Logan Ridge Finance (LRFC) - 2022 Q4 - Annual Report

FORM 10-K Cover Page - Logan Ridge Finance Corporation filed its Annual Report on Form 10-K for the fiscal year ended December 32, 2022, as a non-accelerated filer[1][2] Registrant Information | Indicator | Value | | :--- | :--- | | Registrant Name | Logan Ridge Finance Corporation | | State of Incorporation | Maryland | | Trading Symbol | LRFC | | Exchange | NASDAQ Global Select Market | | Common Stock Outstanding (as of March 3, 2023) | 2,711,068 shares | | Market Value of Common Stock Held by Non-Affiliates (as of June 30, 2022) | $42.8 million | Documents Incorporated by Reference - Portions of the Registrant's Proxy Statement for the 2023 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K[4][5] Table of Contents Cautionary Statement Regarding Forward-Looking Statements - This report contains forward-looking statements based on current expectations that involve substantial risks and are not guarantees of future performance[8][9][10][11] Part I Item 1. Business The company is an externally managed BDC and RIC focused on debt and equity investments in U.S. middle-market companies Formation of Our Company The company, formerly Capitala Finance Corp, commenced operations in 2013 and appointed Mount Logan Management LLC as its new investment adviser in 2021 - Logan Ridge Finance Corporation (formerly Capitala Finance Corp) is an externally managed non-diversified closed-end management investment company, regulated as a BDC and elected to be treated as a RIC[13] - The company's investment objective is to generate current income and capital appreciation through debt and equity investments in lower middle-market and traditional middle-market companies[14] - In July 2021, Mount Logan Management LLC became the new investment adviser, and the company changed its name to Logan Ridge Finance Corporation, with its common stock trading under the symbol 'LRFC' on NASDAQ[19][21] - The company formed Taxable Subsidiaries for equity investments in pass-through entities and established Capitala Business Lending, LLC (CBL) to hold collateralized investments[17][18] Summary Risk Factors The company faces risks related to its business structure, investment portfolio, and external economic and geopolitical conditions - Key risks include dependence on the Investment Adviser's management team, intense competition for investment opportunities, and the necessity of raising additional capital[27] - The company is exposed to risks from economic downturns, geopolitical instability, and interest rate volatility, which could impair portfolio companies' ability to repay borrowings[11][27] - Investment risks include potential losses from speculative, below-investment-grade securities in smaller, privately held companies and the illiquidity of investments[27][35] Our Investment Strategy The company targets debt and equity investments in middle-market companies with $5 million to $50 million in trailing twelve-month EBITDA - The investment objective is to generate current income and capital appreciation through debt and equity investments[29] - Target companies generally have $5 million to $50 million in trailing twelve-month EBITDA[29] - Primary investments are first lien loans, with some second lien loans and equity securities, typically targeting maturities of four to six years[29] Our Investment Adviser Mount Logan Management LLC, an affiliate of BC Partners, serves as the investment adviser, leveraging BC Partners' extensive credit platform - Mount Logan Management LLC, an affiliate of BC Partners, is the investment adviser, utilizing BC Partners' credit team resources[31][32] - The Mount Logan Investment Committee, including Ted Goldthorpe, Matthias Ederer, Henry Wang, and Raymond Svider, makes investment decisions[33] - The company is permitted to co-invest with affiliates in private placement transactions under an SEC exemptive order, subject to independent director approval[37][38][39] Investments The company focuses on debt investments with current cash yields and principal protection, while seeking equity participation for upside potential Types of Investments The company targets established companies with positive cash flow, experienced management, and strong competitive positions - Investment criteria include established companies with positive cash flow ($5M-$50M EBITDA), experienced management with significant equity ownership, and strong competitive positions[44] Debt Investments The debt portfolio is primarily composed of first lien loans, with a weighted average annualized cash yield of 9.7% as of year-end 2022 - As of December 31, 2022, 80.9% of the fair value of debt investments were first lien loans, including unitranche debt, and 3.8% were second lien loans[46][47] - Some debt investments include Payment-in-Kind (PIK) interest; as of December 31, 2022, the weighted average PIK yield was 0.7%[48] - The weighted average annualized cash yield on the debt portfolio was 9.7% as of December 31, 2022 (excluding non-accruals and CLOs)[48] Equity Investments Equity participation is typically acquired through detachable warrants or non-control co-investments alongside debt financing - Equity participation is often granted via detachable warrants to purchase common equity or through non-control equity co-investments[50] - Equity investments are structured to include minority rights provisions and, where available, event-driven put rights and limited 'piggyback' registration rights[50] Investment Process The investment process involves deal generation, rigorous screening, comprehensive due diligence, and a multi-stage approval by the Investment Committee Deal Generation/Origination Deal generation is primarily achieved through extensive, long-standing relationships with various industry contacts - Deal generation is maximized through extensive relationships with industry contacts, brokers, bankers, entrepreneurs, and service providers[54] Screening Potential investments are screened for suitability against investment criteria, followed by preliminary due diligence - Potential investments are screened for suitability and consistency with investment criteria, followed by preliminary due diligence[56] - Preliminary due diligence