UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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Commission file number: |
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(Exact Name of Registrant as Specified in its Charter) |
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(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
(Address of Principal Executive Offices, Including Zip Code) |
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(Registrant’s Telephone Number, Including Area Code) |
Not Applicable |
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) |
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
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Trading symbol(s) |
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Name of Each Exchange on Which |
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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.
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No ¨ |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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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.
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Large accelerated filer |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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Yes ¨ |
No |
The number of shares of Logan Ridge Finance Corporation’s common stock, $0.01 par value, outstanding as of August 5, 2024 was
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LOGAN RIDGE FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(in thousands, except share and per share data)
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As of June 30, |
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As of December 31, |
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(unaudited) |
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ASSETS |
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Investments at fair value: |
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Non-control/non-affiliate investments (amortized cost of $ |
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$ |
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$ |
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Affiliate investments (amortized cost of $ |
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Total investments at fair value (amortized cost of $ |
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Cash and cash equivalents |
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Interest and dividend receivable |
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Prepaid expenses |
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Other assets |
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— |
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Total assets |
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$ |
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$ |
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LIABILITIES |
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2026 Notes (net of deferred financing costs and original issue discount of $ |
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$ |
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$ |
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2032 Convertible Notes (net of deferred financing costs and original issue discount of $ |
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KeyBank Credit Facility (net of deferred financing costs of $ |
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Management and incentive fees payable |
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Interest and financing fees payable |
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Accounts payable and accrued expenses |
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Payable for unsettled trades |
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— |
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Total liabilities |
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$ |
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$ |
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(Note 2) |
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NET ASSETS |
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Common stock, par value $ |
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$ |
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$ |
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Capital in excess of par value |
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Total distributable loss |
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( |
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( |
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Total net assets |
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$ |
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$ |
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Total liabilities and net assets |
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$ |
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$ |
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Net asset value per share |
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$ |
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$ |
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See accompanying notes to consolidated financial statements
3
LOGAN RIDGE FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
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For the Three Months Ended June 30, |
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For the Six Months Ended June 30, |
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2024 |
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2023 |
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2024 |
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2023 |
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INVESTMENT INCOME |
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Interest income: |
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Non-control/non-affiliate investments |
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$ |
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$ |
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$ |
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$ |
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Affiliate investments |
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Total interest income |
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Payment-in-kind interest and dividend income: |
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Non-control/non-affiliate investments |
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(1) |
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Affiliate investments |
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Total payment-in-kind interest and dividend income |
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Dividend income: |
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Affiliate investments |
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Total dividend income |
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Other income: |
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Non-control/non-affiliate investments |
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Affiliate investments |
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— |
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— |
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Total other income |
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Total investment income |
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EXPENSES |
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Interest and financing expenses |
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Base management fee |
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Directors' expense |
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Administrative service fees |
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General and administrative expenses |
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Total expenses |
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NET INVESTMENT INCOME |
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REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS |
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Net realized gain (loss) on investments: |
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Non-control/non-affiliate investments |
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( |
) |
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( |
) |
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( |
) |
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Net realized gain (loss) on investments |
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( |
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( |
) |
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( |
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Net change in unrealized appreciation (depreciation) on investments: |
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Non-control/non-affiliate investments |
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( |
) |
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( |
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( |
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Affiliate investments |
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Net change in unrealized appreciation (depreciation) on investments |
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( |
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( |
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Total net realized and change in unrealized gain (loss) on investments |
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( |
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( |
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Net realized loss on extinguishment of debt |
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( |
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— |
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( |
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— |
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NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS |
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$ |
( |
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$ |
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$ |
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$ |
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NET INCREASE (DECREASE) IN NET ASSETS PER SHARE RESULTING |
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$ |
( |
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$ |
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$ |
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$ |
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WEIGHTED AVERAGE COMMON STOCK OUTSTANDING |
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NET INCREASE (DECREASE) IN NET ASSETS PER SHARE RESULTING |
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$ |
( |
) |
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$ |
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$ |
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$ |
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WEIGHTED AVERAGE COMMON STOCK OUTSTANDING |
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DISTRIBUTIONS PAID PER SHARE |
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$ |
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$ |
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$ |
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$ |
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See accompanying notes to consolidated financial statements.
4
LOGAN RIDGE FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(in thousands, except share data)
(unaudited)
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Common Stock |
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Additional |
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Total |
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Number of |
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Paid in |
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Distributable |
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For the Three Months Ended June 30, 2024 and 2023 |
Shares |
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Par Value |
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Capital |
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Loss |
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Total |
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BALANCE, March 31, 2024 |
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$ |
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$ |
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$ |
( |
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$ |
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Net investment income |
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— |
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— |
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— |
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Net realized loss on investments |
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— |
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— |
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— |
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( |
) |
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( |
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Net realized loss on extinguishment of debt |
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— |
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— |
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— |
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( |
) |
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( |
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Net change in unrealized depreciation on investments |
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— |
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— |
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— |
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( |
) |
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( |
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Stock issued under dividend reinvestment plan |
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— |
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— |
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Distributions declared |
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— |
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— |
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— |
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( |
) |
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( |
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BALANCE, June 30, 2024 |
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$ |
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$ |
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$ |
( |
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$ |
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BALANCE, March 31, 2023 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Net investment income |
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— |
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— |
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— |
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Net realized loss on investments |
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— |
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— |
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— |
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( |
) |
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( |
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Net change in unrealized appreciation on investments |
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— |
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— |
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— |
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Repurchase of common stock |
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( |
) |
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— |
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( |
) |
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— |
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( |
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Stock issued under dividend reinvestment plan |
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— |
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— |
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Distributions declared |
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— |
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— |
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— |
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( |
) |
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( |
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BALANCE, June 30, 2023 |
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$ |
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$ |
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$ |
( |
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$ |
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Common Stock |
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Additional |
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Total |
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Number of |
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Paid in |
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Distributable |
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For the Six Months Ended June 30, 2024 and 2023 |
Shares |
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Par Value |
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Capital |
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Loss |
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Total |
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BALANCE, December 31, 2023 |
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$ |
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$ |
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$ |
( |
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$ |
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Net investment income |
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— |
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— |
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— |
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Net realized gain on investments |
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— |
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— |
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— |
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Net realized loss on extinguishment of debt |
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— |
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— |
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— |
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( |
) |
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( |
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Net change in unrealized depreciation on investments |
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— |
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— |
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— |
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( |
) |
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( |
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Issuance of common stock in debt conversion |
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— |
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— |
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Repurchase of common stock |
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( |
) |
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— |
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( |
) |
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— |
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( |
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Stock issued under dividend reinvestment plan |
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— |
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— |
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Distributions declared |
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— |
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— |
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— |
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( |
) |
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( |
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BALANCE, June 30, 2024 |
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$ |
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$ |
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$ |
( |
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$ |
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BALANCE, December 31, 2022 |
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$ |
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$ |
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$ |
( |
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$ |
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Net investment income |
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— |
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— |
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— |
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Net realized loss on investments |
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— |
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— |
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— |
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( |
) |
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( |
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Net change in unrealized appreciation on investments |
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— |
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— |
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— |
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Repurchase of common stock |
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( |
) |
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— |
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( |
) |
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— |
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( |
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Stock issued under dividend reinvestment plan |
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— |
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— |
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Distributions declared |
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— |
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— |
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— |
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( |
) |
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( |
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BALANCE, June 30, 2023 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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See accompanying notes to consolidated financial statements.
5
LOGAN RIDGE FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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For the Six Months Ended June 30, |
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2024 |
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2023 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net increase (decrease) in net assets resulting from operations |
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$ |
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$ |
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Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash (used in) provided by operating activities: |
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Purchase of investments |
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( |
) |
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( |
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Repayments and sales of investments |
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Net realized (gain) loss on investments |
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( |
) |
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Net realized loss on extinguishment of debt |
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— |
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Net change in unrealized (appreciation) depreciation on investments |
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( |
) |
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Payment-in-kind interest and dividends |
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( |
) |
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( |
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Accretion of original issue discount on investments |
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( |
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( |
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Amortization of deferred financing fees and original issue discount |
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Changes in assets and liabilities: |
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Interest and dividend receivable |
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( |
) |
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( |
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Prepaid expenses |
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Other assets |
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( |
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Management and incentive fees payable |
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Interest and financing fees payable |
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Payable for unsettled trades |
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( |
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— |
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Accounts payable and accrued expenses |
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES |
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( |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Repayment of 2032 Convertible Notes |
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( |
) |
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— |
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Borrowings under KeyBank Credit Facility |
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Repayments under KeyBank Credit Facility |
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( |
) |
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( |
) |
Distributions paid to shareholders |
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( |
) |
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( |
) |
Repurchase of common stock |
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( |
) |
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( |
) |
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
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( |
) |
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
|
|
|
( |
) |
|
CASH AND CASH EQUIVALENTS, beginning of period |
|
|
|
|
|
|
||
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
|
|
$ |
|
||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
|
|
|
|
|
|
||
Cash paid for interest |
|
$ |
|
|
$ |
|
||
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND |
|
|
|
|
|
|
||
Issuance of common stock on our convertible debt |
|
$ |
|
|
$ |
— |
|
|
Distributions paid through dividend reinvestment plan share issuances |
|
$ |
|
|
$ |
|
||
See accompanying notes to consolidated financial statements.
6
LOGAN RIDGE FINANCE CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
(in thousands, except for units/shares)
June 30, 2024
(unaudited)
Investment (1), (2), (3), (4), (5) |
|
Industry |
|
Interest Rate (+) |
|
Reference Rate |
|
Floor (+) |
|
Maturity |
|
Par/Shares (++) |
|
|
Cost |
|
|
Fair Value |
|
|
Footnotes |
|||
Investments in Non-Control, Non-Affiliate Portfolio Companies - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
First Lien/Senior Secured Debt - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Accordion Partners LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
$ |
|
|
$ |
|
|
(16) |
|||||||
Accordion Partners LLC (Revolver) |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(12) |
|||||||
Accurate Background, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
AIDC Intermediateco 2, LLC (Peak Technologies) |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
American Academy Holdings, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
American Clinical Solutions |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
AP Core Holdings II, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
AP Core Holdings II, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Astro Acquisition, LLC (Cooper Machinery Services) |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
BetaNXT, Inc. |
|
|
|
SOFR + |
|
— |
|
|
|
|
|
|
|
|
|
|
|
(16) |
||||||
BetaNXT, Inc. (Revolver) |
|
|
|
SOFR + |
|
— |
|
|
|
|
|
|
|
|
|
|
|
(12) |
||||||
Bradshaw International, Inc. |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Bradshaw International, Inc. (Revolver) |
|
|
— |
|
SOFR + |
|
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
(12)(17) |
|||
Critical Nurse Staffing, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Critical Nurse Staffing, LLC (Revolver) |
|
|
— |
|
SOFR + |
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
|
(12)(17) |
||||
Datalink, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Dentive, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Dentive, LLC (Revolver) |
|
|
— |
|
SOFR + |
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
(12)(17) |
||||
Dodge Data & Analytics LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Epic Staffing Group |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Florida Food Products, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Fortis Payment Systems, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(12)(16) |
|||||||
Hudson Hospital OpCo, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
HUMC Opco, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
H.W. Lochner, Inc. |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
IDC Infusion Services LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(12)(16) |
|||||||
IJKG OpCo, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
JO ET Holdings Limited |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Keg Logistics LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Keg Logistics LLC (Revolver) |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Material Handling Systems, Inc. |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Money Transfer Acquisition Inc. |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Morae Global Corporation |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Morae Global Corporation (Revolver) |
|
|
— |
|
SOFR + |
|
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
(12)(17) |
|||
Neptune BidCo US Inc. |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Orthopaedic (ITC) Buyer, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(12)(16) |
|||||||
PhyNet Dermatology LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(12)(16) |
|||||||
Premier Imaging, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
RN Enterprises, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Sequoia Healthcare Management LLC |
|
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
(7) |
|||||
South Street Securities Holdings, Inc. |
|
|
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
STG Logistics |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Synamedia Americas Holdings, Inc. |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Tactical Air Support, Inc. |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(12)(16) |
|||||||
Taoglas Group Holdings Limited |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Taoglas Group Holdings Limited (Revolver) |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(12)(16) |
|||||||
TransNetwork LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
VBC Spine Opco LLC (DxTx Pain and Spine LLC) |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(12)(16) |
|||||||
VBC Spine Opco LLC (DxTx Pain and Spine LLC)(Revolver) |
|
|
— |
|
SOFR + |
|
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
(12)(17) |
|||
Wealth Enhancement Group, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Wealth Enhancement Group, LLC (Revolver) |
|
|
— |
|
SOFR + |
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
(12)(17) |
|||
Total First Lien/Senior Secured Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Second Lien/Senior Secured Debt - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
American Academy Holdings, LLC |
|
|
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
BLST Operating Company, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(8)(16) |
|||||||
Ivanti Software, Inc. |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total Second Lien/Senior Secured Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Subordinated Debt - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
DeltaDx Limited, LP (Money Transfer Acquisition Inc.) |
|
|
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Eastport Holdings, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Lucky Bucks, LLC |
|
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
(7) |
|||||
Tubular Textile Machinery, Inc. |
|
|
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total Subordinated Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Collateralized Loan Obligations - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
JMP Credit Advisors CLO IV Ltd. |
|
|
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
(13)(15) |
||||||
JMP Credit Advisors CLO V Ltd. |
|
|
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
(13)(15) |
||||||
Total Collateralized Loan Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Preferred Stock and Units - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
American Academy Holdings, LLC |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
— |
|
|
|
|
|
(6) |
|||
MicroHoldco, LLC |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
(11) |
||||
Taylor Precision Products, Inc. |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
||||
Total Preferred Stock and Units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
See accompanying notes to consolidated financial statements.
7
LOGAN RIDGE FINANCE CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS - CONTINUED
(in thousands, except for units/shares)
June 30, 2024
(unaudited)
Investment (1), (2), (3), (4), (5) |
|
Industry |
|
Interest Rate (+) |
|
Reference Rate |
|
Floor (+) |
|
Maturity |
|
Par/Shares (++) |
|
|
Cost |
|
|
Fair Value |
|
|
Footnotes |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Common Stock and Membership Units - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
American Academy Holdings, LLC |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
— |
|
|
|
|
|
(6) |
|||
American Clinical Solutions, LLC - Class A |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
(6) |
||||
Aperture Dodge 18 LLC |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
||||
BLST Operating Company, LLC - Class A |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
(6) |
||||
DxTx Pain and Spine LLC |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
(6) |
||||
Freedom Electronics, LLC |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
(6) |
||||
Lucky Bucks, LLC |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
||||
Morae Global Corporation - Warrants |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
||||
South Street Securities Holdings, Inc. - Warrants |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
||||
Total Common Stock and Membership Units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total Investments in Non-Control, Non-Affiliate Portfolio Companies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Investments in Affiliated Portfolio Companies - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
First Lien/Senior Secured Debt - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
MMI Holdings, LLC |
|
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
(7) |
|||||
Riddell, Inc. |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(12)(16) |
|||||||
Total First Lien/Senior Secured Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Second Lien/Senior Secured Debt - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
MMI Holdings, LLC |
|
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
(7) |
|||||
V12 Holdings, Inc. |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
(11) |
||||
Total Second Lien/Senior Secured Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Joint Ventures - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Great Lakes Funding II LLC - Series A |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
(12)(15) |
||||
Total Joint Ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Preferred Stock and Units - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
EBSC Holdings LLC (Riddell, Inc.) |
|
|
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
(14) |
|||||
GA Communications, Inc. - Series A-1 |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
||||
GreenPark Infrastructure, LLC - Series A |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
(6) |
||||
MMI Holdings, LLC |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
(6) |
||||
RAM Payment, LLC |
|
|
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
(14) |
|||||
Total Preferred Stock and Units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Common Stock and Membership Units - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Burgaflex Holdings, LLC |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
(6) |
||||
Burgaflex Holdings, LLC |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
(6) |
||||
GA Communications, Inc. - Series B-1 |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
||||
GreenPark Infrastructure, LLC - Series M-1 |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
(6)(12) |
||||
MMI Holdings, LLC |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
— |
|
|
|
— |
|
|
(6) |
||
Nth Degree Investment Group, LLC |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
||||
Sierra Hamilton Holdings Corporation |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
||||
Total Common Stock and Membership Units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total Investments in Affiliated Portfolio Companies^ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total Investments - |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
|
|||||
^
^^ As defined in the 1940 Act, the investment is deemed to be a “controlled affiliated person” of the Company because the Company owns, either directly or indirectly,
(+)
(++)
See accompanying notes to consolidated financial statements.
