LOGAN RIDGE FINANCE CORP. Administration’s Dialogue and Evaluation of Monetary Situation and Outcomes of Operations (type 10-Q)

The following discussion and analysis should be read in conjunction with our

consolidated financial statements and related notes and other financial

information appearing elsewhere in this Quarterly Report on Form 10-Q.

Except as otherwise specified, references to “we,” “us,” “our,” “Logan Ridge,”

or the “Company”, refer to Logan Ridge Finance Corporation.

Forward-Looking Statements

This Quarterly Report on Form 10-Q, including Management’s Discussion and

Analysis of Financial Condition and Results of Operations, contains

forward-looking statements that involve substantial risks and uncertainties.

These forward-looking statements are not historical facts, but rather are based

on current expectations, estimates and projections about the Company, our

current and prospective portfolio investments, our industry, our beliefs, and

our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,”

“will,” “may,” “continue,” “believes,” “seeks,” “estimates,” “would,” “could,”

“should,” “targets,” “projects,” and variations of these words and similar

expressions are intended to identify forward-looking statements.

Some of the statements in this Quarterly Report on Form 10-Q constitute

forward-looking statements, which relate to future events or our performance or

financial condition. The forward-looking statements contained in this Quarterly

Report on Form 10-Q involve risks and uncertainties, including statements as to:

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

our business prospects and the prospects of our portfolio companies, including

our and their ability to achieve our respective objectives as a result of the

current COVID-19 pandemic;

the impact of investments that we expect to make;

our contractual arrangements and relationships with third parties;

the dependence of our future success on the general economy and its impact on

the industries in which we invest;

our expected financings and investments;

the adequacy of our cash resources and working capital; and

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

and the impact of the COVID-19 pandemic thereon.

These statements are not guarantees of future performance and are subject to

risks, uncertainties, and other factors, some of which are beyond our control

and difficult to predict and could cause actual results to differ materially

from those expressed or forecasted in the forward-looking statements, including

without limitation:

an economic downturn, due to the COVID-19 pandemic or otherwise, could impair

our portfolio companies’ ability to continue to operate or repay their

borrowings, which could lead to the loss of some or all of our investments in

such portfolio companies;

a contraction of available credit and/or an inability to access the equity

markets could impair our lending and investment activities and the impact of the

COVID-19 pandemic thereon;

interest rate volatility could adversely affect our results, particularly if we

use leverage as part of our investment strategy; and

the risks, uncertainties and other factors we identify in “Risk Factors” and

elsewhere in this Quarterly Report on Form 10-Q.

Although we believe that the assumptions on which these forward-looking

statements are based are reasonable, any of those assumptions could prove to be

inaccurate, and as a result, the forward-looking statements based on those

assumptions also could be inaccurate. Important assumptions include our ability

to originate new loans and investments, certain margins and levels of

profitability, and the availability of additional capital. In light of these and

other uncertainties, the inclusion of a projection or forward-looking statement

in this Quarterly Report on Form 10-Q should not be regarded as a representation

by us that our plans and objectives will be achieved. These risks and

uncertainties include those described or identified in “Risk Factors” and

elsewhere in our Annual Report on Form 10-K for the fiscal year ended December

31, 2021 and in this Quarterly Report on Form 10-Q. You should not place undue

reliance on these forward-looking statements, which apply only as of the date of

this Quarterly Report on Form 10-Q. We undertake no obligation to revise or

update any forward-looking statements, whether as a result of new information,

future events, or otherwise, unless required by law or U.S. Securities and

Exchange Commission (“SEC”) rule or regulation.

Overview

We are a Maryland corporation that has elected to be regulated as a business

development company (”BDC”) under the Investment Company Act of 1940, as

amended (the ”1940 Act”). Our investment objective is to generate both current

income and capital appreciation through debt and equity investments. We are

managed by Mount Logan Management LLC (the ”Investment Advisor”), and BC

Partners Management LLC (the ”Administrator”) provides the administrative

services necessary for us to operate.

We provide capital to lower and traditional middle-market companies in the

United States (”U.S.”), with a non-exclusive emphasis on the Southeast,

Southwest, and Mid-Atlantic regions. We invest primarily in companies with a

history of earnings growth and positive cash flow, proven management teams,

products or services with competitive advantages, and industry-appropriate

margins. We primarily invest in companies with between $5.0 million and $50.0

million in trailing twelve-month earnings before interest, tax, depreciation,

and amortization (”EBITDA”).

We invest in first lien loans and, to a lesser extent, second lien loans and

equity securities issued by lower middle-market and traditional middle-market

companies.

As a BDC, we are required to comply with certain regulatory requirements. For

instance, we generally must invest at least 70% of our total assets in

“qualifying assets,” including securities of private or thinly traded public

U.S. companies, cash, cash equivalents, U.S. government securities and

high-quality debt investments that mature in one year or less. In addition, we

are only allowed to borrow money such that our asset coverage, as defined in the

1940 Act, equals at least 150%, if certain requirements are met, after such

borrowing, with certain limited exceptions. As of March 31, 2022, our asset

coverage ratio was 184%. To maintain our regulated

30

——————————————————————————–

investment company (“RIC”) status, we must meet specified source-of-income and

asset diversification requirements. To maintain our RIC tax treatment under

subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”) for

U.S. federal income tax purposes, we must distribute at least 90% of our net

ordinary income and realized net short-term capital gains in excess of realized

net long-term capital losses, if any, for the taxable year.

Corporate History

We commenced operations on May 24, 2013 and completed our initial public

offering (“IPO”) on September 30, 2013. The Company was formed for the purpose

of (i) acquiring, through a series of transactions, an investment portfolio from

the following entities: CapitalSouth Partners Fund I Limited Partnership (“Fund

I”); CapitalSouth Partners Fund II Limited Partnership (“Fund II”); CapitalSouth

Partners Fund III, L.P. (“Fund III Parent”); CapitalSouth Fund III, L.P. (f/k/a

CapitalSouth Partners SBIC Fund III, L.P.) (“Fund III”) and CapitalSouth

Partners Florida Sidecar Fund I, L.P. (“Florida Sidecar” and, collectively with

Fund I, Fund II, Fund III and Fund III Parent, the “Legacy Funds”); (ii) raising

capital in the IPO and (iii) continuing and expanding the business of the Legacy

Funds by making additional debt and equity investments in lower middle-market

and traditional middle-market companies.

On September 24, 2013, the Company acquired 100% of the limited partnership

interests in Fund II, Fund III, and Florida Sidecar and each of their respective

general partners, as well as certain assets from Fund I and Fund III Parent, in

exchange for an aggregate of 8,974,420 shares of the Company’s common stock (the

“Formation Transactions”). Fund II, Fund III, and Florida Sidecar became the

Company’s wholly owned subsidiaries. Fund II and Fund III retained their small

business investment company (“SBIC”) licenses issued by the U.S. Small Business

Administration (“SBA”), and continued to hold their existing investments at the

time of IPO and have continued to make new investments after the IPO. The IPO

consisted of the sale of 4,000,000 shares of the Company’s common stock at a

price of $20.00 per share resulting in net proceeds to the Company of $74.25

million, after deducting underwriting fees and commissions totaling $4.0 million

and offering expenses totaling $1.75 million. The other costs of the IPO were

borne by the limited partners of the Legacy Funds. During the fourth quarter of

2017, Florida Sidecar transferred all of its assets to the Company and was

legally dissolved as a standalone partnership. On March 1, 2019, Fund II repaid

its outstanding debentures guaranteed by the SBA (“SBA-guaranteed debentures”)

and relinquished its SBIC license. On June 10, 2021, Fund III repaid its

SBA-guaranteed debentures and relinquished its SBIC license.

