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 March 31, 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 May 5, 2017 was 15,888,656

 

 

 

 

TABLE OF CONTENTS

 

    Page
     
PART I FINANCIAL INFORMATION 3
     
Item 1. Consolidated Financial Statements 3
     
  Consolidated Statements of Assets and Liabilities as of March 31, 2017 (unaudited) and December 31, 2016 3
     
  Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 (unaudited) 4
     
  Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2017 and 2016 (unaudited) 5
     
  Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 (unaudited) 6
     
  Consolidated Schedules of Investments as of March 31, 2017 (unaudited) and December 31, 2016 7
     
  Notes to Consolidated Financial Statements as of March 31, 2017 (unaudited) 14
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 35
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 53
     
Item 4. Controls and Procedures 54
     
PART II    OTHER INFORMATION 55
     
Item 1. Legal Proceedings 55
     
Item 1A. Risk Factors 55
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 55
     
Item 3. Defaults Upon Senior Securities 55
     
Item 4. Mine Safety Disclosures 55
     
Item 5. Other Information 55
     
Item 6. Exhibits 56
   
Signatures 58

 

 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 
   March 31, 2017   December 31, 2016 
   (unaudited)     
ASSETS          
Investments at fair value          
Non-control/non-affiliate investments (amortized cost of $368,836 and $391,706, respectively)  $364,260   $393,525 
Affiliate investments (amortized cost of $56,043 and $39,279, respectively)   78,454    61,464 
Control investments (amortized cost of $84,407 and $82,791, respectively)   89,764    86,650 
Total investments at fair value (amortized cost of $509,286 and $513,776, respectively)   532,478    541,639 
Cash and cash equivalents   40,564    36,281 
Interest and dividend receivable   5,994    5,735 
Trade settlement receivable   990    - 
Due from related parties   143    182 
Prepaid expenses   441    506 
Other assets   67    72 
Total assets  $580,677   $584,415 
           
LIABILITIES          
SBA debentures (net of deferred financing costs of $2,760 and $2,911, respectively)  $167,940   $167,789 
Notes (net of deferred financing costs of $2,880 and $3,025, respectively)   110,558    110,413 
Credit Facility (net of deferred financing costs of $521 and $759, respectively)   43,479    43,241 
Due to related parties   -    35 
Management and incentive fee payable   3,887    6,426 
Interest and financing fees payable   966    2,657 
Accounts payable and accrued expenses   147    536 
Written call option at fair value (proceeds of $0 and $20, respectively)   4,221    2,736 
Total liabilities  $331,198   $333,833 
           
Commitments and contingencies (Note 2)          
           
NET ASSETS          
Common stock, par value $.01, 100,000,000 common shares authorized, 15,883,492 and 15,868,045 common shares issued and outstanding, respectively  $159   $159 
Additional paid in capital   240,391    240,184 
Undistributed net investment income   22,973    22,973 
Accumulated net realized losses from investments   (33,035)   (37,881)
Net unrealized appreciation on investments   23,192    27,863 
Net unrealized depreciation on written call option   (4,201)   (2,716)
Total net assets  $249,479   $250,582 
Total liabilities and net assets  $580,677   $584,415 
           
Net asset value per share  $15.71   $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 March 31 
   2017   2016 
INVESTMENT INCOME          
Interest and fee income:          
Non-control/non-affiliate investments  $9,638   $10,747 
Affiliate investments   1,044    1,363 
Control investments   1,988    2,854 
Total interest and fee income   12,670    14,964 
Payment-in-kind interest and dividend income:          
Non-control/non-affiliate investments   1,178    878 
Affiliate investments   231    95 
Control investments   246    231 
Total payment-in-kind interest and dividend income   1,655    1,204 
Dividend income:          
Non-control/non-affiliate investments   168    205 
Affiliate investments   29    29 
Control investments   280    1,045 
Total dividend income   477    1,279 
Interest income from cash and cash equivalents   13    2 
Total investment income   14,815    17,449 
           