8
LOGAN RIDGE FINANCE CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
(in thousands, except for units/shares)
December 31, 2023
Investment (1), (2), (3), (4), (5) |
|
Industry |
|
Interest Rate (+) |
|
Reference Rate |
|
Floor (+) |
|
Maturity |
|
Par/Shares (++) |
|
|
Cost |
|
|
Fair Value |
|
|
Footnotes |
|||
Investments in Non-Control, Non-Affiliate Portfolio Companies - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
First Lien/Senior Secured Debt - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Accordion Partners LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
$ |
|
|
$ |
|
|
(16) |
|||||||
Accordion Partners LLC (Revolver) |
|
|
— |
|
SOFR + |
|
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
(12)(17) |
|||
Accurate Background, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
AIDC Intermediateco 2, LLC (Peak Technologies) |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
American Academy Holdings, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
American Clinical Solutions, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(12) |
|||||||
AP Core Holdings II, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
AP Core Holdings II, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
BetaNXT, Inc. |
|
|
|
SOFR + |
|
— |
|
|
|
|
|
|
|
|
|
|
|
(16) |
||||||
BetaNXT, Inc. (Revolver) |
|
|
|
SOFR + |
|
— |
|
|
|
|
|
|
|
|
|
|
|
(12) |
||||||
Bradshaw International, Inc. |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Bradshaw International, Inc. (Revolver) |
|
|
— |
|
SOFR + |
|
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
(12)(17) |
|||
Critical Nurse Staffing, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Critical Nurse Staffing, LLC (Revolver) |
|
|
— |
|
SOFR + |
|
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
(12)(17) |
|||
Datalink, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Dentive, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(12)(16) |
|||||||
Dentive, LLC (Revolver) |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(12) |
|||||||
Dodge Data & Analytics LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Epic Staffing Group |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Florida Food Products, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Hudson Hospital OpCo, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
HUMC Opco, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
H.W. Lochner, Inc. |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
IDC Infusion Services LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(12)(16) |
|||||||
IJKG OpCo, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
JO ET Holdings Limited |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Keg Logistics LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Keg Logistics LLC (Revolver) |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Lucky Bucks, LLC (Priority First Out) |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Lucky Bucks, LLC (Priority Second Out) |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Material Handling Systems, Inc. |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Money Transfer Acquisition Inc. |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Morae Global Corporation |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Morae Global Corporation (Revolver) |
|
|
— |
|
SOFR + |
|
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
(12)(17) |
|||
Neptune BidCo US Inc. |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Orthopaedic (ITC) Buyer, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(12)(16) |
|||||||
PhyNet Dermatology LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(12)(16) |
|||||||
Premier Imaging, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
RN Enterprises, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Sequoia Healthcare Management LLC |
|
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
(7) |
|||||
South Street Securities Holdings, Inc. |
|
|
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
(16) |
||||||
STG Logistics |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Symplr Software, Inc. |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Synamedia Americas Holdings, Inc. |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Tactical Air Support, Inc. |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(12)(16) |
|||||||
Taoglas Group Holdings Limited |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Taoglas Group Holdings Limited (Revolver) |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(12) |
|||||||
TransNetwork LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
VBC Spine Opco LLC (DxTx Pain and Spine LLC) |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(12)(16) |
|||||||
VBC Spine Opco LLC (DxTx Pain and Spine LLC) (Revolver) |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(12)(16) |
|||||||
Wealth Enhancement Group, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Wealth Enhancement Group, LLC (Revolver) |
|
|
— |
|
SOFR + |
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
(12)(17) |
|||
Total First Lien/Senior Secured Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Second Lien/Senior Secured Debt - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
American Academy Holdings, LLC |
|
|
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
(16) |
||||||
BLST Operating Company, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(8)(16) |
|||||||
Ivanti Software, Inc. |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
(16) |
|||||||
Total Second Lien/Senior Secured Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Subordinated Debt - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Eastport Holdings, LLC |
|
|
|
SOFR + |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Lucky Bucks, LLC |
|
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
(7) |
|||||
Tubular Textile Machinery, Inc. |
|
|
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total Subordinated Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Collateralized Loan Obligations - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
JMP Credit Advisors CLO IV Ltd. |
|
|
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
(13)(15) |
||||||
JMP Credit Advisors CLO V Ltd. |
|
|
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
(13)(15) |
||||||
Total Collateralized Loan Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Preferred Stock and Units - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
American Academy Holdings, LLC |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
— |
|
|
|
|
|
(6) |
|||
MicroHoldco, LLC |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
(11) |
||||
Taylor Precision Products, Inc. - Series C |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. BioTek Laboratories, LLC - Class A |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
||||
Total Preferred Stock and Units |
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|||||
See accompanying notes to consolidated financial statements.
9
LOGAN RIDGE FINANCE CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS - CONTINUED
(in thousands, except for units/shares)
December 31, 2023
Investment (1), (2), (3), (4), (5) |
|
Industry |
|
Interest Rate (+) |
|
Reference Rate |
|
Floor (+) |
|
Maturity |
|
Par/Shares (++) |
|
|
Cost |
|
|
Fair Value |
|
|
Footnotes |
|||
Common Stock and Membership Units - |
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|||||
American Academy Holdings, LLC |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
— |
|
|
|
|
|
(6) |
|||
American Clinical Solutions, LLC - Class A |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
(6) |
||||
Aperture Dodge 18 LLC |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
||||
BLST Operating Company, LLC - Class A |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
(6) |
||||
DxTx Pain and Spine LLC |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
(6) |
||||
Freedom Electronics, LLC |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
||||
Lucky Bucks, LLC |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
||||
Morae Global Corporation - Warrants |
|
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
||||
South Street Securities Holdings, Inc. - Warrants |
|
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— |
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— |
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— |
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— |
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||||
U.S. BioTek Laboratories, LLC - Class C |
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— |
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— |
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— |
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— |
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— |
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Total Common Stock and Membership Units |
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Total Investments in Non-Control, Non-Affiliate Portfolio Companies |
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Investments in Affiliated Portfolio Companies - |
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First Lien/Senior Secured Debt - |
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MMI Holdings, LLC |
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— |
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— |
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— |
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(7) |
|||||
Total First Lien/Senior Secured Debt |
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Second Lien/Senior Secured Debt - |
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MMI Holdings, LLC |
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— |
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— |
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— |
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(7) |
|||||
V12 Holdings, Inc. |
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— |
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— |
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— |
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— |
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(11) |
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Total Second Lien/Senior Secured Debt |
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Joint Ventures - |
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|||||
Great Lakes Funding II LLC - Series A |
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— |
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— |
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— |
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— |
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(12)(15) |
||||
Total Joint Ventures |
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Preferred Stock and Units - |
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|||||
GA Communications, Inc. - Series A-1 |
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— |
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— |
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— |
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— |
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||||
GreenPark Infrastructure, LLC - Series A |
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— |
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— |
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— |
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— |
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(6) |
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MMI Holdings, LLC |
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— |
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— |
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— |
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— |
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||||
RAM Payment, LLC |
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— |
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— |
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— |
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(14) |
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Total Preferred Stock and Units |
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Common Stock and Membership Units - |
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Burgaflex Holdings, LLC - Class A |
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— |
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— |
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— |
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— |
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||||
Burgaflex Holdings, LLC - Class B |
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— |
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— |
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— |
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— |
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||||
GA Communications, Inc. - Series B-1 |
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— |
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— |
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— |
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— |
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||||
GreenPark Infrastructure, LLC - Series M-1 |
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— |
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— |
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— |
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— |
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(6)(12) |
||||
MMI Holdings, LLC |
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— |
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— |
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— |
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— |
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— |
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— |
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Nth Degree Investment Group, LLC |
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— |
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— |
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— |
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— |
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Sierra Hamilton Holdings Corporation |
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— |
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— |
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— |
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— |
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||||
Total Common Stock and Membership Units |
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Total Investments in Affiliated Portfolio Companies^ |
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Total Investments - |
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$ |
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$ |
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^
^^ As defined in the 1940 Act, the investment is deemed to be a “controlled affiliated person” of the Company because the Company owns, either directly or indirectly,
(+)
(++)
See accompanying notes to consolidated financial statements.
10
LOGAN RIDGE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024
(Unaudited)
Note 1. Organization
Logan Ridge Finance Corporation (“Logan Ridge”, the “Company”, “we”, “us”, and “our”) is an externally managed non-diversified closed-end management investment company incorporated in Maryland on
The Company’s investment objective is to generate both current income and capital appreciation through debt and equity investments. The Company offers customized financing to business owners, management teams, and financial sponsors for change of ownership transactions, recapitalizations, strategic acquisitions, business expansion, and other growth initiatives. The Company invests in first lien loans, and, to a lesser extent, second lien loans and equity securities issued by lower middle-market and traditional middle-market companies.
The Company was formed for the purpose of: (i) acquiring, through a series of transactions, an investment portfolio from the following entities: CapitalSouth Partners Fund I Limited Partnership (“Fund I”); CapitalSouth Partners Fund II Limited Partnership (“Fund II”); CapitalSouth Partners Fund III, L.P. (“Fund III Parent”); CapitalSouth Fund III, L.P. (f/k/a CapitalSouth Partners SBIC Fund III, L.P.) (“Fund III”); and CapitalSouth Partners Florida Sidecar Fund I, L.P. (“Florida Sidecar” and, collectively with Fund I, Fund II, Fund III, and Fund III Parent, the “Legacy Funds”); (ii) raising capital in the IPO and (iii) continuing and expanding the business of the Legacy Funds by making additional debt and equity investments in lower middle-market and traditional middle-market companies.
On September 24, 2013, the Company acquired
The Company has formed, and expects to continue to form, certain consolidated taxable subsidiaries (the “Taxable Subsidiaries”), which are taxed as corporations for U.S. federal income tax purposes. The Taxable Subsidiaries allow the Company to make equity investments in companies organized as pass-through entities while continuing to satisfy the requirements of a RIC under the Code.
Capitala Business Lending, LLC (“CBL”), a wholly-owned subsidiary of the Company, was established on October 30, 2020, for the sole purpose of holding certain investments pledged as collateral under the Company's line of credit with KeyBank National Association (the “KeyBank Credit Facility”). See Note 6 for more details about the KeyBank Credit Facility. The financial statements of CBL are consolidated with those of Logan Ridge Finance Corporation.
Definitive Agreement
On April 20, 2021, Capitala Investment Advisors, LLC (“Capitala”), the Company’s former investment adviser, entered into a definitive agreement (the “Definitive Agreement”) with the Investment Adviser and Mount Logan Capital Inc. (“MLC”), both affiliates of BC Partners Advisors L.P. (“BC Partners”) for U.S. regulatory purposes, whereby Mount Logan acquired certain assets related to Capitala’s business of providing investment management services to the Company (the “Transaction”), through which the Investment Adviser became the Company’s investment adviser pursuant to an investment advisory agreement (the “Investment Advisory Agreement”) with the Company. At a special meeting of the Company’s stockholders (the “Special Meeting”) held on May 27, 2021, the Company’s stockholders approved the Investment Advisory Agreement. The transactions contemplated by the Definitive Agreement closed on July 1, 2021 (the “Closing”). Unless earlier terminated in accordance with its terms, the Investment Advisory Agreement will remain in effect from year to year if approved annually by the Board or by a majority of our outstanding voting securities, including, in either case, by a majority of our directors who are not “interest persons” as such term is defined in Section 2(a)(19) of the 1940 Act (“Independent Directors”). The Board most recently approved the renewal of the Investment Advisory Agreement at a meeting on May 7, 2024.
As part of the Transaction, the Investment Adviser entered into a two-year contractual fee waiver (the “Fee Waiver”) with the Company to waive, to the extent necessary, any capital gains fee under the Investment Advisory Agreement that exceeds what would have been paid to Capitala in the aggregate over such two-year period under the prior advisory agreement. The Fee Waiver expired at the end of the two-year period.
On the date of the Closing, the Company changed its name from Capitala Finance Corp. to Logan Ridge Finance Corporation and on July 2, 2021, the Company’s common stock began trading on the NASDAQ Global Select Market under the symbol “LRFC.”
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The Company is considered an investment company as defined in Accounting Standards Codification (“ASC”) Topic 946 — Financial Services — Investment Companies (“ASC 946”). The accompanying unaudited consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 6 and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying our annual consolidated financial statements prepared in accordance with U.S. GAAP have been omitted. The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries, including Fund II, Fund III, CBL, and the Taxable Subsidiaries.
The Company’s financial statements as of June 30, 2024 and December 31, 2023 and for the periods ended June 30, 2024 and 2023 are presented on a consolidated basis. The effects of all intercompany transactions between the Company and its subsidiaries (Fund II, Fund III, CBL, and the Taxable Subsidiaries) have been eliminated in consolidation. All financial data and information included in these consolidated financial statements have been presented on the basis described above.
11
LOGAN RIDGE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024
(Unaudited)
In the opinion of management, the consolidated financial statements reflect all adjustments that are necessary for the fair presentation of financial results as of and for the periods presented.
The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year. Additionally, the unaudited consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the U.S. Securities and Exchange Commission (“SEC”) on March 26, 2024.
Use of Estimates in the Preparation of Financial Statements
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates under different assumptions and conditions. The most significant estimates in the preparation of the consolidated financial statements are investment valuation, revenue recognition and income taxes.
Consolidation
As provided under ASC 946, the Company will generally not consolidate its investment in a company other than a substantially wholly owned investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated the results of the Company’s wholly owned investment company subsidiaries (Fund II, Fund III, CBL, and the Taxable Subsidiaries) in its consolidated financial statements.
Cash and Cash Equivalents
The Company considers cash equivalents to be highly liquid investments with original maturities of three months or less at the date of purchase. The Company deposits its cash in financial institutions, and, at times, such balances may be in excess of the Federal Deposit Insurance Corporation insurance limits.
Investment Classification
In accordance with the provisions of the 1940 Act, the Company classifies its investments by level of control. As defined in the 1940 Act, “Control Investments” are investments in those companies that the Company is deemed to “Control.” “Affiliate Investments” are investments in those companies that are “Affiliated Companies” of the Company, as defined in the 1940 Act, other than Control Investments. “Non-Control/Non-Affiliate Investments” are those investments that are neither Control Investments nor Affiliate Investments. Generally, under the 1940 Act, the Company is deemed to control a company in which it has invested if the Company owns more than
Valuation of Investments
Investment transactions are recorded on the trade date. Realized gains or losses on investments are calculated using the specific identification method as the difference between the net proceeds received (excluding prepayment fees, if any) and the amortized cost basis of the investment without regard to unrealized appreciation or depreciation previously recognized, and include investments charged off during the period, net of recoveries. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation when gains or losses are recognized.
Investments for which market quotations are available are typically valued at those market quotations. To validate market quotations, the Company will utilize a number of factors to determine if the quotations are representative of fair value, including the source and number of the quotations.
Debt that is not publicly traded but for which there are external pricing sources available as of the valuation date is valued using independent broker-dealer, market maker quotations or independent pricing services. The valuation committee, comprised of members of the Investment Adviser, (the “Valuation Committee”) subjects these quotes to various criteria including, but not limited to, the number and quality of quotes, the deviation among the quotes and information derived from analyzing the Company’s own transactions in such investments throughout the reporting period. Generally, such investments are categorized in Level 2 of the fair value hierarchy, unless the Valuation Committee determines that the quality, quantity or deviation among quotes warrants significant adjustment to the inputs utilized.
The Board has designated the Investment Adviser as its “valuation designee” pursuant to Rule 2a-5 under the 1940 Act, and in that role the Investment Adviser is responsible for performing fair value determinations relating to all of the Company's investments, including periodically assessing and managing any material valuation risks and establishing and applying fair value methodologies, in accordance with valuation policies and procedures that have been approved by the Board. The Board remains ultimately responsible for fair value determinations under the 1940 Act and satisfies its responsibility through oversight of the valuation designee in accordance with Rule 2a-5. Investments that are not publicly traded or whose market prices are not readily available, as is expected to be the case for substantially all of the Company’s investments, are valued at fair value as determined in good faith by the Investment Adviser, based on, among other things, input of independent third-party valuation firm(s).
The Investment Adviser undertakes a multi-step valuation process, which includes, among other procedures, the following:
As part of the valuation process, the Investment Adviser may consider other information and may use valuation methods including but not limited to (i) market quotes for similar investments, (ii) recent trading activity, (iii) discounting forecasted cash flows of the investment, (iv) models that consider the implied yields from
12
LOGAN RIDGE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024
(Unaudited)
comparable debt, (v) third-party appraisal, (vi) sale negotiations and purchase offers received from independent parties and (vii) estimated value of underlying assets to be received in liquidation or restructuring.
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of such investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that may ultimately be realized. Further, such investments are generally less liquid than publicly traded securities and may be subject to contractual and other restrictions on resale. If the Company were required to liquidate a portfolio investment in a forced or liquidation sale, it could realize amounts that are different from the amounts presented and such differences could be material.
In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the unrealized gains or losses reflected herein.
Under existing accounting guidance, fair value is defined as the price that the Company would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. This accounting guidance emphasizes valuation techniques that maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances.
The Company classifies the inputs used to measure these fair values into the following hierarchy as defined by current accounting guidance:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible to the Company.
Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.
Level 3: Significant inputs that are unobservable for an asset or liability.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Investments for which no external pricing sources are available as of the valuation date are included in Level 3 of the fair value hierarchy.
As a practical expedient, the Company uses net asset value (“NAV”) as the fair value for its equity investment in Great Lakes Funding II LLC (“Great Lakes II Joint Venture”). The Great Lakes II Joint Venture records its underlying investments at fair value on a quarterly basis in accordance with the 1940 Act and U.S. GAAP.
