CION Investment Corp 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations As used in this Quarterly Report on Form 10-Q, “we,” “us,” “our” or similar terms include CĪON Investment Corporation and its consolidated subsidiaries. In addition, the term "portfolio companies" refers to companies in which we have invested, either directly or indirectly through our consolidated subsidiaries. The following discussion should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2020. In addition to historical information, the following discussion and other parts of this Quarterly Report on Form 10-Q contain forward-looking information that involves risks and uncertainties. Amounts and percentages presented herein may have been rounded for presentation and all dollar amounts, excluding share and per share amounts, are presented in thousands unless otherwise noted. In addition, all share and per share amounts have been retroactively adjusted to reflect the Reverse Stock Split discussed below and in Note 3 to our consolidated financial statements included in this report. Forward-Looking Statements Some of the statements within this Quarterly Report on Form 10-Q constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this Quarterly Report on Form 10-Q may include statements as to: • our future operating results; • our business prospects and the prospects of our portfolio companies, including our and their ability to achieve our respective objectives as a result of COVID-19; • the impact of the investments that we expect to make; • the ability of our portfolio companies to achieve their objectives; • our current and expected financings and investments; • the adequacy of our cash resources, financing sources and working capital; • the use of borrowed money to finance a portion of our investments; • the timing of cash flows, if any, from the operations of our portfolio companies; • our contractual arrangements and relationships with third parties; • the actual and potential conflicts of interest with CIM and Apollo and their respective affiliates; • the ability of CIM's and AIM's investment professionals to locate suitable investments for us and the ability of CIM to monitor and administer our investments; • the ability of CIM and its affiliates to attract and retain highly talented professionals; • the dependence of our future success on the general economy and its impact on the industries in which we invest, including COVID-19 and the related economic disruptions caused thereby; • the effects of a changing interest rate environment; • our ability to source favorable private investments; • our tax status; • the effect of changes to tax legislation and our tax position; • the tax status of the companies in which we invest; and • the timing and amount of distributions and dividends from the companies in which we invest. In addition, words such as “anticipate,” “believe,” “expect” and “intend” indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this Quarterly Report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q. Other factors that could cause actual results to differ materially include: • changes in the economy; • risks associated with possible disruption in our operations or the economy generally due to terrorism, pandemics, or natural disasters; 61 • future changes in laws or regulations and conditions in our operating areas; and • the price at which shares of our common stock may trade on the NYSE. We have based the forward-looking statements on information available to us on the date of this Quarterly Report on Form 10-Q. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised to review any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements contained in this Quarterly Report on Form 10-Q are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Overview We were incorporated under the general corporation laws of the State of Maryland on August 9, 2011 and commenced operations on December 17, 2012 upon raising proceeds of $2,500 from persons not affiliated with us, CIM or Apollo. We are an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act. We elected to be treated for federal income tax purposes as a RIC, as defined under Subchapter M of the Code. Our investment objective is to generate current income and, to a lesser extent, capital appreciation for investors. Our portfolio is comprised primarily of investments in senior secured debt, including first lien loans, second lien loans and unitranche loans, and, to a lesser extent, collateralized securities, structured products and other similar securities, unsecured debt, and equity, of private and thinly traded U.S. middle-market companies. In connection with our debt investments, we may receive equity interests such as warrants or options as additional consideration. We may also purchase equity interests in the form of common or preferred stock in our target companies, either in conjunction with one of our debt investments or through a co-investment with a financial sponsor. On October 5, 2021, shares of our common stock began trading on the NYSE under the ticker symbol “CION”. The Listing accomplished our goal of providing our shareholders with greatly enhanced liquidity. We are managed by CIM, our affiliate and a registered investment adviser. Pursuant to an investment advisory agreement with us, CIM oversees the management of our activities and is responsible for making investment decisions for our portfolio. On November 13, 2020, our board of directors, including a majority of directors who are not interested persons, approved the renewal of the investment advisory agreement with CIM for a period of twelve months commencing December 17, 2020. On April 5, 2021, our board of directors, including a majority of directors who are not interested persons, approved the amended and restated investment advisory agreement with CIM for a period of twenty four months, which was subsequently approved by shareholders on August 9, 2021 (as described in further detail below). We and CIM previously engaged AIM to act as our investment sub-adviser. On July 11, 2017, the members of CIM entered into the Third Amended CIM LLC Agreement for the purpose of creating a joint venture between AIM and CIG, our affiliate. Under the Third Amended CIM LLC Agreement, AIM became a member of CIM and was issued a newly-created class of membership interests in CIM pursuant to which AIM, among other things, shares in the profits, losses, distributions and expenses of CIM with the other members in accordance with the terms of the Third Amended CIM LLC Agreement, which results in CIG and AIM each owning a 50% economic interest in CIM. On July 10, 2017, our independent directors unanimously approved the termination of the investment sub-advisory agreement with AIM, effective as of July 11, 2017, as part of the new and ongoing relationship among us, CIM and AIM. Although the investment sub-advisory