EXPENSES          
Interest and financing expenses   4,653    5,023 
Base management fee   2,514    2,728 
Incentive fees   1,308    1,706 
General and administrative expenses   1,107    1,168 
Expenses before incentive fee waiver   9,582    10,625 
Incentive fee waiver (See Note 6)   (958)   (597)
Total expenses, net of fee waivers   8,624    10,028 
           
NET INVESTMENT INCOME   6,191    7,421 
           
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND WRITTEN CALL OPTION:          
Net realized gain (loss) from investments:          
Non-control/non-affiliate investments   4,831    - 
Affiliate investments   15    (2,262)
Total realized gain (loss) from investments   4,846    (2,262)
Net unrealized depreciation on investments   (4,671)   (9,348)
Net unrealized depreciation on written call option   (1,485)   - 
Net loss on investments and written call option   (1,310)   (11,610)
           
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS  $4,881   $(4,189)
           
NET INCREASE (DECREASE) IN NET ASSETS PER SHARE RESULTING FROM OPERATIONS – BASIC AND DILUTED  $0.31   $(0.27)
           
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING - BASIC AND DILUTED   15,873,655    15,785,943 
           
DISTRIBUTIONS PAID PER SHARE  $0.39   $0.47 

 

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 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   -    -    -    7,421    -    -    -    7,421 
Net realized loss from investments   -    -    -    -    (2,262)   -    -    (2,262)
Net change in unrealized depreciation on investments   -    -    -    -    -    (9,348)   -    (9,348)
Distributions to Shareholders:                                        
Stock issued under dividend reinvestment plan   22,290    -    227    -    -    -    -    227 
Distributions declared   -    -    -    (7,421)   -    -    -    (7,421)
BALANCE, March 31, 2016   15,799,635   $158   $239,331   $8,570   $(3,561)  $12,921   $-   $257,419 
                                         
BALANCE, December 31, 2016   15,868,045   $159   $240,184   $22,973   $(37,881)  $27,863   $(2,716)  $250,582 
Net investment income   -    -    -    6,191    -    -    -    6,191 
Net realized gain from investments   -    -    -    -    4,846    -    -    4,846 
Net change in unrealized depreciation on investments   -    -    -    -    -    (4,671)   -    (4,671)
Net change in unrealized depreciation on written call option   -    -    -    -    -    -    (1,485)   (1,485)
Distributions to Shareholders:                                        
Stock issued under dividend reinvestment plan   15,447    -    207    -     -    -    -    207 
Distributions declared   -    -    -    (6,191)   -    -    -    (6,191)
BALANCE, March 31, 2017   15,883,492    $159    $240,391    $22,973   $ (33,035)   $23,192    (4,201)  $249,479 

 

See accompanying notes to consolidated financial statements.

 

 5 

 

 

Capitala Finance Corp.

 

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

   For the Three Months Ended March 31 
   2017   2016 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net increase (decrease) in net assets resulting from operations  $4,881   $(4,189)
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:          
Purchase of investments   (21,708)   (27,523)
Repayments and sales of investments   33,049    10,186 
Net realized (gain) loss on investments   (4,846)   2,262 
Net unrealized depreciation on investments   4,671    9,348 
Payment-in-kind interest and dividends   (1,655)   (1,204)
Accretion of original issue discount on investments   (350)   (354)
Net unrealized depreciation on written call option   1,485    - 
Amortization of deferred financing fees   534    535 
Changes in assets and liabilities:          
Interest and dividend receivable   (259)   (1,147)
Trade settlement receivable   (990)   - 
Due from related parties   39    - 
Prepaid expenses   65    117 
Other assets   5    29 
Due to related parties   (35)   (2)
Management and incentive fee payable   (2,539)   681 
Interest and financing fees payable   (1,691)   (1,837)
Accounts payable and accrued expenses   (389)   (467)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES   10,267    (13,565)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Paydowns on SBA debentures   -    (2,000)
Proceeds from Credit Facility   -    3,000 
Distributions paid to shareholders   (5,984)   (7,194)
NET CASH USED IN FINANCING ACTIVITIES   (5,984)   (6,194)
           
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   4,283    (19,759)
CASH AND CASH EQUIVALENTS, beginning of period   36,281    34,105 
CASH AND CASH EQUIVALENTS, end of period  $40,564   $14,346 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION          
Cash paid for interest  $5,582   $6,217 
           
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS          
Distributions paid through dividend reinvestment plan share issuances  $207   $227 

 

See accompanying notes to consolidated financial statements.

