Logan Ridge Finance (LRFC) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements This section presents the unaudited consolidated financial statements for Logan Ridge Finance Corporation as of June 30, 2021, and for the three and six-month periods then ended Consolidated Statements of Assets and Liabilities As of June 30, 2021, total assets were $263.2 million, a decrease from $328.0 million at year-end 2020, primarily due to a reduction in investments and cash Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total investments at fair value | $228,048 | $274,692 | | Cash and cash equivalents | $26,144 | $49,942 | | Total assets | $263,156 | $327,997 | | SBA-guaranteed debentures | $0 | $90,515 | | Total liabilities | $149,409 | $219,050 | | Total net assets | $113,747 | $108,947 | | Net asset value per share | $41.96 | $40.19 | Consolidated Statements of Operations For the six months ended June 30, 2021, the company reported a net increase in net assets of $4.8 million, a significant turnaround from a net decrease of $39.3 million in the same period of 2020 Six Months Ended June 30, (in thousands, except per share data) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Total investment income | $9,970 | $14,073 | | Total expenses | $10,719 | $14,695 | | Net investment income (loss) | $(749) | $(622) | | Total net realized and unrealized gain (loss) on investments | $6,364 | $(38,718) | | Net realized loss on extinguishment of debt | $(815) | - | | Net increase (decrease) in net assets | $4,800 | $(39,340) | | Net increase (decrease) in net assets per share | $1.77 | $(14.53) | Consolidated Statements of Cash Flows For the six months ended June 30, 2021, net cash provided by operating activities was $42.7 million, with net cash used in financing activities totaling $66.5 million Cash Flow Summary for the Six Months Ended June 30, (in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $42,721 | $36,837 | | Net Cash Used in Financing Activities | $(66,519) | $(3,932) | | Net (Decrease) Increase in Cash | $(23,798) | $32,905 | | Cash and Cash Equivalents, end of period | $26,144 | $95,226 | Consolidated Schedules of Investments As of June 30, 2021, the total investment portfolio had a fair value of $228.0 million, primarily valued using unobservable (Level 3) inputs Investment Portfolio Composition as of June 30, 2021 (in thousands) | Investment Type | Amortized Cost | Fair Value | % of Total Fair Value | | :--- | :--- | :--- | :--- | | First Lien Debt | $128,977 | $115,535 | 50.7% | | Second Lien Debt | $38,673 | $38,772 | 17.0% | | Equity and Warrants | $49,918 | $73,741 | 32.3% | | Total | $217,568 | $228,048 | 100.0% | - The total fair value of the investment portfolio was $228.0 million as of June 30, 2021, compared to $274.7 million as of December 31, 2020[15][41] - All investments are valued using unobservable inputs (Level 3), except for one Level 1 equity investment (U.S. Well Services, Inc.)[34][39] Notes to Consolidated Financial Statements The notes detail key events and policies, including the company's organization as a BDC, a one-for-six reverse stock split, and the transition to a new investment adviser, Mount Logan Management LLC - On July 1, 2021, the company changed its name from Capitala Finance Corp. to Logan Ridge Finance Corporation and appointed Mount Logan Management LLC as its new investment adviser[66][68] - A one-for-six reverse stock split was effected on August 21, 2020[64][104] - On June 10, 2021, the company's subsidiary, Fund III, repaid all its outstanding SBA-guaranteed debentures and relinquished its SBIC license, resulting in a debt extinguishment loss of $0.8 million[60][186] - The Board of Directors did not declare a distribution for the first or second quarter of 2021 due to the impact of the COVID-19 pandemic on expected net investment income[208] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, portfolio changes, and liquidity, including a net decrease in investments, a positive swing in unrealized gains, and the transition to a new investment adviser - Effective July 1, 2021, Mount Logan Management LLC became the company's new investment adviser, and the company's name changed to Logan Ridge Finance Corporation[236][238] - For the six months ended June 30, 2021, the company had net investment repayments and sales of $53.4 million[286] - As of June 30, 2021, the asset coverage ratio was 175.9%, above the 150% regulatory requirement[225][322] - The company had three portfolio companies on non-accrual status as of June 30, 2021, with a fair value of $9.8 million, representing 4.3% of the total