SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FORM10-Q
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31,
20182024
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number:333-222986 000-56162
CNL STRATEGIC CAPITAL, LLC
(Exact name of registrant as specified in its charter)
__________________________________________________________________________________________________________________________________ | | | | | | | | |
Delaware | | 32-0503849 |
Delaware | | 32-0503849 |
(State or other jurisdiction of incorporation or organization)
| | (I.R.S. Employer Identification No.)
|
| | | | | | | | | | | |
CNL Center at City Commons | | |
450 South Orange Avenue Orlando, Florida
| | |
Orlando, | Florida | | 32801 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code (407)650-1000
Securities registered pursuant to Section 12(b) of the Exchange Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
N/A | N/A | N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐☒ No ☒☐
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 RegulationS-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). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer,
or a smaller reporting
company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | |
Large accelerated filer | | ☐ | | Accelerated filer | | ☐ |
| | | |
Non-accelerated filer | | ☒ Do not check if smaller reporting company | | Smaller reporting company | | ☐☒ |
| | | |
| | | | | | Emerging growth company | | ☒☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ☐ No ☒ As of May
10, 2018,8, 2024, the Company had
3,266,2604,106,671 Class FA shares,
2996,044,026 Class A shares,
and 17,9482,565,283 Class T shares, 2,795,142 Class D shares, 12,974,666 Class I shares
and 1,746,383 Class S shares outstanding.
CNL STRATEGIC CAPITAL, LLC
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
Item 1. Financial Statements
CNL
Strategic Capital,STRATEGIC CAPITAL, LLC
Condensed Consolidated Statements of Assets and Liabilities
| | | | | | | | |
| | March 31, 2018 (unaudited) | | | December 31, 2017 | |
Assets | |
Investments, at fair value (amortized cost $76,931,763 and $— as of March 31, 2018 and December 31, 2017, respectively) | | $ | 77,456,212 | | | $ | — | |
Cash and cash equivalents | | | 5,633,760 | | | | 199,683 | |
Deferred offering expenses | | | 485,482 | | | | 317 | |
| | | | | | | | |
Total assets | | | 83,575,454 | | | | 200,000 | |
| | | | | | | | |
Liabilities | |
Due to related parties (Note 5) | | $ | 772,290 | | | $ | — | |
Distributions payable | | | 302,841 | | | | — | |
Payable for investments purchased | | | 181,126 | | | | — | |
Accounts payable and other accrued expenses | | | 115,345 | | | | — | |
Accrued directors’ fees | | | 22,903 | | | | — | |
| | | | | | | | |
Total liabilities | | | 1,394,505 | | | | — | |
| | | | | | | | |
Commitments and contingencies (Note 8) | |
Members’ Equity (Net Assets) | |
Preferred shares, $0.001 par value 50,000,000 shares authorized and unissued | | $ | — | | | $ | — | |
Common shares, $0.001 par value 94,660,000 Class A shares authorized and unissued | | | — | | | | — | |
Common shares, $0.001 par value 3,400,000 Class FA shares authorized; 3,266,260 and 8,000 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively | | | 3,266 | | | | 8 | |
Common shares, $0.001 par value 662,620,000 Class T shares authorized and unissued | | | — | | | | — | |
Common shares, $0.001 par value 94,660,000 Class D shares authorized and unissued | | | — | | | | — | |
Common shares, $0.001 par value 94,660,000 Class I shares authorized and unissued | | | — | | | | — | |
Capital in excess of par value | | | 81,653,234 | | | | 199,992 | |
Accumulated net unrealized appreciation on investments | | | 524,449 | | | | — | |
| | | | | | | | |
Total Members’ Equity | | $ | 82,180,949 | | | $ | 200,000 | |
| | | | | | | | |
| | | | | | | | |
Net assets, Class FA shares | | $ | 82,180,949 | | | $ | 200,000 | |
| | | | | | | | |
Total Members’ Equity | | $ | 82,180,949 | | | $ | 200,000 | |
| | | | | | | | |
CONDENSED CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(in thousands, except per share data)
| | | | | | | | | | | |
| March 31, 2024 (Unaudited) | | December 31, 2023 |
Assets | | | |
Portfolio company investments at fair value (amortized cost of $729,266 and $719,976, respectively) | $ | 903,133 | | | $ | 876,843 | |
Cash and cash equivalents | 159,876 | | | 134,453 | |
| | | |
Receivable for shares sold | — | | | 1,411 | |
| | | |
| | | |
Prepaid expenses and other assets | 537 | | | 440 | |
Total assets | 1,063,546 | | | 1,013,147 | |
Liabilities | | | |
| | | |
Due to related parties, net (Note 5) | 5,844 | | | 15,787 | |
Payable for shares repurchased | 13,780 | | | 8,224 | |
Deferred tax liabilities, net | 8,233 | | | 7,462 | |
| | | |
| | | |
Accounts payable and other accrued expenses | 1,456 | | | 2,325 | |
| | | |
| | | |
Total liabilities | 29,313 | | | 33,798 | |
Commitments and contingencies (Note 11) | | | |
Members’ Equity (Net Assets) | | | |
Preferred shares, $0.001 par value, 50,000 shares authorized and unissued | — | | | — | |
Class FA Common shares, $0.001 par value, 7,400 shares authorized; 4,844 shares issued; 4,107 and 4,179 shares outstanding, respectively | 4 | | | 4 | |
Class A Common shares, $0.001 par value, 94,660 shares authorized; 6,045 and 5,328 shares issued, respectively; 5,832 and 5,152 shares outstanding, respectively | 6 | | | 5 | |
Class T Common shares, $0.001 par value, 558,620 shares authorized; 3,284 and 3,179 shares issued, respectively; 2,552 and 2,629 shares outstanding, respectively | 3 | | | 3 | |
Class D Common shares, $0.001 par value, 94,660 shares authorized; 2,834 and 2,714 shares issued, respectively; 2,733 and 2,632 shares outstanding, respectively | 3 | | | 3 | |
Class I Common shares, $0.001 par value, 94,660 shares authorized; 13,661 and 12,846 shares issued, respectively; 12,737 and 12,095 shares outstanding, respectively | 13 | | | 12 | |
Class S Common shares, $0.001 par value, 100,000 shares authorized; 1,770 shares issued; 1,746 and 1,748 shares outstanding, respectively | 2 | | | 2 | |
Capital in excess of par value | 894,267 | | | 851,529 | |
Distributable earnings | 139,935 | | | 127,791 | |
Total Members’ Equity | $ | 1,034,233 | | | $ | 979,349 | |
| | | |
Net asset value per share: | | | |
Class FA | $ | 37.20 | | | $ | 36.67 | |
Class A | $ | 33.94 | | | $ | 33.57 | |
Class T | $ | 33.99 | | | $ | 33.64 | |
Class D | $ | 33.68 | | | $ | 33.31 | |
Class I | $ | 34.44 | | | $ | 34.06 | |
Class S | $ | 37.80 | | | $ | 37.25 | |
See notes to condensed consolidated financial statements.
CNL
Strategic Capital,STRATEGIC CAPITAL, LLC
Condensed Consolidated Statement of Operations
(unaudited)
| | | | |
| | For the Period from February 7, 2018 (Commencement of Operations) to March 31, 2018 | |
Investment Income | | | | |
Interest income | | $ | 728,216 | |
| | | | |
Total investment income | | | 728,216 | |
| | | | |
Operating Expenses | | | | |
Organization and offering expenses | | | 221,564 | |
Base management fees | | | 88,562 | |
Professional services | | | 73,581 | |
Director fees and expenses | | | 37,070 | |
Administrative services | | | 32,493 | |
Custodian and accounting fees | | | 15,000 | |
Other | | | 317 | |
| | | | |
Total operating expenses | | | 468,587 | |
Expense support | | | (43,212 | ) |
| | | | |
Net expenses | | | 425,375 | |
| | | | |
Net investment income | | | 302,841 | |
Net change in unrealized appreciation on investments | | | 524,449 | |
| | | | |
Net increase in net assets resulting from operations | | $ | 827,290 | |
| | | | |
| | | | |
Class FA common stock: | | | | |
Net investment income per share | | $ | 0.09 | |
| | | | |
Diluted and basic earnings per share | | $ | 0.25 | |
| | | | |
Weighted average number of common shares outstanding (basic and diluted) | | | 3,266,430 | |
| | | | |
Distributions declared per share | | $ | 0.09 | |
| | | | |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2024 | | 2023 |
Investment income | | | | | | | |
From portfolio company investments: | | | | | | | |
Interest income | | | | | $ | 9,927 | | | $ | 6,848 | |
Dividend income | | | | | 3,673 | | | 5,237 | |
From U.S. Treasury bills and cash accounts | | | | | | | |
Interest and dividend income | | | | | 1,320 | | | 1,233 | |
Total investment income | | | | | 14,920 | | | 13,318 | |
Operating expenses | | | | | | | |
Total return incentive fees | | | | | 4,485 | | | 3,635 | |
Base management fees | | | | | 4,018 | | | 2,663 | |
Offering expenses | | | | | 256 | | | 904 | |
Professional services | | | | | 587 | | | 500 | |
Pursuit costs | | | | | 505 | | | 185 | |
Distribution and shareholder servicing fees | | | | | 318 | | | 269 | |
Custodian and accounting fees | | | | | 133 | | | 138 | |
Insurance expense | | | | | 50 | | | 54 | |
Director fees and expenses | | | | | 53 | | | 51 | |
General and administrative expenses | | | | | 89 | | | 148 | |
| | | | | | | |
| | | | | | | |
Total operating expenses | | | | | 10,494 | | | 8,547 | |
Expense support | | | | | (295) | | | (355) | |
Reimbursement of expense support | | | | | — | | | 242 | |
Net operating expenses | | | | | 10,199 | | | 8,434 | |
Net investment income before taxes | | | | | 4,721 | | | 4,884 | |
Income tax expense | | | | | — | | | 27 | |
Net investment income | | | | | 4,721 | | | 4,911 | |
Realized and unrealized gain (loss) on investments | | | | | | | |
Net realized gain on investments: | | | | | | | |
U.S. Treasury bills | | | | | — | | | 4 | |
Total net realized gain on investments | | | | | — | | | 4 | |
Net change in unrealized appreciation on investments: | | | | | | | |
Portfolio company investments | | | | | 17,001 | | | 14,636 | |
U.S. Treasury bills | | | | | — | | | (24) | |
Provision for deferred taxes on investments | | | | | (771) | | | (1,524) | |
Total net change in unrealized appreciation on investments | | | | | 16,230 | | | 13,088 | |
Net increase in net assets resulting from operations | | | | | $ | 20,951 | | | $ | 18,003 | |
| | | | | | | |
Net increase in net assets resulting from operations per share | | | | | | | |
Class FA | | | | | $ | 0.84 | | | $ | 0.91 | |
Class A | | | | | $ | 0.68 | | | $ | 0.78 | |
Class T | | | | | $ | 0.60 | | | $ | 0.70 | |
Class D | | | | | $ | 0.65 | | | $ | 0.74 | |
Class I | | | | | $ | 0.69 | | | $ | 0.79 | |
Class S | | | | | $ | 0.86 | | | $ | 0.95 | |
See notes to condensed consolidated financial statements.
CNL
Strategic Capital,STRATEGIC CAPITAL, LLC
Condensed Consolidated Statement of Changes
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in
Net Assets(unaudited)
| | | | |
| | For the Period from February 7, 2018 (Commencement of Operations) to March 31, 2018 | |
Operations: | | | | |
Net investment income | | $ | 302,841 | |
Net change in unrealized appreciation on investments | | | 524,449 | |
| | | | |
Net increase in net assets resulting from operations | | | 827,290 | |
| | | | |
Distributions to shareholders from: | | | | |
Net investment income | | | (302,841 | ) |
| | | | |
Net decrease in net assets resulting from distributions to shareholders | | | (302,841 | ) |
| | | | |
Capital share transactions: | | | | |
Issuance of Class FA shares | | | 81,456,500 | |
| | | | |
Net increase in net assets resulting from capital share transactions | | | 81,456,500 | |
| | | | |
Total increase in net assets | | | 81,980,949 | |
Net assets at beginning of period | | | 200,000 | |
| | | | |
Net assets at end of period | | $ | 82,180,949 | |
| | | | |
Capital share activity: | | | | |
Issuance of Class FA shares | | | 3,258,260 | |
| | | | |
Net increase in shares outstanding | | | 3,258,260 | |
| | | | |
thousands, except per share data)
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2024 | | 2023 |
Weighted average shares | | | | | | | |
Class FA | | | | | 4,179 | | | 4,244 | |
Class A | | | | | 5,401 | | | 2,265 | |
Class T | | | | | 2,648 | | | 2,458 | |
Class D | | | | | 2,666 | | | 2,016 | |
Class I | | | | | 12,373 | | | 9,091 | |
Class S | | | | | 1,748 | | | 1,765 | |
See notes to condensed consolidated financial statements.
CNL
Strategic Capital,STRATEGIC CAPITAL, LLC
Condensed Consolidated Statement of Cash Flows
(unaudited)
| | | | |
| | For the Period from February 7, 2018 (Commencement of Operations) to March 31, 2018 | |
Operating Activities: | | | | |
Net increase in net assets resulting from operations | | $ | 827,290 | |
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities: | | | | |
Purchases of investments, net | | | (74,531,763 | ) |
Net change in unrealized appreciation on investments | | | (524,449 | ) |
Amortization of deferred offering expenses | | | 196,041 | |
Increase in payable to related parties | | | 772,290 | |
Increase in payable for investments purchased | | | 181,126 | |
Increase in accrued directors’ fees | | | 22,903 | |
Increase in accounts payable and other accrued expenses | | | 115,345 | |
Increase in deferred offering expenses | | | (681,206 | ) |
| | | | |
Net cash used in operating activities | | | (73,622,423 | ) |
| | | | |
Financing Activities: | | | | |
Proceeds from issuance of common shares | | | 79,056,500 | |
| | | | |
Net cash provided by financing activities | | | 79,056,500 | |
| | | | |
Net increase in cash | | | 5,434,077 | |
Cash and cash equivalents, beginning of period | | | 199,683 | |
| | | | |
Cash and cash equivalents, end of period | | $ | 5,633,760 | |
| | | | |
Supplemental disclosure of cash flow information andnon-cash financing activities: | | | | |
Amounts incurred but not paid (including amounts due to related parties): | | | | |
Distributions payable | | $ | 302,841 | |
Offering costs | | $ | 681,523 | |
Non-cash contribution fromSub-Manager | | $ | 2,400,000 | |
Non-cash purchase of investments | | $ | (2,400,000 | ) |
As described further
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2024 AND 2023
(in
Note 3. “Investments” and Note 5. “Related Party Transactions” to the condensed consolidated financial statements, the approximate $77 million purchase price to acquire the investment in the portfolio companies was partially also funded using the $2.4 millionnon-cash contribution from theSub-Manager.thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Shares | | Capital in Excess of Par Value | | Distributable Earnings | | Total Net Assets |
| Number of Shares | | Par Value | | | |
Balance as of December 31, 2023 | 28,435 | | | $ | 29 | | | $ | 851,529 | | | $ | 127,791 | | | $ | 979,349 | |
Net investment income | — | | | — | | | — | | | 4,721 | | | 4,721 | |
| | | | | | | | | |
Net change in unrealized appreciation on investments | — | | | — | | | — | | | 16,230 | | | 16,230 | |
Distributions to shareholders | — | | | — | | | — | | | (8,807) | | | (8,807) | |
Issuance of common shares through the Public Offerings | 1,552 | | | 2 | | | 52,462 | | | — | | | 52,464 | |
Issuance of common shares through distribution reinvestment plan | 120 | | | — | | | 4,056 | | | — | | | 4,056 | |
Repurchase of common shares pursuant to share repurchase program | (400) | | | — | | | (13,780) | | | — | | | (13,780) | |
Balance as of March 31, 2024 | 29,707 | | | $ | 31 | | | $ | 894,267 | | | $ | 139,935 | | | $ | 1,034,233 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Shares | | Capital in Excess of Par Value | | Distributable Earnings | | Total Net Assets |
| Number of Shares | | Par Value | | | |
Balance as of December 31, 2022 | 21,276 | | | $ | 21 | | | $ | 615,383 | | | $ | 93,695 | | | $ | 709,099 | |
Net investment income | — | | | — | | | — | | | 4,911 | | | 4,911 | |
Net realized loss on investments | — | | | — | | | — | | | 4 | | | 4 | |
Net change in unrealized appreciation on investments | — | | | — | | | — | | | 13,088 | | | 13,088 | |
Distributions to shareholders | — | | | — | | | — | | | (6,601) | | | (6,601) | |
Issuance of common shares through the Public Offerings | 1,806 | | | 2 | | | 59,358 | | | — | | | 59,360 | |
Issuance of common shares through distribution reinvestment plan | 79 | | | — | | | 2,590 | | | — | | | 2,590 | |
Repurchase of common shares pursuant to share repurchase program | (74) | | | — | | | (2,491) | | | — | | | (2,491) | |
Balance as of March 31, 2023 | 23,087 | | | $ | 23 | | | $ | 674,840 | | | $ | 105,097 | | | $ | 779,960 | |
See notes to condensed consolidated financial statements.
CNL
Strategic Capital,STRATEGIC CAPITAL, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2024 | | 2023 |
Operating Activities: | | | |
Net increase in net assets resulting from operations | $ | 20,951 | | | $ | 18,003 | |
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities: | | | |
Purchases of portfolio company investments | (9,938) | | | (106,000) | |
Proceeds from return of capital on portfolio company investments | 649 | | | 165 | |
Purchases of investments in U.S. Treasury bills | — | | | (358,988) | |
Proceeds from redemptions/sales of U.S. Treasury bills | — | | | 412,225 | |
Net realized gain on investments | — | | | (4) | |
Net change in unrealized appreciation on investments, excluding deferred taxes | (17,001) | | | (14,612) | |
Accretion of discounts | — | | | (1,022) | |
| | | |
| | | |
Decrease in due to related parties | (9,943) | | | (10,622) | |
(Decrease) increase in accounts payable and other accrued expenses | (869) | | | 496 | |
Increase in deferred tax liabilities, net | 771 | | | 1,524 | |
Increase (decrease) in prepaid expenses and other assets | 46 | | | (60) | |
Other operating activities | 20 | | | 82 | |
Net cash used in operating activities | (15,314) | | | (58,813) | |
Financing Activities: | | | |
Proceeds from issuance of common shares | 53,875 | | | 34,415 | |
Payment on repurchases of common shares | (8,224) | | | (2,368) | |
Distributions paid, net of distributions reinvested | (4,751) | | | (4,011) | |
Deferred financing costs | (163) | | | (125) | |
Net cash provided by financing activities | 40,737 | | | 27,911 | |
Net increase (decrease) in cash and cash equivalents | 25,423 | | | (30,902) | |
Cash and cash equivalents, beginning of period | 134,453 | | | 36,837 | |
Cash and cash equivalents, end of period | $ | 159,876 | | | $ | 5,935 | |
Supplemental disclosure of cash flow information and non-cash financing activities: | | | |
Distributions reinvested | $ | 4,056 | | | $ | 2,590 | |
Amounts incurred but not paid (including amounts due to related parties): | | | |
| | | |
Offering costs | $ | 134 | | | $ | 380 | |
Payable for shares repurchased | $ | 13,780 | | | $ | 2,491 | |
| | | |
| | | |
| | | |
See notes to condensed consolidated financial statements.
Condensed Consolidated ScheduleTable of Investments(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Company(a) | | Industry | | Interest Rate | | | Base Floor | | | Maturity Date | | | No. Shares/ Principal Amount | | | Cost | | | Fair Value | |
Senior Secured Loan – First Lien–19.1% | | | | | | | | | | | | | | | | | | | | | | | | |
Polyform Products, Co. | | Modeling Clay | | | 16.0 | % | | | N/A | | | | 8/7/2023 | | | $ | 15,700,000 | | | $ | 15,700,000 | | | $ | 15,700,000 | |
Senior Secured Loan – Second Lien–18.3% | | | | | | | | | | | | | | | | | | | | | | | | |
Lawn Doctor | | Commercial and Professional Services | | | 16.0 | % | | | N/A | | | | 8/7/2023 | | | | 15,000,000 | | | | 15,000,000 | | | | 15,000,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Senior Secured Loans | | | | | | | | | | | | | | | | | | $ | 30,700,000 | | | $ | 30,700,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Equity–56.9% | | | | | | | | | | | | | | | | | | | | | | | | |
Polyform Products, Co. | | Modeling Clay | | | | | | | | | | | | | | | 10,820 | | | $ | 15,756,212 | | | $ | 15,756,212 | |
Lawn Doctor | | Commercial and Professional Services | | | | | | | | | | | | | | | 7,746 | | | | 30,475,551 | | | | 31,000,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Equity | | | | | | | | | | | | | | | | | | | | $ | 46,231,763 | | | $ | 46,756,212 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
TOTAL INVESTMENTS–94.3% | | | | | | | | | | | | | | | | | | $ | 76,931,763 | | | $ | 77,456,212 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
OTHER ASSETS IN EXCESS OF LIABILITIES–5.7% | | | | | | | | | | | | 4,724,737 | |
| | | | | | | | | | | | | |
NET ASSETS–100.0% | | | | | | | | | | | $ | 82,180,949 | |
| | | | | | | | | | | | | |
(a)Contents
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
CNL STRATEGIC CAPITAL, LLC CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (UNAUDITED) AS OF MARCH 31, 2024 |
(in thousands except share data) |
Company (1)(2) | | Industry | | Interest Rate | | | | Maturity Date | | Principal Amount / No. Shares | | Amortized Cost | | Fair Value |
Senior Secured Note – First Lien – 5.0% | | | | | | | | | | | | |
Clarion Safety Systems, LLC | | Visual Safety Solutions | | 15.0% | | | | 12/9/2028 | | 22,500 | | | $ | 22,500 | | | $ | 22,500 | |
Lawn Doctor, Inc. | | Commercial and Professional Services | | (3) | | | | 8/6/2029 | | 29,490 | | | 29,490 | | | 29,490 | |
Total Senior Secured Notes – First Lien | | | | | | | | | | | | 51,990 | | | 51,990 | |
Senior Secured Note –14.4% | | | | | | | | | | | | |
ATA Holding Company, LLC(4) | | Real Estate Services | | 15.0% | | | | 4/1/2027 | | $ | 37000 | | | $ | 37,000 | | | $ | 37,000 | |
Auriemma Consulting Group, Inc.(4) | | Information Services and Advisory Solutions | | 8.0% | | | | 8/1/2024 | | 2,000 | | | 2,000 | | | 2,000 | |
Healthcare Safety Holdings, LLC(4) | | Healthcare Supplies | | 15.0% | | | | 7/16/2027 | | 24,400 | | | 24,400 | | | 24,400 | |
Polyform Products, Co.(4) | | Hobby Goods and Supplies | | 16.0% | | | | 2/7/2026 | | 15,700 | | | 15,700 | | | 15,700 | |
Sill Holdings, LLC(4) | | Business Services | | 14.0% | | | | 10/20/2030 | | 15,851 | | | 15,851 | | | 15,851 | |
Tacmed Holdings, LLC(4) | | Healthcare Supplies | | 16.0% | | | | 3/24/2030 | | 29,000 | | | 29,000 | | | 29,000 | |
Vektek Holdings, LLC(4) | | Engineered Products | | (3) | | | | 5/6/2029 | | 24,813 | | | 24,813 | | | 24,813 | |
Total Senior Secured Note | | | | | | | | | | | | 148,764 | | | 148,764 | |
Senior Secured Notes – Second Lien – 7.4% | | | | | | | | | | | | |
Auriemma U.S. Roundtables | | Information Services and Advisory Solutions | | 16.0% | | | | 8/1/2025 | | 12,114 | | | $ | 12,114 | | | $ | 12,114 | |
Blue Ridge ESOP Associates | | Business Services | | 15.0% | | | | 12/28/2028 | | 2,641 | | | 2,641 | | | 2,641 | |
Douglas Machines Corp. | | Sanitation Products | | 16.0% | | | | 10/7/2028 | | 15,000 | | | 15,000 | | | 15,000 | |
Lawn Doctor, Inc. | | Commercial and Professional Services | | 16.0% | | | | 2/7/2030 | | 15,000 | | | 15,000 | | | 15,000 | |
Milton Industries Inc. | | Engineered Products | | 15.0% | | | | 12/19/2027 | | 3,353 | | | 3,353 | | | 3,353 | |
Resolution Economics, LLC | | Business Services | | 15.0% | | | | 1/2/2026 | | 2,834 | | | 2,834 | | | 2,834 | |
USA Water Intermediate Holdings, LLC | | Commercial and Professional Services | | 16.0% | | | | 8/20/2031 | | 1,376 | | | 1,376 | | | 1,376 | |
Vektek Holdings, LLC | | Engineered Products | | 15.0% | | | | 11/6/2029 | | 24,400 | | | 24,400 | | | 24,400 | |
Total Senior Secured Notes – Second Lien | | | | | | | | | | 76,718 | | | 76,718 | |
Total Senior Secured Notes | | | | | | | | | | | | $ | 277,472 | | | $ | 277,472 | |
See notes to condensed consolidated financial statements.
7
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CNL STRATEGIC CAPITAL, LLC CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS (UNAUDITED) AS OF MARCH 31, 2024 (CONTINUED) |
(in thousands except share data) |
Company (1)(2) | | Industry | | Interest Rate | | | | Maturity Date | | Principal Amount / No. Shares | | Amortized Cost | | Fair Value |
Equity – 60.5% | | | | | | | | | | | | | | |
ATA Holding Company, LLC(5) | | Real Estate Services | | | | | | | | 37,985 | | | $ | 37,125 | | | $ | 32,809 | |
Auriemma U.S. Roundtables(5) | | Information Services and Advisory Solutions | | | | | | | | 33,094 | | | 33,476 | | | 59,170 | |
Blue Ridge ESOP Associates | | Business Services | | | | | | | | 11,489 | | | 12,793 | | | 26,247 | |
Clarion Safety Systems, LLC(5) | | Visual Safety Solutions | | | | | | | | 57,368 | | | 56,816 | | | 62,632 | |
Douglas Machines Corp.(5) | | Sanitation Products | | | | | | | | 35,500 | | | 35,500 | | | 42,982 | |
Healthcare Safety Holdings, LLC(5) | | Healthcare Supplies | | | | | | | | 17,320 | | | 17,320 | | | 45,927 | |
Lawn Doctor, Inc.(5) | | Commercial and Professional Services | | | | | | | | 7,746 | | | 27,555 | | | 80,466 | |
Milton Industries Inc. | | Engineered Products | | | | | | | | 6,647 | | | 6,647 | | | 19,639 | |
Polyform Products, Co.(5) | | Hobby Goods and Supplies | | | | | | | | 10,820 | | | 15,599 | | | 14,532 | |
Resolution Economics, LLC | | Business Services | | | | | | | | 7,666 | | | 8,118 | | | 15,683 | |
Sill Holdings, LLC(5) | | Business Services | | | | | | | | 58,549 | | | 58,549 | | | 58,549 | |
Tacmed Holdings, LLC(5) | | Healthcare Supplies | | | | | | | | 77,000 | | | 76,744 | | | 81,631 | |
USA Water Intermediate Holdings, LLC | | Commercial and Professional Services | | | | | | | | 86,245 | | | 8,624 | | | 8,624 | |
Vektek Holdings, LLC(5) | | Engineered Products | | | | | | | | 56,928 | | | 56,928 | | | 76,770 | |
Total Equity | | | | | | | | | | | | 451,794 | | | 625,661 | |
TOTAL INVESTMENTS – 87.3% | | | | | | | | | | | | $ | 729,266 | | | $ | 903,133 | |
OTHER ASSETS IN EXCESS OF LIABILITIES – 12.7% | | | | | | | | | | | | 131,100 | |
NET ASSETS – 100.0% | | | | | | | | | | | | | | $ | 1,034,233 | |
FOOTNOTES:
(1) Security may be an obligation of one or more entities affiliated with the named company.
(2) Percentages represent fair value as a percentage of net assets for each investment category.
(3) As of March 31, 2024, the senior debt investments in Lawn Doctor and Vektek accrue interest at a per annum rate of SOFR + 4.60% and SOFR + 4.35%, respectively. SOFR at March 31, 2024 was 5.32%.
(4) The Company has a first lien on this portfolio company’s assets, except in cases when the portfolio company has a revolving line of credit provided by a third party lender. In some instances the revolving lender has a first priority lien on all assets, whereas, in others, the revolving lender has a first priority lien on only accounts receivable and inventory, if applicable, and a second lien on all other assets.
(5) As of March 31, 2024, the Company owned a controlling interest in this portfolio company.
See notes to condensed consolidated financial statements.
8
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CNL STRATEGIC CAPITAL, LLC CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2023 |
(in thousands except share data) |
Company (1)(2) | | Industry | | Interest Rate | | | | Maturity Date | | Principal Amount / No. Shares | | Amortized Cost | | Fair Value |
Senior Secured Note – First Lien – 20.5% | | | | | | | | | | | | |
ATA Holding Company, LLC | | Real Estate Services | | 15.0% | | | | 4/1/2027 | | 37,000 | | | $ | 37,000 | | | $ | 37,000 | |
Auriemma U.S. Roundtables | | Information Services and Advisory Solutions | | 8.0% | | | | 8/1/2024 | | 2,000 | | | 2,000 | | | 2,000 | |
Clarion Safety Systems, LLC | | Visual Safety Solutions | | 15.0% | | | | 12/9/2028 | | 22,500 | | | 22,500 | | | 22,500 | |
Healthcare Safety Holdings, LLC | | Healthcare Supplies | | 15.0% | | | | 7/16/2027 | | 24,400 | | | 24,400 | | | 24,400 | |
Lawn Doctor, Inc. | | Commercial and Professional Services | | (3) | | | | 2/7/2025 | | 29,490 | | | 29,490 | | | 29,490 | |
Polyform Products, Co. | | Hobby Goods and Supplies | | 16.0% | | | | 2/7/2026 | | 15,700 | | | 15,700 | | | 15,700 | |
Sill Holdings, LLC | | Business Services | | 14.0% | | | | 10/20/2030 | | 15,851 | | | 15,851 | | | 15,851 | |
Tacmed Holdings, LLC | | Healthcare Supplies | | 16.0% | | | | 3/24/2030 | | 29,000 | | | 29,000 | | | 29,000 | |
Vektek Holdings, LLC | | Engineered Products | | (3) | | | | 5/6/2029 | | 24,875 | | | 24,875 | | | 24,875 | |
Total Senior Secured Notes – First Lien | | | | | | | | | | | | 200,816 | | | 200,816 | |
Senior Secured Note – Second Lien – 7.7% | | | | | | | | | | | | |
Auriemma U.S. Roundtables | | Information Services and Advisory Solutions | | 16.0% | | | | 8/1/2025 | | 12,114 | | | $ | 12,114 | | | $ | 12,114 | |
Blue Ridge ESOP Associates | | Business Services | | 15.0% | | | | 12/28/2028 | | 2,641 | | | 2,641 | | | 2,641 | |
Douglas Machines Corp. | | Sanitation Products | | 16.0% | | | | 10/7/2028 | | 15,000 | | | 15,000 | | | 15,000 | |
Lawn Doctor, Inc. | | Commercial and Professional Services | | 16.0% | | | | 7/7/2026 | | 15,000 | | | 15,000 | | | 15,000 | |
Milton Industries Inc. | | Engineered Products | | 15.0% | | | | 12/19/2027 | | 3,353 | | | 3,353 | | | 3,353 | |
Resolution Economics, LLC | | Business Services | | 15.0% | | | | 1/2/2026 | | 2,834 | | | 2,834 | | | 2,834 | |
Vektek Holdings, LLC | | Engineered Products | | 15.0% | | | | 11/6/2029 | | 24,400 | | | 24,400 | | | 24,400 | |
Total Senior Secured Notes – Second Lien | | | | | | | | | | 75,342 | | | 75,342 | |
Total Senior Secured Notes | | | | | | | | | | | | $ | 276,158 | | | $ | 276,158 | |
See notes to condensed consolidated financial statements.
