CAPITALA FINANCE CORP. 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 Annual Report on Form 10-K.
Except as otherwise specified, references to "we," "us," "our," "
Forward-Looking Statements
This Annual Report on Form 10-K, 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 Annual Report on Form 10-K constitute forward-looking statements, which relate to future events or our performance or financial condition. The forward-looking statements contained in our Annual Report on Form 10-K involve risks and uncertainties, including statements as to:
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our future operating results and the impact of the COVID-19 pandemic thereon;
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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;
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the impact of investments that we expect to make;
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our contractual arrangements and relationships with third parties;
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the dependence of our future success on the general economy and its impact on the industries in which we invest;
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our expected financings and investments;
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the adequacy of our cash resources and working capital; and
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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:
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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;
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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;
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interest rate volatility could adversely affect our results, particularly if we use leverage as part of our investment strategy; and
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the risks, uncertainties and other factors we identify in "Risk Factors" and elsewhere in this Annual Report on Form 10-K. 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 Annual Report on Form 10-K 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. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Annual Report on Form 10-K. 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 orU.S. Securities and Exchange Commission ("SEC") rule or regulation.
Overview
We are aMaryland 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 byMount Logan Management LLC (the "Investment Advisor"), andBC Partners Management LLC (the "Administrator") provides the administrative services necessary for us to operate. We provide capital to lower and traditional middle-market companies inthe United States ("U.S."), with a non-exclusive emphasis on the Southeast, Southwest, and Mid-Atlantic regions. We invest primarily in companies with a history of earnings growth and positive cash flow, proven management teams, products or services with competitive advantages and industry-appropriate margins. We primarily invest in companies with between$4.5 million and$30.0 million in trailing twelve-month earnings before interest, tax, depreciation, and amortization ("EBITDA"). We invest in first lien loans, 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 publicU.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. The Small Business Credit Availability Act (the "SBCA") allows BDCs to decrease their asset coverage requirement from 200% to 150% (i.e. the amount of debt may not exceed 66.7% of the value of our total assets), if certain requirements are met. OnNovember 1, 2018 , our board of directors (the "Board"), including a "required majority" (as such term is defined in Section 57(o) of the 1940 Act) approved the application of the modified asset coverage, and as a result, our asset coverage requirements for senior securities was changed from 200% to 150%, effectiveNovember 1, 2019 . As ofDecember 31, 2021 , our asset coverage ratio was 184.9%. To maintain our regulated investment company ("RIC") status, we must meet specified source-of-income and asset diversification requirements. To maintain our RIC tax treatment under subchapter M of the Internal Revenue Code of 1986, as amended (the "Code") forU.S. 47 --------------------------------------------------------------------------------
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 onMay 24, 2013 and completed our initial public offering ("IPO") onSeptember 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/aCapitalSouth Partners SBIC Fund III, L.P. ) ("Fund III") andCapitalSouth 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. OnSeptember 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 theU.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. OnMarch 1, 2019 , Fund II repaid its outstanding debentures guaranteed by the SBA ("SBA-guaranteed debentures") and relinquished its SBIC license. OnJune 10, 2021 , Fund III repaid its SBA-guaranteed debentures and relinquished its SBIC license. As ofDecember 31, 2021 , there were no SBA-guaranteed debentures outstanding. 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 untilMarch 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
Capitala Business Lending, LLC ("CBL"), a wholly-owned subsidiary of ours, was established onOctober 30, 2020 , for the sole purpose of holding certain investments pledged as collateral under a senior secured revolving credit agreement withKeyBank 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 ofLogan Ridge Finance Corporation . Reverse Stock Split OnJuly 30, 2020 , the Company's board of directors (the "Board") approved a one-for-six reverse stock split of shares of the Company's common stock. Accordingly, onAugust 3, 2020 , the Company filed Articles of Amendment (the "Articles of Amendment") to its Articles of Amendment and Restatement with theState Department of Assessments and Taxation of the State of Maryland to effectuate a one-for-six reverse stock split (the "Reverse Stock Split") of the Company's shares of common stock, par value$0.01 per share (the "Shares"). The Reverse Stock Split became effective at5:00 p.m. Eastern Time onAugust 21, 2020 (the "Effective Time"). At the Effective Time, every six (6) issued and outstanding Shares were converted into one (1) Share. The Articles of Amendment also provided that there was no change in the par value of$0.01 per Share as a result of the Reverse Stock Split. No fractional shares of common stock were issued in connection with the Reverse Stock Split and fractional shares of common stock were eliminated by paying cash for the fair value of a fractional portion of Shares. The Reverse Stock Split applied to all of the Company's outstanding Shares and therefore did not affect any shareholder's relative ownership percentage.
