CAPITALA FINANCE CORP.

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LOGAN RIDGE FINANCE CORP. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/10/2021 | 04:09pm EDT

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

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Form 10-K for the fiscal year ended December 31, 2020 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 $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 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 September 30, 2021, our asset
coverage ratio was 188.3%. To maintain our regulated investment company ("RIC")
status, we must meet specified source-of-income and asset diversification
requirements. To maintain our RIC tax treatment under subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code") for U.S. federal income
tax purposes, we must distribute at least 90% of our net ordinary income and
realized net short-term capital gains in excess of realized net long-term
capital losses, if any, for the taxable year.



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.

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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.



Reverse Stock Split



On July 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, on August 3, 2020, the Company filed Articles of Amendment (the
"Articles of Amendment") to its Articles of Amendment and Restatement with the
State 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 at 5:00 p.m. Eastern Time on August 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 on August 21, 2020 for the three and nine months ended
September 30, 2020. See Note 1 for more information regarding the Reverse Stock
Split.



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."



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.



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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.



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.



The Company's financial statements as of September 30, 2021 and December 31,
2020 and for the periods ended September 30, 2021 and 2020 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, 2020, filed with the SEC on March 8, 2021.



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 in Capitala 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;
?
the cost of effecting sales and repurchases of our shares and other securities;
?
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;
?
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.



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

                                       47

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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

                                       48
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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:




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 the investment
transaction closes. Prepayment penalties received by the Company for debt
instruments repaid prior to the maturity date are recorded as income upon
receipt.



Income Taxes



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



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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, 2020, 2019, 2018, and 2017 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 September 30, 2021
and 2020. 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
September 30, 2021, and December 31, 2020, the Company recorded a net deferred
tax asset of zero. For the three and nine months ended September 30, 2021 and
2020, the Company recorded a deferred tax provision of zero. As of September 30,
2021 and December 31, 2020, the valuation allowance on the Company's deferred
tax asset was $10.7 million and $4.6 million, respectively. During the three and
nine months ended September 30, 2021, the Company recognized an increase in the
valuation allowance of $7.5 million and $6.1 million, respectively. During the
three and nine months ended September 30, 2020, the Company recognized an
increase in the valuation allowance of $1.0 million and $1.8 million,
respectively.



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 September 30, 2021
and December 31, 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.



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 September 30, 2021 and December 31, 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.



                                       50
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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 September 30, 2021, our portfolio consisted of investments in
33 portfolio companies with a fair value of approximately $195.4 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 September 30, 2021,
11.2% of the fair value of our first lien loans consisted of last-out loans. As
of December 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 three months ended September 30, 2021, we made approximately $33.3
million of investments and had approximately $64.1 million in repayments and
sales, resulting in net repayments and sales of approximately $30.8 million for
the period. During the three months ended September 30, 2020, we made
approximately $0.3 million of investments and had approximately $10.3 million in
repayments and sales, resulting in net repayments and sales of approximately
$10.0 million for the period.



During the nine months ended September 30, 2021, we made approximately $43.3
million of investments and had approximately $127.5 million in repayments and
sales, resulting in net repayments and sales of approximately $84.2 million for
the period. During the nine months ended September 30, 2020, we made
approximately $21.1 million of investments and had approximately $69.2 million
in repayments and sales, resulting in net repayments and sales of approximately
$48.1 million for the period



As of September 30, 2021, our debt investment portfolio, which represented 69.1%
of the fair value of our total portfolio, had a weighted average annualized
yield of approximately 8.9%. As of September 30, 2021, 31.4% of the fair value
of our debt investment portfolio was bearing a fixed rate of interest. As of
December 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 of December 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 of September 30, 2021, the Board approved the fair value of our investment
portfolio of approximately $195.4 million in good faith in accordance with our
valuation procedures. The Board approved the fair value of our investment
portfolio as of September 30, 2021 with input from a third-party valuation firm
and the Investment Advisor based on information known or knowable as of the
valuation date, including trailing and forward-looking data. The COVID-19
pandemic is an unprecedented circumstance that materially impacts the fair value
of our investments. As a result, the fair value of our portfolio investments may
be further negatively impacted after September 30, 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 of September 30, 2021, we had debt investments in three portfolio companies
on non-accrual status with an aggregate amortized cost of $21.3 million and an
aggregate fair value of $9.2 million, which represented 11.0% and 4.7% of the
investment portfolio, respectively. As of December 31, 2020, we had debt
investments in four portfolio companies on non-accrual status with

                                       51

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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.

