UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2018

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

Commission File Number	Exact name of registrant as specified in its charter,  address of principal executive office, telephone number and state or other jurisdiction of incorporation or organization	I.R.S. Employer Identification Number
814-01022	Capitala Finance Corp. 4201 Congress St., Suite 360 Charlotte, North Carolina Telephone: (704) 376-5502 State of Incorporation: Maryland	90-0945675

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

Capitala Finance Corp. Yes   x No   ¨

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

Capitala Finance Corp. Yes   ¨ No   ¨

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

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

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

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

Capitala Finance Corp. Yes  ¨ No   x

The number of shares of Capitala Finance Corp.’s common stock, $0.01 par value, outstanding as of August 3, 2018 was 16,001,205.

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION	3
Item 1.	Consolidated Financial Statements	3
	Consolidated Statements of Assets and Liabilities as of June 30, 2018 (unaudited) and December 31, 2017	3
	Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017 (unaudited)	4
	Consolidated Statements of Changes in Net Assets for the six months ended June 30, 2018 and 2017 (unaudited)	5
	Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 (unaudited)	6
	Consolidated Schedules of Investments as of June 30, 2018 (unaudited) and December 31, 2017	7
	Notes to Consolidated Financial Statements as of June 30, 2018 (unaudited)	22
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	52
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	72
Item 4.	Controls and Procedures	73
PART II.	OTHER INFORMATION	73
Item 1.	Legal Proceedings	73
Item 1A.	Risk Factors	74
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	74
Item 3.	Defaults Upon Senior Securities	74
Item 4.	Mine Safety Disclosures	74
Item 5.	Other Information	74
Item 6.	Exhibits	75
Signatures		76

2

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Capitala Finance Corp.

Consolidated Statements of Assets and Liabilities

(in thousands, except share and per share data)

	As of
	June 30, 2018			December 31, 2017
	(unaudited)
ASSETS
Investments at fair value
Non-control/non-affiliate investments (amortized cost of $236,344 and $298,132, respectively)	$	253,813		$	288,374
Affiliate investments (amortized cost of $98,046 and $77,336, respectively)		118,664			103,957
Control investments (amortized cost of $92,357 and $89,559, respectively)		110,784			107,608
Total investments at fair value (amortized cost of $426,747 and $465,027, respectively)		483,261			499,939
Cash and cash equivalents		40,826			31,221
Interest and dividend receivable		3,420			2,976
Due from related parties		-			95
Prepaid expenses		260			309
Deferred tax asset, net		6			-
Other assets		84			55
Total assets	$	527,857		$	534,595
LIABILITIES
SBA debentures (net of deferred financing costs of $1,995 and $2,300, respectively)	$	168,705		$	168,400
2022 Notes (net of deferred financing costs of $2,245 and $2,496, respectively)		72,755			72,504
2022 Convertible Notes (net of deferred financing costs of $1,423 and $1,583, respectively)		50,665			50,505
Credit Facility (net of deferred financing costs of $1,078 and $1,293, respectively)		3,922			7,707
Management and incentive fees payable		2,560			2,172
Interest and financing fees payable		3,111			3,141
Trade settlement payable		-			175
Deferred tax liability, net		-			1,289
Written call option at fair value (proceeds of $20 and $20, respectively)		6,815			6,815
Accounts payable and accrued expenses		7			-
Total liabilities	$	308,540		$	312,708
Commitments and contingencies (Note 2)
NET ASSETS
Common stock, par value $.01, 100,000,000 common shares authorized, 15,994,690 and 15,951,231 common shares issued and outstanding, respectively	$	160		$	160
Additional paid in capital		241,350			241,027
Undistributed net investment income		16,541			15,854
Accumulated net realized losses from investments		(88,459	)		(61,982	)
Net unrealized appreciation on investments, net of deferred taxes		56,520			33,623
Net unrealized depreciation on written call option		(6,795	)		(6,795	)
Total net assets	$	219,317		$	221,887
Total liabilities and net assets	$	527,857		$	534,595
Net asset value per share	$	13.71		$	13.91

See accompanying notes to consolidated financial statements.

3

Capitala Finance Corp.

Consolidated Statements of Operations

(in thousands, except share and per share data)

(unaudited)

	For the Three Months Ended June 30						For the Six Months Ended June 30
	2018			2017			2018			2017
INVESTMENT INCOME
Interest and fee income:
Non-control/non-affiliate investments	$	6,867		$	7,405		$	14,223		$	17,043
Affiliate investments		2,077			1,112			4,018			2,156
Control investments		1,838			1,583			3,687			3,571
Total interest and fee income		10,782			10,100			21,928			22,770
Payment-in-kind interest and dividend income:
Non-control/non-affiliate investments		427			1,530			1,132			2,708
Affiliate investments		289			411			775			642
Control investments		254			162			420			408
Total payment-in-kind interest and dividend income		970			2,103			2,327			3,758
Dividend income:
Non-control/non-affiliate investments		59			-			59			168
Affiliate investments		29			29			58			58
Control investments		25			25			50			305
Total dividend income		113			54			167			531
Other income		-			77			-			77
Interest income from cash and cash equivalents		17			28			32			41
Total investment income		11,882			12,362			24,454			27,177
EXPENSES
Interest and financing expenses		4,331			5,488			8,695			10,141
Loss on extinguishment of debt		-			2,732			-			2,732
Base management fee		2,314			2,505			4,617			5,019
Incentive fees		-			-			244			1,308
General and administrative expenses		1,006			934			2,229			2,041
Expenses before incentive fee waiver		7,651			11,659			15,785			21,241
Incentive fee waiver (See Note 6)		-			-			-			(958	)
Total expenses, net of fee waivers		7,651			11,659			15,785			20,283
NET INVESTMENT INCOME		4,231			703			8,669			6,894
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND WRITTEN CALL OPTION:
Net realized gain (loss) from investments:
Non-control/non-affiliate investments		(21,115	)		214			(25,694	)		5,045
Affiliate investments		139			4,473			863			4,489
Control investments		(1,646	)		-			(1,646	)		-
Net realized gain (loss) from investments		(22,622	)		4,687			(26,477	)		9,534
Net unrealized appreciation (depreciation) on investments:
Non-control/non-affiliate investments		25,093			(6,454	)		27,227			(12,849	)
Affiliate investments		(5,227	)		746			(6,003	)		972
Control investments		2,128			(4,280	)		378			(2,782	)
Net unrealized appreciation (depreciation) on investments		21,994			(9,988	)		21,602			(14,659	)
Net unrealized depreciation on written call option		-			(927	)		-			(2,412	)
Net realized and unrealized loss on investments and written call option		(628	)		(6,228	)		(4,875	)		(7,537	)
Tax benefit		1,345			-			1,295			-
Total net realized and unrealized gain (loss) on investments and written call option, net of taxes		717			(6,228	)		(3,580	)		(7,537	)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS	$	4,948		$	(5,525	)	$	5,089		$	(643	)
NET INCREASE (DECREASE) IN NET ASSETS PER SHARE RESULTING FROM OPERATIONS – BASIC (SEE NOTE 11)	$	0.31		$	(0.35	)	$	0.32		$	(0.04	)
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING - BASIC		15,981,857			15,889,682			15,970,599			15,881,712
NET INCREASE (DECREASE) IN NET ASSETS PER SHARE RESULTING FROM OPERATIONS – DILUTED (SEE NOTE 11)	$	0.26		$	(0.35	)	$	0.27		$	(0.04	)
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING - DILUTED		19,297,331			15,889,682			19,286,073			15,881,712
DISTRIBUTIONS PAID PER SHARE	$	0.25		$	0.39		$	0.50		$	0.78

See accompanying notes to consolidated financial statements.

4

Capitala Finance Corp.

Consolidated Statements of Changes in Net Assets

(in thousands, except share data)

(unaudited)

	Common Stock				Additional		Undistributed Net			Accumulated Net Realized			Net Unrealized Appreciation (Depreciation) on Investments, net of			Net Unrealized Depreciation on
	Number of Shares		Par Value		Paid in Capital		Investment Income			Gains (Losses)			Deferred Taxes			Written Call Option			Total
BALANCE, December 31, 2016		15,868,045	$	159	$	240,184	$	22,973		$	(37,881	)	$	27,863		$	(2,716	)	$	250,582
Net investment income		-		-		-		6,894			-			-			-			6,894
Net realized gain from investments		-		-		-		-			9,534			-			-			9,534
Net change in unrealized depreciation on investments		-		-		-		-			-			(14,659	)		-			(14,659	)
Net change in unrealized depreciation on written call option		-		-		-		-			-			-			(2,412	)		(2,412	)
Distributions to Shareholders:
Stock issued under dividend reinvestment plan		34,450		-		449		-			-			-			-			449
Distributions declared		-		-		-		(12,388	)		-			-			-			(12,388	)
BALANCE, June 30, 2017		15,902,495	$	159	$	240,633	$	17,479		$	(28,347	)	$	13,204		$	(5,128	)	$	238,000
BALANCE, December 31, 2017		15,951,231	$	160	$	241,027	$	15,854		$	(61,982	)	$	33,623		$	(6,795	)	$	221,887
Net investment income		-		-		-		8,669			-			-			-			8,669
Net realized loss from investments		-		-		-		-			(26,477	)		-			-			(26,477	)
Net change in unrealized appreciation on investments		-		-		-		-			-			21,602			-			21,602
Tax benefit		-		-		-		-			-			1,295			-			1,295
Distributions to Shareholders:
Stock issued under dividend reinvestment plan		43,459		-		323		-			-			-			-			323
Distributions declared		-		-		-		(7,982	)		-			-			-			(7,982	)
BALANCE, June 30, 2018		15,994,690	$	160	$	241,350	$	16,541		$	(88,459	)	$	56,520		$	(6,795	)	$	219,317

See accompanying notes to consolidated financial statements.

5

Capitala Finance Corp.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	For the Six Months Ended June 30
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase (decrease) in net assets resulting from operations	$	5,089		$	(643	)
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities:
Purchase of investments		(38,976	)		(28,249	)
Repayments and sales of investments		53,656			82,336
Net realized (gain) loss on investments		26,477			(9,534	)
Net unrealized (appreciation) depreciation on investments		(21,602	)		14,659
Payment-in-kind interest and dividends		(2,327	)		(3,758	)
Accretion of original issue discount on investments		(550	)		(790	)
Net unrealized depreciation on written call option		-			2,412
Amortization of deferred financing fees		931			1,174
Loss on extinguishment of debt		-			2,732
Tax benefit		(1,295	)		-
Changes in assets and liabilities:
Interest and dividend receivable		(444	)		2,127
Due from related parties		95			53
Prepaid expenses		49			367
Other assets		(29	)		(26	)
Due to related parties		-			39
Management and incentive fees payable		388			(4,159	)
Interest and financing fees payable		(30	)		356
Accounts payable and accrued expenses		7			(501	)
Trade settlement payable		(175	)		-
NET CASH PROVIDED BY OPERATING ACTIVITIES		21,264			58,595
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Credit Facility		21,000			-
Payments to Credit Facility		(25,000	)		(14,000	)
Issuance of 2022 Notes		-			75,000
Issuance of 2022 Convertible Notes		-			52,088
Repayment of 2021 Notes		-			(113,438	)
Distributions paid to shareholders		(7,659	)		(11,939	)
Deferred financing fees paid		-			(5,720	)
NET CASH USED IN FINANCING ACTIVITIES		(11,659	)		(18,009	)
NET INCREASE IN CASH AND CASH EQUIVALENTS		9,605			40,586
CASH AND CASH EQUIVALENTS, beginning of period		31,221			36,281
CASH AND CASH EQUIVALENTS, end of period	$	40,826		$	76,867
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	7,158		$	8,233
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS
Distributions paid through dividend reinvestment plan share issuances	$	323		$	449

See accompanying notes to consolidated financial statements.

6

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

June 30, 2018

(unaudited)

Portfolio Company, Country (1), (2), (3), (4)	Industry	Type of Investment	Principal Amount		Cost		Fair Value		% of Net Assets
Non-control/non-affiliated investments - 115.7%
Non-control/non-affiliated investments - United States
3 Bridge Solutions, LLC	IT Consulting	First Lien Debt (11.0% Cash (1 month LIBOR + 9.0%, 1.0% Floor), Due 12/4/22)	$	11,109	$	11,109	$	11,109		5.1	%
3 Bridge Solutions, LLC	IT Consulting	Preferred Units (965,250 units, 8.0% PIK) (5)				1,010		1,010		0.5	%
3 Bridge Solutions, LLC	IT Consulting	Membership Units (39,000 units)				10		36		0.0	%
						12,129		12,155		5.6	%
Alternative Biomedical Solutions, LLC	Healthcare	First Lien Debt (12.2% Cash, Due 12/18/22) (6)		13,000		13,000		13,000		5.9	%
Alternative Biomedical Solutions, LLC	Healthcare	Membership Units (20,092 units)				800		128		0.1	%
						13,800		13,128		6.0	%
American Clinical Solutions, LLC	Healthcare	First Lien Debt (10.5% Cash, 2.0% PIK, Due 6/11/20) (7)		9,114		9,091		6,731		3.1	%
						9,091		6,731		3.1	%
AmeriMark Direct, LLC	Consumer Products	First Lien Debt (12.8% Cash, Due 9/8/21)		18,800		18,470		18,800		8.6	%
						18,470		18,800		8.6	%
B&W Quality Growers, LLC	Farming	Membership Unit Warrants (91,739 Units)				-		5,673		2.6	%
						-		5,673		2.6	%
BigMouth, Inc.	Consumer Products	First Lien Debt (14.0% Cash, Due 11/14/21) (6)		9,442		9,442		9,442		4.3	%
BigMouth, Inc.	Consumer Products	Series A Preferred Stock (350,000 shares, 8.0% PIK) (5)				396		681		0.3	%
						9,838		10,123		4.6	%
Bluestem Brands, Inc.	Online Merchandise Retailer	First Lien Debt (9.6% Cash (1 month LIBOR + 7.5%, 1.0% Floor), Due 11/7/20)		3,904		3,864		3,526		1.6	%
						3,864		3,526		1.6	%
Burke America Parts Group, LLC	Home Repair Parts Manufacturer	Membership Units (14 units)				5		1,759		0.8	%
						5		1,759		0.8	%
California Pizza Kitchen, Inc.	Restaurant	Second Lien Debt (12.1% Cash (1 month LIBOR + 10.0%, 1.0% Floor), Due 8/23/23)		5,000		4,892		4,892		2.2	%
						4,892		4,892		2.2	%
Cedar Ultimate Parent, LLC	Consumer Electronics	Series C Preferred Stock (4,759,250 units)				958		1,130		0.5	%
Cedar Ultimate Parent, LLC	Consumer Electronics	Series D Preferred Stock (16,562,190 units)				-		-		0.0	%
Cedar Ultimate Parent, LLC	Consumer Electronics	Series E Common Units (190,370 units)				-		-		0.0	%
						958		1,130		0.5	%

7

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

June 30, 2018

(unaudited)

Portfolio Company, Country (1), (2), (3), (4)	Industry	Type of Investment	Principal Amount		Cost		Fair Value		% of Net Assets
CIS Secure Computing, Inc.	Government Services	First Lien Debt (10.6% Cash (1 month LIBOR + 8.5%, 1.0% Floor), 1.0% PIK, Due 9/14/22)	$	10,621	$	10,621	$	10,621		4.8	%
CIS Secure Computing, Inc.	Government Services	Common Stock (46,163 shares)				1,000		1,596		0.7	%
						11,621		12,217		5.5	%
Corporate Visions, Inc.	Sales & Marketing Services	Subordinated Debt (9.0% Cash, 2.0% PIK, Due 11/29/21)		18,342		18,342		17,596		8.0	%
Corporate Visions, Inc.	Sales & Marketing Services	Common Stock (15,750 shares)				1,575		645		0.3	%
						19,917		18,241		8.3	%
Currency Capital, LLC	Financial Services	First Lien Debt (13.0% Cash (1 month LIBOR + 11.0%, 0.5% Floor), Due 1/20/22) (8)		17,000		17,000		17,000		7.8	%
Currency Capital, LLC	Financial Services	Class A Preferred Units (2,000,000 units) (8)				2,000		1,818		0.8	%
						19,000		18,818		8.6	%
Flavors Holdings, Inc.	Food Product Manufacturer	First Lien Debt (8.1% Cash (3 month LIBOR + 5.8%, 1.0% Floor), Due 4/3/20)		6,326		6,243		5,790		2.6	%
Flavors Holdings, Inc.	Food Product Manufacturer	Second Lien Debt (12.3% Cash (3 month LIBOR + 10.0%, 1.0% Floor), Due 10/3/21)		12,000		11,774		10,850		5.0	%
						18,017		16,640		7.6	%
Installs, LLC	Logistics	First Lien Debt (9.1% Cash (1 month LIBOR + 7.0%, 1.8% Floor), Due 6/20/23)		2,750		2,750		2,750		1.2	%
Installs, LLC	Logistics	First Lien Debt (9.1% Cash (1 month LIBOR + 7.0%, 1.8% Floor), Due 6/20/23)		3,000		3,000		3,000		1.4	%
						5,750		5,750		2.6	%
MC Sign Lessor Corp.	Advertising & Marketing Services	First Lien Debt (9.0% Cash (1 month LIBOR + 7.0%, 1.0% Floor), Due 12/22/22)(9)		327		327		327		0.1	%

8

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

June 30, 2018

(unaudited)

Portfolio Company, Country (1), (2), (3), (4)	Industry	Type of Investment	Principal Amount			Cost		Fair Value		% of Net Assets
MC Sign Lessor Corp.	Advertising & Marketing Services	First Lien Debt (9.0% Cash (1 month LIBOR + 7.0%, 1.0% Floor), Due 12/22/22)(10)	$	3,925	$		3,925	$	3,925		1.8	%
							4,252		4,252		1.9	%
Nth Degree, Inc.	Business Services	First Lien Debt (13.5% Cash (1 month LIBOR + 11.5%, 1.0% Floor), 2.0% PIK, Due 12/14/20)		7,272			7,272		7,272		3.3	%
Nth Degree, Inc.	Business Services	Preferred Stock (2,400 Units, 10.0% PIK dividend) (5)					3,086		13,188		6.0	%
							10,358		20,460		9.3	%
Sequoia Healthcare Management, LLC	Healthcare Management	First Lien Debt (12.0% Cash, 4.0% PIK, Due 7/17/19)		8,445			8,414		8,445		3.9	%
							8,414		8,445		3.9	%
Sur La Table, Inc.	Retail	First Lien Debt (12.0% Cash, Due 7/28/20)		15,000			15,000		15,000		6.8	%
							15,000		15,000		6.8	%
Taylor Precision Products, Inc.	Household Product Manufacturer	Series C Preferred Stock (379 shares)					758		758		0.3	%
							758		758		0.3	%
Vology, Inc.	Information Technology	Subordinated Debt (15.0% Cash (3 month LIBOR + 14.0%, 1.0% Ceiling), 4.0% PIK Due 6/30/20)		8,544			8,544		8,544		3.9	%
							8,544		8,544		3.9	%
Western Windows Systems, LLC	Building Products	First Lien Debt (12.3% Cash, Due 7/31/20) (6)		10,500			10,500		10,500		4.8	%
Western Windows Systems, LLC	Building Products	Membership Units (39,860 units)					3,000		12,769		5.8	%
							13,500		23,269		10.6	%
Xirgo Technologies, LLC	Information Technology	Subordinated Debt (11.5% Cash, Due 3/1/22)		15,750			15,750		15,750		7.2	%
Xirgo Technologies, LLC	Information Technology	Membership Units (600,000 units)					600		838		0.4	%
							16,350		16,588		7.6	%
Sub Total Non-control/non-affiliated investments - United States							224,528		246,899		112.5	%
Non-control/non-affiliated investments - Brazil
Velum Global Credit Management, LLC	Financial Services	First Lien Debt (15.0% PIK, Due 12/31/17) (7) (8) (11)		13,230			11,816		6,914		3.2	%
							11,816		6,914		3.2	%
Sub Total Non-control/non-affiliated investments - Brazil							11,816		6,914		3.2	%
Sub Total Non-control/non-affiliated investments						$	236,344	$	253,813		115.7	%

9

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

June 30, 2018

(unaudited)

Portfolio Company, Country (1), (2), (3), (4)	Industry	Type of Investment	Principal Amount		Cost		Fair Value		% of Net Assets
Affiliate investments - 54.1%
Affiliate investments - United States
AAE Acquisition, LLC	Industrial Equipment Rental	Second Lien Debt (8.0% Cash, 4.0% PIK, Due 8/24/19) (11)	$	16,165	$	16,165	$	16,039		7.3	%
AAE Acquisition, LLC	Industrial Equipment Rental	Membership Units (2.2% fully diluted)				17		-		0.0	%
AAE Acquisition, LLC	Industrial Equipment Rental	Warrants (37.8% fully diluted)				-		-		0.0	%
						16,182		16,039		7.3	%
Burgaflex Holdings, LLC	Automobile Part Manufacturer	First Lien Debt (12.0% Cash, 1.0% PIK, Due 3/23/21)		14,726		14,726		14,453		6.6	%
Burgaflex Holdings, LLC	Automobile Part Manufacturer	Common Stock Class A (1,253,198 shares)				1,504		-		0.0	%
Burgaflex Holdings, LLC	Automobile Part Manufacturer	Common Stock Class B (900,000 shares)				300		-		0.0	%
						16,530		14,453		6.6	%
City Gear, LLC	Footwear Retail	Subordinated Debt (13.0% Cash, Due 10/20/19) (11)		8,231		8,231		8,231		3.7	%
City Gear, LLC	Footwear Retail	Preferred Membership Units (2.8% fully diluted, 9.0% Cash Dividend) (5)				1,269		1,269		0.6	%
City Gear, LLC	Footwear Retail	Membership Unit Warrants (11.4% fully diluted)				-		7,407		3.4	%
						9,500		16,907		7.7	%
GA Communications, Inc.	Advertising & Marketing Services	Series A-1 Preferred Stock (1,998 shares, 8.0% PIK Dividend) (5)				3,036		3,350		1.5	%
GA Communications, Inc.	Advertising & Marketing Services	Series B-1 Common Stock (200,000 shares)				2		1,442		0.7	%
						3,038		4,792		2.2	%
J&J Produce Holdings, Inc.	Produce Distribution	Subordinated Debt (13.0% Cash, Due 6/16/19) (11)		6,406		6,406		6,162		2.8	%
J&J Produce Holdings, Inc.	Produce Distribution	Common Stock (8,182 shares)				818		-		0.0	%
J&J Produce Holdings, Inc.	Produce Distribution	Common Stock Warrants (6,369 shares)				-		-		0.0	%
						7,224		6,162		2.8	%
LJS Partners, LLC	QSR Franchisor	Common Stock (1,500,000 shares)				896		6,245		2.8	%
						896		6,245		2.8	%

10

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

June 30, 2018

(unaudited)

Portfolio Company, Country (1), (2), (3), (4)	Industry	Type of Investment	Principal Amount		Cost		Fair Value		% of Net Assets
MMI Holdings, LLC	Medical Device Distributor	First Lien Debt (12.0% Cash, Due 1/31/19) (11)	$	2,600	$	2,600	$	2,600		1.2	%
MMI Holdings, LLC	Medical Device Distributor	Subordinated Debt (6.0% Cash, Due 1/31/19) (11)		400		388		400		0.2	%
MMI Holdings, LLC	Medical Device Distributor	Preferred Units (1,000 units, 6.0% PIK Dividend) (5)				1,426		1,566		0.7	%
MMI Holdings, LLC	Medical Device Distributor	Common Membership Units (45 units)				-		191		0.1	%
						4,414		4,757		2.2	%
Sierra Hamilton Holdings Corporation	Oil & Gas Engineering and Consulting Services	Common Stock (15,068,000 shares)				6,958		8,909		4.1	%
						6,958		8,909		4.1	%
Source Capital Penray, LLC	Automotive Chemicals & Lubricants	Membership Units (11.3% ownership) (12)				-		101		0.0	%
						-		101		0.0	%
US Bath Group, LLC	Building Products	First Lien Debt (11.0% Cash (1 month LIBOR + 9.0%, 1.0% Floor), Due 1/2/23)		13,375		13,375		13,375		6.1	%
US Bath Group, LLC	Building Products	Membership Units (500,000 units)				500		2,047		0.9	%
						13,875		15,422		7.0	%
U.S. Well Services, LLC	Oil & Gas Services	First Lien Debt (8.0% Cash (1 month LIBOR + 6.0%, 1.0% floor), Due 2/2/22) (13)		2,299		2,299		2,299		1.0	%
U.S. Well Services, LLC	Oil & Gas Services	First Lien Debt (11.0% Cash (1 month LIBOR + 9.0%, 1.0% floor), Due 2/2/22)		9,616		9,616		9,616		4.4	%
U.S. Well Services, LLC	Oil & Gas Services	Class A Units (5,680,688 Units)				6,260		11,155		5.1	%
U.S. Well Services, LLC	Oil & Gas Services	Class B Units (2,076,298 Units)				441		772		0.4	%
						18,616		23,842		10.9	%
V12 Holdings, Inc.	Data Processing & Digital Marketing	Subordinated Debt (14)				813		1,035		0.5	%
						813		1,035		0.5	%
Sub Total Affiliate investments - United States					$	98,046	$	118,664		54.1	%

