UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the Quarter Ended September 30, 2017

 

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

 

Commission
File Number
  Exact name of registrant as specified in its
charter, address of principal executive
office, telephone number and state or other jurisdiction of incorporation
or organization
  I.R.S. Employer
Identification Number
814-01022  

Capitala Finance Corp.

4201 Congress St., Suite 360

Charlotte, North Carolina

Telephone: (704) 376-5502

State of Incorporation: Maryland

  90-0945675

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

 

  Capitala Finance Corp. Yes   x No   ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

  Capitala Finance Corp. Yes   ¨ No   ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.           ¨

 

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

 

  Capitala Finance Corp. Yes  ¨ No   x

 

The number of shares of Capitala Finance Corp.’s common stock, $0.01 par value, outstanding as of November 3, 2017 was 15,936,507.

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
     
PART I. FINANCIAL INFORMATION 3
     
Item 1. Consolidated Financial Statements 3
     
  Consolidated Statements of Assets and Liabilities as of September 30, 2017 (unaudited) and December 31, 2016 3
     
  Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016 (unaudited) 4
     
  Consolidated Statements of Changes in Net Assets for the nine months ended September 30, 2017 and 2016 (unaudited) 5
     
  Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 (unaudited) 6
     
  Consolidated Schedules of Investments as of September 30, 2017 (unaudited) and December 31, 2016 7
     
  Notes to Consolidated Financial Statements as of September 30, 2017 (unaudited) 17
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 42
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 63
     
Item 4. Controls and Procedures 64
     
PART II.    OTHER INFORMATION 64
     
Item 1. Legal Proceedings 64
     
Item 1A. Risk Factors 64
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 64
     
Item 3. Defaults Upon Senior Securities 64
     
Item 4. Mine Safety Disclosures 64
     
Item 5. Other Information 64
     
Item 6. Exhibits 65
   
Signatures 66

 

 2 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

 

Capitala Finance Corp.

 

Consolidated Statements of Assets and Liabilities

(in thousands, except share and per share data)

 

   As of 
   September 30, 2017   December 31, 2016 
   (unaudited)     
ASSETS          
Investments at fair value          
Non-control/non-affiliate investments (amortized cost of $276,221 and $391,706, respectively)  $274,795   $393,525 
Affiliate investments (amortized cost of $76,414 and $39,279, respectively)   98,101    61,464 
Control investments (amortized cost of $102,079 and $82,791, respectively)   98,210    86,650 
Total investments at fair value (amortized cost of $454,714 and $513,776, respectively)   471,106    541,639 
Cash and cash equivalents   52,307    36,281 
Interest and dividend receivable   4,246    5,735 
Due from related parties   74    182 
Prepaid expenses   409    506 
Other assets   82    72 
Total assets  $528,224   $584,415 
           
LIABILITIES          
SBA debentures (net of deferred financing costs of $2,454 and $2,911, respectively)  $168,246   $167,789 
2021 Notes (net of deferred financing costs of $0 and $3,025, respectively)   -    110,413 
2022 Notes (net of deferred financing costs of $2,618 and $0, respectively)   72,382    - 
2022 Convertible Notes (net of deferred financing costs of $1,658 and $0, respectively)   50,430    - 
Credit Facility (net of deferred financing costs of $1,096 and $759, respectively)   (1,096)   43,241 
Due to related parties   -    35 
Management and incentive fee payable   2,228    6,426 
Interest and financing fees payable   1,512    2,657 
Accounts payable and accrued expenses   -    536 
Deferred tax liability   2,660    - 
Written call option at fair value (proceeds of $20 and $20, respectively)   5,555    2,736 
Total liabilities  $301,917   $333,833 
           
Commitments and contingencies (Note 2)          
           
NET ASSETS          
Common stock, par value $.01, 100,000,000 common shares authorized, 15,930,631 and 15,868,045 common shares issued and outstanding, respectively  $159   $159 
Additional paid in capital   240,897    240,184 
Undistributed net investment income   15,684    22,973 
Accumulated net realized losses from investments   (38,630)   (37,881)
Net unrealized appreciation on investments, net of deferred taxes   13,732    27,863 
Net unrealized depreciation on written call option   (5,535)   (2,716)
Total net assets  $226,307   $250,582 
Total liabilities and net assets  $528,224   $584,415 
           
Net asset value per share  $14.21   $15.79 

 

See accompanying notes to consolidated financial statements.

 

 3 

 

 

Capitala Finance Corp.

 

Consolidated Statements of Operations

(in thousands, except share and per share data)

(unaudited)

 

   For the Three Months Ended September 30   For the Nine Months Ended September 30 
   2017   2016   2017   2016 
INVESTMENT INCOME                    
Interest and fee income:                    
Non-control/non-affiliate investments  $6,935   $10,520   $23,978   $31,870 
Affiliate investments   1,187    1,150    3,344    4,754 
Control investments   1,639    3,545    5,209    8,681 
Total interest and fee income   9,761    15,215    32,531    45,305 
Payment-in-kind interest and dividend income:                    
Non-control/non-affiliate investments   1,103    1,176    3,810    2,966 
Affiliate investments   611    101    1,254    293 
Control investments   166    241    574    707 
Total payment-in-kind interest and dividend income   1,880    1,518    5,638    3,966 
Dividend income:                    
Non-control/non-affiliate investments   -    -    168    206 
Affiliate investments   555    29    612    86 
Control investments   25    545    330    2,135 
Total dividend income   580    574    1,110    2,427 
Other Income   48    42    125    85 
Interest income from cash and cash equivalents   43    8    85    15 
Total investment income   12,312    17,357    39,489    51,798 
                     
