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, 2021. 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 involve numerous risks and uncertainties, including 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, inflation and supply-chain disruptions; • 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 its affiliates; • the ability of CIM'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, inflation and supply-chain disruptions 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. 60 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; and • future changes in laws or regulations and conditions in our operating areas; • the price at which shares of our common stock may trade on and volume fluctuations in the NYSE; and • the costs associated with being a publicly traded company. 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 its affiliates. 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 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. 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 continues to perform certain services for CIM and us. 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. 61 On December 4, 2017, the members of CIM entered into the Fourth Amended CIM LLC Agreement under which AIM performs certain services for CIM, which include, among other services, 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. AIM may also, from time to time, provide us with access to potential investment opportunities made available on Apollo's credit platform on a similar basis as other third-party market participants. 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 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. 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 two to one 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 management fees and subordinated incentive fees on income 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 Share Repurchase Policy On June 24, 2022, our board of directors, including the independent directors, increased the amount of shares of our common stock that may be repurchased under our existing share repurchase policy by $10 million to up to an aggregate of $60 million. Additionally, we expect to enter into a trading plan adopted in accordance with Rule 10b5-1 of the Exchange Act to facilitate repurchases under the share repurchase policy during our first available trading window after the filing of this report. 62 Under the share repurchase policy, we expect to 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 share repurchase 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. The 10b5-1 trading plan will be entered into by us and adopted in accordance with Rule 10b5-1 of the Exchange Act 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. Portfolio Investment Activity for the Three Months Ended June 30, 2022 and 2021 and the Year Ended December 31, 2021 The following table summarizes our investment activity, excluding short term investments and PIK securities, for the three months ended June 30, 2022 and 2021 and the year ended December 31, 2021: Three Months Ended June 30, Year Ended December 31, Net Investment Activity 2022 2021 2021 Purchases and drawdowns Senior secured first lien debt $ 170,379 $ 221,361 $ 868,031 Senior secured second lien debt 1,836 — — Unsecured debt — — 20,000 Equity 1,009 737 32,008 Sales and principal repayments (109,553) (96,828) (827,958) Net portfolio activity $ 63,671 $ 125,270 $ 92,081 The following tables summarize the composition of our investment portfolio at amortized cost and fair value as of June 30, 2022 and December 31, 2021: June 30, 2022 Investments Cost(1) Investments Fair Value Percentage of Investment Portfolio Senior secured first lien debt $ 1,732,780 $ 1,660,828 92.7 % Senior secured second lien debt 42,737 27,086 1.5 % Collateralized securities and structured products - equity 2,841 1,602 0.1 % Unsecured debt 28,057 27,994 1.6 % Equity 55,213 73,597 4.1 % Subtotal/total percentage 1,861,628 1,791,107 100.0 % Short term investments(2) 14,345 14,345 Total investments $ 1,875,973 $ 1,805,452 Number of portfolio companies 121 Average annual EBITDA of portfolio companies $49.6 million Median annual EBITDA of portfolio companies $33.7 million Purchased at a weighted average price of par 97.99 % Gross annual portfolio yield based upon the purchase price(3) 8.90 % (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. 63 December 31, 2021 Investments Cost(1) Investments Fair Value Percentage of Investment Portfolio Senior secured first lien debt $ 1,564,891 $ 1,526,989 91.6 % Senior secured second lien debt 55,455 38,583 2.3 % Collateralized securities and structured products - equity 3,885 2,998 0.2 % Unsecured debt 26,777 26,616 1.6 % Equity 53,379 70,936 4.3 % Subtotal/total percentage 1,704,387 1,666,122 100.0 % Short term investments(2) 87,917 87,917 Total investments $ 1,792,304 $ 1,754,039 Number of portfolio companies 113 Average annual EBITDA of portfolio companies $50.4 million Median annual EBITDA of portfolio companies $36.3 million Purchased at a weighted average price of par 98.13 % Gross annual portfolio yield based upon the purchase price(3) 8.62 % (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 June 30, 2022 and December 31, 2021, excluding short term investments of $14,345 and $87,917, respectively: June 30, 2022 December 31, 2021 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 $ 1,603,065 $ 1,521,137 84.9 % $ 1,454,429 $ 1,403,097 84.2 % Fixed