Capital Southwest
Annual Report 2018

Plain-text annual report

Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FORM 10-K(Mark One)[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2018OR[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 814-00061 CAPITAL SOUTHWEST CORPORATION(Exact name of registrant as specified in its charter) Texas75-1072796(State or other jurisdiction of incorporationor organization)(I.R.S. EmployerIdentification No.) 5400 Lyndon B Johnson Freeway, Suite 1300, Dallas, Texas75240(Address of principal executive offices)(Zip Code) Registrant’s telephone number, including area code: (214) 238-5700 Securities registered pursuant to Section 12(b) of the Act: Title of Each ClassName of Each Exchange on Which RegisteredCommon Stock, $0.25 par value per shareThe Nasdaq Global Select Market5.95% Notes due 2022The Nasdaq Global Select Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐NO ☒ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ NO ☒ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements forthe past 90 days. YES ☐ NO ☐ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files). YES ☐ NO ☐ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will notbe contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerginggrowth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act. Large accelerated filer Accelerated filer ☒ Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new orrevised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).YES ☐ NO ☒ The aggregate market value of the voting stock held by non-affiliates of the registrant as of September 30, 2017 was $258,610,103 based on the last sale priceof such stock as quoted by The Nasdaq Global Select Market on such date. The number of shares of common stock, $0.25 par value per share, outstanding as of June 1, 2018 was 16,161,786. Documents Incorporated by ReferencePortions of the registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the registrant’s AnnualMeeting of Shareholders to be held August 1, 2018 are incorporated by reference into Part III of this Annual Report on Form 10-K. Table of ContentsTABLE OF CONTENTS PART I PageItem 1. Business2Item 1A. Risk Factors22Item 1B. Unresolved Staff Comments37Item 2. Properties37Item 3. Legal Proceedings37Item 4. Mine Safety Disclosures38 PART II Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases ofEquity Securities39Item 6. Selected Financial Data42Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations44Item 7A. Quantitative and Qualitative Disclosures About Market Risk57Item 8. Financial Statements and Supplementary Data59Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure118Item 9A. Controls and Procedures119Item 9B. Other Information119 PART III Item 10. Directors, Executive Officers and Corporate Governance120Item 11. Executive Compensation120Item 12. Security Ownership of Certain Beneficial Owners and Management and Related ShareholderMatters120Item 13. Certain Relationships and Related Transactions, and Director Independence120Item 14. Principal Accountant Fees and Services121 PART IV Item 15. Exhibits, Financial Statement Schedules122 Signatures 127 Table of ContentsCAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements regarding the plans and objectives ofmanagement for future operations. Any such forward-looking statements may involve known and unknown risks,uncertainties and other factors which may cause our actual results, performance or achievements to be materially differentfrom future results, performance or achievements expressed or implied by any forward-looking statements. Forward-lookingstatements, which involve assumptions and describe our future plans, strategies and expectations are generally identifiableby use of the words “may,” “predict,” “will,” “continue,” “likely,” “would,” “could,” “should,” “expect,” “anticipate,”“potential,” “estimate,” “indicate,” “seek,” “believe,” “target,” “intend,” “plan,” or “project” or the negative of thesewords or other variations on these words or comparable terminology. These forward-looking statements involve risks anduncertainties and are based on assumptions that may be incorrect, and we cannot assure you that the projections includedin these forward-looking statements will come to pass. Accordingly, there are or will be important factors that could causeour actual results to differ materially from those expressed or implied by the forward-looking statements. We believe thesefactors include, but are not limited to, the following: ·our future operating results;·market conditions and our ability to access debt and equity capital and our ability to manage our capital resourceseffectively;·the timing of cash flows, if any, from the operations of our portfolio companies;·our business prospects and the prospects of our existing and prospective portfolio companies;·the financial condition and ability of our existing and prospective portfolio companies to achieve their objectives;·the adequacy of our cash resources and working capital;·our ability to recover unrealized losses;·our expected financings and investments;·our contractual arrangements and other relationships with third parties;·the impact of fluctuations in interest rates on our business;·the impact of a protracted decline in the liquidity of credit markets on our business;·our ability to operate as a BDC and a RIC, including the impact of changes in laws or regulations, including the taxreform, governing our operations or the operations of our portfolio companies;·the dependence of our future success on the general economy and its impact on the industries in which we invest;·our ability to successfully invest any capital raised in an offering;·the return or impact of current and future investments;·our transition to a debt focused investment strategy;·the valuation of our investments in portfolio companies, particularly those having no liquid trading market;·our regulatory structure and tax treatment; and·the timing, form and amount of any dividend distributions. For a discussion of these and other factors that could cause our actual results to differ materially from forward-looking statements contained in this Annual Report, please see the discussion under “Risk Factors” in Item 1A. We havebased the forward-looking statements included in this Annual Report on Form 10-K on information available to us on thedate of this Annual Report on Form 10-K. You should not place undue reliance on these forward-looking statements andyou should carefully consider all of the factors identified in this report that could cause actual results to differ. We assumeno obligation to update any such forward-looking statements, unless we are required to do so by applicable law. 1 Table of Contents PART I Item 1. Business ORGANIZATION Capital Southwest Corporation, which we refer to as “we,” “our,” “us,” “CSWC,” or the “Company” is an internallymanaged closed-end, non-diversified management investment company that has elected to be regulated as a businessdevelopment company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. We specialize inproviding customized financing to middle market companies in a broad range of industry segments located primarily in theUnited States. Our common stock currently trades on The Nasdaq Global Select Market under the ticker symbol “CSWC.” We were organized as a Texas corporation on April 19, 1961. Until September 1969, we operated as a smallbusiness investment company, or SBIC, licensed under the Small Business Investment Act of 1958. At that time, wetransferred to our wholly-owned subsidiary, Capital Southwest Venture Corporation, or CSVC, certain assets including ourSBIC license. CSVC was a closed-end, non-diversified investment company registered under the 1940 Act. Effective June14, 2016, CSVC was dissolved and its SBIC license was surrendered. All assets held in CSVC were transferred to us upondissolution. Prior to March 30, 1988, we were registered as a closed-end, non-diversified investment company under the 1940Act. On that date, we elected to be treated as a BDC under the 1940 Act. As a BDC, we are required to comply with certainregulatory requirements. For instance, we generally have to invest at least 70% of our assets in “qualifying assets,” includingsecurities of private or thinly traded public U.S. companies, cash, cash equivalents, U.S. government securities and highquality debt investments that mature in one year or less. In addition, we are allowed to borrow money such that our assetcoverage, as defined in the 1940 Act, equals at least 200% (or, pursuant to recent legislation, 150% if certain requirementsare met as described in the Business Section under “Regulation as a Business Development Company—Senior Securities”)after such borrowing, with certain limited exceptions. We have elected to be treated for U.S. federal income tax purposes as a regulated investment company, or RIC, underSubchapter M of the U.S. Internal Revenue Code of 1986, or the Code. As such, we generally will not have to pay corporate-level U.S. federal income tax on any ordinary income or capital gains that we distribute to our shareholders as dividends. Tocontinue to maintain our RIC status, we must meet specified source-of-income and asset diversification requirements anddistribute annually at least 90% of our ordinary income and realized net short-term capital gains in excess of realized netlong-term capital losses, if any. Depending on the level of taxable income earned in a tax year, we may choose to carryforward taxable income in excess of current year distributions into the next year and pay a 4% excise tax on such income.Any such carryover taxable income must be distributed through a dividend declared prior to filing the final tax return relatedto the year that generated such taxable income. Capital Southwest Management Corporation, or CSMC, our wholly-owned subsidiary, is our managementcompany. CSMC generally incurs all normal operating and administrative expenses, including, but not limited to, salariesand related benefits, rent, equipment and other administrative costs required for day-to-day operations. We also have a direct wholly-owned subsidiary that has been elected to be a taxable entity (the “TaxableSubsidiary”). The primary purpose of the Taxable Subsidiary is to permit us to hold certain interests in portfolio companiesthat are organized as limited liability companies, or LLCs (or other forms of pass-through entities) and still allow us to satisfythe RIC tax requirement that at least 90% of our gross income for federal income tax purposes must consist of qualifyinginvestment income. The Taxable Subsidiary is taxed at normal corporate tax rates based on its taxable income. On September 30, 2015, we completed the spin-off, which we refer to as the Share Distribution, of CSW Industrials,Inc., or CSWI. CSWI is now an independent publicly traded company. The Share Distribution was effected through a tax-free,pro-rata distribution of 100% of CSWI’s common stock to our shareholders. Each of our shareholders received one share ofCSWI common stock for every one share of our common stock on the record date, September 18, 2015. Cash was paid in lieuof any fractional shares of CSWI common stock. Following the Share Distribution, we have maintained operations as an internally managed BDC and pursue acredit-focused investing strategy akin to similarly structured organizations. We intend to continue to provide capital tomiddle-market companies. We invest primarily in debt securities, including senior debt, second lien and subordinated debt,and may also invest in preferred stock and common stock alongside our debt investments or through warrants. 2 Table of ContentsThe following diagram depicts our organizational structure: Employees As of March 31, 2018, we had nineteen employees, each of whom was employed by our management company,CSMC. These employees include our corporate officers, investment and portfolio management professionals andadministrative staff. All of our employees are located in our principal executive offices in Dallas, Texas. Corporate Information Our principal executive offices are located at 5400 Lyndon B. Johnson Freeway, Suite 1300, Dallas, Texas75240. We maintain a website at www.capitalsouthwest.com. You can review the filings we have made with the Securitiesand Exchange Commission, or the SEC, free of charge on EDGAR, the Electronic Data Gathering, Analysis, and RetrievalSystem of the SEC, accessible at http://www.sec.gov. We also make available free of charge on our website our AnnualReports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, any amendments to those reports andany other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, or theExchange Act, as soon as reasonably practicable after filing these reports with the SEC. Information on our website is notincorporated by reference into this Annual Report on Form 10-K and you should not consider that information to be part ofthis Annual Report on Form 10-K. The public may read and copy materials that we file with the SEC at the SEC’s Public Reference Room at 100 FStreet, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by callingthe SEC at 1-800-732-0330. The SEC also maintains a website that contains the reports, proxy and information statementsand other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The charters adopted by the committees of our Board of Directors are also available on our website. Informationcontained on our website is not incorporated by reference into this Annual Report on Form 10-K, and you should notconsider that information to be part of this Annual Report on Form 10-K. OVERVIEW OF OUR BUSINESS We are an internally managed closed-end, non-diversified management investment company that has elected to beregulated as a BDC under the 1940 Act. We specialize in providing customized debt and equity financing to lower middlemarket, or LMM, companies and debt capital to upper middle market, or UMM, companies in a broad range of industrysegments located primarily in the United States. Our investment objective is to produce attractive risk-adjusted returns bygenerating current income from our debt investments and capital appreciation from our equity and equity relatedinvestments. Our investment strategy is to partner with business owners, management teams and financial sponsors toprovide flexible financing solutions to fund growth, changes of control, or other corporate events. We invest primarily insenior debt securities, secured by security interests in portfolio company assets, and in secured and unsecured subordinateddebt securities. We also invest in equity interests in our portfolio companies alongside our debt securities.3 Table of Contents We focus on investing in companies with histories of generating revenues and positive cash flow, establishedmarket positions and proven management teams with strong operating discipline. We target senior debt, subordinated debt,and equity investments in LMM companies, as well as first and second lien syndicated loans in UMM companies. Our targetLMM companies typically have annual earnings before interest, taxes, depreciation and amortization, or EBITDA, between$3.0 million and $15.0 million, and our LMM investments generally range in size from $5.0 million to $25.0 million. OurUMM investments generally include syndicated first and second lien loans in companies with EBITDA generally greaterthan $50.0 million, and our UMM investments typically range in size from $5.0 million to $15.0 million. We seek to fill the financing gap for LMM companies, which, historically, have had more limited access tofinancing from commercial banks and other traditional sources. The underserved nature of the LMM creates the opportunityfor us to meet the financing needs of LMM companies while also negotiating favorable transaction terms, including equityparticipation. Our ability to invest across a LMM company’s capital structure, from secured loans to equity securities, allowsus to offer portfolio companies a comprehensive suite of financing options. Providing customized financing solutions isimportant to LMM companies. We generally seek to partner directly with financial sponsors, entrepreneurs, managementteams and business owners in making our investments. Our LMM debt investments typically include senior loans with a firstlien on the assets of the portfolio company, as well as subordinated debt which may either be secured or unsecuredsubordinated loans. Our LMM debt investments typically have a term of between five and seven years from the originalinvestment date. We also often seek to invest in the equity securities of our LMM portfolio companies. Our investments in UMM companies primarily consist of direct investments in or secondary purchases of interestbearing debt securities in privately held companies that are generally larger in size than the LMM companies included in ourportfolio. Our UMM debt investments are generally secured by either a first or second priority lien on the assets of theportfolio company and typically have an expected duration of between three and seven years from the original investmentdate. We offer managerial assistance to our portfolio companies and provide them access to our investment experience,direct industry expertise and contacts. Our obligation to offer to make available significant managerial assistance to ourportfolio companies is consistent with our belief that providing managerial assistance to a portfolio company is important toits business development activities. Because we are internally managed, we do not pay external investment advisory fees, but instead directly incur theoperating costs associated with employing investment and portfolio management professionals. We believe that ourinternally managed structure provides us with a beneficial operating expense structure when compared to other publiclytraded and privately held investment firms which are externally managed, and our internally managed structure allows us theopportunity to leverage our non-interest operating expenses as we grow our investment portfolio. Recent Developments On April 2, 2018, CSWC paid regular dividends declared on February 28, 2018 in the amount of $4.5 million, or$0.28 per share. On April 16, 2018 and May 11, 2018, CSWC entered into Incremental Assumption Agreements, which increased thetotal commitments under our senior secured credit facility, dated as of August 30, 2016 and amended as of November 16,2017, or the Credit Facility, by $20 million and $10 million, respectively. The increases were executed under the accordionfeature of the Credit Facility and increased total commitments from $180 million to $210 million. On April 25, 2018, the Board of Directors unanimously approved the application of the recently modified assetcoverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, the minimum asset coverage ratio applicableto the Company will be decreased from 200% to 150%, effective April 25, 2019. The Board of Directors also approved aresolution which limits the Company’s issuance of senior securities such that the asset coverage ratio, taking into accountany such issuance, would not be less than 166%, effective April 25, 2019. On June 1, 2018, the Company’s Board of Directors declared a $0.29 dividend per share for the quarter ended June30, 2018. The record date for the dividend is June 26, 2018. The payment date for the dividend is July 2, 2018. 4 Table of ContentsOur Business Strategy Our business strategy is to achieve our investment objective of producing attractive risk-adjusted returns bygenerating current income from our debt investments and realizing capital appreciation from our equity and equity-relatedinvestments. We have adopted the following business strategies to achieve our investment objective: ·Leveraging the Experience of Our Management Team. Our senior management team has extensive experienceinvesting in and lending to middle market companies across changing market cycles. The members of ourmanagement team have diverse investment backgrounds, with prior experience at BDCs in the capacity of seniorofficers. We believe this extensive experience provides us with an in-depth understanding of the strategic, financialand operational challenges and opportunities of the middle market companies in which we invest. We believe thisunderstanding allows us to select and structure better investments and to efficiently monitor and provide managerialassistance to our portfolio companies. ·Applying Rigorous Underwriting Policies and Active Portfolio Management. Our senior management team hasimplemented rigorous underwriting policies that are followed in each transaction. These policies include a thoroughanalysis of each potential portfolio company’s competitive position, financial performance, management teamoperating discipline, growth potential and industry attractiveness, which we believe allows us to better assess thecompany’s prospects. After investing in a company, we monitor the investment closely, typically receiving monthly,quarterly and annual financial statements. Senior management, together with the deal team and accounting andfinance departments, meets at least monthly to analyze and discuss in detail the company’s financial performanceand industry trends. We believe that our initial and ongoing portfolio review process allows us to monitoreffectively the performance and prospects of our portfolio companies. ·Investing Across Multiple Companies, Industries, Regions and End Markets. We seek to maintain a portfolio ofinvestments that is appropriately diverse among various companies, industries, geographic regions and end markets.This portfolio balance is intended to mitigate the potential effects of negative economic events for particularcompanies, regions, industries and end markets. However, we may from time to time hold securities of an individualportfolio company that comprise more than 5% of our total assets and/or more than 10% of the outstanding votingsecurities of the portfolio company. For that reason, we are classified as a non-diversified management investmentcompany that has elected to be regulated as a BDC under the 1940 Act. ·Utilizing Long-Standing Relationships to Source Deals. Our senior management team and investmentprofessionals maintain extensive relationships with entrepreneurs, financial sponsors, attorneys, accountants,investment bankers, commercial bankers and other non-bank providers of capital who refer prospective portfoliocompanies to us. These relationships historically have generated significant investment opportunities. We believethat our network of relationships will continue to produce attractive investment opportunities. ·Focusing on Underserved Markets. The middle market has traditionally been underserved. We believe thatoperating margin and growth pressures, as well as regulatory concerns, have caused many financial institutions tode-emphasize services to middle market companies in favor of larger corporate clients and more liquid capitalmarket transactions. We also invest in securities that would be rated below investment grade if they were rated. Webelieve these dynamics have resulted in the financing market for middle market companies being underserved,providing us with greater investment opportunities. ·Focus on Established Companies. We generally invest in companies with established market positions, provenmanagement teams with strong operating discipline, histories of generating revenues, and recurring cash flowstreams. We believe that those companies generally possess better risk adjusted return profiles than earlier stagecompanies that are building their management teams and establishing their revenue base. We also believe thatestablished companies in our target size range generally provide opportunities for capital appreciation. ·Capital Structures Appropriate for Potential Industry and Business Volatility. Our investment team spendssignificant time understanding the performance of both the target portfolio company and its specific industrythroughout a full economic cycle. The history of each specific industry and target portfolio company willdemonstrate a different level of potential volatility in financial performance. We seek to understand this dynamic5 Table of Contentsthoroughly and invest our capital at leverage levels in the capital structure that will remain within enterprise valueand in securities that will receive interest payments if such downside volatility were to occur. ·Providing Customized Financing Solutions. We offer a variety of financing structures and have the flexibility tostructure our investments to meet the needs of our portfolio companies. Often we invest in senior and subordinateddebt securities, coupled with equity interests. We believe our ability to customize financing structures makes us anattractive partner to middle market companies. INVESTMENT CRITERIA AND OBJECTIVES Our investment team has identified the following investment criteria that we believe are important in evaluatingprospective investment opportunities. However, not all of these criteria have been or will be met in connection with each ofour investments: ·Companies with Positive and Sustainable Cash Flow: We generally seek to invest in established companies withsound historical financial performance. ·Excellent Management: Management teams with a proven record of achievement, exceptional ability, unyieldingdetermination and integrity. We believe management teams with these attributes are more likely to manage thecompanies in a manner that protects and enhances value. ·Industry: We primarily focus on companies having competitive advantages in their respective markets and/oroperating in industries with barriers to entry, which may help protect their market position. ·Strong Private Equity Sponsors: We focus on developing relationships with leading private equity firms in order topartner with these firms and provide them capital to support the acquisition and growth of their portfolio companies. ·Appropriate Risk-Adjusted Returns: We focus on and price opportunities to generate returns that are attractive ona risk-adjusted basis, taking into consideration factors, in addition to the ones depicted above, including creditstructure, leverage levels and the general volatility and potential volatility of cash flows. We have an investment committee that is responsible for all aspects of our investment process relating toinvestments made by us. The current members of the investment committee are Bowen Diehl, Chief Executive Officer,Michael Sarner, Chief Financial Officer, Douglas Kelley, Managing Director, Josh Weinstein, Managing Director, and DavidBrooks, Chairman of the Board. Investment Process Our investment strategy involves a team approach, whereby our investment team screens potential transactionsbefore they are presented to the investment committee for approval. Transactions that are either above a certain hold size oroutside our general investment policy will also be reviewed and approved by the Board of Directors. Our investment teamgenerally categorizes the investment process into six distinctive stages: ·Deal Generation/Origination: Deal generation and origination is maximized through long-standing and extensiverelationships with private equity firms, leveraged loan syndication desks, brokers, commercial and investmentbankers, entrepreneurs, service providers such as lawyers and accountants, and current and former portfoliocompanies and investors. ·Screening: Once it is determined that a potential investment has met our investment criteria, we will screen theinvestment by performing preliminary due diligence, which could include discussions with the private equity firm,management team, loan syndication desk, etc. Upon successful screening of the proposed investment, theinvestment team makes a recommendation to move forward and prepares an initial screening memo for ourinvestment committee. We then issue either a non-binding term sheet (in the case of a directly originatedtransaction), or submit an order to the loan syndication desk (in the case of a large-market syndicated loantransaction).6 Table of Contents ·Term Sheet: In a directly originated transaction, the non-binding term sheet will typically include the keyeconomic terms of our investment proposal, along with exclusivity, confidentiality, and expense reimbursementprovisions, among other terms relevant to the particular investment. Upon acceptance of the term sheet, we willbegin our formal due diligence process. In a syndicated loan transaction, rather than a formal term sheet, we willsubmit an order for an allocation to the syndicated loan desk. ·Due Diligence: Due diligence is performed under the direction of our senior investment professionals, and involvesour entire investment team as well as certain external resources, who together perform due diligence to understandthe relationships among the prospective portfolio company’s business plan, operations, financial performance, andlegal risks. On our directly originated transactions, our due diligence will often include (1) conducting site visitswith management and key personnel; (2) performing a detailed review of historical and projected financialstatements, often with a third-party accounting firm, to evaluate the target company’s normalized cash flow; (3)creating our own detailed modeling projections, including a downside case which attempts to project how thebusiness would perform in a recession based on past operating history of either the company or the industry (4)interviewing key customers and suppliers; (5) evaluating company management, including a formal backgroundcheck; (6) reviewing material contracts; (7) conducting an industry, market and strategy analysis; and (8) obtaininga review by legal, environmental or other consultants. In instances where a financial sponsor is investing in theequity in a transaction, we will leverage work done by the financial sponsor for purposes of our due diligence. Insyndicated loan transactions, our due diligence may exclude direct customer and supplier interviews, and willconsist of a detailed review of reports from the financial sponsor or syndication agent for industry and marketanalysis, and legal and environmental diligence. ·Document and Close: Upon completion of a satisfactory due diligence review, our investment team presents itswritten findings to the investment committee. For transactions that are either over a certain hold size, or outside ourgeneral investment policy, the investment team will present the transaction to our Board of Directors forapproval. Upon approval for the investment, we re-confirm our regulatory company compliance, process andfinalize all required legal documents and fund the investment. ·Post-Investment: We continuously monitor the status and progress of our portfolio companies, as well as ourinvestment thesis developed at the time of investment. We offer managerial assistance to our portfolio companiesand provide them access to our investment experience, direct industry expertise and contacts. The same investmentteam leader that was involved in the investment process will continue to be involved in the portfolio company post-investment. This approach provides continuity of knowledge and allows the investment team to maintain a strongbusiness relationship with the financial sponsor, business owner and key management of our portfoliocompanies. As part of the monitoring process, members of our investment team will analyze monthly, quarterly andannual financial statements against previous periods, review financial projections, meet with the financial sponsorand management (when necessary), attend board meetings (when appropriate) and review all compliance certificatesand covenants. Our investment team meets once each month with senior management to review the performance ofeach of our portfolio companies. We utilize an internally developed investment rating system to rate the performance and monitor the expected levelof returns for each debt investment in our portfolio. The investment rating system takes into account both quantitative andqualitative factors of the portfolio company and the investments held therein, including each investment’s expected level ofreturns and the collectability of our debt investments, comparisons to competitors and other industry participants and theportfolio company’s future outlook. The ratings are not intended to reflect the performance or expected level of returns ofour equity investments. ·Investment Rating 1 represents the least amount of risk in our portfolio. The investment is performing materiallyabove underwriting expectations and the trends and risk factors are generally favorable. ·Investment Rating 2 indicates the investment is performing as expected at the time of underwriting and the trendsand risk factors are generally favorable to neutral. ·Investment Rating 3 involves an investment performing below underwriting expectations and the trends and riskfactors are generally neutral to negative. The portfolio company or investment may be out of compliance with7 Table of Contentsfinancial covenants and interest payments may be impaired, however principal payments are generally not past due. ·Investment Rating 4 indicates that the investment is performing materially below underwriting expectations, thetrends and risk factors are generally negative and the risk of the investment has increased substantially. Interest andprincipal payments on our investment are likely to be impaired. Determination of Net Asset Value and Portfolio Valuation Process We determine our net asset value, or NAV, per share on a quarterly basis. The NAV per share is equal to our totalassets minus liabilities divided by the total number of shares of common stock outstanding. We determine in good faith the fair value of our portfolio investments pursuant to a valuation policy in accordancewith Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) and avaluation process approved by our Board of Directors and in accordance with the 1940 Act. Our valuation policy is intendedto provide a consistent basis for determining the fair value of the portfolio. We undertake a multi-step valuation process each quarter in connection with determining the fair value of ourinvestments. The valuation process is led by the finance department in conjunction with the investment teams and seniormanagement. Valuations of each portfolio security are prepared quarterly by the finance department using updated portfoliocompany financial and operational information. Each investment valuation is also subject to review by the executiveofficers and investment teams. In conjunction with the internal valuation process, we have engaged multiple independent consulting firms thatspecialize in financial due diligence, valuation and business advisory services to provide third-party valuation reviews of themajority of our investments on a quarterly basis. Our Board of Directors is ultimately responsible for overseeing, reviewingand approving, in good faith, our determination of the fair value of each investment in our portfolio. COMPETITION We compete for attractive investment opportunities with other financial institutions, including BDCs, junior capitallenders, and banks. We believe we are able to be competitive with these entities primarily on the basis of the experience andcontacts of our management team and our responsive and efficient investment analysis and decision-makingprocesses. However, many of our competitors are substantially larger and have considerably greater financial, technical andmarketing resources than we do. Furthermore, our competitors may have a lower cost of funds and many have access tofunding sources that are not available to us. In addition, certain of our competitors may have higher risk tolerances ordifferent risk assessments, which could allow them to consider a wider variety of investments, establish more relationshipsand build their market shares. Likewise, many of our competitors are not subject to the regulatory restrictions and valuationrequirements that the 1940 Act imposes on us as a BDC. See “Risk Factors—Risks Related to Our Business and Structure—We operate in a highly competitive market for investment opportunities.” We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business,financial condition and results of operations. In addition, because of this competition, we may be unable to take advantageof attractive investment opportunities and may be unable to identify and make investments that satisfy our investmentobjectives or meet our investment goals. 8 Table of ContentsLEVERAGE We may from time to time borrow funds to make investments, a practice known as “leverage,” in an attempt toincrease returns to our shareholders. With certain limited exceptions, we are only allowed to borrow amounts such that ourasset coverage, as calculated in accordance with the 1940 Act, equals at least 200% (or, pursuant to recent legislation, 150%if certain requirements are met as described in the Business Section under “Regulation as a Business Development Company—Senior Securities”) after such borrowing. The amount of leverage that we employ at any particular time will depend onmanagement’s and our Board of Directors’ assessments of portfolio mix, prevailing market advance rates and other marketfactors at the time of any proposed borrowing. See “Risk Factors – Risks Related to Our Business and Structure – Because weborrow money to make investments, the potential for gain or loss on amounts invested in us is magnified and may increasethe risk of investing in us.” We intend to continue borrowing under the Credit Facility in the future and we may increase the size of the CreditFacility, add additional credit facilities or otherwise issue additional debt securities or other evidences of indebtedness in thefuture, although there can be no assurance that we will be able to do so. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations—FinancialLiquidity and Capital Resources" as well as Note 5 to our consolidated financial statements for the year ended March 31,2018 for information regarding the Credit Facility and the issuance of the December 2022 Notes. BROKERAGE ALLOCATION AND OTHER PRACTICES Since we generally acquire and dispose of our investments in privately negotiated transactions, we infrequently usebrokers in the normal course of our business. Our investment team is primarily responsible for the execution of the publiclytraded securities portion of our portfolio transactions and the allocation of brokerage commissions. We do not expect toexecute transactions through any particular broker or dealer, but will seek to obtain the best net results for us, taking intoaccount such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty ofexecution, and operational facilities of the firm and the firm’s risk and skill in positioning blocks of securities. While we willgenerally seek reasonably competitive trade execution costs, we will not necessarily pay the lowest spread or commissionavailable. Subject to applicable legal requirements, we may select a broker based partly upon brokerage or research servicesprovided to us. In return for such services, we may pay a higher commission than other brokers would charge if we determinein good faith that such commission is reasonable in relation to the services provided. We did not pay any brokeragecommissions during the three years ended March 31, 2018. DIVIDEND REINVESTMENT PLAN We have adopted a dividend reinvestment plan, or DRIP, that provides for the reinvestment of dividends on behalfof our shareholders. Under the DRIP, if we declare a dividend, registered shareholders who have opted into the DRIP as of thedividend record date will have their dividend automatically reinvested into additional shares of our common stock. Theshare requirements of the DRIP are satisfied through open market purchases of common stock by the DRIP plan administrator.Shares purchased in the open market to satisfy the DRIP requirements will be valued based upon the average price of theapplicable shares purchased by the DRIP plan administrator, before any associated brokerage or other costs. ELECTION TO BE REGULATED AS A BUSINESS DEVELOPMENT COMPANY We are a closed-end, non-diversified management investment company that has elected to be treated as a BDCunder the 1940 Act. In addition, we have elected, and intend to qualify annually, to be treated as a RIC. Our election to beregulated as a BDC and our election to be treated as a RIC for U.S. federal income tax purposes have a significant impact onour operations. Some of the most important effects on our operations of our election to be regulated as a BDC and ourelection to be treated as a RIC are outlined below. ·We report our investments at market value or fair value with changes in value reported through ourconsolidated statements of operations. In accordance with the requirements of the 1940 Act and Article 6 of Regulation S-X, we report all of ourinvestments, including debt investments, at market value or, for investments that do not have a readily availablemarket value, at their “fair value” as determined in good faith by our Board of Directors. Changes in these values9 Table of Contentsare reported through our consolidated statements of operations under the caption of “net change in unrealizedappreciation on investments.” See “Determination of Net Asset Value and Portfolio Valuation Process” above. ·We intend to distribute substantially all of our income to our shareholders. We generally will be required to payincome taxes only on the portion of our taxable income we do not distribute to shareholders (actually orconstructively). As a RIC, so long as we meet certain minimum distribution, source of income and asset diversification requirements,we generally are required to pay U.S. federal income taxes only on the portion of our taxable income and gains wedo not distribute (actually or constructively) and certain built-in gains. Depending on the level of taxable incomeearned in a tax year, we may choose to carry forward taxable income in excess of current year distributions into thenext year and pay a 4% excise tax on such income. Any such carryover taxable income must be distributed througha dividend declared prior to filing the final tax return related to the year that generated such taxable income. Weintend to distribute to our shareholders substantially all of our income. We may, however, make deemeddistributions to our shareholders of any retained net long-term capital gains. If this happens, our shareholders will betreated as if they received an actual distribution of the net capital gains and reinvested the net after-tax proceeds inus. Our shareholders also may be eligible to claim a tax credit (or, in certain circumstances, a tax refund) equal totheir allocable share of the corporate-level U.S. federal income tax we pay on the deemed distribution. See “MaterialU.S. Federal Income Tax Considerations.” We met the minimum distribution requirements for tax years 2015, 2016and 2017 and continually monitor our distribution requirements with the goal of ensuring compliance with theCode. In addition, we have a Taxable Subsidiary that holds a portion of one or more of our portfolio investments that arelisted on the Consolidated Schedule of Investments. The Taxable Subsidiary is consolidated for financial reportingpurposes in accordance with U.S. Generally Accepted Accounting Principles, or GAAP, so that our consolidatedfinancial statements reflect our investments in the portfolio companies owned by the Taxable Subsidiary. Thepurpose of the Taxable Subsidiary is to permit us to hold certain interests in portfolio companies that are organizedas limited liability companies, or LLCs (or other forms of pass-through entities) and still satisfy the RIC taxrequirement that at least 90% of our gross income for federal income tax purposes must consist of qualifyinginvestment income. Absent the Taxable Subsidiary, a proportionate amount of any gross income of a partnership orLLC (or other pass-through entity) portfolio investment would flow through directly to us. To the extent that suchincome did not consist of investment income, it could jeopardize our ability to qualify as a RIC and therefore causeus to incur significant amounts of corporate-level U.S. federal income taxes. Where interests in LLCs (or other pass-through entities) are owned by the Taxable Subsidiary, the income from those interests is taxed to the TaxableSubsidiary and does not flow through to us, thereby helping us preserve our RIC status and resultant tax advantages.The Taxable Subsidiary is not consolidated for U.S. federal income tax purposes and may generate income taxexpense as a result of its ownership of the portfolio companies. This income tax expense, if any, is reflected in ourConsolidated Statements of Operations. ·Our ability to use leverage as a means of financing our portfolio of investments is limited. As a BDC, we are required to meet a coverage ratio of total assets to total senior securities of at least 200% (or,pursuant to recent legislation, 150% if certain requirements are met as described in the Business Section under“Regulation as a Business Development Company—Senior Securities”). For this purpose, senior securities includeall borrowings and any preferred stock we may issue in the future. Additionally, our ability to utilize leverage as ameans of financing our portfolio of investments may be limited by this asset coverage test. While the use of leveragemay enhance returns if we meet our investment objective, our returns may be reduced or eliminated if our returns oninvestments are less than the costs of borrowing. ·We are required to comply with the provisions of the 1940 Act applicable to business development companies. As a BDC, we are required to have a majority of directors who are not “interested persons” as such term is defined inSection 2(a)(19) of the 1940 Act. In addition, we are required to comply with other applicable provisions of the1940 Act, including those requiring the adoption of a code of ethics, maintaining a fidelity bond and placing andmaintaining its securities and similar investments in custody. See “Regulation as a Business DevelopmentCompany” below.10 Table of Contents Regulation as a Business Development Company We have elected to be regulated as a BDC under the 1940 Act. The 1940 Act contains prohibitions and restrictionsrelating to transactions between BDCs and their affiliates and principal underwriters as well as their respective affiliates. The1940 Act requires that a majority of the members of the board of directors of a BDC be persons other than “interestedpersons,” as defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our businessso as to cease to be, or to withdraw our election as, a BDC unless approved by holders of a majority of our outstanding votingsecurities. The 1940 Act defines “a majority of the outstanding voting securities” as the lesser of (1) 67% or more of the votingsecurities of holders present or represented by proxy at a meeting if the holders of more than 50% of our outstanding votingsecurities are present or represented by proxy or (2) more than 50% of our voting securities. The following is a brief description of the 1940 Act provisions applicable to BDCs, which is qualified in its entiretyby reference to the full text of the 1940 Act and rules issued thereunder by the SEC. ·Generally, BDCs must offer, and must provide upon request, significant managerial assistance available to certainportfolio companies. In general, as a BDC, a company must, among other things: (1) be a domestic company; (2)have registered a class of its securities pursuant to Section 12 of the Exchange Act; (3) operate for the purpose ofinvesting in the securities of certain types of eligible portfolio companies, including early stage or emergingcompanies and businesses suffering or just recovering from financial distress (see following paragraph); (4) offer tomake available significant managerial assistance to such portfolio companies; and (5) file a proper notice of electionwith the SEC. ·An eligible portfolio company generally is a domestic company that is not a regulated or private investmentcompany or a financial company (such as brokerage firms, banks, insurance companies and investment bankingfirms) and that: (1) does not have a class of securities listed on a national securities exchange; (2) has a class ofsecurities listed on a national securities exchange with an equity market capitalization of less than $250 million; or(3) is controlled by the BDC itself or together with others and, as a result of such control, the BDC has an affiliatedperson on the board of directors of the company. The 1940 Act presumes that a person has “control” of a portfoliocompany if that person owns at least 25% of its outstanding voting securities. ·As a BDC, we are required to provide and maintain a bond issued by a reputable insurance company to protectagainst larceny and embezzlement. Furthermore, as a BDC, we are prohibited from protecting any director or officeragainst any liability to us or our shareholders arising from any act or omission constituting willful malfeasance, badfaith, gross negligence or reckless disregard of the duties involved in the conduct of that person’s office. ·We are required to adopt and implement written policies and procedures reasonably designed to prevent violation ofthe federal securities laws, review these policies and procedures annually for their adequacy and the effectiveness oftheir implementation and designate a chief compliance officer to be responsible for administering these policies andprocedures. Qualifying Assets The 1940 Act provides that we may not make an investment in non-qualifying assets unless at the time of theinvestment at least 70% of the value of our total assets (measured as of the date of our most recently filed financialstatements) consists of qualifying assets. Qualifying assets include: (1) securities of eligible portfolio companies; (2)securities of certain companies that were eligible portfolio companies at the time we initially acquired their securities and inwhich we retain a substantial interest; (3) securities of certain controlled companies; (4) securities of certain bankrupt,insolvent or distressed companies; (5) securities received in exchange for or distributed in or with respect to any of theforegoing; and (6) cash items, U.S. government securities and high-quality short-term debt. 11 Table of ContentsSignificant Managerial Assistance to Portfolio Companies As a BDC, we must offer, and must provide upon request, significant managerial assistance to the issuer whosesecurities we consider qualifying assets. Temporary Investments Pending investment in other types of “qualifying assets,” as described above, our investments may consist of cash,cash equivalents, U.S. government securities, short-term investments in secured debt investments, independently rated debtinvestments and diversified bond funds, which we refer to as temporary investments. Senior Securities We are generally permitted by the 1940 Act, under specific conditions, to issue multiple classes of debt and oneclass of stock senior to our common stock if our asset coverage, as defined by the 1940 Act, is at least 200% immediatelyafter each such issuance. However, recent legislation has modified the 1940 Act by allowing a BDC to increase the maximumamount of leverage it may incur by reducing the minimum asset coverage ratio from 200% to 150%, if certain requirementsare met. Under the requirements of the legislation, we are allowed to increase our leverage capacity if shareholdersrepresenting at least a majority of the votes cast, when a quorum is present, approve a proposal to do so. If we receiveshareholder approval, we would be allowed to increase our leverage capacity on the first day after such approval.Alternatively, the legislation allows the majority of our independent directors to approve an increase in our leveragecapacity, but such approval would not become effective until the one-year anniversary of the approval. In either case, wewould be required to make certain disclosures on our website and in SEC filings regarding, among other things, the receipt ofapproval to increase our leverage, our leverage capacity and usage, and risks related to our use of leverage. As of March 31,2018, we had $40.0 million and $57.5 million in total aggregate principal amount of debt outstanding under our CreditFacility and December 2022 Notes, respectively. As of March 31, 2018, our asset coverage was 416%. On April 25, 2018, the Board of Directors unanimously approved the application of the recently modified assetcoverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, the minimum asset coverage ratio applicableto the Company will be decreased from 200% to 150%, effective April 25, 2019. The Board of Directors also approved aresolution which limits the Company’s issuance of senior securities such that the asset coverage ratio, taking into accountany such issuance, would not be less than 166%, effective April 25, 2019. In addition, while any preferred stock or publicly traded debt securities are outstanding, we may be prohibited frommaking distributions to our shareholders or the repurchasing of such securities or shares unless we meet the applicable assetcoverage ratios at the time of the distribution or repurchase. We may also borrow amounts up to 5% of the value of our totalassets for temporary or emergency purposes without regard to asset coverage. Under specific conditions, we are alsopermitted by the 1940 Act to issue warrants. Common Stock As a BDC, the 1940 Act generally limits our ability to issue and sell our common stock at a price below our NAV pershare, exclusive of any distributing commission or discount, without shareholder approval. Shares of our common stock havetraded below our NAV per share. While our common stock continues to trade at a price below our NAV per share, there are noassurances that we can issue or sell shares of our common stock if needed to fund our business. Code of Ethics and Code of Conduct We adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act that establishes procedures for personalinvestments and restricts certain personal securities transactions. Personnel subject to the code may invest in securities fortheir personal investment accounts including securities that may be purchased or held by us, so long as those investments aremade in accordance with the code’s requirements. We have also adopted a code of conduct that applies to our ChiefExecutive Officer, Chief Financial Officer (or persons performing similar functions), our Board, and all other employees. Thiscode sets forth policies that these executives and employees must follow when performing their duties. Proxy Voting Policies and Procedures 12 Table of ContentsWe vote proxies relating to our portfolio securities in a manner in which we believe is consistent with the bestinterest of our shareholders. We review on a case-by-case basis each proposal submitted to a shareholder vote to determine itsimpact on the portfolio securities held by us. Although we generally vote against proposals that we expect would have anegative impact on our portfolio securities, we may vote for such a proposal if there exists compelling long-term reasons todo so. Our proxy voting decisions are made by the investment team that is responsible for monitoring the investments. Toensure that our vote is not the product of a conflict of interest, we require that anyone involved in the decision-makingprocess discloses to our Chief Compliance Officer any potential conflict of which he or she is aware. Shareholders may obtaininformation, without charge, regarding how we voted proxies with respect to our portfolio securities by making a writtenrequest for proxy voting information to: Chief Financial Officer c/o Capital Southwest Corporation, 5400 Lyndon B.Johnson Freeway, Suite 1300, Dallas, Texas 75240. Compliance Policies and Procedures We have adopted and implemented written policies and procedures reasonably designed to prevent violation of theU.S. federal securities laws, and are required to review these compliance policies and procedures annually for their adequacyand the effectiveness of their implementation, and to designate a Chief Compliance Officer to be responsible foradministering these policies and procedures. Michael S. Sarner serves as our Chief Compliance Officer. Exemptive Relief On October 26, 2010, we received an exemptive order from the SEC permitting us to issue restricted stock to ourexecutive officers and certain key employees, or the Original Order. On August 22, 2017, we received an exemptive orderthat supersedes the Original Order, or the Exemptive Order, and in addition to the relief granted under the Original Order,allows us to withhold shares to satisfy tax withholding obligations related to the vesting of restricted stock granted pursuantto the 2010 Restricted Stock Award Plan, or the 2010 Plan, and to pay the exercise price of options to purchase shares of ourcommon stock granted pursuant to the 2009 Stock Incentive Plan, or the 2009 Plan. Other We may also be prohibited under the 1940 Act from knowingly participating in certain transactions with ouraffiliates without the prior approval of our Board of Directors who are not interested persons and, in some cases, priorapproval by the SEC. The prior approval of the SEC is not required, however, where a transaction involves no negotiation ofterms other than price. We expect to periodically be examined by the SEC for compliance with the 1940 Act. MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS The following discussion is a general summary of the material U.S. federal income tax considerations applicable tous and to an investment in our shares. This summary does not purport to be a complete description of the income taxconsiderations applicable to us or to investors in such an investment. For example, we have not described tax consequencesthat we assume to be generally known by investors or certain considerations that may be relevant to certain types of holderssubject to special treatment under U.S. federal income tax laws, including shareholders subject to the alternative minimumtax, tax-exempt organizations, insurance companies, dealers in securities, pension plans and trusts, financial institutions, U.S.shareholders (as defined below) whose functional currency is not the U.S. dollar, persons who mark-to-market our shares andpersons who hold our shares as part of a “straddle,” “hedge” or “conversion” transaction. This summary assumes thatinvestors hold shares of our common stock as capital assets (within the meaning of the Code). The discussion is based uponthe Code, Treasury regulations, and administrative and judicial interpretations, each as of the date of this Annual Report onForm 10-K and all of which are subject to change, possibly retroactively, which could affect the continuing validity of thisdiscussion. This summary does not discuss any aspects of U.S. estate or gift tax or foreign, state or local tax. It does notdiscuss the special treatment under U.S. federal income tax laws that could result if we invested in tax-exempt securities orcertain other investment assets. 13 Table of ContentsFor purposes of our discussion, a “U.S. shareholder” means a beneficial owner of shares of our common stock that isfor U.S. federal income tax purposes: ·A citizen or individual resident of the United States; ·A corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in orunder the laws of the United States or any state thereof of the District of Columbia; ·An estate, the income of which is subject to U.S. federal income taxation regardless of its source; or ·A trust if (1) a U.S. court is able to exercise primary supervision over the administration of the trust and one or moreU.S. persons have the authority to control all substantial decisions of the trust or (2) it has a valid election in place tobe treated as a U.S. person. For purposes of our discussion, a “Non-U.S. shareholder” means a beneficial owner of shares of our common stockthat is neither a U.S. shareholder nor a partnership (including an entity treated as a partnership for U.S. federal income taxpurposes). If an entity treated as a partnership for U.S. federal income tax purposes (a “partnership”) holds shares of ourcommon stock, the tax treatment of a partner or member of the partnership will generally depend upon the status of thepartner or member and the activities of the partnership. A prospective shareholder that is a partner or member in a partnershipholding shares of our common stock should consult his, her or its tax advisors with respect to the purchase, ownership anddisposition of shares of our common stock. Tax matters are very complicated and the tax consequences to an investor of an investment in our shares will dependon the facts of his, her or its particular situation. We encourage investors to consult their own tax advisors regarding thespecific consequences of such an investment, including tax reporting requirements, the applicability of U.S. federal, state,local and foreign tax laws, eligibility for the benefits of any applicable tax treaty and the effect of any possible changes inthe tax laws. Taxation as a Regulated Investment Company Election to be Taxed as a RIC We have elected to be treated as a RIC under Subchapter M of the Code. As a RIC, we generally are not subject tocorporate-level U.S. federal income taxes on any income that we distribute to our shareholders from our tax earnings andprofits. To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversificationrequirements (as described below). In addition, in order to obtain RIC tax treatment, we must distribute to our shareholders,for each taxable year, at least 90% of our “investment company taxable income,” which is generally our net ordinary incomeplus the excess, if any, of realized net short-term capital gain over realized net long-term capital loss, or the AnnualDistribution Requirement. Depending on the level of taxable income earned in a tax year, we may choose to carry forwardtaxable income in excess of current year distributions into the next year and pay a 4% excise tax on such income. Any suchcarryover taxable income must be distributed through a dividend declared prior to filing the final tax return related to theyear that generated such taxable income. Even if we qualify as a RIC, we generally will be subject to corporate-level U.S.federal income tax on our undistributed taxable income and could be subject to U.S. federal excise, state, local and foreigntaxes. Taxation as a RIC Provided that we qualify as a RIC, we will not be subject to U.S. federal income tax on the portion of our investmentcompany taxable income and net capital gain (which we define as net long-term capital gain in excess of net short-termcapital loss) that we timely distribute to shareholders. We will be subject to U.S. federal income tax at the regular corporaterates on any income or capital gain not distributed (or deemed distributed) to our shareholders. We will be subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income unless wedistribute in a timely manner an amount at least equal to the sum of (1) 98% of our ordinary income for each calendar year,14 Table of Contents(2) 98.2% of our capital gain net income for the one year period ended October 31 and (3) any income and gains recognized,but not distributed, in preceding years and on which we paid no U.S. federal income tax. In order to qualify as a RIC for U.S. federal income tax purposes, we must, among other things: ·Meet the Annual Distribution Requirement; ·Qualify to be treated as a BDC or be registered as a management investment company under the 1940 Act atall times during each taxable year; ·Derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect tocertain securities loans, gains from the sale or other disposition of stock or other securities or foreigncurrencies or other income derived with respect to our business of investing in such stock, securities orcurrencies and net income derived from an interest in a “qualified publicly traded partnership” (as defined inthe Code), or the 90% Income Test; and ·Diversify our holdings so that at the end of each quarter of the taxable year: oat least 50% of the value of our assets consists of cash, cash equivalents, U.S. Government securities,securities of other RICs, and other securities if such other securities of any one issuer do not representmore than 5% of the value of our assets or more than 10% of the outstanding voting securities of theissuer (which for these purposes includes the equity securities of a “qualified publicly tradedpartnership”); and ono more than 25% of the value of our assets is invested in the securities, other than U.S. Governmentsecurities or securities of other RICs, (1) of one issuer (2) of two or more issuers that are controlled, asdetermined under applicable tax rules, by us and that are engaged in the same or similar or relatedtrades or businesses or (3) of one or more “qualified publicly traded partnerships,” or theDiversification Tests. To the extent that we invest in entities treated as partnerships for U.S. federal income tax purposes (other than a“qualified publicly traded partnership”), we generally must include the items of gross income derived by the partnerships forpurposes of the 90% Income Test, and the income that is derived from a partnership (other than a “qualified publicly tradedpartnership”) will be treated as qualifying income for purposes of the 90% Income Test only to the extent that such income isattributable to items of income of the partnership which would be qualifying income if realized by us directly. In addition,we generally must take into account our proportionate share of the assets held by partnerships (other than a “qualifiedpublicly traded partnership”) in which we are a partner for purposes of the Diversification Tests. In order to meet the 90% Income Test, we have established the Taxable Subsidiary to hold assets from which we donot anticipate earning dividend, interest or other income under the 90% Income Test. We may establish additionalsubsidiaries for the same purpose in the future. Any investments held through a Taxable Subsidiary generally are subject toU.S. federal income and other taxes, and therefore we can expect to achieve a reduced after-tax yield on such investments. We may be required to recognize taxable income in circumstances in which we do not receive a correspondingpayment in cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issuediscount (including debt instruments with payment-in-kind interest or, in certain cases, increasing interest rates or issuedwith warrants), we must include in income each year a portion of the original issue discount or payment-in-kind interest thataccrues over the life of the obligation, regardless of whether cash representing such income is received by us in the sametaxable year. We anticipate that a portion of our income may constitute original issue discount or other income required to beincluded in taxable income prior to receipt of cash. Because any original issue discount or other amounts accrued will be included in our investment company taxableincome for the year of the accrual, we may be required to make a distribution to our shareholders in order to satisfy theAnnual Distribution Requirement, even though we will not have received any corresponding cash amount. As a result, wemay have difficulty meeting the annual distribution requirement necessary to obtain and maintain RIC tax treatment under15 Table of Contentsthe Code. We may have to sell some of our investments at times and/or at prices we would not consider advantageous, raiseadditional debt or equity capital or forgo new investment opportunities for this purpose. If we are not able to obtain cashfrom other sources, we may fail to qualify for RIC tax treatment and thus become subject to corporate-level U.S. federalincome tax. Furthermore, a portfolio company in which we invest may face financial difficulty that requires us to work-out,modify or otherwise restructure our investment in the portfolio company. Any such restructuring may result in unusablecapital losses and future non-cash income. Any restructuring may also result in our recognition of a substantial amount ofnon-qualifying income for purposes of the 90% Income Test, such as cancellation of indebtedness income in connection withthe work-out of a leveraged investment (which, while not free from doubt, may be treated as non-qualifying income) or thereceipt of other non-qualifying income. Gain or loss realized by us from warrants acquired by us as well as any loss attributable to the lapse of such warrantsgenerally will be treated as capital gain or loss. Such gain or loss generally will be long-term or short-term, depending onhow long we held a particular warrant. Investments by us in non-U.S. securities may be subject to non-U.S. income, withholding and other taxes, andtherefore, our yield on any such securities may be reduced by such non-U.S. taxes. Shareholders will generally not be entitledto claim a credit or deduction with respect to non-U.S. taxes paid by us. We are authorized to borrow funds and to sell assets in order to satisfy distribution requirements. Under the 1940Act, we are not permitted to make distributions to our shareholders while our debt obligations and other senior securities areoutstanding unless certain “asset coverage” tests are met. See “Regulation as a Business Development Company” above.Moreover, our ability to dispose of assets to meet our distribution requirements may be limited by (1) the illiquid nature ofour portfolio and/or (2) other requirements relating to our status as a RIC, including the Diversification Tests. If we dispose ofassets in order to meet the Annual Distribution Requirement or to avoid the excise tax, we may make such dispositions attimes that, from an investment standpoint, are not advantageous. If we fail to satisfy the Annual Distribution Requirement or otherwise fail to qualify as a RIC in any taxable year, wewill be subject to tax in that year on all of our taxable income, regardless of whether we make any distributions to ourshareholders. In that case, all of such income will be subject to corporate-level U.S. federal income tax, reducing the amountavailable to be distributed to our shareholders. See “Failure To Obtain RIC Tax Treatment” below. As a RIC, we are not allowed to carry forward or carry back a net operating loss for purposes of computing ourinvestment company taxable income in other taxable years. U.S. federal income tax law generally permits a RIC to carryforward (1) the excess of its net short-term capital loss over its net long-term capital gain for a given year as a short-termcapital loss arising on the first day of the following year and (2) the excess of its net long-term capital loss over its net short-term capital gain for a given year as a long-term capital loss arising on the first day of the following year. Future transactionswe engage in may cause our ability to use any capital loss carryforwards, and unrealized losses once realized, to be limitedunder Section 382 of the Code. Certain of our investment practices may be subject to special and complex U.S. federalincome tax provisions that may, among other things, (1) disallow, suspend or otherwise limit the allowance of certain lossesor deductions, (2) convert lower taxed long-term capital gain and qualified dividend income into higher taxed short-termcapital gain or ordinary income, (3) convert an ordinary loss or a deduction into a capital loss (the deductibility of which ismore limited), (4) cause us to recognize income or gain without a corresponding receipt of cash, (5) adversely affect the timeas to when a purchase or sale of stock or securities is deemed to occur, (6) adversely alter the characterization of certaincomplex financial transactions and (7) produce income that will not be qualifying income for purposes of the 90% IncomeTest. We will monitor our transactions and may make certain tax elections in order to mitigate the effect of these provisions. As described above, to the extent that we invest in equity securities of entities that are treated as partnerships forU.S. federal income tax purposes, the effect of such investments for purposes of the 90% Income Test and the DiversificationTests will depend on whether or not the partnership is a “qualified publicly traded partnership” (as defined in the Code). Ifthe entity is a “qualified publicly traded partnership,” the net income derived from such investments will be qualifyingincome for purposes of the 90% Income Test and will be “securities” for purposes of the Diversification Tests. If the entity isnot treated as a “qualified publicly traded partnership,” however, the consequences of an investment in the partnership willdepend upon the amount and type of income and assets of the partnership allocable to us. The income derived from suchinvestments may not be qualifying income for purposes of the 90% Income Test and, therefore,16 Table of Contentscould adversely affect our qualification as a RIC. We intend to monitor our investments in equity securities of entities thatare treated as partnerships for U.S. federal income tax purposes to prevent our disqualification as a RIC. We may invest in preferred securities or other securities the U.S. federal income tax treatment of which may not beclear or may be subject to re-characterization by the Internal Revenue Service, or the IRS. To the extent the tax treatment ofsuch securities or the income from such securities differs from the expected tax treatment, it could affect the timing orcharacter of income recognized, requiring us to purchase or sell securities, or otherwise change our portfolio, in order tocomply with the tax rules applicable to RICs under the Code. We may distribute taxable dividends that are payable in cash or shares of our common stock at the election of eachshareholder. Under certain applicable provisions of the Code and the Treasury regulations, distributions payable in cash or inshares of stock at the election of shareholders are treated as taxable dividends. The IRS has issued a revenue procedureindicating that this rule will apply where the total amount of cash to be distributed is not less than 20% of the totaldistribution. Under this revenue procedure, if too many shareholders elect to receive their distributions in cash, each suchshareholder would receive a pro rata share of the total cash to be distributed and would receive the remainder of theirdistribution in shares of stock. If we decide to make any distributions consistent with this revenue procedure that are payablein part in our stock, taxable shareholders receiving such dividends will be required to include the full amount of the dividend(whether received in cash, our stock, or a combination thereof) as ordinary income (or as long-term capital gain to the extentsuch distribution is properly reported as a capital gain dividend) to the extent of our current and accumulated earnings andprofits for United States federal income tax purposes. As a result, a U.S. shareholder may be required to pay tax with respect tosuch dividends in excess of any cash received. If a U.S. shareholder sells the stock it receives in order to pay this tax, the salesproceeds may be less than the amount included in income with respect to the dividend, depending on the market price of ourstock at the time of the sale. Furthermore, with respect to non-U.S. shareholders, we may be required to withhold U.S. tax withrespect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. If a significantnumber of our shareholders determine to sell shares of our stock in order to pay taxes owed on dividends, it may putdownward pressure on the trading price of our stock. Failure to Obtain RIC Tax Treatment If we fail to satisfy the 90% Income Test or the Diversification Tests for any taxable year, we may neverthelesscontinue to qualify as a RIC for that year if certain relief provisions are applicable (which may, among other things, requireus to pay certain corporate-level U.S. federal taxes or to dispose of certain assets). If we were unable to obtain tax treatment as a RIC, we would be subject to tax on all of our taxable income at regularcorporate rates. We would not be able to deduct distributions to shareholders, nor would they be required to be made.Distributions would generally be taxable to our shareholders as dividend income to the extent of our current andaccumulated earnings and profits (in the case of non-corporate U.S. shareholders, generally at a maximum federal income taxrate applicable to qualified dividend income of 20%). Subject to certain limitations under the Code, corporate distributeeswould be eligible for the dividends-received deduction. Distributions in excess of our current and accumulated earnings andprofits would be treated first as a return of capital to the extent of the shareholder’s tax basis, and any remaining distributionswould be treated as a capital gain. If we fail to meet the RIC requirements for more than two consecutive years, and then seek to re-qualify as a RIC, wewould be subject to corporate-level taxation on any built-in gain recognized during the succeeding 5-year period unless wemade a special election to recognize all that built-in gain upon our re-qualification as a RIC and to pay the corporate-levelU.S. federal income tax on that built-in gain. Taxation of U.S. Shareholders Whether an investment in shares of our common stock is appropriate for a U.S. shareholder will depend upon thatperson’s particular circumstances. An investment in shares of our common stock by a U.S. shareholder may have adverse taxconsequences. The following summary generally describes certain U.S. federal income tax consequences of an investment inshares of our common stock by taxable U.S. shareholders and not by U.S. shareholders that are generally exempt from U.S.federal income taxation. U.S. shareholders should consult their own tax advisors before making an investment in ourcommon stock. 