Logan Ridge Finance (LRFC) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Consolidated Financial Statements This section presents the unaudited consolidated financial statements for Logan Ridge Finance Corporation as of March 31, 2023, and for the three months then ended. It includes the balance sheet, income statement, changes in net assets, cash flows, and a detailed schedule of investments, along with accompanying notes that provide context and detail on accounting policies and financial items Consolidated Statements of Assets and Liabilities As of March 31, 2023, total assets were $216.5 million and total liabilities were $122.6 million, resulting in total net assets of $93.8 million. This represents a slight decrease in net assets from $95.0 million at year-end 2022. The net asset value (NAV) per share decreased to $34.63 from $35.04 over the same period Consolidated Statements of Assets and Liabilities (in thousands) | | As of March 31, 2023 | As of December 31, 2022 | | :--- | :--- | :--- | | Total investments at fair value | $203,337 | $203,592 | | Total assets | $216,469 | $214,710 | | Total liabilities | $122,636 | $119,705 | | Total net assets | $93,833 | $95,005 | | Net asset value per share | $34.63 | $35.04 | Consolidated Statements of Operations For the three months ended March 31, 2023, the company generated total investment income of $5.3 million and incurred total expenses of $4.2 million, resulting in a net investment income of $1.1 million. This is a significant improvement from the same period in 2022, which saw a net investment loss of $1.1 million. After accounting for net realized and unrealized losses, the net decrease in net assets from operations was $0.7 million, or ($0.24) per share Comparison of Operations for the Three Months Ended March 31 (in thousands) | | 2023 | 2022 | | :--- | :--- | :--- | | Total investment income | $5,256 | $3,337 | | Total expenses | $4,183 | $4,388 | | Net investment income (loss) | $1,073 | $(1,051) | | Total net realized and unrealized loss/gain | $(1,723) | $193 | | Net decrease in net assets from operations | $(650) | $(858) | | Net decrease in net assets per share | $(0.24) | $(0.32) | Consolidated Statements of Changes in Net Assets Net assets decreased from $95.0 million at the beginning of the period to $93.8 million as of March 31, 2023. The decrease was primarily driven by a net decrease from operations of $0.7 million and distributions of $0.5 million, partially offset by accretive effects of stock repurchases and issuances under the dividend reinvestment plan Changes in Net Assets for the Three Months Ended March 31, 2023 (in thousands) | Description | Amount | | :--- | :--- | | Balance, December 31, 2022 | $95,005 | | Net investment income | $1,073 | | Net realized loss on investments | $(1,506) | | Net change in unrealized depreciation | $(217) | | Repurchase of common stock | $(34) | | Stock issued under dividend reinvestment plan | $3 | | Distributions declared | $(491) | | Balance, March 31, 2023 | $93,833 | Consolidated Statements of Cash Flows For the first quarter of 2023, net cash provided by operating activities was $0.6 million, a significant turnaround from the $23.2 million used in the prior-year period. Net cash provided by financing activities was $1.9 million, primarily from net borrowings under the KeyBank Credit Facility. This resulted in a net increase in cash and cash equivalents of $2.6 million, ending the period with a balance of $9.3 million Cash Flow Summary for the Three Months Ended March 31 (in thousands) | | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $634 | $(23,151) | | Net cash provided by (used in) financing activities | $1,920 | $(67) | | Net increase (decrease) in cash | $2,554 | $(23,218) | | Cash and cash equivalents, end of period | $9,347 | $15,838 | Consolidated Schedules of Investments As of March 31, 2023, the company held investments in 59 portfolio companies with a total fair value of $203.3 million. The portfolio is primarily composed of debt investments, with first lien/senior secured debt representing 67.7% of the portfolio's fair value. The largest industry concentrations are in Healthcare, Financials, and Business Services - As of March 31, 2023, the investment portfolio had a fair value of approximately $203.3 million across 59 portfolio companies, compared to $203.6 million at year-end 2022[101] Investment Composition by Type at Fair Value (in thousands) | Investment Type | March 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | First Lien Debt | $137,563 (67.7%) | $136,896 (67.3%) | | Second Lien Debt | $6,775 (3.3%) | $6,464 (3.2%) | | Subordinated Debt | $24,696 (12.1%) | $25,851 (12.7%) | | Collateralized Loan Obligations | $4,207 (2.1%) | $4,972 (2.4%) | | Joint Venture | $456 (0.2%) | $403 (0.2%) | | Equity | $29,640 (14.6%) | $29,006 (14.2%) | | Total | $203,337 (100.0%) | $203,592 (100.0%) | Notes to Consolidated Financial Statements The notes provide detailed explanations of the company's organization, significant accounting policies, and specific financial statement items. Key areas covered include the company's status as a BDC and RIC, the valuation process for its Level 3 investments, details on its various debt obligations (including the KeyBank Credit Facility, 2026 Notes, and 2032 Convertible Notes), related party transactions with its Investment Adviser, and information on its share repurchase program and dividend policy - The company is an externally managed BDC and has elected to be treated as a RIC for tax purposes. It is managed by Mount Logan Management LLC following a transaction that closed on July 1, 2021[32][38] - As of March 31, 2023, the company had debt investments in two portfolio companies on non-accrual status, with an aggregate fair value of $10.0 million, representing 4.9% of the investment portfolio[70] - On March 6, 2023, the Board authorized a new share repurchase program for up to $5.0 million of its common stock, terminating on March 31, 2024. During Q1 2023, 1,625 shares were repurchased for approximately $34 thousand[172][173] Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations for the first quarter of 2023. It covers the company's business overview, portfolio activity, a detailed analysis of operating results compared to the prior