includes preparing a comprehensive financial model, analyzing the competitive landscape, evaluating business strategy, and assessing management quality[56] Due Diligence and Underwriting Due diligence involves an in-depth review of financial statements, interviews, and third-party reports, with a focus on downside scenario analysis - Due diligence involves on-site visits, in-depth review of financial statements, interviews with customers/suppliers, management background checks, and review of third-party reports[58][63] - Underwriting includes sensitivity analyses for 'downside' scenarios to assess profitability and covenant compliance[58] Approval, Documentation and Closing Final approval from the investment committee is required after satisfactory documentation and fulfillment of closing conditions - Final approval from the investment committee is sought after satisfactory documentation and fulfillment of closing conditions[64] Ongoing Relationships with Portfolio Companies The Investment Adviser continuously monitors portfolio companies' financial trends, business plan adherence, and covenant compliance - Monitoring includes assessing adherence to business plans, compliance with covenants, regular contact with management, and review of financial statements[65][71] Agreements The company operates under an Investment Advisory Agreement with Mount Logan Management LLC and an Administration Agreement with BC Partners Management LLC Investment Advisory Agreement The agreement outlines the Investment Adviser's responsibilities and a fee structure comprising a base management fee and a two-part incentive fee - The Investment Advisory Agreement, effective July 1, 2021, outlines the Investment Adviser's role in managing the portfolio and providing investment advisory services[66] - The fee structure includes a base management fee of 1.75% of gross assets, payable quarterly in arrears[69] - The incentive fee has two parts: one based on pre-incentive fee net investment income (with a 2.0% quarterly hurdle) and another based on cumulative realized capital gains (20%)[70][72][74] Graphical Representation and Examples under the Investment Advisory Agreement This section provides graphical and numerical examples illustrating the calculation of the income-related and capital gains portions of the incentive fee - The income-related incentive fee calculation includes a 2.0% quarterly hurdle rate and a 'catch-up' provision[75][77][80] - The capital gains incentive fee is 20.0% of cumulative realized capital gains, net of realized capital losses and unrealized capital depreciation[72][81][82][83][84][85][86] - An incentive fee deferral mechanism is in place, carrying over deferred fees for payment in subsequent periods[73][87][88] Prior Investment Advisory Agreement The prior agreement with Capitala Investment Advisors, LLC had substantially similar terms, including a 1.75% base management fee and a two-part incentive fee - The Prior Investment Advisory Agreement with Capitala Investment Advisors, LLC, effective September 24, 2013, had terms substantially similar to the current agreement[89] - The prior base management fee was 1.75% of gross assets, and the prior incentive fee included a net investment income component and a cumulative realized capital gains component[93][94] - The Prior Investment Adviser voluntarily waived quarterly incentive fees to ensure net investment income met distribution payments[96] Payment of Our Expenses The company bears all operational and transactional costs, including advisory fees, interest on debt, and administrative expenses - The company bears all operational and transactional expenses, including organization costs, NAV calculation, interest on debt, and third-party investment fees[97][98][105] Duration and Termination The Investment Advisory Agreement renews annually and can be terminated by either party with 60 days' written notice without penalty Indemnification The Investment Advisory and Administration Agreements indemnify the Adviser and Administrator, except for willful misfeasance, bad faith, or gross negligence - The Investment Advisory Agreement indemnifies the Investment Adviser and its affiliates against liabilities, except in cases of willful misfeasance, bad faith, or gross negligence[67][100] - The Administration Agreement contains similar indemnification provisions for the Administrator and its affiliates[103] Organization of the Investment Adviser The Investment Adviser, Mount Logan Management LLC, is a Delaware limited liability company with principal offices in New York Administration Agreement BC Partners Management LLC serves as the administrator, providing office facilities, bookkeeping, and other administrative services - BC Partners Management LLC provides administrative services, including office facilities, bookkeeping, financial record-keeping, and stockholder reporting[102] - The company reimburses the administrator for allocable overhead and expenses, including compensation for the CFO and CCO[102] - The Administration Agreement is annually renewable by the Board and can be terminated by either party with 60 days' written notice[102] Prior Administration Agreement The prior agreement with Capitala Advisors Corp provided similar administrative services, including office facilities and financial reporting - The Prior Administration Agreement with Capitala Advisors Corp provided administrative services, including office facilities, bookkeeping, and record-keeping[104][106] - The company reimbursed the Prior Administrator for allocable overhead and expenses, including compensation for the CFO and CCO[106] - The Prior Administrator engaged U.S. Bank Global Fund Services for certain administrative services[104] Prior License Agreement The company had a non-exclusive, royalty-free license to use the 'Capitala' name, which terminated with the prior advisory agreement Staffing The company has no direct employees and is externally managed by Mount Logan Management LLC, an affiliate of BC Partners - Logan Ridge has no employees and is externally managed by Mount Logan Management LLC, an affiliate of BC Partners[109] - The Investment Advisory Agreement outlines Base Management Fees and Incentive Fees payable to the Investment