Retroactive Adjustments for Reverse Stock Split
The share amount and per share amount of our common stock in the consolidated financial statements and notes have been retroactively adjusted for the Reverse Stock Split effected onAugust 21, 2020 for all periods presented. See Note 1 for more information regarding the Reverse Stock Split.
Definitive Agreement
OnApril 20, 2021 ,Capitala Investment Advisors, LLC ("Capitala"), the Company's former investment adviser, entered into a definitive agreement (the "Definitive Agreement") with theInvestment Advisor and Mount Logan Capital Inc. ("MLC"), both affiliates ofBC Partners Advisors L.P. ("BC Partners ") forU.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 onMay 27, 2021 , the Company's stockholders approved the Investment Advisory Agreement. The transactions contemplated by the Definitive Agreement closed onJuly 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 fromCapitala Finance Corp. toLogan Ridge Finance Corporation and onJuly 2, 2021 , the Company's common stock began trading on the NASDAQ Global Select Market under the symbol "LRFC." OnJuly 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 andTed Goldthorpe , the Chairman and Chief Executive Officer of the Company, along withAlexander Duka ,George Grunebaum , andRobert 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 48 -------------------------------------------------------------------------------- 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 appointedTed 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 andDavid Held as the Company's Chief Compliance Officer. OnNovember 9, 2021 ,Jason Roos was replaced as Secretary and Treasurer of the Company byBrandon 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 consolidated financial statements have
been prepared on the accrual basis of accounting in conformity with U.S.
generally accepted accounting principles ("U.S. GAAP") and pursuant to the
requirements for reporting on Form 10-K and Article 6 of Regulation S-X. The
consolidated financial statements of the Company include the accounts of the
Company and its wholly owned subsidiaries.
The Company's financial statements as of December 31, 2021 and 2020, and for the
years ended December 31, 2021 , 2020, and 2019 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.
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. The Company did not consolidate its interest inCapitala Senior Loan Fund II, LLC ("CSLF II") during the periods it was in existence because the investment was not considered a substantially wholly owned investment company subsidiary. Further, CSLF II was a joint venture for which shared power existed relating to the decisions that most significantly impact the economic performance of the entity. See Note 4 to the consolidated financial statements for a description of the Company's investment in CSLF II.
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;
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the cost of effecting sales and repurchases of our shares and other securities;
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interest payable on debt, if any, to finance our investments;
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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;
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transfer agent and custodial fees;
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fees and expenses associated with marketing efforts;
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costs associated with our reporting and compliance obligations under the 1940 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act") other applicable federal and state securities laws and ongoing stock exchange listing fees;
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federal, state and local taxes;
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independent directors' fees and expenses;
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brokerage commissions;
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costs of proxy statements, stockholders' reports and other communications with stockholders;
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fidelity bond, directors' and officers' liability insurance, errors and omissions liability insurance and other insurance premiums;
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direct costs and expenses of administration, including printing, mailing, telephone and staff;
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fees and expenses associated with independent audits and outside legal costs; and
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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.
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--------------------------------------------------------------------------------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 ofU.S. GAAP. Our significant accounting policies are described in Note 2 to the consolidated financial statements. While all of these policies are important to understanding our consolidated financial statements, certain accounting policies and estimates are considered critical due to their impact on the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the periods covered by such consolidated financial statements. We have identified investment valuation, revenue recognition, and income taxes as our most critical accounting estimates. We continuously evaluate our estimates, including those related to the matters described below. Because of the nature of the judgments and assumptions we make, actual results could materially differ from those estimates under different assumptions or conditions. A discussion of our critical accounting policies follows.
Valuation of Investments
The Company applies fair value accounting to all of its financial instruments in
accordance with the 1940 Act and ASC Topic 820 - Fair Value Measurements and
Disclosures ("ASC 820"). ASC 820 defines fair value, establishes a framework
used to measure fair value and requires disclosures for fair value measurements.
In accordance with ASC 820, the Company has categorized its financial
instruments carried at fair value, based on the priority of the valuation
technique, into a three-level fair value hierarchy as discussed in Note 4 to our
consolidated financial statements.
In determining fair value, 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.
As a practical expedient, the Company used net asset value ("NAV") as the fair
value for its equity investment in CSLF II. CSLF II recorded its underlying
investments at fair value on a quarterly basis in accordance with the 1940 Act
and ASC 820.