17 Table of ContentsDistributions by us generally are taxable to U.S. shareholders as ordinary income or capital gains. Distributions ofour “investment company taxable income” (which generally is our ordinary income excluding net capital gains) will betaxable as ordinary income to U.S. shareholders to the extent of our current or accumulated earnings and profits, whether paidin cash or reinvested in additional common stock. To the extent such distributions paid by us to non-corporate U.S.shareholders (including individuals) are attributable to dividends from U.S. corporations and certain qualified foreigncorporations, such distributions generally will be eligible for taxation at rates applicable to “qualifying dividends” at amaximum federal income tax rate of 20% provided that we properly report such distribution as “qualified dividend income”in a written statement furnished to our shareholders and certain holding period and other requirements are satisfied. In thisregard, it is not anticipated that a significant portion of distributions paid by us will be attributable to qualifying dividends;therefore, our distributions generally will not qualify for the preferential rates applicable to qualified dividend income.Distributions of our net capital gains (which generally is our net long-term capital gains in excess of net short-term capitallosses) properly designated by us as “capital gain dividends” will be taxable to a U.S. shareholder as long-term capital gains(at a maximum federal income tax rate of 20% in the case of individuals, trusts or estates), regardless of the U.S. shareholder’sholding period for his, her or its common stock and regardless of whether paid in cash or reinvested in additional commonstock. Distributions in excess of our current and accumulated earnings and profits first will reduce a U.S. shareholder’sadjusted tax basis in such shareholder’s common stock and, after the adjusted basis is reduced to zero, will constitute capitalgain to such U.S. shareholder. In lieu of actually distributing our realized net capital gains, we may retain some or all of our long-term capital gainand elect to be deemed to have made a distribution of the retained portion to our shareholders (a “deemed distribution”)under the “designated undistributed capital gains” rule of the Code. In that case, among other consequences, we will pay taxon the retained amount, each U.S. shareholder will be required to include his, her or its proportionate share of the deemeddistribution in income as if it had been actually distributed to the U.S. shareholder, and the U.S. shareholder will be entitledto claim a credit equal to his, her or its allocable share of the tax paid thereon by us. The amount of the deemed distribution,net of such tax, will be added to the U.S. shareholder’s tax basis for his, her or its common stock. If the amount of U.S. federalincome tax credit received by a shareholder exceeds the U.S. federal income tax such shareholder owes on the retained netcapital gain, such excess generally may be claimed as a credit against the U.S. shareholder’s other U.S. federal income taxobligations or may be refunded to the extent it exceeds a shareholder’s liability for U.S. federal income tax. A shareholderthat is not subject to U.S. federal income tax or otherwise required to file a U.S. federal income tax return would be requiredto file a U.S. federal income tax return on the appropriate form in order to claim a refund for the taxes we paid. In order toutilize the deemed distribution approach, we must provide written notice to our shareholders prior to the expiration of 60days after the close of the relevant taxable year. We cannot treat any of our investment company taxable income as a“deemed distribution.” For purposes of determining (1) whether the Annual Distribution Requirement is satisfied for any year and (2) theamount of capital gain dividends paid for that year, we may, under certain circumstances, elect to treat a dividend that is paidduring the following taxable year as if it had been paid during the taxable year in question. If we make such an election, theU.S. shareholder will still be treated as receiving the dividend in the taxable year in which the distribution is made. However,any dividend declared by us in October, November or December of any calendar year, payable to shareholders of record on aspecified date in any such month and actually paid during January of the following year, will be treated as if it had beenreceived by our U.S. shareholders on December 31 of the year in which the dividend was declared. If an investor purchases shares of our common stock shortly before the record date of a distribution, the price of theshares will include the value of the distribution, and the investor will be subject to tax on the distribution even though itrepresents a return of his, her or its investment. A U.S. shareholder generally will recognize taxable gain or loss if the shareholder sells or otherwise disposes of his,her or its shares of our common stock. The amount of gain or loss will be measured by the difference between suchshareholder’s adjusted tax basis in the common stock sold and the amount of the proceeds received in exchange. Any gainarising from such sale or disposition generally will be treated as long-term capital gains or losses if the shareholder has heldhis, her or its shares for more than one year. Otherwise, it will be classified as short-term capital gains or losses. However, anycapital loss arising from the sale or disposition of shares of our common stock held for six months or less will be treated aslong-term capital loss to the extent of the amount of capital gain dividends received, or undistributed capital gain deemedreceived, with respect to such shares. In addition, all or a portion of any loss recognized upon a disposition of shares of ourcommon stock may be disallowed if other substantially identical shares are purchased (whether18 Table of Contentsthrough reinvestment of distributions or otherwise) within 30 days before or after the disposition. The ability to otherwisededuct capital losses may be subject to other limitations under the Code. In general, non-corporate U.S. shareholders, including individuals, trusts and estates, are subject to U.S. federalincome tax at a maximum rate of 20% on their net capital gains, or the excess of realized net long-term capital gains overrealized net short-term capital losses for a taxable year, including a long-term capital gain derived from an investment in ourshares. Such rate is lower than the maximum rate on ordinary income currently payable by individuals. Corporate U.S.shareholders currently are subject to U.S. federal income tax on net capital gains at the maximum 21% rate also applied toordinary income. Non-corporate shareholders with net capital losses for a year (which we define as capital loss in excess ofcapital gain) generally may deduct up to $3,000 of such losses against their ordinary income each year; any net capital lossof a non-corporate shareholder in excess of $3,000 generally may be carried forward and used in subsequent years asprovided in the Code. Corporate shareholders generally may not deduct any net capital loss for a year, but may carry backsuch losses for three years or carry forward such losses for five years. Certain U.S. shareholders who are individuals, estates or trusts generally are subject to a 3.8% Medicare surtax onthe lesser of (1) the U.S. shareholder’s “net investment income” (or “undistributed net investment income” in the case of anestate or trust) for the relevant taxable year and (2) the excess of the U.S shareholder’s modified adjusted gross income for thetaxable year over a certain threshold (which in the case of individuals is between $125,000 and $250,000, depending on theindividual’s circumstances). A U.S. shareholder’s net investment income generally includes its dividends on, and capital gainfrom the sale or other disposition of, shares of our common stock. A “publicly offered” RIC is a RIC whose shares are either (1) continuously offered pursuant to a public offering, (2)regularly traded on an established securities market or (3) held by at least 500 persons at all times during the taxable year. Ifwe are not a publicly offered RIC for any period, a non-corporate shareholder’s pro rata portion of our affected expenses,including our management fees, will be treated as an additional dividend to the shareholder and will be deductible by suchshareholder only to the extent permitted under the limitations described below. For non-corporate shareholders, includingindividuals, trusts, and estates, significant limitations generally apply to the deductibility of certain expenses of a non-publicly offered RIC, including advisory fees. In particular, these expenses, referred to as miscellaneous itemized deductions,are deductible only to individuals to the extent they exceed 2% of such a shareholder’s adjusted gross income, and are notdeductible for AMT purposes. These expenses are not deductible by U.S. shareholders for tax years beginning 2018 through2025. Because we anticipate that shares of our common stock will continue to be regularly traded on an established securitiesmarket, we believe that we will continue to qualify as a “publicly offered regulated investment company.” We (or the applicable withholding agent) will send to each of our U.S. shareholders, as promptly as possible after theend of each calendar year, a written statement detailing the amounts includible in such U.S. shareholder’s taxable income forsuch year as ordinary income and as long-term capital gain. In addition, the U.S. federal tax status of each year’s distributionsgenerally will be reported to the IRS. Distributions paid by us generally will not be eligible for the dividends-receiveddeduction or the preferential tax rate applicable to qualifying dividends. Distributions may also be subject to additionalstate, local and foreign taxes depending on a U.S. shareholder’s particular situation. We may be required to withhold U.S. federal income tax, or backup withholding at a rate of 24%, from all taxabledistributions to any U.S. shareholder (1) who fails to furnish us with a correct taxpayer identification number or a certificatethat such shareholder is exempt from backup withholding (e.g., because it is a corporation) or (2) with respect to whom theIRS notifies us that such shareholder has failed to properly report certain interest and dividend income to the IRS and torespond to notices to that effect. An individual’s taxpayer identification number is his or her social security number. Backupwithholding tax is not an additional tax, and any amount withheld may be refunded or credited against the U.S. shareholder’sU.S. federal income tax liability, provided that proper information is timely provided to the IRS. Under U.S. Treasury regulations, if a shareholder recognizes a loss with respect to shares of our stock of $2.0 millionor more for an individual, S corporation, trust or a partnership with at least one non-corporate partner or $10.0 million ormore for a shareholder that is either a corporation or a partnership with only corporate partners in any single taxable year (or agreater loss over a combination of years), the shareholder must file with the IRS a disclosure statement on IRS Form 8886 (orsuccessor form). Direct shareholders of portfolio securities in many cases are exempted from this reporting requirement, butunder current guidance, shareholders of a RIC are not exempted. Future guidance may extend the current exception from thisreporting requirement to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does notaffect the legal determination of whether the taxpayer’s treatment of the loss is proper.19 Table of ContentsSignificant monetary penalties apply to a failure to comply with this reporting requirement. States may also have a similarreporting requirement. Shareholders should consult their own tax advisors to determine the applicability of these regulationsin light of their individual circumstances. Taxation of Non-U.S. Shareholders Whether an investment in the shares is appropriate for a Non-U.S. shareholder will depend upon that person’sparticular circumstances. An investment in the shares by a Non-U.S. shareholder may have adverse tax consequences. Non-U.S. shareholders should consult their tax advisers before investing in our common stock. Distributions of our “investment company taxable income” to Non-U.S. shareholders that are not “effectivelyconnected” with a U.S. trade or business carried on by the Non-U.S. shareholder, will generally be subject to withholding ofU.S. federal income tax at a rate of 30% (or lower rate provided by an applicable treaty) to the extent of our current andaccumulated earnings and profits, unless an applicable exception applies. No withholding is required with respect todistributions of (i) net U.S. source interest income that the Company properly reports as “interest-related dividends”, or (ii)net short term capital gains in excess of net long term capital losses that the Company properly reports as “short-term capitalgain dividends.” The Company anticipates that a portion of its distributions will be eligible for this exception fromwithholding; however, the Company cannot determine what portion of its distributions (if any) will be eligible for thisexception until after the end of their taxable year. No certainty can be provided that any distributions will be reported aseligible for this exception. Actual or deemed distributions of our net capital gain to a Non-U.S. shareholder, and gains realized by a Non-U.S.shareholder upon the sale of our common stock, that are not effectively connected with a U.S. trade or business carried on bythe Non-U.S. shareholder, will generally not be subject to U.S. federal withholding tax and generally will not be subject toU.S. federal income tax unless the Non-U.S. shareholder is a nonresident alien individual and is physically present in theUnited States for more than 182 days during the taxable year and meets certain other requirements. However, withholding ofU.S. federal income tax at a rate of 30% on capital gain of nonresident alien individuals who are physically present in theUnited States for more than the 182 day period only applies in exceptional cases because any individual present in theUnited States for more than 182 days during the taxable year is generally treated as a resident for U.S. income tax purposes;in that case, he or she would be subject to U.S. income tax on his or her worldwide income at the graduated rates applicableto U.S. citizens, rather than the 30% U.S. federal withholding tax. If we distribute our net capital gain in the form of deemed rather than actual distributions (which we may do in thefuture), a Non-U.S. shareholder will be entitled to a U.S. federal income tax credit or tax refund equal to the shareholder’sallocable share of the tax we pay on the capital gain deemed to have been distributed. In order to obtain the refund, the Non-U.S. shareholder must obtain a U.S. taxpayer identification number and file a U.S. federal income tax return even if the Non-U.S. shareholder would not otherwise be required to obtain a U.S. taxpayer identification number or file a U.S. federal incometax return. Accordingly, investment in the shares may not be appropriate for a Non-U.S. shareholder. Distributions of our “investment company taxable income” and net capital gain (including deemed distributions) toNon-U.S. shareholders, and gain realized by Non-U.S. shareholders upon the sale of our common stock that is “effectivelyconnected” with a U.S. trade or business carried on by the Non-U.S. shareholder (or if an income tax treaty applies,attributable to a “permanent establishment” in the United States), will be subject to U.S. federal income tax at the graduatedrates applicable to U.S. citizens, residents and domestic corporations. Corporate Non-U.S. shareholders may also be subject toan additional branch profits tax at a rate of 30% imposed by the Code (or lower rate provided by an applicable treaty). The tax consequences to a Non-U.S. shareholder entitled to claim the benefits of an applicable tax treaty may differfrom those described herein. Non-U.S. shareholders are advised to consult their own tax advisers with respect to the particulartax consequences to them of an investment in our shares. Non-U.S. shareholders may be subject to information reporting and backup withholding of U.S. federal income taxon dividends unless the Non-U.S. shareholder provides us or the dividend paying agent with an IRS Form W-8BEN or IRSForm W-8BEN-E, as applicable (or an acceptable substitute form) or otherwise meets documentary evidence requirements forestablishing that it is a Non-U.S. shareholder or otherwise establishes an exemption from backup withholding. To claim acredit or refund for any taxes paid by the Company on any undistributed long-term capital gains20 Table of Contents(as discussed above) or any taxes collected through withholding or to claim a benefit under an applicable tax treaty, a Non-U.S. shareholder must obtain a U.S. taxpayer identification number and may be required to file a federal income tax returneven if the Non-U.S. shareholder would not otherwise be required to obtain a U.S. taxpayer identification number or file aU.S. income tax return. Non-U.S. persons should consult their own tax advisors with respect to the U.S. federal income tax and withholdingtax, and state, local and foreign tax consequences of an investment in the shares. FATCA Legislation commonly referred to as the “Foreign Account Tax Compliance Act,” or “FATCA,” generally imposes a30% withholding tax on payments of certain types of income to foreign financial institutions (“FFIs”) unless such FFIs either(i) enter into an agreement with the U.S. Treasury to report certain required information with respect to accounts held by U.S.persons (or held by foreign entities that have U.S. persons as substantial owners) or (ii) reside in a jurisdiction that has enteredinto an intergovernmental agreement (“IGA”) with the United States to collect and share such information and are incompliance with the terms of such IGA and any enabling legislation or regulations. The types of income subject to the taxinclude U.S. source interest and dividends and the gross proceeds from the sale of any property that could produce U.S.-source interest or dividends received after December 31, 2018. The information required to be reported includes the identityand taxpayer identification number of each account holder that is a U.S. person and transaction activity within the holder’saccount. In addition, subject to certain exceptions, this legislation also imposes a 30% withholding on payments to foreignentities that are not FFIs unless the foreign entity certifies that it does not have a greater than 10% U.S. owner or provides thewithholding agent with identifying information on each greater than 10% U.S. owner. Depending on the status of a Non-U.S.shareholder and the status of the intermediaries through which they hold their shares, Non-U.S. shareholders could be subjectto this 30% withholding tax with respect to distributions on their shares and proceeds from the sale of their shares. Undercertain circumstances, a non-U.S. shareholder might be eligible for refunds or credits of such taxes. Possible Legislative or Other Actions Affecting Tax Considerations Prospective investors should recognize that the present U.S. federal income tax treatment of an investment in ourstock may be modified by legislative, judicial or administrative action at any time, and that any such action may affectinvestments and commitments previously made. The rules dealing with U.S. federal income taxation are constantly underreview by persons involved in the legislative process and by the IRS and the U.S. Treasury Department, resulting in revisionsof regulations and revised interpretations of established concepts as well as statutory changes. Revisions in U.S. federal taxlaws and interpretations thereof could affect the tax consequences of an investment in our stock. State and Local Tax Treatment The state and local tax treatment may differ from federal income tax treatment. The discussion set forth herein does not constitute tax advice, and potential investors should consult their own taxadvisors concerning the tax considerations relevant to their particular situation. THE NASDAQ GLOBAL SELECT MARKET CORPORATE GOVERNANCE REGULATIONS The NASDAQ Global Select Market, or Nasdaq, has adopted corporate governance listing standards with whichlisted companies must comply in order to remain listed. We believe that we are in compliance with these corporategovernance listing standards. We intend to monitor our compliance with future listing standards and to take all necessaryactions to ensure that we remain in compliance. SECURITIES EXCHANGE ACT OF 1934 AND SARBANES-OXLEY ACT COMPLIANCE We are subject to the reporting and disclosure requirements of the Exchange Act, including the filing of quarterly,annual and current reports, proxy statements and other required items. In addition, we are subject to the Sarbanes-Oxley21 Table of ContentsAct of 2002 and regulations promulgated thereunder, which imposes a wide variety of regulatory requirements on publicly-held companies and their insiders. For example: ·Pursuant to Rule 13a-14 of the Exchange Act, our Chief Executive Officer and Chief Financial Officer are requiredto certify the accuracy of the financial statements contained in our periodic reports; ·Pursuant to Item 307 of Regulation S-K, our periodic reports are required to disclose our conclusions about theeffectiveness of our disclosure controls and procedures; ·Pursuant to Rule 13a-15 of the Exchange Act, our management is required to prepare a report on its assessment ofour internal control over financial reporting, and we engage an independent registered public accounting firm toseparately audit our internal control over financial reporting; and ·Pursuant to Item 308 of Regulation S-K and Rule 13a-15 of the Exchange Act, our periodic reports must disclosewhether there were significant changes in our internal control over financial reporting or in other factors that couldsignificantly affect these controls subsequent to the date of their evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses. Item 1A. Risk Factors Investing in our common stock involves a number of significant risks. In addition to other information contained inthis Annual Report on Form 10-K, investors should consider the following information before making an investment in ourcommon stock. The risks and uncertainties described below could materially adversely affect our business, financialconditions and results of operations. Risks and uncertainties not presently known to us, or not presently deemed material byus, may also impair our operations and performance. If any of the following risks, or risks not presently known to us,actually occur, the trading price of our common stock could decline, and you may lose all or part of your investment. RISKS RELATED TO OUR BUSINESS AND STRUCTURE Our financial condition and results of operations will depend on our ability to effectively allocate and manage capital. Our ability to achieve our investment objective of maximizing risk-adjusted returns to shareholders depends on ourability to effectively allocate and manage capital. Capital allocation depends, in part, upon our investment team’s ability toidentify, evaluate, invest in and monitor companies that meet our investment criteria. Accomplishing our investment objectives is largely a function of our investment team’s management of theinvestment process and our access to investments offering attractive risk adjusted returns. In addition, members of ourinvestment team are called upon, from time to time, to provide managerial assistance to some of our portfolio companies. The results of our operations depend on many factors, including the availability of opportunities for investment,readily accessible short and long-term funding alternatives in the financial markets and economic conditions. Our ability tomake new investments at attractive relative returns is also a function of our marketing and our management of the investmentprocess, as well as conditions in the private credit market in which we invest. If we fail to invest our capital effectively, ourreturn on equity may be negatively impacted, which could have a material adverse effect on the price of the shares of ourcommon stock. Any unrealized losses we experience may be an indication of future realized losses, which could reduce our incomeavailable to make distributions. As a BDC, we are required to carry our investments at market value or, if no market value is ascertainable, at the fairvalue as determined in good faith by our Board of Directors pursuant to a valuation methodology approved by our Board ofDirectors. Decreases in the market values or fair values of our investments will be recorded as unrealized losses. Anunrealized loss could be an indication of a portfolio company’s inability to generate cash flow or meet its repaymentobligations. This could result in realized losses in the future and ultimately in reductions of our income available to paydividends or interest and principal on our securities and could have a material adverse effect on your investment.22 Table of Contents Our business model depends to a significant extent upon strong referral relationships. Our inability to maintain ordevelop these relationships, as well as the failure of these relationships to generate investment opportunities, couldadversely affect our business. We expect that members of our management team will maintain their relationships with financial sponsors,intermediaries, financial institutions, investment bankers, commercial bankers, financial advisors, attorneys, accountants,consultants and other individuals within our network, and we will rely to a significant extent upon these relationships toprovide us with potential investment opportunities. If our management team fails to maintain its existing relationships ordevelop new relationships with sources of investment opportunities, we will not be able to effectively invest our capital. Individuals with whom members of our management team have relationships are not obligated to provide us with investmentopportunities; therefore, there is no assurance that these relationships will generate investment opportunities for us. In addition to regulatory limitations on our ability to raise capital, our current debt obligations contain variouscovenants, which, if not complied with, could accelerate our repayment obligations under the Credit Facility or theDecember 2022 Notes, thereby materially and adversely affecting our liquidity, financial condition, results of operationsand ability to pay distributions. We will have a continuing need for capital to finance our investments. We are party to a senior secured creditfacility, dated as of August 30, 2016 and amended as of November 16, 2017, which we refer to as the Credit Facility. As ofMarch 31, 2018, the Credit Facility provides us with a revolving credit line of up to $180.0 million of which $40.0 millionwas drawn. On April 16, 2018 and May 11, 2018, CSWC entered into Incremental Assumption Agreements, which increasedthe total commitments under the Credit Facility by $20 million and $10 million, respectively. The increases were executedunder the accordion feature of the Credit Facility and increased total commitments from $180 million to $210 million. The Credit Facility contains customary terms and conditions, including, without limitation, affirmative andnegative covenants such as information reporting requirements, minimum consolidated net worth, minimum consolidatedinterest coverage ratio, minimum asset coverage, and maintenance of RIC tax treatment and BDC status. The Credit Facilityalso contains customary events of default with customary cure and notice provisions, including, without limitation,nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenants, bankruptcy, andchange of control. The Credit Facility permits us to fund additional loans and investments as long as we are within theconditions set out in the Credit Facility. In December 2017, we issued $57.5 million in aggregate principal amount of 5.95% Notes due 2022, or theDecember 2022 Notes. The indenture governing the December 2022 Notes contains certain covenants including but notlimited to (i) a requirement that we comply with the asset coverage requirement of Section 61 of the 1940 Act or anysuccessor provisions thereto, after giving effect to any exemptive relief granted to us by the SEC, (ii) a requirement, subjectto a limited exception, that we will not declare any cash dividend, or declare any other cash distribution, upon a class of ourcapital stock, or purchase any such capital stock, unless, in every such case, at the time of the declaration of any suchdividend or distribution, or at the time of any such purchase, we have the minimum asset coverage required pursuant toSection 61 of the 1940 Act or any successor provisions thereto after deducting the amount of such dividend, distribution orpurchase price, as the case may be, giving effect to any exemptive relief granted to us by the SEC and (iii) a requirement toprovide financial information to the holders of the December 2022 Notes and the trustee under the indenture if we should nolonger be subject to the reporting requirements under the Exchange Act. The indenture and supplement relating to theDecember 2022 Notes also provides for customary events of default. Our continued compliance with these covenants depends on many factors, some of which are beyond our control,and there are no assurances that we will continue to comply with these covenants. Our failure to satisfy these covenants couldresult in foreclosure by our lenders, which would accelerate our repayment obligations under the facility and thereby have amaterial adverse effect on our business, liquidity, financial condition, results of operations and ability to pay distributions toour shareholders. All of our assets are subject to security interests under our secured Credit Facility and if we default on our obligationsunder the Credit Facility, we may suffer adverse consequences, including foreclosure on our assets. 23 Table of ContentsAll of our assets are currently pledged as collateral under our Credit Facility. If we default on our obligations underthe Credit Facility, the lenders party thereto may have the right to foreclose upon and sell, or otherwise transfer, the collateralsubject to their security interests. In such event, we may be forced to sell our investments to raise funds to repay ouroutstanding borrowings in order to avoid foreclosure and these forced sales may be at times and at prices we would notconsider advantageous. Moreover, such deleveraging of our company could significantly impair our ability to effectivelyoperate our business in the manner in which we have historically operated. As a result, we could be forced to curtail or ceasenew investment activities and lower or eliminate the dividends that we have historically paid to our shareholders. Inaddition, if the lenders exercise their right to sell the assets pledged under our Credit Facility, such sales may be completed atdistressed sale prices, thereby diminishing or potentially eliminating the amount of cash available to us after repayment ofthe amounts outstanding under the Credit Facility. These distressed prices could be materially below our most recentvaluation of each security, which could have a significantly negative effect on NAV. Because we borrow money to make investments, the potential for gain or loss on amounts invested in us is magnified andmay increase the risk of investing in us. Borrowings to fund investments, also known as leverage, magnify the potential for loss on investments in ourindebtedness and gain or loss on investments in our equity capital. As we use leverage to partially finance our investments, you will experience increased risks of investing in our securities. We may borrow from banks and other lenders, includingunder our Credit Facility, and may issue debt securities or enter into other types of borrowing arrangements in the future. Ifthe value of our assets decreases, leveraging would cause NAV to decline more sharply than it otherwise would have had wenot leveraged our business. Similarly, any decrease in our income would cause net investment income to decline moresharply than it would have had we not leveraged our business. Such a decline could negatively affect our ability to paycommon stock dividends, scheduled debt payments or other payments related to our securities. Use of leverage is generallyconsidered a speculative investment technique. As of March 31, 2018, we had $40.0 million debt outstanding under our Credit Facility. Borrowings under theCredit Facility bear interest, on a per annum basis at a rate equal to the applicable LIBOR rate plus 3.00%, with a step-downto LIBOR plus 2.75% at the time the Company’s net worth exceeds $325 million. We pay unused commitment fees of 0.50%to 1.00% per annum, based on utilization, on the unused lender commitments under the Credit Facility. The Credit Facility issecured by substantially all of our assets. If we are unable to meet the financial obligations under the Credit Facility, thelenders under the Credit Facility may exercise its remedies under the Credit Facility as the result of a default by us. On April16, 2018 and May 11, 2018, CSWC entered into Incremental Assumption Agreements, which increased the totalcommitments under the Credit Facility by $20 million and $10 million, respectively. The increases were executed under theaccordion feature of the Credit Facility and increased total commitments from $180 million to $210 million. As of March 31, 2018, the carrying amount of the December 2022 Notes was $55.3 million. The December 2022Notes mature on December 15, 2022 and may be redeemed in whole or in part at any time, or from time to time, at our optionon or after December 15, 2019. The December 2022 Notes bear interest at a rate of 5.95% per year, payable quarterly onMarch 15, June 15, September 15 and December 15 of each year. The December 2022 Notes are an unsecured obligation,rank pari passu with our other outstanding and future unsecured unsubordinated indebtedness and are effectivelysubordinated to all of our existing and future secured indebtedness, including borrowings under our Credit Facility. Our ability to achieve our investment objective may depend in part on our ability to access additional leverage onfavorable terms by borrowing from banks or insurance companies or by issuing debt securities and there can be no assurancethat such additional leverage can in fact be achieved.24 Table of ContentsIllustration. The following table illustrates the effect of leverage on returns from an investment in our common stockassuming various annual returns, net of expenses. The calculations in the table below are hypothetical and actual returns maybe higher or lower than those appearing below.Assumed Return on Our Portfolio(net of expenses) (10.0)% (5.0)% 0.0% 5.0% 10.0%Corresponding net return to common shareholder (15.80)% (9.02)% (2.25)% 4.52% 11.29% (1)Assumes $417.5 million in total assets, $97.5 million in debt outstanding, $308.3 million in net assets and a weighted-average interestrate of 5.69% on our senior securities based on our financial data available on March 31, 2018. Actual interest payments may bedifferent.(2)In order for us to cover our annual interest payments on indebtedness, we must achieve annual returns on our March 31, 2018 totalassets of at least 1.66%. If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a BDC or be precludedfrom investing according to our current business strategy. As a BDC, we may not acquire any assets other than “qualifying assets” unless, at the time of and after giving effectto such acquisition, at least 70% of our total assets are qualifying assets. Currently, more than 70% of our assets consist of qualifying assets. However, we may be precluded from investing inwhat we believe are attractive investments if those investments are not qualifying assets for purposes of the 1940 Act.Similarly, these rules could prevent us from making follow-on investments in existing portfolio companies or we could berequired to dispose of investments at inappropriate times to comply with the 1940 Act (which could result in the dilution ofour position). A failure on our part to maintain our status as a BDC would significantly reduce our operating flexibility. If we fail to maintain our status as a BDC, we might be regulated as a closed-end investment company that isrequired to register under the 1940 Act, which would subject us to additional regulatory restrictions and significantlydecrease our operating flexibility. In addition, any such failure could cause an event of default under our outstandingindebtedness, which could have a material adverse effect on our business, financial condition or results of operations. We will be subject to corporate-level U.S. Federal income tax if we are unable to qualify as a Regulated InvestmentCompany under Subchapter M of the Code. To maintain RIC tax treatment under the Code, we must meet the following annual distribution, income source andasset diversification requirements: ·The annual distribution requirement for a RIC will be satisfied if we distribute to our shareholders on an annual basisat least 90% of our net ordinary income and realized short-term capital gains in excess of realized net long-termcapital losses. Depending on the level of taxable income earned in a tax year, we may choose to carry forwardtaxable income in excess of current year distributions into the next year and pay a 4% excise tax on such income.Any such carryover taxable income must be distributed through a dividend declared prior to filing the final taxreturn related to the year that generated such taxable income. ·The source of income requirement will be satisfied if we obtain at least 90% of our gross income for each taxableyear from dividends, interest, payments with respect to certain securities loans, gains from the sale or otherdisposition of stock or other securities or foreign currencies or other income derived with respect to our business ofinvesting in such stock, securities or currencies and net income derived from an interest in a “qualified publiclytraded partnership” (as defined in the Code), or the 90% Income Test. ·The asset diversification requirement will be satisfied if we meet certain asset diversification requirements at the endof each quarter of our taxable year. To satisfy this requirement, at least 50% of the value of our assets must consist ofcash, cash equivalents, U.S Government securities, securities of other RICs, and other securities if such othersecurities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of25 (1)(2)Table of Contentsthe outstanding voting securities of the issuer (which for these purposes includes the equity securities of a “qualifiedpublicly traded partnership”). In addition, no more than 25% of the value of our assets can be invested in thesecurities, other than U.S Government securities or securities of other RICs, (1) of one issuer (2) of two or moreissuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same orsimilar or related trades or businesses or (3) of one or more “qualified publicly traded partnerships,” or theDiversification Tests. Failure to meet these requirements may result in us having to dispose of certain unqualified investments quickly inorder to prevent the loss of RIC tax treatment. If we fail to maintain RIC tax treatment for any reason and are subject tocorporate income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income availablefor distribution and the amount of our distributions. In addition, to the extent we had unrealized gains, we would have toestablish deferred tax liabilities for taxes, which would reduce our NAV accordingly. In addition, our shareholders would losethe tax credit realized when we, as a RIC, decide to retain the net realized capital gain and make deemed distributions of netrealized capital gains, and pay taxes on behalf of our shareholders at the end of the tax year. The loss of this pass-through taxtreatment could have a material adverse effect on the total return of an investment in our common stock. Even if the Company qualifies as a Regulated Investment Company, it may face tax liabilities that reduce its cash flow. Even if we qualify for taxation as a RIC, we may be subject to certain U.S. federal, state and local taxes on ourincome and assets. In addition, we may hold some of our assets through our Taxable Subsidiary, which is not consolidated forU.S. federal income tax purposes, or any other taxable subsidiary we may form. Any taxes paid by our subsidiary corporationswould decrease the cash available for distribution to our shareholders. Our historical financial statements are not necessarily representative of the results we would have achieved as a stand-alone publicly-traded company and therefore may not be indicative of our future performance. As part of the Share Distribution, we spun off 63.5% of our NAV to our shareholders and divested other majorinvestments during the past three years. We emerged from these divestitures and the Share Distribution with a significantlydifferent company profile. Our historical financial statements included in this Form 10-K for historical periods are notnecessarily representative of the results we would have achieved as a stand-alone publicly traded company with a smallermarket footprint. Accordingly, this data may not be indicative of our future performance, or necessarily reflect what ourfinancial position and results of operations or cash flows would have been, had we operated as a separate, stand-alonepublicly-traded entity during all of the periods presented. Our investment portfolio is and will continue to be recorded at fair value. Our Board of Directors has finalresponsibility for overseeing, reviewing and approving, in good faith, our fair value determination. As a result ofrecording our investments at fair value, there is and will continue to be subjectivity as to the value of our portfolioinvestments. Under the 1940 Act, we are required to carry our portfolio investments at market value or, if there is no readilyavailable market value, at fair value as determined by us, with our Board of Directors having final responsibility foroverseeing, reviewing and approving, in good faith, our fair value determination. Typically, there is not a public market forthe securities of the privately held companies in which we have invested and will continue to invest. As a result, we valuethese securities quarterly at fair value based on inputs from management and our investment team, along with the oversight,review and approval of our Board of Directors. The determination of fair value and, consequently, the amount of unrealized gains and losses in our portfolio, are toa certain degree, subjective and dependent on a valuation process approved by our Board of Directors. Certain factors thatmay be considered in determining the fair value of our investments include external events, such as private mergers, sales andacquisitions involving comparable companies. Because of the inherent uncertainty of the valuation of portfolio securitiesthat do not have readily ascertainable market values, our fair value determinations may differ materially from the values athird party would be willing to pay for our portfolio securities or the values which would be applicable to unrestrictedsecurities having a public market. Due to this uncertainty, our fair value determinations may cause our NAV on a given dateto materially understate or overstate the value that we may ultimately realize on one or more of our investments. As a result,investors purchasing our common stock based on an overstated NAV may pay a higher price26 Table of Contentsthan the value of our investments might warrant. Conversely, investors selling shares during a period in which the NAVunderstates the value of our investments may receive a lower price for their shares than the value of our investments mightwarrant. The capital markets may experience periods of disruption and instability. Such market conditions may materially andadversely affect debt and equity capital markets in the United States, which may have a negative impact on our businessand operations. From time to time, capital markets may experience periods of disruption and instability. For example, between 2008and 2009, the global capital markets were unstable as evidenced by periodic disruptions in liquidity in the debt capitalmarkets, significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated creditmarket and the failure of major financial institutions. These events contributed to worsening general economic conditionsthat materially and adversely impacted the broader financial and credit markets and reduced the availability of debt andequity capital for the market as a whole and financial services firms in particular. While market conditions have largelyrecovered from the events of 2008 and 2009, there have been continuing periods of volatility, some lasting longer thanothers. There can be no assurance these market conditions will not repeat themselves or worsen in the future. Thereappearance of market conditions similar to those experienced from 2008 through 2009 for any substantial length of timecould make it difficult to extend the maturity of or refinance our existing indebtedness or obtain new indebtedness withsimilar terms. Additionally, the debt capital that will be available to us in the future may be at a higher cost and on lessfavorable terms than what we currently experience due to the existence of a rising interest rate environment. If any of theseconditions appear, they may have an adverse effect on our business, financial condition, and results of operations. Theseevents could limit our investment originations, limit our ability to increase returns to equity holders through the effective useof leverage, and negatively impact our operating results. In addition, significant changes or volatility in the capital markets may also have a negative effect on the valuationsof our investments. While most of our investments are not publicly traded, applicable accounting standards require us toassume as part of our valuation process that our investments are sold in a principal market to market participants (even if weplan on holding an investment through its maturity). Significant changes in the capital markets may also affect the pace ofour investment activity and the potential for liquidity events involving our investments. Thus, the illiquidity of ourinvestments may make it difficult for us to sell our investments to access capital if required, and as a result, we could realizesignificantly less than the value at which we have recorded our investments if we were required to sell them for liquiditypurposes. An inability to raise or access capital could have a material adverse effect on our business, financial condition orresults of operations. Changes in the laws or regulations governing our business, or changes in the interpretations thereof, and any failure byus to comply with these laws or regulations, could negatively affect the profitability of our operations. Changes in the laws or regulations or the interpretations of the laws and regulations that govern BDCs, RICs or non-depository commercial lenders could significantly affect our operations and our cost of doing business. We are subject tofederal, state and local laws and regulations and are subject to judicial and administrative decisions that affect ouroperations, including our loan originations, maximum interest rates, fees and other charges, disclosures to portfoliocompanies, the terms of secured transactions, collection and foreclosure procedures and other trade practices. If these laws,regulations or decisions change, or if we expand our business into jurisdictions that have adopted more stringentrequirements than those in which we currently conduct business, we may have to incur significant expenses in order tocomply or we might have to restrict our operations. In addition, if we do not comply with applicable laws, regulations anddecisions, we may lose licenses needed for the conduct of our business and be subject to civil fines and criminal penalties,any of which could have a material adverse effect upon our business, results of operations or financial condition. We operate in a highly competitive market for investment opportunities. We compete for attractive investment opportunities with other financial institutions, including BDCs, junior capitallenders, and banks. Some of these competitors are substantially larger and have greater financial, technical and marketingresources, and some are subject to different, and frequently less stringent, regulations. Our competitors may have a lower costof funds and may have access to funding sources that are not available to us. Furthermore, many of our competitors are notsubject to the regulatory restrictions that the 1940 Act imposes on us as a BDC. As a result of this competition, we may notbe able to take advantage of attractive investment opportunities from time to time, and there can27 Table of Contentsbe no assurance that we will be able to identify and make investments that satisfy our objectives. A significant increase inthe number and/or size of our competitors in our target market could force us to accept less attractive investment terms. Wecannot assure you that the competitive pressures we face will not have a materially adverse effect on our business, financialcondition and results of operation. Adverse market and economic conditions could cause harm to our operating results. Past recessions have had a significant negative impact on the operating performance and fair value of many middlemarket companies. Many of our portfolio companies could be adversely impacted again by any future economic downturn orrecession and may be unable to be sold at a price that would allow us to recover our investment, or may be unable to operateduring a recession. Such portfolio company performance could have a material adverse effect on our business, financialcondition and results of operations. Our success depends on attracting and retaining qualified personnel in a competitive environment. Sourcing, selection, structuring and closing our investments depends upon the diligence and skill of ourmanagement. Our management’s capabilities may significantly impact our results of operations. Our success requires that weretain investment and operations personnel in a competitive environment. Our ability to attract and retain personnel with therequisite credentials, experience and skills depends on several factors, including, but not limited to, our ability to offercompetitive wages, benefits and professional growth opportunities. The competitive environment for qualified personnel may require us to take certain measures to ensure that we areable to attract and retain experienced personnel. Such measures may include increasing the attractiveness of our overallcompensation packages, altering the structure of our compensation packages through the use of additional forms ofcompensation or other steps. The inability to attract and retain experienced personnel could potentially have an adverseeffect on our business. In connection with CSWI’s separation from us, CSWI has indemnified us for certain liabilities. However, there can be noassurance that these indemnities will be sufficient to insure us against the full amount of such liabilities or that CSWI’sability to satisfy its indemnification obligation will not be impaired in the future. CSWI agreed to indemnify us for certain liabilities, including certain tax liabilities. However, third parties couldseek to hold us responsible for any of the liabilities that CSWI has agreed to retain, and there can be no assurance that CSWIwill be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering fromCSWI any amounts for which we are held liable, we may be temporarily required to bear these losses while seeking recoveryfrom CSWI. Potential indemnification liabilities of us to CSWI could materially adversely affect us. Agreements relating to the Share Distribution between us and CSWI provide for indemnification obligationsdesigned to make us financially responsible for liabilities that may exist relating to or arising out of our business activities,whether incurred prior to or after the Share Distribution. Potential liabilities may arise due to fraudulent transfer considerations, which would adversely affect our financialcondition and our results of operations. In connection with the Share Distribution, we undertook several corporate restructuring transactions which, alongwith the Share Distribution, may be subject to federal and state fraudulent conveyance and transfer laws. If, under these laws,a court were to determine that, at the time of the Share Distribution, any entity involved in these restructuring transactions orthe Share Distribution: (1) was insolvent; (2) was rendered insolvent by reason of the Share Distribution; (3) had remainingassets constituting unreasonably small capital; or (4) intended to incur, or believed it would incur, debts beyond its ability topay these debts as they matured, then the court could void the Share Distribution, in whole or in part, as a fraudulentconveyance or transfer, the court could require us to fund liabilities of the other company for the benefit of creditors. 28 Table of ContentsRecent legislation may allow us to incur additional leverage, which could increase the risk of investing in the Company. The 1940 Act generally prohibits us from incurring indebtedness unless immediately after such borrowing we havean asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our totalassets). However, on March 23, 2018, the Small Business Credit Availability Act (the “SBCA”) was signed into law, whichincluded various changes to regulations under the federal securities laws that impact BDCs. The SBCA included changes tothe 1940 Act to allow BDCs to decrease their asset coverage requirement from 200% to 150%, if certain requirements are met.Under the SBCA, we are allowed to reduce our asset coverage requirement to 150%, and thereby increase our leveragecapacity, if shareholders representing at least a majority of the votes cast, when a quorum is present, approve a proposal to doso. If we receive shareholder approval, we would be allowed to reduce our asset coverage requirement to 150% on the firstday after such approval. Alternatively, the SBCA allows the majority of our independent directors to approve the reductionin our asset coverage requirement to 150%, and such approval would become effective on the one-year anniversary of suchapproval. In either case, we would be required to make certain disclosures on our website and in SEC filings regarding,among other things, the receipt of approval to reduce our asset coverage requirement to 150%, our leverage capacity andusage, and risks related to leverage. On April 25, 2018, the Board, including a “required majority” (as such term is defined in Section 57(o) of the 1940Act) of the Board, approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the1940 Act. As a result, the minimum asset coverage ratio applicable to the Company will be decreased from 200% to 150%,effective April 25, 2019. The Board also approved a resolution which limits the Company’s issuance of senior securities suchthat the asset coverage ratio, taking into account such issuance, would not be less than 166%, effective April 25, 2019. Leverage is generally considered a speculative investment technique and increases the risk of investing in oursecurities. Leverage magnifies the potential for loss on investments in our indebtedness and on invested equity capital. As weuse leverage to partially finance our investments, you will experience increased risks of investing in our securities. If thevalue of our assets increases, then leveraging would cause the net asset value attributable to our common stock to increasemore sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging wouldcause net asset value to decline more sharply than it otherwise would have had we not leveraged our business. Similarly, anyincrease in our income in excess of interest payable on the borrowed funds would cause our net investment income toincrease more than it would without the leverage, while any decrease in our income would cause net investment income todecline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to paycommon stock dividends, scheduled debt payments or other payments related to our securities. If we incur additionalleverage, you will experience increased risks of investing in our common stock. Efforts to comply with the Sarbanes-Oxley Act involve significant expenditures, and non-compliance with the Sarbanes-Oxley Act may adversely affect us. We are subject to the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the related rules and regulationspromulgated by the SEC. Among other requirements, under Section 404 of the Sarbanes-Oxley Act and rules and regulationsof the SEC thereunder, our management is required to report on our internal controls over financial reporting. We are requiredto review on an annual basis our internal controls over financial reporting, and on a quarterly and annual basis to evaluateand disclose significant changes in our internal controls over financial reporting. We have and expect to continue to incursignificant expenses related to compliance with the Sarbanes-Oxley Act, which will negatively impact our financialperformance and our ability to make distributions. In addition, this process results in a diversion of management’s time andattention. In the event that we are unable to maintain compliance with the Sarbanes-Oxley Act and related rules, we may beadversely affected. Our ability to enter into transactions with our affiliates is restricted. We are prohibited under the 1940 Act from participating in certain transactions with certain of our affiliates withoutthe prior approval of our independent directors and, in some cases, the SEC. Any person that owns, directly or indirectly, 5%or more of our outstanding voting securities is our affiliate for purposes of the 1940 Act, and we generally are prohibited frombuying or selling any security from or to an affiliate, absent the prior approval of our independent directors. The 1940 Actalso prohibits certain “joint” transactions with certain of our affiliates, which could include investments in the same portfoliocompany (whether at the same or different times), without prior approval of our29 Table of Contentsindependent directors and, in some cases, the SEC. If a person acquires more than 25% of our voting securities, we areprohibited from buying or selling any security from or to that person or certain of that person’s affiliates, or entering intoprohibited joint transactions with that person, absent the prior approval of the SEC. Similar restrictions limit our ability totransact business with our officers or directors or their affiliates. Regulations governing our operation as a BDC will affect our ability to, and the way in which we, raise additionalcapital. Our business will require capital to operate and grow. We may acquire such additional capital from the followingsources: Senior Securities. We may issue debt securities and/or borrow money from banks or other financial institutions,which we refer to collectively as senior securities. As a result of issuing senior securities, we will be exposed to additionalrisks, including the following: ·Under the provisions of the 1940 Act, we are permitted, as a BDC, to issue senior securities only in amountssuch that our asset coverage, as defined in the 1940 Act, equals at least 200% (or, pursuant to recent legislation,150% if certain requirements are met as described in the Business Section under “Regulation as a BusinessDevelopment Company—Senior Securities”) immediately after each issuance of senior securities. If the value ofour assets declines, we may be unable to satisfy this test. If that happens, we will be prohibited from issuing debtsecurities and/or borrowing money from banks or other financial institutions and may not be permitted todeclare a dividend or make any distribution to shareholders or repurchase shares until such time as we satisfythis test. ·Any amounts that we use to service our debt will not be available for dividends to our common shareholders.·It is likely that any senior securities or other indebtedness we issue will be governed by an indenture or otherinstrument containing covenants restricting our operating flexibility. Additionally, some of these securities orother indebtedness may be rated by rating agencies, and in obtaining a rating for such securities and otherindebtedness, we may be required to abide by operating and investment guidelines that further restrict operatingand financial flexibility.·We and, indirectly, our stockholders will bear the cost of issuing and servicing such securities and otherindebtedness.·Any unsecured debt issued by us would rank (1) pari passu with our future unsecured indebtedness andeffectively subordinated to all of our existing and future secured indebtedness, to the extent of the value of theassets securing such indebtedness, and (2) structurally subordinated to all existing and future indebtedness andother obligations of any of our subsidiaries·Upon a liquidation of our company, holders of our debt securities and lenders with respect to other borrowingswould receive a distribution of our available assets prior to the holders of our common stock. Future offerings ofadditional debt securities, which would be senior to our common stock upon liquidation, or equity securities,which could dilute our existing stockholders, may harm the value of our common stock. Additional Common Stock. The 1940 Act prohibits us from selling shares of our common stock at a price below thecurrent NAV per share of such stock, with certain exceptions. One such exception is prior shareholder approval of issuancesbelow current NAV per share provided that our Board of Directors makes certain determinations. We did not seek shareholderauthorization to sell shares of our common stock below the then current NAV per share of our common stock at our 2017annual meeting of shareholders. We do not anticipate seeking such authorization in the future. However, in the event wechange our position, we will seek the requisite approval of our common shareholders. If we raise additional funds by issuingmore common stock or senior securities convertible into, or exchangeable for, our common stock, the percentage ownershipof our shareholders at that time would decrease, and they may experience dilution. Moreover, we can offer no assurance thatwe will be able to issue and sell additional equity securities in the future, on favorable terms or at all. We cannot predict how tax reform legislation will affect us, our investments, or our shareholders, and any suchlegislation could adversely affect our business. Legislative or other actions relating to taxes could have a negative effect on us. The rules dealing with U.S.federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and theU.S.30 Table of ContentsTreasury Department. The U.S. House of Representatives and U.S. Senate recently passed tax reform legislation, which thePresident recently signed into law. Such legislation will make many changes to the Code, including significant changes tothe taxation of business entities, the deductibility of interest expense, and the tax treatment of capital investment. We cannotpredict with certainty how any changes in the tax laws might affect us, our shareholders, or our portfolio investments. Newlegislation and any U.S. Treasury regulations, administrative interpretations or court decisions interpreting such legislationcould significantly and negatively affect our ability to qualify for tax treatment as a RIC or the U.S. federal income taxconsequences to us and our shareholders of such qualification, or could have other adverse consequences. Shareholders areurged to consult with their tax advisor regarding tax legislative, regulatory, or administrative developments and proposalsand their potential effect on an investment in our securities. We are highly dependent on information systems and systems failures could significantly disrupt our business, whichmay, in turn, negatively affect the market price of our common stock and our ability to pay dividends. Our business is highly dependent on our and third parties’ communications and information systems. Any failure orinterruption of those systems, including as a result of the termination of an agreement with any third-party service providers,could cause delays or other problems in our activities. Our financial, accounting, data processing, backup or other operatingsystems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors,including events that are wholly or partially beyond our control and adversely affect our business. There could be: ·Sudden electrical or telecommunications outages;·Natural disasters such as earthquakes, tornadoes and hurricanes;·Events arising from local or larger scale political or social matters, including terrorist acts; and·Cyber-attacks. If we are unable to maintain the availability of our electronic data systems and safeguard the security of our data, ourability to conduct business may be compromised, which could impair our liquidity, disrupt our business, damage ourreputation and cause losses. Cybersecurity refers to the combination of technologies, processes, and procedures established to protectinformation technology systems and data from unauthorized access, attack, or damage. We are subject to cybersecurity risks.Information cybersecurity risks have significantly increased in recent years and, while we have not experienced any materiallosses relating to cyber-attacks or other information security breaches, we could suffer such losses in the future. Our computersystems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code andother events that could have a security impact. If one or more of such events occur, this potentially could jeopardizeconfidential and other information, including nonpublic personal information and sensitive business data, processed andstored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions inour operations or the operations of our customers or counterparties. This could result in significant losses, reputationaldamage, litigation, regulatory fines or penalties, or otherwise adversely affect our business, financial condition or results ofoperations. Privacy and information security laws and regulation changes, and compliance with those changes, may result incost increases due to system changes and the development of new administrative processes. In the future, we may be requiredto expend significant additional resources to modify our protective measures and to investigate and remediate vulnerabilitiesor other exposures arising from operational and security risks. In addition, we may be subject to litigation and financiallosses that are not fully insured. Third parties with which we do business may also be sources of cybersecurity or other technological risks. Weoutsource certain functions, and these relationships allow for the storage and processing of our information, as well ascustomer, counterparty, employee and borrower information. While we engage in actions to reduce our exposure resultingfrom outsourcing, ongoing threats may result in unauthorized access, loss, exposure or destruction of data, or othercybersecurity incidents, with increased costs and other consequences, including those described above. 