9
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CNL STRATEGIC CAPITAL, LLC CONDENSED CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2023 (CONTINUED) |
(in thousands except share data) |
Company (1)(2) | | Industry | | Interest Rate | | | | Maturity Date | | Principal Amount / No. Shares | | Amortized Cost | | Fair Value |
Equity – 61.3% | | | | | | | | | | | | | | |
ATA Holding Company, LLC(4) | | Real Estate Services | | | | | | | | 37,985 | | | $ | 37,125 | | | $ | 32,376 | |
Auriemma U.S. Roundtables(4) | | Information Services and Advisory Solutions | | | | | | | | 33,094 | | | 33,476 | | | 58,964 | |
Blue Ridge ESOP Associates | | Business Services | | | | | | | | 11,489 | | | 12,793 | | | 22,926 | |
Clarion Safety Systems, LLC(4) | | Visual Safety Solutions | | | | | | | | 57,368 | | | 57,189 | | | 60,451 | |
Douglas Machines Corp.(4) | | Sanitation Products | | | | | | | | 35,500 | | | 35,500 | | | 43,379 | |
Healthcare Safety Holdings, LLC(4) | | Healthcare Supplies | | | | | | | | 17,320 | | | 17,320 | | | 44,988 | |
Lawn Doctor, Inc.(4) | | Commercial and Professional Services | | | | | | | | 7,746 | | | 27,611 | | | 75,165 | |
Milton Industries, Inc. | | Engineered Products | | | | | | | | 6,647 | | | 6,647 | | | 20,982 | |
Polyform Products, Co.(4) | | Hobby Goods and Supplies | | | | | | | | 10,820 | | | 15,599 | | | 15,964 | |
Resolution Economics, LLC | | Business Services | | | | | | | | 7,666 | | | 8,081 | | | 15,189 | |
Sill Holdings, LLC (4) | | Business Services | | | | | | | | 58,549 | | | 58,549 | | | 58,549 | |
Tacmed Holdings, LLC (4) | | Healthcare Supplies | | | | | | | | 77,000 | | | 77,000 | | | 77,000 | |
Vektek Holdings, LLC (4) | | Engineered Products | | | | | | | | 56,928 | | | 56,928 | | | 74,752 | |
Total Equity | | | | | | | | | | | | 443,818 | | | 600,685 | |
TOTAL INVESTMENTS – 89.5% | | | | | | | | | | | | $ | 719,976 | | | $ | 876,843 | |
OTHER ASSETS IN EXCESS OF LIABILITIES – 10.5% | | | | | | | | | | | | 102,506 | |
NET ASSETS – 100.0% | | | | | | | | | | | | | | $ | 979,349 | |
FOOTNOTES:
(1) Security may be an obligation of one or more entities affiliated with the named company.
(2) Percentages represent fair value as a percentage of net assets for each investment category.
(3) As of December 31, 2023, the senior debt investments in Lawn Doctor and Vektek accrue interest at a per annum rate of SOFR + 4.60% and SOFR + 4.35%, respectively. SOFR at December 31, 2023 was 5.34%.
(4) As of December 31, 2023, the Company owned a controlling interest in this portfolio company.
See notes to condensed consolidated financial statements.
10
CNL
Strategic Capital,STRATEGIC CAPITAL, LLC
Notes to Financial Statements (Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2024
1. Principal Business and Organization
CNL Strategic Capital, LLC (the “Company”) is a limited liability company that primarily seeks to acquire and grow durable, middle-market U.S. businesses. The Company is externally managed by CNL Strategic Capital Management, LLC (the “Manager”), an entity that and sub-managed by Levine Leichtman Strategic Capital, LLC (the “Sub-Manager”). The Manager is responsible for the overall management of the Company’s activities and the Sub-Manager is responsible for the day-to-day management of the Company’s assets. The Manager and the Sub-Manager are each registered as an investment adviser under the Investment Advisers Act of 1940, as amended. The Manager is controlled by CNL Financial Group, LLC, a private investment management firm specializing in alternative investment products. Company conducts and intends to continue its operations so that the Company and each of its subsidiaries do not fall within, or are excluded from, the definition of an “investment company” under the Investment Company Act of 1940, as amended (the “Investment Company Act”).
The Company
has engaged the Manager under a management agreement (the “Management Agreement”) pursuantintends to
which the Manager is responsible for the overall management of the Company’s activities. The Manager has engaged Levine Leichtman Strategic Capital, LLC (the“Sub-Manager”), a registered investment advisor, under asub-management agreement (the“Sub-Management Agreement”) pursuant to which theSub-Manager is responsible for theday-to-day management of the Company’s assets. TheSub-Manager is an affiliate of Levine Leichtman Capital Partners, Inc.The Company targets, for acquisition,target businesses that are highly cash flow generative, with annual revenues of primarily between $25$15 million and $500 million.$250 million and whose management teams seek an ownership stake in the company. The Company’s business strategy is to acquire controlling equity stakesinterests in combination with loandebt positions and in middle-market businesses. The Company’s business strategy seeks todoing so, provide long-term capital appreciation and current income while protecting invested capital. The Company seeks to structure its investments with limited, if any, third-party senior leverage.
The Company intends for a significant majority of its total assets to be comprised of long-term controlling equity interests and debt positions in the businesses it acquires. In addition, and to a lesser extent, the Company
intends tomay acquire other debt and minority equity
positions, whichpositions. The Company intends to acquire, directly or through syndication, various types of debt including secured and senior unsecured debt, notes and other instruments. The Company may
include acquiring debt in the secondary market as well asalso acquire minority equity
stakesinterests as a standalone investment and
loan positions viaco-investmentsas a co-investment in combination with other funds
and partnerships managed by
affiliates of theSub-Manager.LLCP or its affiliates. The Company expects that these positions will comprise a minority of its total assets.
The Company
was formed as a Delaware limited liability company on August 9, 2016 and intends to operatecommenced its
business in a manner that will permit it to avoid registration under the Investment Company Actinitial public offering of
1940, as amended (the “Investment Company Act”). The Company did not commence operations until February 7, 2018, as described below.The Company offered through a private placement (the “Private Placement”) up to $85 million$1.1 billion of Class FAits limited liability company interests (the “Class FA” shares, or the “founder (“shares”) andon March 7, 2018 (the “Initial Public Offering”), which included up to $115$100.0 million of Class A limited liability company interests (the “Class A” shares) (one of the classes of shares that constitutenon-founder shares). On February 7, 2018, the Company met the minimum offering requirement of $80 million in Class FA shares under the Private Placement, at which point the Company commenced operations, and it issued approximately 3.3 million Class FA shares at $25.00 per Class FA share resulting in gross proceeds of approximately $81.7 million. No Class A shares were sold under the Private Placement.
In October 2016, the Company confidentially submittedbeing offered through its distribution reinvestment plan, pursuant to a registration statement on FormS-1, as amended (the “Initial Registration Statement”). On November 1, 2021, the Company commenced a follow-on public offering of up to $1.1 billion of shares (the “Follow-On Public Offering” and together with the Initial Public Offering, the “Public Offerings”), which included up to $100.0 million of shares being offered through its distribution reinvestment plan, pursuant to a registration statement on Form S-1 (the “Registration Statement”) filed with the Securities and Exchange Commission (the “SEC”). On February 15, 2024, the Company filed a registration statement on Form S-1 (the “Second Follow-On Registration Statement”) with the SEC in connection with the proposed offering of shares of itsour limited liability company interestsinterest (the “Public“Second Follow-On Public Offering” and together with) which share amounts may be adjusted. As permitted under applicable securities laws, the Private Placement,Company will continue to offer its common shares in the “Offerings”). TheFollow-On Public Offering until the effective date of the Second Follow-On Registration Statement, forupon which the Public Offering was declared effective bycurrent Registration Statement will be deemed terminated.
Through the SEC on March 7, 2018. Through itsFollow-On Public Offering, the Company is offering, in any combination, four classes of shares: Class A shares, Class T shares, Class D shares and Class I shares (collectively, the“non-founder “Non-founder shares”). There are differing selling fees and together withcommissions and dealer manager fees for each share class. The Company also pays distribution and shareholder servicing fees, subject to certain limits, on the Founder Shares,Class T and Class D shares sold in the “Shares”)Follow-On Public Offering (excluding sales pursuant to its distribution reinvestment plan). See Note 7. “Capital Transactions” and Note 13. “Subsequent Events” for additional information related to the Public Offerings.
2. Significant Accounting Policies
The Company’s financial statements are prepared in accordance with
accounting principles generally accepted in the United States
of America (“GAAP”) as contained in the Financial Accounting Standards Board Accounting Standards Codification (the “Codification” or “ASC”), which requires the use of estimates, assumptions and the exercise of subjective judgment as to future uncertainties.
In the opinion of management, the condensed consolidated financial statements reflect all adjustments that are of a normal recurring nature and necessary for the fair presentation of financial results as of and for the periods presented.
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2024
Although the Company is organized and intends to conduct its business in a manner so that it is not required to register as an investment company under the Investment Company Act, its financial statements are prepared using the specialized accounting principles of ASC Topic 946, “Financial Services—Investment Companies” (“ASC Topic 946”) to utilize investment company accounting. The Company obtains funds through the issuance of equity interests to multiple unrelated investors, and provides such investors with investment management services. Further, the Company’s business strategy is to acquire interests in middle-market U.S. businesses to provide current income and long term capital appreciation, while protecting invested capital.
Overall, the Company believes that the use of investment company accounting on a fair value basis is consistent with the management of its assets on a fair value basis, and makes the Company’s financial statements more useful to investors and other financial statement users in facilitating the evaluation of an investment in the Company as compared to other investment products in the marketplace.
Principles of Consolidation
Under ASC Topic 946
“Financial Services—Investment Companies” (“ASC Topic 946”) the Company is precluded from consolidating any entity other than
anotheran investment company or an operating company which provides substantially all of its services to benefit the Company. In accordance therewith, the Company has consolidated the results of its wholly owned subsidiaries
which provide services to the Company in its condensed consolidated financial statements.
However, the Company has not consolidated the results of its subsidiaries in which the Company holds debt and equity investments. All intercompany account balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash consistsand cash equivalents consist of demand deposits and money market funds at commercial banksbanks. Demand deposits are carried at cost plus accrued interest, which approximates fair value. The Company deposits its cash with original maturitieshighly-rated banking corporations and, at times, cash deposits may exceed the insured limits under applicable law.
As of
three months or less fromMarch 31, 2024, the
Company held no cash equivalents. As of December 31, 2023, the Company held cash equivalents in the form of money market fund shares held in Fidelity Government Money Market with a fair value of approximately $73.1 million which represented 7.2% of total assets. Cash equivalents in the form of money market fund shares are valued at their reported net asset value on the measurement date,
and are categorized within Level 1 of
purchase.the fair value hierarchy under ASC Topic 820, as inputs in the valuation are observable.
Management makes estimates and assumptions related to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare the financial
statementstatements in conformity with
generally accepted accounting principles. ActualGAAP. The uncertainty of future events may materially impact the accuracy of the estimates and assumptions used in the financial statements and related footnotes and actual results could differ from those estimates.
ASC Topic 820,
“Fair Value Measurements and Disclosures” (“ASC Topic 820”) clarifies that
the fair value is the price in an orderly transaction between market participants to sell an asset or transfer a liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. ASC Topic 820 provides a consistent definition of fair value which focuses on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs.
In addition, ASC Topic 820 provides a framework for measuring fair value and establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels of valuation hierarchy established by ASC Topic 820 are defined as follows:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market is defined as a market in which transactions for the asset or liability occur with sufficient pricing information on an ongoing basis. Publicly listed equity and debt securities and listed derivatives that are traded on major securities exchanges and publicly traded equity options are generally valued using Level 1 inputs. If a price for a Level 1an asset cannot be determined based upon this established process, it shall then be valued as a Level 2 or Level 3 asset.
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2024
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include the following: (i) quoted prices for similar assets in active markets; (ii) quoted prices for identical or similar assets in markets that are not active; (iii) inputs that are derived principally from or corroborated by observable market data by correlation or other means; and (iv) inputs other than quoted prices that are observable for the assets. Fixed income and derivative assets, where there is an observable secondary trading market and through which pricing inputs are available through pricing services or broker quotes, are generally valued using Level 2 inputs. If a price for a Level 2an asset cannot be determined based upon this established process, it shall then be valued as a Level 3 asset.
Level 3 – Unobservable inputs for the asset or liability being valued. Unobservable inputs will be used to measure fair value to the extent that observable inputs are not available and such inputs will be based on the best information available in the circumstances, which under certain circumstances might include the Manager’s or theSub-Manager’s own data. Level 3 inputs may include, but are not limited to, capitalization and discount rates and earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples. The information may also include pricing information or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. Certain assets may be valued based upon estimated value of underlying collateral and include adjustments deemed necessary for estimates of costs to obtain control and liquidate available collateral. Thenon-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence. Debt and equity investments in private companies or assets valued using the market or income approach are generally valued using Level 3 inputs. In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls will be determined based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each asset.
U.S. Treasury securities are classified as Level 1 assets and are recorded at fair value based on the average of the bid and ask quotes for identical instruments.
The Company’s board of directors is responsible for determining in good faith the fair value of the Company’s
Level 3 investments in accordance with the
Company’s valuation policy and procedures approved by the board of directors, based on, among other
things,factors, the input of the Manager, the
Sub-Manager, management, its audit committee, and
the independent third-party valuation firm. The determination of the fair value of the Company’s
Level 3 assets requires judgment,
especially with respect towhich include assets for which market prices are not available. For most of the Company’s assets, market prices will not be available. Due to the inherent uncertainty of determining the fair value of assets that do not have a readily available market value, the fair value of the assets may differ significantly from the values that would have been used had a readily available market value existed for such assets, and the differences could be material. Because the calculation of the Company’s net asset value is based, in part, on the fair value of its assets, the Company’s calculation of net asset value is subjective and could be adversely affected if the determinations regarding the fair value of its assets were materially higher than the values that the Company ultimately realizes upon the disposal of such assets. Furthermore, through the valuation process, the Company’s board of directors may determine that the fair value of the Company’s
Level 3 assets differs materially from the values that were provided by the independent valuation firm.
The Company may also look to private merger and acquisition statistics, public trading multiples adjusted for illiquidity and other factors, valuations implied by third-party investments in the businesses or industry practices in determining fair value. The Company may also consider the size and scope of a business and its specific strengths and weaknesses, as well as any other factors it deems relevant in assessing the value.
Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation on Investments
The Company will measure realized gains or losses as the difference between the net proceeds from the sale, repayment, or disposal of an asset and the
adjustedamortized cost basis of the asset, without regard to unrealized appreciation or depreciation previously recognized. Net change in unrealized appreciation or depreciation
on investments will reflect the change in asset values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2024
Interest Income– Interest income from loans and debt securities is recorded on an accrual basis to the extent that the Company expects to collect such amounts. The Company does not accrue as a receivable interest on loans and debt securities for accounting purposes if it has reason to doubt its ability to collect such interest.The Company places loans onnon-accrual status when principal and interest are past due 90 days or more or when there is a reasonable doubt that the Company will collect principal or interest. Accrued interest is generally reversed when a loan is placed onnon-accrual. Interest payments received onnon-accrual loans may be recognized as income or applied to principal depending upon management’s judgment.Non-accrual loans are generally restored to accrual status when past due and principal and interest isamounts are paid and, in management’s judgment, isare likely to remain current.
Since inception, the Company has not experienced any past due payments on any of its loan investments.
Original issue discounts (“OID”) on U.S. Treasury securities are reflected in the initial cost basis and the Company accretes such amounts as interest income over the term of the respective security using the effective interest method. The amortized cost of investments represents the original cost adjusted for the accretion of discounts.
Dividend Income – Dividend income is recorded (1) on theex-dividend date for publicly issued securities and (2) on the record date for privately issued securities.securities, but excludes any portion of distributions that are treated as a return of capital. Each distribution received from an equity investment is evaluated to determine if the distribution should be recorded as dividend income or a return of capital. Generally, the Company will not record distributions from equity investments as dividend income unless there are sufficient current or accumulated earnings prior to the distribution. Distributions that are classified as a return of capital are recorded as a reduction in the cost basis of the investment.
Paid in Capital –
The Company records the proceeds from the sale of its common shares on a net basis to (i) capital
stockshares at par value and (ii) paid in capital in excess of par value, excluding upfront selling commissions and dealer manager fees.
Organization and Offering Expenses
Organization expenses are expensed on
Share Repurchases
Under the Company’s statementshare repurchase program (the “Share Repurchase Program”), shares are redeemed as of operations as incurred. the repurchase date, which will generally be the last business day of the month of a calendar quarter. Shares redeemed are retired and not available for reissue. See Note 7. “Capital Transactions” for additional information. Offering Expenses
Offering expenses, which consist of amounts incurred for items such as legal, accounting, regulatory and printing work incurred related to the
Public Offerings, are capitalized on the Company’s
condensed consolidated statements of assets and liabilities as deferred offering expenses and expensed to the Company’s
condensed consolidated statements of operations over the lesser of the offering period or 12 months; however, the end of the deferral period will not exceed 12 months from the date the offering expense is incurred by the Manager and the
Sub-Manager.Earnings
Distribution and Shareholder Servicing Fees
The Company pays distribution and shareholder servicing fees with respect to its Class T and Class D shares, as described further below in Note 5. “Related Party Transactions.” The Company records the distribution and shareholder servicing fees, which accrue daily, in the Company’s condensed consolidated statements of operations as they are incurred. Deferred Financing Costs
Financing costs, including upfront fees, commitment fees and legal fees related to borrowings (as further described in Note 8. “Borrowings”) are deferred and amortized over the life of the related financing instrument using the effective yield method. The amortization of deferred financing costs is included in general and administrative expense in the Company’s condensed consolidated statements of operations.
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2024
Allocation of Profit and Loss
Class-specific expenses, including base management fees, total return incentive fees, offering expenses, expense support (reimbursement), distribution and shareholder servicing fees and certain transfer agent fees, are allocated to each share class of common shares in accordance with how such expenses are attributable to the particular share classes, as determined by the Company’s board of directors, the Company’s governing agreements and, in certain cases, expenses which are specifically identifiable to a share class.
The following table reflects class-specific expenses by share class during the three months ended March 31, 2024 and 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2024 |
| Class FA Shares | | Class A Shares | | Class T Shares | | Class D Shares | | Class I Shares | | Class S Shares |
Base management fees | $ | 265 | | | $ | 850 | | | $ | 405 | | | $ | 414 | | | $ | 1,957 | | | $ | 127 | |
Total return incentive fees | 394 | | | 958 | | | 395 | | | 439 | | | 2,130 | | | 169 | |
Offering expenses | — | | | 99 | | | 16 | | | 17 | | | 124 | | | — | |
Expense support | — | | | — | | | — | | | — | | | (257) | | | (38) | |
Other class-specific expenses (1) | 9 | | | 34 | | | 227 | | | 117 | | | 53 | | | 6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| Class FA Shares | | Class A Shares | | Class T Shares | | Class D Shares | | Class I Shares | | Class S Shares |
Base management fees | $ | 255 | | | $ | 317 | | | $ | 353 | | | $ | 289 | | | $ | 1,328 | | | $ | 121 | |
Total return incentive fees | 418 | | | 442 | | | 437 | | | 378 | | | 1,773 | | | 187 | |
Offering expenses | — | | | 184 | | | 143 | | | 82 | | | 495 | | | — | |
Expense reimbursement (support) | 242 | | | (38) | | | — | | | — | | | (317) | | | — | |
Other class-specific expenses (1) | 11 | | | 25 | | | 208 | | | 92 | | | 60 | | | 6 | |
(1) Other class-specific expenses consist of distribution and shareholder servicing fees and certain transfer agent fees.
Income and expenses which are not class-specific are allocated monthly pro rata among the share classes based on shares outstanding as of the end of the month.
Net Investment Income per Share
Earnings and Net Increase in Net Assets Resulting from Operations per Share
Net investment income per share
isand net increase in net assets resulting from operations per share are calculated for each share class of common shares based upon the weighted average number of common shares outstanding during the reporting period.
Distributions
In March 2018, the
The Company’s board of directors
beganhas declared and intends to continue to declare
cash distributions
to shareholders based on
weeklymonthly record
dates and suchdates. The Company’s distributions are
expected to be paid
on a monthly basis.in the same month as the declared record date. Distributions are made on all classes of the Company’s shares at the same time.
U.S. Federal Income Taxes
The Company has adopted a distribution reinvestment plan that provides for reinvestment of distributions on behalf of shareholders. Non-founder shareholders participating in the distribution reinvestment plan will have their cash distribution automatically reinvested in additional shares having the same class designation as the class of shares to which such distributions are attributable at a price per share equivalent to the then current public offering price, net of up-front selling commissions and dealer manager fees. Cash distributions paid on Class FA shares participating in the distribution reinvestment plan are reinvested in additional Class A shares. Class S shares do not participate in the distribution reinvestment plan.
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2024
Income Taxes
Under GAAP, the Company is subject to the provisions of ASC 740, “Income Taxes.” The Company follows the authoritative guidance on accounting for uncertainty in income taxes and concluded it has no material uncertain tax positions to be recognized at this time. If applicable, the Company will recognize interest and penalties related to unrecognized tax benefits as income tax expense in the Company’s condensed consolidated statements of operations.
The Company has operated and expects
that it willto continue to operate so that it will qualify to be treated for U.S. federal income tax purposes as a partnership, and not as an association or a publicly traded partnership taxable as a corporation. Generally,
if the Company
willwere otherwise treated as a publicly traded partnership, the Company would not be taxable as a corporation if 90% or more of its gross income for each taxable year consists of “qualifying income” (generally, interest (other than interest generated from a financial business), dividends, real property rents, gain from the sale of assets that produce qualifying income and certain other items) and the Company is not required to register under the Investment Company Act (the “qualifying income exception”).
3. Investments
In October 2017, As a partnership, the individual shareholders are responsible for their proportionate share of the Company’s taxable income.
The Company holds certain equity investments in taxable subsidiaries (the “Taxable Subsidiaries”). The Taxable Subsidiaries permit the Company entered intoto hold equity investments in portfolio companies which are “pass through” entities for tax purposes. The Taxable Subsidiaries are not consolidated with the Company for income tax purposes and may generate income tax expense, benefit, and the related tax assets and liabilities, as a merger agreement with LD Merger Sub, Inc., a wholly owned subsidiaryresult of the Company,Taxable Subsidiaries’ ownership of certain portfolio investments. The income tax expense, or benefit, and LD Parent, Inc.,related tax assets and liabilities are reflected in the parent company of Lawn Doctor, Inc. (“Lawn Doctor”). The merger agreement was amended on February 6, 2018. On February 7, 2018, pursuant toCompany’s condensed consolidated financial statements. See Note 9. “Income Taxes” for additional information. During the terms of the merger agreementthree months ended March 31, 2024 and an exchange agreement between2023, the Company did not incur any material interest or penalties. Tax years ending December 31, 2020 and forward remain subject to examination by taxing authorities.
Recently Issued Accounting Standards Updates
In November 2023, the Leichtman-Levine Living Trust, an affiliateFASB issued ASU 2023-07 "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures" ("ASU 2023-07"). ASU 2023-07 intends to improve reportable segment disclosure requirements, enhance interim disclosure requirements and provide new segment disclosure requirements for entities with a single reportable segment. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and for interim periods with fiscal years beginning after December 15, 2024. ASU 2023-07 is to be adopted retrospectively to all prior periods presented. We are currently assessing the impact this guidance will have on our consolidated financial statements; however, we do not expect a material impact to our consolidated financials statements as ASU 2023-07 results in additional disclosure only.
In December 2023, the FASB issued ASU 2023-09 "Improvements to Income Tax Disclosures" ("ASU 2023-09"). ASU 2023-09 intends to improve the transparency of income tax disclosures. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024 and is to be adopted on a prospective basis with theSub-Manager (the “Exchange Agreement”), option to apply retrospectively. We are currently assessing the impact of this guidance; however, we do not expect a material impact to our consolidated financial statements.
3. Investments
In February 2024, the Company, acquired anthrough its wholly-owned subsidiaries, USAW Strategic Capital EquityCo, LLC and USAW Strategic Capital DebtCo, LLC, made a co-investment in USA Water Intermediate Holdings, LLC (“USAW”) of approximately 63.9% equity interest in Lawn Doctor from an affiliate$10.0 million. The Company’s co-investment is comprised of theSub-Manager, through an investment consisting ofa minority common equity position of approximately $8.6 million and a debt$1.4 million of senior secured subordinated notes.
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2024
The Company’s investment in the form of a secured second lien loan to Lawn Doctor. After the closing of the merger, the consummation of the equity contribution pursuant to the Exchange Agreement and subsequent purchases of common equity in Lawn Doctor by certain members of Lawn Doctor’s senior management team, the Company owns approximately 62.9% of the outstanding equity in Lawn Doctor. Asportfolio is summarized as follows as of March 31, 2018, the cost basis of2024 and December 31, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2024 |
Asset Category | Cost | | Fair Value | | Fair Value Percentage of Investment Portfolio | | Fair Value Percentage of Net Assets |
Senior secured debt | | | | | | | |
First lien | $ | 51,990 | | | $ | 51,990 | | | 5.8 | % | | 5.0 | % |
Secured | 148,764 | | | 148,764 | | | 16.5 | | | 14.4 | |
Second lien | 76,718 | | | 76,718 | | | 8.4 | | | 7.4 | |
Total senior secured debt | 277,472 | | | 277,472 | | | 30.7 | | | 26.8 | |
Equity | 451,794 | | | 625,661 | | | 69.3 | | | 60.5 | |
Total investments | $ | 729,266 | | | $ | 903,133 | | | 100.0 | % | | 87.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2023 |
Asset Category | Cost | | Fair Value | | Fair Value Percentage of Investment Portfolio | | Fair Value Percentage of Net Assets |
Senior secured debt | | | | | | | |
First lien | $ | 200,816 | | | $ | 200,816 | | | 22.9 | % | | 20.5 | % |
Second lien | 75,342 | | | 75,342 | | | 8.6 | | | 7.7 | |
Total senior secured debt | 276,158 | | | 276,158 | | | 31.5 | | | 28.2 | |
Equity | 443,818 | | | 600,685 | | | 68.5 | | | 61.3 | |
Total investments | $ | 719,976 | | | $ | 876,843 | | | 100.0 | % | | 89.5 | % |
Collectively, the Company’s
investments in Lawn Doctor was approximately $30.5 million of common equity and $15.0 million of a debt investment. The purchase price is subject to adjustment based on, among other factors, Lawn Doctor’s working capital and indebtedness at the closing with atrue-up adjustment.In October 2017, the Company entered into a merger agreement with PFHI Merger Sub, Inc., a wholly owned subsidiary of the Company, and Polyform Holdings, Inc. (“Polyform”). The merger agreement was amended on February 6, 2018. On February 7, 2018, pursuant to the terms of the merger agreement, the Company acquired an approximately 87.1% equity interest in Polyform from an affiliate of theSub-Manager, through an investment consisting of common equity and a debt investment in the form of a first lien secured term loan to Polyform. As of March 31, 2018, the cost basis of the Company’s investments in Polyform was approximately $15.8 million of common equity and $15.7 million of a debt investment. The purchase price is subject to adjustment based on, among other factors, Polyform’s working capital and indebtedness at the closing with atrue-up adjustment.
The debt investments in the form of a secured second lien loan to Lawn Doctor and in the form of a first lien secured term loan to Polyform, as described above, accrue interest at a weighted average per annum rate of 16%. Each loan will mature in August 2023.14.2% and have weighted average remaining years to maturity of 4.5 years as of March 31, 2024. The note purchase agreements contain customary covenants and events of default.
As of March 31, 2018,2024, all of the Company’s investment portfolio consisted of four distinct positions, summarized as follows:
| | | | | | | | | | | | | | | | |
| | As of March 31, 2018 | |
Asset Category | | Cost | | | Fair Value | | | Fair Value Percentage of Investment Portfolio | | | Fair Value Percentage of Net Assets | |
Senior debt | | | | | | | | | | | | | | | | |
Senior secured debt - first lien | | $ | 15,700,000 | | | $ | 15,700,000 | | | | 20.3 | % | | | 19.1 | % |
Senior secured debt - second lien | | | 15,000,000 | | | | 15,000,000 | | | | 19.4 | | | | 18.3 | |
| | | | | | | | | | | | | | | | |
Total senior debt | | $ | 30,700,000 | | | $ | 30,700,000 | | | | 39.7 | | | | 37.4 | |
Equity | | | 46,231,763 | | | | 46,756,212 | | | | 60.3 | | | | 56.9 | |
| | | | | | | | | | | | | | | | |
Total investments | | $ | 76,931,763 | | | $ | 77,456,212 | | | | 100.0 | % | | | 94.3 | % |
| | | | | | | | | | | | | | | | |
companies were in compliance with their respective debt covenants. As of March 31, 2018,2024 and December 31, 2023, none of the Company’s debt investments were onnon-accrual status.
The industry
and geographic dispersion of the Company’s
investment portfolio
as a percentage of totalcompany investments, based on fair value,
of the Company’s investments as of March 31,
20182024 and December 31, 2023 were as follows:
| | | | |
Industry
| | As of
March 31, 2018 | |
Modeling Clay
| | | 40.6 | % |
Commercial and Professional Services
| | | 59.4 | |
| | | | |
Total
| | | 100.0 | % |
| | | | |
| | | | |
Geographic Dispersion(1)
| | As of
March 31, 2018 | |
United States
| | | 100.0 | % |
| | | | |
Total
| | | 100.0 | % |
| | | | |
(1) | The geographic dispersion is determined by the portfolio company’s country of domicile or the jurisdiction of the security’s issuer. |
| | | | | | | | | | | |
Industry | March 31, 2024 | | December 31, 2023 |
Healthcare Supplies | 20.0 | % | | 20.0 | % |
Engineered Products | 16.5 | | | 16.9 | |
Commercial and Professional Services | 15.0 | | | 13.6 | |
Business Services | 13.5 | | | 13.5 | |
Visual Safety Solutions | 9.4 | | | 9.5 | |
Information Services and Advisory Solutions | 8.1 | | | 8.3 | |
Real Estate Services | 7.8 | | | 7.9 | |
Sanitation Products | 6.4 | | | 6.7 | |
Hobby Goods and Supplies | 3.3 | | | 3.6 | |
Total | 100.0 | % | | 100.0 | % |
All
portfolio companiesinvestment positions held at March 31,
20182024 and December 31, 2023 were denominated in U.S.
dollars.dollars and located in the United States based on their country of domicile.
