Logan Ridge Finance (US:LRFC)2021-03-08 21:30Part I Business Capitala Finance Corp. is an externally managed BDC focused on debt and equity investments in U.S. lower and middle-market companies, utilizing an SBIC-licensed subsidiary - Capitala Finance Corp. is an externally managed BDC with a dual investment objective of generating current income and capital appreciation1415 - The company invests in first and second lien loans, as well as equity securities, targeting lower and traditional middle-market companies with EBITDA typically between $4.5 million and $30.0 million1529 - The company has elected to be treated as a Regulated Investment Company (RIC) for U.S. federal income tax purposes, which generally allows it to avoid corporate-level income tax by distributing its earnings to shareholders14118 - A significant portion of the company's investments are held through its wholly-owned subsidiary, Fund III, which is licensed as a Small Business Investment Company (SBIC) and regulated by the SBA. As of December 31, 2020, Fund III had $91.0 million of SBA-guaranteed debentures outstanding161 Risk Factors The company faces substantial risks across its business operations, investment portfolio, and securities, including reliance on key personnel, market competition, illiquidity, and stock price volatility - Business and structural risks include reliance on the Investment Advisor's key personnel, operating in a highly competitive market, potential conflicts of interest, and the complexities of maintaining BDC and RIC status174179181185 - Investment risks are high due to a focus on smaller, privately held companies, which involves illiquidity, lack of public information, and greater vulnerability to economic downturns. The portfolio may also lack diversification296301317323 - Risks related to the company's securities include significant market price fluctuation, the possibility of shares trading at a discount to net asset value (NAV), and potential dilution to existing shareholders from future equity offerings355363 - The COVID-19 pandemic is identified as a significant risk, potentially affecting portfolio companies' operations and ability to repay debt, disrupting capital markets, and impacting the fair value of investments280281283 Unresolved Staff Comments The company has no unresolved staff comments from the SEC - There are no unresolved staff comments374 Properties The company's executive offices are located in Charlotte, NC, provided by its Administrator and deemed suitable for business needs - The company's executive offices are located in Charlotte, NC, and are provided by its Administrator375 Legal Proceedings The company and its subsidiaries are not currently subject to any material legal proceedings - The company is not currently subject to any material legal proceedings376 Mine Safety Disclosures This section is not applicable to the company - Not applicable378 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock (CPTA) traded at a significant discount to NAV, with distributions suspended in 2020 due to the COVID-19 pandemic - The company's common stock (CPTA) has traded at a significant discount to its Net Asset Value (NAV) per share, particularly in 2020383386 Distributions Declared per Share (2019-2020) | Fiscal Year | Q1 | Q2 | Q3 | Q4 | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | 2020 | $1.50 | $0.00 | $0.00 | $0.00 | $1.50 | | 2019 | $1.50 | $1.50 | $1.50 | $1.50 | $6.00 | - Distributions were suspended after the first quarter of 2020 due to the impact of the COVID-19 pandemic on the company's expected net investment income. The distribution policy was also changed from monthly to quarterly387 - For the year ended December 31, 2020, distributions of $4.1 million were estimated to be comprised of approximately $0.7 million from ordinary income and $3.4 million from return of capital393 Selected Consolidated Financial Data Selected financial data for 2020 indicates a significant decline in total investment income, net investment income, and net asset value per share Selected Financial Data (2019 vs. 2020) | Metric (in thousands, except per share data) | 2020 | 2019 | | :--- | :--- | :--- | | Total investment income | $26,446 | $44,035 | | Net investment income | $58 | $13,043 | | Net (decrease) in net assets from operations | $(35,447) | $(27,647) | | Net asset value per share | $40.19 | $54.84 | | Distributions declared per share | $1.50 | $6.00 | - Total assets decreased from $427.3 million in 2019 to $328.0 million in 2020, while total net assets declined from $148.1 million to $108.9 million over the same period408 Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 2020 performance decline to the COVID-19 pandemic, resulting in reduced investment income, decreased net assets, and strategic liquidity adjustments - Total investment income for 2020 decreased by $17.6 million (39.9%) compared to 2019, primarily due to lower interest income from a smaller average debt portfolio and a significant drop in dividend income497500 - Total operating expenses for 2020 decreased by $4.6 million (14.9%) compared to 2019, driven by lower interest and financing expenses, a smaller base management fee, and no incentive fees being paid502 - The company recorded a net decrease in net assets from operations of $35.4 million in 2020, compared to a $27.6 million decrease in 2019. This was driven by a $24.0 million net realized loss and an $11.6 million net unrealized depreciation on investments495506 - As of December 31, 2020, four portfolio companies were on non-accrual status, representing 13.5% of the portfolio's amortized cost and 7.6% of its fair value. This