CION Investment Corp 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K. In addition to historical information, the following discussion and other parts of this Annual Report on Form 10-K contain forward-looking information that involves risks and uncertainties (see “Forward-Looking Statements” in this report). 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, which became effective on September 21, 2021. 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. On February 26, 2023, our shares of common stock also listed and commenced trading on the TASE under the ticker symbol “CION”. 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. 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 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. 63 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). 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 then 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 Series A Notes On February 28, 2023, we entered into the Deed of Trust with Mishmeret Trust Company Ltd., as trustee, under which we issued approximately $80.7 million in aggregate principal amount of our Series A Notes. The Series A Notes offering in Israel closed on February 28, 2023 and the Series A Notes listed and commenced trading on the TASE on February 28, 2023. After the deduction of fees and other offering expenses, we received net proceeds of approximately $77.9 million, which we intend to use to make investments in portfolio companies in accordance with our investment objectives and for working capital and general corporate purposes. The Series A Notes are rated A1.il by Midroog Ltd., an affiliate of Moody’s. The Series A Notes will mature on August 31, 2026 and may be redeemed in whole or in part at our option at par plus a “make-whole” premium, if applicable, as set forth in the Deed of Trust. The Series A Notes bear interest at a rate equal to SOFR plus a credit spread of 3.82% per year, which will be paid quarterly on February 28, May 31, August 31, and November 30 of each year, commencing on May 31, 2023. The Series A Notes are our general unsecured obligations that rank senior in right of payment to all of our existing and future indebtedness that is expressly subordinated in right of payment to the Series A Notes, rank pari passu with all our existing and future unsecured unsubordinated indebtedness, rank effectively junior to any of our secured indebtedness (including unsecured indebtedness that we later secure) to the extent of the value of the assets securing such indebtedness, and rank structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries, financing vehicles or similar facilities. 64 The Deed of Trust contains other terms and conditions, including, without limitation, affirmative and negative covenants such as (i) information reporting, (ii) maintenance of our status as a business development company within the meaning of the 1940 Act, (iii) minimum shareholders’ equity of $525 million, (iv) a minimum asset coverage ratio of not less than 150%, and (v) an unencumbered asset coverage ratio of 1.25 to 1.00. In addition, the Deed of Trust contains customary events of default with customary cure and notice periods, including, without limitation, nonpayment, incorrect representation in any material respect, breach of covenant, cross-default under our other indebtedness in an outstanding aggregate principal amount of at least $50 million, certain judgments and orders, and certain events of bankruptcy. Q1 2013 Regular Distribution On March 13, 2023, our co-chief executive officers declared a regular quarterly distribution of $0.34 per share for the first quarter of 2023 payable on March 31, 2023 to shareholders of record as of March 24, 2023. Portfolio Investment Activity for the Years Ended December 31, 2022 and 2021 The following table summarizes our investment activity, excluding short term investments and PIK securities, for the years ended December 31, 2022 and 2021: Years Ended December 31, Net Investment Activity 2022 2021 Purchases and drawdowns Senior secured first lien debt $ 524,293 $ 868,031 Senior secured second lien debt 19,932 — Unsecured debt — 20,000 Equity 6,313 32,008 Sales and principal repayments (469,760) (827,958) Net portfolio activity $ 80,778 $ 92,081 The following tables summarize the composition of our investment portfolio at amortized cost and fair value as of December 31, 2022 and 2021: December 31, 2022 Investments Cost(1) Investments Fair Value Percentage of Investment Portfolio Senior secured first lien debt $ 1,638,995 $ 1,579,512 90.3 % Senior secured second lien debt 41,036 38,769 2.2 % Collateralized securities and structured products - equity 2,687 1,179 0.1 % Unsecured debt 30,427 22,643 1.3 % Equity 79,595 107,058 6.1 % Subtotal/total percentage 1,792,740 1,749,161 100.0 % Short term investments(2) 10,869 10,869 Total investments $ 1,803,609 $ 1,760,030 Number of portfolio companies 113 Average annual EBITDA of portfolio companies $55.2 million Median annual EBITDA of portfolio companies $35.0 million Purchased at a weighted average price of par 97.81 % Gross annual portfolio yield based upon the purchase price(3) 11.80 % (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. 