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2024
Summarized
Operating DataPortfolio Company Financial Information
The Company had five significant portfolio companies in which it owned a controlling equity interest during the three months ended March 31, 2024 and 2023. The following tables present unaudited summarized operating data for
Lawn Doctor and Polyform (the “initial businesses”) for the
period February 7, 2018 (the date we acquired the initial businesses) throughthree months ended March 31,
20182024 and
unaudited2023, and summarized balance sheet data as of March 31,
2018:2024 (unaudited) and December 31, 2023 for these portfolio companies (in thousands):
Lawn DoctorSummarized Operating Data (Unaudited)
| | | | |
| | Period February 7, 2018(1) through March 31, 2018 | |
Revenues | | $ | 3,118,748 | |
Expenses | | | (3,087,288 | ) |
| | | | |
Income before taxes | | | 31,460 | |
Income tax expense | | | (7,825 | ) |
| | | | |
Net Income | | $ | 23,635 | |
| | | | |
Summarized Balance Sheet Data (Unaudited)
| | | | |
| | As of March 31, 2018 | |
Current assets | | $ | 7,016,164 | |
Non-current assets | | $ | 28,927,037 | |
Current liabilities | | $ | 4,081,423 | |
Non-current liabilities | | $ | 38,785,943 | |
Stockholders’ Equity | | $ | (6,924,165 | ) |
Polyform
Summarized Operating Data (Unaudited)
| | | | |
| | Period February 7, 2018(1) through March 31, 2018 | |
Revenues | | $ | 2,417,593 | |
Expenses | | | (2,897,329 | ) |
| | | | |
Net loss before taxes | | | (479,736 | ) |
Income tax benefit | | | 48,000 | |
| | | | |
Net loss | | $ | (431,736 | ) |
| | | | |
Summarized Balance Sheet Data (Unaudited)
| | | | |
| | As of March 31, 2018 | |
Current assets | | $ | 5,771,064 | |
Non-current assets | | $ | 22,436,533 | |
Current liabilities | | $ | 1,167,304 | |
Non-current liabilities | | $ | 20,567,473 | |
Stockholders’ Equity | | $ | 6,472,820 | |
(1) | February 7, 2018 is the date the Company acquired the portfolio companies. |
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2024 | | 2023 |
Revenues | | | | | $ | 9,792 | | | $ | 9,128 | |
Expenses | | | | | (9,589) | | | (8,938) | |
Income before taxes | | | | | 203 | | | 190 | |
Income tax expense | | | | | (169) | | | (80) | |
Consolidated net income | | | | | 34 | | | 110 | |
Net loss attributable to non-controlling interests | | | | | 182 | | | 147 | |
Net income | | | | | $ | 216 | | | $ | 257 | |
| | | | | | | | | | | | | | |
| | As of March 31, 2024 | | As of December 31, 2023 |
Current assets | | $ | 12,592 | | | $ | 10,359 | |
Non-current assets | | 88,425 | | | 89,666 | |
Current liabilities | | 9,538 | | | 7,484 | |
Non-current liabilities | | 62,182 | | | 62,530 | |
Non-controlling interests | | 65 | | | 246 | |
Stockholders’ equity | | 29,232 | | | 29,765 | |
Ownership percentage(1) | | 61 | % | | 61 | % |
FOOTNOTE:
(1)Represents the Company’s undiluted ownership percentage as of the end of the period presented, rounded to the nearest percent.
Roundtables
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2024 | | 2023 |
Revenues | | | | | $ | 4,311 | | | $ | 4,079 | |
Expenses | | | | | (4,498) | | | (4,013) | |
(Loss) income before taxes | | | | | (187) | | | 66 | |
Income tax benefit (expense) | | | | | 44 | | | (7) | |
Net (loss) income | | | | | $ | (143) | | | $ | 59 | |
| | | | | | | | | | | | | | |
| | As of March 31, 2024 | | As of December 31, 2023 |
Current assets | | $ | 12,346 | | | $ | 2,376 | |
Non-current assets | | 58,694 | | | 59,192 | |
Current liabilities | | 13,376 | | | 5,071 | |
Non-current liabilities | | 21,398 | | | 19,399 | |
| | | | |
Stockholders’ equity | | 36,266 | | | 37,098 | |
Ownership percentage(1) | | 81 | % | | 81 | % |
FOOTNOTE:
(1)Represents the Company’s undiluted ownership percentage as of the end of the period presented, rounded to the nearest percent.
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2024
Douglas
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2024 | | 2023 |
Revenues | | | | | $ | 6,552 | | | $ | 8,431 | |
Expenses | | | | | (6,348) | | | (7,844) | |
Income before taxes | | | | | 204 | | | 587 | |
Income tax expense | | | | | (14) | | | (138) | |
Net income | | | | | $ | 190 | | | $ | 449 | |
| | | | | | | | | | | | | | |
| | As of March 31, 2024 | | As of December 31, 2023 |
Current assets | | $ | 10,350 | | | $ | 10,750 | |
Non-current assets | | 46,672 | | | 46,850 | |
Current liabilities | | 3,784 | | | 4,458 | |
Non-current liabilities | | 16,188 | | | 16,271 | |
| | | | |
Stockholders’ equity | | 37,050 | | | 36,871 | |
Ownership percentage(1) | | 90 | % | | 90 | % |
FOOTNOTE:
(1)Represents the Company’s undiluted ownership percentage as of the end of the period presented, rounded to the nearest percent.
Vektek
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2024 | | 2023 |
Revenues | | | | | $ | 9,072 | | | $ | 10,421 | |
Expenses | | | | | (8,796) | | | (9,656) | |
Income before taxes | | | | | 276 | | | 765 | |
Income tax expense | | | | | — | | | (13) | |
Net income | | | | | $ | 276 | | | $ | 752 | |
| | | | | | | | | | | | | | |
| | As of March 31, 2024 | | As of December 31, 2023 |
Current assets | | $ | 14,542 | | | $ | 14,846 | |
Non-current assets | | 98,614 | | | 99,254 | |
Current liabilities | | 2,054 | | | 2,182 | |
Non-current liabilities | | 49,563 | | | 49,625 | |
Stockholders’ equity | | 61,539 | | | 62,293 | |
Ownership percentage(1) | | 84 | % | | 84 | % |
FOOTNOTE:
(1)Represents the Company’s undiluted ownership percentage as of the end of the period presented, rounded to the nearest percent.
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2024
TacMed
The Company acquired its investments in TacMed in March 2023.
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2024 | | 2023 |
Revenues | | | | | $ | 8,428 | | | $ | 786 | |
Expenses | | | | | (10,763) | | | (2,854) | |
Loss before taxes | | | | | (2,335) | | | (2,068) | |
Income tax benefit (expense) | | | | | 228 | | | (20) | |
Net loss | | | | | $ | (2,107) | | | $ | (2,088) | |
| | | | | | | | | | | | | | |
| | As of March 31, 2024 | | As of December 31, 2023 |
Current assets | | $ | 20,449 | | | $ | 22,128 | |
Non-current assets | | 91,103 | | | 92,209 | |
Current liabilities | | 4,108 | | | 4,206 | |
Non-current liabilities | | 35,015 | | | 35,345 | |
Stockholders’ equity | | 72,429 | | | 74,786 | |
Ownership percentage(1) | | 95 | % | | 95 | % |
FOOTNOTE:
(1)Represents the Company’s undiluted ownership percentage as of the end of the period presented, rounded to the nearest percent.
4. Fair Value of Financial Instruments
The Company’s investments were categorized in the fair value hierarchy described in Note 2. “Significant Accounting Policies”,Policies,” as follows as of March 31, 2018: | | | | | | | | | | | | | | | | |
| | As of March 31, 2018 | |
Description | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Senior debt | | $ | — | | | $ | — | | | $ | 30,700,000 | | | $ | 30,700,000 | |
Equity | | | — | | | | — | | | | 46,756,212 | | | | 46,756,212 | |
| | | | | | | | | | | | | | | | |
Total investments | | $ | — | | | $ | — | | | $ | 77,456,212 | | | $ | 77,456,212 | |
| | | | | | | | | | | | | | | | |
There were no transfers between Level 12024 and Level 2 during the period from February 7, 2018 (commencement of operations) through MarchDecember 31, 2018. The carrying value of cash is classified as Level 1 with respect to the fair value hierarchy. For the period from February 7, 2018 (commencement of operations) through March 31, 2018, the Company held four distinct investment positions classified as Level 3, representing an aggregate fair value of $77.5 million or 100.0% of the total investment portfolio. 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2024 | | As of December 31, 2023 |
Description | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Senior Debt | $ | — | | | $ | — | | | $ | 277,472 | | | $ | 277,472 | | | $ | — | | | $ | — | | | $ | 276,158 | | | $ | 276,158 | |
Equity | — | | | — | | | 625,661 | | | 625,661 | | | — | | | — | | | 600,685 | | | 600,685 | |
Total Investments | $ | — | | | $ | — | | | $ | 903,133 | | | $ | 903,133 | | | $ | — | | | $ | — | | | $ | 876,843 | | | $ | 876,843 | |
The ranges of unobservable inputs used in the fair value measurement of the Company’s Level 3 investments as of March 31,
20182024 and December 31, 2023 were as
follows: | | | | | | | | | | | | |
As of March 31, 2018 |
Asset Group | | Fair Value(1) | | | Valuation Techniques | | Unobservable Inputs | | Range (Weighted Average) (2) | | Impact to Valuation from an Increase in Input (3) |
Senior Debt | | $ | 30,700,000 | | | Discounted Cash Flow Market Comparables Transaction Method | | Discount Rate EBITDA Multiple EBITDA Multiple | | 10.5% - 13.5% (11.5%) 7.5x – 12.1x (10.5x) 8.0x – 12.0x (10.7x) | | Decrease Increase Increase |
Equity | | | 46,756,212 | | | Discounted Cash Flow Market Comparables Transaction Method | | Discount Rate EBITDA Multiple EBITDA Multiple | | 10.5% - 13.5% (11.5%) 7.5x – 12.1x (10.5x) 8.0x – 12.0x (10.7x) | | Decrease Increase Increase |
| | | | | | | | | | | | |
Total | | $ | 77,456,212 | | | | | | | | | |
| | | | | | | | | | | | |
follows (in thousands): | (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of March 31, 2024 |
Asset Group | | Certain investments may be valued at cost for a period of time after an acquisition as the best indicator of fair value.
(2)Fair Value | | Valuation Techniques | | Unobservable Inputs | | Range (Weighted average amounts are based on the estimated fair values. |
(3)Average)(1) | | This column represents the directional change in the fair value of the Level 3 investments that would resultImpact to Valuation from an increaseIncrease in Input(2) |
Senior Debt | | $ | 276,096 | | | Discounted Cash Flow Market Comparables Transaction Method | | Discount Rate EBITDA Multiple | | 10.8% – 14.5% (12.7%) 6.3x – 15.1x (11.7x) | | Decrease Increase |
| | 1,376 | | | Transaction Precedent | | Transaction Price | | N/A | | N/A |
Equity | | 617,037 | | | Discounted Cash Flow Market Comparables Transaction Method | | Discount Rate EBITDA Multiple | | 10.8% – 14.5% (12.7%) 6.3x – 15.1x (11.7x) | | Decrease Increase |
| | 8,624 | | | Transaction Precedent | | Transaction Price | | N/A | | N/A |
Total | | $ | 903,133 | | | | | | | | | |
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2024
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2023 |
Asset Group | | Fair Value | | Valuation Techniques | | Unobservable Inputs | | Range (Weighted Average)(1) | | Impact to the corresponding unobservable input. A decrease to the input would have the opposite effect. Significant changesValuation from an Increase in these inputs in isolation could result in significantly higher or lower fair value measurements. Input(2) |
Senior Debt | | $ | 276,158 | | | Discounted Cash Flow Market Comparables Transaction Method | | Discount Rate EBITDA Multiple EBITDA Multiple | | 10.5% – 14.5% (12.5%) 6.9x – 15.1x (10.8x) 6.3x – 16.0x (11.9x) | | Decrease Increase Increase |
| | | | | | | | | | |
Equity | | 600,685 | | | Discounted Cash Flow Market Comparables Transaction Method | | Discount Rate EBITDA Multiple EBITDA Multiple | | 10.5% – 14.5% (12.5%) 6.9x – 15.1x (10.8x) 6.3x – 16.0x (11.9x) | | Decrease Increase Increase |
| | | | | | | | | | |
Total | | $ | 876,843 | | | | | | | | | |
FOOTNOTES:
(1) Discount rates are relative to the enterprise value of the portfolio companies and are not the market yields on the associated debt investments. Unobservable inputs were weighted by the relative fair value of the investments.
(2) This column represents the directional change in the fair value of the Level 3 investments that would result from an increase to the corresponding unobservable input. A decrease to the input would have the opposite effect. Significant changes in these inputs in isolation could result in significantly higher or lower fair value measurements.
The preceding tables
representinclude the significant unobservable inputs as they relate to the Company’s determination of fair values for its investments categorized within Level 3 as of March 31,
2018.2024 and December 31, 2023. In addition to the techniques and inputs noted in the
tabletables above, according to the Company’s valuation policy, the Company may also use other valuation techniques and methodologies when determining the fair value estimates for the Company’s investments. Any significant increases or decreases in the unobservable inputs would result in significant increases or decreases in the fair value of the Company’s investments.
Investments that do not have a readily available market value are valued utilizing a market approach, an income approach (i.e. discounted cash flow approach), a transaction approach, or a combination of such approaches, as appropriate. The market
comparables approach uses prices, including third party indicative broker quotes, and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The transaction approach uses pricing indications derived from recent precedent merger and acquisition transactions involving comparable target companies. The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) that are discounted based on a required or expected discount rate to derive a
single present value
amount.amount range. The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors the Company may take into account to determine the fair value of its investments include, as relevant: available current market data, including an assessment of the credit quality of the security’s issuer, relevant and applicable market trading and transaction comparables, applicable market yields and multiples, illiquidity discounts, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, data derived from merger and acquisition activities for comparable companies, and enterprise values, among other factors.
The following tables provide
reconciliations for the period from February 7, 2018 (commencement of operations) through March 31, 2018a reconciliation of investments for which Level 3 inputs were used in determining fair
value: | | | | | | | | | | | | |
| | Period from February 7, 2018 (commencement of operations) through March 31, 2018 | |
| | Senior Debt | | | Equity | | | Total | |
Fair value balance as of February 7, 2018 | | $ | — | | | $ | — | | | $ | — | |
Additions | | | 30,700,000 | | | | 46,231,763 | | | | 76,931,763 | |
Net change in unrealized appreciation(1) | | | — | | | | 524,449 | | | | 524,449 | |
| | | | | | | | | | | | |
Fair value balance as of March 31, 2018 | | $ | 30,700,000 | | | $ | 46,756,212 | | | $ | 77,456,212 | |
| | | | | | | | | | | | |
Change in net unrealized appreciation in investments held as of March 31, 2018(1) | | $ | — | | | $ | 524,449 | | | $ | 524,449 | |
| | | | | | | | | | | | |
(1) | Included in net change in unrealized appreciation in the consolidated statement of operations. |
No securities were transferred into or out ofvalue for the Level 3 hierarchy during the period from February 7, 2018 (commencement of operations) throughthree months ended March 31, 2018. All realized2024 and 2023 (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2024 |
| Senior Debt | | Equity | | Total |
Fair value balance as of January 1, 2024 | $ | 276,158 | | | $ | 600,685 | | | $ | 876,843 | |
Additions | 1,376 | | | 8,624 | | | 10,000 | |
Principal repayment | (62) | | | — | | | (62) | |
Return of capital(1) | — | | | (649) | | | (649) | |
Net change in unrealized appreciation(2) | — | | | 17,001 | | | 17,001 | |
Fair value balance as of March 31, 2024 | $ | 277,472 | | | $ | 625,661 | | | $ | 903,133 | |
Change in net unrealized appreciation on investments held as of March 31, 2024(2) | $ | — | | | $ | 17,001 | | | $ | 17,001 | |
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2024
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| Senior Debt | | Equity | | Total |
Fair value balance as of January 1, 2023 | $ | 176,942 | | | $ | 411,895 | | | $ | 588,837 | |
Additions | 29,000 | | | 77,000 | | | 106,000 | |
Return of capital(1) | — | | | (165) | | | (165) | |
Net change in unrealized appreciation(2) | — | | | 14,636 | | | 14,636 | |
Fair value balance as of March 31, 2023 | $ | 205,942 | | | $ | 503,366 | | | $ | 709,308 | |
Change in net unrealized appreciation on investments held as of March 31, 2023(2) | $ | — | | | $ | 14,636 | | | $ | 14,636 | |
FOOTNOTES:
(1) Represents portion of distributions received which were accounted for as a return of capital. See Note 2. “Significant Accounting Policies” for information on the accounting treatment of distributions from portfolio companies.
(2) Included in net change in unrealized
gains and losses are includedappreciation on investments in
earnings and are reported as separate line items within the
Company’s statementcondensed consolidated statements of operations.
5. Related Party Transactions
As of December 31, 2017, the Company had issued 4,000 shares of the Company’s Class FA shares, to each of the Manager andSub-Manager, for an aggregate purchase price of $0.2 million (total of 8,000 Class FA shares). No selling commissions or dealer manager fees were paid in connection with the issuances.
On February 7, 2018, the Company commenced operations when it met the minimum offering requirement of $80 million in Class FA shares under its Private Placement. The $81.7 million in gross proceeds included a cash capital contribution of $2.4 million from the Manager in exchange for 96,000 Class FA shares and a cash capital contribution of $9.5 million from CNL Strategic Capital Investment, LLC, which is indirectly controlled by James M. Seneff, Jr., the chairman of the Company, in exchange for 380,000 Class FA shares. The $81.7 million also included 96,000 Class FA shares received in exchange for $2.4 million ofnon-cash consideration in the form of equity interests in Lawn Doctor received from an affiliate of theSub-Manager pursuant to the Exchange Agreement. The $81.7 million in gross proceeds also included a cash capital contribution of approximately $0.4 million in exchange for 15,000 Class FA shares, from other individuals affiliated with the Manager.
The Manager and
Sub-Manager, along with certain affiliates of the Manager or
Sub-Manager, will receive fees and compensation in connection with the
Private Placement and Public
OfferingOfferings, as well as the acquisition, management and sale of the assets of the Company, as follows:
Placement Agent/
Commissions — Under the Private Placement, there was no selling commission for the sale of Class FA shares. Under the Public Offering, theThe Company will paypays CNL Securities Corp. (the “Managing Dealer” in connection with), an affiliate of the Public Offering and the “Placement Agent” in connection with the Private Placement)Manager, a selling commission up to 6.00% of the sale price for each Class A share and 3.00% of the sale price for each Class T share sold in the Follow-On Public Offering (excluding sales pursuant to the Company’s distribution reinvestment plan). The Managing Dealer may reallow all or a portion of the selling commissions to participating broker-dealers.Placement Agent/
Dealer Manager Fee— Under the Private Placement, there was no placement agent fee for the sale of Class FA shares. Under the Public Offering, theThe Company will paypays the Managing Dealer a dealer manager fee of up to 2.50% of the price of each Class A share and 1.75% of the price of each Class T share sold in the Follow-On Public Offering (excluding sales pursuant to the Company’s distribution reinvestment plan). The Managing Dealer may reallow all or a portion of such dealer manager fees to participating broker-dealers.Annual
Distribution and Shareholder Servicing Fee— Under the Public Offering, beginning no later than the end of June 2018, theThe Company will also paypays the Managing Dealer an annuala distribution and shareholder servicing fee, subject to certain limits, with respect to its Class T and Class D shares sold in the Public Offerings (excluding Class T Sharesshares and Class D shares sold through the distribution reinvestment plan and those received as share distributions) in an annual amount equal to 1.00% and 0.50%, respectively, of its current net asset value per share, as disclosed in its periodic or current reports, payable on a monthly basis. The annual distribution and shareholder servicing fee will accrueaccrues daily and beis paid monthly in arrears. The Managing Dealer may reallow all or a portion of the annual distribution and shareholder servicing fee to the broker-dealer who sold the Class T or Class D shares or, if applicable, to a servicing broker-dealer of the Class T or Class D shares or a fund supermarket platform featuring Class D shares, so long as the broker-dealer or financial intermediary has entered into a contractual agreement with the Managing Dealer that provides for such reallowance. The annual distribution and shareholder servicing feesfee is an ongoing fee, subject to certain limits, that will beis allocated among all Class T and Class D shares, respectively, and willis not be paid at the time of purchase.
Manager and/or
Sub-ManagerOrganization and
Offering Costs — Under each of the Private Placement and Public Offering, theThe Company will reimbursereimburses the Manager and itsthe Sub-Manager, along with their respective affiliates, for the organization and offering costs (other than selling commissions and placement agentdealer manager fees) they have incurred on the Company’s behalf only to the extent that such expenses do not exceed (A) 1.0% of the cumulative gross proceeds from the Private Placement and (B) 1.5% of the cumulative gross proceeds from the Public Offering. As of March 31, 2018, the Manager andSub-Manager, along with their respective affiliates, have incurred organization and offering costs of approximately $3.6 million. As of March 31, 2018, theOfferings. The Company had incurred an obligation to reimburse the Manager andSub-Manager for approximately $0.7 million in organization and offering costs based on actual amounts raised through the Public Offerings of Class FA shares under its Private Placement, all of which was outstanding as ofapproximately $0.3 million and $0.9 million during the three months ended March 31, 2018.2024 and 2023, respectively.
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2024
Base Management Fee to Manager andSub-Manager— The Company will paypays each of the Manager and theSub-Manager 50% of the total base management fee for their services under the Management Agreement and theSub-Management Agreement, subject to any reduction or deferral of any such fees pursuant to the terms of the Expense Support and Conditional Reimbursement Agreement described below. The Company incurred base management fees of approximately $4.0 million and $2.7 million during the three months ended March 31, 2024 and 2023, respectively.
The base management fee
will beis calculated for each share class at an annual rate of (i) for the
non-founder Non-founder shares of a particular class, 2% of the product of (x) the Company’s average gross assets and (y) the ratio of
non-founder share Non-founder shares Average Adjusted Capital (as defined below), for a particular class to total Average Adjusted Capital and (ii) for the
founderFounder shares
of a particular class, 1% of the product of (x) the Company’s average gross assets and (y) the ratio of outstanding
founder shareFounder shares Average Adjusted Capital
for a particular class to total Average Adjusted Capital, in each case excluding cash, and
will beis payable monthly in arrears. The management fee for a certain month is calculated based on the average value of the Company’s gross assets at the end of that month and the immediately preceding calendar month. The determination of gross assets
will reflectreflects changes in the fair market value of the Company’s assets, which
willdoes not necessarily equal their notional value, reflecting both realized and unrealized capital
appreciation. Average Adjusted Capital of an applicable class is computed on the daily Adjusted Capital for such class for the actual number of days in such applicable month.appreciation or depreciation. The base management fee may be reduced or deferred by the Manager and the
Sub-Manager under the Management Agreement and the Expense Support and Conditional Reimbursement Agreement described below. For purposes of this calculation, “Average Adjusted Capital” for an applicable class is computed on the daily Adjusted Capital for such class for the actual number of days in such applicable
quarter. The annual preference return of 7% and the relevant breakpoints of 8.75% and 7.777%, respectively, are also adjusted for the actual number of days in each calendar year, measured as of each calendar quarter end.month. “Adjusted Capital” is defined as cumulative proceeds generated from sales of
ourthe Company’s shares of a particular share class (including proceeds from the sale of shares pursuant to the distribution reinvestment plan, if any), net of
sales load (upfrontupfront selling commissions and dealer manager
fees)fees (“sales load”), if any, reduced for the full amounts paid for share repurchases pursuant to any share repurchase program, if any,
and adjusted for share conversions, if any, for such class.
Total Return Incentive Fee on Income to the Manager andSub-Manager — The Company will also paypays each of the Manager and theSub-Manager 50% of the total return incentive fee for their services under the Management Agreement and theSub-Management Agreement. The Company recorded total return incentive fees of approximately $4.5 million and $3.6 million during the three months ended March 31, 2024 and 2023, respectively.
The total return incentive fee
will beis based on the Total Return to Shareholders (as defined below) for each share class in any calendar year, payable annually in arrears. The Company
will accrueaccrues (but
does not pay) the total return incentive fee on a quarterly basis, to the extent that it is earned, and
will performperforms a final reconciliation
and makes required payments at completion of each calendar year. The total return incentive fee may be reduced or deferred by the Manager and the
Sub-Manager under the Management Agreement and the Expense Support and Conditional Reimbursement Agreement described below. For purposes of this calculation, “Total Return to Shareholders” for any calendar quarter is calculated for each share class as the change in the net asset value for such share class plus total distributions for such share class calculated based on the Average Adjusted Capital for such class as of such calendar quarter end. The terms “Total Return to
Non-founder Shareholders” and “Total Return to Founder Shareholders” means the Total Return to Shareholders specifically attributable to each particular share class of
non-founder Non-founder shares or
founderFounder shares, as applicable.
The total return incentive fee for each share class
will beis calculated as follows:
•No total return incentive fee will be payable in any calendar year in which the annual Total Return to Shareholders of a particular share class does not exceed 7% (the “Annual Preferred Return”).
•As it relates to thenon-founder Non-founder shares, all of the Total Return to Shareholders with respect to each particular share class ofnon-founder Non-founder shares, if any, that exceeds the annual preferred return, but is less than or equal to 8.75%, or the“non-founder “Non-founder breakpoint,” in any calendar year, will be payable to the Manager(“ (“Non-founder Catch Up”). TheNon-Founder Catch Up is intended to provide an incentive fee of 20% of the Total Return toNon-founder Shareholders of a particular share class once the Total Return toNon-founder Shareholders of a particular class exceeds 8.75% in any calendar year.
•As it relates to founderFounder shares, all of the Total Return to Founder Shareholders with respect to each particular share class of Founder shares, if any, that exceeds the annual preferred return, but is less than or equal to 7.777%, or the “founder breakpoint,” in any calendar year, will be payable to the Manager (“Founder Catch Up”). The Founder Catch Up is intended to provide an incentive fee of 10% of the Total Return to Founder Shareholders of a particular share class once the Total Return to Founder Shareholders of a particular class exceeds 7.777% in any calendar year.
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2024
•For any quarter in which the Total Return to Shareholders of a particular share class exceeds the relevant breakpoint, the total return incentive fee of a particular share class shall equal, fornon-founder Non-founder shares, 20% of the Total Return toNon-founder Shareholders of a particular class, and for founderFounder shares, 10% of the Total Return to Founder Shareholders of a particular class, in each case because the annual preferred and relevant catch ups will have been achieved.
•For purposes of calculating the Total Return to Shareholders, the change in the Company’s net asset value is subject to a High Water Mark. The “High Water Mark” is equal to the highestyear-end net asset value, for each share class of the Company since inception, adjusted for any special distributions resulting from the sale of the Company’s assets, provided such adjustment is approved by the Company’s board of directors. If, as of each calendar year end, the Company’s net asset value for the applicable share class is (A) above the High Water Mark, then, for such calendar year, the Total Return to Shareholders calculation will include the increase in the Company’s net asset value for such share class in excess of the High Water Mark, and (B) if the Company’s net asset value for the applicable share class is below the High Water Mark, for such calendar year, (i) any increase in the Company’s per share net asset value will be disregarded in the calculation of Total Return to Shareholders for such share class while (ii) any decrease in the Company’s per share net asset value will be included in the calculation of Total Return to Shareholders for such share class. ForWith respect to the year endingcalculation of Total Return to Shareholders, the following tables provides the applicable High Water Marks for the years ended December 31, 2018,2024 and 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the year ended: | | Class FA | | Class A | | Class T | | Class D | | Class I | | Class S |
December 31, 2024 | | $ | 36.67 | | | $ | 33.57 | | | $ | 33.64 | | | $ | 33.31 | | | $ | 34.06 | | | $ | 37.25 | |
December 31, 2023 | | 34.90 | | | 32.45 | | | 32.46 | | | 32.11 | | | 32.88 | | | 35.39 | |
For purposes of this calculation, “Average Adjusted Capital” for an applicable class is computed on the High Water Mark will be $24.75.
daily Adjusted Capital for such class for the actual number of days in such applicable quarter. The Company did not incur any incentive fees duringannual preferred return of 7% and the period from February 7, 2018 (commencementrelevant breakpoints of operations) through March 31, 2018.
8.75% and 7.777%, respectively, are also adjusted for the actual number of days in each calendar year, measured as of each calendar quarter end.Reimbursement to Manager andSub-Manager for Operating Expenses and Pursuit Costs — The Company will reimbursereimburses the Manager and theSub-Manager and their respective affiliates for certain third party operating costsexpenses and expenses of third partiespursuit costs incurred in connection with their provision of services to the Company, including fees, costs, expenses, liabilities and obligations relating to the Company’s activities, acquisitions, dispositions, financings and business, subject to the terms of the Company’s limited liability company agreement, the Management Agreement, theSub-Management Agreement and the Expense Support and Conditional Reimbursement Agreement (as defined below). The Company willdoes not reimburse the Manager andSub-Manager for administrative services performed by the Manager orSub-Manager for the benefit of the Company.
Expense Support and Conditional Reimbursement Agreement— The Company entered into an expense support and conditional reimbursement agreement with the Manager and theSub-Manager, as amended, (the “Expense Support and Conditional Reimbursement Agreement”), which became effective on February 7, 2018, pursuant to which each of the Manager and theSub-Manager agrees to reduce the payment of base management fees, total return incentive fees and the reimbursements of reimbursable expenses due to the Manager and theSub-Manager under the Management Agreement and theSub-Management Agreement, as applicable, to the extent that the Company’s annual regular cash distributions exceed its annual net income (with certain adjustments). The amount of such expense support is equal to the annual (calendar year) excess, if any, of (a) the distributions (as defined in the Expense Support and Conditional Reimbursement Agreement) declared and paid (net of the Company’s distribution reinvestment plan) to shareholders minus (b) the available operating funds, as defined in the Expense Support and Conditional Reimbursement Agreement (the “Expense Support”).
The Expense Support amount
will beis borne equally by the Manager and the
Sub-Manager and
will beis calculated as of the last business day of the calendar year.
Beginning on February 7, 2018 and continuing untilUntil the Expense Support and Conditional Reimbursement Agreement is terminated, the Manager and
Sub-Manager shall equally conditionally reduce the payment of fees and reimbursements of reimbursable expenses in an amount equal to the conditional waiver amount (as defined in and subject to limitations described in the Expense Support and Conditional Reimbursement Agreement). The term of the Expense Support and Conditional Reimbursement Agreement has the same initial term and renewal terms as the Management Agreement or the
Sub-Management Agreement, as applicable, to the Manager or the
Sub-Manager. Expense support is paid by the Manager and Sub-Manager annually in arrears.