The following table summarizes the amortized cost and the fair value of investments as of September 30, 2021 (dollars in thousands):



                       Investments
                           at                                Investments
                        Amortized        Percentage of           at            Percentage of
                          Cost               Total           Fair Value            Total
First Lien Debt       $     126,463                65.1 %   $     113,854                58.3 %
Second Lien Debt             21,055                10.8 %          21,165                10.8 %
Equity and Warrants          46,788                24.1 %          60,366                30.9 %
Total                 $     194,306               100.0 %   $     195,385               100.0 %



The following table summarizes the amortized cost and the fair value of investments as of December 31, 2020 (dollars in thousands):



                       Investments
                           at                                Investments
                        Amortized        Percentage of           at            Percentage of
                          Cost               Total           Fair Value            Total
First Lien Debt       $     185,108                66.7 %   $     167,418                60.9 %
Second Lien Debt             39,026                14.0            39,209                14.3
Equity and Warrants          53,518                19.3            68,065                24.8
Total                 $     277,652               100.0 %   $     274,692               100.0 %




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The following table shows the portfolio composition by industry grouping at fair
value as of September 30, 2021 and December 31, 2020 (dollars in thousands):



                                     September 30, 2021                   December 31, 2020
                                                   Percentage                          Percentage
                                Investments            of           Investments            of
                                     at              Total               at              Total
                                 Fair Value        Portfolio         Fair Value        Portfolio
Business Services              $       35,892             18.4 %   $       36,794             13.4 %
Healthcare                             20,848             10.7             23,899              8.7
Information Technology                 13,810              7.1             11,154              4.1
Industrials                            13,685              7.0                  -                -
Textile Equipment
Manufacturer                           12,010              6.1             11,868              4.3
Multi-platform media and
consumer products                      10,046              5.1             13,000              4.7
Entertainment                           9,840              5.0             10,241              3.7
Financial Services                      9,175              4.7             15,721              5.7
Electronic Machine Repair               8,464              4.3              8,759              3.2
Healthcare Management                   8,297              4.3             10,673              3.9
QSR Franchisor                          6,460              3.3              4,707              1.7
Financials                              5,976              3.1                  -                -
Consumer Discretionary                  5,880              3.0                  -                -
Wireless Deployment Services            5,809              3.0              6,948              2.5
Testing laboratories                    5,119              2.6              6,449              2.4
Medical Device Distributor              4,930              2.5              5,019              1.8
Online Merchandise Retailer             4,484              2.3              2,253              0.8
Advertising & Marketing
Services                                4,360              2.2              4,212              1.5
Home Repair Parts
Manufacturer                            3,300              1.7              2,461              0.9
Automobile Part Manufacturer            2,700              1.4             14,935              5.5
Consumer Products                         948              0.5             15,649              5.7
Oil & Gas Engineering and
Consulting Services                       944              0.5              1,418              0.5
Oil & Gas Services                        872              0.4                493              0.2
General Industrial                        740              0.4                670              0.3
Data Processing & Digital
Marketing                                 509              0.3                490              0.2
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
Data Services                               -                -              3,856              1.4
Footwear Retail                             -                -              2,011              0.7
Government Services                         -                -             11,381              4.1
Total                          $      195,385            100.0 %   $      274,692            100.0 %




All investments made by the Company as of September 30, 2021 and December 31,
2020 were made in portfolio companies located in the U.S. The geographic
composition is determined by the location of the corporate headquarters of the
portfolio company, which may not be indicative of the primary source of the
portfolio company's business.