 

 6 

 

 

Capitala Finance Corp.

 

Consolidated Schedule of Investments

(in thousands, except for units/shares)

March 31, 2017

(unaudited)

 

Company (4) , (5)  Industry  Type of Investment  Principal
Amount
   Cost   Fair Value   % of
Net Assets
 
                       
Non-control/non-affiliated investments - 146.0%                    
                           
AAE Acquisition, LLC  Industrial Equipment Rental  Second Lien Debt (12% Cash, Due 3/31/18)  $11,000   $11,000   $10,560    4.2%
                           
AAE Acquisition, LLC  Industrial Equipment Rental  Membership Units (14% fully diluted)        17    -    0.0%
                           
               11,017    10,560    4.2%
                           
American Clinical Solutions, LLC  Healthcare  First Lien Debt (10.5% Cash (3 month LIBOR + 9.5%, 1% Floor), Due 6/11/20)   9,034    9,034    8,649    3.5%
                           
               9,034    8,649    3.5%
                           
American Exteriors, LLC  Replacement Window Manufacturer  First Lien Debt (10% PIK, Due 1/1/19) (1) (2)   6,620    4,678    2,756    1.1%
                           
American Exteriors, LLC  Replacement Window Manufacturer  Common Stock Warrants (10% fully diluted)        -    -    0.0%
                           
               4,678    2,756    1.1%
                           
AmeriMark Direct, LLC  Consumer Products  First Lien Debt (12.75% Cash, Due 9/8/21)   19,550    19,072    19,550    7.8%
                           
               19,072    19,550    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    6,695    2.7%
                           
               6,016    12,695    5.1%
                           
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)        361    602    0.2%
                           
               10,674    10,915    4.3%
                           
Bluestem Brands, Inc.  Online Merchandise Retailer  First Lien Debt (8.5% Cash (1 month LIBOR + 7.5%, 1% Floor), Due 11/7/20)   4,217    4,115    4,115    1.6%
                           
               4,115    4,115    1.6%
                           
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    0.6%
                           
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)        3,453    6,139    2.5%
                           
               10,639    13,325    5.3%
                           
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    4,862    4,862    1.9%
                           
               4,862    4,862    1.9%
                           
Caregiver Services, Inc.  In-Home Healthcare Services  Common Stock (293,186 shares)        258    62    0.0%
                           
Caregiver Services, Inc.  In-Home Healthcare Services  Common Stock Warrants (655,908 units) (7)        264    138    0.1%
                           
               522    200    0.1%
                           
Cedar Electronics Holding Corp.  Consumer Electronics  Subordinated Debt (12% Cash, Due 12/26/20) (13)   21,550    21,550    20,245    8.1%
                           
               21,550    20,245    8.1%
                           
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)   16,349    16,349    15,056    6.0%
                           
Corporate Visions, Inc.  Sales & Marketing Services  Common Stock (15,750 shares)        1,575    666    0.3%
                           
               17,924    15,722    6.3%
                           
CSM Bakery Solutions, LLC  Bakery Supplies Distributor  Second Lien Debt (8.76% Cash (1 month LIBOR + 7.75%, 1% Floor), Due 8/7/22)   12,000    11,821    10,500    4.2%
                           
               11,821    10,500    4.2%
                           
Currency Capital, LLC  Financial Services  First Lien Debt (11.81% Cash (1 month LIBOR + 11.00%, 0.50% Floor) Due 1/20/22) (8)   16,000    16,000    16,000    6.4%
                           