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2024
If, on the last business day of the calendar year, the annual (calendar year)
year-to-date available operating funds exceeds the sum of the annual (calendar year)
year-to-date distributions paid per share class (the “Excess Operating Funds”), the Company
will useuses such Excess Operating Funds to pay the Manager and the
Sub-Manager all or a portion of the outstanding unreimbursed Expense Support amounts for each share class, as applicable, subject to certain conditions (the “Conditional Reimbursements”) as described further in the Expense Support and Conditional Reimbursement Agreement. The Company’s obligation to make Conditional Reimbursements shall automatically terminate and be of no further effect three years following the date which the Expense Support amount was provided and to which such Conditional Reimbursement relates, as described further in the Expense Support and Conditional Reimbursement Agreement.
Since inception, the Company has received cumulative Expense Support of approximately $5.1 million. Of the Expense Support received as of March 31, 2024, approximately $4.9 million had been reimbursed and approximately $0.2 million was no longer eligible for reimbursement. As of March 31, 2024, there was no remaining amount of Expense Support collected from the Manager and Sub-Manager subject to reimbursement. Additionally, the Company accrued expense support due from the Manager and Sub-Manager of approximately $0.3 million and $0.4 million during the three months ended March 31, 2024 and 2023, respectively.
Distributions
Individuals and entities affiliated with the Manager and Sub-Manager owned approximately 0.4 million shares as of March 31, 2024 and 2023. These individuals and entities received distributions from the Company of approximately $0.1 million during the three months ended March 31, 2024 and 2023, respectively.
Related party fees and expenses incurred
duringfor the
period February 7, 2018 (commencement of operations) throughthree months ended March 31,
20182024 and 2023 are summarized
below: | | | | | | |
Related Party
| | Source Agreement & Description
| | Period from February 7,
2018 (commencement of
operations) through
March 31, 2018 | |
Manager and Sub-Manager
| | Management Agreement andSub-Management Agreement:
Organization and offering reimbursement(1)
Base management fees (1)
| | $
| 707,046
88,562
|
|
Manager andSub-Manager
| | Expense Support and Conditional Reimbursement Agreement:
Expense Support Provided
| | | (43,212 | ) |
Manager
| | Administrative Services Agreement:
Operating, administrative and compliance services(1)
| | | 19,894 | |
(1) | Expenses subject to Expense Support. |
below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Three Months Ended March 31, |
Related Party | | Source Agreement & Description | | | | | | 2024 | | 2023 |
Managing Dealer | | Managing Dealer Agreement: Commissions | | | | | | $ | 508 | | | $ | 642 | |
| Dealer manager fees | | | | | | 84 | | | 264 | |
| Distribution and shareholder servicing fees | | | | | | 318 | | | 269 | |
Manager and Sub-Manager | | Management Agreement and Sub-Management Agreement: Offering expense reimbursement(1)(2) | | | | | | 256 | | | 904 | |
| | Base management fees(1) | | | | | | 4,018 | | | 2,663 | |
| | Total return incentive fees(1) | | | | | | 4,485 | | | 3,635 | |
Manager and Sub-Manager | | Expense Support and Conditional Reimbursement Agreement: Expense Support | | | | | | (295) | | | (355) | |
| | | | | | | | | |
| Expense Support and Condition Reimbursement Agreement: Reimbursement of Expense Support | | | | | | — | | | 242 | |
Manager | | Administrative Services Agreement: Reimbursement of third-party operating expenses(1) | | | | | | 28 | | | 25 | |
Sub-Manager | | Sub-Management Agreement: Reimbursement of third-party pursuit costs(1)(3) | | | | | | 505 | | | 185 | |
FOOTNOTES:
(1)Expenses subject to Expense Support, if applicable.
(2)Offering expense reimbursements are capitalized on the Company’s condensed consolidated statements of assets and liabilities as deferred offering expenses and expensed to the Company’s condensed consolidated statements of operations over the lesser of the offering period or 12 months.
(3)Includes reimbursement of third-party fees incurred for investments that did not close, including fees and expenses associated with performing due diligence reviews.
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2024
The following table presents amounts due
from (to)to related parties
net as of March 31,
2018: | | | | |
Due from related parties: | | | | |
Expense Support | | $ | 43,212 | |
| | | | |
Total due from related parties | | | 43,212 | |
Due to related parties: | | | | |
Organization and offering expenses | | | 707,046 | |
Base management fees | | | 88,562 | |
Operating, administrative and compliance expense reimbursement | | | 19,894 | |
| | | | |
Total due to related parties | | | 815,502 | |
| | | | |
Net due to related parties | | $ | (772,290 | ) |
| | | | |
There were no amounts due to related parties as of2024 and December 31, 2017.
Other Related Party Transactions
Prior to2023 (in thousands):
| | | | | | | | | | | |
| March 31, 2024 | | December 31, 2023 |
Due from related parties: | | | |
Expense Support | $ | 295 | | | $ | — | |
Total due from related parties | 295 | | | — | |
Due to related parties: | | | |
Total return incentive fees | $ | (4,485) | | | $ | (13,506) | |
Reimbursement of Expense Support | — | | | (644) | |
Base management fees | (1,390) | | | (1,338) | |
Offering expenses | (134) | | | (92) | |
Distribution and shareholder servicing fees | (110) | | | (106) | |
Reimbursement of third-party operating expenses and pursuit costs | (20) | | | (101) | |
Total due to related parties | $ | (6,139) | | | $ | (15,787) | |
| | | |
6. Distributions
The Company’s board of directors declared distributions on a monthly basis in each of the three months ended March 31, 2024 and 2023 (three record dates). The Company’s acquisitiondistributions are paid in the same month as the declared record date. The following table reflects the total distributions declared during the three months ended March 31, 2024 and 2023 (in thousands except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2024 | | 2023 |
Distribution Period | | Distributions Declared(1) | | Distributions Reinvested(2) | | Cash Distributions Net of Distributions Reinvested(2) | | Distributions Declared(1)(2) | | Distributions Reinvested(2) | | Cash Distributions Net of Distributions Reinvested(2) |
First Quarter | | $ | 8,807 | | | $ | 4,056 | | | $ | 4,751 | | | $ | 6,601 | | | $ | 2,590 | | | $ | 4,011 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
FOOTNOTES:
(1) The Company’s board of Lawn Doctor and Polyformdirectors declared distributions per share on a monthly basis. See Note 12. “Financial Highlights” for distributions declared by share class. Monthly distributions declared per share for each share class were as described in Note 3. “Investments,” Lawn Doctor and Polyform were majority owned by an affiliate of theSub-Manager.6. Distributions
follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Record Date Period | | Class FA | | Class A | | Class T | | Class D | | Class I | | Class S | | |
January 1, 2024 - March 31, 2024 | | $ | 0.104167 | | | $ | 0.104167 | | | $ | 0.083333 | | | $ | 0.093750 | | | $ | 0.104167 | | | $ | 0.104167 | | | |
January 1, 2023 - March 31, 2023 | | 0.104167 | | | 0.104167 | | | 0.083333 | | | 0.093750 | | | 0.104167 | | | 0.104167 | | | |
(2) Amounts based on distribution record date.
The
total and the sources of declared distributions on a GAAP basis
for the period from February 7, 2018 (commencement of operations) through March 31, 2018 are presented in the tables below. | | | | | | | | | | | | |
| | Period from February 7, 2018 (commencement of operations) through March 31, 2018 | |
| | Class FA | |
| | Per Share | | | Amount | | | Allocation | |
Total Declared Distributions | | $ | 0.09 | | | $ | 302,841 | | | | 100.0 | % |
From net investment income | | $ | 0.09 | | | $ | 302,841 | | | | 100.0 | % |
were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2024 | | 2023 |
| Amount | | % of Distributions Declared | | Amount | | % of Distributions Declared |
Net investment income(1) | $ | 4,721 | | | 53.6 | % | | $ | 4,911 | | | 74.4 | % |
Distributions in excess of net investment income(2) | 4,086 | | | 46.4 | | | 1,690 | | | 25.6 | |
Total distributions declared | $ | 8,807 | | | 100.0 | % | | $ | 6,601 | | | 100.0 | % |
FOOTNOTES:
(1) Net investment income includes Expense Support, net of $43,212 which supported distributions of $302,841 during$295 and $113 for the period from February 7, 2018 (commencement of operations) throughthree months ended March 31, 2018.7. Capital Transactions
As of December 31, 2017, the Company had issued 4,000 shares of the Company’s Class FA shares, to each of the Manager2024 andSub-Manager, for an aggregate purchase price of $200,000 (total of 8,000 Class FA shares). No selling commissions or dealer manager fees were paid in connection with the issuances.
On February 7, 2018, the Company commenced operations when it met the minimum offering requirement of $80 million in Class FA shares under its Private Placement and issued approximately 3.3 million shares of Class FA shares for aggregate gross proceeds of $81.7 million. The Company did not incur any selling commissions or placement agent fees from the sale of the approximately 3.3 million Class FA shares sold under the terms of the Private Placement. 2023, respectively. See Note 5. “Related Party Transactions” for additional informationinformation.
(2) Consists of distributions made from offering proceeds for the periods presented.
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2024
In March 2024, the Company’s board of directors declared a monthly cash distribution on
the outstanding shares
issued to the Manager,Sub-Manager and their affiliates.Private Placement
The Company offered through the Private Placement up to $85 million of all classes of common shares of record on April 26, 2024 of $0.104167 per share for Class FA shares, and up to $115 million of$0.104167 per share for Class A shares, on a best efforts basis, which meant that$0.083333 per share for Class T shares, $0.093750 per share for Class D shares, $0.104167 per share for Class I shares and $0.104167 per share for Class S shares.
7. Capital Transactions
Public Offerings
Under the
Placement Agent, used its best efforts but was not required to sell any specific amount of shares. On February 7, 2018,Follow-On Public Offering, the Company
met the minimum offering requirement of $80 million in Class FA shares under the Private Placementhas offered and
the Company issued approximately 3.3 million Class FA shares at $25.00 per Class FA share resulting in gross proceeds of approximately $81.7 million. No Class A shares were sold under the Private Placement. There was no selling commission or Placement Agent fee for the sale of Class FA shares. The Class FA shares and Class A shares in the Private Placement were offered for sale onlycontinues to
persons that were “accredited investors,” as that term is defined under the Securities Act of 1933, as amended (the “Securities Act”), and Regulation D promulgated thereunder.Public Offering
Once the Registration Statement became effective on March 7, 2018, the Company began offeringoffer up to $1,000,000,000$1.0 billion of Shares,shares, on a best efforts basis, which means that CNL Securities Corp., as the Managing Dealer of the Follow-On Public Offering, will useuses its best effortseffort but is not required to sell any specific amount of Shares.shares. The Company is offering, in any combination, four classes of Sharesshares in the Follow-On Public Offering: Class A shares, Class T shares, Class D shares and Class I shares. The initial minimum permitted purchase amount is $5,000 in Shares. The initial per share Public Offering price was $27.32 per Class A share, $26.25 per Class T share, $25.00 per Class D share and $25.00 per Class I share.shares. There are differing selling fees and commissions for each share class. The Company will also pay annualpays distribution and shareholder servicing fees, subject to certain limits, on the Class T and Class D shares sold in the Public OfferingOfferings (excluding sales pursuant to the Company’s distribution reinvestment plan). See Note 10. “Subsequent Events” for information on changes to the Public OfferingThe public offering price, selling commissions and dealer manager fees per share class.
class are determined monthly as approved by the Company’s board of directors. As of March 28, 2024, the public offering price was $36.78 per Class A share, $35.38 per Class T share, $33.38 per Class D share and $34.13 per Class I share.
The Company is also offering, in any combination, up to $100,000,000$100.0 million of Class A shares, Class T shares, Class D shares and Class I shares to be issued pursuant to its distribution reinvestment plan. The Public Offering has a minimum offering requirement of $2 million in Shares under the Private Placement or the Public Offering. As of February 7, 2018, the Company had met the minimum offering requirement of $80 million in Class FA shares under the Private Placement.
The following
table summarizestables summarize the total shares issued and proceeds received
by share class in connection with the
Private PlacementPublic Offerings, excluding shares repurchased through the Share Repurchase Program described further below, for the
periodthree months ended March 31,
2018. | | | | | | | | |
| | Period from February 7, 2018 (commencement of operations) through March 31, 2018 | |
| | Class FA | |
| | Shares | | | Amount | |
Gross proceeds | | | 3,258,260 | | | $ | 81,456,500 | |
Up-front selling commissions and dealer manager fees(1) | | | — | | | | — | |
| | | | | | | | |
Net proceeds to Company | | | 3,258,260 | | | $ | 81,456,500 | |
| | | | | | | | |
Average net proceeds per share | | | $25.00 | |
(1) | The Company did not incur any selling commissions or placement agent fees from the sale of the approximately 3.3 million Class FA shares sold under the terms of the Private Placement. |
8. Commitment & Contingences
2024 and 2023 (in thousands except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2024 |
| | Proceeds from Public Offerings | | Distributions Reinvested | | Total |
Share Class | | Shares Issued | | Gross Proceeds | | Sales Load(1) | | Net Proceeds to Company | | Shares Issued | | Proceeds to Company | | Shares Issued | | Net Proceeds to Company | | Average Net Proceeds per Share |
| | | | | | | | | | | | | | | | | | |
Class A | | 598 | | | $ | 20,524 | | | $ | (442) | | | $ | 20,082 | | | 34 | | | $ | 1,132 | | | 632 | | | $ | 21,214 | | | $ | 33.59 | |
Class T | | 92 | | | 3,231 | | | (150) | | | 3,081 | | | 13 | | | 452 | | | 105 | | | 3,533 | | | 33.63 | |
Class D | | 107 | | | 3,563 | | | — | | | 3,563 | | | 13 | | | 447 | | | 120 | | | 4,010 | | | 33.32 | |
Class I | | 755 | | | 25,738 | | | — | | | 25,738 | | | 60 | | | 2,025 | | | 815 | | | 27,763 | | | 34.07 | |
| | | | | | | | | | | | | | | | | | |
| | 1,552 | | | $ | 53,056 | | | $ | (592) | | | $ | 52,464 | | | 120 | | | $ | 4,056 | | | 1,672 | | | $ | 56,520 | | | $ | 33.81 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2023 |
| | Proceeds from Public Offerings | | Distributions Reinvested | | Total |
Share Class | | Shares Issued | | Gross Proceeds | | Sales Load(1) | | Net Proceeds to Company | | Shares Issued | | Proceeds to Company | | Shares Issued | | Net Proceeds to Company(2) | | Average Net Proceeds per Share |
| | | | | | | | | | | | | | | | | | |
Class A | | 360 | | | $ | 12,248 | | | $ | (464) | | | $ | 11,784 | | | 16 | | | $ | 505 | | | 376 | | | $ | 12,289 | | | $ | 32.70 | |
Class T | | 278 | | | 9,511 | | | (442) | | | 9,069 | | | 12 | | | 403 | | | 290 | | | 9,472 | | | 32.62 | |
Class D | | 169 | | | 5,446 | | | — | | | 5,446 | | | 10 | | | 329 | | | 179 | | | 5,775 | | | 32.32 | |
Class I | | 999 | | | 33,061 | | | — | | | 33,061 | | | 41 | | | 1,353 | | | 1,040 | | | 34,414 | | | 33.10 | |
| | | | | | | | | | | | | | | | | | |
| | 1,806 | | | $ | 60,266 | | | $ | (906) | | | $ | 59,360 | | | 79 | | | $ | 2,590 | | | 1,885 | | | $ | 61,950 | | | $ | 32.87 | |
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2024
FOOTNOTES:
(1)The Company incurs selling commissions and dealer manager fees on the sale of Class A and Class T shares sold through the Public Offerings. See Note 5. “Related Party Transactions” for additional information regarding up-front selling commissions and dealer manager fees. (2)Approximately $24.9 million of net proceeds for shares sold and issued on March 31, 2023 were received in cash in April 2023.
Share Repurchase Program
In accordance with the Share Repurchase Program, the total amount of aggregate repurchases of Class FA, Class A, Class T, Class D, Class I and Class S shares is limited to up to 2.5% of the aggregate net asset value per calendar quarter (based on the aggregate net asset value as of the last date of the month immediately prior to the repurchase date) and up to 10% of the aggregate net asset value per year (based on the average aggregate net asset value as of the end of each of the Company’s trailing four quarters). At the sole discretion of the Company’s board of directors, the Company may use sources, including, but not limited to, offering proceeds and borrowings to repurchase shares.
During the three months ended March 31, 2024 and 2023, the Company received requests for the repurchase of approximately $13.8 million and $2.5 million, respectively, of the Company’s common shares. The Company’s board of directors approved the repurchase requests.
The following table summarizes the shares repurchased during the three months ended March 31, 2024 and 2023 (in thousands except per share data):
| | | | | | | | | | | | | | | | | |
| Shares Repurchased | | Total Consideration | | Average Price Paid per Share |
Class FA | 72 | | | $ | 2,675 | | | $ | 36.82 | |
Class A | 37 | | | 1,252 | | | 33.65 | |
Class T | 97 | | | 3,242 | | | 33.70 | |
Class D | 19 | | | 645 | | | 33.38 | |
Class I | 173 | | | 5,900 | | | 34.13 | |
Class S | 2 | | | 66 | | | 37.41 | |
Three Months Ended March 31, 2024 | 400 | | | $ | 13,780 | | | $ | 34.45 | |
| | | | | | | | | | | | | | | | | |
| Shares Repurchased | | Total Consideration | | Average Price Paid per Share |
Class FA | 16 | | | $ | 578 | | | $ | 35.26 | |
Class A | 10 | | | 335 | | | 32.72 | |
Class T | 3 | | | 105 | | | 32.69 | |
Class D | 6 | | | 180 | | | 32.36 | |
Class I | 38 | | | 1,257 | | | 33.16 | |
Class S | 1 | | | 36 | | | 35.77 | |
Three Months Ended March 31, 2023 | 74 | | | $ | 2,491 | | | $ | 33.52 | |
As of March 31, 2024 and December 31, 2023, the Company had a payable for shares repurchased of approximately $13.8 million and $8.2 million, respectively, which were paid in April and January 2024, respectively.
Share Conversions
Class T and Class D shares are converted into Class A shares once the maximum amount of distribution and shareholder servicing fees for those particular shares has been met. The shares to be converted are multiplied by the applicable conversion rate, the numerator of which is the net asset value per share of the share class being converted and the denominator of which is the net asset value per Class A share.
During the three months ended March 31, 2024, approximately 85,000 Class T shares were converted to approximately 85,000 Class A shares at an average conversion rate of 1.00. During the three months ended March 31, 2023, approximately 24,000 Class T shares were converted to approximately 24,000 Class A shares at an average conversion rate of 1.00.
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2024
8. Borrowings
In August 2022, the Company entered into a loan agreement (the “2022 Loan Agreement”) and related promissory note with First Horizon Bank for a $50.0 million revolving line of credit (the “2022 Line of Credit”). In connection with the 2022 Loan Agreement, the Company was required to pay a total commitment fee to First Horizon Bank of $0.25 million, of which $0.13 million was paid during the three months ended March 31, 2023.
The Company is required to pay a fee to First Horizon with each advance under the 2022 Line of Credit in the amount equal to 0.05% of the amount of each borrowing. The Company is also required to pay interest on the borrowed amount at a rate per year equal to the 30-day Secured Overnight Financing Rate (“SOFR”) plus 2.75%. Interest payments are due monthly in arrears. Furthermore, the Company is required to pay a quarterly unused line fee when the average outstanding balance of the 2022 Line of Credit is less than $25.0 million. Unused line fees are due quarterly in arrears.
The Company may prepay, without penalty, all or any part of the borrowings under the 2022 Loan Agreement at any time and such borrowings are required to be repaid within 180 days of the borrowing date. Under the 2022 Loan Agreement, the Company is required to comply with certain covenants including the provision of financial statements on a quarterly basis, a restriction from incurring any debt, and restrictions on the transfer and sale of assets held by certain subsidiaries. Additionally, the Company has a covenant related to its fair market value of investments as a multiple of borrowings outstanding.
In connection with the 2022 Loan Agreement, the Company entered into a pledge and security agreement (“Pledge Agreement”) in favor of the lender under the 2022 Line of Credit. Under the Pledge Agreement, the Company is required to contribute proceeds from the Follow-On Public Offering to pay down the outstanding debt to the extent there are any borrowings outstanding under the 2022 Loan Agreement.
The 2022 Line of Credit was available for advances through August 2023 and the Company extended the 2022 Line of Credit through December 2023. The 2022 Line of Credit was expired as of December 31, 2023.
In February 2024, CNL Strategic Capital B, Inc. (“Borrower”), a wholly-owned subsidiary of the Company and Valley National Bank, entered into a Revolving Loan Agreement (the “2024 Loan Agreement”) for a $50.0 million revolving line of credit (the “2024 Line of Credit”). Unless extended, the Line of Credit has a maturity date of February 15, 2025. In connection with the 2024 Line of Credit, the Borrower paid a total commitment fee and Valley National Bank expenses of $0.16 million. The Borrower is required to pay interest on any borrowed amounts under the 2024 Line of Credit at a rate per year equal to the 1-Month Term SOFR plus 2.75%. Interest payments are due on the first calendar day of the month in arrears. Furthermore, the Borrower is required to pay a quarterly unused borrowing fee at an annual rate of 0.15% on the difference between (i) total 2024 Line of Credit amount and (ii) the aggregate average daily balance of outstanding borrowings under the 2024 Line of Credit during such quarter. The Borrower may prepay, without penalty, all or any part of the borrowings under the 2024 Loan Agreement at any time and such borrowings are required to be repaid within 180 days of the borrowing date. Under the 2024 Loan Agreement, the Company is required to comply with certain covenants including the requirement to provide certain financial and compliance reports to Valley National Bank and restrictions on incurring certain levels of additional debt by the Company.
In February 2024, the Company entered into a Guaranty agreement to act as a guarantor of the Borrower’s outstanding borrowings under the 2024 Loan Agreement (the “Guaranty Agreement”). On February 15, 2024, the Borrower and the Company also entered into a pledge and assignment of bank and deposit accounts (“2024 Pledge Agreement”) in favor of Valley National Bank. Under the 2024 Pledge Agreement, the Company is required to maintain accounts with Valley National Bank, including to contribute proceeds from the Company’s offering, as a pledge of collateral to pay down the outstanding debt to the extent there are any borrowings outstanding under the 2024 Loan Agreement.
The Company had not borrowed any amounts under the 2024 Line of Credit as of March 31, 2024.
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2024
9. Income Taxes
The Company incurs income tax expense (benefit) related to its Taxable Subsidiaries. The components of income tax expense (benefit) were as follows during the three months ended March 31, 2024 and 2023 (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2024 | | 2023 |
Current tax expense | | | | | $ | — | | | $ | (27) | |
Deferred tax expense (benefit) | | | | | 771 | | | 1,524 | |
Total income tax expense (benefit) | | | | | $ | 771 | | | $ | 1,497 | |
The effective tax rate for the three months ended March 31, 2024 and 2023 was 3.5% and 7.7%, respectively. The primary items giving rise to the difference between the 21.0% federal statutory rate applicable to corporations and the effective tax rates are due to state taxes and the benefits of the partnership structure.
Significant components of the Company’s deferred tax assets and liabilities as of March 31, 2024 and December 31, 2023 were as follows (in thousands):
| | | | | | | | | | | |
| March 31, 2024 | | December 31, 2023 |
Deferred tax assets: | | | |
Carryforwards for net operating loss | $ | 1,155 | | | $ | 1,249 | |
Unrealized depreciation on investments | 861 | | | 913 | |
Other | 7 | | | — | |
Valuation allowance | (1,282) | | | (1,324) | |
Total deferred tax assets | 741 | | | 838 | |
Deferred tax liabilities: | | | |
| | | |
Unrealized appreciation on investments | (8,974) | | | (8,300) | |
Total deferred tax liabilities | (8,974) | | | (8,300) | |
Deferred tax liabilities, net | $ | (8,233) | | | $ | (7,462) | |
10. Concentrations of Risk
The Company had five portfolio companies which met at least one of the significance tests under Rule 10-01(b) of Regulation S-X for at least one of the periods presented in the condensed consolidated financial statements.
The portfolio companies are required to make monthly interest payments on their debt, with the debt principal due upon maturity. Failure of any of these portfolio companies to pay contractual interest payments could have a material adverse effect on the Company’s results of operations and cash flows from operations, which would impact its ability to make distributions to shareholders.
11. Commitments & Contingencies
See Note 5. “Related Party Transactions” for information on contingent amounts due to the Manager andSub-Manager for the reimbursement of organization and offering costs under the Public Offering.9.Offerings and for the reimbursement of Expense Support.
From time to time, the Company and officers or directors of the Company may be party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of the Company’s rights under contracts with its businesses. As of March 31, 2024, the Company was not involved in any legal proceedings.
In addition, in the normal course of business, the Company enters into contracts with its vendors and others that provide for general indemnifications. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company. However, based on experience, the Company expects that risk of loss to be remote.
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2024
The following
is a scheduleare schedules of financial highlights of the Company attributed to
Class FAeach class of shares for the
period from February 7, 2018 (commencement of operations) throughthree months ended March 31,
2018. | | | | |
| | Period ended March 31, 2018(1) | |
| | Class FA Shares(2) | |
OPERATING PERFORMANCE PER SHARE | | | | |
Net Asset Value, Beginning of Period | | $ | 25.00 | |
| | | | |
Net investment income, before expense support(3) | | | 0.08 | |
Expense support(3) | | | 0.01 | |
| | | | |
Net investment income(3) | | | 0.09 | |
Net realized and unrealized gains(3)(4) | | | 0.16 | |
| | | | |
Net increase resulting from investment operations | | | 0.25 | |
| | | | |
Distributions from net investment income(5) | | | (0.09 | ) |
| | | | |
Net Asset Value, End of Period | | $ | 25.16 | |
| | | | |
Net assets, end of period | | $ | 82,180,949 | |
Average net assets(6) | | $ | 81,716,492 | |
Shares outstanding, end of period | | | 3,266,260 | |
Weighted average shares outstanding | | | 3,266,430 | |
Total investment return based on net asset value(7) | | | 1.01 | % |
RATIOS/SUPPLEMENTAL DATA (annualized): | | | | |
Ratios to average net assets:(6)(8) | | | | |
Total operating expenses before expense support | | | 3.95 | % |
Total operating expenses after expense support | | | 3.58 | % |
Net investment income | | | 2.55 | % |
Portfolio turnover rate | | | — | % |
(1) | Operations commenced on February 7, 2018. |
(2) | As of March 31, 2018, the Company had not sold any Class A, Class T, Class D or Class I shares. |
(3) | The per share data was derived by using the weighted average shares outstanding during the period. |
(4) | The amount shown at this caption is the balancing figure derived from the other figures in the schedule. The amount shown at this caption for a share outstanding throughout the period may not agree with the change in the aggregate gains and losses in portfolio securities for the period because of the timing of sales of the Company’s shares in relation to fluctuating market values for the portfolio. |
(5) | The per share data for distributions is the actual amount of distributions paid or payable per common share outstanding during the entire period; distributions per share are rounded to the nearest $0.01. |
(6) | The computation of average net assets during the period is based on the monthly value of net assets. |
(7) | Total investment return based on asset value is a measure of the change in total value for shareholders who held the Company’s common shares at the beginning and end of the period, including distributions declared during the period. Total investment return based on net asset value is based on (i) net asset value per share on the first day of the period, (ii) the net asset value per share on the last day of the period, of (A) one share plus (B) any fractional shares issued in connection with the reinvestment of monthly distributions, and (iii) distributions payable relating to one share, if any, on the last day of the period. The total investment return based on net asset value calculation assumes that (i) monthly cash distributions are reinvested in accordance with the Company’s distribution reinvestment plan and (ii) the fractional shares issued pursuant to the distribution reinvestment plan are issued at the then current public offering price, net of sales load, on each monthly distribution payment date. Since there is no public market for the Company’s shares, terminal market value per share is assumed to be equal to net asset value per share on the last day of the period presented. The Company’s performance changes over time and currently may be different than that shown above. Past performance is no guarantee of future results. Investment performance is presented without regard to sales load that may be incurred by shareholders in the purchase of the Company’s shares. |
(8) | Annualized assuming consistent results over a full fiscal year consisting of 365 days; however, this may not be indicative of actual results over a full fiscal year. |
10.2024 and 2023 (in thousands except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2024 |
| Class FA Shares | | Class A Shares | | Class T Shares | | Class D Shares | | Class I Shares | | Class S Shares |
OPERATING PERFORMANCE PER SHARE | | | | | | | | | | |
Net Asset Value, Beginning of Period | $ | 36.67 | | | $ | 33.57 | | | $ | 33.64 | | | $ | 33.31 | | | $ | 34.06 | | | $ | 37.25 | |
Net investment income, before Expense Support (reimbursement)(1) | 0.30 | | | 0.13 | | | 0.06 | | | 0.10 | | | 0.13 | | | 0.29 | |
Expense Support (reimbursement)(1)(2) | — | | | — | | | — | | | — | | | 0.02 | | | 0.02 | |
Net investment income(1) | 0.30 | | | 0.13 | | | 0.06 | | | 0.10 | | | 0.15 | | | 0.31 | |
Net realized and unrealized gains, net of taxes(1)(3) | 0.54 | | | 0.55 | | | 0.54 | | | 0.55 | | | 0.54 | | | 0.55 | |
Net increase resulting from investment operations | 0.84 | | | 0.68 | | | 0.60 | | | 0.65 | | | 0.69 | | | 0.86 | |
Distributions to shareholders(4) | (0.31) | | | (0.31) | | | (0.25) | | | (0.28) | | | (0.31) | | | (0.31) | |
| | | | | | | | | | | |
Net decrease resulting from distributions to shareholders | (0.31) | | | (0.31) | | | (0.25) | | | (0.28) | | | (0.31) | | | (0.31) | |
Net Asset Value, End of Period | $ | 37.20 | | | $ | 33.94 | | | $ | 33.99 | | | $ | 33.68 | | | $ | 34.44 | | | $ | 37.80 | |
| | | | | | | | | | | |
Net assets, end of period | $ | 152,782 | | | $ | 197,940 | | | $ | 86,765 | | | $ | 92,046 | | | $ | 438,695 | | | $ | 66,005 | |
Average net assets(5) | $ | 153,445 | | | $ | 181,432 | | | $ | 89,105 | | | $ | 88,861 | | | $ | 421,591 | | | $ | 65,221 | |
Shares outstanding, end of period | 4,107 | | | 5,832 | | | 2,552 | | | 2,733 | | | 12,737 | | | 1,746 | |
Distributions declared | $ | 1,306 | | | $ | 1,683 | | | $ | 662 | | | $ | 749 | | | $ | 3,861 | | | $ | 546 | |
Total investment return based on net asset value before total return incentive fee(6) | 2.56 | % | | 2.54 | % | | 2.25 | % | | 2.45 | % | | 2.54 | % | | 2.59 | % |
Total investment return based on net asset value after total return incentive fee(6) | 2.25 | % | | 2.05 | % | | 1.79 | % | | 1.97 | % | | 2.05 | % | | 2.33 | % |
RATIOS/SUPPLEMENTAL DATA (not annualized): | | | | | | | | | | | |
Ratios to average net assets:(5)(7) | | | | | | | | | | | |
Total operating expenses before total return incentive fee | 0.30 | % | | 0.68 | % | | 0.86 | % | | 0.75 | % | | 0.64 | % | | 0.32 | % |
Total operating expenses before Expense Support (reimbursement) | 0.55 | % | | 1.21 | % | | 1.30 | % | | 1.24 | % | | 1.14 | % | | 0.58 | % |
Total operating expenses after Expense Support (reimbursement) | 0.55 | % | | 1.21 | % | | 1.30 | % | | 1.24 | % | | 1.08 | % | | 0.52 | % |
Net investment income before total return incentive fee(8) | 1.07 | % | | 0.90 | % | | 0.62 | % | | 0.79 | % | | 0.94 | % | | 1.09 | % |
Net investment income | 0.81 | % | | 0.37 | % | | 0.18 | % | | 0.30 | % | | 0.43 | % | | 0.83 | % |
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2024
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| Class FA Shares | | Class A Shares | | Class T Shares | | Class D Shares | | Class I Shares | | Class S Shares |
OPERATING PERFORMANCE PER SHARE | | | | | | | | | | |
Net Asset Value, Beginning of Period | $ | 34.90 | | | $ | 32.45 | | | $ | 32.46 | | | $ | 32.11 | | | $ | 32.88 | | | $ | 35.39 | |
Net investment income before Expense Support (reimbursement)(1) | 0.38 | | | 0.17 | | | 0.11 | | | 0.15 | | | 0.17 | | | 0.37 | |
Expense Support (reimbursement)(1)(2) | (0.05) | | | 0.02 | | | — | | | — | | | 0.04 | | | — | |
Net investment income(1) | 0.33 | | | 0.19 | | | 0.11 | | | 0.15 | | | 0.21 | | | 0.37 | |
Net realized and unrealized gains, net of taxes(1)(3) | 0.58 | | | 0.59 | | | 0.59 | | | 0.59 | | | 0.58 | | | 0.58 | |
Net increase resulting from investment operations | 0.91 | | | 0.78 | | | 0.70 | | | 0.74 | | | 0.79 | | | 0.95 | |
Distributions to shareholders(4) | (0.31) | | | (0.31) | | | (0.25) | | | (0.28) | | | (0.31) | | | (0.31) | |
| | | | | | | | | | | |
Net decrease resulting from distributions to shareholders | (0.31) | | | (0.31) | | | (0.25) | | | (0.28) | | | (0.31) | | | (0.31) | |
| | | | | | | | | | | |
Net Asset Value, End of Period | $ | 35.50 | | | $ | 32.92 | | | $ | 32.91 | | | $ | 32.57 | | | $ | 33.36 | | | $ | 36.03 | |
| | | | | | | | | | | |
Net assets, end of period | $ | 150,083 | | | $ | 85,090 | | | $ | 85,762 | | | $ | 69,384 | | | $ | 326,074 | | | $ | 63,567 | |
Average net assets(5) | $ | 149,170 | | | $ | 73,964 | | | $ | 80,239 | | | $ | 65,138 | | | $ | 300,817 | | | $ | 62,927 | |
Shares outstanding, end of period | 4,228 | | | 2,585 | | | 2,606 | | | 2,130 | | | 9,774 | | | 1,764 | |
Distributions declared | $ | 1,326 | | | $ | 706 | | | $ | 614 | | | $ | 566 | | | $ | 2,837 | | | $ | 552 | |
Total investment return based on net asset value before total return incentive fee(6) | 2.90 | % | | 2.91 | % | | 2.68 | % | | 2.88 | % | | 2.88 | % | | 3.01 | % |
Total investment return based on net asset value after total return incentive fee(6) | 2.58 | % | | 2.42 | % | | 2.17 | % | | 2.32 | % | | 2.42 | % | | 2.71 | % |
RATIOS/SUPPLEMENTAL DATA (not annualized): | | | | | | | | | | | |
Ratios to average net assets:(5)(7) | | | | | | | | | | | |
Total operating expenses before total return incentive fee | 0.30 | % | | 0.85 | % | | 1.01 | % | | 0.84 | % | | 0.76 | % | | 0.32 | % |
Total operating expenses before Expense Support (reimbursement) | 0.58 | % | | 1.44 | % | | 1.55 | % | | 1.42 | % | | 1.35 | % | | 0.62 | % |
Total operating expenses after Expense Support (reimbursement) | 0.74 | % | | 1.39 | % | | 1.55 | % | | 1.42 | % | | 1.24 | % | | 0.62 | % |
Net investment income before total return incentive fee(8) | 1.21 | % | | 1.17 | % | | 0.87 | % | | 1.05 | % | | 1.22 | % | | 1.33 | % |
Net investment income | 0.93 | % | | 0.57 | % | | 0.33 | % | | 0.47 | % | | 0.63 | % | | 1.03 | % |
FOOTNOTES:
(1)The per share amounts presented are based on weighted average shares outstanding.
