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, 2022. 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. 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 inflation, rising interest rates, supply-chain disruptions and the risk of recession; • 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 inflation, rising interest rates 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. 65 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; • 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. 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 August 7, 2023, our board of directors, including a majority of directors who are not interested persons, approved the renewal of the second amended and restated investment advisory agreement with CIM for a period of twelve months, commencing August 9, 2023. 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. 66 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. 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). 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 Regular and Supplemental Distributions On August 7, 2023, our co-chief executive officers declared a supplemental distribution of $0.05 per share for both the third and fourth quarters of 2023, paid on October 16, 2023 and payable on January 15, 2024, respectively, to shareholders of record as of September 29, 2023 and December 29, 2023, respectively. On November 6, 2023, our co-chief executive officers declared a regular quarterly distribution of $0.34 per share for the fourth quarter of 2023, payable on December 15, 2023 to shareholders of record as of December 1, 2023. Additional Series A Notes On October 10, 2023, we issued $ 33,146 in aggregate principal amount of Additional Series A Notes to institutional investors in Israel. The Additional Series A Notes were issued pursuant to the Deed of Trust and were issued by way of expanding, and have the same terms and conditions as, the existing Series A Notes that we issued on February 28, 2023 (as described in further detail in Note 8 to our consolidated financial statements included in this report). After the deduction of fees and other offering expenses, we received net proceeds of $ 32,317 , 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 Additional Series A Notes are rated A1.il by Midroog Ltd., an affiliate of Moody’s, and commenced trading on the TASE on October 10, 2023. 67 The Additional 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 Additional Series A Notes bear interest at a floating 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 November 30, 2023. The Additional 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 Additional Series A Notes, rank pari passu with all existing and future unsecured unsubordinated indebtedness issued by us, 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. 2027 Notes On November 8, 2023, we entered into the 2027 Note Purchase Agreement with certain institutional investors, in connection with our issuance of $100,000 aggregate principal amount of 2027 Notes, at a purchase price equal to 99.25% of the principal amount of the 2027 Notes. The net proceeds to us were approximately $99,000, after the deduction of placement agent fees and other financing expenses, which we intend to use to primarily repay debt under our senior secured financing arrangements, make investments in portfolio companies in accordance with our investment objectives, and for working capital and general corporate purposes. The 2027 Notes are rated BBB (low) by DBRS, Inc. The 2027 Notes mature on November 8, 2027. The 2027 Notes bear interest at a floating rate equal to the three-month SOFR plus a credit spread of 4.75% per year and subject to a 2.00% SOFR floor, which will be paid quarterly on February 15, May 15, August 15, and November 15 of each year, commencing on February 15, 2024. We have the right to, at our option, redeem all or a part that is not less than 10% of the 2027 Notes (i) on or before August 8, 2027, at a redemption price equal to 100% of the principal amount of 2027 Notes to be redeemed plus an applicable “make-whole” amount equal to (x) the discounted value of the remaining scheduled payments with respect to the principal of such 2027 Note that is to be prepaid or becomes due and payable pursuant to the 2027 Note Purchase Agreement over (y) the amount of such called principal, plus accrued and unpaid interest, if any, and (ii) after August 8, 2027, at a redemption price equal to 100% of the principal amount of the 2027 Notes to be redeemed, plus accrued and unpaid interest, if any. For any redemptions occurring on or before August 8, 2027, the discounted value portion of the “make whole amount” is calculated by applying a discount rate on the same periodic basis as that on which interest on the 2027 Notes is payable equal to the sum of 0.50% plus the yield to maturity of the most recently issued U.S. Treasury securities having a maturity equal to the remaining average life of the 2027 Notes, or if there are no such U.S. Treasury securities, using