (12% Cash, 4% PIK, Due 5/24/18) $12,373  $1,473  $11,882  $491  $                    -  $-  $-  $12,373 
                                   
CableOrganizer Acquisition, LLC Common Stock (21.3% fully diluted)  -   -   200   -   -   -   (82)  118 
                                   
CableOrganizer Acquisition, LLC Common Stock Warrants (10% fully diluted)  -   -   101   -   -   -   (41)  60 
                                   
         1,473   12,183   491   -   -   (123)  12,551 
                                   
Capitala Senior Liquid Loan Fund I, LLC Common Stock (80% Ownership)  -   5   -   -   -   -   -   - 
                                   
         5   -   -   -   -   -   - 
                                   
Eastport Holdings, LLC Subordinated Debt (14.49% Cash (3 month LIBOR + 13%, 0.5% Floor), Due 4/29/20)  16,500   3,138   16,500   757   -   -   (757)  16,500 
                                   
Eastport Holdings, LLC Membership Units (33.3% ownership)  -   -   13,395   -   -   -   13,054   26,449 
                                   
         3,138   29,895   757   -   -   12,297   42,949 
                                   
Kelle's Transport Service, LLC First Lien Debt (4% Cash, Due 2/15/20)  2,000   22   -   2,000   -   -   -   2,000 
                                   
Kelle's Transport Service, LLC First Lien Debt (1.46% Cash, Due 2/15/20)  13,674   77   -   13,669   -   -   (4,109)  9,560 
                                   
Kelle's Transport Service, LLC Membership Units (27.5% fully diluted)  -   -   -   -   -   -   -   - 
                                   
         99   -   15,669   -   -   (4,109)  11,560 
                                   
Micro Precision, LLC Subordinated Debt (10% Cash, Due 9/15/18)  1,862   186   1,862   -   -   -   -   1,862 
                                   
Micro Precision, LLC Subordinated Debt (14% Cash, 4% PIK, Due 9/15/18)  4,154   577   3,989   165   -   -   -   4,154 
                                   
Micro Precision, LLC Series A Preferred Units (47 units)  -   -   2,523   -   -   -   (894)  1,629 
                                   
         763   8,374   165   -   -   (894)  7,645 
                                   
Navis Holdings, Inc. First Lien Debt (15% Cash, Due 10/30/20)  6,500   989   6,500   -   -   -   -   6,500 
                                   
Navis Holdings, Inc.(5) Class A Preferred Stock (1,000 shares, 10% Cash Dividend)  -   100   1,000   -   -   -   -   1,000 
                                   
Navis Holdings, Inc. Common Stock (300,000 shares)  -   250   5,634   -   -   -   (629)  5,005 
                                   
         1,339   13,134   -   -   -   (629)  12,505 
                                   
On-Site Fuel Services, Inc. Subordinated Debt (18% Cash, Due 12/19/18)  14,072   -   10,303   1,182   -   -   103   11,588 
                                   
On-Site Fuel Services, Inc. Series A Preferred Stock (32,782 shares)  -   -   -   -   -   -   -   - 
                                   
On-Site Fuel Services, Inc. Series B Preferred Stock (23,648 shares)  -   -   -   -   -   -   -   - 
                                   
On-Site Fuel Services, Inc. Common Stock (33,058 shares)  -   -   -   -   -   -   -   - 
                                   
         -   10,303   1,182   -   -   103   11,588 
                                   
Portrait Studio, LLC First Lien Debt (8.56% Cash (1 month LIBOR + 7%, 2% ceiling), Due 12/31/22)  1,860   -   -   1,860   -   -   -   1,860 
                                   
Portrait Studio, LLC First Lien Debt (8.56% Cash (1 month LIBOR + 7%, 5% ceiling), Due 12/31/22)  4,500   -   -   4,500   -   -   -   4,500 
                                   
Portrait Studio, LLC Preferred Units (4,350,000 Units)  -   -   -   2,450   -   -   -   2,450 
                                   
Portrait Studio, LLC Membership Units (150,000 Units)  -   -   -   -   -   -   -   - 
                                   
         -   -   8,810   -   -   -   8,810 
                                   
Print Direction, Inc. First Lien Debt (10% cash 2% PIK, due 2/24/19)  -   434   12,761   2,087   -   (19,403)  4,555   - 
                                   
Print Direction, Inc. Common Stock (18,543 shares)  -   -   -   40   -   (3,030)  2,990   - 
                                   
Print Direction, Inc. Common Stock Warrants (820 shares)  -   -   -   -   -   -   -   - 
                                   
         434   12,761   2,127   -   (22,433)  7,545   - 
                                   
Total Control investments       $7,251  $86,650  $29,201  $-  $(22,433) $14,190  $107,608 

(1) Represents the total amount of interest, fees or dividends credited to income for the portion of the year an investment was included in Control or Affiliate categories, respectively.

(2) Gross additions include increases in the cost basis of investments resulting from new portfolio investments, follow-on investments and accrued PIK interest. Gross additions also include transfers into an affiliate or control classification.

(3) Gross reductions include decreases in the total cost basis of investments resulting from principal or PIK repayments and sales.

(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.

3842

 

 

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-person meeting on July 26, 2018.August 1, 2019. 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 was initiallyis calculated based on the value of the gross assets at the end of the first calendar quarter subsequent to the IPO, and thereafter 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:

 

3943

 

 

· no incentive fee in any calendar quarter in which the pre-incentive fee net investment income does not exceed the hurdle of 2.0%;

  

· 100% of the pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle but is less than 2.5% in any calendar quarter (10.0% annualized). The Company refers to this portion of the pre-incentive fee net investment income (which exceeds the hurdle but is less than 2.5%) as the “catch-up.” The “catch-up” is meant to provide the Investment Advisor with 20% of the pre-incentive fee net investment income as if a hurdle did not apply if this net investment income exceeds 2.5% in any calendar quarter; and

 

· 20% of the amount of the pre-incentive fee net investment income, if any, that exceeds 2.5% in any calendar quarter (10.0% annualized) is payable to the Investment Advisor (once the hurdle is reached and the catch-up is achieved, 20% of all pre-incentive fee investment income thereafter is allocated to the Investment Advisor).

 

The Investment Advisor has voluntarily agreed to waive all, or such portion of the quarterly incentive fees earned by the Investment Advisor that would otherwise cause the Company’s quarterly net investment income to be less than the distribution payments declared by the Board. Quarterly incentive fees are earned by the Investment Advisor pursuant to the Investment Advisory Agreement. Incentive fees subject to the waiver cannot exceed the amount of incentive fees earned during the period, as calculated on a quarterly basis. The Investment Advisor will not be entitled to recoup any amount of incentive fees that it waives. The waiver was effective in the fourth quarter of 2015 and will continue unless otherwise publicly disclosed by the Company.

 

The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date), and will equal 20% of our realized capital gains, if any, on a cumulative basis from inception through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees with respect to each of the investments in our portfolio.

 

The Company will defer cash payment of the portion of any incentive fee otherwise earned by the Investment Advisor that would, when taken together with all other incentive fees paid to the Investment Advisor during the most recent 12 full calendar month period ending on or prior to the date such payment is to be made, exceed 20% of the sum of (a) the pre-incentive fee net investment income during such period, (b) the net unrealized appreciation or depreciation during such period and (c) the net realized capital gains or losses during such period. Any deferred incentive fees will be carried over for payment in subsequent calculation periods to the extent such payment is payable under the Investment Advisory Agreement. As of June 30, 20182019 and December 31, 2017,2018, the Company had incentive fees payable to the Investment Advisor of $2.5$3.7 million and $2.2$2.5 million, respectively.

 

For the three months ended June 30, 20182019 and 2017,2018, the Company incurred $2.3$2.0 million and $2.5$2.3 million in base management fees, respectively. The Company incurred $0.0$0.5 million and $0.0 million in incentive fees related to pre-incentive fee net investment income for the three months ended June 30, 20182019 and 2017,2018, respectively. For the three months ended June 30, 2019 and 2018, and 2017, our Investment Advisor waived incentive fees of $0.0$0.3 million and $0.0 million, respectively.respectively, in incentive fees were waived by our Investment Advisor.

 

For the six months ended June 30, 20182019 and 2017,2018, the Company incurred $4.6$4.1 million and $5.0$4.6 million in base management fees, respectively. The Company incurred $0.2$1.5 million and $1.3$0.2 million in incentive fees related to pre-incentive fee net investment income for the six months ended June 30, 20182019 and 2017,2018, respectively. For the six months ended June 30, 2019 and 2018, $0.3 million and 2017,$0.0 million, respectively, in incentive fees were waived by our Investment Advisor waived incentive fees of $0.0 million and $1.0 million, respectively.Advisor.

44

 

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.

 

40

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, and the chief compliance officer, and their respective administrative support staff. Under the Administration Agreement, the Administrator will also provide, on the Company’s behalf, managerial assistance to those portfolio companies that request such assistance. Unless terminated earlier in accordance with its terms, the Administration Agreement will remain in effect if approved annually by the Board. The Board most recently approved the renewal of the Administration Agreement on July 26, 2018.August 1, 2019. To the extent that the Administrator outsources any of its functions, the Company will pay the fees associated with such functions on a direct basis without any incremental profit to our Administrator. Stockholder approval is not required to amend the Administration Agreement.

 

For the three and six months ended June 30, 2018,2019, the Company paid the Administrator $0.4 million and $0.7 million, respectively, for the Company’s allocable portion of the Administrator’s overhead. For the three and six months ended June 30, 2017,2018, the Company paid the Administrator $0.3$0.4 million and $0.6$0.7 million, respectively, for the Company’s allocable portion of the Administrator’s overhead.

  

The Administration Agreement provides that, absent willful misfeasance, bad faith, or negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, our Administrator and its officers, managers, partners, agents, employees, controlling persons, members, and any other person or entity affiliated with it are entitled to indemnification from the Company for any damages, liabilities, costs, and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of our Administrator’s services under the Administration Agreement or otherwise as Administrator for the Company.

 

Note 7. Related Party Transactions

 

At June 30, 20182019 and December 31, 2017,2018, the Company had the following receivables from (payables to) related parties relating to certain$3.6 million and $2.5 million, respectively, of management fees,and incentive fees reimbursable expenses, and other payments owedpayable to related parties (dollars in thousands):

  June 30,
2018		  December 31,
2017		 
CapitalSouth Corporation $—  $74 
CapitalSouth Partners Florida Sidecar Fund II, L.P.  —   21 
Capitala Investment Advisors, LLC  (2,560)  (2,172)
Total $(2,560) $(2,077)

These amounts are reflected in the accompanying consolidated statements of assets and liabilities under the captions, “Due from related parties” and “Management and incentive fee payable.”Investment Advisor. 

 

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. The Administrator also serves as the administrator to FSC 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 June 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 June 30, 2019 and December 31, 2018 was $7.4 million and $4.3 million, respectively, and extends to the stated maturity of the underlying loans in CSLF II.