agreement and AIM's engagement as our investment sub-adviser were terminated, AIM's investment professionals continue to perform certain services for CIM and us, including, without limitation, assistance with identifying investment opportunities for approval by CIM's investment committee. AIM is not paid a separate fee in exchange for such services, but is entitled to receive distributions as a member of CIM as described above. On December 4, 2017, the members of CIM entered into the Fourth Amended CIM LLC Agreement. Under the Fourth Amended CIM LLC Agreement, AIM's investment professionals perform certain services for CIM, which include, among other services, (i) assistance with identifying and providing information about potential investment opportunities for approval by CIM’s investment committee; and (ii) providing (a) trade and settlement support; (b) portfolio and cash reconciliation; (c) market pipeline information regarding syndicated deals, in each case, as reasonably requested by CIM; and (d) monthly valuation reports and support for all broker-quoted investments. All of our investment decisions are the sole responsibility of, and are made at the sole discretion of, CIM's investment committee, which consists entirely of CIG senior personnel. The amended and restated investment advisory agreement was approved by shareholders on August 9, 2021 at our reconvened 2021 annual meeting of shareholders. As a result, on August 10, 2021, we and CIM entered into the amended and restated investment advisory agreement in order to implement the change to the calculation of the subordinated incentive fee payable from us to CIM that expresses the hurdle rate required for CIM to earn, and be paid, the incentive fee as a percentage of our net assets rather than adjusted capital. 62 Upon the occurrence of the Listing on October 5, 2021, we and CIM entered into the second amended and restated investment advisory agreement in order to implement the changes to the advisory fees payable from us to CIM that (i) reduced the annual base management fee, (ii) amended the structure of the subordinated incentive fee on income payable from us to CIM and reduced the hurdle and incentive fee rates, and (iii) reduced the incentive fee on capital gains payable from us to CIM (as described in further detail in Notes 2 and 4 to our consolidated financial statements included in this report). Also, a complete description of the second amended and restated investment advisory agreement is set forth in Proposal No. 3 in our definitive proxy statement filed on May 13, 2021. On September 21, 2021, we effected a 2 to 1 reverse split of our shares of common stock under which every two shares of our common stock issued and outstanding were automatically combined into one share of our common stock, with the number of issued and outstanding shares reduced from 113,916,869 to 56,958,440. The Reverse Stock Split Amendment also provided that there was no change in the par value of $0.001 per share as a result of the Reverse Stock Split. The Reverse Stock Split did not modify the rights or preferences of our common stock. We seek to meet our investment objective by utilizing the experienced management team of CIM, which includes its access to the relationships and human capital of its affiliates in sourcing, evaluating and structuring transactions, as well as monitoring and servicing our investments. We focus primarily on the senior secured debt of private and thinly-traded U.S. middle-market companies, which we define as companies that generally possess annual EBITDA of $75 million or less, with experienced management teams, significant free cash flow, strong competitive positions and potential for growth. Revenue We primarily generate revenue in the form of interest income on the debt securities that we hold and capital gains on debt or other equity interests that we acquire in portfolio companies. The majority of our senior debt investments bear interest at a floating rate. Interest on debt securities is generally payable quarterly or monthly. In some cases, some of our investments may provide for deferred interest payments or PIK interest. The principal amount of the debt securities and any accrued, but unpaid, interest generally will become due at the maturity date. In addition, we may generate revenue in the form of commitment and capital structuring fees, monitoring fees, fees for providing managerial assistance and possibly consulting fees and performance-based fees. Any such fees generated in connection with our investments will be recognized when earned. Operating Expenses Our primary operating expenses are the payment of advisory fees under the investment advisory agreement and interest expense on our financing arrangements. Our investment advisory fees compensate CIM for its work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments. We bear all other expenses of our operations and transactions. Recent Developments COVID-19 The rapid spread of COVID-19, and associated impacts on the U.S. and global economies and the financial and credit markets, initially had negatively impacted, and may again negatively impact, our business operations and the business operations of some of our portfolio companies. We cannot at this time fully predict the impact of COVID-19 on our business or the business of our portfolio companies, its duration or magnitude or the extent to which it will negatively impact our portfolio companies’ operating results or our own results of operations or financial condition, including, without limitation, our ability to pay distributions to our shareholders. We expect that certain of our portfolio companies will continue to experience economic distress for the foreseeable future and may significantly limit business operations if subjected to prolonged economic distress. These developments could result in a decrease in the value of certain of our investments. COVID-19 initially had adverse effects on our investment income and may again have adverse effects in the future. These adverse effects may require us to restructure certain of our investments, which could result in further reductions to our investment income or in impairments on our investments. In addition, disruptions in the capital markets have resulted in illiquidity in certain market areas. These market disruptions and illiquidity initially had an adverse effect on our business, financial condition, results of operations and cash flows. Unfavorable economic conditions caused by COVID-19 can also be expected to increase our funding costs and limit our access to the capital markets. These events initially limited our investment originations, which may occur again in the future, and may also have a material negative impact on our operating results. We will continue to carefully monitor the impact of COVID-19 on our business and the business of our portfolio companies. Because the full effects of COVID-19 are not capable of being known at this time, we cannot estimate the impacts of COVID-19 on our future financial condition, results of operations or cash flows, including its effects on us with respect to our compliance with covenants in our financing arrangements with lenders. We do, however, expect that it will continue to have a negative impact on our business and the financial condition of certain of our portfolio companies. 