such implied yield to maturity determined in accordance with the terms of the 2027 Note Purchase Agreement. The 2027 Notes are general unsecured obligations of ours that rank pari passu with all existing and future unsecured unsubordinated indebtedness issued by us, 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 certain of our subsidiaries, financing vehicles or similar facilities. The 2027 Note Purchase Agreement 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 $543.6 million, (iv) a minimum asset coverage ratio of not less than 150%, (v) a minimum interest coverage ratio of 1.25 to 1.00 and (vi) an unencumbered asset coverage ratio of 1.25 to 1.00, provided that (a) first lien senior secured loans and cash represent more than 65% of the total value of unencumbered assets used by us for purposes of the ratio and (b) equity interests or structured products in the aggregate represent less than 15% of the total value of unencumbered assets used by us for purposes of the ratio. The 2027 Note Purchase Agreement also contains a “most favored lender” provision in favor of the purchasers in respect of any new credit facilities, loans, notes or unsecured indebtedness in excess of $25 million incurred by us, which indebtedness contains a financial covenant not contained in, or more restrictive against us than those contained, in the 2027 Note Purchase Agreement. In addition, the 2027 Note Purchase Agreement 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 other indebtedness or derivative securities of ours in an outstanding aggregate principal amount of at least $25 million, certain judgments and orders, and certain events of bankruptcy. 68 Portfolio Investment Activity for the Three and Nine Months Ended September 30, 2023 and 2022 and the Year Ended December 31, 2022 The following table summarizes our investment activity, excluding short term investments and PIK securities, for the three and nine months ended September 30, 2023 and 2022 and the year ended December 31, 2022: Three Months Ended September 30, Nine Months Ended September 30, Year Ended December 31, Net Investment Activity 2023 2022 2023 2022 2022 Purchases and drawdowns Senior secured first lien debt $ 102,666 $ 119,789 $ 186,493 $ 426,866 $ 524,293 Senior secured second lien debt — 18,108 — 19,944 19,932 Unsecured debt — — 4,200 — — Equity 377 3,379 5,283 5,513 6,313 Sales and principal repayments (96,373) (154,872) (217,246) (325,456) (469,760) Net portfolio activity $ 6,670 $ (13,596) $ (21,270) $ 126,867 $ 80,778 The following tables summarize the composition of our investment portfolio at amortized cost and fair value as of September 30, 2023 and December 31, 2022: September 30, 2023 Investments Cost(1) Investments Fair Value Percentage of Investment Portfolio Senior secured first lien debt $ 1,529,434 $ 1,481,498 85.7 % Senior secured second lien debt 41,196 36,114 2.1 % Collateralized securities and structured products - equity 2,424 1,224 0.1 % Unsecured debt 34,640 14,631 0.8 % Equity 171,194 194,476 11.3 % Subtotal/total percentage 1,778,888 1,727,943 100.0 % Short term investments(2) 116,934 116,934 Total investments $ 1,895,822 $ 1,844,877 Number of portfolio companies 109 Average annual EBITDA of portfolio companies $61.3 million Median annual EBITDA of portfolio companies $33.7 million Purchased at a weighted average price of par 96.39 % Gross annual portfolio yield based upon the purchase price(3) 11.81 % (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. 69 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. The following table summarizes the composition of our investment portfolio by the type of interest rate as of September 30, 2023 and December 31, 2022, excluding short term investments of $116,934 and $10,869, respectively: September 30, 2023 December 31, 2022 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 $ 1,452,475 $ 1,403,479 81.2 % $ 1,539,214 $ 1,477,630 84.5 % Fixed interest rate investments 148,595 124,978 7.3 % 166,297 157,006 9.0 % Non-income producing investments 142,883 145,706 8.4 % 76,061 104,619 6.0 % Other income producing investments 34,935 53,780 3.1 % 11,168 9,906 0.5 % Total investments $ 1,778,888 $ 1,727,943 100.0 % $ 1,792,740 $ 1,749,161 100.0 % 70 The following table shows the composition of our investment portfolio by industry classification and the percentage, by fair value, of the total assets in such industries as of September 30, 2023 and December 31, 2022: September 30, 2023 December 31, 2022 Industry Classification Investments Fair Value Percentage of Investment Portfolio Investments Fair Value Percentage of Investment Portfolio Services: Business $ 292,366 16.8 % $ 336,055 19.2 % Healthcare & Pharmaceuticals 233,292 13.5 % 237,082 13.6 % Media: Diversified & Production 124,271 7.2 % 134,927 7.7 % Media: Advertising, Printing & Publishing 113,476 6.6 % 105,375 6.0 % Construction & Building 109,283 6.3 % 46,007 2.6 % Services: Consumer 105,805 6.1 % 115,849 6.6 % Retail 101,301 5.9 % 74,718 4.3 % Chemicals, Plastics & Rubber 