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, 2023. 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 and high interest rates; • 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 and high interest rates 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. 67 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 prices at which shares of our common stock and our 2029 Notes 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 and our Series A Notes listed and commenced trading in Israel on the TASE under the ticker symbol “CION” and "CION B1", respectively. On October 9, 2024, our 2029 Notes listed and commenced trading on the NYSE under the ticker symbol “CICB”. 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 6, 2024, 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, 2024. We have also entered into an administration agreement with CIM to provide us with administrative services necessary for us to operate. 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. 68 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 Q4 Base Distribution On November 4, 2024, our co-chief executive officers declared a quarterly base distribution of $0.36 per share for the fourth quarter of 2024, payable on December 16, 2024 to shareholders of record as of December 2, 2024. 2029 Notes On October 3, 2024, we issued and sold $172,500 in aggregate principal amount of our 2029 Notes, which includes $22,500 in aggregate principal amount of the 2029 Notes issued and sold pursuant to the exercise in full of the underwriters’ option to purchase additional 2029 Notes to cover overallotments. The 2029 Notes were issued pursuant to the Indenture between us and the Trustee. We used the net proceeds of the offering of the 2029 Notes to pay down borrowings under our senior secured credit facility with JPM. The 2029 Notes began trading on the NYSE under the ticker symbol “CICB” on October 9, 2024. The 2029 Notes will mature on December 30, 2029, unless previously redeemed or repurchased in accordance with their terms. The interest rate of the 2029 Notes is 7.50% per year and will be paid quarterly in arrears on March 30, June 30, September 30 and December 30 of each year, commencing December 30, 2024. The 2029 Notes are our direct unsecured obligations and rank pari passu with our existing and future unsecured, unsubordinated indebtedness; senior to any series of preferred stock that we may issue in the future; senior to any of our future indebtedness that expressly provides it is subordinated to the 2029 Notes; effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness; and structurally subordinated to all existing and future indebtedness and other obligations of any of our existing or future subsidiaries. 69 The 2029 Notes may be redeemed in whole or in part at any time or from time to time at our option on or after December 30, 2026, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of $25 per 2029 Note plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to the date fixed for redemption. The Indenture contains certain covenants, including covenants requiring us to comply with the asset coverage ratio requirements set forth in the 1940 Act, but giving effect to any exemptive relief granted to us by the SEC, and certain other exceptions, and to provide financial information to the holders of the 2029 Notes and the Trustee if we should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934, as amended. The 2029 Notes were offered and sold in an offering registered under the Securities Act of 1933, as amended, pursuant to our shelf registration statement on Form N-2 (Registration No. 333-278658) previously filed with the SEC, as supplemented by a preliminary prospectus supplement dated September 26, 2024 and a final prospectus supplement dated September 26, 2024. Portfolio Investment Activity for the Three and Nine Months Ended September 30, 2024 and 2023 and the Year Ended December 31, 2023 The following table summarizes our investment activity, excluding short term investments and PIK securities, for the three and nine months ended September 30, 2024 and 2023 and the year ended December 31, 2023: Three Months Ended September 30, Nine Months Ended September 30, Year Ended December 31, Net Investment Activity 2024 2023 2024 2023 2023 Purchases and drawdowns Senior secured first lien debt $ 91,286 $ 102,666 $ 330,952 $ 186,493 $ 340,704 Unsecured debt — — 1,096 4,200 4,200 Equity 1,183 377 19,585 5,283 5,283 Sales and principal repayments (153,580) (96,373) (438,164) (217,246) (300,250) Net portfolio activity $ (61,111) $ 6,670 $ (86,531) $ (21,270) $ 49,937 The following tables summarize the composition of our investment portfolio at amortized cost and fair value as of September 30, 2024 and December 31, 2023: September 30, 2024 Investments Cost(1) Investments Fair Value Percentage of Investment Portfolio Senior secured first lien debt $ 1,541,136 $ 1,494,524 85.3 % Senior secured second lien debt 5,116 3,873 0.2 % Collateralized securities and structured products - equity 1,003 685 — Unsecured debt 29,501 11,761 0.7 % Equity 219,985 241,883 13.8 % Subtotal/total percentage 1,796,741 1,752,726 100.0 % Short term investments(2) 53,503 53,503 Total investments $ 1,850,244 $ 1,806,229 Number of portfolio companies 103 Average annual EBITDA of portfolio companies $51.8 million Median annual EBITDA of portfolio companies $32.8 million Purchased at a weighted average price of par 97.11 % Gross annual portfolio yield based upon the purchase price(3) 10.88 % (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. 