63 Portfolio Investment Activity for the Three Months Ended September 30, 2021 and 2020 and the Year Ended December 31, 2020 The following table summarizes our investment activity, excluding short term investments and PIK securities, for the three months ended September 30, 2021 and 2020 and the year ended December 31, 2020: Three Months Ended September 30, Year Ended December 31, Net Investment Activity 2021 2020 2020 Purchases and drawdowns Senior secured first lien debt $ 160,124 $ 32,048 $ 347,992 Senior secured second lien debt — — 4,375 Equity 4,909 4,082 7,266 Sales and principal repayments (223,214) (77,154) (543,167) Net portfolio activity $ (58,181) $ (41,024) $ (183,534) The following tables summarize the composition of our investment portfolio at amortized cost and fair value as of September 30, 2021 and December 31, 2020: September 30, 2021 Investments Cost(1) Investments Fair Value Percentage of Investment Portfolio Senior secured first lien debt $ 1,454,253 $ 1,428,556 87.6 % Senior secured second lien debt 118,881 99,499 6.1 % Collateralized securities and structured products - equity 13,278 13,012 0.8 % Unsecured debt 5,679 5,551 0.3 % Equity 89,409 83,846 5.2 % Subtotal/total percentage 1,681,500 1,630,464 100.0 % Short term investments(2) 115,834 115,834 Total investments $ 1,797,334 $ 1,746,298 Number of portfolio companies 126 Average annual EBITDA of portfolio companies $57.8 million Median annual EBITDA of portfolio companies $43.1 million Purchased at a weighted average price of par 97.58 % Gross annual portfolio yield based upon the purchase price(3) 8.31 % (1) Represents amortized cost for debt investments and cost for equity investments. Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on our investments. (2) Short term investments represent an investment in a fund that invests in highly liquid investments with average original maturity dates of three months or less. (3) The gross annual portfolio yield does not represent and may be higher than an actual investment return to shareholders because it excludes our expenses and all sales commissions and dealer manager fees and does not consider the cost of leverage. 64 December 31, 2020 Investments Cost(1) Investments Fair Value Percentage of Investment Portfolio Senior secured first lien debt $ 1,266,564 $ 1,223,268 81.8 % Senior secured second lien debt 171,480 151,506 10.1 % Collateralized securities and structured products - equity 15,305 12,131 0.8 % Unsecured debt 5,668 5,464 0.4 % Equity 118,638 103,405 6.9 % Subtotal/total percentage 1,577,655 1,495,774 100.0 % Short term investments(2) 73,597 73,597 Total investments $ 1,651,252 $ 1,569,371 Number of portfolio companies 119 Average annual EBITDA of portfolio companies $67.3 million Median annual EBITDA of portfolio companies $53.2 million Purchased at a weighted average price of par 98.18 % Gross annual portfolio yield based upon the purchase price(3) 8.28 % (1) Represents amortized cost for debt investments and cost for equity investments. Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on our investments. (2) Short term investments represent an investment in a fund that invests in highly liquid investments with average original maturity dates of three months or less. (3) The gross annual portfolio yield does not represent and may be higher than an actual investment return to shareholders because it excludes our expenses and all sales commissions and dealer manager fees and does not consider the cost of leverage. The following table summarizes the composition of our investment portfolio by the type of interest rate as of September 30, 2021 and December 31, 2020, excluding short term investments of $115,834 and $73,597, respectively: September 30, 2021 December 31, 2020 Interest Rate Allocation Investments Cost Investments Fair Value Percentage of Investment Portfolio Investments Cost Investments Fair Value Percentage of Investment Portfolio Floating interest rate investments $ 1,479,836 $ 1,438,160 88.2 % $ 1,347,194 $ 1,284,282 85.9 % Fixed interest rate investments 101,290 99,294 6.1 % 126,962 124,816 8.3 % Non-income producing investments 67,216 59,718 3.7 % 66,086 52,505 3.5 % Other income producing investments 33,158 33,292 2.0 % 37,413 34,171 2.3 % Total investments $ 1,681,500 $ 1,630,464 100.0 % $ 1,577,655 $ 1,495,774 100.0 % 65 The following table shows the composition of our investment portfolio by industry classification and the percentage, by fair value, of the total assets in such industries as of September 30, 2021 and December 31, 2020: September 30, 2021 December 31, 2020 Industry Classification Investments at Fair Value Percentage of Investment Portfolio Investments at Fair Value Percentage of Investment Portfolio Services: Business $ 266,853 16.4 % $ 211,572 14.0 % Healthcare & Pharmaceuticals 265,317 16.3 % 298,944 19.9 % Services: Consumer 122,919 7.5 % 85,254 5.7 % Media: Diversified & Production 106,982 6.6 % 108,078 7.2 % Media: Advertising, Printing & Publishing 106,854 6.6 % 110,083 7.4 % Capital Equipment 86,037 5.3 % 65,752 4.4 % Chemicals, Plastics & Rubber 85,232 5.2 % 141,654 9.5 % High Tech Industries 67,449 4.1 % 55,619 3.7 % Banking, Finance, Insurance & Real Estate 53,517 3.3 % 41,211 2.8 % Construction & Building 49,720 3.0 % 34,653 2.3 % Beverage, Food & Tobacco 49,561 3.0 % 69,975 4.7 % Consumer Goods: Durable 46,916 2.9 % 7,417 0.5 % Aerospace & Defense 42,726 2.6 % 35,751 2.4 % Retail 41,800 2.6 % 29,312 2.0 % Consumer Goods: Non-Durable 41,456 2.5 % 15,757 1.1 % Telecommunications 39,602 2.4 % 46,638 3.1 % Hotel, Gaming & Leisure 35,428 2.2 % 21,920 1.5 % Diversified Financials 32,457 2.0 % 37,214 2.5 % Energy: Oil & Gas 28,117 1.7 % 28,136 1.9 % Forest Products & Paper 21,699 1.3 % 21,686 1.4 % Transportation: Cargo 14,344 0.9 % 19,001 1.3 % Automotive 13,965 0.9 % — — Metals & Mining 11,513 0.7 % 10,147 0.7 % Subtotal/total percentage 1,630,464 100.0 % 1,495,774 100.0 % Short term investments 115,834 73,597 Total investments $ 1,746,298 $ 1,569,371 Our investment portfolio may contain senior secured investments that are in the form of lines of credit, delayed draw term loans, revolving credit facilities, or unfunded commitments, which may require us to provide funding when requested in accordance with the terms of the underlying agreements. As of September 30, 2021 and December 31, 2020, our unfunded commitments amounted to $96,846 and $43,130, respectively. As of November 11, 2021, our