At the time of the Formation Transactions, our portfolio consisted of: (1)

approximately $326.3 million in investments; (2) an aggregate of approximately

$67.1 million in cash, interest receivable and other assets; and (3) liabilities

of approximately $202.2 million of SBA-guaranteed debentures payable. Fund III,

our subsidiary, is licensed under the Small Business Investment Act, of 1958, as

amended, and has elected to be regulated as BDC under the 1940 Act. Fund II, our

subsidiary, was licensed under the SBIC Act until March 1, 2019 and has elected

to be regulated as a BDC under the 1940 Act.

The Company has formed and expects to continue to form certain consolidated

taxable subsidiaries (the ”Taxable Subsidiaries”), which are taxed as

corporations for U.S. federal income tax purposes. The Taxable Subsidiaries

allow the Company to make equity investments in companies organized as

pass-through entities while continuing to satisfy the requirements of a RIC

under the Code.

Capitala Business Lending, LLC (“CBL”), a wholly-owned subsidiary of ours, was

established on October 30, 2020, for the sole purpose of holding certain

investments pledged as collateral under a senior secured revolving credit

agreement with KeyBank National Association (the “KeyBank Credit Facility”). See

“Financial Condition, Liquidity and Capital Resources” for more details. The

financial statements of CBL are consolidated with those of Logan Ridge Finance

Corporation.

Definitive Agreement

On April 20, 2021, Capitala Investment Advisors, LLC (“Capitala”), the Company’s

former investment adviser, entered into a definitive agreement (the “Definitive

Agreement”) with the Investment Advisor and Mount Logan Capital Inc. (“MLC”),

both affiliates of BC Partners Advisors L.P. (“BC Partners”) for U.S. regulatory

purposes, whereby Mount Logan acquired certain assets related to Capitala’s

business of providing investment management services to the Company (the

“Transaction”), through which the Investment Advisor became the Company’s

investment adviser pursuant to an investment advisory agreement (the “Investment

Advisory Agreement”) with the Company. At a special meeting of the Company’s

stockholders (the “Special Meeting”) held on May 27, 2021, the Company’s

stockholders approved the Investment Advisory Agreement. The transactions

contemplated by the Definitive Agreement closed on July 1, 2021 (the “Closing”).

As part of the Transaction, the Investment Advisor entered into a two-year

contractual fee waiver (the “Fee Waiver”) with the Company to waive, to the

extent necessary, any capital gains fee under the Investment Advisory Agreement

that exceeds what would have been paid to Capitala in the aggregate over such

two-year period under the prior advisory agreement.

On the date of the Closing, the Company changed its name from Capitala Finance

Corp. to Logan Ridge Finance Corporation and on July 2, 2021, the Company’s

common stock began trading on the NASDAQ Global Select Market under the symbol

“LRFC.” The Company’s 5.75% Convertible Notes due 2022 and 6.00% Notes due 2022

continue to trade under the symbols “CPTAG” and “CPTAL,” respectively.

On July 1, 2021, in connection with the Closing, the Company’s then-current

interested directors and the Company’s then-current independent directors

resigned as members of the Board and Ted Goldthorpe, the Chairman and Chief

Executive Officer of the Company, along with Alexander Duka, George Grunebaum,

and Robert Warshauer, were appointed as members of the Board (the “Directors”).

The Directors were appointed by the Board to fill the vacancies created by the

resignations described above and the Directors were appointed to the class of

directors as determined by the Board in accordance with the Company’s

organizational documents. The Company’s stockholders will have the opportunity

to vote for each of the Directors when his class of directors is up for

reelection.

All of the Company’s then-current officers resigned at the Closing and the Board

appointed Ted Goldthorpe as the Company’s Chief Executive Officer and President,

Jason Roos as the Company’s Chief Financial Officer, Treasurer and Secretary,

Patrick Schafer as the Company’s Chief Investment Officer and David Held as the

Company’s Chief Compliance Officer. On November 9, 2021, Jason T. Roos was

replaced as Secretary and Treasurer of the Company by Brandon Satoren, who was

also appointed as Chief Accounting Officer. Mr. Roos continues to serve as Chief

Financial Officer of the Company.

Basis of Presentation

The Company is considered an investment company as defined in Accounting

Standards Codification (“ASC”) Topic 946 – Financial Services – Investment

Companies (“ASC 946”). The accompanying unaudited consolidated financial

statements have been prepared on the accrual basis of accounting in conformity

with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim

financial information and pursuant to the requirements for reporting on Form

10-Q and Article 6 and Article 10 of Regulation S-X. Accordingly, certain

disclosures accompanying our annual consolidated financial statements prepared

in accordance with U.S. GAAP have been omitted. The consolidated financial

statements of the Company include the accounts of the Company and its wholly

owned subsidiaries, including Fund II, Fund III, CBL, and the Taxable

Subsidiaries.

31

——————————————————————————–

The Company’s financial statements as of March 31, 2022 and December 31, 2021

and for the periods ended March 31, 2022 and 2021 are presented on a

consolidated basis. The effects of all intercompany transactions between the

Company and its subsidiaries (Fund II, Fund III, CBL, and the Taxable

Subsidiaries) have been eliminated in consolidation. All financial data and

information included in these consolidated financial statements have been

presented on the basis described above. In the opinion of management, the

consolidated financial statements reflect all adjustments that are necessary for

the fair presentation of financial results as of and for the periods presented.

The current period’s results of operations are not necessarily indicative of

results that ultimately may be achieved for the year. Additionally, the

unaudited consolidated financial statements and notes should be read in

conjunction with the audited consolidated financial statements and notes thereto

appearing in the Company’s Annual Report on Form 10-K for the year ended

December 31, 2021, filed with the SEC on March 14, 2022.

Consolidation

As provided under ASC 946, the Company will generally not consolidate its

investment in a company other than an investment company subsidiary or a

controlled operating company whose business consists of providing services to

the Company. Accordingly, the Company consolidated the results of the Company’s

wholly owned investment company subsidiaries (Fund II, Fund III, CBL, and the

Taxable Subsidiaries) in its consolidated financial statements.

Revenues

We generate revenue primarily from the periodic cash interest we collect on our

debt investments. In addition, most of our debt investments offer the

opportunity to participate in a borrower’s equity performance through warrant

participation, direct equity ownership, or otherwise, which we expect to result

in revenue in the form of dividends and/or capital gains. Further, we may

generate revenue in the form of commitment fees, origination fees, amendment

fees, diligence fees, monitoring fees, fees for providing managerial assistance

and possibly consulting fees and performance-based fees. These fees will be

recognized as they are earned.

Expenses

Our primary operating expenses include the payment of investment advisory fees

to our Investment Advisor, our allocable portion of overhead and other expenses

incurred by our Administrator in performing its obligations under an

administration agreement between us and the Administrator (the “Administration

Agreement”) and other operating expenses as detailed below. Our investment

advisory fee will compensate our Investment Advisor for its work in identifying,

evaluating, negotiating, closing, monitoring, and servicing our investments. We

will bear all other expenses of our operations and transactions, including

(without limitation):



the cost of our organization;

the cost of calculating our net asset value, including the cost of any

third-party valuation services;

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

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

fees payable to third parties relating to, or associated with, making

investments (such as legal, accounting, and travel expenses incurred in

connection with making investments), including fees and expenses associated with

performing due diligence reviews of prospective investments and advisory fees;

transfer agent and custodial fees;

fees and expenses associated with marketing efforts;

costs associated with our reporting and compliance obligations under the 1940

Act, the Securities Exchange Act of 1934, as amended (the “Exchange Act”), other

applicable federal and state securities laws and ongoing stock exchange listing

fees;

federal, state and local taxes;

independent directors’ fees and expenses;

brokerage commissions;

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

stockholders;

fidelity bond, directors’ and officers’ liability insurance, errors and

omissions liability insurance and other insurance premiums;

direct costs and expenses of administration, including printing, mailing,

telephone and staff;

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

and

all other expenses incurred by either our Administrator or us in connection with

administering our business, including payments under the Administration

Agreement that will be based upon our allocable portion of overhead and other

expenses incurred by our Administrator in performing its obligations under the

Administration Agreement, including rent, the fees and expenses associated with

performing compliance functions, and our allocable portion of any costs of

compensation and related expenses of our chief compliance officer, our chief

financial officer, and their respective administrative support staff.