45

Note 8. Borrowings

 

SBA Debentures

 

The Company, through its two wholly owned subsidiaries,subsidiary, uses debenture leverage provided through the SBA to fund a portion of its investment portfolio. As of June 30, 20182019 and December 31, 20172018, the Company had $170.7$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 and Fund III.prior to March 1, 2019. As of June 30, 2018 and2019 Fund III had total assets of $263.0 million. As of December 31, 2017,2018, Fund II and Fund III had total assets of approximately $347.9 million and $341.5 million, respectively.$332.7 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 balance outstanding, and average stated interest and annual charge rate on the SBA-guaranteed debentures for the three and six months ended June 30, 20182019 and 20172018 (dollars in thousands):

 

41

 For the three months ended  For the six months ended  For the Three Months Ended  For the Six Months Ended 
 June 30, 2018  June 30, 2017  June 30, 2018  June 30, 2017  June 30, 2019  June 30, 2018  June 30, 2019  June 30, 2018 
Interest expense and annual charges $1,580  $1,580  $3,142  $3,142  $1,331  $1,580  $2,764  $3,142 
Deferred financing costs  151   152   305   303   139   151   424   305 
Total interest and financing expenses $1,731  $1,732  $3,447  $3,445  $1,470  $1,731  $3,188  $3,447 
Average outstanding balance $170,700  $170,700  $170,700  $170,700  $150,000  $170,700  $155,118  $170,700 
Average stated interest and annual charge rate  3.71%  3.71%  3.71%  3.71%  3.56%  3.71%  3.59%  3.71%

 

As of June 30, 20182019 and December 31, 2017,2018, the Company’s issued and outstanding SBA-guaranteed debentures mature as follows (dollars in thousands):

 

Fixed Maturity Date Interest Rate  SBA Annual
Charge		  June 30,
2018		  December 31,
2017		 
March 1, 2019  4.620%  0.941% $5,000  $5,000 
September 1, 2020  3.215%  0.285%  19,000   19,000 
March 1, 2021  4.084%  0.515%  15,700   15,700 
March 1, 2021  4.084%  0.285%  46,000   46,000 
March 1, 2022  2.766%  0.285%  10,000   10,000 
March 1, 2022  2.766%  0.515%  50,000   50,000 
March 1, 2023  2.351%  0.515%  25,000   25,000 
          $170,700  $170,700 

 2021 Notes

On June 16, 2014, the Company issued $113.4 million in aggregate principal amount of 7.125% fixed-rate notes due 2021 (the “2021 Notes”). On May 26, 2017, the Company caused notices to be issued to the holders of its 2021 Notes regarding the Company’s exercise of its option to redeem all of the issued and outstanding 2021 Notes. The Company redeemed all $113.4 million in aggregate principal amount of the 2021 Notes on June 25, 2017. The Notes were redeemed at 100% of their principal amount ($25 per Note), plus the accrued and unpaid interest thereon from June 16, 2017, through, but excluding, June 25, 2017. As a result of the redemption, the Company recognized a loss on the extinguishment of debt of $2.7 million for the three and six months ended June 30, 2017, due to the amortization of the deferred financing costs remaining on the 2021 Notes.

The following table summarizes the interest expense, deferred financing costs, average outstanding balance and average stated interest rate on the 2021 Notes for the three and six months ended June 30, 2018 and 2017 (dollars in thousands):

  For the three months ended  For the six months ended 
  June 30, 2018  June 30, 2017  June 30, 2018  June 30, 2017 
Interest expense $—  $1,886  $—  $3,908 
Deferred financing costs  —   148   —   293 
Total interest and financing expenses $—  $2,034  $—  $4,201 
Average outstanding balance $—  $103,465  $—  $108,424 
Average stated interest rate  —%  7.125%  —%  7.125%
Fixed Maturity Date Interest Rate  SBA Annual
Charge		  June 30,
2019		  December 31,
2018		 
September 1, 2020  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 
March 1, 2022  2.766%  0.285%  10,000   10,000 
March 1, 2022  2.766%  0.515%  50,000   50,000 
March 1, 2023  2.351%  0.515%  25,000   25,000 
          $150,000  $165,700 

 

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. Interest was payable quarterly beginning August 31, 2017.

 

4246

 

 

The following table summarizes the interest expense, deferred financing costs, average outstanding balance, and average stated interest rate on the 2022 Notes for the three and six months ended June 30, 20182019 and 20172018 (dollars in thousands):

 

 For the three months ended  For the six months ended  For the Three Months Ended  For the Six Months Ended 
 June 30, 2018  June 30, 2017  June 30, 2018  June 30, 2017  June 30, 2019  June 30, 2018  June 30, 2019  June 30, 2018 
Interest expense $1,125  $555  $2,250  $555  $1,125  $1,125  $2,250  $2,250 
Deferred financing costs  126   60   251   60   134   126   266   251 
Total interest and financing expenses $1,251  $615  $2,501  $615  $1,259  $1,251  $2,516  $2,501 
Average outstanding balance $75,000  $37,418  $75,000  $18,812  $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 on 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. Interest was payable quarterly beginning August 31, 2017.

 

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.

 

The following table summarizes the interest expense, deferred financing costs, average outstanding balance, and average stated interest rate on the 2022 Convertible Notes for the three and six months ended June 30, 20182019 and 20172018 (dollars in thousands):

 

 For the three months ended  For the six months ended  For the Three Months Ended  For the Six Months Ended 
 June 30, 2018  June 30, 2017  June 30, 2018  June 30, 2017  June 30, 2019  June 30, 2018  June 30, 2019  June 30, 2018 
Interest expense $749  $281  $1,498  $281  $749  $749  $1,498  $1,498 
Deferred financing costs  81   25   159   25   85   81   169   159 
Total interest and financing expenses $830  $306  $1,657  $306  $834  $830  $1,667  $1,657 
Average outstanding balance $52,088  $19,895  $52,088  $10,002  $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 (the(as amended, the “Credit Facility”) with ING Capital, LLC, as administrative agent, arranger, and bookrunner, and the lenders party thereto. The Credit Facility was amended on May 22, 2015, June 16, 2017, and July 19, 2018, and February 22, 2019 (the “Amendments”). The Amendments were affected, among other things, in order to increase the total borrowings allowed under the Credit Facility, allow for stock repurchases, extend the maturity date, and to 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.

47

 

Borrowings under the Credit Facility bear 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% 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 are based, provides the company with increased flexibility to manage interest rate risks as compared to a borrowing arrangement that does not provide for such optionality. Once a particular LIBOR rate has been selected, the interest rate on the applicable amount borrowed will reset after the applicable tenor period and be based on the then applicable selected LIBOR rate (e.g., borrowings for which the Company has elected the one month LIBOR rate will reset on the one month anniversary of the period based on the then selected LIBOR rate)LIBOR). For any given borrowing under the Credit Facility, the Company intends to elect what it believes to be an appropriate LIBOR rate 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 provides for the ability to step-down the pricing of the Credit Facility from LIBOR plus 3.00% to LIBOR plus 2.75% when certain conditions are met. The Company will also pay an unused commitment fee at a rate of 2.50% per annum on the amount (if positive) by which 40% of the aggregate commitments under the Credit Facility exceeds the outstanding amount of loans under the Credit Facility and 0.50% per annum on any remaining unused portion of the Credit Facility.

 

43

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 six months ended June 30, 20182019 and 20172018 (dollars in thousands):

 

 For the three months ended  For the six months ended  For the Three Months Ended  For the Six Months Ended 
 June 30, 2018  June 30, 2017  June 30, 2018  June 30, 2017  June 30, 2019  June 30, 2018  June 30, 2019  June 30, 2018 
Interest expense $71  $395  $260  $815  $307  $71  $523  $260 
Deferred financing costs  108   256   215   493   122   108   237   215 
Unused commitment fees  340   150   615   266   236   340   510   615 
Total interest and financing expenses $519  $801  $1,090  $1,574  $665  $519  $1,270  $1,090 
Average outstanding balance $5,714  $38,154  $11,000  $41,061  $22,252  $5,714  $18,977  $11,000 
Average stated interest rate  4.94%  4.12%  4.78%  3.97%  5.47%  4.94%  5.50%  4.78%

 

As of June 30, 20182019 and December 31, 2017,2018, the Company had $5.0 million and $9.0$10.0 million, respectively, outstanding under the Credit Facility. The Credit Facility is secured by investments and cash held by the Company, exclusive of assets held at our two SBIC subsidiaries.pledged as collateral for the Company’s SBA debentures. Assets pledged to secure the Credit Facility had a carrying value of $179.6$175.3 million and $192.4$158.9 million, respectively, at June 30, 20182019 and December 31, 2017.2018. 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.

 

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 June 30, 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 $170,700  $171,118  $—  $—  $171,118  $150,000  $150,371  $—  $—  $150,371 
2022 Notes  75,000   74,850   74,850   —   —   75,000   75,750   75,750   —   — 
2022 Convertible Notes  52,088   51,233   51,233   —   —   52,088   52,650   52,650   —   — 
Credit Facility  5,000   5,018   —   —   5,018   5,000   5,012   —   —   5,012 
Total $302,788  $302,219  $126,083  $—  $176,136  $282,088  $283,783  $128,400  $—  $155,383 

 

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

48

 

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, 2017,2018, 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 $170,700  $173,373  $—  $—  $173,373  $165,700  $165,436  $—  $—  $165,436 
2022 Notes  75,000   75,600   75,600   —   —   75,000   74,700   74,700   —   — 
2022 Convertible Notes  52,088   51,775   51,775   —   —   52,088   49,546   49,546   —   — 
Credit Facility  9,000   9,038   —   —   9,038   10,000   10,030   —   —   10,030 
Total $306,788  $309,786  $127,375  $—  $182,411  $302,788  $299,712  $124,246  $—  $175,466 

 

(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.

 

44

Note 9. Directors’ Fees

 

Our independent directors receive an annual fee of $50,000. They also receive $5,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting and $5,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each committee meeting. In addition, the chairman of the audit committee receives an annual fee of $10,000 and each chairman of any other committee receives an annual fee of $5,000 for their additional services, if any, in these capacities. For the three and six months ended June 30, 2018,2019, the Company recognized directors’ fees expense of $0.1 million and $0.2 million, respectively. For the three and six months ended June 30, 2017,2018, the Company recognized directors’ fees expense of $0.1 million and $0.2 million, respectively. No compensation is expected to be paid to directors who are “interested persons” of the Company, as such term is defined in Section 2(a)(19) of the 1940 Act.

 

Note 10. Summarized Financial Information of Our Unconsolidated Subsidiaries

 

The Company holds a control interest, as defined by the 1940 Act, in fivetwo 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 as of June 30, 20182019 and December 31, 2017,2018, and for the six months ended June 30, 20182019 and June 30, 2017, respectively.2018.

During the six months ended June 30, 2019, the Company wrote off its investment in AAE Acquisition, LLC and realized a loss of $20.4 million.

49

 

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 income (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 $0.8$(7.0) million and $0.7$0.8 million for the six months ended June 30, 20182019 and June 30, 2017,2018, respectively.

 

Eastport Holdings, LLC

 

Eastport Holdings, LLC, an Ohio limited liability company organized on November 1, 2011, is a holding company consisting of marketing and advertising companies located across the U.S. The income (loss) the Company generated from Eastport Holdings, LLC, which includes all interest, dividends, PIK interest and PIK dividends, fees, and unrealized appreciation (depreciation), was $1.3$(0.8) million and $6.3$1.3 million for the six months ended June 30, 20182019 and June 30, 2017,2018, 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 (loss) the Company generated from Micro Precision, LLC, which includes all interest, dividends, PIK interest and PIK dividends, fees, and unrealized appreciation (depreciation), was $0.5 million and $(0.4) million for the six months ended June 30, 2018 and June 30, 2017, respectively.

Navis Holdings, Inc.

Navis Holdings, Inc., incorporated in Delaware on December 21, 2010, designs and manufactures leading machinery for the global knit and woven finishing textile industries. The income the Company generated from Navis Holdings, Inc., which includes all interest, dividends, PIK interest and PIK dividends, fees, and unrealized appreciation (depreciation), was $0.9 million and $0.6 million for the six months ended June 30, 2018 and June 30, 2017.

On-Site Fuel Services, Inc.

On-Site Fuel Services, Inc. is a 100% owned subsidiary of On-Site Fuel Holdings, Inc., which was incorporated in Delaware on December 19, 2011. On-Site Fuel Services, Inc. provides fueling services for commercial and government vehicle fleets throughout the southeast U.S. The income (loss) the Company generated from On-Site Fuel Services, Inc., which includes all interest, dividends, PIK interest and PIK dividends, fees, and unrealized appreciation (depreciation), was $0.5 million and $(0.6) million for the six months ended June 30, 2018 and June 30, 2017, respectively.