unfunded commitments amounted to $110,475. Since these commitments may expire without being drawn upon, unfunded commitments do not necessarily represent future cash requirements or future earning assets for us. Refer to the section “Commitments and Contingencies and Off-Balance Sheet Arrangements” for further details on our unfunded commitments. Investment Portfolio Asset Quality CIM uses an investment rating system to characterize and monitor our expected level of returns on each investment in our portfolio. These ratings are just one of several factors that CIM uses to monitor our portfolio, are not in and of themselves determinative of fair value or revenue recognition and are presented for indicative purposes. CIM rates the credit risk of all investments on a scale of 1 to 5 no less frequently than quarterly. This system is intended primarily to reflect the underlying risk of a portfolio investment relative to our initial cost basis in respect of such portfolio investment (i.e., at the time of acquisition), although it may also take into account under certain circumstances the performance of the portfolio company’s business, the collateral coverage of the investment and other relevant factors. 66 The following is a description of the conditions associated with each investment rating used in this ratings system: Investment Rating Description 1 Indicates the least amount of risk to our initial cost basis. The trends and risk factors for this investment since origination or acquisition are generally favorable, which may include the performance of the portfolio company or a potential exit. 2 Indicates a level of risk to our initial cost basis that is similar to the risk to our initial cost basis at the time of origination or acquisition. This portfolio company is generally performing in accordance with our analysis of its business and the full return of principal and interest or dividend is expected. 3 Indicates that the risk to our ability to recoup the cost of such investment has increased since origination or acquisition, but full return of principal and interest or dividend is expected. A portfolio company with an investment rating of 3 requires closer monitoring. 4 Indicates that the risk to our ability to recoup the cost of such investment has increased significantly since origination or acquisition, including as a result of factors such as declining performance and noncompliance with debt covenants, and we expect some loss of interest, dividend or capital appreciation, but still expect an overall positive internal rate of return on the investment. 5 Indicates that the risk to our ability to recoup the cost of such investment has increased materially since origination or acquisition and the portfolio company likely has materially declining performance. Loss of interest or dividend and some loss of principal investment is expected, which would result in an overall negative internal rate of return on the investment. For investments rated 3, 4, or 5, CIM enhances its level of scrutiny over the monitoring of such portfolio company. The following table summarizes the composition of our investment portfolio based on the 1 to 5 investment rating scale at fair value as of September 30, 2021 and December 31, 2020, excluding short term investments of $115,834 and $73,597, respectively: September 30, 2021 December 31, 2020 Investment Rating Investments Fair Value Percentage of Investment Portfolio Investments Fair Value Percentage of Investment Portfolio 1 $ 86,001 5.3 % $ 2,997 0.2 % 2 1,299,419 79.7 % 1,173,191 78.5 % 3 229,567 14.1 % 309,930 20.7 % 4 14,734 0.9 % 9,210 0.6 % 5 743 — 446 — $ 1,630,464 100.0 % $ 1,495,774 100.0 % The amount of the investment portfolio in each rating category may vary substantially from period to period resulting primarily from changes in the composition of such portfolio as a result of new investment, repayment and exit activities. In addition, changes in the rating of investments may be made to reflect our expectation of performance and changes in investment values. 67 Current Investment Portfolio The following table summarizes the composition of our investment portfolio at fair value as of November 11, 2021: Investments Fair Value Percentage of Investment Portfolio Senior secured first lien debt $ 1,438,397 87.6 % Senior secured second lien debt 99,687 6.1 % Collateralized securities and structured products - equity 13,012 0.8 % Unsecured debt 5,551 0.3 % Equity 85,013 5.2 % Subtotal/total percentage 1,641,660 100.0 % Short term investments(2) 100,405 Total investments $ 1,742,065 Number of portfolio companies 126 Average annual EBITDA of portfolio companies $54.3 million Median annual EBITDA of portfolio companies $41.6 million Purchased at a weighted average price of par 97.80 % Gross annual portfolio yield based upon the purchase price(2) 8.25 % (1) Short term investments represent an investment in a fund that invests in highly liquid investments with average original maturity dates of three months or less. (2) The gross annual portfolio yield does not represent and may be higher than an actual investment return to shareholders because it excludes our expenses and all sales commissions and dealer manager fees and does not consider the cost of leverage. Results of Operations for the Three Months Ended September 30, 2021 and 2020 Our results of operations for the three months ended September 30, 2021 and 2020 were as follows: Three Months Ended September 30, 2021 2020 Investment income $ 42,620 $ 38,887 Net operating expenses and income tax expense 23,008 17,467 Net investment income 19,612 21,420 Net realized gain (loss) on investments and foreign currency 19,736 (42,511) Net change in unrealized (depreciation) appreciation on investments (14,240) 52,178 Net increase in net assets from operations $ 25,108 $ 31,087 Investment Income For the three months ended September 30, 2021 and 2020, we generated investment income of $42,620 and $38,887, respectively, consisting primarily of interest income on investments in senior secured debt, and collateralized securities and structured products of 128 and 118 portfolio companies held during each respective period. The increase in investment income was primarily the result of additional dividends received upon the exit of an equity investment during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. 