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
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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:
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 forU.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 forU.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 fromU.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 nondeductibleU.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 onOctober 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 forU.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 endedDecember 31, 2021 , 2020, 2019, and 2018 remain subject to examination byU.S. federal, state, and local tax authorities. No interest expense or penalties have been assessed for the years endedDecember 31, 2021 , 2020, and 2019. If the Company was required to recognize interest and penalties, if any, related to unrecognized tax benefits this would be recognized as income tax expense in the consolidated statements of operations. The Company's Taxable Subsidiaries record deferred tax assets or liabilities related to temporary book versus tax differences on the income or loss generated by the underlying equity investments held by the Taxable Subsidiaries. As ofDecember 31, 2021 and 2020, the Company recorded a net deferred tax asset of zero. For the years endedDecember 31, 2021 , 2020 and 2019, the Company recorded a deferred tax benefit (provision) of zero, zero, and$(0.6) million , respectively. As ofDecember 31, 2021 and 2020, the valuation allowance on the Company's deferred tax asset was$9.9 million and$4.6 million , respectively. During the years endedDecember 31, 2021 , 2020, and 2019, the Company recognized an increase in the valuation allowance of$5.3 million ,$1.4 million , and$2.8 million , respectively. In accordance with certain applicableU.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 51 -------------------------------------------------------------------------------- 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, forU.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'sU.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 ofDecember 31, 2021 and 2020, there were no uncertain tax positions. The Company is required to determine whether a tax position of the Company is more likely-than-not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized could result in the Company recording a tax liability that could negatively impact the Company's net assets.
The Company has concluded that it was not necessary to record a liability for any such tax positions as ofDecember 31, 2021 or 2020. 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 ofDecember 31, 2021 , our portfolio consisted of investments in 40 portfolio companies with a fair value of approximately$198.2 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 ofDecember 31, 2021 , 8.5% of the fair value of our first lien loans consisted of last-out loans. As ofDecember 31, 2020 , 14.5% of the fair value of our first lien loans consisted of last-out loans. In some cases, first lien loans may be subordinated, solely with respect to the payment of cash interest, to an asset based revolving credit facility. The Company also invests in debt instruments structured as second lien loans. Second lien loans are loans which have a second priority security interest in all or substantially all of the borrower's assets, and in some cases, may be subject to the interruption of cash interest payments upon certain events of default, at the discretion of the first lien lender. During the year endedDecember 31, 2021 , we made approximately$89.4 million of investments and had approximately$169.6 million in repayments and sales of investments resulting in net repayments and sales of approximately$80.2 million for the year. During the year endedDecember 31, 2020 , we made approximately$21.1 million of investments and had approximately$75.8 million in repayments and sales resulting in net repayments and sales of approximately$54.7 million for the year. As ofDecember 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 9.3%. As ofDecember 31, 2021 , 22.8% of the fair value of our debt investment portfolio was bearing a fixed rate of interest. As ofDecember 31, 2020 , our debt investment portfolio, which represented 75.2% of the fair value of our total portfolio, had a weighted average annualized yield of approximately 10.0%. As ofDecember 31, 2020 , 48.9% 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 ofDecember 31, 2021 , the Board approved the fair value of our investment portfolio of approximately$198.2 million in good faith in accordance with our valuation procedures. The Board approved the fair value of our investment portfolio as ofDecember 31, 2021 with input from third-party valuation firms and the Investment Advisor based on information known or knowable as of the valuation date, including trailing and forward-looking data. The COVID-19 pandemic is an unprecedented circumstance that materially impacts the fair value of our investments. As a result, the fair value of our portfolio investments may be further negatively impacted afterDecember 31, 2021 by circumstances and events that are not yet known. The COVID-19 pandemic may also impact our portfolio companies' ability to pay their respective contractual obligations, including principal and interest due to us, and some portfolio companies may require interest or amortization deferrals in order to fulfill short-term liquidity needs in response to the COVID-19 pandemic. We are working with each of our portfolio companies to help them access short-term liquidity through interest deferrals, funding on unused lines of credit, and other sources of liquidity. As ofDecember 31, 2021 , 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$7.6 million , which represented 6.7% and 3.8% of the investment portfolio, respectively. As ofDecember 31, 2020 , we had debt investments in four portfolio companies on non-accrual status with an aggregate amortized cost of$37.5 million and an aggregate fair value of$20.8 million , which represented 13.5% and 7.6% of the investment portfolio, respectively. 52 --------------------------------------------------------------------------------