70 December 31, 2023 Investments Cost(1) Investments Fair Value Percentage of Investment Portfolio Senior secured first lien debt $ 1,604,111 $ 1,565,171 85.0 % Senior secured second lien debt 41,280 29,111 1.6 % Collateralized securities and structured products - equity 2,362 1,096 0.1 % Unsecured debt 31,693 12,874 0.7 % Equity 182,738 232,572 12.6 % Subtotal/total percentage 1,862,184 1,840,824 100.0 % Short term investments(2) 113,446 113,446 Total investments $ 1,975,630 $ 1,954,270 Number of portfolio companies 111 Average annual EBITDA of portfolio companies $61.7 million Median annual EBITDA of portfolio companies $33.7 million Purchased at a weighted average price of par 96.33 % Gross annual portfolio yield based upon the purchase price(3) 12.12 % (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, 2024 and December 31, 2023, excluding short term investments of $53,503 and $113,446, respectively: September 30, 2024 December 31, 2023 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 $ 1,466,022 $ 1,423,920 81.2 % $ 1,521,848 $ 1,475,126 80.1 % Non-income producing investments 195,146 218,049 12.5 % 154,419 184,175 10.0 % Fixed interest rate investments 130,179 105,365 6.0 % 155,244 131,533 7.2 % Other income producing investments 5,394 5,392 0.3 % 30,673 49,990 2.7 % Total investments $ 1,796,741 $ 1,752,726 100.0 % $ 1,862,184 $ 1,840,824 100.0 % 71 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, 2024 and December 31, 2023: September 30, 2024 December 31, 2023 Industry Classification Investments Fair Value Percentage of Investment Portfolio Investments Fair Value Percentage of Investment Portfolio Services: Business $ 272,919 15.5 % $ 282,237 15.3 % Healthcare & Pharmaceuticals 224,219 12.6 % 238,624 13.0 % Retail 137,725 7.9 % 135,000 7.3 % Media: Diversified & Production 131,196 7.5 % 135,037 7.3 % Services: Consumer 109,005 6.2 % 107,195 5.8 % Media: Advertising, Printing & Publishing 106,365 6.1 % 116,100 6.3 % Construction & Building 101,037 5.8 % 104,727 5.7 % Consumer Goods: Durable 96,513 5.5 % 59,955 3.3 % Energy: Oil & Gas 94,504 5.4 % 104,893 5.7 % Beverage, Food & Tobacco 89,320 5.1 % 68,780 3.7 % Banking, Finance, Insurance & Real Estate 63,644 3.6 % 52,272 2.8 % Diversified Financials 57,421 3.3 % 85,733 4.7 % Hotel, Gaming & Leisure 50,199 2.9 % 50,906 2.8 % Capital Equipment 39,092 2.2 % 49,571 2.7 % Consumer Goods: Non-Durable 33,468 1.9 % 42,381 2.3 % Automotive 30,934 1.8 % 12,403 0.7 % Environmental Industries 27,413 1.6 % 15,336 0.8 % Containers, Packaging & Glass 18,926 1.1 % 18,480 1.0 % High Tech Industries 18,529 1.1 % 22,671 1.2 % Metals & Mining 14,815 0.8 % 13,957 0.8 % Aerospace & Defense 14,000 0.8 % 12,000 0.6 % Transportation: Cargo 11,533 0.7 % 12,201 0.7 % Telecommunications 6,538 0.4 % 17,768 1.0 % Chemicals, Plastics & Rubber 3,411 0.2 % 82,597 4.5 % Subtotal/total percentage 1,752,726 100.0 % 1,840,824 100.0 % Short term investments 53,503 113,446 Total investments $ 1,806,229 $ 1,954,270 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, 2024 and December 31, 2023, our unfunded commitments amounted to $71,113 and $47,349, respectively. As of October 30, 2024, our unfunded commitments amounted to $69,980. 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. 72 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, 2024 and December 31, 2023, excluding short term investments of $53,503 and $113,446, respectively: September 30, 2024 December 31, 2023 Investment Rating Investments Fair Value Percentage of Investment Portfolio Investments Fair Value Percentage of Investment Portfolio 1 $ 10,429 0.6 % $ 98,255 5.3 % 2 1,501,302 85.7 % 1,603,975 87.2 % 3 207,168 11.8 % 120,132 6.5 % 4 26,920 1.5 % 10,304 0.6 % 5 6,907 0.4 % 8,158 0.4 % $ 1,752,726 100.0 % $ 1,840,824 100.0 % 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. 73 Current Investment Portfolio The following table summarizes the composition of our investment portfolio at fair value as of October 30, 2024: Investments Fair Value Percentage of Investment Portfolio Senior secured first lien debt $ 1,509,381 85.4 % Senior secured second lien debt 3,860 0.2 % Collateralized securities and structured products - equity 685 — Unsecured debt 11,705 0.7 % Equity 241,397 13.7 % Subtotal/total percentage 1,767,028 100.0 % Short term investments(1) 275,755 Total investments $ 2,042,783 Number of portfolio companies 104 Average annual EBITDA of portfolio companies $52.6 million Median annual EBITDA of portfolio companies $33.7 million Purchased at a weighted average price of par 97.01 % Gross annual portfolio yield based upon the purchase price(2) 10.93 % (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, 2024 and 2023 Our results of operations for the three months ended September 30, 2024 and 2023 were as follows: Three Months Ended September 30, 2024 2023 Investment income $ 59,627 $ 67,540 Operating expenses and income taxes 38,009 37,550 Net investment income after taxes 21,618 29,990 Net realized gain (loss) on investments and foreign currency 3,938 (8,123) Net change in unrealized (depreciation) appreciation on investments (25,935) 25,606 Net (decrease) increase in net assets resulting from operations $ (379) $ 47,473 Investment Income For the three months ended September 30, 2024 and 2023, we generated investment income of $59,627 and $67,540, respectively, consisting primarily of interest income on investments in senior secured debt, collateralized securities and structured products, and unsecured debt of 99 and 101 portfolio companies held during each respective period. The decrease in total investment income was primarily driven by a decrease in transaction fees on investments received during the three months ended September 30, 2024 compared to the three months ended September 30, 2023. 