Critical Accounting Policies and Use of Estimates

In the preparation of our consolidated financial statements and related

disclosures, we have adopted various accounting policies that govern the

application of U.S. GAAP. Our significant accounting policies are described in

Note 2 to the consolidated financial statements. While all of these policies are

important to understanding our consolidated financial statements, certain

accounting policies and estimates are considered critical due to their impact on

the reported amounts of assets and liabilities at the date of the consolidated

financial statements and the reported amounts of revenues and expenses for the

periods covered by such consolidated financial statements. We have identified

investment valuation, revenue recognition, and income taxes as our most critical

accounting estimates. We continuously evaluate our estimates, including those

related to the matters described below. Because of the nature of the judgments

and assumptions we make, actual results could materially differ from those

estimates under different assumptions or conditions. A discussion of our

critical accounting policies follows.

32

——————————————————————————–

Valuation of Investments

The Company applies fair value accounting to all of its financial instruments in

accordance with the 1940 Act and ASC Topic 820 – Fair Value Measurements and

Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework

used to measure fair value and requires disclosures for fair value measurements.

In accordance with ASC 820, the Company has categorized its financial

instruments carried at fair value, based on the priority of the valuation

technique, into a three-level fair value hierarchy as discussed in Note 4 to our

consolidated financial statements.

In determining fair value, the Board uses various valuation approaches, and

engages a third-party independent valuation firm, which provides positive

assurance on the investments it reviews. In accordance with U.S. GAAP, a fair

value hierarchy for inputs is used in measuring fair value that maximizes the

use of observable inputs and minimizes the use of unobservable inputs by

requiring that the most observable inputs be used when available.

Observable inputs are those that market participants would use in pricing the

asset or liability based on market data obtained from sources independent of the

Board. Unobservable inputs reflect the Board’s assumptions about the inputs

market participants would use in pricing the asset or liability developed based

upon the best information available in the circumstances. The fair value

hierarchy is categorized into three levels based on the inputs as follows:

Level 1 – Valuations based on unadjusted quoted prices in active markets for

identical assets or liabilities that the Company has the ability to access.

Valuation adjustments and block discounts are not applied to Level 1 securities.

Since valuations are based on quoted prices that are readily and regularly

available in an active market, valuation of these securities does not entail a

significant degree of judgment.

Level 2 – Valuations based on quoted prices in markets that are not active or

for which all significant inputs are observable, either directly or indirectly.

Level 3 – Valuations based on inputs that are unobservable and significant to

the overall fair value measurement.

The availability of valuation techniques and observable inputs can vary from

security to security and is affected by a wide variety of factors including the

type of security, whether the security is new and not yet established in the

marketplace, and other characteristics particular to the transaction. To the

extent that valuation is based on models or inputs that are less observable or

unobservable in the market, the determination of fair value requires more

judgment. Those estimated values do not necessarily represent the amounts that

may be ultimately realized due to the occurrence of future circumstances that

cannot be reasonably determined. Because of the inherent uncertainty of

valuation, those estimated values may be materially higher or lower than the

values that would have been used had a market for the securities existed.

Accordingly, the degree of judgment exercised by the Company in determining fair

value is greatest for securities categorized in Level 3. In certain cases, the

inputs used to measure fair value may fall into different levels of the fair

value hierarchy. In such cases, for disclosure purposes, the level in the fair

value hierarchy within which the fair value measurement in its entirety falls is

determined based on the lowest level input that is significant to the fair value

measurement.

Fair value is a market-based measure considered from the perspective of a market

participant rather than an entity-specific measure. Therefore, even when market

assumptions are not readily available, the Company’s own assumptions are set to

reflect those that market participants would use in pricing the asset or

liability at the measurement date. We use prices and inputs that are current as

of the measurement date, including periods of market dislocation. In periods of

market dislocation, the observability of prices and inputs may be reduced for

many securities. This condition could cause a security to be reclassified to a

lower level within the fair value hierarchy.

In estimating the fair value of portfolio investments, the Company starts with

the cost basis of the investment, which includes original issue discount and

payment-in-kind (“PIK”) income, if any. The transaction price is typically the

best estimate of fair value at inception. When evidence supports a subsequent

change to the carrying value from the original transaction price, adjustments

are made to reflect the expected fair value.

Valuation Techniques

Enterprise Value Waterfall Approach

The enterprise value waterfall approach determines an enterprise value based on

EBITDA multiples of publicly traded companies that are considered similar to the

subject portfolio company. The Company considers a variety of items in

determining a reasonable pricing multiple, including, but not limited to,

operating results, budgeted projections, growth, size, risk, profitability,

leverage, management depth, diversification, market position, supplier or

customer dependence, asset utilization, liquidity metrics, and access to capital

markets. EBITDA of the portfolio company is adjusted for non-recurring items in

order to reflect a normalized level of earnings that is representative of future

earnings. In certain instances, the Company may also utilize revenue multiples

to determine enterprise value. When available, the Company may assign a pricing

multiple or value its investments based on the value of recent investment

transactions in the subject portfolio company or offers to purchase the

portfolio company. The enterprise value is adjusted for financial instruments

with seniority to the Company’s ownership and for the effect of any instrument

which may dilute the Company’s investment in the portfolio company. The adjusted

enterprise value is then apportioned based on the seniority and privileges of

the Company’s investments within the portfolio company.

Income Approach

The income approach utilizes a discounted cash flow methodology in which the

Company estimates fair value based on the present value of expected cash flows

discounted at a market rate of interest. The determination of a discount rate,

or required rate of return, takes into account the portfolio company’s

fundamentals and perceived credit risk. Because the majority of the Company’s

portfolio companies do not have a public credit rating, determining a discount

rate often involves assigning an implied credit rating based on the portfolio

company’s operating metrics compared to average metrics of similar publicly

rated debt. Operating metrics include, but are not limited to, EBITDA, interest

coverage, leverage ratio, return on capital, and debt to equity ratios. The

implied credit rating is used to assign a base discount rate range based on

publicly available yields on similarly rated debt securities. The Company may

apply a premium to the discount rate utilized in determining fair value when

performance metrics and other qualitative information indicate that there is an

additional level of uncertainty about collectability of cash flows.

Asset Approach

The asset approach values an investment based on the value of the underlying

collateral securing the investment.

Revenue Recognition

The Company’s revenue recognition policies are as follows:

33

——————————————————————————–

Interest income and paid-in-kind interest income: Interest income is recorded on

the accrual basis to the extent that such amounts are expected to be collected.

The Company has loans in the portfolio that contain a PIK interest provision.

PIK interest, which represents contractually deferred interest added to the loan

balance that is generally due at maturity, is recorded on the accrual basis to

the extent that such amounts are expected to be collected. PIK interest is not

accrued if the Company does not expect the issuer to be able to pay all

principal and interest when due.