EXPENSES                    
Interest and financing expenses   4,585    4,938    14,726    14,990 
Loss on extinguishment of debt   -    -    2,732    - 
Base management fee   2,417    2,619    7,436    8,049 
Incentive fees   -    1,782    1,308    5,155 
General and administrative expenses   900    889    2,941    2,984 
Expenses before incentive fee waiver   7,902    10,228    29,143    31,178 
Incentive fee waiver (See Note 5)   -    (312)   (958)   (1,673)
Total expenses, net of fee waivers   7,902    9,916    28,185    29,505 
                     
NET INVESTMENT INCOME   4,410    7,441    11,304    22,293 
                     
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND WRITTEN CALL OPTION:                    
Net realized gain (loss) from investments:                    
Non-control/non-affiliate investments   (10,381)   1,192    (5,336)   1,261 
Affiliate investments   98    (18,222)   4,587    (26,303)
Control investments   -    -    -    145 
Total realized loss from investments   (10,283)   (17,030)   (749)   (24,897)
Net unrealized appreciation (depreciation) on investments:                    
Non-control/non-affiliate investments   9,605    (8,217)   (3,245)   (6,915)
Affiliate investments   (1,472)   15,230    (498)   3,060 
Control investments   (4,946)   1,461    (7,728)   8,412 
Total unrealized appreciation (depreciation) from investments   3,187    8,474    (11,471)   4,557 
Net unrealized depreciation on written call option   (407)   (898)   (2,819)   (898)
Change in provision for deferred taxes on unrealized appreciation on investments   (2,660)   -    (2,660)   - 
Net loss on investments and written call option   (10,163)   (9,454)   (17,699)   (21,238)
                     
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS  $(5,753)  $(2,013)  $(6,395)  $1,055 
                     
NET INCREASE (DECREASE) IN NET ASSETS PER SHARE RESULTING FROM OPERATIONS – BASIC AND DILUTED  $(0.36)  $(0.13)  $(0.40)  $0.07 
                     
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING - BASIC AND DILUTED   15,911,160    15,829,878    15,891,636    15,807,801 
                     
DISTRIBUTIONS PAID PER SHARE  $0.39   $0.47   $1.17   $1.41 

 

See accompanying notes to consolidated financial statements.

 

 4 

 

 

Capitala Finance Corp.

 

Consolidated Statements of Changes in Net Assets

(in thousands, except share data)

(unaudited)

 

   Common Stock                         
   Number of
Shares
   Par Value   Additional Paid
in Capital
   Undistributed Net
Investment Income
   Accumulated Net
Realized Losses
   Net Unrealized
Appreciation on
Investments, net of
Deferred Taxes
   Net Unrealized
Depreciation on
Written Call Option
   Total 
                                 
BALANCE, December 31, 2015   15,777,345  $158  $239,104  $8,570  $(1,299)  $22,269   $-   $268,802 
Net investment income   -    -    -    22,293    -    -    -    22,293 
Net realized loss from investments   -    -    -    -    (24,897)   -    -    (24,897)
Net change in unrealized appreciation on investments   -    -    -    -    -    4,557    -    4,557 
Net change in unrealized depreciation on written call option   -    -    -    -    -    (898)   -    (898)
Distributions to Shareholders:                                        
Stock issued under dividend reinvestment plan   66,814    -    813    -    -    -    -    813 
Distributions declared   -    -    -    (22,293)   -    -    -    (22,293)
BALANCE, September 30, 2016   15,844,159   $158   $239,917   $8,570   $(26,196)  $25,928   $-   $248,377 
                                         
BALANCE, December 31, 2016   15,868,045   $159   $240,184   $22,973   $(37,881)  $27,863   $(2,716)  $250,582 
Net investment income   -    -    -    11,304    -    -    -    11,304 
Net realized loss from investments   -    -    -    -    (749)   -    -    (749)
Net change in unrealized depreciation on investments   -    -    -    -    -    (11,471)   -    (11,471)
Net change in unrealized depreciation on written call option   -    -    -    -    -    -    (2,819)   (2,819)
Change in provision for deferred taxes on unrealized appreciation on investments   -    -    -    -    -    (2,660)   -    (2,660)
Distributions to Shareholders:                                        
Stock issued under dividend reinvestment plan   62,586    -    713    -    -    -    -    713 
Distributions declared   -    -    -    (18,593)   -    -    -    (18,593)
BALANCE, September 30, 2017   15,930,631   $159   $240,897   $15,684   $(38,630)  $13,732   $(5,535)  $226,307 

 

See accompanying notes to consolidated financial statements.

 

 5 

 

 

Capitala Finance Corp.

 

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

   For the Nine Months Ended September 30 
   2017   2016 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net increase (decrease) in net assets resulting from operations  $(6,395)  $1,055 
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by operating activities:          
Purchase of investments   (39,690)   (53,949)
Repayments and sales of investments   104,709    128,586 
Net realized loss on investments   749    24,897 
Net unrealized (appreciation) depreciation on investments   11,471    (4,557)
Payment-in-kind interest and dividends   (5,638)   (3,966)
Accretion of original issue discount on investments   (1,068)   (2,335)
Proceeds from written call option   -    20 
Net unrealized depreciation on written call option   2,819    898 
Amortization of deferred financing fees   1,868    1,614 
Loss on extinguishment of debt   2,732    - 
Change in provision for deferred taxes on unrealized appreciation on investments   2,660    - 
Changes in assets and liabilities:          
Interest and dividend receivable   1,489    251 
Due from related parties   108    56 
Prepaid expenses   97    322 
Other assets   (10)   (8)
Due to related parties   (35)   (6)
Management and incentive fee payable   (4,198)   3,031 
Interest and financing fees payable   (1,145)   (2,063)
Accounts payable and accrued expenses   (536)   (387)
NET CASH PROVIDED BY OPERATING ACTIVITIES   69,987    93,459 
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Paydowns on SBA debentures   -    (13,500)
Proceeds from Credit Facility   -    4,000 
Payments to Credit Facility   (44,000)   (36,000)
Issuance of 2022 Notes   75,000    - 
Issuance of 2022 Convertible Notes   52,088    - 
Repayment of 2021 Notes   (113,438)   - 
Distributions paid to shareholders   (17,880)   (21,480)
Deferred financing fees paid   (5,731)   - 
NET CASH USED IN FINANCING ACTIVITIES   (53,961)   (66,980)
           