74 Operating Expenses and Income Taxes The composition of our operating expenses and income taxes for the three months ended September 30, 2024 and 2023 was as follows: Three Months Ended September 30, 2024 2023 Management fees $ 6,854 $ 6,741 Administrative services expense 1,184 996 Subordinated incentive fee on income 4,586 6,362 General and administrative 1,855 1,931 Interest expense 23,551 21,757 Income tax benefit, including excise tax (21) (237) Total operating expenses and income taxes $ 38,009 $ 37,550 The increase in interest expense was primarily the result of higher average borrowings under our financing arrangements during the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The decrease in subordinated incentive fee on income was primarily the result of the decrease in investment income during the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The composition of our general and administrative expenses for the three months ended September 30, 2024 and 2023 was as follows: Three Months Ended September 30, 2024 2023 Professional fees $ 777 $ 405 Valuation expense 205 212 Insurance expense 195 168 Director fees and expenses 171 177 Accounting and administrative costs 137 282 Printing and marketing expense 127 284 Transfer agent expense 121 189 Dues and subscriptions 117 162 Other expenses 5 52 Total general and administrative expense $ 1,855 $ 1,931 Net Investment Income After Taxes Our net investment income after taxes totaled $21,618 and $29,990 for the three months ended September 30, 2024 and 2023, respectively. The decrease in net investment income was a result of a decrease in our investment income during the three months ended September 30, 2024 compared to the three months ended September 30, 2023. Net Realized Gain (Loss) on Investments and Foreign Currency Our net realized gain (loss) on investments and foreign currency totaled $3,938 and $(8,123) for the three months ended September 30, 2024 and 2023, respectively. This change was driven primarily by lower realized losses due to the restructure of certain investments during the three months ended September 30, 2024 compared to the three months ended September 30, 2023. 75 Net Change in Unrealized (Depreciation) Appreciation on Investments The net change in unrealized (depreciation) appreciation on our investments totaled $(25,935) and $25,606 for the three months ended September 30, 2024 and 2023, respectively. This change was primarily due to the decline in fair value of certain investments from mark-to-market adjustments during the three months ended September 30, 2024 compared to during the three months ended September 30, 2023. Net (Decrease) Increase in Net Assets Resulting from Operations For the three months ended September 30, 2024 and 2023, we recorded a net (decrease) increase in net assets resulting from operations of $(379) and $47,473, respectively, as a result of our operating activity for the respective periods. Results of Operations for the Nine Months Ended September 30, 2024 and 2023 Our results of operations for the nine months ended September 30, 2024 and 2023 were as follows: Nine Months Ended September 30, 2024 2023 Investment income $ 194,538 $ 191,011 Operating expenses and income taxes 117,364 107,747 Net investment income after taxes 77,174 83,264 Net realized loss on investments and foreign currency (26,075) (31,576) Net change in unrealized depreciation on investments (22,655) (7,366) Net increase in net assets resulting from operations $ 28,444 $ 44,322 Investment Income For the nine months ended September 30, 2024 and 2023, we generated investment income of $194,538 and $191,011, respectively, consisting primarily of interest income on investments in senior secured debt, collateralized securities and structured products, and unsecured debt of 104 and 107 portfolio companies held during each respective period. The increase in total investment income was primarily driven by an increase in certain transaction fees on investments received during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. Operating Expenses and Income Taxes The composition of our operating expenses and income taxes for the nine months ended September 30, 2024 and 2023 was as follows: Nine Months Ended September 30, 2024 2023 Management fees $ 20,559 $ 19,963 Administrative services expense 3,522 2,743 Subordinated incentive fee on income 16,371 17,662 General and administrative 5,298 5,960 Interest expense 71,626 61,533 Income tax benefit, including excise tax (12) (114) Total operating expenses and income taxes $ 117,364 $ 107,747 The increase in interest expense was primarily the result of higher average borrowings under our financing arrangements during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. 