The following table summarizes the amortized cost and the fair value of
investments as of
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 summarizes the amortized cost and the fair value of
investments as of
Amortized Cost Fair Value
Investments at Percentage of Investments at Percentage of
Amortized Cost Total Portfolio Fair Value Total Portfolio
First Lien Debt $ 185,107 66.7 % $ 167,418 60.9 %
Second Lien Debt 39,026 14.0 % 39,209 14.3 %
Equity and Warrants 53,519 19.3 % 68,065 24.8 %
Total $ 277,652 100.0 % $ 274,692 100.0 %
The following table shows the portfolio composition by industry grouping at fair
value as of
December 31, 2021 December 31, 2020
Percentage Percentage
Investments at of Total Investments at of Total
Fair Value Portfolio Fair Value Portfolio
Business Services $ 32,819 16.6 % $ 36,794 13.4 %
Healthcare 28,852 14.6 % 23,899 8.7 %
Information Technology 24,066 12.1 % 11,154 4.1 %
Financials 17,162 8.7 % - - %
Industrials 14,640 7.4 % - - %
Consumer Discretionary 11,017 5.6 % - - %
Entertainment 8,894 4.5 % 10,241 3.7 %
Electronic Machine Repair 8,465 4.3 % 8,759 3.2 %
QSR Franchisor 8,007 4.0 % 4,707 1.7 %
Financial Services 7,430 3.7 % 15,721 5.7 %
Healthcare Management 7,002 3.5 % 10,673 3.9 %
Online Merchandise Retailer 5,951 3.0 % 2,253 0.8 %
Textile Equipment
Manufacturer 5,050 2.5 % 11,868 4.3 %
Medical Device Distributor 4,961 2.5 % 5,019 1.8 %
Advertising & Marketing
Services 4,579 2.3 % 4,212 1.5 %
Home Repair Parts
Manufacturer 3,062 1.5 % 2,461 0.9 %
Automobile Part Manufacturer 2,722 1.4 % 14,935 5.5 %
Testing Laboratories 1,113 0.6 % 6,449 2.4 %
General Industrial 645 0.3 % 670 0.3 %
Consumer Products 623 0.3 % 15,649 5.7 %
Data Processing & Digital
Marketing 509 0.3 % 490 0.2 %
Oil & Gas Engineering and
Consulting Services 333 0.2 % 1,418 0.5 %
Household Product
Manufacturer 287 0.1 % 758 0.3 %
Sales & Marketing Services - - % 20,947 7.6 %
Security System Services - - % 14,727 5.4 %
IT Consulting - - % 13,199 4.8 %
Multi-platform media and
consumer products - - % 13,000 4.7 %
Government Services - - % 11,381 4.1 %
Wireless Deployment Services - - % 6,948 2.5 %
Data Services - - % 3,856 1.4 %
Footwear Retail - - % 2,011 0.7 %
Oil & Gas Services - - % 493 0.2 %
Total $ 198,189 100.0 % $ 274,692 100.0 %
All investments made by the Company as of
OnDecember 20, 2018 , the Company andTrinity Universal Insurance Company ("Trinity"), a subsidiary of Kemper Corporation, entered into a limited liability company agreement (the "LLC Agreement") to co-manage CSLF II. The purpose and design of the joint venture was to invest primarily in senior secured first-out loans. The Company and Trinity committed to provide$25.0 million of equity to CSLF II, with the Company providing$20.0 million and Trinity providing$5.0 million . The Company and Trinity each appointed two members to CSLF II's four-person board of directors and investment committee. All material decisions with respect to CSLF II, including those involving its investment portfolio, required approval of a member on the board of directors and investment committee of at least one member representing the Company and Trinity, respectively. 53 -------------------------------------------------------------------------------- InMay 2020 , the Company and Trinity elected to wind-down operations of CSLF II. OnJune 1, 2020 , CSLF II sold its existing assets with the Company and Trinity each purchasing approximately 50% of CSLF II's debt investments at their par value. OnJune 12, 2020 , CSLF II declared final distributions and returned all remaining capital of$13.1 million and$3.3 million to the Company and Trinity, respectively. For the year endedDecember 31, 2020 , the Company did not receive a dividend income distribution from its equity interest in CSLF II. As ofDecember 31, 2019 ,$13.6 million and$3.4 million in equity capital had been contributed by the Company and Trinity, respectively. As ofDecember 31, 2019 , the Company and Trinity had$6.4 million and$1.6 million of unfunded equity capital commitments outstanding, respectively. The Company's equity investment in CSLF II was not redeemable. OnJune 12, 2020 , the capital commitments for the Company and Trinity were terminated. OnSeptember 3, 2019 , CSLF II entered into a senior secured revolving credit facility (the "CSLF II Credit Facility") with KeyBank Specialty Finance Lending, an affiliate of KeyCorp. The CSLF II Credit Facility provided for borrowings up to$60.0 million , subject to certain borrowing base restrictions. Borrowings under the CSLF II Credit Facility bore interest at a rate of one-month LIBOR + 2.25%. Prior to the termination of the CSLF II Credit Facility, CSLF II incurred unused fees of .35% when utilization of the CSLF II Credit Facility exceeded 50% and .65% when utilization of the CSLF II Credit Facility was less than 50%. OnJune 5, 2020 , CSLF II terminated the CSLF II Credit Facility and repaid all amounts outstanding.
For the year ended
OnSeptember 3, 2019 , the Company and Trinity committed to provide$25.0 million of subordinated debt (the "Subordinated Notes") to CSLF II, with the Company providing$5.0 million and Trinity providing$20.0 million . The Subordinated Notes were scheduled to mature onSeptember 3, 2024 , however, the Subordinated Notes were terminated onJune 12, 2020 .