31 Table of ContentsTerrorist attacks, acts of war or natural disasters may affect any market for our common stock, impact the businesses inwhich we invest and harm our business, operating results and financial condition. Terrorist attacks, acts of war or natural disasters may disrupt our operations, as well as the operations of thebusinesses in which we invest. These events have created, and continue to create, economic and political uncertainties andhave contributed to global economic instability. Future terrorist activities, military or security operations, or naturaldisasters could further weaken the domestic or global economy. These events could create additional uncertainties, whichmay negatively impact the businesses in which we invest directly or indirectly and, in turn, could have a material adverseimpact on our business, operating results and financial condition. Losses from terrorist attacks and natural disasters aregenerally uninsurable. We may be negatively affected by securities litigation or shareholder activism, which could cause us to incur significantexpense and impact our results of operations. We may be the target of securities litigation in the future, particularly if the trading price of our common stock andour debt securities fluctuates significantly. We could also generally be subject to litigation, including derivative actions byour shareholders or shareholder activism for a variety of other reasons. Any litigation or shareholder activism may result insubstantial costs and divert management's and our Board of Directors’ attention and resources from our business. Significantlegal fees and other expenses may cause a material adverse effect on our business, financial condition and results ofoperations. RISKS RELATED TO OUR INVESTMENTS Our investments in portfolio companies involve a number of significant risks: ·Portfolio companies are more likely to depend on the management talents and efforts of a small group of keyemployees. Therefore, the death, disability, resignation, termination, or significant under-performance of one ormore of these persons could have a material adverse impact on our portfolio company and, in turn, on us. ·Portfolio companies may have unpredictable operating results, could become parties to litigation, may be engagedin rapidly changing businesses with products subject to a substantial risk of obsolescence and may requiresubstantial additional capital to support their operations, finance expansion or maintain their competitive position. ·Most of our portfolio companies are private companies. Private companies may not have readily publicly availableinformation about their businesses, operations and financial condition. Consequently, we rely on the ability of ourmanagement team and investment professionals to obtain adequate information to evaluate the potential returnsfrom making investments in these portfolio companies. If we are unable to uncover all material information aboutthe target portfolio company, we may not make a fully informed investment decision and may lose all or part of ourinvestment. ·Portfolio companies may have shorter operating histories, narrower product lines, smaller market shares and/or moresignificant customer concentration than larger businesses, which tend to render them more vulnerable tocompetitors’ actions and market conditions, as well as general economic downturns. ·Portfolio companies may have limited financial resources and may be unable to meet their obligations under theirdebt instruments that we hold, which may be accompanied by a deterioration in the value of any collateral and areduction in the likelihood of us realizing any guarantees from subsidiaries or affiliates of our portfolio companiesthat we may have obtained in connection with our investment, as well as a corresponding decrease in the value ofthe equity components of our investments. In addition, in the course of providing significant managerial assistance to certain of our portfolio companies,certain of our officers and directors may serve as directors on the boards of these companies. To the extent that litigationarises out of our investments in these companies, our officers and directors may be named as defendants in such litigation,which could result in an expenditure of funds for claims in excess of our directors’ and officers’ insurance coverage (throughour indemnification of our officers and directors) and the diversion of management’s time and resources. 32 Table of ContentsThe lack of liquidity in our investments may adversely affect our business. We invest, and will continue to invest, in portfolio companies whose securities are not publicly traded. Thesesecurities are generally subject to legal and other restrictions on resale or will otherwise be less liquid than publicly tradedsecurities. As a result, we do not expect to achieve liquidity in our investments in the near-term. The illiquidity of theseinvestments may make it difficult for us to sell these investments when desired. In addition, if we are required to liquidate allor a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recordedthese investments and, as a result, we may suffer losses. Defaults by our portfolio companies could harm our operating results. Portfolio companies may fail to satisfy financial, operating or other covenants imposed by us or other lenders, whichcould lead to a default and, potentially, acceleration of its loans and foreclosure on its secured assets. These events couldtrigger cross-defaults under other agreements and jeopardize the portfolio company’s ability to meet its obligations,including under the debt or equity securities we hold. We may also incur expenses to the extent necessary to recover upon adefault or to negotiate new terms with the defaulting portfolio company. Our investments in equity securities involve a substantial degree of risk. We may purchase common stock and other equity securities, including warrants. Although equity securities havehistorically generated higher average total returns than fixed-income securities over the long term, equity securities have alsoexperienced significantly more volatility in those returns. The equity securities we acquire may fail to appreciate and maydecline in value or become worthless, and our ability to recover our investment depends on our portfolio company’s success.Investments in equity securities involve a number of significant risks, including the risk of further dilution as a result ofadditional issuances, inability to access additional capital and failure to pay current distributions. Investments in preferredsecurities involve special risks, such as the risk of deferred distributions, credit risk, illiquidity and limited voting rights. We may not realize gains from our equity investments. Certain investments that we have made in the past and may make in the future include warrants or other equitysecurities. Investments in equity securities involve a number of significant risks, including the risk of further dilution as aresult of additional issuances, inability to access additional capital and failure to pay current distributions. Investments inpreferred securities involve special risks, such as the risk of deferred distributions, credit risk, illiquidity and limited votingrights. In addition, we may from time to time make non-control, equity investments in portfolio companies. Our goal isultimately to realize gains upon our disposition of these equity interests. However, the equity interests we receive may notappreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equityinterests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any otherlosses we experience. We also may be unable to realize any value if a portfolio company does not have a liquidity event,such as a sale of the business, recapitalization or public offering, which would allow us to sell the underlying equity interests.We often seek puts or similar rights to give us the right to sell our equity securities back to the portfolio company issuer;however, we may be unable to exercise these put rights for the consideration provided in our investment documents if theissuer is in financial distress. Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations andreduce our return on equity. From time to time, certain portfolio companies may prepay our debt investments in our portfolio companies prior tomaturity, the specific timing of which we do not control. When this occurs, we will generally reinvest these proceeds intemporary investments, pending their future investment in new portfolio companies. These temporary investments willtypically have substantially lower yields than the debt being prepaid and we could experience significant delays inreinvesting these amounts. Any future investment in a new portfolio company may also be at lower yields than the debt thatwas repaid. As a result, our results of operations could be materially adversely affected if one or more of our portfoliocompanies elect to prepay amounts owed to us. Additionally, prepayments could negatively impact our return on equity,which could result in a decline in the market price of our securities. 33 Table of ContentsChanges in interest rates may affect our cost of capital, the value of investments and net investment income. Some of our debt investments will bear interest at variable rates and the interest income from these investmentscould be negatively affected by decreases in market interest rates. In addition, an increase in interest rates would make itmore expensive for us to use debt to finance our investments. As a result, a significant increase in market interest rates couldincrease our cost of capital, which would reduce our net investment income. Also, an increase in interest rates available toinvestors could make an investment in our securities less attractive than alternative investments, a situation which couldreduce the value of our securities. Conversely, a decrease in interest rates may have an adverse impact on our returns byrequiring us to seek lower yields on our debt investments and by increasing the risk that our portfolio companies will prepayour debt investments, resulting in the need to redeploy capital at potentially lower rates. A decrease in market interest ratesmay also adversely impact our returns on temporary investments, which would reduce our net investment income. Inaddition, certain of our debt investments and debt liabilities may bear interest at fixed rates. To the extent that our fixed rateassets and liabilities are not perfectly hedged, our net investment income may decrease based on changes in market interestrates. An increase in market interest rates may also decrease the fair value of our fixed rate investments, as these may be lessattractive securities in a rising rate environment. There may be circumstances in which our debt investments could be subordinated to claims of other creditors or wecould be subject to lender liability claims. Even though we may have structured certain of our investments as secured loans, if one of our portfolio companieswere to go bankrupt, depending on the facts and circumstances, and based upon principles of equitable subordination asdefined by existing case law, a bankruptcy court could subordinate all or a portion of our claim to that of other creditors andtransfer any lien securing our subordinated claim to the bankruptcy estate. The principles of equitable subordination definedby case law have generally indicated that a claim may be subordinated only if its holder is guilty of misconduct or where thesenior loan is re-characterized as an equity investment and the senior lender has actually provided significant managerialassistance to the bankrupt debtor. We may also be subject to lender liability claims for actions taken by us with respect to aborrower’s business or instances where we exercise control over the borrower. It is possible that we could become subject to alender’s liability claim, including as a result of actions taken in rendering significant managerial assistance or actions tocompel and collect payments from the borrower outside the ordinary course of business. As a Regulated Investment Company, we may have certain regulatory restrictions that could preclude us from makingadditional investments in our portfolio companies. We may not have the ability to make additional investments in our portfolio companies. After our initialinvestment in a portfolio company, we may be called upon from time to time to provide additional funds to that company orhave the opportunity to increase our investment or make follow-on investments. Any decisions not to make a follow-oninvestment or any inability on our part to make such an investment may have a negative impact on a portfolio company inneed of such an investment, may result in a missed opportunity for us to increase our participation in a successful operationor may reduce the expected return on the investment. Changes relating to LIBOR may adversely affect the value of the LIBOR-indexed, floating-rate debt securities in ourportfolio. In July 2017, the head of the United Kingdom Financial Conduct Authority announced the desire to phase out theuse of LIBOR by the end of 2021. As of March 31, 2018, approximately 92.1% of our debt investment portfolio (at fair value)bore interest rates indexed upon LIBOR. Additionally, our Credit Facility accrues interest at the applicable LIBOR rate plus3.00%, with a step-down to LIBOR plus 2.75% at the time our net worth exceeds $325 million. The use of the new indexcould reduce our interest income or increase our interest expense and therefore have an adverse effect on our results ofoperations. Management continues to monitor the status and discussions regarding LIBOR. We generally will not control our portfolio companies. We do not, and do not expect to, control most of our portfolio companies, even though we may have boardrepresentation or board observation rights, and our debt agreements may contain certain restrictive covenants. As a result, weare subject to the risk that a portfolio company in which we invest may make business decisions with which we disagree, andthe management of such company, as representatives of the holders of their common equity, may take risks or otherwise actin ways that do not serve our interests as debt investors. Due to the lack of liquidity for our investments in34 Table of Contentsnon-traded companies, we may not be able to dispose of our interests in our portfolio companies as readily as we would likeor at an appropriate valuation. As a result, a portfolio company may make decisions that could decrease the value of ourportfolio holdings. Second priority liens on collateral securing loans that we make to our portfolio companies may be subject to control bysenior creditors with first priority liens. Further, in cases where we invest in unsecured subordinated debt, we would nothave any lien on the collateral. In each of these cases, if there is a default, the value of the collateral may not be sufficientto repay in full both the first priority creditors and us. Certain loans that we make are either secured by a second priority security interest in the same collateral pledged bya portfolio company to secure senior debt owed by the portfolio company to commercial banks or other traditional lenders, orin the case of unsecured subordinated debt, we have no lien at all on the assets. Often the senior lender has procuredcovenants from the portfolio company prohibiting the incurrence of additional secured debt without the senior lender’sconsent. Prior to and as a condition of permitting the portfolio company to borrow money from us secured by the samecollateral pledged to the senior lender, or in the case where we invest in unsecured subordinated debt, the senior lender willrequire assurances that it will control the disposition of any collateral in the event of bankruptcy or other default. In manycases, the senior lender will require us to enter into an “intercreditor agreement” prior to permitting the portfolio company toborrow from us. Typically the intercreditor agreements we are requested to execute expressly subordinate our debtinstruments to those held by the senior lender and further provide that the senior lender shall control: (1) the commencementof foreclosure or other proceedings to liquidate and collect on the collateral, subject to a negotiated “standstill period” afterwhich we can initiate; (2) the nature, timing and conduct of foreclosure or other collection proceedings, subject to anegotiated “standstill period” after which we can initiate; (3) the amendment of any collateral document; (4) the release ofthe security interests in respect of any collateral; and (5) the waiver of defaults under any security agreement. Because of thecontrol we may cede to senior lenders under intercreditor agreements we may enter, we may be unable to realize the proceedsof any collateral securing some of our loans. Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in those companies. We invest primarily in the secured term debt of middle market companies and equity issued by middle marketcompanies. Our portfolio companies may have, or may be permitted to incur, other debt that ranks equally with, or senior to,the debt in which we invest. By their terms, these debt instruments may entitle the holders to receive payment of interest orprincipal on or before the dates on which we are entitled to receive payments with respect to the debt instruments in whichwe invest. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company,holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receivepayment in full before we receive any distribution. After repaying its senior creditors, the portfolio company may not haveany remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with debt instruments inwhich we invest, we would have to share on an equal basis any distributions with other creditors holding such debt in theevent of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company. RISKS RELATED TO OUR SECURITIES The market price of our common stock may fluctuate significantly. The market price of our common stock will fluctuate with market conditions and other factors. Our common stock isintended for long-term investors and should not be treated as a trading vehicle. The market price and liquidity of the marketfor shares of our common stock may be significantly affected by numerous factors, some of which are beyond our control andmay not be directly related to our operating performance. These factors include: ·significant volatility in the market price and trading volume of securities of BDCs or other companies in our sector,which is not necessarily related to the operating performance of these companies;·exclusion of our common stock from certain market indices, such as the Russell 2000 Financial Services Index,which could reduce the ability of certain investment funds to own our common stock and put short-term sellingpressure on our common stock;35 Table of Contents·changes in regulatory policies or tax guidelines, particularly with respect to RICs or BDCs;·loss of RIC tax treatment;·our origination activity, including the pace of, and competition for, new investment opportunities;·changes or perceived changes in earnings or variations of operating results;·changes or perceived changes in the value of our portfolio of investments;·any shortfall in revenue or net income or any increase in losses from levels expected by investors or securitiesanalysts;·potential future sales of common stock or debt securities convertible into or exchangeable or exercisable for ourcommon stock or the conversion of such securities;·departure of our key personnel;·operating performance of companies comparable to us;·general economic trends and other external factors; and·loss of a major funding source. Investing in shares of our common stock may involve an above average degree of risk. The investments we make in accordance with our investment objectives may result in a higher amount of risk,volatility or loss of principal than alternative investment options. Our investments in portfolio companies may be highlyspeculative, and therefore, an investment in our common stock may not be suitable for investors with lower risk tolerance. Our common stock often trades at a discount from NAV. Our common stock is listed on Nasdaq. Shareholders desiring liquidity may sell their shares on Nasdaq at currentmarket value, which has often been below NAV. Shares of closed-end investment companies frequently trade at discountsfrom NAV, which is a risk separate and distinct from the risk that a fund’s performance will cause its NAV to decrease. Wecannot predict whether our common stock will trade at, above or below NAV. In addition, if our common stock trades belowour NAV per share, we will generally not be able to issue additional common stock at the market price unless ourshareholders approve such a sale and our Board of Directors make certain determinations. The trading market or market value of our publicly issued debt securities may be volatile. The trading market for our publicly issued debt securities may from time to time be significantly affected bynumerous factors, including: ·Creditworthiness;·Terms, including, but not limited to, maturity, principal amount, redemption, and repayment of convertible features;·Market and economic conditions; and·Demand for our debt securities.36 Table of ContentsIn addition, credit rating assessments by third parties regarding our ability to pay our obligations will generallyaffect the market value of our debt securities. We currently intend to pay quarterly dividends. However, in the future we may not pay any dividends depending on avariety of factors. While we intend to pay dividends to our shareholders out of taxable income available for distribution, there can beno assurance that we will do so. Any dividends that we do pay may be payable in cash, in our stock, or in stock in any of ourholdings or in a combination of all three. All dividends will be paid at the discretion of our Board of Directors and willdepend upon our financial condition, maintenance of our RIC status, and compliance with applicable BDC regulations. We currently pay dividends in cash. However, in the future we may choose to pay dividends in our own stock, in whichcase you may be required to pay tax in excess of the cash you receive. We may distribute taxable dividends that are payable in part in our stock. Under certain applicable provisions ofthe Code and the Treasury regulations, distributions payable by us in cash or in shares of stock (at the shareholders election)would satisfy the annual distribution requirement for a RIC. The IRS has issued a revenue procedure providing that adividend payable in stock or in cash at the election of the shareholders will be treated as a taxable dividend eligible for thedividends paid deduction provided that at least 20% of the total dividend is payable in cash and certain other requirementsare satisfied. Taxable shareholders receiving such dividends will be required to include the full amount of the dividend asordinary income (or as long-term capital gain to the extent such dividend is properly reported as a capital gain dividend) tothe extent of our current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, a U.S.shareholder may be required to pay tax with respect to such dividends in excess of any cash received. If a U.S. shareholdersells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included inincome with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, withrespect to non-U.S. shareholders, we may be required to withhold U.S. tax with respect to such dividends, including in respectof all or a portion of such dividends payable in stock. If a significant number of our shareholders determine to sell shares ofour stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our stock. Provisions of the Texas law and our charter could deter takeover attempts and have an adverse impact on the price ofour common stock. Texas law and our charter contain provisions that may have the effect of discouraging, delaying or making difficulta change in control. The existence of these provisions, among others, may have a negative impact on the price of ourcommon stock and may discourage third-party bids for ownership of our company. These provisions may prevent anypremiums being offered to you for our common stock. Item 1B. Unresolved Staff Comments None. Item 2. Properties We do not own any real estate or other physical properties. We maintain our offices at 5400 Lyndon B. JohnsonFreeway, Suite 1300, Dallas, Texas 75240, where we lease approximately 9,261 square feet of office space pursuant to a leaseagreement expiring in January 2022. We believe that our offices are adequate to meet our current and expected future needs. Item 3. Legal Proceedings We may, from time to time, be involved in litigation arising out of our operations in the normal course of business orotherwise. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of ourportfolio companies. As of the date hereof, we are not a party to, and none of our assets are subject to, any material pendinglegal proceedings and are not aware of any claims that could have a materially adverse effect on our financial position,results of operations or cash flows.37 Table of Contents Item 4. Mine Safety Disclosures Not applicable.38 Table of Contents PART II Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of EquitySecurities PRICE RANGE OF COMMON STOCK AND HOLDERS Market Information Our common stock is traded on the Nasdaq Global Select Market under the symbol “CSWC.” The following tablesets forth, for the periods indicated, the high and low sales prices of our common stock, as reported by Nasdaq. Quarter Ended High Low March 31, 2018 $18.00 $14.85 December 31, 2017 17.76 16.15 September 30, 2017 17.50 16.00 June 30, 2017 17.34 15.20 March 31, 2017 $16.91 $15.04 December 31, 2016 16.86 13.81 September 30, 2016 15.05 13.75 June 30, 2016 14.37 13.49 On June 1, 2018, the last sale price of our common stock on the Nasdaq was $17.01 per share, and there wereapproximately 450 holders of record of the common stock which did not include shareholders for whom shares are held in“nominee” or “street name.” Shares of BDCs may trade at a market price that is less than the value of the net assets attributable to those shares.The possibility that our shares of common stock will trade at a discount from net asset value per share or at premiums that areunsustainable over the long term are separate and distinct from the risk that our net asset value per share will decrease. It isnot possible to predict whether our common stock will trade at, above, or below net asset value per share. DISTRIBUTIONS We intend to make distributions on a quarterly basis to our shareholders of substantially all of our taxable income.In lieu of cash, we may make deemed distributions of certain net capital gains to our shareholders. The payment dates and amounts of cash dividends per share for the past two fiscal years are as follows: Payment Date Cash Dividend Fiscal Year 2017 July 1, 2016 $ 0.06 October 1, 2016 0.11 January 3, 2017 0.17 April 3, 2017 0.45 $ 0.79 Fiscal Year 2018 July 3, 2017 $ 0.21 October 2, 2017 0.24 January 2, 2018 0.26 April 2, 2018 0.28 $ 0.99 1On April 3, 2017, CSWC paid a regular dividend of $0.19 per share and a supplemental dividend of $0.26 per share. 39 1Table of ContentsOn June 1, 2018, the Company’s Board of Directors declared a $0.29 dividend per share for the quarter ended June30, 2018. The record date for the dividend is June 26, 2018. The payment date for the dividend is July 2, 2018. The amounts and timing of cash dividend payments have generally been dictated by requirements of the Coderegarding the distribution of taxable net investment income (ordinary income) of regulated investment companies. Distribution Policy We generally intend to make distributions on a quarterly basis to our shareholders of substantially all of our taxableincome. In order to avoid certain excise taxes imposed on RICs, we must distribute during each calendar year an amount atleast equal to the sum of (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our capital gains in excess ofcapital losses for the one year period ended each October 31, and (3) any ordinary income and net capital gains for thepreceding year that were not distributed during that year. We will not be subject to excise taxes on amounts on which we arerequired to pay corporate income tax (such as retained net capital gains). In order to obtain the tax benefits applicable toRICs, we will be required to distribute to our shareholders with respect to each taxable year at least 90% of our ordinaryincome and realized net short-term capital gains in excess of realized net long-term capital losses. Depending on the level oftaxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year distributionsinto the next year and pay a 4% excise tax on such income. Any such carryover taxable income must be distributed through adividend declared prior to filing the final tax return related to the year that generated such taxable income. We may retain for investment realized net long-term capital gains in excess of realized net short-term capital losses.We may make deemed distributions to our shareholders of any retained net capital gains. If this happens, our shareholderswill be treated as if they received an actual distribution of the capital gains we retain and then reinvested the net after-taxproceeds in our common stock. Our shareholders also may be eligible to claim a tax credit (or, in certain circumstances, a taxrefund) equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. Please refer to“Business —Material U.S. Federal Income Tax Considerations” included in Item 1 of Part I of this Annual Report for furtherinformation regarding the consequences of our retention of net capital gains. We may, in the future, make actual distributionsto our shareholders of some or all realized net long-term capital gains in excess of realized net short-term capital losses. Ourability to make distributions in the future may be limited by our Credit Facility, the indenture and related supplementsgoverning our December 2022 Notes and the 1940 Act. For a more detailed discussion, see “Business — Election to beRegulated as a Business Development Company – Regulation as a Business Development Company,” “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” and “Note 5” to our consolidated financialstatements included in this Annual Report on Form 10K. We have adopted a DRIP which provides for reinvestment of our distributions on behalf of our commonshareholders if opted into by a common shareholder. See “Business — Dividend Reinvestment Plan” included in Item I ofPart I of this Annual Report on Form 10-K. Shareholders who receive dividends in the form of stock generally are subject to the same federal, state and local taxconsequences as are shareholders who elect to receive their dividends in cash. A shareholder’s basis for determining gain orloss upon the sale of stock received in a dividend from us will be equal to the total dollar amount of the dividend payable tothe shareholder. Any stock received in a dividend will have a holding period for tax purposes commencing on the dayfollowing the day on which the shares are credited to the U.S. shareholder’s account.40 Table of ContentsISSUER PURCHASES OF EQUITY SECURITIES The following table provides information for the year ended March 31, 2018. Total Numberof ApproximateDollar SharesPurchased Value of Shares as Part ofPublicly That May YetBe TotalNumber of AveragePrice Paid AnnouncedPlans PurchasedUnder thePeriod SharesPurchased Per Share or Programs Plans orPrograms (2)January 1 through January 31, 2018 (1) 40 $16.78 - $-February 1 through February 28, 2018 35,911 16.37 35,911 9,412,228March 1 through March 31, 2018 - - - -Total 35,951 $16.37 35,911 $9,412,228 (1)Includes shares of common stock withheld upon vesting of restricted stock to cover withholding tax obligations.(2)On January 25, 2016, we announced that our Board of Directors authorized us to repurchase an indeterminatenumber of shares of our common stock at an aggregate market value of up to $10 million. The repurchase programwill be in effect until the approved dollar amount has been used to repurchase shares or the Board amends ordiscontinues the plan at any time. Performance Graph The following graph compares our cumulative total shareholder return during the last six years (based on the marketprice of our common stock and assuming reinvestment of all dividends, prior to any tax effect) with the Nasdaq CompositeIndex, the Russell 2000 Total Return Index and the KBW Regional Bank Total Return Index. The graph assumes initialinvestment of $100 on March 31, 2013 and reinvestment of dividends. The value of the CSWI shares distributed in the spin-off is reflected in the cumulative total return as a reinvested dividend. 41 Table of Contents Item 6. Selected Financial Data The following table provides selected financial data relating to our historical financial condition and results ofoperations as of and for each of the years ended March 31, 2014 through 2018. This data should be read in conjunction withItem 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidatedfinancial statements and related notes. Selected Consolidated Financial Data(In thousands except per share data) Year ended March 31, 2018 2017 2016 2015 2014 Income statement data: Investment income: Interest and dividends $34,233 $22,324 $8,033 $9,231 $11,915 Interest income from cash and cash equivalents 21 166 386 122 67 Fees and other income 872 984 741 595 625 Total investment income 35,126 23,474 9,160 9,948 12,607 Operating expenses: Compensation-related expenses 9,238 8,217 9,515 6,440 5,489 Interest expense 4,875 989 - - - General, administrative and other 4,585 4,601 11,610 5,683 2,963 Total operating expenses 18,698 13,807 21,125 12,123 8,452 Income (loss) before income taxes 16,428 9,667 (11,965) (2,175) 4,155 Income tax expense (benefit) 195 1,779 (1,278) 270 (739) Net investment income (loss) 16,233 7,888 (10,687) (2,445) 4,894 Net realized gains (losses): Non-control/Non-affiliate investments 1,492 3,992 (9,575) 8,226 14,084 Affiliate investments 90 3,876 (1,458) 157,213 - Control investments - 28 231 (1,175) - Net realized gains (losses) on investments 1,582 7,896 (10,802) 164,264 14,084 Net unrealized appreciation (depreciation) on investments 21,492 7,690 16,089 (108,377) 93,032 Net realized and unrealized gains on investments 23,074 15,586 5,287 55,887 107,116 Net increase (decrease) in net assets resulting from operations $39,307 $23,474 $(5,400) $53,442 $112,010 Net investment income (loss) per share - basic and diluted $1.01 $0.50 $(0.68) $(0.16) $0.32 Net realized earnings per share - basic and diluted $1.11 $1.00 $(1.37) $10.45 $1.24 Net increase (decrease) in net assets from operations - basic anddiluted $2.45 $1.48 $(0.35) $3.44 $7.32 Net asset value per common share $19.08 $17.80 $17.34 $49.30 $49.98 Total dividends/distributions declared per common share $0.99 $0.79 $0.14 $0.20 $0.20 Weighted average number of shares outstanding – basic 16,074 15,825 15,636 15,492 15,278 Weighted average number of shares outstanding – diluted 16,139 15,877 15,724 15,531 15,298 1“Net realized earnings per share – basic and diluted” is calculated as the sum of “Net investment income (loss)” and “Net realized gain(loss) on investments” divided by weighted average shares outstanding – basic and diluted. 42 1Table of Contents Year ended March 31, 2018 2017 2016 2015 2014Balance sheet data: Assets: Investments at fair value $393,095 $286,880 $178,436 $535,536 $677,920Cash and cash equivalents 7,907 22,386 95,969 225,797 88,163Interest, escrow and other receivables 5,894 4,308 6,405 4,418 1,371Net pension assets - - - 10,294 10,962Deferred tax asset 2,050 2,017 2,342 - -Other assets 8,544 10,161 1,341 827 278Total assets $417,490 $325,752 $284,493 $776,872 $778,694Liabilities: Notes $55,305 $- $- $- $-Credit facility 40,000 25,000 - - -Other liabilities 6,245 5,996 9,028 4,923 3,263Dividends payable 4,525 7,191 625 - -Accrued restoration plan liability 2,937 2,170 2,205 3,119 3,103Deferred income taxes 190 323 - 1,412 1,940Total liabilities 109,202 40,680 11,858 9,454 8,306Net assets 308,288 285,072 272,635 767,418 770,388Total liabilities and net assets $417,490 $325,752 $284,493 $776,872 $778,694Other data: Number of portfolio companies 30 28 23 22 27Weighted average yield on debt investments at end ofperiod 11.46% 10.28% 10.67% 3.14% NMWeighted average yield on total investments at end ofperiod 10.48% 10.49% 9.46% 0.46% NMExpense ratios (as percentage of average net assets): Total expenses, excluding interest expense 4.70% 4.59% 4.48% 1.59% 1.18 NM = not meaningful 43 Table of Contents Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with our consolidated financial statements and the notesthereto included elsewhere in this Annual Report on Form 10-K. Statements we make in the following discussion whichexpress a belief, expectation or intention, as well as those that are not historical fact, are forward-looking statements thatare subject to risks, uncertainties and assumptions. Our actual results, performance or achievements, or industry results,could differ materially from those we express in the following discussion as a result of a variety of factors, including therisks and uncertainties we have referred to under the headings “Cautionary Statement Concerning Forward-LookingStatements” and “Risk Factors” in Part I of this report. OVERVIEW We are an internally managed closed-end, non-diversified management investment company that has been electedto be regulated as a BDC under the 1940 Act. We specialize in providing customized debt and equity financing to LMMcompanies and debt capital to UMM companies in a broad range of investment segments located primarily in the UnitedStates. Our investment objective is to produce attractive risk-adjusted returns by generating current income from our debtinvestments and capital appreciation from our equity and equity related investments. Our investment strategy is to partnerwith business owners, management teams and financial sponsors to provide flexible financing solutions to fund growth,changes of control, or other corporate events. We invest primarily in senior debt securities, secured by security interests inportfolio company assets, and in secured and unsecured subordinated debt securities. We also invest in equity interests in ourportfolio companies alongside our debt securities. We focus on investing in companies with histories of generating revenues and positive cash flow, establishedmarket positions and proven management teams with strong operating discipline. We target senior debt, subordinated debt,and equity investments in LMM companies, as well as first and second lien syndicated loans in UMM companies. Our targetLMM companies typically have annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) between$3.0 million and $15.0 million, and our LMM investments generally range in size from $5.0 million to $25.0 million. OurUMM investments generally include syndicated first and second lien loans in companies with EBITDA generally greaterthan $50.0 million, and our UMM investments typically range in size from $5.0 million to $15.0 million. We seek to fill the financing gap for LMM companies, which, historically, have had more limited access tofinancing from commercial banks and other traditional sources. The underserved nature of the LMM creates the opportunityfor us to meet the financing needs of LMM companies while also negotiating favorable transaction terms and equityparticipations. Our ability to invest across a LMM company’s capital structure, from secured loans to equity securities, allowsus to offer portfolio companies a comprehensive suite of financing options. Providing customized financing solutions isimportant to LMM companies. We generally seek to partner directly with financial sponsors, entrepreneurs, managementteams and business owners in making our investments. Our LMM debt investments typically include senior loans with a firstlien on the assets of the portfolio company, as well as subordinated debt which may either be secured or unsecuredsubordinated loans. Our LMM debt investments typically have a term of between five and seven years from the originalinvestment date. We also often seek to invest in the equity securities of our LMM portfolio companies. Our investments in UMM companies primarily consist of direct investments in or secondary purchases of interestbearing debt securities in privately held companies that are generally larger in size than the LMM companies included in ourportfolio. Our UMM debt investments are generally secured by either a first or second priority lien on the assets of theportfolio company and typically have an expected duration of between three and seven years from the original investmentdate. Since the Share Distribution on September 30, 2015 through March 31, 2018, our exited investments resulted in aweighted average internal rate of return to the Company of approximately 16.9% (based on original cash invested ofapproximately $119.4 million). Internal rate of return is the discount rate that makes the net present value of all cash flowsrelated to a particular investment equal to zero. Internal rate of return is gross of expenses related to investments as theseexpenses are not allocable to specific investments. Investments are considered to be exited when the original investmentobjective has been achieved through the receipt of cash and/or non-cash consideration upon the repayment of a debtinvestment or sale of an investment or through the determination that no further consideration was collectible and, thus, aloss may have been realized. Approximately 78.9% of these exited investments resulted in an aggregate cash flow realizedinternal rate of return to the Company of 10% or greater.44 Table of Contents Because we are internally managed, we do not pay any external investment advisory fees, but instead directly incurthe operating costs associated with employing investment and portfolio management professionals. We believe that ourinternally managed structure provides us with a beneficial operating expense structure when compared to other publiclytraded and privately held investment firms which are externally managed, and our internally managed structure allows us theopportunity to leverage our non-interest operating expenses as we grow our investment portfolio. For the years ended March31, 2018 and 2017, the ratio of our annualized fourth quarter operating expenses, excluding interest expense, as a percentageof our quarterly average total assets was 3.36% and 4.54%, respectively. CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES The preparation of our consolidated financial statements in accordance with U.S. GAAP requires management tomake certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of theconsolidated financial statements and the reported amounts of revenues and expenses for the periods covered by theconsolidated financial statements. We have identified investment valuation and revenue recognition as our most criticalaccounting estimates. On an on-going basis, we evaluate our estimates, including those related to the matters below. Theseestimates are based on the information that is currently available to us and on various other assumptions that we believe to bereasonable under the circumstances. Actual results could differ materially from those estimates under different assumptions orconditions. A discussion of our critical accounting policies follows. Valuation of Investments The most significant determination inherent in the preparation of our consolidated financial statements is thevaluation of our investment portfolio and the related amounts of unrealized appreciation and depreciation. As of March 31,2018 and 2017, our investment portfolio at fair value represented approximately 94.2% and 88.0% of our total assets,respectively. We are required to report our investments at fair value. We follow the provisions of ASC 820. ASC 820 definesfair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputsused to measure fair value, and enhances disclosure requirements for fair value measurements. ASC 820 requires us to assumethat the portfolio investment is to be sold in the principal market to independent market participants, which may be ahypothetical market. See Note 4 — “Fair Value Measurements” in the notes to consolidated financial statements for adetailed discussion of our investment portfolio valuation process and procedures. Due to the inherent uncertainty in the valuation process, our determination of fair value for our investment portfoliomay differ materially from the values that would have been determined had a ready market for the securities actually existed.In addition, changes in the market environment, portfolio company performance, and other events may occur over the livesof the investments that may cause the gains or losses ultimately realized on these investments to be materially different thanthe valuations currently assigned. We determine the fair value of each individual investment and record changes in fair valueas unrealized appreciation or depreciation. Our Board of Directors is responsible for determining, in good faith, the fair value for our investment portfolio andour valuation procedures, consistent with 1940 Act requirements. Our Board of Directors believes that our investmentportfolio as of March 31, 2018 and 2017 reflects fair value as of those dates based on the markets in which we operate andother conditions in existence on those reporting dates. Revenue Recognition Interest and Dividend Income Interest and dividend income is recorded on an accrual basis to the extent amounts are expected to becollected. Dividend income is recognized on the date dividends are declared by the portfolio company or at the point anobligation exists for the portfolio company to make a distribution. Discounts/premiums received to par on loans purchasedare capitalized and accreted or amortized into income over the life of the loan. In accordance with our valuation policy,accrued interest and dividend income is evaluated periodically for collectability. When we do not expect the debtor to beable to service all of its debt or other obligations, we will generally establish a reserve against interest income receivable,thereby placing the loan or debt security on non-accrual status, and cease to recognize interest income on that loan or debtsecurity until the borrower has demonstrated the ability and intent to pay contractual amounts due. If a loan or debtsecurity’s status significantly improves regarding ability to service debt or other obligations, it will be restored to accrualbasis. As45 Table of Contentsof March 31, 2018 and March 31, 2017, we did not have any investments on non-accrual status or past due its contractualpayment obligation. Recently Issued Accounting Standards In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to recognize on the balance sheet aright-of-use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases withterms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess theamount, timing, and uncertainty of cash flows arising from leases. The standard requires the use of a modified retrospectivetransition approach, which includes a number of optional practical expedients that entities may elect to apply. The newguidance is effective for annual periods beginning after December 15, 2018, and interim periods therein. Early application ispermitted. While we continue to assess the effect of adoption, we currently believe the single change relates to therecognition of a new right-of-use asset and lease liability on our consolidated balance sheet for our office space operatinglease. We currently have one operating lease for office space and do not expect a significant change in our leasing activitybetween now and adoption. See further discussion of our operating lease obligation in "Note 12 — Commitments andContingences" in the notes to the consolidated financial statements. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09supersedes the revenue recognition requirements under SAC Topic 605, Revenue Recognition, and most industry-specificguidance throughout the Industry Topics of the ASC. The core principle of the guidance is that an entity should recognizerevenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration towhich an entity expects to be entitled in exchange for those goods or services. Under the new guidance, an entity is requiredto perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations inthe contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in thecontract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The new guidance willsignificantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capitalmarkets. Additionally, the guidance requires improved disclosures as to the nature, amount, timing and uncertainty ofrevenue that is recognized. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic606)—Narrow-Scope Improvements and Practical Expedients. This ASU clarified guidance on assessing collectability,presenting sales tax, measuring noncash consideration, and certain transition matters. The new guidance is effective for theannual reporting period beginning after December 15, 2017, including interim periods within that reporting period. CSWC isstill completing its assessment; however, in evaluating the potential impact on its consolidated financial statements, theCompany determined that its material financial contracts are excluded from the scope of ASU 2014-09. As a result of thescope exception for financial contracts, the Company's management has determined that there will be no material changes tothe recognition timing and classification of revenues and expenses; additionally, the adoption of ASU 2014-09 will not havea significant impact to pretax income upon adoption or on the consolidated financial statement disclosures. In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), which is intended to reducethe existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statementof cash flows. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods therein.The adoption of this new accounting standard will not have a material impact on the Company’s consolidated financialstatements. INVESTMENT PORTFOLIO COMPOSITION Our LMM investments consist of secured debt, subordinated debt, equity warrants and direct equity investments inprivately held, LMM companies based in the United States. Our LMM portfolio companies generally have annual EBITDAbetween $3.0 million and $15.0 million, and our LMM investments typically range in size from $5.0 million to $25.0million. The LMM debt investments are typically secured by either a first or second priority lien on the assets of the portfoliocompany, generally bear interest at floating rates, and generally have a term of between five and seven years from the originalinvestment date. Our UMM investments consist of direct investments in or secondary purchases of interest-bearing debt securities inprivately held companies based in the United States that are generally larger in size than the LMM companies included inour portfolio with EBITDA generally greater than $50.0 million. Our UMM investments typically range in size from $5.0million to $15.0 million. Our UMM debt investments are generally secured by ether a first or second priority lien on46 Table of Contentsthe assets of the portfolio company and typically have a term of between three and seven years from the original investmentdate. The total value of our investment portfolio was $393.1 million as of March 31, 2018, as compared to $286.9 millionas of March 31, 2017. As of March 31, 2018, we had investments in 30 portfolio companies with an aggregate cost of $335.4million. As of March 31, 2017, we had investments in 28 portfolio companies with an aggregate cost of $250.5 million.As of March 31, 2018 and 2017, approximately $220.3 million, or 92.1%, and $155.0 million, or 92.6%,respectively, of our debt investment portfolio (at fair value) bore interest at floating rates, of which 94.2% and 100%,respectively were subject to contractual minimum interest rates. As of March 31, 2018 and 2017, approximately $18.8million, or 7.9%, and $12.4 million, or 7.4%, respectively, of our debt investment portfolio (at fair value) bore interest atfixed rates. The following tables provide a summary of our investments in LMM and UMM companies as of March 31, 2018and 2017 (excluding our investment in I-45 SLF LLC): As of March 31, 2018 LMM (a) UMM (dollars in thousands)Number of portfolio companies 19 10Fair value $259,116 $66,866Cost $204,331 $66,266% of portfolio at cost - debt 83.5% 100.0%% of portfolio at cost - equity 16.5% -% of debt investments at cost secured by first lien 74.2% 65.2%Weighted average annual effective yield (b)(c) 11.9% 10.2%Weighted average EBITDA (c) $8,600 $86,200Weighted average leverage through CSWC security (c)(d) 3.3x 4.3x(a)At March 31, 2018, we had equity ownership in approximately 73.7% of our LMM investments.(b)The weighted-average annual effective yields were computed using the effective interest rates for all debt investments at cost as of March31, 2018, including accretion of original issue discount but excluding fees payable upon repayment of the debt instruments and any debtinvestments on non-accrual status. As of March 31, 2018, there were no investments on non-accrual status. Weighted-average annualeffective yield is higher than what an investor in shares in our common stock will realize on its investment because it does not reflect ourexpenses or any sales load paid by an investor. (c)Weighted average metrics are calculated using investment cost basis weighting. (d)Includes CSWC debt investments only. Calculated as the amount of each portfolio company’s debt (including CSWC’s position and debtsenior or pari passu to CSWC’s position, but excluding debt subordinated to CSWC’s position) in the capital structure divided by eachportfolio company’s adjusted EBITDA. Management uses this metric as a guide to evaluate the relative risk of its position in eachportfolio debt investment.47 Table of Contents As of March 31, 2017 LMM (a) UMM (dollars in thousands)Number of portfolio companies 10 17Fair value $126,305 $97,180Cost $93,822 $95,918% of portfolio at cost - debt 74.8% 100.0%% of portfolio at cost - equity 25.2% -% of debt investments at cost secured by first lien 61.5% 51.2%Weighted average annual effective yield (b)(c) 11.4% 9.6%Weighted average EBITDA (c) $7,400 $101,300Weighted average leverage through CSWC security (c)(d) 3.1x 4.0x (a)At March 31, 2017, we had equity ownership in approximately 70.0% of our LMM investments.(b)The weighted-average annual effective yields were computed using the effective interest rates for all debt investments at cost as of March31, 2017, including accretion of original issue discount but excluding fees payable upon repayment of the debt instruments and any debtinvestments on non-accrual status. As of March 31, 2017, there were no investments on non-accrual status. Weighted-average annualeffective yield is higher than what an investor in shares in our common stock will realize on its investment because it does not reflect ourexpenses or any sales load paid by an investor.(c)Weighted average metrics are calculated using investment cost basis weighting.(d)Includes CSWC debt investments only. Calculated as the amount of each portfolio company’s debt (including CSWC’s position and debtsenior or pari passu to CSWC’s position, but excluding debt subordinated to CSWC’s position) in the capital structure divided by eachportfolio company’s adjusted EBITDA. Management uses this metric as a guide to evaluate the relative risk of its position in eachportfolio debt investment. As of March 31, 2018 and March 31, 2017, our investment portfolio consisted of the following investments: Percentage of Percentage of Total Portfolio Total Portfolio Fair Value at Fair Value Cost at Cost (dollars in thousands) March 31, 2018: First lien loans $197,110 50.1%$194,820 58.1%Second lien loans 23,229 5.9 23,092 6.9 Subordinated debt 18,783 4.8 18,885 5.6 Preferred equity 36,545 9.3 16,666 5.0 Common equity & warrants 50,315 12.8 17,134 5.1 I-45 SLF LLC 67,113 17.1 64,800 19.3 $393,095 100.0%$335,397 100.0% March 31, 2017: First lien loans $107,817 37.6%$106,799 42.6%Second lien loans 47,176 16.5 46,856 18.7 Subordinated debt 12,453 4.3 12,402 4.9 Preferred equity 19,343 6.7 15,782 6.3 Common equity & warrants 36,696 12.8 7,901 3.2 I-45 SLF LLC 63,395 22.1 60,800 24.3 $286,880 100.0%$250,540 100.0%1Included in first lien loans are loans structured as first lien last out loans. These loans may in certain cases be subordinated in paymentpriority to other senior secured lenders. As of March 31, 2018 and 2017, the fair value of the first lien last out loans are $26.9 million and$21.8 million, respectively.2I-45 SLF LLC is a joint venture between CSWC and Main Street Capital. This entity primarily invests in syndicated senior secured loansin the UMM. The I-45 SLF LLC portfolio consists of 93.7% first lien loans and 6.3% second lien loans. The portfolio companies held byI-45 SLF LLC represent a diverse set of industry classifications similar to those in which CSWC invests directly. We own 80% of I-45SLF LLC and have a profits interest of 75.6%, while Main Street Capital owns 20% and has a profits interest of 24.4%. I-45 SLF LLC’sBoard of Managers makes all investment and operational decisions for the fund, and consists of equal48 12312Table of Contentsrepresentation from our Company and Main Street Capital. The Company does not guarantee or otherwise obligate itself to makepayments on debts owed by I-45 SLF LLC.3Presentation of the March 31, 2017 disclosure is updated to conform to current period presentation. Portfolio Asset Quality We utilize an internally developed investment rating system to rate the performance and monitor the expected levelof returns for each debt investment in our portfolio. The investment rating system takes into account both quantitative andqualitative factors of the portfolio company and the investments held therein, including each investment’s expected level ofreturns and the collectability of our debt investments, comparisons to competitors and other industry participants and theportfolio company’s future outlook. The ratings are not intended to reflect the performance or expected level of returns ofour equity investments. ·Investment Rating 1 represents the least amount of risk in our portfolio. The investment is performing materiallyabove underwriting expectations and the trends and risk factors are generally favorable.·Investment Rating 2 indicates the investment is performing as expected at the time of underwriting and the trendsand risk factors are generally favorable to neutral. ·Investment Rating 3 involves an investment performing below underwriting expectations and the trends and riskfactors are generally neutral to negative. The portfolio company or investment may be out of compliance withfinancial covenants and interest payments may be impaired, however principal payments are generally not past due. ·Investment Rating 4 indicates that the investment is performing materially below underwriting expectations, thetrends and risk factors are generally negative and the risk of the investment has increased substantially. Interest andprincipal payments on our investment are likely to be impaired. The following table shows the distribution of our debt portfolio investments on the 1 to 4 investment rating scale atfair value as of March 31, 2018 and 2017: As of March 31, 2018 Debt Investments at Percentage of Investment Rating Fair Value Debt Portfolio (dollars in thousands) 1 $8,194 3.4%2 217,989 91.2 3 12,939 5.4 4 - - Total $239,122 100.0% As of March 31, 2017 Debt Investments at Percentage of Investment Rating Fair Value Debt Portfolio (dollars in thousands) 1 $12,173 7.3%2 155,276 92.7 3 - - 4 - - Total $167,449 100.0% Interest and dividend income is recorded on an accrual basis to the extent amounts are expected to becollected. When we do not expect the debtor to be able to service all of its debt or other obligations, we will generallyestablish a reserve against interest income receivable, thereby placing the loan or debt security on non-accrual status, andcease to recognize interest income on that loan or debt security until the borrower has demonstrated the ability and intent topay contractual amounts due. 49 Table of Contents As of March 31, 2018 and 2017, we did not have any investments on non-accrual status or past due its contractualpayment obligation. Investment Activity During the year ended March 31, 2018, we made new debt investments in 14 portfolio companies totaling $142.9million, follow-on debt investments in four portfolio companies totaling $9.4 million, and equity investments in oneexisting and seven new portfolio companies totaling $9.8 million. We also funded $4.0 million on our existing equitycommitment to I-45 SLF LLC. We received partial repayments totaling approximately $11.7 million and full prepayments ofapproximately $72.2 million from 13 portfolio companies. During the year ended March 31, 2017, we made new debt investments in 15 portfolio companies totaling $117.9million, follow-on debt investments in two portfolio companies totaling $1.1 million, and equity investments in three newportfolio companies totaling $2.8 million. We also funded $24.0 million on our existing equity commitment to I-45 SLFLLC. We received proceeds from sales and repayments of debt investments in portfolio companies of $45.8 million. Inaddition, we received proceeds from sales and return of capital of equity investments in portfolio companies totaling $7.7million and recognized net realized gains on those sales totaling $7.2 million in the year ended March 31, 2017. Total portfolio investment activity for the years ended March 31, 2018 and 2017 was as follows (in thousands): Preferred & First Lien Second Lien Subordinated CommonEquity I-45 SLF Year ended March 31, 2018 Loans Loans Debt & Warrants LLC Total Fair value, beginning of period $107,817 $47,176 $12,453 $56,039 $63,395 $286,880 New investments 128,189 9,765 14,406 9,821 4,000 166,181 Proceeds from sales of investments - - - (104) - (104) Principal repayments received (41,687) (34,179) (8,100) - - (83,966) PIK interest earned - - 11 295 - 306 Accretion of loan discounts 705 100 52 - - 857 Realized gain 814 550 114 104 - 1,582 Unrealized gain (loss) 1,272 (183) (153) 20,705 (282) 21,359 Fair value, end of period $197,110 $23,229 $18,783 $86,860 $67,113 $393,095 Weighted average yield on debt investmentsat end of period 11.46%Weighted average yield on total investmentsat end of period 10.48% Preferred & First Lien Second Lien Subordinated CommonEquity I-45 SLF Year ended March 31, 2017 Loans Loans Debt & Warrants LLC Total Fair value, beginning of period $39,491 $38,227 $15,114 $49,267 $36,337 $178,436 New investments 101,858 17,133 - 2,787 24,000 145,778 Proceeds from sales of investments - (2,507) - (7,692) - (10,199) Principal repayments received (36,168) (7,051) (60) - - (43,279) PIK interest earned - - - 63 - 63 Accretion of loan discounts 303 97 34 - - 434 Realized gain 1,514 207 28 5,885 - 7,634 Unrealized gain 819 1,070 52 3,014 3,058 8,013 Conversion of security from debt to equity - - (2,715) 2,715 - - Fair value, end of period $107,817 $47,176 $12,453 $56,039 $63,395 $286,880 Weighted average yield on debt investmentsat end of period 10.28%Weighted average yield on total investmentsat end of period 10.49% 50 Table of ContentsRESULTS OF OPERATIONS The composite measure of our financial performance in the Consolidated Statements of Operations is captioned “Netincrease (decrease) in net assets from operations” and consists of three elements. The first is “Net investment income (loss),”which is the difference between income from interest, dividends and fees and our combined operating and interest expenses,net of applicable income taxes. The second element is “Net realized gain (loss) on investments before income tax,” which isthe difference between the proceeds received from the disposition of portfolio securities and their stated cost. The thirdelement is the “Net change in unrealized appreciation on investments, net of tax” which is the net change in the market orfair value of our investment portfolio, compared with stated cost. It should be noted that the “Net realized gain (loss) oninvestments before income tax” and “Net change in unrealized appreciation on investments, net of tax” are directly related inthat when an appreciated portfolio security is sold to realize a gain, a corresponding decrease in net unrealized appreciationoccurs by transferring the gain associated with the transaction from being “unrealized” to being “realized.” Conversely,when a loss is realized on a depreciated portfolio security, an increase in net unrealized appreciation occurs. Comparison of years ended March 31, 2018 and March 31, 2017 Year ended March 31, Net Change 2018 2017 Amount % (in thousands) Total investment income $35,126 $23,474 $11,652 49.6%Interest expense (4,875) (989) (3,886) 392.9%Other operating expenses (13,823) (12,818) (1,005) 7.8%Income before taxes 16,428 9,667 6,761 69.9%Income tax expense 195 1,779 (1,584) (89.0)%Net investment income 16,233 7,888 8,345 105.8%Net realized gain on investments before income tax 1,582 7,896 (6,314) (80.0)%Net change in net unrealized appreciation on investments, net of tax 21,492 7,690 13,802 179.5%Net increase in net assets from operations $39,307 $23,474 $15,833 67.4% Investment Income Total investment income consisted of interest income, management fees, dividend income and other income foreach applicable period. For the year ended March 31, 2018, total investment income was $35.1 million, a $11.7 million, or49.6%, increase over total investment income of $23.5 million for the year ended March 31, 2017. The increase wasprimarily due to a $9.4 million, or 76.0% increase in interest income generated from our debt investments due to a 42.6%increase in the cost basis of debt investments held from $166.1 million to $236.8 million year over year in addition to anincrease in the weighted average yield on debt investments from 10.28% to 11.46%. We receive management fees primarily from our controlled affiliate investments which aggregated $0.4 million forboth the years ended March 31, 2018 and 2017. We also received other miscellaneous fees and income of approximately$0.5 million and $0.6 million during the years ended March 31, 2018 and 2017, respectively, related primarily to otherportfolio company activity. Operating Expenses Due to the nature of our business, the majority of our operating expenses are related to interest and fees on ourborrowings, employee compensation (including both cash and share-based compensation), and general and administrativeexpenses. Interest and Fees on our Borrowings For the year ended March 31, 2018, total interest expense was $4.9 million, an increase of $3.9 million as comparedto the total interest expense of $1.0 million for the year ended March 31, 2017. The increase was primarily51 Table of Contentsattributable to an increase of $24.4 million in average borrowings on our Credit Facility during the year ended March 31,2018, as well as the additional $57.5 million of December 2022 Notes. Salaries, General and Administrative Expenses For the year ended March 31, 2018, total employee compensation expense (including both cash and share-basedcompensation) was $9.2 million, a $1.0 million, or 12.4%, increase over total employee compensation expense of $8.2million for the year ended March 31, 2017. The increase was primarily due to an increase in headcount, as well as additionalrestricted stock award grants. For both the years ended March 31, 2018 and 2017, total general and administrative expensewas $4.6 million. Net Investment Income For the year ended March 31, 2018, net investment income was $16.2 million, an $8.3 million, or 105.8%, increaseover net investment income of $7.9 million for the year ended March 31, 2017. The increase was driven by an $11.7 millionincrease in total investment income and a $1.6 million decrease in income tax expense primarily due to the tax reform, offsetby a $3.9 million increase in interest expense and a $1.0 million increase in employee compensation expense. Increase in Net Assets from Operations During the fiscal year ended March 31, 2018, we recognized realized gains on investments before income taxtotaling $1.6 million, which consisted of gains on the partial repayments of five non-control/non-affiliate investments andfull repayments on 13 non-control/non-affiliate investments. In addition, for the fiscal year ended March 31, 2018, we recorded a net increase in unrealized appreciation oninvestments, net of tax, totaling $21.5 million, consisting of net unrealized appreciation on our current portfolio of $22.0million, the reversal of $0.6 million of net unrealized appreciation recognized in prior periods due to the realized gains notedabove, and net unrealized appreciation related to deferred tax associated with the Taxable Subsidiary of $0.1 million. Netunrealized appreciation on our current portfolio included unrealized gains on TitanLiner, Inc. of $20.3 million and MediaRecovery, Inc. of $5.3 million, partially offset by unrealized losses on Deepwater Corrosion Services of $5.3 million. Theseunrealized gains and losses were due to changes in fair value based on the overall EBITDA performance and cash flows ofeach investment. During the fiscal year ended March 31, 2017, we recognized realized gains on investments before income taxtotaling $7.9 million, which consisted of net gains on the partial repayments of 22 non-control/non-affiliate investments, fullrepayments on five non-control/non-affiliate investments and the sale of certain equity securities. In addition, for the fiscal year ended March 31, 2017, we recorded a net increase in unrealized appreciation, net oftax, on investments totaling $7.7 million, consisting of net unrealized appreciation on our current portfolio of $12.5 million,the reversal of $4.5 million of net unrealized appreciation recognized in prior periods due to the realized gains noted above,and net unrealized depreciation related to deferred tax associated with the Taxable Subsidiary of $0.3 million. Net unrealizedappreciation on our current portfolio included unrealized gains on Media Recovery, Inc. of $5.6 million, DeepwaterCorrosion Services, Inc. of $4.9 million and I-45 SLF LLC of $3.1 million, partially offset by unrealized losses on TitanLiner,Inc. of $3.3 million. These unrealized gains and losses were due to changes in fair value based on the overall EBITDAperformance and cash flows of each investment. 