Enterprise Value Waterfall Approach
The enterprise value waterfall approach determines an enterprise value based on earnings before interest, tax, depreciation, and amortization (“EBITDA”) multiples of publicly traded companies that are considered similar to the subject portfolio company. The Company considers a variety of items in determining a reasonable pricing multiple, including, but not limited to, operating results, budgeted projections, growth, size, risk, profitability, leverage, management depth, diversification, market position, supplier or customer dependence, asset utilization, liquidity metrics, and access to capital markets. EBITDA of the portfolio company is adjusted for non-recurring items in order to reflect a normalized level of earnings that is representative of future earnings. In certain instances, the Company may also utilize revenue multiples to determine enterprise value. When available, the Company may assign a pricing multiple or value its investments based on the value of recent investment transactions in the subject portfolio company or offers to purchase the portfolio company. The enterprise value is adjusted for financial instruments with seniority to the Company’s ownership and for the effect of any instrument which may dilute the Company’s investment in the portfolio company. The adjusted enterprise value is then apportioned based on the seniority and privileges of the Company’s investments within the portfolio company.
Income Approach
The income approach utilizes a discounted cash flow methodology in which the Company estimates fair value based on the present value of expected cash flows discounted at a market rate of interest. The determination of a discount rate, or required rate of return, takes into account the portfolio company’s fundamentals and perceived credit risk. Because the majority of the Company’s portfolio companies do not have a public credit rating, determining a discount rate often involves assigning an implied credit rating based on the portfolio company’s operating metrics compared to average metrics of similar publicly rated debt. Operating metrics include, but are not limited to, EBITDA, interest coverage, leverage ratios, return on capital, and debt to equity ratios. The implied credit rating is used to assign a base discount rate range based on publicly available yields on similarly rated debt securities. The Company may apply a premium to the discount rate utilized in determining fair value when performance metrics and other qualitative information indicate that there is an additional level of uncertainty about collectability of cash flows.
Asset Approach
The asset approach values an investment based on the value of the underlying collateral securing the investment.
Revenue Recognition
The Company’s revenue recognition policies are as follows:
Interest income and payment-in-kind (“PIK”) interest income: Interest income is recorded on the accrual basis to the extent that such amounts are expected to be collected. The Company has loans in the portfolio that contain a PIK interest provision. PIK interest, which represents contractually deferred interest added to the loan balance that is generally due at maturity, is recorded on an accrual basis to the extent that such amounts are expected to be collected. PIK interest is not accrued if the Company does not expect the issuer to be able to pay all principal and interest when due.
Non-accrual investments: Management reviews all loans that become 90 days or more past due, or when there is reasonable doubt that principal or interest will be collected, for possible placement on non-accrual status. When the Company otherwise does not expect the borrower to be able to service its debt and other obligations, the Company will place the loan on non-accrual status and will generally cease recognizing interest income and PIK interest on that loan for financial reporting purposes. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment. The Company
13
LOGAN RIDGE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024
(Unaudited)
writes off any previously accrued and uncollected interest when it is determined that interest is no longer considered collectible. Non-accrual loans are returned to accrual status when the borrower’s financial condition improves such that management believes current interest and principal payments are expected to be collected. As of June 30, 2024, we had debt investments in
Gains and losses on investment sales: Realized gains and losses on investments are recognized using the specific identification method.
Dividend income and payment-in-kind dividends: Dividend income is recognized on the date dividends are declared. The Company holds preferred equity investments in the portfolio that contain a PIK dividend provision. PIK dividends, which represent contractually deferred dividends added to the equity balance, are recorded on the accrual basis to the extent that such amounts are expected to be collected. The Company will typically cease accrual of PIK dividends when the fair value of the equity investment is less than the cost basis of the investment or when it is otherwise determined by management that PIK dividends are unlikely to be collected. If management determines that a decline in fair value is temporary in nature and PIK dividends are more likely than not to be collected, management may elect to continue accruing PIK dividends.
Original issue discount: Discounts received to par on loans purchased are capitalized and accreted into income over the life of the loan. Any remaining discount is accreted into income upon prepayment of the loan.
Other income: Origination fees (to the extent services are performed to earn such income upon closing), amendment fees, consent fees, and other fees associated with investments in portfolio companies are recognized as income when they are earned. Prepayment penalties received by the Company for debt instruments repaid prior to maturity date are recorded as income upon receipt.
General and Administrative Expenses
General and administrative expenses are accrued as incurred. The Company’s administrative expenses include personnel and overhead expenses allocable to the Company paid by and reimbursed to the Administrator under an administration agreement between the Company and the Administrator (the “Administration Agreement”). Other operating expenses such as legal and audit fees and director and officer insurance are generally paid directly by the Company.
Deferred Financing Fees
Costs incurred to issue the Company’s debt obligations are capitalized and are amortized over the term of the debt agreements under the effective interest method. Deferred financing fees are presented as a direct deduction from the carrying amount of the corresponding debt liability in the consolidated statements of assets and liabilities.
Earnings Per Share
The Company’s earnings per share (“EPS”) amounts have been computed based on the weighted-average number of shares of the Company’s common stock outstanding for the period. Basic EPS is computed by dividing net increase (decrease) in net assets resulting from operations by the weighted average number of shares of the Company’s common stock outstanding during the period of computation. Diluted EPS is computed by dividing net increase (decrease) in net assets resulting from operations, adjusted for the change in net assets resulting from the exercise of the dilutive shares, by the weighted average number of shares of the Company’s common stock assuming all potentially dilutive shares had been issued. Diluted EPS reflects the potential dilution, using the as-if-converted method for convertible debt, which could occur if all potentially dilutive securities were exercised.
Commitments and Contingencies
As of June 30, 2024 and December 31, 2023, the Company had the following unfunded commitments to existing portfolio companies (dollars in thousands):
Portfolio Company |
Investment |
|
June 30, |
|
|
December 31, 2023 |
|
||
Accordion Partners LLC (Revolver) |
First Lien/Senior Secured Debt |
$ |
|
|
$ |
|
|
||
American Clinical Solutions, LLC(1) |
First Lien/Senior Secured Debt |
|
N/A |
|
|
|
|
||
BetaNXT, Inc. (Revolver) |
First Lien/Senior Secured Debt |
|
|
|
|
|
|
||
Bradshaw International, Inc. (Revolver) |
First Lien/Senior Secured Debt |
|
|
|
|
|
|
||
Critical Nurse Staffing, LLC (Revolver) |
First Lien/Senior Secured Debt |
|
|
|
|
|
|
||
Dentive, LLC(1) |
First Lien/Senior Secured Debt |
|
N/A |
|
|
|
|
||
Dentive, LLC (Revolver) |
First Lien/Senior Secured Debt |
|
|
|
|
|
|
||
Fortis Payment Systems, LLC(1) |
First Lien/Senior Secured Debt |
|
|
|
|
N/A |
|
||
Great Lakes Funding II LLC - Series A |
Joint Venture |
|
|
|
|
|
|
||
GreenPark Infrastructure, LLC - Series M-1 |
Common Stock and Membership Units |
|
|
|
|
|
|
||
IDC Infusion Services, LLC(1) |
First Lien/Senior Secured Debt |
|
|
|
|
|
|
||
Morae Global Corporation (Revolver) |
First Lien/Senior Secured Debt |
|
|
|
|
|
|
||
Orthopaedic (ITC) Buyer, LLC(1) |
First Lien/Senior Secured Debt |
|
|
|
|
|
|
||
PhyNet Dermatology LLC(1) |
First Lien/Senior Secured Debt |
|
|
|
|
|
|
||
Riddell, Inc.(1) |
First Lien/Senior Secured Debt |
|
|
|
|
N/A |
|
||
Tactical Air Support, Inc.(1) |
First Lien/Senior Secured Debt |
|
|
|
|
|
|
||
Taoglas Group Holdings Limited (Revolver) |
First Lien/Senior Secured Debt |
|
|
|
|
|
|
||
VBC Spine Opco, LLC (DxTx Pain and Spine LLC)(1) |
First Lien/Senior Secured Debt |
|
|
|
|
|
|
||
VBC Spine Opco, LLC (DxTx Pain and Spine LLC) (Revolver) |
First Lien/Senior Secured Debt |
|
|
|
|
|
|
||
Wealth Enhancement Group, LLC (Revolver) |
First Lien/Senior Secured Debt |
|
|
|
|
|
|
||
Total Unfunded Commitments |
|
$ |
|
|
$ |
|
|
||
(1)
14
LOGAN RIDGE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024
(Unaudited)
In the ordinary course of business, the Company may enter into contracts or agreements that contain indemnifications or warranties. Future events could occur that could lead to the execution of these provisions against the Company. Based on its history and experience, management believes that the likelihood of such an event is remote.
In the ordinary course of business, the Company may directly or indirectly be a defendant or plaintiff in legal actions with respect to bankruptcy, insolvency, or other types of proceedings. Such lawsuits may involve claims that could adversely affect the value of certain financial instruments owned by the Company or result in direct losses to the Company. The nature of litigation can make it difficult to predict the impact a particular lawsuit will have on the Company. There are many reasons that the Company cannot make these assessments, including, among others, one or more of the following: the proceeding is in its early stages; the damages sought are unspecified, unsupportable, unexplained or uncertain; discovery has not started or is not complete; there are significant facts in dispute; and there are other parties who may share in any ultimate liability.
In management’s opinion,
Income Taxes
The Company has elected to be treated for U.S. federal income tax purposes and intends to comply with the requirements to qualify annually as a RIC under Subchapter M of the Code and, among other things, intends to make the requisite distributions to its stockholders which will relieve the Company from U.S. federal income taxes.
In order to qualify for tax treatment as a RIC, among other requirements, the Company is required to timely distribute to its stockholders at least
Depending on the level of taxable income earned in an excise tax year, the Company may choose to carry forward taxable income in excess of current year dividend distributions into the next excise tax year and pay a
The tax years ended December 31, 2023, 2022, 2021 and 2020 remain subject to examination by U.S. federal, state, and local tax authorities.
The Company’s Taxable Subsidiaries record deferred tax assets or liabilities related to temporary book versus tax differences on the income or loss generated by the underlying equity investments held by the Taxable Subsidiaries. As of both June 30, 2024 and December 31, 2023, the Company recorded a net deferred tax asset of
In accordance with certain applicable U.S. Treasury regulations and guidance issued by the Internal Revenue Service, a publicly offered RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive its entire distribution in either cash or stock of the RIC, subject to a limitation on the aggregate amount of cash available to be distributed to all stockholders, which limitation must be at least
ASC Topic 740 — Income Taxes (“ASC 740”), provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the consolidated financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s U.S. federal income tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the consolidated statements of operations. As of June 30, 2024 and December 31, 2023, there were
The Company is required to determine whether a tax position of the Company is more-likely-than-not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized could result in the Company recording a tax liability that could negatively impact the Company’s net assets.
The Company has concluded that it was not necessary to record a liability for any such tax positions as of June 30, 2024 and December 31, 2023. However, the Company’s conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, ongoing analyses of, and changes to, tax laws, regulations and interpretations thereof.
15
LOGAN RIDGE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024
(Unaudited)
Distributions
Distributions to the Company’s common stockholders are recorded on the record date. The amount to be paid out as a dividend is determined by the Board. Net capital gains, if any, are generally distributed at least annually, although we may decide to retain such capital gains for reinvestment.
The Company has adopted an “opt out” dividend reinvestment plan (“DRIP”) for the Company’s common stockholders. As a result, if the Company declares a distribution, then stockholders’ cash distributions will be automatically reinvested in additional shares of the Company’s common stock unless a stockholder specifically “opts out” of our DRIP. If a stockholder opts out, that stockholder will receive cash distributions. Although distributions paid in the form of additional shares of our common stock will generally be subject to U.S. federal, state, and local taxes in the same manner as cash distributions, stockholders participating in the Company’s DRIP will not receive any corresponding cash distributions with which to pay any such applicable taxes.
Company Investment Risk, Concentration of Credit Risk and Liquidity Risk
The Investment Adviser has broad discretion in making investments for the Company. Investments will generally consist of debt and equity instruments that may be affected by business, financial market, or legal uncertainties. Prices of investments may be volatile, and a variety of factors that are inherently difficult to predict, such as domestic or international economic and political developments, may significantly affect the results of the Company’s activities and the value of its investments. In addition, the value of the Company’s portfolio may fluctuate as the general level of interest rates fluctuate.
The value of the Company’s investments may be detrimentally affected to the extent, among other things, that a borrower defaults on its obligations, there is insufficient collateral and/or there are extensive legal and other costs incurred in collecting on a defaulted loan. The value of the Company’s investments may also be detrimentally affected to the extent observable primary or secondary market yields for similar instruments issued by comparable companies increase materially or risk premiums in the market between smaller companies, such as our borrowers, and those for which market yields are observable increase materially.
The Investment Adviser may attempt to minimize this risk by maintaining low debt-to-liquidation values with each debt investment and the collateral underlying the debt investment.
The Company’s assets may, at any time, include securities and other financial instruments or obligations that are illiquid or thinly traded, making purchase or sale of such securities and financial instruments at desired prices or in desired quantities difficult. Furthermore, the sale of any such investments may be possible only at substantial discounts, and it may be extremely difficult to value any such investments accurately.
Recent Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board issued Accounting Standards Update 2023-07, Segment Reporting – Improvements to Reportable Segment Disclosures. The accounting standard update clarifies the segment disclosure requirements in Topic 280 and requires public entities to disclose significant segment expenses, provide all annual disclosures about a reportable segment's profit or loss and assets in interim periods, and clarify the reporting of additional measures of segment profit or loss. The amendments aim to improve consistency and comparability in segment reporting. The amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company has evaluated the impact of adopting this new accounting standard and has concluded that the impact of the adoption will not be material to the consolidated financial statements.
Note 3. Investments and Fair Value Measurements
Most of the Company’s debt investments are structured as first lien loans. First lien loans may contain some minimum amount of principal amortization, excess cash flow sweep feature, prepayment penalties, or any combination of the foregoing. First lien loans are secured by a first priority lien in existing and future assets of the borrower and may take the form of term loans, delayed draw facilities, or revolving credit facilities. Unitranche debt, a form of first lien loan, typically involves issuing one debt security that blends the risk and return profiles of both senior secured and subordinated debt, bifurcating the loan into a first-out tranche and last-out tranche. As of June 30, 2024 and December 31, 2023, none of the fair value of our first lien loans consisted of last-out loans.
The Company also invests in debt instruments structured as second lien loans. Second lien loans are loans which have a second priority security interest in all or substantially all of the borrower’s assets, and in some cases, may be subject to the interruption of cash interest payments upon certain events of default, at the discretion of the first lien lender.
During the three months ended June 30, 2024, we made approximately $
During the six months ended June 30, 2024, we made approximately $
As of June 30, 2024, the Company’s Investment Adviser approved the fair value of the Company’s investment portfolio of approximately $
16
LOGAN RIDGE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024
(Unaudited)
The composition of our investments as of June 30, 2024, at amortized cost and fair value was as follows (dollars in thousands):
|
|
Investments at |
|
|
Amortized Cost |
|
|
Investments at |
|
|
Fair Value |
|
||||
First Lien Debt |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
||||
Second Lien Debt |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Subordinated Debt |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Collateralized Loan Obligations |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Joint Venture |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Equity |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Total |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
||||
The composition of our investments as of December 31, 2023, at amortized cost and fair value was as follows (dollars in thousands):
|
|
Investments at |
|
|
Amortized Cost |
|
|
Investments at |
|
|
Fair Value |
|
||||
First Lien Debt |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
||||
Second Lien Debt |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Subordinated Debt |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Collateralized Loan Obligations |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Joint Venture |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Equity |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Total |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
||||
The following table shows the portfolio composition by industry grouping at fair value as of June 30, 2024 and December 31, 2023 (dollars in thousands):
|
|
June 30, 2024 |
|
|
December 31, 2023 |
|
||||||||||
|
|
Investments at |
|
|
Percentage of Total Portfolio |
|
|
Investments at |
|
|
Percentage of Total Portfolio |
|
||||
Healthcare |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
||||
Business Services |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Financials |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Information Technology |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Industrials |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Consumer Discretionary |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Healthcare Management |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Automobile Part Manufacturer |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Advertising & Marketing Services |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Communication Services |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Medical Device Distributor |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Textile Equipment Manufacturer |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Financial Services |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Online Merchandise Retailer |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Consumer Staples |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Household Product Manufacturer |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Oil & Gas Engineering and Consulting Services |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Data Processing & Digital Marketing |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Electronic Machine Repair |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
General Industrial |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Testing Laboratories |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
% |
||
Total |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
||||
As noted above, the Company values all investments in accordance with Rule 2a-5 under the 1940 Act and ASC 820. ASC 820 requires enhanced disclosures about assets and liabilities that are measured and reported at fair value. As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
ASC 820 establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair value. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
Based on the observability of the inputs used in the valuation techniques, the Company is required to provide disclosures on fair value measurements according to the fair value hierarchy. The fair value hierarchy ranks the observability of the inputs used to determine fair values. Investments carried at fair value are classified and disclosed in one of the following three categories:
|
• |
Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. |
17
LOGAN RIDGE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024
(Unaudited)
|
• |
Level 2 — Valuations based on inputs other than quoted prices in active markets, which are either directly or indirectly observable. |
|
• |
Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement. |
The Company employs the valuation policy approved by the Board that is consistent with ASC 820 (see Note 2). Consistent with the Company’s valuation policy, the Company evaluates the source of inputs, including any markets in which its investments are trading, in determining fair value.