Currency Capital, LLC  Financial Services  Class A Preferred Units (2,000,000 units)        2,000    2,000    0.8%
                           
               18,000    18,000    7.2%
                           
Flavors Holdings, Inc.  Food Product Manufacturer  First Lien Debt (6.90% Cash (3 month LIBOR + 5.75%, 1% Floor), Due 4/3/20)   7,000    6,845    6,312    2.6%
                           
Flavors Holdings, Inc.  Food Product Manufacturer  Second Lien Debt (11.15% Cash (3 month LIBOR + 10%, 1% Floor), Due 10/3/21)   12,000    11,688    10,239    4.1%
                           
               18,533    16,551    6.7%
                           
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    13,669    12,982    5.2%
                           
Kelle's Transport Service, LLC  Transportation  Preferred Units (1,000 units)        3,433    -    0.0%
                           
Kelle's Transport Service, LLC  Transportation  Common Stock Warrants (15% fully diluted)        22    -    0.0%
                           
               17,124    12,982    5.2%
                           
Medical Depot, Inc.  Medical Device Distributor  Series C Convertible Preferred Stock (740 shares)(12)        -    136    0.1%
                           
               -    136    0.1%
                           
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    14,857    15,000    6.0%
                           
               14,857    15,000    6.0%

 

 7 

 

 

Capitala Finance Corp.

 

Consolidated Schedule of Investments

(in thousands, except for units/shares)

March 31, 2017

(unaudited)

 

Company (4) , (5)  Industry  Type of Investment  Principal
Amount
   Cost   Fair Value   % of
Net Assets
 
                       
Nth Degree, Inc.  Business Services  First Lien Debt (8% Cash (1 month LIBOR + 7%, 1% Floor), 1% PIK, Due 12/14/20)   9,929    9,929    9,929    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)   7,387    7,387    7,387    3.1%
                           
Nth Degree, Inc.  Business Services  Preferred Stock (10% PIK dividend) (6)        2,728    6,321    2.5%
                           
               20,044    23,637    9.6%
                           
Portrait Innovations, Inc.  Professional and Personal Digital Imaging  Subordinated Debt (12% Cash, Due 2/26/20)   9,000    9,000    8,974    3.6%
                           
               9,000    8,974    3.6%
                           
Sequoia Healthcare Management, LLC  Healthcare Management  First Lien Debt (12% Cash, 4% PIK, Due 7/17/19)   10,544    10,457    10,544    4.2%
                           
               10,457    10,544    4.2%
                           
Sierra Hamilton, LLC  Oil & Gas Engineering and Consulting Services  First Lien Debt (9% Cash (1 Month LIBOR + 8.00%, 1.00% Floor), Due 6/13/17)   1,214    1,214    1,214    0.5%
                           
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%
                           
               16,214    5,714    2.3%
                           
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%
                           
Velum Global Credit Management, LLC  Financial Services  First Lien Debt (15% PIK, Due 12/31/17) (1) (8)   10,954    10,954    10,954    4.4%
                           
               10,954    10,954    4.4%
                           
Vintage Stock, Inc.  Specialty Retail  First Lien Debt (13.28% Cash (1 month LIBOR + 12.5%, 0.5% floor), 3% PIK, Due 11/3/21)   21,693    21,693    21,693    8.7%
                           
               21,693    21,693    8.7%
                           
Vology, Inc.  Information Technology  Subordinated Debt (15% Cash (3 month LIBOR + 14%, 1% Floor), 2% PIK Due 1/24/21)   8,123    8,123    8,123    3.3%
                           
               8,123    8,123    3.3%
                           
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    7,767    3.0%
                           
               13,500    18,267    7.2%
                           
Xirgo Technologies, LLC  Information Technology  Subordinated Debt (11.5% Cash, Due 3/1/22)   15,750    15,750    15,750    6.4%
                           
Xirgo Technologies, LLC  Information Technology  Membership Units (400,000 units)        400    400    0.2%
                           