11

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

June 30, 2018

(unaudited)

Portfolio Company, Country (1), (2), (3), (4)	Industry	Type of Investment	Principal Amount		Cost		Fair Value		% of Net Assets
Control investments - 50.5%
Control investments - United States
CableOrganizer Acquisition, LLC	Computer Supply Retail	First Lien Debt (10.0% Cash, Due 6/30/19) (15)	$	1,708	$	1,708	$	1,708		0.8	%
CableOrganizer Acquisition, LLC	Computer Supply Retail	First Lien Debt (12.0% Cash, 4.0% PIK, Due 6/30/19) (11)		8,709		8,709		8,709		3.9	%
CableOrganizer Acquisition, LLC	Computer Supply Retail	Preferred Units (4,000,000 units)				2,354		2,354		1.1	%
CableOrganizer Acquisition, LLC	Computer Supply Retail	Common Stock (21.3% fully diluted)				1,394		-		0.0	%
CableOrganizer Acquisition, LLC	Computer Supply Retail	Common Stock Warrants (10.0% fully diluted )				-		-		0.0	%
						14,165		12,771		5.8	%
Eastport Holdings, LLC	Business Services	Subordinated Debt (15.3% Cash (3 month LIBOR + 13.0%, 0.5% Floor), Due 4/29/20)		16,500		15,115		16,500		7.5	%
Eastport Holdings, LLC	Business Services	Membership Units (33.3% ownership) (16)				4,733		26,449		12.1	%
						19,848		42,949		19.6	%
Kelle's Transport Service, LLC	Transportation	First Lien Debt (4.0% Cash, Due 2/15/20) (17)		3,300		3,300		3,300		1.5	%
Kelle's Transport Service, LLC	Transportation	First Lien Debt (2.2% Cash, Due 2/15/20) (11)		13,674		13,668		10,000		4.6	%
Kelle's Transport Service, LLC	Transportation	Membership Units (27.5% fully diluted)				-		-		0.0	%
						16,968		13,300		6.1	%
Micro Precision, LLC	Conglomerate	Subordinated Debt (10.0% Cash, Due 9/15/18) (11)		1,862		1,862		1,862		0.9	%
Micro Precision, LLC	Conglomerate	Subordinated Debt (14.0% Cash, 4.0% PIK, Due 9/15/18) (11)		4,238		4,238		4,238		1.9	%
Micro Precision, LLC	Conglomerate	Series A Preferred Units (47 units)				1,629		1,629		0.7	%
						7,729		7,729		3.5	%
Navis Holdings, Inc.	Textile Equipment Manufacturer	First Lien Debt (15.0% Cash, Due 10/30/20) (11)		7,500		7,500		7,500		3.4	%
Navis Holdings, Inc.	Textile Equipment Manufacturer	Class A Preferred Stock (1,000 shares, 10.0% Cash Dividend) (5)				1,000		1,000		0.5	%
Navis Holdings, Inc.	Textile Equipment Manufacturer	Common Stock (300,000 shares)				1		5,309		2.4	%
						8,501		13,809		6.3	%

12

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

June 30, 2018

(unaudited)

Portfolio Company, Country (1), (2), (3), (4)	Industry	Type of Investment	Principal Amount		Cost			Fair Value			% of Net Assets
On-Site Fuel Services, Inc.	Fuel Transportation Services	First Lien Debt (18.0% Cash, Due 12/19/18) (7) (11)	$	15,525	$	11,020		$	12,134			5.5	%
On-Site Fuel Services, Inc.	Fuel Transportation Services	Series A Preferred Stock (32,782 shares)				3,278			-			0.0	%
On-Site Fuel Services, Inc.	Fuel Transportation Services	Series B Preferred Stock (23,648 shares)				2,365			-			0.0	%
On-Site Fuel Services, Inc.	Fuel Transportation Services	Common Stock (33,058 shares)				33			-			0.0	%
						16,696			12,134			5.5	%
Portrait Studio, LLC	Professional and Personal Digital Imaging	First Lien Debt (9.0% Cash (1 month LIBOR + 7.0%, 1.0% floor, 2.0% ceiling), Due 12/31/22) (18)		1,500		1,500			1,500			0.7	%
Portrait Studio, LLC	Professional and Personal Digital Imaging	First Lien Debt (9.0% Cash (1 month LIBOR + 7.0%, 1.0% floor, 5.0% ceiling), Due 12/31/22)		4,500		4,500			4,500			2.1	%
Portrait Studio, LLC	Professional and Personal Digital Imaging	Preferred Units (4,350,000 Units)				2,450			2,092			0.9	%
Portrait Studio, LLC	Professional and Personal Digital Imaging	Membership Units (150,000 Units)				-			-			0.0	%
						8,450			8,092			3.7	%
Sub Total Control investments - United States					$	92,357		$	110,784			50.5	%
TOTAL INVESTMENTS - 220.3%					$	426,747		$	483,261			220.3	%
Derivatives - (3.1)%
Derivatives - United States
Eastport Holdings, LLC	Business Services	Written Call Option (16)			$	(20	)	$	(6,815	)		(3.1	%)
Sub Total Derivatives - United States					$	(20	)	$	(6,815	)		(3.1	%)
TOTAL DERIVATIVES - (3.1)%					$	(20	)	$	(6,815	)		(3.1	%)

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

(2) All investments valued by the Board of Directors.

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

(4) Percentages are based on net assets of $219,317 as of June 30, 2018.

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

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

(7) Non-accrual investment.

(8) Indicates assets that the Company believes do not represent “qualifying assets” under Section 55(a) of the Investment Company Act of 1940, as amended. Qualifying assets must represent at least 70% of the Company's total assets at the time of acquisition of any additional non-qualifying assets. As of June 30, 2018, 4.9% of the Company's total assets were non-qualifying assets.

(9) The investment has a $0.2 million unfunded commitment.

(10) The investment has a $0.6 million unfunded commitment.

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

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

(13) The investment has a $0.7 million unfunded commitment.

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

(15) The investment has a $0.3 million unfunded commitment.

(16) The Company has written a call option that enables CapitalSouth Partners Florida Sidecar Fund II, L.P. to purchase up to 31.25% of the Company's interest at a strike price of $1.5 million. As of June 30, 2018, the fair value of the written call option is approximately $6.8 million. See Note 4 to the consolidated financial statements for further detail on the written call option transaction.

(17) The investment has a $1.4 million unfunded commitment.

(18) The investment has a $3.8 million unfunded commitment.

See accompanying notes to consolidated financial statements.

13

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

December 31, 2017

Portfolio Company, Country (1), (2), (3), (4)	Industry	Type of Investment	Principal Amount		Cost		Fair Value		% of Net Assets
Non-control/non-affiliated investments - 130.0%
Non-control/non-affiliated investments - United States
3 Bridge Solutions, LLC	IT Consulting	First Lien Debt (10.38% Cash (1 month LIBOR + 9.0%, 1% Floor), Due 12/4/22)	$	11,250	$	11,250	$	11,250		5.1	%
3 Bridge Solutions, LLC	IT Consulting	Preferred Units (965,250 units, 8% PIK) (5)				971		971		0.4	%
3 Bridge Solutions, LLC	IT Consulting	Membership Units (39,000 units)				10		10		0.0	%
						12,231		12,231		5.5	%
Alternative Biomedical Solutions, LLC	Healthcare	First Lien Debt (11.74% Cash, Due 12/18/22) (6)		13,000		13,000		13,000		5.9	%
Alternative Biomedical Solutions, LLC	Healthcare	Membership Units (20,092 units)				800		800		0.4	%
						13,800		13,800		6.3	%
American Clinical Solutions, LLC	Healthcare	First Lien Debt (10.5% Cash, 1% PIK, Due 6/11/20)		9,068		9,068		7,568		3.4	%
						9,068		7,568		3.4	%
American Exteriors, LLC	Replacement Window Manufacturer	First Lien Debt (10% PIK, Due 1/1/19) (7)(8)		8,287		5,679		1,880		0.8	%
American Exteriors, LLC	Replacement Window Manufacturer	Common Stock Warrants (10% fully diluted)				-		-		0.0	%
						5,679		1,880		0.8	%
AmeriMark Direct, LLC	Consumer Products	First Lien Debt (12.75% Cash, Due 9/8/21)		19,100		18,713		19,100		8.6	%
						18,713		19,100		8.6	%
B&W Quality Growers, LLC	Farming	Membership Unit Warrants (91,739 Units)				-		5,581		2.5	%
						-		5,581		2.5	%
BigMouth, Inc.	Consumer Products	First Lien Debt (13.3% Cash, Due 11/14/21) (6)		9,790		9,790		9,790		4.4	%
BigMouth, Inc.	Consumer Products	Series A Preferred Stock (350,000 shares, 8% PIK) (5)				382		722		0.3	%
						10,172		10,512		4.7	%

14

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

December 31, 2017

Portfolio Company, Country (1), (2), (3), (4)	Industry	Type of Investment	Principal Amount		Cost		Fair Value		% of Net Assets
Bluestem Brands, Inc.	Online Merchandise Retailer	First Lien Debt (9.07% Cash (1 month LIBOR + 7.5%, 1% Floor), Due 11/7/20)	$	4,029	$	3,965	$	3,755		1.7	%
						3,965		3,755		1.7	%
Brunswick Bowling Products, Inc.	Bowling Products	First Lien Debt (8% Cash (1 month LIBOR + 6%, 2% Floor), Due 5/22/20)		1,600		1,600		1,600		0.7	%
Brunswick Bowling Products, Inc.	Bowling Products	First Lien Debt (16.25% Cash (1 month LIBOR + 14.25%, 2% Floor), Due 5/22/20)		5,586		5,586		5,586		2.5	%
						7,186		7,186		3.2	%
Burke America Parts Group, LLC	Home Repair Parts Manufacturer	Membership Units (14 units)				5		2,767		1.2	%
						5		2,767		1.2	%
California Pizza Kitchen, Inc.	Restaurant	Second Lien Debt (11.57% Cash (1 month LIBOR + 10%, 1% Floor), Due 8/23/23)		5,000		4,880		4,880		2.2	%
						4,880		4,880		2.2	%
Caregiver Services, Inc.	In-Home Healthcare Services	Common Stock (293,186 shares)				258		54		0.0	%
Caregiver Services, Inc.	In-Home Healthcare Services	Common Stock Warrants (655,908 units) (9)				264		120		0.1	%
						522		174		0.1	%
Cedar Electronics Holding Corp.	Consumer Electronics	Subordinated Debt (12% Cash, Due 12/26/20) (7)		21,550		21,550		3,498		1.6	%
						21,550		3,498		1.6	%
CIS Secure Computing, Inc.	Government Services	First Lien Debt (9.88% Cash (1 month LIBOR + 8.5%, 1% Floor), 1% PIK, Due 9/14/22) (10)		9,116		9,116		9,116		4.1	%
CIS Secure Computing, Inc.	Government Services	Common Stock (46,163 shares)				1,000		1,204		0.5	%
						10,116		10,320		4.6	%
Corporate Visions, Inc.	Sales & Marketing Services	Subordinated Debt (9% Cash, 2% PIK, Due 11/29/21)		18,159		18,159		16,995		7.7	%
Corporate Visions, Inc.	Sales & Marketing Services	Common Stock (15,750 shares)				1,575		393		0.2	%
						19,734		17,388		7.9	%
Currency Capital, LLC	Financial Services	First Lien Debt (12.38% Cash (1 month LIBOR + 11%, 0.50% Floor) Due 1/20/22) (11)		17,000		17,000		17,000		7.7	%
Currency Capital, LLC	Financial Services	Class A Preferred Units (2,000,000 units) (11)				2,000		1,905		0.9	%
						19,000		18,905		8.6	%

15

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

December 31, 2017

Portfolio Company, Country (1), (2), (3), (4)	Industry	Type of Investment	Principal Amount		Cost		Fair Value		% of Net Assets
Flavors Holdings, Inc.	Food Product Manufacturer	First Lien Debt (7.44% Cash (3 month LIBOR + 5.75%, 1% Floor), Due 4/3/20)	$	6,700	$	6,589	$	5,911		2.7	%
Flavors Holdings, Inc.	Food Product Manufacturer	Second Lien Debt (11.69% Cash (3 month LIBOR + 10%, 1% Floor), Due 10/3/21)		12,000		11,740		10,311		4.6	%
						18,329		16,222		7.3	%
Nth Degree, Inc.	Business Services	First Lien Debt (8.38% Cash (1 month LIBOR + 7%, 1% Floor), 1% PIK, Due 12/14/20)		8,833		8,833		8,833		4.0	%
Nth Degree, Inc.	Business Services	First Lien Debt (12.88% Cash (1 month LIBOR + 11.5%, 1% Floor), 2% PIK, Due 12/14/20)		7,200		7,200		7,200		3.2	%
Nth Degree, Inc.	Business Services	Preferred Stock (2,400 Units, 10% PIK dividend) (5)				2,938		11,140		5.0	%
						18,971		27,173		12.2	%
Sequoia Healthcare Management, LLC	Healthcare Management	First Lien Debt (12% Cash, 4% PIK, Due 7/17/19)		9,014		8,964		9,014		4.1	%
						8,964		9,014		4.1	%
Spectra Services Holdings, LLC	Refrigeration / HVAC services	First Lien Debt (10% Cash, 4% PIK, Due 12/27/22)		7,450		7,450		7,450		3.4	%
Spectra Services Holdings, LLC	Refrigeration / HVAC services	Class A Units (1,283,824 units, 4% Cash dividend, 11% PIK dividend) (5)				1,286		1,286		0.6	%
Spectra Services Holdings, LLC	Refrigeration / HVAC services	Class B Units (257 units)				-		-		0.0	%
						8,736		8,736		4.0	%
Sur La Table, Inc.	Retail	First Lien Debt (12% Cash, Due 7/28/20)		15,000		15,000		15,000		6.8	%
						15,000		15,000		6.8	%
Taylor Precision Products, Inc.	Household Product Manufacturer	Series C Preferred Stock (379 shares)				758		1,316		0.6	%
						758		1,316		0.6	%
Vintage Stock, Inc.	Specialty Retail	First Lien Debt (13.86% Cash (1 month LIBOR + 12.5%, 0.5% floor), 3% PIK, Due 11/3/21)		20,713		20,713		20,713		9.3	%
						20,713		20,713		9.3	%

16

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

December 31, 2017

Portfolio Company, Country (1), (2), (3), (4)	Industry	Type of Investment	Principal Amount		Cost		Fair Value		% of Net Assets
Vology, Inc.	Information Technology	Subordinated Debt (15% Cash (3 month LIBOR + 14%, 1% Ceiling), 4% PIK Due 6/30/20)	$	8,374	$	8,374	$	8,374		3.8	%
						8,374		8,374		3.8	%
Western Windows Systems, LLC	Building Products	First Lien Debt (11.9% Cash, Due 7/31/20) (6)		10,500		10,500		10,500		4.7	%
Western Windows Systems, LLC	Building Products	Membership Units (39,860 units)				3,000		7,379		3.3	%
						13,500		17,879		8.0	%
Xirgo Technologies, LLC	Information Technology	Subordinated Debt (11.5% Cash, Due 3/1/22)		15,750		15,750		15,750		7.1	%
Xirgo Technologies, LLC	Information Technology	Membership Units (600,000 units)				600		637		0.3	%
						16,350		16,387		7.4	%
Sub Total Non-control/non-affiliated investments - United States						286,316		280,359		126.4	%
Non-control/non-affiliated investments - Brazil
Velum Global Credit Management, LLC	Financial Services	First Lien Debt (15% PIK, Due 12/31/17) (7) (8) (11) (12)		12,275		11,816		8,015		3.6	%
						11,816		8,015		3.6	%
Sub Total Non-control/non-affiliated investments - Brazil						11,816		8,015		3.6	%
Sub Total Non-control/non-affiliated investments					$	298,132	$	288,374		130.0	%
Affiliate investments - 46.8%
Affiliate investments - United States
AAE Acquisition, LLC	Industrial Equipment Rental	Second Lien Debt (8% Cash, 4% PIK, Due 8/24/19) (8)	$	15,846	$	15,846	$	15,603		7.0	%
AAE Acquisition, LLC	Industrial Equipment Rental	Membership Units (2.19% fully diluted)				17		-		0.0	%
AAE Acquisition, LLC	Industrial Equipment Rental	Warrants (37.78% fully diluted)				-		-		0.0	%
						15,863		15,603		7.0	%

17

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

December 31, 2017

Portfolio Company, Country (1), (2), (3), (4)	Industry	Type of Investment	Principal Amount		Cost		Fair Value		% of Net Assets
Burgaflex Holdings, LLC	Automobile Part Manufacturer	Subordinated Debt (14% Cash, Due 8/9/19) (13)	$	3,000	$	3,000	$	3,000		1.4	%
Burgaflex Holdings, LLC	Automobile Part Manufacturer	Subordinated Debt (12% Cash, Due 8/9/19) (13)		5,828		5,828		5,828		2.6	%
Burgaflex Holdings, LLC	Automobile Part Manufacturer	Common Stock (1,253,198 shares)				1,504		457		0.2	%
						10,332		9,285		4.2	%
City Gear, LLC	Footwear Retail	Subordinated Debt (13% Cash, Due 10/20/19) (8)		8,231		8,231		8,231		3.7	%
City Gear, LLC	Footwear Retail	Preferred Membership Units (2.78% fully diluted, 9% Cash Dividend) (5)				1,269		1,269		0.6	%
City Gear, LLC	Footwear Retail	Membership Unit Warrants (11.38% fully diluted)				-		8,248		3.7	%
						9,500		17,748		8.0	%
GA Communications, Inc.	Advertising & Marketing Services	Series A-1 Preferred Stock (1,998 shares, 8% PIK Dividend) (5)				2,902		3,225		1.5	%
GA Communications, Inc.	Advertising & Marketing Services	Series B-1 Common Stock (200,000 shares)				2		1,932		0.9	%
						2,904		5,157		2.4	%
J&J Produce Holdings, Inc.	Produce Distribution	Subordinated Debt (6% Cash, 7% PIK, Due 6/16/19) (8)		6,368		6,368		6,170		2.8	%
J&J Produce Holdings, Inc.	Produce Distribution	Common Stock (8,182 shares)				818		-		0.0	%
J&J Produce Holdings, Inc.	Produce Distribution	Common Stock Warrants (6,369 shares)				-		-		0.0	%
						7,186		6,170		2.8	%
LJS Partners, LLC	QSR Franchisor	Common Stock (1,500,000 shares)				896		7,650		3.4	%
						896		7,650		3.4	%
MMI Holdings, LLC	Medical Device Distributor	First Lien Debt (12% Cash, Due 1/31/19) (8)		2,600		2,600		2,600		1.2	%
MMI Holdings, LLC	Medical Device Distributor	Subordinated Debt (6% Cash, Due 1/31/19) (8)		400		388		400		0.2	%
MMI Holdings, LLC	Medical Device Distributor	Preferred Units (1,000 units, 6% PIK dividend) (5)				1,381		1,520		0.7	%
MMI Holdings, LLC	Medical Device Distributor	Common Membership Units (45 units)				-		193		0.1	%
						4,369		4,713		2.2	%
MTI Holdings, LLC	Retail Display & Security Services	Membership Units (2,000,000 units) (14)				-		100		0.0	%
						-		100		0.0	%
Sierra Hamilton Holdings Corporation	Oil & Gas Engineering and Consulting Services	Common Stock (15,068,000 shares)				6,958		8,528		3.8	%
						6,958		8,528		3.8	%
Source Capital Penray, LLC	Automotive Chemicals & Lubricants	Membership Units (11.3% ownership) (14)				-		101		0.0	%
						-		101		0.0	%
STX Healthcare Management Services, Inc.	Dental Practice Management	Common Stock (1,200,000 shares) (14)				-		93		0.0	%
						-		93		0.0	%

18

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

December 31, 2017

Portfolio Company, Country (1), (2), (3), (4)	Industry	Type of Investment	Principal Amount		Cost		Fair Value		% of Net Assets
U.S. Well Services, LLC	Oil & Gas Services	First Lien Debt (7.35% Cash (1 month LIBOR + 6%, 1% floor), Due 2/2/22) (15)	$	2,299	$	2,299	$	2,299		1.0	%
U.S. Well Services, LLC	Oil & Gas Services	First Lien Debt (12.35% PIK (1 month LIBOR + 11%, 1% floor), Due 2/2/22)		9,516		9,516		9,516		4.3	%
U.S. Well Services, LLC	Oil & Gas Services	Class A Units (5,680,688 Units)				6,259		15,004		6.8	%
U.S. Well Services, LLC	Oil & Gas Services	Class B Units (2,076,298 Units)				441		955		0.4	%
						18,515		27,774		12.5	%
V12 Holdings, Inc.	Data Processing & Digital Marketing	Subordinated Debt (19)				813		1,035		0.5	%
						813		1,035		0.5	%
Sub Total Affiliate investments - United States					$	77,336	$	103,957		46.8	%
Control investments - 48.5%
Control investments - United States
CableOrganizer Acquisition, LLC	Computer Supply Retail	First Lien Debt (12% Cash, 4% PIK, Due 5/24/18)	$	12,373		12,373		12,373		5.6	%
CableOrganizer Acquisition, LLC	Computer Supply Retail	Common Stock (21.3% fully diluted)				1,394		118		0.1	%
CableOrganizer Acquisition, LLC	Computer Supply Retail	Common Stock Warrants (10% fully diluted )				-		60		0.0	%
						13,767		12,551		5.7	%

19

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

December 31, 2017

Portfolio Company, Country (1), (2), (3), (4)	Industry	Type of Investment	Principal Amount		Cost		Fair Value		% of Net Assets
Eastport Holdings, LLC	Business Services	Subordinated Debt (14.49% Cash (3 month LIBOR + 13%, 0.5% Floor), Due 4/29/20)	$	16,500	$	14,738	$	16,500		7.4	%
Eastport Holdings, LLC	Business Services	Membership Units (33.3% ownership) (16)				4,733		26,449		11.9	%
						19,471		42,949		19.3	%
Kelle's Transport Service, LLC	Transportation	First Lien Debt (4% Cash, Due 2/15/20) (17)		2,000		2,000		2,000		0.9	%
Kelle's Transport Service, LLC	Transportation	First Lien Debt (1.46% Cash, Due 2/15/20) (8)		13,674		13,669		9,560		4.3	%
Kelle's Transport Service, LLC	Transportation	Membership Units (27.5% fully diluted)				-		-		0.0	%
						15,669		11,560		5.2	%
Micro Precision, LLC	Conglomerate	Subordinated Debt (10% Cash, Due 9/15/18) (8)		1,862		1,862		1,862		0.8	%
Micro Precision, LLC	Conglomerate	Subordinated Debt (14% Cash, 4% PIK, Due 9/15/18) (8)		4,154		4,154		4,154		1.9	%
Micro Precision, LLC	Conglomerate	Series A Preferred Units (47 units)				1,629		1,629		0.7	%
						7,645		7,645		3.4	%
Navis Holdings, Inc.	Textile Equipment Manufacturer	First Lien Debt (15% Cash, Due 10/30/20) (8)		6,500		6,500		6,500		2.9	%
Navis Holdings, Inc.	Textile Equipment Manufacturer	Class A Preferred Stock (1,000 shares, 10% Cash Dividend) (5)				1,000		1,000		0.5	%
Navis Holdings, Inc.	Textile Equipment Manufacturer	Common Stock (300,000 shares)				1		5,005		2.3	%
						7,501		12,505		5.7	%
On-Site Fuel Services, Inc.	Fuel Transportation Services	Subordinated Debt (18% Cash, Due 12/19/18) (7) (8)		14,072		11,020		11,588		5.2	%
On-Site Fuel Services, Inc.	Fuel Transportation Services	Series A Preferred Stock (32,782 shares)				3,278		-		0.0	%
On-Site Fuel Services, Inc.	Fuel Transportation Services	Series B Preferred Stock (23,648 shares)				2,365		-		0.0	%
On-Site Fuel Services, Inc.	Fuel Transportation Services	Common Stock (33,058 shares)				33		-		0.0	%
						16,696		11,588		5.2	%

20

Capitala Finance Corp.