NET INCREASE IN CASH AND CASH EQUIVALENTS   16,026    26,479 
CASH AND CASH EQUIVALENTS, beginning of period   36,281    34,105 
CASH AND CASH EQUIVALENTS, end of period  $52,307   $60,584 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION          
Cash paid for interest  $13,611   $15,139 
           
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS          
Distributions paid through dividend reinvestment plan share issuances  $713   $813 

 

See accompanying notes to consolidated financial statements.

 

 6 

 

 

Capitala Finance Corp.

 

Consolidated Schedule of Investments

(in thousands, except for units/shares)

September 30, 2017

(unaudited)

 

Company (1), (2), (3), (4)   Industry  Type of Investment  Principal
Amount
   Cost   Fair Value   % of
Net Assets
 
                       
Non-control/non-affiliated investments - 121.5%                 
                           
American Clinical Solutions, LLC  Healthcare  First Lien Debt (10.5% Cash, 1% PIK, Due 6/11/20)  $9,045   $9,045   $7,571    3.3%
               9,045    7,571    3.3%
                           
American Exteriors, LLC  Replacement Window Manufacturer  First Lien Debt (10% PIK, Due 1/1/19) (5)(6)   7,847    5,429    2,706    1.2%
                           
American Exteriors, LLC  Replacement Window Manufacturer  Common Stock Warrants (10% fully diluted)        -    -    0.0%
               5,429    2,706    1.2%
                           
AmeriMark Direct, LLC  Consumer Products  First Lien Debt (12.75% Cash, Due 9/8/21)   19,400    18,980    19,400    8.6%
               18,980    19,400    8.6%
                           
B&W Quality Growers, LLC  Farming  Membership Unit Warrants (91,739 Units)        -    5,724    2.5%
               -    5,724    2.5%
                           
BigMouth, Inc.  Consumer Products  First Lien Debt (13.2% Cash, Due 11/14/21) (7)   9,964    9,964    9,964    4.4%
                           
BigMouth, Inc.  Consumer Products  Series A Preferred Stock (350,000 shares, 8% PIK) (8)        375    771    0.3%
               10,339    10,735    4.7%
                           
Bluestem Brands, Inc.  Online Merchandise Retailer  First Lien Debt (8.74% Cash (1 month LIBOR + 7.5%, 1% Floor), Due 11/7/20)   4,092    4,015    3,840    1.7%
               4,015    3,840    1.7%
                           
Brunswick Bowling Products, Inc.  Bowling Products  First Lien Debt (8% Cash (1 month LIBOR + 6%, 2% Floor), Due 5/22/20)   1,600    1,600    1,600    0.7%
                           
Brunswick Bowling Products, Inc.  Bowling Products  First Lien Debt (16.25% Cash (1 month LIBOR + 14.25%, 2% Floor), Due 5/22/20)   5,586    5,586    5,586    2.5%
                           
Brunswick Bowling Products, Inc.  Bowling Products  Preferred Shares (2,966 shares, 8% PIK) (8)        3,597    6,144    2.7%
               10,783    13,330    5.9%
                           
Burke America Parts Group, LLC  Home Repair Parts Manufacturer  Membership Units (14 units)        5    3,213    1.4%
               5    3,213    1.4%
                           
California Pizza Kitchen, Inc.  Restaurant  Second Lien Debt (11.24% Cash (1 month LIBOR + 10%, 1% Floor), Due 8/23/23)   5,000    4,874    4,874    2.2%
               4,874    4,874    2.2%
                           
Caregiver Services, Inc.  In-Home Healthcare Services  Common Stock (293,186 shares)        258    44    0.0%
                           
Caregiver Services, Inc.  In-Home Healthcare Services  Common Stock Warrants (655,908 units) (9)        264    98    0.0%
               522    142    0.0%
                           
Cedar Electronics Holding Corp.  Consumer Electronics  Subordinated Debt (12% Cash, Due 12/26/20) (6)   21,550    21,550    8,477    3.7%
               21,550    8,477    3.7%
                           
CIS Secure Computing, Inc.  Government Services  First Lien Debt (9.73% Cash (1 month LIBOR + 8.5%, 1% Floor), 1% PIK, Due 9/14/22) (10)   7,070    7,070    7,070    3.1%
                           
CIS Secure Computing, Inc.  Government Services  Common Stock (46,163 shares)        1,000    1,000    0.4%

 

 7 

 

 

Company (1), (2), (3), (4)   Industry  Type of Investment  Principal
Amount
   Cost   Fair Value   % of
Net Assets
 
                       
               8,070    8,070    3.5%
                           
Corporate Visions, Inc.  Sales & Marketing Services  Subordinated Debt (9% Cash, 2% PIK, Due 11/29/21)   16,515    16,515    15,252    6.7%
                           