45

 

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

 

 As of  As of 
Balance Sheet – CableOrganizer Acquisition, LLC June 30,
2018		  December 31,
2017		 
 June 30, December 31, 
Balance Sheets – CableOrganizer Acquisition, LLC 2019  2018 
Current assets $5,012  $5,182  $2,757  $2,987 
Noncurrent assets  8,609   8,354   7,125   8,459 
Total assets $13,621  $13,536  $9,882  $11,446 
                
Current liabilities $13,894  $5,205  $1,792  $13,094 
Noncurrent liabilities  —   12,346   4,689   — 
Total liabilities $13,894  $17,551  $6,481  $13,094 
                
Total deficit $(273) $(4,015)
Total equity (deficit) $3,401  $(1,648)

 

 For the Six Months Ended 
 For the six months ended  June 30, June 30, 
Statements of Operations – CableOrganizer Acquisition, LLC June 30,
2018		  June 30,
2017		  2019  2018 
Net sales $10,098  $14,522  $6,294  $10,098 
Cost of goods sold  6,701   10,201   4,527   6,701 
Gross profit $3,397  $4,321  $1,767  $3,397 
                
Other expenses $4,161  $5,205  $3,200  $4,161 
Loss before income taxes  (764)  (884)  (1,433)  (764)
Income tax benefit  —   — 
Income tax provision  —   — 
Net loss $(764) $(884) $(1,433) $(764)

 

  As of 
Balance Sheet – Eastport Holdings, LLC(1) March 31,
2018		  December 31,
2017		 
Current assets $94,994  $94,396 
Noncurrent assets  186,934   180,266 
Total assets $281,928  $274,662 
         
Current liabilities $153,649  $153,182 
Noncurrent liabilities  62,348   56,272 
Total liabilities $215,997  $209,454 
         
Total equity $65,931  $65,208 

  For the six months ended 
Statements of Operations – Eastport Holdings, LLC(1) March 31,
2018		  March 31,
2017		 
Net sales $271,862  $279,038 
Cost of goods sold  195,941   212,736 
Gross profit $75,921  $66,302 
         
Other expenses $68,285  $60,226 
Income before income taxes  7,636   6,076 
Income tax (provision)/benefit  (285)  1,088 
Net income $7,351  $7,164 

(1)June 30, 2018 financial statements are not available. As such, the most recent comparable period is presented.
  As of 
  June 30,  December 31, 
Balance Sheets - Eastport Holdings, LLC 2019  2018 
Current assets $108,692  $81,232 
Noncurrent assets  197,885   198,962 
Total assets $306,577  $280,194 
         
Current liabilities $174,789  $144,928 
Noncurrent liabilities  53,886   56,951 
Total liabilities $228,675  $201,879 
         
Total equity $77,902  $78,315 

 

4650

 

 

  As of 
Balance Sheet – Micro Precision, LLC June 30,
2018		  December 31,
2017		 
Current assets $6,524  $6,187 
Noncurrent assets  19,586   15,864 
Total assets $26,110  $22,051 
         
Current liabilities $7,005  $6,511 
Noncurrent liabilities  13,954   15,790 
Total liabilities $20,959  $22,301 
         
Total equity (deficit) $5,151  $(250)

  For the six months ended 
Statements of Operations – Micro Precision, LLC June 30,
2018		  June 30,
2017		 
Net sales $5,907  $9,225 
Cost of goods sold  3,003   5,713 
Gross profit $2,904  $3,512 
         
Other expenses $2,486  $3,152 
Income before income taxes  418   360 
Income tax provision  —   — 
Net income $418  $360 

  As of 
  June 30,  December 31, 
Balance Sheet – Navis Holdings, Inc. 2018  2017 
Current assets $4,498  $4,724 
Noncurrent assets  3,767   2,161 
Total assets $8,265  $6,885 
         
Current liabilities $2,694  $2,463 
Noncurrent liabilities  7,939   6,739 
Total liabilities $10,633  $9,202 
         
Total deficit $(2,368) $(2,317)

47

  For the six months ended 
  June 30,  June 30, 
Statement of Operations – Navis Holdings, Inc. 2018  2017 
Net sales $6,286  $7,200 
Cost of goods sold  3,699   4,437 
Gross profit $2,587  $2,763 
         
Other expenses $2,650  $2,370 
Income (loss) before income taxes  (63)  393 
Income tax benefit (provision)  11   (155)
Net income (loss) $(52) $238 

  As of 
  June 30,  December 31, 
Balance Sheet – On-Site Fuel Services, Inc. 2018  2017 
Current assets $13,505 $28,064 
Noncurrent assets  28,527  26,807 
Total assets $42,032 $54,871 
        
Current liabilities $25,536 $32,626 
Noncurrent liabilities  32,400  34,515 
Total liabilities $57,936 $67,141 
        
Total deficit $(15,904) $(12,270)

 For the six months ended  For the Six Months Ended 
 June 30, June 30,  June 30, June 30, 
Statement of Operations – On-Site Fuel Services, Inc. 2018  2017 
Statements of Operations - Eastport Holdings, LLC 2019  2018 
Net sales $68,582 $74,069  $272,702  $272,634 
Cost of goods sold  65,148  71,812   195,256   192,419 
Gross profit $3,434 $2,257  $77,446  $80,215 
                
Other expenses $6,988 $5,301  $77,360  $77,994 
Loss before income taxes  (3,554)  (3,044)
Income before income taxes  86   2,221 
Income tax provision  —  —   (241)  (289)
Net loss $(3,554) $(3,044)
Net income (loss) $(155) $1,932 

  

Note 11. 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 earnings per share on a diluted basis.share.

  

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 per share for the three and six months ended June 30, 20182019 and June 30, 20172018 (dollars in thousands, except share and per share data):

  For the Three Months Ended  For the Six Months Ended 
  June 30, 2019  June 30, 2018  June 30, 2019  June 30, 2018 
Net increase (decrease) in net assets from operations per share – basic                
Numerator for basic net increase (decrease) in net assets from operations per share $(29,144) $4,948  $(29,295) $5,089 
Denominator for basic net increase (decrease) in net assets from operations per share  16,096,678   15,981,857   16,079,885   15,970,599 
Basic net increase (decrease) in net assets from operations per share $(1.81) $0.31  $(1.82) $0.32 
Net increase (decrease) in net assets from operations per share – diluted(1)                
Numerator for basic net increase (decrease) in net assets from operations per share $(29,144) $4,948  $(29,295) $5,089 
Adjustment for interest on the 2022 Convertible Notes and incentive fees, net  —   133   —   133 
Numerator for diluted net increase (decrease) in net assets from operations per share $(29,144) $5,081  $(29,295) $5,222 
Denominator for basic weighted average shares  16,096,678   15,981,857   16,079,885   15,970,599 
Adjustment for dilutive effect of the 2022 Convertible Notes  —   3,315,474   —   3,315,474 
Denominator for diluted weighted average shares  16,096,678   19,297,331   16,079,885   19,286,073 
Diluted net increase (decrease) in net assets from operations per share $(1.81) $0.26  $(1.82) $0.27 

 

4851

 

  For the three months ended  For the six months ended 
  June 30, 2018  June 30, 2017  June 30, 2018  June 30, 2017 
Net increase (decrease) in net assets from operations per share – basic                
Numerator for basic net increase (decrease) in net assets from operations per share $4,948  $(5,525) $5,089  $(643)
Denominator for basic net increase (decrease) in net assets from operations per share  15,981,857   15,889,682   15,970,599   15,881,712 
Basic net increase (decrease) in net assets from operations per share $0.31  $(0.35) $0.32  $(0.04)
Net increase (decrease) in net assets from operations per share – diluted(1)                
Numerator for basic net increase (decrease) in net assets from operations per share $4,948  $(5,525) $5,089  $(643)
Adjustment for interest on the 2022 Convertible Notes and incentive fees, net  133   —   133   — 
Numerator for diluted net increase (decrease) in net assets from operations per share $5,081  $(5,525) $5,222  $(643)
Denominator for basic weighted average shares  15,981,857   15,889,682   15,970,599   15,881,712 
Adjustment for dilutive effect of the 2022 Convertible Notes  3,315,474   —   3,315,474   — 
Denominator for diluted weighted average shares  19,297,331   15,889,682   19,286,073   15,881,712 
Diluted net increase (decrease) in net assets from operations per share $0.26  $(0.35) $0.27  $(0.04)

  

(1)In applying the if-converted method, conversion is not assumed for purposes of computing diluted earnings per share if the effect would be anti-dilutive. For the three and six months ended June 30, 2017,2019, conversion of the 3.3 million in convertible shares was not assumed as the effect on diluted earnings per share would be anti-dilutive.

 

Note 12. Distributions

 

The Company’s distributions are recorded as payable on the declarationrecord 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.

 

The following table summarizes the Company’s distribution declarations for the six months ended June 30, 20182019 (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 
Total Distributions Declared and Distributed   $0.50  $7,659   43,459  $323 
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 

 

The following table summarizes the Company’s distribution declarations for the six months ended June 30, 20172018 (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 3, 2017 January 20, 2017 January 30, 2017 $0.13  $1,993   5,304  $70 
January 3, 2017 February 20, 2017 February 27, 2017  0.13   1,993   5,195   70 
January 3, 2017 March 23, 2017 March 30, 2017  0.13   1,998   4,948   67 
April 3, 2017 April 19, 2017 April 27, 2017  0.13   1,996   5,164   69 
April 3, 2017 May 23, 2017 May 29, 2017  0.13   1,990   5,880   76 
April 3, 2017 June 21, 2017 June 29, 2017  0.13   1,969   7,959   97 
Total Distributions Declared and Distributed   $0.78  $11,939   34,450  $449 
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 
Total Distributions Declared and Distributed   $0.50  $7,659   43,459  $323 

52

 

Note 13. Financial Highlights

 

The following is a schedule of financial highlights for the six months ended June 30, 20182019 and 20172018 (dollars in thousands, except share and per share data):

 

49

 For the Six Months Ended 
 June 30, 2018  June 30, 2017  June 30, 2019  June 30, 2018 
Per share data:                
Net asset value at beginning of period $13.91  $15.79  $11.88  $13.91 
Net investment income(1)  0.54   0.43   0.51   0.54 
Net realized gain (loss) on investments(1)  (1.66)  0.60 
Net realized loss on investments(1)  (1.30)  (1.66)
Net unrealized appreciation (depreciation) on investments(1)  1.35   (0.92)  (0.99)  1.35 
Net unrealized depreciation on Written Call Option(1)  —   (0.15)
Tax benefit(1)  0.08   — 
Tax benefit (provision)(1)  (0.04)  0.08 
Distributions declared from net investment income  (0.50)  (0.78)  (0.50)  (0.50)
Other(7)  (0.01)  —   (0.01)  (0.01)
Net asset value at end of period $13.71  $14.97  $9.55  $13.71 
Net assets at end of period $219,317  $238,000  $153,863  $219,317 
Shares outstanding at end of period  15,994,690   15,902,495   16,118,948   15,994,690 
Per share market value at end of period $8.30  $13.01  $9.45  $8.30 
Total return based on market value(2)  21.89%  6.75%  40.11%  21.89%
Ratio/Supplemental data:                
Ratio of net investment income to average net assets(9)  8.07%  6.92%  9.98%  8.07%
Ratio of incentive fee, net of incentive fee waiver, to average net assets(6)(10)  0.11%  0.14%  0.68%  0.11%
Ratio of interest and financing expenses to average net assets(8)  7.98%  8.31%  9.84%  7.98%
Ratio of loss on extinguishment of debt to average net assets(10)  —%  1.11%
Ratio of tax benefit to average net assets(8)  (1.19)%  —%
Ratio of tax (benefit) provision to average net assets(8)  0.72%  (1.19)%
Ratio of other operating expenses to average net assets(8)  6.28%  5.79%  7.13%  6.28%
Ratio of total expenses including tax benefit, net of fee waivers, to average net assets(6)(9)  13.18%  15.35%
Ratio of total expenses including tax (benefit) provision, net of incentive fee waiver, to average net assets(6)(9)  18.37%  13.18%
Portfolio turnover rate(3)  7.86%  5.43%  8.09%  7.86%
Average debt outstanding(4) $308,788  $348,999  $301,183  $308,788 
Average debt outstanding per common share $19.31  $21.95  $18.69  $19.31 
Asset coverage ratio per unit(5) $2,660  $2,515  $2,165  $2,660 

 

(1)Based on daily weighted average balance of shares outstanding during the period.
(2)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)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)Based on the daily weighted average balance of debt outstanding during the period.
(5)Asset coverage per unit is the ratio of the carrying value of our total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. We have excluded our SBA-guaranteed debentures from the asset coverage calculation as of June 30, 20182019 and June 30, 20172018 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% 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 0.00%0.16% and 0.39%0.00%, respectively, for the six months ended June 30, 20182019 and June 30, 2017.2018.
(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 fees waiver and loss on extinguishment of debt included within the ratio are not annualized.
(10)Ratio is not annualized.