(2)Expense Support (reimbursement) is accrued throughout the year and is subject to a final calculation as of the last business day of the calendar year.
(3)The amount shown at this caption is the balancing figure derived from the other figures in the schedule. The amount shown at this caption for a share outstanding throughout the period may not agree with the change in the aggregate gains and losses in portfolio investments for the period because of the timing of sales and repurchases of the Company’s shares in relation to fluctuating fair values for the portfolio investments.
(4)The per share data for distributions is the actual amount of distributions paid or payable per common share outstanding during the entire period; distributions per share are rounded to the nearest $0.01.
(5)The computation of average net assets during the period is based on net assets measured at each month end, adjusted for capital contributions or withdrawals during the month.
(6)Total investment return is calculated for each share class as the change in the net asset value for such share class during the period and assuming all distributions are reinvested. Class FA assumes distributions are reinvested in Class A shares and all other share classes assume distributions are reinvested in the same share class, including Class S shares which do not participate in the distribution reinvestment plan. Amounts are not annualized and are not representative of total return as calculated for purposes of the total return incentive fee described in Note 5. “Related Party Transactions.” See footnote (8) below for information regarding the percentage of total incentive fees covered by expense support by share class for all periods presented. Since there is no public market for the Company’s shares, terminal market value per share is assumed to be equal to net asset value per share on the last day of the period presented. The Company’s performance changes over time and currently may be different than that shown above. Past performance is no guarantee of future results. Investment performance is presented without regard to sales load that may be incurred by shareholders in the purchase of the Company’s shares. (7)Actual results may not be indicative of future results. Additionally, an individual investor’s ratios may vary from the ratios presented for a share class as a whole.
(8)Amounts represent net investment income before total return incentive fee and related expense support as a percentage of average net assets. For the three months ended March 31, 2024, approximately 12% and 23% of total return incentive fees for Class I and Class S, respectively, were covered by Expense Support and none of the total return incentive fees for Class FA, Class A, Class T or Class D were covered by Expense Support. For the three months ended March 31, 2023, approximately 8% and 18% of total return incentive fees for Class A and Class I, respectively, were covered by Expense Support and none of the total return incentive fees for Class FA, Class T, Class D or Class S were covered by Expense Support.
CNL STRATEGIC CAPITAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2024
Distributions
In April 2024, the Company’s board of directors declared
a monthly cash
distributionsdistribution on the outstanding shares of all classes of
the Company’s common shares
basedof record on
weekly record datesMay 28, 2024 of $0.104167 per share for
the time period beginning on April 3, 2018 throughClass FA shares, $0.104167 per share for Class A shares, $0.083333 per share for Class T shares, $0.093750 per share for Class D shares, $0.104167 per share for Class I shares and
including May 29, 2018, as set forth below: | | | | | | | | | | | | | | | | | | | | | | |
Distribution Record Date | | Distribution Payment Date | | Declared Distribution Per Share for Each Share Class | |
| | Class FA | | | Class A | | | Class T | | | Class D | | | Class I | |
April 3, 2018 | | May 10, 2018 | | $ | 0.024038 | | | $ | 0.024038 | | | $ | 0.019231 | | | $ | 0.021635 | | | $ | 0.024038 | |
April 10, 2018 | | May 10, 2018 | | $ | 0.024038 | | | $ | 0.024038 | | | $ | 0.019231 | | | $ | 0.021635 | | | $ | 0.024038 | |
April 17, 2018 | | May 10, 2018 | | $ | 0.024038 | | | $ | 0.024038 | | | $ | 0.019231 | | | $ | 0.021635 | | | $ | 0.024038 | |
April 24, 2018 | | May 10, 2018 | | $ | 0.024038 | | | $ | 0.024038 | | | $ | 0.019231 | | | $ | 0.021635 | | | $ | 0.024038 | |
May 1, 2018 | | June 11, 2018 | | $ | 0.024038 | | | $ | 0.024038 | | | $ | 0.019231 | | | $ | 0.021635 | | | $ | 0.024038 | |
May 8, 2018 | | June 11, 2018 | | $ | 0.024038 | | | $ | 0.024038 | | | $ | 0.019231 | | | $ | 0.021635 | | | $ | 0.024038 | |
May 15, 2018 | | June 11, 2018 | | $ | 0.024038 | | | $ | 0.024038 | | | $ | 0.019231 | | | $ | 0.021635 | | | $ | 0.024038 | |
May 22, 2018 | | June 11, 2018 | | $ | 0.024038 | | | $ | 0.024038 | | | $ | 0.019231 | | | $ | 0.021635 | | | $ | 0.024038 | |
May 29, 2018 | | June 11, 2018 | | $ | 0.024038 | | | $ | 0.024038 | | | $ | 0.019231 | | | $ | 0.021635 | | | $ | 0.024038 | |
$0.104167 per share for Class S shares.
Offerings
In April
2018,2024, the Company’s board of directors
also approved new per share
public offering prices for each share class in the
Follow-On Public Offering. The new
public offering prices
becameare effective
onas of April
27, 2018.30, 2024. The following table provides the new
public offering prices and applicable upfront selling commissions and dealer manager fees for each share class available in the
Follow-On Public Offering:
| | | | | | | | | | | | | | | | |
| | Class A | | | Class T | | | Class D | | | Class I | |
Public Offering Price, Per Share | | $ | 27.46 | | | $ | 26.38 | | | $ | 25.13 | | | $ | 25.13 | |
Selling Commissions, Per Share | | $ | 1.65 | | | $ | 0.79 | | | $ | — | | | $ | — | |
Dealer Manager Fees, Per Share | | $ | 0.68 | | | $ | 0.46 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Class A | | Class T | | Class D | | Class I |
Effective April 30, 2024: | | | | | | | | | |
Offering Price, Per Share | | | $ | 37.09 | | | $ | 35.69 | | | $ | 33.68 | | | $ | 34.44 | |
Selling Commissions, Per Share | | | 2.23 | | | 1.07 | | | — | | | — | |
Dealer Manager Fees, Per Share | | | 0.92 | | | 0.63 | | | — | | | — | |
Capital Transactions
During the period April 1,
20182024 through May
10, 2018,8, 2024, the Company received additional net proceeds
of $450,000 from the
sale of 17,948 Class I shares from itsFollow-On Public Offering and
net proceeds of $7,500 from the issuance of 299 Class A shares through its distribution reinvestment
plan.plan of the following (in thousands except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Proceeds from Follow-On Public Offering | | Distribution Reinvestment Plan | | Total |
Share Class | Shares | | Gross Proceeds | | Sales Load | | Net Proceeds to Company | | Shares | | Gross Proceeds | | Shares | | Net Proceeds to Company | | Average Net Proceeds per Share |
| | | | | | | | | | | | | | | | | |
Class A | 187 | | | $ | 6,491 | | | $ | (138) | | | $ | 6,353 | | | 12 | | | $ | 413 | | | 199 | | | $ | 6,766 | | | $ | 34.00 | |
Class T | 22 | | | 773 | | | (37) | | | 736 | | | 4 | | | 147 | | | 26 | | | 883 | | | 33.96 | |
Class D | 57 | | | 1,941 | | | — | | | 1,941 | | | 5 | | | 152 | | | 62 | | | 2,093 | | | 33.76 | |
Class I | 217 | | | 7,471 | | | — | | | 7,471 | | | 21 | | | 707 | | | 238 | | | 8,178 | | | 34.36 | |
| | | | | | | | | | | | | | | | | |
| 483 | | | $ | 16,676 | | | $ | (175) | | | $ | 16,501 | | | 42 | | | $ | 1,419 | | | 525 | | | $ | 17,920 | | | $ | 34.13 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion is based on the unaudited condensed
consolidated financial statements as of March 31,
20182024 and December 31, 2023, and for the
period February 7, 2018 (commencement of operations) throughthree months ended March 31,
2018.2024 and 2023. Amounts as of December 31, 2023 included in the unaudited condensed consolidated statements of assets and liabilities have been derived from the audited consolidated financial statements as of that date. This information should be read in conjunction with the accompanying unaudited condensed
consolidated financial statements and the notes
thereto.thereto, as well as the audited consolidated financial statements, notes and management’s discussion and analysis included in our Annual Report on Form 10-K for the year ended December 31, 2023 (our “Form 10-K”). Capitalized terms used in this Item 2 have the same meaning as in the accompanying unaudited condensed financial statements
in Item 1 unless otherwise defined herein.
Statement Regarding Forward-Looking Information
Certain statements in this quarterly report on Form
10-Q for the
quarterly period
February 7, 2018 (commencement of operations) throughended March 31,
2018 (“Quarterly2024 (this “Quarterly Report”) constitute
“forward-looking “forward-looking statements.”
Forward-looking statements are statements that do not relate strictly to historical or current facts, but reflect management’s current understandings, intentions, beliefs, plans, expectations, assumptions and/or predictions regarding the future of our business and its performance, the economy and other future conditions and forecasts of future events and circumstances.
Forward-looking statements are typically identified by words such as “believes,” “expects,” “anticipates,” “intends,” “estimates,” “plans,” “continues,” “pro forma,” “may,” “will,” “seeks,” “should” and “could,” and words and terms of similar substance, although not all forward-looking statements include these words. The forward-looking statements contained in this Quarterly Report involve risks and uncertainties, including statements as to:
•our future operating results;
•our business prospects and the prospects of our businesses and other assets;
•unanticipated costs, delays and other difficulties in executing our business strategy;
•performance of our businesses and other assets relative to our expectations and the impact on our actual return on invested equity, as well as the cash provided by these assets;
•our contractual arrangements and relationships with third parties;
•actual and potential conflicts of interest with the Manager, theSub-Manager and their respective affiliates;
•the dependence of our future success on the general economy and its effect on the industries in which we target;target, including rising interest rates, inflationary pressures, recessionary concerns or global supply chain issues;
•events or circumstances which undermine confidence in the financial markets or otherwise have a broad impact on financial markets, such as the sudden instability or collapse of large depository institutions or other significant corporations, terrorist attacks, natural orman-made disasters, pandemics or threatened or actual armed conflicts;
•the use, adequacy and availability of proceeds from thisour current public offering (“Follow-On Public Offering”), financing sources, working capital or borrowed money to finance a portion of our business strategy and to service our outstanding indebtedness;
•the timing of cash flows, if any, from our businesses and other assets;
•the ability of the Manager and theSub-Manager to locate suitable acquisition opportunities for us and to manage and operate our businesses and other assets;
•the ability of the Manager, theSub-Manager and their respective affiliates to attract and retain highly talented professionals;
•the ability to operate our business efficiently, manage costs (including general and administrative expenses) effectively and generate cash flow;
•the lack of a public trading market for our shares;
•the ability to make and the amount and timing of anticipated future distributions;
•estimated net asset value per share of our shares;
•the loss of our exemption from the definition of an “investment company” under the Investment Company Act;Act of 1940, as amended (the “Investment Company Act”);
•fiscal policies or inaction at the U.S. federal government level, which may lead to federal government shutdowns or negative impacts on the U.S economy;
•the degree and nature of our competition; or
•the effect of changes to government regulations, accounting rules or tax legislation.
Our
forward-looking statements are not guarantees of our future performance and shareholders are cautioned not to place undue reliance on any
forward-looking statements. While we believe our
forward-looking statements are reasonable, such statements are inherently susceptible to uncertainty and changes in circumstances. As with any projection or forecast,
forward-looking statements are necessarily dependent on assumptions, data and/or methods that may be incorrect or imprecise, and may not be realized. Our
forward-looking statements are based on our current expectations and a variety of risks, uncertainties and other factors, many of which are beyond our ability to control or accurately predict.
Important factors that could cause our actual results to vary materially from those expressed or implied in ourforward-looking statements include, but are not limited to, the factors listed and described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Risk Factors” insections of the Company’s prospectusdocuments filed from time to time with the SEC pursuantU.S. Securities and Exchange Commission, including, but not limited to, Rule 424(b)(3)our Form 10-K and dated March 7, 2018 (our “Prospectus”) and Item 1A in Part II of this Quarterly Report. All written and oral
forward-looking statements attributable to us or persons acting on our behalf are qualified in their entirety by these cautionary statements.
Forward-looking statements speak only as of the date on which they are made; we undertake no obligation to, and expressly disclaim any obligation to, update or revise
forward-looking statements to reflect new information, changed assumptions, the occurrence of subsequent events, or changes to future operating results over time unless otherwise required by law.
CNL Strategic Capital, LLC is a limited liability company that primarily seeks to acquire and grow durable, middle-market
U.S. businesses. We are externally managed by
the Manager, CNL Strategic Capital Management, LLC, an entity that is registered as an investment adviser under the
Investment Advisers
Act of 1940, as amended.Act. The Manager is controlled by CNL Financial Group, LLC, a private investment management firm specializing in alternative investment products. We have engaged the Manager under
a management agreementthe Management Agreement pursuant to which the Manager is responsible for the overall management of our
activities. The Manager has engagedactivities and sub-managed by the Sub-Manager, Levine Leichtman Strategic Capital, LLC, a registered investment
advisor,adviser, under
asub-management agreementthe Sub-Management Agreement pursuant to which the
Sub-Manager is responsible for the
day-to-day management of our assets. The
Sub-Manager is an affiliate of Levine Leichtman Capital Partners,
Inc.LLC.
The Manager and the
Sub-Manager are collectively responsible for sourcing potential
acquisitionacquisitions and debt financing opportunities, subject to approval by the Manager’s management committee that such opportunity meets our investment objectives and final approval of such opportunity by our board of directors, and monitoring and managing the businesses we acquire and/or finance on an ongoing basis. The
Sub-Manager is primarily responsible for analyzing and conducting due diligence on prospective acquisitions and debt financings, as well as the overall structuring of transactions.
We target, for acquisition,
Since we commenced operations on February 7, 2018, we have acquired equity and debt investments in 14 middle market U.S. businesses. Our businesses
thatgenerally have a track record of stable and predictable operating performance, are highly cash flow generative
with annual revenuesand have management teams who have a meaningful ownership stake in their respective company. As of
primarily between $25 million and $500 million. Our business strategy is to acquireMarch 31, 2024, we had ten investments structured as controlling equity
stakesinterests in combination with
loandebt positions
in middle-market businesses. Our business strategy seeks to provide long-term capital appreciation and
current income, while protecting invested capital. In addition and to a lesser extent, we intend to acquire other debt and minority equity positions, which may include acquiring debt in the secondary market as wellfour investments structured as minority equity
stakes and loan positions via co-investmentsinterests in combination with
other funds managed by theSub-Manager or their affiliates. We expect that these positions will comprise a minoritydebt positions. All of
its total assets.our debt investments were current as of March 31, 2024.
We were formed as a Delaware limited liability company on August 9, 2016 and we operate and intend to continue to operate our business in a manner that will permit us to avoid registration under the Investment Company Act. We are not a “blank check” company within the meaning of Rule 419 of the Securities Act. We did not commencecommenced operations untilon February 7, 2018.
Our Common Shares Offerings
Public Offerings
On March 7, 2018,
as described below.Wewe commenced the Initial Public Offering of up to $1.1 billion of shares, which included up to $100.0 million of shares being offered through a private placementour distribution reinvestment plan, pursuant to the Initial Registration Statement. On November 1, 2021, we commenced the Follow-On Public Offering of up to $85$1.1 billion of shares, which includes up to $100.0 million of shares being offered through our distribution reinvestment plan, of our shares, upon which the Initial Registration Statement was deemed terminated.
Through March 31, 2024, we had received net proceeds from the Public Offerings of approximately $790.6 million, including approximately $32.3 million received through our distribution reinvestment plan. As of March 31, 2024, the public offering price was $36.78 per Class FA limited liability company interestsA share, $35.38 per Class T share, $33.38 per Class D share and up to $115$34.13 per Class I share. See Note 7. “Capital Transactions” and Note 13. “Subsequent Events” in Item 1. “Financial Statements” for additional information regarding the Initial Public Offering. Through March 31, 2024, we had incurred selling commissions and dealer manager fees of approximately $12.1 million from the sale of Class A limited liability company interests (oneshares and Class T shares in the Public Offerings. The Class D shares and Class I shares sold through March 31, 2024, were not subject to selling commissions and dealer manager fees. We also incurred obligations to reimburse the Manager and Sub-Manager for offering costs of approximately $10.7 million based on actual amounts raised through the classesPublic Offerings through March 31, 2024. These offering costs related to the Public Offerings were advanced by the Manager and Sub-Manager, as described further in Note 5. “Related Party Transactions” of Shares that constitutenon-founder shares).In October 2016, we confidentially submitted a registration statement on FormS-1 with the SEC in connection with the proposed offering of shares of our limited liability company interests (the “Public Offering” and together with the Private Placement, the “Offerings”). Through our Public Offering, weItem 1. “Financial Statements.”
We are
currently offering, in any combination, four classes of shares: Class A shares, Class T shares, Class D shares and Class I
shares. See Note 7. “Capital Transactions” of Item 1. “Financial Statements” for additional information related to our Offerings.On February 7, 2018, we commenced operations when we met the minimum offering requirement of $80 million in Class FA shares under the Private Placement and issued approximately 3.3 million shares of Class FA shares for aggregate gross proceeds of $81.7 million, as described below under “Our Common Shares Offering.” On February 7, 2018, we acquired the initial businesses using a substantial portion of the net proceeds from the Private Placement. For a discussion of the initial businesses, see “Portfolio and Investment Activity” below.
On March 7, 2018, our Registration Statement was declared effective by the SEC and we began offering $1,000,000,000 of Shares under the Public Offering, as further described below under “Our Common Shares Offering–Public Offering.”
Our Common Shares Offering
As of December 31, 2017, we had issued 4,000 shares of the Company’s Class FA shares, to each of the Manager andSub-Manager, for an aggregate purchase price of $200,000 (total of 8,000 Class FA shares). No selling commissions or dealer manager fees were paid in connection with the issuances.
Private Placement
We offered(collectively, “Non-founder shares”) through the Private Placement up to $85 million of Class FA shares and up to $115 million of Class A shares (one of the classes of Shares that constitutenon-founder shares) on a best efforts basis, which meant that the Placement Agent in connection with the Private Placement used its best efforts but was not required to sell any specific amount of shares. On February 7, 2018, we commenced operations when we met our minimum offering requirement of $80 million in Class FA shares under the Private Placement and we issued approximately 3.3 million Class FA shares at $25.00 per Class FA share resulting in gross proceeds of approximately $81.7 million. The $81.7 million in gross proceeds included a cash capital contribution of $2.4 million from the Manager in exchange for 96,000 Class FA shares and a cash capital contribution of $9.5 million from CNL Strategic Capital Investment, LLC, which is indirectly controlled by James M. Seneff, Jr., the chairman of the Company, in exchange for 380,000 Class FA shares. The $81.7 million also included 96,000 Class FA shares received in exchange for $2.4 million ofnon-cash consideration in the form of equity interests in Lawn Doctor received from an affiliate of theSub-Manager pursuant to the Exchange Agreement. The $81.7 million in gross proceeds also included a cash capital contribution of approximately $0.4 million in exchange for 15,000 Class FA shares, from other individuals affiliated with the Manager. The Class FA shares and Class A shares in the Private Placement were offered for sale only to persons that were “accredited investors,” as that term is defined under the Securities Act, and Regulation D promulgated thereunder. No Class A shares were sold under the Private Placement.
We did not incur any selling commissions or placement agent fees from the sale of the approximately 3.3 million Class FA shares sold under the terms of the Private Placement. We did incur obligations to reimburse the Manager andSub-Manager for organization and offering costs based on actual amounts raised. These organization and offering costs related to the Private Placement had been previously advanced by the Manager andSub-Manager, as described further in Note 5. “Related Party Transactions” of “Item 1. “Financial Statements.” Through March 31, 2018, we incurred approximately $0.7 million of organization and offering costs.
Follow-On Public Offering
Once the Registration Statement became effective on March 7, 2018, we began offering up to $1,000,000,000 of Shares, on a best efforts basis, which means that CNL Securities Corp., as the Managing Dealer of the Public Offering, will use its best efforts, but is not required to sell any specific amount of Shares. We are offering, in any combination, four classes of Shares in the Public Offering: Class A shares, Class T shares, Class D shares and Class I shares. The initial minimum permitted purchase amount is $5,000 in Shares. The initial per share Public Offering price was $27.32 per Class A share, $26.25 per Class T share, $25.00 per Class D share and $25.00 per Class I share.Offering. There are differing selling fees and commissions for each share class. We will also pay annual distribution and shareholder servicing fees, subject to certain limits, on the Class T and Class D shares sold in the Public OfferingOfferings (excluding salesshares sold pursuant to the Company’sour distribution reinvestment plan).
In April
2018,2024, our board of directors approved new per share public offering prices for each share class in the
Follow-On Public Offering. The new public offering prices
becameare effective
onas of April
27, 2018.30, 2024. The following table provides the new public offering prices and applicable upfront selling commissions and dealer manager fees for each share class available in the
Follow-On Public Offering:
| | | | | | | | | | | | | | | | |
| | Class A | | | Class T | | | Class D | | | Class I | |
Public Offering Price, Per Share | | $ | 27.46 | | | $ | 26.38 | | | $ | 25.13 | | | $ | 25.13 | |
Selling Commissions, Per Share | | $ | 1.65 | | | $ | 0.79 | | | $ | — | | | $ | — | |
Dealer Manager Fees, Per Share | | $ | 0.68 | | | $ | 0.46 | | | $ | — | | | $ | — | |
In May
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A | | Class T | | Class D | | Class I |
Effective April 30, 2024: | | | | | | | | |
Public Offering Price, Per Share | | $ | 37.09 | | | $ | 35.69 | | | $ | 33.68 | | | $ | 34.44 | |
Selling Commissions, Per Share | | 2.23 | | | 1.07 | | | — | | | — | |
Dealer Manager Fees, Per Share | | 0.92 | | | 0.63 | | | — | | | — | |
Since we commenced operations on February 7, 2018, after taking in consideration the effectwe have raised total net offering proceeds (including amounts raised from our private offerings and Public Offerings) of subsequent post-closing adjustments during the true up period relating to the working capital and tax indebtedness ofapproximately $966.0 million, including approximately $32.3 million received through our portfolio companies, our net asset value per Class FA share was adjusted to $25.16distribution reinvestment plan as of March 31, 2018. See Note 9. “Financial Highlights” for information on the end2024.
Portfolio and Investment Activity
In October 2017, we entered into a merger agreement with LD Merger Sub, Inc., a wholly owned subsidiary of the Company, and LD Parent, Inc., the parent company of Lawn Doctor. The merger agreement was amended on February 6, 2018. On February 7, 2018, pursuant to the terms of the merger agreement and the Exchange Agreement, we acquired an approximately 63.9% equity interest in Lawn Doctor from an affiliate of theSub-Manager, through an investment consisting of common equity and a debt investment in the form of a secured second lien loan to Lawn Doctor. After the closing of the merger, the consummation of the equity contribution pursuant to the Exchange Agreement and subsequent purchases of common equity in Lawn Doctor by certain members of Lawn Doctor’s senior management team, we own approximately 62.9% of the outstanding equity in Lawn Doctor.
As of March 31,
2018, the cost basis of our investments2024, we had invested in
Lawn Doctor was approximately $30.5 million of common equity and $15.0 million of a debt investment. The purchase price is subject to adjustment based on, among other factors, Lawn Doctor’s working capital and indebtedness at closing. In October 2017, we entered into a merger agreement with PFHI Merger Sub, Inc., a wholly owned subsidiary of the Company, and Polyform. The merger agreement was amended on February 6, 2018. On February 7, 2018, pursuant to the terms of the merger agreement, we acquired an approximately 87.1% equity interest in Polyform from an affiliate of theSub-Manager, through an investment14 portfolio companies, consisting of common equity and a debt investment in the form of a first lien secured term loan to Polyform. As of March 31, 2018, the cost basis of our investments in Polyform was approximately $15.8 million of common equity and $15.7 million of a debt investment. The purchase price is subject to adjustment based on, among other factors, Polyform’s working capital and indebtedness at closing.
The debt investments in the form of a secured second lien loan to Lawn Doctor and in the form of a first lien secured term loan to Polyform as described above accrue interest at a per annum rate of 16%. Each loan will mature in August 2023.each portfolio company. The table below presents our portfolio company investments (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | As of March 31, 2024 |
| | | | Equity Investments | | Debt Investments(1) | | |
Portfolio Company | | Initial Investment Date | | Ownership % | | Cost Basis | | Senior Secured Debt | | Interest Rate | | Maturity Date | | Cost Basis | | Total Cost Basis(2) |
Lawn Doctor | | 2/7/2018 | | 61 | % | | $ | 27.6 | | | Second Lien | | 16.0 | % | | 2/7/2030 | | $ | 15.0 | | | $ | 42.6 | |
Lawn Doctor | | 6/30/2023 | | — | | | — | | | First Lien | | (3) | | 8/6/2029 | | 29.5 | | | 29.5 | |
Polyform | | 2/7/2018 | | 87 | | | 15.6 | | | Secured | | 16.0 | | | 2/7/2026 | | 15.7 | | | 31.3 | |
Roundtables | | 8/1/2019 | | 81 | | | 33.5 | | | Second Lien | | 16.0 | | | 8/1/2025 | | 12.1 | | | 45.6 | |
Roundtables | | 11/13/2019 | | — | | | — | | | Secured | | 8.0 | | | 8/1/2024 | | 2.0 | | | 2.0 | |
Milton Industries Inc. | | 11/21/2019 | | 13 | | | 6.6 | | | Second Lien | | 15.0 | | | 12/19/2027 | | 3.4 | | | 10.0 | |
Resolution Economics, LLC | | 1/2/2020 | | 8 | | | 8.1 | | | Second Lien | | 15.0 | | | 1/2/2026 | | 2.8 | | | 10.9 | |
Blue Ridge ESOP Associates | | 3/24/2020 | | 16 | | | 12.9 | | | Second Lien | | 15.0 | | | 12/28/2028 | | 2.6 | | | 15.5 | |
HSH | | 7/16/2020 | | 75 | | | 17.3 | | | Secured | | 15.0 | | | 7/16/2027 | | 24.4 | | | 41.7 | |
ATA | | 4/1/2021 | | 75 | | | 37.1 | | | Secured | | 15.0 | | | 4/1/2027 | | 37.0 | | | 74.1 | |
Douglas | | 10/7/2021 | | 90 | | | 35.5 | | | Second Lien | | 16.0 | | | 10/7/2028 | | 15.0 | | | 50.5 | |
Clarion | | 12/9/2021 | | 96 | | | 56.8 | | | First Lien | | 15.0 | | | 12/9/2028 | | 22.5 | | | 79.3 | |
Vektek | | 5/6/2022 | | 84 | | | 56.9 | | | Second Lien | | 15.0 | | | 11/6/2029 | | 24.4 | | | 81.3 | |
Vektek | | 6/30/2023 | | — | | | — | | | Secured | | (3) | | 5/6/2029 | | 24.8 | | | 24.8 | |
TacMed | | 3/24/2023 | | 95 | | | 76.7 | | | Secured | | 16.0 | | | 3/24/2030 | | 29.0 | | | 105.7 | |
Sill | | 10/20/2023 | | 99 | | | 58.5 | | | Secured | | 14.0 | | | 10/20/2030 | | 15.9 | | | 74.4 | |
USAW | | 2/21/2024 | | 5 | | | 8.6 | | | Second Lien | | 16.0 | | | 8/20/2031 | | 1.4 | | | 10.0 | |
| | | | | | $ | 451.7 | | | | | | | | | $ | 277.5 | | | $ | 729.2 | |
FOOTNOTES:
(1) The note purchase agreements contain customary covenants and events of default.