Adviser[110] - The Administrator provides office facilities and administrative services, for which the company reimburses allocable overhead and compensation costs[111][112] Valuation Process and Determination of Net Asset Value Net asset value is determined quarterly, with the Board designating the Adviser as its 'valuation designee' for fair value determinations - Net asset value is determined quarterly, consistent with U.S. GAAP and the 1940 Act[113] - The Board designated the Adviser as its 'valuation designee' to perform fair value determinations for all investments, with input from independent third-party valuation firms[116][117] - Valuation methods include market quotes, discounted cash flows, and enterprise value approaches, with investments categorized into Level 1, 2, or 3[117][120][121][122] Determinations in Connection with Offerings For future securities offerings, the Board must determine that shares are not sold below the current net asset value - The Board must determine that shares are not sold below the current net asset value (NAV) for future offerings[124] - Factors considered include the most recent disclosed NAV, management's assessment of material changes, and the difference between the current NAV and the offering price[127] Competition The company operates in a highly competitive market, competing with other BDCs, investment funds, and traditional financial institutions - The company competes with other BDCs, investment funds, and traditional financial services companies[128] - Competition has intensified due to new entrants like CLOs and hedge funds focusing on middle-market companies[128] - Competitive advantages include experience, reputation, strong relationships, and efficient investment analysis[128][129] Election to be Taxed as a RIC The company has elected and intends to maintain its status as a Regulated Investment Company (RIC) to avoid corporate-level federal income taxes - The company has elected to be treated as a RIC to avoid corporate-level U.S. federal income taxes on timely distributed income[130] - RIC qualification requires meeting source-of-income and asset diversification requirements, and distributing at least 90% of 'investment company taxable income' annually[130][131][133] Taxation as a RIC To maintain RIC status, the company must meet income, diversification, and distribution requirements, and is subject to a 4% excise tax on undistributed income - To avoid corporate-level U.S. federal income tax, the company must qualify as a RIC and satisfy the Annual Distribution Requirement[131] - The company is subject to a 4% non-deductible U.S. federal excise tax if it does not distribute at least 98% of ordinary income and 98.2% of capital gain net income annually[132] - Taxable income may be recognized before cash receipt, potentially forcing asset dispositions to meet distribution requirements[134][137] Failure to Qualify as a RIC Failure to qualify as a RIC would subject the company to corporate-level U.S. federal income tax, substantially reducing net assets and income - If the company fails to qualify as a RIC, it would be subject to corporate-level U.S. federal income tax on all taxable income[145] - Requalification as a RIC would require satisfying qualification requirements and disposing of earnings and profits from non-qualifying years[145] Regulation As a BDC, the company is regulated under the 1940 Act and must maintain an asset coverage ratio of at least 150% for senior securities - As a BDC, the company is regulated under the 1940 Act, requiring it to invest in primarily private companies and offer managerial assistance[146] - The asset coverage ratio requirement for senior securities was decreased from 200% to 150%, effective November 1, 2019[150] - The company is generally prohibited from certain transactions with affiliates and from issuing shares below net asset value per share without stockholder approval[151][152] Qualifying Assets A BDC must hold at least 70% of its gross assets in 'qualifying assets,' which include securities of eligible portfolio companies and certain temporary investments - A BDC must maintain at least 70% of its gross assets in 'qualifying assets' as defined by Section 55(a) of the 1940 Act[154] - Qualifying assets include securities of eligible portfolio companies and temporary investments like cash or U.S. government securities[154] - An eligible portfolio company is generally a domestic, non-investment company that is not publicly traded or has a market capitalization under $250 million[154] Significant Managerial Assistance to Portfolio Companies BDCs are generally required to offer significant managerial assistance to portfolio companies, unless certain exceptions apply - BDCs must generally offer significant managerial assistance to portfolio companies, providing guidance on management, operations, and business objectives[156] - This requirement is waived if the BDC controls the issuer or co-invests with another party providing the assistance[156] Temporary Investments Pending investment in qualifying assets, the company may hold temporary investments such as cash, U.S. government securities, or high-quality debt - Pending investment in other qualifying assets, the company may hold temporary investments to maintain 70% qualifying assets[158] Repurchase Agreements The company may invest in repurchase agreements but will limit exposure to a single counterparty to 25% of gross assets - The company may invest in repurchase agreements but will not exceed 25% of gross assets with a single counterparty to meet RIC diversification tests[159] Senior Securities The company can issue senior securities provided its asset coverage ratio is at least 150% after issuance - The company can issue senior securities if its asset coverage ratio is at least 150% after issuance[160] - Distributions to stockholders or repurchases of securities are prohibited if applicable asset coverage ratios are not met[160] - Temporary or emergency borrowings up to 5% of gross assets are allowed without regard to asset coverage[160] Code of Ethics The company and its Investment Adviser have adopted a code of ethics to establish procedures for personal investments and restrict certain transactions - A code of