 

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 June 30, 2018.2019.

 

50

Distributions

 

On July 2, 2018,1, 2019, the Company’s Board declared normal monthly distributions for July, August, and September of 20182019 as set forth below:

  

Date Declared Record Date Payment Date Distributions per Share 
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 
Date Declared Record Date Payment Date Distributions per Share 
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 

53

 

Portfolio Activity

On August 2, 2018,July 25, 2019, the Company invested $13.0received $6.3 million for its debt investments in first lien debt of Sunset Digital Holding,Micro Precision, LLC, yielding 1-month LIBOR + 7.25%.repaid at par.

 

On July 31, 2018,August 1, 2019, the Company soldreceived $18.0 million for its first lien debt investment in Kelle’s Transport Services,Sunset Digital Holdings, LLC, receiving $13.3 million in proceeds upon exit.

Credit Facility

On July 19, 2018, the Company entered into Amendment No. 3 (the “Amendment”) to the Credit Facility.

The Amendment amended the Credit Facility to, among other things, reduce the minimum required Consolidated Interest Coverage Ratio (as defined in the Credit Facility) that the Company must maintain on a quarterly basis from 2.25 to 1 as of the last day of any fiscal quarter of the Company, as was previously in effect, to (i) 1.75 to 1 as of the last day of any fiscal quarter of the Company ending after March 31, 2018 but on or prior to December 31, 2018, and (ii) 2.00 to 1 as of the last day of any fiscal quarter of the Company ending after December 31, 2018.repaid at par.

 

5154

 

 

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 business prospects and the prospects of our portfolio companies;

 

 ·the impact of investments that we expect to make;

 

 ·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 ability of our portfolio companies to achieve their objectives;

 

 ·our expected financings and investments;

 

 ·the adequacy of our cash resources and working capital; and

 

 ·the timing of cash flows, if any, from the operations of our portfolio companies.

 

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;

 

 ·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.10-K and in this quarterly report on Form 10-Q.

 

5255

 

  

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, 2017.2018 and in this quarterly 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.

 

Overview

 

We are a Maryland corporation that has elected to be regulated as a business development company (“BDC”(‘‘BDC’’) under the Investment Company Act of 1940 as amended (the “1940 Act”‘‘1940 Act’’). We are an “emerging growth company” within the meaning of the Jumpstart Our Business Startups Act of 2012, and as such, are subject to reduced public company reporting requirements. 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”‘‘Investment Advisor’’), and Capitala Advisors Corp. (the “Administrator”‘‘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$30.0 million in trailing twelve-month earnings before interest, tax, depreciation, and amortization (“EBITDA”(‘‘EBITDA’’).

 

We invest in first lien loans, second lien loans, and subordinated loans. Most of our debt investments are coupled withloans, and, to a lesser extent, equity interests, whether in the form of detachable “penny” warrants or equity co-investments made pari-passu with our borrowers’ financial sponsors.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)met, after November 1, 2019) after such borrowing, with certain limited exceptions. On March 23, 2018, the Small Business Credit Availability Act (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 allow 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’’ (as such term is defined in Section 57(o) of the 1940 Act) approved the application of the modified asset coverage. As a result, our asset coverage requirements for senior securities will be changed from 200% to 150%, effective November 1, 2019. 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-term capital gains in excess of realized net long-term capital losses, if any, for the taxable year.

56

  

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 IPOIPO; 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.

53

 

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. We have two subsidiariesFund III, our subsidiary, is licensed under the Small Business Investment Company (“SBIC”) Act that haveand has elected to be regulated as BDCsa BDC under the 1940 Act.

During Fund II, our subsidiary, was licensed under the fourth quarter of 2017, Florida Sidecar transferred all of its assetsSBIC Act until March 1, 2019 and has elected to the Company and was legally dissolvedbe regulated as a standalone partnership.BDC under the 1940 Act.

 

The Company has formed and expects to continue to form certain consolidated taxable subsidiaries (the “Taxable Subsidiaries”‘‘Taxable Subsidiaries’’), which are taxed as corporations for 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 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, Florida Sidecar, and the Taxable Subsidiaries.subsidiaries.

 

The Company’s financial statements as of June 30, 20182019 and December 31, 20172018 and for the periods ended June 30, 2019 and June 30, 2018 are presented on a consolidated basis. The effects of all intercompany transactions between the Company and its subsidiaries (Fund II, Fund III, Florida Sidecar, 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 Regulation S-X and 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, Florida Sidecar, and the Taxable Subsidiaries) in its consolidated financial statements. The Company does not consolidate its interest in Capitala Senior Loan Fund II, LLC (‘‘CSLF II’’) because the investment is not considered a substantially wholly owned investment company subsidiary. Further, CSLF II is a joint venture for which shared power exists relating to the decisions that most significantly impact 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.

57

  

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, origination, amendment, structuring or 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 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;

 

·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;

  

54

·transfer agent and custodial fees;

 

·fees 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 “1934 Act”), other applicable federal and state securities laws, and ongoing stock exchange listing fees;

  

·federal, state, and local taxes;

 

·independent directors’ fees and expenses;

 

·brokerage commissions;

 

·costs of proxy statements, stockholders’ reports, and other communications with stockholders;

  

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

 

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

 

58

·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, and 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 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 financial statements and the reported amounts of revenues and expenses for the periods covered by such 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”) 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:

 

55

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.

59

 

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 income (“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 uses net asset value (“NAV”) as the fair value for its equity investment in CSLF II. CSLF II records 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.

 

60

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.

56

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 payment-in-kindPIK interest (“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 income 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 payment-in-kind dividend (“PIK dividends”)dividends 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.

 

61

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.

 

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.

57

 

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 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.

 

For U.S. federal incomeThe Company elected to amend its tax purposes, as of June 30,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, the aggregate net unrealized appreciation for all securities was $56.5 million. As of June 30, 2018, gross unrealized appreciation was $85.1 million and gross unrealized depreciation was $28.6 million. The aggregate cost of securities for U.S. federal income tax purposes was $426.7 million. For U.S. federal income tax purposes, as of December 31, 2017, the aggregate net unrealized appreciation for all securities was $34.9 million. As of DecemberAugust 31, 2017, gross unrealized appreciation was $81.4 million and gross unrealized depreciation was $46.5 million. The aggregate cost of securities forAugust 31, 2016 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 June 30, 2019 and 2018. If the Company was required to recognize interest and penalties, if any, related to unrecognized tax benefits this would be recognized as income tax purposes was $465.0 million asexpense in the consolidated statements of December 31, 2017.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 June 30, 20182019 and December 31, 2017,2018, the Company recorded a net deferred tax asset of $6 thousand$0.0 million and net deferred tax liability of $1.3$0.6 million, respectively. For the three months and six months ended June 30, 2018,2019, the Company recorded a tax benefitprovision of $1.3 million.$(0.7) million and $(0.6) million, respectively. For the three months and six months ended June 30, 2018, the Company recorded a tax benefit of $1.3 million and $1.3 million, respectively. As of June 30, 2019 and December 31, 2018, the valuation allowance on the Company’s deferred tax asset was $2.4 million and $0.4 million, respectively. During the three months and six months ended June 30, 2019, the Company recognized an increase in the valuation allowance of $2.0 million. ForNo change in the valuation allowance was recognized for the three and six months ended June 30, 2017, no tax provision was recorded.2018.

 

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% 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% 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.

 

62

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 June 30, 20182019 and December 31, 2017,2018, there were no uncertain tax positions.

 

The Company is required to determine whether a tax position of the Company is more likely-than-not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized could result in the Company recording a tax liability that could negatively impact the Company’s net assets.

 

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 Company has concluded that it was not necessary to record a liability for any such tax positions as of June 30, 20182019 and December 31, 2017.2018. 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.

  

The tax years ended August 31, 2017, 2016, 2015, and 2014 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 June 30, 2018 and June 30, 2017. 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 has elected to amend its tax year end from August 31 to December 31 and expects to file a tax return for the four months ended December 31, 2017. The election to change tax year end is not expected to have a material impact on the Company’s consolidated statements of operations, the Company’s tax status as a RIC, or the nature of distributions paid to our stockholders.

58

On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act, which significantly changes the existing U.S. tax laws, including a reduction in the corporate tax rate from 35% to 21%, a move from a worldwide tax system to a territorial system, as well as other changes. The Taxable Subsidiaries’ provisional tax is based on the new lower blended federal and state corporate tax rate of 25%. This estimate incorporates assumptions made based on the Taxable Subsidiaries’ current interpretation of the Tax Act and may change, possibly materially, as we complete our analysis and receive additional clarification and implementation guidance.

Portfolio and Investment Activity

 

The Company’s investment objective is to generate both current income and capital appreciation through debt and equity investments. Both directly and through the Company’s subsidiaries that are licensed by the SBA under the SBIC Act, theThe 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, and subordinated loans. Most of the Company’s debt investments are coupled withloans and, to a lesser extent, equity interests, whether in the form of detachable “penny” warrants or equity co-investments made pari-passu with our borrowers’ financial sponsors.securities issued by lower middle-market companies and traditional middle-market companies. As of June 30, 2018,2019, our portfolio consisted of investments in 4341 portfolio companies with a fair value of approximately $483.3$391.1 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. 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 June 30, 2018, 13.4%2019, 17.6% of the fair value of our first lien loans consisted of last-out loans. As of December 31, 2017,2018, 13.7% 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, andbut unlike second lien loans, may be subject to the interruption of cash interest payments upon certain events of default, at the discretion of the first lien lender.

 

63

During the three months ended June 30, 2019, we made approximately $13.8 million of investments and had approximately $46.6 million in repayments and sales of investments, resulting in net repayments and sales of approximately $32.8 million for the period. During the three months ended June 30, 2018, we made approximately $11.2 million of investments and had approximately $32.3 million in repayments and sales, of investments resulting in net repayments and sales of approximately $21.1 million for the period.

During the threesix months ended June 30, 2017,2019, we made approximately $6.5$34.9 million of investments and had approximately $49.3$58.1 million in repayments and sales of investments, resulting in net repayments and sales of approximately $42.8$23.2 million for the period.

During the six months ended June 30, 2018, we made approximately $39.0 million of investments and had approximately $53.7 million in repayments and sales, of investments resulting in net repayments and sales of approximately $14.7 million for the period. During the six months ended June 30, 2017, we made approximately $28.2 million of investments and had approximately $82.3 million in repayments and sales resulting in net repayments and sales of approximately $54.1 million for the period.

On August 31, 2016, we sold a portion of 14 securities across 10 portfolio companies to CapitalSouth Partners Florida Sidecar Fund II, L.P. (“FSC II”), including granting an option to acquire a portion of our equity investment in Eastport Holdings, LLC (the “Written Call Option”), in exchange for 100% of the partnership interests in FSC II. Concurrent with the sale of these assets to FSC II, we 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. Our Board pre-approved this transaction pursuant to Section 57(f) of the 1940 Act.