interest rate investments 184,462 179,133 10.0 % 176,326 172,162 10.3 % Non-income producing investments 51,661 70,562 4.0 % 49,845 67,532 4.1 % Other income producing investments 22,440 20,275 1.1 % 23,787 23,331 1.4 % Total investments $ 1,861,628 $ 1,791,107 100.0 % $ 1,704,387 $ 1,666,122 100.0 % 64 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 June 30, 2022 and December 31, 2021: June 30, 2022 December 31, 2021 Industry Classification Investments Fair Value Percentage of Investment Portfolio Investments Fair Value Percentage of Investment Portfolio Services: Business $ 355,881 19.9 % $ 240,316 14.4 % Healthcare & Pharmaceuticals 228,630 12.8 % 250,049 15.0 % Media: Diversified & Production 147,620 8.2 % 139,399 8.4 % Services: Consumer 135,972 7.6 % 119,365 7.2 % Diversified Financials 99,465 5.6 % 101,032 6.1 % Chemicals, Plastics & Rubber 86,531 4.8 % 109,860 6.6 % Retail 83,579 4.7 % 56,726 3.4 % High Tech Industries 82,547 4.6 % 65,544 3.9 % Media: Advertising, Printing & Publishing 78,936 4.4 % 94,610 5.7 % Energy: Oil & Gas 60,937 3.4 % 32,164 1.9 % Capital Equipment 59,982 3.3 % 82,795 5.0 % Consumer Goods: Durable 58,203 3.2 % 58,124 3.5 % Hotel, Gaming & Leisure 52,426 2.9 % 50,855 3.0 % Beverage, Food & Tobacco 45,822 2.6 % 49,054 2.9 % Aerospace & Defense 38,531 2.2 % 38,279 2.3 % Banking, Finance, Insurance & Real Estate 38,378 2.1 % 40,634 2.4 % Construction & Building 37,645 2.1 % 27,585 1.7 % Consumer Goods: Non-Durable 34,660 1.9 % 45,682 2.7 % Telecommunications 20,066 1.1 % 24,649 1.5 % Automotive 17,147 1.0 % 14,367 0.9 % Metals & Mining 15,775 0.9 % 10,927 0.7 % Transportation: Cargo 12,374 0.7 % 14,106 0.8 % Subtotal/total percentage 1,791,107 100.0 % 1,666,122 100.0 % Short term investments 14,345 87,917 Total investments $ 1,805,452 $ 1,754,039 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 June 30, 2022 and December 31, 2021, our unfunded commitments amounted to $96,129 and $107,247 , respectively. As of August 4, 2022, our unfunded commitments amount ed to $81,369. 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” 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. 65 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 June 30, 2022 and December 31, 2021, excluding short term investments of $14,345 and $87,917, respectively: June 30, 2022 December 31, 2021 Investment Rating Investments Fair Value Percentage of Investment Portfolio Investments Fair Value Percentage of Investment Portfolio 1 $ 130,882 7.3 % $ 47,221 2.8 % 2 1,482,352 82.8 % 1,373,509 82.5 % 3 150,849 8.4 % 233,223 14.0 % 4 26,595 1.5 % 8,201 0.5 % 5 429 — 3,968 0.2 % $ 1,791,107 100.0 % $ 1,666,122 100.0 % 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. 66 Current Investment Portfolio The following table summarizes the composition of our investment portfolio at fair value as of August 4, 2022: Investments Fair Value Percentage of Investment Portfolio Senior secured first lien debt $ 1,549,613 91.8 % Senior secured second lien debt 27,091 1.6 % Collateralized securities and structured products - equity 1,526 0.1 % Unsecured debt 27,994 1.6 % Equity 82,380 4.9 % Subtotal/total percentage 1,688,604 100.0 % Short term investments(2) 32,832 Total investments $ 1,721,436 Number of portfolio companies 114 Average annual EBITDA of portfolio companies $50.7 million Median annual EBITDA of portfolio companies $36.3 million Purchased at a weighted average price of par 97.96 % Gross annual portfolio yield based upon the purchase price(2) 9.46 % (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 June 30, 2022 and 2021 Our results of operations for the three months ended June 30, 2022 and 2021 were as follows: Three Months Ended June 30, 2022 2021 Investment income $ 43,552 $ 38,021 Operating expenses and income taxes 24,264 19,335 Net investment income after taxes 19,288 18,686 Net realized gain on investments and foreign currency 180 441 Net change in unrealized (depreciation) appreciation on investments (20,734) 8,842 Net (decrease) increase in net assets resulting from operations $ (1,266) $ 27,969 Investment Income For the three months ended June 30, 2022 and 2021, we generated investment income of $43,552 and $38,021, respectively, consisting primarily of interest income on investments in senior secured debt, collateralized securities and structured products, and unsecured debt of 113 and 123 portfolio companies held during each respective period. Our average investment portfolio size, excluding our short term investments, increased $160,519, from $1,604,801 for the three months ended June 30, 2021 to $1,765,321 for the three months ended June 30, 2022. In addition, LIBOR and SOFR rates were higher during the three months ended June 30, 2022 compared to the three months ended June 30, 2021. 