65 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 December 31, 2022 and 2021, excluding short term investments of $10,869 and $87,917, respectively: December 31, 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 $ 1,539,214 $ 1,477,630 84.5 % $ 1,454,429 $ 1,403,097 84.2 % Fixed interest rate investments 166,297 157,006 9.0 % 176,326 172,162 10.3 % Non-income producing investments 76,061 104,619 6.0 % 49,845 67,532 4.1 % Other income producing investments 11,168 9,906 0.5 % 23,787 23,331 1.4 % Total investments $ 1,792,740 $ 1,749,161 100.0 % $ 1,704,387 $ 1,666,122 100.0 % 66 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 December 31, 2022 and 2021: December 31, 2022 December 31, 2021 Industry Classification Investments Fair Value Percentage of Investment Portfolio Investments Fair Value Percentage of Investment Portfolio Services: Business $ 336,055 19.2 % $ 240,316 14.4 % Healthcare & Pharmaceuticals 237,082 13.6 % 250,049 15.0 % Media: Diversified & Production 134,927 7.7 % 139,399 8.4 % Services: Consumer 115,849 6.6 % 119,365 7.2 % Media: Advertising, Printing & Publishing 105,375 6.0 % 94,610 5.7 % Diversified Financials 99,819 5.7 % 101,032 6.1 % Retail 74,718 4.3 % 56,726 3.4 % Energy: Oil & Gas 68,756 3.9 % 32,164 1.9 % Chemicals, Plastics & Rubber 66,753 3.8 % 109,860 6.6 % Consumer Goods: Durable 60,735 3.5 % 58,124 3.5 % High Tech Industries 56,501 3.2 % 65,544 3.9 % Consumer Goods: Non-Durable 47,886 2.8 % 45,682 2.7 % Hotel, Gaming & Leisure 46,739 2.7 % 50,855 3.0 % Construction & Building 46,007 2.6 % 27,585 1.7 % Beverage, Food & Tobacco 45,396 2.6 % 49,054 2.9 % Banking, Finance, Insurance & Real Estate 43,836 2.5 % 40,634 2.4 % Capital Equipment 41,580 2.4 % 82,795 5.0 % Aerospace & Defense 38,842 2.2 % 38,279 2.3 % Containers, Packaging & Glass 19,551 1.1 % — — Telecommunications 18,302 1.1 % 24,649 1.5 % Automotive 16,255 0.9 % 14,367 0.9 % Metals & Mining 15,780 0.9 % 10,927 0.7 % Transportation: Cargo 12,417 0.7 % 14,106 0.8 % Subtotal/total percentage 1,749,161 100.0 % 1,666,122 100.0 % Short term investments 10,869 87,917 Total investments $ 1,760,030 $ 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 December 31, 2022 and 2021, our unfunded commitments amounted to $71,420 and $107,247 , respectively. As of March 8, 2023, our unfunded commitments amount ed to $61,841. 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. 67 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 December 31, 2022 and 2021, excluding short term investments of $10,869 and $87,917, respectively: December 31, 2022 December 31, 2021 Investment Rating Investments Fair Value Percentage of Investment Portfolio Investments Fair Value Percentage of Investment Portfolio 1 $ 24,450 1.4 % $ 47,221 2.8 % 2 1,424,681 81.5 % 1,373,509 82.5 % 3 260,662 14.9 % 233,223 14.0 % 4 39,032 2.2 % 8,201 0.5 % 5 336 — 3,968 0.2 % $ 1,749,161 100.0 % $ 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. 68 Current Investment Portfolio The following table summarizes the composition of our investment portfolio at fair value as of March 8, 2023: Investments Fair Value Percentage of Investment Portfolio Senior secured first lien debt $ 1,540,952 89.8 % Senior secured second lien debt 38,768 2.3 % Collateralized securities and structured products - equity 1,179 0.1 % Unsecured debt 22,643 1.3 % Equity 110,821 6.5 % Subtotal/total percentage 1,714,363 100.0 % Short term investments(1) 100,513 Total investments $ 1,814,876 Number of portfolio companies 110 Average annual EBITDA of portfolio companies $55.2 million Median annual EBITDA of portfolio companies $35.0 million Purchased at a weighted average price of par 96.47 % Gross annual portfolio yield based upon the purchase price(2) 11.89 % (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 Years Ended December 31, 2022 and 2021 Our results of operations for the years ended December 31, 2022 and 2021 were as follows: Years Ended December 31, 2022 2021 Investment income $ 194,898 $ 157,348 Operating expenses and income taxes 106,693 83,041 Net investment income after taxes 88,205 74,307 Net realized (loss) gain on investments and foreign currency (32,750) 840 Net change in unrealized (depreciation) appreciation on investments (5,314) 43,617 Net increase in net assets resulting from operations $ 50,141 $ 118,764 Investment Income For the years ended December 31, 2022 and 2021, we generated investment income of $194,898 and $157,348, respectively, consisting primarily of interest income on investments in senior secured debt, collateralized securities and structured products, and unsecured debt of 128 and 153 portfolio companies held during each respective period. Our average investment portfolio size, excluding our short term investments, increased $126,694, from $1,580,948 for the year ended December 31, 2021 to $1,707,642 for the year ended December 31, 2022. In addition, higher LIBOR and SOFR rates during the year ended December 31, 2022 compared to the year ended December 31, 2021 also contributed to the increase in interest income generated on our investments. 