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.

59

The Written Call Option granted FSC II the right to purchase up to 31.25% of our equity investment in Eastport Holdings, LLC. The Written Call Option has a strike price of $1.5 million and a termination date of August 31, 2018. The fair value of the Written Call Option, which has been treated as a derivative liability and is recorded in the financial statement line item Written Call Option at fair value in our consolidated statements of assets and liabilities, was approximately $6.8 million and $6.8 million as of June 30, 2018 and December 31, 2017, respectively. For purposes of determining the fair value of the Written Call Option, we calculated the difference in the fair value of the underlying equity investment in Eastport Holdings, LLC and the strike price of the Written Call Option, or intrinsic value. The time value of the Written Call Option as of June 30, 2018 and December 31, 2017 was determined to be insignificant. The Written Call Option is classified as a Level 3 financial instrument. The Written Call Option remained outstanding as of June 30, 2018 and December 31, 2017.

   

As of June 30, 2018,2019, our debt investment portfolio, which represented 74.1%77.4% of the fair value of our total portfolio, had a weighted average annualized yield of approximately 11.4%12.2%. As of June 30, 2018, 52.4%2019, 27.2% of the fair value of our debt investment portfolio was bearing a fixed rate of interest. As of December 31, 2017,2018, our debt investment portfolio, which represented 75.5%76.4% of the fair value of our total portfolio, had a weighted average annualized yield of approximately 11.9%. As of December 31, 2017, 51.7%2018, 41.4% 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.

 

The following table summarizes the amortized cost and the fair value of investments and cash and cash equivalents as of June 30, 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 $256,365   54.8% $245,846   46.9% $242,894   64.3% $235,010   60.1%
Second Lien Debt  32,831   7.0   31,781   6.1   16,759   4.4   16,107   4.1 
Subordinated Debt  79,689   17.1   80,318   15.3   51,238   13.5   51,476   13.2 
Equity and Warrants  57,862   12.4   125,316   23.9   53,511   14.2   74,703   19.1 
Cash and Cash Equivalents  40,826   8.7   40,826   7.8 
Capitala Senior Loan Fund II, LLC  13,600   3.6   13,763   3.5 
Total $467,573   100.0% $524,087   100.0% $378,002   100.0% $391,059   100.0%

 

The following table summarizes the amortized cost and the fair value of investments and cash and cash equivalents as of December 31, 20172018 (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 $257,147   51.8% $243,489   45.8% $252,174   60.0% $237,570   52.9%
Second Lien Debt  32,465   6.6   30,794   5.8   33,040   7.9   32,495   7.2 
Subordinated Debt  120,235   24.2   103,385   19.5   72,562   17.3   73,113   16.3 
Equity and Warrants  55,180   11.1   122,271   23.0   48,594   11.6   92,054   20.5 
Cash and Cash Equivalents  31,221   6.3   31,221   5.9 
Capitala Senior Loan Fund II, LLC  13,600   3.2   13,695   3.1 
Total $496,248   100.0% $531,160   100.0% $419,970   100.0% $448,927   100.0%

  

6064

 

  

The following table shows the portfolio composition by industry grouping at fair value (dollars in thousands):

 

  June 30, 2018  December 31, 2017 
  Investments at
Fair Value		  Percentage of
Total Portfolio		  Investments at
Fair Value		  Percentage of
Total Portfolio		 
Business Services $63,409   13.1% $70,122   14.0%
Building Products  38,691   8.0   17,879   3.6 
Consumer Products  28,923   6.0   29,612   5.9 
Financial Services  25,732   5.3   26,920   5.4 
Information Technology  25,132   5.2   24,761   5.0 
Oil & Gas Services  23,842   4.9   27,774   5.6 
Healthcare  19,859   4.1   21,368   4.3 
Sales & Marketing Services  18,241   3.8   17,388   3.5 
Footwear Retail  16,907   3.5   17,748   3.6 
Food Product Manufacturer  16,640   3.4   16,222   3.2 
Industrial Equipment Rental  16,039   3.3   15,603   3.1 
Retail  15,000   3.1   15,000   3.0 
Automobile Part Manufacturer  14,453   3.0   9,285   1.9 
Textile Equipment Manufacturer  13,809   2.9   12,505   2.5 
Transportation  13,300   2.8   11,560   2.3 
Computer Supply Retail  12,771   2.6   12,551   2.5 
Government Services  12,217   2.5   10,320   2.1 
IT Consulting  12,155   2.5   12,231   2.4 
Fuel Transportation Services  12,134   2.5   11,588   2.3 
Advertising & Marketing Services  9,044   1.9   5,157   1.0 
Oil & Gas Engineering and Consulting Services  8,909   1.8   8,528   1.7 
Healthcare Management  8,445   1.8   9,014   1.8 
Professional and Personal Digital Imaging  8,092   1.7   8,810   1.8 
Conglomerate  7,729   1.6   7,645   1.5 
QSR Franchisor  6,245   1.3   7,650   1.5 
Produce Distribution  6,162   1.3   6,170   1.2 
Logistics  5,750   1.2   —   — 
Farming  5,673   1.2   5,581   1.1 
Restaurant  4,892   1.0   4,880   1.0 
Medical Device Distributor  4,757   1.0   4,713   0.9 
Online Merchandise Retailer  3,526   0.7   3,755   0.8 
Home Repair Parts Manufacturer  1,759   0.4   2,767   0.6 
Consumer Electronics  1,130   0.2   3,498   0.7 
Data Processing & Digital Marketing  1,035   0.2   1,035   0.2 
Household Product Manufacturer  758   0.2   1,316   0.3 
Automotive Chemicals & Lubricants  101   0.0   101   0.0 
Specialty Retail  —   —   20,713   4.1 
Refrigeration/HVAC Services  —   —   8,736   1.7 
Bowling Products  —   —   7,186   1.4 
Replacement Window Manufacturer  —   —   1,880   0.4 
In-Home Healthcare Services  —   —   174   0.1 
Retail Display & Security Services  —   —   100   0.0 
Dental Practice Management  —   —   93   0.0 
Total $483,261   100.0% $499,939   100.0%

  June 30, 2019  December 31, 2018 
  Investments at
Fair Value		  Percentage of
Total Portfolio		  Investments at
Fair Value		  Percentage of
Total Portfolio		 
Business Services $59,972   15.4% $57,946   12.9%
Financial Services  28,981   7.4   21,666   4.8 
Consumer Products  26,553   6.8   27,746   6.2 
Sales & Marketing Services  19,277   4.9   19,496   4.3 
Telecommunications  18,000   4.6   18,000   4.0 
Food Product Manufacturer  16,950   4.3   17,335   3.9 
Healthcare  16,944   4.3   16,972   3.8 
IT Consulting  14,591   3.7   15,233   3.4 
Automobile Part Manufacturer  14,571   3.7   14,384   3.2 
Investment Funds  13,763   3.5   13,695   3.0 
Healthcare Management  13,261   3.4   13,792   3.1 
Multi-Platform Media and Consumer Products  12,941   3.3   13,000   2.9 
Textile Equipment Manufacturer  11,445   2.9   12,848   2.8 
Government Services  11,433   2.9   12,109   2.7 
Entertainment  10,950   2.8   —   — 
Retail  10,500   2.7   14,979   3.3 
Information Technology  9,551   2.4   25,232   5.6 
Conglomerate  9,173   2.4   9,004   2.0 
Advertising & Marketing Services  8,935   2.3   8,712   1.9 
Testing Laboratories  7,492   1.9   7,503   1.7 
Electronic Machine Repair  6,137   1.6   6,432   1.4 
Oil & Gas Services  5,796   1.5   9,861   2.2 
Oil & Gas Engineering and Consulting Services  5,689   1.5   6,854   1.5 
Data Services  4,938   1.3   —   — 
Medical Device Distributor  4,865   1.3   4,797   1.1 
Restaurant  4,800   1.2   4,903   1.1 
Computer Supply Retail  4,689   1.2   10,597   2.4 
Online Merchandise Retailer  3,494   0.9   3,499   0.8 
Professional and Personal Digital Imaging  3,252   0.8   6,674   1.5 
Footwear Retail  3,184   0.8   3,184   0.7 
Logistics  2,977   0.8   2,984   0.7 
Home Repair Parts Manufacturer  2,416   0.6   1,722   0.4 
QSR Franchisor  2,039   0.5   3,018   0.7 
Household Product Manufacturer  758   0.2   758   0.2 
Data Processing & Digital Marketing  742   0.2   742   0.2 
Industrial Equipment Rental  —   —   16,327   3.6 
Building Products  —   —   14,833   3.3 
Produce Distribution  —   —   6,210   1.4 
Farming  —   —   5,880   1.3 
Total $391,059   100.0% $448,927   100.0%

 

With the exception of the international investment holdings noted below, all investments made by the Company as of June 30, 20182019 and December 31, 20172018 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 June 30, 20182019 and December 31, 20172018 (dollars in thousands):

 

  June 30, 2018  December 31, 2017 
  Investments at
Fair Value		  Percentage of
Total Portfolio		  Investments at
Fair Value		  Percentage of
Total Portfolio		 
South $244,161   50.5% $254,829   51.0%
West  105,216   21.8   107,835   21.5 
Midwest  77,248   16.0   84,832   17.0 
Northeast  49,722   10.3   44,428   8.9 
International  6,914   1.4   8,015   1.6 
Total $483,261   100.0% $499,939   100.0%
65

  June 30, 2019  December 31, 2018 
  Investments at
Fair Value		  Percentage of
Total Portfolio		  Investments at
Fair Value		  Percentage of
Total Portfolio		 
South $206,673   52.9% $224,856   50.1%
Northeast  65,079   16.6   66,303   14.8 
Midwest  62,806   16.1   77,537   17.3 
West  56,501   14.4   77,353   17.2 
International  —   —   2,878   0.6 
Total $391,059   100.0% $448,927   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.

61

  

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.

 

66

The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of June 30, 20182019 and December 31, 20172018 (dollars in thousands):

 

 As of June 30, 2018  As of December 31, 2017  As of June 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		  Investments at
Fair Value		  Percentage of
Total
Investments		  Investments at
Fair Value		  Percentage of
Total
Investments		 
1 $187,661   38.8% $191,204   38.2% $120,375   30.8% $171,829   38.3%
2  159,091   32.9   186,445   37.3   222,588   56.9   194,411   43.3 
3  110,730   22.9   97,309   19.5   38,293   9.8   73,325   16.3 
4  25,779   5.4   24,981   5.0   9,803   2.5   9,362   2.1 
5  —   —   —   —   —   —   —   — 
Total $483,261   100.0% $499,939   100.0% $391,059   100.0% $448,927   100.0%

 

As of June 30, 2018,2019, we had two debt investments in three portfolio companies on non-accrual status with an aggregate amortized cost of $31.9$13.3 million and aan aggregate fair value of $25.8$8.7 million, which represented 7.5%3.5% and 5.3%2.2% of the investment portfolio, respectively. As of December 31, 2017,2018, we had debt investments in fourtwo portfolio companies on non-accrual status with an aggregate amortized cost of $50.1$20.7 million and aan aggregate fair value of $25.0$9.4 million, which represented 10.8%4.9% and 5.0%2.1% of the investment portfolio, respectively.

Capitala Senior Loan Fund II, LLC

On December 20, 2018, Capitala 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 is to invest primarily in senior secured first-out loans. Capitala and Trinity have committed to provide $25.0 million of equity to CSLF II, with Capitala providing $20.0 million and Trinity providing $5.0 million.

Capitala 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, require approval of a member on the board of directors and investment committee of at least one member representing Capitala and Trinity, respectively.