67 Operating Expenses and Income Taxes The composition of our operating expenses and income taxes for the three months ended June 30, 2022 and 2021 was as follows: Three Months Ended June 30, 2022 2021 Management fees $ 6,839 $ 8,243 Administrative services expense 781 697 Subordinated incentive fee on income 4,091 — General and administrative 1,712 2,563 Interest expense 10,841 7,828 Income tax expense, including excise tax — 4 Total operating expenses and income taxes $ 24,264 $ 19,335 The increase in subordinated incentive fee on income was primarily the result of entering into (i) the amended and restated investment advisory agreement in August 2021, which changed the calculation of the subordinated incentive fee to express 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, and (ii) the second amended and restated investment advisory agreement in October 2021, which reduced the hurdle rate applicable to the subordinated incentive fee. The increase in interest expense was primarily the result of (a) higher average borrowings under our financing arrangements during the three months ended June 30, 2022 compared to the three months ended June 30, 2021, and (b) higher LIBOR and SOFR rates during the three months ended June 30, 2022 compared to the three months ended June 30, 2021. The decrease in management fees was also primarily due to entering into the second amended and restated investment advisory agreement in October 2021, which among other things reduced the annual rate from 2.0% to 1.5%. The composition of our general and administrative expenses for the three months ended June 30, 2022 and 2021 was as follows: Three Months Ended June 30, 2022 2021 Professional fees $ 519 $ 1,213 Transfer agent expense 303 253 Insurance expense 254 137 Valuation expense 212 269 Director fees and expenses 161 111 Accounting and administrative costs 145 175 Dues and subscriptions 80 27 Printing and marketing expense 28 355 Other expenses 10 23 Total general and administrative expense $ 1,712 $ 2,563 Net Investment Income After Taxes Our net investment income after taxes totaled $19,288 and $18,686 for the three months ended June 30, 2022 and 2021, respectively. The increase in our investment income during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 was partially offset by an increase in our operating expenses during the same period, which was driven primarily by increases in the subordinated incentive fee on income and interest expense. Net Realized Gain on Investments and Foreign Currency Our net realized gain on investments and foreign currency totaled $180 and $441 for the three months ended June 30, 2022 and 2021, respectively, which was driven primarily by less sale activity during the three months ended June 30, 2022 compared to the three months ended June 30, 2021. 68 Net Change in Unrealized (Depreciation) Appreciation on Investments The net change in unrealized (depreciation) appreciation on our investments totaled $(20,734) and $8,842 for the three months ended June 30, 2022 and 2021, respectively. This change was driven primarily by widening credit spreads and decreased multiples in equity markets as well as the underperformance of certain portfolio companies during the three months ended June 30, 2022 that negatively impacted the fair value of certain of our investments, as compared to tightening credit spreads and increased multiples in equity markets during the three months ended June 30, 2021 that positively impacted the fair value of certain of our investments. Net (Decrease) Increase in Net Assets Resulting from Operations For the three months ended June 30, 2022 and 2021, we recorded a net (decrease) increase in net assets resulting from operations of $(1,266) and $27,969, respectively, as a result of our operating activity for the respective periods. Results of Operations for the Six Months Ended June 30, 2022 and 2021 Our results of operations for the six months ended June 30, 2022 and 2021 were as follows: Six Months Ended June 30, 2022 2021 Investment income $ 85,235 $ 74,324 Operating expenses and income taxes 46,464 38,039 Net investment income after taxes 38,771 36,285 Net realized gain (loss) on investments and foreign currency 111 (3,687) Net change in unrealized (depreciation) appreciation on investments (32,259) 45,085 Net increase in net assets resulting from operations $ 6,623 $ 77,683 Investment Income For the six months ended June 30, 2022 and 2021, we generated investment income of $85,235 and $74,324, respectively, consisting primarily of interest income on investments in senior secured debt, collateralized securities and structured products, and unsecured debt of 119 and 127 portfolio companies held during each respective period. Our average investment portfolio size, excluding our short term investments, increased $142,951, from $1,585,664 for the six months ended June 30, 2021 to $1,728,615 for the six months ended June 30, 2022. Additionally, the increase in LIBOR rates during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 also contributed to the increase in interest income generated on our investments. Operating Expenses and Income Taxes The composition of our operating expenses and income taxes for the six months ended June 30, 2022 and 2021 was as follows: Six Months Ended June 30, 2022 2021 Management fees $ 13,494 $ 16,026 Administrative services expense 1,501 1,381 Subordinated incentive fee on income 8,224 — General and administrative 3,934 5,241 Interest expense 19,300 15,376 Income tax expense, including excise tax 11 15 Total operating expenses and income taxes $ 46,464 $ 38,039 69 The increase in subordinated incentive fee on income was primarily the result of entering into (i) the amended and restated investment advisory agreement in August 2021, which changed the calculation of the subordinated incentive fee to express 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, and (ii) the second amended and restated investment advisory agreement in October 2021, which reduced the hurdle rate applicable to the subordinated incentive fee. The increase in interest expense was primarily the result of (a) higher average borrowings under our financing arrangements during