68 Operating Expenses The composition of our operating expenses for the three months ended September 30, 2021 and 2020 was as follows: Three Months Ended September 30, 2021 2020 Management fees $ 8,443 $ 7,780 Administrative services expense 722 593 Subordinated incentive fee on income 2,933 — General and administrative 2,709 1,503 Interest expense 8,175 7,570 Total operating expenses $ 22,982 $ 17,446 The increase in subordinated incentive fee on income was primarily the result of entering into the amended and restated investment advisory agreement, which replaced adjusted capital with our net assets as the denominator of the subordinated incentive fee calculation. The increase in interest expense was primarily the result of higher average borrowings on our financing arrangements during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, which also resulted in an increase in total assets and therefore an increase in management fees during the three months ended September 30, 2021. The composition of our general and administrative expenses for the three months ended September 30, 2021 and 2020 was as follows: Three Months Ended September 30, 2021 2020 Professional fees $ 1,355 $ 198 Transfer agent expense 316 239 Printing and marketing expense 235 241 Accounting and administrative costs 194 224 Valuation expense 191 241 Director fees and expenses 151 105 Insurance expense 135 131 Dues and subscriptions 120 124 Other expenses 12 — Total general and administrative expense $ 2,709 $ 1,503 The increase in general and administrative expenses was primarily the result of higher nonrecurring professional fees incurred during the three months ended September 30, 2021 associated with the Listing. Net Investment Income After Taxes Our net investment income after taxes totaled $19,612 and $21,420 for the three months ended September 30, 2021 and 2020, respectively. The decrease in net investment income after taxes was primarily due to an increase in the subordinated incentive fee on income for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. Net Realized Gain (Loss) on Investments and Foreign Currency Our net realized gain (loss) on investments and foreign currency totaled $19,736 and ($42,511) for the three months ended September 30, 2021 and 2020, respectively. This change was driven primarily by realized gains recognized on the exit of our investment in Conisus Holdings, Inc. during the three months ended September 30, 2021 compared to realized losses on the restructure of certain investments during the three months ended September 30, 2020. Net Change in Unrealized (Depreciation) Appreciation on Investments The net change in unrealized (depreciation) appreciation on our investments totaled ($14,240) and $52,178 for the three months ended September 30, 2021 and 2020, respectively. This change was driven primarily by certain previously unrealized gains being realized and the continued recovery of loan prices during the three months ended September 30, 2021 compared to certain previously unrealized losses being realized during the three months ended September 30, 2020 and the continued recovery of loan prices. 69 Net Increase in Net Assets Resulting from Operations For the three months ended September 30, 2021 and 2020, we recorded a net increase in net assets resulting from operations of $25,108 and $31,087, respectively, as a result of our operating activity for the respective periods. Results of Operations for the Nine Months Ended September 30, 2021 and 2020 Our results of operations for the nine months ended September 30, 2021 and 2020 were as follows: Nine Months Ended September 30, 2021 2020 Investment income $ 116,944 $ 120,443 Net operating expenses and income taxes 61,047 63,446 Net investment income 55,897 56,997 Net realized gain (loss) on investments and foreign currency 16,049 (57,693) Net change in unrealized appreciation (depreciation) on investments 30,845 (57,542) Net increase (decrease) in net assets resulting from operations $ 102,791 $ (58,238) Investment Income For the nine months ended September 30, 2021 and 2020, we generated investment income of $116,944 and $120,443, respectively, consisting primarily of interest income on investments in senior secured debt and collateralized securities and structured products of 135 and 134 portfolio companies held during each respective period. Our average investment portfolio size, excluding our short term investments, decreased $63,095, from $1,626,213 for the nine months ended September 30, 2020 to $1,563,119 for the nine months ended September 30, 2021. Operating Expenses The composition of our operating expenses for the nine months ended September 30, 2021 and 2020 was as follows: Nine Months Ended September 30, 2021 2020 Management fees $ 24,469 $ 24,160 Administrative services expense 2,103 1,793 Subordinated incentive fee on income 2,933 3,308 General and administrative 7,950 4,684 Interest expense 23,551 29,476 Total operating expenses $ 61,006 $ 63,421 The decrease in interest expense during the nine months ended September 30, 2021 was primarily the result of all remaining unamortized debt issuance costs related to the Second Amended Citibank Credit Facility and the Amended MS Credit Facility being expensed upon the repayment of all amounts outstanding on these facilities during the nine months ended September 30, 2020. The decrease in interest expense was also the result of a decrease in LIBOR during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 and lower average borrowings on our financing arrangements during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. 70 The composition of our general and administrative expenses for the nine months ended September 30, 2021 and 2020 was as follows: Nine Months Ended September 30, 2021 2020 Professional fees $ 3,833 $ 1,108 Transfer agent expense 991 894 Valuation expense 712 802 Printing and marketing expense 634 359 Accounting and administrative costs 606 507 Insurance expense 404 354 Director fees and expenses 365 334 Dues and subscriptions 316 273 Other expenses 89 53 Total general and administrative expense $ 7,950 $ 4,684 The increase in general and administrative expenses was primarily the result of higher professional fees incurred during the nine months ended September 30, 2021 associated with the Listing and higher printing and marketing expense incurred during the nine months ended September 30, 2021 associated with shareholder proxy solicitation costs. Net Investment Income After Taxes Our net investment income after taxes totaled $55,897 and $56,997 for the nine months ended September 30, 2021 and 2020, respectively. The decrease in our net investment income after taxes was primarily due to a decrease in investment income during the nine months ended September 30, 2021, which was partially offset by a decrease in operating expenses. Net Realized Gain (Loss) on Investments and Foreign Currency Our net realized gain (loss) on investments and foreign currency totaled $16,049 and ($57,693) for the nine months ended September 30, 2021 and 2020, respectively. This change was driven primarily by realized gains recognized on the exit of our investment in Conisus Holdings, Inc.during the nine months ended September 30, 2021 as compared to realized losses on the restructure of certain investments during the nine months ended September 30, 2020. Net Change in Unrealized Appreciation (Depreciation) on Investments The net change in unrealized