In estimating the fair value of portfolio investments, the Company starts with the cost basis of the investment, which includes amortized original issue discount and PIK income, if any. The transaction price is typically the best estimate of fair value at inception. When evidence supports a subsequent change to the carrying value from the original transaction price, adjustments are made to reflect the expected fair values.
The following table presents the fair value measurements of investments, by major class, as of June 30, 2024, according to the fair value hierarchy (dollars in thousands):
|
|
Fair Value Measurements |
|
|||||||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
NAV |
|
|
Total |
|
|||||
First Lien Debt |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
Second Lien Debt |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Subordinated Debt |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Collateralized Loan Obligations |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Joint Venture |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Equity |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Total |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
Fair Value Measurements |
|
|||||||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
NAV |
|
|
Total |
|
|||||
First Lien Debt |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
Second Lien Debt |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Subordinated Debt |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Collateralized Loan Obligations |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Joint Venture |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Equity |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Total |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the six months ended June 30, 2024 (dollars in thousands):
|
|
First Lien |
|
|
Second Lien |
|
|
Subordinated |
|
|
Collateralized Loan Obligations |
|
|
Equity |
|
|
Total |
|
||||||
Balance as of January 1, 2024 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Repayments/sales |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Purchases |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Payment-in-kind interest and dividends accrued |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||||
Accretion of original issue discount |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||||
Net realized (loss) gain on investments |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
Net change in unrealized appreciation (depreciation) on investments |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Balance as of June 30, 2024 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the six months ended June 30, 2023 (dollars in thousands):
|
|
First Lien |
|
|
Second Lien |
|
|
Subordinated |
|
|
Collateralized Loan Obligations |
|
|
Equity |
|
|
Total |
|
||||||
Balance as of January 1, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Repayments/sales |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Purchases |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|||
Payment-in-kind interest and dividends accrued |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|||||
Accretion of original issue discount |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||||
Net realized (loss) gain on investments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Net change in unrealized (depreciation) appreciation on investments |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
||||
Transfers out |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Balance as of June 30, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
18
LOGAN RIDGE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024
(Unaudited)
The net change in unrealized appreciation (depreciation) on investments held was $(
The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of June 30, 2024 were as follows:
|
|
Fair Value |
|
|
Valuation |
|
Unobservable |
|
Range of Input |
|
First lien debt |
|
$ |
|
|
Market |
|
Broker/Dealer Quotes |
|
N/A |
|
First lien debt |
|
|
|
|
Income |
|
Required Rate of Return |
|
||
First lien debt |
|
|
|
|
Enterprise Market Value |
|
EBITDA Multiple |
|
||
First lien debt |
|
|
|
|
Enterprise Market Value |
|
Revenue Multiple |
|
||
Second lien debt |
|
|
|
|
Market |
|
Broker/Dealer Quotes |
|
N/A |
|
Second lien debt |
|
|
|
|
Income |
|
Required Rate of Return |
|
||
Subordinated debt |
|
|
|
|
Income |
|
Required Rate of Return |
|
||
Subordinated debt |
|
|
|
|
Enterprise Market Value |
|
EBITDA Multiple |
|
||
Subordinated debt |
|
|
|
|
Enterprise Market Value |
|
Revenue Multiple |
|
||
Collateralized Loan Obligations |
|
|
|
|
Income |
|
Discount Margin |
|
||
Equity |
|
|
|
|
Income |
|
Stock Price |
|
$ |
|
Equity |
|
|
|
|
Income |
|
Required Rate of Return |
|
||
Equity |
|
|
|
|
Enterprise Market Value and Asset(1) |
|
EBITDA Multiple |
|
||
Equity |
|
|
|
|
Enterprise Market Value |
|
Revenue Multiple |
|
||
|
|
$ |
|
|
|
|
|
|
|
|
The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of December 31, 2023 were as follows:
|
|
Fair Value |
|
|
Valuation |
|
Unobservable |
|
Range of Input |
|
First lien debt |
|
$ |
|
|
Market |
|
Broker/Dealer Quotes |
|
N/A |
|
First lien debt |
|
|
|
|
Income |
|
Required Rate of Return |
|
||
Second lien debt |
|
|
|
|
Market |
|
Broker/Dealer Quotes |
|
N/A |
|
Second lien debt |
|
|
|
|
Income |
|
Required Rate of Return |
|
||
Subordinated debt |
|
|
|
|
Income |
|
Required Rate of Return |
|
||
Subordinated debt |
|
|
|
|
Enterprise Market Value |
|
EBITDA Multiple |
|
||
Subordinated debt |
|
|
|
|
Enterprise Market Value |
|
Revenue Multiple |
|
||
Collateralized Loan Obligations |
|
|
|
|
Income |
|
Discount Margin |
|
||
Equity |
|
|
|
|
Income |
|
Stock Price |
|
$ |
|
Equity |
|
|
|
|
Enterprise Market Value and Asset(1) |
|
EBITDA Multiple |
|
||
Equity |
|
|
|
|
Enterprise Market Value |
|
Revenue Multiple |
|
||
|
|
$ |
|
|
|
|
|
|
|
|
The significant unobservable inputs used in the valuation of the Company’s investments are required rate of return, EBITDA multiples, revenue multiples, discount margin, stock price, projected time to exit and volatility. Changes in any of these unobservable inputs could have a significant impact on the Company’s estimate of fair value. An increase (decrease) in the required rate of return or discount margin will result in a lower (higher) estimate of fair value, respectively, while an increase (decrease) in adjusted EBITDA or revenue multiples, stock price, projected time to exit (option-pricing model) or volatility will result in a higher (lower) estimate of fair value, respectively.
Great Lakes Funding II LLC
In August 2022, the Company invested in the Great Lakes II Joint Venture, a joint venture with an investment strategy to underwrite and hold senior, secured unitranche loans made to middle-market companies. The Company treats its investment in the Great Lakes II Joint Venture as a joint venture since an affiliate of the Investment Adviser controls a
The Great Lakes II Joint Venture is a Delaware series limited liability company, and pursuant to the terms of the Great Lakes Funding II LLC Limited Liability Company Agreement (the “Great Lakes II LLC Agreement”), prior to the end of the investment period with respect to each series established under the Great Lakes II LLC Agreement, each member of the predecessor series would be offered the opportunity to roll its interests into any subsequent series of the Great Lakes II Joint Venture. The Company does not pay any advisory fees in connection with its investment in the Great Lakes II Joint Venture. Certain other funds managed by the Investment Adviser or its affiliates have also invested in the Great Lakes II Joint Venture.
The fair value of the Company’s investment in the Great Lakes II Joint Venture at June 30, 2024 and December 31, 2023 was $
19
LOGAN RIDGE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024
(Unaudited)
Agreement, the Company generally may not effect any direct or indirect sale, transfer, assignment, hypothecation, pledge or other disposition of or encumbrance upon its interests in the Great Lakes II Joint Venture, except that the Company may sell or otherwise transfer its interests with the consent of the managing members of the Great Lakes II Joint Venture or to an affiliate or a successor to substantially all of the assets of the Company.
As of June 30, 2024, the Company has an unfunded commitment to the Great Lakes II Joint Venture of $
Note 4. Transactions With Affiliated Companies
During the six months ended June 30, 2024, the Company had investments in portfolio companies designated as affiliates under the 1940 Act. Transactions with affiliates were as follows (dollars in thousands):
Company(4) |
|
Type of Investment |
Principal Amount |
|
|
Amount of Interest, Fees or Dividends Credited to Income(1) |
|
|
December 31, |
|
|
Gross Additions(2) |
|
|
Gross Reductions(3) |
|
|
Realized Gain/(Loss) |
|
|
Unrealized Appreciation (Depreciation) |
|
|
June 30, 2024 |
|
||||||||
Affiliate investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Burgaflex Holdings, LLC |
|
Common Stock Class A ( |
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
|||
Burgaflex Holdings, LLC |
|
Common Stock Class B ( |
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||||
GA Communications, Inc. |
|
Series A-1 Preferred Stock ( |
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|||
GA Communications, Inc. |
|
Series B-1 Common Stock ( |
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
|||
Great Lakes Funding II LLC |
|
Series A |
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
|
|||||
GreenPark Infrastructure, LLC |
|
Series A ( |
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
GreenPark Infrastructure, LLC |
|
Series M-1 ( |
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
MMI Holdings, LLC |
|
First Lien Debt (Due |
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||||
MMI Holdings, LLC |
|
Second Lien Debt (Due |
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||||
MMI Holdings, LLC(5) |
|
Preferred Units ( |
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|||
MMI Holdings, LLC |
|
Common Membership Units ( |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||||
Nth Degree Investment Group, LLC |
|
Membership Units ( |
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||||
RAM Payment, LLC(5) |
|
Preferred Units ( |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
|||||
Riddell, Inc. |
|
First Lien Debt (Due |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
|
||||
EBSC Holdings LLC (Riddell, Inc.) |
|
Preferred Units ( |
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
|
||||
Sierra Hamilton Holdings Corporation |
|
Common Stock ( |
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
|||
V12 Holdings, Inc. |
|
Second Lien Debt |
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
|||
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
|||
Total Affiliate investments |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
|
|
$ |
|
||||||||
20
LOGAN RIDGE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024
(Unaudited)
During the year ended December 31, 2023, the Company had investments in portfolio companies designated as affiliates under the 1940 Act. Transactions with affiliates were as follows (dollars in thousands):
Company(4) |
|
Type of Investment |
|
Principal Amount |
|
|
Amount of Interest, Fees or Dividends Credited to Income(1) |
|
|
December 31, |
|
|
Gross Additions(2) |
|
|
Gross Reductions(3) |
|
|
Realized Gain/(Loss) |
|
|
Unrealized Appreciation (Depreciation) |
|
|
December 31, |
|
||||||||
Affiliate investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Burgaflex Holdings, LLC |
|
Common Stock Class A ( |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
|||
Burgaflex Holdings, LLC |
|
Common Stock Class B ( |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||||
GA Communications, Inc. |
|
Series A-1 Preferred Stock ( |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
|
||
GA Communications, Inc. |
|
Series B-1 Common Stock ( |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
|
||||
Great Lakes Funding II LLC |
|
Series A |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
|
||||||
GreenPark Infrastructure, LLC |
|
Series A ( |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
GreenPark Infrastructure, LLC |
|
Series M-1 ( |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
MMI Holdings, LLC |
|
First Lien Debt ( |
|
|
|
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
|||
MMI Holdings, LLC |
|
Second Lien Debt ( |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
||||
MMI Holdings, LLC(5) |
|
Preferred Units ( |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
||||
MMI Holdings, LLC |
|
Common Membership Units ( |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
||||
Nth Degree Investment Group, LLC |
|
Membership Units ( |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||||
RAM Payment, LLC |
|
First Lien Debt ( |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
||
RAM Payment, LLC |
|
First Lien Debt ( |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
||
RAM Payment, LLC(5) |
|
Preferred Units ( |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
|
|||||
Sierra Hamilton Holdings Corporation |
|
Second Lien Debt ( |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
||
Sierra Hamilton Holdings Corporation |
|
Common Stock ( |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
|
|||||
V12 Holdings, Inc. |
|
Second Lien Debt |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Total Affiliate investments |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
|
|
$ |
|
||||||||
21
LOGAN RIDGE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024
(Unaudited)
Note 5. Agreements and Related Party Transactions
Investment Advisory Agreement
On July 1, 2021, the Company entered into the Investment Advisory Agreement with the Investment Adviser, which was approved by the Company’s stockholders on May 27, 2021. Unless earlier terminated in accordance with its terms, the Investment Advisory Agreement will remain in effect from year to year if approved annually by the Board or by a majority of our Independent Directors. The Board most recently approved the renewal of the Investment Advisory Agreement at a meeting on May 7, 2024. Subject to the overall supervision of the Board, the Investment Adviser manages our day-to-day operations and provides investment advisory and management services to us. Under the terms of the Investment Advisory Agreement, the Investment Adviser:
• determines the composition of our portfolio, the nature and timing of the changes to our portfolio, and the manner of implementing such changes;
• identifies, evaluates, and negotiates the structure of the investments we make (including performing due diligence on our prospective portfolio companies);
• closes and monitors the investments we make; and
• provides us with other investment advisory, research, and related services as we may from time to time require.
The Investment Adviser’s services under the Investment Advisory Agreement are not exclusive, and it is free to furnish similar services to other entities so long as its services to us are not impaired.
The Investment Advisory Agreement provides that, absent willful misfeasance, bad faith, or negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, the Investment Adviser and its officers, managers, partners, agents, employees, controlling persons, members, and any other person or entity affiliated with it are entitled to indemnification from the Company for any damages, liabilities, costs, and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of our Investment Adviser’s services under the Investment Advisory Agreement or otherwise as Investment Adviser for the Company.
Pursuant to the Investment Advisory Agreement, the Company has agreed to pay the Investment Adviser a fee for investment advisory and management services consisting of two components — a base management fee and an incentive fee.
The incentive fee consists of the following two parts:
The first part of the incentive fee is calculated and payable quarterly in arrears based on the pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income, and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, diligence, and consulting fees or other fees that we receive from portfolio companies) accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement to our Administrator, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income that we have not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, computed net of all realized capital losses or unrealized capital appreciation or depreciation. Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets at the end of the immediately preceding calendar quarter, is compared to a hurdle of
• no incentive fee in any calendar quarter in which the pre-incentive fee net investment income does not exceed the hurdle of
•
•
The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year, commencing on December 31, 2021, and equals
The Company will defer cash payment of the portion of any incentive fee otherwise earned by the Investment Adviser that would, when taken together with all other incentive fees paid to the Investment Adviser during the most recent 12 full calendar month period ending on or prior to the date such payment is to be made, exceed
22
LOGAN RIDGE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024
(Unaudited)
such payment is payable under the Investment Advisory Agreement. As of June 30, 2024 and December 31, 2023, the Company did
As part of the Transaction, the
For the three months ended June 30, 2024 and 2023, the Company incurred $
For the six months ended June 30, 2024 and 2023, the Company incurred $
As of June 30, 2024 and December 31, 2023, the Company had $
Administration Agreement
On July 1, 2021, the Company entered into the Administration Agreement, pursuant to which the Administrator has agreed to furnish the Company with office facilities, equipment and clerical, bookkeeping, and record keeping services at such facilities. The Administrator also performs or oversees the performance of the required administrative services, which include, among other things, being responsible for the financial records that the Company is required to maintain and preparing reports to our stockholders. In addition, the Administrator assists in determining and publishing the net asset value, oversees the preparation and filing of the tax returns and the printing and dissemination of reports to the stockholders, and generally oversees the payment of the expenses and the performance of administrative and professional services rendered to the Company by others.
Payments under the Administration Agreement are equal to an amount based upon the allocable portion of the Administrator’s overhead in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions, and the allocable portion of the compensation of the chief financial officer, the chief compliance officer, and their respective administrative support staff. Under the Administration Agreement, the Administrator will also provide, on the Company’s behalf, managerial assistance to those portfolio companies that request such assistance. Unless terminated earlier in accordance with its terms, the Administration Agreement was renewed on May 9, 2023 for a period of one year effective July 1, 2023 and will remain in effect until July 1, 2024. It will remain in effect from year-to-year thereafter if approved annually by the Board. To the extent that the Administrator outsources any of its functions, the Company will pay the fees associated with such functions on a direct basis without any incremental profit to our Administrator. Stockholder approval is not required to amend the Administration Agreement.
For the three months ended June 30, 2024 and 2023, the Company accrued $
For the six months ended June 30, 2024 and 2023, the Company accrued $
The Administration Agreement provides that, absent willful misfeasance, bad faith, or negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, our Administrator and its officers, managers, partners, agents, employees, controlling persons, members, and any other person or entity affiliated with it are entitled to indemnification from the Company for any damages, liabilities, costs, and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of our Administrator’s services under the Administration Agreement or otherwise as Administrator for the Company.
Co-investment Exemptive Relief
As a BDC, the Company is subject to certain regulatory restrictions in making its investments. For example, BDCs generally are not permitted to co-invest with certain affiliated entities in transactions originated by the BDC or its affiliates in the absence of an exemptive order from the SEC. However, BDCs are permitted to, and may, simultaneously co-invest in transactions where price is the only negotiated term. On April 10, 2023, superseding a prior exemptive order granted on October 23, 2018, the SEC issued an order granting an application for exemptive relief to us and certain of our affiliates that allows BDCs managed by the Investment Adviser, including Logan Ridge, to co-invest, subject to the satisfaction of certain conditions, in certain private placement transactions, with other funds managed by the Investment Adviser or its affiliates, certain proprietary accounts of the Investment Adviser or its affiliates and any future funds that are advised by the Investment Adviser or its affiliated investment advisers.
Under the terms of the exemptive order, in order for the Company to participate in a co-investment transaction a “required majority” (as defined in Section 57(0) of the 1940 Act) of the Company's independent directors must conclude that (i) the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to the Company and its stockholders and do not involve overreaching with respect of the Company or its stockholders on the part of any person concerned, and (ii) the proposed transaction is consistent with the interests of the Company's stockholders and is consistent with the Company's investment objectives and strategies and certain criteria established by the Board.