Corporate Visions, Inc.  Sales & Marketing Services  Common Stock (15,750 shares)        1,575    921    0.4%
               18,090    16,173    7.1%
                           
Currency Capital, LLC  Financial Services  First Lien Debt (12.23% Cash (1 month LIBOR + 11%, 0.50% Floor) Due 1/20/22) (11)   16,000    16,000    16,000    7.1%
                           
Currency Capital, LLC  Financial Services  Class A Preferred Units (2,000,000 units) (11)        2,000    2,000    0.9%
               18,000    18,000    8.0%
                           
Flavors Holdings, Inc.  Food Product Manufacturer  First Lien Debt (7.08% Cash (3 month LIBOR + 5.75%, 1% Floor), Due 4/3/20)   6,800    6,674    6,249    2.8%
                           
Flavors Holdings, Inc.  Food Product Manufacturer  Second Lien Debt (11.33% Cash (3 month LIBOR + 10%, 1% Floor), Due 10/3/21)   12,000    11,723    10,525    4.7%
               18,397    16,774    7.5%
                           
Immersive Media Tactical Solutions, LLC  Specialty Defense Contractor  Subordinated Debt (Due 12/9/19) (12)   2,000    2,000    -    0.0%
               2,000    -    0.0%
                           
Nth Degree, Inc.  Business Services  First Lien Debt (8.23% Cash (1 month LIBOR + 7%, 1% Floor), 1% PIK, Due 12/14/20)   9,006    9,006    9,006    4.0%
                           
Nth Degree, Inc.  Business Services  First Lien Debt (12.73% Cash (1 month LIBOR + 11.5%, 1% Floor), 2% PIK, Due 12/14/20)   7,460    7,460    7,460    3.3%
                           
Nth Degree, Inc.  Business Services  Preferred Stock (2,400 Units, 10% PIK dividend) (8)        2,866    8,932    4.0%
               19,332    25,398    11.3%
                           
Portrait Innovations, Inc.  Professional and Personal Digital Imaging  First Lien Debt (9% Cash, Due 12/27/17) (13)   960    960    960    0.4%
                           
Portrait Innovations, Inc.  Professional and Personal Digital Imaging  First Lien Debt (9.6% Cash, Due 2/26/20)   9,000    9,000    8,455    3.7%
               9,960    9,415    4.1%
                           
Sequoia Healthcare Management, LLC  Healthcare Management  First Lien Debt (13% Cash, 4% PIK, Due 7/17/19)   9,892    9,829    9,892    4.4%
               9,829    9,892    4.4%
                           
Sur La Table, Inc.  Retail  First Lien Debt (12% Cash, Due 7/28/20)   15,000    15,000    14,915    6.6%
               15,000    14,915    6.6%
                           
Taylor Precision Products, Inc.  Household Product Manufacturer  Series C Preferred Stock (379 shares)        758    1,184    0.5%
               758    1,184    0.5%
                           
Velum Global Credit Management, LLC  Financial Services  First Lien Debt (15% PIK, Due 12/31/17) (5)(11)(14)   11,816    11,816    11,232    5.0%
               11,816    11,232    5.0%
                           
Vintage Stock, Inc.  Specialty Retail  First Lien Debt (13.74% Cash (1 month LIBOR + 12.5%, 0.5% floor), 3% PIK, Due 11/3/21)   21,288    21,288    21,288    9.4%
               21,288    21,288    9.4%

 

 8 

 

 

Company (1), (2), (3), (4)   Industry  Type of Investment  Principal
Amount
   Cost   Fair Value   % of
Net Assets
 
                       
Vology, Inc.  Information Technology  Subordinated Debt (15% Cash (3 month LIBOR + 14%, 1% Ceiling), 4% PIK Due 1/24/21)   8,289    8,289    8,085    3.6%
               8,289    8,085    3.6%
                           
Western Windows Systems, LLC  Building Products  First Lien Debt (11.7% Cash, Due 7/31/20) (7)   10,500    10,500    10,500    4.7%
                           
Western Windows Systems, LLC  Building Products  Membership Units (39,860 units)        3,000    7,452    3.3%
               13,500    17,952    8.0%
                           
Xirgo Technologies, LLC  Information Technology  Subordinated Debt (11.5% Cash, Due 3/1/22)   15,750    15,750    15,750    7.0%
                           
Xirgo Technologies, LLC  Information Technology  Membership Units (600,000 units)        600    655    0.3%
               16,350    16,405    7.3%
                           
Sub Total Non-control/non-affiliated investments   $276,221   $274,795    121.5%
                           
Affiliate investments - 43.3%                 
                           
AAE Acquisition, LLC  Industrial Equipment Rental  Second Lien Debt (8% Cash, 4% PIK, Due 8/24/19) (5)  $15,688   $15,688   $15,374    6.8%
                           
AAE Acquisition, LLC  Industrial Equipment Rental  Membership Units (2.19% fully diluted)        17    -    0.0%
                           
AAE Acquisition, LLC  Industrial Equipment Rental  Warrants (37.78% fully diluted)        -    -    0.0%
               15,705    15,374    6.8%
                           
Burgaflex Holdings, LLC  Automobile Part Manufacturer  Subordinated Debt (14% Cash, Due 8/9/19) (15)   3,000    3,000    3,000    1.3%
                           
Burgaflex Holdings, LLC  Automobile Part Manufacturer  Subordinated Debt (12% Cash, Due 8/9/19) (15)   5,828    5,828    5,693    2.5%
                           
Burgaflex Holdings, LLC  Automobile Part Manufacturer  Common Stock (1,253,198 shares)        1,504    627    0.3%
               10,332    9,320    4.1%
                           