Consolidated Schedule of Investments

(in thousands, except for units/shares)

December 31, 2017

Portfolio Company, Country (1), (2), (3), (4)	Industry	Type of Investment	Principal Amount		Cost			Fair Value			% of Net Assets
Portrait Studio, LLC	Professional and Personal Digital Imaging	First Lien Debt (8.56% Cash (1 month LIBOR + 7%, 1% floor, 2% ceiling), Due 12/31/22) (18)	$	1,860	$	1,860		$	1,860			0.9	%
Portrait Studio, LLC	Professional and Personal Digital Imaging	First Lien Debt (8.56% Cash (1 month LIBOR + 7%, 1% floor, 5% ceiling), Due 12/31/22)		4,500		4,500			4,500			2.0	%
Portrait Studio, LLC	Professional and Personal Digital Imaging	Preferred Units (4,350,000 Units)				2,450			2,450			1.1	%
Portrait Studio, LLC	Professional and Personal Digital Imaging	Membership Units (150,000 Units)				-			-			0.0	%
						8,810			8,810			4.0	%
Sub Total Control investments - United States					$	89,559		$	107,608			48.5	%
TOTAL INVESTMENTS - 225.3%					$	465,027		$	499,939			225.3	%
Derivatives - (3.1)%
Derivatives - United States
Eastport Holdings, LLC	Business Services	Written Call Option (16)			$	(20	)	$	(6,815	)		(3.1	)%
Sub Total Derivatives - United States					$	(20	)	$	(6,815	)		(3.1	)%
TOTAL DERIVATIVES - (3.1)%					$	(20	)	$	(6,815	)		(3.1	)%

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

(2) All investments valued by the Board of Directors.

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

(4) Percentages are based on net assets of $221,887 as of December 31, 2017.

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

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

(7) Non-accrual investment.

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

(9) The equity investment has an excercisable put option.

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

(11) Indicates assets that the Company believes do not represent “qualifying assets” under Section 55(a) of the Investment Company Act of 1940, as amended. Qualifying assets must represent at least 70% of the Company's total assets at the time of acquisition of any additional non-qualifying assets. As of December 31, 2017, 5.0% of the Company's total assets were non-qualifying assets.

(12) The company is headquartered in Brazil.

(13) In addition to the stated rate, the Company is charging 3% default interest on the investment.

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

(15) The investment has a $0.7 million unfunded commitment.

(16) The Company has written a call option that enables CapitalSouth Partners Florida Sidecar Fund II, L.P. to purchase up to 31.25% of the Company's interest at a strike price of $1.5 million. As of December 31, 2017, the fair value of the written call option is approximately $6.8 million. See Note 4 to the consolidated financial statements for further detail on the written call option transaction.

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

(18) The investment has a $3.1 million unfunded commitment.

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

See accompanying notes to consolidated financial statements.

21

CAPITALA FINANCE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(Unaudited)

Note 1. Organization

Capitala Finance Corp. (the “Company”, “we”, “us”, and “our”) is an externally managed non-diversified closed-end management investment company incorporated in Maryland that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company is an “emerging growth company” within the meaning of the Jumpstart Our Business Startups Act of 2012, and as such, is subject to reduced public company reporting requirements. The Company commenced operations on May 24, 2013 and completed its initial public offering (“IPO”) on September 30, 2013. The Company is managed by Capitala Investment Advisors, LLC (the “Investment Advisor”), an investment adviser that is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, and Capitala Advisors Corp. (the “Administrator”) provides the administrative services necessary for the Company to operate. For United States (“U.S.”) federal income tax purposes, the Company has elected to be treated, and intends to comply with the requirements to continue to qualify annually, as a regulated investment company (“RIC”) under subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).

The Company’s investment objective is to generate both current income and capital appreciation through debt and equity investments. Both directly and through our subsidiaries that are licensed by the U.S. Small Business Administration (“SBA”) under the Small Business Investment Company (“SBIC”) Act, 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, second lien loans, subordinated loans, and, to a lesser extent, equity securities issued by lower middle-market companies 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 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 SBIC licenses, continued to hold their existing investments at the time of the IPO and have continued to make new investments. 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.

The Company has formed and expects to continue to form certain consolidated taxable subsidiaries (the “Taxable Subsidiaries”), which are taxed as corporations for 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.

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, Florida Sidecar, and the Taxable Subsidiaries.

22

The Company’s financial statements as of June 30, 2018 and December 31, 2017 are presented on a consolidated basis. The effects of all intercompany transactions between the Company and its subsidiaries (Fund II, Fund III, Florida Sidecar, 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, 2017, filed with the U.S. Securities and Exchange Commission (“SEC”) on February 27, 2018.

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 Regulation S-X and 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, Florida Sidecar, and the Taxable Subsidiaries) in its consolidated financial statements.

Segments

In accordance with ASC Topic 280 — Segment Reporting (“ASC 280”), the Company has determined that it has a single reporting segment and operating unit structure. While the Company invests in several industries and geographic locations, all investments share similar business and economic risks. As such, all investment activities have been aggregated into a single segment.

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 25% of the voting securities of such company and/or has greater than 50% representation on its board or has the power to exercise control over management or policies of such portfolio company. The Company is deemed to be an affiliate of a company in which the Company has invested if it owns between 5% and 25% of the voting securities of such company.

Valuation of Investments

The Company applies fair value accounting to all of its financial instruments in accordance with the 1940 Act and ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework used to measure fair value and requires disclosures for fair value measurements. In accordance with ASC 820, the Company has categorized its financial instruments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy, as discussed in Note 4.

In determining fair value, the Company’s board of directors (the “Board”) uses various valuation approaches, and engages a third-party valuation firm, which provides an independent valuation of certain investments it reviews. In accordance with U.S. GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.

23

Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Board. Unobservable inputs reflect the Board’s assumptions about the inputs market participants would use in pricing the asset or liability developed based upon the best information available in the circumstances.

The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including the type of security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a market for the securities existed. Accordingly, the degree of judgment exercised by the Board in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement.

Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy.

In estimating the fair value of portfolio investments, the Company starts with the cost basis of the investment, which includes original issue discount and payment-in-kind (“PIK”) income, if any. The transaction price is typically the best estimate of fair value at inception. When evidence supports a subsequent change to the carrying value from the original transaction price, adjustments are made to reflect the expected fair values.

The valuation methodologies summarized below are utilized by the Company in estimating fair value.

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.

The enterprise value waterfall approach is primarily utilized to value the Company’s equity securities, including warrants. However, the Company may utilize the enterprise value waterfall approach to value certain debt securities.

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.

24

Asset Approach

The asset approach values an investment based on the value of the underlying collateral securing the investment. This approach is used when the Company has reason to believe that it will not collect all principal and interest in accordance with the contractual terms of the debt agreement.

Revenue Recognition

The Company’s revenue recognition policies are as follows:

Interest income and paid-in-kind interest income: Interest income is recorded on the accrual basis to the extent that such amounts are expected to be collected. The Company has loans in the portfolio that contain a payment-in-kind interest (“PIK interest”) provision. The 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 writes off any previously accrued and uncollected interest when it is determined that interest is no longer considered collectible. The Company may elect to cease accruing PIK interest and continue accruing interest income in cases where a loan is currently paying its interest income but, in management’s judgment, there is a reasonable likelihood of principal loss on the loan. Non-accrual loans are returned to accrual status when the borrower’s financial condition improves such that management believes current interest and principal payments are expected to be collected.

Gains and losses on investment sales and paydowns: Realized gains and losses on investments are recognized using the specific identification method.

Dividend income and paid-in-kind dividends: Dividend income is recognized on the date dividends are declared. The Company holds preferred equity investments in the portfolio that contain a payment-in-kind dividend (“PIK dividends”) 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 the PIK dividends are more likely than not to be collected, management may elect to continue accruing PIK dividends.

Original issue discount: Discounts received to par on loans purchased are capitalized and accreted into income over the life of the loan. Any remaining discount is accreted into income upon prepayment of the loan.

Other income: Origination fees (to the extent services are performed to earn such income), amendment fees, consent fees, and other fees associated with investments in portfolio companies are recognized as income when the investment transaction closes. Prepayment penalties received by the Company for debt instruments repaid prior to maturity date are recorded as income upon receipt.

Loan Sales

The Company follows the guidance in ASC Topic 860 — Transfers and Servicing (“ASC 860”) when accounting for loan participations and partial loan sales as it relates to concluding on sales accounting treatment for such transactions. Based on the Company’s analysis of all loan participations and partial sales completed, the Company believes that all such transactions meet the criterion required by ASC 860 to qualify for sales accounting treatment.

General and Administrative Expenses

General and administrative expenses are paid 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, director fees, and director and officer insurance are generally paid directly by the Company.

25

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.

Earnings per share

The Company’s earnings per share (“EPS”) amounts have been computed based on the weighted-average number of shares of 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 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 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, 2018, the Company had outstanding unfunded commitments related to debt investments in existing portfolio companies of $3.8 million (Portrait Studio, LLC), $1.4 million (Kelle’s Transport Service, LLC), $0.7 million (MC Sign Lessor Corp), $0.7 million (U.S. Well Services, LLC) and $0.3 million (CableOrganizer Acquisition, LLC). As of December 31, 2017, the Company had outstanding unfunded commitments related to debt investments in existing portfolio companies of $3.1 million (Portrait Studio, LLC), $2.0 million (CIS Secure Computing, Inc.), $1.0 million (Kelle’s Transport Service, LLC), and $0.7 million (U.S. Well Services, LLC).

In addition to unfunded commitments related to debt investments, the Company also has extended a guaranty on behalf of one of its portfolio companies, whereby the Company has guaranteed $1.9 million of obligations of Kelle’s Transport Service, LLC. As of June 30, 2018, we have not been required to make payments on this or any previous guaranties, and we consider the credit risks to be remote and the fair value of this guaranty to be immaterial.

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.

On December 28, 2017, an alleged stockholder filed a putative class action lawsuit complaint, Paskowitz v. Capitala Finance Corp., et al., in the United States District Court for the Central District of California (case number 2:17-cv-09251-MWF-AS) (the “Paskowitz Action”), against the Company and certain of its current officers on behalf of all persons who purchased or otherwise acquired the Company’s common stock between January 4, 2016 and August 7, 2017. On January 3, 2018, another alleged stockholder filed a putative class action complaint, Sandifer v. Capitala Finance Corp., et al., in the United States District Court for the Central District of California (case number 2:18-cv-00052-MWF-AS) (the “Sandifer Action”), asserting substantially similar claims on behalf of the same putative class and against the same defendants. On February 2, 2018, the Sandifer Action was transferred, on stipulation of the parties, to the United States District Court for the Western District of North Carolina. The Sandifer Action was voluntarily dismissed on February 28, 2018. On March 1, 2018, the Paskowitz Action was transferred, on stipulation of the parties, to the United States District Court for the Western District of North Carolina (case number 3:18-cv-00096-RJC-DSC). On June 19, 2018, the plaintiffs in the Paskowitz Action filed their amended complaint. The complaint, as currently amended, alleges certain violations of the securities laws, including, inter alia, that the defendants made certain materially false and misleading statements and omissions regarding the Company’s business, operations, and prospects between January 4, 2016 and August 7, 2017. The plaintiffs in the Paskowitz Action seek compensatory damages and attorneys’ fees and costs, among other relief, but did not specify the amount of damages being sought. The time for the defendants in the Paskowitz Action to respond to the amended complaint has not yet expired. While the Company intends to vigorously defend itself in this litigation, the outcome of these legal proceedings cannot be predicted with certainty.

Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult and requires an extensive degree of judgment, particularly where the matters involve indeterminate claims for monetary damages, are in the early stages of the proceedings, and are subject to appeal. In addition, because most legal proceedings are resolved over extended periods of time, potential losses are subject to change due to, among other things, new developments, changes in legal strategy, the outcome of intermediate procedural and substantive rulings and other parties’ settlement posture and their evaluation of the strength or weakness of their case against us. For these reasons, we are currently unable to predict the ultimate timing or outcome of, or reasonably estimate the possible losses or a range of possible losses resulting from, the matters described above. Based on information currently available, the Company does not believe that any reasonably possible losses arising from the currently pending legal matters described above will be material to the Company’s results of operations or financial condition. However, in light of the inherent uncertainties involved in such matters, an adverse outcome in this litigation could materially and adversely affect the Company’s financial condition, results of operations or cash flows in any particular reporting period.

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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. In management’s opinion, no direct losses with respect to litigation contingencies were probable as of June 30, 2018 and December 31, 2017. Management is of the opinion that the ultimate resolution of such claims, if any, will not materially affect the Company’s business, financial position, results of operations or liquidity. Furthermore, in management’s opinion, it is not possible to estimate a range of reasonably possible losses with respect to litigation contingencies.

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 as a RIC, among other requirements, the Company is required to timely distribute to its stockholders at least 90.0% of its investment company taxable income, as defined by the Code, for each fiscal tax year. The Company will be subject to a nondeductible U.S. federal excise tax of 4.0% on undistributed income if it does not distribute at least 98.0% of its ordinary income in any calendar year and 98.2% of its capital gain net income for each one-year period ending on October 31.

Depending on the level of taxable income earned in an excise tax year, the Company may choose to carry forward taxable income in excess of current year dividend distributions into the next excise tax year and pay a 4.0% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions for 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.

For U.S. federal income tax purposes, as of June 30, 2018, the aggregate net unrealized appreciation for all securities was $56.5 million. As of June 30, 2018, gross unrealized appreciation was $85.1 million and gross unrealized depreciation was $28.6 million. The aggregate cost of securities for U.S. federal income tax purposes was $426.7 million as of June 30, 2018. For U.S. federal income tax purposes, as of December 31, 2017, the aggregate net unrealized appreciation for all securities was $34.9 million. As of December 31, 2017, gross unrealized appreciation was $81.4 million and gross unrealized depreciation was $46.5 million. The aggregate cost of securities for U.S. federal income tax purposes was $465.0 million as of December 31, 2017.

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 June 30, 2018 and December 31, 2017, the Company recorded a net deferred tax asset of $6 thousand and net deferred tax liability of $1.3 million, respectively. For the three months ended June 30, 2018, the Company recorded a tax benefit of $1.3 million. For the six months ended June 30, 2018, the Company recorded a tax benefit of $1.3 million. For the three and six months ended June 30, 2017, no tax provision was recorded.

In accordance with certain applicable U.S. Treasury regulations and guidance issued by the Internal Revenue Service, a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive its entire distribution in either cash or stock of the RIC, subject to a limitation on the aggregate amount of cash to be distributed to all stockholders, which limitation must be at least 20.0% of the aggregate declared distribution. If too many stockholders elect to receive cash, the cash available for distribution must be allocated 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 the lesser of (a) the portion of the distribution such stockholder has elected to receive in cash or (b) an amount equal to his or her entire distribution times the percentage limitation on cash available for distribution. 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. For income tax purposes, the Company has paid distributions on its common stock from ordinary income in the amount of $25.2 million, $24.5 million, and $25.1 million during the tax years ended August 31, 2017, 2016 and 2015, respectively.

ASC Topic 740 — Income Taxes (“ASC 740”), provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s 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, 2018 and December 31, 2017, there were no uncertain tax positions.

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The Company is required to determine whether a tax position of the Company is more likely-than-not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized could result in the Company recording a tax liability that could negatively impact the Company’s net assets.

U.S. GAAP provides guidance on thresholds, measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition that is intended to provide better financial statement comparability among different entities.

The tax years ended August 31, 2017, 2016 and 2015 remain subject to examination by U.S. federal, state, and local tax authorities. No interest expense or penalties have been assessed for the three and six months ended June 30, 2018 and June 30, 2017. 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 has elected to amend its tax year end from August 31 to December 31 and will file a tax return for the four months ended December 31, 2017. The election to change the tax year end is not expected to have a material impact on the Company’s consolidated statements of operations, the Company’s tax status as a RIC, or the nature of distributions paid to our stockholders.

On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act, which significantly changes the existing U.S. tax laws, including a reduction in the corporate tax rate from 35% to 21%, a move from a worldwide tax system to a territorial system, as well as other changes. The Taxable Subsidiaries’ provisional tax is based on the new lower blended federal and state corporate tax rate of 25%. This estimate incorporates assumptions made based on the Taxable Subsidiaries’ current interpretation of the Tax Act and may change, possibly materially, as we complete our analysis and receive additional clarification and implementation guidance.

Distributions

Distributions to common stockholders are recorded as payable on the declaration 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 Advisor 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, observable secondary or primary market yields for similar instruments issued by comparable companies increase materially or risk premiums required in the market between smaller companies, such as our borrowers, and those for which market yields are observable increase materially.

The Investment Advisor 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.

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Note 3. Recent Accounting Pronouncements

In October 2016, the SEC adopted new rules and amended existing rules (together, “final rules”) intended to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require standardized, enhanced disclosures about derivatives in investment company financial statements, as well as other amendments. The compliance date for the amendments to Regulation S-X was August 1, 2017. Management has adopted the amendments to Regulation S-X and included required disclosures in the Company’s consolidated financial statements and related disclosures.

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASC Topic 606) (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements under ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the ASC. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The new guidance significantly enhances comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. Additionally, the guidance requires improved disclosures as to the nature, amount, timing and uncertainty of revenue that is recognized. The new guidance became effective for the annual reporting period beginning January 1, 2018, including interim periods within that reporting period. The Company completed its assessment in evaluating the potential impact on its consolidated financial statements and based on its assessment, determined that its financial contracts are excluded from the scope of ASU 2014-09. As a result of the scope exception for financial contracts, the Company’s management has determined that there will be no material changes to the recognition timing and classification of revenues and expenses; additionally, the Company’s management determined that the adoption of ASU 2014-09 does not have a significant impact on its consolidated financial statement disclosures.

Note 4. Investments and Fair Value Measurements

The Company’s investment objective is to generate both current income and capital appreciation through debt and equity investments. Both directly and through the Company’s subsidiaries that are licensed by the SBA under the SBIC Act, 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, second lien loans, and subordinated loans. Most of the Company’s debt investments are coupled with equity interests, whether in the form of detachable “penny” warrants or equity co-investments made pari-passu with our borrowers’ financial sponsors. As of June 30, 2018, our portfolio consisted of investments in 43 portfolio companies with a fair value of approximately $483.3 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 or delayed draw 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 in one debt security, bifurcating the loan into a first-out tranche and last-out tranche. As of June 30, 2018, 13.4% of the fair value of our first lien loans consisted of last-out loans. As of December 31, 2017, 13.7% 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 which are not subject to the blockage of cash interest payments to the Company at the first lien lender’s discretion.

In addition to first and second lien loans, the Company may also invest in subordinated loans. Subordinated loans typically have a second lien on all or substantially all of the borrower’s assets, and unlike second lien loans, 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, 2018, the Company made approximately $11.2 million of investments and had approximately $32.3 million in repayments and sales resulting in net repayments and sales of approximately $21.1 million for the period. During the three months ended June 30, 2017, the Company made approximately $6.5 million of investments and had approximately $49.3 million in repayments and sales resulting in net repayments and sales of approximately $42.8 million for the period.

During the six months ended June 30, 2018, the Company made approximately $39.0 million of investments and had approximately $53.7 million in repayments and sales resulting in net repayments and sales of approximately $14.7 million for the period. During the six months ended June 30, 2017, the Company made approximately $28.2 million of investments and had approximately $82.3 million in repayments and sales resulting in net repayments and sales of approximately $54.1 million for the period.

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During the three and six months ended June 30, 2018, the Company funded $4.2 million and $5.2 million, respectively, of previously committed capital to existing portfolio companies. During the three and six months ended June 30, 2018, the Company funded $7.0 million and $33.8 million, respectively, of investments in portfolio companies for which it was not previously committed to fund. During the three and six months ended June 30, 2017, the Company funded $0.3 million and $1.5 million, respectively, of previously committed capital to existing portfolio companies. During the three and six months ended June 30, 2017, the Company funded $6.2 million and $26.7 million, respectively, of investments in portfolio companies for which it was not previously committed to fund. In addition to investing directly in portfolio companies, the Company may assist portfolio companies in securing financing from other sources by introducing portfolio companies to sponsors or by leading a syndicate of investors to provide the portfolio companies with financing. During the three and six months ended June 30, 2018, and June 30, 2017, the Company did not lead any syndicates and did not assist any portfolio companies in obtaining indirect financing.

On August 31, 2016, the Company sold a portion of 14 securities across 10 portfolio companies to CapitalSouth Partners Florida Sidecar Fund II, L.P. (“FSC II”), including granting an option to acquire a portion of the Company’s equity investment in Eastport Holdings, LLC (the “Written Call Option”), in exchange for 100% of the partnership interests in FSC II. Concurrent with the sale of these assets to FSC II, the Company received cash consideration of $47.6 million from an affiliated third-party purchaser in exchange for 100% of the partnership interests of FSC II. These assets were sold to FSC II at their June 30, 2016 fair market values, resulting in a net realized gain of $0.1 million. The Company’s Board pre-approved this transaction pursuant to Section 57(f) of the 1940 Act.

The Company collected and will periodically collect principal and interest payments related to certain of the securities purchased by FSC II. Such principal and interest payments will be remitted timely to FSC II based on its proportionate share of the security. FSC II does not have any recourse to the Company related to the non-payment of principal or interest by the underlying issuers of the securities.

The Written Call Option granted FSC II the right to purchase up to 31.25% of the Company’s equity investment in Eastport Holdings, LLC. The Written Call Option has a strike price of $1.5 million and a termination date of August 31, 2018. The fair value of the Written Call Option, which has been treated as a derivative liability and is recorded in the financial statement line item Written Call Option at fair value in the Company’s consolidated statements of assets and liabilities, was approximately $6.8 million and $6.8 million as of June 30, 2018, and December 31, 2017, respectively. For purposes of determining the fair value of the Written Call Option, the Company calculated the difference in the fair value of the underlying equity investment in Eastport Holdings, LLC and the strike price of the Written Call Option, or intrinsic value. The time value of the Written Call Option as of June 30, 2018, was determined to be insignificant. The Written Call Option is classified as a Level 3 financial instrument.

The composition of our investments as of June 30, 2018, at amortized cost and fair value was as follows (dollars in thousands):

	Investments at Amortized Cost		Amortized Cost Percentage of Total Portfolio			Investments at Fair Value		Fair Value Percentage of Total Portfolio
First Lien Debt	$	256,365		60.1	%	$	245,846		50.9	%
Second Lien Debt		32,831		7.7			31,781		6.6
Subordinated Debt		79,689		18.7			80,318		16.6
Equity and Warrants		57,862		13.5			125,316		25.9
Total	$	426,747		100.0	%	$	483,261		100.0	%

The composition of our investments as of December 31, 2017, at amortized cost and fair value was as follows (dollars in thousands):

	Investments at Amortized Cost		Amortized Cost Percentage of Total Portfolio			Investments at Fair Value		Fair Value Percentage of Total Portfolio
First Lien Debt	$	257,147		55.3	%	$	243,489		48.7	%
Second Lien Debt		32,465		7.0			30,794		6.1
Subordinated Debt		120,235		25.8			103,385		20.7
Equity and Warrants		55,180		11.9			122,271		24.5
Total	$	465,027		100.0	%	$	499,939		100.0	%

As noted above, the Company values all investments in accordance with 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.

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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.

· 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.

In addition to using the above inputs in investment valuations, the Company continues to employ 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 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, 2018 (dollars in thousands), according to the fair value hierarchy:

	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
First Lien Debt	$	—	$	—	$	245,846	$	245,846
Second Lien Debt		—		—		31,781		31,781
Subordinated Debt		—		—		80,318		80,318
Equity and Warrants		—		—		125,316		125,316
Total	$	—	$	—	$	483,261	$	483,261

The following table presents fair value measurements of the Written Call Option as of June 30, 2018 (dollars in thousands), according to the fair value hierarchy:

	Fair Value Measurements
	Level 1		Level 2		Level 3			Total
Written Call Option	$	—	$	—	$	(6,815	)	$	(6,815	)
Total	$	—	$	—	$	(6,815	)	$	(6,815	)

The following table presents fair value measurements of investments, by major class, as of December 31, 2017 (dollars in thousands), according to the fair value hierarchy:

	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
First Lien Debt	$	—	$	—	$	243,489	$	243,489
Second Lien Debt		—		—		30,794		30,794
Subordinated Debt		—		—		103,385		103,385
Equity and Warrants		—		—		122,271		122,271
Total	$	—	$	—	$	499,939	$	499,939

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The following table presents fair value measurements of the Written Call Option as of December 31, 2017 (dollars in thousands), according to the fair value hierarchy:

	Fair Value Measurements
	Level 1		Level 2		Level 3			Total
Written Call Option	$	—	$	—	$	(6,815	)	$	(6,815	)
Total	$	—	$	—	$	(6,815	)	$	(6,815	)

 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, 2018 (dollars in thousands):

	First Lien Debt			Second Lien Debt		Subordinated Debt			Equity and Warrants			Total
Balance as of January 1, 2018	$	243,489		$	30,794	$	103,385		$	122,271		$	499,939
Reclassifications		17,494			—		(20,806	)		3,312			—
Repayments/sales		(51,472	)		—		—			(2,184	)		(53,656	)
Purchases		38,176			—		—			800			38,976
Payment in-kind interest and dividends accrued		1,116			320		476			415			2,327
Accretion of original issue discount		129			46		375			—			550
Realized gain (loss) from investments		(6,226	)		—		(20,592	)		341			(26,477	)
Net unrealized appreciation on investments		3,140			621		17,480			361			21,602
Balance as of June 30, 2018	$	245,846		$	31,781	$	80,318		$	125,316		$	483,261

The following table provides a reconciliation of the beginning and ending balances for the Written Call Option that uses Level 3 inputs for the six months ended June 30, 2018 (dollars in thousands):

	Written Call Option
Balance as of January 1, 2018	$	(6,815	)
Net unrealized depreciation on Written Call Option		—
Balance as of June 30, 2018	$	(6,815	)

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, 2017 (dollars in thousands):

	First Lien Debt			Second Lien Debt			Subordinated Debt			Equity and Warrants			Total
Balance as of January 1, 2017	$	226,578		$	71,483		$	150,232		$	93,346		$	541,639
Reclassifications		2,299			—			(9,000	)		6,701			—
Repayments/sales		(18,948	)		(35,290	)		(16,092	)		(12,006	)		(82,336	)
Purchases		20,867			4,000			1,182			2,200			28,249
Payment in-kind interest and dividends accrued		2,421			532			368			437			3,758
Accretion of original issue discount		140			274			376			—			790
Realized gain (loss) from investments		—			(140	)		—			9,674			9,534
Net unrealized appreciation (depreciation) on investments		(11,583	)		(73	)		(8,495	)		5,492			(14,659	)
Balance as of June 30, 2017	$	221,774		$	40,786		$	118,571		$	105,844		$	486,975

The following table provides a reconciliation of the beginning and ending balances for the Written Call Option that uses Level 3 inputs for the six months ended June 30, 2017 (dollars in thousands):

	Written Call Option
Balance as of January 1, 2017	$	(2,736	)
Net unrealized depreciation on Written Call Option		(2,412	)
Balance as of June 30, 2017	$	(5,148	)

The net change in unrealized appreciation (depreciation) on investments held as of June 30, 2018 and June 30, 2017, was $(0.4) million and $(5.9) million, respectively, and is included in net unrealized appreciation (depreciation) on investments in the consolidated statements of operations.