As of March 31, 2018, our investment portfolio included four distinct investment positions and the fair value2024, all of our portfolio was comprisedcompanies were in compliance with their respective debt covenants.
(2) See the Schedule of the following: | | | | | | | | | | | | |
| | As of March 31, 2018 | |
Asset Category | | Cost | | | Fair Value | | | Fair Value Percentage of Investment Portfolio | |
Senior debt | | | | | | | | | | | | |
Senior secured debt - first lien | | $ | 15,700,000 | | | $ | 15,700,000 | | | | 20.3 | % |
Senior secured debt - second lien | | | 15,000,000 | | | | 15,000,000 | | | | 19.4 | |
| | | | | | | | | | | | |
Total senior debt | | $ | 30,700,000 | | | $ | 30,700,000 | | | | 39.7 | |
Equity | | | 46,231,763 | | | | 46,756,212 | | | | 60.3 | |
| | | | | | | | | | | | |
Total investments | | $ | 76,931,763 | | | $ | 77,456,212 | | | | 100.0 | % |
| | | | | | | | | | | | |
As of March 31, 2018, the weighted average yield on our debt portfolio was 16.0%.
Lawn Doctor
Lawn Doctor is a leading franchisor of residential lawn care programsInvestments
and services. Lawn Doctor’s core service offerings provide residential homeowners with year-round monitoring and treatment by focusing on weed and insect control, seeding, and professionally and consistently-administered fertilization, using its proprietary line of equipment. Lawn Doctor is not involved in other lawn maintenance services, such as mowing, edging, and leaf blowing.Lawn Doctor’s franchised business model has repeatedly received recognition as a leading franchisor of lawn care services by industry associations and trade magazines, and has a customer retention rate of more than 80% over the past three years, which reflects the high level of quality and customer service that Lawn Doctor has been able to sustain over the years. Lawn Doctor’s efforts on behalf of its franchisees (which include shared marketing programs and infrastructure, an extensive online presence, and comprehensive training) have attracted a strong core of dedicated franchise owners who, in turn, contribute to the continued growth and success of the Lawn Doctor brand.
Polyform
Polyform is a leading developer, manufacturer and marketer of polymer clay products worldwide. Through its two primary brands, Sculpey® and Premo!®, Polyform sells a comprehensive line of premium craft products to a diverse mix of customers including specialty and big box retailers, distributors ande-tailers. We believe Polyform is well regarded for its high quality, comprehensive line of polymer clays, clay molds, children kits,wax-base clays,non-dry clays, clay tools and accessories. Polyform’s strong brand recognition, unique product attributes and strong customer network have earned it one of the leading market share positions in the polymer clay segment within the United States. Polyform estimates that its products are available in approximately 8,900 retail locations through its major customers, plus many other locations through independent retailers. Products are shipped directly to 48 countries worldwide.
See Note 3. “Investments” of Item 1. “Financial Statements” for additional information related to our investments.
investments, including fair values as of March 31, 2024.
(3) As of March 31, 2024, the senior debt investments in Lawn Doctor and Vektek accrue interest at a per annum rate of SOFR + 4.60% and SOFR + 4.35%, respectively. SOFR at March 31, 2024 was 5.32%.
The portfolio companies are required to make monthly interest payments on their debt, with the debt principal due upon maturity. Failure of any of these portfolio companies to pay contractual interest payments could have a material adverse effect on our results of operations and cash flows from operations, which would impact our ability to make distributions to shareholders. See our Form 10-K for the year ended December 31, 2023 for additional information regarding our portfolio companies and their related business activities. Our Portfolio Companies
The below information regarding our portfolio companies contain a financial measure, Adjusted EBITDA,
utilized by management to evaluate the operating performance and liquidity of our portfolio companies that is not calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Adjusted EBITDA should not be considered in isolation from or as superior to or as a substitute for net income (loss), income (loss) from operations, or other financial measures determined in accordance with GAAP. We use this non-GAAP financial measure to supplement our GAAP results in order to provide a more complete understanding of the factors and trends affecting our portfolio companies. We present this non-GAAP measure quarterly for our portfolio companies in which we own a controlling equity interest and annually for all of our portfolio companies.
You are encouraged to evaluate the adjustments to Adjusted EBITDA, including the reasons we consider this measure appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future our portfolio companies may incur expenses that are the same as or similar to some of the adjustments in this presentation. The presentation of Adjusted EBITDA should not be construed as an inference that the future results of our portfolio companies will be unaffected by unusual or non-recurring items.
We caution investors that amounts presented in accordance with our definition of Adjusted EBITDA may not be comparable to similar measures disclosed by other companies, because not all companies calculate this non-GAAP measure in the same manner. Because of these limitations and additional limitations described below, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on the GAAP results and using Adjusted EBITDA only as a supplemental measure.
Additionally, we provide our proportionate share of each non-GAAP measure because our ownership percentage of each portfolio company varies. We urge investors to consider our ownership percentage of each portfolio company when evaluating the results of each of our portfolio companies.
Adjusted EBITDA
When evaluating the performance of our portfolio, we monitor
adjustedAdjusted EBITDA to measure the financial and operational performance of our portfolio companies and their ability to pay contractually obligated debt payments to us. In connection with this evaluation, the Manager and
Sub-Manager review monthly portfolio company operating performance versus budgeted expectations and conduct regular operational review calls with the management teams of the portfolio companies.
We present Adjusted EBITDA as a supplemental measure of the performance of our
initial businesses. We define Adjusted EBITDA as net income (loss), plus (i) interest expense, net, and loan cost amortization, (ii) taxes and (iii) depreciation and amortization, as further adjusted for certain othernon-recurring items that we do not consider indicative of the ongoing operating performance of our initial businesses. These further adjustments are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future our initial businesses may incur expenses that are the same as or similar to some of the adjustments in this presentation. This presentation of Adjusted EBITDA should not be construed as an inference that the future results of our initial businesses will be unaffected by unusual ornon-recurring items.We present Adjusted EBITDAportfolio companies because we believe it assists investors in comparing the performance of such businesses across reporting periods on a consistent basis by excluding items that we do not believe are indicative of their core operating performance.
We define Adjusted EBITDA as net income (loss), plus (i) interest expense, net, and loan cost amortization, (ii) taxes and (iii) depreciation and amortization, as further adjusted for certain other non-recurring items that we do not consider indicative of the ongoing operating performance of our portfolio companies. These further adjustments are itemized below. Our proportionate share of Adjusted EBITDA is calculated based on our equity ownership percentage at period end.
Adjusted EBITDA has limitations as an analytical tool. Some of these limitations are: (i) Adjusted EBITDA does not reflect cash expenditures, or future requirements, for capital expenditures or contractual commitments; (ii) Adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs; (iii) Adjusted EBITDA does not reflect
the significant interest expense, or the cash requirements necessary to service interest or principal payments, on indebtedness; (iv) although depreciation and amortization are
non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and Adjusted EBITDA does not reflect any cash requirements for such replacements; (v) Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we do not consider to be indicative of the
on-going ongoing operations of our
initial businesses;portfolio companies; and (vi) other companies in similar industries as our
initial businessesportfolio companies may calculate Adjusted EBITDA differently, limiting its usefulness as a comparative measure.
Because
Lawn Doctor
As of March 31, 2024 and December 31, 2023, Lawn Doctor, Inc. (“Lawn Doctor”) had total assets of approximately $101.0 million and $100.0 million, respectively.
The following table reconciles our proportionate share of Adjusted EBITDA should not be considered in isolation orfrom net income of Lawn Doctor for the three months ended March 31, 2024 and 2023 (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2024 | | 2023 |
Revenues | | | | | $ | 9,792 | | | $ | 9,128 | |
| | | | | | | |
Net income (GAAP) | | | | | $ | 216 | | | $ | 257 | |
Interest and debt related expenses | | | | | 1,475 | | | 1,441 | |
Depreciation and amortization | | | | | 639 | | | 646 | |
Income tax expense | | | | | 169 | | | 100 | |
Adjusted EBITDA (non-GAAP) | | | | | $ | 2,499 | | | $ | 2,444 | |
| | | | | | | |
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(1) | | | | | $ | 1,513 | | | $ | 1,480 | |
FOOTNOTE:
(1)Amounts based on our ownership percentage as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily onof the GAAP resultsend of the periods presented. As of March 31, 2024 and using2023, we owned approximately 61% of Lawn Doctor.
Polyform
As of March 31, 2024 and December 31, 2023, Polyform Products, Co. (“Polyform”) had total assets of approximately $32.3 million and $33.1 million, respectively. The following table reconciles our proportionate share of Adjusted EBITDA
only supplementally.Summarized Net Incomefrom net loss of Polyform for the three months ended March 31, 2024 and 2023 (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2024 | | 2023 |
Revenues | | | | | $ | 3,721 | | | $ | 4,103 | |
| | | | | | | |
Net loss (GAAP) | | | | | $ | (443) | | | $ | (193) | |
Interest and debt related expenses | | | | | 723 | | | 716 | |
Depreciation and amortization | | | | | 465 | | | 465 | |
Income tax benefit | | | | | (175) | | | (77) | |
Adjusted EBITDA (non-GAAP) | | | | | $ | 570 | | | $ | 911 | |
| | | | | | | |
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(1) | | | | | $ | 497 | | | $ | 794 | |
FOOTNOTE:
(1)Amounts based on our ownership percentage as of the end of the periods presented. As of March 31, 2024 and 2023, we owned approximately 87% of Polyform.
Roundtables
As of March 31, 2024 and December 31, 2023, Auriemma U.S. Roundtables (“Roundtables”) had total assets of approximately $71.0 million and $61.6 million, respectively. In August 2023, Roundtables acquired insideARM, a U.S.-based company providing services to the third-party debt collection industry.
The following table reconciles our proportionate share of Adjusted EBITDA
Reconciliations (Unaudited)Lawn Doctor
| | | | |
| | Period February 7, 2018(1) through March 31, 2018 | |
Net Income (GAAP) | | $ | 23,635 | |
Interest and Debt Related Expenses | | | 606,186 | |
Depreciation and Amortization | | | 127,088 | |
Income Tax Expense | | | 7,825 | |
Transaction Costs | | | 313,895 | |
| | | | |
Adjusted EBITDA(non-GAAP) | | $ | 1,078,629 | |
| | | | |
Polyform
| | | | |
| | Period February 7, 2018(1) through March 31, 2018 | |
Net Loss (GAAP) | | $ | (431,736 | ) |
Interest and Debt Related Expenses | | | 428,946 | |
Depreciation and Amortization | | | 291,465 | |
Income Tax Benefit | | | (48,000 | ) |
Transaction Costs | | | 313,895 | |
| | | | |
Adjusted EBITDA(non-GAAP) | | $ | 554,570 | |
| | | | |
from net (loss) income of Roundtables for the three months ended March 31, 2024 and 2023 (in thousands): | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2024 | | 2023 |
Revenues | | | | | $ | 4,311 | | | $ | 4,079 | |
| | | | | | | |
Net (loss) income (GAAP) | | | | | $ | (143) | | | $ | 59 | |
Interest and debt related expenses | | | | | 651 | | | 644 | |
Depreciation and amortization | | | | | 522 | | | 512 | |
Income tax (benefit) expense | | | | | (44) | | | 7 | |
Adjusted EBITDA (non-GAAP) | | | | | $ | 986 | | | $ | 1,222 | |
| | | | | | | |
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(1) | | | | | $ | 796 | | | $ | 987 | |
FOOTNOTE:
(1)Amounts based on our ownership percentage as of the end of the periods presented. As of March 31, 2024 and 2023, we owned approximately 81% of Roundtables.
HSH
As of March 31, 2024 and December 31, 2023, Healthcare Safety Holdings, LLC (“HSH”) had total assets of approximately $44.1 million and $45.0 million, respectively. The following table reconciles our proportionate share of Adjusted EBITDA from net income of HSH for the three months ended March 31, 2024 and 2023 (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2024 | | 2023 |
Revenues | | | | | $ | 8,331 | | | $ | 8,717 | |
| | | | | | | |
Net income (GAAP) | | | | | $ | 597 | | | $ | 660 | |
Interest and debt related expenses | | | | | 911 | | | 917 | |
Depreciation and amortization | | | | | 747 | | | 751 | |
Income tax expense | | | | | 210 | | | 257 | |
Adjusted EBITDA (non-GAAP) | | | | | $ | 2,465 | | | $ | 2,585 | |
| | | | | | | |
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(1) | | | | | $ | 1,837 | | | $ | 1,926 | |
FOOTNOTE:
(1)Amounts based on our ownership percentage as of the end of the periods presented. As of March 31, 2024 and 2023, we owned approximately 75% of HSH.
ATA
As of March 31, 2024 and December 31, 2023, ATA Holding Company, LLC (“ATA”) had total assets of approximately $85.8 million and $89.2 million, respectively. The following table reconciles our proportionate share of Adjusted EBITDA from net loss of ATA for the three months ended March 31, 2024 and 2023 (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2024 | | 2023 |
Revenues | | | | | $ | 10,197 | | | $ | 9,372 | |
| | | | | | | |
Net loss (GAAP) | | | | | $ | (2,389) | | | $ | (2,931) | |
Interest and debt related expenses | | | | | 1,460 | | | 1,500 | |
Depreciation and amortization | | | | | 1,101 | | | 1,096 | |
Adjusted EBITDA (non-GAAP) | | | | | $ | 172 | | | $ | (335) | |
| | | | | | | |
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(1) | | | | | $ | 129 | | | $ | (251) | |
FOOTNOTE:
(1)Amounts based on our ownership percentage as of the end of the periods presented. As of March 31, 2024 and 2023, we owned approximately 75% of ATA.
Douglas
As of March 31, 2024 and December 31, 2023, Douglas Machines Corp. (“Douglas”) had total assets of approximately $57.0 million and $57.6 million, respectively. The following table reconciles our proportionate share of Adjusted EBITDA from net income of Douglas for the three months ended March 31, 2024 and 2023 (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2024 | | 2023 |
Revenues | | | | | $ | 6,552 | | | $ | 8,431 | |
| | | | | | | |
Net income (GAAP) | | | | | $ | 190 | | | $ | 449 | |
Interest and debt related expenses | | | | | 650 | | | 621 | |
Depreciation and amortization | | | | | 353 | | | 425 | |
Income tax expense | | | | | 14 | | | 138 | |
Adjusted EBITDA (non-GAAP) | | | | | $ | 1,207 | | | $ | 1,633 | |
| | | | | | | |
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(1) | | | | | $ | 1,089 | | | $ | 1,473 | |
FOOTNOTE:
(1)Amounts based on our ownership percentage as of the end of the periods presented. As of March 31, 2024 and 2023, we owned approximately 90% of Douglas.
Clarion
As of March 31, 2024 and December 31, 2023, Clarion Safety Systems, LLC (“Clarion”) had total assets of approximately $80.0 million and $80.4 million, respectively. The following table reconciles our proportionate share of Adjusted EBITDA from net income of Clarion for the three months ended March 31, 2024 and 2023 (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2024 | | 2023 |
Revenues | | | | | $ | 4,393 | | | $ | 3,327 | |
| | | | | | | |
Net income (GAAP) | | | | | $ | 542 | | | $ | 87 | |
Interest and debt related expenses | | | | | 841 | | | 843 | |
Depreciation and amortization | | | | | 256 | | | 247 | |
Income tax expense | | | | | 208 | | | 34 | |
Adjusted EBITDA (non-GAAP) | | | | | $ | 1,847 | | | $ | 1,211 | |
| | | | | | | |
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(1) | | | | | $ | 1,779 | | | $ | 1,186 | |
FOOTNOTE:
(1)Amounts based on our ownership percentage as of the end of the periods presented. As of March 31, 2024 and 2023, we owned approximately 96% and 98%, respectively, of Clarion.
Vektek
As of March 31, 2024 and December 31, 2023, Vektek Holdings, LLC (“Vektek”) had total assets of approximately $113.2 million and $114.1 million, respectively. The following table reconciles our proportionate share of Adjusted EBITDA from net income of Vektek for the three months ended March 31, 2024 (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2024 | | 2023 |
Revenues | | | | | $ | 9,072 | | | $ | 10,421 | |
| | | | | | | |
Net income (GAAP) | | | | | $ | 276 | | | $ | 752 | |
Interest and debt related expenses | | | | | 1,557 | | | 1,523 | |
Depreciation and amortization | | | | | 922 | | | 902 | |
Income tax expense | | | | | — | | | 13 | |
| | | | | | | |
Adjusted EBITDA (non-GAAP) | | | | | $ | 2,755 | | | $ | 3,190 | |
| | | | | | | |
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(1) | | | | | $ | 2,306 | | | $ | 2,671 | |
FOOTNOTE:
(1)Amounts based on our ownership percentage as of the end of the periods presented. As of March 31, 2024 and 2023, we owned approximately 84% of Vektek.
TacMed
As of March 31, 2024 and December 31, 2023, Tacmed Holdings, LLC (“TacMed”) had total assets of approximately $111.6 million and $114.3 million, respectively.
The following table reconciles our proportionate share of Adjusted EBITDA from net loss of TacMed for the three months ended March 31, 2024 and the period from March 24, 2023 (the date we acquired our investments in TacMed) to March 31, 2023 (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2024 | | | | For the Period Ended March 24, 2023 through March 31, 2023 | | |
Revenues | $ | 8,428 | | | | | $ | 786 | | | |
| | | | | | | |
Net loss (GAAP) | $ | (2,107) | | | | | $ | (2,088) | | | |
Interest and debt related expenses | 1,173 | | | | | 106 | | | |
Depreciation and amortization | 1,260 | | | | | 97 | | | |
Income tax (benefit) expense | (228) | | | | | 20 | | | |
Transaction related expenses(1) | 11 | | | | | 1,835 | | | |
| | | | | | | |
Adjusted EBITDA (non-GAAP) | $ | 109 | | | | | $ | (30) | | | |
| | | | | | | |
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(2) | $ | 104 | | | | | $ | (29) | | | |
FOOTNOTES:
(1)Initial buyer transaction costs paid by TacMed included in the purchase price. Transaction related expenses are non-recurring.
(2)Amounts based on our ownership percentage as of the end of the periods presented. As of March 31, 2024 and 2023, we owned approximately 95% of TacMed.
Sill
As of March 31, 2024 and December 31, 2023, Sill Holdings, LLC (“Sill”) had total assets of approximately $77.2 million and $76.9 million, respectively. The Company acquired its investments in Sill in October 2023.
The following table reconciles our proportionate share of Adjusted EBITDA from net income of Sill for the three months ended March 31, 2024 (in thousands):
| (1) | | | | | | | | | | |
| Three Months Ended March 31, 2024 | | February 7, 2018 is the date we acquired the portfolio companies. | | | | |
Revenues | $ | 3,673 | | | | | | | |
| | | | | | | |
Net income (GAAP) | $ | 383 | | | | | | | |
Interest and debt related expenses | 569 | | | | | | | |
Depreciation and amortization | 550 | | | | | | | |
Income tax benefit | (933) | | | | | | | |
| | | | | | | |
Adjusted EBITDA (non-GAAP) | $ | 569 | | | | | | | |
| | | | | | | |
Our Proportionate Share of Adjusted EBITDA (non-GAAP)(1) | $ | 564 | | | | | | | |
FOOTNOTE:
(1)Amounts based on our ownership percentage as of the end of the periods presented. As of March 31, 2024, we owned approximately 99% of Sill.
Factors Impacting Our Operating Results
We expect that the results of our operations will be affected by a number of factors. Many of the factors that will affect our operating results are beyond our control.
We will be dependent upon the earnings of and cash flow from the businesses that we acquire to meet our corporate overheadoperating and management fee expenses and to make distributions. These earnings and cash flows, net of any minority interests in these businesses, will be available:
| • | | first, to meet management fees and corporate overhead expenses of the company; and |
| • | | second, to fund business operations and distributions by the company to shareholders. |
•first, to meet our management fees and corporate overhead expenses; and
•second, to fund business operations and to make distributions to our shareholders.
If we are unable to raise substantial funds, we will be limited in the number and type of acquisitions we may make. The size of our assets will be a key revenue driver. Generally, as the size of our assets grows, the amount of income we receive will increase. In addition, our assets may grow at an uneven pace as opportunities to acquire assets may be irregularly timed, and the timing and extent of the Manager’s and the
Sub-Manager’s success in identifying such opportunities, and our success in making acquisitions, cannot be predicted.
From time to time, the global capital markets may experience periods of disruption and instability,
as we have seen and continue to see with the recent public health crises, natural disasters and geopolitical events, which could materially and adversely impact the broader financial and credit markets and reduce the availability
to us of debt and equity capital.
Furthermore, economic growth remains affected by inflationary pressure and supply chain related disruptions and could be slowed or halted by significant external events. Some of our portfolio companies have experienced supply chain related disruptions from time to time. In some instances, strategic decisions to hold more inventory have been made as a result of ongoing supply chain related disruptions. Significant changes or volatility in the capital markets
have and may
alsocontinue to have a negative effect on the valuations of our businesses and other assets. While all of our assets are likely to not be publicly traded, applicable accounting standards require us to assume as part of our valuation process that our assets are sold in a principal market to market participants (even if we plan on holding an asset long term or through its maturity) and impairments of the market values or fair market values of our assets, even if unrealized, must be reflected in our financial statements for the applicable period, which could result in significant reductions to our net asset value for the period. Significant changes in the capital markets may also affect the pace of our activity and the potential for liquidity events involving our assets. Thus, the illiquidity of our assets may make it difficult for us to sell such assets to access capital if required, and as a result, we could realize significantly less than the value at which we have recorded our assets if we were required to sell them for liquidity purposes.
Results of Operations
From the time
Liquidity and Capital Resources
General
Liquidity is a measure of our formation on August 9, 2016 through February 6, 2018,ability to meet potential cash requirements, including ongoing commitments, fund and maintain our assets and operations, repay borrowings, make distributions to our shareholders and other general business needs. We will use significant cash to fund acquisitions, make additional investments in our portfolio companies, make distributions to our shareholders and fund our operations. Additionally, to the extent we had not commenced operations. Operations commenced on February 7, 2018, when aggregate subscription proceedshave available cash we may make investments in excessshort-term U.S. Treasury bills. Our primary sources of the minimum offering amount of $80 million were received in the Private Placement. We acquired our initial businesses on February 7, 2018 using a substantial portion of cash will generally consist of:
•the net proceeds from the Private Placement. See “Overview – Our Common Shares Offering”Public Offerings;
•distributions and “Overview – Portfoliointerest earned from our assets; and Investment Activity” above
•proceeds from sales of assets and principal repayments from our assets.
We expect we will have sufficient cash from current sources to meet our liquidity needs for
additional information.the next twelve months. However, we may opt to supplement our equity capital and increase potential returns to our shareholders through the use of prudent levels of borrowings. We may use debt when the available terms and conditions are favorable to long-term investing and well-aligned with our business strategy. In light of the current economic environment, impacted by rising interest rates, record inflationary pressures due to global supply chain issues, a rise in energy prices, and the impact of the recent public health crises, natural disasters and geopolitical events on the global economy, we are closely monitoring overall liquidity levels and changes in the business performance of our portfolio companies to be in a position to enact changes to ensure adequate liquidity going forward.
While we generally intend to hold our assets for the long term, certain assets may be sold in order to manage our liquidity needs, meet other operating objectives and adapt to market conditions. The timing and impact of future sales of our assets, if any, cannot be predicted with any certainty.
As of March 31, 2018,2024 and December 31, 2023, we had cash and cash equivalents of approximately $159.9 million and $134.5 million, respectively.
Sources of Liquidity and Capital Resources
Offerings. We received approximately $53.9 million and $34.4 million in net proceeds during the three months ended March 31, 2024 and 2023, respectively, from the Public Offerings, which excludes approximately $4.1 million and $2.6 million raised through our distribution reinvestment plan, respectively. As of March 31, 2024, we had approximately 817 million authorized common shares remaining for sale.
Investments. We received a return of capital from portfolio company investments of approximately $0.6 million and $0.2 million during each of the three months ended March 31, 2024 and 2023, respectively. During the three months ended March 31, 2023, we received proceeds from sales and redemptions of U.S. Treasury bills of approximately $412.2 million which were reinvested in new U.S. Treasury bills. We did not have any sale or redemptions of U.S. Treasury bills for the three months ended March 31, 2024.
Borrowings. We did not borrow any amounts during the three months ended March 31, 2024 or 2023. See Note 8. “Borrowings” of Item 1. “Financial Statements” for additional information regarding our the 2022 Line of Credit and 2024 Line of Credit. Uses of Liquidity and Capital Resources
Investments.We used approximately $10.0 million and $106.0 million of cash to purchase portfolio company investments during the three months ended March 31, 2024 and 2023, respectively.
Operating Activities. We used operating cash flows (excluding amounts related to investment activity) of approximately $6.0 million and $6.2 million during the three months ended March 31, 2024 and 2023, respectively.
Distributions.We paid distributions to our shareholders of approximately $4.8 million and $4.0 million (which excludes distributions reinvested of approximately $4.1 million and $2.6 million, respectively) during the three months ended March 31, 2024 and 2023, respectively. See “Distributions Declared” below for additional information. Share Repurchases. We paid approximately $8.2 million and $2.4 million during the three months ended March 31, 2024 and 2023, respectively, to repurchase shares in accordance with our Share Repurchase Program.
Deferred Financing Costs. We paid approximately $0.2 million and $0.1 million in deferred financing costs during the three months ended March 31, 2024 and 2023.
Reimbursement of Expense Support. During the three months ended March 31, 2024 and 2023, we reimbursed the Manager and Sub-Manager approximately $0.6 million and $2.4 million, respectively, for Expense Support received in previous years. Expense Support is received or Expense Support reimbursement is paid annually. As of March 31, 2024, there is no remaining unreimbursed Expense Support under the terms of the Expense Support and Conditional Reimbursement Agreement. Our obligation to make Conditional Reimbursements will automatically terminate and be of no further effect three years following the date which the Expense Support amount was provided and to which such Conditional Reimbursement relates, as described further in the Expense Support and Conditional Reimbursement Agreement. Additionally, the Company accrued expense support due from the Manager and Sub-Manager of approximately $0.3 million and $0.4 million during the three months ended March 31, 2024 and 2023, respectively. See Note 5. “Related Party Transactions” of Item 1. “Financial Statements” for additional information. Distributions Declared
The Company’s board of directors declared distributions on a monthly basis during the three months ended March 31, 2024 and 2023 (three record dates). The following table reflects the total distributions declared during the three months ended March 31, 2024 and 2023 (in thousands except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2024 | | 2023 |
Distribution Period | | Distributions Declared(1) | | Distributions Reinvested(2) | | Cash Distributions Net of Distributions Reinvested (2) | | Distributions Declared(1)(2) | | Distributions Reinvested (2) | | Cash Distributions Net of Distributions Reinvested (2) |
First Quarter | | $ | 8,807 | | | $ | 4,056 | | | $ | 4,751 | | | $ | 6,601 | | | $ | 2,590 | | | $ | 4,011 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
FOOTNOTES:
(1) Monthly distributions declared per share for each share class were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Record Date Period | | Class FA | | Class A | | Class T | | Class D | | Class I | | Class S |
January 1, 2024 – March 31, 2024 | | $ | 0.104167 | | | $ | 0.104167 | | | $ | 0.083333 | | | $ | 0.093750 | | | $ | 0.104167 | | | $ | 0.104167 | |
January 1, 2023 – March 31, 2023 | | 0.104167 | | | 0.104167 | | | 0.083333 | | | 0.093750 | | | 0.104167 | | | 0.104167 | |
(2) Amounts based on distribution record date.
Cash distributions declared net of distributions reinvested were funded from the following sources noted below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2024 | | 2023 |
| Amount | | Percentage(1) | | Amount | | Percentage(1) |
Net investment income before Expense Support (reimbursement) | $ | 4,426 | | | 93.2 | % | | $ | 4,798 | | | 119.6 | % |
Expense Support (reimbursement) | 295 | | | 6.2 | | | 113 | | | 2.8 | |
Net investment income | $ | 4,721 | | | 99.4 | % | | $ | 4,911 | | | 122.4 | % |
Cash distributions net of distributions reinvested in excess of net investment income | 30 | | | 0.6 | | | — | | | — | |
Cash distributions declared, net of distributions reinvested(2) | $ | 4,751 | | | 100.0 | % | | $ | 4,011 | | | 100.0 | % |
FOOTNOTES:
(1) Represents percentage of cash distributions declared, net of distribution reinvested for the period presented.
(2)Excludes $4,056 and $2,590 of distributions reinvested pursuant to our distribution reinvestment plan during the three months ended March 31, 2024 and 2023, respectively.
Distribution amounts and sources of distributions declared vary among share classes. We calculate each shareholder’s specific distribution amount for the period using record and declaration dates. Distributions are declared on all classes of our shares at the same time. Amounts distributed to each class are allocated among the holders of our shares in such class in proportion to their shares. Distributions on the Non-founder shares may be lower than distributions on Founder shares because we are required to pay higher management and total return incentive fees to the Manager and the Sub-Manager with respect to the Non-founder shares. Additionally, distributions on Class T and Class D shares are lower than distributions on Class FA, Class A, Class I and Class S shares because we are required to pay ongoing distribution and shareholder servicing fees with respect to Class T and Class D shares. There is no assurance that we will pay distributions in any particular amount, if at all.
Distribution Reinvestment Plan
We have adopted a distribution reinvestment plan pursuant to which shareholders who purchase shares in the Public Offerings have their cash distributions automatically reinvested in additional shares having the same class designation as the class of shares to which such distributions are attributable, unless such shareholders elect to receive distributions in cash, are residents of Opt-In States, or are clients of certain participating broker-dealers that do not permit automatic enrollment in our distribution reinvestment plan. Opt-In States include Alabama, Arkansas, Idaho, Kansas, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Nebraska, New Hampshire, New Jersey, North Carolina, Ohio, Oklahoma, Oregon, Vermont and Washington. Shareholders who are residents of Opt-In States, holders of Class FA shares and clients of certain participating broker-dealers that do not permit automatic enrollment in our distribution reinvestment plan automatically receive their distributions in cash unless they elect to have their cash distributions reinvested in additional shares. Cash distributions paid on Class FA shares are reinvested in additional Class A shares. Class S shares do not participate in the distribution reinvestment plan.