Non-accrual investments: Management reviews all loans that become 90 days or

more past due, or when there is reasonable doubt that principal or interest will

be collected, for possible placement on non-accrual status. When the Company

otherwise does not expect the borrower to be able to service its debt and other

obligations, the Company will place the loan on non-accrual status and will

generally cease recognizing interest income and PIK interest on that loan for

financial reporting purposes. Interest payments received on non-accrual loans

may be recognized as income or applied to principal depending upon management’s

judgment. The Company writes off any previously accrued and uncollected cash

interest when it is determined that interest is no longer considered

collectible. Non-accrual loans are returned to accrual status when the

borrower’s financial condition improves such that management believes current

interest and principal payments are expected to be collected.

Gains and losses on investment sales and paydowns: Realized gains and losses on

investments are recognized using the specific identification method.

Dividend income and paid-in-kind dividends: Dividend income is recognized on the

date dividends are declared. The Company holds preferred equity investments in

the portfolio that contain a PIK dividend provision. PIK dividends, which

represent contractually deferred dividends added to the equity balance, are

recorded on the accrual basis to the extent that such amounts are expected to be

collected. The Company will typically cease accrual of PIK dividends when the

fair value of the equity investment is less than the cost basis of the

investment or when it is otherwise determined by management that PIK dividends

are unlikely to be collected. If management determines that a decline in fair

value is temporary in nature and PIK dividends are more likely than not to be

collected, management may elect to continue accruing PIK dividends.

Original issue discount: Discounts received to par on loans purchased are

capitalized and accreted into income over the life of the loan. Any remaining

discount is accreted into income upon prepayment of the loan.

Other income: Origination fees (to the extent services are performed to earn

such income), amendment fees, consent fees and other fees associated with

investments in portfolio companies are recognized as income when they are

earned. Prepayment penalties received by the Company for debt instruments repaid

prior to the maturity date are recorded as income upon receipt.

Income Taxes

Prior to the Formation Transactions, the Legacy Funds were treated as

partnerships for U.S. federal, state and local income tax purposes and,

therefore, no provision has been made in the accompanying consolidated financial

statements for federal, state or local income taxes. In accordance with the

partnership tax law requirements, each partner would include their respective

components of the Legacy Funds’ taxable profits or losses, as shown on their

Schedule K-1 in their respective tax or information returns. The Legacy Funds

are disregarded entities for tax purposes prior to and post the Formation

Transactions.

The Company has elected to be treated for U.S. federal income tax purposes and

intends to comply with the requirement to qualify annually as a RIC under

subchapter M of the Code and, among other things, intends to make the requisite

distributions to its stockholders which will relieve the Company from U.S.

federal income taxes.

In order to qualify as a RIC, among other requirements, the Company is required

to timely distribute to its stockholders at least 90.0% of its investment

company taxable income, as defined by the Code, for each fiscal tax year. The

Company will be subject to a nondeductible U.S. federal excise tax of 4.0% on

undistributed income if it does not distribute at least 98.0% of its ordinary

income in any calendar year and 98.2% of its capital gain net income for each

one-year period ending on October 31.

Depending on the level of taxable income earned in an excise tax year, the

Company may choose to carry forward taxable income in excess of current year

dividend distributions into the next excise tax year and pay a 4.0% excise tax

on such income, as required. To the extent that the Company determines that its

estimated current year annual taxable income will be in excess of estimated

current year dividend distributions for U.S. federal excise tax purposes, the

Company accrues excise tax, if any, on estimated excess taxable income as

taxable income is earned. Since the Company’s IPO, the Company has not accrued

or paid excise tax.

The tax years ended December 31, 2021, 2020, 2019, and 2018 remain subject to

examination by U.S. federal, state, and local tax authorities. No interest

expense or penalties have been assessed for the periods ended March 31, 2022 and

2021. If the Company was required to recognize interest and penalties, if any,

related to unrecognized tax benefits this would be recognized as income tax

expense in the consolidated statements of operations.

The Company’s Taxable Subsidiaries record deferred tax assets or liabilities

related to temporary book versus tax differences on the income or loss generated

by the underlying equity investments held by the Taxable Subsidiaries. As of

March 31, 2022, and December 31, 2021, the Company recorded a net deferred tax

asset of zero. For the three months ended March 31, 2022 and 2021, the Company

recorded a deferred tax provision of zero. As of March 31, 2022 and December 31,

2021, the valuation allowance on the Company’s deferred tax asset was $2.5

million and $2.5 million, respectively. During the three months ended March 31,

2022, there was no change in the valuation allowance recognized by the Company.

During the three months ended March 31, 2021, the Company recognized a decrease

in the valuation allowance of $1.0 million.

In accordance with certain applicable U.S. treasury regulations and private

letter rulings issued by the Internal Revenue Service, a RIC may treat a

distribution of its own stock as fulfilling its RIC distribution requirements if

each stockholder may elect to receive its entire distribution in either cash or

stock of the RIC, subject to a limitation on the aggregate amount of cash to be

distributed to all stockholders, which limitation must be at least 20.0% of the

aggregate declared distribution. If too many stockholders elect to receive cash,

each stockholder electing to receive cash will receive a pro rata amount of cash

(with the balance of the distribution paid in stock). In no event will any

stockholder, electing to receive cash, receive less than 20.0% of its entire

distribution in cash. If these and certain other requirements are met, for U.S.

federal income tax purposes, the amount of the dividend paid in stock will be

equal to the amount of cash that could have been received instead of stock.

ASC Topic 740 – Income Taxes (“ASC 740”), provides guidance for how uncertain

tax positions should be recognized, measured, presented, and disclosed in the

consolidated financial statements. ASC 740 requires the evaluation of tax

positions taken or expected to be taken in the course of preparing the Company’s

U.S. federal income tax returns to determine whether the tax positions are

“more-likely-than-not” of being sustained by the applicable tax authority. Tax

positions deemed to meet a “more-likely-than-not” threshold would be recorded as

a tax benefit or expense in the current period. The Company recognizes interest

and penalties, if any, related to unrecognized tax benefits as income tax

expense in the consolidated statements of operations. As of March 31, 2022 and

December 31, 2021, there were no uncertain tax positions.

34

——————————————————————————–

The Company is required to determine whether a tax position of the Company is

more-likely-than-not to be sustained upon examination by the applicable taxing

authority, including resolution of any related appeals or litigation processes,

based on the technical merits of the position. The tax benefit to be recognized

is measured as the largest amount of benefit that is greater than fifty percent

likely of being realized upon ultimate settlement. De-recognition of a tax

benefit previously recognized could result in the Company recording a tax

liability that could negatively impact the Company’s net assets.

U.S. GAAP provides guidance on thresholds, measurement, de-recognition,

classification, interest and penalties, accounting in interim periods,

disclosure, and transition that is intended to provide better financial

statement comparability among different entities.

The Company has concluded that it was not necessary to record a liability for

any such tax positions as of March 31, 2022 and December 31, 2021. However, the

Company’s conclusions regarding this policy may be subject to review and

adjustment at a later date based on factors including, but not limited to,

ongoing analyses of, and changes to, tax laws, regulations and interpretations

thereof.

Portfolio and Investment Activity

The Company’s investment objective is to generate both current income and

capital appreciation through debt and equity investments. The Company offers

customized financing to business owners, management teams and financial sponsors

for change of ownership transactions, recapitalizations, strategic acquisitions,

business expansion and other growth initiatives. The Company invests primarily

in first lien loans, and, to a lesser extent, second lien loans and equity

securities issued by lower middle-market companies and traditional middle-market

companies. As of March 31, 2022, our portfolio consisted of investments in 42

portfolio companies with a fair value of approximately $206.9 million.