City Gear, LLC  Footwear Retail  Subordinated Debt (13% Cash, Due 10/20/19) (5)   8,231    8,231    8,231    3.6%
                           
City Gear, LLC  Footwear Retail  Preferred Membership Units (2.78% fully diluted, 9% Cash Dividend) (8)        1,269    1,269    0.6%
                           
City Gear, LLC  Footwear Retail  Membership Unit Warrants (11.38% fully diluted)        -    8,056    3.5%
               9,500    17,556    7.7%
                           
GA Communications, Inc.  Advertising & Marketing Services  Series A-1 Preferred Stock (1,998 shares, 8% PIK Dividend) (8)        2,836    3,163    1.4%
                           
GA Communications, Inc.  Advertising & Marketing Services  Series B-1 Common Stock (200,000 shares)        2    1,906    0.8%
               2,838    5,069    2.2%
                           
J&J Produce Holdings, Inc.  Produce Distribution  Subordinated Debt (6% Cash, 7% PIK, Due 6/16/19) (5)   6,255    6,255    6,035    2.7%
                           
J&J Produce Holdings, Inc.  Produce Distribution  Common Stock (8,182 shares)        818    -    0.0%
                           
J&J Produce Holdings, Inc.  Produce Distribution  Common Stock Warrants (6,369 shares)        -    -    0.0%
               7,073    6,035    2.7%

 

 9 

 

 

Company (1), (2), (3), (4)   Industry  Type of Investment  Principal
Amount
   Cost   Fair Value   % of
Net Assets
 
                       
LJS Partners, LLC  QSR Franchisor  Common Stock (1,500,000 shares)        896    8,404    3.7%
               896    8,404    3.7%
                           
MMI Holdings, LLC  Medical Device Distributor  First Lien Debt (12% Cash, Due 1/31/18) (5)   2,600    2,600    2,600    1.1%
                           
MMI Holdings, LLC  Medical Device Distributor  Subordinated Debt (6% Cash, Due 1/31/18) (5)   400    388    400    0.2%
                           
MMI Holdings, LLC  Medical Device Distributor  Preferred Units (1,000 units, 6% PIK dividend) (8)        1,359    1,497    0.7%
                           
MMI Holdings, LLC  Medical Device Distributor  Common Membership Units (45 units)        -    187    0.1%
               4,347    4,684    2.1%
                           
MTI Holdings, LLC  Retail Display & Security Services  Membership Units (2,000,000 units) (16)        -    439    0.2%
               -    439    0.2%
                           
Sierra Hamilton Holdings Corporation  Oil & Gas Engineering and Consulting Services  Common Stock (15,068,000 shares)        6,958    6,958    3.1%
               6,958    6,958    3.1%
                           
Source Capital Penray, LLC  Automotive Chemicals & Lubricants  Membership Units (11.3% ownership)(16)        -    101    0.0%
               -    101    0.0%
                           
STX Healthcare Management Services, Inc.  Dental Practice Management  Common Stock (1,200,000 shares) (16)        -    93    0.0%
               -    93    0.0%
                           
U.S. Well Services, LLC  Oil & Gas Services  First Lien Debt (7.24% Cash (1 month LIBOR + 6%, 1% floor), Due 2/2/22) (17)   2,022    2,022    2,022    0.9%
                           
U.S. Well Services, LLC  Oil & Gas Services  First Lien Debt (12.24% PIK (1 month LIBOR + 11%, 1% floor), Due 2/2/22)   9,230    9,230    9,230    4.1%
                           
U.S. Well Services, LLC  Oil & Gas Services  Class A Units (5,680,688 Units)        6,259    11,014    4.9%
                           
U.S. Well Services, LLC  Oil & Gas Services  Class B Units (2,076,298 Units)        441    767    0.3%
               17,952    23,033    10.2%
                           
V12 Holdings, Inc.  Data Processing & Digital Marketing  Subordinated Debt (16)        813    1,035    0.5%
               813    1,035    0.5%
                           
Sub Total Affiliate investments             $76,414   $98,101    43.3%
                           
Control investments- 43.4%                          
                           
CableOrganizer Acquisition, LLC  Computer Supply Retail  First Lien Debt (12% Cash, 4% PIK, Due 5/24/18)  $12,247   $12,247   $12,247    5.4%
                           
CableOrganizer Acquisition, LLC  Computer Supply Retail  Common Stock (19.7% fully diluted)        1,394    109    0.0%
                           
CableOrganizer Acquisition, LLC  Computer Supply Retail  Common Stock Warrants (10% fully diluted )        -    55    0.0%
               13,641    12,411    5.4%
                           
Eastport Holdings, LLC  Business Services  Subordinated Debt (14.32% Cash (3 month LIBOR + 13%, 0.5% Floor), Due 4/29/20)   16,500    14,549    16,500    7.3%

 

 10 

 

 

Company (1), (2), (3), (4)   Industry  Type of Investment  Principal
Amount
   Cost   Fair Value   % of
Net Assets
 
                       
Eastport Holdings, LLC  Business Services  Membership Units (33.3% ownership) (18)        4,733    22,366    9.9%
               19,282    38,866    17.2%
                           
Kelle's Transport Service, LLC  Transportation  First Lien Debt (4% Cash, Due 2/15/20) (19)   1,545    1,545    1,545    0.7%
                           
Kelle's Transport Service, LLC  Transportation  First Lien Debt (1.46% Cash, Due 2/15/20) (5)   13,674    13,668    9,368    4.2%
                           