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The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets and (liabilities) as of June 30, 2018 were as follows:

	Fair Value (in millions)			Valuation Approach	Unobservable Input	Range (Weighted Average)
First lien debt	$	182.9		Income	Required Rate of Return Leverage Ratio Adjusted EBITDA	9.1% – 16.0% (12.6%) 1.2x – 7.2x (3.5x) $1.8 million – $112.7 million ($25.1 million)
First lien debt	$	62.9		Enterprise Value Waterfall and Asset (1)	EBITDA Multiple Adjusted EBITDA Revenue Multiple Revenue	5.5x – 6.5x (6.0x) $0.7 million – $2.9 million ($1.7 million) 0.2x – 1.1x (0.4x) $12.2 million – $161.3 million ($84.7 million)
Second lien debt	$	31.8		Income	Required Rate of Return Leverage Ratio Adjusted EBITDA	12.5% – 18.1% (15.0%) 4.9x – 6.8x (5.9x) $7.5 million – $77.0 million ($40.5 million)
Subordinated debt	$	56.3		Income	Required Rate of Return Leverage Ratio Adjusted EBITDA	11.5% – 19.0% (14.2%) 3.3x – 8.4x (5.7x) $1.8 million – $15.4 million ($10.6 million)
Subordinated debt	$	24.0		Enterprise Value Waterfall and Asset (1)	EBITDA Multiple Adjusted EBITDA Revenue Multiple Revenue	6.0x – 6.0x (6.0x) $1.8 million – $2.8 million ($2.7 million) 0.5x – 0.5x (0.5x) $545.9 million – $545.9 million ($545.9 million)
Equity and warrants	$	125.3		Enterprise Value Waterfall	EBITDA Multiple Adjusted EBITDA Revenue Multiple Revenue	3.3x – 15.5x (8.1x) $0.7 million – $110.7 million ($26.5 million) 0.5x – 0.5x (0.5x) $156.1 million – $545.9 million ($447.7 million)
Written Call Option	$	(6.8	)	Enterprise Value Waterfall	Revenue Multiple Revenue	0.5x – 0.5x (0.5x) $545.9 million – $545.9 million ($545.9 million)

(1) $1.0 million in subordinated debt and $6.9 million in first lien debt were valued using the asset approach.

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets and (liabilities) as of December 31, 2017 were as follows:

	Fair Value (in millions)			Valuation Approach	Unobservable Input	Range (Weighted Average)
First lien debt	$	211.2		Income	Required Rate of Return Leverage Ratio Adjusted EBITDA	8.6% – 21.2% (13.5%) 1.7x – 7.0x (3.6x) $1.8 million – $131.2 million ($21.1 million)
First lien debt	$	32.3		Enterprise Value Waterfall and Asset (1)	EBITDA Multiple Adjusted EBITDA	4.0x – 7.0x (5.5x) $2.1 million – $3.1 million ($2.6 million)
Second lien debt	$	30.8		Income	Required Rate of Return Leverage Ratio Adjusted EBITDA	11.6% – 17.6% (14.4%) 4.9x – 7.0x (6.0x) $7.3 million – $78.5 million ($41.1 million)
Subordinated debt	$	64.4		Income	Required Rate of Return Leverage Ratio Adjusted EBITDA	11.5% – 19.0% (14.2%) 3.2x – 8.1x (5.6x) 3.2 million – $15.1 million ($9.7 million)
Subordinated debt	$	39.0		Enterprise Value Waterfall and Asset (1)	EBITDA Multiple Adjusted EBITDA Revenue Multiple Revenue	6.0x – 7.5x (7.2x) $1.8 million – $30.1 million ($21.2 million) 0.2x – 0.2x (0.2x) $150.7 million – $150.7 million ($150.7 million)
Equity and warrants	$	122.3		Enterprise Value Waterfall	EBITDA Multiple Adjusted EBITDA	3.5x – 14.5x (7.9x) $1.8 million – $77.6 million ($24.3 million)
Written Call Option	$	(6.8	)	Enterprise Value Waterfall	EBITDA Multiple Adjusted EBITDA	7.25x – 7.25x (7.25x) $30.1 million – $30.1 million ($30.1 million)

(1) $1.0 million in subordinated debt and $1.9 million in first lien debt were valued using the asset approach.

33

 The significant unobservable inputs used in the valuation of the Company’s investments are required rate of return, adjusted EBITDA, EBITDA multiples, revenue, revenue multiples, and leverage ratios. 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 leverage will result in a lower (higher) estimate of fair value while an increase (decrease) in adjusted EBITDA, EBITDA multiples, revenue, or revenue multiples will result in a higher (lower) estimate of fair value.

34

Note 5. Transactions With Affiliated Companies

During the six months ended June 30, 2018, 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, 2017 Fair Value		Gross Additions (2)		Gross Reductions (3)			Realized Gain/(Loss)			Unrealized Gain/(Loss)			June 30, 2018 Fair Value
Affiliate investments
AAE Acquisition, LLC	Second Lien Debt (8.0% Cash, 4.0% PIK, Due 8/24/19)	$	16,165	$	639	$	15,603	$	320	$	-		$	-		$	116		$	16,039
AAE Acquisition, LLC	Membership Units (2.2% fully diluted)		-		-		-		-		-			-			-			-
AAE Acquisition, LLC	Warrants (37.8% fully diluted)		-		-		-		-		-			-			-			-
					639		15,603		320		-			-			116			16,039
Burgaflex Holdings, LLC	First Lien Debt (12.0% Cash, 1.0% PIK, Due 3/23/21)		14,726		485		-		14,725		-			-			(272	)		14,453
Burgaflex Holdings, LLC	Subordinated Debt (14% Cash, Due 8/9/19)		-		116		3,000		-		(3,000	)		-			-			-
Burgaflex Holdings, LLC	Subordinated Debt (12% Cash, Due 8/9/19)		-		199		5,828		-		(5,828	)		-			-			-
Burgaflex Holdings, LLC	Common Stock Class A (1,253,198 shares)		-		-		457		-		-			-			(457	)		-
Burgaflex Holdings, LLC	Common Stock Class B (900,000 shares)		-		-		-		300		-			-			(300	)		-
					800		9,285		15,025		(8,828	)		-			(1,029	)		14,453
Chef'n Corporation	Series A Preferred Stock (1,000,000 shares)		-		-		-		-		(644	)		644			-			-
					-		-		-		(644	)		644			-			-
City Gear, LLC	Subordinated Debt (13.0% Cash, Due 10/20/19)		8,231		538		8,231		-		-			-			-			8,231
City Gear, LLC (5)	Preferred Membership Units (2.8% fully diluted, 9.0% Cash Dividend)		-		58		1,269		-		-			-			-			1,269
City Gear, LLC	Membership Unit Warrants (11.4% fully diluted)		-		-		8,248		-		-			-			(841	)		7,407
					596		17,748		-		-			-			(841	)		16,907
GA Communications, Inc. (5)	Series A-1 Preferred Stock (1,998 shares, 8.0% PIK Dividend)		-		-		3,225		134		-			-			(9	)		3,350
GA Communications, Inc.	Series B-1 Common Stock (200,000 shares)		-		-		1,932		-		-			-			(490	)		1,442
					-		5,157		134		-			-			(499	)		4,792
J&J Produce Holdings, Inc.	Subordinated Debt (13.0% Cash, Due 6/16/19)		6,406		380		6,170		38		-			-			(46	)		6,162
J&J Produce Holdings, Inc.	Common Stock (8,182 shares)		-		-		-		-		-			-			-			-
J&J Produce Holdings, Inc.	Common Stock Warrants (6,369 shares)		-		-		-		-		-			-			-			-
					380		6,170		38		-			-			(46	)		6,162
LJS Partners, LLC	Common Stock (1,500,000 shares)		-		-		7,650		-		-			-			(1,405	)		6,245
					-		7,650		-		-			-			(1,405	)		6,245
MMI Holdings, LLC	First Lien Debt (12.0% Cash, Due 1/31/19)		2,600		158		2,600		-		-			-			-			2,600
MMI Holdings, LLC	Subordinated Debt (6.0% Cash, Due 1/31/19)		400		12		400		-		-			-			-			400
MMI Holdings, LLC (5)	Preferred Units (1,000 units, 6.0% PIK Dividend)		-		-		1,520		46		-			-			-			1,566
MMI Holdings, LLC	Common Membership Units (45 units)		-		-		193		-		-			-			(2	)		191
					170		4,713		46		-			-			(2	)		4,757
MTI Holdings, LLC	Membership Units (2,000,000 units)		-		-		100		-		(139	)		139			(100	)		-
					-		100		-		(139	)		139			(100	)		-
Sierra Hamilton Holdings Corporation	Common Stock (15,068,000 shares)		-		-		8,528		-		-			-			381			8,909
					-		8,528		-		-			-			381			8,909
Source Capital Penray, LLC	Membership Units (11.3% ownership)		-		-		101		-		-			-			-			101
					-		101		-		-			-			-			101
STX Healthcare Management Services, Inc.	Common Stock (1,200,000 shares)		-		-		93		-		(80	)		80			(93	)		-
					-		93		-		(80	)		80			(93	)		-
US Bath Group, LLC	First Lien Debt (11.0% Cash (1 month LIBOR + 9.0%, 1.0% Floor), Due 1/2/23)		13,375		1,049		-		15,000		(1,625	)		-			-			13,375
US Bath Group, LLC	Membership Units (500,000 units)		-		-		-		500		-			-			1,547			2,047
					1,049		-		15,500		(1,625	)		-			1,547			15,422
U.S. Well Services, LLC	First Lien Debt (8.0% Cash (1 month LIBOR + 6.0%, 1.0% floor), Due 2/2/22)		2,299		90		2,299		-		-			-			-			2,299
U.S. Well Services, LLC	First Lien Debt (11.0% Cash (1 month LIBOR + 9.0%, 1.0% floor), Due 2/2/22)		9,616		352		9,516		197		(97	)		-			-			9,616
U.S. Well Services, LLC	Class A Units (5,680,688 Units)		-		-		15,004		-		-			-			(3,849	)		11,155
U.S. Well Services, LLC	Class B Units (2,076,298 Units)		-		-		955		-		-			-			(183	)		772
					442		27,774		197		(97	)		-			(4,032	)		23,842
V12 Holdings, Inc.	Subordinated Debt		-		-		1,035		-		-			-			-			1,035
					-		1,035		-		-			-			-			1,035
Total Affiliate investments				$	4,076	$	103,957	$	31,260	$	(11,413	)	$	863		$	(6,003	)	$	118,664
Control investments
CableOrganizer Acquisition, LLC	First Lien Debt (10.0% Cash, Due 6/30/19)	$	1,708	$	33	$	-	$	1,708	$	-		$	-		$	-		$	1,708
CableOrganizer Acquisition, LLC	First Lien Debt (12.0% Cash, 4.0% PIK, Due 6/30/19)		8,709		633		12,373		336		(2,354	)		(1,646	)		-			8,709

35

Company (4)	Type of Investment	Principal Amount		Amount of Interest, Fees or Dividends Credited to Income (1)		December 31, 2017 Fair Value		Gross Additions (2)		Gross Reductions (3)			Realized Gain/(Loss)			Unrealized Gain/(Loss)			June 30, 2018 Fair Value
CableOrganizer Acquisition, LLC	Common Stock (21.3% fully diluted)	$	-	$	-	$	118	$	-	$	-		$	-		$	(118	)	$	-
CableOrganizer Acquisition, LLC	Common Stock Warrants (10.0% fully diluted )		-		-		60		-		-			-			(60	)		-
CableOrganizer Acquisition, LLC	Preferred Units (4,000,000 units)		-		-		-		2,354		-			-			-			2,354
					666		12,551		4,398		(2,354	)		(1,646	)		(178	)		12,771
Eastport Holdings, LLC	Subordinated Debt (15.3% Cash (3 month LIBOR + 13.0%, 0.5% Floor), Due 4/29/20)		16,500		1,627		16,500		376		-			-			(376	)		16,500
Eastport Holdings, LLC	Membership Units (33.3% ownership)		-		-		26,449		-		-			-			-			26,449
					1,627		42,949		376		-			-			(376	)		42,949
Kelle's Transport Service, LLC	First Lien Debt (4.0% Cash, Due 2/15/20)		3,300		51		2,000		1,300		-			-			-			3,300
Kelle's Transport Service, LLC	First Lien Debt (2.2% Cash, Due 2/15/20)		13,674		126		9,560		-		-			-			440			10,000
Kelle's Transport Service, LLC	Membership Units (27.5% fully diluted)		-		-		-		-		-			-			-			-
					177		11,560		1,300		-			-			440			13,300
Micro Precision, LLC	Subordinated Debt (10.0% Cash, Due 9/15/18)		1,862		93		1,862		-		-			-			-			1,862
Micro Precision, LLC	Subordinated Debt (14.0% Cash, 4.0% PIK, Due 9/15/18)		4,238		295		4,154		84		-			-			-			4,238
Micro Precision, LLC	Series A Preferred Units (47 units)		-		-		1,629		-		-			-			-			1,629
					388		7,645		84		-			-			-			7,729
Navis Holdings, Inc.	First Lien Debt (15.0% Cash, Due 10/30/20)		7,500		549		6,500		1,000		-			-			-			7,500
Navis Holdings, Inc. (5)	Class A Preferred Stock (1,000 shares, 10.0% Cash Dividend)		-		50		1,000		-		-			-			-			1,000
Navis Holdings, Inc.	Common Stock (300,000 shares)		-		-		5,005		-		-			-			304			5,309
					599		12,505		1,000		-			-			304			13,809
On-Site Fuel Services, Inc. (6)	First Lien Debt (18.0% Cash, Due 12/19/18)		15,525		-		-		11,020		-			-			1,114			12,134
On-Site Fuel Services, Inc.	Subordinated Debt (18% Cash, Due 12/19/18)		-		-		11,588		-		(11,020	)		-			(568	)		-
On-Site Fuel Services, Inc.	Series A Preferred Stock (32,782 shares)		-		-		-		-		-			-			-			-
On-Site Fuel Services, Inc.	Series B Preferred Stock (23,648 shares)		-		-		-		-		-			-			-			-
On-Site Fuel Services, Inc.	Common Stock (33,058 shares)		-		-		-		-		-			-			-			-
					-		11,588		11,020		(11,020	)		-			546			12,134
Portrait Studio, LLC	First Lien Debt (9.0% Cash (1 month LIBOR + 7.0%, 1.0% floor, 2.0% ceiling), Due 12/31/22)		1,500		82		1,860		1,080		(1,440	)		-			-			1,500
Portrait Studio, LLC	First Lien Debt (9.0% Cash (1 month LIBOR + 7.0%, 1.0% floor, 5.0% ceiling), Due 12/31/22)		4,500		198		4,500		-		-			-			-			4,500
Portrait Studio, LLC	Preferred Units (4,350,000 Units)		-		-		2,450		-		-			-			(358	)		2,092
Portrait Studio, LLC	Membership Units (150,000 Units)		-		-		-		-		-			-			-			-
					280		8,810		1,080		(1,440	)		-			(358	)		8,092
Total Control investments				$	3,737	$	107,608	$	19,258	$	(14,814	)	$	(1,646	)	$	378		$	110,784

(1) Represents the total amount of interest, original issue discount, fees or dividends credited to income for the portion of the year an investment was included in Control or Affiliate categories, respectively.

(2) Gross additions include increases in the cost basis of investments resulting from new portfolio investments, follow-on investments, accrued PIK and accretion of OID. Gross additions also include transfers into an affiliate or control classification.

(3) Gross reductions include decreases in the total cost basis of investments resulting from principal or PIK repayments and sales.

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

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

(6) Non-accrual investment.

36

During the year ended December 31, 2017, 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, 2016 Fair Value		Gross Additions (2)		Gross Reductions (3)			Realized Gain/(Loss)		Unrealized Gain/(Loss)			December 31, 2017 Fair Value
Affiliate investments
AAE Acquisition, LLC	Second Lien Debt (8% Cash, 4% PIK, Due 8/24/19)	$	15,846	$	757	$	-	$	15,846	$	-		$	-	$	(243	)	$	15,603
AAE Acquisition, LLC	Membership Units (2.19% fully diluted)		-		-		-		16		-			-		(16	)		-
AAE Acquisition, LLC	Warrants (37.78% fully diluted)		-		-		-		-		-			-		-			-
					757		-		15,862		-			-		(259	)		15,603
Burgaflex Holdings, LLC	Subordinated Debt (14% Cash, Due 8/9/19)		3,000		515		3,000		-		-			-		-			3,000
Burgaflex Holdings, LLC	Subordinated Debt (12% Cash, Due 8/9/19)		5,828		886		5,828		-		-			-		-			5,828
Burgaflex Holdings, LLC	Common Stock (1,253,198 shares)		-		-		1,248		-		-			-		(791	)		457
					1,401		10,076		-		-			-		(791	)		9,285
City Gear, LLC	Subordinated Debt (13% Cash, Due 10/20/19)		8,231		1,085		8,231		-		-			-		-			8,231
City Gear, LLC (5)	Preferred Membership Units (2.78% fully diluted, 9% Cash Dividend)		-		115		1,269		-		-			-		-			1,269
City Gear, LLC	Membership Unit Warrants (11.38% fully diluted)		-		-		9,736		-		-			-		(1,488	)		8,248
					1,200		19,236		-		-			-		(1,488	)		17,748
GA Communications, Inc. (5)	Series A-1 Preferred Stock (1,998 shares, 8% PIK Dividend)		-		-		2,864		255		-			-		106			3,225
GA Communications, Inc.	Series B-1 Common Stock (200,000 shares)		-		-		1,046		-		-			-		886			1,932
					-		3,910		255		-			-		992			5,157
J&J Produce Holdings, Inc.	Subordinated Debt (6% Cash, 7% PIK, Due 6/16/19)		6,368		632		6,182		186		-			-		(198	)		6,170
J&J Produce Holdings, Inc.	Common Stock (8,182 shares)		-		-		-		-		-			-		-			-
J&J Produce Holdings, Inc.	Common Stock Warrants (6,369 shares)		-		-		-		-		-			-		-			-
					632		6,182		186		-			-		(198	)		6,170
LJS Partners, LLC	Common Stock (1,500,000 shares)		-		-		8,497		-		(630	)		-		(217	)		7,650
					-		8,497		-		(630	)		-		(217	)		7,650
MJC Holdings, LLC	Series A Preferred Units (2,000,000 units)		-		-		5,011		-		(5,473	)		4,473		(4,011	)		-
					-		5,011		-		(5,473	)		4,473		(4,011	)		-
MMI Holdings, LLC	First Lien Debt (12% Cash, Due 1/31/19)		2,600		317		2,600		-		-			-		-			2,600
MMI Holdings, LLC	Subordinated Debt (6% Cash, Due 1/31/19)		400		24		400		-		-			-		-			400
MMI Holdings, LLC (5)	Preferred Units (1,000 units, 6% PIK Dividend)		-		-		1,433		85		-			-		2			1,520
MMI Holdings, LLC	Common Membership Units (45 units)		-		-		228		-		-			-		(35	)		193
					341		4,661		85		-			-		(33	)		4,713
MTI Holdings, LLC	Membership Units (2,000,000 units)		-		-		537		-		(437	)		437		(437	)		100
					-		537		-		(437	)		437		(437	)		100
Sierra Hamilton Holdings Corporation	Common Stock (15,068,000 shares)		-		-		-		6,958		-			-		1,570			8,528
					-		-		6,958		-			-		1,570			8,528
Source Capital Penray, LLC	Subordinated Debt (13% Cash, Due 4/8/19)		-		78		1,425		-		(1,425	)		-		-			-
Source Capital Penray, LLC	Membership Units (11.3% ownership)		-		526		805		-		(750	)		-		46			101
					604		2,230		-		(2,175	)		-		46			101
STX Healthcare Management Services, Inc.	Common Stock (1,200,000 shares)		-		-		109		-		(16	)		16		(16	)		93
					-		109		-		(16	)		16		(16	)		93
U.S. Well Services, LLC	First Lien Debt (7.35% Cash (1 month LIBOR + 6%, 1% floor), Due 2/2/22)		2,299		132		-		2,299		-			-		-			2,299
U.S. Well Services, LLC	First Lien Debt (12.35% PIK (1 month LIBOR + 11%, 1% floor), Due 2/2/22)		9,516		83		-		9,516		-			-		-			9,516
U.S. Well Services, LLC	Class A Units (5,680,688 Units)		-		-		-		6,260		-			-		8,744			15,004
U.S. Well Services, LLC	Class B Units (2,076,298 Units)		-		-		-		441		-			-		514			955
					215		-		18,516		-			-		9,258			27,774
V12 Holdings, Inc.	Subordinated Debt		-		-		1,015		-		-			-		20			1,035
					-		1,015		-		-			-		20			1,035
Total Affiliate investments				$	5,150	$	61,464	$	41,862	$	(8,731	)	$	4,926	$	4,436		$	103,957

37

Company (4)	Type of Investment	Principal Amount		Amount of Interest, Fees or Dividends Credited to Income (1)		December 31, 2016 Fair Value		Gross Additions (2)		Gross Reductions (3)		Realized Gain/(Loss)			Unrealized Gain/(Loss)			December 31,  2017 Fair Value
Control investments
CableOrganizer Acquisition, LLC	First Lien Debt (12% Cash, 4% PIK, Due 5/24/18)	$	12,373	$	1,473	$	11,882	$	491	$	-	$	-		$	-		$	12,373
CableOrganizer Acquisition, LLC	Common Stock (21.3% fully diluted)		-		-		200		-		-		-			(82	)		118
CableOrganizer Acquisition, LLC	Common Stock Warrants (10% fully diluted)		-		-		101		-		-		-			(41	)		60
					1,473		12,183		491		-		-			(123	)		12,551
Capitala Senior Liquid Loan Fund I, LLC	Common Stock (80% Ownership)		-		5		-		-		-		-			-			-
					5		-		-		-		-			-			-
Eastport Holdings, LLC	Subordinated Debt (14.49% Cash (3 month LIBOR + 13%, 0.5% Floor), Due 4/29/20)		16,500		3,138		16,500		757		-		-			(757	)		16,500
Eastport Holdings, LLC	Membership Units (33.3% ownership)		-		-		13,395		-		-		-			13,054			26,449
					3,138		29,895		757		-		-			12,297			42,949
Kelle's Transport Service, LLC	First Lien Debt (4% Cash, Due 2/15/20)		2,000		22		-		2,000		-		-			-			2,000
Kelle's Transport Service, LLC	First Lien Debt (1.46% Cash, Due 2/15/20)		13,674		77		-		13,669		-		-			(4,109	)		9,560
Kelle's Transport Service, LLC	Membership Units (27.5% fully diluted)		-		-		-		-		-		-			-			-
					99		-		15,669		-		-			(4,109	)		11,560
Micro Precision, LLC	Subordinated Debt (10% Cash, Due 9/15/18)		1,862		186		1,862		-		-		-			-			1,862
Micro Precision, LLC	Subordinated Debt (14% Cash, 4% PIK, Due 9/15/18)		4,154		577		3,989		165		-		-			-			4,154
Micro Precision, LLC	Series A Preferred Units (47 units)		-		-		2,523		-		-		-			(894	)		1,629
					763		8,374		165		-		-			(894	)		7,645
Navis Holdings, Inc.	First Lien Debt (15% Cash, Due 10/30/20)		6,500		989		6,500		-		-		-			-			6,500
Navis Holdings, Inc. (5)	Class A Preferred Stock (1,000 shares, 10% Cash Dividend)		-		100		1,000		-		-		-			-			1,000
Navis Holdings, Inc.	Common Stock (300,000 shares)		-		250		5,634		-		-		-			(629	)		5,005
					1,339		13,134		-		-		-			(629	)		12,505
On-Site Fuel Services, Inc.	Subordinated Debt (18% Cash, Due 12/19/18)		14,072		-		10,303		1,182		-		-			103			11,588
On-Site Fuel Services, Inc.	Series A Preferred Stock (32,782 shares)		-		-		-		-		-		-			-			-
On-Site Fuel Services, Inc.	Series B Preferred Stock (23,648 shares)		-		-		-		-		-		-			-			-
On-Site Fuel Services, Inc.	Common Stock (33,058 shares)		-		-		-		-		-		-			-			-
					-		10,303		1,182		-		-			103			11,588
Portrait Studio, LLC	First Lien Debt (8.56% Cash (1 month LIBOR + 7%, 2% ceiling), Due 12/31/22)		1,860		-		-		1,860		-		-			-			1,860
Portrait Studio, LLC	First Lien Debt (8.56% Cash (1 month LIBOR + 7%, 5% ceiling), Due 12/31/22)		4,500		-		-		4,500		-		-			-			4,500
Portrait Studio, LLC	Preferred Units (4,350,000 Units)		-		-		-		2,450		-		-			-			2,450
Portrait Studio, LLC	Membership Units (150,000 Units)		-		-		-		-		-		-			-			-
					-		-		8,810		-		-			-			8,810
Print Direction, Inc.	First Lien Debt (10% cash 2% PIK, due 2/24/19)		-		434		12,761		2,087		-		(19,403	)		4,555			-
Print Direction, Inc.	Common Stock (18,543 shares)		-		-		-		40		-		(3,030	)		2,990			-
Print Direction, Inc.	Common Stock Warrants (820 shares)		-		-		-		-		-		-			-			-
					434		12,761		2,127		-		(22,433	)		7,545			-
Total Control investments				$	7,251	$	86,650	$	29,201	$	-	$	(22,433	)	$	14,190		$	107,608

(1) Represents the total amount of interest, fees or dividends credited to income for the portion of the year an investment was included in Control or Affiliate categories, respectively.