The purchase price for shares purchased under our distribution reinvestment plan is equal to the most recently determined and published net asset value per share of the applicable class of shares. Because the distribution and shareholder servicing fee is calculated based on net asset value, it reduces net asset value and/or distributions with respect to Class T shares and Class D shares, including shares issued under the distribution reinvestment plan with respect to such share classes. To the extent newly issued shares are purchased from us under the distribution reinvestment plan or shareholders elect to reinvest their cash distribution in our shares, we retain and/or receive additional funds for acquisitions and general purposes including the repurchase of shares under the Share Repurchase Program.
We do not pay selling commissions or dealer manager fees on shares sold pursuant to our distribution reinvestment plan. However, the amount of the distribution and shareholder servicing fee payable with respect to Class T or Class D shares, respectively, sold in the Public Offerings is allocated among all Class T or Class D shares, respectively, including those sold under our distribution reinvestment plan and those received as distributions.
Our shareholders will be taxed on their allocable share of income, even if their distributions are reinvested in additional shares of our common shares and even if no distributions are made.
Share Repurchase Program
We adopted the Share Repurchase Program effective March 2019, as amended, pursuant to which we conduct quarterly share repurchases to allow our shareholders to sell all or a portion of their shares (at least 5% of his or her shares) back to us at a price equal to the net asset value per share of the month immediately prior to the repurchase date. The repurchase date is generally the last business day of the month of a calendar quarter end. We are not obligated to repurchase shares under the Share Repurchase Program. If we determine to repurchase shares, the Share Repurchase Program also limits the total amount of aggregate repurchases of Class FA, Class A, Class T, Class D, Class I and Class S shares to up to 2.5% of our aggregate net asset value per calendar quarter (based on the aggregate net asset value as of the last date of the month immediately prior to the repurchase date) and up to 10% of our aggregate net asset value per year (based on the average aggregate net asset value as of the end of each of our trailing four quarters). The Share Repurchase Program also includes certain restrictions on the timing, amount and terms of our repurchases intended to ensure our ability to qualify as a partnership for U.S. federal income tax purposes.
Our board of directors has the right to amend or suspend the Share Repurchase Program to the extent it determines that it is in our best interest to do so, such as when repurchase requests would place an undue burden on our liquidity, adversely affect our operations, risk having an adverse impact on us that would outweigh the benefit of repurchasing our shares or risk our ability to qualify as a partnership for U.S. federal income tax purposes, upon 30 days’ prior notice to our shareholders. Once the Share Repurchase Program is suspended, the Share Repurchase Program requires that we consider the recommencement of the plan at least quarterly. Continued suspension of the Share Repurchase Program would only be permitted under the plan if our board of directors determines that the continued suspension of the Share Repurchase Program is in our best interest and the best interest of our shareholders. Our board of directors must affirmatively authorize the recommencement of the plan before shareholder requests will be considered again. Our board of directors cannot terminate the Share Repurchase Program absent a liquidity event or where otherwise required by law. We may provide notice by including such information in a current report on Form 8-K or in our annual or quarterly reports, each of which are publicly filed with the SEC followed by a separate mailing to our investors. Moreover, the Share Repurchase Program will terminate, and we no longer will accept shares for repurchase, if and when our shares are listed on a national securities exchange, are included for quotation in a national securities market or, in the sole determination of our board of directors, a secondary trading market for the shares otherwise develops. All shares to be repurchased under the Share Repurchase Program must be (i) fully transferable and not be subject to any liens or other encumbrances and (ii) free from any restrictions on transfer. If we determine that a lien or other encumbrance or restriction exists against the shares requested to be repurchased, we will not repurchase any such shares.
The aggregate amount of funds under the Share Repurchase Program is determined on a quarterly basis at the sole discretion of our board of directors. At the sole discretion of our board of directors, we may use sources, including, but not limited to, offering proceeds and borrowings to repurchase shares.
To the extent that the number of shares submitted to us for repurchase exceeds the number of shares that we are able to purchase, we will repurchase shares on a pro rata basis, from among the requests for repurchase received by us based upon the total number of shares for which repurchase was requested and the order of priority described in the Share Repurchase Program. We may repurchase shares including fractional shares, computed to three decimal places. We have had no unfufilled share repurchase requests under the Share Repurchase Program since inception.
Under the Share Repurchase Program, our ability to make new acquisitions of businesses or increase the current distribution rate may become limited if, over any two-year period, we experience repurchase demand in excess of capacity. If, during any consecutive two year period, we do not have at least one quarter in which we fully satisfy 100% of properly submitted repurchase requests, we will not make any new acquisitions of businesses (excluding short-term cash management investments under 90 days in duration) and we will use all available investable assets (as defined below) to satisfy repurchase requests (subject to the limitations under the Share Repurchase Program) until all Unfulfilled Repurchase Requests have been satisfied. Additionally, during such time as there remains any Unfulfilled Repurchase Requests outstanding from such period, the Manager and the Sub-Manager will defer their total return incentive fee until all such Unfulfilled Repurchase Requests have been satisfied. “Investable assets” includes net proceeds from new subscription agreements, unrestricted cash, proceeds from marketable securities, proceeds from the distribution reinvestment plan, and net cash flows after any payment, accrual, allocation, or liquidity reserves or other business costs in the normal course of owning, operating or selling our acquired businesses, debt service, repayment of debt, debt financing costs, current or anticipated debt covenants, funding commitments related to our businesses, customary general and administrative expenses, customary organizational and offering costs, asset management and advisory fees, performance or actions under existing contracts, obligations under our organizational documents or those of our subsidiaries, obligations imposed by law, regulations, courts or arbitration, or distributions or establishment of an adequate liquidity reserve as determined by our board of directors.
During the three months ended March 31, 2024 and 2023, we received requests for the repurchase of approximately $13.8 million and $2.5 million, respectively, of our common shares. Our board of directors approved the repurchase requests received.
The following tables summarizes the shares repurchased during the three months ended March 31, 2024 and 2023 (in thousands except per share data):
| | | | | | | | | | | | | | | | | |
| Shares Repurchased | | Total Consideration | | Average Price Paid per Share |
Class FA shares | 72 | | | $ | 2,675 | | | $ | 36.82 | |
Class A shares | 37 | | | 1,252 | | | 33.65 | |
Class T shares | 97 | | | 3,242 | | | 33.70 | |
Class D shares | 19 | | | 645 | | | 33.38 | |
Class I shares | 173 | | | 5,900 | | | 34.13 | |
Class S shares | 2 | | | 66 | | | 37.41 | |
Three Months Ended March 31, 2024 | 400 | | | $ | 13,780 | | | $ | 34.45 | |
| | | | | |
Class FA shares | 16 | | | $ | 578 | | | $ | 35.26 | |
Class A shares | 10 | | | 335 | | | 32.72 | |
Class T shares | 3 | | | 105 | | | 32.69 | |
Class D shares | 6 | | | 180 | | | 32.36 | |
Class I shares | 38 | | | 1,257 | | | 33.16 | |
Class S shares | 1 | | | 36 | | | 35.77 | |
Three Months Ended March 31, 2023 | 74 | | | $ | 2,491 | | | $ | 33.52 | |
Results of Operations
The following discussion and analysis should be read in conjunction with the accompanying condensed consolidated financial statements and notes thereto.
Through March 31, 2024, we had acquired equity and debt investments in 14 portfolio companies. As of March 31, 2024 and 2023, the fair value of our investment portfolio company investments totaled approximately $77.5$903.1 million and $709.3 million, respectively. Additionally, as of March 31, 2023, we had invested in U.S. Treasury bills with a fair value of $54.0 million. Our investmentsWe did not have any U.S. Treasury bills at March 31, 2018 consisted of two debt investments and two equity investments.2024. See section entitled “Overview – Portfolio“Portfolio and Investment Activity” above for discussion of the general terms and characteristics of our investments, and for information regarding investment activities during the period from February 7, 2018 (commencementour portfolio companies.
The following
is a summary oftable summarizes our operating results for the
period from February 7, 2018 (commencement of operations) throughthree months ended March 31,
2018: | | | | |
Total investment income | | $ | 728,216 | |
Net operating expense | | | 425,375 | |
| | | | |
Net investment income | | | 302,841 | |
Net change in unrealized appreciation | | | 524,449 | |
| | | | |
Net increase in net assets resulting from operations | | $ | 827,290 | |
| | | | |
2024 and 2023 (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2024 | | 2023 |
Total investment income | | | | | $ | 14,920 | | | $ | 13,318 | |
Total operating expenses | | | | | (10,494) | | | (8,547) | |
Expense support (reimbursement), net | | | | | 295 | | | 113 | |
Net investment income before taxes | | | | | 4,721 | | | 4,884 | |
Income tax expense | | | | | — | | | 27 | |
Net investment income | | | | | 4,721 | | | 4,911 | |
Total net realized gain on investments | | | | | — | | | 4 | |
Total net change in unrealized appreciation on investments | | | | | 16,230 | | | 13,088 | |
Net increase in net assets resulting from operations | | | | | $ | 20,951 | | | $ | 18,003 | |
Investment income consisted of the following for the
period from February 7, 2018 (commencement of operations) throughthree months ended March 31,
2018: | | | | |
Interest income | | $ | 728,216 | |
| | | | |
Total investment income | | $ | 728,216 | |
| | | | |
2024 and 2023 (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2024 | | 2023 |
From portfolio company investments: | | | | | | | |
Interest income | | | | | $ | 9,927 | | | $ | 6,848 | |
Dividend income | | | | | 3,673 | | | 5,237 | |
From U.S. Treasury bills and cash accounts | | | | | | | |
Interest and dividend income | | | | | 1,320 | | | 1,233 | |
Total investment income | | | | | $ | 14,920 | | | $ | 13,318 | |
Interest income from portfolio company investments is generated from our senior secured note investments, the majority of which had fixed rate interest as of March 31, 2024 and 2023. As of March 31, 2018,2024 and 2023, our weighted average annual yield on our accruing debt investments was 16.0%14.2% and 15.4%, respectively, based on amortized cost as defined above in “Overview – Portfolio“Portfolio and Investment Activity.” As of March 31, 2018, all ofInterest income from our debt investments had fixed rate interest. Interestwas approximately $9.9 million and $6.8 million during the three months ended March 31, 2024 and 2023. The increase in interest income from portfolio company investments during the three months ended March 31, 2024, as compared to the three months ended March 31, 2023, is primarily attributable to additional debt investments made during the twelve months ended March 31, 2024 of approximately $71.7 million and three months of interest income from TacMed during the three months ended March 31, 2024 compared to approximately one week during the three months ended March 31, 2023.
Dividend income from portfolio company investments is recorded on the record date for privately issued securities, but excludes any portion of distributions that are treated as a return of capital. Dividend income was approximately $3.7 million and $5.2 million during the three months ended March 31, 2024 and 2023. During each of the three months ended March 31, 2024 and 2023, we received dividend income from eight and seven of our portfolio companies, respectively.
Our total investment income for the three months ended March 31, 2024, resulted in annualized cash yields ranging from 2.2% to 19.6% based on our investment cost, as compared to 2.6% to 21.4% for the three months ended March 31, 2023.
We stopped investing in U.S. Treasury bills by the end of the fourth quarter of 2023. During the three months ended March 31, 2023, our effective yield on U.S. Treasury bills ranged from 4.0% to 4.3%. We currently invest in an IntraFi Cash Service account with an effective yield of 5.0%.
We do not believe that our interest income, dividend income and total investment income
for the period February 7, 2018 (commencement of operations) through March 31, 2018 was $728,216. We believe that our interest income and total investment income is notare representative of either our stabilized performance or our future performance. We expect aninvestment income to increase in interest income and dividend income in future periods due to an increasingas we increase our base of investmentsassets that we expect to resultacquire from theexisting cash, borrowings and an expected increase in capital available for investment as related to ourusing proceeds from the Public Offering.
Offerings.
Our operating expenses for the
period from February 7, 2018 (commencement of operations) throughthree months ended March 31,
20182024 and 2023 were as
follows: | | | | |
Organization and offering expenses | | $ | 221,564 | |
Base management fees | | | 88,562 | |
Professional services | | | 73,581 | |
Director fees and expenses | | | 37,070 | |
Administrative services | | | 32,493 | |
Custodian and accounting fees | | | 15,000 | |
Other | | | 317 | |
| | | | |
Total operating expenses | | | 468,587 | |
Expense support | | | (43,212 | ) |
| | | | |
Net expenses | | $ | 425,375 | |
| | | | |
Operating expenses were partially offset by expense support of $43,212 for the period from February 7, 2018 (commencement of operations) through March 31, 2018. follows (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2024 | | 2023 |
Total return incentive fees | | | | | $ | 4,485 | | | $ | 3,635 | |
Base management fees | | | | | 4,018 | | | 2,663 | |
Offering expenses | | | | | 256 | | | 904 | |
Professional services | | | | | 587 | | | 500 | |
Pursuit costs | | | | | 505 | | | 185 | |
Distribution and shareholder servicing fees | | | | | 318 | | | 269 | |
Custodian and accounting fees | | | | | 133 | | | 138 | |
Insurance expense | | | | | 50 | | | 54 | |
Director fees and expenses | | | | | 53 | | | 51 | |
General and administrative expenses | | | | | 89 | | | 148 | |
| | | | | | | |
| | | | | | | |
Total operating expenses | | | | | 10,494 | | | 8,547 | |
Expense support | | | | | (295) | | | (355) | |
Reimbursement of expense support | | | | | — | | | 242 | |
Net expenses | | | | | $ | 10,199 | | | $ | 8,434 | |
We consider the following expense categories to be relatively fixed in the near term:
administrative services,insurance expenses and director fees and
expenses, and custodian and accounting fees.expenses. Variable operating expenses include
professional services,total return incentive fees, base management fees,
performance–based incentive fees,offering expenses, professional services, distribution and shareholder servicing fees,
custodian and
a component of other operatingaccounting fees, general and administrative expenses,
related to transfer agency services and
shareholder services.pursuit costs. We expect these variable operating expenses to increase
either in connection with the growth in
theour asset base
(investment advisory(base management fees,
and total return incentive
fees)fees, accounting fees and general and administrative expenses), the number of shareholders and open accounts
(transfer agency services and shareholder(professional services, distribution and shareholder servicing
fees and custodian and accounting fees)
and, and/or the complexity of our investment processes and capital structure (professional services).
Organization
Total Return Incentive Fee
The Manager and Sub-Manager are eligible to receive incentive fees based on the Total Return to Shareholders, as defined in the Management Agreement and Sub-Management Agreement, for each share class in any calendar year, payable annually in arrears. We accrue (but do not pay) the total return incentive fee on a quarterly basis, to the extent that it is earned, and perform a final reconciliation at completion of each calendar year. The total return incentive fee is due and payable to the Manager and Sub-Manager no later than ninety (90) calendar days following the end of the applicable calendar year. The total return incentive fee may be reduced or deferred by the Manager and the Sub-Manager under the Management Agreement and the Expense Support and Conditional Reimbursement Agreement.
We recorded total return incentive fees of approximately $4.5 million and $3.6 million during the three months ended March 31, 2024 and 2023, respectively. The increase in total return incentive fees during the three months ended March 31, 2024, as compared to the three months ended March 31, 2023, is primarily due to an increase in net investment income and an increase in the net change in unrealized appreciation on investments.
Base Management Fee
Our base management fee is calculated for each share class at an annual rate of (i) for the Non-founder shares, 2% of the product of (x) our average gross assets and (y) the ratio of Non-founder share Average Adjusted Capital for a particular class to total Average Adjusted Capital and (ii) for the Founder shares, 1% of the product of (x) our average gross assets and (y) the ratio of outstanding Founder share Average Adjusted Capital to total Average Adjusted Capital, in each case excluding cash, and is payable monthly in arrears.
We incurred base management fees of approximately $4.0 million and $2.7 million during the three months ended March 31, 2024 and 2023, respectively. The increase in base management fees is primarily attributable to the increase in our average gross assets (excluding cash and U.S. Treasury bills) which were approximately $886.7 million and $615.5 million during the three months ended March 31, 2024 and 2023, respectively.
Offering Expenses
Organization expenses are expensed on our statement of operations as incurred.
Offering expenses, which consist of amounts incurred for items such as legal, accounting, regulatory and printing work incurred related to
ourthe Public Offerings, are capitalized on our
statementcondensed consolidated statements of assets and liabilities as deferred offering expenses and expensed to our
statementcondensed consolidated statements of operations over the lesser of the offering period or 12 months; however, the end of the deferral period will not exceed 12 months from the date the offering expense is incurred by the Manager and the
Sub-Manager.Base Management Fee
Our base management fee
We expensed offering expenses of approximately $0.3 million and $0.9 million during the three months ended March 31, 2024 and 2023, respectively. The decrease is calculated for each share class at an annual ratedue to lower incurred offering expenses by the Manager during the three months ended March 31, 2024.
Pursuit Costs
Pursuit costs relate to transactional expenses incurred to identify, evaluate and negotiate acquisitions that ultimately were not consummated. We incurred pursuit costs of (i) forapproximately $0.5 million and $0.2 million during thenon-founder shares, 2% of the product of (x) our average gross assets three months ended March 31, 2024 and (y) the ratio ofnon-founder share Average Adjusted Capital for a particular class to total Average Adjusted Capital2023, respectively.
Distribution and (ii) for the founder shares, 1% of the product of (x) our average gross assets and (y) the ratio of outstanding founder share Average Adjusted Capital to total Average Adjusted Capital, in each case excluding cash, andShareholder Servicing Fee
The Managing Dealer is
payable monthly in arrears.Total Return Incentive Fee
The Manager andSub-Manager are also eligible to receive incentive fees based on the Total Returna distribution and shareholder servicing fee, subject to Shareholders, as definedcertain limits, with respect to our Class T and Class D shares sold in the Management AgreementPublic Offerings (excluding Class T shares andSub-Management Agreement, for each Class D shares sold through our distribution reinvestment plan and those received as share classdistributions) in any calendar year, payable annually in arrears. We will accrue (but not pay) the total return incentive fee on a quarterly basis,an amount equal to the extent that it is earned,1.00% and will perform a final reconciliation at completion of each calendar year and the total return incentive fee shall be due and payable to the Manager no later than ninety (90) calendar days following the end0.50%, respectively, of the applicable calendar year. The total return incentive fee may be reduced or deferred bycurrent net asset value per share.
We incurred distribution and shareholder servicing fees of approximately $0.3 million during each of the Managerthree months ended March 31, 2024 and theSub-Manager under2023.
Other Operating Expenses
Other operating expenses (consisting of professional services, insurance expense, custodian and accounting fees, director fees and expenses, and general and administrative expenses) were approximately $0.9 million during each of the Management Agreementthree months ended March 31, 2024 and the 2023.
Expense Support
and Conditional Reimbursement Agreement. We did not incur any total return incentive fees during the period February 7, 2018 (commencement of operations) through March 31, 2018.Expense Support and Conditional Reimbursement Agreement
(Reimbursement)
We have entered into an Expense Support and Conditional Reimbursement Agreement with the Manager and the
Sub-Manager, pursuant to which each of the Manager and the
Sub-Manager agrees to reduce the payment of base management fees, total return incentive fees and the reimbursements of reimbursable expenses due to the Manager and the
Sub-Manager under the Management Agreement and the
Sub-Management Agreement, as applicable, to the extent that our annual regular cash distributions exceed our annual net income (with certain adjustments). Expense Support is equal to the annual (calendar year) excess, if any, of (a) the distributions (as defined in the Expense Support and Conditional Reimbursement Agreement) declared and paid (net of our distribution reinvestment plan) to shareholders minus (b) the available operating
funds.funds (the “Expense Support”). The Expense Support amount
will beis borne equally by the Manager and the
Sub-Manager and
will beis calculated as of the last business day of the calendar year.
Beginning on February 7, 2018The Manager and
continuing until the Expense Support and Conditional Reimbursement Agreement is terminated, the Manager andSub-Manager shall equally conditionally reduce the payment of fees and reimbursements of reimbursable expenses in an amount equal to the conditional waiver amount (as defined in and subject to limitations described in the Expense Support and Conditional Reimbursement Agreement). The term of the Expense Support and Conditional Reimbursement Agreement has the same initial term and renewal terms as the Management Agreement or the
Sub-Management Agreement, as applicable to the Manager or the
Sub-Manager.If, on the last business day of the calendar year,
there are Excessthe annual (calendar year) year-to-date available operating funds exceeds the sum of the annual (calendar year) year-to-date distributions paid per share class (the “Excess Operating
Funds,Funds”), we will use such Excess Operating Funds to pay the Manager and the
Sub-Manager all or a portion of the outstanding unreimbursed Expense Support amounts for each share class, as applicable, subject to the Conditional Reimbursements as described further in the Expense Support and Conditional Reimbursement Agreement. Our obligation to make Conditional Reimbursements shall automatically terminate and be of no further effect three years following the date which the Expense Support amount was provided and to which such Conditional Reimbursement relates, as described further in the Expense Support and Conditional Reimbursement Agreement.
Since inception, we have received cumulative Expense Support of approximately $5.1 million. During the three months ended March 31, 2023, we recorded reimbursement of Expense Support of approximately $0.2 million. We reimbursed approximately $0.6 million and $2.4 million of Expense Support to the Manager and Sub-Manager for the years ended December 31, 2023 and 2022, respectively. As of March 31, 2024, there is no remaining amount of Expense Support to be collected from the Manager and Sub-Manager subject to reimbursement. Additionally, the Company accrued expense support due from the Manager and Sub-Manager of approximately $0.3 million and $0.4 million during the three months ended March 31, 2024 and 2023, respectively.
The actual amount of Expense Support or Expense Support Reimbursement is determined as of the last business day of each calendar year and is paid within 90 days after each year end per the terms of the Expense Support and Conditional Reimbursement Agreement described above. See Note 5. “Related Party Transactions” of Item 1. “Financial Statements” for additional information. Other Expenses and Changes in Net Assets
Net Change in Unrealized Appreciation
For on Portfolio Company Investments
Unrealized appreciation on portfolio company investments is based on the period February 7, 2018 (commencementcurrent fair value of operations) throughour investments as determined by our board of directors based on inputs from the Sub-Manager and our independent valuation firm and consistent with our valuation policy, which take into consideration, among other factors, actual results of our portfolio companies in comparison to budgeted results for the year, future growth prospects, and the valuations of publicly traded and private comparable companies as determined by our independent valuation firm.
During the three months ended March 31, 2018,2024, we recognized a net change in unrealized appreciation on our portfolio company investments of approximately $17.0 million. The net change in unrealized appreciation on portfolio company investments included gross unrealized appreciation on nine portfolio companies of approximately $20.2 million, offset partially by gross unrealized depreciation on three portfolio companies of approximately $3.2 million during the three months ended March 31, 2024. Two portfolio company investments have remained flat. Gross unrealized appreciation was due to EBITDA growth, accretive add-on acquisitions and multiple expansion in certain of our portfolio companies. Gross unrealized depreciation was primarily driven by EBITDA declines. Additionally, deferred taxes on unrealized appreciation of portfolio company investments offset unrealized appreciation on portfolio company investments by approximately $0.8 million during the three months ended March 31, 2024.
During the three months ended March 31, 2023, we recognized a net change in unrealized appreciation on portfolio company investments of approximately $14.6 million. The net change in unrealized appreciation on portfolio company investments included gross unrealized appreciation on seven portfolio companies of approximately $23.4 million, offset partially by gross unrealized depreciation on four portfolio company of approximately $8.8 million during the three months ended March 31, 2023. One portfolio company investment has remained flat. Gross unrealized appreciation was primarily due to EBITDA growth and accretive add-on acquisitions. Gross unrealized depreciation was primarily driven by EBITDA declines. Additionally, deferred taxes on unrealized appreciation of portfolio company investments offset unrealized appreciation on portfolio company investments by approximately $1.5 million during the three months ended March 31, 2023.
Net Assets
During the three months ended March 31, 2024 and 2023, the net increase in net assets consisted of the following (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2024 | | 2023 |
Operations | | | | | $ | 20,951 | | | $ | 18,003 | |
Distributions to shareholders | | | | | (8,807) | | | (6,601) | |
Capital transactions | | | | | 42,740 | | | 59,459 | |
Net increase in net assets | | | | | $ | 54,884 | | | $ | 70,861 | |
Operations increased by approximately $2.9 million during the three months ended March 31, 2024, as compared to the three months ended March 31, 2023. The increase in operations for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023, is primarily due to an increase in the net change in unrealized appreciation on investments consisted of approximately $3.1 million and a decrease in net investment income of approximately $0.2 million.
Distributions increased approximately $2.2 million during the
following: | | | | |
Unrealized appreciation | | $ | 524,449 | |
Unrealized depreciation | | | — | |
| | | | |
Total net unrealized appreciation | | $ | 524,449 | |
| | | | |
The unrealized appreciation of $524,449 pertains solelythree months ended March 31, 2024, as compared to our investment in the equity of Lawn Doctor,three months ended March 31, 2023, primarily as a result of amongan increase in shares outstanding.
Capital transactions decreased by approximately $16.7 million during the three months ended March 31, 2024, as compared to the three months ended March 31, 2023. The decrease in capital transactions for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023, is primarily due to an increase in share repurchases of approximately $11.3 million and a decrease in net proceeds received through the Follow-On Public Offering (including proceeds received through our distribution reinvestment plan) of approximately $5.4 million.
Total Returns
The following table illustrates year-to-date (“YTD”), trailing 12 months (“One Year”), trailing 36 months (“Three Year”), Average Annual Return (“AAR”), trailing 60 months (“Five Year”), Average Annual Return (“AAR”) and cumulative total returns with and without upfront selling commissions and dealer manager fees (“sales load”), as applicable. All total returns with sales load assume full upfront selling commissions and dealer manager fees. Total returns are calculated for each share class as the change in the net asset value for such share class during the period and assuming all distributions are reinvested. Class FA assumes distributions are reinvested in Class A shares and all other things, strongshare classes assume distributions are reinvested in the same share class. Management believes total return is a useful measure of the overall investment performance above expectationsof our shares.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | YTD Total Return | | One Year Total Return(1) | | Three Year Total Return(2) | | Five Year Total Return(3) | | AAR Since Inception(4) | | Cumulative Total Return(4) | | Cumulative Total Return Period(4) |
Class FA (no sales load) | | 2.3 | % | | 8.2 | % | | 32.0 | % | | 68.7 | % | | 14.5 | % | | 89.0 | % | | Feb. 7, 2018 - Mar. 31, 2024 |
Class FA (with sales load) | | (4.4) | % | | 1.2 | % | | 23.4 | % | | 57.7 | % | | 12.5 | % | | 76.7 | % | | Feb. 7, 2018 - Mar. 31, 2024 |
Class A (no sales load) | | 2.0 | % | | 7.1 | % | | 27.7 | % | | 58.5 | % | | 12.6 | % | | 75.4 | % | | Apr. 10, 2018 - Mar. 31, 2024 |
Class A (with sales load) | | (6.6) | % | | (2.0) | % | | 16.9 | % | | 45.0 | % | | 10.1 | % | | 60.5 | % | | Apr. 10, 2018 - Mar. 31, 2024 |
Class I | | 2.0 | % | | 7.1 | % | | 28.0 | % | | 59.6 | % | | 12.9 | % | | 77.4 | % | | Apr. 10, 2018 - Mar. 31, 2024 |
Class T (no sales load) | | 1.8 | % | | 6.4 | % | | 25.6 | % | | 51.6 | % | | 11.1 | % | | 65.0 | % | | May 25, 2018 - Mar. 31, 2024 |
Class T (with sales load) | | (3.0) | % | | 1.4 | % | | 19.6 | % | | 44.4 | % | | 9.8 | % | | 57.1 | % | | May 25, 2018 - Mar. 31, 2024 |
Class D | | 2.0 | % | | 7.0 | % | | 27.8 | % | | 55.7 | % | | 11.6 | % | | 66.8 | % | | June 26, 2018 - Mar. 31, 2024 |
Class S (no sales load) | | 2.3 | % | | 8.6 | % | | 34.4 | % | | N/A | | 14.9 | % | | 59.6 | % | | Mar. 31, 2020 - Mar. 31, 2024 |
Class S (with sales load) | | (1.3) | % | | 4.8 | % | | 29.7 | % | | N/A | | 13.5 | % | | 54.1 | % | | Mar. 31, 2020 - Mar. 31, 2024 |
FOOTNOTES:
(1) For the period from April 1, 2023 to March 31, 2024.
(2) For the period from April 1, 2021 to March 31, 2024.
(3) For the period from April 1, 2019 to March 31, 2024.
(4) For the period from the date the first share was issued for each respective share class to March 31, 2024. The AAR since inception is calculated by taking the Cumulative Total Return and
dividing it by the
future growth opportunities of Lawn Doctor.cumulative total return period.
We are not aware of any material trends or uncertainties, favorable or unfavorable, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from our investments, other than those described above and the risk factors if any, identified in Part II, Item 1A of this report, and the “Risk Factors”in Part I of our Prospectus.Net Assets
Net assets increased approximately $82.0 million duringForm 10-K for the period February 7, 2018 (commencement of operations) through Marchyear ended December 31, 2018. The most significant increase in net assets during the quarter ended March 31, 2018 was attributable to capital transactions2023 and this Quarterly Report, including the issuance of Class FA shares resulting in net proceeds of approximately $81.5 million. Additionally, during the quarter ended March 31, 2018, our operations resulted in an increase in net assets of approximately $0.8 million. These increases in net assets were partially offset by distributions to shareholders of approximately $0.3 million during the quarter ended March 31, 2018.
negative impacts from recent geopolitical events.
Our shares are illiquid investments for which there
currently is
currently not ano secondary market.
YouInvestors should not expect to be able to resell
yourtheir shares regardless of how we perform. If
youinvestors are able to sell
yourtheir shares,
youthey will likely receive less than
yourtheir purchase price. Our net asset value and
annualizedtotal returns — which are based in part upon determinations of fair value of Level 3 investments by our board of directors, not active market quotations — are inherently uncertain. Past performance is not a guarantee of future results.
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments, fund and maintain our assets and operations, repay borrowings, make distributions to our shareholders and other general business needs. We will use significant cash to fund acquisitions, repay principal and interest on our borrowings, make distributions to our shareholders and fund our operations. Our primary sources of cash will generally consist of:
the net proceeds of the Public Offering;
distributions, interest earned and fees from our assets;
proceeds from sales of assets and principal repayments from our assets; and
unused borrowing capacity under our financing sources.
We expect we will have sufficient cash from current sources to meet our liquidity needs for the next twelve months. However, we may opt to supplement our equity capital and increase potential returns to our shareholders through the use of prudent levels of borrowings. We may use debt when the available terms and conditions are favorable to long-term investing and well-aligned with our business strategy. In determining whether to borrow money, we seek to optimize maturity, covenant packages and rate structures. Most importantly, the risks of borrowing within the context of our business outlook and the impact on our businesses are extensively analyzed by the Manager and our board of directors in making this determination.