69 Operating Expenses and Income Taxes The composition of our operating expenses and income taxes for the years ended December 31, 2022 and 2021 was as follows: Years Ended December 31, 2022 2021 Management fees $ 27,361 $ 31,143 Administrative services expense 3,348 3,069 Subordinated incentive fee on income 18,710 6,875 General and administrative 7,278 9,805 Interest expense 49,624 31,807 Income tax expense, including excise tax 372 342 Total operating expenses and income taxes $ 106,693 $ 83,041 The increase in interest expense was primarily the result of (a) higher average borrowings under our financing arrangements during the year ended December 31, 2022 compared to the year ended December 31, 2021, and (b) higher LIBOR and SOFR rates during the year ended December 31, 2022 compared to the year ended December 31, 2021. 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 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%, and further to 1.0% of our average gross assets purchased with leverage resulting in our asset coverage ratio dropping below 200%. The composition of our general and administrative expenses for the years ended December 31, 2022 and 2021 was as follows: Years Ended December 31, 2022 2021 Professional fees $ 1,778 $ 4,214 Transfer agent expense 1,124 1,290 Insurance expense 833 612 Valuation expense 821 904 Dues and subscriptions 791 411 Printing and marketing expense 708 990 Director fees and expenses 632 516 Accounting and administrative costs 524 759 Other expenses 67 109 Total general and administrative expense $ 7,278 $ 9,805 The decrease in general and administrative expenses was primarily the result of lower nonrecurring professional fees incurred during the year ended December 31, 2021 associated with the Listing. Net Investment Income After Taxes Our net investment income after taxes totaled $88,205 and $74,307 for the years ended December 31, 2022 and 2021, respectively. The increase in net investment income was a result of an increase in our investment income during the year ended December 31, 2022 as compared to the year ended December 31, 2021, which 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 (Loss) Gain on Investments and Foreign Currency Our net realized (loss) gain on investments and foreign currency totaled $(32,750) and $840 for the years ended December 31, 2022 and 2021, respectively. This change was driven primarily by the write-off of certain investments during the year ended December 31, 2022 as compared to fewer investment write-offs during the year ended December 31, 2021. 70 Net Change in Unrealized (Depreciation) Appreciation on Investments The net change in unrealized (depreciation) appreciation on our investments totaled $(5,314) and $43,617 for the years ended December 31, 2022 and 2021, respectively. This change was driven primarily by the underperformance of certain investments during the year ended December 31, 2022, which was partially offset by the realization of previously unrealized losses due to the write-off of certain investments. This is compared to tightening credit spreads and increased multiples in equity markets during the year ended December 31, 2021 that positively impacted the fair value of certain of our investments. Net Increase in Net Assets Resulting from Operations For the years ended December 31, 2022 and 2021, we recorded a net increase in net assets resulting from operations of $50,141 and $118,764, respectively, as a result of our operating activity for the respective periods. Results of Operations for the Years Ended December 31, 2021 and 2020 Our results of operations for the years ended December 31, 2021 and 2020 were as follows: Years Ended December 31, 2021 2020 Investment income $ 157,348 $ 163,842 Operating expenses and income taxes 83,041 85,114 Net investment income after taxes 74,307 78,728 Net realized gain (loss) on investments and foreign currency 840 (69,872) Net change in unrealized appreciation (depreciation) on investments 43,617 (19,878) Net increase (decrease) in net assets resulting from operations $ 118,764 $ (11,022) Investment Income For the years ended December 31, 2021 and 2020, we generated investment income of $157,348 and $163,842, respectively, consisting primarily of interest income on investments in senior secured debt, collateralized securities and structured products, and unsecured debt of 153 and 137 portfolio companies held during each respective period. Our average investment portfolio size, excluding our short term investments, decreased $34,712, from $1,615,660 during the year ended December 31, 2020 to $1,580,948 during the year ended December 31, 2021. Additionally, the higher average LIBOR during the year ended December 31, 2020 as compared to the year ended December 31, 2021 also contributed to the decrease in interest income. Operating Expenses and Income Taxes The composition of our operating expenses and income taxes for the years ended December 31, 2021 and 2020 was as follows: Years Ended December 31, 2021 2020 Management fees $ 31,143 $ 31,828 Administrative services expense 3,069 2,465 Subordinated incentive fee on income 6,875 7,631 General and administrative 9,805 6,085 Interest expense 31,807 36,837 Income tax expense, including excise tax 342 268 Total operating expenses and income taxes $ 83,041 $ 85,114 The decrease in interest expense was primarily the result of lower borrowing costs incurred on our financing arrangements during the year ended December 31, 2021 as compared to the year ended December 31, 2020. 