Kelle's Transport Service, LLC  Transportation  Membership Units (27.5% fully diluted)        -    -    0.0%
               15,213    10,913    4.9%
                           
Micro Precision, LLC  Conglomerate  Subordinated Debt (10% Cash, Due 9/15/18) (5)   1,862    1,862    1,862    0.8%
                           
Micro Precision, LLC  Conglomerate  Subordinated Debt (14% Cash, 4% PIK, Due 9/15/18) (5)   4,112    4,112    4,112    1.8%
                           
Micro Precision, LLC  Conglomerate  Series A Preferred Units (47 units)        1,629    1,629    0.7%
               7,603    7,603    3.3%
                           
Navis Holdings, Inc.  Textile Equipment Manufacturer  First Lien Debt (15% Cash, Due 10/30/20) (5)   6,500    6,500    6,500    2.9%
                           
Navis Holdings, Inc.  Textile Equipment Manufacturer  Class A Preferred Stock (1,000 shares, 10% Cash Dividend) (8)        1,000    1,000    0.4%
                           
Navis Holdings, Inc.  Textile Equipment Manufacturer  Common Stock (300,000 shares)        1    5,330    2.4%
               7,501    12,830    5.7%
                           
On-Site Fuel Services, Inc.  Fuel Transportation Services  Subordinated Debt (14% Cash, 4% PIK, Due 12/19/18) (5) (6)   11,834    11,020    11,588    5.1%
                           
On-Site Fuel Services, Inc.  Fuel Transportation Services  Series A Preferred Stock (32,782 shares)        3,278    -    0.0%
                           
On-Site Fuel Services, Inc.  Fuel Transportation Services  Series B Preferred Stock (23,648 shares)        2,365    -    0.0%
                           
On-Site Fuel Services, Inc.  Fuel Transportation Services  Common Stock (33,107 shares)        33    -    0.0%
               16,696    11,588    5.1%
                           
Print Direction, Inc.  Printing Services  First Lien Debt (10% Cash, 2% PIK, Due 2/24/19) (6)   19,153    19,153    3,999    1.8%
                           
Print Direction, Inc.  Printing Services  Common Stock (18,543 shares)        2,990    -    0.0%
                           
Print Direction, Inc.  Printing Services  Common Stock Warrants (820 shares)        -    -    0.0%
               22,143    3,999    1.8%
                           
Sub Total Control investments   $102,079   $98,210    43.4%
                           
TOTAL INVESTMENTS - 208.2%   $454,714   $471,106    208.2%
                           
Derivatives - (2.5)%                          
                           
Eastport Holdings, LLC  Business Services  Written Call Option (18)       $(20)  $(5,555)   (2.5)%
                           
TOTAL DERIVATIVES- (2.5)%   $(20)  $(5,555)   (2.5)%

 

 11 

 

 

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

(2) All debt investments are income producing, unless otherwise noted. Equity and warrant investments are non-income producing, unless otherwise noted.

(3) Percentages are based on net assets of $226,307 as of September 30, 2017.

(4) All companies are headquartered in the United States, unless otherwise noted

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

(6) Non-accrual investment.

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

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

(9) The equity investment has an excercisable put option

(10) The investment has a $4.0 million unfunded commitment.

(11) Indicates assets that the Company believes do not represent “qualifying assets” under Section 55(a) of the Investment Company Act of 1940, as amended. Qualifying assets must represent at least 70% of the Company's total assets at the time of acquisition of any additional non-qualifying assets. As of September 30, 2017, 5.5% of the Company's total assets were non-qualifying assets.

(12) Interest rate was amended to zero. The Company is entitled to receive earn-out payments of up to $2.4 million in satisfaction of the debt.

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

(14) The company is headquartered in Brazil.

(15) In addition to the stated rate, the investment is paying 3% default interest.

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

(17) The investment has a $1.0 million unfunded commitment.

(18) The Company has written a call option that enables CapitalSouth Partners Florida Sidecar Fund II, L.P. to purchase up to 31.25% of the Company's interest at a strike price of $1.5 million. As of September 30, 2017, the fair value of the written call option is approximately $5.6 million. See Note 4 to the consolidated financial statements for further detail on the written call option transaction.

(19) The investment has a $1.5 million unfunded commitment.

 

See accompanying notes to consolidated financial statements.

 

 12 

 

 

Capitala Finance Corp.

 

Consolidated Schedule of Investments

(in thousands, except for units/shares)

December 31, 2016

 

Company (4) , (5)  Industry  Type of Investment  Principal
Amount
   Cost   Fair Value   % of
Net Assets
 
                       
Non-control/non-affiliated investments - 157.1%                
                           
AAE Acquisition, LLC  Industrial Equipment Rental  Second Lien Debt (12% Cash, Due 3/31/18)  $11,000   $11,000   $10,755    4.3%
                           
AAE Acquisition, LLC  Industrial Equipment Rental  Membership Units (14% fully diluted)        17    -    0.0%
               11,017    10,755    4.3%
                           
American Clinical Solutions, LLC  Healthcare  First Lien Debt (10.5% Cash (3 month LIBOR + 9.5%, 1% Floor), Due 6/11/20)(13)   9,034    9,034    8,582    3.4%
               9,034    8,582    3.4%
                           
American Exteriors, LLC  Replacement Window Manufacturer  First Lien Debt (10% PIK, Due 1/1/17) (1) (2)   6,456    4,679    2,571    1.0%
                           
American Exteriors, LLC  Replacement Window Manufacturer  Common Stock Warrants (10% fully diluted)        -    -    0.0%
               4,679    2,571    1.0%
                           