Trade with Affiliated Funds
There were no transactions subject to Rule 17a-7 under the 1940 Act during the three and six months ended June 30, 2024. There were no transactions subject to Rule 17a-7 under the 1940 Act during the three and six months ended June 30, 2023.
23
LOGAN RIDGE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024
(Unaudited)
Potential Conflicts of Interest
The members of the senior management and investment teams of the Investment Adviser serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as the Company does, or of investment vehicles managed by the same personnel. In serving in these multiple and other capacities, they may have obligations to other clients or investors in those entities, the fulfillment of which may or may not be in the Company's best interests or in the best interest of the Company's stockholders. The Company's investment objectives may overlap with the investment objectives of such investment funds, accounts or other investment vehicles.
Note 6. Borrowings
2026 Notes
On
In July 2022, pursuant to the requirements of a registration rights agreements entered into in connection with the offering described above, the Company completed an exchange offer pursuant to which all of the outstanding 2026 Notes were exchanged for notes with substantially identical terms, but that are registered under the Securities Act (which notes are also referred to herein as the “2026 Notes”).
As of June 30, 2024 and December 31, 2023, the Company had $
The following table summarizes the interest expense, deferred financing costs, average outstanding balance, and average stated interest rate on the 2026 Notes for the three and six months ended June 30, 2024 and 2023 (dollars in thousands):
|
|
For the Three Months Ended June 30, |
|
|
For the Six Months Ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Interest expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Deferred financing costs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total interest and financing expenses |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Average outstanding balance |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Average stated interest rate |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
2032 Convertible Notes
On
On March 28, 2024, the Company obtained a BB+ rating from a Nationally Recognized Statistical Rating Organization (“NRSRO”) with respect to the 2032 Convertible Notes.
During the three months ended June 30, 2024, the Company repaid $
24
LOGAN RIDGE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024
(Unaudited)
During the six months ended June 30, 2024, the Company repaid $
As of June 30, 2024 and December 31, 2023, the Company had $
The following table summarizes the interest expense, deferred financing costs, average outstanding balance, and average stated interest rate on the 2032 Convertible Notes for the three and six months ended June 30, 2024 and 2023 (dollars in thousands):
|
|
For the Three Months Ended June 30, |
|
|
For the Six Months Ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Interest expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Deferred financing costs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total interest and financing expenses |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Average outstanding balance |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Average stated interest rate |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
KeyBank Credit Facility
On
The following table summarizes the interest expense, deferred financing costs, unused commitment fees, average outstanding balance, and average stated interest rate on the KeyBank Credit Facility for the three and six months ended June 30, 2024 and 2023 (dollars in thousands):
|
|
For the Three Months Ended June 30, |
|
|
For the Six Months Ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Interest expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Deferred financing costs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Unused commitment fees |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total interest and financing expenses |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Average outstanding balance |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Average stated interest rate |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
Financial Instruments Disclosed, But Not Carried, At Fair Value
The following table presents the outstanding principal and fair value of the Company’s financial liabilities disclosed, but not carried, at fair value as of June 30, 2024, and the level of each financial liability within the fair value hierarchy (dollars in thousands):
|
|
Outstanding |
|
|
Fair Value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|||||
2026 Notes |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|||
2032 Convertible Notes |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
KeyBank Credit Facility |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|||
The following table presents the outstanding principal and fair value of the Company’s financial liabilities disclosed, but not carried, at fair value as of December 31, 2023, and the level of each financial liability within the fair value hierarchy (dollars in thousands):
|
|
Outstanding |
|
|
Fair Value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|||||
2026 Notes |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|||
2032 Convertible Notes |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
KeyBank Credit Facility |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|||
25
LOGAN RIDGE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024
(Unaudited)
Note 7. Directors’ Expense
Our Independent Directors receive an annual fee of $
Note 8. Stockholders' Equity
On March 6, 2023, the Company's Board authorized a share repurchase program, whereby the Company could repurchase up to an aggregate of $
During the three and six months ended June 30, 2024, the Company repurchased
During the three and six months ended June 30, 2024, the Company issued
During the three and six months ended June 30, 2024, the 2032 Note Convertible Noteholders elected to convert
The total number of shares of the Company’s common stock outstanding as of June 30, 2024 and December 31, 2023 was
Note 9. Earnings Per Share
In accordance with the provisions of ASC Topic 260 - Earnings per Share (“ASC 260”), basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of shares of the Company’s common stock outstanding during the period. Other potentially dilutive shares of the Company’s common stock, and the related impact to earnings, are considered when calculating diluted earnings per share. For the three and six months ended June 30, 2024 and 2023,
The following information sets forth the computation of the weighted average basic and diluted net increase (decrease) in net assets per share resulting from operations for the three and six months ended June 30, 2024 and 2023 (dollars in thousands, except share and per share data):
|
|
For the Three Months Ended June 30, |
|
|
For the Six Months Ended June 30, |
|
||||||||||
|
|
2024(1) |
|
|
2023(2) |
|
|
2024(1) |
|
|
2023(2) |
|
||||
Net increase (decrease) in net assets resulting from operations - basic |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Weighted average common stock outstanding – basic |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net increase (decrease) in net assets per share from operations - basic |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Net increase (decrease) in net assets resulting from operations - basic |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Adjustment for interest on the 2032 Convertible Notes and incentive fees, net |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Adjusted net increase (decrease) in net assets resulting from operations - diluted |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Weighted average common stock outstanding – basic |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Adjustment for dilutive effect of the 2032 Convertible Notes |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Adjusted weighted average common stock outstanding - diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net increase (decrease) in net assets per share resulting from operations - diluted |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Note 10. Distributions
The Company’s distributions are recorded on the record date. Stockholders have the option to receive payment of the distribution in cash, shares of the Company’s common stock, or a combination of cash and shares of common stock. Tax characteristics of all distributions paid are reported to stockholders on Form 1099 after the end of the calendar year. Accordingly, distributions may be subject to reclassification based on future dividends and operating results and will not be determined until the end of the year.
26
LOGAN RIDGE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024
(Unaudited)
The following table summarizes the Company's distribution declarations for the six months ended June 30, 2024 (dollars in thousands, except share and per share data):
Date Declared |
|
Record Date |
|
Payment Date |
|
Amount |
|
|
Cash Distribution |
|
|
DRIP |
|
|
DRIP |
|
||||
|
|
|
$ |
|
|
$ |
|
|
|
— |
|
|
$ |
— |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total Distributions Declared and Distributed for 2024 |
|
$ |
|
|
$ |
|
|
|
|
|
$ |
|
||||||||
The following table summarizes the Company's distribution declarations for the six months ended June 30, 2023 (dollars in thousands, except share and per share data):
Date Declared |
|
Record Date |
|
Payment Date |
|
Amount |
|
|
Cash Distribution |
|
|
DRIP |
|
|
DRIP |
|
||||
|
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total Distributions Declared and Distributed for 2023 |
|
$ |
|
|
$ |
|
|
|
|
|
$ |
|
||||||||
27
LOGAN RIDGE FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2024
(Unaudited)
Note 11. Financial Highlights
The following is a schedule of financial highlights for the six months ended June 30, 2024 and 2023 (dollars in thousands, except share and per share data):
|
|
For the Six Months Ended June 30, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Per share data: |
|
|
|
|
|
|
||
Net asset value at beginning of period |
|
$ |
|
|
$ |
|
||
Net investment income(1) |
|
|
|
|
|
|
||
Net realized gain (loss) on investments(1) |
|
|
|
|
|
( |
) |
|
Net change in unrealized (depreciation) on investments(1) |
|
|
( |
) |
|
|
|
|
Net realized (loss) on extinguishment of debt(1) |
|
|
( |
) |
|
|
— |
|
Dilutive effect of common stock issuance(1) |
|
|
( |
) |
|
|
— |
|
Distributions - net investment income |
|
|
( |
) |
|
|
( |
) |
Accretive effect of common stock repurchases(1) |
|
|
|
|
|
|
||
Net asset value at end of year |
|
$ |
|
|
$ |
|
||
Net assets at end of period |
|
$ |
|
|
$ |
|
||
Shares outstanding at end of period |
|
|
|
|
|
|
||
Per share market value at end of period |
|
$ |
|
|
$ |
|
||
Total return based on market value(2) |
|
|
% |
|
|
( |
)% |
|
Ratio/Supplemental data: |
|
|
|
|
|
|
||
Ratio of net investment income (loss) to average net assets |
|
|
% |
|
|
% |
||
Ratio of interest and financing expenses to average net assets |
|
|
% |
|
|
% |
||
Ratio of other operating expenses to average net assets |
|
|
% |
|
|
% |
||
Ratio of total expenses including tax provision, net of fee waivers to average net assets(3) |
|
|
% |
|
|
% |
||
Portfolio turnover rate(4) |
|
|
% |
|
|
% |
||
Average debt outstanding(5) |
|
$ |
|
|
$ |
|
||
Average debt outstanding per common share(1) |
|
$ |
|
|
$ |
|
||
Asset coverage ratio per unit(6) |
|
$ |
|
|
$ |
|
||
Note 12. Subsequent Events
Management has evaluated subsequent events through the date of issuance of the consolidated financial statements included herein. There have been no subsequent events that occurred during such period that would be required to be recognized in the consolidated financial statements as of June 30, 2024, other than as set forth below.
On August 7, 2024, the Company’s Board of Directors approved a distribution of $
28
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information contained in this section should be read in conjunction with our consolidated financial statements and related notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.
Except as otherwise indicated, the terms “we”, “us”, “our”, the “Company”, “Logan Ridge” and “LRFC” refer to Logan Ridge Finance Corporation.
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about the Company, our current and prospective portfolio investments, our industry, our beliefs, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” “continue,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “targets,” “projects,” and variations of these words and similar expressions are intended to identify forward-looking statements.
Some of the statements in this Quarterly Report on Form 10-Q constitute forward-looking statements, which relate to future events or our performance or financial condition. The forward-looking statements contained in this Quarterly Report on Form 10-Q involve risks and uncertainties, including statements as to:
These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:
Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. Important assumptions include our ability to originate new loans and investments, certain margins and levels of profitability, and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 and in this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events, or otherwise, unless required by law or U.S. Securities and Exchange Commission (“SEC”) rule or regulation.
Overview
We are a Maryland corporation that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”).
We provide capital to lower and traditional middle-market companies in the United States (“U.S.”), with a non-exclusive emphasis on the Southeast, Southwest, and Mid-Atlantic regions. We invest primarily in companies with a history of earnings growth and positive cash flow, proven management teams, products or services with competitive advantages, and industry-appropriate margins. We primarily invest in companies with between $5.0 million and $50.0 million in trailing twelve-month earnings before interest, tax, depreciation, and amortization (“EBITDA”).
We invest in first lien loans and, to a lesser extent, second lien loans and equity securities issued by lower middle-market and traditional middle-market companies.
As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally must invest at least 70% of our total assets in “qualifying assets,” including securities of private or thinly traded public U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. In addition, we are only allowed to borrow money such that our asset coverage, as defined in the 1940 Act, equals at least 150%, if certain requirements are met, after such borrowing, with certain limited exceptions. As of June 30, 2024, our asset coverage ratio was 176%. To maintain our regulated investment company (“RIC”) status, we must meet specified source-of-income and asset diversification requirements. To maintain our RIC tax treatment under Subchapter M of the
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Internal Revenue Code of 1986, as amended (the “Code”), we must distribute at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, for the taxable year.
Corporate History
We commenced operations on May 24, 2013 and completed our initial public offering (“IPO”) on September 30, 2013. The Company was formed for the purpose of (i) acquiring, through a series of transactions, an investment portfolio from the following entities: CapitalSouth Partners Fund I Limited Partnership (“Fund I”); CapitalSouth Partners Fund II Limited Partnership (“Fund II”); CapitalSouth Partners Fund III, L.P. (“Fund III Parent”); CapitalSouth Fund III, L.P. (f/k/a CapitalSouth Partners SBIC Fund III, L.P.) (“Fund III”) and CapitalSouth Partners Florida Sidecar Fund I, L.P. (“Florida Sidecar” and, collectively with Fund I, Fund II, Fund III and Fund III Parent, the “Legacy Funds”); (ii) raising capital in the IPO and (iii) continuing and expanding the business of the Legacy Funds by making additional debt and equity investments in lower middle-market and traditional middle-market companies.
On September 24, 2013, the Company acquired 100% of the limited partnership interests in Fund II, Fund III, and Florida Sidecar and each of their respective general partners, as well as certain assets from Fund I and Fund III Parent, in exchange for an aggregate of 8,974,420 shares of the Company’s common stock (the “Formation Transactions”). Fund II, Fund III, and Florida Sidecar became the Company’s wholly owned subsidiaries. Fund II and Fund III retained their small business investment company (“SBIC”) licenses issued by the U.S. Small Business Administration (“SBA”), and continued to hold their existing investments at the time of IPO and have continued to make new investments after the IPO. The IPO consisted of the sale of 4,000,000 shares of the Company’s common stock at a price of $20.00 per share resulting in net proceeds to the Company of $74.25 million, after deducting underwriting fees and commissions totaling $4.0 million and offering expenses totaling $1.75 million. The other costs of the IPO were borne by the limited partners of the Legacy Funds. During the fourth quarter of 2017, Florida Sidecar transferred all of its assets to the Company and was legally dissolved as a standalone partnership. On March 1, 2019, Fund II repaid its outstanding debentures guaranteed by the SBA (“SBA-guaranteed debentures”) and relinquished its SBIC license. On June 10, 2021, Fund III repaid its SBA-guaranteed debentures and relinquished its SBIC license. Accordingly, as of June 30, 2024 and December 31, 2023, there were no SBA-guaranteed debentures outstanding.
At the time of the Formation Transactions, our portfolio consisted of: (1) approximately $326.3 million in investments; (2) an aggregate of approximately $67.1 million in cash, interest receivable and other assets; and (3) liabilities of approximately $202.2 million of SBA-guaranteed debentures payable. Fund III, our subsidiary, was licensed under the SBIC Act until June 10, 2021 and has elected to be regulated as BDC under the 1940 Act. Fund II, our subsidiary, was licensed under the SBIC Act until March 1, 2019 and has elected to be regulated as a BDC under the 1940 Act.
The Company has formed and expects to continue to form certain consolidated taxable subsidiaries (the ‘‘Taxable Subsidiaries’’), which are taxed as corporations for U.S. federal income tax purposes. The Taxable Subsidiaries allow the Company to make equity investments in companies organized as pass-through entities while continuing to satisfy the requirements of a RIC under the Code.
Capitala Business Lending, LLC (“CBL”), a wholly-owned subsidiary of ours, was established on October 30, 2020, for the sole purpose of holding certain investments pledged as collateral under a senior secured revolving credit agreement with KeyBank National Association (the “KeyBank Credit Facility”). See “Financial Condition, Liquidity and Capital Resources” for more details. The financial statements of CBL are consolidated with those of Logan Ridge Finance Corporation.
In addition, we evaluate strategic opportunities available to us, including mergers with unaffiliated funds and affiliated funds, divestures, spin-offs, joint ventures and other similar transactions from time to time. An example of an opportunity we are currently in the initial stages of evaluating is a potential merger with one or more of our affiliated 1940 Act funds, which may result in the use of an exchange ratio other than NAV-for-NAV (including but not limited to relative market price) in connection therewith.
Definitive Agreement
On April 20, 2021, Capitala Investment Advisors, LLC (“Capitala”), the Company’s former investment adviser, entered into a definitive agreement (the “Definitive Agreement”) with the Investment Adviser and Mount Logan Capital Inc. (“MLC”), both affiliates of BC Partners Advisors L.P. (“BC Partners”) for U.S. regulatory purposes, whereby Mount Logan acquired certain assets related to Capitala’s business of providing investment management services to the Company (the “Transaction”), through which the Investment Adviser became the Company’s investment adviser pursuant to an investment advisory agreement (the “Investment Advisory Agreement”) with the Company. At a special meeting of the Company’s stockholders (the “Special Meeting”) held on May 27, 2021, the Company’s stockholders approved the Investment Advisory Agreement. The transactions contemplated by the Definitive Agreement closed on July 1, 2021 (the “Closing”).
As part of the Transaction, the Investment Adviser entered into a two-year contractual fee waiver (the “Fee Waiver”) with the Company to waive, to the extent necessary, any capital gains fee under the Investment Advisory Agreement that exceeds what would have been paid to Capitala in the aggregate over such two-year period under the prior advisory agreement.
On the date of the Closing, the Company changed its name from Capitala Finance Corp. to Logan Ridge Finance Corporation and on July 2, 2021, the Company’s common stock began trading on the NASDAQ Global Select Market under the symbol “LRFC.”
Basis of Presentation
The Company is considered an investment company as defined in Accounting Standards Codification (“ASC”) Topic 946 — Financial Services — Investment Companies (“ASC 946”). The accompanying unaudited consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 6 and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying our annual consolidated financial statements prepared in accordance with U.S. GAAP have been omitted. The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries, including Fund II, Fund III, CBL, and the Taxable Subsidiaries.