Capitala Senior Loan Fund II, LLC




On December 20, 2018, the Company and Trinity Universal Insurance Company
("Trinity"), a subsidiary of Kemper Corporation, entered into a limited
liability company agreement (the "LLC Agreement") to co-manage CSLF II. The
purpose and design of the joint venture 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.



In May 2020, the Company and Trinity elected to wind-down operations of CSLF II.
On June 1, 2020, CSLF II sold its existing assets with the Company and Trinity
each purchasing approximately 50% of CSLF II's debt investments at their par
value. On June 12,

                                       53
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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. The
Company's equity investment in CSLF II was not redeemable. On June 12, 2020, the
capital commitments for the Company and Trinity were terminated.



On September 3, 2019, CSLF II entered into a senior secured revolving credit
facility (the "CSLF II Credit Facility") with KeyBank Specialty Finance Lending,
an affiliate of KeyCorp. The CSLF II Credit Facility 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 0.35% when utilization of the CSLF II Credit Facility exceeded
50% and 0.65% when utilization of the CSLF II Credit Facility was less than 50%.
On June 5, 2020, CSLF II terminated the CSLF II Credit Facility and repaid all
amounts outstanding. For the three and nine months ended September 30, 2020,
CSLF II incurred interest and financing expenses of $0.0 million and $1.1
million, respectively.



On September 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 on September 3, 2024, however, the Subordinated
Notes were terminated on June 12, 2020. For the nine months ended September 30,
2020, CSLF II did not incur any interest and financing expenses related to the
Subordinated Notes.



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



                                                            For the Nine
                                                            Months ended
                                                           September 30,
                                                              2020(1)
INVESTMENT INCOME
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 )

(1)

On June 12, 2020, CSLF II paid a final distribution and returned all capital to
investors. Accordingly, a statement of operations is not presented for the three
months ended September 30, 2020.

Results of Operations

Operating results for the three and nine months ended September 30, 2021 and 2020 were as follows (dollars in thousands):



                                 For the Three Months Ended               For the Nine Months Ended
                             September 30,        September 30,      

September 30, September 30,

                                  2021                 2020               2021                  2020

Total investment income $ 3,373 $ 6,694 $

  13,342       $       20,767
Total expenses                        4,883                5,952              15,601               20,647
Net investment (loss)
income                               (1,510 )                742              (2,259 )                120
Net realized gain (loss)
on investments                        7,426              (12,344 )               349              (24,661 )
Net unrealized
(depreciation)
appreciation on
investments                          (9,402 )             14,802               4,039              (11,599 )
Net realized gain (loss)
on extinguishment of debt                 -                  155                (815 )                155
Net (decrease) increase in
net assets resulting from
operations                   $       (3,486 )     $        3,355     $         1,314       $      (35,985 )




Investment income



The composition of our investment income for the three and nine months ended September 30, 2021 and 2020 was as follows (dollars in thousands):

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                                 For the Three Months Ended               

For the Nine Months Ended

                             September 30,        September 30,      September 30,        September 30,
                                  2021                 2020               2021                 2020
Interest income              $        3,019       $        6,003     $       11,737       $       18,509
Fee income                              229                  228                470                  639
Payment-in-kind interest
and dividend income                     100                  462                393                1,544
Dividend income                          24                    -                739                   25
Interest income from cash
and cash equivalents                      1                    1                  3                   50

Total investment income $ 3,373 $ 6,694 $

 13,342       $       20,767




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.



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 September 30, 2021, total investment income decreased
by $3.3 million, or 49.6%, compared to the three months ended September 30,
2020. The decrease from the prior period was driven by a decrease in interest
income from $6.0 million for the three months ended September 30, 2020 to $3.0
million for the three months ended September 30, 2021. The decline in interest
income is primarily due to lower average outstanding debt investments for the
three months ended September 30, 2021 compared to the three months ended
September 30, 2020. PIK income declined from $0.5 million for the three months
ended September 30, 2020 to $0.1 million for the three months ended September
30, 2021. The decrease in PIK income was due to a decline in investments with a
contractual PIK rate. For the three months ended September 30, 2021, we
generated $204 thousand in origination fees from new deployments and $25
thousand in other fees. Comparatively, for the three months ended September 30,
2020, we generated $0.0 million in origination fees from new deployments and
$0.2 million in other fees. Dividend income increased from zero for the three
months ended September 30, 2020 to $24 thousand for the three months ended
September 30, 2021, primarily due to non-recurring dividends received from
portfolio companies during the three months ended September 30, 2021.