52 Table of ContentsComparison of years ended March 31, 2017 and March 31, 2016 Year ended March 31, Net Change 2017 2016 Amount % (in thousands) Total investment income $23,474 $9,160 $14,314 156.3%Interest expense (989) - (989) 100.0%Other operating expenses (12,818) (21,125) 8,307 (39.3)%Income (loss) before taxes 9,667 (11,965) 21,632 180.8%Income tax expense (benefit) 1,779 (1,278) 3,057 239.2%Net investment income (loss) 7,888 (10,687) 18,575 173.8%Net realized gain (loss) on investments before income tax 7,896 (10,802) 18,698 173.1%Net change in net unrealized appreciation on investments, net of tax 7,690 16,089 (8,399) (52.2)%Net increase (decrease) in net assets from operations $23,474 $(5,400) $28,874 534.7% Investment Income Total investment income consisted of interest income, management fees, dividend income and other income foreach applicable period. For the year ended March 31, 2017, total investment income was $23.5 million, a $14.3 million, or156.3%, increase over total investment income of $9.2 million for the year ended March 31, 2016. This increase wasprimarily due to a $7.9 million, or 173.2%, increase in interest income generated from our debt investments due to a 78%increase in the cost basis of debt investments held from $93.4 million to $166.1 million year over year, partially offset by adecrease in the weighted average yield on debt investments from 10.67% to 10.28% year over year. Additionally, there was a$6.4 million, or 184.0%, increase in dividend income due to dividends received from I-45 SLF LLC and Media Recovery,Inc. Total investment income also includes interest income we earn from the short-term investment of cash funds, and theannual amount of such income varies based upon the average level of funds invested during the year and fluctuations inshort-term interest rates. During the two years ended March 31, we had interest income from cash and cash equivalents of$0.2 million in 2017 and $0.4 million in 2016. We receive management fees primarily from our controlled affiliate investments which aggregated $0.4 million in2017 and $0.7 million in 2016. We also received other miscellaneous income of approximately $0.6 million and $0.1million during the years ended March 31, 2017 and 2016, respectively, related primarily to other portfolio company activity. Operating Expenses Due to the nature of our business, the majority of our operating expenses are related to interest and fees on ourborrowings, employee compensation (including both cash and share-based compensation), and general and administrativeexpenses. Interest and Fees on our Borrowings For the year ended March 31, 2017, total interest expense was $1.0 million. We entered into the Credit Facility inAugust 2016. As such, there was no interest expense incurred during the year ended March 31, 2016. Salaries, General and Administrative Expenses For the year ended March 31, 2017, total employee compensation expense (including both cash and share-basedcompensation) was $8.2 million, a $1.6 million, or 16.2%, decrease from the total employee compensation expense of $9.8million for the year ended March 31, 2016. The decrease was primarily due to approximately $1.6 million of compensationexpense incurred in fiscal 2016 for employees who transferred to CSWI following the Share Distribution. For the year endedMarch 31, 2017, total general and administrative expense was $4.6 million, a $6.7 million, or 59.4%, decrease over totalgeneral and administrative expenses of $11.3 million for the year ended March 31, 2016. The decrease was primarily due toexpenses of $7.0 million related to the Share Distribution. 53 Table of Contents Net Investment Income/Loss For the year ended March 31, 2017, net investment income was $7.9 million, a $18.6 million, or 173.8%, increaseover net investment loss of $10.7 million during the fiscal year ended March 31, 2016, primarily as a result of the $14.3million increase in total investment income and the $7.3 million decrease in operating expenses. Increase/Decrease in Net Assets from Operations During the fiscal year ended March 31, 2017, we recognized realized gains on investments before income taxtotaling $7.9 million, which consisted of net gains on the partial repayments of 22 non-control/non-affiliate investments, fullrepayments on five non-control/non-affiliate investments and the sale of certain equity securities. In addition, for the fiscal year ended March 31, 2017, we recorded a net increase in unrealized appreciation oninvestments totaling $7.7 million, consisting of net unrealized appreciation on our current portfolio of $12.5 million, thereversal of $4.5 million of net unrealized appreciation recognized in prior periods due to the realized gains noted above, andnet unrealized depreciation related to deferred tax associated with the Taxable Subsidiary of $0.3 million. Net unrealizedappreciation on our current portfolio included unrealized gains on Media Recovery, Inc. of $5.6 million, DeepwaterCorrosion Services, Inc. of $4.9 million and I-45 SLF LLC of $3.1 million, partially offset by unrealized losses on TitanLiner,Inc. of $3.3 million. These unrealized gains and losses were due to changes in fair value based on the overall EBITDAperformance and cash flows of each investment. During the fiscal year ended March 31, 2016, we recognized a total net realized loss before income taxes of $10.8million consisting of the difference between $19.7 million of proceeds from disposition of investments and $30.5 million ofcost from four partial repayments of investments and the disposition of 12 investments. In addition, for the fiscal year ended March 31, 2016, we recorded a net increase in unrealized appreciationon investments of $16.1 million, consisting of net unrealized appreciation on our current portfolio of $7.6 million and thereversal of $8.5 million of net unrealized appreciated recognized in prior periods due to the realized gains and losses notedabove. FINANCIAL LIQUIDITY AND CAPITAL RESOURCES Our liquidity and capital resources are generated primarily from cash flows from operations, the net proceeds ofpublic offerings of debt securities and advances from the Credit Facility. Management believes that the Company’s cash andcash equivalents, cash available from investments, and commitments under the Credit Facility are adequate to meet its needsfor the next twelve months. We may from time to time seek to retire or repurchase our common stock through cash purchases, as well as retire,cancel or purchase our outstanding debt through cash purchases and/or exchanges, in open market purchases, privatelynegotiated transactions or otherwise. In addition, we may from time to time enter into additional debt facilities, increase thesize of existing facilities or issue additional debt securities. Any repurchase or issuance would be subject to prevailingmarket conditions, our liquidity requirements, contractual and regulatory restrictions and other factors. In accordance withthe 1940 Act, with certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage,calculated pursuant to the 1940 Act, is at least 200% (or, pursuant to recent legislation, 150% if certain requirements are metas described in the Business Section under “Regulation as a Business Development Company—Senior Securities”) after suchborrowing. As of March 31, 2018, our asset coverage was 416%. Cash Flows For the year ended March 31, 2018, we experienced a net decrease in cash and cash equivalents in the amount of$14.5 million. During that period, our operating activities used $63.9 million in cash, consisting primarily of new portfolioinvestments of $166.2 million, partially offset by $82.5 million of repayments received from debt investments in portfoliocompanies. In addition, our financing activities increased cash by $49.4 million, consisting primarily of proceeds from theissuance of the December 2022 Notes of $55.8 million and net borrowings under the Credit Facility of $15.0 million,partially offset by cash dividends paid in the amount of $18.6 million. At March 31, 2018, the Company had cash and cashequivalents of approximately $7.9 million.54 Table of Contents For the year ended March 31, 2017, we experienced a net decrease in cash and cash equivalents in the amount of$73.6 million. During that period, our operating activities used $89.6 million in cash, consisting primarily of new portfolioinvestments of $145.8 million, partially offset by $44.6 million of sales and repayments received from debt investments inportfolio companies and $7.7 million in proceeds from sales of equity investments in portfolio companies. In addition, ourfinancing activities increased cash by $16.0 million, consisting primarily of proceeds from the Credit Facility of $25.0million, partially offset by cash dividends paid in the amount of $6.0 million and debt issuance costs paid of $2.5 million. AtMarch 31, 2017, the Company had cash and cash equivalents of approximately $22.4 million. Financing Transactions Credit Facility In August 2016, CSWC entered into the Credit Facility to provide additional liquidity to support its investment andoperational activities, which included total commitments of $100.0 million. The Credit Facility contains an accordionfeature that allows CSWC to increase the total commitments under the facility up to $150.0 million from new and existinglenders on the same terms and conditions as the existing commitments. In August 2017, we increased our total commitmentsby $15 million through adding an additional lender using the accordion feature. On November 16, 2017, CSWC entered into Amendment No. 1 (the “Amendment”) to its Credit Facility. Prior to theAmendment, borrowings under the Credit Facility accrued interest on a per annum basis at a rate equal to the applicableLIBOR rate plus 3.25% with no LIBOR floor. CSWC paid unused commitment fees of 0.50% to 1.50% per annum, based onutilization, on the unused lender commitments under the Credit Facility. The Amendment (1) increased the total borrowingcapacity under the Credit Facility to $180.0 million, with commitments from a diversified group of eight lenders, (2)increased the Credit Facility’s accordion feature that allows for an increase in total commitments of up to $250 million underthe Credit Facility from new and existing lenders on the same terms and conditions as the existing commitments, (3) reducedthe interest rate on borrowings to LIBOR plus 3.00%, with a step-down to LIBOR plus 2.75% at the time the Company’s networth exceeds $325 million, (4) reduced unused commitment fees to a range of 0.50% to 1.0% per annum based onutilization, and (5) extended the Credit Facility’s revolving period that ended on August 30, 2019 through November 16,2020. Additionally, the final maturity of the Credit Facility was extended from August 30, 2020 to November 16, 2021.Subsequent to March 31, 2018, on April 16, 2018 and May 11, 2018, CSWC entered into Incremental AssumptionAgreements, which increased the total commitments under the Credit Facility by $20 million and $10 million, respectively.The increases were executed under the accordion feature of the Credit Facility and increased total commitments from $180million to $210 million. The Credit Facility contains certain affirmative and negative covenants, including but not limited to: (1) certainreporting requirements, (2) maintaining RIC and BDC status, (3) maintaining a minimum shareholders’ equity, (4)maintaining a minimum consolidated net worth, (5) maintaining an asset coverage of not less than 200%, (6) maintaining aconsolidated interest coverage ratio of at least 2.5 to 1.0, and (7) at any time the outstanding advances exceed 90% of theborrowing base, maintaining a minimum liquidity of not less than 10% of the covered debt amount. The Credit Facility also contains customary events of default, including, without limitation, nonpayment,misrepresentation of representations and warranties in a material respect, breach of covenant, bankruptcy, and change ofcontrol, with customary cure and notice provisions. If the Company defaults on its obligations under the Credit Facility, thelenders may have the right to foreclose upon and sell, or otherwise transfer, the collateral subject to their security interests.There are no changes to the covenants or the events of default in the Credit Facility as a result of the Amendment. The Credit Facility is secured by (1) substantially all of the present and future property and assets of the Companyand the guarantors and (2) 100% of the equity interests in the Company’s wholly-owned subsidiaries. As of March 31, 2018,substantially all of the Company’s assets were pledged as collateral for the Credit Facility. At March 31, 2018, CSWC had $40.0 million in borrowings outstanding under the Credit Facility. CSWCrecognized interest expense related to the Credit Facility, including unused commitment fees and amortization of deferredloan costs of $3.7 million and $1.0 million, respectively, for the years ended March 31, 2018 and 2017. The weightedaverage interest rate on the Credit Facility was 4.66% and 4.28%, respectively, for the years ended March 31, 2018 and 2017.Average borrowings for the years ended March 31, 2018 and 2017 were $42.2 million and $17.8 million,55 Table of Contentsrespectively. As of March 31, 2018 and 2017, CSWC was in compliance with all financial covenants under the CreditFacility. December 2022 Notes In December 2017, the Company issued $57.5 million, including the underwriters’ full exercise of their option topurchase additional principal amounts to cover over-allotments, in aggregate principal amount of 5.95% Notes due 2022 (the“December 2022 Notes”). The December 2022 Notes mature on December 15, 2022 and may be redeemed in whole or in partat any time, or from time to time, at the Company’s option on or after December 15, 2019. The December 2022 Notes bearinterest at a rate of 5.95% per year, payable quarterly on March 15, June 15, September 15 and December 15 of each year,beginning on March 15, 2018. The December 2022 Notes are an unsecured obligation, rank pari passu with our otheroutstanding and future unsecured unsubordinated indebtedness and are effectively subordinated to all of our existing andfuture secured indebtedness, including borrowings under our Credit Facility. As of March 31, 2018, the carrying amount of the December 2022 Notes was $55.3 million. As of March 31, 2018,the fair value of the December 2022 Notes was $58.4 million. The fair value is based on the closing price of the security ofThe Nasdaq Global Select Market, which is a Level 1 input under ASC 820. The Company recognized interest expenserelated to the December 2022 Notes, including amortization of deferred issuance costs, of $1.2 million for the year endedMarch 31, 2018. The indenture governing the December 2022 Notes contains certain covenants including but not limited to (i) arequirement that the Company comply with the asset coverage requirement of Section 61 of the 1940 Act or any successorprovisions thereto, after giving effect to any exemptive relief granted to the Company by the SEC, (ii) a requirement, subjectto a limited exception, that the Company will not declare any cash dividend, or declare any other cash distribution, upon aclass of its capital stock, or purchase any such capital stock, unless, in every such case, at the time of the declaration of anysuch dividend or distribution, or at the time of any such purchase, the Company has the minimum asset coverage requiredpursuant to Section 61 of the 1940 Act or any successor provision thereto after deducting the amount of such dividend,distribution or purchase price, as the case may be, giving effect to any exemptive relief granted to the Company by the SECand (iii) a requirement to provide financial information to the holders of the December 2022 Notes and the trustee under theindenture if the Company should no longer be subject to the reporting requirements under the Exchange Act. The indentureand supplement relating to the December 2022 Notes also provides for customary events of default. As of March 31, 2018,the Company was in compliance with all covenants of the December 2022 Notes. Equity Capital Activities In January 2016, our board of directors approved a share repurchase program authorizing us to repurchase up to $10million in the aggregate of our outstanding common stock in the open market at certain thresholds below our net asset valueper share, in accordance with Rules 10b-18 under the Exchange Act. As of March 31, 2018, we had repurchased a total of35,911 shares of our common stock in the open market under the stock repurchase program, at an average price of $16.37,including commissions paid, leaving approximately $9.4 million available for additional repurchases under the program. We anticipate that we will continue to fund our investment activities through existing cash and cash equivalents,cash flows generated through our ongoing operating activities, utilization of available borrowings under our Credit Facilityand future issuances of debt and equity on terms we believe are favorable to the Company and our shareholders. Our primaryuses of funds will be investments in portfolio companies and operating expenses. In order to satisfy the Code requirements applicable to a RIC, we intend to distribute to our stockholders, afterconsideration and application of our ability under the Code to carry forward certain excess undistributed taxable incomefrom one tax year into the next tax year, substantially all of our taxable income.56 Table of ContentsOFF-BALANCE SHEET ARRANGEMENTS We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet thefinancial needs of our portfolio companies. These instruments may include commitments to extend credit and fund equitycapital and involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in thebalance sheet. At March 31, 2018, we had a total of approximately $11.6 million in currently unfunded commitments,consisting of $3.2 million in equity capital commitments to I-45 SLF LLC that had not been fully called, a $2.0 millionrevolver to Clickbooth.com, a $2.0 million revolver to ITA Holdings Group, LLC, a $0.9 million delayed draw term loan toLGM Pharma, a $1.5 million revolver to Prism Spectrum Holdings LLC, and a $2.0 million revolver to Zenfolio Inc. Webelieve our assets will provide adequate coverage to satisfy these commitments. As of March 31, 2018, we had cash and cashequivalents of $7.9 million and $140 million in available borrowings under the Credit Facility. CONTRACTUAL OBLIGATIONS As shown below, we had the following contractual obligations as of March 31, 2018. For information on ourunfunded investment commitments, see Note 12 of the Notes to Consolidated Financial Statements. Payments Due By Period (In thousands) Lessthan More ThanContractual Obligations Total 1Year 1-3 Years 3-5 Years 5 YearsOperating lease obligations $1,019 $248 $771 $- $-Credit Facility (1) 47,350 2,022 45,328 - -December 2022 Notes (2) 73,846 3,469 10,416 59,961 -Total $122,215 $5,739 $56,515 $59,961 $- (1)Amounts include interest payments calculated at an average rate 5.00% of outstanding Credit Facility borrowings,which were $40.0 million as of March 31, 2018.(2)Includes interest payments. RECENT DEVELOPMENTS On April 2, 2018, CSWC paid regular dividends declared on February 28, 2018 in the amount of $4.5 million, or$0.28 per share. On April 16, 2018 and May 11, 2018, CSWC entered into Incremental Assumption Agreements, which increased thetotal commitments under the Credit Facility by $20 million and $10 million, respectively. The increases were executed underthe accordion feature of the Credit Facility and increased total commitments from $180 million to $210 million. On April 25, 2018, the Board of Directors unanimously approved the application of the recently modified assetcoverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, the minimum asset coverage ratio applicableto the Company will be decreased from 200% to 150%, effective April 25, 2019. The Board of Directors also approved aresolution which limits the Company’s issuance of senior securities such that the asset coverage ratio, taking into accountany such issuance, would not be less than 166%, effective April 25, 2019. On June 1, 2018, the Company’s Board of Directors declared a $0.29 dividend per share for the quarter ended June30, 2018. The record date for the dividend is June 26, 2018. The payment date for the dividend is July 2, 2018. Item 7A. Quantitative and Qualitative Disclosures about Market Risk We are subject to market risk. Market risk includes risk that arise from changes in interest rates, commodity prices,equity prices and other market changes that affect market sensitive instruments. The prices of securities held by us maydecline in response to certain events, including those directly involving the companies in which we invest; conditionsaffecting the general economy; overall market changes; legislative reform; local, regional, national or global political, socialor economic instability; and interest rate fluctuations. 57 Table of ContentsInterest Rate Risk We are subject to interest rate risk. Interest rate risk is defined as the sensitivity of our current and future earnings tointerest rate volatility, variability of spread relationships, the difference in re-pricing internals between our assets andliabilities and the effect that interest rates may have on our cash flows. Changes in the general level of interest rates can affectour net interest income, which is the difference between the interest income earned on interest earning assets and our interestexpense incurred in connection with our interest-bearing liabilities. Changes in interest rates can also affect, among otherthings, our ability to acquire and originate loans and securities and the value of our investment portfolio. Our net investmentincome is affected by fluctuations in various interest rates including LIBOR and prime rates. However, the interest rates onour December 2022 Notes are fixed for the life of such debt. Our risk management systems and procedures are designed toidentify and analyze our risk, to set appropriate policies and limits and to continually monitor these risks. We regularlymeasure exposure to interest rate risk and determine whether or not any hedging transactions are necessary to mitigateexposure to changes in interest rates. As of March 31, 2018, we were not a party to any hedging arrangements. As of March 31, 2018, approximately 92.1% of our debt investment portfolio (at fair value) bore interest at floatingrates, of which 94.2% were subject to contractual minimum interest rates. A hypothetical 100 basis point increase in interestrates could increase our net investment income by a maximum of $2.4 million, or $0.15 per share, on an annual basis. Ahypothetical 100 basis point decrease in interest rates could decrease our net investment income by a maximum of $2.4million, or $0.15 per share, on an annual basis. Our Credit Facility bears interest on a per annum basis equal to the applicableLIBOR rate plus 3.00%, with a step-down to LIBOR plus 2.75% at the time the Company’s net worth exceeds $325 million.We pay unused commitment fees of 0.50% to 1.00% per annum, based on utilization. Although we believe that the foregoing analysis is indicative of our sensitivity to interest rate changes, it does notadjust for potential changes in the credit market, credit quality, size and composition of the assets in our portfolio. It alsodoes not adjust for other business developments, including future borrowings that could affect the net increase in net assetsresulting from operations, or net income. It also does not assume any repayments from borrowers. Accordingly, no assurancescan be given that actual results would not differ materially from the statement above. Because we currently borrow, and plan to borrow in the future, money to make investments, our net investmentincome is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest the fundsborrowed. Accordingly, there can be no assurance that a significant change in interest rates will not have a material adverseeffect on our net investment income. In periods of rising interest rates, our cost of funds would increase, which could reduceour net investment income if there is not a corresponding increase in interest income generated by our investment portfolio. 58 Table of Contents Item 8. Financial Statements and Supplementary Data Index to Financial Statements PageReports of Independent Registered Public Accounting Firm 60Consolidated Statements of Assets and Liabilities as of March 31, 2018 and 2017 63Consolidated Statements of Operations for Years Ended March 31, 2018, 2017 and 2016 64Consolidated Statements of Changes in Net Assets for Years Ended March 31, 2018, 2017 and2016 65Consolidated Statements of Cash Flows for Years Ended March 31, 2018, 2017 and 2016 66Consolidated Schedules of Investments as of March 31, 2018 and 2017 67Notes to Consolidated Financial Statements 74 59 Table of ContentsReport of Independent Registered Public Accounting Firm To the Board of Directors and ShareholdersCapital Southwest Corporation Opinion on the Financial StatementsWe have audited the accompanying consolidated statement of assets and liabilities, including the consolidated schedule ofinvestments, of Capital Southwest Corporation and Subsidiaries (the Company) as of March 31, 2018, and the relatedconsolidated statements of operations, changes in net assets and cash flows for the year then ended, the related notes to theconsolidated financial statements, and the Schedule of Investments in and Advances to Affiliates of the Company listed inSchedule 12-14 (collectively, the financial statements). In our opinion, the financial statements present fairly, in all materialrespects, the financial position of the Company as of March 31, 2018, and the results of its operations and its cash flows forthe year ended March 31, 2018 in conformity with accounting principles generally accepted in the United States of America,and in our opinion, the related Schedule of Investments in and Advances to Affiliates, when considered in relation to thebasic consolidated financial statements taken as a whole, present fairly in all material respects the information set forththerein. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)(PCAOB), the Company's internal control over financial reporting as of March 31, 2018, based on criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the TreadwayCommission in 2013, and our report dated June 5, 2018, expressed an unqualified opinion on the effectiveness of theCompany’s internal control over financial reporting. Basis for OpinionThese financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinionon the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB andare required to be independent with respect to the Company in accordance with U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and performthe audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whetherdue to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financialstatements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures includedexamining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits alsoincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating theoverall presentation of the financial statements. Our procedures included confirmation of investments owned as of March 31,2018, by correspondence with the custodians, portfolio companies or agents or by other appropriate procedures where repliesfrom custodians, portfolio companies or agents were not received. We believe that our audit provides a reasonable basis forour opinion. /s/ RSM US LLP We have served as the Company's auditor since 2017. Chicago, IllinoisJune 5, 2018 60 Table of ContentsReport of Independent Registered Public Accounting Firm To the Board of Directors and ShareholdersCapital Southwest Corporation Opinion on the Internal Control Over Financial ReportingWe have audited Capital Southwest Corporation and Subsidiaries’ (the Company) internal control over financial reporting asof March 31, 2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all materialrespects, effective internal control over financial reporting as of March 31, 2018, based on criteria established in InternalControl — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in2013. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)(PCAOB), the consolidated statements of assets and liabilities, including the consolidated schedules of investments, of theCompany as of March 31, 2018, and the related consolidated statements of operations, changes in net assets and cash flowsfor the year then ended, the related notes to the consolidated financial statements, and our report dated June 5, 2018expressed an unqualified opinion. Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report onInternal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal controlover financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required tobe independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules andregulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained inall material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing therisk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal controlbased on the assessed risk. Our audit also included performing such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial ReportingA company's internal control over financial reporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company's internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and thatreceipts and expenditures of the company are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ RSM US LLP Chicago, IllinoisJune 5, 201861 Table of ContentsReport of Independent Registered Public Accounting Firm Board of Directors and ShareholdersCapital Southwest Corporation We have audited the accompanying consolidated statements of assets and liabilities of Capital Southwest Corporation (aTexas corporation) and subsidiaries (the “Company”), including the consolidated schedules of investments, as of March 31,2017, and the related consolidated statements of operations, changes in net assets, and cash flows for each of the two years inthe period ended March 31, 2017 and the selected per share data and ratios for each of the four years in the period endedMarch 31, 2017. Our audits of the basic consolidated financial statements included the Schedule of Investments In andAdvances to Affiliates listed in the index appearing under Item 15(2). These financial statements, per share data and ratios,and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements, per share data and ratios, and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements, including the consolidated schedules of investments, referred to abovepresent fairly, in all material respects, the financial position of Capital Southwest Corporation and subsidiaries as of March31, 2017, and the results of their operations, changes in their net assets and their cash flows for each of the two years in theperiod ended March 31, 2017, and the selected per share data and ratios for each of the four years in the period ended March31, 2017, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion,the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as awhole, presents fairly, in all material respects, the information set forth therein. /s/ Grant Thornton LLP Dallas, TexasJune 1, 2017 62 Table of ContentsCAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES(In thousands except share and per share data) March 31, March 31, 2018 2017 Assets Investments at fair value: Non-control/Non-affiliate investments (Cost: $200,981 and $172,437, respectively) $199,949 $175,731 Affiliate investments (Cost: $51,648 and $5,925, respectively) 53,198 7,138 Control investments (Cost: $82,768 and $72,178, respectively) 139,948 104,011 Total investments (Cost: $335,397 and $250,540, respectively) 393,095 286,880 Cash and cash equivalents 7,907 22,386 Receivables: Dividends and interest 5,219 3,137 Escrow 119 545 Other 447 626 Income tax receivable 109 - Deferred tax asset 2,050 2,017 Debt issuance costs (net of accumulated amortization of $1,041 and $366, respectively) 2,575 2,137 Other assets 5,969 8,024 Total assets $417,490 $325,752 Liabilities Notes (Par value: $57,500 and $ -, respectively) $55,305 $- Credit facility 40,000 25,000 Other liabilities 6,245 5,996 Dividends payable 4,525 7,191 Accrued restoration plan liability 2,937 2,170 Deferred income taxes 190 323 Total liabilities 109,202 40,680 Commitments and contingencies (Note 12) Net Assets Common stock, $0.25 par value per share: authorized, 25,000,000 shares; issued,18,501,298 shares at March 31, 2018 and 18,350,808 shares at March 31, 2017 4,625 4,588 Additional capital 260,713 261,472 Accumulated net investment income (loss) 6,147 (1,457) Accumulated net realized gain 3,231 8,390 Unrealized appreciation on investments, net of income taxes 57,509 36,016 Treasury stock - at cost, 2,339,512 shares (23,937) (23,937) Total net assets 308,288 285,072 Total liabilities and net assets $417,490 $325,752 Net asset value per share (16,161,786 shares outstanding at March 31, 2018 and16,011,296 shares outstanding at March 31, 2017) $19.08 $17.80 The accompanying Notes are an integral part of these Consolidated Financial Statements.63 Table of ContentsCAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands except share and per share data) Years Ended March 31, 2018 2017 2016 Investment income Interest income: Non-control/Non-affiliate investments $18,257 $11,739 $4,172 Affiliate investments 3,513 560 135 Control investments 82 116 237 Dividend income: Non-control/Non-affiliate investments - 20 - Affiliate investments 127 163 - Control investments 12,254 9,726 3,489 Interest income from cash and cash equivalents 21 166 386 Fees and other income 872 984 741 Total investment income 35,126 23,474 9,160 Operating expenses: Compensation 7,013 6,330 7,310 Spin-off compensation plan 517 690 1,303 Share-based compensation 1,708 1,197 1,181 Interest 4,875 989 - Professional fees 1,580 1,774 1,749 Net pension expense (benefit) 164 166 (99) Spin-off professional fees - - 7,040 General and administrative 2,841 2,661 2,641 Total operating expenses 18,698 13,807 21,125 Income (loss) before taxes 16,428 9,667 (11,965) Income tax expense (benefit) 195 1,779 (1,278) Net investment income (loss) $16,233 $7,888 $(10,687) Realized gain (loss) Non-control/Non-affiliate investments 1,492 3,992 (9,575) Affiliate investments 90 3,876 (1,458) Control investments - 28 231 Total net realized gain (loss) on investments before income tax 1,582 7,896 (10,802) Change in unrealized appreciation of investments Non-control/Non-affiliate investments (4,325) (884) 5,585 Affiliate investments 337 184 2,860 Control investments 25,347 8,713 7,644 Income tax provision 133 (323) - Total net change in unrealized appreciation of investments, net of tax 21,492 7,690 16,089 Net realized and unrealized gains on investments $23,074 $15,586 $5,287 Net increase (decrease) in net assets from operations $39,307 $23,474 $(5,400) Pre-tax net investment income (loss) per share - basic and diluted $1.02 $0.61 $(0.76) Net investment income (loss) per share - basic and diluted $1.01 $0.50 $(0.68) Net increase (decrease) in net assets from operations - basic and diluted $2.45 $1.48 $(0.35) Weighted average shares outstanding – basic 16,073,642 15,824,879 15,635,597 Weighted average shares outstanding – diluted 16,138,541 15,877,331 15,723,617 The accompanying Notes are an integral part of these Consolidated Financial Statements.64 Table of ContentsCAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS(In thousands) Years Ended March 31, 2018 2017 2016 Operations: Net investment income (loss) $16,233 $7,888 $(10,687) Net realized gain (loss) on investments 1,582 7,896 (10,802) Net change in unrealized appreciation on investments, net of tax 21,492 7,690 16,089 Net increase (decrease) in net assets from operations 39,307 23,474 (5,400) Distributions from: Undistributed net investment income (12,905) (8,132) (625) Realized gains (3,015) (4,428) (1,544) Taxes incurred on deemed capital gain distributions - - (2,948) Distributions of CSW Industrials, Inc. Decrease in unrealized appreciation related to spin-off investments - - (458,338) Distribution from additional capital for spin-off - - (26,279) Spin-Off Compensation Plan distribution, net of tax of $ - , $692 and $ - for theyears ended March 31, 2018, 2017 and 2016, respectively (517) (1,175) (1,261) Capital share transactions: Change in restoration plan liability (813) (6) - Exercise of employee stock options 125 1,507 431 Share-based compensation expense 1,708 1,197 1,181 Common stock withheld for payroll taxes upon vesting of restricted stock (86) - - Repurchase of common stock (588) - - Increase (decrease) in net assets 23,216 12,437 (494,783) Net assets, beginning of year 285,072 272,635 767,418 Net assets, end of year $308,288 $285,072 $272,635 The accompanying Notes are an integral part of these Consolidated Financial Statements.65 Table of ContentsCAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Years Ended March 31, 2018 2017 2016 Cash flows from operating activities Net increase (decrease) in net assets from operations $39,307 $23,474 $(5,400) Adjustments to reconcile net increase (decrease) in net assets from operations to net cash usedin operating activities: Purchases and originations of investments (166,181) (145,778) (123,014) Proceeds from sales and repayments of debt investments in portfolio companies 82,489 44,568 529 Proceeds from sales and return of capital of equity investments in portfolio companies 104 7,692 19,637 Payment of accreted original issue discounts 1,477 1,218 12 Depreciation and amortization 927 459 86 Net pension benefit (46) (41) (308) Realized (gain) loss on investments before income tax (1,582) (7,896) 10,802 Net change in unrealized appreciation on investments (21,359) (8,013) (16,089) Accretion of discounts on investments (857) (434) (96) Payment-in-kind interest and dividends (306) (63) - Stock option and restricted awards expense 1,708 1,197 1,181 Deferred income taxes (537) 1,813 (363) Changes in other assets and liabilities: (Increase) decrease in dividend and interest receivable (2,082) (1,385) (1,675) Decrease (increase) in escrow receivables 426 2,860 (570) Decrease (increase) in other receivables 180 (127) 1,173 (Increase) decrease in tax receivable (109) 1,010 (915) Decrease (increase) in other assets 1,958 (6,775) (601) Increase in other liabilities 620 602 165 Increase (decrease) in payable for unsettled transaction - (3,940) 3,940 Net cash used in operating activities (63,863) (89,559) (111,506) Cash flows from financing activities Borrowings under credit facility 76,000 25,000 - Repayments of credit facility (61,000) - - Debt issuance costs paid (1,739) (2,503) - Proceeds from notes 55,775 - - Taxes incurred on deemed capital gain distribution - - (2,948) Dividends to shareholders (18,586) (5,994) (1,544) Proceeds from exercise of employee stock options 125 1,507 431 Common stock withheld for payroll taxes upon vesting of restricted stock (86) - - Repurchase of common stock (588) - - Spin-off Compensation Plan distribution (517) (2,034) (1,261) Cash distribution to CSW Industrials, Inc. - - (13,000) Net cash provided by (used in) financing activities 49,384 15,976 (18,322) Net decrease in cash and cash equivalents (14,479) (73,583) (129,828) Cash and cash equivalents at beginning of year 22,386 95,969 225,797 Cash and cash equivalents at end of year $7,907 $22,386 $95,969 Supplemental cash flow disclosures: Cash paid for income taxes $708 $289 $2,948 Cash paid for interest 3,405 325 - Supplemental disclosure of noncash financing activities: Dividends declared, not yet paid $4,525 $7,191 $625 Noncash adjustment to realized gain for escrow receivable - 118 - Cost of Investments spun-off - - 6,981 Decrease in unrealized appreciation due to spin-off of CSWI - - 458,338 Net pension assets - - 9,687 Change in deferred tax liabilities - - 3,391 Spin-off Compensation Plan distribution accrued, not yet paid - 345 513 1These non-cash items are related to the spin-off of CSW Industrials, Inc. at September 30, 2015. The accompanying Notes are an integral part of these Consolidated Financial Statements. 66 1111CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES CONSOLIDATED SCHEDULE OF INVESTMENTSMarch 31, 2018 Current Type of Interest Fair Portfolio Company Investment Industry Rate Maturity Principal Cost Value Non-control/Non-affiliateInvestments AAC HOLDINGS, INC. First Lien Healthcare services L+6.75%(Floor 1.00%),CurrentCoupon 8.52% 6/30/2023 $9,321,875 $9,110,902 $9,485,008 AG KINGS HOLDINGSINC. First Lien Food, agriculture &beverage L+9.40%(Floor 1.00%),CurrentCoupon11.21% 8/8/2021 9,650,000 9,507,562 9,437,700 ALLIANCE SPORTSGROUP, L.P. Senior subordinated debt Consumer products& retail 11.00% 2/1/2023 10,100,000 9,916,216 9,807,100 2.65% membership interest - - - 2,500,000 1,996,000 12,416,216 11,803,100 AMERICANTELECONFERENCINGSERVICES, LTD. First Lien Telecommunications L+6.50%(Floor 1.00%),CurrentCoupon 8.29% 12/8/2021 6,378,173 6,238,734 6,376,578 Second Lien L+9.50%(Floor 1.00%),CurrentCoupon11.20% 6/6/2022 2,005,714 1,941,047 1,918,806 8,179,781 8,295,384 AMWARE FULFILLMENTLLC First Lien Distribution L+12.00%(Floor 1.00%),CurrentCoupon14.02% 5/21/2019 13,478,333 13,284,488 12,939,200 BINSWANGER HOLDINGCORP. First Lien Distribution L+8.00%(Floor 1.00%),CurrentCoupon10.02% 3/9/2022 13,036,418 12,817,614 12,899,536 900,000 shares of common stock - - - 900,000 874,000 13,717,614 13,773,536 CALIFORNIA PIZZAKITCHEN, INC. First Lien Restaurants L+6.00%(Floor 1.00%),CurrentCoupon 7.88% 8/23/2022 4,925,000 4,886,550 4,836,350 CAPITAL PAWNHOLDINGS, LLC First Lien Consumer products& retail L+9.50%, CurrentCoupon11.19% 7/8/2020 12,922,365 12,669,652 12,767,297 CLICKBOOTH.COM, LLC First Lien Media, marketing &entertainment L+8.50%(Floor 1.00%),CurrentCoupon10.19% 12/5/2022 17,390,625 17,059,608 17,442,797 Revolving Loan L+8.50%(Floor 1.00%) 12/5/2022 - (18,719) - 17,040,889 17,442,797 DEEPWATERCORROSION SERVICES,INC. 127,004 shares of Series Aconvertible preferred stock Energy services(upstream) - - - 8,000,000 4,629,000 DELPHI INTERMEDIATEHEALTHCO, LLC First Lien Healthcare services L+7.50%(Floor 1.00%),CurrentCoupon 9.27% 10/3/2022 7,406,250 7,336,879 7,265,531 67 1234581715 Current Type of Interest Fair Portfolio Company Investment Industry Rate Maturity Principal Cost Value DIGITAL RIVER, INC. First Lien Software & ITservices L+6.50%(Floor 1.00%),CurrentCoupon 8.61% 2/12/2021 6,285,443 6,273,415 6,285,443 DUNN PAPER, INC. Second Lien Paper & forestproducts L+8.75%(Floor 1.00%),CurrentCoupon10.63% 8/26/2023 3,000,000 2,949,611 3,000,000 LGM PHARMA, LLC First Lien Healthcareproducts L+8.50%(Floor 1.00%),CurrentCoupon10.17% 11/15/2022 9,975,000 9,787,481 9,955,050 Delayed Draw Term Loan L+8.50%(Floor 1.00%),CurrentCoupon10.29% 11/15/2022 1,300,000 1,274,815 1,297,400 110,000 units of Class A commonstock - - - 1,100,000 1,100,000 12,162,296 12,352,450 LIGHTING RETROFITINTERNATIONAL, LLC First Lien Environmentalservices L+9.25%(Floor 1.00%),CurrentCoupon10.94% 6/30/2022 14,625,000 14,487,144 14,361,750 396,825 shares of Series Bpreferred stock - - - 500,000 376,000 14,987,144 14,737,750 PRE-PAID LEGALSERVICES, INC. Second Lien Consumerservices L+9.00%(Floor 1.25%),CurrentCoupon10.88% 7/1/2020 5,000,000 4,967,603 5,000,000 RESEARCH NOWGROUP, INC. Second Lien Business services L+9.50%(Floor 1.00%),CurrentCoupon11.28% 12/20/2025 10,500,000 9,778,956 9,817,500 RESTAURANTTECHNOLOGIES, INC. Second Lien Business services L+8.75%(Floor 1.00%),CurrentCoupon10.69% 11/23/2023 3,500,000 3,454,894 3,493,000 JVMC HOLDINGS CORP. First Lien Financial services L+8.02%(Floor 1.00%),CurrentCoupon 9.90% 5/5/2022 7,218,750 7,156,878 7,215,141 TAX ADVISORS GROUP,LLC Senior subordinated debt Financial services 10.00% /2.00% PIK 12/23/2022 4,600,000 4,517,884 4,600,000 143.3 Class A units - - - 541,176 886,000 5,059,060 5,486,000 VISTAR MEDIA INC. First Lien Media, marketing& entertainment L+10.00%(Floor 1.00%),CurrentCoupon12.02% 2/16/2022 8,112,500 7,434,072 8,193,625 Warrants (Expiration - February17, 2027) - - - 886,000 1,682,000 8,320,072 9,875,625 WASTEWATERSPECIALTIES, LLC First Lien Industrial services L+12.25%(Floor 1.00%),CurrentCoupon13.90% 4/18/2022 9,863,582 9,720,600 10,011,536 Total Non-control/Non-affiliate Investments $200,981,062 $199,949,348 Affiliate Investments CHANDLER SIGNS, LLC Senior subordinated debt Business services 12.00% /1.00% PIK 7/4/2021 $4,511,259 $4,450,704 $4,375,922 1,500,000 units of Class A-1common stock - - - 1,500,000 1,934,000 5,950,704 6,309,922 ELITE SEM, INC. First Lien Media, marketing& entertainment L+9.90%(Floor 1.00%),CurrentCoupon12.10% 2/1/2022 17,500,000 17,103,533 17,500,000 12341318914139166139868  Current Type of Interest Fair Portfolio Company Investment Industry Rate Maturity Principal Cost Value 1,089 Preferred units 12% PIK - - 1,235,651 1,879,000 18,339,184 19,379,000 ITA HOLDINGS GROUP,LLC First Lien Transportation &logistics L+8.50%(Floor 1.00%,CurrentCoupon10.32%) 2/14/2023 9,500,000 9,313,995 9,313,995 Revolving Loan L+8.50%(Floor 1.00%) 2/14/2023 - (9,748) - Delayed Draw Term Loan L+8.50%(Floor 1.00%,CurrentCoupon10.32%) 2/14/2023 1,500,000 1,470,378 1,470,378 9.25% Class A Membership Interest - - - 1,500,000 1,500,000 12,274,625 12,284,373 ZENFOLIO INC. First Lien Business services L+9.00%(Floor 1.00%),CurrentCoupon10.69% 7/17/2022 13,432,500 13,200,549 13,325,040 Revolving Loan L+9.00%(Floor 1.00%) 7/17/2022 - (17,174) - 190 shares of common stock - - - 1,900,000 1,900,000 15,083,375 15,225,040 Total Affiliate Investments $51,647,888 $53,198,335 Control Investments I-45 SLF LLC 80% LLC equity interest Multi-sectorholdings - - - $64,800,000 $67,113,368 MEDIA RECOVERY,INC. 800,000 shares of Series Aconvertible preferred stock Industrialproducts - - - 800,000 6,370,748 4,000,002 shares of common stock - - - 4,615,000 36,751,252 5,415,000 43,122,000 PRISM SPECTRUMHOLDINGS, LLC First Lien Environmentalservices L+9.50%(Floor 2.25%),CurrentCoupon11.75% 2/6/2023 4,325,177 4,240,522 4,240,522 Revolving Loan L+9.50%(Floor 2.25%),CurrentCoupon11.75% 2/6/2023 500,000 490,290 490,290 57.25 Class A units - - - 1,691,674 1,691,674 6,422,486 6,422,486 TITANLINER, INC. 1,189,609 shares of Series Bconvertible preferred stock Energy services(upstream) 6% PIK - - 2,925,960 11,362,000 339,277 shares of Series Aconvertible preferred stock - - - 3,204,222 11,928,000 6,130,182 23,290,000 Total Control Investments $82,767,668 $139,947,854 TOTAL INVESTMENTS $335,396,618 $393,095,537 1All debt investments are income-producing, unless otherwise noted. Equity investments are non-income producing, unless otherwise noted.2All of the Company’s investments, unless otherwise noted, are encumbered as security for the Company’s senior secured credit facility.3The majority of investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime (“P”) andreset daily, monthly, quarterly, or semiannually. For each the Company has provided the spread over LIBOR or Prime and the current contractual interest rate ineffect at March 31, 2018. Certain investments are subject to a LIBOR or Prime interest rate floor. Certain investments, as noted, accrue payment-in-kind (“PIK”)interest.69 1234131991579, 10, 111113209124Investments are carried at fair value in accordance with the Investment Company Act of 1940 (the “1940 Act”) and Financial Accounting Standards Board(“FASB”) Accounting Standard Codification (“ASC”) 820, Fair Value Measurements and Disclosures. We determine in good faith the fair value of ourInvestment portfolio pursuant to a valuation policy in accordance with ASC 820 and a valuation process approved by our Board of Directors. See Note 4 to theconsolidated financial statements.5Non-Control/Non-Affiliate investments are generally defined by the 1940 Act as investments that are neither control investments nor affiliate investments. AtMarch 31, 2018, approximately 50.9% of the Company’s investment assets were non-control/non-affiliate investments. The fair value of these investments as apercent of net assets is 64.9%.6Affiliate investments are generally defined by the 1940 Act as investments in which between 5% and 25% of the voting securities are owned and the investmentsare not classified as control investments. At March 31, 2018, approximately 13.5% of the Company’s investment assets were affiliate investments. The fair valueof these investments as a percent of net assets is 17.3%.7Control investments are generally defined by the 1940 Act as investments in which more than 25% of the voting securities are owned or where greater than 50% ofthe board representation is maintained. At March 31, 2018, approximately 35.6% of the Company’s investment assets were control investments. The fair value ofthese investments as a percent of net assets is 45.4%.8The investment is structured as a first lien last out term loan.9Indicates assets that are considered “non-qualifying assets” under section 55(a) of the 1940 Act. Qualifying assets must represent at least 70% of total assets at thetime of acquisition of any additional non-qualifying assets. As of March 31, 2018, approximately 18.0% of the Company’s investment assets are non-qualifyingassets.10The investment has approximately $3.2 million unfunded commitment as of March 31, 2018.11Income producing through dividends on distributions.12As of March 31, 2018, the cumulative gross unrealized appreciation for federal income tax purposes is approximately $62.4 million; cumulative gross unrealizeddepreciation for federal income tax purposes is $4.9 million. Cumulative net unrealized appreciation is $57.5 million, based on a tax cost of $335.6 million.13ITA Holdings Group, LLC membership interest, LGM Pharma, LLC Class A common stock, Prism Spectrum Holdings LLC Class A units, Tax Advisors Group,LLC Class A units and Chandler Signs, LP Class A-1 common stock are held through a wholly-owned taxable subsidiary.14The investment is structured as a first lien first out term loan.15The investment has approximately $2.0 million unfunded commitment as of March 31, 2018.16As of March 31, 2018, the investment is paying default interest at a rate of 3.0% per annum.17As of March 31, 2018, the investment is paying default interest at a rate of 2.5% per annum.18The investment has approximately $0.9 million unfunded commitment as of March 31, 2018.19The investment has approximately $2.0 million unfunded commitment as of March 31, 2018.20The investment has approximately $1.5 million unfunded commitment as of March 31, 2018. The accompanying Notes are an integral part of these Consolidated Financial Statements. 70  CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES CONSOLIDATED SCHEDULE OF INVESTMENTSMarch 31, 2017 Current Type of Interest Fair Portfolio Company Investment Industry Rate Maturity Principal Cost Value Non-control/Non-affiliateInvestments AG KINGS HOLDINGS First Lien Food, agriculture &beverage L+8.50%(Floor 1.00%) 8/10/2021 $9,900,000 $9,720,743 $9,900,000 AMERICANTELECONFERENCING First Lien Telecommunications L+6.50%(Floor 1.00%) 12/8/2021 6,733,503 6,559,616 6,720,709 Second Lien L+9.50% (Floor 1.00%) 6/6/2022 2,005,714 1,929,670 1,965,600 AMWARE FULFILLMENT First Lien Distribution L+9.50% (Floor 1.00%) 5/21/2019 13,065,000 12,858,885 12,934,350 ARGON MEDICAL DEVICES Second Lien Healthcare products L+9.50% (Floor 1.00%) 6/23/2022 5,000,000 4,871,024 5,000,000 BINSWANGER CORP. First Lien Consumer products& retail L+8.00%(Floor 1.00%) 3/9/2022 13,251,760 12,988,847 12,988,848 900,000 shares of commonstock 900,000 900,000 13,888,847 13,888,848 CALIFORNIA PIZZAKITCHEN First Lien Restaurants L+6.00%(Floor 1.00%) 8/23/2022 4,975,000 4,929,234 4,975,995 CAST AND CREWPAYROLL, LLC Second Lien Media, marketing &entertainment L+7.75% (Floor 1.00%) 8/12/2023 3,705,263 3,685,537 3,671,916 DEEPWATER CORROSIONSERVICES, INC. 127,004 shares of Series Aconvertible preferred stock Energy services(upstream) - - - 8,000,000 9,956,000 DIGITAL RIVER, INC. First Lien Software & ITservices L+6.50% (Floor 1.00%) 2/12/2021 7,032,285 7,001,500 7,067,446 DIGITAL ROOM INC. Second Lien Paper & forestproducts L+10.00%(Floor 1.00%) 5/21/2023 7,000,000 6,864,682 6,864,682 DUNN PAPER, INC. Second Lien Paper & forestproducts L+8.75%(Floor 1.00%) 8/26/2023 3,000,000 2,942,972 2,970,000 ELITE SEM, INC. First Lien Media, marketing &entertainment L+8.50%(Floor 1.00%) 2/1/2022 12,150,000 11,864,161 11,864,161 1,000 Preferred units 12% PIK - - 1,019,667 1,020,000 12,883,828 12,884,161 IMAGINE! PRINTSOLUTIONS, INC. First Lien Media, marketing &entertainment L+6.00% (Floor 1.00%) 3/30/2022 4,853,233 4,800,146 4,913,898 INFOGROUP INC. First Lien Software & ITservices L+5.50%(Floor 1.50%) 5/26/2018 4,895,007 4,822,951 4,890,112 LIGHTING RETROFITINTERNATIONAL First Lien Environmentalservices L+9.75%(Floor 0.5%) 9/28/2021 10,222,222 10,126,394 10,126,394 LTI HOLDINGS, INC. Second Lien Industrial products L+9.25% (Floor 1.00%) 4/17/2023 7,000,000 6,853,685 6,825,000 PREPAID LEGAL SERVICES,INC. Second Lien Consumer services L+9.00% (Floor 1.25%) 7/1/2020 5,000,000 4,955,404 5,029,000 REDBOX AUTOMATEDRETAIL First Lien Gaming & leisure L+7.50% (Floor 1.00%) 9/27/2021 8,750,000 8,505,558 8,761,375 RESEARCH NOW GROUP,INC. Second Lien Business services L+8.75% (Floor 1.00%) 3/18/2022 7,000,000 6,918,134 6,860,000 RESTAURANTTECHNOLOGIES, INC. Second Lien Restaurants L+8.75% (Floor 1.00%) 11/23/2023 3,500,000 3,449,262 3,482,500 71 123488 Current Type of Interest Fair Portfolio Company Investment Industry Rate Maturity Principal Cost Value TAXACT, INC. First Lien Financialservices L+6.00% (Floor 1.00%) 12/31/2022 2,775,000 2,722,263 2,775,000 VISTAR MEDIA INC. First Lien Media,marketing &entertainment L+10.00%(Floor 1.00%) 2/16/2022 11,000,000 9,898,494 9,898,494 Warrants 886,000 886,000 10,784,494 10,784,494 WATER PIK, INC. Second Lien Consumerproducts & retail L+8.75% (Floor 1.00%) 2/8/2021 4,473,684 4,385,853 4,507,237 WINZER CORPORATION Senior subordinated debt Distribution 11.00% 6/1/2021 8,100,000 7,976,347 7,976,347 Total Non-control/Non-affiliate Investments $172,437,029 $175,731,064 Affiliate Investments CHANDLER SIGNS, LP Senior subordinated debt Business services 12.00% 7/4/2021 $4,500,000 $4,425,310 $4,477,500 1,500,000 units of Class A-1common stock - - - 1,500,000 2,661,000 5,925,310 7,138,500 Total Affiliate Investments $5,925,310 $7,138,500 Control Investments I-45 SLF LLC 80% LLC equity interest Multi-sectorholdings - - - $60,800,000 $63,394,679 MEDIA RECOVERY,INC. 800,000 shares of Series Aconvertible preferred stock Industrialproducts - - - 800,000 5,590,249 4,000,002 shares of common stock - - - 4,615,000 32,248,751 5,415,000 37,839,000 TITANLINER, INC. 1,189,609 shares of Series Bconvertible preferred stock Energy services(upstream) 6% PIK - - 2,758,528 2,777,000 339,277 shares of Series Aconvertible preferred stock - - - 3,204,222 - 5,962,750 2,777,000 Total Control Investments $72,177,750 $104,010,679 TOTAL INVESTMENTS $250,540,089 $286,880,243 1All debt investments are income-producing, unless otherwise noted. Equity investments are non-income producing, unless otherwise noted.2All of the Company’s investments, unless otherwise noted, are encumbered as security for the Company’s senior secured credit facility.3The majority of investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime (“P”) andreset daily, monthly, quarterly, or semiannually. For each the Company has provided the spread over LIBOR or Prime and the current contractual interest rate ineffect at March 31, 2017. Certain investments are subject to a LIBOR or Prime interest rate floor.4Investments are carried at fair value in accordance with the Investment Company Act of 1940 (the “1940 Act”) and Financial Accounting Standards Board(“FASB”) Accounting Standard Codification (“ASC”) 820, Fair Value Measurements and Disclosures. We determine in good faith the fair value of ourInvestment portfolio pursuant to a valuation policy in accordance with ASC 820 and a valuation process approved by our Board of Directors. See Note 4 to theconsolidated financial statements.5Non-Control/Non-Affiliate investments are generally defined by the 1940 Act as investments that are neither control investments nor affiliate investments. AtMarch 31, 2017, approximately 61.3% of the Company’s investment assets were non-control/non-affiliate investments.6Affiliate investments are generally defined by the 1940 Act as investments in which between 5% and 25% of the voting securities are owned and the investmentsare not classified as control investments. At March 31, 2017, approximately 2.5% of the Company’s investment assets were affiliate investments.7Control investments are generally defined by the 1940 Act as investments in which more than 25% of the voting securities are owned or maintains greater than50% of the board representation. At March 31, 2017, approximately 36.2% of the Company’s investment assets were control investments.8The investment is structured as a first lien last out term loan and earns interest in addition to the stated rate.9Indicates assets that the Company believes do not represent “qualifying assets” under section 55(a) of the 1940 Act. Qualifying assets must represent at least 70%of total assets at the time of acquisition of any additional non-qualifying assets.10The investment has approximately $7.2 million unfunded commitment as of March 31, 2017.11Income producing through dividends on distributions.72 12361379, 10, 111112 12As of March 31, 2017, the cumulative gross unrealized appreciation for federal income tax purposes is approximately $40.1 million; cumulative gross unrealizeddepreciation for federal income tax purposes is $3.4 million. Cumulative net unrealized appreciation is $36.7 million, based on a tax cost of $250.1 million.13Chandler Signs, LP Class A-1 common stock is held through a wholly-owned taxable subsidiary. The accompanying Notes are an integral part of these Consolidated Financial Statements. 73 Table of ContentsNotes to Consolidated Financial Statements 1. ORGANIZATION AND BASIS OF PRESENTATION References in this Annual Report on Form 10-K to “we,” “our,” “us,” “CSWC,” or the “Company” refer to CapitalSouthwest Corporation, unless the context requires otherwise. Organization Capital Southwest Corporation is an internally managed investment company that specializes in providingcustomized financing to middle market companies in a broad range of industry segments located primarily in the UnitedStates. Our common stock currently trades on The Nasdaq Global Select Market under the ticker symbol “CSWC.” CSWC was organized as a Texas corporation on April 19, 1961. Until September 1969, we operated as a SmallBusiness Investment Company (“SBIC”) licensed under the Small Business Investment Act of 1958. At that time, CSWCtransferred to its then wholly-owned subsidiary, Capital Southwest Venture Corporation (“CSVC”), certain assets includingour license as a “SBIC”. CSVC was a closed-end, non-diversified investment company registered under the InvestmentCompany Act of 1940, as amended (the “1940 Act”). Effective June 14, 2016, CSVC was dissolved and its SBIC license wassurrendered. All assets held in CSVC were transferred to CSWC upon dissolution. Prior to March 30, 1988, CSWC wasregistered as a closed-end, non-diversified investment company under the 1940 Act. On that date, we elected to be treated asa business development company (“BDC”) subject to the provisions of the 1940 Act, as amended by the Small BusinessIncentive Act of 1980. In order to remain a BDC, we must meet certain specified requirements under the 1940 Act, includinginvesting at least 70% of our assets in eligible portfolio companies and limiting the amount of leverage we incur. We have elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the U.S. InternalRevenue Code of 1986 (the “Code”). As such, we are not required to pay corporate-level U.S federal income tax on ourinvestment income. We intend to maintain our RIC status, which requires that we qualify annually as a RIC by meetingcertain specified requirements. Capital Southwest Management Corporation (“CSMC”), a wholly-owned subsidiary of CSWC, is the managementcompany for CSWC. CSMC generally incurs all normal operating and administrative expenses, including, but not limited to,salaries and related benefits, rent, equipment and other administrative costs required for day-to-day operations. CSWC also has a direct wholly owned subsidiary that has been elected to be a taxable entity (the “TaxableSubsidiary”). The primary purpose of the Taxable Subsidiary is to permit CSWC to hold certain interests in portfoliocompanies that are organized as limited liability companies, or LLCs (or other forms of pass-through entities) and still allowus to satisfy the RIC tax requirement that at least 90% of our gross income for federal income tax purposes must consist ofqualifying investment income. The Taxable Subsidiary is taxed at normal corporate tax rates based on its taxable income. We focus on investing in companies with histories of generating revenues and positive cash flow, establishedmarket positions and proven management teams with strong operating discipline. We target senior and subordinatedinvestments in the lower middle market, as well as first and second lien syndicated loans in upper middle marketcompanies. Our target lower middle market (“LMM”) companies typically have annual earnings before interest, taxes,depreciation and amortization (“EBITDA”) between $3.0 million and $15.0 million, and our LMM investments generallyrange in size from $5.0 million to $25.0 million. Our upper middle market (“UMM”) investments generally includesyndicated first and second lien loans in companies with EBITDA generally greater than $50.0 million and typically range insize from $5.0 million to $15.0 million. We make available significant managerial assistance to the companies in which weinvest as we believe that providing managerial assistance to an investee company is critical to its business developmentactivities. 74 Table of ContentsOn September 30, 2015, we completed the spin-off (the “Share Distribution”) of CSW Industrials, Inc. (“CSWI”).CSWI is now an independent publicly traded company. CSWI’s common stock trades on the Nasdaq Global Select Marketunder the ticker symbol “CSWI.” The Share Distribution was effected through a tax-free, pro-rata distribution of 100% ofCSWI’s common stock to shareholders of the Company. Each Company shareholder received one share of CSWI commonstock for every one share of Company common stock on the record date, September 18, 2015. Cash was paid in lieu of anyfractional shares of CSWI common stock. Following the Share Distribution, we have maintained operations as an internally managed BDC and pursue acredit-focused investing strategy akin to similarly structured organizations. We intend to continue to provide capital tomiddle-market companies. In the future, we intend to invest primarily in debt securities, including senior debt, second lienand subordinated debt, and may also invest in preferred stock and common stock alongside our debt investments or throughwarrants. Basis of Presentation The consolidated financial statements have been prepared in accordance with Generally Accepted AccountingPrinciples in the United States of America (“U.S. GAAP”). We meet the definition of an investment company and follow theaccounting and reporting guidance in the Financial Accounting Standards Board (“FASB”) Accounting StandardsCodification (“ASC”) Topic 946 – Financial Services – Investment Companies (“ASC Topic 946”). Under rules andregulations applicable to investment companies, we are generally precluded from consolidating any entity other thananother investment company, subject to certain exceptions. One of the exceptions to this general principle occurs if theinvestment company has an investment in an operating company that provides services to the investmentcompany. Accordingly, the consolidated financial statements include CSMC, our management company, and the TaxableSubsidiary. Portfolio Investment Classification We classify our investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “ControlInvestments” are generally defined as investments in which we own more than 25% of the voting securities or have rights tomaintain greater than 50% of the board representation; “Affiliate investments” are generally defined as investments in whichwe own between 5% and 25% of the voting securities; and “Non-Control/Non-Affiliate investments” are generally defined asinvestments that are neither “Control Investments” nor “Affiliate Investments.” Under the 1940 Act, a BDC must meet certain requirements, including investing at least 70% of our assets inqualifying assets. As of March 31, 2018, the Company has 82.0% of our assets in qualifying assets. The principal categoriesof qualifying assets relevant to our business are: (1) Securities purchased in transactions not involving any public offering from the issuer of such securities, whichissuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been duringthe preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to suchrules as may be prescribed by the SEC. (2) Securities of any eligible portfolio company that we control. (3) Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from anaffiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganizationor if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they came due withoutmaterial assistance other than conventional lending or financing arrangements. (4) Securities of an eligible portfolio company purchased from any person in a private transaction if there is noreadily available market for such securities and we already own 60% of the outstanding equity of the eligible portfoliocompany. (5) Securities received in exchange for or distributed on or with respect to securities described in (1) through75 Table of Contents(4) above, or pursuant to the exercise of warrants or rights relating to such securities. (6) Cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or lessfrom the time of investment. Additionally, in order to qualify as a RIC for U.S. federal income tax purposes, we must, among other things meetthe following tests: (1) Continue to qualify as a BDC under the 1940 Act at all times during each taxable year. (2) Derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect tocertain securities, loans, gains from the sale of stock or other securities, net income from certain “qualified publicly tradedpartnerships,” or other income derived with respect to our business of investing in such stock or securities (the “90% IncomeTest”). (3) Diversify our holdings in accordance with two Diversification Tests: (a) Diversify our holdings such that at theend of each quarter of the taxable year at least 50% of the value of our assets consists of cash, cash equivalents, U.S.Government securities, securities of other RICs, and such other securities if such other securities of any one issuer do notrepresent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer; and (b)Diversify our holdings such that no more than 25% of the value of our assets is invested in the securities, other than U.S.government securities or securities of other RICs, (i) of one issuer, (ii) of two or more issuers that are controlled, asdetermined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or(iii) of certain “qualified publicly traded partnerships” (collectively, the “Diversification Tests”). The two Diversification Tests must be satisfied quarterly. If a RIC satisfies the tests for one quarter, and then, duesolely to fluctuations in market value, fails to meet one of the tests in the next quarter, it retains RIC status. A RIC that fails tomeet the Diversification Tests as a result of a nonqualified acquisition may be subject to excess taxes unless the nonqualifiedacquisition is disposed of and the tests are satisfied within 30 days of the close of the quarter in which the tests are failed. This quarter we satisfied all RIC tests and have 17.0% in nonqualified assets according to measurement criteriaestablished in Section 851(d) of the Internal Revenue Code (as amended, the “IRC”). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies followed in the preparation of the consolidatedfinancial statements of CSWC. Fair Value Measurements We account for substantially all of our financial instruments at fair value in accordancewith ASC Topic 820 – Fair Value Measurements and Disclosures (“ASC Topic 820”). ASC Topic 820 defines fair value,establishes a framework used to measure fair value, and requires disclosures for fair value measurements, including thecategorization of financial instruments into a three-level hierarchy based on the transparency of valuation inputs. ASCTopic 820 requires disclosure of the fair value of financial instruments for which it is practical to estimate such value. Webelieve that the carrying amounts of our financial instruments such as cash, receivables and payables approximate the fairvalue of these items due to the short maturity of these instruments. This is considered a Level 1 valuation technique. Thecarrying value of our credit facility approximates fair value (Level 3 input). See Note 4 below for further discussion regardingthe fair value measurements and hierarchy. Investments Investments are stated at fair value and are reviewed and approved by our Board of Directors asdescribed in the footnotes to the Consolidated Schedule of Investments and Notes 3 and 4 below. Investments are recordedon a trade date basis. Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation Realized gains or lossesare measured by the difference between the net proceeds from the sale or redemption of an investment or a financial76 Table of Contentsinstrument and the cost basis of the investment or financial investment, without regard to unrealized appreciation ordepreciation previously recognized, and includes investments written off during the period net of recoveries and realizedgains or losses from in-kind redemptions. Net change in unrealized appreciation or depreciation reflects the net change inthe fair value of the investment portfolio and financial instruments and the reclassification of any prior period unrealizedappreciation or depreciation on exited investments and financial instruments to realized gains or losses. Cash and Cash Equivalents Cash and cash equivalents, which consist of cash and highly liquid investments with anoriginal maturity of three months or less at the date of purchase, are carried at cost, which approximates fair value. Cash maybe held in a money market fund from time to time, which is a Level 1 security. Cash and cash equivalents includes depositsat financial institutions. We deposit our cash balances in financial institutions and, at times, such balances may be in excessof the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. At March 31, 2018 and 2017, cash balances totaling$6.8 million and $19.6 million, respectively, exceeded FDIC insurance limits, subjecting us to risk related to the uninsuredbalance. All of our cash deposits are held at large established high credit quality financial institutions and managementbelieves that the risk of loss associated with any uninsured balances is remote. Segment Information We operate and manage our business in a singular segment. As an investment company, weinvest in portfolio companies in various industries and geographic areas as discussed in Note 3. Consolidation As permitted under Regulation S-X and ASC Topic 946, we generally do not consolidate ourinvestment in a portfolio company other than an investment company subsidiary or a controlled operating company whosebusiness consists of providing services to CSWC. Accordingly, we consolidated the results of CSWC’s wholly-ownedTaxable Subsidiary and CSWC’s wholly-owned management company, CSMC. Prior to its dissolution, we consolidated theresults of CSWC’s wholly-owned subsidiary, CSVC. All intercompany balances have been eliminated upon consolidation. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requiresmanagement to make estimates and assumptions that affect amounts reported in the consolidated financial statements andaccompanying notes. Actual results could differ from those estimates. We have identified investment valuation and revenuerecognition as our most critical accounting estimates. Interest and Dividend Income Interest and dividend income is recorded on an accrual basis to the extent amounts areexpected to be collected. Dividend income is recorded as dividends are declared by the portfolio company or at the point anobligation exists for the portfolio company to make a distribution. Discounts/premiums received to par on loans purchasedare capitalized and accreted or amortized into income over the life of the loan using the effective interest method. Inaccordance with our valuation policy, accrued interest and dividend income are evaluated quarterly for collectability. Whenwe do not expect the debtor to be able to service all of its debt or other obligations, we will generally establish a reserveagainst interest income receivable, thereby placing the loan or debt security on non-accrual status, and cease to recognizeinterest income on that loan or debt security until the borrower has demonstrated the ability and intent to pay contractualamounts due. If a loan or debt security’s status significantly improves regarding its ability to service debt or otherobligations, it will be restored to accrual basis. As of March 31, 2018 and 2017, we did not have any investments on non-accrual status or past due its contractual payment obligation. To maintain RIC tax treatment, non-cash sources of income such as accretion of interest income may need to be paidout to shareholders in the form of distributions, even though CSWC may not have collected the interest income. For the yearended March 31, 2018, approximately 2.4% of CSWC’s total investment income was attributable to non-cash interestincome for the accretion of discounts associated with debt investments, net of any premium reduction. For the year endedMarch 31, 2017, approximately 1.8% of CSWC’s total investment income was attributable to non-cash interest income forthe accretion of discounts associated with debt investments, net of any premium reduction. Payment-in-Kind Interest The Company currently holds, and expects to hold in the future, some investments in itsportfolio that contain payment-in-kind (“PIK”) interest and dividend provisions. The PIK interest and dividends, computedat the contractual rate specified in each loan agreement, are added to the principal balance of the loan, rather than being paidto the Company in cash, and are recorded as interest and dividend income. Thus, the actual collection of PIK interest anddividends may be deferred until the time of debt principal repayment or disposition of equity investment.77 Table of ContentsPIK interest and dividends, which are non-cash sources of income, are included in the Company’s taxable income andtherefore affect the amount the Company is required to distribute to stockholders to maintain its qualification as a RIC forfederal income tax purposes, even though the Company has not yet collected the cash. Generally, when current cash interestand/or principal payments on a loan become past due, or if the Company otherwise does not expect the borrower to be ableto service its debt and other obligations, the Company will place the investment on non-accrual status and will generallycease recognizing PIK interest and dividend income on that loan for financial reporting purposes until all principal andinterest have been brought current through payment or due to a restructuring such that the interest and dividend income isdeemed to be collectible. The Company writes off any accrued and uncollected PIK interest and dividends when it isdetermined that the PIK interest and dividends are no longer collectible. As of March 31, 2018 and 2017, we did not haveany investments on non-accrual status and have not written off any accrued and uncollected PIK interest and dividends. Forthe years ended March 31, 2018 and 2017, approximately 0.9% and 0.3%, respectively, of CSWC’s total investment incomewas attributable to non-cash PIK interest and dividend income. Debt Issuance Costs Debt issuance costs include commitment fees and other costs related to CSWC’s senior securedcredit facility and its notes (as discussed further in Note 5). The costs in connection with the credit facility have beencapitalized and are amortized into interest expense over the term of the credit facility. The costs in connection with the notesare a direct deduction from the related debt liability and amortized into interest expense over the term of the notes. Federal Income Taxes CSWC has elected and intends to comply with the requirements of the IRC necessary toqualify as a RIC. By meeting these requirements, we will not be subject to corporate federal income taxes on ordinaryincome distributed to shareholders. In order to qualify as a RIC, the company is required to timely distribute to itsshareholders at least 90% of investment company taxable income, as defined by the IRC, each year. Depending on the levelof taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year distributionsinto the next year and pay a 4% excise tax on such income. Any such carryover taxable income must be distributed through adividend declared prior to filing the final tax return related to the year that generated such taxable income. Investmentcompany taxable income generally differs from net income for financial reporting purposes due to temporary and permanentdifferences in the recognition of income and expenses. Investment company taxable income generally excludes netunrealized appreciation or depreciation, as investment gains and losses are not included in investment company taxableincome until they are realized. In addition to the requirement that we must annually distribute at least 90% of our investment company taxableincome, we may either distribute or retain our realized net capital gains from investments, but any net capital gains notdistributed may be subject to corporate level tax. We may decide to retain some or all of our long-term capital gains in excessof the amount required to be distributed. If we retain the capital gains, they are subject to a corporate tax rate of 35% and areclassified as a “deemed distribution” to our shareholders. With the tax reform legislation enacted on December 22, 2017 (the“Tax Reform”), deemed distributions will be subject to a corporate tax rate of 21% as of January 1, 2018. As an investmentcompany that qualifies as a RIC, federal income taxes payable on security gains that we elect to retain are accrued only onthe last day of our tax year, December 31. Any capital gains actually distributed to shareholders are generally taxable to theshareholders as long-term capital gains. See Note 6 for further discussion. CSMC, a wholly-owned subsidiary of CSWC, and the Taxable Subsidiary are not RICs and are required to pay taxesat the corporate rate of 34% as of December 31, 2017. Due to the Tax Reform, CSMC and the Taxable Subsidiary are nowrequired to pay taxes at the corporate rate of 21% as of January 1, 2018. For tax purposes, CSMC and the Taxable Subsidiaryhave elected to be treated as taxable entities, and therefore are not consolidated for tax purposes and are taxed at normalcorporate tax rates based on taxable income and, as a result of their activities, may generate income tax expense or benefit.The taxable income, or loss, of each of CSMC and the Taxable Subsidiary may differ from its book income, or loss, due totemporary book and tax timing differences and permanent differences. This income tax expense, or benefit, if any, and therelated tax assets and liabilities, are reflected in our consolidated financial statements. Management evaluates tax positions taken or expected to be taken in the course of preparing the Company’sconsolidated financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by theapplicable tax authority. Tax positions with respect to tax at the CSWC level not deemed to meet the “more-likely-than-not”threshold would be recorded as an expense in the current year. Management’s conclusions regarding tax positions78 Table of Contentswill be subject to review and may be adjusted at a later date based on factors including, but not limited to, on-going analysesof tax laws, regulations and interpretations thereof. The Company has concluded that it does not have any uncertain taxpositions that meet the recognition of measurement criteria of ASC 740, Income Taxes, (“ASC 740”) for the current period.Also, we account for interest and, if applicable, penalties for any uncertain tax positions as a component of income taxexpense. No interest or penalties expense was recorded during the years ended March 31, 2018, 2017 and 2016. Deferred Taxes Deferred tax assets and liabilities are recorded for losses or income at our taxable subsidiaries usingstatutory tax rates. A valuation allowance is provided against deferred tax assets when it is more likely than not that someportion or all of the deferred tax asset will not be realized. ASC 740 requires the effects of changes in tax rates and laws ondeferred tax balances to be recognized in the period in which the legislation was enacted. As such, we have accounted for thetax effects as a result of the enactment of the Tax Reform as of March 31, 2018. See Note 6 for further discussion. Stock-Based Compensation We account for our stock-based compensation using the fair value method, asprescribed by ASC Topic 718, Compensation – Stock Compensation. Accordingly, we recognize stock-based compensationcost on a straight-line basis for all share-based payments awards granted to employees. The fair value of stock options aredetermined on the date of grant using the Black-Scholes pricing model and are expensed over the requisite service period ofthe related stock options. For restricted stock awards, we measured the grant date fair value based upon the market price ofour common stock on the date of the grant. For restricted stock awards, we will amortize this fair value to share-basedcompensation expense over the vesting term. We recognized forfeitures as they occur. We issue new shares upon the exerciseof stock options. The unvested shares of restricted stock awarded pursuant to CSWC’s equity compensation plans areparticipating securities and are included in the basic and diluted earnings per share calculation. On October 26, 2010, wereceived an exemptive order from the SEC permitting us to issue restricted stock to our executive officers and certain keyemployees (the “Original Order”) .On August 22, 2017, we received an exemptive order that supersedes the Original Order(the “Exemptive Order”) and, in addition to the relief granted under the Original Order, allows us to withhold shares to satisfytax withholding obligations related to the vesting of restricted stock granted pursuant to the 2010 Restricted Stock AwardPlan (the “2010 Plan”) and to pay the exercise price of options to purchase shares of our common stock granted pursuant tothe 2009 Stock Incentive Plan (the “2009 Plan”). At the years ended March 31, 2018, 2017 and 2016, weighted-average basic shares were adjusted for the dilutedeffect of stock-based awards of 64,899, 52,452 and 88,020, respectively. For individual cash incentive awards, the optionvalue of the individual cash incentive awards is calculated based on the changes in net asset value of our Company. Inconnection with the Share Distribution, we entered into an Employee Matters Agreement (the “Employee MattersAgreement”) with CSWI. Under the Employee Matters Agreement, the value of individual cash incentive awards wasdetermined based upon the net asset value of CSWC as of June 30, 2015. See Note 9 for further discussion. Shareholder Distributions Distributions to common shareholders are recorded on the ex-dividend date. The amountof distributions, if any, is determined by the Board of Directors each quarter and is generally based upon the earningsestimated by management. Net realized capital gains, if any, are generally distributed, although the Company may decide toretain such capital gains for investment. Presentation Presentation of certain amounts on the Consolidated Financial Statements for the prior yearcomparative financial statements is updated to conform to the current period presentation. This mainly includes disclosureof amounts at a more disaggregated level. Recently Issued or Adopted Accounting Standards In February 2016, the FASB issued ASU 2016-02, Leases, whichrequires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for thelease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative andquantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. Thestandard requires the use of a modified retrospective transition approach, which includes a number of optional practicalexpedients that entities may elect to apply. The new guidance is effective for annual periods beginning after December 15,2018, and interim periods therein. Early application is permitted. While we continue to assess the effect of adoption, wecurrently believe the single change relates to the recognition of a new right-of-use asset and lease liability79 Table of Contentson our consolidated balance sheet for our office space operating lease. We currently have one operating lease for office spaceand do not expect a significant change in our leasing activity between now and adoption. See further discussion of ouroperating lease obligation in "Note 12 — Commitments and Contingences" in the notes to the consolidated financialstatements. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09supersedes the revenue recognition requirements under SAC Topic 605, Revenue Recognition, and most industry-specificguidance throughout the Industry Topics of the ASC. The core principle of the guidance is that an entity should recognizerevenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration towhich an entity expects to be entitled in exchange for those goods or services. Under the new guidance, an entity is requiredto perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations inthe contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in thecontract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The new guidance willsignificantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capitalmarkets. Additionally, the guidance requires improved disclosures as to the nature, amount, timing and uncertainty ofrevenue that is recognized. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic606)—Narrow-Scope Improvements and Practical Expedients. This ASU clarified guidance on assessing collectability,presenting sales tax, measuring noncash consideration, and certain transition matters. The new guidance will be effective forthe annual reporting period beginning after December 15, 2017, including interim periods within that reporting period.CSWC is still completing its assessment; however, in evaluating the potential impact on its consolidated financialstatements, the Company determined that its material financial contracts are excluded from the scope of ASU 2014-09. As aresult of the scope exception for financial contracts, the Company's management has determined that there will be nomaterial changes to the recognition timing and classification of revenues and expenses; additionally, the adoption of ASU2014-09 will not have a significant impact to pretax income upon adoption or on the consolidated financial statementdisclosures. In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), which is intended to reducethe existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statementof cash flows. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods therein.The adoption of this new accounting standard will not have a material impact on the Company’s consolidated financialstatements.80 Table of Contents 3. INVESTMENTS The following tables show the composition of the investment portfolio, at cost and fair value (with correspondingpercentage of total portfolio investments), as of March 31, 2018 and 2017: Percentage of Percentage of Total Portfolio Percentage of Total Portfolio FairValue at Fair Value Net Assets Cost at Cost (dollars in thousands) March 31, 2018: First lien loans $197,110 50.1% 63.9% $194,820 58.1%Second lien loans 23,229 5.9 7.5 23,092 6.9 Subordinated debt 18,783 4.8 6.1 18,885 5.6 Preferred equity 36,545 9.3 11.9 16,666 5.0 Common equity & warrants 50,315 12.8 16.3 17,134 5.1 I-45 SLF LLC 67,113 17.1 21.8 64,800 19.3 $393,095 100.0% 127.5% $335,397 100.0% March 31, 2017: First lien loans $107,817 37.6% 37.8% $106,799 42.6%Second lien loans 47,176 16.5 16.6 46,856 18.7 Subordinated debt 12,453 4.3 4.4 12,402 4.9 Preferred equity 19,343 6.7 6.4 15,782 6.3 Common equity & warrants 36,696 12.8 13.2 7,901 3.2 I-45 SLF LLC 63,395 22.1 22.2 60,800 24.3 $286,880 100.0% 100.6% $250,540 100.0%1Included in first lien loans are loans structured as first lien last out loans. These loans may in certain cases be subordinated in paymentpriority to other senior secured lenders. As of March 31, 2018 and 2017, the fair value of the first lien last out loans are $26.9 million and$21.8 million, respectively.2I-45 SLF LLC is a joint venture between CSWC and Main Street Capital. This entity primarily invests in syndicated senior secured loansin the upper middle market. The portfolio companies held by I-45 SLF LLC represent a diverse set of industry classifications, which aresimilar to those in which CSWC invests directly. See Note 17 for further discussion.3Presentation of March 31, 2017 disclosure is updated to conform to the current period presentation. 81 1232Table of ContentsThe following tables show the composition of the investment portfolio by industry, at cost and fair value (withcorresponding percentage of total portfolio investments), as of March 31, 2018 and 2017: Percentage of Percentage of Total Portfolio Percentage of Total Portfolio Fair Value at Fair Value Net Assets Cost at Cost (dollars in thousands) March 31, 2018: I-45 SLF LLC $67,113 17.1% 21.8% $64,800 19.3%Media, Marketing, & Entertainment 46,697 11.9 15.1 43,700 13.0 Industrial Products 43,122 11.0 14.0 5,415 1.6 Business Services 34,846 8.9 11.3 34,268 10.2 Energy Services (Upstream) 27,919 7.1 9.1 14,130 4.2 Distribution 26,713 6.8 8.7 27,002 8.1 Consumer Products and Retail 24,570 6.2 7.9 25,086 7.5 Environmental Services 21,160 5.4 6.9 21,410 6.4 Healthcare Services 16,751 4.3 5.4 16,448 4.9 Financial Services 12,701 3.2 4.1 12,216 3.6 Healthcare Products 12,353 3.1 4.0 12,162 3.6 Transportation & Logistics 12,284 3.1 4.0 12,275 3.7 Industrial Services 10,012 2.5 3.2 9,721 2.9 Food, Agriculture & Beverage 9,438 2.4 3.1 9,507 2.8 Telecommunications 8,295 2.1 2.7 8,180 2.4 Software & IT Services 6,285 1.6 2.0 6,273 1.9 Consumer Services 5,000 1.3 1.6 4,968 1.5 Restaurants 4,836 1.2 1.6 4,886 1.5 Paper & Forest Products 3,000 0.8 1.0 2,950 0.9 $393,095 100.0% 127.5% $335,397 100.0% March 31, 2017: I-45 SLF LLC $63,395 22.1% 22.2% $60,800 24.3%Industrial Products 44,664 15.6 15.7 12,269 4.9 Media, Marketing, & Entertainment 32,254 11.2 11.3 32,154 12.8 Distribution 20,911 7.3 7.3 20,835 8.3 Consumer Products & Retail 18,396 6.4 6.4 18,275 7.3 Business Services 13,999 4.9 4.9 12,843 5.1 Energy Services (Upstream) 12,733 4.4 4.5 13,963 5.6 Software & IT Services 11,958 4.2 4.2 11,825 4.7 Environmental Services 10,126 3.5 3.6 10,126 4.0 Food, Agriculture & Beverage 9,900 3.5 3.5 9,721 3.9 Paper & Forest Products 9,835 3.4 3.4 9,808 3.9 Gaming & Leisure 8,761 3.1 3.1 8,506 3.4 Telecommunications 8,686 3.0 3.0 8,489 3.4 Restaurants 8,458 2.9 2.9 8,378 3.4 Consumer Services 5,029 1.8 1.8 4,955 2.0 Healthcare Products 5,000 1.7 1.8 4,871 1.9 Financial Services 2,775 1.0 1.0 2,722 1.1 $286,880 100.0% 100.6% $250,540 100.0%1I-45 SLF LLC is a joint venture between CSWC and Main Street Capital. This entity primarily invests in syndicated senior secured loansto the UMM. The portfolio companies in I-45 SLF LLC include multi-sector holdings, which are similar to those in which CSWC investsdirectly. See Note 17 for further discussion. 82 11Table of ContentsThe following tables summarize the composition of the investment portfolio by geographic region of the UnitedStates, at cost and fair value (with corresponding percentage of total portfolio investments), as of March 31, 2018 and 2017: Percentage of Percentage of Total Portfolio Percentage of Total Portfolio Fair Value at Fair Value Net Assets Cost at Cost (dollars in thousands) March 31, 2018: Southwest $131,753 33.5% 42.7% $79,713 23.8%Southeast 84,969 21.6 27.6 84,290 25.1 Northeast 72,205 18.4 23.4 69,739 20.8 I-45 SLF LLC 67,113 17.1 21.8 64,800 19.3 West 23,554 6.0 7.6 23,425 7.0 Midwest 13,501 3.4 4.4 13,430 4.0 $393,095 100.0% 127.5% $335,397 100.0% March 31, 2017: Southwest $82,576 28.8% 29.0% $50,024 20.0%I-45 SLF LLC 63,395 22.1 22.2 60,800 24.3 Northeast 43,695 15.2 15.3 43,516 17.4 Southeast 38,479 13.4 13.5 38,180 15.2 West 30,327 10.6 10.6 30,168 12.0 Midwest 28,408 9.9 10.0 27,852 11.1 $286,880 100.0% 100.6% $250,540 100.0%1I-45 SLF LLC is a joint venture between CSWC and Main Street Capital. This entity primarily invests in syndicated senior secured loansto the UMM. The portfolio companies in I-45 SLF LLC represent a diverse set of industry classifications, which are similar to those inwhich CSWC invests directly. See Note 17 for further discussion.2Presentation of March 31, 2017 disclosure is updated to conform to the current period presentation. 4. FAIR VALUE MEASUREMENTS Investment Valuation Process The valuation process is led by the finance department in conjunction with the investment team. The processincludes a monthly review of each investment by our executive officers and investment teams. Valuations of each portfoliosecurity are prepared quarterly by the finance department using updated financial and other operational informationcollected by the investment teams. Each investment valuation is then subject to review by the executive officers andinvestment teams. In conjunction with the internal valuation process, we have also engaged multiple independentconsulting firms specializing in financial due diligence, valuation, and business advisory services to provide third-partyvaluation reviews of certain investments. The third-party valuation firms provide a range of values for selected investments,which is presented to CSWC’s executive officers and Board of Directors. CSWC also uses a standard internal investment rating system in connection with its investment oversight, portfoliomanagement, and investment valuation procedures for its debt portfolio. This system takes into account both quantitativeand qualitative factors of the portfolio company and the investments held therein. There is no single standard for determining fair value in good faith, as fair value depends upon the specificcircumstances of each individual investment. While management believes our valuation methodologies are appropriate andconsistent with market participants, the recorded fair values of our investments may differ significantly from fair values thatwould have been used had an active market for the securities existed. In addition, changes in the market environment andother events that may occur over the life of the investments may cause the gains or losses ultimately realized on theseinvestments to be different than the valuations currently assigned. The Board of Directors has the ultimate83 121Table of Contentsresponsibility for reviewing and approving, in good faith, the fair value of CSWC’s investments in accordance with the 1940Act. Fair Value Hierarchy CSWC has established and documented processes for determining the fair values of portfolio company investmentson a recurring basis in accordance with the 1940 Act and ASC Topic 820. As required by ASC Topic 820, when the inputsused to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement iscategorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, aLevel 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3).Therefore, unrealized appreciation and depreciation related to such investments categorized within the Level 3 tables belowmay include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs(Level 3). CSWC conducts reviews of fair value hierarchy classifications on a quarterly basis. We also use judgment andconsider factors specific to the investment in determining the significance of an input to a fair value measurement. The three levels of valuation inputs established by ASC Topic 820 are as follows: ·Level 1: Investments whose values are based on unadjusted quoted prices in active markets for identical assets orliabilities. ·Level 2: Investments whose values are based on quoted prices for similar assets and liabilities in active markets, andinputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of thefinancial instrument. ·Level 3: Investments whose values are based on unobservable inputs that are significant to the overall fair valuemeasurement. As of March 31, 2018 and 2017, 100% of the CSWC investment portfolio consisted of debt and equity instrumentsof privately held companies for which inputs falling within the categories of Level 1 and Level 2 are generally not available.Therefore, CSWC determines the fair value of its investments (excluding investments for which fair value is measured atNAV) in good faith using Level 3 inputs, pursuant to a valuation policy and process that is established by the managementof CSWC with assistance from multiple third-party valuation advisors, which is subsequently approved by our Board ofDirectors. Investment Valuation Inputs ASC Topic 820 defines fair value in terms of the price that would be received upon the sale of an asset or paid totransfer a liability in an orderly transaction between market participants at the measurement date excluding transaction costs.Under ASC Topic 820, the fair value measurement also assumes that the transaction to sell an asset occurs in the principalmarket for the asset or, in the absence of a principal market, the most advantageous market for the asset. The principal marketis the market in which the reporting entity would sell or transfer the asset with the greatest volume and level of activity forthe asset. In determining the principal market for an asset or liability under ASC Topic 820, it is assumed that the reportingentity has access to the market as of the measurement date. The Level 3 inputs to CSWC’s valuation process reflect our best estimate of the assumptions that would be used bymarket participants in pricing the investment in a transaction in the principal or most advantageous market for the asset. The fair value determination of each portfolio investment categorized as Level 3 required one or more of thefollowing unobservable inputs: ·Financial information obtained from each portfolio company, including unaudited statements of operations andbalance sheets for the most recent period available as compared to budgeted numbers;·Current and projected financial condition of the portfolio company;84 Table of Contents·Current and projected ability of the portfolio company to service its debt obligations;·Type and amount of collateral, if any, underlying the investment;·Current financial ratios (e.g., fixed charge coverage ratio, interest coverage ratio and net debt/EBITDA ratio)applicable to the investment;·Current liquidity of the investment and related financial ratios (e.g., current ratio and quick ratio);·Indicative dealer quotations from brokers, banks, and other market participants;·Market yields on other securities of similar risk;·Pending debt or capital restructuring of the portfolio company;·Projected operating results of the portfolio company;·Current information regarding any offers to purchase the investment;·Current ability of the portfolio company to raise any additional financing as needed;·Changes in the economic environment which may have a material impact on the operating results of theportfolio company;·Internal occurrences that may have an impact (both positive and negative) on the operating performance of theportfolio company;·Qualitative assessment of key management;·Contractual rights, obligations or restrictions associated with the investment; and·Other factors deemed relevant. CSWC uses several different valuation approaches depending on the security type including the Market Approach,the Income Approach, the Enterprise Value Waterfall Approach, and the NAV Valuation Method. Market Approach Market Approach is a qualitative and quantitative analysis of the aforementioned unobservable inputs. It is acombination of the Enterprise Value Waterfall Approach and Income Approach as described in detail below. For investmentsrecently originated (within a quarterly reporting period) or where the value has not departed significantly from its cost, wegenerally rely on our cost basis or recent transaction price to determine the fair value, unless a material event has occurredsince origination. Income Approach In valuing debt securities, CSWC typically uses an Income Approach model, which considers some or all of thefactors listed above. Under the Income Approach, CSWC develops an expectation of the yield that a hypothetical marketparticipant would require when purchasing each debt investment (the “Required Market Yield”). The Required Market Yieldis calculated in a two-step process. First, using quarterly market data we estimate the current market yield of similar debtsecurities. Next, based on the factors described above, we modify the current market yield for each security to produce aunique Required Market Yield for each of our investments. The resulting Required Market Yield is the significant Level 3input to the Income Approach model. If, with respect to an investment, the unobservable inputs have not fluctuatedsignificantly from the date the investment was made or have not fluctuated significantly from CSWC’s expectations on thedate the investment was made, and there have been no significant fluctuations in the market pricing for such investments, wemay conclude that the Required Market Yield for that investment is equal to the stated rate on the investment. In instanceswhere CSWC determines that the Required Market Yield is different from the stated rate on the investment, we discount thecontractual cash flows on the debt instrument using the Required Market Yield in order to estimate the fair value of the debtsecurity. In addition, under the Income Approach, CSWC also determines the appropriateness of the use of third-party brokerquotes, if any, as a significant Level 3 input in determining fair value. In determining the appropriateness of the use of third-party broker quotes, CSWC evaluates the level of actual transactions used by the broker to develop the quote, whether thequote was an indicative price or binding offer, the depth and consistency of broker quotes, the source of the broker quotes,and the correlation of changes in broker quotes with underlying performance of the portfolio company and other marketindices. To the extent sufficient observable inputs are available to determine fair value, CSWC may use third-party brokerquotes or other independent pricing to determine the fair value of certain debt investments.85 Table of Contents Fair value measurements using the Income Approach model can be sensitive to significant changes in one or more ofthe inputs. A significant increase (decrease) in the Required Market Yield for a particular debt security may result in a lower(higher) fair value for that security. A significant increase (decrease) in a third-party broker quote for a particular debt securitymay result in a higher (lower) value for that security. Enterprise Value Waterfall Approach In valuing equity securities (including warrants), CSWC estimates fair value using an Enterprise Value Waterfallvaluation model. CSWC estimates the enterprise value of a portfolio company and then allocates the enterprise value to theportfolio company’s securities in order of their relative liquidation preference. In addition, CSWC assumes that anyoutstanding debt or other securities that are senior to CSWC’s equity securities are required to be repaid at par. Additionally,we may estimate the fair value of non-performing debt securities using the Enterprise Value Waterfall approach as needed. To estimate the enterprise value of the portfolio company, CSWC uses a weighted valuation model based on publiccomparable companies, observable transactions and discounted cash flow analyses. A main input into the valuation model isa measure of the portfolio company’s financial performance, which generally is either earnings before interest, taxes,depreciation and amortization, as adjusted (“Adjusted EBITDA”) or revenues. In addition, we consider other factors,including but not limited to (1) offers from third parties to purchase the portfolio company, and (2) the implied value ofrecent investments in the equity securities of the portfolio company. For certain non-performing assets, we may utilize theliquidation or collateral value of the portfolio company’s assets in our estimation of its enterprise value. The significant Level 3 inputs to the Enterprise Value Waterfall model are (1) an appropriate multiple derived fromthe comparable public companies and transactions, (2) discount rate assumptions used in the discounted cash flow model and(3) a measure of the portfolio company’s financial performance, which generally is either Adjusted EBITDA or revenues.Inputs can be based on historical operating results, projections of future operating results or a combination thereof. Theoperating results of a portfolio company may be unaudited, projected or pro forma financial information and may requireadjustments for certain non-recurring items. CSWC also may consult with the portfolio company’s senior management toobtain updates on the portfolio company’s performance, including information such as industry trends, new productdevelopment, loss of customers and other operational issues. Fair value measurements using the Enterprise Value Waterfallmodel can be sensitive to significant changes in one or more of the inputs. A significant increase (decrease) in either themultiple, Adjusted EBITDA or revenues for a particular equity security would result in a higher (lower) fair value for thatsecurity. NAV Valuation Method Under the NAV valuation method, for an investment in an investment fund that does not have a readilydeterminable fair value, CSWC measures the fair value of the investment predominately based on the NAV of the investmentfund as of the measurement date. However, in determining the fair value of the investment, we may consider whetheradjustments to the NAV are necessary in certain circumstances, based on the analysis of any restrictions on redemption of ourinvestment as of the measurement date, recent actual sales or redemptions of interests in the investment fund, expected futurecash flows available to equity holders, or other uncertainties surrounding CSWC’s ability to realize the full NAV of itsinterests in the investment fund.86 Table of ContentsThe following fair value hierarchy tables set forth our investment portfolio by level as of March 31, 2018 and March31, 2017 (in thousands): Fair Value Measurements at March 31, 2018 Using Quoted Prices in Significant Active Markets Other Significant for Identical Observable Unobservable Assets Inputs Inputs Asset Category Total (Level 1) (Level 2) (Level 3) First lien loans $197,110 $− $− $197,110 Second lien loans 23,229 − − 23,229 Subordinated debt 18,783 − − 18,783 Preferred equity 36,545 − − 36,545 Common equity & warrants 50,315 − − 50,315 Investments measured at net asset value 67,113 − − − Total Investments $393,095 $− $− $325,982 Fair Value Measurements at March 31, 2017 Using Quoted Prices in Significant Active Markets Other Significant for Identical Observable Unobservable Assets Inputs Inputs Asset Category Total (Level 1) (Level 2) (Level 3) First lien loans $107,817 $− $− $107,817 Second lien loans 47,176 − − 47,176 Subordinated debt 12,453 − − 12,453 Preferred equity 19,343 19,343 Common equity & warrants 36,696 − − 36,696 Investments measured at net asset value 63,395 − − − Total Investments $286,880 $− $− $223,485 1Certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not beencategorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair valuehierarchy to the amounts presented in Consolidated Statements of Assets and Liabilities. For the investment valued at net asset value pershare at March 31, 2018 and 2017, the redemption restrictions dictate that we cannot withdraw our membership interest withoutunanimous approval. We are permitted to sell or transfer our membership interest and must deliver written notice of such transfer to theother member no later than 60 business days prior to the sale or transfer.2Presentation of March 31, 2017 disclosure updated to conform to current period presentation.87 121Table of Contents The table below presents the Valuation Techniques and Significant Level 3 Inputs (ranges and weighted averages)used in the valuation of CSWC’s debt and equity securities at March 31, 2018 and March 31, 2017. The table is notintended to be all inclusive, but instead captures the significant unobservable inputs relevant to our determination of fairvalue. Fair Value at Significant Valuation 3/31/2018 Unobservable Weighted Type Technique (in thousands) Inputs Range Average First lien loans Income Approach $181,595 Discount Rate 9.5% - 17.0% 12.8% Third Party BrokerQuote 98.2 - 101.8 100.3 Market Approach 15,515 Cost 98.0 - 98.1 98.0 Second lien loans Income Approach 18,229 Discount Rate 11.6% -11.6% 11.6% Third Party BrokerQuote 93.5 - 100.0 96.0 Market Approach 5,000 Exit Value 100.0 100.0 Subordinated debt Income Approach 18,783 Discount Rate 12.4% -13.8% 12.9% Preferred equity Enterprise ValueWaterfallApproach 36,545 EBITDA Multiple 5.1x - 9.3x 6.9x Discount Rate 15.0% -32.1% 20.2% Common equity & warrants Enterprise ValueWaterfallApproach 47,123 EBITDA Multiple 6.0x - 8.4x 8.1x Discount Rate 15.7% -21.6% 20.6% Market Approach 3,192 Cost 100.0 100.0 Total Level 3 Investments $325,982 Fair Value at Significant Valuation 3/31/2017 Unobservable Weighted Type Technique (in thousands) Inputs Range Average First lien loans Income Approach $73,065 Discount Rate 7.7% - 12.6% 11.1% Third Party BrokerQuote 99.8 - 101.3 100.3 Market Approach 34,752 Cost 90.0 - 98.0 95.6 Second lien loans Income Approach 47,176 Discount Rate 9.5% - 12.6% 11.0% Third Party BrokerQuote 97.5 - 100.8 99.2 Subordinated debt Income Approach 12,453 Discount Rate 11.5% -12.3% 11.8% Preferred equity Enterprise ValueWaterfallApproach 19,343 EBITDA Multiple 3.5x - 9.2x 5.8x Discount Rate 14.1% -27.8% 20.2% Common equity & warrants Enterprise ValueWaterfallApproach 36,696 EBITDA Multiple 5.8x - 8.3x 8.0x Discount Rate 16.0% -17.0% 16.1% Total Level 3 Investments $223,485 Changes in Fair Value Levels We monitor the availability of observable market data to assess the appropriate classification of financial instrumentswithin the fair value hierarchy. Changes in economic conditions or model based valuation techniques may require the transferof financial instruments from one fair value to another. We recognize transfer of financial instruments between levels at theend of each quarterly reporting period. During the years ended March 31, 2018 and 2017, we had no transfers between levels.88 Table of Contents The following table provides a summary of changes in the fair value of investments measured using Level 3 inputsduring the years ended March 31, 2018 and 2017 (in thousands): Realized & Fair Value Unrealized Purchases of PIK Interest Fair Value at 3/31/2017 Gains (Losses) Investments Repayments Earned Divestitures 3/31/2018First lien loans $107,817 $2,086 $128,894 $(41,687) $ $ — $197,110Second lien loans 47,176 367 9,865 (34,179) — 23,229Subordinated debt 12,453 (39) 14,458 (8,100) 11 — 18,783Preferred equity 19,343 16,319 588 — 295 — 36,545Common equity & warrants 36,696 4,401 9,233 — — (15) 50,315Total Investments $223,485 $23,134 $163,038 $(83,966) $306 $(15) $325,982 Realized & Conversion of Fair Value Unrealized Purchases of Security from Fair Value at 3/31/2016 Gains (Losses) Investments Repayments Divestitures Debt to Equity 3/31/2017First lien loans $39,491 $2,332 $102,159 $(36,165) $− $− $107,817Second lien loans 38,227 1,277 17,229 (7,050) (2,507) - 47,176Subordinated debt 15,114 80 34 (60) − (2,715) 12,453Preferred equity 13,155 2,410 1,063 − − 2,715 19,343Common equity & warrants 36,112 6,490 2,049 − (7,955) − 36,696Total Investments $142,099 $12,589 $122,534 $(43,275) $(10,462) $− $223,4851Includes purchases of new investments, as well as discount accretion on existing investments. The total net unrealized gains (excluding reversals) included in earnings that related to assets still held at the reportdate for the years ended March 31, 2018 and 2017 were $22.0 million and $12.5 million, respectively. 5. BORROWINGS In accordance with the 1940 Act, with certain limitations, the Company is only allowed to borrow amounts such thatits asset coverage, calculated pursuant to the 1940 Act, is at least 200% (or, pursuant to recent legislation, 150% if certainrequirements are met as described in the Business Section under “Regulation as a Business Development Company-SeniorSecurities”) after such borrowing. As of March 31, 2018, the Company’s asset coverage was 416%. The Company had the following borrowings outstanding as of March 31, 2018 and March 31, 2017 (amounts inthousands): March 31, 2018 March 31, 2017 Credit Facility $40,000 $25,000 December 2022 Notes $57,500 $ —Less: Unamortized debt issuance costs and debt discount (2,195) —Total Notes $55,305 $ — Credit Facility In August 2016, CSWC entered into a senior secured credit facility (as amended, restated, supplemented orotherwise modified from time to time, the “Credit Facility”) to provide additional liquidity to support its investment andoperational activities, which included total commitments of $100.0 million. The Credit Facility contained an accordionfeature that allowed CSWC to increase the total commitments under the facility up to $150.0 million from new and existing89 11Table of Contentslenders on the same terms and conditions as the existing commitments. In August 2017, we increased our total commitmentsby $15 million through adding an additional lender using the accordion feature. On November 16, 2017, CSWC entered into Amendment No. 1 (the “Amendment”) to its Credit Facility. Prior to theAmendment, borrowings under the Credit Facility accrued interest on a per annum basis at a rate equal to the applicableLIBOR rate plus 3.25% with no LIBOR floor. CSWC paid unused commitment fees of 0.50% to 1.50% per annum, based onutilization, on the unused lender commitments under the Credit Facility. The Amendment (1) increased the total borrowingcapacity under the Credit Facility to $180 million, with commitments from a diversified group of eight lenders, (2) increasedthe Credit Facility’s accordion feature that allows for an increase in total commitments of up to $250 million under the CreditFacility from new and existing lenders on the same terms and conditions as the existing commitments, (3) reduced theinterest rate on borrowings to LIBOR plus 3.00%, with a step-down to LIBOR plus 2.75% at the time the Company’s networth exceeds $325 million, (4) reduced unused commitment fees to a range from 0.50% to 1.0% per annum based onutilization, and (5) extended the Credit Facility’s revolving period that ended on August 30, 2019 through November 16,2020. Additionally, the final maturity of the Credit Facility was extended from August 30, 2020 to November 16, 2021.Subsequent to March 31, 2018, on April 16, 2018 and May 11, 2018, CSWC entered into Incremental AssumptionAgreements, which increased the total commitments under the Credit Facility by $20 million and $10 million, respectively.The increases were executed under the accordion feature of the Credit Facility and increased total commitments from $180million to $210 million. The Credit Facility contains certain affirmative and negative covenants, including but not limited to: (1) certainreporting requirements, (2) maintaining RIC and BDC status, (3) maintaining a minimum shareholders’ equity, (4)maintaining a minimum consolidated net worth, (5) maintaining an asset coverage of not less than 200%, (6) maintaining aconsolidated interest coverage ratio of at least 2.5 to 1.0, and (7) at any time the outstanding advances exceed 90% of theborrowing base, maintaining a minimum liquidity of not less than 10% of the covered debt amount. The Credit Facility also contains customary events of default, including, without limitation, nonpayment,misrepresentation of representations and warranties in a material respect, breach of covenant, bankruptcy, and change ofcontrol, with customary cure and notice provisions. If the Company defaults on its obligations under the Credit Facility, thelenders may have the right to foreclose upon and sell, or otherwise transfer, the collateral subject to their security interests.There are no changes to the covenants or the events of default in the Credit Facility as a result of the Amendment. The Credit Facility is secured by (1) substantially all of the present and future property and assets of the Companyand the guarantors and (2) 100% of the equity interests in the Company’s wholly-owned subsidiaries. As of March 31, 2018,substantially all of the Company’s assets were pledged as collateral for the Credit Facility. At March 31, 2018, CSWC had $40.0 million in borrowings outstanding under the Credit Facility. CSWCrecognized interest expense related to the Credit Facility, including unused commitment fees and amortization of deferredloan costs of $3.7 million and $1.0 million, respectively, for the years ended March 31, 2018 and 2017. The weightedaverage interest rate on the Credit Facility was 4.66% and 4.28%, respectively, for the years ended March 31, 2018 and 2017.Average borrowings for the years ended March 31, 2018 and 2017 were $42.2 million and $17.8 million, respectively. As ofMarch 31, 2018, CSWC was in compliance with all financial covenants under the Credit Facility. December 2022 Notes In December 2017, the Company issued $57.5 million in aggregate principal amount, including the underwriters’full exercise of their option to purchase additional principal amounts to cover over-allotments, of 5.95% Notes due 2022 (the“December 2022 Notes”). The December 2022 Notes mature on December 15, 2022 and may be redeemed in whole or in partat any time, or from time to time, at the Company’s option on or after December 15, 2019. The December 2022 Notes bearinterest at a rate of 5.95% per year, payable quarterly on March 15, June 15, September 15 and December 15 of each year,beginning on March 15, 2018. The December 2022 Notes are an unsecured obligation, rank pari passu with our otheroutstanding and future unsecured unsubordinated indebtedness and are effectively subordinated to all of our existing andfuture secured indebtedness, including borrowings under our Credit Facility. As of March 31, 2018, the carrying amount of the December 2022 Notes was $55.3 million. As of March 31,90 Table of Contents2018, the fair value of the December 2022 Notes was $58.4 million. The fair value is based on the closing price of thesecurity of The Nasdaq Global Select Market, which is a Level 1 input under ASC 820. The Company recognized interestexpense related to the December 2022 Notes, including amortization of deferred issuance costs, of $1.2 million for the yearended March 31, 2018. The indenture governing the December 2022 Notes contains certain covenants including but not limited to (i) arequirement that the Company comply with the asset coverage requirement of Section 61 of the 1940 Act or any successorprovisions thereto, after giving effect to any exemptive relief granted to the Company by the Securities and ExchangeCommission (“SEC”), (ii) a requirement, subject to limited exception, that the Company will not declare any cash dividend,or declare any other cash distribution, upon a class of its capital stock, or purchase any such capital stock, unless, in everysuch case, at the time of the declaration of any such dividend or distribution, or at the time of any such purchase, theCompany has the minimum asset coverage required pursuant to Section 61 of the 1940 Act or any successor provisionsthereto after deducting the amount of such dividend, distribution or purchase price, as the case may be, giving effect to anyexemptive relief granted to the Company by the SEC and (iii) a requirement to provide financial information to the holdersof the December 2022 Notes and the trustee under the indenture if the Company should no longer be subject to the reportingrequirements under the Securities Exchange Act of 1934, as amended. The indenture and supplement relating to theDecember 2022 Notes also provides for customary events of default. As of March 31, 2018, the Company was in compliancewith all covenants of the December 2022 Notes. 6. INCOME TAXES We have elected to be treated as a RIC under Subchapter M of the IRC and have a tax year end of December 31. Inorder to qualify as a RIC, we must annually distribute at least 90% of our investment company taxable income, as defined bythe IRC, to our shareholders in a timely manner. Investment company income generally includes net short-term capital gainsbut excludes net long-term capital gains. A RIC is not subject to federal income tax on the portion of its ordinary incomeand long-term capital gains that is distributed to its shareholders, including “deemed distributions” as discussed below. Aspart of maintaining RIC status, undistributed taxable income, which is subject to a 4% non-deductible U.S. federal excisetax, pertaining to a given fiscal year may be distributed up to 12 months subsequent to the end of that fiscal year, providedsuch dividends are declared on or prior to the later of (1) the filing of the U.S federal income tax return for the applicablefiscal year or (2) the fifteenth day of the ninth month following the close of the year in which such taxable income wasgenerated. For the tax years ended December 31, 2017, 2016 and 2015, CSWC qualified to be taxed as a RIC. We intend tomeet the applicable qualifications to be taxed as a RIC in future periods. However, the company’s ability to meet certainportfolio diversification requirements of RICs in future years may not be controllable by the company. We have distributed or intend to distribute sufficient dividends to eliminate taxable income for our completed taxyears. If we fail to satisfy the 90% distribution requirement or otherwise fail to qualify as a RIC in any tax year, we would besubject to tax in that year on all of our taxable income, regardless of whether we made any distributions to our shareholders.During the quarter ended March 31, 2018, CSWC declared regular dividends in the amount of $4.5 million, or $0.28 pershare. During the tax year ended December 31, 2017, we declared total dividends of $18.3 million or $1.16 per share. Wedeclared quarterly dividends of $0.45 ($0.19 in regular dividends and $0.26 in supplemental dividends) in March 2017,$0.21 in June 2017, $0.24 in September 2017, and $0.26 in December 2017. For the tax year ended December 31, 2016, wedeclared total dividends of $6.0 million or $0.38 per share. We declared quarterly dividends of $0.04 per share in March2016, $0.06 per share in June 2016, $0.11 per share in September 2016, and $0.17 per share in December 2016. For the taxyear ended December 31, 2015, we declared total dividends of $1.5 million, or $0.10 per share, in May 2015. 91 Table of ContentsBook and tax basis differences relating to stockholder dividends and distributions and other permanent book andtax differences are typically reclassified among the CSWC’s capital accounts. In addition, the character of income and gainsto be distributed is determined in accordance with income tax regulations that may differ from GAAP; accordingly for thefiscal years ended March 31, 2018 and 2017, CSWC reclassified for book purposes amounts arising from permanent book/taxdifferences related to the tax treatment of return of capital and/or deemed distributions, tax treatment of investments upondisposition, and non-deductible expenses, as follows (amounts in thousands): Year ended Year ended March 31, 2018 March 31, 2017 Additional capital $(552) $(2,518) Accumulated net investment (income) loss $4,277 $(889) Accumulated net realized gains $(3,725) $3,407 The determination of the tax attributes of CSWC’s distributions is made after tax year end, based upon its taxableincome for the full tax year and distributions paid for the full tax year. Therefore, the determination of tax attributes made onan interim basis for fiscal year end may not be representative of the actual tax attributes determined at tax year end. For tax purposes, the 2017 dividends totaled $1.16 per share and were comprised of (1) ordinary income totalingapproximately $0.643 per share, (2) long term capital gains totaling approximately $0.324 per share, and (3) qualifieddividend income totaling approximately $0.193 per share. In addition, 88.35% of each of the ordinary distributions representinterest-related dividends and 10.76% of each of the distributions represents short-term capital gains dividends. 94.54% oftotal distributions represent the portion of CSWC’s dividends received by non-U.S. residents and foreign corporationshareholders that are generally exempt from U.S. withholding tax. Of the qualified dividends of $3.5 million, 23.13% areeligible for the dividends received deduction. For tax purposes, the 2016 dividends totaled $0.38 per share and werecomprised of (1) ordinary income totaling approximately $0.065 per share, (2) long term capital gains totalingapproximately $0.28 per share, and (3) qualified dividend income totaling approximately $0.035 per share. In addition,19.75% of total distributions are considered an interest-related dividend and 97.78% of total distributions represent theportion of CSWC’s dividends received by non-U.S. residents and foreign corporation shareholders that are generally exemptfrom U.S. withholding tax. Of the qualified dividends of $0.5 million, 34.65% are eligible for the dividends receiveddeduction. Ordinary dividend distributions from a RIC do not qualify for the 20% maximum tax rate (plus a 3.8% Medicaresurtax, if applicable) on dividend income from domestic corporations and qualified foreign corporations, except to the extentthat the RIC received the income in the form of qualifying dividends from domestic corporations and qualified foreigncorporations. The tax attributes for distributions will generally include both ordinary income and capital gains, but may alsoinclude qualified dividends or return of capital. The tax character of distributions paid for the tax years ended December 31, 2017 and 2016 was as follows (amountsin thousands): Twelve Months Ended December 31, 2017 2016Ordinary income $13,149 $1,551Distributions of long term capital gains 5,101 4,367Distributions on tax basis $18,250 $5,9181Includes only those distributions which reduce estimated taxable income. As of March 31, 2018, CSWC estimates that it has undistributed taxable income of approximately $10.9 million, or$0.67 per share, which includes $4.7 million of distributions related to prior year, that will be carried forward towarddistributions to be paid in future periods. We intend to meet the applicable qualifications to be taxed as a RIC in futureperiods.92 1Table of Contents The following reconciles net increase in assets resulting from operations to estimated RIC taxable income for theyears ended March 31, 2018, 2017 and 2016: Years ended March 31, 2018 2017 2016Reconciliation of RIC Taxable Income Net increase (decrease) in net assets resulting from operations $39,307 $23,474 $(5,400)Net change in unrealized (appreciation) depreciation on investments (21,492) (7,690) (16,089)Disallowed net operating loss — — 3,630(Expense/loss) income/gain recognized for tax on pass-through entities (403) 986 2,334Gain (loss) recognized for tax on dispositions 643 1,248 (2,165)Net operating loss - management company and taxable subsidiary 316 1,323 6,188Non-deductible tax expense 228 588 —Other book tax differences (62) 223 563Estimated taxable income (loss) before deductions for distributions 18,537 20,152 (10,939)Distributions: Ordinary 7,020 932 —Capital gains 930 4,367 1,544Deemed distributions — — 8,423Distributions payable 4,421 7,072 619Estimated RIC undistributed taxable income (loss) 6,166 7,781 (21,525)1The calculation of taxable income for each period is an estimate and will not be finally determined until the Company files its tax returneach year. Final taxable income may be different than this estimate.2Includes only those distributions which reduce estimated taxable income. As of March 31, 2018, 2017 and 2016, the components of estimated RIC accumulated earnings on a tax basis wereas follows (amounts in thousands): Years ended March 31,Components of Accumulated Earnings on a Tax Basis 2018 2017 2016Undistributed ordinary income - tax basis $13,427 $11,890 $ —Capital loss carryforward — — (10,939)Undistributed net realized gain 2,276 3,085 —Unrealized appreciation on investments 57,264 36,481 30,740Other temporary differences (321) (122) 243Distributions payable (4,421) (7,072) (619)Components of distributable earnings at year-end 68,225 44,262 19,4251The calculation of taxable income for each period is an estimate and will not be finally determined until the Company files its tax returneach year. Final taxable income may be different than this estimate.2Includes only those distributions which reduce estimated taxable income. As of March 31, 2018, the cost of investments for U.S. federal income tax purposes was $335.6 million, with suchinvestments having a gross unrealized appreciation of $62.4 million and gross unrealized depreciation of $4.9 million. A RIC may elect to retain all or a portion of its long-term capital gains by designating them as a “deemeddistribution” to its shareholders and paying a federal tax on the long-term capital gains for the benefit of itsshareholders. Shareholders then report their share of the retained capital gains on their income tax returns as if it had beenreceived and report a tax credit for tax paid on their behalf by the RIC. Shareholders then add the amount of the “deemeddistribution” net of such tax to the basis of their shares. As a result of the Tax Reform, the federal tax rate for deemeddistributions is 21% as of January 1, 2018.93 12212Table of Contents For the tax years ended December 31, 2017 and 2016, we distributed all long-term capital gains and therefore hadno deemed distributions to our shareholders or federal taxes incurred related to such items. During our tax year endedDecember 31, 2015, we had net long-term capital gains of $8.4 million for tax purposes, which we elected to retain and treatas deemed distributions to our shareholders. For the tax year ended December 31, 2015, we incurred federal taxes on behalfof our shareholders in the amount of $2.9 million. CSMC, a wholly-owned subsidiary of CSWC, is not a RIC and is required to pay taxes at the current corporate rate.For tax purposes, CSMC has elected to be treated as a taxable entity, and therefore is not consolidated for tax purposes and istaxed at normal corporate tax rates based on its taxable income and, as a result of its activities, may generate income taxexpense or benefit. The taxable income, or loss, of CSMC may differ from its book income, or loss, due to temporary bookand tax timing differences and permanent differences. This income tax expense, or benefit, if any, and the related tax assetsand liabilities, are reflected in our consolidated financial statements. CSMC records individual cash incentive award andbonus accruals on a quarterly basis. Deferred taxes related to the changes in the restoration plan, individual cash incentiveaward and bonus accruals are also recorded on a quarterly basis. A valuation allowance is provided against deferred tax assetswhen it is more likely than not that some portion or all of the deferred tax asset will not be realized. Establishing a valuationallowance of a deferred tax asset requires management to make estimates related to expectations of future taxable income.Estimates of future taxable income are based on forecasted cash flows from CSMC’s operations. As of March 31, 2018,CSMC had a deferred tax asset of approximately $2.1 million and a deferred tax liability of $0.2 million. During the yearended March 31, 2018, the deferred tax asset increased by approximately $0.1 million as a result of the Tax Reform. Thedeferred tax asset decreased by $1.2 million due to the reduction of the corporate tax rate to 21% and was offset by anincrease of $1.3 million due to the release of the valuation allowance on our deferred tax asset. Our estimated taxable incomeincreased due to the repeal of 162(m) qualified performance-based pay exemptions and the expansion of the definition of a“covered employee,” As of March 31, 2018, we believe that we will be able to utilize all $2.1 million of our deferred taxassets. We will continue to assess our ability to realize our existing deferred tax assets. As of March 31, 2017, CSMC had adeferred tax asset of $2.0 million. Based on our assessment of our unrecognized tax benefits, management believes that all benefits will be realizedand they do not contain any uncertain tax positions. As a result of the Tax Reform, the corporate tax rate of CSMC is 21% asof January 1, 2018. The following table sets forth the significant components of the deferred tax assets and liabilities as of March 31,2018 and 2017 (amounts in thousands): Years ended 2018 2017 Deferred tax asset: Net operating loss carryforwards $487 $1,571 Compensation 924 1,110 Pension liability 617 722 Other 22 76 Total deferred tax asset 2,050 3,479 Less valuation allowance — (1,325) Total net deferred tax asset 2,050 2,154 Deferred tax liabilities: Other (190) (137) Total deferred tax liabilities (190) (137) Total net deferred tax assets $1,860 $2,017 The above referenced Net Operating Loss was generated in 2015 and expires in 2035. In addition, we have a wholly-owned taxable subsidiary, or the Taxable Subsidiary, which holds a portion of one ormore of our portfolio investments that are listed on the Consolidated Schedule of Investments. The Taxable Subsidiary isconsolidated for financial reporting purposes in accordance with U.S. GAAP, so that our consolidated financial94 Table of Contentsstatements reflect our investments in the portfolio companies owned by the Taxable Subsidiary. The purpose of the TaxableSubsidiary is to permit us to hold certain interests in portfolio companies that are organized as limited liability companies, orLLCs (or other forms of pass-through entities) and still satisfy the RIC tax requirement that at least 90% of our gross incomefor federal income tax purposes must consist of qualifying investment income. Absent the Taxable Subsidiary, aproportionate amount of any gross income of a partnership or LLC (or other pass-through entity) portfolio investment wouldflow through directly to us. To the extent that our income did not consist of investment income, it could jeopardize ourability to qualify as a RIC and therefore cause us to incur significant amounts of corporate-level U.S. federal income taxes.Where interests in LLCs (or other pass-through entities) are owned by the Taxable Subsidiary, however, the income fromthose interests is taxed to the Taxable Subsidiary and does not flow through to us, thereby helping us preserve our RIC statusand resultant tax advantages. The Taxable Subsidiary is not consolidated for U.S. federal income tax purposes and maygenerate income tax expense as a result of their ownership of the portfolio companies. This income tax expense, or benefit,and the related tax assets and liabilities, if any, are reflected in our Statement of Operations. As a result of the Tax Reform, thecorporate tax rate of the Taxable Subsidiary is 21% as of January 1, 2018. The income tax expense, or benefit, and the related tax assets and liabilities generated by CSWC, CSMC and theTaxable Subsidiary, if any, are reflected in CSWC’s consolidated financial statements. For the year ended March 31, 2018,we recognized total net income tax expense of $0.2 million, principally consisting of a $0.2 million accrual for excise tax onour estimated undistributed taxable income. For the year ended March 31, 2017, we recognized a total net income taxprovision of $1.8 million, principally consisting of a provision for deferred U.S. federal income taxes relating to CSMC of$1.0 million, a $0.6 million accrual for excise tax on our estimated undistributed taxable income and $0.2 million relating tothe Taxable Subsidiary. We also recognized a deferred tax provision of $0.3 million, which is primarily the result of theunrealized appreciation related to the portfolio investment held in the Taxable Subsidiary. Regarding the Tax Reform, the Company has completed all accounting and there are no items reported asprovisional amounts. However, the Tax Reform accounting incorporates assumptions made based on the Company's currentinterpretation of the Tax Act and may change, possibly materially, as the Company completes the analysis and receivesadditional clarification and implementation guidance. In addition, changes in interpretations, assumptions, and guidanceregarding the new tax legislation, as well as the potential for technical corrections to the Tax Reform, could have a materialimpact to the Company’s effective tax rate in future periods. Finally, given the significant complexity of the Tax Reform,current guidance from the U.S. Treasury about implementing the Tax Act and any related guidance from the SEC or the FASBmay change, which may require us to refine the Company's estimates in the future. Although we believe our tax returns are correct, the final determination of tax examinations could be different fromwhat was reported on the returns. In our opinion, we have made adequate tax provisions for years subject to examination.Generally, we are currently open to audit under the statute of limitations by the Internal Revenue Service as well as statetaxing authorities for the years ended December 31, 2014 through 2017. The following table sets forth the significant components of the income tax expense as of March 31, 2018, 2017 and2016 (amounts in thousands): Years ended March 31, Components of Income Tax Expense 2018 2017 2016 Statutory federal income tax $(91) $(175) $(2,593) 162(m) limitation 710 625 545 Excise tax 228 588 — Valuation allowance (1,324) 459 866 Tax related to Taxable Subsidiary — 173 — Prior year deferred tax true-up (164) 67 (125) Compensation benefits (426) — — Tax Reform 1,246 — — Other 16 42 29 Total income tax expense $195 $1,779 $(1,278) 95 Table of Contents7. SHAREHOLDERS’ EQUITY There were no sales of the Company’s equity securities for the years ended March 31, 2018 and 2017. On October 26, 2010, we received an exemptive order from the SEC permitting us to issue restricted stock to ourexecutive officers and certain key employees, or the Original Order. On August 22, 2017, we received the Exemptive Orderthat supersedes the Original Order and in addition to the relief granted under the Original Order, allows us to withhold sharesto satisfy tax withholding obligations related to the vesting of restricted stock granted pursuant to the 2010 Restricted StockAward Plan, or the 2010 Plan, and to pay the exercise price of options to purchase shares of our common stock grantedpursuant to the 2009 Stock Incentive Plan, or the 2009 Plan. During the year ended March 31, 2018, the Companyrepurchased 5,080 shares at an aggregate cost of approximately $0.1 million and a weighted average price per share of$16.78 in connection with the vesting of restricted stock awards. During the year ended March 31, 2017, the Company didnot repurchase any shares in connection with the vesting of restricted stock awards. Share Repurchase Program In January 2016, the Company’s Board of Directors approved a share repurchase program authorizing the Companyto repurchase up to $10 million of its outstanding common stock in the open market at certain thresholds below its NAV pershare, in accordance with guidelines specified in Rules 10b5-1(c)(1)(i)(B) and 10b-18 under the Securities Exchange Act of1934. On March 1, 2016, the Company entered into a share repurchase agreement with Cantor Fitzgerald & Co. Thisagreement became effective immediately and shall terminate on the earliest of: (1) the date on which a total of $10 millionworth of common shares have been purchased under the plan; (2) the date on which the terms set forth in the purchaseinstructions have been met; or (3) the date that is one trading day after the date on which insider notifies broker in writingthat this agreement shall terminate. During the year ended March 31, 2018, the Company had repurchased a total of 35,911 shares at an average price of$16.37 per share, including commissions paid, leaving approximately $9.4 million available for additional repurchasesunder the program. During the year ended March 31, 2017, the Company did not repurchase any shares of the Company’scommon stock under the share repurchase program. The following table summarizes the Company’s share repurchases underthe program for the years ended March 31, 2018 and 2017: Year Ended March 31,Repurchases of Common Stock 2018 2017Number of shares repurchased 35,911 —Cost of shares repurchased, including commissions$587,772 $ —Weighted average price per share$16.37 $ —Net asset value per share at prior quarter end$18.44 N/AWeighted average discount to prior quarter net asset value 11.2% N/A 8. SPIN-OFF COMPENSATION PLAN On August 28, 2014, CSWC’s Board of Directors adopted a compensation plan (the “Spin-off Compensation Plan”)consisting of grants of nonqualified stock options, restricted stock and cash incentive awards to certain officers of theCompany at the time. The Spin-off Compensation Plan was intended to align the compensation of the Company’s keyofficers with the Company’s strategic objective of increasing the market value of the Company’s shares through atransformative transaction for the benefit of the Company’s shareholders. Under the Spin-Off Compensation Plan, Joseph B.Armes, former Chief Executive Officer of the Company, Kelly Tacke, former Chief Financial Officer of the Company, andBowen S. Diehl, former Chief Investment Officer and current Chief Executive Officer of the company, were collectively as agroup eligible to receive an amount equal to six percent of the aggregate appreciation in the Company’s share price fromAugust 28, 2014 (using a base price of $36.16 per share) to the date 90 days after the completion of a transformativetransaction (the “Trigger Event Date”). The first plan component consisted of nonqualified options awarded to purchase anaggregate of 259,000 shares of common stock at an exercise price of $36.60 per share. The second plan96 Table of Contentscomponent consisted of an aggregate of 127,000 shares of restricted stock, which have voting rights but do not have cashdividend rights. See Note 9 for further discussion on the first two components of the Spin-off Compensation Plan. The finalplan component consisted of cash incentive payments awarded to each participant in an amount equal to the excess of eachawardee’s allocable portion of the total payment amount over the aggregate value as of the Trigger Event Date of theawardee’s restricted common stock and nonqualified options awarded under the Spin-off Compensation Plan. On September 8, 2015, the Board designated the Share Distribution as a transformative transaction for purposes ofthe Spin-off Compensation Plan and amended the award agreements granted under the plan to provide for accelerated vestingof the awards held by a participant in the event of a termination of that participant’s service effected by the participant forgood reason, by the employer without cause, or as a result of the disability or death of the participant. On September 30,2015, we completed the Share Distribution. Effective immediately with the Share Distribution, both Joseph B. Armes and Kelly Tacke became employees ofCSWI and Bowen Diehl, our President and Chief Executive Officer, continued to be an employee of our Company. TheCompany entered into the Employee Matters Agreement with CSWI. Under the Employee Matters Agreement, we retainedthe cash incentive awards granted under the Spin-off Compensation Plan, and all liabilities with respect to the cash incentiveawards remained liabilities of CSWC. The equity based awards vesting terms were as follows: (1) 1/3 on December 29, 2015;(2) 1/3 on December 29, 2016; and (3) 1/3 on December 29, 2017, subject to accelerated vesting as described above. The total value accretion was six percent of the aggregate appreciation in the Company’s share price from $36.16 tothe combined volume-weighted average prices of both CSWC and CSWI stock as of December 29, 2015. The cashcomponent of the Spin-off Compensation Plan was the difference between the total value accretion and the aggregate valueof the awardee’s restricted common stock and non-qualified option awards under the Spin-Off Compensation Plan. The