Most of the Company’s debt investments are structured as first lien loans. First

lien loans may contain some minimum amount of principal amortization, excess

cash flow sweep feature, prepayment penalties, or any combination of the

foregoing. First lien loans are secured by a first priority lien in existing and

future assets of the borrower and may take the form of term loans, delayed draw

facilities, or revolving credit facilities. Unitranche debt, a form of first

lien loan, typically involves issuing one debt security that blends the risk and

return profiles of both senior secured and subordinated debt, bifurcating the

loan into a first-out tranche and last-out tranche. As of March 31, 2022, 8.2%

of the fair value of our first lien loans consisted of last-out loans. As of

December 31, 2021, 8.5% of the fair value of our first lien loans consisted of

last-out loans. In some cases, first lien loans may be subordinated, solely with

respect to the payment of cash interest, to an asset based revolving credit

facility.

The Company also invests in debt instruments structured as second lien loans.

Second lien loans are loans which have a second priority security interest in

all or substantially all of the borrower’s assets, and in some cases, may be

subject to the interruption of cash interest payments upon certain events of

default, at the discretion of the first lien lender.

During the three months ended March 31, 2022, we made approximately $16.4

million of investments and had approximately $8.4 million in repayments and

sales, resulting in net deployment of approximately $8.0 million for the period.

During the three months ended March 31, 2021, we made no investments and had

approximately $29.9 million in repayments and sales, resulting in net repayments

and sales of approximately $29.9 million for the period.

As of March 31, 2022, our debt investment portfolio, which represented 68.1% of

the fair value of our total portfolio, had a weighted average annualized yield

of approximately 8.3% (excluding non-accruals and collateralized loan

obligations). As of March 31, 2022, 24.3% of the fair value of our debt

investment portfolio was bearing a fixed rate of interest. As of December 31,

2021, our debt investment portfolio, which represented 67.4% of the fair value

of our total portfolio, had a weighted average annualized yield of approximately

8.1% (excluding non-accruals and collateralized loan obligations). As of

December 31, 2021, 22.8% of the fair value of our debt investment portfolio was

bearing a fixed rate of interest.

The weighted average annualized yield is calculated based on the effective

interest rate as of period end, divided by the fair value of our debt

investments. The weighted average annualized yield of our debt investments is

not the same as a return on investment for our stockholders but, rather, relates

to a portion of our investment portfolio and is calculated before the payment of

all of our fees and expenses. There can be no assurance that the weighted

average annualized yield will remain at its current level.

As of March 31, 2022, the Board approved the fair value of our investment

portfolio of approximately $206.9 million in good faith in accordance with our

valuation procedures. The Board approved the fair value of our investment

portfolio as of March 31, 2022 with input from a third-party valuation firm and

the Investment Advisor based on information known or knowable as of the

valuation date, including trailing and forward-looking data.

As of March 31, 2022, we had debt investments in two portfolio companies on

non-accrual status with an aggregate amortized cost of $12.7 million and an

aggregate fair value of $7.0 million, which represented 6.4% and 3.4% of the

investment portfolio, respectively. As of December 31, 2021, we had debt

investments in two portfolio companies on non-accrual status with aggregate

amortized cost of $12.7 million and an aggregate fair value of $7.6 million,

which represented 6.7% and 3.8% of the investment portfolio, respectively.

The following table summarizes the amortized cost and the fair value of

investments as of March 31, 2022 (dollars in thousands):

Amortized Cost Fair Value

Investments at Percentage of

Investments at Percentage of

Amortized Cost Total Portfolio Fair Value Total Portfolio

First Lien Debt $ 106,929 53.7 % $ 100,663 48.7 %

Second Lien Debt 33,168 16.7 % 33,220 16.1 %

Subordinated Debt 7,117 3.6 % 7,115 3.4 %

Collateralized Loan

Obligations 8,106 4.1 % 7,199 3.5 %

Equity and Warrants 43,649 21.9 % 58,708 28.3 %

Total $ 198,969 100.0 % $ 206,905 100.0 %

The following table summarizes the amortized cost and the fair value of

investments as of December 31, 2021 (dollars in thousands):

35

——————————————————————————–

Amortized Cost Fair Value

Investments at Percentage of

Investments at Percentage of

Amortized Cost Total Portfolio Fair Value Total Portfolio

First Lien Debt $ 103,667 54.4 % $ 98,251 49.6 %

Second Lien Debt 30,048 15.8 % 30,190 15.2 %

Subordinated Debt 5,050 2.6 % 5,050 2.6 %

Equity and Warrants 51,717 27.2 % 64,698 32.6 %

Total $ 190,482 100.0 % $ 198,189 100.0 %

The following table shows the portfolio composition by industry grouping at fair

value as of March 31, 2022 and December 31, 2021 (dollars in thousands):

March 31, 2022 December 31, 2021

Percentage Percentage

Investments at of Total Investments at of Total

Fair Value Portfolio Fair Value Portfolio

Healthcare $ 35,509 17.2 % $ 28,852 14.6 %

Business Services 32,456 15.7 % 32,819 16.6 %

Information Technology 25,605 12.4 % 24,066 12.1 %

Financials 19,679 9.5 % 17,162 8.7 %

Consumer Discretionary 12,809 6.2 % 11,017 5.6 %

Industrials 10,062 4.9 % 14,640 7.4 %

Entertainment 8,643 4.2 % 8,894 4.5 %

Electronic Machine Repair 8,395 4.1 % 8,465 4.3 %

QSR Franchisor 8,178 4.0 % 8,007 4.0 %

Financial Services 7,498 3.6 % 7,430 3.7 %

Healthcare Management 6,247 3.0 % 7,002 3.5 %

Online Merchandise Retailer 5,954 2.9 % 5,951 3.0 %

Textile Equipment

Manufacturer 5,107 2.5 % 5,050 2.5 %

Medical Device Distributor 4,961 2.4 % 4,961 2.5 %

Automobile Part Manufacturer 4,402 2.1 % 2,722 1.4 %

Advertising & Marketing

Services 4,390 2.1 % 4,579 2.3 %

Home Repair Parts

Manufacturer 3,055 1.5 % 3,062 1.5 %

Testing Laboratories 986 0.5 % 1,113 0.6 %

Consumer Products 803 0.4 % 623 0.3 %

Household Product

Manufacturer 758 0.4 % 287 0.1 %

General Industrial 645 0.3 % 645 0.3 %

Data Processing & Digital

Marketing 509 0.3 % 509 0.3 %

Oil & Gas Engineering and

Consulting Services 254 0.1 % 333 0.2 %

Total $ 206,905 100.0 % $ 198,189 100.0 %

Results of Operations

Operating results for the three months ended March 31, 2022 and 2021 were as

follows (dollars in thousands):

For the Three Months Ended March 31,

2022 2021

Total investment income $ 3,337 $ 4,926

Total expenses, net of incentive fee waiver 4,388 5,709

Net investment loss (1,051 ) (783 )

Net realized loss on investments (36 ) (14,023 )

Net change in unrealized appreciation on investments 229 27,160

Net (decrease) increase in net assets resulting from

operations $ (858 ) $ 12,354

Investment income

The composition of our investment income for the three months ended March 31,

2022 and 2021 was as follows (dollars in thousands):

For the Three Months Ended March 31,

2022 2021

Interest income $ 3,197 $ 4,592

Other income 8 9

Payment-in-kind interest and dividend income 132 170

Dividend income – 155

Total investment income $ 3,337 $ 4,926

The income reported as interest income, PIK interest, and PIK dividend income is

generally based on the stated rates as disclosed in our consolidated schedules

of investments. Accretion of discounts received for purchased loans are included

in interest income as an adjustment to yield. As a general rule, our interest

income, PIK interest, and PIK dividend income are recurring in nature.

36

——————————————————————————–

We also generate fee income primarily through origination fees charged for new

investments, and secondarily via amendment fees, consent fees, prepayment

penalties, and other fees. While fee income is typically non-recurring for each

investment, most of our new investments include an origination fee; as such, fee

income is dependent upon our volume of directly originated investments and the

fee structure associated with those investments.