(2) Gross additions include increases in the cost basis of investments resulting from new portfolio investments, follow-on investments and accrued PIK interest. Gross additions also include transfers into an affiliate or control classification.

(3) Gross reductions include decreases in the total cost basis of investments resulting from principal or PIK repayments and sales.

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

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

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Note 6. Agreements

On September 24, 2013, the Company entered into an investment advisory agreement (the “Investment Advisory Agreement”) with our Investment Advisor, which was initially approved by the Board on June 10, 2013. Unless earlier terminated in accordance with its terms, the Investment Advisory Agreement will remain in effect if approved annually by the Board or by a majority of our outstanding voting securities, including, in either case, by a majority of our non-interested directors. The Investment Advisory Agreement was most recently re-approved by the Board, including a majority of our non-interested directors, at an in-person meeting on July 26, 2018. Subject to the overall supervision of the Board, the Investment Advisor 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 Advisor:

·  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 Advisor’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 Advisor 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 Advisor’s services under the Investment Advisory Agreement or otherwise as Investment Advisor for the Company.

Pursuant to the Investment Advisory Agreement, the Company has agreed to pay the Investment Advisor a fee for investment advisory and management services consisting of two components — a base management fee and an incentive fee.

The base management fee is calculated at an annual rate of 1.75% of the gross assets, which are the total assets reflected on the consolidated statements of assets and liabilities and includes any borrowings for investment purposes. Although the Company does not anticipate making significant investments in derivative financial instruments, the fair value of any such investments, which will not necessarily equal their notional value, will be included in the calculation of gross assets. For services rendered under the Investment Advisory Agreement, the base management fee is payable quarterly in arrears. The base management fee was initially calculated based on the value of the gross assets at the end of the first calendar quarter subsequent to the IPO, and thereafter based on the average value of the gross assets at the end of the two most recently completed calendar quarters, and appropriately adjusted for any share issuances or repurchases during the current calendar quarter.

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, structuring, 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 2.0% per quarter (8.0% annualized). The net investment income used to calculate this part of the incentive fee is also included in the amount of the gross assets used to calculate the 1.75% base management fee. The Company pays the Investment Advisor an incentive fee with respect to the pre-incentive fee net investment income in each calendar quarter as follows:

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·  no incentive fee in any calendar quarter in which the pre-incentive fee net investment income does not exceed the hurdle of 2.0%;

·  100% of the pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle but is less than 2.5% in any calendar quarter (10.0% annualized). The Company refers to this portion of the pre-incentive fee net investment income (which exceeds the hurdle but is less than 2.5%) as the “catch-up.” The “catch-up” is meant to provide the Investment Advisor with 20% of the pre-incentive fee net investment income as if a hurdle did not apply if this net investment income exceeds 2.5% in any calendar quarter; and

·  20% of the amount of the pre-incentive fee net investment income, if any, that exceeds 2.5% in any calendar quarter (10.0% annualized) is payable to the Investment Advisor (once the hurdle is reached and the catch-up is achieved, 20% of all pre-incentive fee investment income thereafter is allocated to the Investment Advisor).

The Investment Advisor has voluntarily agreed to waive all or such portion of the quarterly incentive fees earned by the Investment Advisor that would otherwise cause the Company’s quarterly net investment income to be less than the distribution payments declared by the Board. Quarterly incentive fees are earned by the Investment Advisor pursuant to the Investment Advisory Agreement. Incentive fees subject to the waiver cannot exceed the amount of incentive fees earned during the period, as calculated on a quarterly basis. The Investment Advisor will not be entitled to recoup any amount of incentive fees that it waives. The waiver was effective in the fourth quarter of 2015 and will continue unless otherwise publicly disclosed by the Company.

The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date), and will equal 20% of our realized capital gains, if any, on a cumulative basis from inception through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees with respect to each of the investments in our portfolio.

The Company will defer cash payment of the portion of any incentive fee otherwise earned by the Investment Advisor that would, when taken together with all other incentive fees paid to the Investment Advisor during the most recent 12 full calendar month period ending on or prior to the date such payment is to be made, exceed 20% of the sum of (a) the pre-incentive fee net investment income during such period, (b) the net unrealized appreciation or depreciation during such period and (c) the net realized capital gains or losses during such period. Any deferred incentive fees will be carried over for payment in subsequent calculation periods to the extent such payment is payable under the Investment Advisory Agreement. As of June 30, 2018 and December 31, 2017, the Company had incentive fees payable to the Investment Advisor of $2.5 million and $2.2 million, respectively.

For the three months ended June 30, 2018 and 2017, the Company incurred $2.3 million and $2.5 million in base management fees, respectively. The Company incurred $0.0 million and $0.0 million in incentive fees related to pre-incentive fee net investment income for the three months ended June 30, 2018 and 2017, respectively. For the three months ended June 30, 2018 and 2017, our Investment Advisor waived incentive fees of $0.0 million and $0.0 million, respectively.

For the six months ended June 30, 2018 and 2017, the Company incurred $4.6 million and $5.0 million in base management fees, respectively. The Company incurred $0.2 million and $1.3 million in incentive fees related to pre-incentive fee net investment income for the six months ended June 30, 2018 and 2017, respectively. For the six months ended June 30, 2018 and 2017, our Investment Advisor waived incentive fees of $0.0 million and $1.0 million, respectively.

On September 24, 2013, 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.

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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 and 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 will remain in effect if approved annually by the Board. The Board most recently approved the renewal of the Administration Agreement on July 26, 2018. 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 and six months ended June 30, 2018, the Company paid the Administrator $0.4 million and $0.7 million, respectively, for the Company’s allocable portion of the Administrator’s overhead. For the three and six months ended June 30, 2017, the Company paid the Administrator $0.3 million and $0.6 million, respectively, for the Company’s allocable portion of the Administrator’s overhead.

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.

Note 7. Related Party Transactions

At June 30, 2018 and December 31, 2017, the Company had the following receivables from (payables to) related parties relating to certain management fees, incentive fees, reimbursable expenses, and other payments owed to related parties (dollars in thousands):

	June 30, 2018			December 31, 2017
CapitalSouth Corporation	$	—		$	74
CapitalSouth Partners Florida Sidecar Fund II, L.P.		—			21
Capitala Investment Advisors, LLC		(2,560	)		(2,172	)
Total	$	(2,560	)	$	(2,077	)

These amounts are reflected in the accompanying consolidated statements of assets and liabilities under the captions, “Due from related parties” and “Management and incentive fee payable.”

On August 31, 2016, the Company sold assets to FSC II in exchange for 100% of the partnership interests in FSC II. Concurrent with the sale of these assets to FSC II, the Company received cash consideration of $47.6 million from an affiliated third-party purchaser in exchange for 100% of the partnership interests of FSC II. The Company’s Board pre-approved this transaction pursuant to Section 57(f) of the 1940 Act. The Administrator also serves as the administrator to FSC II. See Note 4 for a further description of this transaction.

Note 8. Borrowings

SBA Debentures

The Company, through its two wholly owned subsidiaries, uses debenture leverage provided through the SBA to fund a portion of its investment portfolio. As of June 30, 2018 and December 31, 2017 the Company had $170.7 million of SBA-guaranteed debentures outstanding. The Company has issued all SBA-guaranteed debentures that were permitted under each of the Legacy Funds’ respective SBIC licenses (as applicable), and there are no unused SBA debenture commitments remaining. SBA-guaranteed debentures are secured by a lien on all assets of Fund II and Fund III. As of June 30, 2018 and December 31, 2017, Fund II and Fund III had total assets of approximately $347.9 million and $341.5 million, respectively. On June 10, 2014, the Company received an exemptive order from the SEC exempting the Company, Fund II, and Fund III from certain provisions of the 1940 Act (including an exemptive order granting relief from the asset coverage requirements for certain indebtedness issued by Fund II and Fund III as SBICs) and from certain reporting requirements mandated by the Securities Exchange Act of 1934, as amended, with respect to Fund II and Fund III. The Company intends to comply with the conditions of the order.

The following table summarizes the interest expense and annual charges, deferred financing costs, average balance outstanding, and average stated interest and annual charge rate on the SBA-guaranteed debentures for the three and six months ended June 30, 2018 and 2017 (dollars in thousands):

41

	For the three months ended						For the six months ended
	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
Interest expense and annual charges	$	1,580		$	1,580		$	3,142		$	3,142
Deferred financing costs		151			152			305			303
Total interest and financing expenses	$	1,731		$	1,732		$	3,447		$	3,445
Average outstanding balance	$	170,700		$	170,700		$	170,700		$	170,700
Average stated interest and annual charge rate		3.71	%		3.71	%		3.71	%		3.71	%

As of June 30, 2018 and December 31, 2017, the Company’s issued and outstanding SBA-guaranteed debentures mature as follows (dollars in thousands):

Fixed Maturity Date	Interest Rate			SBA Annual Charge			June 30, 2018		December 31, 2017
March 1, 2019		4.620	%		0.941	%	$	5,000	$	5,000
September 1, 2020		3.215	%		0.285	%		19,000		19,000
March 1, 2021		4.084	%		0.515	%		15,700		15,700
March 1, 2021		4.084	%		0.285	%		46,000		46,000
March 1, 2022		2.766	%		0.285	%		10,000		10,000
March 1, 2022		2.766	%		0.515	%		50,000		50,000
March 1, 2023		2.351	%		0.515	%		25,000		25,000
							$	170,700	$	170,700

 2021 Notes

On June 16, 2014, the Company issued $113.4 million in aggregate principal amount of 7.125% fixed-rate notes due 2021 (the “2021 Notes”). On May 26, 2017, the Company caused notices to be issued to the holders of its 2021 Notes regarding the Company’s exercise of its option to redeem all of the issued and outstanding 2021 Notes. The Company redeemed all $113.4 million in aggregate principal amount of the 2021 Notes on June 25, 2017. The Notes were redeemed at 100% of their principal amount ($25 per Note), plus the accrued and unpaid interest thereon from June 16, 2017, through, but excluding, June 25, 2017. As a result of the redemption, the Company recognized a loss on the extinguishment of debt of $2.7 million for the three and six months ended June 30, 2017, due to the amortization of the deferred financing costs remaining on the 2021 Notes.

The following table summarizes the interest expense, deferred financing costs, average outstanding balance and average stated interest rate on the 2021 Notes for the three and six months ended June 30, 2018 and 2017 (dollars in thousands):

	For the three months ended						For the six months ended
	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
Interest expense	$	—		$	1,886		$	—		$	3,908
Deferred financing costs		—			148			—			293
Total interest and financing expenses	$	—		$	2,034		$	—		$	4,201
Average outstanding balance	$	—		$	103,465		$	—		$	108,424
Average stated interest rate		—	%		7.125	%		—	%		7.125	%

2022 Notes

On May 16, 2017, the Company issued $70.0 million in aggregate principal amount of 6.0% fixed-rate notes due May 31, 2022 (the “2022 Notes”). On May 25, 2017, the Company issued an additional $5.0 million in aggregate principal amount of the 2022 Notes pursuant to a partial exercise of the underwriters’ overallotment option. The 2022 Notes will mature on May 31, 2022, and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after May 31, 2019 at a redemption price equal to 100% of the outstanding principal, plus accrued and unpaid interest. Interest was payable quarterly beginning August 31, 2017.

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The following table summarizes the interest expense, deferred financing costs, average outstanding balance and average stated interest rate on the 2022 Notes for the three and six months ended June 30, 2018 and 2017 (dollars in thousands):

	For the three months ended						For the six months ended
	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
Interest expense	$	1,125		$	555		$	2,250		$	555
Deferred financing costs		126			60			251			60
Total interest and financing expenses	$	1,251		$	615		$	2,501		$	615
Average outstanding balance	$	75,000		$	37,418		$	75,000		$	18,812
Average stated interest rate		6.0	%		6.0	%		6.0	%		6.0	%

2022 Convertible Notes

On May 26, 2017, the Company issued $50.0 million in aggregate principal amount of 5.75% fixed-rate convertible notes due on May 31, 2022 (the “2022 Convertible Notes”). On June 26, 2017, the Company issued an additional $2.1 million in aggregate principal amount of the 2022 Convertible Notes pursuant to a partial exercise of the underwriters’ overallotment option. Interest was payable quarterly beginning August 31, 2017.

The 2022 Convertible Notes are convertible, at the holder’s option, into shares of the Company’s common stock at any time on or prior to the close of business on the business day immediately preceding the maturity date. The conversion rate for the 2022 Convertible Notes is initially 1.5913 shares per $25.00 principal amount of 2022 Convertible Notes (equivalent to an initial conversion price of approximately $15.71 per share of common stock). The initial conversion premium is approximately 14.0%. Upon conversion, the Company will deliver shares of its common stock (and cash in lieu of fractional shares). The conversion rate is subject to adjustment if certain events occur as outlined in the supplemental indenture relating to the 2022 Convertible Notes. The Company has determined that the embedded conversion option in the 2022 Convertible Notes is not required to be separately accounted for as a derivative under U.S. GAAP.

In addition, pursuant to a “fundamental change”, as defined in the supplemental indenture relating to the 2022 Convertible Notes, holders of the 2022 Convertible Notes may require the Company to repurchase for cash all or part of their 2022 Convertible Notes at a repurchase price equal to 100.0% of the principal amount of the 2022 Convertible Notes to be repurchased, plus accrued and unpaid interest through, but excluding, the repurchase date. The 2022 Convertible Notes are not redeemable prior to maturity and no “sinking fund” is provided for the 2022 Convertible Notes.

The following table summarizes the interest expense, deferred financing costs, average outstanding balance, and average stated interest rate on the 2022 Convertible Notes for the three and six months ended June 30, 2018 and 2017 (dollars in thousands):

	For the three months ended						For the six months ended
	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
Interest expense	$	749		$	281		$	1,498		$	281
Deferred financing costs		81			25			159			25
Total interest and financing expenses	$	830		$	306		$	1,657		$	306
Average outstanding balance	$	52,088		$	19,895		$	52,088		$	10,002
Average stated interest rate		5.75	%		5.75	%		5.75	%		5.75	%

Credit Facility

On October 17, 2014, the Company entered into a senior secured revolving credit agreement (the “Credit Facility”) with ING Capital, LLC, as administrative agent, arranger, and bookrunner, and the lenders party thereto. The Credit Facility was amended on May 22, 2015, June 16, 2017, and July 19, 2018 (the “Amendments”). The Amendments were affected, among other things, in order to increase the total borrowings allowed under the Credit Facility, allow for stock repurchases, extend the maturity date, and to reduce the minimum required interest coverage ratio. The Credit Facility currently provides for borrowings up to $114.5 million and may be increased up to $200.0 million pursuant to its “accordion” feature. The Credit Facility matures on June 16, 2021.

Borrowings under the Credit Facility bear interest, at the Company’s election, at a rate per annum equal to (i) the one, two, three or six month LIBOR, as applicable, plus 3.00% or (ii) 2.00% plus the highest of (A) a prime rate, (B) the Federal Funds rate plus 0.5% and (C) three month LIBOR plus 1.0%. The Company’s ability to elect LIBOR indices with various tenors (e.g., one, two, three or six month LIBOR) on which the interest rates for borrowings under the Credit Facility are based, provides the company with increased flexibility to manage interest rate risks as compared to a borrowing arrangement that does not provide for such optionality. Once a particular LIBOR rate has been selected, the interest rate on the applicable amount borrowed will reset after the applicable tenor period and be based on the then applicable selected LIBOR rate (e.g., borrowings for which the Company has elected the one month LIBOR rate will reset on the one month anniversary of the period based on the then selected LIBOR rate). For any given borrowing under the Credit Facility, the Company intends to elect what it believes to be an appropriate LIBOR rate taking into account the Company’s needs at the time as well as the Company’s view of future interest rate movements. The Credit Facility provides for the ability to step-down the pricing of the Credit Facility from LIBOR plus 3.00% to LIBOR plus 2.75% when certain conditions are met. The Company will also pay an unused commitment fee at a rate of 2.50% per annum on the amount (if positive) by which 40% of the aggregate commitments under the Credit Facility exceeds the outstanding amount of loans under the Credit Facility and 0.50% per annum on any remaining unused portion of the Credit Facility.

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The following table summarizes the interest expense, deferred financing costs, unused commitment fees, average outstanding balance, and average stated interest rate on the Credit Facility for the three and six months ended June 30, 2018 and 2017 (dollars in thousands):

	For the three months ended						For the six months ended
	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
Interest expense	$	71		$	395		$	260		$	815
Deferred financing costs		108			256			215			493
Unused commitment fees		340			150			615			266
Total interest and financing expenses	$	519		$	801		$	1,090		$	1,574
Average outstanding balance	$	5,714		$	38,154		$	11,000		$	41,061
Average stated interest rate		4.94	%		4.12	%		4.78	%		3.97	%

As of June 30, 2018 and December 31, 2017, the Company had $5.0 million and $9.0 million, respectively, outstanding under the Credit Facility. The Credit Facility is secured by investments and cash held by the Company, exclusive of assets held at our two SBIC subsidiaries. Assets pledged to secure the Credit Facility had a carrying value of $179.6 million and $192.4 million, respectively, at June 30, 2018 and December 31, 2017. As part of the terms of the Credit Facility, the Company may not make cash distributions with respect to any taxable year that exceed 110% (125% if the Company is not in default and our covered debt does not exceed 85% of the borrowing base) of the amounts required to be distributed to maintain eligibility as a RIC and to reduce our tax liability to zero for taxes imposed on our investment company taxable income and net capital gains.

The following table presents the carrying value and fair value of the Company’s financial liabilities disclosed, but not carried, at fair value as of June 30, 2018, and the level of each financial liability within the fair value hierarchy (dollars in thousands):

	Carrying Value (1)		Fair Value		Level 1		Level 2		Level 3
SBA debentures	$	170,700	$	171,118	$	—	$	—	$	171,118
2022 Notes		75,000		74,850		74,850		—		—
2022 Convertible Notes		52,088		51,233		51,233		—		—
Credit Facility		5,000		5,018		—		—		5,018
Total	$	302,788	$	302,219	$	126,083	$	—	$	176,136

(1) Carrying value equals the gross principal outstanding at period end.

The following table presents the carrying value and fair value of the Company’s financial liabilities disclosed, but not carried, at fair value as of December 31, 2017, and the level of each financial liability within the fair value hierarchy (dollars in thousands):

	Carrying Value (1)		Fair Value		Level 1		Level 2		Level 3
SBA debentures	$	170,700	$	173,373	$	—	$	—	$	173,373
2022 Notes		75,000		75,600		75,600		—		—
2022 Convertible Notes		52,088		51,775		51,775		—		—
Credit Facility		9,000		9,038		—		—		9,038
Total	$	306,788	$	309,786	$	127,375	$	—	$	182,411

(1) Carrying value equals the gross principal outstanding at period end.

The estimated fair value of the Company’s SBA debentures was based on future contractual cash payments discounted at market interest rates to borrow from the SBA as of the measurement date.

The estimated fair value of the 2022 Notes and 2022 Convertible Notes was based on their respective closing prices as of the measurement date as they are traded on the NASDAQ Global Select Market under the ticker “CPTAL” (2022 Notes) and on the NASDAQ Capital Market under the ticker “CPTAG” (2022 Convertible Notes).

The estimated fair value of the Credit Facility was based on future contractual cash payments discounted at estimated market interest rates for similar debt.

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Note 9. Directors’  Fees

Our independent directors receive an annual fee of $50,000. They also receive $5,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting and $5,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each committee meeting. In addition, the chairman of the audit committee receives an annual fee of $10,000 and each chairman of any other committee receives an annual fee of $5,000 for their additional services, if any, in these capacities. For the three and six months ended June 30, 2018, the Company recognized directors’ fees expense of $0.1 million and $0.2 million, respectively. For the three and six months ended June 30, 2017, the Company recognized directors’ fees expense of $0.1 million and $0.2 million, respectively. No compensation is expected to be paid to directors who are “interested persons” of the Company, as such term is defined in Section 2(a)(19) of the 1940 Act.

Note 10. Summarized Financial Information of Our Unconsolidated Subsidiaries

The Company holds a control interest, as defined by the 1940 Act, in five portfolio companies that are considered significant subsidiaries under the guidance in Regulation S-X, but are not consolidated in the Company’s consolidated financial statements. Below is a brief description of each such portfolio company, along with summarized financial information as of June 30, 2018 and December 31, 2017, and for the six months ended June 30, 2018 and June 30, 2017, respectively.

CableOrganizer Acquisition, LLC

CableOrganizer Acquisition, LLC, a Delaware limited liability company that began operations on April 23, 2013, is a leading online provider of cable and wire management products. The income the Company generated from CableOrganizer Acquisition, LLC, which includes all interest, dividends, PIK interest and PIK dividends, fees, and unrealized appreciation (depreciation), was $0.8 million and $0.7 million for the six months ended June 30, 2018 and June 30, 2017, respectively.

Eastport Holdings, LLC

Eastport Holdings, LLC, an Ohio limited liability company organized on November 1, 2011, is a holding company consisting of marketing and advertising companies located across the U.S. The income the Company generated from Eastport Holdings, LLC, which includes all interest, dividends, PIK interest and PIK dividends, fees, and unrealized appreciation (depreciation), was $1.3 million and $6.3 million for the six months ended June 30, 2018 and June 30, 2017, respectively.

Micro Precision, LLC

Micro Precision, LLC, formed on August 5, 2011 as a Delaware limited liability company, is a prime contractor supplying critical parts and mechanical assemblies to the U.S. Department of Defense as well as designer and manufacturer of locomotive air horns. The income (loss) the Company generated from Micro Precision, LLC, which includes all interest, dividends, PIK interest and PIK dividends, fees, and unrealized appreciation (depreciation), was $0.5 million and $(0.4) million for the six months ended June 30, 2018 and June 30, 2017, respectively.

Navis Holdings, Inc.

Navis Holdings, Inc., incorporated in Delaware on December 21, 2010, designs and manufactures leading machinery for the global knit and woven finishing textile industries. The income the Company generated from Navis Holdings, Inc., which includes all interest, dividends, PIK interest and PIK dividends, fees, and unrealized appreciation (depreciation), was $0.9 million and $0.6 million for the six months ended June 30, 2018 and June 30, 2017.

On-Site Fuel Services, Inc.

On-Site Fuel Services, Inc. is a 100% owned subsidiary of On-Site Fuel Holdings, Inc., which was incorporated in Delaware on December 19, 2011. On-Site Fuel Services, Inc. provides fueling services for commercial and government vehicle fleets throughout the southeast U.S. The income (loss) the Company generated from On-Site Fuel Services, Inc., which includes all interest, dividends, PIK interest and PIK dividends, fees, and unrealized appreciation (depreciation), was $0.5 million and $(0.6) million for the six months ended June 30, 2018 and June 30, 2017, respectively.