76 The composition of our general and administrative expenses for the nine months ended September 30, 2024 and 2023 was as follows: Nine Months Ended September 30, 2024 2023 Professional fees $ 1,753 $ 1,576 Dues and subscriptions 649 635 Valuation expense 578 637 Insurance expense 533 504 Director fees and expenses 519 525 Accounting and administrative costs 459 606 Transfer agent expense 368 736 Printing and marketing expense 292 558 Other expenses 147 183 Total general and administrative expense $ 5,298 $ 5,960 Net Investment Income After Taxes Our net investment income after taxes totaled $77,174 and $83,264 for the nine months ended September 30, 2024 and 2023, respectively. The decrease in our net investment income was primarily the result of an increase in our interest expense during the nine months ended September 30, 2024 compared to during the nine months ended September 30, 2023. Net Realized Loss on Investments and Foreign Currency Our net realized loss on investments and foreign currency totaled $(26,075) and $(31,576) for the nine months ended September 30, 2024 and 2023, respectively. This decrease was driven primarily by lower realized losses due to the restructure of certain investments during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. Net Change in Unrealized Depreciation on Investments The net change in unrealized depreciation on our investments totaled $(22,655) and $(7,366) for the nine months ended September 30, 2024 and 2023, respectively. This increase was driven primarily by the decline in fair value of certain investments from mark-to-market adjustments during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. Net Increase in Net Assets Resulting from Operations For the nine months ended September 30, 2024 and 2023, we recorded a net increase in net assets resulting from operations of $28,444 and $44,322, 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 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. 77 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, 2024 and December 31, 2023, our asset coverage ratio was 1.78 and 1.81, respectively. We seek to carefully consider our unfunded commitments for the purpose of planning our ongoing financial leverage and liquidity requirements. On August 27, 2024, 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, or have any intent to, issue any such shares. As of September 30, 2024, we had cash of $29,765 and short term investments of $53,503 invested in a fund that primarily invests in U.S. government securities. Cash and short term investments as of September 30, 2024, taken together with the undrawn debt available under our credit facilities, is expected to be sufficient for our investing and financing activities and to conduct our operations in the near term. As of September 30, 2024, we had $162 million available under our secured 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 19, 2024, as part of the share repurchase policy, we entered into a new 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 19, 2025, and is subject to price, market volume and timing restrictions. During the nine months ended September 30, 2024, we repurchased an aggregate of 824,750 shares under the 10b5-1 trading plan for an aggregate purchase price of $9,344, or an average purchase price of $11.33 per share. From October 1, 2024 to October 30, 2024, we repurchased an aggregate of 73,943 shares of common stock under the 10b5-1 trading plan for an aggregate purchase price of $881, or an average purchase price of $11.92 per share. From the inception of the 10b5-1 trading plan in August 2022 through October 30, 2024, we repurchased an aggregate of 3,672,497 shares of common stock under the 10b5-1 trading plan for an aggregate purchase price of $37,187, or an average purchase price of $10.13 per share. 78 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. 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 base distributions on a quarterly basis. Base and any supplemental and/or 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, 2023 and the nine months ended September 30, 2024: Distributions Three Months Ended Per Share Amount 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 December 31, 2023 (three record dates) 0.54 29,290 Total distributions for the year ended December 31, 2023 $ 1.61 $ 87,867 2024 March 31, 2024 (one record date) $ 0.34 $ 18,279 June 30, 2024 (two record dates) 0.41 21,960 September 30, 2024 (one record date) 0.36 19,234 Total distributions for the nine months ended September 30, 2024 $ 1.11 $ 59,473 On November 4, 2024, our co-chief executive officers declared a quarterly base distribution of $0.36 per share for the fourth quarter of 2024 payable on December 16, 2024 to shareholders of record as of December 2, 2024. 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, 2024 and October 30, 2024, our aggregate outstanding borrowings under the JPM Credit Facility were $450,000 and the aggregate unfunded principal amount in connection with the JPM Credit Facility was $112,500. For a detailed discussion of our JPM Credit Facility, refer to Note 8 to our consolidated financial statements included in this report. 