totalcash liabilities for three participants under the plan totaled $6.1 million. The final payment of $1.4 million was fully vestedon December 29, 2017, and was subsequently paid out in January 2018. As of March 31, 2018, there is no remainingunrecognized expense related to the Spin-off Compensation Plan. During both the years ended March 31, 2018 and 2017, we recognized the cash component of spin-offcompensation expense of $0.7 million, which represented the cash component of spin-off compensation for our currentemployee. During the years ended March 31, 2018 and 2017, we recorded $0.5 million and $1.9 million, respectively,directly to additional capital for the cash component of the spin-off compensation related to the two employees whotransferred to CSWI, of which $1.3 million was paid to Kelly Tacke during the year ended March 31, 2017 upon herseparation from CSWI. As of March 31, 2018, there is no remaining unrecognized expense related to the cash component ofthe Spin-Off Compensation Plan. 9. EMPLOYEE STOCK BASED COMPENSATION PLANS Stock Awards Pursuant to the Capital Southwest Corporation 2010 Plan, our Board of Directors originally reserved 188,000 sharesof restricted stock for issuance to certain of our employees. At our annual shareholder meeting in August 2015, ourshareholders approved an increase of an additional 450,000 shares to our 2010 Plan. A restricted stock award is an award ofshares of our common stock, which generally have full voting and dividend rights but are restricted with regard to sale ortransfer. Restricted stock awards are independent of stock grants and are generally subject to forfeiture if employmentterminates prior to these restrictions lapsing. Unless otherwise specified in the award agreement, these shares vest in equalannual installments over a four to five-year period from the grant date and are expensed over the vesting period starting onthe grant date. On August 28, 2014, our Board of Directors amended the 2010 Plan, as permitted pursuant to Section 14 of the 2010Plan (the “First Amendment to the 2010 Plan”). The First Amendment to the 2010 Plan provides that an award agreementmay allow an award to remain outstanding after a spin-off or change in control of one or more wholly-owned subsidiaries ofthe Company. In addition, on August 28, 2014, the Board of Directors granted 127,000 shares of restricted97 Table of Contentsstock under the Spin-Off Compensation Plan. On August 10, 2015, the Second Amendment to the 2010 Plan increased thenumber of shares of Company common stock available for issuance by 450,000 shares. On August 22, 2017, we received the Exemptive Order from the SEC that supersedes the Original Order and, inaddition to the relief granted under the Original Order, allows the Company to withhold shares to satisfy tax withholdingobligations related to the vesting of restricted stock granted pursuant to the 2010 Plan. The Third Amendment to the 2010Plan, which became effective on August 22, 2017, reflects amendments relating to the Exemptive Order. On September 30, 2015, we completed the Share Distribution. Each holder of an outstanding Capital SouthwestRestricted Stock Award immediately prior to the Share Distribution received, as of the effective date of the ShareDistribution, a CSWI Restricted Stock Award for the number of CSWI Shares the holder would have received if theoutstanding Capital Southwest Restricted Stock Award was comprised of fully vested Capital Southwest Shares as of theeffective date. The vesting terms for restricted stock awards previously granted under the Spin-off Compensation Plan are asfollows: (1) one-third on December 29, 2015; (2) one-third on December 29, 2016; and (3) one-third on December 29, 2017,subject to accelerated vesting as described above. As of March 31, 2018, there is no remaining unrecognized expense relatedto the Spin-off Compensation Plan. The following table summarizes the restricted stock available for issuance for the year ended March 31, 2018: Restricted stock available for issuance as of March 31, 2017 190,502 Additional restricted stock approved under the plan − Restricted stock granted during the year ended March 31, 2018 (185,725) Restricted stock forfeited during the year ended March 31, 2018 5,000 Restricted stock available for issuance as of March 31, 2018 9,777 We expense the cost of the restricted stock awards, which is determined to equal the fair value of the restricted stockaward at the date of grant, on a straight-line basis over the requisite service period. For these purposes, the fair value of therestricted stock award is determined based upon the closing price of our common stock on the date of the grant. Due to theShare Distribution, the Company evaluated (1) the value of the CSWC stock awards prior to the Share Distribution and (2)the combined value of CSWC and CSWI stock awards following the Share Distribution and recorded additional incrementalstock based compensation expenses. For the fiscal years ended March 31, 2018, 2017, and 2016 we recognized total share based compensation expenseof $1.7 million, $1.0 million and $0.7 million, respectively, related to the restricted stock issued to our employees andofficers. As of March 31, 2018, the total remaining unrecognized compensation expense related to non-vested restrictedstock awards was $5.1 million, which will be amortized over the weighted-average vesting period of approximately 2.9 years.Subsequent to the Share Distribution, the compensation expense related to non-vested awards held by employees who arenow employed by CSWI is recorded by CSWI. 98 Table of ContentsThe following table summarizes the restricted stock outstanding as of March 31, 2018: Weighted Average Weighted Average Fair Value Per Remaining Vesting Restricted Stock Awards Number of Shares Share at grant date Term (in Years) Unvested at March 31, 2016 233,207 $15.79 3.0 Granted 161,918 14.46 3.6 Vested (93,202) 15.87 − Forfeited (7,880) 22.44 − Unvested at March 31, 2017 294,043 $14.99 3.1 Granted 185,725 16.79 3.6 Vested (102,605) 15.25 − Forfeited (5,000) 14.48 − Unvested at March 31, 2018 372,163 $15.82 2.9 Stock Options On July 20, 2009, shareholders approved our 2009 Plan, which provides for the granting of stock options toemployees and officers and authorizes the issuance of common stock upon exercise of stock options for up to 560,000shares. All options are granted at or above market price, generally expire up to 10 years from the date of grant and aregenerally exercisable on or after the first anniversary of the date of grant in five annual installments. On August 28, 2014, our Board of Directors amended the 2009 Plan, as permitted pursuant to Section 18 of the 2009Plan (the “First Amendment to the 2009 Plan”). The First Amendment to the 2009 Plan provides that an award agreementmay allow an award to remain outstanding after a spin-off or change in control of one or more wholly-owned subsidiaries ofthe Company. In addition, on August 28, 2014, options to purchase 259,000 shares at $36.60 per share were granted underthe 2009 Plan, as amended. On September 8, 2015, the Board designated the Share Distribution as a transformativetransaction for purposes of the 2009 Plan and amended the award agreements granted under the 2009 Plan to provide foraccelerated vesting of the awards held by a participant in the event of a termination of that participant’s service effected bythe executive for good reason, by the employer without cause, or as a result of the disability or death of the participant. Athird of these options were vested on each of December 29, 2015, December 29, 2016, and December 29, 2017, respectively,subject to accelerated vesting as described above. On August 22, 2017, we received the Exemptive Order from the SEC that supersedes the Original Order and, inaddition to the relief granted under the Original Order, allows us to withhold shares of our common stock to satisfy theexercise of options to purchase shares of our common stock granted pursuant to the 2009 Plan. At March 31, 2018, there are options to acquire 195,608 shares of common stock outstanding. The CompensationCommittee does not intend to grant additional options under the 2009 Stock Incentive Plan or request shareholders’approval of additional stock options to be added under the 2009 Stock Incentive Plan. We previously granted stock options under our 1999 Stock Option Plan (the “1999 Plan”), as approved byshareholders on July 19, 1999. The 1999 Plan expired on April 19, 2009. Options previously granted under our 1999 Planand outstanding on July 20, 2009 continue in effect and are governed by the provisions of the 1999 Plan. All optionsgranted under the 1999 Plan were granted at market price on the date of grant, generally expire up to 10 years from the dateof grant and are generally exercisable on or after the first anniversary of the date of grant in five to ten annual installments. AtMarch 31, 2018 and 2017, there are no options to acquire shares of common stock outstanding under the 1999 Plan. At September 30, 2015, in connection with the Share Distribution, we entered into the Employee MattersAgreement, which provided that each option to acquire CSWC common stock that was outstanding immediately prior toSeptember 30, 2015, would be converted into both an option to acquire post-Share Distribution CSWC common stock andan option to acquire CSWI common stock and would be subject to substantially the same terms and conditions (includingwith respect to vesting and expiration) after the Share Distribution. Certain adjustments, using volumetric weighted-averageprices for the 10-day period immediately prior to and immediately following the distribution, were made to the99 Table of Contentsexercise price and number of shares of CSWC subject to such awards, with the intention of preserving the economic value ofthe awards immediately prior to the distribution for all CSWC employees. We compared the fair market value of our stockoptions on the day of the Share Distribution with the combined fair value of our stock options and CSWI stock options theday after the completion of the Share Distribution. The distribution-related adjustments did not have a material impact oncompensation expense for the years ended March 31, 2018 and 2017. The following table summarizes activity in the 2009 Plan and the 1999 Plan as of March 31, 2018, includingadjustments in connection with the Share Distribution: Weighted AverageAggregate ExerciseIntrinsic Number of Shares PriceValue 2009 Plan Balance at March 31, 2015 372,000 $35.24 Granted – – Exercised (8,000) 23.37$221,020 Canceled/Forfeited – – Spin-off adjustments (1,487)* NA Balance at March 31, 2016 362,513 11.21* Granted – – Exercised (131,252) 11.48$479,177 Canceled/Forfeited (24,897) 10.56 Balance at March 31, 2017 206,364 11.12 Granted – – Exercised (10,756) 11.66$58,081 Canceled/Forfeited – – Balance at March 31, 2018 195,608 $11.09 1999 Plan Balance at March 31, 2015 16,000 $23.37 Granted – – Exercised (15,974) 17.38$316,241 Canceled/Forfeited – – Spin-off adjustments (26)* NA Balance at March 31, 2016 – – Granted – – Exercised – – Canceled/Forfeited – – Balance at March 31, 2017 − – Granted – – Exercised – – Canceled/Forfeited – – Balance at March 31, 2018 − $–$ Combined Balance at March 31, 2018 195,608 $11.09*$ Aggregate Weighted Average Intrinsic March 31, 2018 Remaining Contractual Term Value Outstanding 5.6 years $1,160,177 Exercisable 5.6 years $1,092,181 *Certain adjustments were made to the exercise price and number of shares of Capital Southwest awards using volumetric weighted-average prices for the 10-day period immediately prior to and immediately following the distribution with the intention of preserving theeconomic value of the awards immediately prior to the distribution for all Capital Southwest employees. 100 Table of ContentsWe recognize compensation cost using the straight-line method for all share-based payments. The fair value of stockoptions is determined on the date of grant using the Black-Scholes pricing model and is expensed over the requisite serviceperiod of the related stock options. Accordingly, for the years ended March 31, 2018, 2017 and 2016, we recognized stockoption compensation expense of $0.2 million, $0.2 million, and $0.4 million, respectively, related to the stock options heldby our employees and officers. As of March 31, 2018, the total remaining unrecognized compensation expense related tonon-vested stock options was $39 thousand, which will be amortized over the weighted-average vesting period ofapproximately 0.6 years. At March 31, 2018, the range of exercise prices was $7.55 to $11.66 and the weighted-average remaining contractuallife of outstanding options was 5.6 years. The total number of shares of common stock exercisable under both the 2009 Planand the 1999 Plan at March 31, 2018 was 183,658 shares with a weighted-average exercise price of $11.07. During the yearended March 31, 2018, no options were granted, 69,272 options vested with a total fair value of approximately $0.4 millionand 10,756 options were exercised with an average exercise price of $11.66. At March 31, 2017, the range of exercise prices was $7.55 to $11.53 and the weighted-average remaining contractuallife of outstanding options was 6.5 years. The total number of options exercisable under both the 2009 Plan and the 1999Plan at March 31, 2017, was 125,141 shares with a weighted-average exercise price of $11.12. During the year ended March31, 2017, no options were granted, 126,594 options vested with a total fair value of approximately $0.8 million and 131,252options were exercised with an average exercise price of $11.48. Individual Incentive Awards On January 16, 2012, our Board of Directors approved the issuance of 104,000 individual cash incentive awardswith a baseline for measuring increases in NAV per share of $36.74 (NAV at December 31, 2011) to provide deferredcompensation to certain key employees. Under the individual cash incentive award agreements, awards vest on the fifthanniversary of the award date. Upon exercise of an individual cash incentive award, the Company pays the recipient a cashpayment in an amount equal to the net asset value per share minus the baseline net asset value per share, adjusted for capitalgain dividends declared. In connection with the Share Distribution, we entered into the Employee Matters Agreement with CSWI. Under theEmployee Matters Agreement, the individual cash incentive award agreements were amended to provide that the value ofeach individual cash incentive award is determined based upon the NAV of CSWC as of June 30, 2015. The remaining termsof each individual incentive award agreement, including the vesting and payment terms, will remain unchanged. After theeffective date of the Share Distribution, CSWC retains all liabilities associated with all individual cash incentive awardsgranted by CSWC. There are currently 48,000 individual cash incentive awards outstanding as of March 31, 2018 and the liability forindividual cash incentive awards was $0.3 million at March 31, 2018. During the year ended March 31, 2018, no paymentswere made. During the year ended March 31, 2017, payments in the amount of $0.3 million were paid to vested employees.The estimated liability for individual cash incentive awards was $0.3 million at March 31, 2017. There were no individual cash incentive awards vested or granted during the year ended March 31, 2018. Weighted Average Weighted Remaining Number of Average Grant Vesting Term Individual Cash Incentive Awards Shares Price Per Share (in Years) Unvested at March 31, 2017 48,000 $47.03 1.6 Granted − − − Vested − − − Forfeited or expired − − − Unvested at March 31, 2018 48,000 $47.03 0.6 101 Table of Contents10. OTHER EMPLOYEE COMPENSATION We established a 401(k) plan (“401K Plan”) effective October 1, 2015. All full-time employees are eligible toparticipate in the 401K Plan. The 401K Plan permits employees to defer a portion of their total annual compensation up tothe Internal Revenue Service annual maximum based on age and eligibility. We made contributions to the 401K Plan of upto 4.5% of the Internal Revenue Service’s annual maximum eligible compensation, all of which is fully vested immediately.During the year ended March 31, 2018, we made matching contributions of approximately $128.0 thousand. During theyear ended March 31, 2017, we made matching contributions of approximately $119.0 thousand. 11. RETIREMENT PLANS Until the Share Distribution, CSWC sponsored a qualified defined benefit pension plan which covers its employeesand employees of certain of its controlled affiliates. The following information about the plan represents amounts andinformation related to CSWC’s participation in the plan and is presented as though CSWC sponsored a single-employerplan. Benefits were based on years of service and an average of the highest five consecutive years of compensation duringthe last 10 years of employment. The funding policy of the plan was to contribute annual amounts that are currentlydeductible for tax reporting purposes. No contribution was made to the plan during the three years ended March 31, 2018.The qualified defined benefit pension plan is closed to any employees hired or rehired on or after January 1, 2015. Inconnection with the Share Distribution, we entered into an Employee Matters Agreement with CSWI on September 8, 2015.The Employee Matters Agreement was amended and restated on September 14, 2015. Under the Employee MattersAgreement, Capital Southwest Corporation and Capital Southwest Management Corporation withdrew as participatingemployers in the Plan and CSWI became the Sponsoring Employer of the Qualified Retirement Plan and assumed all theliabilities, assets, and future funding obligations for providing benefits for the covered Participants under the QualifiedRetirement Plan. Additionally, CSWC sponsors an unfunded Retirement Restoration Plan, which is a nonqualified plan that providesfor the payment, upon retirement, of the difference between the maximum annual payment permissible under the qualifiedretirement plan pursuant to federal limitations and the amount which would otherwise have been payable under the qualifiedplan. Effective September 30, 2015, the benefits accrued under the Restoration Plan on behalf of CSWI employees, includingemployees who transferred from the Company to CSWI, were transferred to a non-qualified deferred compensation planestablished by CSWI. The Company retained all liabilities associated with benefits accrued under the Restoration Plan onbehalf of individuals who remain employees of the Company or Capital Southwest Management Corporation followingSeptember 30, 2015 or who terminated employment prior to September 30, 2015 with vested benefits under the RestorationPlan. Unvested accrued benefits under the Restoration Plan were forfeited as of September 30, 2015. The following tables set forth the qualified plan’s net pension benefit, benefit obligation, fair value of plan assets,and amounts recognized in our Consolidated Statements of Operations at March 31, 2018, 2017 and 2016, as well asamounts recognized in our Consolidated Statements of Assets and Liabilities at March 31, 2018 and 2017 in thousands): Years ended March 31, 2018 2017 2016 Net pension benefit Service cost-benefits earned during the year $- $- $190 Interest cost on projected benefit obligation - - 173 Expected return on assets - - (579) Net amortization - - 5 Immediate recognition of benefit cost due to Plan Freeze at 9/30/2015 - - (72) Net pension benefit from qualified plan $- $- $(283) 102 Table of Contents Years ended March 31, 2018 2017 2016 Change in benefit obligation Benefit obligation at beginning of year $- $- $8,329 Service cost - - 190 Interest cost - - 173 Actuarial (gain) loss - - (508) Benefits paid - - (172) Curtailment recognition - - (409) Transferred to CSWI at 9/30/2015 - - (7,603) Benefit obligation at end of year $- $- $- Years ended March 31, 2018 2017 2016 Change in plan assets Fair value of plan assets at beginning of year $- $- $18,623 Actual return on plan assets - - (315) Benefits paid - - (172) Transferred to CSWI at 9/30/2015 - - (18,136) Fair value of plan assets at end of year $- $- $- Following the Share Distribution, all plan assets were transferred to CSWI. As such, CSWC did not record anyprepaid pension cost or accumulated benefit obligation in connection with the qualified defined benefit pension plan for theyears ended March 31, 2018, 2017 and 2016. The following tables set forth the retirement restoration plan’s net pension benefit and benefit obligation amounts atMarch 31, 2018, 2017 and 2016, as well as amounts recognized in our consolidated statements of assets and liabilities atMarch 31, 2018 and 2017: Years ended March 31, 2018 2017 2016 Net pension cost Service cost-benefits earned during the year $- $- $82 Interest cost on projected benefit obligation 116 125 138 Net amortization 48 47 45 Immediate recognition of benefit cost due to Plan Freeze at 9/30/2015 - - (82) Net pension cost from restoration plan $164 $172 $183 Years ended March 31, 2018 2017 2016 Change in benefit obligation Benefit obligation at beginning of year $3,020 $3,061 $3,119 Service cost - - 82 Interest cost 116 125 138 Actuarial loss 11 41 428 Benefits paid (210) (207) (200) Curtailment recognition - - (329) Other adjustments - - (177) Benefit obligation at end of year $2,937 $3,020 $3,061 103 Table of Contents Years ended March 31, 2018 2017 Amounts recognized in our Consolidated Statements of Assets and Liabilities Projected benefit obligation $(2,937) $(3,020) Net actuarial loss recognized as a component of equity 813 850 Total $(2,124) $(2,170) Accumulated benefit obligation $(2,937) $(3,020) The estimated net actuarial loss that will be amortized from equity into net pension cost during 2019 isapproximately $46 thousand. The following assumptions were used in estimating the actuarial present value of the projected benefit obligations: Years ended March 31, 2018 2017 2016 Discount rate 4.00% 4.00% 4.25%Rate of compensation increases N/A N/A 5.00% The following assumptions were used in estimating the net periodic (income)/expense: Years ended March 31, 2018 2017 2016 Discount rate 4.00% 4.00% 4.25%Expected return on plan assets N/A N/A N/A Rate of compensation increases N/A N/A N/A Following are the expected benefit payments for the next five years and in the aggregate for the years 2024-2028(amounts in thousands): (In thousands) 2019 2020 2021 2022 2023 2024-2028 Restoration Plan $213 $212 $225 $235 $232 $1,084 12. COMMITMENTS AND CONTINGENCIES Commitments In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk,consisting primarily of unused commitments to extend financing to the Company’s portfolio companies. Since commitmentsmay expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. March 31, March 31, 2018 2017Portfolio Company Investment Type (amounts in thousands)I-45 SLF LLC Equity Investment $3,200 $7,200Clickbooth.com, LLC Revolving Loan 2,000 −ITA Holdings Group, LLC Revolving Loan 2,000 −LGM Pharma, LLC Delayed Draw Term Loan 900 −Prism Spectrum Holdings LLC Revolving Loan 1,500 −Zenfolio Inc. Revolving Loan 2,000 −Total unused commitments to extend financing $11,600 $7,200 104 Table of ContentsWe lease office space under an operating lease which requires annual base rentals of approximately $250 thousand.For the three years ended March 31, 2018, total rental expense was $233 thousand in 2018, $233 thousand in 2017, and$186 thousand in 2016, and the rent commitments for the next five years as of March 31, 2018 are as follows (amounts inthousands): Year ending March 31, Rent Commitment 2019 248 2020 257 2021 266 2022 248 2023 — Thereafter — Total $1,019 Contingencies We may, from time to time, be involved in litigation arising out of our operations in the normal course of business orotherwise. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of ourportfolio companies. We have no currently pending material legal proceedings to which we are part or to which any of ourassets is subject. 13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following presents a summary of the unaudited quarterly consolidated financial information for the years endedMarch 31, 2018 and 2017 (in thousands except per share amounts): First Second Third Fourth 2018 Quarter Quarter Quarter Quarter TotalNet investment income $3,436 $3,937 $4,663 $4,197 $16,233Net realized gain on investments 624 210 617 131 1,582Net change in unrealized appreciation on investments, net of tax 1,384 4,496 4,963 10,649 21,492Net increase in net assets from operations 5,444 8,643 10,243 14,977 39,307Net investment income per share 0.21 0.25 0.29 0.26 1.01Net increase in net assets from operations per share 0.34 0.54 0.64 0.93 2.45 First Second Third Fourth 2017 Quarter Quarter Quarter Quarter TotalNet investment income $371 $1,365 $2,873 $3,279 $7,888Net realized gain on investments 199 3,527 72 4,098 7,896Net change in unrealized appreciation on investments, net of tax 2,127 2,026 4,940 (1,403) 7,690Net increase in net assets from operations 2,697 6,918 7,885 5,974 23,474Net investment income per share 0.02 0.09 0.18 0.21 0.50Net increase in net assets from operations per share 0.17 0.44 0.50 0.37 1.48105 Table of Contents14. RELATED PARTY TRANSACTIONS As a BDC, we are obligated under the 1940 Act to make available to our portfolio companies significant managerialassistance. “Making available significant managerial assistance” refers to any arrangement whereby we provide significantguidance and counsel concerning the management, operations, or business objectives and policies of a portfolio company.We are also deemed to be providing managerial assistance to all portfolio companies that we control, either by ourselves orin conjunction with others. The nature and extent of significant managerial assistance provided by us will vary according tothe particular needs of each portfolio company. During both the years ended March 31, 2018 and 2017, we receivedmanagement and other fees from certain of our portfolio companies totaling $0.4 million, which were recognized as fees andother income on the Consolidated Statements of Operations. Additionally, as of March 31, 2018 and 2017, we had dividendsreceivable from I-45 SLF LLC of $2.2 million and $2.1 million, respectively, which were included in dividends and interestreceivables on the Consolidated Statements of Assets and Liabilities. 15. SUBSEQUENT EVENTS On April 2, 2018, CSWC paid regular dividends declared on February 28, 2018 in the amount of $4.5 million, or$0.28 per share. On April 16, 2018 and May 11, 2018, CSWC entered into Incremental Assumption Agreements, which increased thetotal commitments under the Credit Facility by $20 million and $10 million, respectively. The increases were executed underthe accordion feature of the Credit Facility and increased total commitments from $180 million to $210 million. On April 25, 2018, the Board of Directors unanimously approved the application of the recently modified assetcoverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, the minimum asset coverage ratio applicableto the Company will be decreased from 200% to 150%, effective April 25, 2019. The Board of Directors also approved aresolution which limits the Company’s issuance of senior securities such that the asset coverage ratio, taking into accountany such issuance, would not be less than 166%, effective April 25, 2019. On June 1, 2018, the Company’s Board of Directors declared a $0.29 dividend per share for the quarter ended June30, 2018. The record date for the dividend is June 26, 2018. The payment date for the dividend is July 2, 2018. 106 Table of Contents16. SELECTED PER SHARE DATA AND RATIOS The following presents a summary of the selected per share data for the years ended March 31, 2014 through 2018(in thousands except per share amounts): Years Ended March 31, Per Share Data: 2018 2017 2016 2015 2014 Investment income $2.18 $1.48 $0.58 $0.64 $0.82 Operating expenses (1.16) (0.87) (1.34) (0.78) (0.55) Income taxes (0.01) (0.11) 0.08 (0.02) 0.05 Net investment income (loss) 1.01 0.50 (0.68) (0.16) 0.32 Net realized gain (loss) 0.10 0.50 (0.88) 7.06 0.66 Net change in unrealized appreciation on investments 1.34 0.49 1.02 (6.96) 6.04 Total increase (decrease) from investment operations 2.45 1.49 (0.54) (0.06) 7.02 Dividends to shareholders (0.99) (0.79) (0.14) (0.20) (0.20) Distribution from additional capital for spin-off — — (1.67) — — Spin-off Compensation Plan distribution, net of tax (0.03) (0.08) (0.08) — — Decrease in unrealized appreciation due to distributions toCSWI — — (29.15) — — Exercise of employee stock options 0.01 (0.09) 0.03 (0.04) (0.18) Forfeiture (issuance) of restricted stock (0.18) (0.15) (0.49) (0.40) — Share based compensation expense 0.11 0.08 0.08 0.07 (0.04) Common stock withheld for payroll taxes upon vesting ofrestricted stock (0.01) — — — — Repurchase of common stock (0.04) — — — — Net change in pension plan funded status (0.05) — — (0.05) 0.08 Other 0.01 — — — — Increase (decrease) in net asset value 1.28 0.46 (31.96) (0.68) 6.68 Net asset value Beginning of year 17.80 17.34 49.30 49.98 43.30 End of year $19.08 $17.80 $17.34 $49.30 $49.98 Ratios and Supplemental Data Ratio of operating expenses, excluding interest expense,to average net assets 4.70% 4.59% 4.48% 1.59% 1.18%Ratio of net investment income to average net assets 5.51% 2.83% (2.27)% (0.32)% 0.68%Portfolio turnover 25.42% 23.57% 4.20% 0.93% 1.76%Total investment return 6.61% 27.88% (20.71)% 8.40% 16.90%Total return based on change in NAV 12.75% 7.21% (2.15)% (0.96)% 15.89% Per share market value at end of year $17.02 $16.91 $13.87 $46.42 $34.72 Weighted-average basic shares outstanding 16,074 15,825 15,636 15,492 15,278 Weighted-average fully diluted shares outstanding 16,139 15,877 15,724 15,531 15,298 Common shares outstanding at end of year 16,162 16,011 15,726 15,565 15,414 1Based on weighted-average basic shares outstanding for the period.2Net decrease is due to the exercise of employee stock options at prices less than beginning of period net asset value.3Reflects impact of the different share amounts as a result of issuance or forfeiture of restricted stock during the period.4Includes the impact of the different share amounts as a result of calculating certain per share data based on the weighted-average basicshares outstanding during the period and certain per share data based on the shares outstanding as of a period end.5Amounts for fiscal 2015 and 2014 are based on average net assets prior to the Share Distribution.6Total investment return based on purchase of stock at the current market price on the first day and a sale at the current market price on thelast day of each period reported on the table and assumes reinvestment of dividends at prices obtained by CSWC’s DRIP during theperiod. The return does not reflect any sales load that may be paid by an investor.107 111111234567Table of Contents7Total return based on change in NAV was calculated using the sum of ending NAV plus dividends to shareholders and other non-operating changes during the period, as divided by the beginning NAV. 17. SIGNIFICANT SUBSIDIARIES Media Recovery Inc. Media Recovery, Inc., dba SpotSee Holdings, through its subsidiary ShockWatch, provides solutions that currentlyenable over 3,000 customers and some 200 partners in 62 countries to detect mishandling that causes product damage andspoilage during transport and storage. The ShockWatch product portfolio includes impact, tilt, temperature, vibration, andhumidity detection systems and is widely used in the energy, transportation, aerospace, defense, food, pharmaceutical,medical device, consumer goods and manufacturing sectors. At March 31, 2018, our investment in Media Recovery, Inc. exceeded the 10% threshold in at least one of the testsunder Rule 4-08(g) of Regulation S-X. At March 31, 2018, our investment in Media Recovery, Inc. did not exceed the 20%threshold in at least one of the tests under Rule 3-09. However, our investment in Media Recovery, Inc. did exceed the 20%threshold in at least one of the tests under Rule 3-09 as of March 31, 2017. Accordingly, we will amend this Form 10-K toinclude the financial statements of Media Recovery, Inc. once they are available. At March 31, 2017, our investment inMedia Recovery, Inc. exceeded the 10% and 20% thresholds in at least one of the tests under Rule 3-09 and Rule 4-08(g).Accordingly, we amended our Form 10-K for the fiscal year ended March 31, 2017 to include the financial statementsof Media Recovery, Inc. in December 2017, within 90 days of Media Recovery, Inc.’s fiscal year end. Below is certain selected key financial data from its Balance Sheet at March 31, 2018 and 2017 and the twelvemonths ended March 31, 2018, 2017 and 2016 Income Statement (amounts in thousands). March 31, 2018 March 31, 2017Current Assets $8,391 $9,935Non-Current Assets 24,727 23,173Current Liabilities 2,559 2,083Non-Current Liabilities 2,228 2,396 Twelve Months Ended March 31, 2018 2017 2016Revenue $22,242 $19,571 $20,765Income from continuing operations 2,673 1,100 591Net income 2,673 1,100 472 TitanLiner, Inc. TitanLiner, Inc. engages in the manufacture, installation and rental of spill containment systems for oilfieldapplications. At March 31, 2018, our investment in TitanLiner, Inc. exceeded the 10% and 20% thresholds in at least one of thetests under Rule 3-09 and Rule 4-08(g) of Regulation S-X. Accordingly, we have included as an exhibit to this Form 10-K thefinancial statements of TitanLiner, Inc.108 Table of ContentsBelow is certain selected key financial data from its Balance Sheet at March 31, 2018 and 2017 and the twelvemonths ended March 31, 2018, 2017 and 2016 Income Statement (amounts in thousands). March 31, 2018 March 31, 2017Current Assets $8,633 $5,712Non-Current Assets 3,597 2,277Current Liabilities 2,300 1,709Non-Current Liabilities 1,486 1,638 Twelve Months Ended March 31, 2018 2017 2016Revenue $17,455 $9,963 $10,885Income from continuing operations 3,150 (281) (1,360)Net income 3,150 (281) (1,360) I-45 SLF LLC In September 2015, we entered into an LLC agreement with Main Street Capital to form I-45 SLF LLC. I-45 SLFLLC began investing in UMM syndicated senior secured loans during the quarter ended December 31, 2015. The initialequity capital commitment to I-45 SLF LLC totaled $85.0 million, consisting of $68.0 million from CSWC and $17.0million from Main Street Capital. Approximately $81.0 million was funded as of March 31, 2018, relating to thesecommitments, of which $64.8 million was from CSWC. As of March 31, 2018, CSWC has unfunded commitmentsoutstanding of $3.2 million. CSWC owns 80% of I-45 SLF LLC and has a profits interest of 75.6%, while Main Street Capitalowns 20% and has a profits interest of 24.4%. I-45 SLF LLC’s Board of Managers make all investment and operationaldecisions for the fund, and consists of equal representation from CSWC and Main Street Capital. As of March 31, 2018 and 2017, I-45 SLF LLC had total assets of $223.4 million and $216.2 million, respectively. I-45 SLF LLC had approximately $220.8 million and $200.2 million of credit investments at fair value as of March 31, 2018and 2017, respectively. The portfolio companies in I-45 SLF LLC are in industries similar to those in which CSWC mayinvest directly. As of March 31, 2018 and 2017, approximately $3.2 million and $11.8 million, respectively, of the creditinvestments were unsettled trades. For the years ended March 31, 2018 and 2017, I-45 SLF LLC declared total dividends of$11.9 million and $9.1 million, respectively. Additionally, I-45 SLF LLC closed on a $75.0 million 5-year senior secured credit facility (the “I-45 credit facility”)in November 2015. This facility includes an accordion feature which will allow I-45 SLF LLC to achieve leverage ofapproximately 2x debt-to-equity. Borrowings under the facility are secured by all of the assets of I-45 SLF LLC and bearinterest at a rate equal to LIBOR plus 2.5% per annum. During the year ended March 31, 2017, I-45 SLF LLC increased debtcommitments outstanding by an additional $90.0 million by adding three additional lenders to the syndicate, bringing totaldebt commitments to $165.0 million. In July 2017, the I-45 credit facility was amended to extend the maturity to July 2022.Additionally, the amendment reduced the interest rate on borrowings to LIBOR plus 2.4% per annum. Under the I-45 creditfacility, $143.0 million has been drawn as of March 31, 2018. 109 Table of ContentsBelow is a summary of I-45 SLF LLC’s portfolio, followed by a listing of the individual loans in I-45 SLF LLC’s portfolioas of March 31, 2018 and 2017: I-45 SLF LLC Loan Portfolio as of March 31, 2018 Current Investment Maturity Interest Portfolio Company Industry Type Date Rate Principal Cost Fair Value AAC Holdings, Inc. Healthcare services First Lien 6/30/2023 L+ 6.75%(Floor1.00%) $7,568,046 $7,413,688 7,700,487 American Scaffold Holdings, Inc. Aerospace & defense First Lien 3/31/2022 L+6.50%(Floor1.00%) 2,775,000 2,746,293 2,761,125 American TeleconferencingServices, Ltd. Telecommunications First Lien 12/8/2021 L+6.50% (Floor1.00%) 7,287,370 6,938,866 7,285,548 Ansira Holdings, Inc. Business services First Lien 12/20/2022 L+6.50%(Floor1.00%) 3,878,182 3,847,470 3,868,486 DelayedDraw 12/20/2022 L+6.50%(Floor1.00%) 315,316 310,799 314,527 ATI Investment Sub, Inc. Technology products& components First Lien 6/22/2021 L+7.25%(Floor1.00%) 3,557,227 3,503,722 3,552,781 ATX Canada Acquisitionco Inc. Technology products& components First Lien 6/11/2021 L+6.00% (Floor1.00%) 4,836,742 4,801,504 4,498,170 Beaver-Visitec InternationalHoldings, Inc. Healthcare products First Lien 8/21/2023 L+5.00%(Floor1.00%) 4,925,000 4,886,584 4,949,625 California Pizza Kitchen, Inc. Restaurants First Lien 8/23/2022 L+6.00%(Floor1.00%) 6,899,937 6,863,761 6,775,739 Chloe Ox Parent, LLC (CenseoHealth) Healthcare services First Lien 12/31/2024 L+5.00%(Floor1.00%) 5,200,000 5,149,500 5,265,000 CMN.com, LLC Consumer services First Lien 11/3/2021 L+6.00%(Floor1.00%) 8,742,126 8,645,306 8,742,126 Digital River, Inc. Software & ITservices First Lien 2/12/2021 L+6.50%(Floor1.00%) 8,002,967 7,995,112 8,002,967 Go Wireless Holdings, Inc. Retail First Lien 12/31/2024 L+6.50%(Floor1.00%) 6,912,500 6,845,573 6,903,859 Highline Aftermarket Acquisition,LLC Automobile First Lien 3/17/2024 L+4.25%(Floor1.00%) 2,856,595 2,844,340 2,860,166 Hunter Defense Technologies, Inc. Aerospace & defense First Lien 3/29/2023 L+7.00%(Floor1.00%) 6,500,000 6,370,152 6,370,152 iEnergizer Limited Business services First Lien 5/1/2019 L+6.00%(Floor1.25%) 6,550,375 6,421,048 6,558,563 Imagine! Print Solutions, LLC Media, marketing &entertainment SecondLien 6/21/2023 L+8.75%(Floor1.00%) 3,000,000 2,960,563 2,760,000 InfoGroup Inc. Software & ITservices First Lien 4/3/2023 L+5.00%(Floor1.50%) 2,970,000 2,945,028 2,957,021 110 123Table of Contents Current Investment Maturity Interest Portfolio Company Industry Type Date Rate Principal Cost Fair Value Integro Parent Inc. Business services First Lien 10/31/2022 L+5.75%(Floor1.00%) 4,888,924 4,768,810 4,888,924 iPayment Holdings, Inc. Financial services First Lien 4/11/2023 L+5.00%(Floor1.50%) 4,987,500 4,987,500 5,049,844 KeyPoint Government Solutions,Inc. Business services First Lien 4/18/2024 L+6.00%(Floor1.00%) 4,750,000 4,708,981 4,750,000 LOGIX Holdings Company, LLC Telecommunications First Lien 12/22/2024 L+5.75%(Floor1.00%) 4,528,716 4,484,992 4,551,360 LSF9 Atlantis Holdings, LLC Telecommunications First Lien 5/1/2023 L+6.00%(Floor1.00%) 6,868,750 6,810,137 6,854,429 Lulu's Fashion Lounge, LLC Consumer products &retail First Lien 8/23/2022 L+7.00%(Floor1.00%) 4,374,999 4,254,636 4,506,249 NBG Acquisition, Inc. Wholesale First Lien 4/26/2024 L+5.50%(Floor1.00%) 2,962,500 2,911,071 2,973,609 New Media Holdings II LLC Media, marketing &entertainment First Lien 7/14/2022 L+6.25% (Floor1.00%) 8,822,598 8,799,522 8,880,518 Peraton Corp. (fka MHVCAcquisition Corp.) Aerospace & defense First Lien 4/29/2024 L+5.25%(Floor1.00%) 4,960,013 4,938,405 5,022,013 Pet Supermarket, Inc. Consumer products &retail First Lien 7/5/2022 L+5.50%(Floor1.00%) 4,925,000 4,889,928 4,900,375 Polycom, Inc. Telecommunications First Lien 9/27/2023 L+5.25%(Floor1.00%) 5,234,833 5,234,833 5,287,182 Prepaid Legal Services, Inc. Consumer services First Lien 7/1/2019 L+5.25% (Floor1.25%) 3,860,938 3,859,187 3,860,938 SecondLien 7/1/2020 L+9.00% (Floor1.25%) 405,000 398,614 405,000 PT Network, LLC Healthcare products First Lien 11/30/2021 L+6.50%(Floor1.00%) 4,425,133 4,425,133 4,425,133 Redwood Ahead Acquisition, LLC Business services First Lien 11/2/2020 L+ 6.50% 2,811,484 2,767,547 2,829,056 Solaray, LLC Consumer services First Lien 9/8/2023 L+6.50%(Floor1.00%) 6,308,205 6,263,089 6,308,205 DelayedDraw 9/8/2023 L+6.50%(Floor1.00%) 1,784,890 1,768,866 1,784,890 Tacala, LLC Consumer products &retail SecondLien 1/31/2026 L+7.00% 3,000,000 2,985,089 3,063,765 Teleguam Holdings , LLC Telecommunications SecondLien 4/12/2024 L+8.50%(Floor1.00%) 2,000,000 1,963,812 2,015,000 Terra Millennium Corporation Industrial products First Lien 10/31/2022 L+6.25%(Floor1.00%) 7,776,019 7,715,978 7,834,339 TestEquity, LLC Capital equipment First Lien 4/28/2022 L+5.50%(Floor1.00%) 4,952,674 4,911,727 4,952,674 111 1245Table of Contents Current Investment Maturity Interest Portfolio Company Industry Type Date Rate Principal Cost Fair Value TGP Holdings III LLC Durable consumergoods First Lien 9/25/2024 L+5.00%(Floor1.00%) 1,720,169 1,701,604 1,736,296 SecondLien 9/25/2025 L+8.50%(Floor1.00%) 2,500,000 2,464,804 2,537,500 Time Manufacturing Acquisition Capital equipment First Lien 2/3/2023 L+5.00% (Floor1.00%) 4,947,519 4,908,622 4,935,150 Turning Point Brands, Inc. Consumer products &retail SecondLien 3/7/2024 L+7.00%(Floor1.00%) 3,000,000 2,970,120 3,060,000 UniTek Global Services, Inc. Telecommunications First Lien 1/13/2019 L+8.50%(Floor1.00%) 4,584,809 4,584,809 4,584,809 US Joiner Holding Company(IMECO and RAACI) Transportation &logistics First Lien 4/16/2020 L+6.00% (Floor1.00%) 4,459,182 4,425,102 4,436,886 U.S. TelePacific Corp. Telecommunications First Lien 5/2/2023 L+5.00%(Floor1.00%) 7,643,991 7,550,843 7,441,425 VIP Cinema Holdings, Inc. Hotel, gaming &leisure First Lien 3/1/2023 L+6.00% (Floor1.00%) 4,750,000 4,730,480 4,804,934 Total Investments $218,673,548 $220,806,845 1Represents the interest rate as of March 31, 2018. All interest rates are payable in cash, unless otherwise noted. The majority of investments bearinterest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime (“Prime”) which reset daily,monthly, quarterly, or semiannually. For each the Company has provided the spread over LIBOR or Prime in effect at March 31, 2018. Certaininvestments are subject to a LIBOR or Prime interest rate floor.2Represents the fair value determined utilizing a similar process as the Company in accordance with ASC 820. However, the determination of suchfair value is determined by the Board of Managers of the Joint Venture. It is not included in the Company’s Board of Directors’ valuation processdescribed elsewhere herein.3The investment has approximately $0.3 million in an unfunded delayed draw commitment as of March 31, 2018.4The investment has approximately $2.1 million in an unfunded delayed draw commitment as of March 31, 2018.5The investment has approximately $0.9 million in an unfunded delayed draw commitment as of March 31, 2018.6The investment has approximately $0.3 million in an unfunded delayed draw commitment as of March 31, 2018. 112 126Table of ContentsI-45 SLF LLC Loan Portfolio as of March 31, 2017 Current Investment Maturity Interest Portfolio Company Industry Type Date Rate Principal Cost Fair ValueAhead, LLC Business services First Lien 11/2/2020 L+ 6.50% $4,687,500 $4,585,980 4,640,625American Scaffold Holdings Aerospace & defense First Lien 3/31/2022 L+6.50%(Floor1.00%) 2,925,000 2,887,177 2,910,375American Teleconferencing Telecommunications First Lien 12/8/2021 L+6.50% (Floor1.00%) 5,711,302 5,243,687 5,700,451 SecondLien 6/6/2022 L+9.50% (Floor1.00%) 1,708,571 1,643,620 1,674,400Ansira Partners Business services First Lien 12/31/2022 L+6.50%(Floor1.00%) 4,500,000 3,884,092 3,893,523Array Technologies Technology products& components First Lien 6/22/2021 L+7.25%(Floor1.00%) 4,625,000 4,542,126 4,613,437ATX Networks Corp. Technology products& components First Lien 6/12/2021 L+6.00% (Floor1.00%) 4,924,812 4,877,593 4,875,564Beaver-Visitec International Healthcare products First Lien 8/21/2023 L+5.00%(Floor1.00%) 4,975,000 4,928,997 4,975,000California Pizza Kitchen Food, agriculture &beverage First Lien 8/23/2022 L+6.00%(Floor1.00%) 6,969,987 6,925,133 6,971,381CMN.com (Higher Education) Consumer services First Lien 10/15/2021 L+6.00%(Floor1.00%) 6,912,500 6,785,531 6,785,531Contextmedia Media, marketing &entertainment First Lien 12/31/2021 L+6.50% (Floor1.00%) 1,975,000 1,787,489 1,975,000Digital River Software & ITservices First Lien 2/12/2021 L+6.50%(Floor1.00%) 7,015,452 6,988,236 7,050,529Digital Room Paper & forestproducts SecondLien 5/28/2023 L+10.00%(Floor1.00%) 4,000,000 3,924,128 3,924,128Highline Aftermarket Automobile First Lien 3/17/2024 L+4.25% (Floor1.00%) 3,000,000 2,985,000 3,033,900Hunter Defense Technologies Aerospace & defense First Lien 8/5/2019 L+6.00%(Floor1.00%) 2,703,947 2,697,208 2,514,671ICSH, Inc. Containers &packaging First Lien 12/31/2018 L+5.75% (Floor1.00%) 6,698,007 6,670,865 6,685,051iEnergizer Business services First Lien 5/1/2019 L+6.00%(Floor1.25%) 6,567,046 6,217,720 6,542,748IG Investments Holdings Business services First Lien 10/31/2021 L+5.00%(Floor1.00%) 2,480,470 2,469,439 2,507,856Imagine! Print Solutions Media, marketing &entertainment First Lien 3/30/2022 L+6.00% (Floor1.00%) 3,565,489 3,526,760 3,610,057InfoGroup Inc. Software & ITservices First Lien 5/28/2018 L+5.50%(Floor1.50%) 5,913,550 5,813,451 5,907,637113 12Table of Contents Current Investment Maturity Interest Portfolio Company Industry Type Date Rate Principal Cost Fair Value First Lien L+5.00%(Floor1.50%) 3,000,000 2,970,000 2,970,000Integro Parent Inc. Business services First Lien 11/2/2022 L+5.75% (Floor1.00%) 4,938,924 4,790,756 4,963,618iPayment, Inc. Financial services First Lien 5/8/2017 L+5.25% (Floor1.50%) 6,964,029 6,947,920 6,929,209LTI Holdings, Inc. Industrial products First Lien 4/17/2022 L+4.25% (Floor1.00%) 1,974,874 1,780,886 1,974,874Mood Media Corporation Business services First Lien 5/1/2019 L+6.00% (Floor1.00%) 4,503,289 4,427,043 4,483,024MWI Holdings Industrial products First Lien 6/29/2020 L+5.50%(Floor1.00%) 4,962,500 4,921,442 5,006,170New Media Holdings II LLC Media, marketing &entertainment First Lien 6/4/2020 L+6.25% (Floor1.00%) 6,901,894 6,886,200 6,867,385Northstar Travel Media, marketing &entertainment First Lien 6/7/2022 L+6.25% (Floor1.00%) 4,090,625 4,036,655 4,070,172PetValu Consumer products &retail First Lien 7/5/2022 L+5.50%(Floor1.00%) 4,975,000 4,931,261 4,987,438Pike Corp. Utilities SecondLien 8/30/2024 L+8.00%(Floor1.00%) 1,000,000 990,000 1,017,500Polycom Telecommunications First Lien 9/27/2023 L+6.50% (Floor1.00%) 6,445,833 6,445,833 6,547,678Prepaid Legal Services, Inc. Consumer services First Lien 7/1/2019 L+5.25% (Floor1.25%) 4,474,279 4,470,626 4,507,836 SecondLien 7/1/2020 L+9.00% (Floor1.25%) 405,000 395,663 407,349PT Network Healthcare products First Lien 11/30/2021 L+6.50%(Floor1.00%) 4,990,972 3,883,735 3,883,735Redbox Automated Retail Gaming & leisure First Lien 9/27/2021 L+7.50%(Floor1.00%) 6,125,000 5,958,692 6,132,963Safe Guard Automobile First Lien 3/31/2024 L+5.00% (Floor1.00%) 3,250,000 3,152,500 3,225,625Sigma Electric Industrial products First Lien 8/31/2021 L+7.50%(Floor1.00%) 5,000,000 4,886,637 4,886,637SRP Companies Consumer services First Lien 9/8/2023 L+6.50% (Floor1.00%) 5,152,273 5,106,492 5,132,212TaxACT Financial services First Lien 12/31/2022 L+6.00% (Floor1.00%) 1,269,915 1,238,463 1,269,915Terra Millennium Industrial products First Lien 11/23/2022 L+6.25% (Floor1.00%) 6,956,250 6,889,423 6,956,250114 12Table of Contents Current Investment Maturity Interest Portfolio Company Industry Type Date Rate Principal Cost Fair Value Time Manufacturing Capital Equipment First Lien 2/10/2022 L+5.00% (Floor1.00%) 3,000,000 2,985,343 2,985,343Turning Point Brands Retail First Lien 12/31/2021 L+6.00% (Floor1.00%) 5,000,000 4,950,846 4,950,846Tweddle Group Media, marketing &entertainment First Lien 10/24/2022 L+6.00%(Floor1.00%) 2,506,731 2,459,763 2,525,531US Joiner (IMECO and RAACI) Transportation &logistics First Lien 4/16/2020 L+6.00% (Floor1.00%) 4,791,601 4,737,062 4,767,643VIP Cinema Hotel, gaming &leisure First Lien 3/31/2023 L+6.00% (Floor1.00%) 5,000,000 4,975,275 5,059,500Water Pik, Inc. Consumer products& retail First Lien 7/8/2020 L+4.75% (Floor1.00%) 1,137,090 1,135,097 1,139,478 SecondLien 1/8/2021 L+8.75% (Floor1.00%) 1,789,474 1,756,683 1,802,895Total Investments $197,494,528 $200,242,6901Represents the interest rate as of March 31, 2017. All interest rates are payable in cash, unless otherwise noted. The majority of investments bearinterest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime (“Prime”) which reset daily,monthly, quarterly, or semiannually. For each the Company has provided the spread over LIBOR or Prime in effect at March 31, 2017. Certaininvestments are subject to a LIBOR or Prime interest rate floor2Represents the fair value determined utilizing a similar process as the Company in accordance with ASC 820. However, the fair value isdetermined by the Board of Managers of the Joint Venture. It is not included in the Company’s Board of Directors’ valuation process describedelsewhere herein. 115 12Table of ContentsAt March 31, 2018, our investment in I-45 SLF LLC exceeded the 10% threshold in at least one of the tests underRule 4-08(g) of Regulation S-X. At March 31, 2018, our investment in I-45 SLF LLC did not exceed the 20% threshold in atleast one of the tests under Rule 3-09. However, our investment in I-45 SLF LLC did exceed the 20% threshold in at least oneof the tests under Rule 3-09 as of March 31, 2017. Accordingly, we have included as an exhibit to this Form 10-K thefinancial statements of I-45 SLF LLC. Below is certain summarized financial information for I-45 SLF LLC as of March 31,2018 and 2017 and for the years ended March 31, 2018 and 2017 and for the period from September 3, 2015 (the date ofincorporation) to March 31, 2016 (amounts in thousands): March 31, 2018 March 31, 2017 Selected Balance Sheet Information: Investments, at fair value (cost $218,674 and $197,495) $220,807 $200,243 Cash and cash equivalents 9,317 12,093 Due from broker 330 1,732 Deferred financing costs 2,111 1,659 Interest receivable 813 474 Total assets $233,378 $216,201 Senior credit facility payable $143,000 $122,000 Payable for unsettled transactions 3,213 11,795 Other liabilities 3,119 2,988 Total liabilities $149,332 $136,783 Members’ equity 84,046 79,418 Total liabilities and net assets $233,378 $216,201 Period from September 3, 2015 Year Ended Year Ended (date ofincorporation) March 31, 2018 March 31, 2017 to March 31, 2016 Selected Statement of Operations Information: Total revenues $17,066 $12,542 $2,401 Total expenses 6,613 4,400 689 Net investment income 10,453 8,142 1,712 Net unrealized appreciation (depreciation) (615) 3,370 (621) Net realized gains 1,660 1,653 42 Net increase in members’ equity resulting from operations $11,498 $13,165 $1,133 116 Table of ContentsSCHEDULE 12-14 Schedule of Investments in and Advances to Affiliates(In thousands) Amount of Interest or Dividends Fair Value Amount of Amount of Gross Fair Value at Credited in at March31, Realized Unrealized Additions March 31, Portfolio CompanyType of Investment (1) Income (2) 2017 Gain/(Loss) Gain/(Loss) (3) 2018Control Investments I-45 SLF LLC80% LLC equityinterest $8,973 $63,395 $ — $(282) $4,000 $67,113 Prism SpectrumHoldings, LLCFirst lien 78 — — — 4,241 4,241 Revolving loan 4 — — — 490 490 57.25 Class A units — — — — 1,692 1,692 Media Recovery,Inc.800,000 shares SeriesA ConvertiblePreferred Stock,convertible into800,000 sharescommon stock 460 5,590 — 781 — 6,371 4,000,002 sharescommon stock 2,653 32,249 — 4,502 — 36,751 TitanLiner1,189,609 sharesSeries B convertiblepreferred stock (6%PIK) 168 2,777 — 8,418 167 11,362 339,277 shares SeriesA convertiblepreferred stock — — — 11,928 — 11,928Total ControlInvestments $12,336 $104,011 $ — $25,347 $10,590 $139,948 117 Table of Contents Amount of Interest or Dividends Fair Value Amount of Amount of Gross Fair Value at Credited in at March31, Realized Unrealized Additions March 31, Portfolio CompanyType of Investment (1) Income (2) 2017 Gain/(Loss) Gain/(Loss) (3) 2018Affiliate Investments Chandler Signs, LPSenior subordinateddebt (12.00% cash) $577 $4,477 $ — $(127) $26 $4,376 1,500,000 units ofClass A-1 commonstock — 2,661 — (727) — 1,934 Elite SEM, Inc.First lien 1,747 — — 396 17,104 17,500 1,089 Preferred units 127 — — 643 1,236 1,879 ITA Holdings Group,LLCFirst lien 129 — — — 9,314 9,314 Revolving loan 2 — — 10 (10) — Delayed draw termloan 3 — — — 1,470 1,470 9.25% Class Amembership interest — — — — 1,500 1,500 Zenfolio Inc.First lien 1,046 — — 125 13,200 13,325 Revolving loan 9 — — 17 (17) — 190 shares ofcommon stock — — — — 1,900 1,900 Investments not heldat the end of theperiod — — 90 — — — Total AffiliateInvestments $3,640 $7,138 $90 $337 $45,723 $53,198Total Control &Affiliate Investments $15,976 $111,149 $90 $25,684 $56,313 $193,146 This schedule should be read in conjunction with our Consolidated Financial Statements, including the ConsolidatedSchedules of Investments and Notes to Consolidated Financial Statements. (1)The principal amount and ownership detail as shown in the Consolidated Schedules of Investments.(2)Represents the total amount of interest or dividends credited to income for the portion of the year an investment was included in theControl or Affiliate categories, respectively.(3)Gross additions include increases in the cost basis of investments resulting from new portfolio investments, follow-on investments,accrued PIK interest, and accretion of OID. Gross additions also include movement of an existing portfolio company into this categoryand out of a different category. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 118 Table of Contents Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act,that are designed to provide reasonable assurance that information required to be disclosed in our filings and submissionsunder the Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and formsof the SEC and that such information is accumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow timely discussions regarding the required disclosure. We completed an evaluation under the supervision and with participation of management, including the ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls andprocedures as of March 31, 2018. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer haveconcluded that as of March 31, 2018, our disclosure controls and procedures were effective to provide the reasonableassurance described above. We note that the design of any system of controls is based in part upon certain assumptions aboutthe likelihood of future events, and there can be no assurance that any design will succeed in achieving the stated goalsunder all potential future conditions. Management’s Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, asdefined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of management, including theChief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal controlover financial reporting based on the criteria established in the 2013 Internal Control — Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the frameworkin the 2013 Internal Control — Integrated Framework, management concluded that our internal control over financialreporting was effective as of March 31, 2018. RSM US, LLP, our independent registered public accounting firm, has auditedthe effectiveness of the Company’s internal control over financial reporting as of March 31, 2018, as stated in its reportwhich is included in Item 8 of Part II of this Annual Report. Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting (as defined in Rule 13(a)-15(f) of theExchange Act) during the three months ended March 31, 2018 that have materially affected, or are reasonably likely tomaterially affect, our internal controls over financial reporting. Limitations on Controls Because of its inherent limitations, management does not expect that our disclosure controls and our internalcontrols over financial reporting will prevent or detect all misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequate because of changes in conditions or that thedegree of compliance with policies and procedures may deteriorate. Any control system, no matter how well designed andoperated, is based upon certain assumptions and can only provide reasonable, not absolute, assurance that its objectives willbe met. Further, no evaluation of controls can provide absolute assurance that misstatements due to errors or fraud will notoccur or that all control issues and instances of fraud, if any within the Company, have been detected. Item 9B. Other Information None. 119 Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this Item 10 will be contained in the definitive proxy statement relating to our 2018annual meeting of shareholders to be filed with the SEC no later than 120 days after the close of our fiscal year ended March31, 2018, and is incorporated herein by reference. Item 11. Executive Compensation The information required by this Item 11 will be contained in the definitive proxy statement relating to our 2018annual meeting of shareholders to be filed with the SEC no later than 120 days after the close of our fiscal year ended March31, 2018, and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters The information required by this Item 12 will be contained in the definitive proxy statement relating to our 2018annual meeting of shareholders to be filed with the SEC no later than 120 days after the close of our fiscal year ended March31, 2018, and is incorporated herein by reference. The table below sets forth certain information as of March 31, 2018 regarding the shares of our common stockavailable for grant or granted under stock compensation plans that (1) were approved by our shareholders, and (2) were notapproved by our shareholders. Number of Number of Securities Securities to be Weighted- Remaining Issued Upon Average Exercise Available for Exercise of Price of Future Issuance Outstanding Outstanding Under Equity Options, Warrants Options, Warrants Compensation Plan Category and Rights and Rights Plans Equity compensation plans approved byshareholders (1) 195,608 $11.09 13,777 Equity compensation plans not approved byshareholders (2) − − − Total 195,608 $11.09 13,777 1)Includes the 1999 Stock Option Plan, 2009 Stock Incentive Plan and 2010 Restricted Stock Award Plan. For adescription of all plans, please refer to Notes 8 and 9 contained in our consolidated financial statements. 2)We have no equity compensation plans that were not approved by shareholders. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this Item 13 will be contained in the definitive proxy statement relating to our 2018annual meeting of shareholders under the headings of “Certain Relationships and Related Transactions” and “CorporateGovernance” to be filed with the Securities and Exchange Commission no later than 120 days after the close of our fiscalyear ended March 31, 2018, and is incorporated herein by reference. 120 Table of Contents Item 14. Principal Accountant Fees and Services The information required by this Item 14 will be contained in the definitive proxy statement relating to our 2018annual meeting of shareholders under the heading of “Ratification and Appointment of Independent Registered PublicAccounting Firm for the Year Ended March 31, 2018” to be filed with the Securities and Exchange Commission no later than120 days after the close of our fiscal year ended March 31, 2018, and is incorporated herein by reference. 121 Table of Contents PART IV Item 15. Exhibits, Financial Statement Schedules The following documents are filed or incorporated by reference as part of this Annual Report: 1. Consolidated Financial Statements PageReports of Independent Registered Public Accounting Firm 60Consolidated Statements of Assets and Liabilities as of March 31, 2018 and 2017 63Consolidated Statements of Operations for Years Ended March 31, 2018, 2017 and 2016 64Consolidated Statements of Changes in Net Assets for Years Ended March 31, 2018, 2017and 2016 65Consolidated Statements of Cash Flows for Years Ended March 31, 2018, 2017 and 2016 66Consolidated Schedules of Investments as of March 31, 2018 and 2017 67Notes to Consolidated Financial Statements 74 2. Consolidated Financial Statement Schedule PageSchedule of Investments in and Advances to Affiliates for the Year Ended March 31, 2018 117 3. Exhibits Exhibit No. Description 2.1 Distribution Agreement, dated September 8, 2015, between the Company and CSW Industrials, Inc. (incorporatedby reference to Exhibit 2.1 to Form 8-K (File No. 814-00061) filed on September 14, 2015). 3.1 Articles of Incorporation, dated April 19, 1961, including amendments dated June 30, 1969, July 20, 1987, April23, 2007 and July 15, 2013 (incorporated by reference to Exhibit (a) to Registration Statement on Form N-2 (Reg.No. 333-220385) filed on September 8, 2017). 3.2 Second Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to Form 10-Q (File No. 814-00061) filed on November 7, 2017). 4.1 Specimen of Common Stock certificate (incorporated by reference to Exhibit 4.1 to Form 10-K (File No. 811-01056) filed on June 14, 2002). 4.2 Indenture, dated October 23, 2017, between the Company and U.S. Bank National Association, Trustee(incorporated by reference to Exhibit (d)(2) to Registration Statement on Form N-2 (Reg. No. 333-220385) filedon October 23, 2017). 4.3 First Supplemental Indenture, dated December 15, 2017, between the Company and U.S. Bank NationalAssociation, Trustee (incorporated by reference to Exhibit (d)(4) to Registration Statement on Form N-2 (Reg. No.333-220385) filed on December 15, 2017). 4.4 Form of 5.95% Notes due 2022 (incorporated by reference Exhibit (d)(5) to Registration Statement on Form N-2(Reg. No. 333-220385) filed on December 15, 2017). 122 Table of Contents Exhibit No. Description 4.5 Dividend Reinvestment Plan (incorporated by reference Exhibit (e) to Registration Statement on Form N-2 (Reg.No. 333-220385) filed on September 8, 2017). 10.1+ Capital Southwest Corporation and Its Affiliates 2009 Restoration of Retirement Income Plan as amended andrestated effective January 1, 2008 (incorporated by reference to Exhibit 10.3 to Form 10-K (File No. 814-00061)filed on May 29, 2009). 10.2+ Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.1 to Form 10-Q(File No. 814-00061) filed on November 7, 2017). 10.3+ Capital Southwest Corporation 1999 Stock Option Plan (incorporated by reference to Exhibit 10.10 to Form 10-K(File No. 811-01056) filed on June 16, 2000). 10.4+ Severance Pay Agreement with William M. Ashbaugh (incorporated by reference to Exhibit 10.1 to Form 8-K(File No. 811-01056) filed on July 19, 2005). 10.5+ Retirement Plan for Employees of Capital Southwest Corporation and its Affiliates as amended and restatedeffective April 1, 2011 (incorporated by reference to Exhibit 10.15 to Form 10-K (File No. 814-00061) filed onJune 1, 2012). 10.6+ Amendment One to Retirement Plan for Employees of Capital Southwest Corporation and its Affiliates asamended and restated effective April 1, 2011 (incorporated by reference to Exhibit 10.16 to Form 10-K (File No.814-00061) filed on May 31, 2013). 10.7+ Amendment Four to Retirement Plan for Employees of Capital Southwest Corporation and its Affiliates asamended and restated effective April 1, 2011 (incorporated by reference to Exhibit 10.1 to Form 8-K (File No.814-00061) filed on August 6, 2015). 10.8+ Joseph B. Armes Revised Offer Letter (incorporated by reference to Exhibit 99.2 to Form 8-K (File No. 814-00061) filed on May 17, 2013). 10.9+ Capital Southwest Corporation 2009 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to Form 10-Q(File No. 814-00061) filed on August 5, 2011). 10.10+ First Amendment to the Capital Southwest Corporation 2009 Stock Incentive Plan (incorporated by reference toExhibit 10.1 to Form 10-Q (File No. 814-00061) filed on November 7, 2014). 10.11+ Second Amendment to the Capital Southwest Corporation 2009 Stock Incentive Plan (incorporated by reference toExhibit 10.1 to Form 8-K (File No. 814-00061) filed on August 12, 2015). 10.12+ Third Amendment to the Capital Southwest Corporation 2009 Stock Incentive Plan (incorporated by reference toExhibit 10.4 to Form 10-Q (File No. 814-00061) filed on November 7, 2017). 10.13+ Capital Southwest Corporation 2010 Restricted Stock Award Plan (incorporated by reference to Exhibit 10.2 toForm 10-Q (File No. 814-00061) filed on August 5, 2011). 10.14+ First Amendment to the Capital Southwest Corporation 2010 Restricted Stock Award Plan (incorporated byreference to Exhibit 10.2 to Form 10-Q (File No. 814-00061) filed on November 7, 2014). 10.15+ Second Amendment to the Capital Southwest Corporation 2010 Restricted Stock Award Plan (incorporated byreference to Exhibit 10.2 to Form 8-K (File No. 814-00061) filed August 12, 2015). 10.16+ Third Amendment to the Capital Southwest Corporation 2010 Restricted Stock Award Plan (incorporated byreference to Exhibit 10.3 to Form 10-Q (File No. 814-00061) filed on November 7, 2017). 10.17+ Form of Restricted Stock Award Agreement under the 2010 Restricted Stock Award Plan, as amended(incorporated by reference to Exhibit 10.3 to Form 10-Q (File No. 814-00061) filed on November 7, 2014). 123 Table of Contents Exhibit No. Description 10.18+ Form of Non-Qualified Stock Option Agreement under the 2009 Stock Incentive Plan, as amended (incorporatedby reference to Exhibit 10.4 to Form 10-Q (File No. 814-00061) filed on November 7, 2014). 10.19+ Form of Cash Incentive Award Agreement (incorporated by reference to Exhibit 10.5 to Form 10-Q (File No.814-00061) filed on November 7, 2014). 10.20 Tax Matters Agreement, dated September 8, 2015, between the Company and CSW Industrials, Inc. (incorporatedby reference to Exhibit 10.1 to Form 8-K (File No. 814-00061) filed on September 14, 2015). 10.21+ Amended and Restated Employee Matters Agreement, dated September 4, 2015, between the Company and CSWIndustrials, Inc. (incorporated by reference to Exhibit 10.2 to Form 8-K (File No. 814-00061) filed on September14, 2015). 10.22+ Form of Amended and Restated Non-Qualified Stock Option Agreement under the 2009 Stock Incentive Plan(CSWC Employee Form) (incorporated by reference to Exhibit 10.3 to Form 10-Q (File No. 814-00061) filed onNovember 9, 2015). 10.23+ Form of Amended and Restated Non-Qualified Stock Option Agreement under the 2009 Stock Incentive Plan(CSWI Employee Form) (incorporated by reference to Exhibit 10.4 to Form 10-Q (File No. 814-00061) filed onNovember 9, 2015). 10.24+ Form of Amended and Restated Incentive Stock Option Agreement under the 2009 Stock Incentive Plan (CSWCEmployee Form) (incorporated by reference to Exhibit 10.5 to Form 10-Q (File No. 814-00061) filed onNovember 9, 2015). 10.25+ Form of Amended and Restated Incentive Stock Option Agreement under the 2009 Stock Incentive Plan (CSWIEmployee Form) (incorporated by reference to Exhibit 10.6 to Form 10-Q (File No. 814-00061) filed onNovember 9, 2015). 10.26+ Form of Amended and Restated Non-Qualified Stock Option Agreement (Executive Compensation Plan – CSWCEmployee Form) (incorporated by reference to Exhibit 10.7 to Form 10-Q (File No. 814-00061) filed onNovember 9, 2015). 10.27+ Form of Amended and Restated Non-Qualified Stock Option Agreement (Executive Compensation Plan – CSWIEmployee Form) (incorporated by reference to Exhibit 10.8 to Form 10-Q (File No. 814-00061) filed onNovember 9, 2015). 10.28+ Form of Restricted Stock Agreement under the 2010 Restricted Stock Award Plan (CSWC Employee Form)(incorporated by reference to Exhibit 10.9 to Form 10-Q (File No. 814-00061) filed on November 9, 2015). 10.29+ Form of Amended and Restated Restricted Stock Agreement under the 2010 Restricted Stock Award Plan (CSWIEmployee Form) (incorporated by reference to Exhibit 10.10 to Form 10-Q (File No. 814-00061) filed onNovember 9, 2015). 10.30+ Form of Amended and Restated Restricted Stock Award (Executive Compensation Plan – CSWC EmployeeForm) (incorporated by reference to Exhibit 10.11 to Form 10-Q (File No. 814-00061) filed on November 9,2015). 10.31+ Form of Amended and Restated Restricted Stock Award (Executive Compensation Plan – CSWI Employee Form)(incorporated by reference to Exhibit 10.12 to Form 10-Q (File No. 814-00061) filed on November 9, 2015). 10.32+ Form of Amended and Restated Cash Incentive Award Agreement (Executive Compensation Plan) (incorporatedby reference to Exhibit 10.13 to Form 10-Q (File No. 814-00061) filed on November 9, 2015). 10.33 I-45 SLF LLC Agreement dated September 9, 2015 (incorporated by reference to Exhibit 10.14 to Form 10-Q(File No. 814-00061) filed on November 9, 2015).124 Table of Contents Exhibit No. Description 10.34 Guarantee, Pledge and Security Agreement dated August 30, 2016, among the Company, the subsidiaryguarantors thereto, ING Capital LLC, and each financing agent and designated indebtedness holder thereto(incorporated by reference to Exhibit 10.2 to Form 8-K (File No. 814-00061) filed on September 2, 2016). 10.35 Senior Secured Revolving Credit Agreement dated August 30, 2016, among the Company, the lenders partythereto, ING Capital LLC and Texas Capital Bank, N.A. (incorporated by reference to Exhibit 10.1 to Form 8-K(File No. 814-00061) filed on September 2, 2016). 10.36 Incremental Assumption Agreement, dated August 18, 2017, among the Company, ING Capital LLC andLegacyTexas Bank (incorporated by reference to Exhibit 10.2 to Form 10-Q (File No. 814-00061) filed onNovember 7, 2017). 10.37 Amendment No. 1 to the Senior Secured Revolving Credit Agreement, dated November 16, 2017, among theCompany, the lenders party thereto, ING Capital LLC and the subsidiary guarantors thereto (incorporated byreference to Exhibit 10.1 to Form 8-K (File No. 814-00061) filed on November 17, 2017). 10.38 Incremental Assumption Agreement, dated April 16, 2018, among the Company, ING Capital LLC and HitachiCapital America Corp. (incorporated by reference to Exhibit 10.1 to Form 8-K (File No. 814-00061) filed on April17, 2018). 10.39 Incremental Assumption Agreement, dated as of May 11, 2018 among Capital Southwest Corporation, asBorrower, and ING Capital LLC, as Administrative Agent and Increasing Lender (incorporated by reference toExhibit 10.1 to Form 8-K (File No. 814-00061) filed on May 14, 2018). 10.40* Master Reimbursement Agreement, dated as of May 9, 2018, by and between Capital Southwest Corporation, asBorrower, and ING Capital LLC, as Issuer. 10.41 Amended and Restated Administration Agreement, dated March 9, 2017, between the Company and CapitalSouthwest Management Corporation (incorporated by reference to Exhibit (k)(3) to Registration Statement onForm N-2 (Reg. No. 333-220385) filed on September 8, 2017). 10.42 Custody Agreement, dated August 30, 2016, between the Company and U.S. Bank National Association(incorporated by reference to Exhibit (j)(1) to Registration Statement on Form N-2 (Reg. No. 333-220385) filed onSeptember 8, 2017). 10.43 Custody Control Agreement, dated August 30, 2016, between the Company, ING Capital LLC and U.S. BankNational Association (incorporated by reference to Exhibit (j)(2) to Registration Statement on Form N-2 (Reg. No.333-220385) filed on September 8, 2017). 10.44 Document Custody Agreement, dated August 30, 2016, between the Company, ING Capital LLC and U.S. BankNational Association (incorporated by reference to Exhibit (j)(3) to Registration Statement on Form N-2 (Reg. No.333-220385) filed on September 8, 2017). 21.1* List of subsidiaries of the Company. 23.1* Consent of Independent Registered Public Accounting Firm – RSM US LLP (relating to the Company). 23.2* Consent of Independent Auditor – Grant Thornton LLP (relating to the Company). 23.3* Consent of Independent Auditor – RSM US LLP (relating to I-45 SLF LLC). 23.4* Consent of Independent Auditor – Weaver and Tidwell, L.L.P. (relating to TitanLiner, Inc.). 