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The summarized unaudited financial information of our unconsolidated subsidiaries was as follows (dollars in thousands):

	As of
Balance Sheet – CableOrganizer Acquisition, LLC	June 30, 2018			December 31, 2017
Current assets	$	5,012		$	5,182
Noncurrent assets		8,609			8,354
Total assets	$	13,621		$	13,536
Current liabilities	$	13,894		$	5,205
Noncurrent liabilities		—			12,346
Total liabilities	$	13,894		$	17,551
Total deficit	$	(273	)	$	(4,015	)

	For the six months ended
Statements of Operations – CableOrganizer Acquisition, LLC	June 30, 2018			June 30, 2017
Net sales	$	10,098		$	14,522
Cost of goods sold		6,701			10,201
Gross profit	$	3,397		$	4,321
Other expenses	$	4,161		$	5,205
Loss before income taxes		(764	)		(884	)
Income tax benefit		—			—
Net loss	$	(764	)	$	(884	)

	As of
Balance Sheet – Eastport Holdings, LLC(1)	March 31, 2018		December 31, 2017
Current assets	$	94,994	$	94,396
Noncurrent assets		186,934		180,266
Total assets	$	281,928	$	274,662
Current liabilities	$	153,649	$	153,182
Noncurrent liabilities		62,348		56,272
Total liabilities	$	215,997	$	209,454
Total equity	$	65,931	$	65,208

	For the six months ended
Statements of Operations – Eastport Holdings, LLC(1)	March 31, 2018			March 31, 2017
Net sales	$	271,862		$	279,038
Cost of goods sold		195,941			212,736
Gross profit	$	75,921		$	66,302
Other expenses	$	68,285		$	60,226
Income before income taxes		7,636			6,076
Income tax (provision)/benefit		(285	)		1,088
Net income	$	7,351		$	7,164

(1) June 30, 2018 financial statements are not available. As such, the most recent comparable period is presented.

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	As of
Balance Sheet – Micro Precision, LLC	June 30, 2018		December 31, 2017
Current assets	$	6,524	$	6,187
Noncurrent assets		19,586		15,864
Total assets	$	26,110	$	22,051
Current liabilities	$	7,005	$	6,511
Noncurrent liabilities		13,954		15,790
Total liabilities	$	20,959	$	22,301
Total equity (deficit)	$	5,151	$	(250	)

	For the six months ended
Statements of Operations – Micro Precision, LLC	June 30, 2018		June 30, 2017
Net sales	$	5,907	$	9,225
Cost of goods sold		3,003		5,713
Gross profit	$	2,904	$	3,512
Other expenses	$	2,486	$	3,152
Income before income taxes		418		360
Income tax provision		—		—
Net income	$	418	$	360

	As of
	June 30,			December 31,
Balance Sheet – Navis Holdings, Inc.	2018			2017
Current assets	$	4,498		$	4,724
Noncurrent assets		3,767			2,161
Total assets	$	8,265		$	6,885
Current liabilities	$	2,694		$	2,463
Noncurrent liabilities		7,939			6,739
Total liabilities	$	10,633		$	9,202
Total deficit	$	(2,368	)	$	(2,317	)

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	For the six months ended
	June 30,			June 30,
Statement of Operations – Navis Holdings, Inc.	2018			2017
Net sales	$	6,286		$	7,200
Cost of goods sold		3,699			4,437
Gross profit	$	2,587		$	2,763
Other expenses	$	2,650		$	2,370
Income (loss) before income taxes		(63	)		393
Income tax benefit (provision)		11			(155	)
Net income (loss)	$	(52	)	$	238

	As of
	June 30,			December 31,
Balance Sheet – On-Site Fuel Services, Inc.	2018			2017
Current assets	$	13,505		$	28,064
Noncurrent assets		28,527			26,807
Total assets	$	42,032		$	54,871
Current liabilities	$	25,536		$	32,626
Noncurrent liabilities		32,400			34,515
Total liabilities	$	57,936		$	67,141
Total deficit	$	(15,904	)	$	(12,270	)

	For the six months ended
	June 30,			June 30,
Statement of Operations – On-Site Fuel Services, Inc.	2018			2017
Net sales	$	68,582		$	74,069
Cost of goods sold		65,148			71,812
Gross profit	$	3,434		$	2,257
Other expenses	$	6,988		$	5,301
Loss before income taxes		(3,554	)		(3,044	)
Income tax provision		—			—
Net loss	$	(3,554	)	$	(3,044	)

Note 11. 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 outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.

The following information sets forth the computation of the weighted average basic and diluted increase (decrease) in net assets from operations per share for the three and six months ended June 30, 2018 and June 30, 2017 (dollars in thousands, except share and per share data):

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	For the three months ended					For the six months ended
	June 30, 2018		June 30, 2017			June 30, 2018		June 30, 2017
Net increase (decrease) in net assets from operations per share – basic
Numerator for basic net increase (decrease) in net assets from operations per share	$	4,948	$	(5,525	)	$	5,089	$	(643	)
Denominator for basic net increase (decrease) in net assets from operations per share		15,981,857		15,889,682			15,970,599		15,881,712
Basic net increase (decrease) in net assets from operations per share	$	0.31	$	(0.35	)	$	0.32	$	(0.04	)
Net increase (decrease) in net assets from operations per share – diluted (1)
Numerator for basic net increase (decrease) in net assets from operations per share	$	4,948	$	(5,525	)	$	5,089	$	(643	)
Adjustment for interest on the 2022 Convertible Notes and incentive fees, net		133		—			133		—
Numerator for diluted net increase (decrease) in net assets from operations per share	$	5,081	$	(5,525	)	$	5,222	$	(643	)
Denominator for basic weighted average shares		15,981,857		15,889,682			15,970,599		15,881,712
Adjustment for dilutive effect of the 2022 Convertible Notes		3,315,474		—			3,315,474		—
Denominator for diluted weighted average shares		19,297,331		15,889,682			19,286,073		15,881,712
Diluted net increase (decrease) in net assets from operations per share	$	0.26	$	(0.35	)	$	0.27	$	(0.04	)

(1) In applying the if-converted method, conversion is not assumed for purposes of computing diluted earnings per share if the effect would be anti-dilutive. For the three and six months ended June 30, 2017, conversion of the 3.3 million in convertible shares was not assumed as the effect on diluted earnings per share would be anti-dilutive.

Note 12. Distributions

The Company’s distributions are recorded as payable on the declaration date. Stockholders have the option to receive payment of the distribution in cash, shares of common stock, or a combination of cash and common stock.

The following table summarizes the Company’s distribution declarations for the six months ended June 30, 2018 (dollars in thousands, except share and per share data):

Date Declared	Record Date	Payment Date	Amount Per Share		Cash Distribution		DRIP Shares Issued		DRIP Share Value
January 2, 2018	January 22, 2018	January 30, 2018	$	0.0833	$	1,275		7,280	$	54
January 2, 2018	February 20, 2018	February 27, 2018		0.0833		1,275		8,076		54
January 2, 2018	March 23, 2018	March 29, 2018		0.0833		1,274		7,631		56
April 2, 2018	April 19, 2018	April 27, 2018		0.0833		1,278		7,006		53
April 2, 2018	May 22, 2018	May 30, 2018		0.0833		1,277		6,875		54
April 2, 2018	June 20, 2018	June 28, 2018		0.0833		1,280		6,591		52
Total Distributions Declared and Distributed			$	0.50	$	7,659		43,459	$	323

The following table summarizes the Company’s distribution declarations for the six months ended June 30, 2017 (dollars in thousands, except share and per share data):

Date Declared	Record Date	Payment Date	Amount Per Share		Cash Distribution		DRIP Shares Issued		DRIP Share Value
January 3, 2017	January 20, 2017	January 30, 2017	$	0.13	$	1,993		5,304	$	70
January 3, 2017	February 20, 2017	February 27, 2017		0.13		1,993		5,195		70
January 3, 2017	March 23, 2017	March 30, 2017		0.13		1,998		4,948		67
April 3, 2017	April 19, 2017	April 27, 2017		0.13		1,996		5,164		69
April 3, 2017	May 23, 2017	May 29, 2017		0.13		1,990		5,880		76
April 3, 2017	June 21, 2017	June 29, 2017		0.13		1,969		7,959		97
Total Distributions Declared and Distributed			$	0.78	$	11,939		34,450	$	449

Note 13. Financial Highlights

The following is a schedule of financial highlights for the six months ended June 30, 2018 and 2017 (dollars in thousands, except share and per share data):

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	June 30, 2018			June 30, 2017
Per share data:
Net asset value at beginning of period	$	13.91		$	15.79
Net investment income(1)		0.54			0.43
Net realized gain (loss) on investments(1)		(1.66	)		0.60
Net unrealized appreciation (depreciation) on investments(1)		1.35			(0.92	)
Net unrealized depreciation on Written Call Option(1)		—			(0.15	)
Tax benefit(1)		0.08			—
Distributions declared from net investment income		(0.50	)		(0.78	)
Other(7)		(0.01	)		—
Net asset value at end of period	$	13.71		$	14.97
Net assets at end of period	$	219,317		$	238,000
Shares outstanding at end of period		15,994,690			15,902,495
Per share market value at end of period	$	8.30		$	13.01
Total return based on market value(2)		21.89	%		6.75	%
Ratio/Supplemental data:
Ratio of net investment income to average net assets(9)		8.07	%		6.92	%
Ratio of incentive fee, net of incentive fee waiver, to average net assets(6)(10)		0.11	%		0.14	%
Ratio of interest and financing expenses to average net assets(8)		7.98	%		8.31	%
Ratio of loss on extinguishment of debt to average net assets(10)		—	%		1.11	%
Ratio of tax benefit to average net assets(8)		(1.19	)%		—	%
Ratio of other operating expenses to average net assets(8)		6.28	%		5.79	%
Ratio of total expenses including tax benefit, net of fee waivers, to average net assets(6)(9)		13.18	%		15.35	%
Portfolio turnover rate(3)		7.86	%		5.43	%
Average debt outstanding(4)	$	308,788		$	348,999
Average debt outstanding per common share	$	19.31		$	21.95
Asset coverage ratio per unit(5)	$	2,660		$	2,515

(1) Based on daily weighted average balance of shares outstanding during the period.

(2) Total investment return is calculated assuming a purchase of common shares at the current market value on the first day and a sale at the current market value on the last day of the period reported. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Company’s DRIP. Total investment return does not reflect brokerage commissions. Total investment returns covering less than a full period are not annualized.

(3) Portfolio turnover rate is calculated using the lesser of year-to-date sales or year-to-date purchases over the average of the invested assets at fair value. Portfolio turnover rates that cover less than a full period are not annualized.

(4) Based on daily weighted average balance of debt outstanding during the period.

(5) Asset coverage per unit is the ratio of the carrying value of our total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. We have excluded our SBA-guaranteed debentures from the asset coverage calculation as of June 30, 2018 and June 30, 2017 pursuant to the exemptive relief granted by the SEC in June 2014 that permits us to exclude such debentures from the definition of senior securities in the 200% asset coverage ratio we are required to maintain under the 1940 Act. Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness.

(6) The ratio of waived incentive fees to average net assets was 0.00% and 0.39%, for the six months ended June 30, 2018 and June 30, 2017.

(7) Includes the impact of different share amounts used in calculating per share data as a result of calculating certain per share data based on weighted average shares outstanding during the period and certain per share data based on shares outstanding as of a period end or transaction date.

(8) Ratios are annualized.

(9) Ratios are annualized. Incentive fees, net of incentive fees waiver and loss on extinguishment of debt included within the ratio are not annualized.

(10) Ratio is not annualized.

Note 14. 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, 2018.

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Distributions

On July 2, 2018, the Company’s Board declared normal monthly distributions for July, August, and September of 2018 as set forth below:

Date Declared	Record Date	Payment Date	Distributions per Share
July 2, 2018	July 23, 2018	July 30, 2018	$	0.0833
July 2, 2018	August 23, 2018	August 30, 2018	$	0.0833
July 2, 2018	September 20, 2018	September 27, 2018	$	0.0833

Portfolio Activity

On August 2, 2018, the Company invested $13.0 million in first lien debt of Sunset Digital Holding, LLC, yielding 1-month LIBOR + 7.25%.

On July 31, 2018, the Company sold its investment in Kelle’s Transport Services, LLC, receiving $13.3 million in proceeds upon exit.

Credit Facility

On July 19, 2018, the Company entered into Amendment No. 3 (the “Amendment”) to the Credit Facility.

The Amendment amended the Credit Facility to, among other things, reduce the minimum required Consolidated Interest Coverage Ratio (as defined in the Credit Facility) that the Company must maintain on a quarterly basis from 2.25 to 1 as of the last day of any fiscal quarter of the Company, as was previously in effect, to (i) 1.75 to 1 as of the last day of any fiscal quarter of the Company ending after March 31, 2018 but on or prior to December 31, 2018, and (ii) 2.00 to 1 as of the last day of any fiscal quarter of the Company ending after December 31, 2018.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q.

Except as otherwise specified, references to “we,” “us,” “our” or the “Company”, refer to Capitala Finance Corp.

This Quarterly Report, 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 the Quarterly Report on Form 10-Q constitute forward-looking statements, which relate to future events or our performance or financial condition. The forward-looking statements contained in this Quarterly Report on Form 10-Q involve risks and uncertainties, including statements as to:

· our future operating results;

· our business prospects and the prospects of our portfolio companies;

· the impact of investments that we expect to make;

· our contractual arrangements and relationships with third parties;

· the dependence of our future success on the general economy and its impact on the industries in which we invest;

· the ability of our portfolio companies to achieve their objectives;

· our expected financings and investments;

· the adequacy of our cash resources and working capital; and

· the timing of cash flows, if any, from the operations of our portfolio companies.

These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:

· an economic downturn could impair our portfolio companies’ ability to continue to operate or repay their borrowings, which could lead to the loss of some or all of our investments in such portfolio companies;

· a contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities;

· interest rate volatility could adversely affect our results, particularly if we use leverage as part of our investment strategy; and

· the risks, uncertainties and other factors we identify in “Risk Factors” and elsewhere in our Annual Report on Form 10-K.

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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, 2017. 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 are an “emerging growth company” within the meaning of the Jumpstart Our Business Startups Act of 2012, and as such, are subject to reduced public company reporting requirements. Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We are managed by Capitala Investment Advisors, LLC (the “Investment Advisor”), and Capitala Advisors Corp. (the “Administrator”) provides the administrative services necessary for us to operate.

We provide capital to lower and traditional middle-market companies in the United States (“U.S.”), with a non-exclusive emphasis on the Southeast, Southwest and Mid-Atlantic regions. We invest primarily in companies with a history of earnings growth and positive cash flow, proven management teams, products or services with competitive advantages and industry-appropriate margins. We primarily invest in companies with between $4.5 million and $30 million in trailing twelve-month earnings before interest, tax, depreciation, and amortization (“EBITDA”).

We invest in first lien loans, second lien loans, and subordinated loans. Most of our debt investments are coupled with equity interests, whether in the form of detachable “penny” warrants or equity co-investments made pari-passu with our borrowers’ financial sponsors.

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 200% (or 150%, if certain requirements are met) after such borrowing, with certain limited exceptions. On March 23, 2018, the Small Business Credit Availability Act (the “SBCA”) was signed into law, which included various changes to regulations under the federal securities laws that impact BDCs. The SBCA included changes to the 1940 Act to allow BDCs to decrease their asset coverage requirement from 200% to 150% (i.e. the amount of debt may not exceed 66.7% of the value of our total assets), if certain requirements are met. To maintain our regulated investment company (“RIC”) status, we must meet specified source-of-income and asset diversification requirements. To maintain our RIC tax treatment under subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”) for U.S. federal income tax purposes, we must distribute at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, for the taxable year.

Corporate History

We commenced operations on May 24, 2013 and completed our initial public offering (“IPO”) on September 30, 2013. The Company was formed for the purpose of (i) acquiring, through a series of transactions, an investment portfolio from the following entities: CapitalSouth Partners Fund I Limited Partnership (“Fund I”); CapitalSouth Partners Fund II Limited Partnership (“Fund II”); CapitalSouth Partners Fund III, L.P. (“Fund III Parent”); CapitalSouth 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 SBIC licenses, 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.

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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 U.S. Small Business Administration (“SBA”) guaranteed debt payable. We have two subsidiaries licensed under the Small Business Investment Company (“SBIC”) Act that have elected to be regulated as BDCs under the 1940 Act.

During the fourth quarter of 2017, Florida Sidecar transferred all of its assets to the Company and was legally dissolved as a standalone partnership.

The Company has formed and expects to continue to form certain consolidated taxable subsidiaries (the “Taxable Subsidiaries”), which are taxed as corporations for 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.

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, Florida Sidecar, and the Taxable Subsidiaries.

The Company’s financial statements as of June 30, 2018 and December 31, 2017 are presented on a consolidated basis. The effects of all intercompany transactions between the Company and its subsidiaries (Fund II, Fund III, Florida Sidecar, and the Taxable Subsidiaries) have been eliminated in consolidation. All financial data and information included in these consolidated financial statements have been presented on the basis described above. In the opinion of management, the consolidated financial statements reflect all adjustments that are necessary for the fair presentation of financial results as of and for the periods presented.

Consolidation

As provided under Regulation S-X and 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, Florida Sidecar, 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, origination, amendment, structuring or diligence fees, monitoring fees, fees for providing managerial assistance and possibly consulting fees and performance-based fees. These fees will be recognized as they are earned.

Expenses

Our primary operating expenses include the payment of investment advisory fees to our Investment Advisor, our allocable portion of overhead and other expenses incurred by our Administrator in performing its obligations under an administration agreement between us and the Administrator (the “Administration Agreement”) and other operating expenses as detailed below. Our investment advisory fee will compensate our Investment Advisor for its work in identifying, evaluating, negotiating, closing, monitoring and servicing our investments. We will bear all other expenses of our operations and transactions, including (without limitation):

· the cost of our organization;

· the cost of calculating our net asset value, including the cost of any third-party valuation services;

· the cost of effecting sales and repurchases of our shares and other securities;

· interest payable on debt, if any, to finance our investments;

· fees payable to third parties relating to, or associated with, making investments (such as legal, accounting, and travel expenses incurred in connection with making investments), including fees and expenses associated with performing due diligence reviews of prospective investments and advisory fees;

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· transfer agent and custodial fees;

· fees and expenses associated with marketing efforts;

· costs associated with our reporting and compliance obligations under the 1940 Act, the Securities Exchange Act of 1934, as amended (the “1934 Act”), other applicable federal and state securities laws and ongoing stock exchange listing fees;

· federal, state and local taxes;

· independent directors’ fees and expenses;

· brokerage commissions;

· costs of proxy statements, stockholders’ reports and other communications with stockholders;

· fidelity bond, directors’ and officers’ liability insurance, errors and omissions liability insurance and other insurance premiums;

· direct costs and expenses of administration, including printing, mailing, telephone and staff;

· fees and expenses associated with independent audits and outside legal costs; and

· all other expenses incurred by either our Administrator or us in connection with administering our business, including payments under the Administration Agreement that will be based upon our allocable portion of overhead and other expenses incurred by our Administrator in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions, and our allocable portion of any costs of compensation and related expenses of our chief compliance officer and our chief financial officer and their respective administrative support staff.

Critical Accounting Policies and Use of Estimates

In the preparation of our consolidated financial statements and related disclosures, we have adopted various accounting policies that govern the application of U.S. GAAP. Our significant accounting policies are described in Note 2 to the consolidated financial statements. While all of these policies are important to understanding our 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 financial statements and the reported amounts of revenues and expenses for the periods covered by such financial statements. We have identified investment valuation, revenue recognition, and income taxes as our most critical accounting estimates. We continuously evaluate our estimates, including those related to the matters described below. Because of the nature of the judgments and assumptions we make, actual results could materially differ from those estimates under different assumptions or conditions. A discussion of our critical accounting policies follows.

Valuation of Investments

The Company applies fair value accounting to all of its financial instruments in accordance with the 1940 Act and ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework used to measure fair value and requires disclosures for fair value measurements. In accordance with ASC 820, the Company has categorized its financial instruments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy as discussed in Note 4 to our consolidated financial statements.

In determining fair value, our board of directors (the “Board”) uses various valuation approaches, and engages a third-party independent valuation firm, which provides positive assurance on the investments it reviews. In accordance with U.S. GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.

Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Board. Unobservable inputs reflect the Board’s assumptions about the inputs market participants would use in pricing the asset or liability developed based upon the best information available in the circumstances. The fair value hierarchy is categorized into three levels based on the inputs as follows:

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Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 securities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.

Level 2 — Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including the type of security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a market for the securities existed. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement.

Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. We use prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy.

In estimating the fair value of portfolio investments, the Company starts with the cost basis of the investment, which includes original issue discount and payment-in-kind income (“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.

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.

The enterprise value waterfall approach is primarily utilized to value the Company’s equity securities, including warrants. However, the Company may utilize the enterprise value waterfall approach to value certain debt securities.

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 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.

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Asset Approach

The asset approach values an investment based on the value of the underlying collateral securing the investment. This approach is used when the Company has reason to believe that it will not collect all principal and interest in accordance with the contractual terms of the debt agreement.

Revenue Recognition

The Company’s revenue recognition policies are as follows:

Interest income and paid-in-kind interest income: Interest income is recorded on the accrual basis to the extent that such amounts are expected to be collected. The Company has loans in the portfolio that contain a payment-in-kind interest (“PIK interest”) provision. The PIK interest, which represents contractually deferred interest added to the loan balance that is generally due at maturity, is recorded on the accrual basis to the extent that such amounts are expected to be collected. PIK interest is not accrued if the Company does not expect the issuer to be able to pay all principal and interest when due.

Non-accrual investments: Management reviews all loans that become 90 days or more past due, or when there is reasonable doubt that principal or interest will be collected, for possible placement on non-accrual status. When the Company otherwise does not expect the borrower to be able to service its debt and other obligations, the Company will place the loan on non-accrual status, and will generally cease recognizing interest income and PIK interest on that loan for financial reporting purposes. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment. The Company writes off any previously accrued and uncollected cash interest when it is determined that interest is no longer considered collectible. The Company may elect to cease accruing PIK interest and continue accruing interest income in cases where a loan is currently paying its interest income but, in management’s judgment, there is a reasonable likelihood of principal loss on the loan. Non-accrual loans are returned to accrual status when the borrower’s financial condition improves such that management believes current interest and principal payments are expected to be collected.

Gains and losses on investment sales and paydowns: Realized gains and losses on investments are recognized using the specific identification method.

Dividend income and paid-in-kind dividends: Dividend income is recognized on the date dividends are declared. The Company holds preferred equity investments in the portfolio that contain a payment-in-kind dividend (“PIK dividends”) 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 the PIK dividends are more likely than not to be collected, management may elect to continue accruing PIK dividends.

Original issue discount: Discounts received to par on loans purchased are capitalized and accreted into income over the life of the loan. Any remaining discount is accreted into income upon prepayment of the loan.

Other income: Origination fees (to the extent services are performed to earn such income), amendment fees, consent fees, and other fees associated with investments in portfolio companies are recognized as income when the investment transaction closes. Prepayment penalties received by the Company for debt instruments repaid prior to the maturity date are recorded as income upon receipt.

Income Taxes

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

The Company has elected to be treated for U.S. federal income tax purposes, and intends to comply with the requirement to qualify annually as a RIC under subchapter M of the Code and, among other things, intends to make the requisite distributions to its stockholders which will relieve the Company from U.S. federal income taxes.

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In order to qualify as a RIC, among other requirements, the Company is required to timely distribute to its stockholders at least 90.0% of its investment company taxable income, as defined by the Code, for each fiscal tax year. The Company will be subject to a nondeductible U.S. federal excise tax of 4.0% on undistributed income if it does not distribute at least 98.0% of its ordinary income in any calendar year and 98.2% of its capital gain net income for each one-year period ending on October 31.

Depending on the level of taxable income earned in an excise tax year, the Company may choose to carry forward taxable income in excess of current year dividend distributions into the next excise tax year and pay a 4.0% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions for 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.

For U.S. federal income tax purposes, as of June 30, 2018, the aggregate net unrealized appreciation for all securities was $56.5 million. As of June 30, 2018, gross unrealized appreciation was $85.1 million and gross unrealized depreciation was $28.6 million. The aggregate cost of securities for U.S. federal income tax purposes was $426.7 million. For U.S. federal income tax purposes, as of December 31, 2017, the aggregate net unrealized appreciation for all securities was $34.9 million. As of December 31, 2017, gross unrealized appreciation was $81.4 million and gross unrealized depreciation was $46.5 million. The aggregate cost of securities for U.S. federal income tax purposes was $465.0 million as of December 31, 2017.

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 June 30, 2018 and December 31, 2017, the Company recorded a net deferred tax asset of $6 thousand and net deferred tax liability of $1.3 million, respectively. For the three months ended June 30, 2018, the Company recorded a tax benefit of $1.3 million. For the six months ended June 30, 2018, the Company recorded a tax benefit of $1.3 million. For the three and six months ended June 30, 2017, no tax provision was recorded.

In accordance with certain applicable U.S. treasury regulations and private letter rulings issued by the Internal Revenue Service, a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive its entire distribution in either cash or stock of the RIC, subject to a limitation on the aggregate amount of cash to be distributed to all stockholders, which limitation must be at least 20.0% of the aggregate declared distribution. If too many stockholders elect to receive cash, each stockholder electing to receive cash will receive a pro rata amount of cash (with the balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive less than 20.0% of its entire distribution in cash. If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock.