We earn dividends on certain equity investments within our investment portfolio.

As noted in our consolidated schedules of investments, some investments are

scheduled to pay a periodic dividend, though these recurring dividends do not

make up a significant portion of our total investment income. We may receive,

and have received, more substantial one-time dividends from our equity

investments.

For the three months ended March 31, 2022, total investment income decreased by

$1.6 million, or 32.3%, compared to the three months ended March 31, 2021. The

decrease from the prior period was driven by a decrease in interest income from

$4.6 million for the three months ended March 31, 2021 to $3.2 million for the

three months ended March 31, 2022. The decline in interest income is primarily

due to lower average outstanding debt investments for the three months ended

March 31, 2022 compared to the three months ended March 31, 2021. PIK income

declined from $0.2 million for the three months ended March 31, 2021 to $0.1

million for the three months ended March 31, 2022. The decrease in PIK income

was due to a decline in investments with a contractual PIK rate. Dividend income

decreased from $0.2 million for the three months ended March 31, 2021 to zero

for the three months ended March 31, 2022, primarily due to non-recurring

dividends received from portfolio companies during the three months ended March

31, 2021

Operating expenses

The composition of our expenses for the three months ended March 31, 2022 and

2021 was as follows (dollars in thousands):

For the Three Months Ended March

31,

2022 2021

Interest and financing expenses $ 2,188 $ 3,037

Base management fee 1,027 1,398

Directors’ fees 103 103

Administrative service fees 120 350

General and administrative expenses 950 821

Total expenses $ 4,388 $ 5,709

For the three months ended March 31, 2022, operating expenses decreased by $1.3

million, or 23.2%, compared to the three months ended March 31, 2021. Interest

and financing expenses decreased from $3.0 million for the three months ended

March 31, 2021 to $2.2 million for the three months ended March 31, 2022 due

primarily to lower average outstanding debt during the three months ended March

31, 2022 compared to the three months ended March 31, 2021. Base management fees

declined from $1.4 million for the three months ended March 31, 2021 to $1.0

million for the three months ended March 31, 2022, due to lower average assets

under management. Administrative services fees declined from $0.4 million for

the three months ended March 31, 2021 to $0.1 million for the three months ended

March 31, 2022, due to efficiencies generated by the size and scale of the

Investment Advisor’s platform. General and administrative expenses increased

from $0.8 million for the three months ended March 31, 2021 to $1.0 million for

the three months ended March 31, 2022, primarily due to accelerated one-time

prepaid financing costs during the three months ended March 31, 2022 as well as

higher professional fees.

Net realized loss on sales of investments

During the three months ended March 31, 2022, we recognized $36 thousand of net

realized losses on our portfolio investments. During the three months ended

March 31, 2021 we recognized $14.0 million of net realized losses on our

portfolio investments.

Net unrealized appreciation (depreciation) on investments

Net change in unrealized (depreciation) appreciation on investments reflects the

net change in the fair value of our investment portfolio. For the three months

ended March 31, 2022 and 2021, we recognized $0.2 million and $27.2 million of

net change in unrealized appreciation investments, respectively.

Changes in net assets resulting from operations

For the three months ended March 31, 2022, we recorded a net decrease in net

assets resulting from operations of $0.9 million. Based on the weighted average

shares of common stock outstanding for the three months March 31, 2022, our per

share net decrease in net assets resulting from operations was $0.32.

For the three months ended March 31, 2021, we recorded a net increase in net

assets resulting from operations of $12.4 million. Based on the weighted average

shares of common stock outstanding for the three months ended March 31, 2021,

our per share net increase in net assets resulting from operations was $4.56.

Financial Condition, Liquidity and Capital Resources

We use and intend to use existing cash primarily to originate investments in new

and existing portfolio companies, pay distributions to our stockholders, and

repay indebtedness.

Since our IPO, we have raised approximately $136.0 million in net proceeds from

equity offerings through March 31, 2022.

KeyBank Credit Facility

On October 30, 2020, Capitala Business Lending, LLC (“CBL”), a direct, wholly

owned, consolidated subsidiary of the Company, entered into a senior secured

revolving credit agreement (the “KeyBank Credit Facility”) with the Company’s

investment adviser at the time (as collateral manager), the lenders from time to

time parties thereto (each, a “Lender”), KeyBank National Association (as

administrative agent), and U.S. Bank National Association (as custodian). Under

the KeyBank Credit Facility, the Lenders have agreed to extend credit to CBL in

an aggregate principal amount of up to $25.0 million. On January 1, 2021, the

KeyBank Credit Facility was amended to replace the collateral manager with the

Company’s Investment Advisor. CBL may, on any business day prior to October 28,

2022, request an increase in the aggregate principal amount from $25.0 million

to $100.0 million in accordance with the terms and in the manner described in

the KeyBank Credit Facility. The period during which the Lenders may make loans

to CBL under the KeyBank Credit Facility commenced on October 30, 2020 and will

continue through October 28, 2022, unless there is an earlier termination or

event of default. The KeyBank Credit Facility matures on October 28, 2023,

unless there is an earlier termination or event of

37

——————————————————————————–

default. Borrowings under the KeyBank Credit Facility bear interest at one-

month LIBOR plus 3.5%. The KeyBank Credit Facility includes customary

affirmative and negative covenants, including certain limitations on the

incurrence of additional indebtedness and liens, as well as usual and customary

events of default for revolving credit facilities of this nature. As of March

31, 2022, there were no outstanding draws on the KeyBank Credit Facility.

2026 Notes

On October 29, 2021, we issued $50.0 million in aggregate principal amount of

5.25% fixed rate notes due October 30, 2026 (the “2026 Notes”) at 98.00%

pursuant to a supplemental indenture with U.S. Bank National Association (the

“Trustee”), which supplements that certain base indenture, dated as of June 16,

2014. The 2026 Notes were issued in a private placement exempt from registration

under the Section 4(a)(2) of the Securities Act of 1933, as amended (the

“Securities Act”). The net proceeds to the Company were approximately $48.8

million, after deducting estimated offering expenses. The Notes will mature on

October 30, 2026 and may be redeemed in whole or in part at the Company’s option

at any time or from time to time at the redemption prices set forth in the

Indenture. The Notes bear interest at a rate of 5.25% per year payable

semi-annually on April 30 and October 30 of each year, commencing on April 30,

2022. The Notes are general unsecured obligations of the Company that rank

senior in right of payment to all of the Company’s existing and future

indebtedness that is expressly subordinated in right of payment to the Notes,

rank pari passu with all existing and future unsecured unsubordinated

indebtedness issued by the Company, rank effectively junior to any of the

Company’s secured indebtedness (including unsecured indebtedness that the

Company later secures) to the extent of the value of the assets securing such

indebtedness, and rank structurally junior to all existing and future

indebtedness (including trade payables) incurred by the Company’s subsidiaries,

financing vehicles or similar facilities.

In connection with the offering, the Company entered into a Registration Rights

Agreement, dated as of October 29, 2021 (the “Registration Rights Agreement”),

with the purchasers of the 2026 Notes. Pursuant to the Registration Rights

Agreement, the Company is obligated to file with the Securities and Exchange

Commission a registration statement relating to an offer to exchange the 2026

Notes for new notes issued by the Company that are registered under the

Securities Act and otherwise have terms substantially identical to those of the

2026 Notes, and to use its commercially reasonable efforts to cause such

registration statement to be declared effective.

As of March 31, 2022, the Company had approximately $50.0 million in aggregate

principal amount of 2026 Notes outstanding.