For the nine months ended September 30, 2021, total investment income decreased
by $7.4 million, or 35.8%, compared to the nine months ended September 30, 2020.
The decrease from the prior period was driven by a decrease in interest income
from $18.5 million for the nine months ended September 30, 2020 to $11.7 million
for the nine months ended September 30, 2021. The decline in interest income is
primarily due to lower average outstanding debt investments for the nine months
ended September 30, 2021 compared to the nine months ended September 30, 2020.
PIK income declined from $1.5 million for the nine months ended September 30,
2020 to $0.4 million for the nine months ended September 30, 2021. The decrease
in PIK income was due to a decline in investments with a contractual PIK rate.
For the nine months ended September 30, 2021, we generated $378 thousand in
origination fees from new deployments and $92 thousand in other fees.
Comparatively, for the nine months ended September 30, 2020, we generated $0.2
million in origination fees from new deployments and $0.4 million in other fees.
Dividend income increased from $25 thousand for the nine months ended September
30, 2020 to $0.7 million for the nine months ended September 30, 2021, primarily
due to non-recurring dividends received from portfolio companies during the nine
months ended September 30, 2021.



Operating expenses


The composition of our expenses for the three and nine months ended September 30, 2021 and 2020 was as follows (dollars in thousands):

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                                 For the Three Months Ended               

For the Nine Months Ended

                             September 30,        September 30,      

September 30, September 30,

                                  2021                 2020               2021                 2020
Interest and financing
expenses                     $        2,296       $        3,423     $        8,061       $       12,134
Base management fee                   1,111                1,565              3,781                4,988
Administrative service
fees                                    200                  350                900                1,050
General and administrative
expenses                              1,276                  614              2,859                2,475
Total expenses               $        4,883       $        5,952     $       15,601       $       20,647




For the three months ended September 30, 2021, operating expenses decreased by
$1.1 million, or 18.0%, compared to the three months ended September 30, 2020.
Interest and financing expenses decreased from $3.4 million for the three months
ended September 30, 2020 to $2.3 million for the three months ended September
30, 2021 due primarily to lower average outstanding debt during the three months
ended September 30, 2021 compared to the three months ended September 30, 2020.
Base management fees declined from $1.6 million for the three months ended
September 30, 2020 to $1.1 million for the three months ended September 30,
2021, due to lower average assets under management. General and administrative
expenses increased from $0.6 million for the three months ended September 30,
2020 to $1.3 million for the three months ended September 30, 2021, primarily
due to accelerated one-time prepaid finance cost during the nine months ended
September 30, 2021 as well as higher professional fees.



For the nine months ended September 30, 2021, operating expenses decreased by
$5.0 million, or 24.4%, compared to the nine months ended September 30, 2020.
Interest and financing expenses decreased from $12.1 million for the nine months
ended September 30, 2020 to $8.1 million for the nine months ended September 30,
2021 due primarily to lower average outstanding debt during the nine months
ended September 30, 2021 compared to the nine months ended September 30, 2020.
Base management fees declined from $5.0 million for the nine months ended
September 30, 2020 to $3.8 million for the nine months ended September 30, 2021,
due to lower average assets under management. General and administrative
expenses increased from $2.5 million for the nine months ended September 30,
2020 to $2.8 million for the nine months ended September 30, 2021 primarily due
to accelerated one-time prepaid finance cost during the nine months ended
September 30, 2021.



Net realized gain (loss) on sales of investments




During the three and nine months ended September 30, 2021, we recognized $7.4
million and $0.3 million of net realized gains on our portfolio investments,
respectively. During the three and nine months ended September 30, 2020 we
recognized $(12.3) million and $(24.7) million of net realized losses on our
portfolio investments, respectively.