71 The composition of our general and administrative expenses for the years ended December 31, 2021 and 2020 was as follows: Years Ended December 31, 2021 2020 Professional fees $ 4,214 $ 1,490 Transfer agent expense 1,290 1,189 Printing and marketing expense 990 378 Valuation expense 904 999 Accounting and administrative costs 759 680 Insurance expense 612 489 Director fees and expenses 516 450 Dues and subscriptions 411 342 Other expenses 109 68 Total general and administrative expense $ 9,805 $ 6,085 The increase in general and administrative expenses was primarily the result of higher nonrecurring professional fees incurred during the year ended December 31, 2021 associated with the Listing. Net Investment Income After Taxes Our net investment income after taxes totaled $74,307 and $78,728 for the years ended December 31, 2021 and 2020, respectively. The decrease in net investment income after taxes was primarily due to a decrease in our investment income during the year ended December 31, 2021 as compared to the year ended December 31, 2020, which was partially offset by a decrease in operating expenses during the year ended December 31, 2021. Net Realized Gain (Loss) on Investments and Foreign Currency Our net realized gain (loss) on investments and foreign currency totaled $840 and $(69,872) for the years ended December 31, 2021 and 2020, respectively. This change was driven primarily by fewer restructurings of our investments during the year ended December 31, 2021 as compared to the year ended December 31, 2020. Net Change in Unrealized Appreciation (Depreciation) on Investments The net change in unrealized appreciation (depreciation) on our investments totaled $43,617 and $(19,878) for the years ended December 31, 2021 and 2020, respectively. This change was driven primarily by tightening credit spreads and increased multiples in equity markets during the year ended December 31, 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 year ended December 31, 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 year ended December 31, 2021, we recorded a net increase in net assets resulting from operations of $118,764 as compared to a net decrease in net assets resulting from operations of $(11,022) for the year ended December 31, 2020 as a result of our operating activity for the respective periods. 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. As a result, we also generate cash from our existing financing arrangements and may generate cash from future borrowings, as well as future offerings of securities including public and/or private issuances of debt and/or equity securities. We use cash primarily to (i) purchase investments in new and existing portfolio companies, (ii) pay for the cost of operations (including paying or reimbursing CIM), (iii) make debt service payments related to any of our financing arrangements and (iv) pay cash distributions to the holders of our shares. 72 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. As a result of receiving shareholder approval on December 30, 2021, effective December 31, 2021, we are required to maintain asset coverage for our senior securities of 150% rather than 200%, which allows us to increase the maximum amount of leverage that we are permitted to incur. We may from time to time enter into additional financing arrangements or increase the size of our existing financing arrangements. Any such increase to our leverage would be subject to prevailing market conditions, our liquidity requirements, contractual and regulatory restrictions and other factors. As of December 31, 2022 and 2021, our asset coverage ratio was 1.92 and 2.12, respectively. We seek to carefully consider our unfunded commitments for the purpose of planning our ongoing financial leverage. On September 15, 2022, our shareholders authorized us to issue shares of our common stock at prices below the then current NAV per share in one or more offerings for a 12-month period following such shareholder approval. As of the date of this report, we are not engaged in discussions to issue any such shares. As of December 31, 2022, we had cash of $82,739 and short term investments of $10,869 invested in a fund that primarily invests in U.S. government securities. Cash and short term investments as of December 31, 2022, taken together with our available debt, is expected to be sufficient for our investing activities and to conduct our operations in the near term. As of December 31, 2022, we had $72 million available under our financing arrangements. Our short-term cash needs include the funding of additional portfolio investments, the payment of operating expenses including interest expense, management fees, incentive fees, administrative services expense and general and administrative expenses, as well as paying distributions to our shareholders. Our long-term cash needs will include principal payments on outstanding financing arrangements and funding of additional portfolio investments. Funding for short and long-term cash needs will come from cash provided from operating activities and/or unused net proceeds from financing activities. We believe that our liquidity and sources of capital are adequate to satisfy our short and long-term