investment portfolio[292] Portfolio and Investment Activity As of June 30, 2021, the investment portfolio was valued at $228.0 million, with debt investments constituting 67.7% of fair value and a weighted average annualized yield of 9.9% Investment Activity for Six Months Ended June 30, (in millions) | Period | Investments Made | Repayments & Sales | Net Activity | | :--- | :--- | :--- | :--- | | 2021 | $10.0 | $63.4 | $(53.4) | | 2020 | $20.8 | $58.9 | $(38.1) | Portfolio Composition by Investment Type (June 30, 2021) | Investment Type | % of Total Fair Value | | :--- | :--- | | First Lien Debt | 50.7% | | Second Lien Debt | 17.0% | | Equity and Warrants | 32.3% | - The weighted average annualized yield on the debt portfolio was 9.9% as of June 30, 2021, slightly down from 10.0% at year-end 2020[288] Results of Operations For the six months ended June 30, 2021, total investment income fell by 29.2% to $10.0 million, offset by lower operating expenses and a significant positive shift in realized and unrealized gains Operating Results for the Six Months Ended June 30, (in thousands) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Total investment income | $9,970 | $14,073 | | Total expenses | $10,719 | $14,695 | | Net investment income (loss) | $(749) | $(622) | | Net realized (loss) on investments | $(7,076) | $(12,317) | | Net unrealized appreciation (depreciation) | $13,440 | $(26,401) | | Net increase (decrease) in net assets | $4,800 | $(39,340) | - The decrease in investment income was primarily due to lower interest income from a smaller average portfolio of outstanding debt investments[306] - The decrease in operating expenses was mainly due to lower interest and financing expenses resulting from lower average outstanding debt[308] Financial Condition, Liquidity and Capital Resources As of June 30, 2021, the company had $26.1 million in cash and cash equivalents, with total debt obligations of $149.9 million after repaying SBA-guaranteed debentures Contractual Obligations as of June 30, 2021 (in thousands) | Obligation | Total Amount | | :--- | :--- | | 2022 Notes | $72,833 | | 2022 Convertible Notes | $52,088 | | KeyBank Credit Facility | $25,000 | | Total | $149,921 | - The company had $26.1 million in cash and cash equivalents as of June 30, 2021[323] - The Board determined not to declare a distribution for the first or second quarter of 2021, citing the impact of the COVID-19 pandemic[328] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is subject to market risk, primarily from changes in interest rates, with most variable-rate assets at their interest rate floors, limiting sensitivity to rate increases - As of June 30, 2021, 51.5% of the fair value of total debt investments bore a variable rate of interest, with 100% of these yielding at their established interest rate floor[343] Annual Impact on Net Income from Interest Rate Changes (in thousands) | Basis Point Change | Increase (decrease) in net income | | :--- | :--- | | Up 300 basis points | $735 | | Up 200 basis points | $183 | | Up 100 basis points | $26 | | Down 100 basis points | $0 | Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting - Management concluded that as of June 30, 2021, the company's disclosure controls and procedures were effective[347] - No material changes in internal control over financial reporting occurred during the second quarter of 2021[348] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company and its subsidiaries are not currently subject to any material legal proceedings, nor are any known to be threatened against them - As of the filing date, the company is not a party to any material legal proceedings[349] Item 1A. Risk Factors This section highlights potential conflicts of interest arising from the new Investment Advisor, Mount Logan Management LLC, which also advises other entities with similar investment targets - A key risk is the potential for conflicts of interest with the new Investment Advisor, Mount Logan Management LLC, which also advises other entities with similar investment strategies, such as Portman Ridge Finance Corporation[351][352] - The time and resources of the Investment Advisor's personnel will be allocated among multiple entities, which may divert attention from the company's business[353] Other Items (2, 3, 4, 5, 6) This section confirms there were no unregistered sales of equity securities, no defaults upon senior securities, and no other material information to disclose for the period - There were no unregistered sales of equity securities during the period[355] - There were no defaults upon senior securities[356]