As of June 30, 2019 and December 31, 2018, $13.6 million and $3.4 million in equity capital had been contributed by Capitala and Trinity, respectively. As of June 30, 2019 and December 31, 2018, 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 is not redeemable.

For the three months ended June 30, 2019 and 2018, the Company received $0.4 million and $0.0 million, respectively, in dividend income from its equity interest in CSLF II. For the six months ended June 30, 2019 and 2018, the Company received $0.4 million and $0.0 million, respectively, in dividend income from its equity interest in CSLF II.

Below is a summary of CSLF II’s portfolio as of June 30, 2019 and December 31, 2018 (dollars in thousands):

  June 30, 2019  December 31, 2018 
First lien loans(1) $16,866  $10,000 
Weighted average current interest rate on first lien loans  7.5%  7.6%
Number of portfolio companies in CSLF II  3   2 
Largest portfolio company investment(1) $6,915  $5,550 
Total of five largest portfolio company investments(1)(2) $16,866  $10,000 

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

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

67

Below is CSLF II’s unaudited schedule of investments as of June 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 (7.5% Cash (3 month LIBOR + 5.0%, 2.0% Floor), Due 12/14/23) $4,478  $4,478  $4,478 
Freedom Electronics, LLC Electronic Machine Repair First Lien Debt (7.4% Cash (1 month LIBOR + 5.0%, 2.0% Floor), Due 12/20/23)  5,473   5,473   5,473 
RAM Payment, LLC Financial Services First Lien Debt (7.4% Cash (1 month LIBOR + 5.0%, 1.5% Floor), Due 1/4/24)  6,915   6,915   6,915 
TOTAL INVESTMENTS     $16,866  $16,866  $16,866 

Below is CSLF II’s schedule of investments as of December 31, 2018 (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 (7.8% Cash (3 month LIBOR + 5.0%, 2.0% Floor), Due 12/14/23) $4,500  $4,500  $4,500 
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 

Below are the Statements of Assets and Liabilities for CSLF II (dollars in thousands):

  As of 
  June 30, 2019  December 31, 2018 
  (unaudited)    
ASSETS        
Investments at fair value (amortized cost of $16,866 and $10,000, respectively) $16,866  $10,000 
Cash and cash equivalents  251   7,100 
Interest receivable  97   31 
Total assets $17,214  $17,131 
LIABILITIES        
Accounts payable $11  $12 
Total liabilities $11  $12 
NET ASSETS        
Partners’ capital $17,203  $17,119 
Total net assets $17,203  $17,119 

68

Below are the unaudited Statements of Operations for CSLF II (dollars in thousands):

  For the Three Months Ended  For the Six Months Ended 
  June 30, 2019  June 30, 2018  June 30, 2019  June 30, 2018 
INVESTMENT INCOME                
Interest income $320  $—  $632  $— 
Fee income  2   —   70   — 
Total investment income $322  $—  $702  $— 
EXPENSES                
General and administrative expenses $31  $—  $117  $— 
Total expenses $31  $—  $117  $— 
NET INVESTMENT INCOME $291  $—  $585  $— 
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $291  $—  $585  $— 

 

Results of Operations

 

Operating results for the three and six months ended June 30, 20182019 and 20172018 were as follows (dollars in thousands):

 

 For the three months ended  For the six months ended  For the Three Months Ended  For the Six Months Ended 
 June 30, 2018  June 30, 2017  June 30, 2018  June 30, 2017  June 30, 2019  June 30, 2018  June 30, 2019  June 30, 2018 
Total investment income $11,882  $12,362  $24,454  $27,177  $11,590  $11,882  $24,274  $24,454 
Total expenses, net of incentive fee waivers  7,651   11,659   15,785   20,283 
Total expenses, net of incentive fee waiver  7,568   7,651   16,117   15,785 
Net investment income  4,231   703   8,669   6,894   4,022   4,231   8,157   8,669 
Net realized gain (loss) from investments  (22,622)  4,687   (26,477)  9,534 
Net realized loss on investments  (15,077)  (22,622)  (20,924)  (26,477)
Net unrealized appreciation (depreciation) on investments  21,994   (9,988)  21,602   (14,659)  (17,395)  21,994   (15,900)  21,602 
Net unrealized depreciation on Written Call Option  —   (927)  —   (2,412)
Tax benefit  1,345   —   1,295   — 
Tax benefit (provision)  (694)  1,345   (628)  1,295 
Net increase (decrease) in net assets resulting from operations $4,948  $(5,525) $5,089  $(643) $(29,144) $4,948  $(29,295) $5,089 

  

62

Investment income

 

The composition of our investment income for the three and six months ended June 30, 20182019 and 20172018 was as follows (dollars in thousands):

 

 For the three months ended  For the six months ended  For the Three Months Ended  For the Six Months Ended 
 June 30, 2018  June 30, 2017  June 30, 2018  June 30, 2017  June 30, 2019  June 30, 2018  June 30, 2019  June 30, 2018 
Interest income $10,605  $9,777  $21,264  $21,774  $10,096  $10,605  $20,117  $21,264 
Fee income  177   323   664   996   308   177   695   664 
Payment-in-kind interest and dividend income  970   2,103   2,327   3,758   724   970   1,643   2,327 
Dividend income  113   54   167   531   425   113   1,731   167 
Other income  —   77   —   77 
Interest from cash and cash equivalents  17   28   32   41   37   17   88   32 
Total investment income $11,882  $12,362  $24,454  $27,177  $11,590  $11,882  $24,274  $24,454 

 

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 schedule 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.

69

  

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.

 

We earn dividends on certain equity investments within our investment portfolio. As noted in our consolidated scheduleschedules 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, and have received, more substantial one-time dividends from our equity investments.

 

For the three months ended June 30, 2018,2019, total investment income decreased by $0.5$0.3 million, or 3.9%2.5%, compared to the three months ended June 30, 2017.2018. Interest income increased $0.8 million,decreased from $9.8 million for the three months ended June 30, 2017 to $10.6 million for the three months ended June 30, 2018.2018 to $10.1 million for the three months ended June 30, 2019. The increasedecrease from the prior period is primarily related to reversal of interest income on non-accrual loans addedlower average outstanding debt investments during the three months ended June 30, 2017. The increase in interest income was offset by a $1.1 million decline in PIK income and a $0.1 million decline in fee income. PIK income declined from $2.1 million for2019 compared to the three months ended June 30, 2017 to2018. PIK income declined from $1.0 million for the three months ended June 30, 2018 to $0.7 million for the three months ended June 30, 2019, primarily due to a decrease in investments with a contractual PIK rate. Fee income declined by $0.1increased from $0.2 million comparedfor the three months ended June 30, 2018 to the prior year, from $0.3 million for the three months ended June 30, 2017 to $0.2 million for2019. For the three months ended June 30, 2018. For2019, we generated $0.2 million in origination fees from new deployments and $0.1 million in non-origination fees. Comparatively, for the three months ended June 30, 2018, we generated $0.1 million in origination fees from new deployments and $0.1 million in othernon-origination fees. Comparatively,Dividend income increased from $0.1 million for the three months ended June 30, 2017, we generated no origination fees2018 to $0.4 million for the three months ended June 30, 2019, primarily due to a $0.4 million dividend received from new deployments and $0.3 million in non-origination fees.CSLF II.

 

For the six months ended June 30, 2018,2019, total investment income decreased by $2.7$0.2 million, or 10.0%0.7%, compared to the six months ended June 30, 2017. The decrease2018. Interest income decreased from the prior period was driven primarily by a $1.5 million decline in PIK income, from $3.8$21.3 million for the six months ended June 30, 2017,2018 to $20.1 million for the six months ended June 30, 2019. The decrease from the prior period is primarily related to lower average outstanding debt investments during the six months ended June 30, 2019 compared to the six months ended June 30, 2018. PIK income declined from $2.3 million for the six months ended June 30, 2018. The decline in PIK income was2018 to $1.6 million for the six months ended June 30, 2019, primarily due to a decrease in investments with a contractual PIK rate. Interest income decreased $0.5 million, from $21.8 million for the six months ended June 30, 2017 to $21.3 million for the six months ended June 30, 2018. The decrease in interest income was driven by a decline in average debt investments and a decline in overall weighted cash yield on the portfolio, partially offset by the impact of income reversal on non-accrual loans added during the six months ended June 30, 2017. Fee income declined by $0.3 million compared to the prior year, from $1.0 million for the six months ended June 30, 2017 toremained relatively flat at $0.7 million for the six months ended June 30, 2019 and June 30, 2018. For the six months ended June 30, 2019, we generated $0.6 million in origination fees from new deployments and $0.1 million in non-origination fees. Comparatively, for the six months ended June 30, 2018, we generated $0.4 million in origination fees from new deployments and $0.3 million in other fees. Comparatively, for the six months ended June 30, 2017, we generated $0.4 million in origination fees from new deployments and $0.6 million in non-origination fees. Dividend income decreasedincreased from $0.5 million for the six months ended June 30, 2017 to $0.2 million for the six months ended June 30, 2018 mostly driven by a one-time dividend paid duringto $1.7 million for the six months ended June 30, 2017.2019, primarily due to a one-time dividend of $1.3 million received on our investment in Nth Degree, Inc and a $0.4 million dividend received from CSLF II.

 

63

Operating expenses

 

The composition of our expenses for the three and six months ended June 30, 20182019 and June 30, 20172018 was as follows (dollars in thousands):

 

 For the three months ended  For the six months ended  For the Three Months Ended  For the Six Months Ended 
 June 30, 2018  June 30, 2017  June 30, 2018  June 30, 2017  June 30, 2019  June 30, 2018  June 30, 2019  June 30, 2018 
Interest and financing expenses $4,331  $5,488  $8,695  $10,141  $4,228  $4,331  $8,641  $8,695 
Loss on extinguishment of debt  —   2,732   —   2,732 
Base management fee  2,314   2,505   4,617   5,019   2,020   2,314   4,138   4,617 
Incentive fees, net of incentive fee waiver  —   —   244   350   175   —   1,209   244 
General and administrative expenses  1,006   934   2,229   2,041   1,145   1,006   2,129   2,229 
Total expenses, net of fee waivers $7,651  $11,659  $15,785  $20,283 
Total expenses, net of incentive fee waiver $7,568  $7,651  $16,117  $15,785 

70

  

For the three months ended June 30, 2018,2019, operating expenses decreased $4.0$0.1 million, or 34.4%1.1%, compared to the three months ended June 30, 2017. For the three months ended June 30, 2017, we recognized a $2.72018. Interest expense decreased from $4.3 million loss on extinguishment of debt related to repayment of our 7.125% Notes due 2021 (the “2021 Notes”). Forfor the three months ended June 30, 2018 interest and financing expenses decreased $1.2to $4.2 million for the three months ended June 30, 2019. The decrease from the prior period is primarily related to lower average outstanding SBA debentures outstanding during the three months ended June 30, 2019 compared to the three months ended June 30, 2017, due primarily to a larger average outstanding debt balance and a higher weighted average interest rate2018. The decrease was offset in part by lower usage on our credit facility for the three months ended June 30, 2017. Management fees declined by $0.2 million, from $2.5 million for2018 compared to the three months ended June 30, 2017 to2019. Management fees declined from $2.3 million for the three months ended June 30, 2018 due to lower average assets under management.

For$2.0 million for the sixthree months ended June 30, 2018, operating expenses decreased $4.5 million, or 22.2%, compared to the six months ended June 30, 2017. For the six months ended June 30, 2017, we recognized a $2.7 million loss on extinguishment of debt related to repayment of our 2021 Notes. For the six months ended June 30, 2018, interest and financing expenses decreased $1.4 million compared to the six months ended June 30, 2017, due primarily to a larger average outstanding debt balance and a higher weighted average interest rate for the six months ended June 30, 2017. Management fees declined by $0.4 million, from $5.0 million for the six months ended June 30, 2017 to $4.6 million for the six months ended June 30, 2018,2019, due to lower average assets under management. Incentive fees, net of incentive fee waiver, declinedincreased from $0.0 million for the three months ended June 30, 2018 to $0.2 million for the three months ended June 30, 2019, primarily due to better performance in relation to our net asset value. General and administrative expenses increased from $1.0 million for the three months ended June 30, 2018 to $1.1 million for the three months ended June 30, 2019, primarily due to higher accounting and audit expenses during the period.