               16,150    16,150    6.6%
                           
Sub Total Non-control/non-affiliated investments          $368,836   $364,260    146.0%
                           
Affiliate investments - 31.4%                          
                           
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%
                           
Burgaflex Holdings, LLC  Automobile Part Manufacturer  Common Stock (1,253,198 shares)        1,503    1,307    0.5%
                           
               10,331    10,135    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)        -    9,760    3.9%
                           
               9,500    19,260    7.7%
                           
GA Communications, Inc.  Advertising & Marketing Services  Series A-1 Preferred Stock (1,998 shares, 8% PIK dividend) (6)        2,709    3,043    1.2%
                           
GA Communications, Inc.  Advertising & Marketing Services  Series B-1 Common Stock (200,000 shares)        2    882    0.4%
                           
               2,711    3,925    1.6%
                           
J&J Produce Holdings, Inc.  Produce Distribution  Subordinated Debt (13% Cash, Due 7/16/18)   6,182    6,182    6,150    2.5%
                           
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%
                           
               7,000    6,150    2.5%
                           
LJS Partners, LLC  QSR Franchisor  Common Stock (1,500,000 shares)        1,525    8,581    3.4%
                           
               1,525    8,581    3.4%
                           
MJC Holdings, LLC  Specialty Clothing  Series A Preferred Units (2,000,000 units)        1,000    5,011    2.0%
                           
               1,000    5,011    2.0%
                           
MMI Holdings, LLC  Medical Device Distributor  First Lien Debt (12% Cash, Due 1/31/18) (1)   2,600    2,600    2,600    1.0%
                           
MMI Holdings, LLC  Medical Device Distributor  Subordinated Debt (6% Cash, Due 1/31/18) (1)   400    388    400    0.2%
                           
MMI Holdings, LLC  Medical Device Distributor  Preferred Units (1,000 units, 6% PIK dividend) (6)        1,307    1,454    0.6%
                           
MMI Holdings, LLC  Medical Device Distributor  Common Membership Units (45 units)        -    201    0.1%
                           
               4,295    4,655    1.9%
                           
MTI Holdings, LLC  Retail Display & Security Services  Membership Units (2,000,000 units) (12)        -    537    0.2%
                           
               -    537    0.2%

 

 8 

 

 

Capitala Finance Corp.

 

Consolidated Schedule of Investments

(in thousands, except for units/shares)

March 31, 2017

(unaudited)

 

Company (4) , (5)  Industry  Type of Investment  Principal
Amount
   Cost   Fair Value   % of
Net Assets
 
                       
Source Capital Penray, LLC  Automotive Chemicals & Lubricants  Subordinated Debt (13% Cash, Due 4/8/19) (1)   1,425    1,425    1,425    0.6%
                           
Source Capital Penray, LLC  Automotive Chemicals & Lubricants  Membership Units (11.3% ownership)        750    973    0.4%
                           
               2,175    2,398    1.0%
                           
STX Healthcare Management Services, Inc.  Dental Practice Management  Common Stock (1,200,000 shares) (12)        -    93    0.0%
                           
               -    93    0.0%
                           
U.S. Well Services, LLC  Oil & Gas Services  First Lien Debt (7% Cash (1 month LIBOR + 6%, 1% floor), Due 1/31/22) (14)   1,311    1,311    1,311    0.5%
                           
U.S. Well Services, LLC  Oil & Gas Services  First Lien Debt (12% PIK (1 month LIBOR + 11%, 1% floor), Due 1/31/22)   8,681    8,681    8,681    3.5%
                           
U.S. Well Services, LLC  Oil & Gas Services  Class A Units (5,680,688 Units)        6,260    6,260    2.5%
                           
U.S. Well Services, LLC  Oil & Gas Services  Class B Units (2,076,298 Units)        441    441    0.2%
                           
               16,693    16,693    6.7%
                           
V12 Holdings, Inc.  Data Processing & Digital Marketing  Subordinated Debt (12)        813    1,016    0.4%
                           