ethics, compliant with Rule 17j-1 under the 1940 Act and Rule 204A-1 under the Advisers Act, has been adopted to regulate personal investments[161] Compliance Policies and Procedures The company and its Investment Adviser have implemented written compliance policies and procedures, which are reviewed annually - Written compliance policies and procedures are in place to detect and prevent federal securities law violations, reviewed annually for adequacy and effectiveness[162] - David Held serves as the chief compliance officer, responsible for administering these policies[162] Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act imposes various regulatory requirements, including certifications of financial statement accuracy by the CEO and CFO - The Sarbanes-Oxley Act requires CEO and CFO certification of financial statement accuracy in periodic reports[163][166] - Periodic reports must disclose conclusions on the effectiveness of disclosure controls and procedures[163][166] - Management is required to prepare an annual report assessing the effectiveness of internal control over financial reporting[163][166] Proxy Voting Policies and Procedures The Investment Adviser is delegated proxy voting responsibility, with policies designed to act in the best interests of stockholders - Proxy voting responsibility is delegated to the Investment Adviser, with policies aimed at acting in the best interest of clients' stockholders[164][167] - Decisions are made case-by-case, generally opposing proposals with negative impacts unless compelling long-term reasons exist[167] - To prevent conflicts of interest, decision-makers must disclose potential conflicts, and employees are prohibited from revealing voting intentions[168] Privacy Principles The company is committed to safeguarding stockholders' non-public personal information through restricted access and procedural safeguards - The company is committed to maintaining the privacy of stockholders' non-public personal information[170] - Access to non-public personal information is restricted to employees of the Investment Adviser and its affiliates with a legitimate business need[172] - Physical, electronic, and procedural safeguards are maintained to protect this information[171][172] Small Business Investment Company Regulations The company's subsidiaries previously utilized SBA-guaranteed debentures but have since relinquished their SBIC licenses - Historically, Fund II and Fund III (wholly-owned subsidiaries) used SBA-guaranteed debentures[173] - Fund II relinquished its SBIC license in March 2019, and Fund III relinquished its license in June 2021[175] - As of December 31, 2022 and 2021, no SBA-guaranteed debentures were outstanding[175] NASDAQ Global Select Market Requirements The company has adopted policies and procedures to comply with NASDAQ Global Select Market's corporate governance rules Available Information The company's public filings are available free of charge on its website and the SEC's website - The company's corporate headquarters are located at 650 Madison Avenue, 23rd Floor, New York, New York 10022[177] - Public filings are available free on the company's website (www.loganridgefinance.com) and the SEC's website (www.sec.gov)[177](index=177&type=chunk)[178] Item 1A. Risk Factors Investing in the company involves significant risks related to its business, investments, relationship with the Investment Adviser, and common stock Risks Relating to Our Business and Structure The company's business faces risks from capital market disruptions, geopolitical events, inflation, and dependence on key personnel - The Board can change investment objectives and policies without stockholder approval, potentially leading to adverse effects[181] - Capital markets disruptions, including those from the COVID-19 pandemic, can materially affect the company's business and financial condition[183][184][185][186][187][188][211][212] - The company is highly dependent on the Investment Adviser's key personnel; their loss could significantly harm financial performance[214][215][217] - Cybersecurity risks, including attacks and system failures, could disrupt business, lead to financial losses, and damage reputation[248][249][251][256][257] - Inflation and rising interest rates may adversely affect portfolio companies' profit margins and the company's returns[262] Risks Related to the Investment Adviser and its Affiliates Conflicts of interest arise from the Investment Adviser's compensation structure and its management of other funds - The Investment Adviser's compensation structure may incentivize riskier investments and increased leverage[265][266][281][282] - Conflicts of interest exist due to the Investment Adviser's team managing other affiliated funds, potentially creating competition for investment opportunities[267][270][276][277][279][280] - The Investment Advisory Agreement and Administration Agreement were negotiated between related parties, potentially resulting in less favorable terms[286][287] - The Investment Adviser's limited liability and right to resign on 60 days' notice could disrupt operations[289][290] - The company may be obligated to pay incentive compensation even if it incurs a net loss due to portfolio value decline[273][274][275] Risks Related to Business Development Companies As a BDC, the company faces regulatory constraints, including asset coverage ratios and restrictions on co-investing and issuing shares below NAV - The requirement to invest at least 70% of assets in 'qualifying assets' may restrict investment strategy and risk loss of BDC status if not met[292] - Failure to maintain BDC status would result in regulation as a closed-end investment company, leading to more regulatory restrictions[293] - The 150% asset coverage ratio requirement can limit the ability to raise additional capital and pay dividends if asset values decline[294][295] - Restrictions under the 1940 Act limit co-investment with affiliates and generally prohibit issuing common stock below net asset value without stockholder approval[298][300][301] - As a non-diversified investment company, the portfolio may be concentrated in a limited number of issuers or industries[304][305][306] Risks Related to Our Investments Investments in