79 UBS Facility As of September 30, 2024 and October 30, 2024, our outstanding borrowings under the Amended UBS Facility were $100,000 and the aggregate unfunded principal amount in connection with the Amended UBS Facility was $50,000. For a detailed discussion of our Amended UBS Facility, refer to Note 8 to our consolidated financial statements included in this report. 2026 Notes As of September 30, 2024 and October 30, 2024, 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 Term Loan On September 24, 2024, the Company fully repaid all outstanding principal and interest on and otherwise satisfied all its obligations under the 2021 Term Loan. For a detailed discussion of our 2021 Term Loan, refer to Note 8 to our consolidated financial statements included in this report. 2022 Term Loan As of September 30, 2024 and October 30, 2024, our outstanding borrowings under the 2022 Term Loan were $50,000 and there was no unfunded principal amount in connection with the 2022 Term Loan. For a detailed discussion of our 2022 Term Loan, refer to Note 8 to our consolidated financial statements included in this report. 2024 Term Loan As of September 30, 2024 and October 30, 2024, our outstanding borrowings under the 2024 Term Loan were $30,000 and there was no unfunded principal amount in connection with the 2024 Term Loan. For a detailed discussion of our 2024 Term Loan, refer to Note 8 to our consolidated financial statements included in this report. Series A Notes As of September 30, 2024 and October 30, 2024, we had approximately $114,844 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 8 to our consolidated financial statements included in this report. 2027 Notes As of September 30, 2024 and October 30, 2024, we had $200,000 in aggregate principal amount of 2027 Notes outstanding and there was no unfunded principal amount in connection with the 2027 Notes. For a detailed discussion of our 2027 Notes, refer to Note 8 to our consolidated financial statements included in this report. 2029 Notes As of October 30, 2024, we had $172,500 in aggregate principal amount of 2029 Notes outstanding and there was no unfunded principal amount in connection with the 2029 Notes. For a detailed discussion of our 2029 Notes, refer to Note 14 to our consolidated financial statements included in this report. Unfunded Commitments As of September 30, 2024 and October 30, 2024, our unfunded commitments amounted to $71,113 and $69,980, 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. 80 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: • 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 NAV 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. 81 Given the expected types of investments, excluding short term investments and stock of publicly traded companies that are classified as Level 1, management expects our portfolio holdings to be classified as Level 3. Due to the uncertainty inherent in the valuation process, particularly for Level 3 investments, such fair value estimates may differ significantly from the values that would have been used had an active market for the investments existed. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses that we ultimately realize on these investments to materially differ from the valuations currently assigned. Inputs used in the valuation process are subject to variability in the future and can result in materially different fair values. For an additional discussion of our investment valuation process, refer to Note 2 to our consolidated financial statements included in this report. Related Party Transactions For a discussion of our relationship with related parties including CIM, CIG, and AIA and amounts incurred under agreements with such related parties, refer to Note 4 to our consolidated financial statements included in this report. 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 on September 30, 2016, July 11, 2017, November 28, 2017, May 23, 2018, May 15, 2020, February 26, 2021, March 28, 2022, May 15, 2023, May 14, 2024, June 17, 2024 and July 15, 2024. 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 2026 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 Term Loan with an Israeli institutional investor. See Note 8 to our consolidated financial statements for a more detailed description of the 2021 Term Loan. On April 27, 2022, we entered into the 2022 Term Loan with an Israeli institutional investor. See Note 8 to our consolidated financial statements for a more detailed description of the 2022 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 Notes 8 to our consolidated financial statements for a more detailed description of the Deed of Trust and the Series A Notes. On November 8, 2023, we entered into the 2027 Note Purchase Agreement with purchasers of the 2027 Notes (Tranche A) and on September 18, 2024, we entered into the AR Note Purchase Agreement with purchasers of the 2027 Notes (Tranche B). See Note 8 to our consolidated financial statements for a more detailed description of the 2027 Notes. On September 30, 2024, we entered into the 2024 Term Loan with an Israeli institutional investor. See Note 8 to our consolidated financial statements for a more detailed description of the 2024 Term Loan. On October 3, 2024, we issued and sold our 2029 Notes under the Indenture pursuant to a U.S. public offering. See Note 14 to our consolidated financial statements for a more detailed description of the 2029 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. 82