For the six months ended June 30, 2019, operating expenses increased $0.3 million, or 2.1%, compared to the six months ended June 30, 2018. Interest expense decreased from $8.7 million for the six months ended June 30, 2018 to $8.6 million for the six months ended June 30, 2019. The decrease from the prior period is primarily related to lower average outstanding SBA debentures outstanding during the six months ended June 30, 2019 compared to the six months ended June 30, 2018. The decrease was offset in part by $0.1 millionlower usage on our credit facility for the six months ended June 30, 2018 compared to the six months ended June 30, 2017,2019. Management fees declined from $4.6 million for the six months ended June 30, 2018 to $4.1 million for the six months ended June 30, 2019, due to lower pre-incentiveaverage assets under management. Incentive fees, net of incentive fee waiver, increased from $0.2 million for the six months ended June 30, 2018 to $1.2 million for the six months ended June 30, 2019, primarily due to better performance in relation to our net investment income.asset value. General and administrative expenses decreased from $2.2 million for the six months ended June 30, 2018 to $2.1 million for the six months ended June 30, 2019, primarily due to decline in legal fees and accounting and audit expenses during the period.

  

Net realized gains (losses)gain (loss) on sales of investments

 

During the three and six months ended June 30, 2019 we recognized $(15.1) million and $(20.9) million, respectively, of net realized losses on our portfolio investments. During the three and six months ended June 30, 2018 we recognized $(22.6) million and $(26.5) million, respectively, of net realized losses on our portfolio investments. During the three and six months ended June 30, 2017 we recognized $4.7 million and $9.5 million, respectively, of net realized gains 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 six months ended June 30, 2018 we had net unrealized appreciation of $22.0 million and $21.6 million, respectively. For the three and six months ended June 30, 20172019 we had net unrealized depreciation of $(10.0)$(17.4) million and $(14.7)$(15.9) million, respectively.

Net unrealized appreciation (depreciation) on Written Call Option

For the three and six months ended June 30, 2018 we had net unrealized appreciation (depreciation) on the Written Call Option of $0.0$22.0 million and $0.0$21.6 million, respectively.

Tax benefit (provision)

For the three and six months ended June 30, 20172019, we had net unrealized depreciation on the Written Call Optionrecorded a tax provision of $(0.9)$(0.7) million and $(2.4)$(0.6) million, respectively.

Tax benefit

For the three and six months ended June 30, 2018 we recorded a tax benefit of $1.3 million and $1.3 million, respectively. For the three and six months ended June 30, 2017 no tax benefit was recorded.

 

Changes in net assets resulting from operations

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

 

For the three and six months ended June 30, 2018, we recorded a net increase in net assets resulting from operations of $4.9 million and $5.1 million, respectively. Based on the weighted average shares of common stock outstanding for the three and six months ended June 30, 2018, our per share net increase in net assets resulting from operations was $0.31 and $0.32, respectively.

  

For the three and six months ended June 30, 2017 we recorded a net decrease in net assets resulting from operations of $(5.5) million and $(0.6) million, respectively. Based on the weighted average shares of common stock outstanding for the three and six months ended June 30, 2017 our per share net decrease in net assets resulting from operations was $(0.35) and $(0.04), respectively.

6471

 

  

Summarized Financial Information of Our Unconsolidated Subsidiaries

 

The Company holds a control interest, as defined by the 1940 Act, in fivetwo 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 as of June 30, 20182019 and December 31, 2017,2018, and for the six months ended June 30, 20182019 and June 30, 2017.2018.

During the six months ended June 30, 2019, the Company wrote off its investment in AAE Acquisition, LLC and realized a loss of $20.4 million.

 

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 income (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 $0.8$(7.0) million and $0.7$0.8 million for the six months ended June 30, 20182019 and June 30, 2017,2018, respectively.

Eastport Holdings, LLC

 

Eastport Holdings, LLC, an Ohio limited liability company organized on November 1, 2011, is a holding company consisting of marketing and advertising companies located across the U.S. The income (loss) the Company generated from Eastport Holdings, LLC, which includes all interest, dividends, PIK interest and PIK dividends, fees, and unrealized appreciation (depreciation), was $1.3$(0.8) million and $6.3$1.3 million for the six months ended June 30, 20182019 and June 30, 2017, 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 (loss) the Company generated from Micro Precision, LLC, which includes all interest, dividends, PIK interest and PIK dividends, fees, and unrealized appreciation (depreciation), was $0.5 million and $(0.4) million for the six months ended June 30, 2018, and June 30, 2017, respectively.

Navis Holdings, Inc.

Navis Holdings, Inc., incorporated in Delaware on December 21, 2010, designs and manufactures leading machinery for the global knit and woven finishing textile industries. The income the Company generated from Navis Holdings, Inc., which includes all interest, dividends, PIK interest and PIK dividends, fees, and unrealized appreciation (depreciation), was $0.9 million and $0.6 million for the six months ended June 30, 2018 and June 30, 2017.

On-Site Fuel Services, Inc.

On-Site Fuel Services, Inc. is a 100% owned subsidiary of On-Site Fuel Holdings, Inc., which was incorporated in Delaware on December 19, 2011. On-Site Fuel Services, Inc. provides fueling services for commercial and government vehicle fleets throughout the southeast U.S. The income (loss) the Company generated from On-Site Fuel Services, Inc., which includes all interest, dividends, PIK interest and PIK dividends, fees, and unrealized appreciation (depreciation), was $0.5 million and $(0.6) million for the six months ended June 30, 2018 and June 30, 2017, respectively.   

 

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

 

 As of  As of 
Balance Sheet – CableOrganizer Acquisition, LLC June 30,
2018		  December 31,
2017		 
 June 30, December 31, 
Balance Sheets – CableOrganizer Acquisition, LLC 2019  2018 
Current assets $5,012  $5,182  $2,757  $2,987 
Noncurrent assets  8,609   8,354   7,125   8,459 
Total assets $13,621  $13,536  $9,882  $11,446 
                
Current liabilities $13,894  $5,205  $1,792  $13,094 
Noncurrent liabilities  —   12,346   4,689   — 
Total liabilities $13,894  $17,551  $6,481  $13,094 
                
Total deficit $(273) $(4,015)
Total equity (deficit) $3,401  $(1,648)

  For the Six Months Ended 
  June 30,  June 30, 
Statements of Operations – CableOrganizer Acquisition, LLC 2019  2018 
Net sales $6,294  $10,098 
Cost of goods sold  4,527   6,701 
Gross profit $1,767  $3,397 
         
Other expenses $3,200  $4,161 
Loss before income taxes  (1,433)  (764)
Income tax provision  —   — 
Net loss $(1,433) $(764)

 

6572

 

  

  For the six months ended 
Statements of Operations – CableOrganizer Acquisition, LLC June 30,
2018		  June 30,
2017		 
Net sales $10,098  $14,522 
Cost of goods sold  6,701   10,201 
Gross profit $3,397  $4,321 
         
Other expenses $4,161  $5,205 
Loss before income taxes  (764)  (884)
Income tax benefit  —   — 
Net loss $(764) $(884)
  As of 
  June 30,  December 31, 
Balance Sheets - Eastport Holdings, LLC 2019  2018 
Current assets $108,692  $81,232 
Noncurrent assets  197,885   198,962 
Total assets $306,577  $280,194 
         
Current liabilities $174,789  $144,928 
Noncurrent liabilities  53,886   56,951 
Total liabilities $228,675  $201,879 
         
Total equity $77,902  $78,315 

 

  As of 
Balance Sheet – Eastport Holdings, LLC(1) March 31,
2018		  December 31,
2017		 
Current assets $94,994  $94,396 
Noncurrent assets  186,934   180,266 
Total assets $281,928  $274,662 
         
Current liabilities $153,649  $153,182 
Noncurrent liabilities  62,348   56,272 
Total liabilities $215,997  $209,454 
         
Total equity $65,931  $65,208 

  For the six months ended 
Statements of Operations – Eastport Holdings, LLC(1) March 31,
2018		  March 31,
2017		 
Net sales $271,862  $279,038 
Cost of goods sold  195,941   212,736 
Gross profit $75,921  $66,302 
         
Other expenses $68,285  $60,226 
Income before income taxes  7,636   6,076 
Income tax (provision)/benefit  (285)  1,088 
Net income $7,351  $7,164 

(1)June 30, 2018 financial statements are not available. As such, the most recent comparable period is presented.

66

  As of 
Balance Sheet – Micro Precision, LLC June 30,
2018		  December 31,
2017		 
Current assets $6,524  $6,187 
Noncurrent assets  19,586   15,864 
Total assets $26,110  $22,051 
         
Current liabilities $7,005  $6,511 
Noncurrent liabilities  13,954   15,790 
Total liabilities $20,959  $22,301 
         
Total equity (deficit) $5,151  $(250)

  For the six months ended 
Statements of Operations – Micro Precision, LLC June 30,
2018		  June 30,
2017		 
Net sales $5,907  $9,225 
Cost of goods sold  3,003   5,713 
Gross profit $2,904  $3,512 
         
Other expenses $2,486  $3,152 
Income before income taxes  418   360 
Income tax provision  —   — 
Net income $418  $360 

  As of 
  June 30,  December 31, 
Balance Sheet – Navis Holdings, Inc. 2018  2017 
Current assets $4,498  $4,724 
Noncurrent assets  3,767   2,161 
Total assets $8,265  $6,885 
         
Current liabilities $2,694  $2,463 
Noncurrent liabilities  7,939   6,739 
Total liabilities $10,633  $9,202 
         
Total deficit $(2,368) $(2,317)

  For the six months ended 
  June 30,  June 30, 
Statement of Operations – Navis Holdings, Inc. 2018  2017 
Net sales $6,286  $7,200 
Cost of goods sold  3,699   4,437 
Gross profit $2,587  $2,763 
         
Other expenses $2,650  $2,370 
Income (loss) before income taxes  (63)  393 
Income tax benefit (provision)  11   (155)
Net income (loss) $(52) $238 

67

  As of 
  June 30,  December 31, 
Balance Sheet – On-Site Fuel Services, Inc. 2018  2017 
Current assets $13,505 $28,064 
Noncurrent assets  28,527  26,807 
Total assets $42,032 $54,871 
         
Current liabilities $25,536 $32,626 
Noncurrent liabilities  32,400  34,515 
Total liabilities $57,936 $67,141 
         
Total deficit $(15,904) $(12,270)

 For the six months ended  For the Six Months Ended 
 June 30, June 30,  June 30, June 30, 
Statement of Operations – On-Site Fuel Services, Inc. 2018  2017 
Statements of Operations - Eastport Holdings, LLC 2019  2018 
Net sales $68,582 $74,069  $272,702  $272,634 
Cost of goods sold  65,148  71,812   195,256   192,419 
Gross profit $3,434 $2,257  $77,446  $80,215 
                
Other expenses $6,988 $5,301  $77,360  $77,994 
Loss before income taxes  (3,554)  (3,044)
Income before income taxes  86   2,221 
Income tax provision  — —   (241)  (289)
Net loss $(3,554) $(3,044)
Net Income (loss) $(155) $1,932 

 

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.

 

On September 30, 2013, we issued 4,000,000 shares at $20.00 per share inSince our IPO, yieldingwe have raised approximately $136.0 million in net proceeds of $74.25 million.from equity offerings through June 30, 2019.