middle-market companies are inherently risky, with potential for loss of principal, illiquidity, and interest rate uncertainty from the LIBOR phase-out - Investments in first lien, second lien, unitranche, and unsecured debt, as well as equity, are risky, with potential for loss of principal[310][311][312][314][315][319][321] - The company invests in below-investment-grade securities, which are speculative and subject to increased default risk and illiquidity[318][324] - The phase-out of LIBOR and transition to SOFR creates uncertainty regarding interest rates on floating-rate loans[338][343] - Investments in private and middle-market companies involve risks such as limited financial resources and dependence on key personnel[327][329][330][332][358] - The illiquidity of investments may make it difficult to sell them at desired times or prices[359][360][361] Risks Related to Debt Financing Leverage magnifies potential gains and losses, and covenants in credit facilities may restrict business activities and investment discretion - Leverage magnifies potential gains and losses, increasing investment risk and potentially reducing cash available for distributions[366][367] - Defaulting on credit facilities could force premature asset sales at disadvantageous prices[372] - Credit facility covenants may restrict business activities, including limitations on additional loans, investments, and distributions[369][373][375] - Rising interest rates increase the cost of funds, potentially reducing net investment income[377][378] Effect of Leverage on Returns to Common Stockholder (Hypothetical) | Assumed Return on Our Portfolio (net of expenses) | Corresponding net return to common stockholder | | :--- | :--- | | (10.0)% | -30.3% | | (5.0)% | -19.0% | | 0.0% | -7.7% | | 5.0% | 3.6% | | 10.0% | 14.9% | U.S. Federal Income Tax Risks Failure to maintain RIC tax treatment would subject the company to corporate-level U.S. federal income tax, significantly reducing net assets - Failure to qualify or maintain RIC tax treatment would subject the company to corporate-level U.S. federal income tax[380][383] - The company may recognize taxable income before receiving cash, potentially creating difficulty in meeting annual distribution requirements[388][389][390] - The company may pay dividends partially in common stock, requiring shareholders to pay tax on non-cash income[391] - Legislative or other actions relating to taxes could negatively affect RIC qualification or tax consequences for investors[394][395] Risks Relating to an Investment in Our Common Stock Investing in the company's common stock involves high risk due to market price fluctuations and potential dilution from future issuances - The company has broad discretion over the use of proceeds from securities offerings[396][397][398] - Issuance of additional common stock or senior securities will dilute existing stockholders' ownership[399][400][401][402] - The market price of common stock may fluctuate significantly and has traded at a discount from NAV, which could impair the ability to raise additional capital[411][413][415] - Provisions in Maryland law and the company's charter/bylaws could deter takeover attempts[407][408][409] - Securities litigation and stockholder activism could result in substantial costs and divert management attention[416][417][418] Item 1B. Unresolved Staff Comments There are no unresolved staff comments - No unresolved staff comments were reported[419] Item 2. Properties The company's corporate headquarters are located in New York, New York, and are deemed suitable for its business operations - The corporate headquarters are located at 650 Madison Avenue, 23rd Floor, New York, New York 10022, provided by the Administrator[420] - The office facilities are considered suitable and adequate for the company's business[420] Item 3. Legal Proceedings The company and its subsidiaries are not currently subject to any material legal proceedings - The company and its subsidiaries are not currently subject to any material legal proceedings, nor are any threatened[421] - Any ordinary course legal proceedings are not expected to have a material effect on financial condition or results of operations[421] Item 4. Mine Safety Disclosures This item is not applicable to the company - Item 4. Mine Safety Disclosures is not applicable[422] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NASDAQ under 'LRFC' and has traded at a significant discount to its net asset value Common Stock Shares of Logan Ridge Finance Corporation's common stock are traded on the NASDAQ Global Select Market under the symbol 'LRFC' Holders As of March 3, 2023, there were 24 holders of record of the company's common stock - As of March 3, 2023, there were 24 holders of record of the company's common stock[425] Price Range of Common Stock and Distributions The company's common stock has traded at a significant discount to its NAV, and no distributions were declared in 2021 or 2022 - As of March 3, 2023, shares traded at a discount of approximately 69.0% of the NAV attributable to those shares as of December 31, 2022[427] Common Stock Price Range and Distributions (2021-2023 YTD) | Fiscal Quarter Ended | NAV Per Share | High Sales Price | Low Sales Price | Premium or (Discount) of High Sales Price to NAV | Premium or (Discount) of Low Sales Price to NAV | Declared Distributions Per Share | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | December 31, 2023 | | | | | | | | First Quarter (through March 3, 2023) | * | $24.50 | $21.62 | * | * | — | | December 31, 2022 | | | | | | | | Fourth Quarter | $35.04 | $22.75 | $17.61 | (35.1)% | (49.7)% | — | | Third Quarter | $36.21 | $21.04 | $14.85 | (41.9)% | (59.0)% | — | | Second Quarter | $37.31 | $23.05 | $14.43 | (38.2)% | (61.3)% | — | | First Quarter | $39.16 | $26.48 | $21.63 | (32.4)% | (44.8)% | — | | December 31, 2021 | | | | | | | | Fourth Quarter | $39.48 | $26.50 | $20.95 | (32.9)% | (46.9)% | — | | Third Quarter | $40.67 | $28.90 | $24.50 | (28.9)% | (39.8)% | — | | Second Quarter | $41.96 | $26.77 | $15.22 | (36.2)% | (63.7)% | — | | First Quarter | $44.74 | $17.24 | $14.04 | (61.5)% | (68.6)% | — | Distributions To maintain RIC status, the company must distribute at least 90% of its