The Company’s financial statements as of June 30, 2024 and December 31, 2023 and for the periods ended June 30, 2024 and 2023 are presented on a consolidated basis. The effects of all intercompany transactions between the Company and its subsidiaries (Fund II, Fund III, CBL, and the Taxable Subsidiaries) have been eliminated in consolidation. All financial data and information included in these consolidated financial statements have been presented on the basis described above. In the opinion of management, the consolidated financial statements reflect all adjustments that are necessary for the fair presentation of financial results as of and for the periods presented.
The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year. Additionally, the unaudited consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 26, 2024.
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Consolidation
As provided under ASC 946, the Company will generally not consolidate its investment in a company other than an investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated the results of the Company’s wholly owned investment company subsidiaries (Fund II, Fund III, CBL, and the Taxable Subsidiaries) in its consolidated financial statements.
Revenues
We generate revenue primarily from the periodic cash interest we collect on our debt investments. In addition, most of our debt investments offer the opportunity to participate in a borrower’s equity performance through warrant participation, direct equity ownership, or otherwise, which we expect to result in revenue in the form of dividends and/or capital gains. Further, we may generate revenue in the form of commitment fees, origination fees, amendment fees, diligence fees, monitoring fees, fees for providing managerial assistance and possibly consulting fees and performance-based fees. These fees will be recognized as they are earned.
Expenses
Our primary operating expenses include the payment of investment advisory fees to our Investment Adviser, our allocable portion of overhead and other expenses incurred by our Administrator in performing its obligations under an administration agreement between us and the Administrator (the “Administration Agreement”) and other operating expenses as detailed below. Our investment advisory fee will compensate our Investment Adviser for its work in identifying, evaluating, negotiating, closing, monitoring, and servicing our investments. We will bear all other expenses of our operations and transactions, including (without limitation):
Critical Accounting Estimates
In the preparation of our consolidated financial statements and related disclosures, we have adopted various accounting policies that govern the application of U.S. GAAP. Our significant accounting policies are described in Note 2 to the consolidated financial statements. While all of these policies are important to understanding our consolidated financial statements, certain accounting policies and estimates are considered critical due to their impact on the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the periods covered by such consolidated financial statements. We have identified investment valuation, revenue recognition, and income taxes as our most critical accounting estimates. We continuously evaluate our estimates, including those related to the matters described below. Because of the nature of the judgments and assumptions we make, actual results could materially differ from those estimates under different assumptions or conditions. A discussion of our critical accounting policies follows.
Valuation of Investments
Investment transactions are recorded on the trade date. Realized gains or losses on investments are calculated using the specific identification method as the difference between the net proceeds received (excluding prepayment fees, if any) and the amortized cost basis of the investment without regard to unrealized appreciation or depreciation previously recognized, and include investments charged off during the period, net of recoveries. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation when gains or losses are recognized.
Investments for which market quotations are available are typically valued at those market quotations. To validate market quotations, the Company will utilize a number of factors to determine if the quotations are representative of fair value, including the source and number of the quotations.
Debt that is not publicly traded but for which there are external pricing sources available as of the valuation date is valued using independent broker-dealer, market maker quotations or independent pricing services. The valuation committee, comprised of members of the Investment Adviser, (the “Valuation Committee”) subjects these quotes to various criteria including, but not limited to, the number and quality of quotes, the deviation among the quotes and information derived from
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analyzing the Company’s own transactions in such investments throughout the reporting period. Generally, such investments are categorized in Level 2 of the fair value hierarchy, unless the Valuation Committee determines that the quality, quantity or deviation among quotes warrants significant adjustment to the inputs utilized.
The Board has designated the Investment Adviser as its “valuation designee” pursuant to Rule 2a-5 under the 1940 Act, and in that role the Investment Adviser is responsible for performing fair value determinations relating to all of the Company's investments, including periodically assessing and managing any material valuation risks and establishing and applying fair value methodologies, in accordance with valuation policies and procedures that have been approved by the Board. The Board remains ultimately responsible for fair value determinations under the 1940 Act and satisfies its responsibility through oversight of the valuation designee in accordance with Rule 2a-5. Investments that are not publicly traded or whose market prices are not readily available, as is expected to be the case for substantially all of the Company’s investments, are valued at fair value as determined in good faith by the Investment Adviser, based on, among other things, input of independent third-party valuation firm(s).
The Investment Adviser undertakes a multi-step valuation process, which includes, among other procedures, the following:
As part of the valuation process, the Investment Adviser may consider other information and may use valuation methods including but not limited to (i) market quotes for similar investments, (ii) recent trading activity, (iii) discounting forecasted cash flows of the investment, (iv) models that consider the implied yields from comparable debt, (v) third party appraisal, (vi) sale negotiations and purchase offers received from independent parties and (vii) estimated value of underlying assets to be received in liquidation or restructuring.
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of such investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that may ultimately be realized. Further, such investments are generally less liquid than publicly traded securities and may be subject to contractual and other restrictions on resale. If the Company were required to liquidate a portfolio investment in a forced or liquidation sale, it could realize amounts that are different from the amounts presented and such differences could be material.
In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the unrealized gains or losses reflected herein.
Under existing accounting guidance, fair value is defined as the price that the Company would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. This accounting guidance emphasizes valuation techniques that maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances.
The Company classifies the inputs used to measure these fair values into the following hierarchy as defined by current accounting guidance:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible to the Company.
Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.
Level 3: Significant inputs that are unobservable for an asset or liability.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Investments for which no external pricing sources are available as of the valuation date are included in Level 3 of the fair value hierarchy.
As a practical expedient, the Company uses net asset value (“NAV”) as the fair value for its equity investment in Great Lakes Funding II LLC (“Great Lakes II Joint Venture”). The Great Lakes II Joint Venture records its underlying investments at fair value on a quarterly basis in accordance with the 1940 Act and U.S. GAAP.
Valuation Techniques
Enterprise Value Waterfall Approach
The enterprise value waterfall approach determines an enterprise value based on EBITDA multiples of publicly traded companies that are considered similar to the subject portfolio company. The Company considers a variety of items in determining a reasonable pricing multiple, including, but not limited to, operating results, budgeted projections, growth, size, risk, profitability, leverage, management depth, diversification, market position, supplier or customer dependence, asset utilization, liquidity metrics, and access to capital markets. EBITDA of the portfolio company is adjusted for non-recurring items in order to reflect a normalized level of earnings that is representative of future earnings. In certain instances, the Company may also utilize revenue multiples to determine enterprise value. When available, the Company may assign a pricing multiple or value its investments based on the value of recent investment transactions in the subject portfolio company or offers to purchase the portfolio company. The enterprise value is adjusted for financial instruments with seniority to the Company’s ownership and for the effect of any instrument which may dilute the Company’s investment in the portfolio company. The adjusted enterprise value is then apportioned based on the seniority and privileges of the Company’s investments within the portfolio company.
Income Approach
The income approach utilizes a discounted cash flow methodology in which the Company estimates fair value based on the present value of expected cash flows discounted at a market rate of interest. The determination of a discount rate, or required rate of return, takes into account the portfolio company’s fundamentals and perceived credit risk. Because the majority of the Company’s portfolio companies do not have a public credit rating, determining a discount rate often involves assigning an implied credit rating based on the portfolio company’s operating metrics compared to average metrics of similar publicly rated debt. Operating metrics include, but are not limited to, EBITDA, interest coverage, leverage ratio, return on capital, and debt to equity ratios. The implied credit rating is used to assign a base discount rate range
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based on publicly available yields on similarly rated debt securities. The Company may apply a premium to the discount rate utilized in determining fair value when performance metrics and other qualitative information indicate that there is an additional level of uncertainty about collectability of cash flows.
Asset Approach
The asset approach values an investment based on the value of the underlying collateral securing the investment.
Revenue Recognition
The Company’s revenue recognition policies are as follows:
Interest income and payment-in-kind (“PIK”) interest income: Interest income is recorded on the accrual basis to the extent that such amounts are expected to be collected. The Company has loans in the portfolio that contain a PIK interest provision. PIK interest, which represents contractually deferred interest added to the loan balance that is generally due at maturity, is recorded on the accrual basis to the extent that such amounts are expected to be collected. PIK interest is not accrued if the Company does not expect the issuer to be able to pay all principal and interest when due.
Non-accrual investments: Management reviews all loans that become 90 days or more past due, or when there is reasonable doubt that principal or interest will be collected, for possible placement on non-accrual status. When the Company otherwise does not expect the borrower to be able to service its debt and other obligations, the Company will place the loan on non-accrual status and will generally cease recognizing interest income and PIK interest on that loan for financial reporting purposes. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment. The Company writes off any previously accrued and uncollected interest when it is determined that interest is no longer considered collectible. Non-accrual loans are returned to accrual status when the borrower’s financial condition improves such that management believes current interest and principal payments are expected to be collected.
Gains and losses on investment sales and paydowns: Realized gains and losses on investments are recognized using the specific identification method.
Dividend income and payment-in-kind dividends: Dividend income is recognized on the date dividends are declared. The Company holds preferred equity investments in the portfolio that contain a PIK dividend provision. PIK dividends, which represent contractually deferred dividends added to the equity balance, are recorded on the accrual basis to the extent that such amounts are expected to be collected. The Company will typically cease accrual of PIK dividends when the fair value of the equity investment is less than the cost basis of the investment or when it is otherwise determined by management that PIK dividends are unlikely to be collected. If management determines that a decline in fair value is temporary in nature and PIK dividends are more likely than not to be collected, management may elect to continue accruing PIK dividends.
Original issue discount: Discounts received to par on loans purchased are capitalized and accreted into income over the life of the loan. Any remaining discount is accreted into income upon prepayment of the loan.
Other income: Origination fees (to the extent services are performed to earn such income upon closing), amendment fees, consent fees and other fees associated with investments in portfolio companies are recognized as income when they are earned. Prepayment penalties received by the Company for debt instruments repaid prior to the maturity date are recorded as income upon receipt.
Income Taxes
Prior to the Formation Transactions, the Legacy Funds were treated as partnerships for U.S. federal, state and local income tax purposes and, therefore, no provision has been made in the accompanying consolidated financial statements for federal, state or local income taxes. In accordance with the partnership tax law requirements, each partner would include their respective components of the Legacy Funds’ taxable profits or losses, as shown on their Schedule K-1 in their respective tax or information returns. Subsequent to the Formation Transactions, the Legacy Funds became disregarded entities for tax purposes.
The Company has elected to be treated for U.S. federal income tax purposes, and intends to comply with the requirements to qualify annually, as a RIC under Subchapter M of the Code and, among other things, intends to make the requisite distributions to its stockholders which will relieve the Company from U.S. federal income taxes.
In order to qualify for tax treatment as a RIC, among other requirements, the Company is required to timely distribute to its stockholders at least 90.0% of its investment company taxable income, as defined by the Code, for each fiscal tax year. The Company will be subject to a nondeductible U.S. federal excise tax of 4.0% on certain undistributed income if it does not distribute an amount at least equal to the sum of (i) 98.0% of its ordinary income for the calendar year, (ii) 98.2% of its capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year, and (iii) any ordinary income and capital gain net income that it recognized for preceding years, but were not distributed during such years, and on which it paid no U.S. federal income tax.
Depending on the level of taxable income earned in an excise tax year, the Company may choose to carry forward taxable income in excess of current year dividend distributions into the next excise tax year and pay a 4.0% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions for U.S. federal excise tax purposes, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. Since the Company’s IPO, the Company has not accrued or paid excise tax.
The tax years ended December 31, 2023, 2022, 2021 and 2020 remain subject to examination by U.S. federal, state, and local tax authorities. No material interest expense or penalties have been assessed for the three and six months ended June 30, 2024 and 2023. If the Company was required to recognize interest and penalties, if any, related to unrecognized tax benefits this would be recognized as income tax expense in the consolidated statements of operations.
The Company’s Taxable Subsidiaries record deferred tax assets or liabilities related to temporary book versus tax differences on the income or loss generated by the underlying equity investments held by the Taxable Subsidiaries. As of both June 30, 2024 and December 31, 2023, the Company recorded a net deferred tax asset of zero. For both the three and six months ended June 30, 2024 and 2023, the Company recorded a tax provision of zero. As of June 30, 2024 and December 31, 2023, the valuation allowance on the Company’s net deferred tax asset was $3.4 million and $3.9 million, respectively. During the three and six months ended June 30, 2024, the Company recognized a decrease in the valuation allowance of $0.5 million. During the three and six months ended June 30, 2023, the Company recognized a decrease in the valuation allowance of $0.1 million.
In accordance with certain applicable U.S. Treasury regulations and guidance issued by the Internal Revenue Service, a publicly offered RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive its entire distribution in either cash or stock of the RIC, subject to a limitation on the aggregate amount of cash available to be distributed to all stockholders, which limitation must be at least 20.0% of the aggregate declared distribution. If too many stockholders elect to receive cash, the cash available for distribution must be allocated pro rata among the stockholders electing to receive cash (with the balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive less than 20.0% of its entire distribution in cash. If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock. The Company has no current intention of paying dividends in shares of its stock in accordance with these Treasury regulations or other applicable IRS guidance.
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U.S. GAAP provides guidance on thresholds, measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition that is intended to provide better financial statement comparability among different entities.
ASC Topic 740 — Income Taxes (“ASC 740”), provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the consolidated financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s U.S. federal income tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the consolidated statements of operations. As of June 30, 2024 and December 31, 2023, there were no uncertain tax positions.
The Company is required to determine whether a tax position of the Company is more-likely-than-not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized could result in the Company recording a tax liability that could negatively impact the Company’s net assets.
The Company has concluded that it was not necessary to record a liability for any such tax positions as of June 30, 2024 and December 31, 2023. However, the Company’s conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, ongoing analyses of, and changes to, tax laws, regulations and interpretations thereof.
Portfolio and Investment Activity
The Company’s investment objective is to generate both current income and capital appreciation through debt and equity investments. The Company offers customized financing to business owners, management teams and financial sponsors for change of ownership transactions, recapitalizations, strategic acquisitions, business expansion and other growth initiatives. The Company invests primarily in first lien loans, and, to a lesser extent, second lien loans and equity securities issued by lower middle-market companies and traditional middle-market companies. As of June 30, 2024, our portfolio consisted of investments in 61 portfolio companies with a fair value of approximately $195.6 million. As of December 31, 2023, our portfolio consisted of investments in 60 portfolio companies with a fair value of approximately $189.7 million.
Most of the Company’s debt investments are structured as first lien loans. First lien loans may contain some minimum amount of principal amortization, excess cash flow sweep feature, prepayment penalties, or any combination of the foregoing. First lien loans are secured by a first priority lien in existing and future assets of the borrower and may take the form of term loans, delayed draw facilities, or revolving credit facilities. Unitranche debt, a form of first lien loan, typically involves issuing one debt security that blends the risk and return profiles of both senior secured and subordinated debt, bifurcating the loan into a first-out tranche and last-out tranche. As of June 30, 2024, none of the fair value of our first lien loans consisted of last-out loans. As of December 31, 2023, none of the fair value of our first lien loans consisted of last-out loans. In some cases, first lien loans may be subordinated, solely with respect to the payment of cash interest, to an asset based revolving credit facility.
The Company also invests in debt instruments structured as second lien loans. Second lien loans are loans which have a second priority security interest in all or substantially all of the borrower’s assets, and in some cases, may be subject to the interruption of cash interest payments upon certain events of default, at the discretion of the first lien lender.
During the three months ended June 30, 2024, we made approximately $1.5 million of investments and had approximately $5.6 million in repayments and sales, resulting in net repayments and sales of approximately $4.1 million for the period. During the three months ended June 30, 2023, we made approximately $4.8 million of investments and had approximately $4.4 million in repayments and sales, resulting in net deployment of approximately $0.4 million for the period.
During the six months ended June 30, 2024, we made approximately $11.3 million of investments and had approximately $6.5 million in repayments and sales, resulting in net deployment of approximately $4.8 million for the period. During the six months ended June 30, 2023, we made approximately $12.2 million of investments and had approximately $11.2 million in repayments and sales, resulting in net deployment of approximately $1.0 million for the period.
As of June 30, 2024, our debt investment portfolio, which represented 80.0% of the fair value of our total portfolio, had a weighted average annualized yield of approximately 11.4% (excluding income from non-accruals and collateralized loan obligations). As of June 30, 2024, 11.9% of the fair value of our debt investment portfolio was bearing a fixed rate of interest. As of December 31, 2023, our debt investment portfolio, which represented 82.0% of the fair value of our total portfolio, had a weighted average annualized yield of approximately 11.1% (excluding income from non-accruals and collateralized loan obligations). As of December 31, 2023, 13.6% of the fair value of our debt investment portfolio was bearing a fixed rate of interest.
The weighted average annualized yield is calculated based on the effective interest rate as of period end, divided by the fair value of our debt investments. The weighted average annualized yield of our debt investments is not the same as a return on investment for our stockholders but, rather, relates to a portion of our investment portfolio and is calculated before the payment of all of our fees and expenses. There can be no assurance that the weighted average annualized yield will remain at its current level.
As of June 30, 2024, the Company’s Adviser approved the fair value of the Company’s investment portfolio of approximately $195.6 million in good faith in accordance with the Company’s valuation procedures. The Company’s Adviser approved the fair value of the Company’s investment portfolio as of June 30, 2024 with input from third-party valuation firms and the Investment Adviser, as valuation designee, based on information known or knowable as of the valuation date, including trailing and forward looking data.