appreciation (depreciation) on our investments totaled $30,845 and ($57,542) for the nine months ended September 30, 2021 and 2020, respectively. This change was driven primarily by tightening credit spreads and increased multiples in equity markets during the nine months ended September 30, 2021 that positively impacted the fair value of certain of our investments, as compared to the outbreak and spread of COVID-19 around the world during the nine months ended September 30, 2020, which caused significant uncertainty and volatility in the U.S. and global economies as well as in the financial and credit markets and negatively impacted the fair value of certain of our investments. Net Increase (Decrease) in Net Assets Resulting from Operations For the nine months ended September 30, 2021 and 2020, we recorded a net increase (decrease) in net assets resulting from operations of $102,791 and ($58,238), respectively, as a result of our operating activity for the respective periods. Net Asset Value per Share, Annual Investment Return and Total Return Since Inception Our net asset value per share was $16.52 and $15.50 on September 30, 2021 and December 31, 2020, respectively (adjusted for the Reverse Stock Split). After considering (i) the overall changes in net asset value per share, (ii) paid distributions of approximately $0.7944 per share during the nine months ended September 30, 2021, and (iii) the assumed reinvestment of those distributions in accordance with our distribution reinvestment plan then in effect, the total investment return-net asset value was 11.98% for the nine month period ended September 30, 2021. Total investment return-net asset value does not represent and may be higher than an actual return to shareholders because it excludes all sales commissions and dealer manager fees. Total investment return-net asset value is a measure of the change in total value for shareholders who held our common stock at the beginning and end of the period, including distributions paid or payable during the period, and is described further in Note 13 to our consolidated financial statements included in this report. 71 Initial shareholders who subscribed to the offering in December 2012 with an initial investment of $10,000 and an initial purchase price equal to $18.00 per share (public offering price excluding sales load and adjusted for the Reverse Stock Split) have seen an annualized return of 7.01% and a cumulative total return of 81.40% through September 30, 2021 (see chart below). Initial shareholders who subscribed to the offering in December 2012 with an initial investment of $10,000 and an initial purchase price equal to $20.00 per share (the initial public offering price including sales load and adjusted for the Reverse Stock Split) have seen an annualized return of 5.73% and a cumulative total return of 63.26% through September 30, 2021. Over the same time period, the S&P/LSTA Leveraged Loan Index, a primary measure of senior debt covering the U.S. leveraged loan market, which currently consists of approximately 1,000 credit facilities throughout numerous industries, recorded an annualized return of 4.26% and a cumulative total return of 44.30%. In addition, the BofA Merrill Lynch US High Yield Index, a primary measure of short-term US dollar denominated below investment grade corporate debt publicly issued in the US domestic market, recorded an annualized return of 5.86% and a cumulative total return of 65.03% over the same period. (1) Cumulative performance: December 17, 2012 to September 30, 2021 The calculations for the Growth of $10,000 Initial Investment are based upon (i) an initial investment of $10,000 in our common stock at the beginning of the period, at a share price of $20.00 per share (including sales load and adjusted for the Reverse Stock Split) and $18.00 per share (excluding sales load and adjusted for the Reverse Stock Split), (ii) assumes reinvestment of monthly distributions in accordance with our distribution reinvestment plan then in effect, (iii) the sale of the entire investment position at the net asset value per share on the last day of the period, and (iv) the distributions declared and payable to shareholders, if any, on the last day of the period. Financial Condition, Liquidity and Capital Resources We generate cash primarily from cash flows from interest, fees and dividends earned from our investments as well as principal repayments and proceeds from sales of our investments. We also employ leverage to seek to enhance our returns as market conditions permit and at the discretion of CIM. On March 23, 2018, an amendment to Section 61(a) of the 1940 Act was signed into law to permit BDCs to reduce the minimum “asset coverage” ratio from 200% to 150% and, as a result, to potentially increase the ratio of a BDC’s debt to equity from a maximum of 1-to-1 to a maximum of 2-to-1, so long as certain approval and disclosure requirements are satisfied. We are seeking the approval of our shareholders to reduce our minimum “asset coverage” ratio from 200% to 150% in accordance with the 1940 Act. 72 The outbreak and spread of COVID-19 have caused severe stress and uncertainty in the U.S. and global economies as well as in the financial and credit markets. Given the uncertainty as to the full severity and duration of the pandemic and its effects on us with respect to our compliance with covenants in our loan facilities with lenders and our borrowers’ ability to timely meet their financial obligations to us, management and our board of directors determined that it was in the best interest of our company and all of our shareholders to take certain steps disclosed below during the three months ended March 31, 2020 that were necessary to improve our cash position and preserve financial flexibility in the short term. This “Financial Condition, Liquidity and Capital Resources” discussion should also be read in conjunction with “Recent Developments - COVID-19” above. On March 19, 2020, our co-chief executive officers determined to (i) change the timing of declaring distributions to shareholders from quarterly to monthly; and (ii) temporarily suspend the payment of distributions to shareholders commencing with the month ended April 30, 2020, whether in cash or pursuant to our distribution reinvestment plan, as amended and restated. On July 15, 2020, our board of directors determined to recommence the payment of distributions to shareholders in August 2020. On July 30, 2021, our board of directors, including the independent directors, determined to suspend our share repurchase program commencing with the third quarter of 2021 in anticipation of the potential Listing. The share repurchase program terminated upon the Listing on October 5, 2021. On August 9, 2021, our shareholders approved a proposal that authorizes us to issue shares of our common stock at prices below the then current NAV per share of our common