AmeriMark Direct, LLC  Consumer Products  First Lien Debt (12.75% Cash, Due 9/8/21)   19,700    19,192    19,542    7.8%
               19,192    19,542    7.8%
                           
B&W Quality Growers, LLC  Farming  Subordinated Debt (14% Cash, Due 7/23/20)   6,000    5,996    6,000    2.4%
                           
B&W Quality Growers, LLC  Farming  Membership Unit Warrants (91,739 Units)        20    5,779    2.3%
               6,016    11,779    4.7%
                           
BigMouth, Inc.  Consumer Products  First Lien Debt (12.6% Cash, Due 11/14/21) (3)   10,313    10,313    10,313    4.1%
                           
BigMouth, Inc.  Consumer Products  Series A Preferred Stock (350,000 shares, 8% PIK) (6)        354    354    0.1%
               10,667    10,667    4.2%
                           
Bluestem Brands, Inc.  Online Merchandise Retailer  First Lien Debt (8.5% Cash (1 month LIBOR + 7.5%, 1% Floor), Due 11/7/20)   4,279    4,169    4,169    1.7%
               4,169    4,169    1.7%
                           
Brock Holdings III, Inc.  Industrial Specialty Services  Second Lien Debt (10% Cash (1 month LIBOR + 8.25%, 1.75% Floor), Due 3/16/18)   5,000    4,935    4,750    1.9%
               4,935    4,750    1.9%
                           
Brunswick Bowling Products, Inc.  Bowling Products  First Lien Debt (8% Cash (1 month LIBOR + 6.0%, 2% Floor), Due 5/22/20)   1,600    1,600    1,600    0.6%
                           
Brunswick Bowling Products, Inc.  Bowling Products  First Lien Debt (16.25% Cash (1 month LIBOR + 14.25%, 2% Floor), Due 5/22/20)   5,586    5,586    5,586    2.2%
                           
Brunswick Bowling Products, Inc.  Bowling Products  Preferred Shares (2,966 shares, 8% PIK) (6)        3,384    5,317    2.1%
               10,570    12,503    4.9%
                           
Burke America Parts Group, LLC  Home Repair Parts Manufacturer  Membership Units (14 units)        5    1,408    0.6%
               5    1,408    0.6%
                           
California Pizza Kitchen, Inc.  Restaurant  Second Lien Debt (11% Cash (1 month LIBOR + 10%, 1% Floor), Due 8/23/23)   5,000    4,857    4,857    1.9%
               4,857    4,857    1.9%
                           
Caregiver Services, Inc.  In-Home Healthcare Services  Common Stock (293,186 shares)        258    137    0.1%
                           
Caregiver Services, Inc.  In-Home Healthcare Services  Common Stock Warrants (655,908 units) (7)        264    309    0.1%
               522    446    0.2%
                           
Cedar Electronics Holding Corp.  Consumer Electronics  Subordinated Debt (12% Cash, Due 12/26/20)   21,550    21,550    20,818    8.3%
               21,550    20,818    8.3%
                           
Community Choice Financial, Inc.  Financial Services  First Lien Debt (18% Cash (1 month LIBOR + 17%, 1% Floor), Due 3/30/18) (1)(8)   15,000    15,000    15,000    6.0%
               15,000    15,000    6.0%
                           
Construction Partners, Inc.  Construction Services  Second Lien Debt (11.5% Cash, Due 6/12/20)   9,500    9,500    9,500    3.8%
               9,500    9,500    3.8%
                           
Corporate Visions, Inc.  Sales & Marketing Services  Subordinated Debt (9% Cash, 2% PIK, Due 11/29/21)   16,267    16,267    15,648    6.2%
                           
Corporate Visions, Inc.  Sales & Marketing Services  Common Stock (15,750 shares)        1,575    728    0.3%
               17,842    16,376    6.5%
                           
CSM Bakery Solutions, LLC  Bakery Supplies Distributor  Second Lien Debt (8.75% Cash (1 month LIBOR + 7.75%, 1% Floor), Due 8/7/22)   12,000    11,813    10,776    4.3%
               11,813    10,776    4.3%
                           
Emerging Markets Communications, LLC  Satellite Communications  Second Lien Debt (10.625% Cash (1 month LIBOR + 9.625%, 1% Floor), Due 7/1/22)   5,000    4,946    5,000    2.0%
               4,946    5,000    2.0%
                           
Flavors Holdings, Inc.  Food Product Manufacturer  First Lien Debt (6.75% Cash (1 month LIBOR + 5.75%, 1% Floor), Due 4/3/20)   7,100    6,930    6,411    2.6%

 

 13 

 

 

Company (4) , (5)  Industry  Type of Investment  Principal
Amount
   Cost   Fair Value   % of
Net Assets
 
                       
Flavors Holdings, Inc.  Food Product Manufacturer  Second Lien Debt (11% Cash (1 month LIBOR + 10%, 1% Floor), Due 10/3/21)   12,000    11,671    10,188    4.1%
               18,601    16,599    6.7%
                           
Group Cirque du Soleil, Inc.  Entertainment  Second Lien Debt (9.25% Cash (3 month LIBOR + 8.25%, 1% Floor), Due 7/8/23) (8)   1,000    988    987    0.4%
               988    987    0.4%
                           
Immersive Media Tactical Solutions, LLC  Specialty Defense Contractor  Subordinated Debt (Due 12/9/19) (9)   2,000    2,000    1,532    0.6%
               2,000    1,532    0.6%
                           
Kelle's Transport Service, LLC  Transportation  First Lien Debt (14% Cash, Due 3/31/19)   13,674    13,668    13,252    5.3%
                           