year, and a discussion of liquidity, capital resources, and contractual obligations. Management highlights the increase in investment income and the shift to net investment income from a loss in the prior year Portfolio and Investment Activity In Q1 2023, the company made $7.4 million in new investments and received $6.7 million from repayments and sales, for a net deployment of $0.7 million. The portfolio's fair value was $203.3 million across 59 companies. The weighted average annualized yield on the debt portfolio increased to 10.7% from 10.4% at year-end 2022. The number of investments on non-accrual status increased from one to two portfolio companies - Net investment deployment was approximately $0.7 million for Q1 2023, compared to $8.0 million in Q1 2022[248] - The weighted average annualized yield on the debt portfolio increased to 10.7% as of March 31, 2023, up from 10.4% as of December 31, 2022[249] - Investments on non-accrual status increased to two portfolio companies, representing 4.9% of the portfolio's fair value, up from one company representing 4.8% at year-end[252] Results of Operations For Q1 2023, the company reported a net investment income of $1.1 million, a significant improvement from a net investment loss of $1.1 million in Q1 2022. This was driven by a 57.5% increase in total investment income, primarily from higher interest income due to a larger interest-earning portfolio and rising base rates. Total operating expenses decreased by 4.7%, mainly due to lower interest and financing expenses and reduced general and administrative costs Operating Results Comparison (in thousands) | | For the Three Months Ended March 31, | | :--- | :--- | | | 2023 | 2022 | | Total investment income | $5,256 | $3,337 | | Total expenses | $4,183 | $4,388 | | Net investment income (loss) | $1,073 | $(1,051) | - Total investment income increased by $1.9 million (57.5%) YoY, primarily due to higher interest income from a larger debt portfolio and rising base rates[259] - Total operating expenses decreased by $0.2 million (4.7%) YoY, driven by lower interest expenses, lower base management fees, and reduced G&A expenses[260] Financial Condition, Liquidity and Capital Resources As of March 31, 2023, the company had $9.3 million in cash and cash equivalents. Total debt outstanding was $123.4 million, consisting of the KeyBank Credit Facility ($58.4 million), 2026 Notes ($50.0 million), and 2032 Convertible Notes ($15.0 million). The asset coverage ratio was 175%, well above the 150% regulatory requirement. Unfunded commitments to portfolio companies totaled $10.1 million - The company had $9.3 million in cash and cash equivalents as of March 31, 2023[280] Contractual Obligations as of March 31, 2023 (in millions) | Obligation | Total | | :--- | :--- | | 2026 Notes | $50.0 | | 2032 Convertible Notes | $15.0 | | KeyBank Credit Facility | $58.4 | | Total | $123.4 | - The asset coverage ratio was 175% as of March 31, 2023, exceeding the regulatory minimum of 150%[279] - Total unfunded commitments to portfolio companies decreased to $10.1 million from $13.8 million at year-end 2022[296] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, affecting both its variable-rate investments and borrowings. As of March 31, 2023, 83.4% of the fair value of its debt investments were variable-rate, while its variable-rate liabilities consisted of $58.4 million outstanding on the KeyBank Credit Facility. A sensitivity analysis shows that a 100 basis point increase in rates would increase annual net income by approximately $0.9 million - Approximately 83.4% of the fair value of the company's total debt investments bear a variable rate of interest[301] Interest Rate Sensitivity Analysis (Annual Impact on Net Income, in thousands) | Basis Point Change | Increase (decrease) in net income | | :--- | :--- | | Up 300 basis points | $2,717 | | Up 200 basis points | $1,811 | | Up 100 basis points | $906 | | Down 100 basis points | $(906) | | Down 200 basis points | $(1,793) | | Down 300 basis points | $(2,596) | Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of March 31, 2023. No material changes to the company's internal control over financial reporting were identified during the quarter - Management concluded that disclosure controls and procedures were effective as of March 31, 2023[305] - No material changes in internal control over financial reporting occurred during the first quarter of 2023[306] PART II. OTHER INFORMATION Legal Proceedings The company reports that it and its subsidiaries are not currently subject to any material legal proceedings, nor are any known to be threatened against them - The company is not currently subject to any material legal proceedings[307] Risk Factors This section confirms there have been no material changes from the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 - There have been no material changes from the risk factors set forth in the Annual Report on Form 10-K[308] Unregistered Sales of Equity Securities and Use of Proceeds During the first quarter of 2023, the company issued 140 shares of common stock under its dividend reinvestment plan (DRIP). Additionally, under its authorized share repurchase program, the company repurchased 1,625 shares in March 2023 - A total of 140 shares of common stock were issued under the DRIP during the three months ended March 31, 2023[309] Share Repurchases - Q1 2023 | Period | Total Shares Purchased | Average Price per Share | | :--- | :--- | :--- | | Jan 2023 | — | N/A | | Feb 2023 | — | N/A | | Mar 2023 | 1,625 | $20.90 | | Total | 1,625 | | - A new share repurchase program was authorized on March 6, 2023, for up to $5.0 million of outstanding common shares, set to terminate on March 31, 2024[312] Defaults Upon Senior Securities The company reports that there were no defaults upon its senior securities during the period - None[313] Other Information The company reports that there is no other information to disclose for the period - None[315] Exhibits This section lists the exhibits filed as part of the quarterly report, including CEO and CFO certifications required under the Sarbanes-Oxley Act and Inline XBRL data files - Exhibits filed include CEO and CFO certifications pursuant to Rule 13a-14 and Section 906 of the Sarbanes-Oxley Act of 2002[317]