82,501 4.8 % 66,753 3.8 % Diversified Financials 81,093 4.7 % 99,819 5.7 % Energy: Oil & Gas 73,837 4.3 % 68,756 3.9 % Consumer Goods: Durable 59,890 3.5 % 60,735 3.5 % Beverage, Food & Tobacco 52,414 3.0 % 45,396 2.6 % Capital Equipment 48,142 2.8 % 41,580 2.4 % Consumer Goods: Non-Durable 43,089 2.5 % 47,886 2.8 % Banking, Finance, Insurance & Real Estate 38,125 2.2 % 43,836 2.5 % High Tech Industries 33,762 2.0 % 56,501 3.2 % Hotel, Gaming & Leisure 27,158 1.6 % 46,739 2.7 % Containers, Packaging & Glass 19,404 1.1 % 19,551 1.1 % Telecommunications 18,311 1.1 % 18,302 1.1 % Metals & Mining 15,733 0.9 % 15,780 0.9 % Environmental Industries 15,375 0.9 % — — Automotive 14,471 0.8 % 16,255 0.9 % Aerospace & Defense 12,681 0.7 % 38,842 2.2 % Transportation: Cargo 12,163 0.7 % 12,417 0.7 % Subtotal/total percentage 1,727,943 100.0 % 1,749,161 100.0 % Short term investments 116,934 10,869 Total investments $ 1,844,877 $ 1,760,030 Our investment portfolio may contain senior secured investments that are in the form of lines of credit, delayed draw term loans, revolving credit facilities, or unfunded commitments, which may require us to provide funding when requested in accordance with the terms of the underlying agreements. As of September 30, 2023 and December 31, 2022, our unfunded commitments amounted to $59,170 and $71,420 , respectively. As of November 3, 2023, our unfunded commitments amount ed to $57,644. 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. 71 The following is a description of the conditions associated with each investment rating used in this ratings system: Investment Rating Description 1 Indicates the least amount of risk to our initial cost basis. The trends and risk factors for this investment since origination or acquisition are generally favorable, which may include the performance of the portfolio company or a potential exit. 2 Indicates a level of risk to our initial cost basis that is similar to the risk to our initial cost basis at the time of origination or acquisition. This portfolio company is generally performing in accordance with our analysis of its business and the full return of principal and interest or dividend is expected. 3 Indicates that the risk to our ability to recoup the cost of such investment has increased since origination or acquisition, but full return of principal and interest or dividend is expected. A portfolio company with an investment rating of 3 requires closer monitoring. 4 Indicates that the risk to our ability to recoup the cost of such investment has increased significantly since origination or acquisition, including as a result of factors such as declining performance and noncompliance with debt covenants, and we expect some loss of interest, dividend or capital appreciation, but still expect an overall positive internal rate of return on the investment. 5 Indicates that the risk to our ability to recoup the cost of such investment has increased materially since origination or acquisition and the portfolio company likely has materially declining performance. Loss of interest or dividend and some loss of principal investment is expected, which would result in an overall negative internal rate of return on the investment. For investments rated 3, 4, or 5, CIM enhances its level of scrutiny over the monitoring of such portfolio company. The following table summarizes the composition of our investment portfolio based on the 1 to 5 investment rating scale at fair value as of September 30, 2023 and December 31, 2022, excluding short term investments of $116,934 and $10,869, respectively: September 30, 2023 December 31, 2022 Investment Rating Investments Fair Value Percentage of Investment Portfolio Investments Fair Value Percentage of Investment Portfolio 1 $ 776 — $ 24,450 1.4 % 2 1,566,904 90.7 % 1,424,681 81.5 % 3 142,402 8.2 % 260,662 14.9 % 4 10,026 0.6 % 39,032 2.2 % 5 7,835 0.5 % 336 — $ 1,727,943 100.0 % $ 1,749,161 100.0 % 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. 72 Current Investment Portfolio The following table summarizes the composition of our investment portfolio at fair value as of November 3, 2023: Investments Fair Value Percentage of Investment Portfolio Senior secured first lien debt $ 1,520,247 86.1 % Senior secured second lien debt 36,114 2.0 % Collateralized securities and structured products - equity 1,224 0.1 % Unsecured debt 14,666 0.8 % Equity 193,933 11.0 % Subtotal/total percentage 1,766,184 100.0 % Short term investments(2) 125,812 Total investments $ 1,891,996 Number of portfolio companies 110 Average annual EBITDA of portfolio companies $60.3 million Median annual EBITDA of portfolio companies $33.6 million Purchased at a weighted average price of par 95.55 % Gross annual portfolio yield based upon the purchase price(2) 11.90 % (1) Short term investments represent an investment in a fund that invests in highly liquid investments with average original maturity dates of three months or less. (2) The gross annual portfolio yield does not represent and may be higher than an actual