Kelle's Transport Service, LLC  Transportation  Preferred Units (1,000 units, 10% PIK Dividend) (6)        3,433    3,433    1.4%
                           
Kelle's Transport Service, LLC  Transportation  Common Stock Warrants (15% fully diluted)        22    171    0.1%
               17,123    16,856    6.8%
                           
Medical Depot, Inc.  Medical Device Distributor  Subordinated Debt (14% Cash, Due 9/27/20) (1)   14,667    14,667    14,667    5.9%
                           
Medical Depot, Inc.  Medical Device Distributor  Series C Convertible Preferred Stock (740 shares)        1,333    6,440    2.6%
               16,000    21,107    8.5%
                           
Nielsen & Bainbridge, LLC  Home Décor Manufacturer  Second Lien Debt (10.5% Cash (6 month LIBOR + 9.25%, 1% Floor), Due 8/15/21)   15,000    14,849    14,670    5.9%
               14,849    14,670    5.9%
                           
Nth Degree, Inc.  Business Services  First Lien Debt (8.0% Cash (1 month LIBOR + 7%, 1% Floor), 1% PIK, Due 12/14/20)   9,904    9,904    9,904    4.0%
                           
Nth Degree, Inc.  Business Services  First Lien Debt (12.5% Cash (1 month LIBOR + 11.5%, 1% Floor), 2% PIK, Due 12/14/20)   7,351    7,351    7,351    2.9%
                           
Nth Degree, Inc.  Business Services  Preferred Stock (10% PIK dividend) (6)        2,662    4,581    1.8%
               19,917    21,836    8.7%
                           
Portrait Innovations, Inc.  Professional and Personal Digital Imaging  Subordinated Debt (12% Cash, Due 2/26/20)   9,000    9,000    9,000    3.6%
               9,000    9,000    3.6%
                           
Sequoia Healthcare Management, LLC  Healthcare Management  First Lien Debt (12% Cash, 4% PIK, Due 7/17/19)   10,851    10,750    10,851    4.3%
               10,750    10,851    4.3%
                           
Sierra Hamilton, LLC  Oil & Gas Engineering and Consulting Services  First Lien Debt (12.25% Cash, Due 12/15/18)(2)   15,000    15,000    4,500    1.8%
               15,000    4,500    1.8%
                           
Sur La Table, Inc.  Retail  First Lien Debt (12% Cash, Due 7/28/20)   15,000    15,000    15,000    6.0%
               15,000    15,000    6.0%
                           
Taylor Precision Products, Inc.  Household Product Manufacturer  Series C Preferred Stock (379 shares)        758    1,001    0.4%
               758    1,001    0.4%
                           
U.S. Well Services, LLC  Oil & Gas Services  First Lien Debt (14.1% PIK (1 month LIBOR + 13.5%, 0.5% floor), Due 5/2/19)   15,083    15,054    15,083    6.0%
               15,054    15,083    6.0%
                           
Velum Global Credit Management, LLC  Financial Services  First Lien Debt (15% PIK, Due 12/31/17) (1) (8)   10,553    10,553    10,553    4.2%
               10,553    10,553    4.2%
                           
Vintage Stock, Inc.  Specialty Retail  First Lien Debt (13.1% Cash (1 month LIBOR + 12.5%, 0.5% floor), 3% PIK, Due 11/3/21)   22,067    22,067    22,067    8.8%
               22,067    22,067    8.8%
                           
Vology, Inc.  Information Technology  Subordinated Debt (15% Cash (3 month LIBOR + 14%, 1% Floor, 2% PIK), Due 1/24/21)   8,082    8,082    8,082    3.2%
               8,082    8,082    3.2%
                           
Western Windows Systems, LLC  Building Products  First Lien Debt (11.7% Cash, Due 7/31/20) (3)   10,500    10,500    10,500    4.2%
                           
Western Windows Systems, LLC  Building Products  Membership Units (39,860 units)        3,000    7,652    3.0%
               13,500    18,152    7.2%
                           
Xirgo Technologies, LLC  Information Technology  Subordinated Debt (11.5% Cash, Due 3/1/22)   15,750    15,750    15,750    6.3%
                           
Xirgo Technologies, LLC  Information Technology  Membership Units (400,000 units)        400    400    0.2%
               16,150    16,150    6.5%
                           
Sub Total Non-control/non-affiliated investments   $391,706   $393,525    157.1%
                           
Affiliate investments - 24.5%                
                           
Burgaflex Holdings, LLC  Automobile Part Manufacturer  Subordinated Debt (14% Cash, Due 8/9/19) (10)  $3,000   $3,000   $3,000    1.2%
                           
Burgaflex Holdings, LLC  Automobile Part Manufacturer  Subordinated Debt (12% Cash, Due 8/9/19) (10)   5,828    5,828    5,828    2.3%

 

 14 

 

 

Company (4) , (5)  Industry  Type of Investment  Principal
Amount
   Cost   Fair Value   % of
Net Assets
 
                       
Burgaflex Holdings, LLC  Automobile Part Manufacturer  Common Stock (1,253,198 shares)        1,504    1,248    0.5%
               10,332    10,076    4.0%
                           
City Gear, LLC  Footwear Retail  Subordinated Debt (13% Cash, Due 9/28/17) (1)   8,231    8,231    8,231    3.3%
                           
City Gear, LLC  Footwear Retail  Preferred Membership Units (2.78% fully diluted, 9% Cash Dividend) (6)        1,269    1,269    0.5%
                           
City Gear, LLC  Footwear Retail  Membership Unit Warrants (11.38% fully diluted)        -    9,736    3.9%
               9,500    19,236    7.7%