               813    1,016    0.4%
                           
Sub Total Affiliate investments             $56,043   $78,454    31.4%
                           
Control investments- 36.0%                          
                           
CableOrganizer Acquisition, LLC  Computer Supply Retail  First Lien Debt (12% Cash, 4% PIK, Due 5/24/18)   12,001   $12,001   $12,001    4.9%
                           
CableOrganizer Acquisition, LLC  Computer Supply Retail  Common Stock (19.7% fully diluted ownership)        1,394    -    0.0%
                           
CableOrganizer Acquisition, LLC  Computer Supply Retail  Common Stock Warrants (10% fully diluted ownership)        -    -    0.0%
                           
               13,395    12,001    4.9%
                           
Eastport Holdings, LLC  Business Services  Subordinated Debt (14.1% Cash (3 month LIBOR + 13%, 0.5% Floor), Due 4/29/20)   16,500    14,169    16,500    6.6%
                           
Eastport Holdings, LLC  Business Services  Membership Units (30.1% fully diluted) (11)        4,733    18,148    7.3%
                           
               18,902    34,648    13.9%
                           
Micro Precision, LLC  Conglomerate  Subordinated Debt (10% Cash, Due 9/15/18) (1)   1,862    1,862    1,862    0.8%
                           
Micro Precision, LLC  Conglomerate  Subordinated Debt (14% Cash, 4% PIK, Due 9/15/18) (1)   4,029    4,029    4,029    1.6%
                           
Micro Precision, LLC  Conglomerate  Series A Preferred Units (47 units)        1,629    2,566    1.0%
                           
               7,520    8,457    3.4%
                           
Navis Holdings, Inc.  Textile Equipment Manufacturer  First Lien Debt (15% Cash, Due 10/30/20) (1)   6,500    6,500    6,500    2.6%
                           
Navis Holdings, Inc.  Textile Equipment Manufacturer  Class A Preferred Stock (1,000 shares, 10% Cash Dividend) (6)        1,000    1,000    0.4%
                           
Navis Holdings, Inc.  Textile Equipment Manufacturer  Common Stock (300,000 shares)        1    5,486    2.2%
                           
               7,501    12,986    5.2%
                           
On-Site Fuel Services, Inc.  Fuel Transportation Services  Subordinated Debt (14% Cash, 4% PIK, Due 12/19/17) (1) (2)   11,596    11,020    11,485    4.6%
                           
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    11,485    4.6%
                           
Print Direction, Inc.  Printing Services  First Lien Debt (10% Cash, 2% PIK, Due 2/24/19)   17,403    17,403    10,187    4.0%
                           
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%
                           
               20,393    10,187    4.0%
                           
Sub Total Control investments             $84,407   $89,764    36.0%
                           
TOTAL INVESTMENTS - 213.4%             $509,286   $532,478    213.4%
                           
Derivatives - (1.7)%                          
                           
Eastport Holdings, LLC  Business Services  Written Call Option (11)       $(20)  $(4,221)   (1.7)%
                           
TOTAL DERIVATIVES- (1.7)%             $(20)  $(4,221)   (1.7)%

 

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

(2) Non-accrual investment.

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

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

(5) Percentages are based on net assets of $249,479 as of March 31, 2017.

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

(7) The equity investment has an exercisable put option.

(8) 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 March 31, 2017, 7.2% of the Company's total assets were non-qualifying assets.

(9) 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.

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

(11) 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 March 31, 2017, the fair value of the written call option is approximately $4.2 million. See Note 4 to the consolidated financial statements for further detail on the written call option transaction.

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

(13) The Company has accrued 50% of contractual interest as the portfolio company is undergoing amendments to senior and subordinated loans outstanding.

(14) The investment has a $0.8 million unfunded commitment.

 

See accompanying notes to consolidated financial statements.

 

 9 

 

 

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%

 

 10 

 

 

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
 
                       
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%
                           
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%