ordinary income and net short-term capital gains annually - To qualify as a RIC and avoid corporate-level U.S. federal income tax, the company must distribute at least 90% of its ordinary income and net short-term capital gains annually[428] - No distributions were declared by the Board for the years ended December 31, 2022 and 2021[428] - The company has an 'opt out' dividend reinvestment plan (DRIP), where cash distributions are automatically reinvested in additional common stock[431] Performance Graph The performance graph compares the cumulative total return of the company's common stock with the S&P 500 and NASDAQ Financial 100 indices - The performance graph compares the company's common stock total return against the S&P 500 and NASDAQ Financial 100 indices for the period December 31, 2017, through December 31, 2022[433] - The graph assumes a $100 investment on December 31, 2017, with dividends reinvested[433] Fees and Expenses The company's fee structure includes a base management fee, interest payments on borrowed funds, and other operating expenses Annual Expenses (as a percentage of net assets attributable to common stock) - FY2022 | Expense Category | Percentage of Net Assets | | :--- | :--- | | Base management fee | 3.80% | | Incentive fees payable from Net Investment Income | 0.00% | | Incentive fee payable from Capital Gains | 0.00% | | Interest payments on borrowed funds | 8.03% | | Other expenses | 4.34% | | Acquired fund fees and expenses | 0.05% | | Total annual expenses | 16.22% | Projected Cumulative Expenses on a $1,000 Investment (5.0% annual return, no capital gains) | Period | Expenses | | :--- | :--- | | 1 Year | $162 | | 3 Years | $434 | | 5 Years | $648 | | 10 Years | $1,006 | Projected Cumulative Expenses on a $1,000 Investment (5.0% annual return, all net realized capital gains) | Period | Expenses | | :--- | :--- | | 1 Year | $172 | | 3 Years | $456 | | 5 Years | $675 | | 10 Years | $1,027 | Sales of Unregistered Securities During the year ended December 31, 2022, the company did not sell any unregistered equity securities Issuer Purchases of Equity Securities The company did not make any issuer purchases of equity securities Item 6. [Reserved] This item is reserved and contains no information - Item 6 is reserved[443] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of the company's financial condition, results of operations, and liquidity for fiscal years 2022, 2021, and 2020 Overview The company is an externally managed BDC and RIC focused on generating income and capital appreciation from investments in U.S. middle-market companies - Logan Ridge Finance Corporation is an externally managed BDC and RIC, aiming for current income and capital appreciation[445] - It invests in U.S. lower and traditional middle-market companies, primarily with $5 million to $50 million in trailing twelve-month EBITDA[446][447] - The company must comply with BDC regulations, including a 150% asset coverage ratio (177% as of December 31, 2022)[448] Corporate History The company commenced operations in 2013, and its subsidiaries relinquished their SBIC licenses in 2019 and 2021 - The company commenced operations on May 24, 2013, and completed its IPO on September 30, 2013[449] - Wholly-owned subsidiaries repaid SBA-guaranteed debentures and relinquished SBIC licenses in March 2019 and June 2021, respectively[450] - Taxable Subsidiaries were formed for equity investments, and Capitala Business Lending, LLC (CBL) was established for investments under the KeyBank Credit Facility[452][453] Definitive Agreement In 2021, Mount Logan Management LLC acquired the investment management business of the former adviser, leading to a name change and new management - On April 20, 2021, a definitive agreement was reached for Mount Logan Management LLC to acquire Capitala Investment Advisors, LLC's investment management business[456] - The transaction closed on July 1, 2021, resulting in Mount Logan Management LLC becoming the new investment adviser[456][458] - A two-year contractual fee waiver was implemented for capital gains fees, and new directors and officers were appointed[457][458][459] Basis of Presentation The consolidated financial statements are prepared in accordance with U.S. GAAP and ASC Topic 946 for investment companies - Financial statements are prepared in conformity with U.S. GAAP and ASC Topic 946 (Investment Companies)[460] - Statements are presented on a consolidated basis, including wholly-owned subsidiaries, with intercompany transactions eliminated[461] Consolidation The company consolidates its wholly-owned investment company subsidiaries in its financial statements - The company consolidates its wholly-owned investment company subsidiaries (Fund II, Fund III, CBL, and Taxable Subsidiaries) in its financial statements[462] Revenues Revenue is primarily generated from periodic cash interest on debt investments, with additional income from dividends, capital gains, and various fees - The primary revenue source is periodic cash interest from debt investments[463] - Additional revenue comes from dividends, capital gains from equity participation, and various fees[463] Expenses Primary operating expenses include investment advisory fees and allocable overhead reimbursed to the Administrator - Primary operating expenses include investment advisory fees to the Investment Adviser and allocable overhead reimbursed to the Administrator[464] - Other expenses include organization costs, interest on debt, third-party investment fees, and administrative support staff costs[466][478] Income Taxes The company has elected to be treated as a RIC and intends to distribute at least 90% of its taxable income annually to avoid federal income taxes - The company has elected RIC status and intends to distribute at least 90% of its investment company taxable income annually to avoid U.S. federal income taxes[468][469] - A 4% non-deductible U.S. federal excise tax applies if specific distribution thresholds are not met[469] - No uncertain tax positions were identified as of December 31, 2022 and 2021[474] Deferred Tax Assets and Valuation Allowance | Metric | December 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :--- | :--- | :--- | | Net deferred tax asset | $0 | $0 | | Valuation allowance on deferred tax asset | $4,000 | $2,500 | | Increase (decrease) in valuation allowance (YoY) | $1,500 | $(2,100) | Portfolio and Investment Activity As of December 31, 2022, the company's portfolio comprised 59 companies with a fair value of $203.6 million, primarily in first lien loans - As of December 31, 2022, the portfolio consisted of investments in 59 companies with a fair value of approximately $203.6 million[479] - Net deployment for the year ended December 31, 2022, was approximately $13.7 million, compared to net repayments of $80.2 million in 2021[482][708] Debt Investment Portfolio Yield and Fixed Rate (as of December 31) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Weighted average annualized yield (excluding non-accruals and CLOs) | 10.4% | 8.1% | | Fixed rate portion of debt investment portfolio (fair value) | 17.2% | 22.8% | Non-Accrual Debt Investments (as of December 31) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Number of portfolio companies on non-accrual | 1 | 2 | | Aggregate amortized cost | $11.9 million | $12.7 million | | Aggregate fair value | $9.7 million | $7.6 million | | Percentage of investment portfolio (fair value) | 4.8% | 3.8% | Portfolio Composition by Industry Grouping (Fair Value, as of December 31, 2022) | Industry | Fair Value (in thousands) | Percentage of Total Portfolio | | :--- | :--- | :--- | | Healthcare | $42,594 | 20.9% | | Financials | $35,660 | 17.5% | | Business Services | $24,570 | 12.1% | | Information Technology | $17,330 | 8.5% | | Industrials | $15,631 | 7.7% | | Consumer Discretionary | $13,505 | 6.6% | | Healthcare Management | $9,695 | 4.8% | | Entertainment | $7,459 | 3.7% | | Financial Services | $6,651 | 3.3% | | Automobile Part Manufacturer | $4,992 | 2.5% | | Textile Equipment Manufacturer | $5,001 | 2.5% | | Consumer Staples | $4,825 | 2.4% | | Medical Device Distributor | $4,360 | 2.1% | | Online Merchandise Retailer | $3,701 | 1.8% | | Advertising & Marketing Services | $3,562 | 1.7% | | Communication Services | $896 | 0.4% | | Household Product Manufacturer | $758 | 0.4% | | Testing laboratories | $723 | 0.4% | | General Industrial | $641 | 0.3% | | Data Processing & Digital Marketing | $509 | 0.2% | | Electronic Machine Repair | $271 | 0.1% | | Oil & Gas Engineering and Consulting Services | $258 | 0.1% | | QSR Franchisor | $0 | 0.0% | | Home Repair Parts Manufacturer | $0 | 0.0% | | Consumer Products | $0 | 0.0% | | Total | $203,592 | 100.0% | Great Lakes Funding II LLC In August 2022, the company invested $0.4 million in Great Lakes Funding II LLC, a joint venture focused on senior, secured unitranche loans - In August 2022, the company invested in Great Lakes Funding II LLC - Series A, a joint venture for senior, secured unitranche loans to middle-market companies[490] - The fair value of the investment was $0.4 million as of December 31, 2022, determined using NAV as a practical expedient[492] - The company has a $0.1 million unfunded commitment to the Great Lakes II Joint Venture as of December 31, 2022[493] Results of Operations For 2022, the company reported a net decrease in net assets of $12.0 million, driven by unrealized depreciation on investments Investment income Total investment income decreased by $1.8 million (10.9%) to $14.9 million for the year ended December 31, 2022 - Total investment income decreased by $1.8 million, or 10.9%, for the year ended December 31, 2022, compared to 2021[499] - The decrease in interest income was primarily due to lower average outstanding debt investments in 2022[500] - PIK income increased due to an increase in investments with a contractual PIK rate[501] Investment Income (in thousands) | Category | 2022 | 2021 | Change (YoY) | | :--- | :--- | :--- | :--- | | Interest income | $13,666 | $14,825 | $(1,159) | | Payment-in-kind interest | $1,106 | $456 | $650 | | Dividend income | $14 | $906 | $(892) | | Other income | $141 | $567 | $(426) | | Total investment income | $14,927 | $16,754 | $(1,827) | Operating expenses Total operating expenses decreased by $4.3 million (20.9%) to $16.1 million for the year ended December 31, 2022 - Total operating expenses decreased by $4.3 million, or 20.9%, for the year ended December 31, 2022, compared to 2021[504] - Interest and financing expenses declined primarily due to a lower cost of capital and lower average debt outstanding[504] - Base management fee declined due to lower average assets under management, and no incentive fees were earned in 2022 or 2021[504] Operating Expenses (in thousands) | Category | 2022 | 2021 | Change (YoY) | | :--- | :--- | :--- | :--- | | Interest and financing expenses | $7,815 | $10,569 | $(2,754) | | Base management fee | $3,861 | $4,846 | $(985) | | Directors' fees | $493 | $410 | $83 | | Administrative service fees | $620 | $1,039 | $(419) | | General and administrative expenses | $3,300 | $3,483 | $(183) | | Total expenses | $16,089 | $20,347 | $(4,258) | Net realized gains (losses) on sales of investments For 2022, the company recognized $13.8 million in net realized gains, a significant improvement from an $8.0 million net realized loss in 2021 - The change from net realized losses in 2021 to net realized gains in 2022 was primarily due to changes in market conditions[505] Net Realized Gains (Losses) on Investments (in thousands) | Year | Net Realized Gain (Loss) | | :--- | :--- | | 2022 | $13,769 | | 2021 | $(7,967) | Net unrealized appreciation (depreciation) on investments For 2022, the company experienced a net change in unrealized depreciation of $24.6 million, a reversal from $10.7 million in appreciation in 2021 - The net change in unrealized depreciation in 2022 was primarily due to changes in capital market conditions and investment values[507] Net Change in Unrealized Appreciation (Depreciation) on Investments (in thousands) | Year | Net Change in Unrealized (Depreciation) Appreciation | | :--- | :--- | | 2022 | $(24,631) | | 2021 | $10,667 | Changes in net assets resulting from operations For 2022, the company recorded a net decrease in net assets from operations of $12.0 million, or $4.44 per share Net Decrease in Net Assets from Operations | Year | Net Decrease (in thousands) | Per Share | | :--- | :--- | :--- | | 