For the year ended
Below are the statements of operations for CSLF II (dollars in thousands):
For the Year
Ended December
31,
INVESTMENT INCOME 2020
Interest income $ 650
Fee income 5
Total investment income $ 655
EXPENSES
Interest and financing expenses $ 1,135
General and administrative expenses 164 Total expenses $ 1,299 NET INVESTMENT LOSS $ (644 ) NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (644 ) RESULTS OF OPERATIONS Set forth below are the results of operations for the years endedDecember 31, 2021 and 2020. For information regarding results of operations for the year endedDecember 31, 2019 , see the Company's Form 10-K for the fiscal year endedDecember 31, 2020 , located within Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations as filed with theSEC onMarch 8, 2021 , which is incorporated by reference herein.
Our operating results for the years ended
For the Years Ended December 31,
2021 2020
Total investment income $ 16,754 $ 26,446
Total expenses, net of incentive fee waiver 20,347 26,388
Net investment (loss) income (3,593 ) 58
Net realized loss on investments (7,967 ) (24,049 )
Net unrealized appreciation (depreciation) on investments 10,667 (11,611 )
Net realized (loss) gain on extinguishment of debt (1,025 ) 155
Net decrease in net assets resulting from operations
Investment income
The composition of our investment income for the years ended
For the Years Ended December 31,
2021 2020
Interest income $ 14,821 $ 23,668
Other income 567 779
Payment-in-kind interest and dividend income 456 1,923
Dividend income 906 25
Interest income from cash and cash equivalents 4 51
Total investment income $ 16,754 $ 26,446
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.
54
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We earn dividends on certain equity investments within our investment portfolio.
As noted in our consolidated schedules of investments, some investments may be
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.
We also generate other 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.
For the year ended
The decrease from the prior year was driven primarily by a decrease in interest income, from$23.7 million for the year endedDecember 31, 2020 to$14.8 million for the year endedDecember 31, 2021 . The decline in interest income is primarily due to lower average outstanding debt investments for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . PIK income declined from$1.9 million for the year endedDecember 31, 2020 to$0.5 million for the year endedDecember 31, 2021 . The decrease in PIK income was due to a decline in investments with a contractual PIK rate.
Dividend income increased from
For the year endedDecember 31, 2021 , we generated$0.6 million of other income, of which$0.5 million was from origination fees received from new deployments and$0.1 million was from other fees. Comparatively, for the year endedDecember 31, 2020 , we generated$0.8 million of other income, of which$0.2 million was from origination fees received from new deployments and$0.6 million was from other fees. Operating expenses
The composition of our expenses for the years ended
For the Years Ended December 31,
2021 2020
Interest and financing expenses
4,846 6,428
Directors' fees 410 325
Administrative service fees 1,039 1,400
General and administrative expenses 3,483 3,091
Total expenses $ 20,347 $ 26,388
For the year ended December 31, 2021 , operating expenses decreased by $6.0
million , or 22.9%, compared to the year ended December 31, 2020 . Interest and
financing expenses declined from $15.1 million for the year ended December 31,
2020 to $10.6 million for the year ended December 31, 2021 due primarily to
lower average debt outstanding during the period during the year ended December
31, 2021 . Our base management fee declined from $6.4 million for the year ended
December 31, 2020 to $4.8 million for the year ended December 31, 2021 due to
lower average assets under management. No incentive fees were earned during the
years ended December 31, 2021 and 2020. Administrative services fees decreased
to $1.0 million for the year ended December 31, 2021 from $1.4 million for the
year ended December 31, 2020 . General and administrative expenses increased from
$3.1 million for the year ended December 31, 2020 to $3.5 million for the year
ended December 31, 2021 .
Net realized losses on sales of investments
During the years endedDecember 31, 2021 and 2020, we recognized$8.0 million and$24.0 million of net realized losses on our portfolio investments, respectively. The change in realized losses was primarily due to changes in the market conditions of our investments and the values at which they were realized, caused by the fluctuations in the market and in the economy.
Net unrealized appreciation (depreciation) on investments
Net change in unrealized appreciation (depreciation) on investments reflects the net change in the fair value of our investment portfolio. For the years endedDecember 31, 2021 and 2020, we had$10.7 million and$(11.6) million of net change in unrealized appreciation (depreciation) on investments, respectively. The net change in unrealized appreciation (depreciation) on our investments for the year endedDecember 31, 2021 compared to the prior year was primarily due to changes in the capital market conditions of our investments and the values at which they were realized, caused by the fluctuation in the market and in the economy.