As of June 30, 2024, we had debt investments in three portfolio companies on non-accrual status with an aggregate amortized cost of $17.2 million and an aggregate fair value of $10.1 million, which represented 8.5% and 5.2% of the investment portfolio, respectively. As of December 31, 2023, we had debt investments in three portfolio companies on non-accrual status with aggregate amortized cost of $17.2 million and an aggregate fair value of $12.8 million, which represented 8.7% and 6.8% of the investment portfolio, respectively.
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The following table summarizes the amortized cost and the fair value of investments as of June 30, 2024 (dollars in thousands):
|
|
Investments at |
|
|
Amortized Cost |
|
|
Investments at |
|
|
Fair Value |
|
||||
First Lien Debt |
|
$ |
133,516 |
|
|
|
65.8 |
% |
|
$ |
125,133 |
|
|
|
64.0 |
% |
Second Lien Debt |
|
|
9,352 |
|
|
|
4.6 |
% |
|
|
8,012 |
|
|
|
4.1 |
% |
Subordinated Debt |
|
|
26,893 |
|
|
|
13.3 |
% |
|
|
23,218 |
|
|
|
11.9 |
% |
Collateralized Loan Obligations |
|
|
1,770 |
|
|
|
0.9 |
% |
|
|
1,596 |
|
|
|
0.8 |
% |
Joint Venture |
|
|
393 |
|
|
|
0.2 |
% |
|
|
407 |
|
|
|
0.2 |
% |
Equity |
|
|
30,906 |
|
|
|
15.2 |
% |
|
|
37,187 |
|
|
|
19.0 |
% |
Total |
|
$ |
202,830 |
|
|
|
100.0 |
% |
|
$ |
195,553 |
|
|
|
100.0 |
% |
The following table summarizes the amortized cost and the fair value of investments as of December 31, 2023 (dollars in thousands):
|
|
Investments at |
|
|
Amortized Cost |
|
|
Investments at |
|
|
Fair Value |
|
||||
First Lien Debt |
|
$ |
128,537 |
|
|
|
65.4 |
% |
|
$ |
124,007 |
|
|
|
65.4 |
% |
Second Lien Debt |
|
|
8,968 |
|
|
|
4.6 |
% |
|
|
7,918 |
|
|
|
4.2 |
% |
Subordinated Debt |
|
|
26,573 |
|
|
|
13.5 |
% |
|
|
23,548 |
|
|
|
12.4 |
% |
Collateralized Loan Obligations |
|
|
1,600 |
|
|
|
0.8 |
% |
|
|
1,600 |
|
|
|
0.8 |
% |
Joint Venture |
|
|
440 |
|
|
|
0.2 |
% |
|
|
450 |
|
|
|
0.2 |
% |
Equity |
|
|
30,400 |
|
|
|
15.5 |
% |
|
|
32,135 |
|
|
|
17.0 |
% |
Total |
|
$ |
196,518 |
|
|
|
100.0 |
% |
|
$ |
189,658 |
|
|
|
100.0 |
% |
The following table shows the portfolio composition by industry grouping at fair value as of June 30, 2024 and December 31, 2023 (dollars in thousands):
|
|
June 30, 2024 |
|
|
December 31, 2023 |
|
||||||||||
|
|
Investments at |
|
|
Percentage of Total Portfolio |
|
|
Investments at |
|
|
Percentage of Total Portfolio |
|
||||
Healthcare |
|
$ |
44,634 |
|
|
|
23.0 |
% |
|
$ |
47,934 |
|
|
|
25.3 |
% |
Business Services |
|
|
34,715 |
|
|
|
17.8 |
% |
|
|
29,555 |
|
|
|
15.6 |
% |
Financials |
|
|
25,573 |
|
|
|
13.1 |
% |
|
|
24,213 |
|
|
|
12.8 |
% |
Information Technology |
|
|
21,412 |
|
|
|
10.9 |
% |
|
|
21,860 |
|
|
|
11.5 |
% |
Industrials |
|
|
18,215 |
|
|
|
9.3 |
% |
|
|
16,558 |
|
|
|
8.7 |
% |
Consumer Discretionary |
|
|
14,314 |
|
|
|
7.2 |
% |
|
|
10,180 |
|
|
|
5.4 |
% |
Healthcare Management |
|
|
6,682 |
|
|
|
3.4 |
% |
|
|
9,465 |
|
|
|
5.0 |
% |
Automobile Part Manufacturer |
|
|
6,300 |
|
|
|
3.2 |
% |
|
|
5,510 |
|
|
|
2.9 |
% |
Advertising & Marketing Services |
|
|
3,899 |
|
|
|
2.0 |
% |
|
|
4,160 |
|
|
|
2.2 |
% |
Communication Services |
|
|
4,007 |
|
|
|
2.0 |
% |
|
|
4,029 |
|
|
|
2.1 |
% |
Medical Device Distributor |
|
|
4,139 |
|
|
|
2.1 |
% |
|
|
3,425 |
|
|
|
1.8 |
% |
Textile Equipment Manufacturer |
|
|
3,161 |
|
|
|
1.6 |
% |
|
|
3,860 |
|
|
|
2.0 |
% |
Financial Services |
|
|
2,243 |
|
|
|
1.1 |
% |
|
|
2,445 |
|
|
|
1.3 |
% |
Online Merchandise Retailer |
|
|
1,993 |
|
|
|
1.0 |
% |
|
|
2,095 |
|
|
|
1.1 |
% |
Consumer Staples |
|
|
1,718 |
|
|
|
0.9 |
% |
|
|
1,737 |
|
|
|
0.9 |
% |
Household Product Manufacturer |
|
|
758 |
|
|
|
0.4 |
% |
|
|
758 |
|
|
|
0.4 |
% |
Oil & Gas Engineering and Consulting Services |
|
|
580 |
|
|
|
0.3 |
% |
|
|
670 |
|
|
|
0.4 |
% |
Data Processing & Digital Marketing |
|
|
506 |
|
|
|
0.3 |
% |
|
|
509 |
|
|
|
0.3 |
% |
Electronic Machine Repair |
|
|
182 |
|
|
|
0.1 |
% |
|
|
245 |
|
|
|
0.1 |
% |
General Industrial |
|
|
522 |
|
|
|
0.3 |
% |
|
|
212 |
|
|
|
0.1 |
% |
Testing Laboratories |
|
|
— |
|
|
|
— |
|
|
|
238 |
|
|
|
0.1 |
% |
Total |
|
$ |
195,553 |
|
|
|
100.0 |
% |
|
$ |
189,658 |
|
|
|
100.0 |
% |
Results of Operations
Operating results for the three and six months ended June 30, 2024 and 2023 were as follows (dollars in thousands):
|
|
For the Three Months Ended June 30, |
|
|
For the Six Months Ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total investment income |
|
$ |
5,370 |
|
|
$ |
5,344 |
|
|
$ |
10,373 |
|
|
$ |
10,600 |
|
Total expenses |
|
|
4,620 |
|
|
|
4,305 |
|
|
|
8,676 |
|
|
|
8,488 |
|
Net investment income |
|
|
750 |
|
|
|
1,039 |
|
|
|
1,697 |
|
|
|
2,112 |
|
Net realized gain (loss) on investments |
|
|
(200 |
) |
|
|
(2,362 |
) |
|
|
87 |
|
|
|
(3,868 |
) |
Net change in unrealized appreciation (depreciation) on investments |
|
|
(1,092 |
) |
|
|
4,563 |
|
|
|
(417 |
) |
|
|
4,346 |
|
Net realized gain (loss) on extinguishment of debt |
|
|
(116 |
) |
|
|
— |
|
|
|
(174 |
) |
|
|
— |
|
Net increase (decrease) in net assets resulting from operations |
|
$ |
(658 |
) |
|
$ |
3,240 |
|
|
$ |
1,193 |
|
|
$ |
2,590 |
|
35
Investment income
The composition of our investment income for the three and six months ended June 30, 2024 and 2023 was as follows (dollars in thousands):
|
|
For the Three Months Ended June 30, |
|
|
For the Six Months Ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Interest income |
|
$ |
4,635 |
|
|
$ |
4,907 |
|
|
$ |
9,268 |
|
|
$ |
9,675 |
|
Payment-in-kind interest |
|
|
518 |
|
|
|
319 |
|
|
|
871 |
|
|
|
783 |
|
Dividend income |
|
|
17 |
|
|
|
19 |
|
|
|
34 |
|
|
|
33 |
|
Other income |
|
|
200 |
|
|
|
99 |
|
|
|
200 |
|
|
|
109 |
|
Total investment income |
|
$ |
5,370 |
|
|
$ |
5,344 |
|
|
$ |
10,373 |
|
|
$ |
10,600 |
|
The income reported as interest income, PIK interest, and PIK dividend income is generally based on the stated rates as disclosed in our consolidated schedules of investments. Accretion of discounts received for purchased loans are included in interest income as an adjustment to yield. As a general rule, our interest income, PIK interest, and PIK dividend income are recurring in nature.
We also generate fee income primarily through origination fees charged for new investments, and secondarily via amendment fees, consent fees, prepayment penalties, and other fees. While fee income is typically non-recurring for each investment, most of our new investments include an origination fee; as such, fee income is dependent upon our volume of directly originated investments and the fee structure associated with those investments.
We earn dividends on certain equity investments within our investment portfolio. As noted in our consolidated schedules of investments, some investments are scheduled to pay a periodic dividend, though these recurring dividends do not make up a significant portion of our total investment income. We may receive, and have received, more substantial one-time dividends from our equity investments.
For the three months ended June 30, 2024, total investment income increased by less than $0.1 million, or 0.5%, compared to the three months ended June 30, 2023. The increase from the prior period was primarily driven by an increase in PIK interest from $0.3 million for the three months ended June 30, 2023 to $0.5 million for the three months ended June 30, 2024 as well as an increase in other income from $0.1 million for the three months ended June 30, 2023 to $0.2 million for the three months ended June 30, 2024, offset by a decrease in interest income from $4.9 million for the three months ended June 30, 2023 to $4.6 million for the three months ended June 30, 2024. The decrease in interest income is primarily due to a smaller interest earning debt portfolio for the three months ended June 30, 2024 compared to the three months ended June 30, 2023.
For the six months ended June 30, 2024, total investment income decreased $0.2 million, or 2.1%, compared to the six months ended June 30, 2023. The decrease from the prior period was driven by an decrease in interest income from $10.6 million for the six months ended June 30, 2023 to $10.4 million for the six months ended June 30, 2024. The decrease in interest income is primarily due to a smaller interest earning debt portfolio for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. PIK interest increased from $0.8 million for the six months ended June 30, 2023 to $0.9 million for the six months ended June 30, 2024. The increase in PIK income during the six months ended June 30, 2024 compared to the same period in prior year was primarily due to an increase in investments that was paid in-kind.
Operating expenses
The composition of our expenses for the three and six months ended June 30, 2024 and 2023 was as follows (dollars in thousands):
|
|
For the Three Months Ended June 30, |
|
|
For the Six Months Ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Interest and financing expenses |
|
$ |
2,303 |
|
|
$ |
2,236 |
|
|
$ |
4,310 |
|
|
$ |
4,305 |
|
Base management fee |
|
|
909 |
|
|
|
946 |
|
|
|
1,802 |
|
|
|
1,876 |
|
Directors' fees |
|
|
175 |
|
|
|
135 |
|
|
|
325 |
|
|
|
270 |
|
Administrative service fees |
|
|
255 |
|
|
|
224 |
|
|
|
456 |
|
|
|
481 |
|
General and administrative expenses |
|
|
978 |
|
|
|
764 |
|
|
|
1,783 |
|
|
|
1,556 |
|
Total expenses |
|
$ |
4,620 |
|
|
$ |
4,305 |
|
|
$ |
8,676 |
|
|
$ |
8,488 |
|
For the three months ended June 30, 2024, operating expenses increased by $0.3 million, or 7.3%, compared to the three months ended June 30, 2023, primarily due to higher interest and financing expenses, which increased from $2.2 million for the three months ended June 30, 2023 to $2.3 million for the three months ended June 30, 2024, as well as higher general and administrative expenses, which increased from $0.8 million for the three months ended June 30, 2023 to $1.0 million for the three months ended June 30, 2024.
For the six months ended June 30, 2024, operating expenses increased by $0.2 million, or 2.2%, compared to the six months ended June 30, 2023, primarily due to higher general and administrative expenses, which increased from $1.6 million for the six months ended June 30, 2023 to $1.8 million for the six months ended June 30, 2024.
Net realized gain (loss) on sales of investments
During the three and six months ended June 30, 2024, we recognized $(0.2) million and $0.1 million of net realized gains/(losses) on our portfolio investments, respectively. During the three and six months ended June 30, 2023, we recognized $2.4 million and $3.9 million of net realized losses on our portfolio investments, respectively.
Net change in unrealized appreciation (depreciation) on investments
Net change in unrealized appreciation (depreciation) on investments reflects the net change in the fair value of our investment portfolio. For the three and six months ended June 30, 2024, we recognized $(1.1) million and $(0.4) million of net change in unrealized depreciation on investments, respectively. For the three and six months ended June 30, 2023, we recognized $4.6 million and $4.3 million of net change in unrealized appreciation on investments, respectively.
Changes in net assets resulting from operations
For the three and six months ended June 30, 2024, we recorded a net decrease and increase in net assets resulting from operations of $(0.7) million and $1.2 million, respectively. Based on the weighted average shares of common stock outstanding for the three and six months ended June 30, 2024, our basic and diluted per share net decrease and increase in net assets resulting from operations was $(0.25) and $0.45, respectively.
36
For the three and six months ended June 30, 2023, we recorded a net increase in net assets resulting from operations of $3.2 million and $2.6 million. Based on the weighted average shares of common stock outstanding for the three and six months ended June 30, 2023, our basic per share net increase in net assets resulting from operations was $1.20 and $0.96, respectively. Based on the weighted average shares of common stock outstanding for the three and six months ended June 30, 2023, our diluted per share net increase in net assets resulting from operations was $1.07 and $0.94, respectively.
Financial Condition, Liquidity and Capital Resources
We use and intend to use existing cash primarily to originate investments in new and existing portfolio companies, pay distributions to our stockholders, and repay indebtedness.
Since our IPO, we have raised approximately $136.0 million in net proceeds from equity offerings through June 30, 2024.
KeyBank Credit Facility
On October 30, 2020, Capitala Business Lending, LLC (“CBL”), a direct, wholly owned, consolidated subsidiary of the Company, entered into a senior secured revolving credit agreement (“the KeyBank Credit Facility”) with the investment adviser at the time, as collateral manager, the lenders from time to time parties thereto (each, a “Lender”), KeyBank National Association, as administrative agent, and U.S. Bank National Association, as custodian.
2032 Convertible Notes
On April 1, 2022, the Company issued $
The 2032 Convertible Notes are convertible, at the holder’s option and at any time on or prior to the close of business on the business day immediately preceding the maturity date, into such number of shares of the Company’s common stock as is equal to the principal balance of the notes being converted on such date divided by the “Conversion Price,” as described below.
On March 28, 2024, the Company obtained a BB+ rating from a Nationally Recognized Statistical Rating Organization (“NRSRO”) with respect to the 2032 Convertible Notes. The 2032 Convertible Notes have a fixed interest rate of 5.25% per annum payable semi-annually on March 31 and September 30 of each year, commencing on September 30, 2022, subject to a step up of 0.75% per annum to the extent that the 2032 Convertible Notes are downgraded below Investment Grade by an NRSRO or the 2032 Convertible Notes no longer maintain a rating from an NRSRO. Starting on March 28, 2024, as a result of the rating downgrade, the 2032 Convertible Notes have a fixed interest rate of 6.00% per annum.
During the three months ended June 30, 2024, the Company repaid $2.0 million in outstanding principal amount of the 2032 Convertible Notes.
During the six months ended June 30, 2024, the Company repaid $2.0 million and converted another $1.0 million in outstanding principal amount of the 2032 Convertible Notes. Of the $1.0 million that was converted, $0.5 million was paid in cash and $0.5 million was converted into shares of the Company’s common stock at a rate of $22.61 per principal amount, in accordance with a Notice of Exercise of Conversion.
As of June 30, 2024, the Company had $
2026 Notes
On October 29, 2021, the Company issued $
37
In July 2022, pursuant to the requirements of a registration rights agreements entered into in connection with the offering described above, the Company completed an exchange offer pursuant to which all of the outstanding 2026 Notes were exchanged for notes with substantially identical terms, but that are registered under the Securities Act (which notes are also referred to herein as the “2026 Notes”).
As of June 30, 2024, the Company had approximately $
Asset Coverage Ratio
We are only allowed to borrow money such that our asset coverage, as defined in the 1940 Act, equals at least 150% if certain requirements are met, after such borrowing, with certain limited exceptions. As of June 30, 2024, our asset coverage ratio was 176%. If our asset coverage ratio falls below 150% due a decline in the fair market of our portfolio, we may be limited in our ability to raise additional debt.
Cash and Cash Equivalents
As of June 30, 2024, we had $4.3 million in cash and cash equivalents.