the six months ended June 30, 2022 compared to the six months ended June 30, 2021, and (b) higher LIBOR rates during the six months ended June 30, 2022 compared to the six months ended June 30, 2021. The decrease in management fees was also primarily due to entering into the second amended and restated investment advisory agreement in October 2021, which among other things reduced the annual rate from 2.0% to 1.5%. The composition of our general and administrative expenses for the six months ended June 30, 2022 and 2021 was as follows: Six Months Ended June 30, 2022 2021 Professional fees $ 1,152 $ 2,478 Dues and subscriptions 615 196 Transfer agent expense 594 675 Insurance expense 505 269 Valuation expense 391 521 Director fees and expenses 315 214 Accounting and administrative costs 302 412 Printing and marketing expense 33 399 Other expenses 27 77 Total general and administrative expense $ 3,934 $ 5,241 The decrease in general and administrative expenses was primarily the result of (i) higher professional fees incurred during the six months ended June 30, 2021 associated with the listing of our shares on the NYSE with no comparable listing-related fees during the six months ended June 30, 2022, and (ii) higher printing and marketing expense incurred during the six months ended June 30, 2021 compared to the six months ended June 30, 2022 associated with shareholder proxy solicitation costs. Net Investment Income After Taxes Our net investment income after taxes totaled $85,235 and $74,324 for the six months ended June 30, 2022 and 2021, respectively. The increase in our investment income during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 was partially offset by an increase in our operating expenses during the same period, which was driven primarily by increases in the subordinated incentive fee on income and interest expense. Net Realized Gain (Loss) on Investments and Foreign Currency Our net realized gain (loss) on investments and foreign currency totaled $111 and $(3,687) for the six months ended June 30, 2022 and 2021, respectively, which were driven primarily by losses realized on the exit of certain investments during the six months ended June 30, 2021. Net Change in Unrealized (Depreciation) Appreciation on Investments The net change in unrealized (depreciation) appreciation on our investments totaled $(32,259) and $45,085 for the six months ended June 30, 2022 and 2021, respectively. This change was driven primarily by widening credit spreads and decreased multiples in equity markets during the six months ended June 30, 2022 that negatively impacted the fair value of certain of our investments, as compared to tightening credit spreads and increased multiples in equity markets during the six months ended June 30, 2021 that positively impacted the fair value of certain of our investments. Net Increase in Net Assets Resulting from Operations For the six months ended June 30, 2022 and 2021, we recorded a net increase in net assets resulting from operations of $6,623 and $77,683, respectively, as a result of our operating activity for the respective periods. 70 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 and pursuant to the 1940 Act. 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. At our Special Meeting of Shareholders on December 30, 2021, shareholders approved a proposal to reduce our asset coverage ratio to 150%. As a result, commencing on December 31, 2021, we are required to maintain asset coverage for our senior securities of 150% (i.e., $2 of debt outstanding for each $1 of equity) rather than 200% (i.e., $1 of debt outstanding for each $1 of equity), which allows us to increase the maximum amount of leverage that we are permitted to incur. On July 30, 2021, our board of directors, including the independent directors, determined to suspend our pre-Listing share repurchase program commencing with the third quarter of 2021 in anticipation of the Listing. The pre-Listing share repurchase program terminated upon the Listing on October 5, 2021. On August 9, 2021, our shareholders approved a proposal that authorized 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, which authorization expired on August 9, 2022. We did not issue any such shares through the expiration date. We are currently seeking approval from our shareholders to again authorize us to issue shares below the then current NAV per share in one or more offerings for an additional 12-month period following such shareholder approval. There can be no assurance that such approval will be received from our shareholders. 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 August 9, 2022, our co-chief executive officers declared a regular quarterly distribution of $0.31 per share for the third quarter of 2022 payable on September 8, 2022 to shareholders of record as of September 1, 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 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. On June 24, 2022, our board of directors, including the independent directors, increased the amount of shares of our common stock that may be repurchased under the share repurchase policy by $10 million to up to an aggregate of $60 million. 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 during our first available trading window after the filing of this report 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 August 5, 2022, 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 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 June 30, 2022 and December 31, 2021, we had cash of $42,542 and $3,774, respectively. As of June 30, 2022 and December 31, 2021, we had $14,345 and $87,917 in short term investments, respectively, invested in a fund that primarily invests in U.S. government securities. 