While we generally intend to hold our assets for the long term, certain assets Current performance may be sold in order to manage our liquidity needs, meet other operating objectives and adapt to market conditions. The timing and impacthigher or lower than the performance data reported above.
Hedging Activities
As of March 31,
2018 and December 31, 2017,2024, we had
approximately $5.6 million and $0.2 million of cash and cash equivalents, respectively.We raised approximately $81.5 million in net proceeds (3.3 million shares of Class FA shares) during the period February 7, 2018 (commencement of operations) through March 31, 2018 under the Private Placement, which included a $2.4 millionnon-cash contribution by ourSub-Manager, as described above under “Overview – Our Common Shares Offering.” As of March 31, 2018 we had approximately 947 million common shares available for sale through our Public Offering.
During the period February 7, 2018 (commencement of operations) through March 31, 2018, we generated cash flows primarily from interest earned on our debt investments. We used approximately $74.4 million of the cash proceeds from our Private Placement to purchase our initial businesses. We also declared four weekly distributions in March 2018 totaling approximately $0.3 million, which were paid to shareholders in April 2018. See “Distributions” below for information regarding our distribution policy.
Hedging Activities
In an effort to stabilize our revenue and input costs where applicable, we may enternot entered into any derivatives or other financial instruments in an attempt to hedge our commodity risk.instruments. With respect to any potential financings, general increases in interest rates over time may cause the interest expense associated with our borrowings to increase, and the value of our debt investments to decline. We may seek to stabilize our financing costs as well as any potential decline in our assets by entering into derivatives, swaps or other financial products in an attempt to hedge our interest rate risk. In the event we pursue any assets outside of the United States we may have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar. We may in the future, enter into derivatives or other financial instruments in an attempt to hedge any such foreign currency exchange risk. It is difficult to predict the impact hedging activities may have on our results of operations.
Distributions
Subject to our board of directors’ discretion and applicable legal restrictions, our board of directors intends to declare cash distributions to shareholders based on weekly record dates and we intend to pay such distributions on a monthly basis. Shareholders may elect to reinvest their distributions as additional common shares under our distribution reinvestment plan. Distributions are taxable to our shareholders even if they are reinvested in additional shares of our common shares. The following table reflects, by share class, the cash distributions per share and the total amount of distributions that we have declared on our common shares during the period February 7, 2018 (commencement of operations) through March 31, 2018:
| | | | | | | | |
| | Quarter Ended March 31, 2018 | |
| | Per Share | | | Amount | |
March 31, 2018 (4 record dates) | | | | | | | | |
Class FA shares | | $ | 0.092718 | | | $ | 302,841 | |
Class A shares | | | 0.092718 | | | | — | |
Class T shares | | | 0.074177 | | | | — | |
Class D shares | | | 0.083449 | | | | — | |
Class I shares | | | 0.092718 | | | | — | |
Our board of directors also declared cash distributions on the outstanding shares of all classes of our common shares based on weekly record dates for the time period beginning on April 3, 2018 through and including May 29, 2018, as set forth below:
| | | | | | | | | | | | | | | | | | | | | | |
Distribution Record Date | | Distribution Payment Date | | Declared Distribution Per Share for Each Share Class | |
| | Class FA | | | Class A | | | Class T | | | Class D | | | Class I | |
April 3, 2018 | | May 10, 2018 | | $ | 0.024038 | | | $ | 0.024038 | | | $ | 0.019231 | | | $ | 0.021635 | | | $ | 0.024038 | |
April 10, 2018 | | May 10, 2018 | | $ | 0.024038 | | | $ | 0.024038 | | | $ | 0.019231 | | | $ | 0.021635 | | | $ | 0.024038 | |
April 17, 2018 | | May 10, 2018 | | $ | 0.024038 | | | $ | 0.024038 | | | $ | 0.019231 | | | $ | 0.021635 | | | $ | 0.024038 | |
April 24, 2018 | | May 10, 2018 | | $ | 0.024038 | | | $ | 0.024038 | | | $ | 0.019231 | | | $ | 0.021635 | | | $ | 0.024038 | |
May 1, 2018 | | June 11, 2018 | | $ | 0.024038 | | | $ | 0.024038 | | | $ | 0.019231 | | | $ | 0.021635 | | | $ | 0.024038 | |
May 8, 2018 | | June 11, 2018 | | $ | 0.024038 | | | $ | 0.024038 | | | $ | 0.019231 | | | $ | 0.021635 | | | $ | 0.024038 | |
May 15, 2018 | | June 11, 2018 | | $ | 0.024038 | | | $ | 0.024038 | | | $ | 0.019231 | | | $ | 0.021635 | | | $ | 0.024038 | |
May 22, 2018 | | June 11, 2018 | | $ | 0.024038 | | | $ | 0.024038 | | | $ | 0.019231 | | | $ | 0.021635 | | | $ | 0.024038 | |
May 29, 2018 | | June 11, 2018 | | $ | 0.024038 | | | $ | 0.024038 | | | $ | 0.019231 | | | $ | 0.021635 | | | $ | 0.024038 | |
We calculate each shareholder’s specific distribution amount for the period using record and declaration dates. Distributions are made on all classes of our shares at the same time. Amounts distributed are allocated among each class in proportion to the number of shares of each class outstanding. Amounts distributed to each class are allocated among the holders of our shares in such class in proportion to their shares. The per share amount of distributions on Class A, Class T, Class D and Class I shares will differ because of different allocations of certain class-specific expenses. Specifically, distributions on Class T shares and Class D shares will be lower than distributions on Class A, Class FA and Class I shares because the company is required to pay ongoing annual distribution and shareholder servicing fees with respect to the Class T shares and Class D shares sold in the primary offering. Additionally, distributions on thenon-founder shares will likely be lower than distributions on Class FA shares because we are required to pay higher management and incentive fees to the Manager and theSub-Manager with respect to thenon-founder shares. There is no assurance that we will pay distributions in any particular amount, if at all. See Note 6. “Distributions” in Item 1. “Financial Statements” for additional disclosures regarding distributions.
We do not expect to use equity capital or borrowed funds to pay distributions to shareholders nor do we expect any portion of our distributions paid in 2018 to be treated as a return of capital for tax purposes. See Note 6. “Distributions” in Item 1. “Financial Statements” for a discussion of the sources of funds used to pay distributions on a GAAP basis for the periods presented.
Distribution Reinvestment Plan
We have adopted a distribution reinvestment plan pursuant to which shareholders who purchase shares in our Public Offering (other than shareholders who are residents of Alabama, Idaho, Kansas, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Nebraska, New Hampshire, New Jersey, North Carolina, Ohio, Oregon, Washington (collectively the “Opt-in-States”) and clients of certain participating broker-dealers that do not permit automatic enrollment in our distribution reinvestment plan) will have their cash distributions automatically reinvested in additional shares having the same class designation as the class of shares to which such distributions are attributable, unless such shareholders elect to receive distributions in cash. Shareholders who are residents ofOpt-in States, holders of Class FA shares and clients of certain participating broker-dealers that do not permit automatic enrollment in our distribution reinvestment plan will automatically receive their distributions in cash unless they elect to have their cash distributions reinvested in additional shares. Cash distributions paid on Class FA shares will be reinvested in additional shares of Class A shares. The following discussion summarizes the principal terms of this plan.
The purchase price for shares purchased under our distribution reinvestment plan will be equal to the most recently determined and published net asset value per share of the applicable class of shares. Because the annual distribution and shareholder servicing fee is calculated based on net asset value, it reduces net asset value and/or distributions with respect to Class T shares and Class D shares, including shares issued under the distribution reinvestment plan with respect to such share classes. To the extent newly issued shares are purchased from us under the distribution reinvestment plan or shareholders elect to reinvest their cash distribution in our shares, we will retain and/or receive additional funds for acquisitions and general purposes including the repurchase of shares under our share repurchase program.
We will not pay selling commissions or dealer manager fees on shares sold pursuant to our distribution reinvestment plan. However, the amount of the annual distribution and shareholder servicing fee payable with respect to Class T or Class D shares, respectively, sold in this offering will be allocated among all Class T or Class D shares, respectively, including those sold under our distribution reinvestment plan and those received as distributions.
Contractual Obligations
We have entered into the Management Agreement with the Manager and theSub-Management Agreement with the Manager and theSub-Manager pursuant to which the Manager and theSub-Manager are entitled to receive a base management fee and the reimbursement of certain expenses. Certain incentive fees based on our performance are payable to the Manager and theSub-Manager after our performance thresholds are met. Each of the Manager and theSub-Manager is entitled to 50% of the base management fee and incentive fees, subject to any reduction or deferral of any such fees pursuant to the terms of the Expense Support and Conditional Reimbursement Agreement. We have also entered into the Administrative Services Agreement with the Administrator and theSub-Administration Agreement with the Administrator and theSub-Administrator pursuant to which the Administrator and theSub-Administrator will provide us with administrative services and are entitled to reimbursement of expenses for such services. For a discussion of the compensation we pay in connection with the management of our business, see Note 5. “Related Party Transactions” of Item 1. “Financial Statements.”
Off-Balance Sheet Arrangements
We currently have nooff-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.
Inflation
We do not anticipate that inflation will have a significant effect on our results of operations. However, in the event of a significant increase in inflation, interest rates could rise and our assets may be materially adversely affected.
We do not anticipate that seasonality will have a significant effect on our results of operations.
Critical Accounting Policies and Use of Estimates
Our most critical accounting policies will involve decisions
See our Form 10-K for the year ended December 31, 2023 and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our financial statements are based are reasonable at the time made and based upon information available to us at that time. Our critical accounting policies and accounting estimates will be expanded over time as we continue to implement our business and operating strategy. Our significant accounting policies are described in Note 2. “Significant Accounting Policies” of Item 1. “Financial Statements.” Those material accounting policies and estimates that we initially expect to be most critical to an investor’s understandingPart I of this Quarterly Report for a summary of our financial results and condition, as well as those that require complex judgment decisions by our management, are discussed below.Basis of Presentation
Our financial statements are prepared in accordance with GAAP, which requires the use of estimates, assumptions and the exercise of subjective judgment as to future uncertainties.
Although we are organized and intend to conduct our business in a manner so that we are not required to register as an investment company under the Investment Company Act, our financial statements are prepared using the specializedcritical accounting principles of ASC Topic 946 to utilize investment company accounting. We obtain funds through the issuance of equity interests to multiple unrelated investors, and provide such investors with investment management services. Further, our business strategy is to acquire interests in middle-market businesses to provide current income and long term capital appreciation, while protecting invested capital. Overall, we believe that the use of investment company accounting on a fair value basis is consistent with the management of our assets on a fair value basis, and make our financial statements more useful to investors and other financial statement users in facilitating the evaluation of an investment in us as compared to other investment products in the marketplace.
Valuation of Investments
We have adopted, and our valuation policy is performed in accordance with, ASC Topic 820, as described in Note 2. “Significant Accounting Policies” of Item 1. “Financial Statements”. As of March 31, 2018, all of our investments were categorized as Level 3. Our investments are valued utilizing a market approach, an income approach (i.e. discounted cash flow approach), a transaction approach, or a combination of such approaches, as appropriate. The market comparables approach uses prices, including third party indicative broker quotes, and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The transaction approach uses pricing indications derived from recent precedent merger and acquisition transactions involving comparable target companies. The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) that are discounted based on a required or expected discount rate to derive a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors we may take into account to determine the fair value of our investments include, as relevant: available current market data, including an assessment of the credit quality of the security’s issuer, relevant and applicable market trading and transaction comparables, applicable market yields and multiples, illiquidity discounts, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, data derived from merger and acquisition activities for comparable companies, and enterprise values, among other factors.
Our board of directors is ultimately responsible for determining in good faith the fair value of our investments in accordance with the valuation policy and procedures approved by the board of directors, based on, among other things, the input of the Manager, theSub-Manager, management, our audit committee, and independent third-party valuation firm. The determination of the fair value of our assets requires judgment, especially with respect to assets for which market prices are not available. For most of our assets, market prices will not be available. Due to the inherent uncertainty of determining the fair value of assets that do not have a readily available market value, the fair value of the assets may differ significantly from the values that would have been used had a readily available market value existed for such assets, and the differences could be material. Because the calculation of our net asset value is based, in part, on the fair value of our assets, our calculation of net asset value is subjective and could be adversely affected if the determinations regarding the fair value of its assets were materially higher than the values that we ultimately realize upon the disposal of such assets. Furthermore, through the valuation process, our board of directors may determine that the fair value of our assets differs materially from the values that were provided by the independent valuation firm.
U.S. Federal Income Taxes
We believe that we are properly characterized as a partnership for U.S. Federal income tax purposes and expect to continue to qualify as a partnership (and not be treated as a publicly traded partnership or otherwise be treated as a taxable corporation) for such purposes. As a partnership, we are generally not subject to U.S Federal income tax at the entity level.
Recently Issued Accounting Pronouncements
We will adopt all authoritative accounting standards relevant to our financial statements as required.
JOBS Act
We qualify as an “emerging growth company” pursuant to the provisions of the JOBS Act, enacted on April 5, 2012. For as long as we are an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding advisory“say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation. Although these exemptions will be available to us, we do not expect these exemptions to have a material impact on our public reporting and disclosure. Because we are not a “large accelerated filer” or an “accelerated filer” under the Exchange Act, and will not be so long as our shares are not traded on a securities exchange, we are not subject to the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act. In addition, because we have no employees, we do not have any executive compensation or golden parachute payments to report in our periodic reports and proxy statements.
Under the JOBS Act, we will remain an “emerging growth company” until the earliest of:
policies. the last day of the fiscal year during which we have total annual gross revenues of $1.07 billion or more;
the last day of the fiscal year following the fifth anniversary of the completion of this offering;
the date on which we have, during the previous three-year period, issued more than $1 billion innon-convertible debt; and
the date on which we are deemed to be a “large accelerated filer” under the Exchange Act. We will qualify as a large accelerated filer as of the first day of the first fiscal year after we have (i) more than $700 million in outstanding common equity held by ournon-affiliates as of the last day of our most recently completed second fiscal quarter, (ii) been a public company for at least 12 months and (iii) filed at least one annual report with the SEC. The value of our outstanding common equity will be measured each year on the last day of our second fiscal quarter.
The JOBS Act also provides that an “emerging growth company” can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. However, we are choosing to opt out of that extended transition period, and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for companies that are not “emerging growth companies.” Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We anticipate that our primary market risks will be related to the credit quality of our counterparties, market interest rates and
foreign currency changes.changes in exchange rates. We will seek to manage these risks while, at the same time, seeking to provide an opportunity to shareholders to realize attractive returns through ownership of our shares.
Many of these risks have been magnified due to the continuing uncertainties caused by the recent geopolitical events; however, while we continue to monitor the geopolitical events, its impact on such risks remains uncertain and difficult to predict.
We expect to encounter credit risk relating to (i) the businesses and other assets we acquire and (ii)
any potentialour ability to access the debt
financing we may obtain.markets on favorable terms. We will seek to mitigate this risk by deploying a comprehensive review and asset selection process, including
worst casescenario analysis, and careful ongoing monitoring of our acquired businesses and other assets as well as mitigation of negative credit effects through back up planning. Nevertheless, unanticipated credit losses could occur, which could adversely impact our operating results.
Changes in Market Interest Rates
We are subject to financial market risks, including changes in interest rates. Our
debt investments are currently structured with fixed interest rates. Returns on investments that carry fixed rates are not subject to fluctuations in
interest rates,payments we receive from our borrowers, and will not adjust should rates move up or down. However,
wethe fair value of our debt investments may
be negatively impacted by rising interest rates. We may also invest in floating interest rate debt investments in the future.
To
We had not borrowed any money as of March 31, 2024. However, to the extent that we borrow money to make investments, our net investment income will be dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. In periods of rising interest rates, our cost of funds
wouldmay increase, which may reduce our net investment income. 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.
Foreign Currency Risk
All of our investments are currently denominated in U.S. Dollars. Therefore, the current portfolio does
Exchange Rate Sensitivity
At March 31, 2024, we were not present currency riskexposed to U.S. shareholders. In the future, we may hedge againstany foreign currency exchange rate risks that could have a material effect on our financial condition or results of operations. Although we do not have any foreign operations, some of the portfolio companies we invest in conduct business in foreign jurisdictions and interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts. While hedging activities may insulate us from adversetherefore our investments have an indirect exposure to risks associated with changes in currencyforeign exchange rates and interest rates, they may also limit our ability to participate in benefitsrates.
Item 4. | Controls and Procedures |
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures are effective at the reasonable assurance level as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed by us in the reports we filed under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the relevant SEC rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the most recent fiscal quarter, there were no changes in internal control over financial reporting (as defined under Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we and individuals employed by us may be party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our businesses. In addition, our business and the businesses of the Manager, the Sub-Manager and the Managing Dealer are subject to extensive regulation, which may result in regulatory proceedings. Legal proceedings, lawsuits, claims and regulatory proceedings are subject to many uncertainties and their ultimate outcomes are not predictable with assurance.
As of March 31,
2018,2024, we were not involved in any legal proceedings.
Additionally, there is no action, suit or proceeding pending before any court, or, to our knowledge, threatened by any regulatory agency or other third party, against the Manager, the Sub-Manager or the Managing Dealer that would have a material adverse effect on us. Item 1A. Risk Factors
We have disclosed under the heading “Risk Factors” in our Prospectus,Form 10-K for the year ended December 31, 2023, risk factors which materially affect our business, financial condition or results of operations. The following risk factors replace and/or supplement the similar risk factors set forth in our Prospectus. You should carefully consider the risk factors set forth in our Prospectus and Item 1A in Part II of this Quarterly Report.Form 10-K. You should be aware that these risk factors and other information may not describe every risk facing us. Additional risks and uncertainties 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.The U.S. Department of Labor, or the Department of Labor, has issued regulations that revise the definition of an ERISA fiduciary, and these regulations could have a significant effect on an investment in our shares.
The U.S. Department of Labor issued in 2016 its final regulation redefining “investment advice fiduciary” under ERISA and the Code. The final regulation significantly expanded the class of advisers and the scope of investment advice that are subject to fiduciary standards, imposing the same fiduciary standards on advisers to IRAs that have historically only applied to plans covered by ERISA. The Department of Labor also finalized certain prohibited transaction exemptions that allow investment advisers to receive compensation for providing investment advice under arrangements that would otherwise be prohibited due to conflicts of interest. Financial institutions that had been relying on the “Best Interest Contract Exemption” were permitted to comply with only a limited set of requirements through July 1, 2019. The United States Court of Appeals for the Fifth Circuit is currently expected to issue an order vacating the entire final regulation, the two special prohibited transaction exemptions that had come with the new rule, including the Best Interest Contract Exemption, and amendments to other long-standing prohibited transaction exemptions. The Department of Labor has announced that it intends to issue appropriate guidance in the future that will address the consequences of the disposition of the final regulation. Because the status of the final regulation is still developing and the application of the final regulation remains uncertain, plan fiduciaries and the beneficial owners of IRAs are urged to consult with their own advisors regarding this development.
Our business could be adversely affected if we fail to maintain our qualification as a venture capital operating company, or VCOC, under the “plan assets” regulation under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).
We sold and issued our Class FA shares in the private offering and used a substantial portion of the net proceeds from the private offering to acquire our initial businesses. We currently qualify as a VCOC, as defined in the regulations governing plan assets, or the Plan Asset Regulations, promulgated under ERISA by the Department of Labor, and therefore are not subject to the ERISA fiduciary requirements with respect to our assets. However, if we fail to satisfy the requirements to qualify as a VCOC for any reason and no other exception under the Plan Asset Regulations applies, such failure could materially interfere with our activities or expose us to risks related to our failure to comply with the requirements. If no exception under the Plan Asset Regulations applied, the fiduciary responsibility standards of ERISA would apply to us, including the requirement of investment prudence and diversification, and certain transactions that we enter into, or may have entered into, in the ordinary course of business, might constitute or result in non-exempt prohibited transactions under Section 406 of ERISA or Section 4975 of the Code. A non-exempt prohibited transaction, in addition to imposing potential liability upon fiduciaries of a plan subject to Title I of ERISA or Section 4975 of the Code, may also result in the imposition of an excise tax under the Code upon a “party in interest” (as defined in ERISA) or “disqualified person” (as defined in the Code) with whom we engaged in the transaction. Therefore, our business could be adversely affected if we fail to quality as a VCOC under the Plan Asset Regulations.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Item 2. Unregistered Sales of Equity Securities
We were capitalized through the purchase by CNL Strategic Capital Management, LLC and Levine Leichtman Strategic Capital, LLCUse of 4,000 sharesProceeds
Repurchase of Shares
In March 2019, our board of directors approved and adopted a share repurchase program, as amended (the “Share Repurchase Program”). The total amount of aggregate repurchases of Class FA,
Class A, Class T, Class D, Class I and Class S shares
each forwill be limited to up to 2.5% of the aggregate
considerationnet asset value per calendar quarter (based on the aggregate net asset value as of
$200,000 in June 2017.From April 2017the last date of the month immediately prior to February 2018, we conducted the Private Placement ofrepurchase date) and up to $200 million in shares of our Class FA and Class A shares. We offered the shares in the Private Placement only to persons that were “accredited investors,” as that term is defined under the Securities Act and Regulation D promulgated thereunder. As of February 8, 2018, the date we terminated the Private Placement, we received aggregate gross proceeds of approximately $81.7 million from the sale of approximately 3.3 million shares of our Class FA shares in the Private Placement. The $81.7 million in gross proceeds included a cash capital contribution of $2.4 million from the Manager in exchange for 96,000 Class FA shares and a cash capital contribution of $9.5 million from CNL Strategic Capital Investment, LLC, which is indirectly controlled by James M. Seneff, Jr., the chairman10% of the Company, in exchange for 380,000 Class FA shares. The $81.7 million also included 96,000 Class FA shares received in exchange for $2.4 million ofnon-cash consideration inaggregate net asset value per year (based on the form of equity interests in Lawn Doctor received from an affiliateaverage aggregate net asset value as of theSub-Manager pursuant to Exchange Agreement. The $81.7 million in gross proceeds also included a cash capital contribution end of approximately $0.4 million in exchange for 15,000 Class FA shares, from other individuals affiliated with the Manager. No selling commissions or dealer manager fees were charged in connection with the sales of Class FA shares.
Eacheach of the recipientsCompany’s trailing four quarters). Notwithstanding the foregoing, at the sole discretion of our shares has represented to us that they are an accredited investor. Based upon these representations, we believe that the issuances of our shares were exempt from the registration requirements of the Securities Act, pursuant to Section 4(2) thereof and Regulation D promulgated thereunder.
Use of Proceeds
On March 7, 2018, the Registration Statement covering the Public Offering, of up to $1,100,000,000 Shares, was declared effective under the Securities Act. The Public Offering commenced on March 7, 2018, and is currently expected to terminate on or before Mach 7, 2020, unless extended by our board of directors.
Through CNL Securities Corp.,directors, we may also use other sources, including, but not limited to, offering proceeds and borrowings to repurchase shares. Our board of directors, in its sole discretion, may amend, suspend or terminate the Managing DealerShare Repurchase Program or waive any of its specific conditions to the extent it is in our best interest, including to ensure our ability to qualify as a partnership for U.S. federal income tax purposes.
During the quarter ended March 31, 2024, we repurchased the following shares (in thousands except per share data):
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Period | | Total Number of Shares Repurchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plan | | Maximum Value of Shares That May Yet Be Purchased Under the Plan (1) |
January 1, 2024 to January 31, 2024 | | — | | | $ | — | | | — | | | $ | 25,487 | |
February 1, 2024 to February 29, 2024 | | — | | | — | | | — | | | 25,487 | |
March 1, 2024 to March 31, 2024 | | 400 | | | $ | 34.45 | | | 400 | | | 11,707 | |
FOOTNOTE:
(1) Repurchases are limited under the Share Repurchase Program as described above. During the quarter ended March 31, 2024, we received requests for the Public Offering, werepurchase of approximately $13,780 of our common shares. Our board of directors approved the repurchases.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
The exhibits required by this item are
offering toset forth in the
public on a best efforts basis up to $1,000,000,000 Shares consistingExhibit Index attached hereto and are file or incorporated as part of
Class A shares, Class T shares, Class D shares and Class I shares.We are also offering up to $100,000,000 Shares to be issued pursuant to our distribution reinvestment plan. The Shares being offered can be reallocated among the different classes and between the primary Public Offering and the distribution reinvestment plan.
As of March 31, 2018, we had not yet raised any proceeds from the Public Offering so there are not yet any expenses in connection with the issuance and distribution of securities for which we are responsible.
Item 3. | Defaults Upon Senior Securities –None |
Item 4. | Mine Safety Disclosures –Not applicable |
Item 5. | Other Information –None |
Item 6. | Exhibits –The exhibits required by this item are set forth in the Exhibit Index attached hereto and are filed or incorporated as part of this report. |
this report.
The following exhibits are filed or incorporated as part of this
reportreport. | | | | | | | | |
3.1 | |
1.1*
| | Managing Dealer Agreement dated as of March 7, 2018 between CNL Strategic Capital, LLC and CNL Securities Corp. |
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2.1
| | Agreement and Plan of Merger dated as of October 20, 2017 by and among CNL Strategic Capital, LLC, LD Merger Sub, Inc. and LD Parent, Inc. (incorporated by reference to Exhibit 2.1 to the Registration Statement on FormS-1 (FileNo. 333-222986) filed with the SEC on February 12, 2018). |
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2.2
| | Agreement and Plan of Merger dated as of October 20, 2017 by and among CNL Strategic Capital, LLC, PFHI Merger Sub, Inc. and Polyform Holdings, Inc. (incorporated by reference to Exhibit 2.2 to the Registration Statement on FormS-1 (FileNo. 333-222986) filed with the SEC on February 12, 2018). |
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2.3
| | First Amendment to Agreement and Plan of Merger dated as of February 6, 2018 by and among CNL Strategic Capital, LLC, LD Merger Sub, Inc. and LD Parent, Inc. (incorporated by reference to Exhibit 2.3 to the Registration Statement on FormS-1 (FileNo. 333-222986) filed with the SEC on February 12, 2018). |
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2.4
| | First Amendment to Agreement and Plan of Merger dated as of February 6, 2018 by and among CNL Strategic Capital, LLC, PFHI Merger Sub, Inc. and Polyform Holdings, Inc. (incorporated by reference to Exhibit 2.4 to the Registration Statement on FormS-1 (FileNo. 333-222986) filed with the SEC on February 12, 2018). |
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3.1
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3.2 | | |
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4.1 | | |
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4.2 | | |
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4.3 | | |
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10.1 31.1* | | Second Amended and Restated Management Agreement dated as of February 28, 2018 by and between the Registrant and CNL Strategic Capital Management, LLC (incorporated by reference to Exhibit 10.1 to thePre-Effective Amendment No. 1 to the Registration Statement on FormS-1 (FileNo. 333-222986) filed with the SEC on March 1, 2018). |
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10.2
| | Second Amended and RestatedSub-Management Agreement dated as of February 28, 2018 by and among the Registrant, CNL Strategic Capital Management, LLC and Levine Leichtman Strategic Capital, LLC (incorporated by reference to Exhibit 10.2 to thePre-Effective Amendment No. 1 to the Registration Statement on FormS-1 (FileNo. 333-222986) filed with the SEC on March 1, 2018). |
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10.3*
| | Escrow Agreement dated as of February 14, 2018 by and between CNL Strategic Capital, LLC, UMB Bank, N.A. and CNL Securities Corp. |
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10.4
| | Amended and Restated Administrative Services Agreement dated as of February 7, 2018 by and between the Registrant and CNL Strategic Capital Management, LLC (incorporated by reference to Exhibit 10.4 to the Registration Statement on FormS-1 (FileNo. 333-222986) filed with the SEC on February 12, 2018). |
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10.5
| | Amended and RestatedSub-Administration Agreement dated as of February 7, 2018 by and among the Registrant, CNL Strategic Capital Management, LLC and Levine Leichtman Strategic Capital, LLC (incorporated by reference to Exhibit 10.5 to the Registration Statement on FormS-1 (FileNo. 333-222986) filed with the SEC on February 12, 2018). |
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10.6
| | Amended and Restated Expense Support and Conditional Reimbursement Agreement dated as of February 7, 2018 by and among the Registrant, CNL Strategic Capital Management, LLC and Levine Leichtman Strategic Capital, LLC (incorporated by reference to Exhibit 10.6 to the Registration Statement on FormS-1 (FileNo. 333-222986) filed with the SEC on February 12, 2018). |
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10.7
| | Form of Indemnification Agreement (incorporated by reference to Exhibit 10.7 to the Registration Statement on FormS-1 (FileNo. 333-222986) filed with the SEC on February 12, 2018). |
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10.8
| | Note Purchase Agreement dated as of February 7, 2018 by and among Lawn Doctor, Inc., LD Strategic Capital Debtco, LLC and Aspire Capital Group, LLC (incorporated by reference to Exhibit 10.8 to the Registration Statement on FormS-1 (FileNo. 333-222986) filed with the SEC on February 12, 2018). |
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10.9
| | Note Purchase Agreement dated as of February 7, 2018 by and among Polyform Products Company, Inc. and Polyform Strategic Capital Debtco, LLC (incorporated by reference to Exhibit 10.9 to the Registration Statement on FormS-1 (FileNo. 333-222986) filed with the SEC on February 12, 2018). |
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10.10
| | Service Agreement dated as of February 7, 2018 by and between CNL Capital Markets Corp. and CNL Strategic Capital Management, LLC (incorporated by reference to Exhibit 10.10 to the Registration Statement on FormS-1 (FileNo. 333-222986) filed with the SEC on February 12, 2018). |
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31.1*
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31.2* | | |
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32.1* | | |
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101* | | The following materials from CNL Strategic Capital, LLC Quarterly Report on Form10-Q for the quarterthree months ended March 31, 2018,2024, formatted in XBRL (ExtensibleiXBRL (Inline eXtensible Business Reporting Language); (i) Condensed Consolidated StatementStatements of Assets and Liabilities, (ii) Condensed Consolidated StatementStatements of Operations, (iii) Condensed Consolidated StatementStatements of Changes in Net Assets, (iv) Condensed Consolidated StatementStatements of Cash Flows, (v) Condensed Consolidated ScheduleSchedules of Investments, and (vi) Notes to the Condensed Consolidated Financial Statements. |
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104 | | Cover Page Interactive Data File included as Exhibit 101 (embedded within the Inline XBRL document) |
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
Pursuant to the requirements of Section 13 or 15(d) 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, on the
15th9th day of May,
2018.2024. | | | | | | | | | | | |
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| | CNL STRATEGIC CAPITAL, LLC |
| | |
| | By: | | /s/ Chirag J. Bhavsar |
| | | | CHIRAG J. BHAVSAR |
| | | | Chief Executive Officer |
| | | | (Principal Executive Officer) |
| | |
| | By: | | /s/ Tammy J. Tipton |
| | | | TAMMY J. TIPTON |
| | | | Chief Financial Officer |
| | | | (Principal Financial and Accounting Officer) |
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