Changes in net assets resulting from operations
For the years endedDecember 31, 2021 and 2020, we recorded a net decrease in net assets resulting from operations of$1.9 million and$35.4 million , respectively. Based on the weighted average shares of common stock outstanding for the years endedDecember 31, 2021 and 2020, our per share net decrease in net assets resulting from operations was$0.71 and$13.08 , respectively. Per share data has been adjusted for the periods shown to reflect the one-for-six reverse stock split effected onAugust 21, 2020 on a retroactive basis.
For the years ended
The comparison of the fiscal years endedDecember 31, 2020 and 2019 can be found in our annual report on Form 10-K for the fiscal year endedDecember 31, 2020 located within Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, which is incorporated by reference herein.
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.
55
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Since our IPO, we have raised approximately
KeyBank Credit Facility
OnOctober 30, 2020 , CBL, a direct, wholly owned, consolidated subsidiary of the Company, entered into 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, andU.S. Bank National Association , as custodian. Under the KeyBank Credit Facility, the Lenders have agreed to extend credit to CBL in an aggregate principal amount of up to$25.0 million as ofOctober 30, 2020 . CBL may, on any business day prior toOctober 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 onOctober 30, 2020 and will continue throughOctober 28, 2022 , unless there is an earlier termination or event of default. TheKeyBank Credit Facility matures onOctober 28, 2023 , unless there is an earlier termination or event of default. Borrowings under the KeyBank Credit Facility bear interest at one-month LIBOR plus 3.5%. As ofDecember 31, 2021 , the Company had zero outstanding and$25.0 million available under the KeyBank Credit Facility.
2026 Notes
OnOctober 29, 2021 , we issued$50.0 million in aggregate principal amount of 5.25% fixed rate notes dueOctober 30, 2026 (the "2026 Notes") at 98.00% pursuant to a supplemental indenture withU.S. Bank National Association (the "Trustee"), which supplements that certain base indenture, dated as ofJune 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 onOctober 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 onApril 30 andOctober 30 of each year, commencing onApril 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 ofOctober 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 theSecurities 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.
2022 Notes
OnMay 16, 2017 , we issued$70.0 million in aggregate principal amount of 6.0% fixed-rate notes dueMay 31, 2022 (the "2022 Notes"). OnMay 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 onMay 31, 2022 and may be redeemed in whole or in part at any time or from time to time at our option on or afterMay 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. OnNovember 1, 2021 , the Company notified the Trustee for the Company's 2022 Notes, of the Company's election to redeem the$50.0 million aggregate principal amount of the 2022 Notes outstanding. The redemption was completed onDecember 6, 2021 . As a result of the payoff, the Company recorded an extinguishment loss of$0.2 million during the year endedDecember 31, 2021 .
As of
2022 Convertible Notes
OnMay 26, 2017 , we issued$50.0 million in aggregate principal amount of 5.75% fixed-rate convertible notes dueMay 31, 2022 (the "2022 Convertible Notes"). OnJune 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 theNASDAQ Capital Market under the trading symbol "CPTAG" with a par value of$25.00 per share. As ofDecember 31, 2021 , the Company had approximately$52.1 million in aggregate principal amount of 2022 Convertible Notes outstanding.
Bond Repurchase Program
OnJuly 30, 2020 , the Board approved a bond repurchase program which authorizes the Company to repurchase up to an aggregate of$10.0 million worth of the Company's outstanding 2022 Notes and/or 2022 Convertible Notes (the "Bond Repurchase Program"). The Bond Repurchase Program will terminate upon the earlier of (i)July 30, 2021 or (ii) the repurchase of an aggregate of$10.0 million worth of 2022 Notes and/or 2022 Convertible Notes. The Company did not repurchase any of the 2022 Notes or 2022 Convertible Notes during the year endedDecember 31, 2021 . During the year endedDecember 31, 2020 , the Company purchased approximately$2.2 million of outstanding principal of the 2022 Notes under the Bond Repurchase Program, resulting in a net realized gain of$0.2 million . During the year endedDecember 31, 2021 , the Company did not purchase any of the 2022 Convertible Notes.
SBA-guaranteed debentures
OnMarch 1, 2019 , Fund II repaid its outstanding debentures guaranteed by the SBA ("SBA-guaranteed debentures") and relinquished its SBIC license. OnJune 10, 2021 , Fund III repaid its SBA-guaranteed debentures and relinquished its SBIC license. As ofDecember 31, 2021 , there were no SBA-guaranteed debentures outstanding.
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. The SBCA allows BDCs to decrease their asset coverage requirement from 200% to 150% (i.e. the amount of debt may not exceed 66.7% of the value of total assets), if certain requirements are met. OnNovember 1, 2018 , the Board, including a "required majority" (as such term is defined in 56 -------------------------------------------------------------------------------- Section 57(o) of the 1940 Act) approved the application of the modified asset coverage and as a result, our asset coverage requirements for senior securities was changed from 200% to 150%, effectiveNovember 1, 2019 . As ofDecember 31, 2021 , our asset coverage ratio was 184.9%. 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.