71 JPM Credit Facility As of June 30, 2022 and August 4, 2022, our aggregate outstanding borrowings under the JPM First Amendment were $600,000 and the aggregate unfunded principal amount in connection with the JPM First Amendment was $75,000. For a detailed discussion of our JPM First Amendment, refer to Note 8 to our consolidated financial statements included in this report. UBS Facility As of June 30, 2022 and August 4, 2022, our outstanding borrowings under the Amended UBS Facility were $142,500 and the aggregate unfunded principal amount in connection with the Amended UBS Facility was $7,500. 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 June 30, 2022 and August 4, 2022, we had $125,000 in aggregate principal amount of 2026 Notes outstanding and there was no unfunded principal amount in connection with the 2026 Notes. For a detailed discussion of our 2026 Notes, refer to Note 8 to our consolidated financial statements included in this report. 2021 More Term Loan As of June 30, 2022 and August 4, 2022, our outstanding borrowings under the 2021 More Term Loan were $30,000 and there was no unfunded principal amount in connection with the 2021 More Term Loan. For a detailed discussion of our 2021 More Term Loan, refer to Note 8 to our consolidated financial statements included in this report. 2022 More Term Loan As of June 30, 2022 and August 4, 2022, our outstanding borrowings under the 2022 More Term Loan were $50,000 and there was no unfunded principal amount in connection with the 2022 More Term Loan. For a detailed discussion of our 2022 More Term Loan, refer to Note 8 to our consolidated financial statements included in this report. Unfunded Commitments As of June 30, 2022 and August 4, 2022, our unfunded commitments amounted to $96,129 and $81,369, respectively. For a detailed discussion of our unfunded commitments, refer to Note 11 to our consolidated financial statements included in this report. RIC Status and Distributions To qualify for and maintain RIC tax treatment, we must, among other things, distribute in respect of each taxable year at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. We will incur an excise tax of 4% imposed on RICs to the extent we do not distribute in respect of each calendar year an amount at least equal to the sum of (1) 98.0% of our net ordinary income (taking into account certain deferrals and elections) for the calendar year, (2) 98.2% of our capital gains in excess of capital losses, or capital gain net income (adjusted for certain ordinary losses), for the one-year period ending on October 31 of the calendar year and (3) any net ordinary income and capital gain net income from preceding years that were not distributed during such years and on which we paid no federal income tax. 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. 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. 72 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. In accordance with Rule 2a-5 of the 1940 Act, our board of directors has designated CIM as our “valuation designee.” Our board of directors and the audit committee of our board of directors, which is comprised solely of our independent directors, oversees the activities, methodology and processes of the valuation designee. 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. Valuation Methods With respect to investments for which market quotations are not readily available, CIM, as the valuation designee of our board of directors, undertakes a multi-step valuation process each quarter, as described below: • the quarterly valuation process generally begins with each portfolio company or investment either being sent directly to an independent valuation firm or 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 by 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 and our audit committee provide oversight with respect to this valuation process, including requesting such materials as they may determine appropriate. 73 We shall promptly (but no later than five business days after we become aware) report to our board of directors in writing on the occurrence of matters that materially affect the fair value of the designated portfolio of investments. Material matters in this instance include a significant deficiency or material weakness in the design or effectiveness of CIM’s fair value determination process resulting in a material error in the calculation of net asset value of $0.01 per share or greater. 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 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, February 26, 2021 and March 28, 2022. 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 2021 More Term Loan with More. See Note 8 to our consolidated financial statements for a more detailed description of the 2021 More Term Loan. On April 27, 2022, we entered into the 2022 More Term Loan with More Provident. See Note 8 to our consolidated financial statements for a more detailed description of the 2022 More Term Loan. 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. We currently have no off-balance sheet arrangements, except for those discussed in Note 7 and Note 11 to our consolidated financial statements included in this report. 74