ASC Topic 740 — Income Taxes (“ASC 740”), provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the consolidated financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the consolidated statements of operations. As of June 30, 2018 and December 31, 2017, there were no uncertain tax positions.

The Company is required to determine whether a tax position of the Company is more likely-than-not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized could result in the Company recording a tax liability that could negatively impact the Company’s net assets.

U.S. GAAP provides guidance on thresholds, measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition that is intended to provide better financial statement comparability among different entities.

The Company has concluded that it was not necessary to record a liability for any such tax positions as of June 30, 2018 and December 31, 2017. 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.

The tax years ended August 31, 2017, 2016, 2015, and 2014 remain subject to examination by U.S. federal, state, and local tax authorities. No interest expense or penalties have been assessed for the periods ended June 30, 2018 and June 30, 2017. 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 has elected to amend its tax year end from August 31 to December 31 and expects to file a tax return for the four months ended December 31, 2017. The election to change tax year end is not expected to have a material impact on the Company’s consolidated statements of operations, the Company’s tax status as a RIC, or the nature of distributions paid to our stockholders.

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On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act, which significantly changes the existing U.S. tax laws, including a reduction in the corporate tax rate from 35% to 21%, a move from a worldwide tax system to a territorial system, as well as other changes. The Taxable Subsidiaries’ provisional tax is based on the new lower blended federal and state corporate tax rate of 25%. This estimate incorporates assumptions made based on the Taxable Subsidiaries’ current interpretation of the Tax Act and may change, possibly materially, as we complete our analysis and receive additional clarification and implementation guidance.

Portfolio and Investment Activity

The Company’s investment objective is to generate both current income and capital appreciation through debt and equity investments. Both directly and through the Company’s subsidiaries that are licensed by the SBA under the SBIC Act, 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, second lien loans, and subordinated loans. Most of the Company’s debt investments are coupled with equity interests, whether in the form of detachable “penny” warrants or equity co-investments made pari-passu with our borrowers’ financial sponsors. As of June 30, 2018, our portfolio consisted of investments in 43 portfolio companies with a fair value of approximately $483.3 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 or delayed draw 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 in one debt security, bifurcating the loan into a first-out tranche and last-out tranche. As of June 30, 2018, 13.4% of the fair value of our first lien loans consisted of last-out loans. As of December 31, 2017, 13.7% 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 which are not subject to the blockage of cash interest payments to the Company at the first lien lender’s discretion.

In addition to first and second lien loans, the Company may also invest in subordinated loans. Subordinated loans typically have a second lien on all or substantially all of the borrower’s assets, and unlike second lien loans, 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, 2018, we made approximately $11.2 million of investments and had approximately $32.3 million in repayments and sales of investments resulting in net repayments and sales of approximately $21.1 million for the period. During the three months ended June 30, 2017, we made approximately $6.5 million of investments and had approximately $49.3 million in repayments and sales resulting in net repayments and sales of approximately $42.8 million for the period.

During the six months ended June 30, 2018, we made approximately $39.0 million of investments and had approximately $53.7 million in repayments and sales of investments resulting in net repayments and sales of approximately $14.7 million for the period. During the six months ended June 30, 2017, we made approximately $28.2 million of investments and had approximately $82.3 million in repayments and sales resulting in net repayments and sales of approximately $54.1 million for the period.

On August 31, 2016, we sold a portion of 14 securities across 10 portfolio companies to CapitalSouth Partners Florida Sidecar Fund II, L.P. (“FSC II”), including granting an option to acquire a portion of our equity investment in Eastport Holdings, LLC (the “Written Call Option”), in exchange for 100% of the partnership interests in FSC II. Concurrent with the sale of these assets to FSC II, we received cash consideration of $47.6 million from an affiliated third-party purchaser in exchange for 100% of the partnership interests of FSC II. These assets were sold to FSC II at their June 30, 2016 fair market values, resulting in a net realized gain of $0.1 million. Our Board pre-approved this transaction pursuant to Section 57(f) of the 1940 Act.

The Company collected and will periodically collect principal and interest payments related to certain of the securities purchased by FSC II. Such principal and interest payments will be remitted timely to FSC II based on its proportionate share of the security. FSC II does not have any recourse to the Company related to the non-payment of principal or interest by the underlying issuers of the securities.

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The Written Call Option granted FSC II the right to purchase up to 31.25% of our equity investment in Eastport Holdings, LLC. The Written Call Option has a strike price of $1.5 million and a termination date of August 31, 2018. The fair value of the Written Call Option, which has been treated as a derivative liability and is recorded in the financial statement line item Written Call Option at fair value in our consolidated statements of assets and liabilities, was approximately $6.8 million and $6.8 million as of June 30, 2018 and December 31, 2017, respectively. For purposes of determining the fair value of the Written Call Option, we calculated the difference in the fair value of the underlying equity investment in Eastport Holdings, LLC and the strike price of the Written Call Option, or intrinsic value. The time value of the Written Call Option as of June 30, 2018 and December 31, 2017 was determined to be insignificant. The Written Call Option is classified as a Level 3 financial instrument. The Written Call Option remained outstanding as of June 30, 2018 and December 31, 2017.

As of June 30, 2018, our debt investment portfolio, which represented 74.1% of our total portfolio, had a weighted average annualized yield of approximately 11.4%. As of June 30, 2018, 52.4% of our debt investment portfolio was bearing a fixed rate of interest. As of December 31, 2017, our debt investment portfolio, which represented 75.5% of our total portfolio, had a weighted average annualized yield of approximately 11.9%. As of December 31, 2017, 51.7% of our debt investment portfolio was bearing a fixed rate of interest.

The weighted 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 yield will remain at its current level.

The following table summarizes the amortized cost and the fair value of investments and cash and cash equivalents as of June 30, 2018 (dollars in thousands):

	Investments at Amortized Cost		Percentage of Total			Investments at Fair Value		Percentage of Total
First Lien Debt	$	256,365		54.8	%	$	245,846		46.9	%
Second Lien Debt		32,831		7.0			31,781		6.1
Subordinated Debt		79,689		17.1			80,318		15.3
Equity and Warrants		57,862		12.4			125,316		23.9
Cash and Cash Equivalents		40,826		8.7			40,826		7.8
Total	$	467,573		100.0	%	$	524,087		100.0	%

The following table summarizes the amortized cost and the fair value of investments and cash and cash equivalents as of December 31, 2017 (dollars in thousands):

	Investments at Amortized Cost		Percentage of Total			Investments at Fair Value		Percentage of Total
First Lien Debt	$	257,147		51.8	%	$	243,489		45.8	%
Second Lien Debt		32,465		6.6			30,794		5.8
Subordinated Debt		120,235		24.2			103,385		19.5
Equity and Warrants		55,180		11.1			122,271		23.0
Cash and Cash Equivalents		31,221		6.3			31,221		5.9
Total	$	496,248		100.0	%	$	531,160		100.0	%

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The following table shows the portfolio composition by industry grouping at fair value (dollars in thousands):

	June 30, 2018					December 31, 2017
	Investments at Fair Value		Percentage of Total Portfolio			Investments at Fair Value		Percentage of Total Portfolio
Business Services	$	63,409		13.1	%	$	70,122		14.0	%
Building Products		38,691		8.0			17,879		3.6
Consumer Products		28,923		6.0			29,612		5.9
Financial Services		25,732		5.3			26,920		5.4
Information Technology		25,132		5.2			24,761		5.0
Oil & Gas Services		23,842		4.9			27,774		5.6
Healthcare		19,859		4.1			21,368		4.3
Sales & Marketing Services		18,241		3.8			17,388		3.5
Footwear Retail		16,907		3.5			17,748		3.6
Food Product Manufacturer		16,640		3.4			16,222		3.2
Industrial Equipment Rental		16,039		3.3			15,603		3.1
Retail		15,000		3.1			15,000		3.0
Automobile Part Manufacturer		14,453		3.0			9,285		1.9
Textile Equipment Manufacturer		13,809		2.9			12,505		2.5
Transportation		13,300		2.8			11,560		2.3
Computer Supply Retail		12,771		2.6			12,551		2.5
Government Services		12,217		2.5			10,320		2.1
IT Consulting		12,155		2.5			12,231		2.4
Fuel Transportation Services		12,134		2.5			11,588		2.3
Advertising & Marketing Services		9,044		1.9			5,157		1.0
Oil & Gas Engineering and Consulting Services		8,909		1.8			8,528		1.7
Healthcare Management		8,445		1.8			9,014		1.8
Professional and Personal Digital Imaging		8,092		1.7			8,810		1.8
Conglomerate		7,729		1.6			7,645		1.5
QSR Franchisor		6,245		1.3			7,650		1.5
Produce Distribution		6,162		1.3			6,170		1.2
Logistics		5,750		1.2			—		—
Farming		5,673		1.2			5,581		1.1
Restaurant		4,892		1.0			4,880		1.0
Medical Device Distributor		4,757		1.0			4,713		0.9
Online Merchandise Retailer		3,526		0.7			3,755		0.8
Home Repair Parts Manufacturer		1,759		0.4			2,767		0.6
Consumer Electronics		1,130		0.2			3,498		0.7
Data Processing & Digital Marketing		1,035		0.2			1,035		0.2
Household Product Manufacturer		758		0.2			1,316		0.3
Automotive Chemicals & Lubricants		101		0.0			101		0.0
Specialty Retail		—		—			20,713		4.1
Refrigeration/HVAC Services		—		—			8,736		1.7
Bowling Products		—		—			7,186		1.4
Replacement Window Manufacturer		—		—			1,880		0.4
In-Home Healthcare Services		—		—			174		0.1
Retail Display & Security Services		—		—			100		0.0
Dental Practice Management		—		—			93		0.0
Total	$	483,261		100.0	%	$	499,939		100.0	%

With the exception of the international investment holdings noted below, all investments made by the Company as of June 30, 2018 and December 31, 2017 were made in portfolio companies located in the U.S. The geographic composition is determined by the location of the corporate headquarters of the portfolio company, which may not be indicative of the primary source of the portfolio company’s business. The following table shows the portfolio composition by geographic region at fair value as of June 30, 2018 and December 31, 2017 (dollars in thousands):

	June 30, 2018					December 31, 2017
	Investments at Fair Value		Percentage of Total Portfolio			Investments at Fair Value		Percentage of Total Portfolio
South	$	244,161		50.5	%	$	254,829		51.0	%
West		105,216		21.8			107,835		21.5
Midwest		77,248		16.0			84,832		17.0
Northeast		49,722		10.3			44,428		8.9
International		6,914		1.4			8,015		1.6
Total	$	483,261		100.0	%	$	499,939		100.0	%

In addition to various risk management tools, our Investment Advisor uses an investment rating system to characterize and monitor our expected level of return on each investment in our portfolio.

As part of our valuation procedures, we risk rate all of our investments. In general, our investment rating system uses a scale of 1 to 5, with 1 being the lowest probability of default and principal loss. Our internal rating is not an exact system, but it is used internally to estimate the probability of: (i) default on our debt securities and (ii) loss of our debt principal, in the event of a default. In general, our internal rating system may also assist our valuation team in its determination of the estimated fair value of equity securities or equity-like securities. Our internal risk rating system generally encompasses both qualitative and quantitative aspects of our portfolio companies.

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Our internal investment rating system incorporates the following five categories:

Investment Rating	Definition
1	In general, the investment may be performing above our internal expectations. Full return of principal and interest is expected. Capital gain is expected.
2	In general, the investment may be performing within our internal expectations, and potential risks to the applicable investment are considered to be neutral or favorable compared to any potential risks at the time of the original investment. All new investments are initially given this rating.
3	In general, the investment may be performing below our internal expectations and therefore, investments in this category may require closer internal monitoring; however, the valuation team believes that no loss of investment return (interest and/or dividends) or principal is expected. The investment also may be out of compliance with certain financial covenants.
4	In general, the investment may be performing below internal expectations and quantitative or qualitative risks may have increased substantially since the original investment. Loss of some or all principal is expected.
5	In general, the investment may be performing substantially below our internal expectations and a number of quantitative or qualitative risks may have increased substantially since the original investment. Loss of some or all principal is expected.

Our Investment Advisor will monitor and, when appropriate, change the investment ratings assigned to each investment in our portfolio. In connection with our valuation process, our Investment Advisor will review these investment ratings on a quarterly basis. The investment rating of a particular investment should not, however, be deemed to be a guarantee of the investment’s future performance.

The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of June 30, 2018 and December 31, 2017 (dollars in thousands):

	As of June 30, 2018					As of December 31, 2017
Investment Rating	Investments at Fair Value		Percentage of Total Investments			Investments at Fair Value		Percentage of Total Investments
1	$	187,661		38.8	%	$	191,204		38.2	%
2		159,091		32.9			186,445		37.3
3		110,730		22.9			97,309		19.5
4		25,779		5.4			24,981		5.0
5		—		—			—		—
Total	$	483,261		100.0	%	$	499,939		100.0	%

As of June 30, 2018, we had debt investments in three portfolio companies on non-accrual status with an amortized cost of $31.9 million and a fair value of $25.8 million, which represented 7.5% and 5.3% of the investment portfolio, respectively. As of December 31, 2017, we had debt investments in four portfolio companies on non-accrual status with an amortized cost of $50.1 million and a fair value of $25.0 million, which represented 10.8% and 5.0% of the investment portfolio, respectively.

Results of Operations

Operating results for the three and six months ended June 30, 2018 and 2017 were as follows (dollars in thousands):

	For the three months ended						For the six months ended
	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
Total investment income	$	11,882		$	12,362		$	24,454		$	27,177
Total expenses, net of incentive fee waivers		7,651			11,659			15,785			20,283
Net investment income		4,231			703			8,669			6,894
Net realized gain (loss) from investments		(22,622	)		4,687			(26,477	)		9,534
Net unrealized appreciation (depreciation) on investments		21,994			(9,988	)		21,602			(14,659	)
Net unrealized depreciation on Written Call Option		—			(927	)		—			(2,412	)
Tax benefit		1,345			—			1,295			—
Net increase (decrease) in net assets resulting from operations	$	4,948		$	(5,525	)	$	5,089		$	(643	)

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Investment income

The composition of our investment income for the three and six months ended June 30, 2018 and 2017 was as follows (dollars in thousands):

	For the three months ended				For the six months ended
	June 30, 2018		June 30, 2017		June 30, 2018		June 30, 2017
Interest income	$	10,605	$	9,777	$	21,264	$	21,774
Fee income		177		323		664		996
Payment-in-kind interest and dividend income		970		2,103		2,327		3,758
Dividend income		113		54		167		531
Other income		—		77		—		77
Interest from cash and cash equivalents		17		28		32		41
Total investment income	$	11,882	$	12,362	$	24,454	$	27,177

The income reported as interest income and PIK interest and PIK dividend income is generally based on the stated rates as disclosed in our consolidated schedule 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 and 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 schedule 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, and have received, more substantial one-time dividends from our equity investments.

For the three months ended June 30, 2018, total investment income decreased by $0.5 million, or 3.9%, compared to the three months ended June 30, 2017. Interest income increased $0.8 million, from $9.8 million for the three months ended June 30, 2017 to $10.6 million for the three months ended June 30, 2018. The increase from the prior period is primarily related to reversal of interest income on non-accrual loans added during the three months ended June 30, 2017. The increase in interest income was offset by a $1.1 million decline in PIK income and a $0.1 million decline in fee income. PIK income declined from $2.1 million for the three months ended June 30, 2017 to $1.0 million for the three months ended June 30, 2018, primarily due to a decrease in investments with a contractual PIK rate. Fee income declined by $0.1 million compared to the prior year, from $0.3 million for the three months ended June 30, 2017 to $0.2 million for the three months ended June 30, 2018. For the three months ended June 30, 2018, we generated $0.1 million in origination fees from new deployments and $0.1 million in other fees. Comparatively, for the three months ended June 30, 2017, we generated no origination fees from new deployments and $0.3 million in non-origination fees.

For the six months ended June 30, 2018, total investment income decreased by $2.7 million, or 10.0%, compared to the six months ended June 30, 2017. The decrease from the prior period was driven primarily by a $1.5 million decline in PIK income, from $3.8 million for the six months ended June 30, 2017, to $2.3 million for the six months ended June 30, 2018. The decline in PIK income was primarily due to a decrease in investments with a contractual PIK rate. Interest income decreased $0.5 million, from $21.8 million for the six months ended June 30, 2017 to $21.3 million for the six months ended June 30, 2018. The decrease in interest income was driven by a decline in average debt investments and a decline in overall weighted cash yield on the portfolio, partially offset by the impact of income reversal on non-accrual loans added during the six months ended June 30, 2017. Fee income declined by $0.3 million compared to the prior year, from $1.0 million for the six months ended June 30, 2017 to $0.7 million for the six months ended June 30, 2018. For the six months ended June 30, 2018, we generated $0.4 million in origination fees from new deployments and $0.3 million in other fees. Comparatively, for the six months ended June 30, 2017, we generated $0.4 million in origination fees from new deployments and $0.6 million in non-origination fees. Dividend income decreased from $0.5 million for the six months ended June 30, 2017 to $0.2 million for the six months ended June 30, 2018, mostly driven by a one-time dividend paid during the six months ended June 30, 2017.

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Operating expenses

The composition of our expenses for the three and six months ended June 30, 2018 and June 30, 2017 was as follows (dollars in thousands):

	For the three months ended				For the six months ended
	June 30, 2018		June 30, 2017		June 30, 2018		June 30, 2017
Interest and financing expenses	$	4,331	$	5,488	$	8,695	$	10,141
Loss on extinguishment of debt		—		2,732		—		2,732
Base management fee		2,314		2,505		4,617		5,019
Incentive fees, net of incentive fee waiver		—		—		244		350
General and administrative expenses		1,006		934		2,229		2,041
Total expenses, net of fee waivers	$	7,651	$	11,659	$	15,785	$	20,283

For the three months ended June 30, 2018, operating expenses decreased $4.0 million, or 34.4%, compared to the three months ended June 30, 2017. For the three months ended June 30, 2017, we recognized a $2.7 million loss on extinguishment of debt related to repayment of our 7.125% Notes due 2021 (the “2021 Notes”). For the three months ended June 30, 2018, interest and financing expenses decreased $1.2 million compared to the three months ended June 30, 2017, due primarily to a larger average outstanding debt balance and a higher weighted average interest rate for the three months ended June 30, 2017. Management fees declined by $0.2 million, from $2.5 million for the three months ended June 30, 2017 to $2.3 million for the three months ended June 30, 2018, due to lower average assets under management.

For the six months ended June 30, 2018, operating expenses decreased $4.5 million, or 22.2%, compared to the six months ended June 30, 2017. For the six months ended June 30, 2017, we recognized a $2.7 million loss on extinguishment of debt related to repayment of our 2021 Notes. For the six months ended June 30, 2018, interest and financing expenses decreased $1.4 million compared to the six months ended June 30, 2017, due primarily to a larger average outstanding debt balance and a higher weighted average interest rate for the six months ended June 30, 2017. Management fees declined by $0.4 million, from $5.0 million for the six months ended June 30, 2017 to $4.6 million for the six months ended June 30, 2018, due to lower average assets under management. Incentive fees, net of incentive fee waiver, declined by $0.1 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017, due to lower pre-incentive fee net investment income.

Net realized gains (losses) on sales of investments

During the three and six months ended June 30, 2018 we recognized $(22.6) million and $(26.5) million, respectively, of net realized losses on our portfolio investments. During the three and six months ended June 30, 2017 we recognized $4.7 million and $9.5 million, respectively, of net realized gains on our portfolio investments.

Net unrealized appreciation (depreciation) on investments

Net change in unrealized appreciation (depreciation) on investments reflects the net change in the fair value of our investment portfolio. For the three and six months ended June 30, 2018 we had net unrealized appreciation of $22.0 million and $21.6 million, respectively. For the three and six months ended June 30, 2017 we had net unrealized depreciation of $(10.0) million and $(14.7) million, respectively.

Net unrealized appreciation (depreciation) on Written Call Option

For the three and six months ended June 30, 2018 we had net unrealized appreciation (depreciation) on the Written Call Option of $0.0 million and $0.0 million, respectively. For the three and six months ended June 30, 2017 we had net unrealized depreciation on the Written Call Option of $(0.9) million and $(2.4) million, respectively.

Tax benefit

For the three and six months ended June 30, 2018 we recorded a tax benefit of $1.3 million and $1.3 million, respectively. For the three and six months ended June 30, 2017 no tax benefit was recorded.

Changes in net assets resulting from operations 

For the three and six months ended June 30, 2018 we recorded a net increase in net assets resulting from operations of $4.9 million and $5.1 million, respectively. Based on the weighted average shares of common stock outstanding for the three and six months ended June 30, 2018 our per share net increase in net assets resulting from operations was $0.31 and $0.32, respectively.

For the three and six months ended June 30, 2017 we recorded a net decrease in net assets resulting from operations of $(5.5) million and $(0.6) million, respectively. Based on the weighted average shares of common stock outstanding for the three and six months ended June 30, 2017 our per share net decrease in net assets resulting from operations was $(0.35) and $(0.04), respectively.

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Summarized Financial Information of Our Unconsolidated Subsidiaries

The Company holds a control interest, as defined by the 1940 Act, in five portfolio companies that are considered significant subsidiaries under the guidance in Regulation S-X, but are not consolidated in the Company’s consolidated financial statements. Below is a brief description of each such portfolio company, along with summarized financial information as of June 30, 2018 and December 31, 2017, and for the six months ended June 30, 2018 and June 30, 2017.

CableOrganizer Acquisition, LLC

CableOrganizer Acquisition, LLC, a Delaware limited liability company that began operations on April 23, 2013, is a leading online provider of cable and wire management products. The income the Company generated from CableOrganizer Acquisition, LLC, which includes all interest, dividends, PIK interest and PIK dividends, fees, and unrealized appreciation (depreciation), was $0.8 million and $0.7 million for the six months ended June 30, 2018 and June 30, 2017, respectively.

Eastport Holdings, LLC

Eastport Holdings, LLC, an Ohio limited liability company organized on November 1, 2011, is a holding company consisting of marketing and advertising companies located across the U.S. The income the Company generated from Eastport Holdings, LLC, which includes all interest, dividends, PIK interest and PIK dividends, fees, and unrealized appreciation (depreciation), was $1.3 million and $6.3 million for the six months ended June 30, 2018 and June 30, 2017, respectively.

Micro Precision, LLC

Micro Precision, LLC, formed on August 5, 2011 as a Delaware limited liability company, is a prime contractor supplying critical parts and mechanical assemblies to the U.S. Department of Defense as well as designer and manufacturer of locomotive air horns. The income (loss) the Company generated from Micro Precision, LLC, which includes all interest, dividends, PIK interest and PIK dividends, fees, and unrealized appreciation (depreciation), was $0.5 million and $(0.4) million for the six months ended June 30, 2018 and June 30, 2017, respectively.

Navis Holdings, Inc.

Navis Holdings, Inc., incorporated in Delaware on December 21, 2010, designs and manufactures leading machinery for the global knit and woven finishing textile industries. The income the Company generated from Navis Holdings, Inc., which includes all interest, dividends, PIK interest and PIK dividends, fees, and unrealized appreciation (depreciation), was $0.9 million and $0.6 million for the six months ended June 30, 2018 and June 30, 2017.

On-Site Fuel Services, Inc.

On-Site Fuel Services, Inc. is a 100% owned subsidiary of On-Site Fuel Holdings, Inc., which was incorporated in Delaware on December 19, 2011. On-Site Fuel Services, Inc. provides fueling services for commercial and government vehicle fleets throughout the southeast U.S. The income (loss) the Company generated from On-Site Fuel Services, Inc., which includes all interest, dividends, PIK interest and PIK dividends, fees, and unrealized appreciation (depreciation), was $0.5 million and $(0.6) million for the six months ended June 30, 2018 and June 30, 2017, respectively. 

The summarized unaudited financial information of our unconsolidated subsidiaries was as follows (dollars in thousands):

	As of
Balance Sheet – CableOrganizer Acquisition, LLC	June 30, 2018			December 31, 2017
Current assets	$	5,012		$	5,182
Noncurrent assets		8,609			8,354
Total assets	$	13,621		$	13,536
Current liabilities	$	13,894		$	5,205
Noncurrent liabilities		—			12,346
Total liabilities	$	13,894		$	17,551
Total deficit	$	(273	)	$	(4,015	)

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	For the six months ended
Statements of Operations – CableOrganizer Acquisition, LLC	June 30, 2018			June 30, 2017
Net sales	$	10,098		$	14,522
Cost of goods sold		6,701			10,201
Gross profit	$	3,397		$	4,321
Other expenses	$	4,161		$	5,205
Loss before income taxes		(764	)		(884	)
Income tax benefit		—			—
Net loss	$	(764	)	$	(884	)

	As of
Balance Sheet – Eastport Holdings, LLC(1)	March 31, 2018		December 31, 2017
Current assets	$	94,994	$	94,396
Noncurrent assets		186,934		180,266
Total assets	$	281,928	$	274,662
Current liabilities	$	153,649	$	153,182
Noncurrent liabilities		62,348		56,272
Total liabilities	$	215,997	$	209,454
Total equity	$	65,931	$	65,208

	For the six months ended
Statements of Operations – Eastport Holdings, LLC(1)	March 31, 2018			March 31, 2017
Net sales	$	271,862		$	279,038
Cost of goods sold		195,941			212,736
Gross profit	$	75,921		$	66,302
Other expenses	$	68,285		$	60,226
Income before income taxes		7,636			6,076
Income tax (provision)/benefit		(285	)		1,088
Net income	$	7,351		$	7,164

(1) June 30, 2018 financial statements are not available. As such, the most recent comparable period is presented.