stock in one or more offerings for a 12-month period following such shareholder approval. On September 15, 2021, our co-chief executive officers changed the timing of declaring and paying regular distributions to shareholders from monthly to quarterly commencing with the fourth quarter of 2021. On September 15, 2021, our co-chief executive officers declared a regular quarterly cash distribution of $0.1324 per share for the fourth quarter of 2021 and declared a special cash distribution expected to be in the range of $0.07 to $0.10 per share for the year ending December 31, 2021. As adjusted to give effect to the Reverse Stock Split, the regular cash distribution of $0.1324 per share will be paid at a per share distribution amount of $0.2648 and the special cash distribution expected to be in the range of $0.07 to $0.10 per share will be paid at a per share distribution amount expected to be in the range of $0.14 to $0.20. The regular quarterly cash distribution will be paid on December 8, 2021 to shareholders of record as of December 1, 2021. The special cash distribution will be paid on December 23, 2021 to shareholders of record as of December 16, 2021. On November 12, 2021, our co-chief executive officers declared a regular quarterly cash distribution of $0.28 per share for the first quarter of 2022 payable on March 30, 2022 to shareholders of record as of March 23, 2022. We intend to make distributions in an amount sufficient to maintain RIC status each year and to avoid any federal income taxes on income. Therefore, subject to applicable legal restrictions and the sole discretion of our board of directors, we intend to authorize, declare, and pay regular cash distributions on a quarterly basis. Regular and special distributions in respect of future periods will be evaluated by management and our board of directors based on circumstances and expectations existing at the time of consideration. For an additional discussion of our RIC status and distributions, refer to Note 2 and Note 5, respectively, of our consolidated financial statements included in this report. On September 15, 2021, our board of directors, including the independent directors, approved a share repurchase policy authorizing us to repurchase up to $50 million of our outstanding common stock after the Listing. Under the share repurchase policy, we may purchase shares of our common stock through various means such as open market transactions, including block purchases, and privately negotiated transactions. The number of shares repurchased and the timing, manner, price and amount of any repurchases will be determined at our discretion. Factors are expected to include, but are not limited to, share price, trading volume and general market conditions, along with our general business conditions. The policy may be suspended or discontinued at any time and does not obligate us to acquire any specific number of shares of our common stock. As part of the share repurchase policy, we intend to enter into a trading plan in the near future adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, based in part on historical trading data with respect to our shares. The 10b5-1 trading plan would permit common stock to be repurchased at a time that we might otherwise be precluded from doing so under insider trading laws or self-imposed trading restrictions. The 10b5-1 trading plan will be administered by an independent broker and will be subject to price, market volume and timing restrictions. Since we have not yet entered into a 10b5-1 trading plan, during the period from September 15, 2021 to November 11, 2021, we did not repurchase any shares of common stock pursuant to the share repurchase policy. As further described in Note 1 and Note 4 to our consolidated financial statements included in this report, the recent second amended and restated investment advisory agreement (i) reduced the annual base management fees payable by us to CIM and (ii) amended the way the subordinated incentive fee on income and the capital gains incentive fee is payable by us to CIM by reducing the hurdle and incentive fee rates and expressing the hurdle rate as a percentage of our net assets rather than our adjusted capital. These changes were effective upon the Listing on October 5, 2021, except for the change to the calculation of the subordinated incentive fee payable to CIM that expresses the hurdle rate required for CIM to earn, and be paid, the incentive fee as a percentage of our net assets rather than adjusted capital, which was effective on August 10, 2021. These changes, in the aggregate, may lead to the payment of higher advisory fees to CIM depending upon our performance. As of September 30, 2021 and November 11, 2021, we had $115,834 and $100,405 in short term investments, respectively, invested in a fund that primarily invests in U.S. government securities. 73 JPM Credit Facility As of September 30, 2021 and November 11, 2021, our outstanding borrowings under the Third Amended JPM Credit Facility were $550,000 and $575,000, respectively, and the aggregate unfunded principal amount in connection with the Third Amended JPM Credit Facility was $25,000 and $0, respectively. For a detailed discussion of our Third Amended JPM Credit Facility, refer to Note 8 to our consolidated financial statements included in this report. UBS Facility As of September 30, 2021 and November 11, 2021, our outstanding borrowings under the Amended UBS Facility were $100,000 and the aggregate unfunded principal amount in connection with the Amended UBS Facility was $50,000. For a detailed discussion of our Amended UBS Facility, refer to Note 8 to our consolidated financial statements included in this report. 2026 Notes As of September 30, 2021 and November 11, 2021, we had $125,000 in aggregate principal amount of 2026 Notes outstanding. For a detailed discussion of our 2026 Notes, refer to Note 8 to our consolidated financial statements included in this report. More Term Loan As of September 30, 2021 and November 11, 2021, our outstanding borrowings under the More Term Loan were $30,000 and there was no unfunded principal amount in connection with the More Term Loan. For a detailed discussion of our More Term Loan, refer to Note 8 to our consolidated financial statements included in this report. Unfunded Commitments As of September 30, 2021 and November 11, 2021, our unfunded commitments amounted to $96,846 and $110,475, respectively. For a detailed discussion of our unfunded commitments, refer to Note 11 to our consolidated financial statements included in this report. Recent Accounting Pronouncements See Note 2 to our consolidated financial statements included in this report for a discussion of certain recent accounting pronouncements that are applicable to us. Critical Accounting Policies Our consolidated financial statements are prepared in conformity with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the