Net unrealized appreciation (depreciation) on investments




Net change in unrealized appreciation (depreciation) on investments reflects the
net change in the fair value of our investment portfolio. For the three and nine
months ended September 30, 2021, we had $(9.4) million and $4.0 million of net
change in unrealized (depreciation) appreciation on investments, respectively.
For the three and nine months ended September 30, 2020, we had net change in
unrealized appreciation (depreciation) of $14.8 million and $(11.6) million,
respectively.


Net realized gain (loss) on extinguishment of debt




For the three and nine months ended September 30, 2021 we had a net realized
loss on extinguishment of debt of zero and $(0.8) million, respectively. For the
three and nine months ended September 30, 2020 we had a net realized gain on
extinguishment of debt of $0.2 million.



Changes in net assets resulting from operations




For the three and nine months ended September 30, 2021, we recorded a net
(decrease) increase in net assets resulting from operations of $(3.5) million
and $1.3 million, respectively. Based on the weighted average shares of common
stock outstanding for the three and nine months September 30, 2021, our per
share net (decrease) increase in net assets resulting from operations was
$(1.29) and $0.48, respectively.



For the three and nine months ended September 30, 2020, we recorded a net
increase (decrease) in net assets resulting from operations of $3.4 million and
$(36.0) million, respectively. Based on the weighted average shares of common
stock outstanding for the three and nine months ended September 30, 2020, our
per share net increase (decrease) in net assets resulting from operations was
$1.24 and $(13.29), respectively. Per data share has been adjusted for the three
and nine months ended September 30, 2020 to reflect the one-for-six reverse
stock split effected on August 21, 2020 on a retroactive basis.

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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 September 30, 2021.



ING Credit Facility



On October 17, 2014, the Company entered into a senior secured revolving credit
agreement (as amended, the "ING Credit Facility") with ING Capital, LLC, as
administrative agent, arranger, and bookrunner, and the lenders party thereto.
The ING Credit Facility was set to mature on April 30, 2022; however, on June
19, 2020, the Company unilaterally terminated the ING Credit Facility.



KeyBank Credit Facility



On October 30, 2020, CBL, a direct, wholly owned, consolidated subsidiary of the
Company, entered into the KeyBank Credit Facility 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 KeyBank Credit Facility, the
Lenders have agreed to extend credit to CBL in an aggregate principal amount of
up to $25.0 million as of October 30, 2020. 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 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 September 30, 2021, there were
no outstanding draws on the KeyBank Credit Facility.



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. As of September 30, 2021, the Company had
approximately $72.8 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 September 30, 2021, 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 and nine months ended September 30, 2021, the Company did not
purchase any of the 2022 Notes or the 2022 Convertible Notes.



Asset Coverage Ratio



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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 September 30, 2021, our asset
coverage ratio was 188%. If our asset coverage ratio falls below 150% due a
decline in the fair market of our portfolio, including as the result of the
economic impact caused by the COVID-19 pandemic, we may be limited in our
ability to raise additional debt.



Cash and Cash Equivalents


As of September 30, 2021, we had $37.4 million in cash and cash equivalents, and our net assets totaled $110.3 million.



Contractual Obligations



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



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



A summary of our significant contractual payment obligations as of September 30, 2021 are as follows (dollars in thousands):




                                                       Contractual 

Obligations Payments Due by Period

                                           Less                                                  More
                                           Than              1 - 3            3 - 5              Than
                                          1 Year             Years            Years            5 Years          Total
2022 Notes                                    72,833                -                -                  -        72,833
2022 Convertible Notes                        52,088                -                -                  -        52,088
KeyBank Credit Facility                            -                -                -                  -             -
Total Contractual Obligations         $      124,921       $        -       $        -       $          -     $ 124,921




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 during 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, second or third quarter of 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 for U.S. federal income tax purposes. Thus, the source of a

                                       58

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distribution to our stockholders may be the original capital invested by the
stockholder rather than our income or gains. Stockholders should read any
written disclosure accompanying any stockholder distribution carefully and
should not assume that the source of any distribution is our ordinary income or
capital gains.