2022 | $(12,024) | $(4.44) | | 2021 | $(1,918) | $(0.71) | For the years ended December 31, 2021 and 2020 The comparison of results for fiscal years 2021 and 2020 is incorporated by reference from the company's 2021 annual report Liquidity and Capital Resources The company utilizes cash for new investments and debt repayment, with key financing from its KeyBank Credit Facility, 2032 Convertible Notes, and 2026 Notes KeyBank Credit Facility The senior secured revolving credit facility provides up to $75.0 million and matures on May 10, 2027 - The KeyBank Credit Facility, amended in May 2022, provides up to $75.0 million and matures on May 10, 2027[511] - Borrowings bear interest at 1M Term SOFR plus 2.90% with a 0.40% 1M Term SOFR floor[511] - As of December 31, 2022, $55.9 million was outstanding under the facility, secured by $111.3 million in pledged assets[511][979] 2032 Convertible Notes On April 1, 2022, the company issued $15.0 million in 5.25% fixed-rate convertible notes due April 1, 2032 - On April 1, 2022, $15.0 million in 5.25% fixed-rate convertible notes due April 1, 2032, were issued[512][514] - Notes are convertible into common stock at the holder's option[513] - The notes have an Investment Grade rating and bear a fixed interest rate of 5.25% per annum, with a 0.75% step-up if downgraded[514] 2026 Notes On October 29, 2021, the company issued $50.0 million in 5.25% fixed-rate notes due October 30, 2026 - On October 29, 2021, $50.0 million in 5.25% fixed-rate notes due October 30, 2026, were issued in a private placement[515] - The 2026 Notes are general unsecured obligations, ranking pari passu with other unsecured unsubordinated debt[515][517] - The company is obligated to file a registration statement for an exchange offer of the 2026 Notes[518] 2022 Notes The $75.0 million aggregate principal amount of 6.0% fixed-rate notes were fully repaid upon maturity on May 31, 2022 - The $75.0 million aggregate principal amount of 6.0% fixed-rate 2022 Notes matured and were fully repaid on May 31, 2022[519] - A $50.0 million portion of the 2022 Notes was redeemed earlier on December 6, 2021[519] - As of December 31, 2022, there were no 2022 Notes outstanding[519] 2022 Convertible Notes The $52.1 million aggregate principal amount of 5.75% fixed-rate convertible notes were fully repaid upon maturity on May 31, 2022 - The $52.1 million aggregate principal amount of 5.75% fixed-rate convertible notes matured and were fully repaid on May 31, 2022[521] - These notes were convertible into common stock at the holder's option[521][522][966] - As of December 31, 2022, there were no 2022 Convertible Notes outstanding[521] Asset Coverage Ratio As a BDC, the company must maintain an asset coverage ratio of at least 150% for senior securities - The company must maintain an asset coverage ratio of at least 150% for senior securities, a requirement effective November 1, 2019[523] - As of December 31, 2022, the company's asset coverage ratio was 177%[523] Contractual Obligations As of December 31, 2022, the company's significant contractual obligations totaled $120.9 million - The Investment Advisory Agreement and Administration Agreement represent material future commitments, both terminable with 60 days' written notice[525][526] Contractual Obligations Payments Due by Period (as of December 31, 2022, in millions) | Obligation | Less Than 1 Year | 1 – 3 Years | 3 – 5 Years | More Than 5 Years | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | 2026 Notes | $— | $— | $50.0 | $— | $50.0 | | 2032 Convertible Notes | $— | $— | $— | $15.0 | $15.0 | | KeyBank Credit Facility | $— | $— | $55.9 | $— | $55.9 | | Total Contractual Obligations | $— | $— | $105.9 | $15.0 | $120.9 | Senior Securities This section provides historical data on the company's senior securities, including amounts outstanding and asset coverage per unit - Asset coverage per unit is the ratio of total consolidated assets to aggregate senior securities, expressed per $1,000 of indebtedness[530] Senior Securities Information (as of December 31, in thousands) | Class and Year | Total Amount Outstanding | Asset Coverage Per Unit (per $1,000) | | :--- | :--- | :--- | | KeyBank Credit Facility | | | | 2022 | $55,937 | $1,771 | | 2021 | $0 | $1,849 | | 2032 Convertible Notes | | | | 2022 | $15,000 | $1,771 | | 2026 Notes | | | | 2022 | $50,000 | $1,771 | | 2021 | $50,000 | $1,849 | | 2022 Notes | | | | 2021 | $22,833 | $1,849 | | 2020 | $72,833 | $1,900 | | 2022 Convertible Notes | | | | 2021 | $52,088 | $1,849 | | 2020 | $52,088 | $1,900 | | SBA-guaranteed debentures | | | | 2020 | $91,000 | N/A | | 2019 | $150,000 | N/A | | 2018 | $165,700 | N/A | Distributions To maintain RIC status, the company must distribute at least 90% of its ordinary income and net short-term capital gains annually - To qualify as a RIC, the company must distribute at least 90% of its ordinary income and net short-term capital gains annually[531] - No distributions were declared by the Board for the years ended December 31, 2022 and 2021[532] - The company has an 'opt out' dividend reinvestment plan (DRIP)[535] Related Parties The company is externally managed by Mount Logan Management LLC, an affiliate of BC Partners, under an Investment Advisory Agreement - The company is externally managed by Mount Logan Management LLC, an affiliate of BC Partners[536] - BC Partners Management LLC provides administrative services, for which the company reimburses allocable overhead and personnel costs[538][539] - An SEC exemptive order allows co-investment with affiliated funds, subject to independent director approval[540] Off-Balance Sheet Arrangements As of December 31, 2022, the company had total unfunded commitments of $13.8 million to existing portfolio companies - Unfunded commitments primarily consist of delayed-draw term loans and revolving credit facilities[542] - The company has no other material off-balance sheet arrangements[542] Total Unfunded Commitments to Portfolio Companies (in thousands) | Year | Total Unfunded Commitments | | :--- | :--- | | December 31, 2022 | $13,787 | | December 31, 2021 | $25,138 | Recent Developments In March 2023, the Board authorized a new share repurchase program and approved a distribution of $0.18 per