31.1* Certification of Chairman of the Board and President required by Rule 13a-14(a) or Rule 15d-14(a) of theExchange Act. 31.2* Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act. 125 Table of Contents Exhibit No. Description 32.1*^ Certification of Chairman of the Board and President required by Rule 13a-14(b) or Rule 15d-14(b) of theExchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code. 32.2*^ Certification of Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act andSection 1350 of Chapter 63 of Title 18 of the United States Code. 99.1* Audited Consolidated Financial Statements of I-45 SLF LLC as of March 31, 2018 and 2017 and for the yearsended March 31, 2018, 2017 and for the period from September 3, 2015 (the date of incorporation) to March 31,2016. 99.2** Audited Consolidated Financial Statements of Media Recovery, Inc. as of September 30, 2018 and 2017 and forthe years ended September 30, 2018, 2017 and 2016. 99.3* Audited Consolidated Financial Statements of TitanLiner, Inc. as of December 31, 2017 and 2016 and for theyears ended December 31, 2017, 2016 and 2015.* Filed herewith.** Media Recovery, Inc. has a 2018 fiscal year to be ended September 30, 2018. These financial statements will be filed by amendment within90 days of September 30, 2018.+ Indicates management contract or compensatory plan or arrangement.^ The certifications attached as Exhibit 32.1 and 32.2 accompany this Annual Report pursuant to 18 U.S.C. Section 1350, as adopted pursuantto Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the registrant for purposes of Section 18 of theExchange Act, and are not to be incorporated by reference into any of the registrant’s filings under the Securities Act or the Exchange Act,whether made before or after the date of this Annual Report, irrespective of any general incorporation language contained in any such filing. 126 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CAPITAL SOUTHWEST CORPORATION By:/s/ Bowen S. Diehl Bowen S. DiehlPresident and Chief Executive Officer Date: June 5, 2018 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that each individual whose signature appears below hereby constitutesand appoints Bowen S. Diehl and Michael Sarner, and each or either of them, acting individually, as his true and lawfulattorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in anyand all capacities to sign any and all amendments to this Annual Report, and to file the same, with all exhibits thereto andother documents in connection therewith, with the SEC, granting unto said attorney-in-fact and agent, and each of them, fullpower and authority to do and perform each and every act and thing requisite and necessary to be done in connectiontherewith, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that saidattorney-in-fact and agent, or any of them, or their or his substitutes, may lawfully do or cause to be done or by virtue hereof. Pursuant to the requirement of the Securities and Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the Registrant and in the capacities and on the dates indicated: SignatureTitleDate /s/ David R. BrooksChairman of the BoardJune 5, 2018David R. Brooks /s/ Jack D. FurstDirectorJune 5, 2018Jack D. Furst /s/ T. Duane MorganDirectorJune 5, 2018T. Duane Morgan /s/ William Thomas IIIDirectorJune 5, 2018William Thomas III /s/ John H. WilsonDirectorJune 5, 2018John H. Wilson /s/ Bowen S. DiehlPresident and Chief Executive OfficerJune 5, 2018Bowen S. Diehl /s/ Michael SarnerChief Financial OfficerJune 5, 2018Michael Sarner(Chief Financial/Accounting Officer) 127Exhibit 10.40Execution VersionMASTER REIMBURSEMENT AGREEMENTMASTER REIMBURSEMENT AGREEMENT for the Issuance of Standby Letters Of Credit (this “Agreement”),dated as of May 9, 2018, by and between CAPITAL SOUTHWEST CORPORATION, a Texas corporation (the“Borrower”), and ING CAPITAL LLC (the “Issuer” and together with the Borrower, the “Parties”).WHEREAS, the Borrower wishes to enter into this Agreement with the Issuer for the issuance of Standby Lettersof Credit (as hereinafter defined); WHEREAS, the Issuer has agreed to enter into this Agreement with the Borrower and to issue the StandbyLetters of Credit from time to time requested by the Borrower, subject to the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and the agreements herein, the Parties agree to thefollowing terms and conditions:SECTION 1.Definitions. As used in this Agreement or in the Application Form (as hereinafter defined), thefollowing terms shall have the respective meanings indicated below, such meanings to be applicable equally to both thesingular and plural forms of such terms:“Adjusted LIBO Rate” means, for each period equal to three months (commencing on the date hereof), aninterest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greater of (i) (a) the LIBORate for such period multiplied by (b) the Statutory Reserve Rate for such period and (ii) zero.“Applicant” has the meaning set forth in Section 2.“Application Form” means an application for the issue of a Standby Letter of Credit submitted by the Borrowerto the Issuer, substantially in the form attached hereto as Exhibit A or as otherwise approved by the Issuer in itsreasonable discretion.“Base Rate” means, for any day, a rate per annum equal to the greatest of (a) the Prime Rate in effect on suchday, (b) the Federal Funds Effective Rate for such day plus 1/2 of 1%, and (c) zero. Any change in the Base Rate due toa change in the Prime Rate or the Federal Funds Effective Rate shall be effective from and including the effective dateof such change in the Prime Rate or the Federal Funds Effective Rate, as the case may be.“Beneficiary” means anyone named in the Standby Letter of Credit as the person or entity authorized to submita Demand and any other accompanying documents and instruments to the Issuer for payment.“Business Day” means any day that is not a Saturday, Sunday or other day on which commercial Issuers inNew York City are authorized or required by law to remain closed.“Change in Law” has the meaning given to such term in the Revolving Credit Agreement.“Default” means any event or circumstance which, with the giving of notice or the lapse of time or both, wouldconstitute an Event of Default.“Demand” means any claim, demand or request for payment made by a Beneficiary, and paid by the Issuer onthe basis of a Standby Letter of Credit or any other similar instrument issued pursuant to this Agreement.“Dollars” means lawful money of the United States of America.“Event of Default” means the occurrence of any event or condition set forth in Section 11 herein. “Excluded Taxes” means (A) U.S. federal withholding taxes imposed on amounts payable to or for the accountof the Issuer in respect of any payments hereunder pursuant to a law in effect as of the date of this Agreement, (B) tothe extent that Issuer is entitled to an exemption from or reduction of withholding tax with respect to any paymentshereunder, taxes attributable to the Issuer’s failure to provide any documentation and/or certifications to the Borrowerthat are required under applicable law to obtain such reduction or exemption from such taxes, and (C) U.S. federalwithholding taxes imposed under the Foreign Account Tax Compliance Act.“Facility Documents” means this Agreement, each Application Form and all other agreements and documentsexecuted and/or delivered pursuant hereto, as each may be amended, modified, extended or renewed from time to time.“Federal Funds Effective Rate” means, for any day, the weighted average (rounded upwards, if necessary, tothe next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System,as published on the next succeeding Business Day by the Federal Reserve Issuer of New York, or, if such rate is not sopublished for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) ofthe quotations for such day for such transactions received by the Issuer from three Federal funds brokers of recognizedstanding selected by it.“ISP98” means the International Standby Practices published by the International Chamber of Commerce.“LC Exposure” means, at any time, the aggregate undrawn amount of all outstanding Standby Letters of Creditat such time (including any Standby Letter of Credit for which a draft has been presented but not yet honored by theIssuer). “LIBO Rate” means, as of any date of determination, (i) the Intercontinental Exchange BenchmarkAdministration Ltd. LIBO Rate (or the successor thereto if the Intercontinental Exchange Benchmark AdministrationLtd. is no longer making such rates available) per annum for deposits in Dollars for a period equal to three monthsappearing on the display designated as Reuters Screen LIBO01 Page (or such other page on that service or such otherservice designated by the Intercontinental Exchange Benchmark Administration Ltd. LIBO Rate (or the successorthereto if the Intercontinental Exchange Benchmark Administration Ltd. is no longer making such rates available) forthe display of such Administration’s Interest Settlement Rates for deposits in Dollars) as of 11:00 a.m., London time onthe day that is two Business Days prior to such date of determination (or if such Reuters Screen LIBO01 Page isunavailable for any reason at such time, the rate which appears on the Reuters Screen ISDA Page as of such date andsuch time), (ii) if the Issuer determines that the sources set forth in clause (i) are unavailable as of such date ofdetermination, LIBO Rate for purposes of this definition shall mean the rate of interest determined by the Issuer to bethe average (rounded upward, if necessary, to the nearest 1/100th of 1%) of the rates per annum at which deposits inDollars for a period equal to three months are offered to the Issuer two (2) business days preceding such date ofdetermination by leading banks in the London interbank market as of 11:00 a.m. for delivery on such date ofdetermination, for the number of days comprised therein and in an amount comparable to the amount of Obligationsoutstanding hereunder, or (iii) if the Issuer determines that the sources set forth in clause (i) are permanently unavailablefor deposits in Dollars for a period equal to three months, LIBO Rate for purposes of this definition shall mean acomparable or successor rate, which rate is reasonably approved by the Issuer in consultation with the Borrower andwhich rate is consistent with the then prevailing market convention for determining a rate of interest for syndicatedloans in the United States at such time; provided, that if the LIBO Rate is less than zero for any relevant period, suchrate shall be deemed to be zero for such period. To the extent a comparable or successor rate is approved by the Issuerin consultation with the Borrower in accordance with clause (iii) above, the approved rate shall be applied in a mannerconsistent with market practice; provided, that to the extent such market practice is not administratively feasible for theIssuer, such approved rate shall be applied in a manner as otherwise reasonably determined by the Issuer.“Maximum Facility Amount” has the meaning set forth in Section 2.“Obligations” has the meaning set forth in Section 4.“OFAC” means the Office of Foreign Asset Control, Department of the Treasury.“Other Taxes” means all present or future stamp, court or documentary, intangible, recording, filing or similarTaxes that arise from any payment made under, from the execution, delivery, performance, enforcement or registrationof, from the receipt or perfection of a security interest under, or otherwise with respect to, this Agreement, except anysuch Taxes imposed with respect to an assignment. “Prime Rate” means the rate of interest quoted in The Wall Street Journal, Money Rates Section, as the “U.S.Prime Rate” (or its successor), as in effect from time to time. The Prime Rate is a reference rate and does notnecessarily represent the lowest or best rate actually charged to any customer. The Issuer may make commercial loansor other loans at rates of interest at, above, or below the Prime Rate.“Revolving Credit Agreement” means that certain Senior Secured Revolving Credit Agreement, dated as ofAugust 16, 2016, by and among the Borrower, as borrower, the lenders from time to time party thereto, and the Issuer,as administrative agent, as amended, supplemented or otherwise modified from time to time.“Solvent” means, with respect to the Borrower, that as of the date of determination, both (a) (i) the sum of theBorrower’s debt and liabilities (including contingent liabilities) does not exceed the present fair saleable value of theBorrower’s present assets, (ii) the Borrower’s capital is not unreasonably small in relation to its business ascontemplated on the date hereof and reflected in any projections delivered to the Issuer or with respect to anytransaction contemplated or undertaken after the date hereof, and (iii) the Borrower has not incurred and does notintend to incur, or believe (nor should it reasonably believe) that it will incur, debts beyond its ability to pay such debtsas they become due (whether at maturity or otherwise); and (b) the Borrower is “solvent” within the meaning given tosuch term and similar terms under applicable laws relating to fraudulent transfers and conveyances. For purposes ofthis definition, the amount of any contingent liability at any time shall be computed as the amount that, in light of all ofthe facts and circumstances existing at such time, represents the amount that can reasonably be expected to become anactual or matured liability (irrespective of whether such contingent liabilities meet the criteria for accrual underStatement of Financial Accounting Standard No. 5).“Standby Letter of Credit” means any credit instrument issued by the Issuer, for the benefit of the Applicant,upon presentation by the Borrower of an Application Form and pursuant to the terms and conditions hereunder.“Statutory Reserve Rate” means, for each period equal to three months (commencing on the date hereof), afraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is thenumber one minus the arithmetic mean, taken over each day in such period, of the aggregate of the maximum reservepercentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal establishedby the Board of Governors of the Federal Reserve System of the United States of America to which the Issuer is subjectfor eurocurrency funding (currently referred to as “Eurocurrency liabilities” in Regulation D). Such reserve percentagesshall include those imposed pursuant to Regulation D. Obligations hereunder shall be deemed to constituteeurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration,exemptions or offsets that may be available from time to time to the Issuer under Regulation D or any comparableregulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change inany reserve percentage.“Taxes” means any present or future taxes or other amounts for or on account of levies, imposts, duties,deductions, withholdings or other charges of whatsoever nature, imposed, levied, collected, withheld or assessed byany governmental authority excluding taxes on the net income (however denominated), franchise taxes, and branchprofits taxes, in each case, imposed on the Issuer.“UCP” means the Uniform Customs and Practices for Documentary Credits published by the InternationalChamber of Commerce.SECTION 2.Letter of Credit Facility. The Borrower may request, by the submission of an Application Form,that the Issuer issue Standby Letters of Credit, for its own account or for the account of any designee of the Borroweracceptable to the Issuer (the Borrower or such designee, as applicable, the “Applicant”; provided that, for theavoidance of doubt, the Borrower shall remain primarily liable to the Issuer hereunder for payment and reimbursementof all Obligations payable in respect of any Standby Letter of Credit issued hereunder) during the period commencingon the date hereof and expiring on the earlier to occur of (x) May [__], 2019, (y) the termination or satisfaction of thecommitments or obligations under the Revolving Credit Agreement and (z) in the event the Issuer delivers to theBorrower a written notice of termination of the Issuer’s obligations hereunder, the termination date specified in suchwritten notice; provided that, unless an Event of Default shall have occurred and be continuing, such termination dateshall be not less than sixty (60) days after the delivery of such written notice. The Issuer agrees to issue Standby Lettersof Credit prior to the date of termination of the Issuer’s obligations hereunder in accordance with and subject to theterms and conditions hereof, including the satisfaction of each of the conditions set forth in Section 3 with respect toeach requested issuance of a Standby Letter of Credit. No Standby Letter of Credit may have an expiration date(including expiration under any automatic renewal of any Standby Letter of Credit unless such automatic renewal issubject to cancellation by the Issuer upon not more than 60 days’ (or such longer period as Issuer may agree in its sole discretion) notice to the Beneficiary of such Standby Letter of Credit) that is on orafter May [__], 2019. The aggregate face amount of Standby Letters of Credit issued hereunder (whether or not drawn)shall not exceed $5,000,000 at any time outstanding (the “Maximum Facility Amount”). Each Standby Letter ofCredit shall be governed by the terms of this Agreement and the other Facility Documents and shall only be issued andpayable in Dollars. Each Standby Letter of Credit will be issued in a form reasonably acceptable to the Issuer.SECTION 3.Conditions for Issuance of Standby Letters of Credit. The effectiveness of this Agreement on thedate hereof and the Issuer’s obligation to issue Standby Letters of Credit hereunder is subject to the performance by theBorrower of its obligations to be performed hereunder at or prior to the issuance of such Standby Letter of Credit and tothe satisfaction of the following further conditions:(a) On the date hereof, the Issuer shall have received, from each party hereto, either (1) a counterpart ofthis Agreement signed on behalf of such party or (2) written evidence satisfactory to the Issuer (which may includetelecopy or e-mail transmission of a signed signature page to this Agreement) that such party has signed a counterpartof this Agreement;(b) On the date hereof, the Issuer shall have received a certificate of the secretary or assistant secretary ofthe Borrower, dated the date hereof, certifying that attached thereto are (1) true and complete copies of theorganizational documents of the Borrower certified as of a recent date by the appropriate governmental official,(2) signature and incumbency certificates of the officers of such Person executing the Facility Documents to which it isa party, (3) true and complete resolutions of the Board of Directors of the Borrower approving and authorizing theexecution, delivery and performance of this Agreement and the other Facility Documents to which it is a party as of thedate hereof and, and that such resolutions are in full force and effect without modification or amendment, (4) a goodstanding certificate from the applicable governmental authority of the Borrower’s jurisdiction of incorporation, dated arecent date prior to the date hereof, and (5) such other documents and certificates as the Issuer may reasonably requestrelating to the organization, existence and good standing of the Borrower, all in form and substance reasonablysatisfactory to the Issuer;(c) On the date hereof, the Issuer shall have received a solvency certificate of a financial officer of theBorrower dated the date hereof and addressed to the Issuer, and in form, scope and substance reasonably satisfactory tothe Issuer, certifying that both before and after giving effect to the transactions contemplated hereby, the Borrower willbe Solvent on an unconsolidated basis;(d) On the date hereof and on the date of issuance of any Standby Letter of Credit, no Default or Event ofDefault shall have occurred and be continuing;(e) On the date hereof and on the date of issuance of any Standby Letter of Credit, the Issuer shall havereceived all fees and other amounts due and payable on or prior to the date hereof or the requested date of issuance ofsuch Standby Letter of Credit, as applicable, including reimbursement or payment of all out-of-pocket expenses(including reasonable attorneys’ fees) payable under Section 9(b);(f) The Issuer shall have received an Application Form with respect to such Standby Letter of Credit, dulycompleted and executed by an authorized officer of the Borrower;(g) The face amount of such Standby Letter of Credit shall be equal to or less than the remainingAvailability (hereinafter defined). The term “Availability” shall mean, at any time, the Maximum Facility Amountminus the aggregate face amount of all Standby Letters of Credit previously issued and then outstanding hereunder;(h) On the date hereof and on the date of issuance of any Standby Letter of Credit, the representations andwarranties set forth in Section 10 hereof shall be true and correct in all material respects (without duplication ofmateriality qualifiers);(i) On the date hereof and on the date of issuance of any Standby Letter of Credit, except as otherwiseapproved by the Issuer in its sole discretion, there shall be no actions, suits, proceedings or governmental investigationspending or, to the knowledge of the Borrower, threatened against the Borrower, which could reasonably be expected toresult in a material adverse effect on (a) the business, assets, liabilities (actual or contingent), operations or condition(financial or otherwise) of the Borrower, or (b) the validity or enforceability of any of the Facility Documents or therights or remedies of the Issuer or the ability of the Borrower to perform its obligations thereunder; and (j) On the date hereof and on the date of issuance of any Standby Letter of Credit, no “Default” or “Eventof Default” (each as defined in the Revolving Credit Agreement) shall have occurred and be continuing.Each request for issuance of a Standby Letter of Credit shall be deemed to constitute a representation and warranty bythe Borrower on the date thereof as to the satisfaction of the matters specified in this Section 3.SECTION 4.Borrower’s Obligations. The Borrower unconditionally promises to pay to the Issuer, inaccordance with this Section 4, the following amounts (collectively, the “Obligations”):(a) The Borrower shall pay to Issuer any and all amounts paid by the Issuer on the basis of a Demandmade by a Beneficiary of any Standby Letter of Credit issued hereunder, which amounts shall be due automatically onthe date that is three (3) Business Days after the date of such payment by the Issuer without the need for further actionof any party;(b) On the date of written demand therefor delivered by the Issuer to the Borrower, all charges, fees,deductions or withholdings of any nature agreed upon by the Parties or imposed by a regulatory authority in connectionwith this Agreement, any Standby Letter of Credit or any transactions hereunder or thereunder, to the extent that suchpayment is provided for in Section 12, the next paragraph of this Section or in other provisions of this Agreement;(c) On the date of issuance of any Standby Letter of Credit, the Issuer’s standard issuance fee on the faceamount of each Standby Letter of Credit upon issuance, together with such other customary fees, commissions andexpenses therefor as shall be required by the Issuer or any correspondent thereof (if any); it being understood that if nosuch fee or commission is specified with respect to any such Standby Letter of Credit, such fee shall be deemed toequal $750 with respect to such Standby Letter of Credit;(d) Within five (5) Business Days after written demand therefor delivered by the Issuer to the Borrower, allsums and expenses, including attorneys’ fees, collection, legal and receiver’s expenses, advanced or otherwise incurredby the Issuer in enforcing its rights and collecting overdue amounts in connection with this Agreement, any StandbyLetter of Credit or any transactions hereunder or thereunder, to the extent that such payment is provided for in Section9; and(e) The Borrower agrees to pay to the Issuer a letter of credit fee (the “Letter of Credit Fee”) with respectto Standby Letters of Credit issued hereunder, which shall accrue at a rate per annum equal to the Adjusted LIBO Rateplus three percent (3.0%) (or, in the case of any interest, fee, charge or other amount bearing interest by reference to theBase Rate pursuant to the terms hereof, two percent (2.0%)) on the average daily amount of the Issuer’s LC Exposureduring the period from and including the date hereof to the later of the date on which Issuer’s obligations terminatehereunder and the date on which the Issuer ceases to have any LC Exposure. Letter of Credit Fees accrued through andincluding the first day of each calendar month shall be payable on the third Business Day following the first day ofsuch calendar month, commencing on the first such date to occur after the date hereof; provided that all such Letter ofCredit Fees shall be payable on the date on which the Issuer’s obligations terminate hereunder, and the Borrower shallpay any such fees that have accrued and that are unpaid on such termination date.All payments by the Borrower to the Issuer hereunder shall be made free and clear of and without deduction forTaxes. If the Borrower shall be required to withhold or deduct Taxes from any sum payable to the Issuer hereunder, (i)the Borrower shall make such necessary withholdings and deductions, (ii) the Borrower shall pay the full amountwithheld or deducted to the relevant authority according to applicable law so that the Issuer shall not be required tomake any deduction or payment of Taxes, and (iii) unless such Tax is an Excluded Tax, the sum payable to the Issuershall be increased as may be necessary so that the Issuer receives an amount equal to the sum it would have receivedhad no withholdings or deductions been made. The Borrower shall timely pay to the relevant governmental authority inaccordance with applicable law, or at the option of the Issuer timely reimburse it for the payment of, any Other Taxes. Ifthe Issuer determines, in its sole discretion exercised in good faith, that it has received a refund of any Taxes as towhich it has been indemnified pursuant to this Section 4 (including by the payment of additional amounts pursuant tothis Section 4), it shall pay to the Borrower an amount equal to such refund (but only to the extent of indemnitypayments made under this Section 4 with respect to the Taxes giving rise to such refund), net of all out-of-pocketexpenses (including Taxes) of the Issuer and without interest (other than any interest paid by the relevant governmentalauthority with respect to such refund). This paragraph shall not be construed to require the Issuer to make available itsTax returns (or any other information relating to its Taxes that it deems confidential) to the Borrower. All Obligations hereunder and under the Facility Documents shall bear interest, in the case of Obligations described inclause 4(a), from the date of the incurrence thereof, and in the case of all other Obligations, from the date of when dueto the date of payment, at a rate per annum equal to the Adjusted LIBO Rate plus three percent (3.0%) (or, in the caseof any interest, fee, charge or other amount bearing interest by reference to the Base Rate pursuant to the terms hereof,two percent (2.0%)); provided, however, that at the Issuer’s option, upon the occurrence of any Event of Default (ashereinafter defined) and during the continuance thereof, amounts outstanding under this Agreement shall bear interestat a per annum rate equal to the Adjusted LIBO Rate plus five percent (5.0%) (or, in the case of any interest, fee, chargeor other amount bearing interest by reference to the Base Rate pursuant to the terms hereof, four percent (4.0%)), but inno event shall the Obligor pay interest in excess of the maximum rate permitted by applicable law. The Borrower shall make each payment required to be made by it hereunder or under any other Facility Document priorto 12:00 p.m., New York City time, on the date when due, in immediately available funds, in Dollars, without set-off,deduction or counterclaim. Any amounts received after such time on any date may, in the discretion of the Issuer, bedeemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. Allsuch payments shall be made to the Issuer at the account set forth on Schedule I, or to such other account as may bedesignated by the Issuer to the Borrower from time to time in writing. All interest and fees hereunder shall be computedon the basis of a year of 360 days, except that interest computed at times when the Base Rate is based on the Prime Rateshall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable forthe actual number of days elapsed (including the first day but excluding the last day), and interest shall continue toaccrue at the applicable rate set forth herein whether or not a Default or Event of Default exists or a judgment has beenentered.SECTION 5.Performance of Obligations. The Borrower’s Obligations set forth in Section 4 above shall beabsolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms and conditions ofthis Agreement, under all circumstances, including but not limited to:(a) Any declaration that this Agreement or any Standby Letter of Credit issued hereunder areinvalid or unenforceable;(b) Any amendment or waiver of or consent to departure from the terms and conditions containedherein or any Standby Letter of Credit issued hereunder;(c) Any claim, set-off, defense or other rights which the Borrower, any Applicant or any otherperson may have at any time against any Beneficiary or any transferee of a Standby Letter of Credit issued hereunder,the Issuer, or any other person, whether in connection with this Agreement or otherwise;(d) Any statement or other document, presented in connection with a Standby Letter of Creditissued hereunder, that on its face appears to be genuine and substantially compliant, but proving to be forged,fraudulent, invalid, insufficient, untrue or inaccurate in any respect;(e) Payment by the Issuer pursuant to a Standby Letter of Credit issued hereunder, againstpresentation of a draft, certificate or any other document not compliant with the terms and conditions contained hereinor therein; provided, however, that such payment shall not have constituted gross negligence or willful misconduct onthe part of the Issuer;(f) The Issuer’s failure to honor any drawing under any Standby Letter of Credit issued hereunderor to make any payment of a Demand on the ground that such Demand does not conform to the terms and conditionsof the relevant Standby Letter of Credit; or(g) Any circumstance which might constitute a legal or equitable discharge of any Obligations ofthe Borrower (other than the payment and satisfaction in full of the Obligations in accordance with the terms of theFacility Documents).SECTION 6.Payment of Demands. Pursuant to the issuance of a Standby Letter of Credit, the Issuer and itscorrespondents may receive, accept and pay any Demands or other documents and instruments, that appear on theirface to be compliant with the terms and conditions herein or thereunder, signed by, or issued to, the receiver,bankruptcy trustee, executor, administrator, guardian or conservator of the Beneficiary. The Issuer in its sole discretionshall determine whether Demand has been made prior to the expiration of the Standby Letter of Credit and whether aDemand is in proper and sufficient form to comply with the Standby Credit, which determination shall be conclusiveand binding upon the Borrower, absent manifest error. SECTION 7.Liability of the Borrower. Neither the Issuer, nor any of the Issuer’s correspondents shall be liablefor the actions or omissions of any person with respect to a Standby Letter of Credit issued hereunder. The Borrower’sliability hereunder and in connection with the Standby Letters of Credit issued hereunder, includes but is not limited to:(i) the form, sufficiency, correctness, validity, genuineness, falsification and legal effect of any Demands and otherdocuments or instruments relating to a Standby Letter of Credit issued hereunder and any general and particularconditions stipulated therein, (ii) the existence, form, sufficiency and breach of any contract, document or otherinstrument in connection with this Agreement and any Standby Letter of Credit issued hereunder (iii) any delay orfailure to give any notice, demand, or protest, errors, omissions, delays or non-delivery of any message however sent,(iv) any other error, neglect or omission if done in good faith, and any action taken in good faith by the Issuer or any ofthe Issuer’s correspondents, and (v) failure of any person to comply with the terms of the Standby Letter of Credit;provided that this Section 7 shall not be construed to excuse the Issuer from liability to the Borrower to the extent ofany direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by theBorrower to the extent permitted by applicable law) suffered by the Borrower that are caused by the Issuer’s grossnegligence or willful misconduct when determining whether drafts and other documents presented under a Letter ofCredit comply with the terms thereof.SECTION 8.Terms of the Standby Letter of Credit. Each Application Form submitted by the Borrower torequest the issuance of a Standby Letter of Credit shall be deemed to incorporate the terms and conditions of thisAgreement. The Issuer, in its sole discretion, may from time to time modify the Application Form without theBorrower’s approval and the Borrower shall be bound by such modification and shall submit the appropriateApplication Form for the issuance of a Standby Letter of Credit; provided that, without the prior written consent of theBorrower, no such modification of the Application Form shall include additional conditions precedent to the issuance ofStandby Letters of Credit not described in Section 3 unless required by applicable law.Without releasing the Borrower from any liability under this Agreement or any Standby Letter of Credit issuedhereunder, the Issuer may, at the request of the Borrower or the Applicant: (i) increase the amount and extend the termof the Standby Letter of Credit, (ii) modify the terms and conditions governing the making and honoring of Demandsand any other document, instrument or act to be carried out pursuant to the Standby Letter of Credit (the Standby Letterof Credit so increased, extended or modified and all action taken by Issuer or Issuer's correspondents pursuant to thisAgreement or any Standby Letter of Credit issued hereunder, shall be binding upon Borrower as to all property, goods,documents and instruments covered hereby) and (iii) surrender from time to time to the persons designated by theBorrower or the Applicant (or their respective nominees) all or any part of any property, goods, documents andinstruments against payments or other documents or instruments, executed by such persons, and deemed satisfactory bythe Issuer.SECTION 9.Indemnification and Expense Reimbursement. (a) The Borrower shall indemnify and hold the Issuer and its successors, assigns andcorrespondents, and their respective directors, partners, officers, employees, agents and affiliates harmless from allliability, claims, demands, losses and expenses, including reasonable attorneys’ fees and other charges arising under orin connection with this Agreement and the Standby Letters of Credit issued hereunder. Acceptance by the Issuer ofpartial or delinquent payments or failure by the Issuer to exercise any right, power or remedy shall not constitute awaiver of the Borrower’s Obligations hereunder or a modification of this Agreement. The Issuer, its successors and itsassigns have all rights, powers and remedies indicated herein and provided by law, and may exercise such rights,proceed against any security and effect any set-off for the Borrower’s Obligations at any time notwithstanding anycessation of Borrower's liability or running of any statute of limitations, which Borrower hereby waives to the fullestextent permitted by law.(b) The Borrower shall pay to the Issuer, upon the execution of this Agreement, and otherwise ondemand, all reasonable and documented out-of-pocket costs and expenses incurred by the Issuer in connection with thepreparation, negotiation and delivery of this Agreement and the other Facility Documents, the administrationthereof, and any modifications thereto, and the collection of all of the Obligations, including but not limited toenforcement actions with respect thereto, whether through judicial proceedings or otherwise, or in defending orprosecuting any actions or proceedings arising out of or relating to this Agreement, including reasonable fees andexpenses of counsel, expenses for auditors, appraisers and environmental consultants, recording and filing fees andtaxes.(c) To the extent permitted by applicable law, the Borrower shall not assert, and hereby waives,any claim against the Issuer and its successors, assigns and correspondents, and their respective directors, partners,officers, employees, agents and affiliates, on any theory of liability, for special, indirect, consequential or punitivedamages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement or anyagreement or instrument contemplated hereby or any Standby Letter of Credit. SECTION 10.Borrower’s Representations and Warranties. The Borrower represents and warrants to the Issuer(which representations and warranties shall be deemed to be repeated by the Borrower on each day on which anyApplication Form is submitted hereunder) that:(a) It is a corporation duly organized, validly existing and in good standing under the laws of thejurisdiction of its organization or incorporation;(b) It is duly qualified, in good standing and authorized to do business in each jurisdiction to theextent required by applicable law, regulation or rule, except where the failure to do so could not reasonably beexpected to result in a material adverse effect on its business, assets, liabilities (actual or contingent), operations orcondition (financial or otherwise);(c) It has the power to enter into and perform its obligations under this Agreement, and has takenall necessary action to authorize such execution, delivery and performance;(d) The execution, delivery and performance of this Agreement by the Borrower does not and willnot violate or conflict with any applicable law, any provision of its organizational documents, any order or judgment ofany court or other agency of government or any of its assets or any contractual restriction binding on or affecting it orany of its assets;(e) All governmental and other consents, authorizations, approvals, licenses and orders that are required tohave been obtained with respect to this Agreement and the transactions contemplated herein have been obtained andare in full force and effect and all conditions of any such consents, authorizations, approvals, licenses and orders havebeen complied with;(f) Its obligations under this Agreement constitute its legal, valid and binding obligations, enforceable inaccordance with their respective terms (subject to applicable bankruptcy, reorganization, insolvency, moratorium orsimilar laws affecting creditors’ rights generally and subject, as to enforceability, to equitable principles of generalapplication (regardless of whether enforcement is sought in a proceeding in equity or at law));(g) No Event of Default or Default has occurred or is continuing, and no Event of Default or Default wouldoccur as a result of its entering into or performing its obligations hereunder;(h) There is no action, suit or proceeding at law or in equity or before any court, tribunal, governmentalbody, agency, official or arbitrator, pending or, to its knowledge, threatened against the Borrower or any of itssubsidiaries (i) that involves the legality, validity or enforceability of this Agreement or its ability to perform itsobligations under this Agreement or (ii) that if adversely determined, could reasonably be expected to result in amaterial adverse effect on (a) the business, assets, liabilities (actual or contingent), operations or condition (financial orotherwise) of the Borrower, or (b) the validity or enforceability of any of the Facility Documents or the rights orremedies of the Issuer or the ability of the Borrower to perform its obligations thereunder;(i) Neither the Borrower nor any Applicant is listed on the Specially Designated Nationals and BlockedPersons List maintained by the OFAC pursuant to Executive Order No. 13224, 66 Fed. Reg. 49079 (Sept. 25, 2001),and/or any other list maintained pursuant to any of the rules and regulations of OFAC or pursuant to any otherapplicable Executive Orders or otherwise subject to any sanction imposed pursuant to an OFAC implementedregulation;(j) the Borrower is Solvent; and(k) The Facility Documents do not contain any untrue statement of material fact or omit to state a materialfact necessary in order to make the statements contained in this Agreement or the Facility Documents, when taken as awhole at the time made, not misleading in light of the circumstances under which such statements were made. There isno fact known to the Borrower which materially adversely affects or could reasonably be expected to result in amaterial adverse effect on (a) the business, assets, liabilities (actual or contingent), operations or condition (financial orotherwise) of the Borrower, or (b) the validity or enforceability of any of the Facility Documents or the rights orremedies of the Issuer or the ability of the Borrower to perform its obligations thereunder. SECTION 11 Event of Default. The occurrence and continuation of any of the following events or conditionsshall constitute an Event of Default under this Agreement:(a)The Borrower fails to pay when due or otherwise perform any of the Obligations hereunder or pursuant to aStandby Letter of Credit issued hereunder;(b)An action for bankruptcy, reorganization, restructuring, declaration of insolvency, dissolution is commencedby or against the Borrower or the Borrower is unable to pay its debts when they become due;(c)Any representation or warranty made by Borrower hereunder or under any Facility Document or the RevolvingCredit Agreement shall have been untrue or incorrect in any material respect when made or deemed made;(d)The occurrence of any event under any agreement or instrument involving the extension of credit to Borrowerin an aggregate amount in excess of $750,000 which gives the holder of such obligation the right to accelerateits maturity, whether or not such right is exercised;(e)The Borrower, without the prior written consent of the Issuer, becomes a party to any merger, amalgamation orconsolidation or transfers all or substantially all of its assets to another person or entity that is not permitted bythe Revolving Credit Agreement; or(f)Any “Event of Default” (as defined in the Revolving Credit Agreement) shall occur under the Revolving CreditAgreement; then Issuer, in its sole discretion, may: (i) require the Borrower to pay or deposit with Issuer cash in an amount equal toup to 103% of the face amount of all undrawn Standby Letters of Credit then outstanding, which cash shall be held ascollateral security for the performance by the Borrower of its obligations hereunder; (ii) declare all other amounts owinghereunder or under any other Facility Document immediately due and payable without demand or notice and theBorrower shall pay to or deposit with Issuer the amount thereof; (iii) waive any default, provided however that suchwaiver shall not be deemed a waiver of any prior or subsequent default; (iv) take such action as the Issuer in its solediscretion deems necessary or desirable to remedy any default, provided however that such action shall not be deemeda waiver of such default or any prior or subsequent default, (v) terminate the financial arrangement under thisAgreement and elect not to renew any Standby Letter of Credit or cause the Borrower to provide a substitute issuingbank; or (vi) take any other action available to a creditor pursuant to the terms of any Facility Document or applicablelaw, either by suit in equity or by action at law, or both, including for specific performance of any covenant or otheragreement contained in any Facility Document or in aid of the exercise of any power granted in any FacilityDocument. The Borrower hereby agrees and undertakes to notify the Issuer within five (5) business days afterdiscovering or obtaining knowledge of any condition or event constituting a Default or Event of Default or that, withthe lapse of time would constitute an Event of Default.SECTION 12Increased Costs; Illegality. The Borrower hereby agrees to pay promptly after the Issuer’s demandtherefor any increased costs arising from (a) any Change in Law, or (b) reserve requirements (except as reflected in thedefinition of Adjusted LIBO Rate), or any changes in existing reserve requirements, imposed on Issuer with respect tothis Agreement or any Standby Letter of Credit issued hereunder. If any of the above-mentioned measures, or anyother similar measure, should result in (i) any increase in the cost to Issuer of issuing and maintaining the StandbyLetter of Credit issued pursuant to this Agreement or of any transaction hereunder and thereunder, or (ii) any reductionin the amount of principal, interest or any fee receivable by the Issuer in respect of this Agreement or any StandbyLetter of Credit issued hereunder, the Issuer shall provide the Borrower with a certificate specifying the amount sodemanded, which certificate shall be conclusive and binding on the Borrower in the absence of manifest error, and theBorrower shall pay to Issuer upon demand such increased cost or reduction. If, at any time, the Issuer determines (which determination shall be conclusive absent manifest error) that adequate andreasonable means do not exist for ascertaining the Adjusted LIBO Rate, or (ii) the Issuer determines that the AdjustedLIBO Rate will not adequately and fairly reflect the cost to Issuer of making or maintaining its extensions of credithereunder, then then the Issuer shall give notice thereof to the Borrower by telephone, telecopy or e-mail as promptly aspracticable thereafter and, until the Issuer notifies the Borrower that the circumstances giving rise to such notice nolonger exist, the Letter of Credit Fees and all Obligations hereunder shall bear interest by reference to the Base Rate. Without duplication of any other rights that the Issuer has hereunder, if the Issuer determines that any law has made itunlawful, or that any governmental authority has asserted that it is unlawful for the Issuer to make, maintain or fund anyextension of credit whose interest is determined by reference to the LIBO Rate, or to determine or charge interest ratesbased upon the LIBO Rate, or any governmental authority has imposed material restrictions on the authority of theIssuer to purchase or sell, or to take deposits of, Dollars in the London interbank market, then, on notice thereof by theIssuer to the Borrower, the interest rate applicable to all Obligations hereunder shall, if necessary to avoid suchillegality, be determined by Issuer by reference to the Base Rate, in each case until the Issuer notifies the Borrower thatthe circumstances giving rise to such determination no longer exist.SECTION 13.Right of Set-Off. In addition to any rights or remedies now or hereafter granted under applicable law orotherwise, if an Event of Default shall have occurred or be continuing, the Issuer, in its own discretion, may (but shallnot be obliged to) set-off against any Borrower’s obligation due and payable by the Borrower under this Agreement orany Standby Letter of Credit issued hereunder on which a demand has been made by the Beneficiary, any moneys heldby the Issuer for the account of the Borrower and in any currency whether or not such monies are then due andpayable. The Issuer shall promptly thereafter notify the Borrower of any such set-off.SECTION 14 Notices. All notifications, requests, demands and other communications hereunder to either theIssuer or the Borrower shall be in writing, unless otherwise advised by notice by the Party changing its noticeinformation to the other Party. Any communication shall be deemed effective only upon receipt at the followingaddresses:If to the Borrower, to:Capital Southwest CorporationLincoln Center Tower5400 LBJ Freeway, Suite 1300Dallas, TX 75240Attention: Michael SarnerTelephone: 214-884-3829Facsimile: 214-238-5701E-mail: msarner@capitalsouthwest.comwith a copy (which shall not constitute notice) to:Thompson & Knight LLP811 Main Street, Suite 2500Houston, Texas 77002Telephone: (713) 951-5803Facsimile: (832) 397-8012E-mail: Cassandra.Mott@tklaw.comIf to the Issuer, to:ING Capital LLC1133 Avenue of the AmericasNew York, New York 10036Attention: Grace FuTelephone: (646) 424-7213Facsimile: (646) 424-6919E-mail: grace.fu@ing.comwith a copy (which shall not constitute notice) to:Dechert LLP1095 Avenue of the AmericasNew York, New York 10036Attention: Jay R. Alicandri, Esq.Telephone: (212) 698-3800Facsimile: (212) 698-3599E-mail: jay.alicandri@dechert.com The Borrower shall give the Issuer prior written notice of any change in its place of business and address.Such communications shall be deemed effective (a) if sent by United States Postal Service registered or certifiedmail, postage prepaid and return receipt requested, in an envelope addressed as aforesaid, when received, (b) if sent toan officer of the recipient, at the time of receipt such officer, or (c) if sent by facsimile or electronic mail, when thattransmission is received by the recipient in legible form. Furthermore, the Borrower authorizes the Issuer to executeany of Borrower’s duly signed Application sent to the Issuer via fax without need for further confirmation. The Issuerreserves the right to verify, from time to time, at its sole discretion, such Applications directly by telephone. Section 15.Waiver and Modification. (a) No failure or delay by the Issuer in exercising any right or powerunder this Agreement or any Facility Document shall operate as a waiver thereof, nor shall any single or partial exerciseof any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, precludeany other or further exercise thereof or the exercise of any other right or power. The Issuer’s rights and remedies underthis Agreement and the other Facility Documents are cumulative and are not exclusive of any rights or remedies thatthey would otherwise have. No waiver of any provision of this Agreement or any Facility Document or consent to anydeparture by the Borrower therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and thensuch waiver or consent shall be effective only in the specific instance and for the purpose for which given.(b) No amendment, modification or waiver of any provision of this Agreement or any of the StandbyLetters of Credit issued hereunder and no consent by the Issuer to any departure therefrom shall be effective unlesssuch amendment, modification or waiver shall be in writing and signed by two duly authorized officers of the Issuerand a duly authorized officer of the Borrower, and the same shall then be effective only for the period and on theconditions and for the specified instances specified in writing. SECTION 16Entire Agreement; Counterparts; Severability. (a)This Agreement and the Standby Letters of Credit issued hereunder constitute the entire agreement andunderstanding of the parties with respect to the subject matter hereof and thereof and supersedes all oral communicationand prior writings with respect thereto.(b) This Agreement may be executed and delivered in counterparts, each of which, when so executed anddelivered, will be deemed an original and all of which, taken together, shall constitute one instrument. Delivery of anexecuted signature page of this Agreement by electronic means that reproduce an image of the actual executedsignature page shall be effective as delivery of a manually executed counterpart hereof. (c) Any provision of this Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, asto such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting thevalidity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in aparticular jurisdiction shall not invalidate such provision in any other jurisdiction.SECTION 17.Successors and Assigns. This Agreement and the Standby Letters of Credit issued hereunder shallbe binding and inure to the benefit of the parties hereto and their respective successors and assigns, provided that, theBorrower may not assign any of its rights or delegate any of its obligations under this Agreement without the priorwritten consent of the Issuer.SECTION 18Governing Law. Except as otherwise provided herein or in any Application issued pursuanthereto, the UCP and ISP, as in force on the date of issuance of each Standby Letter of Credit hereunder, shall in allrespects be deemed a part hereof and incorporated by reference herein, and this Agreement, each other FacilityDocument and (unless the Issuer otherwise agrees in writing) each Standby Letter of Credit shall be governed by andconstrued in accordance with the laws of the State of New York and the UCP AND ISP (“Governing Laws”). TheBorrower hereby acknowledges that (i) if a Standby Letter of Credit indicates that the same is governed by any laws,regulations or rules other than the Governing Laws (“Specified Laws”) and (ii) the Issuer makes payment under thethereunder, in compliance with the Specified Laws, Borrower shall pay to the Issuer any and all the amounts indicatedin Section 4, notwithstanding any contrary provisions of the Specified Laws or any other applicable laws orregulations. No provision of the Governing Laws or the Specified Laws, now existing or as they may be changed fromtime to time, shall be used or relied upon or in any way raised as a defense by Borrower to any payment Borrower isobligated to make hereunder.SECTION 19. Submission to Jurisdiction. The Borrower hereby irrevocably and unconditionally submits, for itself andits property, to the exclusive jurisdiction of the Supreme Court of the State of New York sitting in New York Countyand of the United States District Court of the Southern District of New York, and any appellate court from any thereof,in any action or proceeding arising out of or relating to this Agreement, or for recognition or enforcement of anyjudgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of anysuch action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, insuch Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall beconclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided bylaw. Nothing in this Agreement shall affect any right that the Issuer may otherwise have to bring any action orproceeding relating to this Agreement against the Borrower or its properties in the courts of any jurisdiction.SECTION 20.WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLESTEXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANYLEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANYOTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT ORATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHERPARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND(B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTOTHIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THISSECTION.SECTION 21EU Bail-In. Notwithstanding anything to the contrary in any Facility Document orin any other agreement, arrangement or understanding among any such parties, each party hereto acknowledges thatany liability of any EEA Financial Institution arising under any Facility Document, to the extent such liability isunsecured, may be subject to the write-down and conversion powers of an EEA Resolution Authority and agrees andconsents to, and acknowledges and agrees to be bound by: (a) the application of any Write-Down and ConversionPowers by an EEA Resolution Authority to any such liabilities arising hereunder which may be payable to it by anyparty hereto that is an EEA Financial Institution; and (b) the effects of any Bail-In Action on any such liability,including, if applicable: (i) a reduction in full or in part or cancellation of any such liability; (ii) a conversion of all, or aportion of, such liability into shares or other instruments of ownership in such EEA Financial Institution, its parententity, or a bridge institution that may be issued to it or otherwise conferred on it, and that such shares or otherinstruments of ownership will be accepted by it in lieu of any rights with respect to any such liability under thisAgreement or any other Loan Document; or (iii) the variation of the terms of such liability in connection with theexercise of the write-down and conversion powers of any EEA Resolution Authority. For purposes of this Section 21,“Bail-In Action” means the exercise of any Write-Down and Conversion Powers by the applicable EEA ResolutionAuthority in respect of any liability of an EEA Financial Institution; “Bail-In Legislation” means, with respect to anyEEA Member Country implementing Article 55 of Directive 2014/59/EU of the European Parliament and of the Councilof the European Union, the implementing law for such EEA Member Country from time to time which is described inthe EU Bail-In Legislation Schedule; “EEA Financial Institution” means (a) any credit institution or investment firmestablished in any EEA Member Country which is subject to the supervision of an EEA Resolution Authority, (b) anyentity established in an EEA Member Country which is a parent of an institution described in clause (a) of thisdefinition, or (c) any financial institution established in an EEA Member Country which is a subsidiary of an institutiondescribed in clauses (a) or (b) of this definition and is subject to consolidated supervision with its parent; “EEAMember Country” means any of the member states of the European Union, Iceland, Liechtenstein, and Norway; “EEAResolution Authority” means any public administrative authority or any Person entrusted with public administrativeauthority of any EEA Member Country (including any delegee) having responsibility for the resolution of any EEAFinancial Institution; “EU Bail-In Legislation Schedule” means the EU Bail-In Legislation Schedule published by theLoan Market Association (or any successor person), as in effect from time to time; and “Write-Down and ConversionPowers” means, with respect to any EEA Resolution Authority, the write-down and conversion powers of such EEAResolution Authority from time to time under the Bail-In Legislation for the applicable EEA Member Country, whichwrite-down and conversion powers are described in the EU Bail-In Legislation Schedule.SECTION 22.USA PATRIOT Act. The Issuer hereby notifies the Borrower that pursuant to the requirements ofthe USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001) (the “Act”), it is required toobtain, verify and record information that identifies the Borrower, which information includes the name and address ofthe Borrower and other information that will allow the Issuer to identify the Borrower in accordance with the Act.[Signature Page Follows] IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly authorized, have executed and deliveredthis Agreement as of the date first above written.ISSUER:BORROWER: ING CAPITAL LLCCAPITAL SOUTHWEST CORPORATION By:/s/ Patrick FrischBy:/s/ Michael SarnerName:Patrick FrischName:Michael SarnerTitle:Managing DirectorTitle:Chief Financial Officer By:/s/ Grace Fu Name:Grace Fu Title:Director Schedule I Issuer Account Info Bank Name:JP Morgan Chase Bank, N.A., New York, NYABA/Routing No.:0210 0002 1Account Name:ING Capital LLC Loans AgencyAccount No.:066 297 311Attention:Mark LaGrecaReference:Capital Southwest Corporation Exhibit A Application Form [Attached hereto]  [DATE] ING CAPITAL LLC1335 AVENUE OF THE AMERICASNEW YORK, NY 10036ATTN: GRACE FUFAX : 646-424-7213 RE : IRREVOCABLE STANDBY LETTER OF CREDIT IN FAVOR OF [________]THIS LETTER OF CREDIT APPLICATION IS SUBJECT TO THE TERMS AND CONDITIONS OF THEMASTER REIMBURSEMENT AGREEMENT BETWEEN ING CAPITAL LLC AND CAPITAL SOUTHWESTCORPORATION DATED APRIL [__], 2018. PLEASE ISSUE AN IRREVOCABLE STANDBY LETTER OF CREDIT IN FAVOR OF: TO: [____________][____________][____________]ATTN: [____________]TEL: [____________]FAX: [____________]EMAIL: [____________] CC: CAPITAL SOUTHWEST CORPORATIONLINCOLN CENTER TOWER5400 LBJ FREEWAY, SUITE 1300DALLAS, TX 75240ATTN: MICHAEL SARNERTELEPHONE: 214-884-3829FAX: 713-230-1251EMAIL: MSARNER@CAPITALSOUTHWEST.COM WE HEREBY OPEN OUR IRREVOCABLE STANDBY LETTER OF CREDIT NUMBER --------------- INFAVOR OF YOURSELVES BY ORDER AND FOR ACCOUNT OF [BENEFICIARY], [LOCATION], AVAILABLEAT SIGHT FOR AN AMOUNT OF [_________] U.S. DOLLARS AGAINST: 1- [DESCRIPTION]. 2- [DESCRIPTION]. SPECIAL CONDITIONS------------------- THE AMOUNT AVAILABLE FOR DRAWING UNDER THIS LETTER OF CREDIT WILL BE REDUCEDBY THE AMOUNT OF ANY PAYMENTS MADE OUTSIDE THIS LETTER OF CREDIT TO[BENEFICIARY] IF SUCH PAYMENTS ARE MADE THROUGH ING CAPITAL LLC, NEW YORK ANDREFERENCE THIS LETTER OF CREDIT. - PARTIAL SHIPMENTS AND PARTIAL AND MULTIPLE DRAWINGS ARE PERMITTED. - DOCUMENTS MUST BE PRESENTED AT OUR COUNTERS NOT LATER THAN [DATE]. - TYPOGRAPHICAL AND SPELLING ERRORS, WITH EXCEPTION OF QUANTITY, AMOUNT, ANDMERCHANDISE DESCRIPTION ARE NOT CONSIDERED DISCREPANCIES. - COMMERCIAL INVOICE(S) REFERENCED ABOVE IN EXCESS OF THE U.S. DOLLAR AMOUNT OF THISLETTER OF CREDIT IS ACCEPTABLE, HOWEVER, PAYMENT NOT TO EXCEED VALUE OF THIS CREDIT. - ALL BANKING CHARGES EXCEPT THOSE OF THE OPENING BANK'S ARE FOR BENEFICIARY'SACCOUNT. - THIS LETTER OF CREDIT SHALL TAKE EFFECT IN ACCORDANCE WITH ITS TERMS BUT SUCHTERMS SHALL NOT ALTER, ADD TO, OR IN ANY WAY AFFECT THE TERMS OF THE MASTERREIMBURSEMENT AGREEMENT BETWEEN ING CAPITAL LLC AND CAPITAL SOUTHWEST CORPORATION TOWHICH THIS LETTER OF CREDIT RELATES. - WE HEREBY ENGAGE WITH THE BENEFICIARY THAT DOCUMENTS DRAWN UNDER AND IN COMPLIANCEWITH THE TERMS OF THIS CREDIT WILL BE DULY HONORED UPON PRESENTATION AS SPECIFIED. - THIS ELECTRONIC COPY IS THE OPERATIVE INSTRUMENT UNTIL RECEIPT OF ORIGINAL LETTEROF CREDIT. - THIS CREDIT IS SUBJECT TO THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS(2007 REVISION) INTERNATIONAL CHAMBER OF COMMERCE PUBLICATION NUMBER 600. ING CAPITAL LLC, NEW YORK=======================================VERY TRULY YOURS,CAPITAL SOUTHWEST CORPORATIONBY:NAME:TITLE: Exhibit 21.1 CAPITAL SOUTHWEST CORPORATIONList of Subsidiaries Name of Subsidiary State of Incorporation I-45 SLF LLC DelawareMedia Recovery, Inc. NevadaTitanLiner, Inc. NevadaCapital Southwest Management Corporation NevadaCapital Southwest Equity Investments, Inc. Delaware  Exhibit 23.1 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the Registration Statements (No. 333-207296, No. 333-177433, No. 333-177432, No. 333-118681) on Form S-8 of Capital Southwest Corporation and Subsidiaries (the Company) of our reportsdated June 5, 2018, relating to the consolidated financial statements, the financial statement schedule and the effectivenessof internal control over financial reporting of the Company, appearing in this Annual Report on Form 10-K of the Companyfor the year ended March 31, 2018. /s/ RSM US LLP Dallas, TexasJune 5, 2018  Exhibit 23.2 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have issued our reports dated June 1, 2017, with respect to the consolidated financial statements and schedules includedin the Annual Report of Capital Southwest Corporation on Form 10-K for the year ended March 31, 2018. We consent to theincorporation by reference of said reports in the Registration Statements of Capital Southwest Corporation on Forms S-8 (FileNo. 333-207296, effective October 5, 2015; File No. 333-177433, effective October 21, 2011; File No. 333-177432, effectiveOctober 21, 2011; File No. 333-118681, effective August 31, 2004). /s/ Grant Thornton LLP Dallas, TexasJune 5, 2018  Exhibit 23.3 Consent of Independent Auditor We consent to the inclusion as an exhibit to the Annual Report on the Form 10-K of Capital Southwest Corporation of ourreport dated May 17, 2018, relating to the financial statements of I-45 SLF LLC for the year ended March 31, 2018. /s/ RSM US LLP Chicago, IllinoisJune 5, 2018  Exhibit 23.4 CONSENT OF INDEPENDENT AUDITORS We consent to the inclusion as an exhibit to the Annual Report on Form 10-K of Capital Southwest Corporation of our reportdated May 31, 2018, relating to the financial statements of TitanLiner, Inc. for the year ended December 31, 2017 We alsoconsent to the incorporation by reference of said reports in the Registration Statements of Capital Southwest Corporation onForms S-8 (File No. 333-207296, effective October 5, 2015; File No. 333-177433, effective October 21, 2011; File No. 333-177432, effective October 21, 2011; File No. 333-118681, effective August 31, 2004). /s/ Weaver and Tidwell, L.L.P. Fort Worth, TexasJune 5, 2018 Exhibit 31.1 CERTIFICATIONS I, Bowen S. Diehl, certify that: 1.I have reviewed this annual report on Form 10-K of Capital Southwest Corporation (the “registrant”); 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly presentin all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, theperiods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designedunder our supervision, to ensure that material information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularly during the period in which this reportis being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting tobe designed under our supervision, to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples; c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered bythis report based on such evaluation; and d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred duringthe registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) thathas materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financialreporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal controlover financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize andreport information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting. Date: June 5, 2018By:/s/ Bowen S. Diehl Bowen S. DiehlPresident and Chief Executive Officer Exhibit 31.2 CERTIFICATIONS I, Michael S. Sarner, certify that: 1.I have reviewed this annual report on Form 10-K of Capital Southwest Corporation (the “registrant”); 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly presentin all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, theperiods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to bedesigned under our supervision, to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during the period inwhich this report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting tobe designed under our supervision, to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples; c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered bythis report based on such evaluation; and d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred duringthe registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) thathas materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financialreporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal controlover financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize andreport financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting. Date: June 5, 2018By:/s/ Michael S. Sarner Michael S. SarnerChief Financial Officer Exhibit 32.1 Certification of the President and Chief Executive OfficerPursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002 I, Bowen S. Diehl, President and Chief Executive Officer of Capital Southwest Corporation, certify that, to my knowledge: 1.The Form 10-K for the year ended March 31, 2018, filed with the Securities and Exchange Commission on June 5,2018 (“accompanied report”) fully complies with the requirements of Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934; and 2.The information contained in the accompanied report fairly presents, in all material respects, the consolidatedfinancial condition and results of operations of Capital Southwest Corporation. Date: June 5, 2018By:/s/ Bowen S. Diehl Bowen S. DiehlPresident and Chief Executive Officer Exhibit 32.2 Certification of the Chief Financial OfficerPursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002 I, Michael S. Sarner, Chief Financial Officer of Capital Southwest Corporation, certify that, to my knowledge: 1.The Form 10-K for the year ended March 31, 2018, filed with the Securities and Exchange Commission on June 5,2018 (“accompanied report”) fully complies with the requirements of Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934; and 2.The information contained in the accompanied report fairly presents, in all material respects, the consolidatedfinancial condition and results of operations of Capital Southwest Corporation. Date: June 5, 2018By:/s/ Michael S. Sarner Michael S. SarnerChief Financial Officer Exhibit 99.1 I-45 SLF LLC Consolidated Financial StatementsandIndependent Auditor’s Report As of March 31, 2018 and 2017 and for the years ended March 31, 2018 and 2017, and for the period from September 3,2015 (the date of incorporation) to March 31, 2016 Table of Contents Independent Auditor’s Report 1Consolidated Statements of Assets, Liabilities and Members’ Equity 2Consolidated Schedules of Investments 3Consolidated Statements of Operations 7Consolidated Statements of Changes in Members’ Equity 8Consolidated Statements of Cash Flows 9Notes to Consolidated Financial Statements 10 Independent Auditor's Report Board of ManagersI-45 SLF LLC Report on the Financial StatementsWe have audited the accompanying consolidated financial statements of I-45 SLF LLC and its subsidiary, which comprise the consolidatedstatements of assets, liabilities and members’ equity, including the consolidated schedules of investments, as of March 31, 2018 and 2017, therelated consolidated statements of operations, changes in members' equity and cash flows for the years ended March 31, 2018 and 2017, and forthe period from September 3, 2015 (date of incorporation) to March 31, 2016, and the related notes to the consolidated financial statements(collectively, the financial statements). Management’s Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principlesgenerally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant tothe preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s ResponsibilityOur responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance withauditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. Theprocedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financialstatements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’spreparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. Anaudit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates madeby management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. OpinionIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of I-45 SLF LLC and itssubsidiary as of March 31, 2018 and 2017, and the results of their operations, and their cash flows for the years ended March 31, 2018 and 2017and for the period from September 3, 2015 (date of incorporation) to March 31, 2016 in accordance with accounting principles generallyaccepted in the United States of America. /s/ RSM US LLP Chicago, IllinoisMay 17, 2018 I-45 SLF LLCConsolidated Statements of Assets, Liabilitiesand Members’ Equity March 31, 2018 2017 Assets Investments, at fair value (cost $218,673,548 and $197,494,528, respectively) $220,806,845 $200,242,690 Cash and cash equivalents 9,317,184 12,092,653 Due from broker 329,987 1,732,500 Deferred financing costs (net of accumulated amortization of $927,485 and $439,982, respectively) 2,110,545 1,659,042 Interest receivable 813,100 474,331 $233,377,661 $216,201,216 Liabilities and Members' Equity Liabilities Credit facility $143,000,000 $122,000,000 Payable for securities purchased 3,212,818 11,795,000 Distributions payable 2,890,475 2,830,442 Interest payable 102,075 60,192 Accrued expenses and other liabilities 126,212 97,882 Total liabilities 149,331,580 136,783,516 Commitments and contingencies (Note 8) Members' equity 84,046,081 79,417,700 $233,377,661 $216,201,216 See accompanying notes to consolidated financial statements2 I-45 SLF LLCConsolidated Schedule of InvestmentsMarch 31, 2018 Description Maturity Date CurrentInterest Rate PrincipalAmount Cost Fair Value Percentage ofMembers' EquityCorporate Bank Loans United States Aerospace & Defense American Scaffold Holdings, Inc. 3/31/2022 L+6.50% $2,775,000 $2,746,293 $2,761,125 3.29%Hunter Defense Technologies, Inc. 3/29/2023 L+7.00% 6,500,000 6,370,152 6,370,152 7.58%Peraton Corp. (fka MHVC AcquisitionCorp.) 