2022 Notes

On May 16, 2017, we issued $70.0 million in aggregate principal amount of 6.0%

fixed-rate notes due May 31, 2022 (the “2022 Notes”). On May 25, 2017, we issued

an additional $5.0 million in aggregate principal amount of the 2022 Notes

pursuant to a partial exercise of the underwriters’ overallotment option. The

2022 Notes will mature on May 31, 2022 and may be redeemed in whole or in part

at any time or from time to time at our option on or after May 31, 2019 at a

redemption price equal to 100% of the outstanding principal, plus accrued and

unpaid interest. Interest on the 2022 Notes is payable quarterly. The 2022 Notes

are listed on the NASDAQ Global Select Market under the trading symbol “CPTAL”

with a par value of $25.00 per share.

On November 1, 2021, the Company notified the Trustee for the Company’s 2022

Notes, of the Company’s election to redeem $50.0 million aggregate principal

amount of the 2022 Notes outstanding. The redemption was completed on December

6, 2021. As of March 31, 2022, the Company had approximately $22.8 million in

aggregate principal amount of 2022 Notes outstanding.

2022 Convertible Notes

On May 26, 2017, we issued $50.0 million in aggregate principal amount of 5.75%

fixed-rate convertible notes due May 31, 2022 (the “2022 Convertible Notes”). On

June 26, 2017, we issued an additional $2.1 million in aggregate principal

amount of the 2022 Convertible Notes pursuant to a partial exercise of the

underwriters’ overallotment option. Interest on the 2022 Convertible Notes is

payable quarterly. The 2022 Convertible Notes are listed on the NASDAQ Capital

Market under the trading symbol “CPTAG” with a par value of $25.00 per share. As

of March 31, 2022, the Company had approximately $52.1 million in aggregate

principal amount of 2022 Convertible Notes outstanding.

Bond Repurchase Program

On July 30, 2020, the Board approved a bond repurchase program which authorizes

the Company to repurchase up to an aggregate of $10.0 million worth of the

Company’s outstanding 2022 Notes and/or 2022 Convertible Notes (the “Bond

Repurchase Program”). The Bond Repurchase Program expired on July 30, 2021.

During the three months ended March 31, 2021, the Company did not purchase any

of the 2022 Notes or the 2022 Convertible Notes.

Asset Coverage Ratio

We are only allowed to borrow money such that our asset coverage, as defined in

the 1940 Act, equals at least 150% if certain requirements are met, after such

borrowing, with certain limited exceptions. As of March 31, 2022, our asset

coverage ratio was 184%. If our asset coverage ratio falls below 150% due a

decline in the fair market of our portfolio, we may be limited in our ability to

raise additional debt.

Cash and Cash Equivalents

As of March 31, 2022, we had $15.8 million in cash and cash equivalents.

Contractual Obligations

We have entered into two contracts under which we have material future

commitments: the Investment Advisory Agreement, pursuant to which the Investment

Advisor serves as our investment adviser, and the Administration Agreement,

pursuant to which our Administrator agrees to furnish us with certain

administrative services necessary to conduct our day-to-day operations. Payments

under the Investment Advisory Agreement in future periods will be equal to: (1)

a percentage of the value of our gross assets; and (2) an incentive fee based on

our performance. Payments under the Administration Agreement will occur on an

ongoing basis as expenses are incurred on our behalf by our Administrator.

The Investment Advisory Agreement and the Administration Agreement are each

terminable by either party without penalty upon 60 days’ written notice to the

other. If either of these agreements is terminated, the costs we incur under new

agreements may increase. In addition, we will likely incur significant time and

expense in locating alternative parties to provide the services we expect to

receive under both our Investment Advisory Agreement and our Administration

Agreement. Any new investment advisory agreement would also be subject to

approval by our stockholders.

38

——————————————————————————–

A summary of our significant contractual payment obligations as of March 31,

2022 are as follows (dollars in millions):

Contractual Obligations Payments Due by Period

Less More

Than 1 – 3 3 – 5 Than

1 Year Years Years 5 Years Total

2022 Notes $ 22.8 $ – $ – $ – $ 22.8

2022 Convertible Notes 52.1 – – – 52.1

2026 Notes – – 50.0 – 50.0

Total Contractual Obligations $ 74.9 $ – $

50.0 $ – $ 124.9

Distributions

In order to qualify as a RIC and to avoid corporate-level U.S. federal income

tax on the income we timely distribute to our stockholders, we are required to

distribute at least 90% of our net ordinary income and our net short-term

capital gains in excess of net long-term capital losses, if any, to our

stockholders on an annual basis. Additionally, we must distribute an amount at

least equal to the sum of 98% of our net ordinary income (during the calendar

year) plus 98.2% of our net capital gain income (during each 12-month period

ending on October 31) plus any net ordinary income and capital gain net income

that we recognized for preceding years, but were not distributed during such

years, and on which we paid no U.S. federal income tax to avoid a U.S. federal

excise tax. We made quarterly distributions to our stockholders for the first

four full quarters subsequent to our IPO. To the extent we had income available,

we made monthly distributions to our stockholders from October 30, 2014 until

March 30, 2020. As announced on April 1, 2020, distributions, if any, will be

made on a quarterly basis effective for the second quarter of 2020. Our

stockholder distributions, if any, will be determined by our Board on a

quarterly basis. Any distributions to our stockholders will be declared out of

assets legally available for distribution. The Company’s Board determined not to

declare a distribution for the first quarter of 2022 and 2021.

We may not be able to achieve operating results that will allow us to make

distributions at a specific level or to increase the amount of our distributions

from time to time, and from time to time we may decrease the amount of our

distributions. In addition, we may be limited in our ability to make

distributions due to the asset coverage requirements applicable to us as a BDC

under the 1940 Act. If we do not distribute a certain percentage of our income

annually, we will suffer adverse tax consequences, including the possible loss

of our qualification as a RIC. We cannot assure stockholders that they will

receive any distributions.

To the extent our taxable earnings fall below the total amount of our

distributions for that fiscal year, a portion of those distributions may be

deemed a return of capital to our stockholders for U.S. federal income tax

purposes. Thus, the source of a distribution to our stockholders may be the

original capital invested by the stockholder rather than our income or gains.

Stockholders should read any written disclosure accompanying any stockholder

distribution carefully and should not assume that the source of any distribution

is our ordinary income or capital gains.

We have adopted an “opt out” dividend reinvestment plan (“DRIP”) for our common

stockholders. As a result, if we declare a distribution, then stockholders’ cash

distributions will be automatically reinvested in additional shares of our

common stock unless a stockholder specifically “opts out” of our DRIP. If a

stockholder opts out, that stockholder will receive cash distributions. Although

distributions paid in the form of additional shares of our common stock will

generally be subject to U.S. federal, state, and local taxes in the same manner

as cash distributions, stockholders participating in our DRIP will not receive

any corresponding cash distributions with which to pay any such applicable

taxes.

The Company’s Board determined not to declare a distribution for any quarter of

2021 and through March 31, 2022.

Tax characteristics of all distributions paid are reported to stockholders on

Form 1099 after the end of the calendar year. There were no distributions for

the year ended December 31, 2021. Distributions may be subject to

reclassification based on future dividends and operating results and will not be

determined until the end of the year.

Related Parties

On July 1, 2021, we entered into the Investment Advisory Agreement with the

Investment Advisor. The Company is externally managed by the Investment Advisor,

an affiliate of BC Partners, pursuant to the Investment Advisory Agreement. Mr.

Goldthorpe, an interested member of the Board, has a direct or indirect

pecuniary interest in the Investment Advisor. The Investment Advisor is a

registered investment adviser under the Investment Advisers Act of 1940, as

amended. The Investment Advisor is an affiliate of BC Partners Advisors L.P. for

U.S. regulatory purposes. Mount Logan Capital Inc. is the ultimate control

person of the Investment Advisor.