consolidated financial statements, we also utilize available information, including our past history, industry standards and the current economic environment, among other factors, in forming our estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. Valuation of Portfolio Investments The value of our assets is determined quarterly and at such other times that an event occurs that materially affects the valuation. The valuation is made pursuant to Section 2(a)(41) of the 1940 Act, which requires that we value our assets as follows: (i) the market price for those securities for which a market quotation is readily available, and (ii) for all other securities and assets, at fair value, as determined in good faith by our board of directors. As a BDC, Section 2(a)(41) of the 1940 Act requires the board of directors to determine in good faith the fair value of portfolio securities for which a market price is not readily available, and it does so in conjunction with the application of our valuation procedures by CIM. There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each asset while employing a valuation process that is consistently followed. Determinations of fair value involve subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements refer to the uncertainty with respect to the possible effect of such valuations, and any change in such valuations in our consolidated financial statements. 74 Valuation Methods With respect to investments for which market quotations are not readily available, we undertake a multi-step valuation process each quarter, as described below: • our quarterly valuation process begins with each portfolio company or investment being initially valued by certain of CIM’s investment professionals and certain members of its management team, with such valuation taking into account information received from various sources, including independent valuation firms, if applicable; • preliminary valuation conclusions are then documented and discussed with members of CIM’s management team; • designated members of CIM’s management team review the preliminary valuation, and, if applicable, deliver such preliminary valuation to an independent valuation firm for its review; • designated members of CIM’s management team, and, if appropriate, the relevant investment professionals meet with the independent valuation firm to discuss the preliminary valuation; • designated members of CIM’s management team respond and supplement the preliminary valuation to reflect any comments provided by the independent valuation firm; • our audit committee meets with members of CIM’s management team and the independent valuation firms to discuss the assistance provided and the results of the independent valuation firms' review; and • our board of directors discusses the valuation and determines the fair value of each investment in our portfolio in good faith based on various statistical and other factors, including the input and recommendation of CIM, the audit committee and any third-party valuation firm, if applicable. In addition to the foregoing, certain investments for which a market price is not readily available are evaluated on a quarterly basis by an independent valuation firm and certain other investments are on a rotational basis reviewed by an independent valuation firm. Finally, certain investments are not evaluated by an independent valuation firm unless certain aspects of such investments in the aggregate meet certain criteria. Given the expected types of investments, excluding short term investments and stock of publicly traded companies that are classified as Level 1, management expects our portfolio holdings to be classified as Level 3. Due to the uncertainty inherent in the valuation process, particularly for Level 3 investments, such fair value estimates may differ significantly from the values that would have been used had an active market for the investments existed. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses that we ultimately realize on these investments to materially differ from the valuations currently assigned. Inputs used in the valuation process are subject to variability in the future and can result in materially different fair values. For an additional discussion of our investment valuation process, refer to Note 2 to our consolidated financial statements included in this report. Related Party Transactions For a discussion of our relationship with related parties including CION Securities, CIM, CIG, and AIA and amounts incurred under agreements with such related parties, refer to Note 4 to our consolidated financial statements included in this report. Contractual Obligations On August 26, 2016, 34th Street entered into the JPM Credit Facility with JPM, as amended and restated on September 30, 2016, July 11, 2017, November 28, 2017, May 23, 2018, May 15, 2020 and February 26, 2021. See Note 8 to our consolidated financial statements for a more detailed description of the JPM Credit Facility. On May 19, 2017, Murray Hill Funding II entered into the UBS Facility with UBS, as amended on December 1, 2017, May 19, 2020, November 12, 2020 and December 17, 2020. See Note 8 to our consolidated financial statements for a more detailed description of the UBS Facility. On February 11, 2021, we entered into the Note Purchase Agreement with purchasers of the 2026 Notes. See Note 8 to our consolidated financial statements for a more detailed description of the 2026 Notes. On April 14, 2021, we entered into the More Term Loan with More. See Note 8 to our consolidated financial statements for a more detailed description of the More Term Loan. 75 Commitments and Contingencies and Off-Balance Sheet Arrangements Commitments and Contingencies We have entered into certain contracts with other parties that contain a variety of indemnifications. Our maximum exposure under these arrangements is unknown. However, we have not experienced claims or losses pursuant to these contracts and believe the risk of loss related to such indemnifications to be remote. Our investment portfolio may contain debt investments that are in the form of lines of credit, delayed draw term loans, revolving credit facilities, or other unfunded commitments, which may require us to provide funding when requested in accordance with the terms of the underlying agreements. For further details on such debt investments, refer to Note 11 to our consolidated financial statements included in this report. Off-Balance Sheet Arrangements We currently have no off-balance sheet arrangements, except for those discussed in Note 11 to our consolidated financial statements included in this report. However, management continually evaluates potential strategic relationships with third parties in which a newly formed, joint venture entity would invest primarily in U.S. middle-market companies consistent with our investment strategy. 76