investment return to shareholders because it excludes our expenses and all sales commissions and dealer manager fees and does not consider the cost of leverage. Results of Operations for the Three Months Ended September 30, 2023 and 2022 Our results of operations for the three months ended September 30, 2023 and 2022 were as follows: Three Months Ended September 30, 2023 2022 Investment income $ 67,540 $ 54,163 Operating expenses and income taxes 37,550 28,606 Net investment income after taxes 29,990 25,557 Net realized loss on investments and foreign currency (8,123) (17,169) Net change in unrealized appreciation on investments 25,606 25,595 Net increase in net assets resulting from operations $ 47,473 $ 33,983 Investment Income For the three months ended September 30, 2023 and 2022, we generated investment income of $67,540 and $54,163, respectively, consisting primarily of interest income on investments in senior secured debt, collateralized securities and structured products, and unsecured debt of 101 and 116 portfolio companies held during each respective period. The increase in investment income was primarily due to higher SOFR and LIBOR rates during the three months ended September 30, 2023 compared to the three months ended September 30, 2022. 73 Operating Expenses and Income Taxes The composition of our operating expenses and income taxes for the three months ended September 30, 2023 and 2022 was as follows: Three Months Ended September 30, 2023 2022 Management fees $ 6,741 $ 6,942 Administrative services expense 996 733 Subordinated incentive fee on income 6,362 5,421 General and administrative 1,931 2,027 Interest expense 21,757 13,469 Income tax (benefit) expense, including excise tax (237) 14 Total operating expenses and income taxes $ 37,550 $ 28,606 The increase in interest expense was primarily the result of (a) higher SOFR and LIBOR rates during the three months ended September 30, 2023 compared to the three months ended September 30, 2022 and (b) higher average borrowings under our financing arrangements during the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The increase in subordinated incentive fee on income was primarily the result of the increase in investment income during the three months ended September 30, 2023 compared to the three months ended September 30, 2022, which was partially offset by the increase in interest expense during the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The composition of our general and administrative expenses for the three months ended September 30, 2023 and 2022 was as follows: Three Months Ended September 30, 2023 2022 Professional fees $ 405 $ 223 Printing and marketing expense 284 672 Accounting and administrative costs 282 180 Valuation expense 212 199 Transfer agent expense 189 296 Director fees and expenses 177 162 Insurance expense 168 157 Dues and subscriptions 162 112 Other expenses 52 26 Total general and administrative expense $ 1,931 $ 2,027 Net Investment Income After Taxes Our net investment income after taxes totaled $29,990 and $25,557 for the three months ended September 30, 2023 and 2022, respectively. The increase in net investment income was a result of an increase in our investment income during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, which was partially offset by an increase in our operating expenses during the same period, which was driven primarily by increases in interest expense and the subordinated incentive fee on income. Net Realized Loss on Investments and Foreign Currency Our net realized loss on investments and foreign currency totaled $(8,123) and $(17,169) for the three months ended September 30, 2023 and 2022, respectively. The decrease in net realized loss on investments and foreign currency was driven primarily by realized gains on a certain investment during the three months ended September 30, 2023 that offset realized losses due to the write-off of certain investments during the same period. During the three months ended September 30, 2022, there were no significant realized gains to offset realized losses due to the write-off of certain investments. 74 Net Change in Unrealized Appreciation on Investments The net change in unrealized appreciation on our investments totaled $25,606 and $25,595 for the three months ended September 30, 2023 and 2022, respectively. In both periods, the net change in unrealized appreciation was primarily driven by the restructure or write-off of certain investments that were previously recorded as unrealized losses. Net Increase in Net Assets Resulting from Operations For the three months ended September 30, 2023 and 2022, we recorded a net increase in net assets resulting from operations of $47,473 and $33,983, respectively, as a result of our operating activity for the respective periods. Results of Operations for the Nine Months Ended September 30, 2023 and 2022 Our results of operations for the nine months ended September 30, 2023 and 2022 were as follows: Nine Months Ended September 30, 2023 2022 Investment income $ 191,011 $ 139,398 Operating expenses and income taxes 107,747 75,070 Net investment income after taxes 83,264 64,328 Net realized loss on investments and foreign currency (31,576) (17,058) Net change in unrealized depreciation on investments (7,366) (6,664) Net increase in net assets resulting from operations $ 44,322 $ 40,606 Investment Income For the nine months ended September 30, 2023 and 2022, we generated investment income of $191,011 and $139,398, respectively, consisting primarily of interest income on investments in senior secured debt, collateralized securities and structured products, and unsecured debt of 107 and 128 portfolio companies held during each respective period. The increase in SOFR and LIBOR rates during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 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 nine months ended September 30, 2023 and 2022 was as follows: Nine Months Ended September 30, 2023 2022 Management fees $ 19,963 $ 20,436 Administrative services expense 2,743 2,234 Subordinated incentive fee on income 17,662 13,645 General and administrative 5,960 5,961 Interest expense 61,533 32,769 Income tax (benefit) expense, including excise tax (114) 25 Total operating expenses and income taxes $ 107,747 $ 75,070 The increase in interest expense was primarily the result of (a) higher SOFR and LIBOR rates during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 and (b) higher average borrowings under our financing arrangements during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase in subordinated incentive fee on income was primarily the result of the increase in investment income during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, which was partially offset by the increase in interest expense during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. 75 The composition of our general and administrative expenses for the nine months ended September 30, 2023 and 2022 was as follows: Nine Months Ended September 30, 2023 2022 Professional fees $ 1,576 $ 1,375 Transfer agent expense 736 890 Valuation expense 637 590 Dues and subscriptions 635 727 Accounting and administrative costs 606 482 Printing and marketing expense 558 705 Director fees and expenses 525 477 Insurance expense 504 662 Other expenses 183 53 Total general and administrative expense $ 5,960 $ 5,961 Net Investment Income After Taxes Our net investment income after taxes totaled $83,264 and $64,328 for the nine months ended September 30, 2023 and 2022, respectively. The increase in our net investment income was a result of an increase in our investment income during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, which was partially offset by an increase in our operating expenses during the same period, which was driven primarily by increases in interest expense and the subordinated incentive fee on income. Net Realized Loss on Investments and Foreign Currency Our net realized loss on investments and foreign currency totaled $(31,576) and $(17,058) for the nine months ended September 30, 2023 and 2022, respectively. This increase was driven primarily by realized losses on the restructure and write-off of certain investments during the nine months ended September 30, 2023. Net Change in Unrealized Depreciation on Investments The net change in unrealized depreciation on our investments totaled $(7,366) and $(6,664) for the nine months ended September 30, 2023 and 2022, respectively. The net change in unrealized depreciation during the nine months ended September 30, 2023 was primarily due to the decline in fair value of certain investments from mark-to-market adjustments, which was partially offset by realized losses recorded on the restructure of certain investments that were previously recorded as unrealized losses. During the nine months ended September 30, 2022, the net change in unrealized depreciation was primarily the result of widening credit spreads and decreased multiples in equity markets that negatively impacted the fair value of certain of our investments. Net Increase in Net Assets Resulting from Operations For the nine months ended September 30, 2023 and 2022, we recorded a net increase in net assets resulting from operations of $44,322 and $40,606, respectively, 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 advisory fees to and/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. 76 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 amend the size of our existing financing arrangements. Any increase to our leverage would be subject to prevailing market conditions, our liquidity requirements, contractual and regulatory restrictions and other factors. As of September 30, 2023 and December 31, 2022, our asset coverage ratio was 1.85 and 1.92, respectively. We seek to carefully consider our unfunded commitments for the purpose of planning our ongoing financial leverage. On September 15, 2023, 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 September 30, 2023, we had cash of $6,805 and short term investments of $116,934 invested in a fund that primarily invests in U.S. government securities. Cash and short term investments as of September 30, 2023, taken together with our available debt, is expected to be sufficient for our investing and financing activities and to conduct our operations in the near term. As of September 30, 2023, we had $102 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. 