increase from zero non-accrual investments in 2019 was largely driven by the COVID-19 pandemic476 - In 2020, the company terminated its ING Credit Facility and entered into a new, smaller KeyBank Credit Facility for up to $25.0 million. The Board also authorized a $10.0 million bond repurchase program for its 2022 Notes and 2022 Convertible Notes509510513 Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk, with variable-rate debt investments at interest rate floors and fixed-rate liabilities, resulting in limited sensitivity to rate decreases - As of December 31, 2020, 51.1% of the fair value of the company's debt portfolio had variable interest rates. However, all of these investments were at their interest rate floors, limiting downside risk from falling rates542 Interest Rate Sensitivity Analysis (Annual Impact on Net Income) | Basis Point Change | Increase (decrease) in net income (in thousands) | | :--- | :--- | | Up 300 basis points | $1,684 | | Up 200 basis points | $708 | | Up 100 basis points | $147 | | Down 100 basis points | $0 | | Down 200 basis points | $0 | | Down 300 basis points | $0 | Consolidated Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for FY2020, with an unqualified opinion from Ernst & Young LLP, highlighting Level 3 investment valuation as a critical audit matter - The independent registered public accounting firm, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements549 - The critical audit matter identified was the valuation of Level 3 investments, which totaled $274.2 million at year-end. This was due to the complex judgment required for significant unobservable inputs like EBITDA multiples and required rates of return553554 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting and financial disclosure - None772 Controls and Procedures Management concluded that disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2020 - Management concluded that both disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2020773775 Other Information The company reports no other information - None778 Part III Directors, Executive Officers and Corporate Governance This section details the company's five-member Board of Directors, including independent members and the Audit Committee's financial expert - The Board of Directors is comprised of five members: two interested directors (Joseph B. Alala, III and M. Hunt Broyhill) and three independent directors (R. Charles Moyer, Larry W. Carroll, and H. Paul Chapman)781823 - The Audit Committee consists of three independent directors, with H. Paul Chapman serving as Chairman and designated as the 'audit committee financial expert'791 Executive Compensation Executive officers are compensated by affiliated entities, while independent directors receive fees, with a 20% waiver in 2020 due to COVID-19 - Executive officers are not directly compensated by the company. Their compensation is paid by the Investment Advisor or the Administrator798 Director Compensation for Fiscal Year 2020 | Director | Fees Earned or Paid in Cash | | :--- | :--- | | Joseph B. Alala, III | $0 | | M. Hunt Broyhill | $0 | | R. Charles Moyer | $106,750 | | Larry W. Carroll | $106,750 | | H. Paul Chapman | $111,000 | - Effective April 1, 2020, independent directors agreed to waive 20% of their fees for the remainder of the fiscal year due to the impact of the COVID-19 pandemic796 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of March 5, 2021, directors and executive officers collectively owned 8.2% of common stock, with key individuals holding significant stakes Security Ownership of Management (as of March 5, 2021) | Name of Beneficial Owner | Percentage of Class | | :--- | :--- | | Joseph B. Alala, III | 3.4% | | M. Hunt Broyhill | 2.5% | | Larry W. Carroll | 2.0% | | Executive Officers and Directors as a Group | 8.2% | Certain Relationships and Related Transactions, and Director Independence The company engages in related party transactions with affiliated entities, and the Board, with a majority of independent directors, re-approved the Investment Advisory Agreement - The company's primary related party transactions are the Investment Advisory Agreement and the Administration Agreement with entities controlled by or affiliated with the company's management811815 - The Board re-approved the Investment Advisory Agreement on July 30, 2020, after reviewing the nature of services, fee structures, and performance relative to peers, and found the terms to be reasonable816817819 - The Board has determined that Messrs. Moyer, Carroll, and Chapman are three independent directors, while Messrs. Alala and Broyhill are interested persons823 Principal Accountant Fees and Services Ernst & Young LLP served as the independent auditor, billing $683,900 in FY2020 for audit and tax services, all pre-approved by the Audit Committee Accountant Fees (in thousands) | Fee Type | FY 2020 | FY 2019 | | :--- | :--- | :--- | | Audit Fees | $632.4 | $808.5 | | Audit-Related Fees | $0.0 | $0.0 | | Tax Fees | $51.5 | $51.5 | | All Other Fees | $0.0 | $0.0 | | Total Fees | $683.9 | $860.0 | - The Audit Committee has a pre-approval policy for all services provided by the independent auditor, and 100% pre-approved the services in 2020829 Part IV Exhibits and Consolidated Financial Statement Schedules This section provides an index to the consolidated financial statements and a comprehensive list of all exhibits filed with the Form 10-K - This section provides an index to the consolidated financial statements and a list of exhibits filed with the annual report832834 Form 10-K Summary The company reports that there is no Form 10-K summary - None835