As of
Contractual Obligations
We have entered into two contracts under which we have material future commitments: the Investment Advisory Agreement, pursuant to which the Investment Advisor serves as our investment adviser, and the Administration Agreement, pursuant to which our Administrator agrees to furnish us with certain administrative services necessary to conduct our day-to-day operations. Payments under the Investment Advisory Agreement in future periods will be equal to: (1) a percentage of the value of our gross assets; and (2) an incentive fee based on our performance. Payments under the Administration Agreement will occur on an ongoing basis as expenses are incurred on our behalf by our Administrator. The Investment Advisory Agreement and the Administration Agreement are each terminable by either party without penalty upon 60 days' written notice to the other. If either of these agreements is terminated, the costs we incur under new agreements may increase. In addition, we will likely incur significant time and expense in locating alternative parties to provide the services we expect to receive under both our Investment Advisory Agreement and our Administration Agreement. Any new investment advisory agreement would also be subject to approval by our stockholders.
A summary of our significant contractual payment obligations as of
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
50.0 $ -$ 124.9 57
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Information about the Company's senior securities as ofDecember 31, 2021 , 2020, 2019, 2018, 2017, 2016, 2015, 2014 and 2013, and information about Fund II's and Fund III's senior securities as ofDecember 31, 2012 and 2011 are shown in the following table. Average Assets Involuntary Market Total Amount Coverage Liquidation Value per Class and Year Outstanding(1) Per Unit(2)(7) Preference per Unit(3) Unit(4) KeyBank Credit Facility(5) 2021 $ - $ 1,849 - N/A 2020 - 1,900 - N/A ING Credit Facility(6) 2019 $ - $ 2,200 - N/A 2018 10,000 2,400 - N/A 2017 9,000 2,600 - N/A 2016 44,000 2,600 - N/A 2015 70,000 2,500 - N/A 2014 - 1,800 - N/A 2026 Notes 2021 $ 50,000 $ 1,849 - N/A 2022 Notes 2021 $ 22,833 $ 1,849 -$ 1,002 2020 72,833 1,900 - 867 2019 75,000 2,200 - 1,000 2018 75,000 2,400 - 996 2017 75,000 2,600 - 1,014 2022 Convertible Notes 2021 $ 52,088 $ 1,849 -$ 1,005 2020 52,088 1,900 - 856 2019 52,088 2,200 - 994 2018 52,088 2,400 - 984 2017 52,088 2,600 - 1,001 SBA-guaranteed debentures 2020 $ 91,000 N/A - N/A 2019 150,000 N/A - N/A 2018 165,700 N/A - N/A 2017 170,700 N/A - N/A 2016 170,700 N/A - N/A 2015 184,200 N/A - N/A 2014 192,200 $ 1,800 - N/A 2013 202,200 2,300 - N/A 2021 Notes 2016 $ 113,438 $ 2,600 -$ 1,006 2015 113,438 2,500 - 1,020 2014 113,438 1,800 - 1,036 Fund II SBA-guaranteed debentures 2012 $ 52,200 $ 2,000 - N/A 2011 52,200 1,600 - N/A Fund III SBA-guaranteed debentures 2012 $ 125,000 $ 1,700 - N/A 2011 90,000 1,700 - N/A (1) Total amount of each class of senior securities outstanding at the end of the period presented in thousands. (2) Asset coverage per unit is the ratio of the carrying value of our total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per$1,000 of indebtedness. Amounts are rounded to the nearest$1,000 . (3) The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security junior to it. The "- " indicates information that theSEC expressly does not require to be disclosed for certain types of senior securities. (4) Not applicable except for the 2021 Notes, the 2022 Notes and the 2022 Convertible Notes which are publicly traded. The Average Market Value Per Unit is calculated by taking the daily average closing price during the period and dividing it bytwenty-five dollars per share and multiplying the result by one thousand to determine a unit price per thousand consistent with Asset Coverage Per Unit. (5) As ofDecember 31, 2021 , there was no outstanding balance on the KeyBank Credit Facility. (6) OnJune 19, 2020 , the Company unilaterally terminated the ING Credit Facility. (7) We have excluded our SBA-guaranteed debentures from the asset coverage calculation as ofDecember 31, 2020 , 2019, 2018, 2017, 2016, and 2015 pursuant to the exemptive relief granted by theSEC inJune 2014 that permits us to exclude such debentures from the definition of senior securities in the asset coverage ratio we are required to satisfy under the 1940 Act.