cash requirements. We cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to us in sufficient amounts in the future. Post-Listing Share Repurchase Policy 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 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. On August 16, 2022, as part of the share repurchase policy, we entered into a trading plan with an independent broker, Wells Fargo, 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 permits 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 is subject to price, market volume and timing restrictions. During the year ended December 31, 2022, we repurchased an aggregate of 1,658,956 shares under the 10b5-1 trading plan for an aggregate purchase price of $15,444, or an average purchase price of $9.31 per share. From January 1, 2023 to March 8, 2023, we repurchased an aggregate of 281,938 shares of common stock under the 10b5-1 trading plan for an aggregate purchase price of $3,044, or an average purchase price of $10.79 per share. 73 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. For an additional discussion of our RIC status, refer to Note 2 of our consolidated financial statements included in this report. 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. The following table presents distributions per share that were declared during the years ended December 31, 2022, 2021 and 2020: Distributions Three Months Ended Per Share(1) Amount 2020 March 31, 2020 (thirteen record dates) $ 0.3657 $ 20,793 June 30, 2020 (no record dates) — — September 30, 2020 (two record dates) 0.1765 10,011 December 31, 2020 (four record dates) 0.5684 32,479 Total distributions for the year ended December 31, 2020 $ 1.1106 $ 63,283 2021 March 31, 2021 (three record dates) $ 0.2648 $ 15,029 June 30, 2021 (three record dates) 0.2648 15,000 September 30, 2021 (three record dates) 0.2648 15,027 December 31, 2021 (two record dates) 0.4648 26,474 Total distributions for the year ended December 31, 2021 $ 1.2592 $ 71,530 2022 March 31, 2022 (one record date) $ 0.2800 $ 15,948 June 30, 2022 (one record date) 0.2800 15,949 September 30, 2022 (one record date) 0.3100 17,604 December 31, 2022 (two record dates) 0.5800 32,074 Total distributions for the year ended December 31, 2022 $ 1.4500 $ 81,575 (1) The per share distribution amount has been retroactively adjusted to reflect the Reverse Stock Split as discussed in Note 3 to the consolidated financial statements included in this report. On March 13, 2023, our co-chief executive officers declared a regular quarterly distribution of $0.34 per share for the first quarter of 2023 payable on March 31, 2023 to shareholders of record as of March 24, 2023. 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. 74 JPM Credit Facility As of December 31, 2022 and March 8, 2023, our aggregate outstanding borrowings under the JPM Credit Facility were $610,000 and $600,000, respectively, and the aggregate unfunded principal amount in connection with the JPM Credit Facility was $65,000 and $75,000, respectively. For a detailed discussion of our JPM Credit Facility, refer to Note 8 to our consolidated financial statements included in this report. UBS Facility As of December 31, 2022 and March 8, 2023, our outstanding borrowings under the Amended UBS Facility were $142,500 and $125,000, respectively, and the aggregate unfunded principal amount in connection with the Amended UBS Facility was $7,500 and $25,000, respectively. 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 December 31, 2022 and March 8, 2023, 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 December 31, 2022 and March 8, 2023, 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 December 31, 2022 and March 8, 2023, 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. Series A Notes As of March 8, 2023, we had approximately $80,700 in aggregate principal amount of Series A Notes outstanding and there was no unfunded principal amount in connection with the Series A Notes. For a detailed discussion of our Series A Notes, refer to Note 16 to our consolidated financial statements included in this report. Unfunded Commitments As of December 31, 2022 and March 8, 2023, our unfunded commitments amounted to $71,420 and $61,841, 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 U.S. generally accepted accounting principles, or 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. 75 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: • our 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 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 and our audit committee provide oversight with respect to this valuation process, including requesting such materials as they may determine appropriate. 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. 76 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. See Note 8 to our consolidated financial statements for a more detailed description of the 2022 More Term Loan. On February 28, 2023, we entered into a Deed of Trust with Mishmeret Trust Company Ltd., as trustee, pursuant to which we issued our Series A Notes. See Note 16 to our consolidated financial statements for a more detailed description of the Deed of Trust and the Series A Notes. 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. 77