Contractual Obligations
We have entered into two contracts under which we have material future commitments: the Investment Advisory Agreement, pursuant to which the Investment Adviser serves as our investment adviser, and the Administration Agreement, pursuant to which our Administrator agrees to furnish us with certain administrative services necessary to conduct our day-to-day operations. Payments under the Investment Advisory Agreement in future periods will be equal to: (1) a percentage of the value of our gross assets; and (2) an incentive fee based on our performance. Payments under the Administration Agreement will occur on an ongoing basis as expenses are incurred on our behalf by our Administrator.
The Investment Advisory Agreement and the Administration Agreement are each terminable by either party without penalty upon 60 days’ written notice to the other. If either of these agreements is terminated, the costs we incur under new agreements may increase. In addition, we will likely incur significant time and expense in locating alternative parties to provide the services we expect to receive under both our Investment Advisory Agreement and our Administration Agreement. Any new investment advisory agreement would also be subject to approval by our stockholders.
A summary of our significant contractual payment obligations as of June 30, 2024 are as follows (dollars in millions):
|
|
Contractual Obligations Payments Due by Period |
|
|||||||||||||||||
|
|
Less |
|
|
1 – 3 |
|
|
3 – 5 |
|
|
More |
|
|
Total |
|
|||||
2026 Notes |
|
$ |
— |
|
|
$ |
50.0 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
50.0 |
|
2032 Convertible Notes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
12.0 |
|
|
|
12.0 |
|
KeyBank Credit Facility |
|
|
— |
|
|
|
53.1 |
|
|
|
— |
|
|
|
— |
|
|
|
53.1 |
|
Total Contractual Obligations |
|
$ |
— |
|
|
$ |
103.1 |
|
|
$ |
— |
|
|
$ |
12.0 |
|
|
$ |
115.1 |
|
Distributions
In order to qualify as a RIC and to avoid corporate-level U.S. federal income tax on the income we timely distribute to our stockholders, we are required to distribute at least 90% of our net ordinary income and our net short-term capital gains in excess of net long-term capital losses, if any, to our stockholders on an annual basis. Additionally, to avoid a U.S. federal excise tax, we must distribute an amount at least equal to the sum of 98% of our ordinary income (during the calendar year) plus 98.2% of our capital gain net income (during each 12-month period ending on October 31 in that calendar year) plus any ordinary income and capital gain net income that we recognized for preceding years, but were not distributed during such years, and on which we paid no U.S. federal income tax. We made quarterly distributions to our stockholders for the first four full quarters subsequent to our IPO. To the extent we had income available, we made monthly distributions to our stockholders from October 30, 2014 until March 30, 2020. As announced on April 1, 2020, distributions, if any, will be made on a quarterly basis effective for the second quarter of 2020. Our stockholder distributions, if any, will be determined by our Board on a quarterly basis. Any distributions to our stockholders will be declared out of assets legally available for distribution. For the three and six months ended June 30, 2024, the Company made a distribution of $0.33 and $0.65 per share, respectively. For the three and six months ended June 30, 2023, the Company made a distribution of $0.22 and $0.40 per share, respectively.
We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of our distributions from time to time, and from time to time we may decrease the amount of our distributions. In addition, we may be limited in our ability to make distributions due to the asset coverage requirements applicable to us as a BDC under the 1940 Act. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including the possible loss of our qualification as a RIC under Subchapter M of the Code. We cannot assure stockholders that they will receive any distributions.
To the extent our taxable earnings fall below the total amount of our distributions for that fiscal year, a portion of those distributions may be deemed a return of capital to our stockholders for U.S. federal income tax purposes. Thus, the source of a distribution to our stockholders may be the original capital invested by the stockholder rather than our income or gains. Stockholders should read any written disclosure accompanying any stockholder distribution carefully and should not assume that the source of any distribution is our ordinary income or capital gains.
We have adopted an “opt out” dividend reinvestment plan (“DRIP”) for our common stockholders. As a result, if we declare a distribution, then stockholders’ cash distributions will be automatically reinvested in additional shares of our common stock unless a stockholder specifically “opts out” of our DRIP. If a stockholder opts out, that stockholder will receive cash distributions. Although distributions paid in the form of additional shares of our common stock will generally be subject to U.S. federal, state, and local taxes in the same manner as cash distributions, stockholders participating in our DRIP will not receive any corresponding cash distributions with which to pay any such applicable taxes.
Tax characteristics of all distributions paid are reported to stockholders on Form 1099 after the end of the calendar year. Distributions may be subject to reclassification based on future dividends and operating results and will not be determined until the end of the year.
Related Parties
On July 1, 2021, we entered into the Investment Advisory Agreement with the Investment Adviser. The Company is externally managed by the Investment Adviser, an affiliate of BC Partners, pursuant to the Investment Advisory Agreement. Mr. Goldthorpe, an interested member of the Board, has a direct or indirect pecuniary interest in the Investment Adviser. The Investment Adviser is a registered investment adviser under the Investment Advisers Act of 1940, as amended. The Investment Adviser is an affiliate of BC Partners Advisors L.P. for U.S. regulatory purposes. Mount Logan Capital Inc. is the ultimate control person of the Investment Adviser.
38
Under the Investment Advisory Agreement, fees payable to the Investment Adviser equal (i) the Base Management Fee and (ii) the Incentive Fee. Unless earlier terminated as described below, the Investment Advisory Agreement will remain in effect from year-to-year if approved annually by a majority of the Board or by the holders of a majority of the outstanding shares, and, in each case, a majority of the independent directors.
Pursuant to the Administration Agreement, the Administrator provides administrative services to the Company necessary for the operations of the Company, which include providing to the Company office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities and such other services as the Administrator, subject to review by the Board, shall from time to time deem to be necessary or useful to perform its obligations under the applicable Administration Agreement. The Administrator also provides to the Company portfolio collection functions for and is responsible for the financial and other records that the Company is required to maintain and prepares, prints and disseminates reports to the Company's stockholders and reports and all other materials filed with the SEC.
For providing these services, facilities and personnel, the Company reimburses the Administrator the allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the Administration Agreement, including the Company's allocable portion of the costs of compensation and related expenses of its chief financial officer and chief compliance officer and their respective staffs.
On April 10, 2023, superseding a prior exemptive order granted on October 23, 2018, the SEC issued an order granting an application for exemptive relief to us and certain of our affiliates that allows BDCs managed by the Investment Adviser, including Logan Ridge, to co-invest, subject to the satisfaction of certain conditions, in certain private placement transactions, with other funds managed by the Investment Adviser or its affiliates, certain proprietary accounts of the Investment Adviser or its affiliates and any future funds that are advised by the Investment Adviser or its affiliated investment advisers. Under the terms of the exemptive order, in order for Logan Ridge to participate in a co-investment transaction, a “required majority” (as defined in Section 57(0) of the 1940 Act) of Logan Ridge's independent directors must conclude that (i) the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to Logan Ridge and its stockholders and do not involve overreaching with respect of Logan Ridge or its stockholders on the part of any person concerned, and (ii) the proposed transaction is consistent with the interests of Logan Ridge's stockholders and is consistent with Logan Ridge's investment objectives and strategies and certain criteria established by the Board. We believe this relief may not only enhance our ability to further our investment objectives and strategies, but may also increase favorable investment opportunities for us, in part by allowing us to participate in larger investments, together with our co-investment affiliates, than would be available to us in the absence of such relief.
Prior to July 1, 2021, we were party to an administration agreement with our then administrator, Capitala Advisors Corp. As administrator, Capitala Advisors Corp. provided us with the office facilities and administrative services necessary to conduct our day-to-day operations. On July 1, 2021, we entered into a new Administration Agreement with our current Administrator, BC Partners Management LLC. Pursuant to the terms of the Administration Agreement, our Administrator provides us with the office facilities and administrative services necessary to conduct our day-to-day operations.
Off-Balance Sheet Arrangements
As of June 30, 2024 and December 31, 2023, the Company had the following outstanding unfunded commitments to existing portfolio companies (dollars in thousands):
Portfolio Company |
Investment |
|
June 30, |
|
|
December 31, 2023 |
|
||
Accordion Partners LLC (Revolver) |
First Lien/Senior Secured Debt |
$ |
|
765 |
|
$ |
|
1,531 |
|
American Clinical Solutions, LLC(1) |
First Lien/Senior Secured Debt |
|
N/A |
|
|
|
250 |
|
|
BetaNXT, Inc. (Revolver) |
First Lien/Senior Secured Debt |
|
|
249 |
|
|
|
408 |
|
Bradshaw International, Inc. (Revolver) |
First Lien/Senior Secured Debt |
|
|
922 |
|
|
|
922 |
|
Critical Nurse Staffing, LLC (Revolver) |
First Lien/Senior Secured Debt |
|
|
1,000 |
|
|
|
1,000 |
|
Dentive, LLC(1) |
First Lien/Senior Secured Debt |
|
N/A |
|
|
|
344 |
|
|
Dentive, LLC (Revolver) |
First Lien/Senior Secured Debt |
|
|
187 |
|
|
|
148 |
|
Fortis Payment Systems, LLC(1) |
First Lien/Senior Secured Debt |
|
|
406 |
|
|
N/A |
|
|
Great Lakes Funding II LLC - Series A |
Joint Venture |
|
|
101 |
|
|
|
55 |
|
GreenPark Infrastructure, LLC - Series M-1 |
Common Stock and Membership Units |
|
|
732 |
|
|
|
732 |
|
IDC Infusion Services, LLC(1) |
First Lien/Senior Secured Debt |
|
|
798 |
|
|
|
799 |
|
Morae Global Corporation (Revolver) |
First Lien/Senior Secured Debt |
|
|
292 |
|
|
|
292 |
|
Orthopaedic (ITC) Buyer, LLC(1) |
First Lien/Senior Secured Debt |
|
|
638 |
|
|
|
638 |
|
PhyNet Dermatology LLC(1) |
First Lien/Senior Secured Debt |
|
|
259 |
|
|
|
259 |
|
Riddell, Inc.(1) |
First Lien/Senior Secured Debt |
|
|
364 |
|
|
N/A |
|
|
Tactical Air Support, Inc.(1) |
First Lien/Senior Secured Debt |
|
|
286 |
|
|
|
286 |
|
Taoglas Group Holdings Limited (Revolver) |
First Lien/Senior Secured Debt |
|
|
122 |
|
|
|
261 |
|
VBC Spine Opco, LLC (DxTx Pain and Spine LLC)(1) |
First Lien/Senior Secured Debt |
|
|
285 |
|
|
|
713 |
|
VBC Spine Opco, LLC (DxTx Pain and Spine LLC) (Revolver) |
First Lien/Senior Secured Debt |
|
|
145 |
|
|
|
97 |
|
Wealth Enhancement Group, LLC (Revolver) |
First Lien/Senior Secured Debt |
|
|
438 |
|
|
|
438 |
|
Total Unfunded Commitments |
|
$ |
|
7,989 |
|
$ |
|
9,173 |
|
(1) Delayed-draw term loan.
We have no other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Recent Developments
On August 7, 2024, the Company’s Board of Directors approved a distribution of $0.33 per share, payable on August 30, 2024 to stockholders of record as of August 22, 2024.
39
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to financial market risks, including changes in interest rates. Changes in interest rates may affect both our cost of funding and our interest income from portfolio investments and cash and cash equivalents.
We may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options, and forward contracts subject to the requirements of the 1940 Act. For the six months ended June 30, 2024, we did not engage in hedging activities.
As of June 30, 2024, we held 48 securities bearing a variable rate of interest. Our variable rate investments represent approximately 88.1% of the fair value of our total debt investments. As of June 30, 2024, none of our variable rate securities were yielding interest at a rate equal to the established interest rate floor. As of June 30, 2024, we had $53.1 million outstanding on our KeyBank Credit Facility, which has a variable rate of interest at one-month SOFR + 2.90%, subject to an interest rate floor of 0.40%. As of June 30, 2024, all of our other interest paying liabilities, consisting of $50.0 million in 2026 Notes and $12.0 million in 2032 Convertible Notes, were bearing interest at a fixed rate.
Interest rate sensitivity refers to the change in earnings that may result from changes in the level of interest rates. Because we fund a portion of our investments with borrowings, our net investment income is affected by the difference between the rate at which we invest and the rate at which we borrow. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In addition, in a prolonged low interest rate environment, including a reduction of LIBOR to zero, the difference between the total interest income earned on interest earning assets and the total interest expense incurred on interest bearing liabilities may be compressed, reducing our net interest income and potentially adversely affecting our operating results.
Based on our June 30, 2024 consolidated statements of assets and liabilities, the following table shows the annual impact on net income (excluding the potential related incentive fee impact) of base rate changes in interest rates (considering interest rate floors for variable rate securities) assuming no changes in our investment and borrowing structure (dollars in thousands):
Basis Point Change |
Increase |
|
(Increase) |
|
Increase |
|
|||
Up 300 basis points |
$ |
4,392 |
|
$ |
(1,620 |
) |
$ |
2,772 |
|
Up 200 basis points |
|
2,928 |
|
|
(1,080 |
) |
|
1,848 |
|
Up 100 basis points |
|
1,464 |
|
|
(540 |
) |
|
924 |
|
Down 100 basis points |
|
(1,464 |
) |
|
540 |
|
|
(924 |
) |
Down 200 basis points |
|
(2,928 |
) |
|
1,080 |
|
|
(1,848 |
) |
Down 300 basis points |
|
(4,307 |
) |
|
1,620 |
|
|
(2,687 |
) |
Item 4. Controls and Procedures
As of June 30, 2024 (the end of the period covered by this report), we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that, due to a material weakness in the Company’s internal control over financial reporting as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, that continued to exist as of June 30, 2024, our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed in periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Specifically, as previously disclosed, in March 2024, we identified a material weakness in our internal controls over financial reporting related to our failure to satisfy the gross income requirement to maintain our special tax status as a RIC for the years ended December 31, 2020, December 31, 2021 and December 31, 2022. Notably, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
We have continued the process of, and are focused on, further enhancing effective internal control measures to improve our internal control over financial reporting and to remediate the identified material weakness. Management continues to undertake certain corrective actions to remediate the control deficiencies identified above, including incorporation of additional controls over the data used regarding the calculation of the gross income test for purposes of evaluating the Company’s qualification as a RIC. We believe our planned actions to enhance our processes and controls will address this material weakness, but these actions are subject to ongoing management evaluation, and we will need a period of execution to demonstrate remediation. We are committed to the continuous improvement of our internal control over financial reporting and will continue to diligently review our internal control over financial reporting.
Other than the remediation efforts described above, there were no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We and our subsidiaries are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us or our subsidiaries. From time to time, we, or our subsidiaries may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. Our business is also subject to extensive regulation, which may result in regulatory proceedings against us.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the “Annual Report on Form 10-K”), which could materially affect our business, financial condition and/or operating results. The risks described in the Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties that are not currently
40
known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. There have been no material changes from the risk factors set forth in the Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Other than the shares issued pursuant to our DRIP, we did not engage in any sales of unregistered securities during the period covered in this report. We issued a total of 126 shares of common stock under our DRIP during the three months ended June 30, 2024. This issuance was not subject to the registration requirements of the Securities Act. For the three months ended June 30, 2024, the aggregate value of the shares of our common stock issued under our DRIP was less than $0.1 million.
The following table sets forth information regarding repurchases of shares of our common stock.
Period |
Total Number of Shares Purchased |
|
Average Price per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (in millions)(1) |
|
|||||
April 1, 2024 through April 30, 2024 |
|
— |
|
|
N/A |
|
— |
|
|
|
4.9 |
|
May 1, 2024 through May 31, 2024 |
|
— |
|
|
N/A |
|
— |
|
|
|
4.9 |
|
June 1, 2024 through June 30, 2024 |
|
— |
|
|
N/A |
|
— |
|
|
|
4.9 |
|
Total |
|
— |
|
|
|
|
— |
|
|
|
|
|
(1) On March 6, 2023, the Company’s Board of Directors authorized a share repurchase program, whereby the Company could repurchase up to an aggregate of $5.0 million of its outstanding shares of common stock in the open market. The repurchase program did not obligate the Company to acquire any specific number of shares, and all repurchases were made in accordance with SEC Rule 10b-18 and accomplished through a Rule 10b5-1 plan, which set certain restrictions on the method, timing, price and volume of share repurchases. On March 11, 2024, the Board authorized the extension of the share repurchase program for an additional year and increased the aggregate available balance to $5.0 million. Unless extended or discontinued by the Board, the repurchase program will terminate on March 31, 2025. The repurchase program may be extended, modified or discontinued at any time for any reason without prior notice.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
41
Item 6. Exhibits
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:
Exhibit |
|
|
Number |
|
Description of Document |
|
||
|
||
|
Certificate of Limited Partnership of CapitalSouth Partners Fund II Limited Partnership(3) |
|
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
101.INS |
|
Inline XBRL Instance Document (filed herewith) |
101.SCH |
|
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents (filed herewith) |
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document) (filed herewith) |
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
Logan Ridge Finance Corporation |
Date: August 8, 2024 |
By |
/s/ Ted Goldthorpe |
|
|
Ted Goldthorpe |
|
|
Chief Executive Officer and President |
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
Date: August 8, 2024 |
By |
/s/ Brandon Satoren |
|
|
Brandon Satoren |
|
|
Chief Financial Officer |
|
|
(Principal Financial Officer and Principal Accounting Officer ) |
|
|
|
43