 

On October 17, 2014, the Company entered into a senior secured revolving credit agreement (the(as amended, the “Credit Facility”) with ING Capital, LLC, as administrative agent, arranger, and bookrunner, and the lenders party thereto. The Credit Facility was amended on May 22, 2015, June 16, 2017, and July 19, 2018, and February 22, 2019 (the “Amendments”). The Amendments were affected, among other things, in order to increase the total borrowings allowed under the Credit Facility, allow for stock repurchases, extend the maturity date, and to 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 June 30, 2018,2019, we had $5.0 million outstanding and $109.5 million available under the Credit Facility.

On April 13, 2015, we completed an underwritten offering of 3,500,000 shares of our common stock at a public offering price of $18.32 per share. The total proceeds received in the offering net of underwriting discounts and offering costs were approximately $61.7 million.

  

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 is payable quarterly beginning August 31, 2017. The 2022 Notes are listed on the NASDAQ Global Select Market under the trading symbol “CPTAL” with a par value $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 on 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 is payable quarterly beginning August 31, 2017. The 2022 Convertible Notes are listed on the NASDAQ Capital Market under the trading symbol “CPTAG” with a par value $25.00 per share.

 

6873

 

  

As of June 30, 2018, Fund II had $26.2 million in regulatory capital and $20.7 million in SBA-guaranteed debentures outstanding and2019, 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 1934 Act, with respect to Fund II and Fund III. We intend to comply with the conditions of the order.

 

As of June 30, 2018,2019, we had $40.8$43.5 million in cash and cash equivalents, and our net assets totaled $219.3$153.9 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.

 

A summary of our significant contractual payment obligations as of June 30, 20182019 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 $5,000  $80,700  $85,000  $—  $170,700  $—  $125,000  $25,000  $—  $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  —   5,000   —   —   5,000   —   5,000   —   —   5,000 
Total Contractual Obligations $5,000  $85,700  $212,088  $—  $302,788  $—  $257,088  $25,000  $—  $282,088 

  

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 have income available, we have made and intend to make monthly distributions thereafter. Our monthly stockholder distributions, if any, will be determined by our Board on a quarterly basis. Any distribution to our stockholders will be declared out of assets legally available for distribution.

74

  

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.

 

69

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 4, 20161, 2017 through June 30, 2018:2019:

 

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 
Total Distributions Declared and Distributed for 2018     $0.50 
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 
Total Distributions Declared and Distributed for 2019     $0.50 

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 

75

  

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 

Date Declared Record Date Payment Date Amount
Per Share		 
January 4, 2016 January 22, 2016 January 28, 2016 $0.1567 
January 4, 2016 February 19, 2016 February 26, 2016  0.1567 
January 4, 2016 March 22, 2016 March 30, 2016  0.1567 
April 1, 2016 April 22, 2016 April 28, 2016  0.1567 
April 1, 2016 May 23, 2016 May 30, 2016  0.1567 
April 1, 2016 June 21, 2016 June 29, 2016  0.1567 
July 1, 2016 July 22, 2016 July 29, 2016  0.1567 
July 1, 2016 August 22, 2016 August 30, 2016  0.1567 
July 1, 2016 September 22, 2016 September 29, 2016  0.1567 
September 22, 2016 October 21, 2016 October 28, 2016  0.1300 
September 22, 2016 November 21, 2016 November 29, 2016  0.1300 
September 22, 2016 December 21, 2016 December 29, 2016  0.1300 
Total Distributions Declared and Distributed for 2016     $1.80 

 

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.

 

70

In addition, an affiliate of the Investment Advisor also manages CapitalSouth Partners SBIC Fund IV, L.P. (“(‘‘Fund IV”IV’’), a private investment limited partnership providingwhich 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”V’’), a private investment limited partnership, and a private investment vehicle (referred to herein as “Capitala Specialty Lending Corp.”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 givento the extent their similarrespective investment strategies.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”‘‘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”‘‘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.

 

76

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.

 

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 June 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 June 30, 2019 and December 31, 2018, was $7.4 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”.‘‘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 June 30, 2019, the Company had outstanding unfunded commitments related to debt and equity investments in existing portfolio companies of $6.4 million (CSLF II), $3.9 million (Portrait Studio, LLC), $1.0 million (Freedom Electronics, LLC), $1.0 million (Jurassic Quest Holdings, LLC), and $1.0 million (U.S. BioTek Laboratories, LLC). As of December 31, 2018, the Company had outstanding unfunded commitments related to debt and equity investments in existing portfolio companies of $3.8$6.4 million (CSLF II), $5.0 million (Portrait Studio, LLC), $1.4 million (Kelle’s Transport Service LLC), $0.7$1.1 million (MC Sign Lessor, Corp)Corp.), $0.7$1.0 million (U.S. Well Services,BioTek Laboratories, LLC), $0.8 million (Freedom Electronics, LLC), and $0.3 million (CableOrganizer Acquisition, LLC).  As of December 31, 2017, the Company had outstanding unfunded commitments related to debt investments in existing portfolio companies of $3.1 million (Portrait Studio, LLC), $2.0 million (CIS Secure Computing, Inc.), $1.0 million (Kelle’s Transport Service, LLC), and $0.7 million (U.S. Well Services, LLC).

In addition to unfunded commitments related to debt investments, the Company also has extended a guaranty on behalf of one of our portfolio companies, whereby we have guaranteed $1.9 million of obligations of Kelle’s Transport Service, LLC. As of June 30, 2018 we have not been required to make payments on this or any previous guaranties, and we consider the credit risks to be remote and the fair value of this guaranty to be immaterial.

 

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.

 

71

Recent Developments

Distributions

 

On July 2, 2018 our1, 2019, the Company’s Board declared the following distributions:normal monthly distributions for July, August, and September of 2019 as set forth below:

 

Date Declared Record Date Payment Date Distributions per Share 
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 
Date Declared Record Date Payment Date Distributions per Share 
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 

Portfolio Activity

 

On August 2, 2018,July 25, 2019, the Company invested $13.0received $6.3 million for its debt investments in Micro Precision, LLC, repaid at par.

On August 1, 2019, the Company received $18.0 million for its first lien debt ofinvestment in Sunset Digital Holding,Holdings, LLC, yielding 1-month LIBOR + 7.25%.repaid at par.

 

On July 31, 2018, the Company sold its investment in Kelle’s Transport Services, LLC, receiving $13.3 million in proceeds upon exit.

77

 

Credit Facility

On July 19, 2018, the Company entered into Amendment No. 3 (the “Amendment”) to the Credit Facility.

The Amendment amended the Credit Facility to, among other things, reduce the minimum required Consolidated Interest Coverage Ratio (as defined in the Credit Facility) that the Company must maintain on a quarterly basis from 2.25 to 1 as of the last day of any fiscal quarter of the Company, as was previously in effect, to (i) 1.75 to 1 as of the last day of any fiscal quarter of the Company ending after March 31, 2018 but on or prior to December 31, 2018, and (ii) 2.00 to 1 as of the last day of any fiscal quarter of the Company ending after December 31, 2018.

  

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 six months ended June 30, 2018,2019, we did not engage in hedging activities.

 

As of June 30, 2018,2019, we held 2227 securities bearing a variable rate of interest. Our variable rate investments represent approximately 47.6%72.8% of the fair value of total debt investments. As of June 30, 2018, 5.9%On a fair value basis, 4.4% of variable rate securities were yielding interest at a rate equal to the established interest rate floor or interest rate ceiling and 94.1%95.6% of variable rate securities were yielding interest at a rate above its interest rate floor or were not subject to an interest rate floor.floor as of June 30, 2019. As of June 30, 2018,2019, we had $5.0 million outstanding on our Credit Facility, which has a variable rate of interest at one-month LIBOR + 3.0%. As of June 30, 2018,2019, all of our other interest paying liabilities, consisting of $170.7$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. 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.

 

Based on our June 30, 20182019 consolidated statements 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 $4,874  $(150) $4,724  $6,749  $(150) $6,599 
Up 200 basis points $3,252  $(100) $3,152  $4,512  $(100) $4,412 
Up 100 basis points $1,626  $(50) $1,576  $2,256  $(50) $2,206 
Down 100 basis points $(1,603) $50  $(1,553) $(1,563) $50  $(1,513)
Down 200 basis points $(2,052) $100  $(1,952) $(2,598) $100  $(2,498)
Down 300 basis points $(2,052) $105  $(1,947) $(2,598) $120  $(2,478)

 

7278

 

  

Item 4. Controls and Procedures

 

(a)Evaluation of Disclosure Controls and Procedures

 

As of June 30, 20182019 (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 second quarter of 20182019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

79

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Other than as described below, we 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 complaint, as currently amended, alleges 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 plaintiffs in the Paskowitz Action seek compensatory damages and attorneys’ fees and costs, among other relief, but did not specify the amount of damages being sought. The time for the defendants in the Paskowitz ActionDefendants have moved to respond todismiss the amended complaint has not yet expired.complaint. While the Company intends to vigorously defend itself in this litigation, 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.

73

 

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, 2017,2018, which could materially affect our business, financial condition and/or operating results.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. During the six months ended June 30, 2018,2019, 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, 2017 except for the following:2018. 

 

Recent legislation may allow us to incur additional leverage.

80

 

The 1940 Act generally prohibits us from incurring indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our total assets). However, on March 23, 2018, the Small Business Credit Availability Act (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 allow 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. Under the SBCA, we are allowed to reduce our asset coverage requirement to 150%, and thereby increase our leverage capacity, if shareholders representing at least a majority of the votes cast, when quorum is met, approve a proposal to do so. If we receive shareholder approval, we would be allowed to reduce our asset coverage requirement to 150% on the first day after such approval. Alternatively, the SBCA allows the majority of our independent directors to approve the reduction in our asset coverage requirement to 150%, and such approval would become effective after one year. In either case, we would be required to make certain disclosures on our website and in SEC filings regarding, among other things, the receipt of approval to reduce our asset coverage requirement to 150%, our leverage capacity and usage, and risks related to leverage.

As a result of the SBCA, if we obtain the necessary approval, we may be able to increase our leverage up to an amount that reduces our asset coverage ratio from 200% to 150%. Leverage magnifies the potential for loss on investments in our indebtedness and on invested equity capital. As we use leverage to partially finance our investments, you will experience increased risks of investing in our securities. If the value of our assets increases, then leveraging would cause the net asset value attributable to our common stock to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged our business. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net investment income to increase more than it would without the leverage, while any decrease in our income would cause net investment income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to pay common stock dividends, scheduled debt payments or other payments related to our securities. Leverage is generally considered a speculative investment technique.

 

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

 

During the quarter ended June 30, 2018,2019, we issued 20,47234,805 shares of common stock under 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 June 30, 20182019 was approximately $0.2$0.3 million. Other than the shares issued under our DRIP during the quarter ended June 30, 2018,2019, we did not sell any unregistered equity securities.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

7481

 

  

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)
10.1Amendment No. 3, dated as of July 19, 2018, to the Senior Secured Revolving Credit Agreement, dated as of October 17, 2014, among Capitala Finance Corp., as borrower, the lenders from time to time party thereto, and ING Capital LLC, as administrative agent, arranger and bookrunner, and First National Bank of Pennsylvania, as documentation agent.(4)
11.1Computation of Per Share Earnings (included in the notes to the consolidated financial statements contained in this report)
   
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 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 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, 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.
(4)Previously filed in connection with Capitala Finance Corp’s report on Form 8-K filed on July 20, 2018.

 

7582

 

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: August 6, 20185, 2019By/s/ Joseph B. Alala III
  Joseph B. Alala III
  Chief Executive Officer
  (Principal Executive Officer)
  Capitala Finance Corp.
   
Date: August 6, 20185, 2019By/s/ Stephen A. Arnall
  Stephen A. Arnall
  Chief Financial Officer
  (Principal Financial andOfficer)
Capitala Finance Corp.
Date: August 5, 2019By/s/ Kevin A. Koonts
Kevin A. Koonts
Chief Accounting Officer
(Principal Accounting Officer)
  Capitala Finance Corp.

 

7683