Distributions
In order to qualify as a RIC and to avoid corporate-levelU.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 onOctober 31 ) plus any net ordinary income and capital gain net income that we recognized for preceding years, but 58 -------------------------------------------------------------------------------- were not distributed during such years, and on which we paid noU.S. federal income tax to avoid aU.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 fromOctober 30, 2014 untilMarch 30, 2020 . As announced onApril 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 any quarter in 2021 due to the impact of the COVID-19 pandemic on the Company's expected net investment income. We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of our distributions from time to time, and from time to time we may decrease the amount of our distributions. In addition, we may be limited in our ability to make distributions due to the asset coverage requirements applicable to us as a BDC under the 1940 Act. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including the possible loss of our qualification as a RIC. We cannot assure stockholders that they will receive any distributions. To the extent our taxable earnings fall below the total amount of our distributions for that fiscal year, a portion of those distributions may be deemed a return of capital to our stockholders forU.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 toU.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. OnApril 30, 2020 ,July 30, 2020 , andOctober 29, 2020 , the Company's Board determined not to declare a distribution for the second quarter, third quarter, or fourth quarter, respectively, of 2020, due to the impact of the COVID-19 pandemic on the Company's expected net investment income. As noted, the Board further determined not to declare any distributions for any quarter in 2021. Accordingly, the following tables summarize our distributions declared fromJanuary 1, 2019 throughJanuary 2, 2020 , the last date on which distributions were declared: Amount Date Declared Record Date Payment Date Per Share(1) January 2, 2020 January 24, 2020 January 30, 2020 $ 0.50 January 2, 2020 February 20, 2020 February 27, 2020 0.50 January 2, 2020 March 23, 2020 March 30, 2020 0.50 Total Distributions Declared and Distributed for 2020 $ 1.50 Amount Date Declared Record Date Payment Date Per Share(1) January 2, 2019 January 24, January 30, 2019 2019 $ 0.50 January 2, 2019 February 20, February 27, 2019 2019 0.50 January 2, 2019 March 21, March 28, 2019 2019 0.50 April 1, 2019 April 22, April 29, 2019 2019 0.50 April 1, 2019 May 23, 2019 May 30, 2019 0.50 April 1, 2019 June 20, June 27, 2019 2019 0.50 July 1, 2019 July 23, July 30, 2019 2019 0.50 July 1, 2019 August 22, August 29, 2019 2019 0.50 July 1, 2019 September September 20, 2019 27, 2019 0.50 October 1, 2019 October 22, October 29, 2019 2019 0.50 October 1, 2019 November 22, November 29, 2019 2019 0.50 October 1, 2019 December 23, December 30, 2019 2019 0.50 Total Distributions Declared and Distributed for 2019 $ 6.00 (1) Amount per share has been adjusted for the periods shown to reflect the one-for-six reverse stock split effected onAugust 21, 2020 on a retroactive basis, as described in Note 1 to our consolidated financial statements included in this Annual Report on Form 10-K. 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 endedDecember 31 , 202l. For the year endedDecember 31, 2020 , we estimate that total distributions of$4.1 million were comprised of approximately$0.7 million from ordinary income and$3.4 million from return of capital. For the year endedDecember 31, 2019 , total distributions of$16.1 million were comprised of approximately$13.4 million from ordinary income and$2.7 million from return of capital.
Related Parties
We have entered into the Investment Advisory Agreement with the Investment Advisor. The Company is externally managed by the Investment Advisor, an affiliate ofBC Partners , pursuant to the Investment Advisory Agreement.Mr. Goldthorpe , an interested members of the Board, has a direct or indirect pecuniary interest in the Investment Advisor. The Investment Advisor is a registered investment adviser under the Advisers Act. The Investment Advisor is an affiliate ofBC Partners Advisors L.P. forU.S. regulatory purposes. MLC 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 59 -------------------------------------------------------------------------------- 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 theSEC . 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. OnOctober 23, 2018 , theSEC 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(o) 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 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.
Off-Balance Sheet Arrangements
As ofDecember 31, 2021 , the Company had outstanding unfunded commitments related to debt investments in existing portfolio companies of$9.0 million toAccordion Partners LLC ,$0.7 million toBradshaw International, Inc. ,$3.1 million toCritical Nursing Staffing, LLC ,$3.5 million toJ5 Infrastructure Partners, LLC ,$0.9 million toKeg Logistics LLC ,$1.9 million toPremiere Imaging, LLC ,$2.5 million toMarble Point Credit Management LLC , and$3.5 million toWealth Enhancement Group, LLC . As ofDecember 31, 2020 , the Company had outstanding unfunded commitments related to debt investments in existing portfolio companies of$4.3 million toRapid Fire Protection, Inc. ,$3.5 million toJ5 Infrastructure Partners, LLC ,$1.0 million toFreedom Electronics, LLC , and$1.0 million toU.S. BioTek Laboratories, 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.
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