Under the Investment Advisory Agreement, fees payable to the Investment Advisor

equal (i) the Base Management Fee and (ii) the Incentive Fee. Unless earlier

terminated as described below, the Investment Advisory Agreement will remain in

effect from year-to-year if approved annually by a majority of the Board or by

the holders of a majority of the outstanding shares, and, in each case, a

majority of the independent directors.

Pursuant to the Administration Agreement, the Administrator provides

administrative services to the Company necessary for the operations of the

Company, which include providing to the Company office facilities, equipment and

clerical, bookkeeping and record keeping services at such facilities and such

other services as the Administrator, subject to review by the Board, shall from

time to time deem to be necessary or useful to perform its obligations under the

applicable Administration Agreement. The Administrator also provides to the

Company portfolio collection functions for and is responsible for the financial

and other records that the Company is required to maintain and prepares, prints

and disseminates reports to the Company’s stockholders and reports and all other

materials filed with the SEC.

For providing these services, facilities and personnel, the Company reimburses

the Administrator the allocable portion of overhead and other expenses incurred

by the Administrator in performing its obligations under the Administration

Agreement, including the Company’s allocable portion of the costs of

compensation and related expenses of its chief financial officer and chief

compliance officer and their respective staffs.

On October 23, 2018, the SEC issued an order granting an application for

exemptive relief to an affiliate of our Investment Advisor that allows BDCs

managed by the Investment Advisor, including Logan Ridge, to co-invest, subject

to the satisfaction of certain conditions, in certain private placement

transactions, with other funds managed by the Investment Advisor or its

affiliates and any future funds that are advised by the Investment Advisor or

its affiliated investment advisers. Under the terms of the exemptive order, in

order for Logan Ridge to participate in a co-investment transaction, a “required

majority” (as defined in Section 57(0) of the 1940 Act) of Logan Ridge’s

independent directors; must conclude that (i) the terms of the proposed

transaction, including the consideration to be paid, are reasonable and fair to

Logan Ridge and its stockholders and do not involve overreaching with respect of

Logan Ridge or its stockholders on the part of any person concerned, and (ii)

the proposed transaction is consistent with the interests of Logan Ridge’s

stockholders and is consistent with Logan Ridge’s investment objectives and

strategies and certain

39

——————————————————————————–

criteria established by the Board. We believe this relief may not only enhance

our ability to further our investment objectives and strategies, but may also

increase favorable investment opportunities for us, in part by allowing us to

participate in larger investments, together with our co-investment affiliates,

than would be available to us in the absence of such relief.

Prior to July 1, 2021, we were party to an administration agreement with our

then administrator, Capitala Advisors Corp. As administrator, Capitala Advisors

Corp. provided us with the office facilities and administrative services

necessary to conduct our day-to-day operations. On July 1, 2021, we entered into

a new Administration Agreement with our current Administrator, BC Partners

Management LLC. Pursuant to the terms of the Administration Agreement, our

Administrator provides us with the office facilities and administrative services

necessary to conduct our day-to-day operations.

Off-Balance Sheet Arrangements

As of March 31, 2022, the Company had outstanding unfunded commitments related

to debt investments in existing portfolio companies of $0.4 million to American

Academy Holdings, LLC, $4.7 million to Accordion Partners LLC, $0.9 million to

Bradshaw International, Inc., $3.1 million to Critical Nurse Staffing, LLC, $0.9

million to Keg Logistics LLC, $1.5 million to Premiere Imaging, LLC, and $3.0

million to Wealth Enhancement Group, LLC. As of December 31, 2021, the Company

had outstanding unfunded commitments related to debt investments in existing

portfolio companies of $9.0 million to Accordion Partners LLC, $0.7 million to

Bradshaw International, Inc., $3.1 million to Critical Nursing Staffing, Inc.,

$3.5 million to J5 Infrastructure Partners, LLC, $0.9 million to Keg Logistics

LLC, $2.5 million to Marble Point Credit Management LLC, $1.9 million to

Premiere Imaging, LLC, and $3.5 million to Wealth Enhancement Group, LLC.

We have no other off-balance sheet arrangements that have or are reasonably

likely to have a current or future effect on our financial condition, changes in

financial condition, revenues or expenses, results of operations, liquidity,

capital expenditures or capital resources.

Recent Developments

On April 1, 2022, the Company entered into a Note Purchase Agreement (the

“Purchase Agreement”) governing the issuance of $15.0 million in aggregate

principal amount of 5.25% Convertible Notes due 2032 (the “Convertible Notes”)

in a transaction exempt from registration pursuant to Section 4(a)(2) of the

Securities Act. The Convertible Notes have not been registered under the

Securities Act or any state securities laws and may not be reoffered or resold

in the United States absent registration or an applicable exemption from such

registration requirements. The Convertible Notes were delivered and paid for on

April 1, 2022. The Convertible Notes will mature on April 1, 2032 (the “Maturity

Date”). The net proceeds to the Company were $13,650,000, after deducting

estimated offering expenses. Capitalized terms used but not defined herein have

the meanings ascribed to them in the Purchase Agreement.

The Company obtained an Investment Grade rating from a Nationally Recognized

Statistical Rating Organization (“NRSRO”) with respect to the Convertible Notes.

The Convertible Notes have a fixed interest rate of 5.25% per annum payable

semi-annually on March 31 and September 30 of each year, commencing on September

30, 2022, subject to a step up of 0.75% per annum to the extent that the

Convertible Notes are downgraded below Investment Grade by an NRSRO or the

Convertible Notes no longer maintain a rating from an NRSRO. The Company will

also be required to pay an additional interest rate of 2.0% per annum (x) on any

overdue payment of interest and (y) during the continuance of an Event of

Default. The Company intends to use the net proceeds from the offering of the

Convertible Notes for general corporate purposes, which may include repaying

outstanding indebtedness, making opportunistic investments and paying corporate

expenses. In addition, on the occurrence of a Change in Control Repurchase Event

or Delisting Event, the Company will generally be required to make an offer to

purchase the outstanding Convertible Notes at a price equal to 100% of the

principal amount of such Convertible Notes plus accrued and unpaid interest to

the repurchase date.

On May 10, 2022, CBL, a direct, wholly owned, consolidated subsidiary of the

Company, amended its existing senior secured revolving credit agreement (the

“Amended KeyBank Credit Facility”), dated as of October 30, 2020 (and amended as

of July 1, 2021) with the Investment Advisor as collateral manager, the lenders

from time to time parties thereto (each a “Lender”), KeyBank National

Association, as administrative agent, and U.S. Bank National Association, as

custodian. Under the Amended KeyBank Credit Facility, the Lender agreed to

extend credit to CBL in an initial commitment equal to an aggregate principal

amount of $75.0 million. CBL may borrow up to an additional $125.0 million

through an incremental uncommitted accordion feature in accordance with the

terms and in the manner described in the Amended KeyBank Credit Facility.

The period during which the Lender may make loans to CBL under the Amended

KeyBank Credit Facility and will continue through May 12, 2025, unless there is

an earlier termination or event of default (the “Commitment Termination Date”).

The Amended KeyBank Credit Facility will mature on May 10, 2027, unless there is

an earlier termination or event of default. Borrowings under the Amended KeyBank

Credit Facility will bear interest at a floating forward-looking term rate equal

to term SOFR plus an applicable margin of 2.90% until the Commitment Termination

Date and 3.25% thereafter. The Company will also pay an unused commitment fee,

depending on the level of utilization, at a rate of 1.00%, 0.65%, or 0.35% per

annum on the unutilized portion of the aggregate commitments under the Amended

KeyBank Credit Facility.

© Edgar Online, source Glimpses

FAQ not present/live