4/29/2024 L+5.25% 4,960,013 4,938,405 5,022,013 5.98%Automobile Highline Aftermarket Acquisition, LLC 3/17/2024 L+4.25% 2,856,595 2,844,340 2,860,166 3.40%Business Services Ansira Holdings, Inc. 12/20/2022 L+6.50% 3,878,182 3,847,470 3,868,486 4.60%Ansira Holdings, Inc. - Delayed Draw 12/20/2022 L+6.50% 315,316 310,799 314,527 0.37%iEnergizer Limited 5/1/2019 L+6.00% 6,550,375 6,421,048 6,558,563 7.80%Integro Parent Inc. 10/31/2022 L+5.75% 4,888,924 4,768,810 4,888,924 5.82%KeyPoint Government Solutions, Inc. 4/18/2024 L+6.00% 4,750,000 4,708,981 4,750,000 5.65%Redwood Ahead Acquisition, LLC 11/2/2020 L+6.50% 2,811,484 2,767,547 2,829,056 3.37%Capital Equipment TestEquity, LLC 4/28/2022 L+5.50% 4,952,674 4,911,727 4,952,674 5.89%Time Manufacturing Acquisition 2/3/2023 L+5.00% 4,947,519 4,908,622 4,935,150 5.87%Consumer Products & Retail Lulu's Fashion Lounge, LLC 8/23/2022 L+7.00% 4,374,999 4,254,636 4,506,249 5.36%Pet Supermarket, Inc. 7/5/2022 L+5.50% 4,925,000 4,889,928 4,900,375 5.83%Tacala, LLC - Second Lien 1/31/2026 L+7.00% 3,000,000 2,985,088 3,063,765 3.65%Turning Point Brands, Inc. - Second Lien 3/7/2024 L+7.00% 3,000,000 2,970,120 3,060,000 3.64%Consumer Services CMN.com, LLC 11/3/2021 L+6.00% 8,742,126 8,645,306 8,742,126 10.40%Prepaid Legal Services, Inc. 7/1/2019 L+5.25% 3,860,938 3,859,187 3,860,938 4.59%Prepaid Legal Services, Inc. - SecondLien 7/1/2020 L+9.00% 405,000 398,614 405,000 0.48%Solaray, LLC 9/8/2023 L+6.50% 6,308,205 6,263,089 6,308,205 7.51%Solaray, LLC - Delayed Draw 9/8/2023 L+6.50% 1,784,890 1,768,866 1,784,890 2.12%Durable Consumer Goods TGP Holdings III LLC 9/25/2024 L+5.00% 1,720,169 1,701,604 1,736,296 2.07%TGP Holdings III LLC - Second Lien 9/25/2025 L+8.50% 2,500,000 2,464,804 2,537,500 3.02%Financial Services iPayment Holdings, Inc. 4/11/2023 L+5.00% 4,987,500 4,987,500 5,049,844 6.01%Healthcare Products Beaver-Visitec International Holdings,Inc. 8/21/2023 L+5.00% 4,925,000 4,886,584 4,949,625 5.89%PT Network, LLC 11/30/2021 L+6.50% 4,425,133 4,425,133 4,425,133 5.27%Healthcare Services AAC Holdings, Inc. 6/30/2023 L+6.75% 7,568,046 7,413,688 7,700,487 9.16%Chloe Ox Parent, LLC (Censeo Health) 12/31/2024 L+5.00% 5,200,000 5,149,500 5,265,000 6.26%Hotel, Gaming & Leisure VIP Cinema Holdings, Inc. 3/1/2023 L+6.00% 4,750,000 4,730,480 4,804,934 5.72%Industrial Products Terra Millennium Corporation 10/31/2022 L+6.25% 7,776,019 7,715,978 7,834,339 9.32%Media, Marketing & Entertainment Imagine! Print Solutions, LLC - SecondLien 6/21/2023 L+8.75% 3,000,000 2,960,563 2,760,000 3.28%New Media Holdings II LLC 7/14/2022 L+6.25% 8,822,598 8,799,522 8,880,518 10.57%See accompanying notes to consolidated financial statements3 (1)I-45 SLF LLCConsolidated Schedule of InvestmentsMarch 31, 2018 (Continued) Description Maturity Date CurrentInterest Rate PrincipalAmount Cost Fair Value Percentage ofMembers' EquityRestaurants California Pizza Kitchen, Inc. 8/23/2022 L+6.00% $6,899,937 $6,863,761 $6,775,739 8.06%Retail Go Wireless Holdings, Inc. 12/31/2024 L+6.50% 6,912,500 6,845,573 6,903,859 8.21%Software & IT Services Digital River, Inc. 2/12/2021 L+6.50% 8,002,967 7,995,112 8,002,967 9.52%InfoGroup Inc. 4/3/2023 L+5.00% 2,970,000 2,945,028 2,957,021 3.52%Technology Products & Components ATI Investment Sub, Inc. 6/22/2021 L+7.25% 3,557,227 3,503,722 3,552,781 4.23%ATX Canada Acquisitionco Inc. 6/11/2021 L+6.00% 4,836,742 4,801,504 4,498,170 5.35%Telecommunications American Teleconferencing Services,Ltd. 12/8/2021 L+6.50% 7,287,370 6,938,866 7,285,548 8.67%LOGIX Holdings Company, LLC 12/22/2024 L+5.75% 4,528,716 4,484,992 4,551,360 5.42%LSF9 Atlantis Holdings, LLC 5/1/2023 L+6.00% 6,868,750 6,810,137 6,854,429 8.16%Polycom, Inc. 9/27/2023 L+5.25% 5,234,833 5,234,833 5,287,182 6.29%Teleguam Holdings , LLC 4/12/2024 L+8.50% 2,000,000 1,963,812 2,015,000 2.40%U.S. TelePacific Corp. 5/2/2023 L+5.00% 7,643,991 7,550,843 7,441,425 8.85%UniTek Global Services, Inc. 1/13/2019 L+8.50% 4,584,809 4,584,809 4,584,809 5.46%Transportation & Logistics US Joiner Holding Company (IMECOand RAACI) 4/16/2020 L+6.00% 4,459,182 4,425,101 4,436,886 5.28%Wholesale NBG Acquisition, Inc. 4/26/2024 L+5.50% 2,962,500 2,911,071 2,973,609 3.54% Total Investments - (cost $218,673,548) $218,673,548 $220,806,845 262.73%(1)The majority of investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”)which reset daily, monthly, quarterly, or semiannually. For each investment, the Company has provided the spread over LIBOR in effect atMarch 31, 2018. Certain investments are subject to a LIBOR interest rate floor.See accompanying notes to consolidated financial statements4 (1)I-45 SLF LLCConsolidated Schedule of InvestmentsMarch 31, 2017 Description Maturity Date CurrentInterest Rate PrincipalAmount Cost Fair Value Percentage ofMembers' EquityCorporate Bank Loans United States Aerospace & Defense American Scaffold Holdings 3/31/2022 L+6.50% $2,925,000 $2,887,177 $2,910,375 3.66%Hunter Defense Technologies 8/5/2019 L+6.00% 2,703,947 2,697,208 2,514,671 3.17%Automobile Highline Aftermarket 3/17/2024 L+4.25% 3,000,000 2,985,000 3,033,900 3.82%Safe Guard 3/31/2024 L+5.00% 3,250,000 3,152,500 3,225,625 4.06%Business Services Ahead, LLC 11/2/2020 L+6.50% 4,687,500 4,585,981 4,640,625 5.84%Ansira Partners 12/31/2022 L+6.50% 4,500,000 3,884,092 3,893,523 4.90%iEnergizer 5/1/2019 L+6.00% 6,567,046 6,217,720 6,542,748 8.24%IG Investments Holdings 10/31/2021 L+5.00% 2,480,570 2,469,439 2,507,856 3.16%Integro Parent Inc. 11/2/2022 L+5.75% 4,938,924 4,790,756 4,963,618 6.25%Mood Media Corporation 5/1/2019 L+6.00% 4,503,289 4,427,043 4,483,024 5.64%Capital Equipment Time Manufacturing 2/10/2022 L+5.00% 3,000,000 2,985,343 2,985,343 3.76%Consumer Products & Retail PetValu 7/5/2022 L+5.50% 4,975,000 4,931,261 4,987,438 6.28%Water Pik, Inc. - 1st lien 7/8/2020 L+4.75% 1,137,090 1,135,097 1,139,478 1.43%Water Pik, Inc. - 2nd lien 1/8/2021 L+8.75% 1,789,474 1,756,683 1,802,895 2.27%Consumer Services CMN.com (Higher Education) 10/15/2021 L+6.00% 6,912,500 6,785,531 6,785,531 8.54%Prepaid Legal Services, Inc. - 2nd Lien 7/1/2020 L+9.00% 405,000 395,663 407,349 0.51%Prepaid Legal Services, Inc. - 1st Lien 7/1/2019 L+5.25% 4,474,279 4,470,626 4,507,836 5.68%SRP Companies 9/8/2023 L+6.50% 5,975,275 5,106,492 5,132,212 6.46%Containers & Packaging ICSH, Inc. 12/31/2018 L+5.75% 6,698,007 6,670,865 6,685,051 8.42%Financial Services iPayment, Inc. 5/8/2017 L+5.25% 6,964,029 6,947,920 6,929,209 8.73%TaxACT 12/31/2022 L+6.00% 1,269,915 1,238,463 1,269,915 1.60%Food, Agriculture & Beverage California Pizza Kitchen 8/23/2022 L+6.00% 6,969,987 6,925,133 6,971,381 8.78%Gaming & leisure Redbox Automated Retail 9/27/2021 L+7.50% 6,125,000 5,958,692 6,132,963 7.72%Healthcare Services Beaver-Visitec International 8/21/2023 L+5.00% 4,975,000 4,928,997 4,975,000 6.26%PT Network 11/30/2021 L+6.50% 4,990,972 3,883,735 3,883,735 4.89%Hotel, gaming & leisure VIP Cinema 3/31/2023 L+6.00% 5,000,000 4,975,275 5,059,500 6.37%Industrial products LTI Holdings, Inc. 4/17/2022 L+4.25% 1,974,874 1,780,886 1,974,874 2.49%MWI Holdings 6/29/2020 L+5.50% 4,962,500 4,921,442 5,006,170 6.30%Sigma Electric 8/31/2021 L+7.50% 5,000,000 4,886,637 4,886,637 6.15%Terra Millennium 11/23/2022 L+6.25% 6,956,250 6,889,423 6,956,250 8.76%Media, Marketing & Entertainment Contextmedia 12/31/2021 L+6.50% 1,975,000 1,787,489 1,975,000 2.49%Imagine! Print Solutions 3/30/2022 L+6.00% 3,565,489 3,526,760 3,610,057 4.55%New Media Holdings II LLC 6/4/2020 L+6.25% 6,901,894 6,886,200 6,867,385 8.65%Northstar Travel 6/7/2022 L+6.25% 4,090,625 4,036,655 4,070,172 5.13%Tweddle Group 10/24/2022 L+6.00% 2,506,731 2,459,763 2,525,531 3.18% See accompanying notes to consolidated financial statements5 (1)I-45 SLF LLCConsolidated Schedule of InvestmentsMarch 31, 2017 (Continued) Description Maturity Date CurrentInterest Rate PrincipalAmount Cost Fair Value Percentage ofMembers' EquityPaper & forest products Digital Room 5/28/2023 L+10.00% $4,000,000 $3,924,128 $3,924,128 4.94%Retail Turning Point Brands 12/31/2021 L+6.00% 5,000,000 4,950,846 4,950,846 6.23%Software & IT Services Digital River 2/12/2021 L+6.50% 7,015,452 6,988,236 7,050,529 8.88%InfoGroup Inc. - 1st Lien 5/28/2018 L+5.50% 3,000,000 2,970,000 2,970,000 3.74%InfoGroup Inc. - 1st Lien 5/28/2018 L+5.00% 5,913,550 5,813,451 5,907,637 7.44%Technology Products & Components Array Technologies 6/22/2021 L+7.25% 4,625,000 4,542,126 4,613,438 5.81%ATX Networks Corp. 6/12/2021 L+6.00% 4,924,812 4,877,594 4,875,564 6.14%Telecommunications American Teleconferencing - 1st Lien 12/8/2021 L+6.50% 5,711,302 5,243,685 5,700,450 7.18%American Teleconferencing - 2nd Lien 6/6/2022 L+9.50% 1,708,571 1,643,620 1,674,400 2.11%Polycom 9/27/2023 L+6.50% 6,445,833 6,445,833 6,547,678 8.24%Transportation & Logistics US Joiner 4/16/2020 L+6.00% 4,791,601 4,737,062 4,767,643 6.00%Utilities Pike Corp. 8/30/2024 L+8.00% 1,000,000 990,000 1,017,500 1.28%Total Investments - (cost $197,494,528) $197,494,528 $200,242,690 252.13%(1)The majority of investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”)which reset daily, monthly, quarterly, or semiannually. For each investment, the Company has provided the spread over LIBOR in effect atMarch 31, 2017. Certain investments are subject to a LIBOR interest rate floor. See accompanying notes to consolidated financial statements6 (1)I-45 SLF LLCConsolidated Statements of Operations Year endedMarch 31, 2018 Year endedMarch 31, 2017 Period fromSeptember 3,2015 (date ofincorporation) toMarch 31, 2016Investment income Interest $16,732,879 $12,293,686 $2,368,470 Fees and other income 332,752 247,870 32,401 Total investment income 17,065,631 12,541,556 2,400,871 Expenses Interest expense 5,202,715 3,164,136 309,949 Amortization of facility fee 487,503 374,659 65,323 Administrative agent fee 418,229 318,150 69,792 Administrative fee 150,362 120,543 35,106 Unused facility fee 145,997 185,897 95,264 Organizational expense - - 80,853 Professional fees and other 208,225 236,372 32,295 Total expenses 6,613,031 4,399,757 688,582 Net investment income 10,452,600 8,141,799 1,712,289 Realized and unrealized gain (loss) on investments Net realized gain on investments 1,660,104 1,653,143 41,926 Net change in unrealized appreciation (depreciation) on investments (614,866) 3,369,673 (621,510) Net gain (loss) on investments 1,045,238 5,022,816 (579,584) Net increase in members' equity resulting from operations $11,497,838 $13,164,615 $1,132,705 See accompanying notes to consolidated financial statements7 I-45 SLF LLCConsolidated Statements of Changes in Members’ Equity Year endedMarch 31, 2018 Year endedMarch 31, 2017 Period fromSeptember 3,2015 (date ofincorporation) toMarch 31, 2016 Members' equity beginning balance $79,417,700 $45,357,231 $- Contributions 5,000,000 30,000,000 46,000,000 Distributions (11,869,457) (9,104,146) (1,775,474) 72,548,243 66,253,085 44,224,526 Net increase in members' equity resulting from operations: Net investment income 10,452,600 8,141,799 1,712,289 Net realized gain on investments 1,660,104 1,653,143 41,926 Net change in unrealized appreciation (depreciation) on investments (614,866) 3,369,673 (621,510) Net increase in members' equity resulting from operations 11,497,838 13,164,615 1,132,705 Members' equity ending balance $84,046,081 $79,417,700 $45,357,231 See accompanying notes to consolidated financial statements8 I-45 SLF LLCConsolidated Statements of Cash Flows Year endedMarch 31, 2018 Year endedMarch 31, 2017 Period fromSeptember 3,2015 (date ofincorporation) toMarch 31, 2016Cash flows from operating activities Net increase in members' equity resulting from operations $11,497,838 $13,164,615 $1,132,705 Adjustments to reconcile net increase in members' equity resulting fromoperations to net cash used in operating activities: Net realized gain on investments (1,660,104) (1,653,143) (41,926)Net change in unrealized (appreciation) depreciation on investments 614,866 (3,369,673) 621,510 Amortization of premiums and discounts on investments (710,236) (1,084,012) (84,867)Amortization of deferred financing costs 487,503 374,659 65,323 Purchases of investments (135,400,139) (161,951,431) (101,973,261)Proceeds from sales / paydowns of investments 116,591,458 67,029,872 2,264,241 Changes in operating assets and liabilities: Due from broker 1,402,513 (1,732,500) - Interest receivable (338,769) (37,939) (436,392)Payable for securities purchased (8,582,182) 3,754,809 8,040,191 Interest payable 41,883 30,987 29,205 Accrued expenses and other liabilities 28,330 58,842 39,040 Net cash used in operating activities (16,027,039) (85,414,914) (90,344,231) Cash flows from financing activities Borrowings under credit facility 34,000,000 74,000,000 48,000,000 Repayments of credit facility (13,000,000) - -Deferred financing costs paid (939,006) (974,024) (1,125,000)Capital contributions 5,000,000 30,000,000 46,000,000 Distributions (11,809,424) (7,699,178) (350,000)Net cash provided by financing activities 13,251,570 95,326,798 92,525,000 Net change in cash and cash equivalents (2,775,469) 9,911,884 2,180,769 Cash and cash equivalents, beginning of period 12,092,653 2,180,769 - Cash and cash equivalents, end of period $9,317,184 $12,092,653 $2,180,769 Supplemental disclosure of cash flow information Cash paid during the period for interest $5,705,952 $3,133,149 $280,744 Supplemental disclosure of noncash financing activities Distributions payable $2,890,475 $2,830,442 $1,425,474 See accompanying notes to consolidated financial statements 9 I-45 SLF LLCNotes to Consolidated Financial Statements 1. ORGANIZATION AND BASIS OF PRESENTATION ORGANIZATION I-45 SLF LLC (the “Company”) was organized as a Delaware limited liability company on September 3, 2015 by the filing of acertificate of formation (the “Certificate”) with the Office of the Secretary of State of the State of Delaware under and pursuant to the DelawareLimited Liability Company Act (the “Act”). The Company is a joint venture between Main Street Capital Corporation and Capital SouthwestCorporation. Capital Southwest Corporation owns 80.0% of the Company and has a profits interest of 75.6%, while Main Street CapitalCorporation owns 20.0% and has a profits interest of 24.4%. The initial equity capital commitment to I-45 SLF totaled $85 million, consistingof $68 million from Capital Southwest Corporation and $17 million from Main Street Capital Corporation, of which, $81 million, or 95.3%, intotal was funded as of March 31, 2018 and $76 million, or 89.4% was funded as of March 31, 2017. On September 18, 2015, the Company’s wholly-owned and consolidated subsidiary, I-45 SPV LLC (the “SPV”) was organized as aDelaware limited liability company by the filing of a certificate of formation with the Office of the Secretary of State of the State of Delaware.The Company is the sole equity member of the SPV. All intercompany balances and transactions have been eliminated in consolidation. The registered agent and office of the Company required by the Act to be maintained in the State of Delaware is The Corporation TrustCompany, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801. The principal office of the Company shall be located at suchplace within or without the State of Delaware, and the Company shall maintain such records, as the Members shall determine from time to time. BASIS OF PRESENTATION The accounting and reporting policies of the Company conform with U.S. generally accepted accounting principles (“U.S. GAAP”) asdetailed in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”). The Company is an investmentcompany and follows the accounting and reporting guidance in FASB Topic 946 – Financial Services – Investment Companies (“ASC Topic946”). Financial statements prepared on a U.S. GAAP basis require management to make estimates and assumptions that affect the amounts anddisclosures reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as moreinformation becomes known, which could impact the amounts reported and disclosed herein. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INVESTMENTS Investment transactions are accounted for on a trade-date basis. Premiums and discounts are amortized over the lives of the respectivedebt securities using the effective interest method. Investments that are held by the Company are stated at fair value in accordance with ASCTopic 820 – Fair Value Measurements and Disclosures (“ASC Topic 820”). Realized gains or losses are measured by the difference between the net proceeds from the sale or redemption of an investment and thecost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, and includes investments written-off during the year net of recoveries and realized gains or losses from in-kind redemptions. Net change in unrealized appreciation ordepreciation reflects the net change in the fair value of the investment portfolio and the reclassification of any prior period unrealizedappreciation or depreciation on exited investments and financial instruments to realized gains or losses. CASH AND CASH EQUIVALENTS Cash and cash equivalents, which consist of cash and highly liquid investments with an original maturity of three months or less at thedate of purchase, are carried at cost, which approximates fair value. In the normal course of business, the Company maintains its cash and cash equivalents balances in financial institutions, which attimes may exceed federally insured limits. The Company is subject to credit risk to the extent any financial institution with which it conductsbusiness is unable to fulfill contractual obligations on its behalf. Management monitors the financial condition of such financial institutionsand does not anticipate any losses from these counterparties.10 I-45 SLF LLCNotes to Consolidated Financial Statements 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued DEFERRED FINANCING COSTS Deferred financing costs include commitment fees and other costs related to the Company’s credit facility (the “Credit Facility”, asdiscussed further in Note 4). These costs have been capitalized and are amortized into interest expense over the term of the individualinstrument. INTEREST INCOME Interest income is recorded as earned on the accrual basis and includes amortization of premiums or accretion of discounts. Inaccordance with the Company’s valuation policy, accrued interest receivables are evaluated periodically for collectability. When the Companydoes not expect the debtor to be able to service all of its debt or other obligations, the Company will generally establish a reserve againstinterest income receivable, thereby placing the loan or debt security on non-accrual status, and cease to recognize interest income on that loanor debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due. If a loan or debt security’s statussignificantly improves regarding the ability to service debt or other obligations, it will be restored to accrual basis. As of March 31, 2018 and2017, the Company did not have any investments on non-accrual status. EXPENSES Unless otherwise voluntarily or contractually assumed by the Board of Managers or another party, the Company bears all expensesincurred in its business including, but not limited to, the following: all costs and expenses related to investment transactions and positions forthe Company, legal fees, accounting, auditing and tax preparation fees, recordkeeping and custodial fees, costs of computing the Company’smembers’ equity, research expenses, costs of registration expenses, all costs with respect to communications with members, and other types ofexpenses as may be approved from time to time. INCOME TAXES The Company is organized and operates as a limited liability company and is not subject to income taxes as a separate entity. Suchtaxes are the responsibility of the individual members. Accordingly, no provision for income taxes has been made in the Company’s financialstatements. Investments in foreign securities may result in foreign taxes being withheld by the issuer of such securities. For the current open tax year and for all major jurisdictions, management of the Company has evaluated the tax positions taken orexpected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions will “more-likely-than-not” besustained by the Company upon challenge by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-notthreshold and that would result in a tax benefit or expense to the Company would be recorded as a tax benefit or expense in the current year. Forthe years ended March 31, 2018 and 2017, and the period from September 3, 2015 (date of incorporation) to March 31, 2016, the Companydetermined that it did not have any uncertain tax positions. Generally, the Company is subject to income tax examinations by major taxingauthorities during the three years prior to the periods covered by these financial statements. RECENTLY ISSUED OR ADOPTED ACCOUNTING STANDARDS In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes therevenue recognition requirements under ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the IndustryTopics of the ASC. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods orservices to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods orservices. Under the new guidance, an entity is required to perform the following five steps: (1) identify the contract(s) with a customer;(2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performanceobligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The new guidance willsignificantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. Additionally,the guidance requires improved disclosures as to the nature, amount, timing and uncertainty of revenue that is recognized. In May 2016, theFASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606)—Narrow-Scope Improvements and Practical Expedients.This ASU clarified guidance on assessing collectability, presenting sales tax, measuring noncash consideration, and certain transition matters.The FASB decided to defer the effective date of the new revenue standard for public entities under U.S. GAAP for one year. The new guidancewill be effective for the annual reporting period beginning after December 15, 2018, and interim periods within annual reporting periodsbeginning after December 15, 2019. Early adoption was permitted for annual reporting periods beginning after December 15, 2016. TheCompany completed its assessment in evaluating the potential impact on its consolidated11 I-45 SLF LLCNotes to Consolidated Financial Statements 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued financial statements and determined that its financial contracts are excluded from the scope of ASU 2014-09. As a result of the scope exceptionfor financial contracts, the Company’s management has determined the adoption of ASU 2014-09 will have no impact on the recognitiontiming and classification of revenues and expenses, pretax income or on the consolidated financial statement disclosures. In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), which is intended to reduce the existingdiversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance iseffective for annual periods beginning after December 15, 2018, and interim periods therein. Early application is permitted. The adoption ofthis new accounting standard is not expected to have an impact on the Company’s consolidated financial statements. 3. FAIR VALUE MEASUREMENTS ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”)in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Company’sinvestments is determined as of the close of business at the end of each reporting period (“Valuation Date”) in conformity with the guidance onfair value measurements and disclosures under U.S. GAAP. The inputs used to determine the fair value of the Company’s investments are summarized in the three broad levels listed below: ·Level 1- unadjusted quoted prices in active markets for identical investments·Level 2- investments with other significant observable inputs (including quoted prices for similar securities, interest rates,prepayments speeds, credit risk, etc.)·Level 3- investments with significant unobservable inputs (including the Company’s own assumptions in determining the fair value ofinvestments) The Company establishes valuation processes and procedures to ensure the valuation methodologies for investments categorizedwithin Level 3 of the fair value hierarchy are fair, consistent, and verifiable. The Company designates the Board of Managers to oversee theentire valuation process of Level 3 investments. The Board of Managers is responsible for developing the Company’s valuation processes andprocedures, conducting periodic reviews of the valuation policies, and evaluating the overall fairness and consistent application of thevaluation policies. Additionally, the Board of Managers is generally responsible for reviewing and approving the valuation determinations andany information provided by U.S. Bancorp Fund Services, LLC (the “Administrator”), as well as determining the levels of the fair valuehierarchy in which the investments fall. The Board of Managers meets on a quarterly basis, or more frequently as needed, to determine the valuations of Level 3investments. Valuations determined by the Board of Managers are required to be supported by market data, third-party pricing sources,industry accepted pricing models, counterparty prices, or other methods the Board of Managers deems to be appropriate, including the use ofinternal proprietary pricing models. The Company, along with the Board of Managers, periodically reviews the valuations of Level 3investments, and if necessary, recalibrates its valuation procedures. Investments currently held by the Company are generally valued as follows: Securities that are listed on a recognized exchange are valued at their last available public sales price. Securities that are listed on morethan one national securities exchange are valued at the last quoted sales price on the primary exchange on which the security is listed. If asecurity was not traded on the primary exchange on the valuation date, such security is valued at the last quoted sales price on the next mostactive market, if the Board of Managers determines the price to be representative of fair value. Investments that are not listed on an exchangebut are traded over-the-counter are generally valued using independent pricing services. These pricing services may use the broker quotes ormodels that consider such factors as issue type, coupon rate, maturity, rating, prepayment speed, yield, or prices of comparable quality, whenpricing securities. In the case of investments not priced by independent pricing services, the Board of Managers will endeavor to obtain market makerquotes. For both long and short positions, the average of all “bid” and “asked” quotations is generally used. The fair value determination of the Company’s investments consists of a combination of observable inputs in non-active markets andunobservable inputs. The observable inputs are not always sufficient to determine the fair value of these investments. As a result, allinvestments currently held by the Company are categorized as Level 3 under ASC 820. 12 I-45 SLF LLCNotes to Consolidated Financial Statements 3. FAIR VALUE MEASUREMENTS, continued The following table summarizes the valuation techniques and significant unobservable inputs used for the Company’s investmentsthat are categorized within Level 3 of the fair value hierarchy as of March 31, 2018 and 2017: Type ofInvestment Fair Value at March 31,2018 ValuationTechnique UnobservableInput Range WeightedAverage Corporate bank loans $182,716,013 Income Approach Broker Quotes 92.0 - 103.0 100.0 23,029,609 Income Approach Discount Rate 7.4% - 8.6% 7.8% 10,795,285 Market Approach Cost 98.0 – 100.0 98.8 4,265,938 Market Approach Exit Value 100.0 100.0 Total $220,806,845 Type ofInvestment Fair Value at March 31,2017 ValuationTechnique UnobservableInput Range WeightedAverage Corporate bank loans $161,497,019 Income Approach Broker Quotes 93.0 - 101.8 99.8 8,359,451 Income Approach Discount Rate 6.06% - 10.5% 7.1% 30,386,220 Market Approach Cost 97.7 – 99.5 98.5 Total $200,242,690 The Board of Managers will evaluate the valuation hierarchy and make changes when necessary. The Company discloses transfersbetween levels based on valuations at the end of the reporting period. There were no transfers between levels for the years ended March 31,2018 and 2017. The inputs or methodology used for valuing investments are not necessarily an indication of the risk associated with investingin those investments. The following is a summary categorization, as of March 31, 2018, of the Company’s investments based on the level of inputs utilizedin determining the value of such investments: LEVEL 1 LEVEL 2 LEVEL 3 TotalInvestments (at fair value) Corporate bank loans $- $- $220,806,845 $220,806,845 Total investments - - 220,806,845 220,806,845 Cash equivalents - money market fund 3,087,598 - - 3,087,598 $3,087,598 $- $220,806,845 $223,894,443 The following is a summary categorization, as of March 31, 2017, of the Company’s investments based on the level of inputs utilizedin determining the value of such investments: LEVEL 1 LEVEL 2 LEVEL 3 TotalInvestments (at fair value) Corporate bank loans $- $- $200,242,690 $200,242,690Total investments - - 200,242,690 200,242,690 Cash equivalents - money market fund 8,861,173 - - 8,861,173 $8,861,173 $- $200,242,690 $209,103,863 13 I-45 SLF LLCNotes to Consolidated Financial Statements 3. FAIR VALUE MEASUREMENTS, continued The following table represents additional information about Level 3 assets measured at fair value. Both observable and unobservableinputs may be used to determine the fair value of positions that the Company has classified within the Level 3 category. As a result, theunrealized gains and losses for assets within the Level 3 category may include changes in fair value that were attributable to both observableand unobservable inputs. Changes in Level 3 assets measured at fair value for the years ended March 31, 2018 and 2017 were as follows: LEVEL 3 Beginning Balance March 31, 2017 Purchases Settlements Change inUnrealizedAppreciation RealizedGains(Losses) Ending BalanceMarch 31, 2018Investments (at fair value) Corporate bank loans $200,242,690 $135,480,991 $(115,962,074) $(614,866) $1,660,104 $220,806,845 Total $200,242,690 $135,480,991 $(115,962,074) $(614,866) $1,660,104 $220,806,845 LEVEL 3 Beginning Balance March 31, 2016 Purchases Settlements Change inUnrealizedAppreciation RealizedGains(Losses) Ending BalanceMarch 31, 2017Investments (at fair value) Corporate bank loans $99,214,303 $162,546,451 $(66,540,880) $3,369,673 $1,653,143 $200,242,690Total $99,214,303 $162,546,451 $(66,540,880) $3,369,673 $1,653,143 $200,242,690(a)Includes purchases of new investments, as well as discount accretion on investments.(b)The change in unrealized appreciation is reflected in the net change in unrealized appreciation on investments in the ConsolidatedStatements of Operations.(c)Realized gains (losses) are included in the net realized gain on investments in the Consolidated Statements of Operations. The total net unrealized gains (excluding reversals) included in earnings related to assets still held at the report date for the yearsended March 31, 2018 and 2017 were approximately $0.6 million and $3.4 million, respectively. 4. CREDIT FACILITYThe Company closed on a $75.0 million 5-year senior secured credit facility with Deutsche Bank AG (the “Credit Facility”) in theperiod ended March 31, 2016. This facility included an accordion feature which allows the Company to achieve leverage of up to 2x debt-to-equity. During the year ended March 31, 2017, the Company increased credit facility commitments outstanding by an additional $90.0 millionby adding three additional lenders to the syndicate, bringing total debt commitments to $165.0 million. In July 2017, the Credit Facility wasamended to extend the maturity to July 2022. The Company maintains the Credit Facility to provide additional liquidity to support itsinvestment and operational activities. Prior to the amendment to the Credit Facility, borrowings under the Credit Facility bore interest on a per annum basis at a rate equal tothe applicable LIBOR rate plus 2.50%. Subsequent to the amendment, borrowings bear interest on a per annum basis at a rate equal to LIBORplus 2.40%. The Company pays an Admin Fee of 0.25% per annum and unused fees of 0.50% per annum on the unused lender commitmentsunder the Credit Facility. The Credit Facility is secured by a first lien on the assets of the Company. The Credit Facility contains certainaffirmative and negative covenants, including but not limited to maintenance of a borrowing base. The Credit Facility is provided on arevolving basis through its final maturity date in July 2022. At March 31, 2018 and 2017, the Company had $143.0 million and $122.0 million, respectively, in borrowings outstanding under theCredit Facility. The Company recognized interest expense related to the Credit Facility, including unused commitment fees and amortization ofdeferred loan costs, of approximately $5.3 million and $3.4 million, respectively, for the years ended March 31, 2018 and 2017. The weightedaverage interest rate on the Credit Facility was 3.92% and 3.44%, respectively, for the years ended March 31, 2018 and 2017. Averageborrowings for the years ended March 31, 2018 and 2017 were $132.5 million and $91.7 million, respectively.14 (a)(b)(c)(a)(b)(c)I-45 SLF LLCNotes to Consolidated Financial Statements 5. ALLOCATION OF PROFITS AND LOSSESFor each fiscal year, profits or net losses of the Company are allocated among and credited to or debited against the capital accounts ofthe members as of the last day of each fiscal year in accordance the Limited Liability Company Agreement (the “LLC Agreement”). Net profitsor net losses are allocated after giving effect for any initial or additional applications for interests or any repurchases of interests. Net investmentincome, realized gains and losses, and unrealized gains or losses are allocated to the members pro rata in accordance with their profitpercentages, as defined in the LLC Agreement. Net profits or net losses are measured as the net change in the value of the members’ equity inthe Company, including any change in unrealized appreciation or depreciation of investments and income, net of expenses, and realized gainsor losses during a fiscal year. Each quarter a cash distribution may be made to the members, which is generally equivalent to estimated taxable income less non-cashrevenue (such as original issue discount amortization or PIK interest). The estimated taxable income distributions are generally made up oftaxable net investment income (excluding non-cash revenue) and realized gains and losses. Estimated taxable income and distributions madeto the members therefore may be materially different than GAAP net investment income. The distribution policy is subject to change by theBoard of Managers based on business and market conditions at any time. 6. DUE FROM BROKERS The Company conducts business with brokers for its investment activities. The clearing and depository operations for the investmentactivities are performed pursuant to agreements with the brokers. The Company is subject to credit risk to the extent any broker with whom theCompany conducts business is unable to deliver cash balances or securities, or clear security transactions on the Company’s behalf. TheCompany monitors the financial condition of the brokers with which the Company conducts business and believes the likelihood of loss underthe aforementioned circumstances is remote. At March 31, 2018 and 2017, the balance in due from brokers is cash of approximately $0.3million and $1.7 million, respectively. 7. ADMINISTRATION AGREEMENT In consideration for administrative, accounting, and recordkeeping services, the Company pays the Administrator a quarterlyadministration fee. This fee is calculated based on the quarter end invested assets. For the year ended March 31, 2018, the Company hadincurred $150,362 in administration fees, of which $37,465 were payable at the end of the year. For the year ended March 31, 2017, theCompany had incurred $120,543 in administration fees, of which $35,101 were payable at the end of the year. For the period ended March 31,2016, the Company had incurred $35,106 in administration fees, of which $19,068 were payable at the end of the year. The Administrator is affiliated with a broker, U.S. Bank, through which the Company transacts operations. At March 31, 2018, cashand cash equivalents in the amount of $9.3 million are held with U.S. Bank. At March 31, 2017, cash and cash equivalents in the amount of$12.1 million are held by U.S. Bank. 8. COMMITMENTS AND CONTINGENCIES The Company entered into various trades during the periods ended March 31, 2018 and 2017. As of March 31, 2018 and 2017, therewere outstanding trades in the amount of approximately $3.2 million and $11.8 million, respectively, that remained unsettled. This is shown aspayable for securities purchased on the Consolidated Statements of Assets, Liabilities and Members’ Equity. In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk, consisting primarily ofunused commitments to extend financing to the Company’s portfolio companies. Since commitments may expire without being drawn upon,the total commitment amount does not necessarily represent future cash requirements. The following table lists the outstanding commitments asof March 31, 2018 and 2017: March 31, March 31, Portfolio Company Investment Type 2018 2017 (amounts in thousands)Ansira Holdings, Inc. Delayed Draw Term Loan $255 $573PT Network, LLC Delayed Draw Term Loan 2,053 1,061Solaray, LLC Delayed Draw Term Loan 912 813TGP Holdings III LLC Delayed Draw Term Loan 271 − Total unused commitments to extend financing $3,491 $2,447 15 I-45 SLF LLCNotes to Consolidated Financial Statements 8. COMMITMENTS AND CONTINGENCIES, continued The Company may, from time to time, be involved in litigation arising out of its operations in the normal course of business orotherwise. Furthermore, third parties may try to seek to impose liability on the Company in connection with the activities of its portfoliocompanies. The Company has no currently pending material legal proceedings to which it is are party or to which any of its assets is subject. 9. FINANCIAL HIGHLIGHTS Financial highlights are as follows: Year endedMarch 31,2018 Year endedMarch 31, 2017 Period fromSeptember 3, 2015(date of incorporation) toMarch 31, 2016 Net investment income to average members' equity 12.40 % 12.17 % 14.79 %Expenses to average members' equity (7.85)% (6.58)% (5.55)%Internal Rate of Return, end of year 15.04 % 15.13 % (1.32)%(1)Ratios are calculated by dividing the indicated amount by average members’ equity measured as the end of each quarter during the period.For the period from September 3, 2015 (date of incorporation) to March 31, 2016, the ratios are annualized.(2)The internal rate of return since inception (“IRR”) of the members is computed based on the actual dates of cash inflows, outflows and theending net assets at the end of the year of the members’ equity account as of each measurement date. The IRR includes actual cashpayments and does not include distributions declared but not yet paid. Financial highlights are calculated for the members’ class taken as a whole. An individual member’s return and ratios may vary.Financial highlights disclosed may not be indicative of future performance of the Company. 10. SUBSEQUENT EVENTS Management has evaluated the need for additional disclosures and/or adjustments resulting from subsequent events through May 17, 2018, the date the consolidated financial statements were available to be issued.16(1) (1)(2)Exhibit 99.3 TitanLiner, Inc.Financial ReportDecember 31, 2017 CONTENTS Page Independent Auditor’s Report 1 Financial Statements Balance Sheets 2 Statements of Operations 3 Statements of Changes in Stockholders’ Equity 4 Statements of Cash Flows 5 Notes to Financial Statements 6  Independent Auditor’s ReportTo the Board of Directors and Stockholders ofTitanLiner, Inc.Fort Worth, TexasWe have audited the accompanying financial statements of TitanLiner, Inc. (a Nevada corporation), which comprise the balance sheets as ofDecember 31, 2017 and 2016, and the related statements of operations, changes in stockholders’ equity and cash flows for each of the years inthe three-year period ended December 31, 2017, and the related notes to the financial statements.Management’s Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principlesgenerally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant tothe preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.Auditor’s ResponsibilityOur responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance withauditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the financial statements are free from material misstatement.An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. Theprocedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financialstatements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’spreparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. Anaudit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates madeby management, as well as evaluating the overall presentation of the financial statements.We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.OpinionIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TitanLiner, Inc. as ofDecember 31, 2017 and 2016, and the results of its operations and its cash flows for the each of the years in the three-year period endedDecember 31, 2017 in accordance with accounting principles generally accepted in the United States of America./s/ WEAVER AND TIDWELL, L.L.P.Fort Worth, TexasMay 31, 2018 AN INDEPENDENT MEMBER OFWEAVER AND TIDWELL, L.L.P.2821 WEST SEVENTH STREET, SUITE 700, FORT WORTH,TX 76107BAKER TILLY INTERNATIONALCERTIFIED PUBLIC ACCOUNTANTS ANDADVISORSP: 817.332.7905 F: 817.429.5936  Financial Statements  TitanLiner, Inc.Balance SheetsDecember 31, 2017 and 2016 2017 2016 ASSETS CURRENT ASSETS Cash $1,382,463 $999,415 Accounts receivable (net of allowance of $67,402 and $33,133, respectively) 5,397,404 3,037,643 Inventory 835,638 483,618 Prepaid expenses 117,832 31,331 Income tax receivable — 413,785 Deferred income tax asset 47,669 32,173 Total current assets 7,781,006 4,997,965 PROPERTY AND EQUIPMENT, net 3,191,639 1,938,310 OTHER ASSETS Intangible assets, net 60,111 69,292 Deposits 39,816 39,601 Total other assets 99,927 108,893 TOTAL ASSETS $11,072,572 $7,045,168 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $819,063 $481,670 Accrued liabilities 954,053 352,666 Income tax payable 348,516 — Capital lease obligation, current portion 131,937 137,369 Long-term debt, current portion 26,787 27,358 Total current liabilities 2,280,356 999,063 LONG-TERM LIABILITIES Line of credit 1,064,114 1,064,114 Capital lease obligation, net of current portion 26,424 19,265 Long-term debt, net of current portion 33,595 62,412 Deferred income tax liability 374,024 240,582 Total long-term liabilities 1,498,157 1,386,373 STOCKHOLDERS' EQUITY Series A preferred stock, $0.001 stated par value, 370,664 shares authorized, issued, and outstanding at December 31, 2017and 2016, respectively 371 371 Series B preferred stock, $0.001 stated par value, 1,299,173 shares authorized, issued, and outstanding at December 31,2017 and 2016, respectively 1,299 1,299 Common stock, $0.001 stated par value, 5,000,000 shares authorized, 1,000,000 issued, and 765,031 and 749,300outstanding at December 31, 2017 and 2016, respectively 1,000 1,000 Additional paid-in capital 8,297,502 8,258,241 Retained earnings 3,158,065 562,999 11,458,237 8,823,910 Treasury stock (4,164,178) (4,164,178) Total stockholders' equity 7,294,059 4,659,732 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,072,572 $7,045,168 The Notes to Financial Statements arean integral part of these statements. 2  TitanLiner, Inc.Statements of OperationsYears Ended December 31, 2017, 2016, and 2015 2017 2016 2015 SALES, net $15,471,273 $8,023,883 $13,374,467 COST OF SALES 7,761,967 5,594,808 8,425,226 Gross profit 7,709,306 2,429,075 4,949,241 SELLING, GENERAL AND ADMINISTRATIVE Selling expenses 879,120 755,302 905,699 General and administrative 3,093,263 2,690,156 3,046,816 Total selling, general and administrative 3,972,383 3,445,458 3,952,515 Operating income (loss) 3,736,923 (1,016,383) 996,726 OTHER INCOME (EXPENSE) Miscellaneous income 5,667 72,837 27,993 Gain (loss) on disposal of assets 13,644 (189,792) (49,746) Interest expense (56,167) (519,457) (623,553) Total other income (expense) (36,856) (636,412) (645,306) INCOME (LOSS) BEFORE INCOME TAXES 3,700,067 (1,652,795) 351,420 INCOME TAX PROVISION (BENEFIT) 1,105,001 (569,742) 319,065 NET INCOME (LOSS) $2,595,066 $(1,083,053) $32,355 The Notes to Financial Statements arean integral part of these statements. 3  TitanLiner, Inc.Statements of Changes in Stockholders’ EquityYears Ended December 31, 2017, 2016, and 2015 Preferred Stock Common Additional Treasury Series A Series A Series B Series B Common Stock Paid-in Treasury Stock Retained Stock Par Value Stock Par Value Stock Par Value Capital Stock Amount Earnings TotalBALANCE, January 1, 2015 237,164 $237 — $— 717,837 $1,000 $5,225,717 282,163 $(4,164,178) $1,613,697 2,676,473 Stock-based compensation — — — — — — 57,585 — — — 57,585 Issuance of stock grants — — — — 11,831 — — (11,831) — — — Exercise of Series A preferred stock warrants 122,239 122 — — — — 1,100 — — — 1,222 Net income — — — — — — — — — 32,355 32,355 BALANCE, December 31, 2015 359,403 359 — — 729,668 1,000 5,284,402 270,332 (4,164,178) 1,646,052 2,767,635 Stock-based compensation — — — — — — 63,693 — — — 63,693 Issuance of stock grants — — — — 19,632 — — (19,632) — — — Exercise of Series A preferred stock warrants 11,261 12 — — — — 101 — — — 113 Conversion of debt to Series B preferred stock — — 1,299,173 1,299 — — 2,910,045 — — — 2,911,344 Net loss — — — — — — — — — (1,083,053) (1,083,053)BALANCE, December 31, 2016 370,664 371 1,299,173 1,299 749,300 1,000 8,258,241 250,700 (4,164,178) 562,999 4,659,732 Stock-based compensation — — — — — — 39,261 — — — 39,261 Issuance of stock grants — — — — 15,731 — — (15,731) — — — Net income — — — — — — — — — 2,595,066 2,595,066 BALANCE, December 31, 2017 370,664 $371 1,299,173 $1,299 765,031 $1,000 $8,297,502 234,969 $(4,164,178) $3,158,065 $7,294,059 The Notes to Financial Statements arean integral part of these statements. 4  TitanLiner, Inc.Statements of Cash FlowsYears Ended December 31, 2017, 2016, and 2015 2017 2016 2015 CASH FLOW FROM OPERATING ACTIVITIES Net income (loss) $2,595,066 $(1,083,053) $32,355 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Provision for bad debt expense 67,402 33,133 — Depreciation and amortization expense 814,873 835,955 1,301,888 Interest on warrants — 206,494 208,737 (Gain) loss on sale of assets (13,644) 189,792 49,746 Non-cash stock-based compensation 39,261 63,693 57,585 Deferred tax 117,946 (191,261) 279,129 Changes in operating assets and liabilities Accounts receivable (2,427,163) (150,133) 1,073,583 Inventory (352,020) 365,392 (52,532) Prepaid expenses (86,501) 59,929 6,673 Income tax receivable 413,785 (28,037) (385,748) Intangible assets — — (2,696) Deposits (215) 5,037 (25,651) Accounts payable 337,393 (24,422) (344,574) Accrued liabilities 601,387 91,094 (2,630,060) Income tax payable 348,516 — — Deferred revenue — (6,500) (393,483) Net cash provided by (used in) operating activities 2,456,086 367,113 (825,048) CASH FLOW FROM INVESTING ACTIVITIES Purchases of property and equipment (1,983,188) (202,096) (760,400) Proceeds from sale of property and equipment 18,644 1,004,266 22,886 Net cash provided by (used in) investing activities (1,964,544) 802,170 (737,514) CASH FLOW FROM FINANCING ACTIVITIES Exercise of preferred stock warrants — 113 1,222 Net payments on line of credit — (617,591) (200,000) Payments on capital lease obligation (79,106) (182,754) (176,507) Payments on long-term debt principal (29,388) (254,013) (66,324) Net cash used in financing activities (108,494) (1,054,245) (441,609) Change in cash 383,048 115,038 (2,004,171) CASH, beginning of year 999,415 884,377 2,888,548 CASH, end of year $1,382,463 $999,415 $884,377 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for interest $56,230 $311,514 $683,171 Cash paid for income taxes $500,000 $— $— NON CASH INVESTING AND FINANCING ACTIVITIES Equipment purchased with financing $80,833 $— $277,051 Conversion of notes payable to Series B preferred stock $— $2,911,344 $— The Notes to Financial Statements arean integral part of these statements. 5 TitanLiner, Inc.Notes to Financial Statements Note 1. Organization and Nature of OperationsTitanLiner, Inc. (the Company) is a Nevada corporation which was originally organized as a Texas limited liability company (LLC) on April 15,2010. The Company converted from a LLC to a Texas corporation on June 29, 2012. On November 2, 2012, the Company converted from aTexas corporation to a Nevada corporation.Additionally, in the conversion, the Company entered into an investment agreement (the Agreement) with Capital Southwest Corporation(CSC), K. Rick Turner Revocable Trust, Turner Family Partnership, MK Holdings, LP, Josh Hopkins, Tim Manning, Brannon Nash and CoyTaylor (collectively the Investors). The Company sold and the Investors acquired the Company’s senior subordinated secured promissory notesin the aggregate principal of $3,000,000, 237,164 shares of Series A Convertible Preferred Stock for $3,500,000 and warrants to acquire anaggregate of 133,500 shares of Series A Convertible Preferred Stock. In December 2016, the Company and the Investors agreed to convert theoutstanding notes payable totaling $2,911,344 net of the debt discount of $88,656 into 1,299,173 shares of Series B Convertible PreferredStock.The Company was organized to acquire and operate containment systems and related activities. The Company derives its revenue frombuilding rigid secondary containment systems and renting portable containment systems in the oil and gas industry and providing coatingservices.Note 2. Summary of Significant Accounting PoliciesCash and Cash EquivalentsFor purposes of the statements of cash flows, the Company considers all highly liquid instruments with an original maturity of three months orless to be cash equivalents.Trade Receivables and Allowance for Doubtful AccountsAccounts receivable are stated at the amounts management expects to collect from outstanding balances. The carrying amount of accountsreceivable is reduced by an allowance for uncollectible accounts that reflects management’s best estimate of the amount that will not becollected. Management individually reviews all receivable balances and, based on an assessment of current creditworthiness, past experience,historical losses, and management’s evaluation of other pertinent factors, estimates the portion, if any, of the balance that will not be collected.Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance, based on itsassessment.Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance anda credit to the respective receivable account.InventoryInventory consists of tank bases, containment systems, and various chemical agents. Inventory is stated at the lower of cost or net realizablevalue. Cost is determined using the average cost method.Prepaid ExpensesPrepaid expenses include the prepaid portion of insurance policies and building leases.6 TitanLiner, Inc.Notes to Financial Statements Property and EquipmentProperty and equipment are stated at cost less accumulated depreciation. Depreciation of property and equipment is provided using thestraight-line method for financial reporting purposes at rates based on the following estimated useful lives:Office equipment and furniture 5 years Equipment 2 – 5 years Autos, trucks and trailers 3 – 5 years Building 40 years Leasehold improvements 40 years Rental equipment 2 years Replacements, betterments, and additions to property and equipment are capitalized at cost. Expenditures for repairs and maintenance areexpensed as incurred. The cost of assets disposed of and the related accumulated depreciation are eliminated from the accounts in the year ofdisposal. Gains or losses resulting from property disposals are credited or charged to operations.Other AssetsIntangible assets include costs incurred for a patent for portable containment systems for hazardous or other materials and computer software.Amortization expense was $9,181 for each of the years ended December 31, 2017, 2016, and 2015 respectively. Estimated amortizationexpense for each of the next 5 years and thereafter are as follows:Years ending December 31, 2018 $9,181 2019 9,181 2020 9,181 2021 9,181 2022 9,181 Thereafter 14,206 $60,111 The Company applies Financial Accounting Standards Board (FASB) Accounting Standard Codification (ASC) Topic 350, Intangibles –Goodwill and Other (ASC Topic 350) which establishes a framework for capitalizing internally developed intangibles. ASC Topic 350 states aninternally generated intangible (i.e. patent or trademark) may be capitalized if the following three conditions are satisfied; 1) the costs relate toan intangible asset that can be specifically identified; 2) the identifiable intangible has a determinable life, and 3) the intangible is not one thatis inherent in a going concern (internally generated goodwill). The Company deems the patent mentioned above meets all three of thesecriteria.Intangible assets are amortized over their estimated useful lives. Amortizable intangible assets are reviewed at least annually to determinewhether events or circumstances warrant a revision to the remaining period of amortization.Fair Values of Financial Instruments and Fair Value MeasurementsThe Company applies Financial Accounting Standards Board (FASB) Accounting Standard Codification (ASC) Topic 820, Fair ValueMeasurements and Disclosure (ASC Topic 820), which establishes a framework for measuring fair value under U.S. generally acceptedaccounting principles and enhances disclosures about the fair value of financial instruments.Financial instruments of the Company consist of cash, trade accounts receivable, and trade accounts payable. The carrying value of thesefinancial instruments approximates their fair value due to the short maturity of these instruments.Revenue RecognitionThe Company’s products and services are sold based upon purchase orders or field tickets with their customers. The Company recognizesrevenue once the following four criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery of the product has occurred7 TitanLiner, Inc.Notes to Financial Statements or services have been rendered, (iii) the price of the product or service is fixed or determinable and (iv) collectability is reasonably assured. TheCompany also recognizes revenue as services are performed in accordance with the related field tickets.Sales of products and services are recognized upon completion of a containment system at the customer site, upon completion of a coatingservice, or upon completion of a portable rental term.Income TaxesThe Company was converted to a C-corporation on June 29, 2012. Items of income and loss attributable to a C-corporation are taxed at thecorporate level. The Company is subject to federal income tax.The deferred taxes represent the future tax return consequences of those differences, which will either be taxable or deductible when the assetsand liabilities are recovered or settled. An asset and liability approach is used in accounting for income taxes. Deferred tax assets and deferredtax liabilities are classified as current or non-current based on the classification of the related asset or liability for financial reporting oraccording to the expected reversal date of temporary differences not related to an asset or liability for financial reporting. In addition, avaluation allowance is used, if necessary, to reduce deferred tax assets by the amount of any tax benefits that are not expected to be realized inthe future based on available evidence.The Company implemented the accounting guidance for uncertainty in income taxes using the provisions of ASC Topic 740. Using thatguidance, tax positions initially need to be recognized in the financial statements when it is more-likely-than-not the position will be sustainedupon examination by the tax authorities. Such tax positions initially and subsequently need to be measured as the largest amount of tax benefitthat has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of theposition and relevant facts. The Company believes that it has appropriate support for the income tax positions taken and to be taken on its taxreturns, and that its accruals for tax liabilities are adequate for all open tax years based on an assessment of many factors including experienceand interpretations of tax laws applied to the facts of each matter. As of December 31, 2017, the Company’s tax years 2014 and thereafterremain subject to examination for federal tax purposes and tax years 2013 and thereafter remain subject to examination for state tax purposes.The Company’s policy is to record any interest or penalties related to uncertain tax positions as a component of the related federal or stateincome tax expense.Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly,actual results could differ from those estimates.Economic ConcentrationsThe Company’s revenue is derived from customers involved in the oil and gas industry. Future operations could be affected by changes ineconomic or other conditions in the geographical areas in which they operate or by changes in the demand for such services.Concentrations of Credit RiskIn the normal course of business, the Company maintains cash balances in excess of federally insured limits. The Company has not experiencedany losses in such accounts and believes it is not exposed to any significant credit risk on cash or cash equivalents.The Company’s customer base consists primarily of oil and natural gas producers. This concentration of customers may impact the Company’soverall credit risk, either positively or negatively, in that these entities may be similarly affected by changes in economic or other conditions.Collateral is not required for credit extended to the Company’s customers in the form of accounts receivable. The Company believes theindividual customer credit risk is generally mitigated by the size, reputation and nature of its customers.In the normal course of business, the Company grants credit to its customers based on credit evaluations of their financial condition andgenerally requires no collateral or other security. Major customers are defined as those individually comprising more than 10% of the8 TitanLiner, Inc.Notes to Financial Statements Company’s accounts receivable. At December 31, 2017 and 2016, the Company had three major customers representing 38% and 56% ofaccounts receivable, respectively.Major customers are defined as those individually comprising more than 10% of the Company’s sales. For the year ended December 31, 2017,the Company had two major customers representing 27% of the Company’s sales. For the year ended December 31, 2016, the Company hadone major customer representing 35% of the Company’s sales. For the year ended December 31, 2015, the Company had three major customersrepresenting 43% of the Company’s sales.AdvertisingAdvertising costs are expensed as incurred. Advertising costs for the years ended December 31, 2017, 2016 , and 2015 were $72,202, $45,748,and $65,745, respectively.Recent Accounting PronouncementsIn November 2015, the FASB issued ASU 2015‑17, “Income Taxes”, which requires all deferred tax assets and liabilities to be classified as non-current on the balance sheet instead of separating deferred taxes into current and non-current amounts. The guidance is effective for annual andinterim periods beginning after December 15, 2017, and may be adopted on either a prospective or retrospective basis.In February 2016, the FASB issued ASU 2016‑02, “Leases”, a comprehensive new standard that amends various aspects of existing accountingguidance for leases, including the recognition of a right of use asset and a lease liability for leases with a duration greater than one year. Theguidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption ispermitted. The Company has not completed a review of the new guidance; however, the Company anticipates that upon adoption of thestandard the Company will recognize additional assets and corresponding liabilities related to leases on the Company’s balance sheet.In May 2014, the FASB issued ASU No. 2014‑09, which amends ASC Topic 606, “Revenue from Contracts with Customers”. The amendmentsin this ASU are intended to provide a more robust framework for addressing revenue issues, improve comparability of revenue recognitionpractices and improve disclosure requirements. The amendments in this accounting standard update are effective for interim and annualreporting periods beginning after December 15, 2017 and December 15, 2018 for public and private entities, respectively. This ASU can beadopted either retrospectively or as a cumulative effect adjustment as of the date of adoption. The Company has not completed a review of thenew guidance and its impact on operations.Subsequent EventsManagement has evaluated all events or transactions that occurred after December 31, 2017 through May 31, 2018, the date the financialstatements were available to be issued. During this period, the Company had no material recognizable subsequent events.Note 3. Property and EquipmentProperty and equipment consisted of the following at December 31: 2017 2016 Office equipment and furniture $29,008 $86,029 Equipment 641,893 643,785 Autos, trucks and trailers 1,906,715 1,726,938 Building 1,299,510 1,244,830 Leasehold improvements 49,535 49,535 Land 97,151 97,151 Rental equipment 3,058,360 1,489,582 7,082,172 5,337,850 Accumulated depreciation (3,890,533) (3,399,540) Total property and equipment, net $3,191,639 $1,938,310 Depreciation expense for the years ended December 31, 2017, 2016, and 2015 was $805,692, $826,774, and $1,292,707 respectively.9 TitanLiner, Inc.Notes to Financial Statements Note 4. Line of CreditThe loan agreement with Comerica Bank was amended in December 2016 to require that the Company pay the principal sum of $3,000,000, orthe amount outstanding under the agreement, together with interest thereon at the daily LIBOR rate plus the applicable margin, due January 1,2019. Eligible accounts consist solely of trade accounts created in the ordinary course of business, upon which the Company’s right to receiveadvances or repayments is absolute and not contingent upon the fulfillment of any condition.At December 31, 2017 and 2016, the outstanding balance was $1,064,114, respectively.Note 5. Long-Term DebtLong-term debt consisted of the following at December 31,: 2017 2016 Term notes payable to a financing company, payable in monthly installmentstotaling $2,664 including interest at 5.95% through January 6, 2020; securedby equipment. $60,382 $89,770 Total long-term debt 60,382 89,770 Current portion (26,787) (27,358) Long-term debt, net of current portion $33,595 $62,412 As of December 31, 2017, maturities of long-term debt are as follows:2018 $26,787 2019 30,933 2020 2,662 $60,382 Note 6. Income TaxesDeferred income tax assets and liabilities for the Company are computed annually for temporary differences between financial statement andtax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable tothe periods in which the differences are expected to be realized. Income tax expenses are the taxes payable or refundable for the period plus orminus the change during the period in deferred tax assets and liabilities.The income tax provision differs from that computed by applying statutory rates to income before income tax expense (refund) primarilybecause of property basis adjustments required by tax regulations.On December 22, 2017, legislation was signed into law which enacts significant changes to U.S. tax and related laws, including certain key U.S.federal income tax provisions applicable to oilfield service and manufacturing companies such as the Company. These include, but are notlimited to, the following: a reduction in the maximum U.S. corporate tax rate to 21% beginning in 2018 from 35% in 2017, allows for theimmediate expensing of certain property placed in service after September 27, 2017, elimination of certain manufacturing deductions after2017 and limitations on the deductibility of Interest expense after 2017. U.S. state or other regulatory bodies have not announced potentialchanges to existing laws and regulations which may result from the new U.S. tax and related laws. U.S. GAAP requires that the impact of taxlegislation be recognized in the period in which the law was enacted. As a result, the Company recorded a tax benefit of $190,288 due to aremeasurement of deferred tax assets and liabilities at December 31, 2017 at the U.S. corporate tax rate of 21%.10 TitanLiner, Inc.Notes to Financial Statements The income tax provision for the years ended December 31, 2017, 2016, and 2015 consists of the following: 2017 2016 2015 Federal Current $739,052 $(384,548) $32,169 Deferred 59,581 6,052 279,130 State Current 278,664 (172,372) 7,766 Deferred 27,704 (18,874) — Income tax provision(benefit) $1,105,001 $(569,742) $319,065 The estimated provision for income tax differs from the amount calculated by applying the statutory federal income tax rates to income beforetaxes due to expenses which are not deductible for federal income tax, as follows: 2017 2016 2015 Taxes at statutory rates $1,258,023 $(561,950) $51,991 State taxes at various rates 68,919 (14,880) 97,766 Other (221,941) 7,088 169,308 Income tax provision (benefit) $1,105,001 $(569,742) $319,065 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2017 and2016 are presented below: 2017 2016 Deferred income tax asset: Stock compensation $23,182 $22,393 Bad debts 18,810 13,949 Inventory — (12,958) Accrued vacation 5,677 8,789 Total deferred income tax asset $47,669 $32,173 Deferred income tax liability: Property and equipment, principally due to depreciation $374,024 $253,590 Net operating loss carryforward — (13,008) Total deferred income tax liability $374,024 $240,582 Note 7. LeasesCapital LeaseThe Company leases autos and equipment with lease terms through 2020. The assets and liabilities under capital leases are recorded at thelower of the present value of the minimum lease payments or the fair value of the assets. The assets are depreciated over the shorter of theirrelated lease terms or their estimated productive lives. Depreciation of assets under capital leases is included in depreciation expense.Following is a summary of property held under capital leases at December 31, 2017 and 2016: 2017 2016 Autos $454,926 $482,948 Accumulated depreciation (350,581) (310,450) Total $104,345 $172,498 11 TitanLiner, Inc.Notes to Financial Statements Minimum future lease payments under capital leases as of December 31, 2017 for each of the next three years are:Year Ending December 31, 2018 $134,051 2019 28,585 2020 2,383 Total minimum lease payments 165,019 Amount representing interest (6,658) Present value of net minimum lease payments 158,361 Current portion (131,937) Present value of net minimum lease payments, net of current portion $26,424 Operating LeasesThe Company leases warehouse and office space under non-cancelable agreements classified as operating leases, expiring at various datesthrough 2022. Rental expense for the year was $567,019, $551,197, and $634,727 for 2017, 2016, and 2015 respectively. Minimum annualrental commitments under non-cancelable agreements are as follows at December 31, 2017:Year Ending December 31, 2018 $439,702 2019 333,248 2020 219,000 2021 78,000 2022 45,500 Total minimum lease payments $1,115,450 Note 8. Stockholders’ EquityThe Company has three classes of stock which includes Series A preferred stock, Series B preferred stock, and common stock. The Company isauthorized to issue an aggregate of 6,669,837 shares having a par value of $0.001 per share, of which 5,000,000 shares shall be common stock,370,664 shares shall be “Series A Convertible Preferred Stock”, and 1,299,173 shares shall be “Series B Convertible Preferred Stock”.Preferred StockSeries A Convertible Preferred Stock and Series B Convertible Preferred Stock holders may vote on any matters and are entitled to cast votesequal to the number of shares each respective class can convert into Common Stock. The holders may convert their shares at any time intoCommon Stock. In the event of liquidation, the holders of Series B shares shall be paid preferential amounts before payments are made to theholders of Series A shares.Series A Convertible Preferred Stock are valued at the Series A Liquidation Preference on the date of such conversion. The Series A LiquidationPreference is equal to the original issue price plus all accrued and unpaid dividends thereon to the date fixed for liquidation. As ofDecember 31, 2017 and 2016, there were no accrued and unpaid dividends.Series B Convertible Preferred Stock are valued at the Series B Liquidation Preference on the date of such conversion. The Series B LiquidationPreference is equal to the original issue price plus the PIK Amount (“PIK”) defined as equal to 6% per annum of the original issue price whereininterest from the date of issuance shall accrue cumulatively and be compounded annually. As of December 31, 2017 and 2016, the balancerelated to PIK was $164,957 and 0, respectively.As of December 31, 2017 and 2016, all Series A shares and Series B shares totaling 1,669,837, respectively, were issued and held by theinvestor group consisting of Capital Southwest Corporation, K. Rick Turner Revocable Trust, Turner Family Partnership, and MK Holdings, LP.12 TitanLiner, Inc.Notes to Financial Statements WarrantsAt December 31, 2017 and 2016, the Company had outstanding warrants to purchase zero shares of Series A Convertible Preferred Stock withan exercise price of $0.01 per share, respectively. The warrants became exercisable in 2012 and will expire on December 31, 2022. No warrantswere exercised during 2017. 11,261 warrants were exercised in December 2016.Common StockCommon Stock has all the rights, privileges, preferences and obligations provided for in the Agreement, which are generally consistent with anordinary equity ownership interest. At December 31, 2017 and 2016, 1,000,000 shares of Common Stock had been issued, 765,031 and749,300 of which were still outstanding at December 31, 2017 and 2016, respectively.Treasury StockTreasury stock is shown at cost and at December 31, 2017 and 2016, consisted of 234,969 and 250,700 shares of common stock respectively.Stock Appreciation RightsDuring 2017 and 2016, the Company granted 9,000 and 6,000 equity equivalent awards, respectively, in the form of Stock Appreciation Rights(“SARs”) to key members of management that vest evenly over four years from the date of the grant. The SARs have no rights with paymentcontingent on a change of control. The Company determined the fair value of the SARs to be $0 as of the date of the grant.Note 9. Commitments and ContingenciesIn the normal course of business, the Company is involved in disputes and/or claims made by it against others or made by others against it.Management believes that the ultimate outcome of any dispute will not have a material adverse effect on its financial position, results ofoperations or on cash flows.The Company is in an industry subject to increasingly demanding environmental standards imposed by federal, state and local environmentallaws and regulations. Management believes it is in substantial compliance with applicable environmental laws and regulations.Note 10. Employee Benefit PlanThe Company has a safe harbor 401(k) plan through Fidelity Investments covering all employees who have worked for the Company for morethan 90 days as defined in the plan. The plan provides for employer matching up to 4% of each eligible employee’s contributions. TheCompany contributed $73,896, $57,525, and $52,684 to the plan for the years ended December 31, 2017, 2016, and 2015, respectively.13 

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