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	As of
Balance Sheet – Micro Precision, LLC	June 30, 2018		December 31, 2017
Current assets	$	6,524	$	6,187
Noncurrent assets		19,586		15,864
Total assets	$	26,110	$	22,051
Current liabilities	$	7,005	$	6,511
Noncurrent liabilities		13,954		15,790
Total liabilities	$	20,959	$	22,301
Total equity (deficit)	$	5,151	$	(250	)

	For the six months ended
Statements of Operations – Micro Precision, LLC	June 30, 2018		June 30, 2017
Net sales	$	5,907	$	9,225
Cost of goods sold		3,003		5,713
Gross profit	$	2,904	$	3,512
Other expenses	$	2,486	$	3,152
Income before income taxes		418		360
Income tax provision		—		—
Net income	$	418	$	360

	As of
	June 30,			December 31,
Balance Sheet – Navis Holdings, Inc.	2018			2017
Current assets	$	4,498		$	4,724
Noncurrent assets		3,767			2,161
Total assets	$	8,265		$	6,885
Current liabilities	$	2,694		$	2,463
Noncurrent liabilities		7,939			6,739
Total liabilities	$	10,633		$	9,202
Total deficit	$	(2,368	)	$	(2,317	)

	For the six months ended
	June 30,			June 30,
Statement of Operations – Navis Holdings, Inc.	2018			2017
Net sales	$	6,286		$	7,200
Cost of goods sold		3,699			4,437
Gross profit	$	2,587		$	2,763
Other expenses	$	2,650		$	2,370
Income (loss) before income taxes		(63	)		393
Income tax benefit (provision)		11			(155	)
Net income (loss)	$	(52	)	$	238

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	As of
	June 30,			December 31,
Balance Sheet – On-Site Fuel Services, Inc.	2018			2017
Current assets	$	13,505		$	28,064
Noncurrent assets		28,527			26,807
Total assets	$	42,032		$	54,871
Current liabilities	$	25,536		$	32,626
Noncurrent liabilities		32,400			34,515
Total liabilities	$	57,936		$	67,141
Total deficit	$	(15,904	)	$	(12,270	)

	For the six months ended
	June 30,			June 30,
Statement of Operations – On-Site Fuel Services, Inc.	2018			2017
Net sales	$	68,582		$	74,069
Cost of goods sold		65,148			71,812
Gross profit	$	3,434		$	2,257
Other expenses	$	6,988		$	5,301
Loss before income taxes		(3,554	)		(3,044	)
Income tax provision		—			—
Net loss	$	(3,554	)	$	(3,044	)

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.

On September 30, 2013, we issued 4,000,000 shares at $20.00 per share in our IPO, yielding net proceeds of $74.25 million.

On October 17, 2014, the Company entered into a senior secured revolving credit agreement (the “Credit Facility”) with ING Capital, LLC, as administrative agent, arranger, and bookrunner, and the lenders party thereto. The Credit Facility was amended on May 22, 2015, June 16, 2017, and July 19, 2018 (the “Amendments”). The Amendments were affected, among other things, in order to increase the total borrowings allowed under the Credit Facility, allow for stock repurchases, extend the maturity date, and to reduce the minimum required interest coverage ratio. The Credit Facility currently provides for borrowings up to $114.5 million and may be increased up to $200.0 million pursuant to its “accordion” feature. The Credit Facility matures on June 16, 2021. As of June 30, 2018, we had $5.0 million outstanding and $109.5 million available under the Credit Facility.

On April 13, 2015, we completed an underwritten offering of 3,500,000 shares of our common stock at a public offering price of $18.32 per share. The total proceeds received in the offering net of underwriting discounts and offering costs were approximately $61.7 million.

On May 16, 2017, we issued $70.0 million in aggregate principal amount of 6.0% fixed-rate notes due May 31, 2022 (the “2022 Notes”). On May 25, 2017, we issued an additional $5.0 million in aggregate principal amount of the 2022 Notes pursuant to a partial exercise of the underwriters’ overallotment option. The 2022 Notes will mature on May 31, 2022, and may be redeemed in whole or in part at any time or from time to time at our option on or after May 31, 2019 at a redemption price equal to 100% of the outstanding principal, plus accrued and unpaid interest. Interest is payable quarterly beginning August 31, 2017. The 2022 Notes are listed on the NASDAQ Global Select Market under the trading symbol “CPTAL” with a par value $25.00 per share.

On May 26, 2017, we issued $50.0 million in aggregate principal amount of 5.75% fixed-rate convertible notes due on May 31, 2022 (the “2022 Convertible Notes”). On June 26, 2017, we issued an additional $2.1 million in aggregate principal amount of the 2022 Convertible Notes pursuant to a partial exercise of the underwriters’ overallotment option. Interest is payable quarterly beginning August 31, 2017. The 2022 Convertible Notes are listed on the NASDAQ Capital Market under the trading symbol “CPTAG” with a par value $25.00 per share.

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As of June 30, 2018, Fund II had $26.2 million in regulatory capital and $20.7 million in SBA-guaranteed debentures outstanding and Fund III had $75.0 million in regulatory capital and $150.0 million in SBA-guaranteed debentures outstanding. In addition to our existing SBA-guaranteed debentures, we may, if permitted by regulation, seek to issue additional SBA-guaranteed debentures as well as other forms of leverage and borrow funds to make investments. On June 10, 2014, we received an exemptive order from the SEC exempting us, Fund II and Fund III from certain provisions of the 1940 Act (including an exemptive order granting relief from the asset coverage requirements for certain indebtedness issued by Fund II and Fund III as SBICs) and from certain reporting requirements mandated by the 1934 Act, with respect to Fund II and Fund III. We intend to comply with the conditions of the order.

As of June 30, 2018, we had $40.8 million in cash and cash equivalents, and our net assets totaled $219.3 million.

Contractual Obligations

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

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

A summary of our significant contractual payment obligations as of June 30, 2018 are as follows (dollars in thousands):

	Contractual Obligations Payments Due by Period
	Less Than 1 Year		1 – 3 Years		3 – 5 Years		More Than 5 Years		Total
SBA Debentures	$	5,000	$	80,700	$	85,000	$	—	$	170,700
2022 Notes		—		—		75,000		—		75,000
2022 Convertible Notes		—		—		52,088		—		52,088
Credit Facility		—		5,000		—		—		5,000
Total Contractual Obligations	$	5,000	$	85,700	$	212,088	$	—	$	302,788

Distributions

In order to qualify as a RIC and to avoid corporate-level U.S. federal income tax on the income we distribute to our stockholders, we are required to distribute at least 90% of our net ordinary income and our net short-term capital gains in excess of net long-term capital losses, if any, to our stockholders on an annual basis. Additionally, we must distribute an amount at least equal to the sum of 98% of our net ordinary income (during the calendar year) plus 98.2% of our net capital gain income (during each 12-month period ending on October 31) plus any net ordinary income and capital gain net income for preceding years that were not distributed during such years and on which we paid no U.S. federal income tax to avoid a U.S. federal excise tax. We made quarterly distributions to our stockholders for the first four full quarters subsequent to our IPO. To the extent we have income available, we have made and intend to make monthly distributions thereafter. Our monthly stockholder distributions, if any, will be determined by our Board on a quarterly basis. Any distribution to our stockholders will be declared out of assets legally available for distribution.

We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of our distributions from time to time, and from time to time we may decrease the amount of our distributions. In addition, we may be limited in our ability to make distributions due to the asset coverage requirements applicable to us as a BDC under the 1940 Act. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including the possible loss of our qualification as a RIC. We cannot assure stockholders that they will receive any distributions.

To the extent our taxable earnings fall below the total amount of our distributions for that fiscal year, a portion of those distributions may be deemed a return of capital to our stockholders for U.S. federal income tax purposes. Thus, the source of a 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.

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

 The following tables summarize our distributions declared from January 4, 2016 through June 30, 2018:

Date Declared	Record Date	Payment Date	Amount Per Share
January 2, 2018	January 22, 2018	January 30, 2018	$	0.0833
January 2, 2018	February 20, 2018	February 27, 2018		0.0833
January 2, 2018	March 23, 2018	March 29, 2018		0.0833
April 2, 2018	April 19, 2018	April 27, 2018		0.0833
April 2, 2018	May 22, 2018	May 30, 2018		0.0833
April 2, 2018	June 20, 2018	June 28, 2018		0.0833
Total Distributions Declared and Distributed for 2018			$	0.50

Date Declared	Record Date	Payment Date	Amount Per Share
January 3, 2017	January 20, 2017	January 30, 2017	$	0.1300
January 3, 2017	February 20, 2017	February 27, 2017		0.1300
January 3, 2017	March 23, 2017	March 30, 2017		0.1300
April 3, 2017	April 19, 2017	April 27, 2017		0.1300
April 3, 2017	May 23, 2017	May 29, 2017		0.1300
April 3, 2017	June 24, 2017	June 29, 2017		0.1300
July 3, 2017	July 21, 2017	July 28, 2017		0.1300
July 3, 2017	August 23, 2017	August 30, 2017		0.1300
July 3, 2017	September 20, 2017	September 28, 2017		0.1300
October 2, 2017	October 23, 2017	October 30, 2017		0.0833
October 2, 2017	November 21, 2017	November 29, 2017		0.0833
October 2, 2017	December 20, 2017	December 28, 2017		0.0833
Total Distributions Declared and Distributed for 2017			$	1.42

Date Declared	Record Date	Payment Date	Amount Per Share
January 4, 2016	January 22, 2016	January 28, 2016	$	0.1567
January 4, 2016	February 19, 2016	February 26, 2016		0.1567
January 4, 2016	March 22, 2016	March 30, 2016		0.1567
April 1, 2016	April 22, 2016	April 28, 2016		0.1567
April 1, 2016	May 23, 2016	May 30, 2016		0.1567
April 1, 2016	June 21, 2016	June 29, 2016		0.1567
July 1, 2016	July 22, 2016	July 29, 2016		0.1567
July 1, 2016	August 22, 2016	August 30, 2016		0.1567
July 1, 2016	September 22, 2016	September 29, 2016		0.1567
September 22, 2016	October 21, 2016	October 28, 2016		0.1300
September 22, 2016	November 21, 2016	November 29, 2016		0.1300
September 22, 2016	December 21, 2016	December 29, 2016		0.1300
Total Distributions Declared and Distributed for 2016			$	1.80

Related Parties

We have entered into the Investment Advisory Agreement with the Investment Advisor. Joseph B. Alala, our chief executive officer and chairman of our Board, is the managing partner and chief investment officer of the Investment Advisor, and M. Hunt Broyhill, a member of our Board, has an indirect controlling interest in the Investment Advisor.

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In addition, an affiliate of the Investment Advisor also manages CapitalSouth Partners SBIC Fund IV, L.P. (“Fund IV”), a private investment limited partnership providing financing solutions to smaller and lower middle-market companies that had its first closing in March 2013 and obtained SBA approval for its SBIC license in April 2013. In addition to Fund IV, affiliates of the Investment Advisor may manage several affiliated funds whereby institutional limited partners in Fund IV have the opportunity to co-invest with Fund IV in portfolio investments. An affiliate of the Investment Advisor also manages Capitala Private Credit Fund V, L.P. (“Fund V”), a private investment limited partnership and a private investment vehicle (referred to herein as “Capitala Specialty Lending Corp.” or “CSLC”), both of which provide financing solutions to lower middle-market and traditional middle-market companies. The Investment Advisor and its affiliates may also manage other funds in the future that may have investment mandates that are similar, in whole and in part, with ours. To the extent permitted by the 1940 Act and interpretation of the SEC staff, the Investment Advisor and its affiliates may determine that an investment is appropriate for us and for one or more of those other funds. In such event, depending on the availability of such investment and other appropriate factors, the Investment Advisor or its affiliates may determine that we should invest side-by-side with one or more other funds. Any such investments will be made only to the extent permitted by applicable law and interpretive positions of the SEC and its staff, and consistent with the Investment Advisor’s allocation procedures. We expect to make, and have made, co-investments with Fund V and/or CSLC given their similar investment strategies.

On September 10, 2015, we, Fund II, Fund III, Fund V, and the Investment Advisor filed an application for exemptive relief with the SEC to permit an investment fund and one or more other affiliated investment funds, including future affiliated investment funds, to participate in the same investment opportunities through a proposed co-investment program where such participation would otherwise be prohibited under the 1940 Act. On June 1, 2016, the SEC issued an order (the “Order”) permitting this relief. Pursuant to the Order, we are permitted to co-invest in such investment opportunities with our affiliates if a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors make certain conclusions in connection with a co-investment transaction, including, but not limited to, that (1) the terms of the potential co-investment transaction, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching in respect of us or our stockholders on the part of any person concerned, and (2) the potential co-investment transaction is consistent with the interests of our stockholders and is consistent with our then-current investment objective and strategies.

On August 31, 2016, the Company sold assets to FSC II in exchange for 100% of the partnership interests in FSC II. Concurrent with the sale of these assets to FSC II, the Company received cash consideration of $47.6 million from an affiliated third-party purchaser in exchange for 100% of the partnership interests of FSC II. The Company’s Board pre-approved this transaction pursuant to Section 57(f) of the 1940 Act. Capitala Advisors Corp., the Company’s Administrator, also serves as the administrator to FSC II.

We have entered into a license agreement with the Investment Advisor, pursuant to which the Investment Advisor has agreed to grant us a non-exclusive, royalty-free license to use the name “Capitala”.

We have entered into the Administration Agreement with our Administrator. 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. Mr. Alala, our chief executive officer, and chairman of our Board, is the chief executive officer, president and a director of our Administrator.

Off-Balance Sheet Arrangements

As of June 30, 2018, the Company had outstanding unfunded commitments related to debt investments in existing portfolio companies of $3.8 million (Portrait Studio, LLC), $1.4 million (Kelle’s Transport Service LLC), $0.7 million (MC Sign Lessor, Corp), $0.7 million (U.S. Well Services, LLC) and $0.3 million (CableOrganizer Acquisition, LLC). As of December 31, 2017, the Company had outstanding unfunded commitments related to debt investments in existing portfolio companies of $3.1 million (Portrait Studio, LLC), $2.0 million (CIS Secure Computing, Inc.), $1.0 million (Kelle’s Transport Service, LLC), and $0.7 million (U.S. Well Services, LLC).

In addition to unfunded commitments related to debt investments, the Company also has extended a guaranty on behalf of one of our portfolio companies, whereby we have guaranteed $1.9 million of obligations of Kelle’s Transport Service, LLC. As of June 30, 2018 we have not been required to make payments on this or any previous guaranties, and we consider the credit risks to be remote and the fair value of this guaranty to be immaterial.

We have no other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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Recent Developments

Distributions

On July 2, 2018 our Board declared the following distributions:

Date Declared	Record Date	Payment Date	Distributions per Share
July 2, 2018	July 23, 2018	July 30, 2018	$	0.0833
July 2, 2018	August 23, 2018	August 30, 2018	$	0.0833
July 2, 2018	September 20, 2018	September 27, 2018	$	0.0833

Portfolio Activity

On August 2, 2018, the Company invested $13.0 million in first lien debt of Sunset Digital Holding, LLC, yielding 1-month LIBOR + 7.25%.

On July 31, 2018, the Company sold its investment in Kelle’s Transport Services, LLC, receiving $13.3 million in proceeds upon exit.

Credit Facility

On July 19, 2018, the Company entered into Amendment No. 3 (the “Amendment”) to the Credit Facility.

The Amendment amended the Credit Facility to, among other things, reduce the minimum required Consolidated Interest Coverage Ratio (as defined in the Credit Facility) that the Company must maintain on a quarterly basis from 2.25 to 1 as of the last day of any fiscal quarter of the Company, as was previously in effect, to (i) 1.75 to 1 as of the last day of any fiscal quarter of the Company ending after March 31, 2018 but on or prior to December 31, 2018, and (ii) 2.00 to 1 as of the last day of any fiscal quarter of the Company ending after December 31, 2018.

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, 2018, we did not engage in hedging activities.

As of June 30, 2018, we held 22 securities bearing a variable rate of interest. Our variable rate investments represent approximately 47.6% of the fair value of total debt investments. As of June 30, 2018, 5.9% of variable rate securities were yielding interest at a rate equal to the established interest rate floor or interest rate ceiling and 94.1% of variable rate securities were yielding interest at a rate above its interest rate floor or were not subject to an interest rate floor. As of June 30, 2018, we had $5.0 million outstanding on our Credit Facility, which has a variable rate of interest at one-month LIBOR + 3.0%. As of June 30, 2018, all of our other interest paying liabilities, consisting of $170.7 million in SBA-guaranteed debentures, $75.0 million in 2022 Notes, and $52.1 million in 2022 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.

Based on our June 30, 2018 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 (decrease) in interest income			(Increase) decrease in interest expense			Increase (decrease) in net income
Up 300 basis points	$	4,874		$	(150	)	$	4,724
Up 200 basis points	$	3,252		$	(100	)	$	3,152
Up 100 basis points	$	1,626		$	(50	)	$	1,576
Down 100 basis points	$	(1,603	)	$	50		$	(1,553	)
Down 200 basis points	$	(2,052	)	$	100		$	(1,952	)
Down 300 basis points	$	(2,052	)	$	105		$	(1,947	)

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Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

As of June 30, 2018 (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 Securities Exchange Act of 1934, as amended). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our 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. However, 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, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.

(b) Changes in Internal Controls Over Financial Reporting

Management has not identified any change in the Company’s internal control over financial reporting that occurred during the second quarter of 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Other than as described below, 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. While the outcome of these legal proceedings, if any, cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.

On December 28, 2017, an alleged stockholder filed a putative class action lawsuit complaint, Paskowitz v. Capitala Finance Corp., et al., in the United States District Court for the Central District of California (case number 2:17-cv-09251-MWF-AS) (the “Paskowitz Action”), against the Company and certain of its current officers on behalf of all persons who purchased or otherwise acquired the Company’s common stock between January 4, 2016 and August 7, 2017. On January 3, 2018, another alleged stockholder filed a putative class action complaint, Sandifer v. Capitala Finance Corp., et al., in the United States District Court for the Central District of California (case number 2:18-cv-00052-MWF-AS) (the “Sandifer Action”), asserting substantially similar claims on behalf of the same putative class and against the same defendants. On February 2, 2018, the Sandifer Action was transferred, on stipulation of the parties, to the United States District Court for the Western District of North Carolina. The Sandifer Action was voluntarily dismissed on February 28, 2018. On March 1, 2018, the Paskowitz Action was transferred, on stipulation of the parties, to the United States District Court for the Western District of North Carolina (case number 3:18-cv-00096-RJC-DSC). On June 19, 2018, the plaintiffs in the Paskowitz Action filed their amended complaint. The complaint, as currently amended, alleges certain violations of the securities laws, including, inter alia, that the defendants made certain materially false and misleading statements and omissions regarding the Company’s business, operations, and prospects between January 4, 2016 and August 7, 2017. The plaintiffs in the Paskowitz Action seek compensatory damages and attorneys’ fees and costs, among other relief, but did not specify the amount of damages being sought. The time for the defendants in the Paskowitz Action to respond to the amended complaint has not yet expired. While the Company intends to vigorously defend itself in this litigation, the outcome of these legal proceedings cannot be predicted with certainty.

Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult and requires an extensive degree of judgment, particularly where the matters involve indeterminate claims for monetary damages, are in the early stages of the proceedings, and are subject to appeal. In addition, because most legal proceedings are resolved over extended periods of time, potential losses are subject to change due to, among other things, new developments, changes in legal strategy, the outcome of intermediate procedural and substantive rulings and other parties’ settlement posture and their evaluation of the strength or weakness of their case against us. For these reasons, we are currently unable to predict the ultimate timing or outcome of, or reasonably estimate the possible losses or a range of possible losses resulting from, the matters described above. Based on information currently available, the Company does not believe that any reasonably possible losses arising from the currently pending legal matters described above will be material to the Company’s results of operations or financial condition. However, in light of the inherent uncertainties involved in such matters, an adverse outcome in this litigation could materially adversely affect the Company’s financial condition, results of operations or cash flows in any particular reporting period. 

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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, 2017, which could materially affect our business, financial condition and/or operating results. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties that are not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. During the six months ended June 30, 2018, there have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2017 except for the following:

Recent legislation may allow us to incur additional leverage.

The 1940 Act generally prohibits us from incurring indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our total assets). However, on March 23, 2018, the Small Business Credit Availability Act (the “SBCA”) was signed into law, which included various changes to regulations under the federal securities laws that impact BDCs. The SBCA included changes to the 1940 Act to allow BDCs to decrease their asset coverage requirement from 200% to 150% (i.e. the amount of debt may not exceed 66.7% of the value of our total assets), if certain requirements are met. Under the SBCA, we are allowed to reduce our asset coverage requirement to 150%, and thereby increase our leverage capacity, if shareholders representing at least a majority of the votes cast, when quorum is met, approve a proposal to do so. If we receive shareholder approval, we would be allowed to reduce our asset coverage requirement to 150% on the first day after such approval. Alternatively, the SBCA allows the majority of our independent directors to approve the reduction in our asset coverage requirement to 150%, and such approval would become effective after one year. In either case, we would be required to make certain disclosures on our website and in SEC filings regarding, among other things, the receipt of approval to reduce our asset coverage requirement to 150%, our leverage capacity and usage, and risks related to leverage.

As a result of the SBCA, if we obtain the necessary approval, we may be able to increase our leverage up to an amount that reduces our asset coverage ratio from 200% to 150%. Leverage magnifies the potential for loss on investments in our indebtedness and on invested equity capital. As we use leverage to partially finance our investments, you will experience increased risks of investing in our securities. If the value of our assets increases, then leveraging would cause the net asset value attributable to our common stock to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged our business. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net investment income to increase more than it would without the leverage, while any decrease in our income would cause net investment income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to pay common stock dividends, scheduled debt payments or other payments related to our securities. Leverage is generally considered a speculative investment technique.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the quarter ended June 30, 2018, we issued 20,472 shares of common stock under our DRIP. The issuances were not subject to the registration requirements under the Securities Act of 1933, as amended. The cash paid for shares of common stock issued under our DRIP during the quarter ended June 30, 2018 was approximately $0.2 million. Other than the shares issued under our DRIP during the quarter ended June 30, 2018, we did not sell any unregistered equity securities.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None. 

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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
3.1	Articles of Amendment and Restatement (1)
3.2	Certificate of Limited Partnership of CapitalSouth Partners Fund II Limited Partnership (2)
3.3	Certificate of Limited Partnership of CapitalSouth Partners SBIC Fund III, L.P. (2)
3.4	Bylaws (1)
3.5	Form of Amended and Restated Limited Partnership Agreement of CapitalSouth Partners Fund II Limited Partnership (3)
3.6	Form of Amended and Restated Agreement of Limited Partnership of CapitalSouth Partners SBIC Fund III, L.P. (3)
4.1	Form of Common Stock Certificate (1)
10.1	Amendment No. 3, dated as of July 19, 2018, to the Senior Secured Revolving Credit Agreement, dated as of October 17, 2014, among Capitala Finance Corp., as borrower, the lenders from time to time party thereto, and ING Capital LLC, as administrative agent, arranger and bookrunner, and First National Bank of Pennsylvania, as documentation agent. (4)
11.1	Computation of Per Share Earnings (included in the notes to the consolidated financial statements contained in this report)
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1	Certification of Chief Executive Officer 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.2	Certification of Chief Financial Officer 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
(1)	Previously filed in connection with the Pre-Effective Amendment No. 1 to Capitala Finance Corp.’s registration statement on Form N-2 (File No. 333-188956) filed on September 9, 2013.
(2)	Previously filed in connection with Pre-Effective Amendment No. 2 to Capitala Finance Corp.’s registration statement on Form N-2 (File No. 333-188956) filed on September 16, 2013.
(3)	Previously filed in connection with Pre-Effective Amendment No. 5 to Capitala Finance Corp.’s registration statement on Form N-2 (File No. 333-188956) filed on September 24, 2013.
(4)	Previously filed in connection with Capitala Finance Corp’s report on Form 8-K filed on July 20, 2018.

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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.

Date: August 6, 2018	By	/s/ Joseph B. Alala III
		Joseph B. Alala III
		Chief Executive Officer
		(Principal Executive Officer)
		Capitala Finance Corp.
Date: August 6, 2018	By	/s/ Stephen A. Arnall
		Stephen A. Arnall
		Chief Financial Officer
		(Principal Financial and Accounting Officer)
		Capitala Finance Corp.

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