We have adopted an "opt out" dividend reinvestment plan ("DRIP") for our common
stockholders. As a result, if we declare a distribution, then stockholders' cash
distributions will be automatically reinvested in additional shares of our
common stock unless a stockholder specifically "opts out" of our DRIP. If a
stockholder opts out, that stockholder will receive cash distributions. Although
distributions paid in the form of additional shares of our common stock will
generally be subject to U.S. federal, state, and local taxes in the same manner
as cash distributions, stockholders participating in our DRIP will not receive
any corresponding cash distributions with which to pay any such applicable
taxes.



The following tables summarize our distributions declared from January 1, 2019 through September 30, 2021:



                                                                                 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, 2019     January 30, 2019    $         0.50
January 2, 2019                      February 20, 2019    February 27, 2019              0.50
January 2, 2019                        March 21, 2019       March 28, 2019               0.50
April 1, 2019                          April 22, 2019       April 29, 2019               0.50
April 1, 2019                           May 23, 2019         May 30, 2019                0.50
April 1, 2019                          June 20, 2019        June 27, 2019                0.50
July 1, 2019                           July 23, 2019        July 30, 2019                0.50
July 1, 2019                          August 22, 2019      August 29, 2019               0.50
July 1, 2019                         September 20, 2019   September 27, 2019             0.50
October 1, 2019                       October 22, 2019     October 29, 2019              0.50
October 1, 2019                      November 22, 2019    November 29, 2019              0.50
October 1, 2019                      December 23, 2019    December 30, 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 on August 21, 2020 on a retroactive
basis, as described in Note 1 to our consolidated financial statements included
in this Quarterly Report on Form 10-Q.



Tax characteristics of all distributions paid are reported to stockholders on
Form 1099 after the end of the calendar year. For the year ended December 31,
2020, 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 ended December 31, 2019, total distributions of $16.1 million were
comprised of approximately $13.4 million from ordinary income and $2.7 million
from return of capital. 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 New Advisory Agreement with the Investment Advisor.




On October 23, 2018, the SEC issued an order granting an application for
exemptive relief to an affiliate of the Investment Advisor that allows BDCs
managed by the Investment Advisor, including the Company, 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, including BCP Special Opportunities Fund I LP, BC Partners Lending
Corporation and any future funds that are advised by the Investment Advisor or
its affiliated investment advisers.



Pursuant to the Order, we are permitted to co-invest in such investment opportunities with our affiliates if a ''required majority'' (as defined in Section 57(o) of the 1940 Act) of our directors each of which is not considered an "interested person", as such term is

                                       59

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defined under the 1940 Act (the "independent directors") make certain
conclusions in connection with a co-investment transaction, including, but not
limited to, that (1) the terms of the potential co-investment transaction,
including the consideration to be paid, are reasonable and fair to us and our
stockholders and do not involve overreaching in respect of us or our
stockholders on the part of any person concerned, and (2) the potential
co-investment transaction is consistent with the interests of our stockholders
and is consistent with our then-current investment objective and strategies.



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 September 30, 2021 and December 31, 2020, the Company had outstanding
unfunded commitments related to debt investments in existing portfolio companies
of $9.0 million (Accordion Partners LLC), $3.5 million (J5 Infrastructure
Partners, LLC), $2.5 million (Marble Point Credit Management LLC), $1.0 million
(U.S. BioTek Laboratories, LLC), and $7.1 million (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



As previously disclosed, on October 29, 2021, the Company issued $50,000,000 in
aggregate principal amount of its 5.25% Notes due 2026 (the " 2026 Notes")
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.



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.



On November 1, 2021, the Company notified the Trustee for the Company's 2022
Notes, of the Company's election to redeem the $50,000,000 aggregate principal
amount of the 2022 Notes outstanding, and instructed the Trustee to provide
notice of such redemption to the holders of the 2022 Notes in accordance with
the terms of the indenture governing the 2022 Notes. The Company expects the
redemption to be completed on December 6, 2021. Following the redemption,
$22,833,200 aggregate principal amount of the 2022 Notes will remain
outstanding.

© Edgar Online, source Glimpses

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