77 On August 29, 2023, 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 expires on August 29, 2024, and is subject to price, market volume and timing restrictions. During the nine months ended September 30, 2023, we repurchased an aggregate of 834,680 shares under the 10b5-1 trading plan for an aggregate purchase price of $8,619, or an average purchase price of $10.33 per share. From October 1, 2023 to November 3, 2023, we repurchased an aggregate of 165,317 shares of common stock under the 10b5-1 trading plan for an aggregate purchase price of $1,669, or an average purchase price of $10.10 per share. From the inception of the 10b5-1 trading plan in August 2022 through November 3, 2023, we repurchased an aggregate of 2,658,968 shares of common stock under the 10b5-1 trading plan for an aggregate purchase price of $25,586, or an average purchase price of $9.62 per share. 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. 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 year ended December 31, 2022 and the nine months ended September 30, 2023: Distributions Three Months Ended Per Share Amount 2022 March 31, 2022 (one record date) $ 0.28 $ 15,948 June 30, 2022 (one record date) 0.28 15,949 September 30, 2022 (one record date) 0.31 17,604 December 31, 2022 (two record dates) 0.58 32,074 Total distributions for the year ended December 31, 2022 $ 1.45 $ 81,575 2023 March 31, 2023 (one record date) $ 0.34 $ 18,687 June 30, 2023 (one record date) 0.34 18,614 September 30, 2023 (two record dates) 0.39 21,276 Total distributions for the nine months ended September 30, 2023 $ 1.07 $ 58,577 78 On August 7, 2023, our co-chief executive officers declared a supplemental distribution of $0.05 per share for both the third and fourth quarters of 2023, paid on October 16, 2023 and payable on January 15, 2024, respectively, to shareholders of record as of September 29, 2023 and December 29, 2023, respectively. On November 6, 2023, our co-chief executive officers declared a regular quarterly distribution of $0.34 per share for the fourth quarter of 2023, payable on December 15, 2023 to shareholders of record as of December 1, 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. JPM Credit Facility As of September 30, 2023 and November 3, 2023, our aggregate outstanding borrowings under the JPM Credit Facility were $600,000 and $575,000, respectively, and the aggregate unfunded principal amount in connection with the JPM Credit Facility was $75,000 and $100,000, 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 September 30, 2023 and November 3, 2023, our outstanding borrowings under the Amended UBS Facility were $122,500 and the aggregate unfunded principal amount in connection with the Amended UBS Facility was $27,500. 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 September 30, 2023 and November 3, 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 September 30, 2023 and November 3, 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 September 30, 2023 and November 3, 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 September 30, 2023 and November 3, 2023, we had $80,712 and $113,858, respectively, in aggregate principal amount of Series A Notes and Additional Series A Notes outstanding and there was no unfunded principal amount in connection with either the Series A Notes or the Additional Series A Notes. For a detailed discussion of our Series A Notes and Additional Series A Notes, refer to Note 8 and Note 14, respectively, to our consolidated financial statements included in this report. Unfunded Commitments As of September 30, 2023 and November 3, 2023, our unfunded commitments amounted to $59,170 and $57,644, 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. 79 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. 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. 80 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 and CIG, and amounts incurred under agreements with such related parties, refer to Note 4 to our consolidated financial statements included in this report. For a discussion of our relationship with CION/EagleTree, refer to Note 7 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, March 28, 2022 and May 15, 2023. 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, December 17, 2020 and June 14, 2023. 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. 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 and Additional Series A Notes. See Notes 8 and 14 to our consolidated financial statements for a more detailed description of the Deed of Trust, the Series A Notes and the Additional 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. 81